ois20140930_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, 2014

 

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 [ X ]             NO [  ]

 

The Registrant had 53,172,851 shares of common stock, par value $0.01, outstanding and 7,610,526 shares of treasury stock as of October 29, 2014.

 

 
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

3

 

Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss)

4

 

Consolidated Balance Sheets

5

 

Unaudited Condensed Consolidated Statements of Cash Flows

6

 

Unaudited Condensed Consolidated Statement of Stockholders’ Equity

7

 

Notes to Unaudited Condensed Consolidated Financial Statements

8 – 20

     
Cautionary Statement Regarding Forward-Looking Statements

21

     
Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

21 – 32

     
Item 3.

Quantitative and Qualitative Disclosures About Market Risk

32

     
Item 4.

Controls and Procedures

32 – 33
     
     
 

Part II -- OTHER INFORMATION

 
     
Item 1.

 Legal Proceedings

33

     
Item 1A.

Risk Factors

33

     
Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

33

     
Item 6.

Exhibits

34

     
 

(a) Index of Exhibits

34 – 35

     
Signature Page

36

  

 
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,  
    2014     2013     2014     2013  
                                 

Revenues

  $ 471,032     $ 438,176     $ 1,335,876     $ 1,207,824  
                                 

Costs and expenses:

                               

Cost of sales and services

    306,497       301,702       886,777       835,471  

Selling, general and administrative expenses

    43,734       38,531       128,181       110,600  

Depreciation and amortization expense

    31,076       28,206       92,970       80,035  

Other operating (income) expense

    (1,887 )     3,981       9,524       6,329  
      379,420       372,420       1,117,452       1,032,435  

Operating income

    91,612       65,756       218,424       175,389  
                                 

Interest expense

    (1,602 )     (9,983 )     (15,500 )     (30,130 )

Interest income

    150       159       411       460  

Loss on extinguishment of debt

    30       (2,058 )     (100,380 )     (2,058 )

Equity in earnings (losses) of unconsolidated affiliates

    74       73       292       (758 )

Other income

    161       617       2,279       1,765  

Income from continuing operations before income taxes

    90,425       54,564       105,526       144,668  

Income tax expense

    (32,048 )     (19,081 )     (36,545 )     (51,692 )

Net income from continuing operations

    58,377       35,483       68,981       92,976  

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

    (1,467 )     132,250       51,571       253,500  

Net income

    56,910       167,733       120,552       346,476  

Less: Net income (loss) attributable to noncontrolling interest

    (10 )     (7 )     8       22  

Net income attributable to Oil States International, Inc.

  $ 56,920     $ 167,740     $ 120,544     $ 346,454  
                                 
                                 

Net income (loss) attributable to Oil States International, Inc.:

                               

Continuing operations

  $ 58,387     $ 35,490     $ 68,973     $ 92,954  

Discontinued operations

    (1,467 )     132,250       51,571       253,500  

Net income attributable to Oil States International, Inc.

  $ 56,920     $ 167,740     $ 120,544     $ 346,454  
                                 
                                 

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

                               

Continuing operations

  $ 1.08     $ 0.64     $ 1.28     $ 1.69  

Discontinued operations

    (0.03 )     2.40       0.95       4.61  

Net income

  $ 1.05     $ 3.04     $ 2.23     $ 6.30  
                                 

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

                               

Continuing operations

  $ 1.07     $ 0.64     $ 1.27     $ 1.67  

Discontinued operations

    (0.02 )     2.37       0.95       4.57  

 Net income

  $ 1.05     $ 3.01     $ 2.22     $ 6.24  
                                 

Weighted average number of common shares outstanding:

                               

Basic

    52,979       55,092       53,119       54,987  

Diluted

    53,294       55,672       53,422       55,542  

 

 

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 (LOSS)

(In Thousands)

 

 

 

    THREE MONTHS ENDED     NINE MONTHS ENDED  
    SEPTEMBER 30,     SEPTEMBER 30,  
    2014     2013     2014     2013  

Net income

  $ 56,910     $ 167,733     $ 120,552     $ 346,476  

Other comprehensive income (loss):

                               

Foreign currency translation adjustment

    (13,144 )     44,693       10,301       (125,407 )

Unrealized gain (loss) on forward contracts, net of tax

    3       (190 )     4       (74 )

Total other comprehensive income (loss)

    (13,141 )     44,503       10,305       (125,481 )

Comprehensive income

    43,769       212,236       130,857       220,995  

Less: Comprehensive income (loss) attributable to noncontrolling interest

    (10 )     26       (16 )     (19 )

Comprehensive income attributable to Oil States International, Inc.

  $ 43,779     $ 212,210     $ 130,873     $ 221,014  

 

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,

 
   

2014

   

2013

 
   

(UNAUDITED)

         
ASSETS                 

Current assets:

               

Cash and cash equivalents

  $ 69,800     $ 599,306  

Accounts receivable, net

    506,508       620,333  

Inventories, net

    247,092       266,552  

Prepaid expenses and other current assets

    22,368       39,716  

Total current assets

    845,768       1,525,907  
                 

Property, plant, and equipment, net

    627,465       1,902,789  

Goodwill, net

    252,880       513,650  

Other intangible assets, net

    52,238       133,531  

Other noncurrent assets

    25,118       55,384  

Total assets

  $ 1,803,469     $ 4,131,261  
                 

LIABILITIES AND STOCKHOLDERS’ EQUITY

               
                 

Current liabilities:

               

Accounts payable

  $ 101,706     $ 149,079  

Accrued liabilities

    79,693       132,046  

Income taxes

    12,589       32,679  

Current portion of long-term debt and capitalized leases

    505       529  

Deferred revenue

    48,755       50,366  

Other current liabilities

    11,853       9,137  

Total current liabilities

    255,101       373,836  
                 

Long-term debt and capitalized leases

    178,040       972,692  

Deferred income taxes

    19,121       122,821  

Other noncurrent liabilities

    16,761       36,618  

Total liabilities

    469,023       1,505,967  
                 

Stockholders’ equity:

               

Oil States International, Inc. stockholders’ equity:

               

Common stock, $.01 par value, 200,000,000 shares authorized, 60,783,119 shares and 59,777,766 shares issued, respectively, and 54,017,285 shares and 54,767,284 shares outstanding, respectively

    608       592  

Additional paid-in capital

    674,435       637,438  

Retained earnings

    1,080,955       2,320,453  

Accumulated other comprehensive loss

    (11,851 )     (85,675 )

Common stock held in treasury at cost, 6,765,834 and 5,010,482 shares, respectively

    (409,875 )     (249,391 )

Total Oil States International, Inc. stockholders’ equity

    1,334,272       2,623,417  

Noncontrolling interest

    174       1,877  

Total stockholders’ equity

    1,334,446       2,625,294  

Total liabilities and stockholders’ equity

  $ 1,803,469     $ 4,131,261  

 

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

CONTINUING AND DISCONTINUED OPERATIONS

(In Thousands)

 

   

NINE MONTHS

ENDED SEPTEMBER 30,

 
   

2014

   

2013

 
                 

Cash flows from operating activities:

               
Net income   $ 121,119     $ 347,540  
Adjustments to reconcile net income to net cash provided by operating activities:                

Depreciation and amortization

    160,520       206,155  

Deferred income tax provision

    (1,735 )     (707 )

Excess tax benefits from share-based payment arrangements

    (4,585 )     (5,447 )

Gain on sale of business

    --       (84,209 )

Gain on disposals of assets

    (923 )     (3,871 )

Non-cash compensation charge

    22,220       22,938  

Amortization of deferred financing costs

    2,896       5,937  

Loss on extinguishment of debt

    103,836       3,265  

Other, net

    5,183       640  
Changes in operating assets and liabilities, net of effect from acquired businesses and net assets of Civeo that were distributed to stockholders:                
Accounts receivable     (68,106 )     53,386  
Inventories     (7,030 )     34,028  
Accounts payable and accrued liabilities     (14,463 )     (24,449 )
Taxes payable     (48,875 )     16,603  
Other operating assets and liabilities, net     32,423       10,868  
Net cash flows provided by operating activities     302,480       582,677  
                 

Cash flows from investing activities:

               

Capital expenditures, including capitalized interest

    (262,619 )     (355,639 )

Acquisitions of businesses, net of cash acquired

    193       (1,771 )

Proceeds from sale of business

    --       600,000  

Proceeds from disposition of property, plant and equipment

    4,077       8,535  

Other, net

    (1,462 )     81  

Net cash flows (used in) provided by investing activities

    (259,811 )     251,206  
                 

Cash flows from financing activities:

               

Revolving credit borrowings and (repayments), net

    171,734       (47,901 )

Repayment of 6 1/2% Senior Notes

    (630,307 )     --  

Repayment of 5 1/8% Senior Notes

    (419,794 )     --  

Term loan repayments

    --       (252,762 )

Debt and capital lease repayments

    (407 )     (2,181 )

Issuance of common stock from share-based payment arrangements

    8,844       14,172  

Purchase of treasury stock

    (162,053 )     (11,889 )

Excess tax benefits from share-based payment arrangements

    4,585       5,447  

Payment of financing costs

    (12,530 )     (203 )

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

    (5,048 )     (4,161 )
Term borrowings of Civeo     775,000       --  
Cash balances of Civeo in Spin-Off     (298,536 )     --  

Net cash flows used in financing activities

    (568,512 )     (299,478 )
                 

Effect of exchange rate changes on cash

    (3,663 )     (11,598 )

Net change in cash and cash equivalents

    (529,506 )     522,807  

Cash and cash equivalents, beginning of period

    599,306       253,172  
                 

Cash and cash equivalents, end of period

  $ 69,800     $ 775,979  

 

The accompanying notes are an integral part of these

financial statements.

 

 
6

 

 

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

(In Thousands)

 

   

Common Stock

   

Additional Paid-In Capital

   

Retained Earnings

   

Accumulated Other Comprehensive Income (Loss)

   

Treasury Stock

   

Noncontrolling Interest

   

Total Stockholders' Equity

 

Balance, December 31, 2013

  $ 592     $ 637,438     $ 2,320,453     $ (85,675 )   $ (249,391 )   $ 1,877     $ 2,625,294  

Net income

                    120,544                       8       120,552  

Currency translation adjustment

                            10,301               (24 )     10,277  

Other comprehensive income

                            4                       4  

Dividends declared

                                            (489 )     (489 )

Exercise of stock options, including tax benefit

    2       13,427                                       13,429  

Amortization of restricted stock compensation

            17,994                                       17,994  

Stock option expense

            2,858                                       2,858  

Surrender of stock to pay taxes on restricted stock awards

    2       (2 )                     (5,048 )             (5,048 )

Stock acquired for cash

                                    (155,437 )             (155,437 )

Exercise of stock options/stock awards released – discontinued operations

            2,727                                       2,727  

Net income from noncontrolling interests – discontinued operations

                                            567       567  

Spin-Off of Civeo

                    (1,360,042 )     63,519               (1,765 )     (1,298,288 )

Other

    12       (7 )                     1               6  

Balance, September 30, 2014

  $ 608     $ 674,435     $ 1,080,955     $ (11,851 )   $ (409,875 )   $ 174     $ 1,334,446  

 

  

The accompanying notes are an integral part of these financial statements.

 

 
7

 

 

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.

 

On May 30, 2014, we completed the spin-off of our accommodations business into a stand-alone, publicly traded corporation (Civeo Corporation, or Civeo). The results of operations for our accommodations business have been classified as discontinued operations for all periods presented. See Note 2 to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for additional information. Unless indicated otherwise, the information in the Notes to the Consolidated Financial Statements relates to our continuing operations.

 

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 results of operations for our tubular services segment have been classified as discontinued operations for all periods presented.

 

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, 2013 (the 2013 Form 10-K).

 

2.

SPIN-OFF OF ACCOMMODATIONS BUSINESS (CIVEO)

 

On May 30, 2014, we completed the spin-off of Civeo into a stand-alone, publicly traded corporation through a tax-free distribution of Civeo shares to the Company’s shareholders (the Spin-Off). After the close of the New York Stock Exchange on May 30, 2014 (the Distribution Date), the stockholders of record as of 5:00 p.m. Eastern time on May 21, 2014 (the Record Date), received two shares of Civeo common stock for each share of Oil States common stock held as of the Record Date. Following the Distribution Date, Oil States ceased to own any shares of Civeo common stock. The objectives of the Spin-Off were to allow each respective management team to more effectively focus on the two distinct businesses, to allow the Company and Civeo the opportunity to pursue more tailored and aggressive growth strategies, and the optimization of operating efficiencies for each of the Company and Civeo, among other objectives. In connection with the Spin-Off, we received a private letter ruling from the Internal Revenue Service on the tax-free status of the Spin-Off.

 

In connection with the Spin-Off, we refinanced our existing debt. Specifically, in June 2014, we commenced and completed tender offers for all of our outstanding 5 1/8% Senior Notes due 2023 (5 1/8% Notes) and 6 1/2% Senior Notes due 2019 (6 1/2% Notes). These tender offers were funded in part with the proceeds of the $750 million special cash dividend paid to us by Civeo in connection with the Spin-Off, using the proceeds from the $775 million term loan entered into by Civeo immediately prior to the consummation of the Spin-Off, and borrowings under our new credit facility and available cash on hand. See Note 9 to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for additional information regarding the tender offers and our new credit facility.

 

 
8

 

 

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(Continued)

 

In order to effect the Spin-Off and govern our relationship with Civeo after the Spin-Off, we entered into a Separation and Distribution Agreement, an Indemnification and Release Agreement, a Tax Sharing Agreement, an Employee Matters Agreement and a Transition Services Agreement.  The Separation and Distribution Agreement governed the Spin-Off, the distribution of Civeo’s shares of common stock to our stockholders, transfer of assets and intellectual property, and other matters related to our relationship with Civeo.  The Indemnification and Release Agreement provides for cross-indemnities between the Company and Civeo and established procedures for handling claims subject to indemnification and related matters. We evaluated the impact of the indemnifications given and the Civeo indemnifications received as of the Spin-Off date and concluded those fair values were immaterial.

 

The Tax Sharing Agreement governs the respective rights, responsibilities and obligations of the Company and Civeo with respect to the payment of taxes, filing of tax returns, reimbursements of taxes, control of audits and other matters regarding taxes.  In addition, the Tax Sharing Agreement reflects each company’s rights and obligations related to taxes that are attributable to periods prior to and including the Spin-Off date and taxes resulting from transactions effected in connection with the Spin-Off. In general under the Tax Sharing Agreement, the Company is responsible for all U.S. federal, state, local and foreign income taxes attributable to the Company or any of its subsidiaries for any tax period that begins after the date of the Spin-Off, and Civeo is responsible for all taxes attributable to it or its subsidiaries, whether accruing before, on or after the Spin-Off.  In addition, the Tax Sharing Agreement imposes certain restrictions on Civeo and its subsidiaries (including restrictions on share issuances, business combinations, sales of assets and similar transactions) that are designed to preserve the tax-free status of the Spin-Off and certain related transactions.

 

The Employee Matters Agreement governs the Company’s and Civeo’s compensation and employee benefit obligations with respect to the current and former employees and non-employee directors of each company, and generally allocates liabilities and responsibilities relating to employee compensation and benefit plans and programs and provides for the treatment of outstanding equity and other compensation awards and programs of the Company. The Employee Matters Agreement provides that Civeo will generally be responsible for all liabilities and obligations relating to their employees and former employees of the Company’s accommodations business, including all obligations pursuant to any collective bargaining, employment and other agreements between any Civeo employee and the Company. In addition, the Employee Matters Agreement provides that employees of Civeo will cease active participation under all benefit plans sponsored by the Company. The Employee Matters Agreement sets forth the general principles relating to employee matters and also addresses any special circumstances during the transition period. The Employee Matters Agreement also provides that (i) the Spin-Off does not constitute a change in control under existing plans, programs, agreements or arrangements, and (ii) the Spin-Off and the assignment, transfer or continuation of the employment of employees with another entity will not constitute a severance event under the applicable plans, programs, agreements or arrangements.

 

Under the Transition Services Agreement, the Company is providing and/or making available various administrative services and assets to Civeo, for a period of up to nine months beginning on the Distribution Date of the Spin-Off, with a possible extension of one month (an aggregate of ten months.)  The services include: information technology services; treasury services; internal audit services; tax services; legal services; risk management services; and accounting services.  In consideration for such services, Civeo is paying fees to the Company for the services provided, and these fees are generally in amounts intended to allow the Company to recover all of its direct and indirect costs incurred in providing these services. 

 

 
9

 

 

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(Continued)

 

The carrying values of the major categories of assets and liabilities of Civeo, immediately preceding the Spin-Off on May 30, 2014, which were removed from the Company’s balance sheet were as follows (in thousands):

 

ASSETS

       

Current assets:

       

Cash and cash equivalents

  $ 298,536  

Accounts receivable, net

    172,937  

Inventories, net

    23,669  

Prepaid expenses and other current assets

    24,888  

Total current assets of discontinued operations

    520,030  
         

Property, plant, and equipment, net

    1,391,458  

Goodwill, net

    268,464  

Other intangible assets, net

    75,105  

Other noncurrent assets

    30,846  

Total assets of discontinued operations

  $ 2,285,903  
         

LIABILITIES

       

Current liabilities:

       

Accounts payable

    52,441  

Accrued liabilities

    23,784  

Income taxes

    897  

Deferred revenue

    22,456  

Other current liabilities

    256  

Total current liabilities of discontinued operations

    99,834  
         

Long-term debt

    775,000  

Deferred income taxes

    85,328  

Other noncurrent liabilities

    27,453  

Total liabilities of discontinued operations

  $ 987,615  

 

See Note 8 to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for selected financial information regarding the results of operations of our accommodations business which are reported as discontinued operations.  

 

3.

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.

 

In April 2014, the FASB issued guidance on the reporting of discontinued operations which amends the definition for what types of asset disposals are to be considered discontinued operations, and amends the required disclosures for discontinued operations and assets held for sale. The amendments in this update are effective for fiscal periods beginning on or after December 15, 2014, and interim periods within annual periods beginning on or after December 15, 2015. The company is currently evaluating the impact of this standard on its consolidated financial statements. This standard was not early adopted in connection with the Spin-Off.

 

In May 2014, the FASB issued guidance on revenue from contracts with customers that will supersede most current revenue recognition guidance, including industry-specific guidance. The underlying principle is that an entity will recognize revenue to depict the transfer of goods or services to customers at an amount that the entity expects to be entitled to in exchange for those goods or services. The guidance provides a five-step analysis of transactions to determine when and how revenue is recognized. Other major provisions include capitalization of certain contract costs, consideration of time value of money in the transaction price, and allowing estimates of variable consideration to be recognized before contingencies are resolved in certain circumstances. The guidance also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity’s contracts with customers. The guidance is effective for the interim and annual periods beginning on or after December 15, 2016 (early adoption is not permitted). The guidance permits the use of either a retrospective or cumulative effect transition method. We have not yet selected a transition method and are currently evaluating the impact of the amended guidance on our consolidated financial position, results of operations and related disclosures.

 

 
10

 

 

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(Continued)

 

4.

DETAILS OF SELECTED BALANCE SHEET ACCOUNTS

 

Additional information regarding selected balance sheet accounts at September 30, 2014 and December 31, 2013 is presented below (in thousands):

 

   

SEPTEMBER 30,

   

DECEMBER 31,

 
   

2014

   

2013

 

Accounts receivable, net:

               

Trade

  $ 325,351     $ 456,114  

Unbilled revenue

    182,936       163,766  

Other

    5,148       7,987  

Total accounts receivable

    513,435       627,867  

Allowance for doubtful accounts

    (6,927 )     (7,534 )
    $ 506,508     $ 620,333  

 

   

SEPTEMBER 30,

   

DECEMBER 31,

 
   

2014

   

2013

 

Inventories, net:

               

Finished goods and purchased products

  $ 90,178     $ 91,909  

Work in process

    55,161       72,903  

Raw materials

    112,636       111,280  

Total inventories

    257,975       276,092  

Allowance for excess, damaged, or obsolete inventory

    (10,883 )     (9,540 )
    $ 247,092     $ 266,552  

 

   

Estimated

   

SEPTEMBER 30,

   

DECEMBER 31,

 
   

Useful Life (in years)

   

2014

   

2013

 

Property, plant and equipment, net:

                       

Land

          $ 26,929     $ 76,545  

Accommodations assets

    --       --       1,535,407  

Buildings and leasehold improvements

 

3-40

      172,477       204,455  

Machinery and equipment

 

2-29

      434,544       434,578  

Completion services equipment

 

4-10

      368,161       314,445  

Office furniture and equipment

 

1-10

      28,935       57,026  

Vehicles

 

2-10

      125,011       140,156  

Construction in progress

            66,900       172,252  

Total property, plant and equipment

            1,222,957       2,934,864  

Accumulated depreciation

            (595,492 )     (1,032,075 )
            $ 627,465     $ 1,902,789  

 

   

SEPTEMBER 30,

   

DECEMBER 31,

 
   

2014

   

2013

 

Accrued liabilities:

               

Accrued compensation

  $ 43,620     $ 71,535  

Insurance liabilities

    12,789       13,198  

Accrued taxes, other than income taxes

    8,812       7,619  

Accrued interest

    108       11,931  

Accrued commissions

    3,908       3,654  

Accrued treasury stock repurchase

    782       7,397  

Other

    9,674       16,712  
    $ 79,693     $ 132,046  

 

A significant portion of our accounts receivable ($177.8 million), inventories ($29.8 million), property, plant and equipment ($1.3 billion) and accrued liabilities ($25.2 million) at December 31, 2013 was related to our accommodations business and were transferred to Civeo at the date of the Spin-Off. See Note 2 to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for additional information on the Spin-Off.

 

 
11

 

 

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(Continued) 

 

 

5.

ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

 

Our accumulated other comprehensive loss decreased from $85.7 million at December 31, 2013 to $11.9 million at September 30, 2014, primarily as a result of the Spin-Off of Civeo. See Note 2 to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for additional information. Prior to the Spin-Off, our accumulated other comprehensive loss was primarily related to fluctuations in the Canadian and Australian dollar exchange rates compared to the U.S. dollar and our Canadian and Australian operations were primarily related to our accommodations business. Subsequent to the Spin-Off, our accumulated other comprehensive loss is primarily related to fluctuations in the foreign currency exchange rates compared to the U.S. dollar for the foreign operations of our offshore products segment (primarily in the United Kingdom, Brazil and Thailand.)

 

6.

EARNINGS PER SHARE

 

The numerator (income) and denominator (shares) used for the computation of basic and diluted earnings per share from continuing operations were as follows (in thousands):

 

   

THREE MONTHS ENDED SEPTEMBER 30,

 
   

2014

   

2013

 
   

Income

   

Shares

   

Income

   

Shares

 

Basic:

                               

Net income attributable to Oil States International, Inc.

  $ 56,920             $ 167,740          

Less: Undistributed net income allocable to participating securities

    (1,187 )             --          

Undistributed net income applicable to common stockholders

    55,733               167,740          

Less: Loss (income) from discontinued operations, net of tax

    1,467               (132,250 )        

Add: Undistributed net loss from discontinued operations allocable to participating securities

    (31 )             --          

Income from continuing operations applicable to Oil States International, Inc. common stockholders – Basic

  $ 57,169       52,979     $ 35,490       55,092  

Diluted:

                               

Income from continuing operations applicable to Oil States International, Inc. common stockholders – Basic

  $ 57,169       52,979     $ 35,490       55,092  

Effect of dilutive securities:

                               

Undistributed net income reallocated to participating securities

    7       --       --       --  

Options on common stock

    --       298       --       323  

Restricted stock awards and other

    --       17       --       257  

Income from continuing operations applicable to Oil States International, Inc. common stockholders – Diluted

    57,176       53,294       35,490       55,672  

(Loss) income from discontinued operations, net of tax, applicable to Oil States International, Inc. common stockholders

    (1,436 )             132,250          

Undistributed net income reallocated to participating securities

    --               --          

Net income attributable to Oil States International, Inc. common stockholders – Diluted

  $ 55,740       53,294     $ 167,740       55,672  

  

 
12

 

 

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(Continued) 

 

   

NINE MONTHS ENDED SEPTEMBER 30,

 
   

2014

   

2013

 
   

Income

   

Shares

   

Income

   

Shares

 

Basic:

                               

Net income attributable to Oil States International, Inc.

  $ 120,544             $ 346,454          

Less: Undistributed net income allocable to participating securities

    (1,846 )             --          

Undistributed net income applicable to common stockholders

    118,698               346,454          

Less: Income from discontinued operations, net of tax

    (51,571 )             (253,500 )        

Add: Undistributed net income from discontinued operations allocable to participating securities

    790               -          

Income from continuing operations applicable to Oil States International, Inc. common stockholders – Basic

  $ 67,917       53,119     $ 92,954       54,987  

Diluted:

                               

Income from continuing operations applicable to Oil States International, Inc. common stockholders – Basic

  $ 67,917       53,119     $ 92,954       54,987  

Effect of dilutive securities:

                               

Undistributed net income reallocated to participating securities

    6       --       --       --  

Options on common stock

    --       286       --       351  

Restricted stock awards and other

    --       17       --       204  

Income from continuing operations applicable to Oil States International, Inc. common stockholders – Diluted

    67,923       53,422       92,954       55,542  

Income from discontinued operations, net of tax, applicable to Oil States International, Inc. common stockholders

    50,781               253,500          

Undistributed net income reallocated to participating securities

    4               --          

Net income attributable to Oil States International, Inc. common stockholders – Diluted

  $ 118,708       53,422     $ 346,454       55,542  

 

Our calculation of diluted earnings per share for the three and nine months ended September 30, 2014 excluded 196,039 shares and 186,354 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, 2013 excluded 247,432 shares and 344,251 shares, respectively, issuable pursuant to outstanding stock options and restricted stock awards, due to their antidilutive effect.

 

7.

BUSINESS ACQUISITIONS AND GOODWILL

 

On December 2, 2013, we acquired all of the operating assets of Quality Connector Systems, LLC (QCS). Headquartered in Houston, Texas, QCS designs, manufactures and markets a portfolio of proprietary deep and shallow water pipeline connectors for subsea pipeline construction, repair and expansion projects. Total cash consideration paid was $42.3 million. The operations of QCS have been included in our offshore products segment since the acquisition date.

 

 
13

 

 

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(Continued) 

 

Changes in the carrying amount of goodwill for the nine month period ended September 30, 2014 were as follows (in thousands):

 

   

Well Site Services

                         
   

Completion

Services

   

Drilling

Services

   

Subtotal

   

Accommodations

   

Offshore

Products

   

Total

 

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       --       26,179       27,755  

Foreign currency translation and other changes

    (946 )     --       (946 )     (34,076 )     99       (34,923 )
      107,383       --       107,383       261,056       145,211       513,650  
                                                 

Balance as of December 31, 2013

                                               

Goodwill

    201,911       22,767       224,678       261,056       145,211       630,945  

Accumulated Impairment Losses

    (94,528 )     (22,767 )     (117,295 )     --       --       (117,295 )
      107,383       --       107,383       261,056       145,211       513,650  

Spin-Off of Civeo

    --       --       --       (268,463 )     --       (268,463 )

Goodwill acquired and purchase price adjustments

    194       --       194       --       907       1,101  

Foreign currency translation and other changes

    (699 )     --       (699 )     7,407       (116 )     6,592  
      106,878       --       106,878       --       146,002       252,880  
                                                 

Balance as of September 30, 2014

                                               

Goodwill

    201,406       22,767       224,173       --       146,002       370,175  

Accumulated Impairment Losses

    (94,528 )     (22,767 )     (117,295 )     --       --       (117,295 )
    $ 106,878     $ --     $ 106,878     $ --     $ 146,002     $ 252,880  

 

 

8.

DISCONTINUED OPERATIONS

 

On May 30, 2014, we completed the Spin-Off of our accommodations business, Civeo Corporation, to the Company’s stockholders. On May 30, 2014, the stockholders of record as of the close of business on the Record Date received two shares of Civeo common stock for each share of Oil States common stock held as of the Record Date. Following the Distribution Date, Oil States ceased to own any shares of Civeo common stock.

 

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. We recognized a net gain on disposal of $128.6 million ($84.2 million after-tax) in the three months ended September 30, 2013.

 

In connection with these transactions, the parties entered into transition services agreements for the Company to provide certain information technology applications and infrastructure and various administrative services to Civeo and Sooner during the transition period in exchange for monthly service fees. The transition services agreement between the Company and Sooner expired on February 28, 2014. The transition services agreement between the Company and Civeo is for a period of up to nine months beginning on the Distribution Date of the Spin-Off, with a possible extension of one month (an aggregate of ten months.) The cash flows from the disposed businesses to the Company resulting from the transition services agreements are not significant and do/did not constitute a significant continuing involvement in Civeo or Sooner.

 

Civeo and Sooner, which had previously been presented as separate reporting segments, both meet the criteria for being reported as discontinued operations and have been reclassified from continuing operations. Discontinued operations for the three and nine months ended September 30, 2014 reflect the operating results of Civeo through the Distribution Date and adjustments related to the revaluation of outstanding equity awards and options previously awarded to the Sooner employees. Discontinued operations for the three and nine months ended September 30, 2013 reflect the operating results of Civeo and Sooner.

 

In connection with the Spin-Off, the holders of our 5 1/8% Notes and 6 1/2% Notes had the right to require the Company to repurchase all of their notes. As such, we allocated a portion of the interest expense related to our outstanding 5 1/8% Notes and 6 1/2% Notes to discontinued operations based on a ratio of the net assets of the accommodations business to the total net assets of the Company, excluding consolidated debt. For the nine months ended September 30, 2014, we allocated $13.7 million, respectively, of interest expense related to our outstanding 5 1/8% Notes and 6 1/2% Notes to discontinued operations. For the three and nine months ended September 30, 2013, we allocated $7.7 million and $23.3 million, respectively, of interest expense related to our outstanding 5 1/8% Notes and 6 1/2% Notes to discontinued operations. In June 2014, we commenced and completed tender offers for all of our outstanding 5 1/8% Notes and 6 1/2% Notes and redeemed all remaining Notes that were not tendered in connection with the Spin-Off. See Note 9 to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for additional information regarding the tender offers.

 

 
14

 

 

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(Continued) 

 

The following table provides the components of net income from discontinued operations, net of tax for each operating segment (in thousands). The $128.6 million ($84.2 million after-tax) net gain related to the disposal of Sooner was excluded. 

 

   

Three Months Ended

    Three Months Ended     Nine Months Ended     Nine Months Ended  
    September 30, 2014     September 30, 2013     September 30, 2014     September 30, 2013  
                                 

Revenues

                               

Accommodations

  $ --     $ 246,280     $ 404,132     $ 787,161  

Tubular services

  $ --     $ 273,637     $ --     $ 1,073,096  
                                 

Income (loss) from Accommodations discontinued operations:

                               

Income from discontinued operations before income taxes

  $ 512     $ 49,549     $ 62,436     $ 178,792  

Income tax expense

    (1,965 )     (7,612 )     (11,063 )     (34,737 )

Net (loss) income from discontinued operations, net of tax

  $ (1,453 )   $ 41,937     $ 51,373     $ 144,055  
                                 

Income (loss) from Tubular services discontinued operations:

                               

(Loss) Income from discontinued operations before income taxes

  $ (21 )   $ 10,463     $ 315     $ 40,964  

Income tax (expense) benefit

    7       (4,359 )     (118 )     (15,728 )

Net (loss) income from discontinued operations, net of tax

  $ (14 )   $ 6,104     $ 197     $ 25,236  

 

9.

DEBT

 

As of September 30, 2014 and December 31, 2013, long-term debt consisted of the following (in thousands):

 

   

September 30,

2014

   

December 31,

2013

 

Revolving credit facility, which matures May 28, 2019, with available commitments up to $600 million and with a weighted average interest rate of 1.8% for the nine month period ended September 30, 2014

  $ 171,734     $ --  
                 

6 1/2% Senior Unsecured Notes, which were repaid in full during the three month period ended June 30, 2014; original due date of June 2019

    --       600,000  
                 

5 1/8% Senior Unsecured Notes, which were repaid in full during the three month period ended June 30, 2014; original due date of January 2023

    --       366,000  
                 

Capital lease obligations and other debt

    6,811       7,221  

Total debt

    178,545       973,221  

Less: Current portion

    505       529  

Total long-term debt and capitalized leases

  $ 178,040     $ 972,692  

  

 
15

 

 

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(Continued) 

 

Credit Facility

 

In connection with the Spin-Off, the Company replaced its existing credit facility on May 28, 2014 with a $600 million senior secured revolving credit facility. The Company has an option to increase the maximum borrowings under the new facility to $750 million with additional lender commitments prior to its maturity. The facility matures on May 28, 2019. The credit facility is governed by a Credit Agreement dated as of May 28, 2014 (Credit Agreement) by and among the Company, the Lenders party thereto, Wells Fargo Bank, N.A., as administrative agent, the Swing Line Lender and an Issuing Bank, and Royal Bank of Canada, as Syndication agent, and Compass Bank, as Documentation agent. Amounts outstanding under the credit facility bear interest at LIBOR plus a margin of 1.50% to 2.50%, or at a base rate plus a margin of 0.50% to 1.50%, in each case based on a ratio of the Company’s total leverage to EBITDA (as defined in the Credit Agreement). From May 28, 2014 through September 30, 2014, our applicable margin over LIBOR was 1.50%. We must also pay a quarterly commitment fee, based on our leverage ratio, on the unused commitments under the Credit Agreement. The unused commitment fee was 0.375% for the period May 28, 2014 through September 30, 2014. The Credit Agreement contains customary financial covenants and restrictions. Specifically, we must maintain an interest coverage ratio, defined as the ratio of consolidated EBITDA, to consolidated interest expense of at least 3.0 to 1.0 and our maximum leverage ratio, defined as the ratio of total debt to consolidated EBITDA of no greater than 3.25 to 1.0. Each of the factors considered in the calculations of these ratios are defined in the Credit Agreement. EBITDA and consolidated interest, exclude goodwill impairments, debt discount amortization and other non-cash charges. As of September 30, 2014, we were in compliance with our debt covenants. The credit facility also contains negative covenants that limit the Company's ability to borrow additional funds, encumber assets, pay dividends, sell assets and enter into other significant transactions. As of September 30, 2014, we had $171.7 million outstanding under the Credit Agreement and an additional $36.4 million of outstanding letters of credit, leaving $391.9 million available to be drawn under the credit facility. As of September 30, 2014, the Company had approximately $69.8 million of cash and cash equivalents.

 

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. In the fourth quarter of 2013, the Company repurchased $34.0 million aggregate principal amount of the 5 1/8% Notes and, in connection with the Spin-Off, repurchased the remaining $366.0 million aggregate principal amount in the second quarter of 2014 primarily through a tender offer. This tender offer was funded with the proceeds of the $750 million special cash dividend paid to us by Civeo in connection with the Spin-Off, using the proceeds from the $775 million term loan entered into by Civeo immediately prior to the consummation of the Spin-Off, and borrowings under our new Credit Agreement and available cash on hand.   

 

6 1/2% Senior Unsecured Notes

 

On June 1, 2011, the Company sold $600 million aggregate principal amount of 6 1/2% Senior Notes due 2019 (6 1/2% Notes) through a private placement to qualified institutional buyers. In connection with the Spin-Off, the Company repurchased the $600.0 million aggregate principal amount of the 6 1/2% Notes in the second quarter of 2014 primarily through a tender offer. This tender offer was funded with the proceeds of the $750 million special cash dividend paid to us by Civeo in connection with the Spin-Off, using the proceeds from the $775 million term loan entered into by Civeo immediately prior to the consummation of the Spin-Off, and borrowings under our new Credit Agreement and available cash on hand.

 

Loss on Extinguishment of Debt

 

During the first nine months of 2014, we recognized losses on the extinguishment of debt totaling $100.4 million primarily due to the repurchase of our remaining 6 1/2% Notes and 5 1/8% Notes in the second quarter, which resulted in a loss of $96.7 million consisting of the premium paid over book value for the Notes and the write-off of unamortized deferred financing costs associated with the Notes. The premium paid to repurchase the 6 1/2% and 5 1/8% Notes was due to their fair market value exceeding their book value at the date tendered or redeemed. In addition, as a result of the refinancing of our existing credit facility in the second quarter 2014, we recognized a loss on extinguishment of $3.7 million (net of $1.8 million allocated to discontinued operations for the Canadian portion of the facility) from the write-off of unamortized deferred financing costs.

 

Pursuant to Rule 3-10 of Regulation S-X, the Company has in its past periodic reports, including its Quarterly Report on Form 10-Q for the quarter ended March 31, 2014, included in a footnote to its financial statements, condensed consolidating financial information for the Company, the wholly-owned guarantor subsidiaries on a combined basis, the non-wholly owned guarantor subsidiaries on a combined basis, the non-guarantor subsidiaries on a combined basis, consolidating adjustments and the total consolidated amounts. Given the repurchase of all of the outstanding 5 1/8% Notes and 6 1/2% Notes as of June 30, 2014, the Company is no longer required to present expanded information with respect to the guarantor and non-guarantor subsidiaries.

 

 
16

 

 

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(Continued) 

 

10.

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 were estimated based on quoted prices and analysis of similar instruments (Level 2 fair value measurements). The December 31, 2013 carrying values and fair values of these Notes were as follows (in thousands):

 

   

Carrying

   

Fair

 
   

Value

   

Value

 

5 1/8% Notes

               

Principal amount originally due 2023

  $ 366,000     $ 411,066  
                 

6 1/2% Notes

               

Principal amount originally due 2019

  $ 600,000     $ 639,378  

 

11.

CHANGES IN COMMON STOCK OUTSTANDING

 

Shares of common stock outstanding – January 1, 2014

    54,767,284  

Repurchase of shares – transferred to treasury

    (1,704,127 )

Shares issued upon conversion of restricted stock awards as a result of the Spin-Off

    565,141  

Shares issued upon granting of restricted stock awards, net of forfeitures

    205,046  

Shares issued upon exercise of stock options

    225,753  

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

    (51,225 )

Shares issued upon vesting of deferred stock units

    9,413  

Shares of common stock outstanding – September 30, 2014

    54,017,285  

 

Subsequent to the end of the third quarter and through October 29, 2014, we repurchased an additional $50.0 million of our stock (843,478 shares).

 

12.

STOCK BASED COMPENSATION

 

Pursuant to the Employee Matters Agreement (see Note 2 to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q) we made certain adjustments to the exercise price and number of our stock based compensation awards with the intention of preserving the intrinsic value of the awards immediately prior to the Spin-Off. Each outstanding and unvested restricted stock award and each outstanding stock option of the Company, whether or not exercisable, that was held by a current or former employee of the Company, a director of the Company or a director of Civeo as of immediately prior to the Spin-Off was adjusted such that the holder received an additional number of restricted stock awards or stock options of the Company common stock based on a calculated ratio. For outstanding stock options, the per share exercise price was adjusted by a factor equal to the per share exercise price of the option prior to the Spin-Off divided by the calculated ratio. The calculated ratio was obtained by dividing the pre-Spin-Off price of the Company’s common stock by the post-Spin-Off price of the Company’s common stock. Each outstanding and unvested restricted stock award and each outstanding stock option of the Company, whether or not exercisable, that was held by a current employee of Civeo as of immediately prior to the Spin-Off was cancelled and the holder received a number of restricted stock awards or stock options of Civeo common stock. Adjustments to our stock based compensation awards did not result in additional compensation expense as an equitable adjustment was required to be made as a result of the Spin-Off. As a result of the Spin-Off, the conversions of outstanding equity awards resulted in the issuance of an additional 449,265 restricted stock awards and 395,454 additional stock options. Shares available for future awards under the equity plan were increased by 1,876,109 shares to adjust for the lower post-Spin-Off stock price of the Company.

 

 
17

 

 

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(Continued) 

 

The following table presenting a summary of stock option award and restricted stock award activity for the nine months ended September 30, 2014 reflects the adjustments discussed above.

 

   

Stock

Options

   

Restricted

Stock

 
   

Number of

Shares

   

Awards

 

Outstanding at January 1, 2014

    896,905       696,991  

Granted

    118,950       293,952  

Options Exercised/Stock Vested

    (225,753 )     (237,812 )

Cancelled

    (14,875 )     (25,993 )

Issued in Conversion, as a result of the Spin-Off

    395,454       449,265  

Outstanding at September 30, 2014

    1,170,681       1,176,403  

 

Stock based compensation pre-tax expense from continuing operations recognized in the three month periods ended September 30, 2014 and 2013 totaled $6.8 million and $6.1 million, or $0.08 and $0.07 per diluted share after tax, respectively. Stock based compensation pre-tax expense from continuing operations recognized in the nine month periods ended September 30, 2014 and 2013 totaled $19.3 million and $16.8 million, or $0.23 and $0.20 per diluted share after tax, respectively.

 

In July 2014, the Company granted performance based stock awards totaling 48,900 shares valued at a total of $3.1 million. These performance based awards may vest in December 2016 in an amount that will depend on the Company’s achievement of specified performance objectives. These 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 two and a half year period commencing July 1, 2014 and ending December 31, 2016.       

 

At September 30, 2014, $46.0 million of compensation cost related to unvested stock options and restricted stock awards attributable to vesting conditions had not yet been recognized.

 

13.

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, 2014 was a total tax expense of $32.0 million, or 35.4% of pretax income, and total income tax expense of $36.5 million, or 34.6% of pretax income, respectively, compared to income tax expense of $19.1 million, or 35.0% of pretax income, and $51.7 million, or 35.7% of pretax income, respectively, for the three and nine months ended September 30, 2013. The decrease in the effective tax rate for the nine months ended September 30, 2014 compared to the same period in 2013 was largely the result of lower domestic earnings in 2014 as a result of the loss incurred on extinguishment of debt associated with the debt refinancings completed in conjunction with the Spin-Off.

 

14.

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 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.

 

 
18

 

 

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, 2014 and 2013 is summarized in the following table (in thousands):

 

   

Revenues

from

unaffiliated

customers

   

Depreciation

and

amortization

   

Operating

income

(loss)

     

Equity in

earnings of

unconsolidated

affiliates

   

Capital

expenditures

   

Total

assets

 

Three months ended September 30, 2014

                                                 

Well site services –

                                                 

Completion services

  $ 171,990     $ 18,560     $ 43,242       $ -     $ 36,370     $ 622,318  

Drilling services

    52,416       6,721