Oil States International, Inc. (OIS) Q1 2020 Earnings Report, Transcript and Summary

Welcome to the Oil States International 1Q 2020 Earnings Conference Call. My name is Johnny, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions]. I'll now turn the call over to Ellen Pennington. Ellen, you may begin.

Good morning, and welcome to Oil States' First Quarter 2020 Earnings Conference Call. Our call today will be led by Cindy Taylor, Oil States' President and Chief Executive Officer; and Lloyd Hajdik, Oil States' Executive Vice President and Chief Financial Officer. We're also joined by Chris Cragg, Oil States' Executive Vice President, Operations; and Ben Smith, President of GEODynamics, our Downhole Technologies segment. Before we begin, we would like to caution listeners regarding forward-looking statements. To the extent that our remarks today contain information other than historical information, please note that we are relying on the safe harbor protections afforded by federal law. Any such remarks should be weighed in the context of the many factors that affect our business, including those risks disclosed in our Form 10-K along with other SEC filings. This call is being webcast and can be accessed at Oil States' website. A replay of the conference call will be available 1.5 hours after the completion of this call and will be available for one month. I will now turn the call over to Cindy.

Thank you, Ellen. Good morning to each of you, and thank you for joining us today to participate in our first quarter 2020 earnings conference call. As you can imagine, the market dislocations caused by the global response to the COVID-19 pandemic have been unprecedented. The impact on the energy industry is even more extreme due to the rapid demand destruction for crude oil and the resulting massive inventory builds across the globe that have resulted. Partially cushioning this very negative industry backdrop is the agreement reached at the OPEC+ Summit earlier this month, whereby both short-term and long-term supply cuts were agreed to. The announced duration for the short-term cuts totaling 10 million barrels per day, extend for two months through May and June. This is the single largest coordinated output cut in history, but nonetheless, it falls far short of the estimated 25 million to 30 million barrels per day of demand destruction. Importantly, the longer-term cuts extend to April 2022, with supply reductions compressing over the extended term. Given the duration of the cuts, the industry should be able to better manage through the unprecedented crude oil demand destruction once we get beyond the immediate impact of inadequate storage globally with well shut-ins and supply constraints that follow. We have important matters to discuss with you today beyond just our results for the first quarter. In conjunction with our discussion of the quarter, we plan to highlight our initiatives undertaken to shore up liquidity, give you our thoughts on near-term market conditions and summarize our efforts to mitigate costs, both capital and operating, as we navigate this difficult market. First, I'd like to provide a brief update regarding COVID-19 and its impact on our global operations. We have implemented stringent protocols in an effort to protect our employees, customers, suppliers and the broader communities within which we work. Measures applied include working remotely, we're able to do so, adhering to social distancing guidelines, limiting visitors to our work sites to essential personnel, adjusting shifts and work schedules to minimize close contact, mandatory stay-at-home principles when employees show symptoms of illness, performing enhanced cleaning protocols, along with other safety measures. To date, we have only been notified of two confirmed cases of COVID-19 in our global workforce with one of the two now testing negative and returning to work. As various states began to reopen nonessential businesses, we have stressed how critical it is that we maintain our diligence to help prevent a second wave of cases developing in our communities. Demand for oil and gas, and therefore, our products and services depends on a fully functional economy, and we intend to set an example for others in working safely during this pandemic based upon what we have learned. Moving on to the quarter. We reported a large headline loss during the quarter resulting from various impairments taken due to impacts on our business from the global response to the COVID-19 crisis. However, our first quarter results, excluding the impairments taken, exceeded our guidance issued in February. During the first quarter, our Completion Services revenues were modestly up sequentially with margins improving 370 basis points. In our Downhole Technologies segment, revenues improved 7% sequentially and margins increased 420 basis points. Revenues in our Offshore/Manufactured Products segment decreased sequentially due to delays in our project-driven sales arising from global disruptions in our own operations and in various parts of our supply chain. Segment backlog at March 31, 2020, totaled $267 million, a decrease of 4% sequentially. Our segment book-to-bill ratio for the quarter approximated one-times. Despite exceeding our first quarter guidance, we are acutely aware of the challenging market conditions that we will face during the remainder of 2020 and into 2021. During stress periods in our business, we know that the immediate focus needs to be on the preservation of liquidity and the management of variable and fixed costs through such a downturn. Lloyd will review with you our efforts taken with our lenders to amend our current cash flow-based revolving credit facility and convert it into an asset-based lending arrangement. We have also taken significant actions on the cost side of our business to adjust to significantly declining revenues, particularly those ties to shale completions in the United States, which are currently in three fall. We will closely manage our debt, working capital and cash flow generation in the quarters to come. Lloyd will now review our consolidated results of operations and financial position in more detail, before I go into a discussion of each of our segments.

Thanks, Cindy. Good morning, everyone. During the first quarter, we generated revenues of $220 million, while reporting a loss of $405 million or $6.79 per share. Our first quarter results were reduced by significant non-cash impairment charges, including the following: a $406 million or $6.48 per share of goodwill written off; a $25 million or $0.34 per share inventory impairment; and a $5 million or $0.07 per share fixed asset impairment, driven by the expected duration of this unprecedented market downturn. Our first quarter EBITDA totaled $22 million with an EBITDA margin of 10%. The goodwill impairment charges were taken in all segments but related primarily to our Downhole Technologies and Completion Services businesses, arising from, among other factors, the significant decline in our stock price and that of our industry peers, along with reduced growth expectations in the next couple of years, given weak energy market conditions resulting from demand destruction, caused by the global response to the COVID-19 pandemic. In addition, given the negative market outlook, our estimated weighted average cost of capital increased approximately 500 basis points compared to year-end 2019. We remained essentially cash flow neutral during the quarter with $5 million in cash flow from operations, offset by $6 million in capital expenditures. In the first quarter, we collected $4 million in proceeds from the sale of equipment and repurchased $6 million in principal amount of our convertible senior notes at a 17% discount to par value. For the first quarter 2020, our net interest expense totaled $4 million, of which $2 million was non-cash amortization of debt discount and issuance costs. At March 31, our net debt-to-book capitalization ratio was 23%, which increased from year-end 2019 due to the non-cash asset impairments recorded during the first quarter. At March 31, our liquidity totaled $132 million, and we were in compliance with our debt covenants. It is important to fully understand our leverage position, which, at March 31, consisted of $72 million of senior secured revolving credit facility borrowings and $217 million of other debt, consisting primarily of our 1.5% convertible senior notes due in February 2023. Our credit agreement underlying our revolving credit facility is the only debt agreement that is subject to leverage covenants. Accordingly, we are working with our bank group to amend our existing cash flow-based revolving credit facility to convert it into an asset-based lending arrangement, giving a negative market outlook and the uncertainty regarding the level of EBITDA to be generated as we progress through to 2020, coupled with the leverage covenants, governing both total net debt and senior secured debt to EBITDA. The amended facility is expected to be subject to a borrowing base based on our accounts receivable and inventory with differing advance rates depending on the age and geographic location of the various assets. While the amount of the borrowing base has not yet been finalized, we expect the amended facility size to range from $175 million to $200 million, and it will not contain similar leverage covenants. At March 31, 2020, our net working capital, excluding cash and the current portion of debt and lease obligations, totaled $348 million compared to borrowings outstanding under our revolver totaling $72 million, which yielded a 4.8 times coverage level. In terms of our second quarter 2020 consolidated guidance, we expect depreciation and amortization expense to total approximately $25 million, net interest expense to total approximately $4 million, of which $2 million is non-cash, and our corporate expenses are projected to total $8.5 million. Corporate expenses in the first quarter of 2020 and forecast for the second quarter reflect reductions in both short-term and long-term incentive compensation expense. We are reducing our CapEx spending during 2020 to a range of $15 million to $20 million, which at the midpoint is roughly 70% less than our 2019 capital expenditures. At this time, I'd like to turn the call back over to Cindy, who will take you through the operating results for each of our business segments.

Thank you, Lloyd. In our Offshore/Manufactured Products segment, we generated revenues of $91 million and segment EBITDA of $13 million during the first quarter. Revenues decreased 16% sequentially due primarily to delays in our project-driven revenues due to global disruptions in our operations and in our supply chain. Segment EBITDA margin was 14% in the first quarter of 2020 compared to 15% in the prior quarter. Orders booked in the first quarter totaled $87 million, resulting in a quarterly book-to-bill ratio of approximately one-times. At March 31, our backlog totaled $267 million, a 4% sequential decrease, but it, nonetheless, reflected a 14% increase from the $234 million of backlog that existed at March 31, 2019. For 75 years, our Offshore/Manufactured Products segment has endeavored to develop leading-edge technologies while cultivating the specific expertise required for working in highly technical deepwater and offshore environments. Recent product developments should help us leverage our capabilities and support a more diverse base of energy customers. In 2020, we are bidding on potential award opportunities to support our subsea, floating and fixed platform systems, drilling, military and wind energy clients globally. However, with reduced market visibility, given much lower crude oil prices and reduced customer spending, we now believe 2020 bookings will be lower than the levels achieved in 2019. In our Well Site Services segment, we generated $88 million of revenue, $12 million of segment EBITDA and a segment EBITDA margin of 14% compared to 10% reported in the preceding quarter. The sequential improvement in our results was driven by sound cost controls during the quarter. However, we know the sequential improvement cannot be sustained, given expected materially lower U.S. land completion activity and the reduced number of frac spreads in operation. International and Gulf of Mexico market activity comprised 20% of our first quarter Completion Services revenues. As announced last year, we have discontinued our drilling operations in the Permian, reducing our marketed fleet from 34 rigs to nine rigs with the remaining assets serving customers in the Rocky Mountain region. We recorded an additional $5 million non-cash fixed asset impairment charge in the first quarter, given the negative outlook for the vertical rig market for the remainder of 2020. As of early April, none of our marketed rigs were working. We are highly focused on streamlining our operations and pursuing profitable activity in support of our global customer base. While focusing on value-added services in 2019, we closed or consolidated eight North American operating districts or 19% of our locations and reduced headcount in our Completion Services business by 20%. Sadly, these headcount reductions and facility closures must continue in 2020 in order to sustain the company through this extreme market downturn. We will continue to focus on core areas of expertise and actively develop new proprietary products to differentiate Oil States' completions offerings. In our Downhole Technologies segment, we generated revenues of $41 million and segment EBITDA of $5 million in the first quarter. First quarter revenues and EBITDA were sequentially higher due to improved sales of our perforating products and frac plugs, coupled with sound cost control. Segment EBITDA margin averaged 13% in the first quarter compared to 9% in the preceding quarter. We continue to develop, field trial and commercialize new products in our Downhole Technologies segment. Sales trends for our vapor gun integrated perforating system and addressable switches are gaining customer acceptance following their respective commercializations late in the fourth quarter. In addition, our premium integrated gun system, named STRATX, was formally launched in the first quarter. As noted on our last earnings conference call in February, we announced the commercialization of ancillary perforating products, including a new wireline release tool and two new families of shaped charge technology. Our product development efforts are designed with our wireline and E&P customers in mind, where we strive to provide them with flexibility, improved functionality and increased performance while ensuring the highest level of safety and reliability. Given the current market weakness, we recognize that revenue uptake of these new technologies will be delayed. Given rapidly declining spending on U.S. land operations by our customers who are facing dunning challenges, we are not comfortable providing specific revenue or EBITDA guidance for the second quarter of 2020 for either of our Well Site Services or Downhole Technologies segments. However, we will attempt to do so directionally. The first quarter 2020 U.S. rig count average was 785 rigs, which was down 4% sequentially. The U.S. rig count totaled 465 rigs on April 24, 2020, down 41% from the first quarter 2020 average rig count. Current analyst estimates are calling for a 40% to 70% sequential decline in Completions activity, which will negatively impact all of our segments with short-cycle U.S. shale-driven exposure. As a result, we expect our U.S. onshore businesses and product lines to feel the dramatic effects of lower well completions consistent with that of our U.S. peers. Accordingly, we are aggressively reducing our cost in order to stabilize our financial results as we manage through this unprecedented downturn. In our Offshore/Manufactured Products segment, we are more confident in our ability to forecast revenues, given our backlog position and the relatively low level of short-cycle product sales in the first quarter. We project our second quarter revenues in this segment to range between $96 million and $104 million with segment EBITDA margins expected to average 10% to 12%, depending on product and service mix, along with absorption levels. Our margins are expected to be compressed in the near-term due to the closures of our India and Singapore facilities until at least May four and June 1, respectively, as mandated by their governments, along with reduced cost absorption globally as we deal with supply chain issues and other inefficiencies. Management teams have to make difficult decisions during market downturns such as this to protect the health of their companies. We wanted to provide a summary of actions that we are taking to mitigate the expected material decline in revenue during 2020. As Lloyd mentioned, CapEx will be reduced by approximately 70% year-over-year. Direct operating cost will be reduced in line with activity declines. Headcount has already been reduced approximately 30% in our Well Site Services and Downhole Technologies segments since the beginning of this year. SG&A headcount has been reduced by approximately 15% since the beginning of the year as well. Short-term incentives have essentially been eliminated for 2020. Our 401(k) and deferred compensation plan matches have been suspended for the immediate future. Various salary personnel, including executive management, have taken salary reductions in addition to other reductions in short-term and long-term compensation. Discretionary spending has been substantially reduced or eliminated. When we summarize the impact of our actions taken, we estimate that we will reduce 2020 cost by $225 million when compared to 2019. Of that total, 87% is estimated at cost of goods sold and 13% relates to SG&A. We believe that 20% to 25% of the cost reductions are fixed in nature. Now I'd like to offer some concluding comments. We believe that we are making substantial progress in terms of shoring up our liquidity with the planned amendment and conversion of our cash flow-based revolving credit facility to an asset-based lending arrangement. With our strong working capital position, we believe that we can manage through this extreme downturn with a safe balance sheet position. We recognize that cost management has to be a primary focus in this lower activity environment. To that end, cash flow generation remains a top priority with near-term plans to manage working capital and secure balance sheet stability. Oil States will continue to conduct safe operations and will remain focused on providing value-added products and services to meet customer demand globally. That completes our prepared comments. Johnny, would you open up the call for questions-and-answers at this time, please?

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first question is from George O'Leary. George, you may begin.

Good morning, Cindy. Good morning, Lloyd.

Good morning, George.

Just curious, there's clearly, right now, we're seeing the impacts of what some are calling a frac holiday, and you're seeing completions activity just fall off a cliff at the moment, but there is some chatter, some E&Ps who've mentioned adding activity back late in the year, sometime in the fourth quarter. But it seems like there's a little bit of hope embedded in those expectations, i.e., higher crude oil prices, demand starts to normalize as COVID abates. Have you seen any evidence anyone has any tangible plans to add that activity back? Or does it seem a little bit more hopeful and kind of crude oil price-dependent at this point?

Well, I think we all have to assume that any discussion right now is just that. I mean, obviously, I think the E&P customers and service providers alike realize it's almost impossible to fully shut down an industry for an extended period of time. And so I do believe that things are evolving. And clearly, I would say, the United States as a whole, not just the energy industry, is beginning to feel a little more positive simply because of the stated gradual reopenings, several of the nonessential businesses as early as this Friday. And I think we all are hopeful that we'll begin to come out of this unprecedented downturn. But to your specific question, different basins have come down faster and harder than others. And different operators are doing more draconian actions than others. So it's very hard to pinpoint any type of trend at this point other than to say, gas basins are feeling just a little more resilient than some of the oil plays. The Permian has not come down quite as hard as areas like the Bakken. And again, trends, George, I know that you are very familiar with. We, too, are hearing indications of maybe some activity returning as early as Q3, but I think it's very dependent on the facts and circumstances that exist at that point in time. And so we have we can't rely on hope and so we have to take actions today as if we are going to live through a fairly extended downturn, at least through the balance of 2020.

That's very helpful color. And then the CapEx spend is obviously that's an impressive cut to CapEx and probably a prudent thing to do in this type of market. I was wondering if you could frame what you guys view as maintenance CapEx today. And if that does contemplate some things like no longer running rigs, is that a business you guys might exit? Are there some other businesses where it doesn't make sense to continue deploying capital going forward? So just maintenance CapEx and then what may be that implies about some of the underperforming businesses, if you will?

I think, it's a fantastic question, but these are very low levels of CapEx for us. I always say, keep in mind the big picture, though, where our Offshore/Manufactured Products is global and scale, huge manufacturing footprint that we've done a really good job of upgrading and putting new facilities in place over the last 10-plus years as well as high-end machinery. So the needs what I call, ongoing maintenance needs are just not that high. The same is actually very true for our Downhole Technologies segment, which post-acquisition of GEO, we did make investments that we thought needed an appropriate, particularly our charge shop manufacturing expansion. And again, I view that as fairly safe capital invested today because we outsourced previously so much of the capacity that you're basically bringing it in-house. So I still feel very good about the CapEx that we spent there. But again, having done that and getting it behind us, the maintenance needs for, again, a low capital intensity, high-end manufacturing operations are just not as great as they are for Completion Services. You mentioned drilling, but we've only got nine rigs left that currently are not working. So there's virtually no CapEx dedicated to drilling. The balance other than the maintenance CapEx and manufacturing is really Completion Services. And to your point, today, we have not exited any individual product line. But when completions fall off a cliff and none of us know, is it going to be 50%? Is it going to be 70%? And what is the time frame of exactly that occurring, it would be an obvious comment. I certainly don't need as much maintenance CapEx in that fairly draconian activity environment. And so when you talk about what is maintenance CapEx, what we have to get through is this massive downturn and figure out what the resilience of U.S. shale activity is for the long-term And I'll just be honest with you, we cannot commit a lot of capital to that business until we get clarity on what the market allocation between international deepwater and U.S. shale looks like as we come out of this thing.

That’s very helpful color. Cindy, I’ll turn it back over.

Thank you, George. Good talking to you. Johnny, is there another question?

Our next question is from Stephen. Stephen, you may begin.

Hi, Stephen Gengaro.

Hi, how are you? I hope everybody is well.

We are all healthy. Thank you.

Good. I know this is – it's probably hard to give specifics, but can you talk maybe about this a little bit. When we think about it, clearly, one of the sharpest, probably the sharper sequential drop off we might ever see in the second quarter, and you are taking aggressive actions on the cost front. Can you give us any guidance on kind of where decrementals could be a range for the Downhole and for the Well Site segments? I know there's a lot of moving pieces. And maybe on top of that, how do you think they normalize maybe even beyond the second quarter?

Well, again, those are the best questions, but I'll also tell you they are absolutely the hardest ones to answer. And why that's why we tried to give the best we could, what we'll call directional guidance. When we are losing 60-plus rigs every week as we have done for the last four, figuring out exactly what your revenue is going to be is elusive at best. But what I can tell you is we first of all, let me be clear to everybody because I've heard on other calls, people are trying to understand the trajectory of the cost savings and the impact. And I will just simply say that the hardest thing management teams do is adjust headcount environments like this, which we have done. But it goes without saying, number one, we've only been in this turmoil since mid-March. And so these reductions have come largely early in the second quarter. Clearly, we are not so insensitive to pay no severance to the people that are being let go, trying to bridge them into unemployment benefits that are offered at this point in time. So just know that these cost savings are weighted to headcount. And therefore, you don't feel the full benefit of those savings until you get out of Q2. So Q2, as we projected, because of the rate of revenue decline and the points that I just mentioned, will be the weakest in terms of EBITDA generation. Once we get through that period because of the cost actions and initiatives we've taken, we think our decrementals kind of trend back to what I call more normalized decrementals that we've seen in the business as more in the range of, I would say, 30% to 40%. But, no, they are going to be higher than that in Q2 for the reasons that I just told you, and I think they could be in a range of 40% to 50%. And then I'll leave it up to you guys to try to project the top line. I pointed out, the rig count, it's not an average yet. But if you just look at April 24 compared to the average of Q1, we've lost 41% already. There are many analysts that have not updated their models for our company since early March. So that has to be adjusted and factored in, but that is about I would absolutely give you guidance if I thought I could give you more meaningful information than I've already provided in our prepared notes.

No, that's very helpful. You always give good color. The when we look at just quickly on the Downhole side, are you seeing any shift? And I know you have these two new products that are in the market. But are you seeing any and you had some commentary on the prepared remarks, but any shifts to customers' work going to save money and maybe go back to buying just components in the short-term? Have you seen any of that in the mix as we think about the next quarter or 2?

I would just say, not as much as you would think. And again, we really think that the integrated systems are the preferred systems long-term I do think there are certain suppliers that are going to be fairly aggressive on cutting cost, particularly on the more commoditized component offering. However, we still think that longer-term, the integrated systems do provide safer, more efficient, more reliable operations long-term which, at the end of the day, will prove to be cost-effective as well. So we really don't believe that market share shifts and strategies necessarily adjust backwards because of this downturn.

Great, thanks for the color.

Thanks, Stephen.

Our next call comes from Sean Meakim. Sean, you can begin.

Hi, Sean.

Hi, Cindy. I appreciate all the feedback around your cost-out initiative. Do you have an estimate for the cash cost associated with the reductions, severance, et cetera.? How much of a cash impact is that in 2020?

Okay. Yes, I'm sorry. We kind of gave you that I think it was $225 million, right?

$225 million.

And cost of sales, I'm looking at Lloyd, it's if you literally just add up cost of sales in 2019 plus SG&A, we expect it to be the total of the two to be down $225 million. So I guess, to your point, the annual impact of that, if it were to continue, would be greater. We did the best we could to split out what we think are the variable versus fixed components of that. So again, if you want the fixed component, which is I know predominantly what people are focused on, take the percentage time the $225 million for this year.

I appreciate that. So to clarify, I guess what I was trying to get at was the one-time payouts that may be associated with could be facility closures, oftentimes severance is the biggest piece there. Just trying to get a sense of what kind of one-time cash outcome would be.

Yes. It's not that material relative to the total, and it's probably in the range of $5 million. I apologize for that, I didn't understand your question fully.

No, I appreciate that. Thank you for that detail. And then I guess, anything else we should be thinking about with respect to balance sheet management. It was great to get the update and obviously, you guys are far along with respect to the revolver. Anything else that can be done with respect to asset sales or anything else from working capital that we should be thinking about as it pertains to cash generation in the next, say, two to six quarters?

Well, right now, I think if I tie together my earlier comments, I think maybe in response to George's question, at this point in time, the business lines that we have exited are the Permian rigs. The cash proceeds for the sale of those rigs came in during the first quarter. That was one of the highlighted points that Lloyd focused on. We only have nine small rigs remaining. And so the plan is to operate those prospectively. But even if we sold it, it would be an immaterial amount of cash received for the equipment sales. At this point in time, prior to COVID-19, we did not have any Completion Services product lines that we're not making cash-on-cash returns, and we will continue to evaluate that over the longer-term as we see how the North American market shift. So without that, we are not planning to exit other business lines at this point in time, so nothing really in the way of asset sales. You did mention, and I tried to have Lloyd highlight, if you really step back, I realize if you just screen a headline on total debt, you really do need to break it down. Our revolver, as Lloyd said, was...

$72 million.

$72 million. Our cash is $24 million. And then if you look at the working capital amount, which is 4.8 times that, we are going to get a healthy working capital release this year. Again, we work for some of the best companies in my view, NOCs, IOCs, some of the largest independents. We certainly have provided for customers that we believe are at risk on aged receivables. Will we get some surprises? Probably, but we just don't think they're going to be of any significant magnitude that we wouldn't collect that working capital. In addition to that, I always say, I'm very involved, obviously, with a lot of the programs that have been put in place to provide relief to businesses, about the only one that really applies to companies of our type and size is the CARES Act and the ability to carry back previously incurred NOLs to prior years, whereas before, we were forced to carry those forward. But I will tell you that $41 million is looking pretty nice right now, and we've assumed that comes in, in the second half of this year. And so that will be helpful. And of course, it is not something that needs to be repaid. But those are more of the puts and takes on kind of the working capital release, maybe some unusual cash inflows in terms of the tax refunds coming out of the CARES Act, but we are not counting on any equipment sales of any consequence.

Got it. It's very helpful recap. Thank you, Cindy

Thank you.

Our next question is from Kurt Hallead. Kurt, you may begin.

Hi, good morning everybody.

Hi, Kurt.

And glad to hear that everybody in respective families are doing well.

Thank you. You too.

Thank you. I had a couple of follow-up questions kind of coming back around to the negotiations that you're doing for the ABL, some of the ratios related to that. So the first dynamic, I'm just kind of curious about, is on the interest coverage ratio. Is that the cash-only portion, Lloyd? Or is that based on the total interest expense number?

Interest coverage is on the cash interest expense, but that's in the existing facility. That will not be in the amended ABL facility.

Right. And then you said on the...

And honestly, that's we've never even been close to that because, again, cash interest is on the revolver of course, but then the cash interest rate on the convert is now less than $3 million a year because we bought back some of those convertible bonds at a discount.

The minimum is three times, and we've been double-digits since inception.

Yes.

All right. Great. That's helpful. And does that tax refund, does that come into play with the leverage ratios at all or in the coverage ratios, just curious?

It just reduces net debt.

Yes, okay. And then…

I mean, as I told you, our net debt at the end of March was $48 million. And we expect to get $41 million in tax credit. So again, that gives us a good amount of comfort.

Net debt with respect to the revolver borrowings.

Correct.

Got it. Great. Thank you for that. And then, just lastly, Cindy, thanks so much for at least providing us some context around how to think about the decremental margins as we go through this downturn. So if I take my own assumptions on activity levels and revenue and take those EBITDA margins, it appears on an aggregate basis, you could be EBITDA negative in the second and third quarter. I always want to make sure that I don't overestimate or underestimate on those dynamics. So directionally, is that how things will probably play out based on how you're looking at the world right now?

We are doing everything we can to not have that happen. But when you factor in severance in the second quarter, I do think it's possible that we go modestly negative, but not of any great significance.

Great. And then just one last follow-up. When you indicated that after the second quarter, the decrementals could potentially "normalize" to the 30% to 40% range. Is that 30% to 40% exclusive of the cost-savings benefits?

Yes. That would be more product line decrementals.

Okay. Awesome, right. Thank you for that color.

Thank you.

[Operator Instructions] At this time, we do not have any further questions.

All right. Everybody that joined our call, I just want to extend my thanks to all of you. We appreciate your commitment to the energy industry through this very difficult time and specifically, your support for Oil States. I know it's a lot of work. It's a busy week, and we need you guys to continue to follow the industry in the healthy, high-integrity way that you always have. We do believe that this while tough, we're going to be one of the companies that makes it through these unprecedented challenges. And all I can say is collectively for all of us, we all look forward to better days ahead. I hope you have a great week and a successful end to the earnings season. Take care.

Thank you, ladies and gentlemen. You may now disconnect. This concludes today’s conference call. Thank you for participating.