OIL STATES INTERNATIONAL : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-K)

Management's Discussion and Analysis of Financial Condition and Results of
Operations contains "forward-looking statements" within the meaning of Section
27A of the Securities Act and Section 21E of the Exchange Act that are based on
management's current expectations, estimates and projections about our business
operations. Our actual results may differ materially from those currently
anticipated and expressed in such forward-looking statements as a result of
numerous factors, including the known material factors set forth in "Part I,
Item 1A. Risk Factors." You should read the following discussion and analysis
together with our Consolidated Financial Statements and the notes to those
statements included elsewhere in this Annual Report on Form 10­K.
We provide a broad range of products and services to the oil and gas industry
through our Well Site Services, Downhole Technologies and Offshore/Manufactured
Products business segments. Demand for our products and services is cyclical and
substantially dependent upon activity levels in the oil and gas industry,
particularly our customers' willingness to invest capital in the exploration for
and development of crude oil and natural gas reserves. Our customers' capital
spending programs are generally based on their cash flows and their outlook for
near-term and long-term commodity prices, economic growth, commodity demand and
estimates of resource production. As a result, demand for our products and
services is largely sensitive to future expectations with respect to crude oil
and natural gas prices.
Our consolidated results of operations include contributions from the
GEODynamics and Falcon acquisitions completed in the first quarter of 2018. Our
reported results of operations reflect the impact of current industry trends and
customer spending activities with investments weighted toward U.S. shale play
regions. However, in 2019, we began to see a general improvement in the level of
planned investments in deepwater markets globally.
Recent Developments
In addition to capital spending, we have invested in acquisitions of businesses
complementary to our growth strategy. Our acquisition strategy has allowed us to
leverage our existing and acquired products and services into new geographic
locations and has expanded the breadth of our technology and product offerings
while allowing us to leverage our cost structure. We have made strategic and
complementary acquisitions in each of our business segments in recent years.
On December 12, 2017 we entered into an agreement to acquire GEODynamics, Inc.
("GEODynamics"), which provides oil and gas perforation systems and downhole
tools in support of completion, intervention, wireline and well abandonment
operations. On January 12, 2018, we closed the acquisition of GEODynamics for
total consideration of approximately $615 million (the "GEODynamics
Acquisition"), consisting of (i) $295 million in cash (net of cash acquired),
(ii) approximately 8.66 million shares of our common stock (valued at $34.05 per
share on the date of closing) and (iii) an unsecured $25 million promissory
note.
In connection with the GEODynamics Acquisition, we completed several financing
transactions in 2018 to extend the maturity of our debt and to provide
flexibility in repaying outstanding borrowings under the Revolving Credit
Facility with anticipated future cash flows from operations.
On January 30, 2018, we sold $200 million aggregate principal amount of our
1.50% convertible senior notes due February 2023 (the "Notes") through a private
placement to qualified institutional buyers. We received net proceeds from the
offering of the Notes of approximately $194 million, after deducting issuance
costs. We used the net proceeds to repay a portion of the borrowings outstanding
under our Revolving Credit Facility, substantially all of which were drawn to
fund the cash portion of the purchase price paid for GEODynamics.
Concurrently with the Notes offering, we amended our Revolving Credit Facility
to extend the maturity date to January 2022, permit the issuance of the Notes
and provide for up to $350 million in borrowing capacity, subject to certain
limitations.
On February 28, 2018, we acquired Falcon Flowback Services, LLC ("Falcon"), a
full-service provider of flowback and well testing services for the separation
and recovery of fluids, solid debris and proppant used during hydraulic
fracturing operations. Falcon provides additional scale and diversity to our
Completion Services operations in key shale plays in the United States. The
acquisition price was $84.2 million in cash, funded with borrowings under our
Revolving Credit Facility.
During the third quarter of 2019, we made the strategic decision to reduce the
scope of our Drilling Services business (adjusting from 34 rigs to 9 rigs) due
to the ongoing weakness in customer demand for vertical drilling rigs in the
U.S. land market. As a result of this decision, our Drilling Services business
recorded a non-cash impairment charge of $33.7 million to decrease the carrying
value of the business' fixed assets to their estimated fair value. Substantially
all of the decommissioned rigs were sold in the fourth quarter of 2019.

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During the fourth quarter of 2019, our Downhole Technologies segment recorded a
non-cash goodwill impairment charge of $165.0 million due to, among other
factors, a reduction in our near-term outlook for demand related to our
short-cycle products and services in the U.S. shale play regions.
See Note 4, "Details of Selected Balance Sheet Accounts," Note 5, "Business
Acquisitions" and Note 7, "Long-term Debt" to the Consolidated Financial
Statements included in this Annual Report on Form 10-K for further discussion.
Macroeconomic Environment
Our long-term outlook for the energy industry remains constructive - guided by
expected population growth, projected future growth in global demand for crude
oil, an underinvestment in major offshore projects over the past five years, a
decline in the productivity of wells drilled on U.S. land over recent years and
increased capital discipline during 2019 by operators in the U.S. shale play
regions. Additionally, OPEC, along with Russia, have demonstrated a willingness
since late 2016 to adjust crude oil production in an effort to balance crude oil
supply and demand in the market. In December 2019, OPEC and other countries
announced further curtailments of crude oil production. We believe that the
currently demonstrated restraint by operators to invest in projects without a
reasonable return on investment at lower commodity prices creates the potential
for crude oil prices to increase over time as production growth slows, providing
for improved market fundamentals over the longer term.
The macroeconomic environment for the energy sector has been and continues to be
extremely volatile due to uncertainties regarding short- and medium-term
commodity price expectations. Most recently, this volatility was driven by
significant production growth from the U.S. shale play regions and concerns over
the possible slowing of global demand growth.
Following material declines in the fourth quarter of 2018, Brent and WTI crude
oil prices averaged $64 and $57 per barrel in 2019 - down 10% and 13%,
respectively, compared to 2018 average prices. While the commodity price
environment improved in 2019 relative to the December 2018 lows, the crude oil
price outlook and associated volatility continues to have a moderating impact on
our customers' operating results and capital spending plans, particularly those
operating in the U.S. shale play regions. Consequently, the U.S. rig count at
December 31, 2019 of 805 rigs fell 26% from the most recent peak of 1,083 rigs
working in December of 2018.
Current and expected future pricing for WTI crude will continue to influence our
customers' willingness to invest in U.S. shale play developments as our
customers strive for financial discipline and spending levels that are within
their capital budgets and cash flows. 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.
There remains a likelihood that crude oil prices could remain highly volatile
due to increases in global inventory levels, increasing domestic or
international crude oil production, trade tensions with China, sanctions on
Iranian production and tensions with Iran, civil unrest in Libya and Venezuela,
increasing price differentials between markets, slowing growth rates in China
and other global regions, use of alternative fuels, improved vehicle fuel
efficiency, a more sustained movement to electric vehicles and/or the potential
for ongoing supply/demand imbalances. However, if the global supply of crude oil
were to decrease due to a prolonged reduction in capital investment by our
customers or if government instability in a major oil-producing nation develops,
and energy demand were to continue to increase, a sustained recovery in WTI and
Brent crude oil prices could occur. In any event, crude oil price improvements
will depend upon the balance of global supply and demand, with a corresponding
continued reduction in global inventories.
Customer spending in the natural gas shale plays has been limited due to natural
gas production from prolific basins in the Northeastern United States and from
associated gas produced from the drilling and completion of unconventional oil
wells in North America.

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Recent WTI crude oil, Brent crude oil and natural gas pricing trends are as
follows:
                                                                                                 Average
                                      Average price(1) for quarter ended                      price(1) for
                                                                                               year ended
      Year              March 31           June 30        September 30       December 31       December 31

WTI Crude (per bbl)
      2019          $        54.82     $       59.88     $       56.34     $       56.82     $       56.98
      2018                   62.91             68.07             69.70             59.97             65.25
      2017                   51.62             48.14             48.18             55.27             50.80
      2016                   33.35             45.46             44.85             49.14             43.29
Brent Crude (per bbl)
      2019          $        63.10     $       69.01     $       61.95     $       63.17     $       64.26
      2018                   66.86             74.53             75.08             68.76             71.32
      2017                   53.59             49.59             52.10             61.40             54.12
      2016                   33.84             45.57             45.80             49.11             43.67

Henry Hub Natural Gas (per mmBtu)

      2019          $         2.92     $        2.57     $        2.38     $        2.40     $        2.56
      2018                    3.08              2.85              2.93              3.77              3.15
      2017                    3.02              3.08              2.95              2.90              2.99
      2016                    1.99              2.15              2.88              3.04              2.52


                [[Image Removed: chart-f8a977e359bc5781bf6.jpg]]
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(1) Source: U.S. Energy Information Administration. As of February 18, 2020, WTI

crude oil, Brent crude oil and natural gas traded at approximately $52.10 per

    barrel, $57.35 per barrel and $2.04 per mmBtu, respectively.



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Overview

Our Well Site Services segment provides completion services and, to a much
lesser extent land drilling services, in the United States (including the Gulf
of Mexico) and the rest of the world. U.S. drilling and completion activity and,
in turn, our Well Site Services results, are sensitive to near-term fluctuations
in commodity prices, particularly WTI crude oil prices, given the short-term,
call-out nature of its operations.
Within this segment, our Completion Services business supplies equipment and
service personnel utilized in the completion and initial production of new and
recompleted wells. Activity for the Completion Services business is dependent
primarily upon the level and complexity of drilling, completion, and workover
activity in the areas of operations mentioned above. Well intensity and
complexity has 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. Similarly,
demand for our Drilling Services operations has historically been driven by
activity in our primary land drilling markets of the Permian Basin in West Texas
and the U.S. Rocky Mountain area. During the third quarter of 2019, we made the
strategic decision to reduce the scope of our Drilling Services business
(adjusting from 34 rigs to 9 rigs) due to the ongoing weakness in customer
demand for vertical drilling rigs in the U.S. land market. Prospectively, the
operations will primarily focus on serving operators in the U.S. Rocky Mountain
region. See Note 4, "Details of Selected Balance Sheet Accounts," to the
Consolidated Financial Statements included in this Annual Report on Form 10­K
for further discussion.
Our Downhole Technologies segment is comprised of the GEODynamics business we
acquired in January 2018. GEODynamics was founded in 2004 as a researcher,
developer and manufacturer of consumable engineered products used in completion
applications. This segment provides oil and gas perforation systems, downhole
tools and services in support of completion, intervention, wireline and well
abandonment operations. This segment designs, manufactures and markets its
consumable engineered products to oilfield service as well as exploration and
production companies. Product and service offerings for this segment include
innovations in perforation technology through patented and proprietary systems
combined with advanced modeling and analysis tools. This expertise has led to
the optimization of perforation hole size, depth, and quality of tunnels, which
are key factors for maximizing the effectiveness of hydraulic fracturing.
Additional offerings include proprietary toe valve and frac plug 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 Well Site Services and Downhole Technologies segments' businesses
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 average U.S. drilling rig count, as measured by Baker Hughes,
for the periods indicated.

                         As of                Average Rig Count for Year 

Ended December 31,

                      February 14,       2019         2018         2017         2016         2015
                          2020
Land - Oil                    656          753          826          684          390          723
Land - Natural gas
and other                     110          165          185          169           97          219
Offshore                       24           25           21           23           25           35
Total                         790          943        1,032          876          512          977


Over recent years, our industry experienced an increase in customer spending on
crude oil and liquids-rich exploration and development activities in U.S. shale
plays utilizing horizontal drilling and completion techniques. As of
December 31, 2019, oil-directed drilling accounted for 84% of the total U.S. rig
count - with the balance largely natural gas related. Following the significant
decline in crude oil prices in the fourth quarter of 2018, coupled with customer
spending within their cash flows, the U.S. rig count declined steadily during
the 2019 and exited the year at 805 rigs - 278 rigs, or 26%, below the level
reported at the end of 2018. As a result, the average U.S. rig count in 2019
decreased 89 rigs, or 9%, from the level reported in 2018.
Our Offshore/Manufactured Products segment provides technology-driven,
highly-engineered products and services for offshore oil and natural gas
production systems and facilities, as well as certain products and services to
the offshore and land-based drilling and completion markets. This segment is
particularly influenced by global deepwater drilling and production spending,
which are primarily driven by our customers' longer-term commodity demand
forecasts and outlook for crude oil and natural gas prices. Approximately 60% of
Offshore/Manufactured Products sales in 2016 were driven by our customers'
capital spending for offshore production systems and subsea pipelines, repairs
and, to a lesser extent, upgrades of existing offshore drilling rigs and
construction of new offshore drilling rigs and vessels (referred to herein as
"project-driven products"). While increasing substantially from levels reported
in 2017 and 2018, these activities only represented approximately 40% of the
segment's revenue in 2019. Deepwater oil

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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 ("IOCs") and state-run national oil companies
("NOCs")) 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
less susceptible to short-term fluctuations in the price of crude oil and
natural gas. However, lower crude oil prices that have persisted since 2014,
coupled with the relatively uncertain outlook around shorter-term and possibly
longer-term pricing improvements, led exploration and production companies to
reduce their capital expenditures in regards to these deepwater projects since
they are expensive to drill and complete, have long lead times to first
production and may be considered uneconomical relative to the risk involved.
Customers have focused on improving the economics of major deepwater projects at
lower commodity breakeven prices by re-bidding projects, identifying
advancements in technology, and reducing overall project costs through equipment
standardization. This resulted in reduced bidding and quoting activity, as well
as reduced orders from customers and backlog levels, for our
Offshore/Manufactured Products segment in 2017 and 2018 relative to 2014.
Bidding and quoting activity, along with orders from customers, for deepwater
projects improved in 2019 from 2018 levels and the potential for future awards
appears to be improving.
Reflecting increased project award activity, backlog in our
Offshore/Manufactured Products segment increased from $179 million at
December 31, 2018 to $280 million at December 31, 2019. The segment received
four notable orders during 2019 for production facility content destined for
South America and Southeast Asia, as well as connector products destined for the
Middle East and military products for the United States. The following table
sets forth backlog reported by our Offshore/Manufactured Products segment as of
the dates indicated (in millions).
                             Backlog as of
Year    March 31     June 30      September 30     December 31
2019   $     234    $     283    $         293    $         280
2018         157          165              175              179
2017         204          202              198              168
2016         306          268              203              199


Reduced demand for our products and services, coupled with a reduction in the
prices we charge our customers for our services, has adversely affected our
results of operations, cash flows and financial position since the second half
of 2014. If the current pricing environment for crude oil does not improve, or
declines, our customers may be required to further reduce their capital
expenditures, causing additional declines in the demand for, and prices of, our
products and services, which would adversely affect our results of operations,
cash flows and financial position.
We use a variety of domestically produced and imported raw materials and
component products, including steel, in manufacturing our products. The United
States recently imposed tariffs on a variety of imported products, including
steel and aluminum. In response to the U.S. tariffs on steel and aluminum, the
European Union and several other countries, including Canada and China, have
threatened and/or imposed retaliatory tariffs. The effect of these new tariffs
and the application and interpretation of existing trade agreements and customs,
anti-dumping and countervailing duty regulations 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 as a result of customs, anti-dumping and countervailing duty
regulations or otherwise, and we are unable to pass corresponding cost increases
on to our customers, our financial position and results of operations could be
adversely affected. Furthermore, uncertainty with respect to potential costs in
the drilling and completion of oil and gas wells could cause 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, regulatory changes 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.

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Consolidated Results of Operations
We manage and measure our business performance in three operating segments: Well
Site Services, Downhole Technologies and Offshore/Manufactured Products.
Selected financial information by business segment for the years ended
December 31, 2019, 2018 and 2017 is summarized as follows (dollars in
thousands):
                                                                  Year Ended December 31,
                                                            Variance 2019 vs. 2018                        Variance 2018 vs. 2017
                            2019             2018                $              %           2017              $               %
Revenues
Well Site Services -
Completion Services     $   390,748      $   411,019     $      (20,271 )

(5 )% $ 234,252 $ 176,767 75 % Drilling Services

            41,346           69,235            (27,889 )      (40 )%       54,462            14,773          27  %
Total Well Site
Services                    432,094          480,254            (48,160 )      (10 )%      288,714           191,540          66  %
Downhole Technologies       182,314          213,813            (31,499 )      (15 )%            -           213,813        n.m.

Offshore/Manufactured

Products -
Project-driven products     159,205          120,894             38,311         32  %      126,960            (6,066 )        (5 )%
Short-cycle products        123,222          144,367            (21,145 )      (15 )%      147,463            (3,096 )        (2 )%
Other products and
services                    120,519          128,805             (8,286 )       (6 )%      107,490            21,315          20  %

Total

Offshore/Manufactured

Products                    402,946          394,066              8,880          2  %      381,913            12,153           3  %
Total                   $ 1,017,354      $ 1,088,133     $      (70,779 )       (7 )%    $ 670,627     $     417,506          62  %

Operating income (loss)
Well Site Services -
Completion Services     $   (11,621 )    $    (7,647 )   $       (3,974 )

52 % $ (45,169 ) $ 37,522 (83 )% Drilling Services(1) (43,419 ) (9,363 ) (34,056 )

      364  %      (13,909 )           4,546         (33 )%
Total Well Site
Services                    (55,040 )        (17,010 )          (38,030 )   

224 % (59,078 ) 42,068 (71 )% Downhole Technologies(2)

            (164,008 )         26,705           (190,713 )     n.m.               -            26,705        n.m.

Offshore/Manufactured

Products                     36,022           38,914             (2,892 )       (7 )%       38,155               759           2  %
Corporate                   (45,154 )        (54,485 )            9,331        (17 )%      (52,949 )          (1,536 )         3  %
Total(1)                $  (228,180 )    $    (5,876 )   $     (222,304 )     n.m.       $ (73,872 )   $      67,996         (92 )%


Operating income (loss) as a percentage of revenues
Well Site Services -
Completion Services                      (3 )%     (2 )%           (19 )%
Drilling Services(1)                   (105 )%    (14 )%           (26 )%
Total Well Site Services                (13 )%     (4 )%           (20 )%
Downhole Technologies(2)                (90 )%     12  %             -  %
Offshore/Manufactured Products            9  %     10  %            10  %
Total                                   (22 )%     (1 )%           (11 )%

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(1) Operating loss includes a non-cash fixed asset impairment charge of

$33.7 million in 2019 to decrease the carrying value of the Drilling Services

business' fixed assets to their estimated fair value. See Note 4, "Details of

Selected Balance Sheet Accounts," to the Consolidated Financial Statements

included in this Annual Report on Form 10­K for further discussion.

(2) Operating loss includes a non-cash goodwill impairment charge of

$165.0 million in 2019 to reduce the carrying value of the Downhole

Technologies segment to its estimated fair value. See Note 6, "Goodwill and

Other Intangible Assets," to the Consolidated Financial Statements included

in this Annual Report on Form 10­K for further discussion.

"n.m." indicates percentage is considered not meaningful.

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YEAR ENDED DECEMBER 31, 2019 COMPARED TO YEAR ENDED DECEMBER 31, 2018
Net loss for the year ended December 31, 2019 was $231.8 million, or $3.90 per
diluted share, which included non-cash impairment charges of $165.0 million
($2.78 per diluted share) related to a write down of goodwill and $33.7 million
($26.6 million after-tax, or $0.45 per diluted share) related to a write down of
fixed assets, as well as $3.5 million ($2.8 million after-tax, or $0.05 per
diluted share) of severance and downsizing charges.
These results compare to a net loss for the year ended December 31, 2018 of
$19.1 million, or $0.33 per diluted share, which included $8.4 million
($6.6 million after-tax, or $0.11 per diluted share) of charges related to legal
fees incurred for patent defense, $3.3 million ($2.6 million after-tax, or
$0.04 per diluted share) of transaction-related expenses, a $3.0 million
($2.4 million after-tax, or $0.04 per diluted share) provision for Fair Labor
Standards Act ("FLSA") claim settlements and $1.6 million ($1.3 million
after-tax, or $0.02 per diluted share) of severance and downsizing charges.
Additionally, during the year ended December 31, 2018 the Company recognized a
$5.8 million ($0.10 per diluted share) income tax benefit related to a change in
its December 2017 provisional estimates with respect to U.S. tax reform
legislation.
Our consolidated results of operations include contributions from the
GEODynamics and Falcon acquisitions completed in the first quarter of 2018. Our
reported results of operations reflect the impact of industry trends and
customer spending activities with investments weighted toward U.S. shale play
regions. However, in 2019 we began to see a general improvement in the level of
planned investments in deepwater markets globally.
During 2019, the average price of WTI crude oil declined approximately 13% from
the 2018 average price. This decline in crude oil prices had a negative impact
on U.S. land-based customer drilling and completion activity, particularly in
the U.S. shale play regions. We expect customer-driven activity to remain
tempered in early 2020 as operators strive for financial discipline and spending
levels that are within their capital budgets and cash flows. If the current
pricing environment for crude oil does not improve, or declines, our customers
may be required to further reduce their capital expenditures, causing additional
declines in the demand for, and prices of, our products and services, which
would adversely affect our results of operations, cash flows and financial
position.
Revenues. Consolidated total revenues decreased $70.8 million, or 7%, in 2019
compared to 2018.
Consolidated product revenues in 2019 decreased $18.5 million, or 4%, from 2018
driven primarily by lower U.S. land-based customer activity and the impact of
competitive pricing pressures for conventional perforating products in our
Downhole Technologies segment, partially offset by higher project-driven sales
within our Offshore/Manufactured Products segment. Consolidated service revenues
for 2019 decreased $52.3 million, or 9%, from 2018 with the impact, particularly
on the Well Site Services segment, of lower customer spending in the U.S. shale
play regions partially offset by two additional months of revenue generated by
the Falcon operations (acquired February 28, 2018). As can be derived from the
following table, 73% of our consolidated revenues in 2019 were related to our
short-cycle product and service offerings, which compared to 77% in 2018.
The following table provides disaggregated revenue information by operating
segment for the years ended December 31, 2019 and 2018 (in thousands):
                                                                                          Offshore/ Manufactured
                             Well Site Services            Downhole Technologies                 Products                        Total
                             2019          2018             2019             2018           2019          2018           2019            2018
Major revenue categories
-
Project-driven products  $        -     $       -     $          -        $       -     $  159,205     $ 120,894     $   159,205     $   120,894
Short-cycle:
Completion products and
services                    390,748       411,019          182,314          

213,813 95,806 116,383 668,868 741,215 Drilling services

            41,346        69,235                -                -              -             -          41,346          69,235
Other products                    -             -                -          

- 27,416 27,984 27,416 27,984 Total short-cycle

           432,094       480,254          182,314          213,813        123,222       144,367         737,630         838,434
Other products and
services                          -             -                -                -        120,519       128,805         120,519         128,805
                         $  432,094     $ 480,254     $    182,314        $ 213,813     $  402,946     $ 394,066     $ 1,017,354     $ 1,088,133


Percentage of total revenue by type -
Products                                - %     - %   97 %   97 %   76 %   75 %   48 %   46 %
Services                              100 %   100 %    3 %    3 %   24 %   25 %   52 %   54 %



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Cost of Revenues (exclusive of Depreciation and Amortization Expense). Our
consolidated cost of revenues (exclusive of depreciation and amortization
expense) decreased $31.9 million, or 4%, in 2019 compared to 2018.
Consolidated product costs in 2019 increased $2.7 million, or 1%, from 2018
(compared to a 4% decrease in product revenue) as a result of a shift in revenue
mix between short-cycle and project-driven products, which generally have higher
relative costs, and increased costs within the Downhole Technologies segment.
Consolidated service costs for 2019 decreased $34.7 million, or 7%, from 2018,
which included the impact of $3.0 million in costs associated with the
settlement of FLSA claims. The balance of the decrease in service costs from
2018 is due primarily to activity-driven revenue declines within the Well Site
Services segment, partially offset by incremental costs in the Downhole
Technologies segment associated with an expansion of field support operations.
Selling, General and Administrative Expense. Selling, general and administrative
expense decreased $15.1 million, or 11%, in 2019 from 2018. The expense in 2018
included $8.4 million of patent defense costs and $1.0 million of
transaction-related costs. Excluding these items from 2018, selling, general and
administrative expense declined $5.7 million, or 4%, due primarily to a
year-over-year reduction in stock-based compensation expense.
Depreciation and Amortization Expense. Depreciation and amortization expense was
relatively consistent between the 2019 and 2018 periods, with the impact of the
GEODynamics and Falcon operations acquired in the first quarter of 2018
partially offset by reduced capital investments and certain assets becoming
fully depreciated. Note 15, "Segments and Related Information," to the
Consolidated Financial Statements included in this Annual Report on Form 10­K
presents depreciation and amortization expense by segment.
Impairment of Goodwill. During the fourth quarter of 2019, our Downhole
Technologies segment recognized a non-cash impairment charge of $165.0 million
to reduce the carrying value of the segment's goodwill. See Note 6, "Goodwill
and Other Intangible Assets," to the Consolidated Financial Statements included
in this Annual Report on Form 10­K for further discussion.
Impairment of Fixed Assets. During the third quarter of 2019, we made the
strategic decision to reduce the scope of our Drilling Services business
(adjusting from 34 rigs to 9 rigs) due to the ongoing weakness in customer
demand for vertical drilling rigs in the U.S. land market. As a result of this
decision, our Drilling Services business recorded a non-cash impairment charge
of $33.7 million to decrease the carrying value of the unit's fixed assets to
their estimated fair value. See Note 4, "Details of Selected Balance Sheet
Accounts," to the Consolidated Financial Statements included in this Annual
Report on Form 10­K for further discussion.
Other Operating Income, Net. Other operating income decreased slightly from
2018, totaling $2.0 million in 2019. During 2018, our Offshore/Manufactured
Products segment recognized a gain of $3.9 million in settlement of a Hurricane
Harvey flood insurance claim, which was partially offset by $2.3 million in
transaction-related expenses. Other operating income in 2019 is primarily
related to an insurance recovery.
Operating Loss. Our consolidated operating loss was $228.2 million in 2019,
which included the impact of $198.7 million in non-cash goodwill and fixed asset
impairment charges discussed previously and $3.5 million of severance and
downsizing charges. This compares to a consolidated operating loss of
$5.9 million in 2018, which included $11.4 million of costs associated with
patent defense and settlement of FLSA claims, $3.3 million of
transaction-related expense and $1.6 million of severance and downsizing charges
partially offset by the $3.9 million gain related to the insurance settlement
discussed above.
Interest Expense, Net. Net interest expense was $17.6 million in 2019, a
decrease of $1.4 million from 2018. Interest expense, which includes
amortization of debt discount and deferred financing costs, as a percentage of
total average debt outstanding was approximately 6% in both 2019 and 2018. Our
contractual cash interest expense as a percentage of total debt outstanding was
substantially lower - averaging approximately 3% in both 2019 and 2018.
Other Income, Net. Other income, net, consisting primarily of gains recognized
on the sale of property and equipment, was $5.1 million in 2019, an increase of
$2.0 million from 2018.
Income Tax. Our income tax benefit for 2019 was $8.9 million on a pre-tax loss
of $240.7 million, which included a non-cash goodwill impairment charge of
$165.0 million and other expenses that are not deductible for tax purposes. This
compares to an income tax benefit for 2018 of $2.6 million on a pre-tax loss of
$21.7 million, which included a $5.8 million discrete tax benefit related to
U.S. tax reform guidance as well as other discrete tax attributes.
Other Comprehensive Income (Loss). Reported comprehensive loss is the sum of the
reported net income (loss) and other comprehensive income (loss). Other
comprehensive income was $3.7 million in 2019 compared to other comprehensive
loss of $12.9 million in 2018 due to fluctuations in foreign currency exchange
rates compared to the U.S. dollar for certain of the international operations of
our reportable segments. For 2019 and 2018, currency translation adjustments
recognized as a component of other comprehensive income (loss) were primarily
attributable to the United Kingdom and Brazil. In 2019, the exchange rate for
the British

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pound strengthened compared to the U.S. dollar, while the Brazilian real
weakened compared to the U.S. dollar. During 2018, the exchange rates for the
British pound and the Brazilian real weakened compared to the U.S. dollar.
Segment Operating Results
Well Site Services
Revenues. Our Well Site Services segment revenues decreased $48.2 million, or
10%, in 2019 compared to 2018. Completion Services revenue decreased
$20.3 million, or 5%, due to a significant decrease in U.S. land-based customer
drilling and completion activity following the decline in commodity prices in
the fourth quarter of 2018, partially offset by the impact of two additional
months of revenue generated by the Falcon operations (acquired February 28,
2018). Our Drilling Services revenues decreased $27.9 million, or 40%, to
$41.3 million in 2019 from 2018 due to a reduction in customer vertical drilling
operations in 2019 and our exit of drilling operations in the West Texas region
in the fourth quarter of 2019.
Operating Loss. Our Well Site Services segment operating loss increased
$38.0 million in 2019 from 2018 due primarily to the $33.7 million non-cash
fixed asset impairment charge recorded in Drilling Services. Our Completion
Services operating loss increased by $4.0 million in 2019 compared to 2018,
which included $3.0 million in charges (presented within cost of services)
associated with additional reserves established for the final settlement of
legacy FLSA claims. Our Drilling Services operating loss increased $34.1 million
in 2019 from 2018 due principally to the $33.7 million non-cash fixed asset
impairment charge discussed previously.
Downhole Technologies
Revenues. Our Downhole Technologies segment revenues decreased $31.5 million, or
15%, in 2019 compared to 2018 due primarily to a decline in U.S. land-based
customer completion activity, competitive pricing pressures for certain of its
conventional perforating products and a market shift toward sales of integrated
perforating gun systems, which the segment did not commercialize until late
2019.
Operating Income (Loss). During 2019, our Downhole Technologies segment
recognized a non-cash impairment charge of $165.0 million to reduce the carrying
value of goodwill. Excluding this charge, operating income declined
$25.7 million in 2019 from 2018 due primarily to the decline in revenues coupled
with an expansion of field support operations, higher product and engineering
costs and $1.4 million of inventory write-offs due to product design changes.
Prior-year results included $8.4 million in patent defense costs incurred after
our acquisition of GEODynamics.
Offshore/Manufactured Products
Revenues. Our Offshore/Manufactured Products segment revenues increased
$8.9 million, or 2%, in 2019 compared to 2018 with higher sales of
project-driven products partially offset by a decrease in sales of short-cycle
products and other products and services.
Operating Income. Our Offshore/Manufactured Products segment operating income
decreased $2.9 million, or 7%, in 2019 compared to 2018. Operating results in
2019 included a $1.7 million provision for bad debt on a prior-year receivable
from a customer claiming bankruptcy protection, while results for 2018 included
a gain of $3.9 million associated with an insurance settlement. To a lesser
extent, reported segment results for 2019 and 2018 were reduced by severance and
downsizing-related expenses of $1.7 million and $1.5 million, respectively.
Backlog. Bidding and quoting activity, along with orders from customers, for our
Offshore/Manufactured Products segment improved during 2019, with deepwater
project awards increasing for a second consecutive year. Backlog in our
Offshore/Manufactured Products increased 57% during 2019 to total $280 million
as of December 31, 2019. Orders totaled $523 million in 2019, resulting in a
book-to-bill ratio of 1.3x.
Corporate
Expenses decreased $9.3 million, or 17%, in 2019 from 2018 due primarily to a
$5.9 million year-over-year decrease in stock-based compensation, a $1.6 million
insurance benefit recognized in the fourth quarter of 2019 and $3.0 million in
nonrecurring transaction-related expenses incurred during 2018 in connection
with the acquisitions of GEODynamics and Falcon.

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YEAR ENDED DECEMBER 31, 2018 COMPARED TO YEAR ENDED DECEMBER 31, 2017
Net loss for the year ended December 31, 2018 was $19.1 million, or $0.33 per
diluted share, which included $8.4 million ($6.6 million after-tax, or $0.11 per
diluted share) of charges related to legal fees incurred for patent defense and
$3.0 million in reserves ($2.4 million after-tax, or $0.04 per diluted share)
for prior years' FLSA claim settlements, $3.3 million ($2.6 million after-tax,
or $0.04 per diluted share) of transaction-related expenses and $1.6 million
($1.3 million after-tax, or $0.02 per diluted share) of severance and downsizing
charges. Additionally, during the year ended December 31, 2018 the Company
recognized a $5.8 million ($0.10 per diluted share) income tax benefit related
to a change in its December 2017 provisional estimates with respect to U.S. tax
reform legislation.
These results compare to a net loss for the year ended December 31, 2017 of
$84.9 million, or $1.69 per diluted share, which included $3.4 million
($2.4 million after-tax, or $0.05 per diluted share) of severance and downsizing
charges and $29.2 million ($0.58 per diluted share) of additional non-cash
income tax expense primarily related to U.S. tax law changes.
Our consolidated results of operations for 2018 included contributions from the
GEODynamics and Falcon acquisitions completed in the first quarter of 2018 and
reflected the impact of industry trends and customer spending activities which
were directed toward growth in the U.S. shale play regions with a general
slowing of global investments in deepwater markets since the start of a
prolonged industry downturn in 2014.
During the fourth quarter of 2018, the price of crude oil fell approximately 40%
- with WTI closing at $45 per barrel on December 28, 2018. This precipitous
decline in crude oil prices had a moderate negative impact on our fourth quarter
2018 consolidated results of operations, particularly in the U.S. shale play
regions.
Revenues. Consolidated total revenues increased $417.5 million, or 62% in 2018
compared to 2017. Consolidated product revenues in 2018 increased
$198.0 million, or 65%, from 2017, reflecting contributions from the acquired
GEODynamics operations. Consolidated service revenues for 2018 increased
$219.5 million, or 60%, from 2017 due principally to contributions from the
acquired Falcon operations and higher customer-driven activity within the Well
Site Services and Offshore/Manufactured Products segments. As can be derived
from the following table, 77% of our consolidated revenues in 2018 were related
to our short-cycle product and service offerings, which compared to 65% in 2017,
due principally to contributions from our first quarter 2018 acquisitions and
higher customer spending in the U.S. shale play regions.
The following table provides disaggregated revenue information by operating
segment for the years ended December 31, 2018 and 2017 (in thousands):
                                                                                  Offshore/ Manufactured
                           Well Site Services         Downhole Technologies              Products                       Total
                           2018          2017           2018          2017          2018          2017           2018           2017
Major revenue
categories -
Project-driven
products               $        -     $       -     $        -     $      -     $  120,894     $ 126,960     $   120,894     $ 126,960
Short-cycle:
Completion products
and services              411,019       234,252        213,813            - 

116,383 117,914 741,215 352,166 Drilling services 69,235 54,462

              -            -              -             -          69,235        54,462
Other products                  -             -              -            - 

27,984 29,549 27,984 29,549 Total short-cycle 480,254 288,714 213,813

            -        144,367       147,463         838,434       436,177
Other products and
services                        -             -              -            -        128,805       107,490         128,805       107,490
                       $  480,254     $ 288,714     $  213,813     $      -     $  394,066     $ 381,913     $ 1,088,133     $ 670,627


Percentage of total revenue by type -
Products                                - %     - %   97 %   - %   75 %   80 %   46 %   45 %
Services                              100 %   100 %    3 %   - %   25 %   20 %   54 %   55 %


Cost of Revenues (exclusive of Depreciation and Amortization Expense). Our
consolidated cost of revenues (exclusive of depreciation and amortization
expense) increased $313.8 million, or 60%, in 2018 compared to 2017, due to
costs associated with the acquisitions completed in the first quarter of 2018 as
well as activity-driven costs associated with revenue growth within the Well
Site Services and Offshore/Manufactured Products segments.
Consolidated product costs in 2018 increased $147.0 million, or 67%, from 2017
due primarily to the GEODynamics Acquisition completed in first quarter 2018.
Consolidated service costs for 2018 increased $166.8 million, or 55%, from 2017
driven by the significant increase in service activity coupled with the acquired
Falcon operations.

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Selling, General and Administrative Expense. Selling, general and administrative
expense increased $23.3 million, or 20%, in 2018 from the prior-year period
primarily due to incremental expenses associated with the acquired GEODynamics
operations (including $8.4 million of patent defense costs), higher activity
levels and $1.0 million of transaction-related costs.
Depreciation and Amortization Expense. Depreciation and amortization expense
increased $15.9 million, or 15%, in 2018 compared to 2017 reflecting the impact
of the acquired GEODynamics and Falcon operations, which was partially offset by
certain assets becoming fully depreciated. Note 14, "Segments and Related
Information," to the Consolidated Financial Statements included in this Annual
Report on Form 10­K presents depreciation and amortization expense by segment.
Other Operating (Income) Expense, Net. Other operating (income) expense moved
from an expense of $1.3 million in 2017 to income of $2.1 million in 2018.
During 2018, our Offshore/Manufactured Products segment recognized a gain of
$3.9 million in settlement of a Hurricane Harvey flood insurance claim, which
was partially offset by $2.3 million in transaction-related expenses. Other
operating expense in the prior year was primarily related to foreign currency
exchange losses.
Operating Loss. Our consolidated operating loss was $5.9 million in 2018, which
included $11.4 million of costs associated with patent defense and settlement of
FLSA claims, $3.3 million of transaction-related expense and $1.6 million of
severance and downsizing charges partially offset by a $3.9 million gain related
to the insurance settlement discussed previously. This compares to a
consolidated operating loss of $73.9 million in 2017, which included
$3.4 million of transaction-related, severance and facility closure charges. The
majority of the year-over-year improvement in operating results reflects
contributions from the GEODynamics and Falcon acquisitions completed in the
first quarter of 2018 as well as the impact of growth in customer spending
activities which was primarily focused in the U.S. shale play regions.
Interest Expense, Net. Net interest expense was $19.0 million in 2018, an
increase of $14.7 million from 2017. This increase reflects our funding during
the first quarter of 2018 of $379.7 million in net acquisition consideration
through borrowings under our revolving credit facility and issuance of the
Notes. Interest expense as a percentage of total average debt outstanding
decreased from 17.3% in 2017 to 5.6% in 2018. Interest expense as a percentage
of total average debt outstanding in 2017 reflects lower average borrowings
outstanding under our revolving credit facility and an increased proportion of
interest expense associated with unused commitment fees and non-cash
amortization of debt issuance costs.
Other Income, Net. Other income, net, consisting primarily of gains recognized
on the sale of property and equipment, was $3.1 million in 2018, an increase of
$2.4 million from 2017.
Income Tax. Our income tax benefit for 2018 was $2.6 million on a pre-tax loss
of $21.7 million, which includes a $5.8 million discrete tax benefit related to
recent U.S. tax reform guidance allowing the carry back of U.S. net operating
losses incurred in 2017 as well as other discrete tax attributes. This compares
to an income tax benefit for 2017 of $7.4 million on a pre-tax loss of
$77.4 million (an income tax benefit of $21.8 million after excluding the
discrete charges discussed below).
On December 22, 2017, the United States enacted Tax Reform Legislation which
resulted in significant changes to U.S. tax and related law, including certain
key federal income tax provisions applicable to multinational companies such as
ours. As a result of the tax law changes, we recorded $28.2 million of
incremental non-cash income tax expense related to the U.S. transition tax on
our unremitted foreign subsidiary earnings and to provide valuation allowances
against our foreign tax credit carryforwards (which were recorded as assets
prior to U.S. tax reform). Additionally, we re-measured our other U.S. deferred
tax assets and liabilities to reflect the lower U.S. corporate income tax rate
which was reduced from 35% to 21%. We also recorded a discrete tax charge of
$1.0 million during 2017 related to the decision to carryback 2016 U.S. net
operating losses against 2014 taxable income.
Other Comprehensive Income (Loss). Reported comprehensive loss is the sum of the
reported net income (loss) and other comprehensive income (loss). Other
comprehensive loss was $12.9 million in 2018 compared to other comprehensive
income of $11.8 million in 2017 due to fluctuations in foreign currency exchange
rates compared to the U.S. dollar for certain of the international operations of
our reportable segments. For 2018 and 2017, currency translation adjustments
recognized as a component of other comprehensive income (loss) were primarily
attributable to the United Kingdom and Brazil. During 2018, the exchange rates
for the British pound and the Brazilian real weakened compared to the U.S.
dollar. This compares to 2017, when the exchange rates for the British pound
strengthened and the Brazilian real weakened compared to the U.S. dollar.

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Segment Operating Results
Well Site Services
Revenues. Our Well Site Services segment revenues increased $191.5 million, or
66%, in 2018 compared to 2017. This growth was concentrated in Completion
Services, where revenues increased $176.8 million, or 75%, reflecting revenue
generated by the acquired Falcon operations and increased completion-related
activity in the United States. Our Drilling Services revenues increased
$14.8 million, or 27%, to $69.2 million in 2018 from 2017 primarily as a result
of improved dayrates for our land drilling rigs and a higher level of
third-party costs reimbursed by our customers.
Operating Loss. With higher revenues, our Well Site Services segment operating
loss declined $42.1 million, or 71%, in 2018 from 2017. Well Site Services
segment revenues and cost of services for 2018 increased 66% and 59%,
respectively, from the prior year, with other costs and expenses remaining
relatively consistent. Our Completion Services operating loss improved
$37.5 million, or 83%, in 2018 compared to 2017, due to increased
completion-related activity levels in the United States coupled with ten months
of contributions from the acquired Falcon operations. 2018 results include
$3.0 million in charges (presented within cost of services) associated with
additional reserves established for the final settlement of historical FLSA
claims. During 2017, reported results included $1.1 million of severance and
downsizing costs. Our Drilling Services operating loss declined $4.5 million, or
33%, in 2018 from 2017 primarily as a result of the reported revenue growth.
Downhole Technologies
Revenues. Our Downhole Technologies segment revenues were $213.8 million in 2018
reflecting the activity of the GEODynamics operations acquired in January 2018.
Operating Income. Our Downhole Technologies segment operating income was
$26.7 million in 2018. Reported results were negatively impacted by $8.4 million
of patent defense costs. The legal actions were settled in the fourth quarter of
2018.
Offshore/Manufactured Products
Revenues. Our Offshore/Manufactured Products segment revenues increased
$12.2 million, or 3%, in 2018 compared to 2017 as a result of higher sales of
other products and service offerings. Service revenue increased 28% from the
prior year's level driven by higher customer demand while project-driven
products revenues decreased 5% year-over-year due to lower sales of production
and subsea equipment, which was partially offset by higher sales of our standard
connector products.
Operating Income. Our Offshore/Manufactured Products segment operating income
increased $0.8 million, or 2%, in 2018 compared to 2017 as a result of a gain of
$3.9 million recognized upon the settlement of a Hurricane Harvey flood
insurance claim during 2018. The impact of the shift in sales mix from 2017 to
2018 offset the impact of the reported revenue growth and the insurance gains
discussed above. To a lesser extent, reported segment results for 2018 and 2017
were reduced by severance and downsizing-related expenses of $1.5 million and
$0.9 million, respectively.
Backlog. Bidding and quoting activity, along with orders from customers, for our
Offshore/Manufactured Products segment continued in 2018, albeit at a
substantially slower pace than in recent years. Backlog in our
Offshore/Manufactured Products increased 6% during 2018 to total $179 million as
of December 31, 2018, with a book to bill ratio of 1.1x for the year.
Corporate
Expenses increased $1.5 million, or 3%, in 2018 from 2017 due to $3.0 million in
transaction-related expenses incurred in connection with the first quarter 2018
acquisitions of GEODynamics and Falcon.

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Liquidity, Capital Resources and Other Matters
Our primary liquidity needs are to fund operating and capital expenditures,
which in the past have included expanding and upgrading our
Offshore/Manufactured Products and Downhole Technologies manufacturing
facilities and equipment, replacing and increasing Completion Services assets,
funding new product development and general working capital needs. In addition,
capital has been used to repay debt, fund strategic business acquisitions and
fund our stock repurchase program. Our primary sources of funds have been cash
flow from operations, proceeds from borrowings under our credit facilities and
capital market transactions.
The crude oil and natural gas industry is highly cyclical which may result in
declines in the demand for, and prices of, our products and services, the
inability or failure of our customers to meet their obligations to us or a
sustained decline in our market capitalization. These and other potentially
adverse market conditions could require us to incur additional asset impairment
charges, record additional deferred tax valuation allowances and/or further
write down the value of our goodwill and other intangible assets, and may
otherwise adversely impact our results of operations, our cash flows and our
financial position. See Note 4, "Details of Selected Balance Sheet Accounts,"
and Note 6, "Goodwill and Other Intangible Assets," to the Consolidated
Financial Statements included in this Annual Report on Form 10­K for further
information.
Operating Activities
Cash flows totaling $137.4 million were provided by operations during the year
ended December 31, 2019 compared to $103.2 million provided by operations during
the year ended December 31, 2018.
During 2019, $39.3 million was provided by net working capital decreases, with a
reduction in accounts receivable partially offset by an increase in inventories.
During 2018, $22.9 million used to fund working capital increases primarily
associated with activity-driven growth in accounts receivable and inventories.
Investing Activities
A total of $52.0 million in cash was used in investing activities during the
year ended December 31, 2019, compared to $461.4 million used during 2018.
Capital expenditures totaled $56.1 million and $88.0 million during the years
ended December 31, 2019 and 2018, respectively. Capital expenditures in both
years consisted principally of purchases of Completion Services equipment,
expansion and upgrading of our Downhole Technologies and Offshore/Manufactured
Products segment facilities and equipment as well as various other capital
spending initiatives.
On January 12, 2018, we acquired GEODynamics for a purchase price consisting of
(i) $295.4 million in cash (net of cash acquired), which we funded through
borrowings under our Revolving Credit Facility, (ii) approximately 8.66 million
shares of our common stock (having a market value of $294.9 million as of the
closing date) and (iii) an unsecured $25.0 million promissory note.
On February 28, 2018, we acquired Falcon for cash consideration of $84.2 million
(net of cash acquired), which we funded from borrowings under our Revolving
Credit Facility.
We expect to spend between $40 million and $45 million in total capital
expenditures during 2020 to replace and upgrade our Completion Services
equipment, to expand and maintain our Downhole Technologies and
Offshore/Manufactured Products facilities and equipment, and to fund various
other capital spending projects. Whether planned expenditures will actually be
spent in 2020 depends on industry conditions, project approvals and schedules,
vendor delivery timing, free cash flow generation and careful monitoring of our
levels of liquidity. We plan to fund these capital expenditures with available
cash, internally generated funds and, if necessary, borrowings under our
Revolving Credit Facility. The foregoing capital expenditure expectations do not
include any funds that might be spent on future strategic acquisitions, which
the Company could pursue depending on the economic environment in our industry
and the availability of transactions at prices deemed attractive to the Company.
At December 31, 2019, we had cash totaling $8.5 million. With the enactment of
the Tax Cuts and Jobs Act in December 2017, we repatriated $14.5 million and
$45.0 million of cash held by our international subsidiaries to reduce
borrowings outstanding under our Revolving Credit Facility during 2019 and 2018,
respectively, without triggering incremental tax expense.

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Financing Activities
Net cash of $95.9 million was used in financing activities during the year ended
December 31, 2019, primarily associated with the net repayment of $84.2 million
in borrowings under the Revolving Credit Facility and the repurchase at a
discount of $7.8 million in principal amount of the Notes for $6.7 million. Net
cash of $324.1 million was provided by financing activities during the year
ended December 31, 2018, primarily as a result of our issuance of $200.0 million
of 1.50% convertible senior notes and net borrowings of $136.1 million under the
Revolving Credit Facility to fund acquisitions.
As discussed above, during 2019 we used $90.9 million of our $137.4 million in
cash flows from operating activities to reduce our outstanding debt level. As of
December 31, 2019, we had principal outstanding of $51.9 million under our
Revolving Credit Facility (due in January 2022, if not repaid in part or in full
in advance) and $192.3 million under our Notes (due in February 2023, if not
repurchased in part or in full in advance). Our reported interest expense, which
appropriately includes amortization of debt discount and deferred financing
costs of $7.9 million, is substantially above our contractual cash interest
expense - reflective primarily of the Notes which provide for a cash interest
payment of 1.5% per annum. For 2019, our contractual interest expense was
$10.0 million, or approximately 3% of the average principal balance of debt
outstanding.
On January 12, 2018, we partially funded the GEODynamics Acquisition through
borrowings available under our Revolving Credit Facility. On January 30, 2018,
we issued $200.0 million in principal amount of our Notes due February 2023 and
entered into our Revolving Credit Facility, to extend the maturity of the
facility to January 30, 2022 and provide for total lender commitments of
$350 million. Net proceeds from the Notes offering of approximately
$194.0 million, after deducting discounts and estimated expenses, were used to
repay a portion of amounts outstanding under the Revolving Credit Facility.
We believe that cash on hand, cash flow from operations and available borrowings
under our Revolving Credit Facility will be sufficient to meet our liquidity
needs in the coming twelve months. If our plans or assumptions change, or are
inaccurate, or if we make acquisitions, we may need to raise additional capital.
The timing, size or success of any acquisition effort and the associated
potential capital commitments are unpredictable and uncertain. We may seek to
fund all or part of any such efforts with proceeds from debt and/or equity
issuances. 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 financial markets and
other factors, many of which are beyond our control.
Revolving Credit Facility. Our Revolving Credit Facility is governed by a credit
agreement dated as of January 30, 2018, as amended, (the "Credit Agreement") by
and among the Company, the Lenders party thereto, Wells Fargo Bank, N.A., as
administrative agent for the lenders party thereto and collateral agent for the
secured parties thereunder, and the lenders and other financial institutions
from time to time party thereto. Our Revolving Credit Facility provides for up
to $350 million in lender commitments with an option to increase the maximum
borrowings to $500 million subject to additional lender commitments and matures
on January 30, 2022. Under our Revolving Credit Facility, $50 million is
available for the issuance of letters of credit. See Note 7, "Long-term Debt,"
to the Consolidated Financial Statements included in this Annual Report on Form
10­K for further information regarding the terms of the Credit Agreement.
As of December 31, 2019, we had $51.9 million of borrowings outstanding under
the Credit Agreement and $19.3 million of outstanding letters of credit, leaving
$131.1 million available to be drawn. The total amount available to be drawn was
less than the lender commitments as of December 31, 2019, due to limits imposed
by maintenance covenants in the Credit Agreement. As of December 31, 2019, we
were in compliance with our debt covenants and expect to continue to be in
compliance over the next twelve months.
1.50% Convertible Senior Notes. On January 30, 2018, we issued $200.0 million
aggregate principal amount of the Notes pursuant to an indenture, dated as of
January 30, 2018 (the "Indenture"), between us and Wells Fargo Bank, N.A., as
trustee. Net proceeds, after deducting discounts and expenses, were
approximately $194.0 million.
During 2019, we repurchased $7.8 million in principal amount of the outstanding
notes for $6.7 million, which approximated the carrying amount of the related
liability.
The initial carrying amount of the Notes recorded in the consolidated balance
sheet as of January 30, 2018 was less than the $200.0 million in principal
amount of the Notes, in accordance with applicable accounting principles,
reflective of the estimated fair value of a similar debt instrument that does
not have a conversion feature. We recorded the value of the conversion feature
of $34.4 million as a debt discount, which is amortized as interest expense over
the term of the Notes, with a similar amount allocated to additional paid-in
capital. As a result of this amortization of debt discount, the interest expense
we recognize related to the Notes for accounting purposes is based on an
effective interest rate of approximately 6%, which is greater than the cash
interest payments we are obligated to pay on the Notes. Interest expense
associated with the Notes for 2019 and 2018 was $10.2 million and $9.0 million,

                                      -46-
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respectively, while the related cash interest expense was $3.0 million and
$2.8 million, respectively. As of December 31, 2019, none of the conditions
allowing holders of the Notes to convert, or requiring us to repurchase the
Notes, had been met. See Note 7, "Long-term Debt," to the Consolidated Financial
Statements included in this Annual Report on Form 10­K for further information
regarding the Notes.
Promissory Note. In connection with the GEODynamics Acquisition, we issued a
$25.0 million promissory note that bears interest at 2.5% per annum and was
scheduled to mature on July 12, 2019. Payments due under the promissory note are
subject to set-off, in full or in part, against certain claims related to
matters occurring prior to our acquisition of GEODynamics. As more fully
described in Note 14, "Commitments and Contingencies" to the Consolidated
Financial Statements included in this Annual Report on Form 10­K, we have
provided notice to and asserted indemnification claims against the seller of
GEODynamics. As a result, the maturity date of the note is extended until the
resolution of the indemnity claim. We expect that the amount ultimately paid in
respect of such note will be reduced as a result of these indemnification
claims.
Our total debt represented 16.9% of our combined total debt and stockholders'
equity at December 31, 2019 compared to 18.7% at December 31, 2018.
Stock Repurchase Program. We maintain a share repurchase program which was
extended to July 29, 2020 by our Board of Directors. During 2019, we repurchased
approximately 51 thousand shares of our common stock under the program at a
total cost of $0.8 million. During 2018, there were no repurchases of our common
stock under the program. In 2017, 562 thousand shares of our common stock were
repurchased under the program at a total cost of $16.2 million. The amount
remaining under our current share repurchase authorization as of December 31,
2019 was $119.8 million. Subject to applicable securities laws, any purchases
will be at such times and in such amounts as the Company deems appropriate.
Contractual Obligations. The following summarizes our contractual obligations at
December 31, 2019, and the effect such obligations are expected to have on our
liquidity and cash flow over the next five years (in thousands):
                                                             Payments due by period
                                                Less than                                           More than
                                    Total         1 year        1 - 3 years       3 - 5 years        5 years

Contractual obligations
Revolving Credit Facility(1)     $  51,931     $        -     $      51,931     $           -     $         -
1.50% convertible senior
notes(2)                           202,343          2,884             5,768           193,692               -
Promissory note(3)                  26,320         26,320                 -                 -               -
Other debt and finance lease
obligations                          5,041            617             1,169               893           2,362
Operating lease liabilities(4)      53,071         10,197            14,641             9,863          18,370
Purchase obligations(5)             71,456         70,730               726                 -               -
Total contractual cash
obligations                      $ 410,162     $  110,748     $      74,235     $     204,448     $    20,732


____________________

(1) Excludes interest on the variable-rate debt, which matures in January 2022.

Since we cannot predict with any certainty the amount of interest due on our

revolving debt due to the expected variability of interest rates and

principal amounts outstanding, we do not include this in our obligations. If

we assume interest payment amounts are calculated using the outstanding

principal balances and interest rates as of December 31, 2019 and include

applicable commitment fees, estimated interest payments on our variable-rate

debt would be $2.4 million "due in less than one year" and $2.6 million "due

in one to three years." See Note 7, "Long-term Debt," to the Consolidated

Financial Statements included in this Annual Report on Form 10­K for

additional information regarding our Revolving Credit Facility.

(2) Amount represents the full principal amount of the Notes together with cash

interest payments due semi-annually.

(3) Amount represents the full principal amount of the $25 million promissory

note together with accrued and unpaid interest as of February 21, 2020. The

$25 million promissory note (together with accrued and unpaid interest)

issued in connection with the GEODynamics Acquisition was scheduled to mature

on July 12, 2019. Payments due under the promissory note are subject to

set-off, in full or in part, against certain claims related to matters

occurring prior to our acquisition of GEODynamics. As more fully described in

Note 14, "Commitments and Contingencies," to the Consolidated Financial

Statements included in this Annual Report on Form 10­K, we have provided

notice to and asserted indemnification claims against the seller of

GEODynamics. As a result, the maturity date of the note is extended until the

resolution of these indemnity claims. We expect that the amount ultimately

paid in respect of such note will be reduced as a result of these

indemnification claims.

(4) Amount represents the payment obligations (including implied interest) for

operating leases with an initial term of greater than 12 months.

(5) The purchase obligations of the Company primarily relate to open purchase

    orders in our Offshore/Manufactured Products and Completion Services
    operations.



                                      -47-

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Effects of Inflation
Our revenues and results of operations have not been materially impacted by
inflation in the past three fiscal years.
Off-Balance Sheet Arrangements
As of December 31, 2019, we had no off-balance sheet arrangements as defined in
Item 303(a)(4)(ii) of Regulation S­K.
Tariffs
We use a variety of domestically produced and imported raw materials and
component products, including steel, in the manufacture of our products. In
2018, the United States imposed tariffs on a variety of imported products,
including steel and aluminum. In response to the U.S. tariffs on steel and
aluminum, the European Union and several other countries, including Canada and
China, have threatened and/or imposed retaliatory tariffs. The effect of these
new tariffs and the application and interpretation of existing trade agreements
and customs, anti-dumping and countervailing duty regulations continues to
evolve, and 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 further as a result of customs, anti-dumping
and countervailing duty regulations or otherwise and we are unable to pass
corresponding cost increases on to our customers, our financial position and
results of operations could be adversely affected. Furthermore, uncertainty with
respect to potential costs in the drilling and completion of oil and gas wells
could cause customers to delay or cancel planned projects which, if this
occurred, would adversely affect our financial position and results of
operations. See Note 14, "Commitments and Contingencies" to the Consolidated
Financial Statements included in this Annual Report on Form 10­K for additional
discussion.
Tax Matters
See Note 2, "Summary of Significant Accounting Policies," and Note 9, "Income
Taxes," to the Consolidated Financial Statements included in this Annual Report
on Form 10­K for additional information with respect to tax matters.
Critical Accounting Policies
Our Consolidated Financial Statements included in this Annual Report on
Form 10­K have been prepared in accordance with accounting principles generally
accepted in the United States ("GAAP"), which require that management make
numerous estimates and assumptions. Actual results could differ from those
estimates and assumptions, thus impacting our reported results of operations and
financial position. The critical accounting policies and estimates described in
this section are those that are most important to the depiction of our financial
condition and results of operations and the application of which requires
management's most subjective judgments in making estimates about the effect of
matters that are inherently uncertain. We describe our significant accounting
policies more fully in Note 2, "Summary of Significant Accounting Policies," to
the Consolidated Financial Statements included in this Annual Report on Form
10­K.
Goodwill and Long-Lived Tangible and Intangible Assets
Our goodwill totaled $482.3 million, representing 28% of our total assets as of
December 31, 2019. Our long-lived tangible assets totaled $459.7 million as of
December 31, 2019, and our long-lived intangible assets totaled $230.1 million,
representing 13% of our total assets. The remainder of our assets largely
consisted of cash, accounts receivable and inventories.
In accordance with current accounting guidance, we do not amortize goodwill, but
rather assess goodwill for impairment annually on December 1 and when an event
occurs or circumstances change to suggest that the carrying amount may not be
recoverable. If the carrying amount of a reporting unit exceeds its fair value,
goodwill is considered to be impaired and an impairment loss is recorded. We
have three reporting units - Completion Services, Downhole Technologies and
Offshore/Manufactured Products - with goodwill balances totaling $646.7 million
as of September 30, 2019.
During the fourth quarter of 2019, U.S. land-based completion activity declined
significantly from levels experienced over the previous three quarters.
Additionally, a number of other market indicators declined to levels not
experienced in recent years. For example, in October 2019, the Philadelphia Oil
Services Index average price declined to a level not reported since 1999 and the
average U.S. rig count was 20% below the level observed a year prior. Consistent
with other oilfield service industry peers, our common stock price declined and
our market capitalization was below the carrying value of stockholders' equity.
Given current market conditions, we reduced our near-term outlook for demand
related to our short-cycle products and services in the U.S. shale play regions.
This refined outlook was incorporated in the December 1, 2019 annual impairment
assessment, which indicated that the fair value of the Downhole Technologies
segment was less than its carrying amount.

                                      -48-
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For our annual quantitative impairment test of goodwill on December 1, 2019, we
estimated the fair value of each reporting unit and compared that fair value to
its recorded carrying value. As none of our reporting units have publicly quoted
market prices, we determined the value that willing buyers and sellers would
place on each reporting unit in a routine sale process (a Level 3 fair value
measurement). In our analysis, we targeted a valuation that would be placed on
the reporting unit by market participants based on historical and projected
operating results throughout a full market cycle, not the value of the reporting
unit based on trough or peak operating results. We utilized, based on
circumstances, a combination of trading multiples analyses, projected discounted
cash flow calculations with estimated terminal values and acquisition
comparables. We discounted our projected cash flows using a long-term weighted
average cost of capital for each reporting unit based on our estimate of
investment returns that would be required by a market participant. The fair
value of our reporting units is primarily affected by expectations regarding
future crude oil and natural gas prices, anticipated spending by our customers,
income tax rates and the cost of capital. We also compared the total market
capitalization of the Company to the sum of the fair values of all of our
reporting units to assess the reasonableness of the aggregated fair value.
Our assessment led us to conclude that the goodwill amount recorded in our
Downhole Technologies reporting unit was partially impaired and we therefore
recognized a non-cash goodwill impairment charge of $165.0 million in the fourth
quarter of 2019. Following the impairment charge, our Downhole Technologies
reporting unit did not have a fair value substantially in excess of its carrying
amount. The fair value of our Completion Services and Offshore/Manufactured
Products reporting units exceeded their carrying amounts by 24% and 38%,
respectively, as of December 1, 2019.
The discount rates used to value our reporting units ranged between 12.5% and
13.0%. Holding all other assumptions and inputs used in each of the respective
discounted cash flow analysis constant, a 50 basis point increase in the
discount rate assumption would have increased the goodwill impairment charge by
approximately $28 million.
As of December 31, 2019, our market capitalization was $987 million, or
$237 million below our equity carrying value.
As discussed above, our annual assessment has appropriately considered the
impact of the current market environment and industry outlook by using projected
discounted cash flows reflecting expected market conditions at December 1, 2019
in estimating the fair value of our reporting units. The underlying fundamentals
supporting the crude oil and natural gas markets continue to support long-term
crude oil demand growth and the need for additional crude oil production. We
continue to monitor commodity prices and other significant assumptions used in
our forecasts. If we experience a prolonged decline in long-term demand for
crude oil and natural gas or significant and sustained increases in commodity
supplies, which serve to depress commodity prices over the long term, we will be
required to update our discounted cash flow analysis and potentially be required
to record a goodwill impairment in the future. Furthermore, if our market
capitalization remains below our book value for a sustained period of time and
the implied fair value of our equity is not reasonably supported by equity
control premiums, we will need to consider updating our assessment.
An assessment for impairment of long-lived tangible and intangible assets is
conducted whenever changes in facts and circumstances indicate a loss in value
may have occurred. Indicators of impairment might include persistent negative
economic trends affecting the markets we serve, recurring losses or lowered
expectations of future cash flows to be generated by our assets. When necessary,
the determination of the amount of impairment is based on quoted market prices,
if available, or on our judgment as to the future operating cash flows to be
generated from these assets throughout their estimated useful lives.
Based on our December 2019 impairment assessment, the carrying values of our
long-lived tangible and intangible asset groups are recoverable and no
impairment losses were recorded. However, industry cyclicality and downturns may
result in future changes to our estimates of projected operating cash flows, or
their timing, and could potentially cause future impairment to the values of our
long-lived assets, including finite-lived intangible assets.
Revenue and Cost Recognition
As further discussed in Note 3, "Recent Accounting Pronouncements," to the
Consolidated Financial Statements included in this Annual Report on Form 10­K,
we account for revenue in accordance with Financial and Accounting Standards
Board guidance on revenue from contracts with customers ("ASC 606"), which we
adopted on January 1, 2018. The new guidance did not have a material impact on
our recognition of revenues.
Our revenue contracts may include one or more promises to transfer a distinct
good or service to the customer, which is referred to under ASC 606 as a
"performance obligation," and to which revenue is allocated. We recognize
revenue and the related cost when, or as, the performance obligations are
satisfied. The majority of our significant contracts for custom engineered
products have a single performance obligation as no individual good or service
is separately identifiable from other performance obligations in the contracts.
For contracts with multiple distinct performance obligations, we allocate
revenue to the identified performance obligations in the contract. Our product
sales terms do not include significant post-performance obligations.

                                      -49-
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Our performance obligations may be satisfied at a point in time or over time as
work progresses. Revenues from goods and services transferred to customers at a
point in time accounted for approximately 34%, 29% and 22% of consolidated
revenues for the years ended December 31, 2019, 2018 and 2017, respectively. The
majority of our revenue recognized at a point in time is derived from short-term
contracts for standard products offered by us. Revenue on these contracts is
recognized when control over the product has transferred to the customer.
Indicators we consider in determining when transfer of control to the customer
occurs include: right to payment for the product, transfer of legal title to the
customer, transfer of physical possession of the product, transfer of risk and
customer acceptance of the product.
Revenues from products and services transferred to customers over time accounted
for approximately 66%, 71% and 78% of consolidated revenues for the years ended
December 31, 2019, 2018 and 2017, respectively. The majority of our revenue
recognized over time is for services provided under short-term contracts with
revenue recognized as the customer receives and consumes the services provided
by our segments. In addition, we manufacture certain products to individual
customer specifications under short-term contracts for which control passes to
the customer as the performance obligations are fulfilled and for which revenue
is recognized over time.
For significant project-related contracts involving custom engineered products
within the Offshore/Manufactured Products segment (also referred to as
"project-driven products"), revenues are typically recognized over time using an
input measure such as the percentage of costs incurred to date relative to total
estimated costs at completion for each contract (cost-to-cost method). Contract
costs include labor, material and overhead. Management believes this method is
the most appropriate measure of progress on large contracts. Billings on such
contracts in excess of costs incurred and estimated profits are classified as a
contract liability (deferred revenue). Costs incurred and estimated profits in
excess of billings on these contracts are recognized as a contract asset (a
component of accounts receivable).
Contract estimates for project-related contracts involving custom engineered
products are based on various assumptions to project the outcome of future
events that may span several years. Changes in assumptions that may affect
future project costs and margins include production efficiencies, the complexity
of the work to be performed and the availability and costs of labor, materials
and subcomponents.
As a significant change in one or more of these estimates could affect the
profitability of our contracts, contract-related estimates are reviewed
regularly. We recognize adjustments in estimated profit on contracts under the
cumulative catch-up method. Under this method, the impact of the adjustment on
profit recorded to date is recognized in the period the adjustment is
identified. Revenue and profit in future periods of contract performance are
recognized using the adjusted estimate. If at any time the estimate of contract
profitability indicates an anticipated loss will be incurred on the contract,
the loss is recognized in the period it is identified.
Cost of goods sold includes all direct material and labor costs and those costs
related to contract performance, such as indirect labor, supplies, tools and
repairs. As presented on our consolidated statements of operations, costs of
goods sold excludes depreciation and amortization expense. Selling, general and
administrative costs are charged to expense as incurred.
Taxes assessed by a governmental authority that are both imposed on and
concurrent with a specific revenue-producing transaction, that we collect from a
customer, are excluded from revenue. Shipping and handling costs associated with
outbound freight after control over a product has transferred to a customer are
accounted for as a fulfillment cost and are included in cost of products.
Proceeds from customers for the cost of oilfield rental equipment that is
damaged or lost downhole are reflected as gains or losses on the disposition of
assets after considering the write-off of the remaining net book value of the
equipment.
Purchase Price Allocation of Acquisitions
We allocate the fair value of the purchase price consideration of an acquired
business to its identifiable assets and liabilities based on estimated fair
values. The excess of the purchase price over the fair value of the acquired
assets and liabilities, if any, is recorded as goodwill. We use available
information to estimate fair values including quoted market prices, the carrying
value of acquired assets, and widely accepted valuation techniques such as
discounted cash flows. Determining the fair value of assets and liabilities
acquired, as well as intangible assets that relate to such items as customer
relationships, technology and know-how, trade names and non-compete agreements
involves significant professional judgment and is ultimately based on
acquisition models and management's assessment of the value of the assets
acquired, and to the extent available, third-party assessments. The judgments
made in determining the estimated fair value assigned to each class of assets
acquired and liabilities assumed, as well as asset lives, could materially
impact our results of operations.

                                      -50-
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Accounting for Contingencies
We have contingent liabilities and future claims for which we have made
estimates of the amount of the eventual cost to liquidate such liabilities or
claims. These liabilities and claims sometimes involve threatened or actual
litigation where damages have been quantified and we have made an assessment of
our exposure and recorded in an amount estimated to cover an expected loss.
Other claims or liabilities have been estimated based on their fair value or our
experience in these matters and, when appropriate, the advice of outside counsel
or other outside experts. Upon the ultimate resolution of these uncertainties,
our future reported financial results will be impacted by the difference between
our estimates and the actual amounts paid to settle a liability. Examples of
areas where we have made important estimates of future liabilities include
duties, income taxes, litigation, insurance claims and contractual claims and
obligations.
Estimation of Useful Lives
The selection of the useful lives of many of our assets requires the judgments
of our operating personnel. Our judgment in this area is influenced by our
historical experience in operating our assets, technological developments and
expectations of future demand for the assets. Should our estimates be too long
or short, we might eventually report a disproportionate number of losses or
gains upon disposition or retirement of our long-lived assets. We believe our
estimates of useful lives are appropriate.
Income Taxes
We follow the liability method of accounting for income taxes in accordance with
current accounting standards regarding the accounting for income taxes. Under
this method, deferred income taxes are recorded based upon the differences
between the financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws in effect at the time the
underlying assets or liabilities are recovered or settled.
On December 22, 2017, Tax Reform Legislation was signed into law which enacts
significant changes to U.S. tax and related laws, including certain key U.S.
federal income tax provisions applicable to oilfield service and manufacturing
companies such as the Company. U.S. state or other regulatory bodies have not
finalized potential changes to existing laws and regulations which may result
from the new U.S. tax and related laws. In accordance with the SEC's Staff
Accounting Bulletin No. 118, we recorded provisional estimates to reflect the
effect of the Tax Reform Legislation on our income tax assets and liabilities as
of December 31, 2017. During 2018, we adjusted these provisional estimates based
on additional guidance issued by the Internal Revenue Service.
Prior to December 22, 2017, the majority of our earnings from international
subsidiaries were considered to be indefinitely reinvested outside of the United
States and no provision for U.S. income taxes was made for these earnings.
However, certain historical foreign earnings were not considered to be
indefinitely reinvested outside of the United States and were subject to U.S
income tax as earned. If any of our subsidiaries distributed earnings in the
form of dividends or otherwise, we generally were subject to both U.S. income
taxes (subject to an adjustment for foreign tax credits) and withholding taxes
payable to various foreign countries.
As of December 31, 2019, our total investment, including earnings and profits,
in foreign subsidiaries is considered to be permanently reinvested.
We record a valuation allowance in the reporting period when management believes
that it is more likely than not that any deferred tax asset will not be
realized. This assessment requires analysis of changes in tax laws, available
positive and negative evidence, including consideration of losses in recent
years, reversals of temporary differences, forecasts of future income,
assessment of future business and tax planning strategies. During 2019, 2018 and
2017, we recorded valuation allowances primarily with respect to net operating
loss carryforwards of certain of our operations outside the United States. As a
result of changes in U.S. tax laws in 2017, we recorded a valuation allowance on
our foreign tax credit carryforwards during the fourth quarter of 2017.
The calculation of our tax liabilities involves assessing uncertainties
regarding the application of complex tax regulations. We recognize liabilities
for tax expenses based on our estimate of whether, and the extent to which,
additional taxes will be due. If we ultimately determine that payment of these
amounts is unnecessary, we reverse the liability and recognize a tax benefit
during the period in which we determine that the liability is no longer
necessary. We record an additional charge in our provision for taxes in the
period in which we determine that the recorded tax liability is less than we
expect the ultimate assessment to be.
Recent Accounting Pronouncements
From time to time, new accounting pronouncements are issued by the Financial
Accounting Standards Board (the "FASB"), which are adopted by us as of the
specified effective date. Unless otherwise discussed, management believes that
the impact of recently issued standards, which are not yet effective, will not
have a material impact on our consolidated financial statements upon adoption.

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