ex_103255.htm

EX-99.5 8 ex_103255.htm EXHIBIT 99.5 ex_103255.htm

Exhibit 99.5

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

On January 12, 2018, Oil States International, Inc. ("Oil States" or the "Company") acquired 100% of the equity interests in GEODynamics, Inc. ("GEODynamics") for total consideration of approximately $615 million (the "Acquisition") consisting of (i) aggregate net cash consideration of $295 million, (ii) issuance of approximately 8.66 million shares of our common stock with a market value of $295 million at closing, and (iii) issuance of a $25 million unsecured promissory note payable (the “Promissory Note”) that bears interest at 2.5% per annum and matures on July 12, 2019.

The cash consideration for the Acquisition and the related fees and expenses was funded primarily with borrowings under our senior secured revolving credit facility (the "Revolving Credit Facility").

The following unaudited pro forma condensed combined financial statements are based on the historical consolidated financial statements of Oil States and GEODynamics, as adjusted to give effect to the Acquisition. The unaudited pro forma condensed combined statements of operations for the three months ended September 30, 2017, the nine months ended September 30, 2017 and 2016, and the year ended December 31, 2016, give effect to the Acquisition as if it had occurred on January 1, 2016. The unaudited pro forma condensed combined balance sheet as of September 30, 2017, gives effect to the Acquisition as if it had occurred on September 30, 2017.

The unaudited pro forma adjustments are based upon available information and certain assumptions that we believe are reasonable. The unaudited condensed consolidated pro forma financial data is presented for informational purposes only and does not purport to represent our financial condition or our results of operations had the Acquisition occurred on or as of the dates noted above or to project the results for any future date or period.

The Acquisition will be accounted for using the acquisition method of accounting. The unaudited pro forma adjustments reflect adjustments required under generally accepted accounting principles for business combinations and are based upon, among other things, preliminary estimates of fair market values of assets acquired and liabilities assumed and certain assumptions that we believe are reasonable. We have not completed the purchase price allocation and these preliminary estimates are subject to revision. Revisions to the preliminary estimates of fair market value may have a significant impact on the pro forma amounts of total assets, total liabilities and stockholders’ equity, depreciation and amortization expense, interest expense and income tax expense.

The unaudited pro forma condensed combined financial statements should be read together with Oil States' historical consolidated financial statements, which are included in Oil States' latest annual report on Form 10-K (December 31, 2016) and quarterly report on Form 10-Q (September 30, 2017), and GEODynamics’ historical consolidated financial statements which are filed as exhibits to the Current Report on Form 8-K with which these unaudited pro forma condensed combined financial statements are filed.

Unaudited Pro Forma Condensed Combined Balance Sheet

As of September 30, 2017

(In thousands)

	Oil States Historical		GEODynamics Historical		Pro Forma Adjustments			Notes	Pro Forma Combined
Cash and cash equivalents	$	65,864	$	7,207	$	—			$	70,567
						(302,504	)	(a)
						300,000		(b)
Accounts receivable, net		210,218		31,106		—				241,324
Inventories, net		173,447		36,523		—				209,970
Other current assets		26,464		1,608		—				28,072
Total current assets		475,993		76,444		(2,504	)			549,933
Property, plant and equipment, net		508,743		14,513		11,256		(c)		534,512
Goodwill, net		268,917		2,803		414,151		(d)		685,871
Other intangible assets, net		50,105		866		198,134		(e)		249,105
Deferred income taxes		—		1,244		(1,244	)	(f)		—
Other noncurrent assets		25,597		185		—				25,782
Total assets	$	1,329,355	$	96,055	$	619,793			$	2,045,203

Current portion of long-term debt and capitalized leases	$	492	$	17,652	$	(17,521	)	(g)	$	623
Accounts payable and accrued liabilities		92,400		14,872		2,000		(h)		109,272
Deferred revenue		22,588		307		—				22,895
Other current liabilities		1,031		2,758		—				3,789
Total current liabilities		116,511		35,589		(15,521	)			136,579
Long-term debt and capitalized leases		19,061		1,275		300,000		(b)		344,771
						(565	)	(g)
						25,000		(i)
Deferred income taxes		4,592		—		(1,244	)	(f)		80,091
						76,743		(j)
Other noncurrent liabilities		22,914		1,661		—				24,575
Total liabilities		163,078		38,525		384,413				586,016
Total stockholders’ equity		1,166,277		57,530		235,380		(k)		1,459,187
Total liabilities and stockholders’ equity	$	1,329,355	$	96,055	$	619,793			$	2,045,203

See accompanying notes to the Unaudited Pro Forma Condensed Combined Financial Information

Unaudited Pro Forma Condensed Combined Statements of Operations

Three Months Ended September 30, 2017

(In thousands, except per share information)

	Oil States Historical			GEODynamics Historical			Pro Forma Adjustments			Notes	Pro Forma Combined
Revenue	$	164,048		$	45,838		$	—			$	209,886
Product and service costs		129,189			25,735			3,790		(l)		158,714
Selling, general and administrative expense		26,843			7,844			(4,675	)	(l)		30,012
Depreciation and amortization expense		26,788			—			885		(l)		31,332
								3,659		(m)
Other operating expense, net		(589	)		—			—				(589	)
Operating income (loss)		(18,183	)		12,259			(3,659	)			(9,583	)
Interest expense, net		(1,074	)		(179	)		(3,846	)	(n)		(5,099	)
Other income (loss)		207			(55	)		—				152
Income (loss) before income taxes		(19,050	)		12,025			(7,505	)			(14,530	)
Income tax benefit (provision)		4,019			(3,928	)		2,739		(o)		2,830
Net income (loss)	$	(15,031	)	$	8,097		$	(4,766	)		$	(11,700	)

Basic and diluted net loss per share	$	(0.30	)								$	(0.20	)
Weighted average number of common shares outstanding		49,978						8,661		(p)		58,639

See accompanying notes to the Unaudited Pro Forma Condensed Combined Financial Information

Unaudited Pro Forma Condensed Combined Statements of Operations

Nine Months Ended September 30, 2017

(In thousands, except per share information)

	Oil States Historical			GEODynamics Historical			Pro Forma Adjustments			Notes	Pro Forma Combined
Revenue	$	486,917		$	117,365		$	—			$	604,282
Product and service costs		379,949			69,818			10,275		(l)		460,042
Selling, general and administrative expense		84,055			21,485			(12,874	)	(l)		92,666
Depreciation and amortization expense		82,552			—			2,599		(l)		96,185
								11,034		(m)
Other operating expense, net		374			—			—				374
Operating income (loss)		(60,013	)		26,062			(11,034	)			(44,985	)
Interest expense, net		(3,127	)		(507	)		(11,747	)	(n)		(15,381	)
Other income (loss)		477			(67	)		—				410
Income (loss) before income taxes		(62,663	)		25,488			(22,781	)			(59,956	)
Income tax benefit (provision)		15,708			(8,256	)		8,315		(o)		15,767
Net income (loss)	$	(46,955	)	$	17,232		$	(14,466	)		$	(44,189	)

Basic and diluted net loss per share	$	(0.94	)								$	(0.75	)
Weighted average number of common shares outstanding		50,190						8,661		(p)		58,851

Nine Months Ended September 30, 2016

(In thousands, except per share information)

	Oil States Historical			GEODynamics Historical			Pro Forma Adjustments			Notes	Pro Forma Combined
Revenue	$	524,510		$	50,914		$	—			$	575,424
Product and service costs		400,980			36,561			6,988		(l)		444,529
Selling, general and administrative expense		90,854			13,289			(9,433	)	(l)		94,710
Depreciation and amortization expense		89,666			—			2,446		(l)		103,299
								11,187		(m)
Other operating income, net		(4,098	)		—			—				(4,098	)
Operating income (loss)		(52,892	)		1,064			(11,188	)			(63,016	)
Interest expense, net		(3,803	)		(513	)		(11,944	)	(n)		(16,260	)
Other income		462			43			—				505
Income (loss) before income taxes		(56,233	)		594			(23,132	)			(78,771	)
Income tax benefit		20,474			296			8,443		(o)		29,213
Net income (loss)	$	(35,759	)	$	890		$	(14,689	)		$	(49,558	)

Basic and diluted net loss per share	$	(0.71	)								$	(0.84	)
Weighted average number of common shares outstanding		50,158						8,661		(p)		58,819

See accompanying notes to the Unaudited Pro Forma Condensed Combined Financial Information

Unaudited Pro Forma Condensed Combined Statements of Operations

Year Ended December 31, 2016

(In thousands, except per share information)

	Oil States Historical			GEODynamics Historical			Pro Forma Adjustments			Notes	Pro Forma Combined
Revenue	$	694,444		$	72,090		$	—			$	766,534
Product and service costs		526,770			52,201			8,979		(l)		587,950
Selling, general and administrative expense		124,033			19,484			(12,306	)	(l)		131,211
Depreciation and amortization expense		118,720			—			3,327		(l)		136,898
								14,851		(m)
Other operating income, net		(5,796	)		—			—				(5,796	)
Operating income (loss)		(69,283	)		405			(14,851	)			(83,729	)
Interest expense, net		(4,944	)		(672	)		(15,968	)	(n)		(21,584	)
Other income		902			94			—				996
Loss before income taxes		(73,325	)		(173	)		(30,819	)			(104,317	)
Income tax benefit		26,939			220			11,249		(o)		38,408
Net income (loss)	$	(46,386	)	$	47		$	(19,570	)		$	(65,909	)

Basic and diluted net loss per share	$	(0.92	)								$	(1.12	)
Weighted average number of common shares outstanding		50,174						8,661		(p)		58,835

See accompanying notes to the Unaudited Pro Forma Condensed Combined Financial Information

Notes to Unaudited Pro Forma Condensed Combined Financial Information

(in thousands, except per share information)

Note 1 - Basis of Presentation

The historical consolidated financial statements have been adjusted in the pro forma condensed combined financial statements to give effect to pro forma events that are (1) directly attributable to the Acquisition, (2) factually supportable and (3) with respect to the pro forma condensed combined statements of operations, expected to have a continuing impact on the combined results following the business combination.

The business combination was accounted for under the acquisition method of accounting in accordance with ASC Topic 805, Business Combinations. As the acquirer for accounting purposes, the Company has estimated the fair value of GEODynamics’ assets acquired and liabilities assumed and conformed the accounting policies of GEODynamics’ to its own accounting policies.

The pro forma condensed combined financial statements do not necessarily reflect what the combined company’s financial condition or results of operations would have been had the Acquisition occurred on the dates indicated. They also may not be useful in predicting the future financial condition and results of operations of the combined company. The actual financial position and results of operations may differ significantly from the pro forma amounts reflected herein due to a variety of factors.

The unaudited pro forma condensed combined financial statements include estimated deferred tax liabilities associated with non-deductible intangible assets and property, plant and equipment. The historical U.S. income tax rate in effect as of September 30, 2017, and for the historical periods presented, was 35% which was the basis for recording the estimated deferred tax liabilities. On December 22, 2017, the United States enacted legislation which resulted in significant changes to U.S. tax and related laws, including a reduction in the corporate income tax rate from 35% to 21% (the rate in effect at the date of the Acquisition). The effect of this tax rate change will be to reduce the level of goodwill and deferred tax liabilities recorded in connection with the Acquisition from amounts presented in the unaudited pro forma condensed combined balance sheet as of September 30, 2017.

The condensed combined pro forma financial information does not reflect the realization of any synergies from the Acquisition following the completion of the business combination.

Note 2 - Transaction Financing

The Company completed the Acquisition for $295 million in net cash consideration, $295 million in common stock consideration and the issuance of a $25 million Promissory Note payable to the previous stockholder. The cash consideration was financed with $300 million of borrowings under our Revolving Credit Facility, together with $5 million of cash on hand, and was offset by cash acquired of $10 million. The equity consideration consisted of 8.66 million shares of Oil States common stock. The Promissory Note bears interest at a fixed rate of 2.5% and matures on July 12, 2019.

Note 3 - Preliminary Purchase Price Allocation

The Company has performed a preliminary valuation analysis of the fair market value of GEODynamics' assets and liabilities. The following table summarizes the allocation of the preliminary purchase price as of September 30, 2017 (in thousands):

Accounts receivable, net	$	31,106
Inventories, net		36,523
Property, plant and equipment		25,769
Intangible assets (Note 4(f))		199,000
Other assets		1,793
Accounts payable and accrued liabilities		(14,872	)
Deferred income taxes		(75,499	)
Other liabilities		(5,567	)
Total identifiable net assets		198,253
Goodwill		416,954
Total net assets	$	615,207

Consideration consists of:
Cash, net of cash acquired	$	295,297
Oil States common stock		294,910
Promissory Note		25,000
Total consideration	$	615,207

This preliminary purchase price allocation, based on GEODynamics' historical balance sheet as of September 30, 2017, has been used to prepare pro forma adjustments in the unaudited pro forma condensed combined balance sheet and statements of operations. The final purchase price allocation will be determined when the Company has completed the detailed valuations and necessary calculations. The final allocation could differ materially from the preliminary allocation used in the pro forma adjustments. The final allocation may include (1) changes in allocations to intangible assets such as trade names, technology and customer relationships as well as goodwill, (2) changes in U.S. tax laws subsequent to September 30, 2017, (3) changes in fair values of property, plant and equipment and (4) other changes to assets and liabilities.

Note 4 - Pro Forma Adjustments

The pro forma adjustments are based on our preliminary estimates and assumptions that are subject to change. The following adjustments have been reflected in the unaudited pro forma condensed combined financial information:

(a)	Reflects cash consideration paid in connection with the Acquisition, excluding cash acquired.

(b)	Reflects cash proceeds received by the Company through borrowings under the Revolving Credit Facility used to finance the cash portion of the Acquisition.

(c)

Reflects an adjustment of $11.3 million to increase the basis in the acquired property, plant and equipment to estimated fair value of $25.8 million. The estimated useful lives range from three to fourteen years. The fair value and useful life calculations are preliminary and subject to change after the Company finalizes its review of the specific types, nature, age and condition of GEODynamics’ property, plant and equipment.

The following table summarizes the changes in the estimated depreciation expense (in thousands):

	Three months ended			Nine months ended September 30,						Year ended
	September 30, 2017			2017			2016			December 31, 2016
Estimated depreciation expense	$	678		$	2,034		$	2,034		$	2,713
Less: Historical depreciation expense		(861	)		(2,485	)		(2,318	)		(3,157	)
Pro forma adjustments to depreciation expense	$	(183	)	$	(451	)	$	(284	)	$	(444	)

(d)	Reflects adjustments to eliminate GEODynamics’ historical goodwill of $2.8 million and record goodwill associated with the acquisition of $417.0 million as presented in Note 3.

(e)

Reflects the adjustment of historical intangible assets acquired by the Company to their estimated fair values. As part of the preliminary valuation analysis, the Company identified intangible assets, including customer relationships, technology, trade names, and noncompete agreements. The fair value of identifiable intangible assets is determined primarily using the “income approach,” which requires a forecast of all of the expected future cash flows. Since all information required to perform a final detailed valuation analysis of GEODynamics’ intangible assets could not be obtained as of the date of this filing, for purposes of these unaudited pro forma condensed combined financial statements, the Company used certain assumptions based on preliminary valuation analysis estimates and publicly available transaction data for the industry.

The following table summarizes the preliminary estimated fair values of GEODynamics' identifiable intangible assets, their estimated useful lives and estimated change in amortization expense (in thousands):

	Estimated Fair		Three months ended			Nine months ended September 30,						Year ended
	Value		September 30, 2017			2017			2016			December 31, 2016
Customer relationships (20 years)	$	100,000	$	1,250		$	3,750		$	3,750		$	5,000
Technology (17 years)		47,000		691			2,074			2,074			2,765
Tradenames (20 years)		34,000		425			1,275			1,275			1,700
Noncompete agreements (3 years)		18,000		1,500			4,500			4,500			6,000
	$	199,000		3,866			11,599			11,599			15,465

Less: Historical amortization expense				(24	)		(114	)		(128	)		(170	)
Pro forma adjustments to amortization expense			$	3,842		$	11,485		$	11,471		$	15,295

These preliminary estimates of fair value and estimated useful lives will likely differ from final amounts the Company will calculate after completing a detailed valuation analysis, and the difference could have a material impact on the accompanying unaudited pro forma condensed combined financial statements. A 10% change in the valuation of intangible assets would cause a corresponding increase or decrease in the balance of goodwill and an increase or decrease to annual amortization expense of approximately $1.1 million, assuming an overall weighted-average useful life of 18 years.

(f)	Reclassifies deferred tax asset into deferred tax liabilities to conform to the presentation used by the Company.

(g)	Reflects adjustments to eliminate the portion of GEODynamics' historical debt not assumed in the Acquisition. As part of the Acquisition, Oil States continued certain capital lease arrangements which totaled $0.8 million as of September 30, 2017.

(h)	Represents accrual of estimated transaction costs of $2.0 million related to the Acquisition.

(i)	Reflects the Promissory Note consideration issued in connection with the Acquisition.

(j)

Adjusts the deferred tax liabilities resulting from the Acquisition. The estimated increase in deferred tax liabilities to $75.5 million results primarily from the fair value adjustments for non-deductible intangible assets and property, plant and equipment based on an estimated combined U.S. federal and state statutory tax rate of 36.5%. Estimates of deferred income tax balances are preliminary and subject to change based on changes in tax laws enacted subsequent to September 30, 2017 and management’s final determination of the fair value of assets acquired and liabilities assumed.

(k)	Represents the elimination of the equity and debt of GEODynamics and the issuance of common shares of Oil States stock in connection with the Acquisition, as follows (in thousands):

Issuance of 8.66 million common shares of Oil States stock	$	294,910
Less: Estimated transaction costs accrued for in connection with the Acquisition		(2,000	)
Add: GEODynamics debt as of September 30, 2017, not assumed		18,086
Less: GEODynamics stockholders’ equity as of September 30, 2017, as adjusted for debt not assumed		(75,616	)
Pro forma adjustment to stockholders' equity	$	235,380

(l)	Reclassifies certain costs to conform to the presentation used by the Company between (i) product and service costs, (ii) selling general and administrative expense and (iii) depreciation and amortization expense.

(m)	Reflects adjustments to depreciation and amortization expense based on the preliminary purchase price allocation as of the acquisition date as presented in Note 3. See (c) and (e) above.

(n)	Represents the net increase to interest expense resulting from interest on the Revolving Credit Facility borrowings and Promissory Note issuance used to finance the Acquisition, and extinguishment of GEODynamics historical debt, as follows (in thousands):

	Three months ended			Nine months ended September 30,						Year ended
	September 30, 2017			2017			2016			December 31, 2016
Interest expense on Revolving Credit Facility⁽¹⁾	$	4,025		$	11,944		$	11,988		$	16,013
Interest expense on Promissory Note⁽²⁾		—			310			469			627
Less: Historical interest expense related to debt not assumed in the Acquisition		(179	)		(507	)		(513	)		(672	)
Pro forma adjustment to interest expense	$	3,846		$	11,747		$	11,944		$	15,968

(1)

Borrowings under the Revolving Credit Facility, at the time of the Acquisition, bear interest at LIBOR plus a margin of 1.75%, or at a base rate plus a margin of 0.75%. The incremental pro forma interest expense for the periods presented is calculated based on borrowings of $300 million and an interest rate of 5.25%. A 12.5 basis point change in the variable interest rate would cause an increase or decrease in annual interest expense of $0.4 million.

(2)

The unsecured Promissory Note payable for $25 million, bears interest at 2.5% per annum and matures 18 months following issuance.

(o)	Reflects the income tax effect of pro forma adjustments using an approximate combined U.S. federal and state statutory tax rate of 36.5% in effect for the periods presented.

(p)	Represents the increase in the weighted average number of common shares outstanding in connection with the issuance of Oil States common stock with the Acquisition.