ois20130930_10q.htm

 

UNITED STATES 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

[X]

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

   

For the quarterly period ended September 30, 2013

 

OR

 

[  ]

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

     
   

For the transition period from _________________________ to _________________________

 

Commission file number: 001-16337

 

OIL STATES INTERNATIONAL, INC.


(Exact name of registrant as specified in its charter)

 

Delaware

76-0476605

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification No.)

   

Three Allen Center, 333 Clay Street, Suite 4620,

77002

Houston, Texas

(Zip Code)

(Address of principal executive offices)

 

 

(713) 652-0582


(Registrant’s telephone number, including area code)

None


(Former name, former address and former fiscal year,

if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

                  YES [ X ]

NO [  ]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files)

                  YES [X]

NO [  ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of "accelerated filer," "large accelerated filer" and "smaller reporting company in Rule 12b-2 of the Exchange Act.

(Check one):

Large Accelerated Filer [X]

Accelerated Filer [  ]

 

 

Non-Accelerated Filer [  ] (Do not check if a smaller reporting company)

Smaller Reporting Company [  ]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

                  YES [  ]

NO [X ]

 

The Registrant had 55,153,548 shares of common stock, par value $0.01, outstanding and 3,979,910 shares of treasury stock as of October 30, 2013.

 

 
1

 

 

OIL STATES INTERNATIONAL, INC.

 

INDEX

 

 

Page No.

                         Part I -- FINANCIAL INFORMATION

 
   

Item 1. Financial Statements:

 
   

Condensed Consolidated Financial Statements

 

Unaudited Condensed Consolidated Statements of Income for the Three and Nine Month Periods Ended September 30, 2013 and 2012

3

Unaudited Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Month Periods Ended September 30, 2013 and 2012

4

Consolidated Balance Sheets – September 30, 2013 (unaudited) and December 31, 2012

5

Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2013 and 2012 

6

Notes to Unaudited Condensed Consolidated Financial Statements

7 – 26

   

Cautionary Statement Regarding Forward-Looking Statements

27

   

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

27 – 41

   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 41

   

Item 4. Controls and Procedures

41– 42

   
   

                          Part II -- OTHER INFORMATION

 
   

Item 1. Legal Proceedings

 42

   

Item 1A. Risk Factors

42 

   

Item 2Unregistered Sales of Equity Securities and Use of Proceeds

43

   

Item 6. Exhibits

43

   

                 (a) Index of Exhibits

43– 44

   

Signature Page

45

 

 
2

 

 

PART I -- FINANCIAL INFORMATION

 

ITEM 1. Financial Statements

 

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

 

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In Thousands, Except Per Share Amounts)

 

  

   

THREE MONTHS ENDED

   

NINE MONTHS ENDED

 
   

SEPTEMBER 30,

   

SEPTEMBER 30,

 
   

2013

   

2012

   

2013

   

2012

 
                                 

Revenues

  $ 684,456     $ 644,512     $ 1,994,985     $ 1,944,151  
                                 

Costs and expenses:

                               

Cost of sales and services

    433,786       393,644       1,250,596       1,174,164  

Selling, general and administrative expenses

    54,130       46,284       156,697       133,648  

Depreciation and amortization expense

    70,217       58,871       204,545       162,610  

Other operating expense

    4,346       1,566       3,485       1,703  
      562,479       500,365       1,615,323       1,472,125  

Operating income

    121,977       144,147       379,662       472,026  
                                 

Interest expense, net of capitalized interest

    (18,678 )     (15,736 )     (58,426 )     (51,617 )

Interest income

    506       440       1,708       979  

Loss on extinguishment of debt

    (3,265 )     --       (3,265 )     --  

Equity in earnings (losses) of unconsolidated affiliates

    72       (103 )     (758 )     150  

Other income

    3,854       2,243       5,603       7,781  

Income from continuing operations before income taxes

    104,466       130,991       324,524       429,319  

Income tax provision

    (27,059 )     (33,635 )     (86,429 )     (113,878 )

Net income from continuing operations

    77,407       97,356       238,095       315,441  

Net income from discontinued operations, net of tax (including a net gain on disposal of $84,209 in the third quarter of 2013)

    90,679       6,753       109,445       35,616  

Net income

    168,086       104,109       347,540       351,057  

Less: Net income attributable to noncontrolling interest

    346       317       1,086       967  

Net income attributable to Oil States International, Inc.

  $ 167,740     $ 103,792     $ 346,454     $ 350,090  
                                 
Net income attributable to Oil States International, Inc.:                                

Continuing operations

  $ 77,061     $ 97,039     $ 237,009     $ 314,474  

Discontinued operations

    90,679       6,753       109,445       35,616  

Net income attributable to Oil States International, Inc.

  $ 167,740     $ 103,792     $ 346,454     $ 350,090  
                                 

Basic net income per share attributable to Oil States International, Inc. common stockholders from:

                               

Continuing operations

  $ 1.40     $ 1.80     $ 4.31     $ 6.01  

Discontinued operations

    1.64       0.12       1.99       0.68  

Net income

  $ 3.04     $ 1.92     $ 6.30     $ 6.69  
                                 

Diluted net income per share attributable to Oil States International, Inc. common stockholders from:

                               

Continuing operations

  $ 1.38     $ 1.75     $ 4.27     $ 5.68  

Discontinued operations

    1.63       0.12       1.97       0.64  

Net income

  $ 3.01     $ 1.87     $ 6.24     $ 6.32  
                                 

Weighted average number of common shares outstanding:

                               

Basic

    55,092       53,975       54,987       52,347  

Diluted

    55,672       55,365       55,542       55,391  

 

The accompanying notes are an integral part of

these financial statements.

 

 
3

 

 

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

 

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In Thousands)

  

   

THREE MONTHS ENDED

SEPTEMBER 30,

   

NINE MONTHS ENDED

SEPTEMBER 30,

 
   

2013

   

2012

   

2013

   

2012

 

Net income

  $ 168,086     $ 104,109     $ 347,540     $ 351,057  
                                 

Other comprehensive income (loss):

                               

Foreign currency translation adjustment

    44,693       43,564       (125,407 )     40,527  

Unrealized loss on forward contracts, net of tax

    (190 )     (434 )     (74 )     (434 )

Total other comprehensive income (loss)

    44,503       43,130       (125,481 )     40,093  
                                 

Comprehensive income

    212,589       147,239       222,059       391,150  

Comprehensive income attributable to noncontrolling interest

    (380 )     (357 )     (1,045 )     (996 )

Comprehensive income attributable to Oil States International, Inc.

  $ 212,209     $ 146,882     $ 221,014     $ 390,154  

 

The accompanying notes are an integral part of

these financial statements.

 

 
4

 

 

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

(In Thousands)

 

   

SEPTEMBER 30,

   

DECEMBER 31,

 
   

2013

   

2012

 
   

(UNAUDITED)

         
ASSETS                
                 

Current assets:

               

Cash and cash equivalents

  $ 775,979     $ 253,172  

Accounts receivable, net

    616,170       647,933  

Inventories, net

    256,665       253,994  

Current assets held for sale

    --       632,496  

Prepaid expenses and other current assets

    34,228       38,497  

Total current assets

    1,683,042       1,826,092  
                 

Property, plant, and equipment, net

    1,914,088       1,827,242  

Goodwill, net

    499,830       520,818  

Other intangible assets, net

    127,605       146,103  

Noncurrent assets held for sale

    --       31,605  

Other noncurrent assets

    48,907       88,102  

Total assets

  $ 4,273,472     $ 4,439,962  
                 

LIABILITIES AND STOCKHOLDERS’ EQUITY

               
                 

Current liabilities:

               

Accounts payable

  $ 144,555     $ 167,642  

Accrued liabilities

    115,911       103,800  

Income taxes

    66,494       29,588  

Current portion of long-term debt and capitalized leases

    492       30,480  

Deferred revenue

    65,924       43,022  

Current liabilities held for sale

    --       139,686  

Other current liabilities

    10,168       4,314  

Total current liabilities

    403,544       518,532  
                 

Long-term debt and capitalized leases

    1,006,844       1,279,805  

Deferred income taxes

    128,343       123,958  

Noncurrent liabilities held for sale

    --       5,277  

Other noncurrent liabilities

    24,163       46,590  

Total liabilities

    1,562,894       1,974,162  
                 

Stockholders’ equity:

               

Oil States International, Inc. stockholders’ equity:

               

Common stock, $.01 par value, 200,000,000 shares authorized, 59,118,683 shares and 58,488,299 shares issued, respectively, and 55,139,418 shares and 54,695,473 shares outstanding, respectively

    591       585  

Additional paid-in capital

    625,752       586,070  

Retained earnings

    2,245,649       1,899,195  

Accumulated other comprehensive income (loss)

    (18,384 )     107,097  

Common stock held in treasury at cost, 3,979,265 and 3,792,826 shares, respectively

    (144,589 )     (128,542 )

Total Oil States International, Inc. stockholders’ equity

    2,709,019       2,464,405  

Noncontrolling interest

    1,559       1,395  

Total stockholders’ equity

    2,710,578       2,465,800  

Total liabilities and stockholders’ equity

  $ 4,273,472     $ 4,439,962  

 

The accompanying notes are an integral part of

these financial statements.

 

 
5

 

 

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

 

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

 

   

NINE MONTHS

 
   

ENDED SEPTEMBER 30,

 
   

2013

   

2012

 
                 

Cash flows from operating activities:

               

Net income

  $ 347,540     $ 351,057  

Adjustments to reconcile net income to net cash provided by operating activities:

               

Depreciation and amortization

    206,155       164,323  

Deferred income tax provision

    (707 )     5,122  

Excess tax benefits from share-based payment arrangements

    (5,447 )     (7,739 )

Gain on sale of business

    (84,209 )     --  

Gains on disposals of assets

    (3,871 )     (7,131 )

Non-cash compensation charge

    22,938       13,934  

Accretion of debt discount

    --       4,106  

Amortization of deferred financing costs

    5,937       5,249  

Loss on extinguishment of debt

    3,265       --  

Other, net

    640       (9 )

Changes in operating assets and liabilities, net of effect from acquired businesses:

               

Accounts receivable

    53,386       (62,688 )

Inventories

    34,028       (140,408 )

Accounts payable and accrued liabilities

    (24,449 )     84,020  

Taxes payable

    16,603       38,035  

Other current assets and liabilities, net

    10,868       (2,337 )

Net cash flows provided by operating activities

    582,677       445,534  
                 

Cash flows from investing activities:

               

Capital expenditures, including capitalized interest

    (355,639 )     (331,750 )

Acquisitions of businesses, net of cash acquired

    (1,771 )     (48,000 )

Proceeds from sale of business

    600,000       --  

Proceeds from disposition of property, plant and equipment

    8,535       9,609  

Other, net

    81       (1,668 )

Net cash flows provided by (used in) investing activities

    251,206       (371,809 )
                 

Cash flows from financing activities:

               

Revolving credit borrowings and (repayments), net

    (47,901 )     201,837  

Payment of principal on 2 3/8% Notes conversion

    --       (174,990 )

Term loan repayments

    (252,762 )     (22,510 )

Debt and capital lease repayments

    (2,180 )     (2,453 )

Issuance of common stock from share-based payment arrangements

    14,172       13,108  

Purchase of treasury stock

    (11,889 )     --  

Excess tax benefits from share-based payment arrangements

    5,447       7,739  

Payment of financing costs

    (203 )     (3,264 )

Shares added to treasury stock as a result of net share settlements due to vesting of restricted stock

    (4,161 )     (4,167 )

Other, net

    (1 )     3  

Net cash flows provided by (used in) financing activities

    (299,478 )     15,303  
                 

Effect of exchange rate changes on cash

    (11,598 )     2,802  

Net change in cash and cash equivalents

    522,807       91,830  

Cash and cash equivalents, beginning of period

    253,172       71,721  

Cash and cash equivalents, end of period

  $ 775,979     $ 163,551  
                 

Non-cash financing activities:

               

Value of common stock issued in payment of 2 3/8% Notes conversion

  $ --     $ 220,597  

 

The accompanying notes are an integral part of these

financial statements.

 

 
6

 

 

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

 

1.     ORGANIZATION AND BASIS OF PRESENTATION

 

The accompanying unaudited condensed consolidated financial statements of Oil States International, Inc. and its wholly-owned subsidiaries (referred to in this report as we or the Company) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the Commission) pertaining to interim financial information. Certain information in footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP) have been condensed or omitted pursuant to these rules and regulations. The unaudited financial statements included in this report reflect all the adjustments, consisting of normal recurring adjustments, which the Company considers necessary for a fair presentation of the results of operations for the interim periods covered and for the financial condition of the Company at the date of the interim balance sheet. Results for the interim periods are not necessarily indicative of results for the full year.

 

In September 2013, the Company entered into a Stock Purchase Agreement with Marubeni-Itochu Tubulars America, Inc. (Marubeni-Itochu) for the sale of Sooner, Inc. and its subsidiaries (Sooner), which comprised the entirety of the Company’s tubular services segment. The applicable assets and liabilities of this business have been classified as held for sale in the Consolidated Balance Sheet as of December 31, 2012. The unaudited Condensed Consolidated Statements of Income for all periods presented have been reclassified to reflect the presentation of discontinued operations. Unless otherwise indicated, all disclosures and amounts in the Notes to Unaudited Condensed Consolidated Financial Statements relate to the Company’s continuing operations.

 

The preparation of condensed consolidated financial statements in conformity with GAAP requires the use of estimates and assumptions by management in determining the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. If the underlying estimates and assumptions, upon which the financial statements are based, change in future periods, actual amounts may differ from those included in the accompanying condensed consolidated financial statements.

 

The financial statements included in this report should be read in conjunction with the Company’s audited financial statements and accompanying notes included in its Annual Report on Form 10-K for the year ended December 31, 2012 (the 2012 Form 10-K).

 

2.     RECENT ACCOUNTING PRONOUNCEMENTS

 

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (the FASB), which are adopted by the Company 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 the Company’s consolidated financial statements upon adoption.

 

3.     DETAILS OF SELECTED BALANCE SHEET ACCOUNTS

 

Additional information regarding selected balance sheet accounts at September 30, 2013 and December 31, 2012 is presented below (in thousands):

 

   

September 30,

   

December  31,

 
   

2013

   

2012

 

Accounts receivable, net:

               

Trade

  $ 421,623     $ 455,031  

Unbilled revenue

    196,312       194,133  

Other

    4,557       3,691  

Total accounts receivable

    622,492       652,855  

Allowance for doubtful accounts

    (6,322 )     (4,922 )
    $ 616,170     $ 647,933  

 

 
7

 

 

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(Continued)

 

    September 30,    

December 31,

 
   

2013

   

2012

 

Inventories, net:

               

Finished goods and purchased products

  $ 96,023     $ 90,974  

Work in process

    62,460       64,267  

Raw materials

    108,333       107,356  

Total inventories

    266,816       262,597  

Allowance for excess, damaged, or obsolete inventory

    (10,151 )     (8,603 )
    $ 256,665     $ 253,994  

 

   

Estimated

Useful Life (years)

     

September 30,

2013

     

December 31,

2012

 

Property, plant and equipment, net:

                         

Land

            $ 69,505     $ 55,340  

Accommodations assets

  3 - 15       1,563,124       1,481,830  

Buildings and leasehold improvements

  3 - 40       197,108       183,017  

Machinery and equipment

   2 - 29       426,949       390,432  

Completion services equipment

  4 - 10       306,218       264,225  

Office furniture and equipment

  1 - 10       53,684       46,461  

Vehicles

  2 - 10       137,354       122,246  

Construction in progress

              181,436       149,657  

Total property, plant and equipment

              2,935,378       2,693,208  

Accumulated depreciation

              (1,021,290 )     (865,966 )
              $ 1,914,088     $ 1,827,242  

 

   

September 30,

   

December 31,

 
   

2013

   

2012

 

Accrued liabilities:

               

Accrued compensation

  $ 54,171     $ 67,144  

Insurance liabilities

    13,596       11,412  

Accrued taxes, other than income taxes

    10,561       5,254  

Accrued interest

    17,357       4,042  

Accrued commissions

    3,316       3,763  

Other

    16,910       12,185  
    $ 115,911     $ 103,800  

 

4.     ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

 

Accumulated other comprehensive income decreased from $107.1 million at December 31, 2012 to an accumulated other comprehensive loss of $18.4 million at September 30, 2013, a net change of $125.5 million, primarily as a result of decreases in the Canadian and Australian dollar exchange rates compared to the U.S. dollar. The Canadian dollar was valued at an exchange rate of U.S. $0.97 at September 30, 2013 compared to U.S. $1.01 at December 31, 2012, a decrease of 4%. The Australian dollar was valued at an exchange rate of U.S. $0.93 at September 30, 2013 compared to U.S. $1.04 at December 31, 2012, a decrease of 11%. Excluding intercompany balances, our Canadian dollar and Australian dollar functional currency net assets total approximately C$926 million and A$941 million, respectively, at September 30, 2013.

 

 
8

 

 

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(Continued)

 

5.     EARNINGS PER SHARE

 

The calculation of earnings per share attributable to the Company is presented below (in thousands, except per share amounts):

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

 
   

2013

   

2012

   

2013

   

2012

 
                                 

Numerator:

                               

Net income attributable to Oil States International, Inc.:

                               

Net income from continuing operations

  $ 77,061     $ 97,039     $ 237,009     $ 314,474  

Net income from discontinued operations

    90,679       6,753       109,445       35,616  

Net income attributable to Oil States International, Inc.

  $ 167,740     $ 103,792     $ 346,454     $ 350,090  
                                 

Denominator:

                               

Denominator for basic earnings per share – weighted average shares outstanding during the period

    55,092       53,975       54,987       52,347  

Effect of dilutive securities:

                               

Options on common stock

    323       477       351       513  

2 3/8% Contingent Convertible Senior Subordinated Notes

    --       782       --       2,391  

Restricted stock awards and other

    257       131       204       140  

Denominator for diluted earnings per share – adjusted weighted average shares and assumed conversions

    55,672       55,365       55,542       55,391  
                                 

Basic earnings per share:

                               

Continuing operations

  $ 1.40     $ 1.80     $ 4.31     $ 6.01  

Discontinued operations

    1.64       0.12       1.99       0.68  

Net income attributable to Oil States International, Inc.

  $ 3.04     $ 1.92     $ 6.30     $ 6.69  
                                 

Diluted earnings per share:

                               

Continuing operations

  $ 1.38     $ 1.75     $ 4.27     $ 5.68  

Discontinued operations

    1.63       0.12       1.97       0.64  

Net income attributable to Oil States International, Inc.

  $ 3.01     $ 1.87     $ 6.24     $ 6.32  

 

Our calculation of diluted earnings per share for the three and nine months ended September 30, 2013 excludes 247,432 shares and 344,251 shares, respectively, issuable pursuant to outstanding stock options and restricted stock awards, due to their antidilutive effect. Our calculation of diluted earnings per share for the three and nine months ended September 30, 2012 excludes 303,833 shares and 424,299 shares, respectively, issuable pursuant to outstanding stock options and restricted stock awards, due to their antidilutive effect.

 

See Note 8 to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for a discussion of the conversion of our 2 3/8% Contingent Convertible Senior Subordinated Notes (2 3/8% Notes).

 

6.     BUSINESS ACQUISITIONS AND GOODWILL

 

On August 29, 2013, we acquired the 51% majority interest in a venture we had previously accounted for under the equity method. The acquired business provides design, manufacturing, sales and aftermarket services for newly manufactured cranes in India. Consideration paid for the majority interest was $1.45 million in cash. The operations of this business have been included in the offshore products segment since the acquisition date.

 

On December 14, 2012, we acquired all of the equity of Tempress Technologies, Inc. (Tempress) for purchase price consideration of $49.5 million consisting of $32.5 million in cash plus contingent consideration with an estimated fair market value of $17.0 million at closing. During the second quarter of 2013, the estimated fair market value of the contingent liability was increased to $20.0 million due to favorable developments related to a patent application by Tempress, resulting in a $3.0 million, or $0.05 per diluted share after tax, charge to other operating expense. The patent was granted in the third quarter of 2013 and the $20.0 million in contingent consideration was paid to the former shareholders of Tempress. The Company’s current escrowed deposits of $5.3 million include other consideration for seller transaction indemnities, are considered restricted cash and are classified as “Other current assets” in our September 30, 2013 Consolidated Balance Sheet and “Other noncurrent assets” in our December 31, 2012 Consolidated Balance Sheet. Liabilities for escrowed amounts expected to be paid to the seller also totaled $5.3 million and are classified as “Other current liabilities” in our September 30, 2013 Consolidated Balance Sheet and “Other noncurrent liabilities” in our December 31, 2012 Consolidated Balance Sheet. Headquartered in Kent, Washington, Tempress designs, develops and markets a suite of highly specialized, hydraulically-activated tools utilized during downhole completion activities. The operations of Tempress have been included in our well site services segment since the acquisition date.

 

 
9

 

 

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(Continued)

 

 

On July 2, 2012, we acquired all of the operating assets of Piper Valve Systems, Ltd (Piper). Headquartered in Oklahoma City, Oklahoma, Piper designs and manufactures high pressure valves and manifold components for oil and gas industry projects offshore (surface and subsea) and onshore. Piper's valve technology complements our offshore products segment, allowing us to integrate their valve products and services into our existing subsea products such as pipeline end manifolds and terminals, increasing our suite of global deepwater product and service offerings. Cash consideration paid for the acquisition totaled $48.0 million. The operations of Piper have been included in our offshore products segment since the acquisition date.

 

In December 2010, we also acquired all of the operating assets of Mountain West Oilfield Service and Supplies, Inc. and Ufford Leasing LLC (Mountain West) for total consideration of $47.1 million including estimated contingent consideration of $4.0 million. During the first quarter of 2013, the liability for the estimated contingent consideration recorded in connection with this transaction was adjusted to its estimated fair value of zero resulting in the recording of other operating income of $4.0 million. Contingent consideration for the Mountain West acquisition was estimated based upon the amount of earnings before interest, depreciation, amortization and taxes expected to be earned by the acquired business during the three-year period ended December 31, 2013, subject to adjustment for capital spending levels.

 

Changes in the carrying amount of goodwill for the nine month period ended September 30, 2013 are as follows (in thousands):

 

   

Well Site Services

                         
   

Completion Services

   

Drilling Services

   

Subtotal

   

Accommodations

   

Offshore Products

   

Total

 

Balance as of December 31, 2011

                                               

Goodwill

  $ 169,711     $ 22,767     $ 192,478     $ 291,323     $ 100,944     $ 584,745  

Accumulated Impairment Losses

    (94,528 )     (22,767 )     (117,295 )     --       --       (117,295 )
      75,183       --       75,183       291,323       100,944       467,450  

Goodwill acquired and purchase price adjustments

    31,254       --       31,254       --       17,757       49,011  

Foreign currency translation and other changes

    316       --       316       3,809       232       4,357  
      106,753       --       106,753       295,132       118,933       520,818  
                                                 

Balance as of December 31, 2012

                                               

Goodwill

    201,281       22,767       224,048       295,132       118,933       638,113  

Accumulated Impairment Losses

    (94,528 )     (22,767 )     (117,295 )     --       --       (117,295 )
      106,753       --       106,753       295,132       118,933       520,818  

Goodwill acquired and purchase price adjustments

    1,576       --       1,576       --       1,954       3,530  

Foreign currency translation and other changes

    (479 )     --       (479 )     (24,015 )     (24 )     (24,518 )
      107,850       --       107,850       271,117       120,863       499,830  
                                                 

Balance as of September 30, 2013

                                               

Goodwill

    202,378       22,767       225,145       271,117       120,863       617,125  

Accumulated Impairment Losses

    (94,528 )     (22,767 )     (117,295 )     --       --       (117,295 )
    $ 107,850     $ --     $ 107,850     $ 271,117     $ 120,863     $ 499,830  

 

 
10

 

 

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(Continued)

 

 

7.     DISCONTINUED OPERATIONS

 

On September 6, 2013, the Company entered into a Stock Purchase Agreement with Marubeni-Itochu for the sale of Sooner, which comprised the entirety of the Company’s tubular services segment. Total consideration received by the Company was $600 million, which remains subject to customary post-closing adjustments, including final working capital determination. We recognized a net gain on disposal of $128.6 million ($84.2 million after-tax) during the third quarter of 2013, which is included within “Net income from discontinued operations, net of tax” in the Unaudited Condensed Consolidated Statements of Income.

 

In connection with this transaction, the parties have entered into a transition services agreement for the Company to provide certain information technology applications and infrastructure and various administrative services to Sooner during the transition period ranging from one to three months from the closing date depending on the nature of the service provided in exchange for monthly service fees. Either party has the option to terminate such transition services with notice at any time and Sooner may elect to extend such services for up to one month. The future continuing cash flows from the disposed business to the Company resulting from the transition services agreement are not significant and do not constitute a material continuing financial interest in Sooner.

 

Sooner, which had previously been presented as a separate reporting unit, meets the criteria for being reported as a discontinued operation and has been reclassified from continuing operations. The amounts in the table below reflect the operating results of Sooner reported as discontinued operations (in thousands). The $128.6 million ($84.2 after-tax) net gain related to the disposal of Sooner is excluded.

 

   

Two

Months

Ended

   

Three

Months

Ended

   

Eight

Months

Ended

   

Nine

Months

Ended

 
   

August 31, 2013

   

September 30, 2012

   

August 31, 2013

   

September 30, 2012

 
                                 

Revenues

  $ 273,637     $ 436,160     $ 1,073,096     $ 1,326,601  

Income from discontinued operations before income taxes

    10,463       10,555       40,964       57,075  

Income tax provision

    (3,993 )     (3,802 )     (15,728 )     (21,459 )

Net income from discontinued operations, net of tax

  $ 6,470     $ 6,753     $ 25,236     $ 35,616  

  

The following table summarizes the major classes of assets and liabilities held for sale in the Company’s Consolidated Balance Sheet related to Sooner (in thousands):

 

   

December 31, 2012

 
         

Assets

       

Accounts receivable, net

  $ 184,852  

Inventories, net

    447,503  

Prepaid expenses and other current assets

    141  

Total current assets held for sale

  $ 632,496  
         

Property, plant and equipment, net

  $ 24,884  

Other noncurrent assets

    6,721  

Total noncurrent assets held for sale

  $ 31,605  
         

Liabilities

       

Accounts payable

  $ 112,291  

Accrued liabilities

    4,106  

Deferred revenue

    23,289  

Total current liabilities held for sale

  $ 139,686  
         

Deferred income taxes

  $ 5,277  

Total noncurrent liabilities held for sale

  $ 5,277  

 

 
11

 

 

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(Continued)

 

 

8.     DEBT

 

As of September 30, 2013 and December 31, 2012, long-term debt consisted of the following (in thousands):

 

   

September 30, 2013

   

December 31, 2012

 

U.S. revolving credit facility, which matures December 10, 2015, with available commitments up to $500 million; no borrowings outstanding during the nine month period ended September 30, 2013

  $ --     $ --  
                 

U.S. term loan of $200 million, which was repaid in full in 2013; weighted average interest rate of 2.3% for the nine month period ended September 30, 2013

    --       170,000  
                 

Canadian revolving credit facility, which matures on December 10, 2015, with available commitments up to $250 million; no borrowings outstanding during the nine month period ended September 30, 2013

    --       --  
                 

Canadian term loan of $100 million, which was repaid in full in 2013; weighted average interest rate of 3.3% for the nine month period ended September 30, 2013

    --       85,786  
                 

Australian revolving credit facility, which matures December 10, 2015, with available commitments up to A$300 million and with a weighted average interest rate of 5.1% for the nine month period ended September 30, 2013

    --       47,803  
                 

6 1/2% senior unsecured notes - due June 2019

    600,000       600,000  
                 

5 1/8% senior unsecured notes - due January 2023

    400,000       400,000  
                 

Capital lease obligations and other debt

    7,336       6,696  

Total debt

    1,007,336       1,310,285  

Less: Current portion

    492       30,480  

Total long-term debt and capitalized leases

  $ 1,006,844     $ 1,279,805  

 

5 1/8% Senior Unsecured Notes

 

On December 21, 2012, the Company sold $400 million aggregate principal amount of 5 1/8% Senior Notes due 2023 (5 1/8% Notes) through a private placement to qualified institutional buyers. The 5 1/8% Notes are senior unsecured obligations of the Company, are guaranteed by our material U.S. subsidiaries (the Guarantors), bear interest at a rate of 5 1/8% per annum and mature on January 1, 2023. At any time prior to January 15, 2016, the Company may redeem up to 35% of the 5 1/8% Notes at a redemption price of 105.125% of the principal amount, plus accrued and unpaid interest to the redemption date, with the proceeds of certain equity offerings. Prior to January 15, 2018, the Company may redeem some or all of the 5 1/8% Notes for cash at a redemption price equal to 100% of their principal amount plus an applicable make-whole premium and accrued and unpaid interest to the redemption date. On and after January 15, 2018, the Company may redeem some or all of the 5 1/8% Notes at redemption prices (expressed as percentages of principal amount), plus accrued and unpaid interest to the redemption date. The optional redemption prices as a percentage of principal amount are as follows:

 

Twelve Month Period Beginning January 15,

 

% of Principal Amount

2018

 

102.563%

2019

 

101.708%

2020

 

100.854%

2021 and thereafter

 

100.000%

 

The Company utilized approximately $334 million of the net proceeds of the 5 1/8% Notes to repay borrowings under its U.S. revolving credit facility. The remaining net proceeds of approximately $61 million were utilized for general corporate purposes.

 

 
12

 

 

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(Continued)

 

 

6 1/2% Senior Unsecured Notes

 

On June 1, 2011, the Company sold $600 million aggregate principal amount of 6 1/2% senior unsecured notes (6 1/2% Notes) due 2019 through a private placement to qualified institutional buyers. The 6 1/2% Notes are senior unsecured obligations of the Company, are guaranteed by our material U.S. subsidiaries (the Guarantors), bear interest at a rate of 6 1/2% per annum and mature on June 1, 2019. At any time prior to June 1, 2014, the Company may redeem up to 35% of the 6 1/2% Notes at a redemption price of 106.5% of the principal amount, plus accrued and unpaid interest to the redemption date, with the proceeds of certain equity offerings. Prior to June 1, 2014, the Company may redeem some or all of the 6 1/2% Notes for cash at a redemption price equal to 100% of their principal amount plus an applicable make-whole premium and accrued and unpaid interest to the redemption date. On and after June 1, 2014, the Company may redeem some or all of the 6 1/2% Notes at redemption prices (expressed as percentages of principal amount), plus accrued and unpaid interest to the redemption date. The optional redemption prices as a percentage of principal amount are as follows:

 

Twelve Month Period Beginning June 1,

 

% of Principal Amount

2014

 

104.875%

2015

 

103.250%

2016

 

101.625%

2017 and thereafter

 

100.000%

 

The Company utilized approximately $515 million of the net proceeds of the 6 1/2% Notes to repay borrowings outstanding under its U.S. and Canadian credit facilities. The remaining net proceeds of approximately $75 million were utilized for general corporate purposes.

 

2 3/8% Contingent Convertible Senior Notes

 

On May 17, 2012, the Company gave notice of the redemption of all of its outstanding 2 3/8% Notes due 2025 (2 3/8% Notes), totaling $174,990,000 at a redemption price equal to 100% of the principal amount thereof plus accrued interest. In July 2012, rather than having their 2 3/8% Notes redeemed, on or prior to July 5, 2012, holders of $174,990,000 aggregate principal amount of the 2 3/8% Notes converted their 2 3/8% Notes and received cash up to the principal amount and, in the aggregate, 3,012,380 shares of the Company’s common stock valued at $220.6 million.   

 

An effective interest rate of 7.17% was applied as of the issuance date for our 2 3/8% Notes in accordance with ASC 470-20 – Debt with Conversion and Other Options. Interest expense on the 2 3/8% Notes, excluding amortization of debt issue costs, was as follows (in thousands):

 

   

Three months ended

   

Nine months ended

 
   

September 30,

   

September 30,

 
   

2013

   

2012

   

2013

   

2012

 

Interest expense

  $ --     $ --     $ --     $ 6,185  

 

As of September 30, 2013, the Company had approximately $776.0 million of cash and cash equivalents and $716.8 million of the Company’s U.S. and Canadian credit facilities available for future financing needs. The Company also had availability totaling A$300 million under its Australian credit facility. As of September 30, 2013, the Company had $33.2 million of outstanding letters of credit which reduced amounts available under its credit facilities.

 

Interest expense on the condensed consolidated statements of income is net of capitalized interest of $0.2 million and $0.8 million, respectively, for the three and nine months ended September 30, 2013 and $0.7 million and $3.2 million, respectively, for the same periods in 2012.

 

 
13

 

 

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(Continued)

 

 

9.    FAIR VALUE MEASUREMENTS

 

The Company’s financial instruments consist of cash and cash equivalents, investments, receivables, payables, bank debt and foreign currency forward contracts. The Company believes that the carrying values of these instruments on the accompanying consolidated balance sheets approximate their fair values.

 

The fair values of the Company’s 6 1/2% Notes and 5 1/8% Notes are estimated based on quoted prices and analysis of similar instruments (Level 2 fair value measurements). The carrying values and fair values of these notes are as follows for the periods indicated (in thousands):

 

   

September 30, 2013

   

December 31, 2012

 
   

Carrying

   

Fair

   

Carrying

   

Fair

 
   

Value

   

Value

   

Value

   

Value

 

5 1/8% Notes

                               

Principal amount due 2023

  $ 400,000     $ 440,500     $ 400,000     $ 405,752  
                                 

6 1/2% Notes

                               

Principal amount due 2019

  $ 600,000     $ 638,622     $ 600,000     $ 641,628  

 

10.   CHANGES IN COMMON STOCK OUTSTANDING

 

Shares of common stock outstanding – January 1, 2013

    54,695,473  

Shares issued upon exercise of stock options and vesting of restricted stock awards

    630,384  

Repurchase of shares – transferred to treasury

    (135,379 )

Shares withheld for taxes on vesting of restricted stock awards and transferred to treasury

    (51,060 )

Shares of common stock outstanding – September 30, 2013

    55,139,418  

 

11.   STOCK BASED COMPENSATION

 

During the first nine months of 2013, we granted restricted stock awards totaling 311,410 shares valued at a total of $25.3 million. Of the restricted stock awards granted in the first nine months of 2013, a total of 264,557 awards vest in four equal annual installments beginning in February 2014, 30,314 awards are performance based awards that may vest in February 2016 in an amount that will depend on the Company’s achievement of specified performance objectives, 9,880 awards vest 100% in May 2014, 3,500 awards vest 100% in February 2014 and 2,750 awards vest 100% in March 2014. The 2013 performance based awards have a performance criteria that will be measured based upon the Company’s achievement levels of average after-tax annual return on invested capital for the three year period commencing January 1, 2013 and ending December 31, 2015. During the nine months ended September 30, 2013, the Company also granted 71,500 units of phantom shares under the Canadian Long-Term Incentive Plan, which provides for the granting of units of phantom shares to key Canadian employees. These awards vest in three equal annual installments beginning in February 2014 and are accounted for as a liability until paid. Participants granted units of phantom shares are entitled to a lump sum cash payment equal to the fair market value of a share of the Company’s common stock on the vesting date. A total of 149,402 stock options with a ten-year term were awarded in the nine months ended September 30, 2013 with an average exercise price of $80.25, a fair value of $4.2 million and that will vest in four equal annual installments starting in February 2014.

 

Stock based compensation pre-tax expense from continuing operations recognized in the nine month periods ended September 30, 2013 and 2012 totaled $21.7 million and $13.5 million, or $0.31 and $0.19 per diluted share after tax, respectively. Stock based compensation pre-tax expense from continuing operations recognized in the three month periods ended September 30, 2013 and 2012 totaled $7.8 million and $4.7 million, or $0.11 and $0.07 per diluted share after tax, respectively. The total fair value of restricted stock awards that vested during the nine months ended September 30, 2013 and 2012 was $13.4 million and $14.2 million, respectively. At September 30, 2013, $46.2 million of compensation cost related to unvested stock options and restricted stock awards attributable to future performance had not yet been recognized.

 

 
14

 

 

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(Continued)

 

 

In connection with the September 2013 sale of Sooner, modifications were made to outstanding equity options and awards for Sooner employees which resulted in $4.7 million in expense. This expense is included in “Net income from discontinued operations, net of tax” on the Unaudited Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2013 and is included in the transaction costs considered in the calculation of the $128.6 million pre-tax gain on the disposal of Sooner.  

  

12.   INCOME TAXES

 

Income tax expense for interim periods is based on estimates of the effective tax rate for the entire fiscal year. The Company’s income tax provision for the three and nine months ended September 30, 2013 totaled $27.1 million, or 25.9% of pretax income, and $86.4 million, or 26.6% of pretax income, respectively, compared to income tax expense of $33.6 million, or 25.7% of pretax income, and $113.9 million, or 26.5% of pretax income, respectively, for the three and nine months ended September 30, 2012. The effective tax rates for the three and nine months ended September 30, 2013 and 2012 are comparable, and are both lower than U.S. statutory rates because of lower foreign tax rates.

 

13.   SEGMENT AND RELATED INFORMATION

 

In accordance with current accounting standards regarding disclosures about segments of an enterprise and related information, the Company has identified the following reportable segments: well site services, accommodations and offshore products. The Company’s reportable segments represent strategic business units that offer different products and services. They are managed separately because each business requires different technologies and marketing strategies. Most of the businesses were initially acquired as a unit, and the management at the time of the acquisition was retained. Subsequent acquisitions have been direct extensions to our business segments. Separate business lines within the well site services segment have been disclosed to provide additional detail for that segment. Results of a portion of our accommodations segment supporting Steam-Assisted Gravity Drainage (SAGD) and traditional oil and natural gas drilling activities are impacted by seasonally higher activity during the Canadian winter drilling season occurring in the first calendar quarter, typically followed by lower activity during Spring break-up in the second quarter.

 

 

 
15

 

 

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(Continued)

 

Financial information by business segment for continuing operations for each of the three and nine months ended September 30, 2013 and 2012 is summarized in the following table (in thousands):

 

   

Revenues from unaffiliated customers

   

Depreciation and amortization

   

Operating income (loss)

   

Equity in earnings (loss) of unconsolidated affiliates

   

Capital expenditures

   

Total assets

 

Three months ended September 30, 2013

                                               

Well site services –

                                               

Completion services

  $ 151,857     $ 17,173     $ 35,302     $ -     $ 25,689     $ 593,773  

Drilling services

    44,046       6,414       4,856       -       6,410       140,096  

Total well site services

    195,903       23,587       40,158       -       32,099       733,869  

Accommodations

    246,280       42,011       56,809       (1 )     74,188       2,092,415  

Offshore products

    242,273       4,396       40,951       73       8,335       889,619  

Corporate and eliminations

    -       223       (15,941 )     -       388       557,569  

Total

  $ 684,456     $ 70,217     $ 121,977     $ 72     $ 115,010     $ 4,273,472  

 

   

Revenues from unaffiliated customers

   

Depreciation and amortization

   

Operating income (loss)

   

Equity in earnings (loss) of unconsolidated affiliates

   

Capital expenditures

   

Total assets

 

Three months ended September 30, 2012

                                               

Well site services –

                                               

Completion services

  $ 130,752     $ 12,746     $ 32,218     $ -     $ 27,251     $ 521,756  

Drilling services

    50,995       5,793       9,943       -       10,102       136,278  

Total well site services

    181,747       18,539       42,161       -       37,353       658,034  

Accommodations

    273,315       36,246       85,132       -       82,046       2,055,964  

Offshore products

    189,450       3,807       28,026       (103 )     9,846       781,483  

Corporate and eliminations

    -       279       (11,172 )     -       98       37,708  

Total

  $ 644,512     $ 58,871     $ 144,147     $ (103 )   $ 129,343     $