OIL STATES INTERNATIONAL INC - 10-Q Quarterly Report

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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 June 30, 2003

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 1-16337

OIL STATES INTERNATIONAL, INC.

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(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 3460,
Houston, Texas 77002
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(Address of principal executive offices) (Zip Code)

(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 is an accelerated filer (as
defined in Rule 12b - 2 of the Exchange Act).

YES [X] NO [ ]

The Registrant had 48,608,763 shares of common stock outstanding as of
July 31, 2003.

OIL STATES INTERNATIONAL, INC.

INDEX

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OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Per Share Amounts)

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

3

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(In Thousands)

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

4

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)

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

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OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS

1. ORGANIZATION AND BASIS OF PRESENTATION

The accompanying unaudited consolidated financials statements of the Company
and its wholly-owned subsidiaries have been prepared pursuant to the rules and
regulations of the Securities and Exchange 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 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 year.

Preparation of financial statements in conformity with U.S. generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosed amounts of contingent assets and liabilities and the reported amounts
of revenues and expenses. 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 consolidated
condensed financial statements.

The Company's shares outstanding include all shares issuable upon the
exercise of exchangeable shares of one of the Company's Canadian subsidiaries.

The calculation of diluted earnings per share include the effect of the
Company's outstanding stock options determined under the treasury stock method.
All unvested restricted stock awards under the Company's Equity Participation
Plan are included in the fully diluted shares.

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
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.

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,
2002.

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2. DETAILS OF SELECTED BALANCE SHEET ACCOUNTS

Additional information regarding selected balance sheet accounts is
presented below (in thousands):

7

Changes in the carrying amount of goodwill for the six month period ended
June 30, 2003 are as follows (in thousands):

3. SEGMENT AND RELATED INFORMATION

In accordance with SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," the Company has identified the following
reportable segments: Offshore Products, Wellsite Services and Tubular Services.
The Company's reportable segments are strategic business units that offer
different products and services. They are managed separately because each
business requires different technology and marketing strategies. Most of the
businesses were acquired as a unit, and the management at the time of the
acquisition was retained. Results of our Canadian well site services business
related to the provision of work force accommodations, catering and logistics
services are seasonal with significant activity occurring in the peak winter
drilling season.

Financial information by industry segment for each of the three and six
month periods ended June 30, 2003 and 2002 is summarized in the following table
(in thousands):

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4. COMPREHENSIVE INCOME

Comprehensive income for the three and six months ended June 30, 2003 and
2002 was as follows (in thousands):

5. STOCK-BASED COMPENSATION

In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock Based
Compensation -- Transition and Disclosure." The Company has adopted the
disclosure requirements of SFAS No. 148 and has elected to record employee
compensation expense utilizing the intrinsic value method permitted under
Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued
to Employees."

The Company accounts for its employee stock-based compensation plan under
APB Opinion No. 25 and its related interpretations. Accordingly, any deferred
compensation expense would be recorded for stock options based on the excess of
the market value of the common stock on the date the options were granted over
the aggregate exercise price of the options. This deferred compensation would be
amortized over the vesting period of each option. The Company is authorized to
grant common stock based awards covering 5,700,000 shares of common stock under
the 2001 Equity Participation Plan, as amended and restated (the Stock Option
Plan), to employees, consultants and directors with amounts, exercise prices and
vesting schedules determined by the compensation committee of the Company's
Board of Directors. Since February 2001, all option grants have been priced at
the closing price on the day of grant, vest 25% per year and have a ten-year
life. Because the exercise price of options granted under the Stock Option Plan
have been equal to or greater than the market price of the Company's stock on
the date of grant, no compensation expense related to this plan has been
recorded. Had compensation expense for its Stock Option Plan been determined
consistent with SFAS No. 123 utilizing the fair value method, the Company's net
income and earnings per share at June 30, 2003 and 2002, would have been as
follows (in thousands, except per share amounts):

6. COMMITMENTS AND CONTINGENCIES

We are a party to various pending or threatened claims, lawsuits and
administrative proceedings seeking damages or other remedies concerning our
commercial operations, products, employees and other matters, including
occasional claims by individuals alleging exposure to hazardous materials as a
result of our products or operations. Some of these claims relate to matters
occurring prior to our acquisition of businesses, and some relate to businesses
we have sold. In certain cases, we are entitled to indemnification from the
sellers of businesses and in other cases, we have indemnified the buyers of
businesses from us. Although we can give no assurance about the outcome of
pending legal and administrative proceedings and the effect such outcomes may
have on us, we believe that any ultimate liability resulting from the outcome of
such proceedings, to the extent not otherwise provided for or

9

covered by insurance, will not have a material adverse effect on our
consolidated financial position, results of operations or liquidity.

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

You should read the following discussion and analysis together with our
financial statements and the notes to those statements included elsewhere in
this Quarterly Report on Form 10-Q.

This discussion contains forward-looking statements based on our current
expectations, assumptions, estimates and projections about us and our industry.
These forward-looking statements involve risks and uncertainties. Our actual
results could differ materially from those indicated in these forward-looking
statements as a result of certain factors, as more fully described under
"Cautionary Statement Regarding Forward-Looking Statements" in our Annual Report
on Form 10-K for the year ended December 31, 2002 filed with the Securities and
Exchange Commission on March 13, 2003. Except to the extent required by law, we
undertake no obligation to update publicly any forward-looking statements, even
if new information becomes available or other events occur in the future.

CRITICAL ACCOUNTING POLICIES

In our selection of critical accounting policies, our objective is to
properly reflect our financial position and results of operations in each
reporting period in a manner that will be understood by those who utilize our
financial statements. Often we must use our judgment about uncertainties.

There are several critical accounting policies that we have put into
practice that have an important effect on our reported financial results. There
have been no changes in these policies since the filing of our Annual Report on
Form 10-K for the year ended December 31, 2002.

We have contingent liabilities and future claims for which we have made
estimates of the amount of the eventual cost to liquidate these liabilities or
claims. These liabilities and claims sometimes involve threatened or actual
litigation where damages have been quantified and we have made an assessment of
our exposure and recorded a provision in our accounts to cover an expected loss.
Other claims or liabilities have been estimated based on our experience in these
matters and, when appropriate, the advice of outside counsel or other outside
experts. Upon the ultimate resolution of these uncertainties, our future
reported financial results will be impacted by the difference between our
estimates and the actual amounts paid to settle a liability. Examples of areas
where we have made important estimates of future liabilities include litigation,
taxes, postretirement benefits, warranty claims and contract claims.

The determination of impairment on long-lived assets, including goodwill, is
conducted as indicators of impairment are present. If such indicators were
present, the determination of the amount of impairment would be based on our
judgments as to the future operating cash flows to be generated from these
assets throughout their estimated useful lives. Our industry is highly cyclical
and our estimates of the period over which future cash flows will be generated,
as well as the predictability of these cash flows, can have a significant impact
on the carrying value of these assets and, in periods of prolonged down cycles,
may result in impairment charges.

We recognize revenue and profit as work progresses on long-term, fixed price
contracts using the percentage-of-completion method, which relies on estimates
of total expected contract revenue and costs. We follow this method since
reasonably dependable estimates of the revenue and costs applicable to various
stages of a contract can be made. Recognized revenues and profit are subject to
revisions as the contract progresses to completion. Revisions in profit
estimates are charged to income or expense in the period in which the facts and
circumstances that give rise to the revision become known. Provisions for
estimated losses on uncompleted contracts are made in the period in which losses
are determined.

Our valuation allowances, especially related to potential bad debts in
accounts receivable and to obsolescence or market value declines of inventory,
involve reviews of underlying details of these assets, known trends in the
marketplace and the application of historical factors that provide us with a
basis for recording these allowances. If market conditions are less favorable
than those projected by management, or if our historical experience is
materially different from future experience, additional allowances may be
required. We record a valuation allowance to reduce our deferred tax assets to
the amount that is more likely than not to be realized. While we have considered
future taxable income and ongoing prudent and feasible tax planning strategies
in assessing the need for the valuation allowance, in the event we were to
determine that we would be able to realize our deferred tax assets in the

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future in excess of our net recorded amount, an adjustment to the deferred tax
asset would increase income in the period such determination was made. Likewise,
should we determine that we would not likely be able to realize all or part of
our net deferred tax asset in the future, an adjustment to the deferred tax
asset would be charged to expense in the period such determination was made.

The selection of the useful lives of many of our assets requires the
judgments of our operating personnel as to the length of these useful lives.
Should our estimates be too long or short, we might eventually report a
disproportionate number of losses or gains upon disposition or retirement of our
long-lived assets. We believe our estimates of useful lives are appropriate.

OVERVIEW

We provide a broad range of products and services to the oil and gas
industry through our offshore products, well site services and tubular services
business segments. Demand for our products and services is cyclical and
substantially dependent upon activity levels in the oil and gas industry,
particularly our customers' willingness to spend capital on the exploration for
and development of oil and gas reserves. Demand for our products and services by
our customers is highly sensitive to current and expected oil and natural gas
prices. Our offshore products segment provides highly engineered and technically
designed products for offshore oil and gas development and production systems
and facilities. Sales of our offshore products and services depend upon the
development of offshore production systems, repairs and upgrades of existing
drilling rigs and construction of new drilling rigs. In this segment, we are
particularly influenced by deepwater drilling and production activities. In our
well site services business segment, we provide hydraulic well control services,
pressure control equipment and rental tools, drilling rigs and work force
accommodations, catering and logistics services. Demand for our well site
services depends upon the level of worldwide drilling and workover activity.
Through our tubular services segment, we distribute premium casing and tubing.
Sales of tubular products and services depend upon the overall level of drilling
activity and the types of wells being drilled. Demand for tubular products is
positively impacted by increased drilling of deeper, horizontal and offshore
wells that generally require premium tubulars and connectors, large diameter
pipe and longer and additional casing and tubular strings.

We have a diversified product and service offering which has exposure
throughout the oil and gas cycle. Demand for our tubular services and well site
services is highly correlated to movements in the rig count in the United
States. The table below sets forth a summary of North American rig activity, as
measured by Baker Hughes Incorporated, as of and for the periods indicated.

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(1) Canadian rig counts typically increase during the peak winter drilling
season.

The average North American rig count in the quarter ended June 30, 2003
increased 276 rigs, or 28.9%, compared to the quarter ended June 30, 2002. This
increase in activity drove increased revenues in our well site services segment.
Our results for the second quarter of 2003 also benefited from continued strong
deliveries for offshore construction and development projects in our offshore
products segment. New orders kept pace with shipments since March 31, 2003, and
our offshore products segment backlog remained relatively flat comparing June
30, 2003 levels to March 31, 2003 levels. Our backlog was $80.2 million at June
30, 2003 compared to $80.9

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million at March 31, 2003. We believe that the offshore construction and
development business is characterized by lengthy projects and a long "lead-time"
order cycle. The change in backlog levels from one quarter to the next does not
necessarily evidence a long-term trend.

Despite the significant increase in rig count noted above, our tubular
services group shipped 60.9 thousand tons in the second quarter of 2003 compared
to 60.7 thousand tons in the second quarter of 2002. Volumes did not show a
significant increase due to the mix of wells drilled which was focused on
shallow land gas drilling. In addition, the second quarter of 2002 included $4.5
million of international sales which did not occur in the second quarter of
2003.

During the first half of 2003, the results of operations of our Canadian
remote accommodations, catering and building services operations benefited from
the strengthening of the Canadian currency. The Canadian dollar vs. U.S. dollar
conversion rate averaged $0.68 in the first half of 2003 compared to $0.63 in
the first half of 2002.

The second quarter and first six months of 2003 results also benefited from
several acquisitions made in our well site services and offshore products
segments that were completed in the third quarter of 2002. The majority of these
acquisitions have been integrated with our existing operations and the financial
impact on our results of operations is not separately identifiable. Total
acquisition costs in the third quarter of 2002 were $71 million.

Management believes that fundamental oil and gas supply and demand factors
will lead to increased drilling activity in North America over time. However,
there can be no assurance that these expectations will be realized.

RESULTS OF OPERATIONS (IN MILLIONS, EXCEPT MARGIN PERCENTAGES)

THREE MONTHS ENDED JUNE 30, 2003 COMPARED TO THREE MONTHS ENDED JUNE 30, 2002

REVENUES. Revenues increased $12.8 million, or 8.5%, to $163.6 million
during the current quarter compared to revenues of $150.8 million during the
quarter ended June 30, 2002. Tubular services revenues and tons shipped were
essentially unchanged in the three months ended June 30, 2003 compared to
revenues and tons shipped in the

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three months ended June 30, 2002 due to industry drilling which focused on
shallow land drilling, a market segment where our tubular services business does
not possess as large a market share as in deeper land and offshore areas
typically requiring premium grades of tubular goods. In addition, the second
quarter of 2002 included $4.5 million of international sales which did not occur
in the second quarter of 2003. Well site services revenues increased $2.0
million, or 3.9%, and offshore products revenues increased $10.7 million, or
23.0%, during the same period. Well site services revenues increased compared to
the prior year because higher drilling activity in West Texas and higher rental
tool revenues associated with acquisitions of additional tools were only
partially offset by lower manufacturing revenues within our well site services
accommodations business. Offshore products revenues increased as a result of
greater activity supporting offshore production facility construction and the
impact of acquisitions completed in the third quarter of 2002.

COST OF SALES. Cost of sales increased by $5.6 million, or 4.6%, to $127.3
million for the quarter ended June 30, 2003 compared to $121.7 million in the
quarter ended June 30, 2002. Increased offshore products shipments and
in-progress contracts accounted for under the percentage of completion method of
accounting were the principal reasons for the corresponding increase in cost of
sales during the period. Offshore products cost of sales increased from $34.0
million in the second quarter of 2002 to $42.0 million in the second quarter of
2003, an increase of $8.0 million, or 23.5%.

GROSS MARGIN. Our gross margins, which we calculate before a deduction for
depreciation expense, increased $7.1 million, or 24.4%, from $29.1 million in
the quarter ended June 30, 2002 to $36.2 million in the quarter ended June 30,
2003. Well site services gross margins increased $4.3 million, or 31.6%, to
$17.9 million in the quarter ended June 30, 2003 compared to the quarter ended
June 30, 2002. Our well site services gross margin percentage was positively
impacted by a lower percentage of lower-margin fabrication work compared to the
prior period and by an increased activity level for our land drilling rigs.
Within our well site services segment, shallow drilling and specialty rental
tool businesses' gross margins increased $1.4 million, or 102.1%, and $1.0
million, or 24.7%, respectively, during the quarter ended June 30, 2003 compared
to the quarter ended June 30, 2002 as a result of higher utilization for our
drilling and rental tool assets. Also in well site services, our work force
accommodations, catering and logistics services and modular building
construction services gross margins increased by $2.2 million, or 37.9%, in the
three months ended June 30, 2003 compared to the three months ended June 30,
2002 because of increased camp and catering activity in Canada. Our hydraulic
workover gross margins decreased by $0.3 million, or 10.3%, as a result of
decreased utilization, especially in the U.S. Gulf of Mexico and Venezuela.

Offshore products gross margins increased $2.7 million, or 21.6%, from $12.5
million in the three months ended June 30, 2002 to $15.2 million in the three
months ended June 30, 2003 primarily due to increased revenues from shipments
and work in progress.

Tubular services gross margins increased to $3.1 million, or 5.8% of tubular
services revenues in the three months ended June 30, 2003 compared to $3.0
million, or 5.6% of tubular services revenues, in the three months ended June
30, 2002 as a result of increased oil and gas drilling activity which increased
demand for our tubular products and services and more that offset the effect of
lower foreign sales in the second quarter of 2003.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. During the three months ended
June 30, 2003, selling, general and administrative expenses (SG&A) totaled $14.0
million compared to SG&A of $12.0 million for the three months ended June 30,
2002. Increased SG&A expense associated with acquisitions in the third quarter
of 2002 and higher selling expenses were only partially offset by lower post
employment benefit costs caused by the settlement of certain plan liabilities.

DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased $1.3 million in the second quarter 2003 compared to the second quarter
2002 due primarily to acquisitions of businesses in 2002 and capital
expenditures made during 2002 and the first half of 2003.

OPERATING INCOME. Our operating income represents revenues less (i) cost of
sales, (ii) selling, general and administrative expenses and (iii) depreciation
and amortization expense plus other operating income. Our operating income
increased $3.8 million, or 33.3%, to $15.2 million for the three months ended
June 30, 2003 from $11.4 million in the three month period ended June 30, 2002.
Well site services operating income increased $2.5 million during the period.
Offshore products operating income increased $1.4 million while tubular services
operating income decreased $0.1 million.

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INTEREST EXPENSE. Interest expense increased $0.7 million, or 70.0%, to $1.7
million for the quarter ended June 30, 2003 compared to $1.0 million for the
quarter ended June 30, 2002. Increased interest expense is primarily
attributable to higher debt levels resulting from acquisitions completed during
the third quarter 2002.

INCOME TAX EXPENSE. Income tax expense totaled $3.7 million, or 26.4% of
pretax income, during the quarter ended June 30, 2003 compared to $2.3 million,
or 22.0% of pretax income, during the quarter ended June 30, 2002. Decreased
amounts of net operating loss carryforwards available to offset currently
taxable income has resulted in a higher estimated annual effective tax rate for
the year 2003 compared to 2002.

SIX MONTHS ENDED JUNE 30, 2003 COMPARED TO SIX MONTHS ENDED JUNE, 2002

REVENUES. Revenues increased $47.7 million, or 15.8%, to $349.1 million
during the six months ended June 30, 2003 compared to revenues of $301.4 million
during the six months ended June 30, 2002. Tubular services revenues decreased
$2.0 million, or 1.9%, in the six months ended June 30, 2003 compared to
revenues in the six months ended June 30, 2002 as a result of lower
international sales and reduced revenue per ton shipped caused by product mix
changes and lower mill prices, partially offset by a 4.9% increase in tons
shipped. Well site services revenues increased $14.2 million, or 12.1%, and
offshore products revenues increased $35.5 million, or 44.8%, during the same
period. Well site services revenues increased compared to the prior year
primarily due to higher drilling activity in West Texas and higher rental tool
revenues due to acquisitions of other rental tool companies and equipment.
Offshore products revenues increased as a result of greater activity supporting
offshore production facility construction and the impact of acquisitions
completed in the third quarter of 2002.

COST OF SALES. Cost of sales increased by $30.5 million, or 12.6%, to $272.3
million for the six months ended June 30, 2003 compared to $241.8 million in the
six months ended June 30, 2002. Increased offshore products shipments and
in-progress contracts accounted for under the percentage of completion method of
accounting were the principal reasons for the corresponding increase in cost of
sales during the period. Offshore products cost of sales increased from $58.5
million in the first half of 2002 to $87.1 million in the first half of 2003, an
increase of $28.6 million, or 48.9%.

GROSS MARGIN. Our gross margins, which we calculate before a deduction for
depreciation expense, increased $17.2 million, or 28.9%, from $59.6 million in
the six months ended June 30, 2002 to $76.8 million in the six months ended June
30, 2003. Well site services gross margins increased $9.6 million, or 28.6%, to
$43.2 million in the six months ended June 30, 2003 compared to the six months
ended June 30, 2002. Within our well site services segment, shallow drilling and
specialty rental tool businesses' gross margins increased $2.1 million, or
86.6%, and $2.8 million, or 37.9%, respectively, during the six months ended
June 30, 2003 compared to the six months ended June 30, 2002 as a result of
higher utilization of our drilling and rental tool assets. Also in well site
services, our work force accommodations, catering and logistics services and
modular building construction services gross margins increased by $3.8 million,
or 19.7%, in the six months ended June 30, 2003 compared to the six months ended
June 30, 2002 because of increased camp and catering activity in Canada. Our
hydraulic workover gross margins increased by $0.9 million, or 19.5%, as a
result of increased activity, especially in the U.S. Gulf of Mexico during the
first three months of 2003.

Offshore products gross margins increased $6.9 million, or 33.3%, from $20.7
million in the six months ended June 30, 2002 to $27.6 million in the six months
ended June 30, 2003 primarily due to increased revenues from shipments and work
in progress. Our offshore products gross margin percentage declined 2.0% and was
negatively impacted by a greater percentage of lower-margin fabrication work
compared to the prior period and to a loss incurred on a subsea pipeline
project. Tubular services gross margins increased to $6.0 million, or 5.8% of
tubular services revenues in the six months ended June 30, 2003 compared to $5.3
million, or 5.1% of tubular services revenues, in the six months ended June 30,
2002 as a result of increased oil and gas drilling activity which increased
demand for our tubular products and services.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. During the six months ended
June 30, 2003, selling, general and administrative expenses (SG&A) totaled $27.7
million compared to SG&A of $24.2 million for the six months ended June 30,
2002. Increased SG&A expense associated with acquisitions in the third quarter
of 2002 and higher

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selling expenses were only partially offset by lower post employment benefit
costs caused by the settlement of certain plan liabilities.

DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased $2.4 million in the first six months of 2003 compared to the first six
months of 2002 due primarily to acquisitions of businesses in 2002 and capital
expenditures made during 2002 and the first half of 2003.

OPERATING INCOME. Our operating income represents revenues less (i) cost of
sales, (ii) selling, general and administrative expenses and (iii) depreciation
and amortization expense plus other operating income. Our operating income
increased $11.0 million, or 44.7%, to $35.6 million for the six months ended
June 30, 2003 from $24.6 million in the six month period ended June 30, 2002.
Well site services operating income increased from $15.9 million during the six
months ended June 30, 2002 to $22.1 million for the six months ended June 30,
2003. Offshore products operating income increased from $10.1 million during the
six months ended June 30, 2002 to $14.1 million for the six months ended June
30, 2003. Tubular Services operating income was $2.2 million during the six
months ended June 30, 2003 compared to $1.1 million for the six months ended
June 30, 2002.

INTEREST EXPENSE. Interest expense increased $1.4 million, or 70.0%, to $3.4
million for the six months ended June 30, 2003 compared to $2.0 million for the
six months ended June 30, 2002. Increased interest expense is primarily
attributable to higher debt levels resulting from acquisitions completed during
the third quarter of 2002.

INCOME TAX EXPENSE. Income tax expense totaled $9.1 million, or 27.9% of
pretax income, during the six months ended June 30, 2003 compared to $5.1
million, or 22.0% of pretax income, during the six months ended June 30, 2002.
Decreased amounts of net operating loss carryforwards available to offset
currently taxable income has resulted in a higher estimated annual effective tax
rate for the year 2003 compared to 2002.

LIQUIDITY AND CAPITAL RESOURCES

Our primary liquidity needs are to fund capital expenditures, such as
expanding and upgrading our manufacturing facilities and equipment, increasing
our drilling rig, rental tool and workover assets, increasing our accommodation
units, funding new product development and funding general working capital
needs. In addition, capital is needed to fund strategic business acquisitions.
Our primary sources of funds have been cash flow from operations, proceeds from
borrowings under our bank facilities.

Cash was provided by operations during the six months ended June 30, 2003
and 2002 in the amounts of $21.0 million and $56.5 million, respectively. Cash
provided by operations in 2003 was generated by our net income plus depreciation
and amortization which was partially offset by higher working capital invested,
primarily in our tubular services inventory.

Cash was used in investing activities in the amount of $15.3 million during
the six months ended June 30, 2003 primarily for capital expenditures. Capital
expenditures totaled $15.4 million and $9.9 million during the six months ended
June 30, 2003 and 2002, respectively. Capital expenditures in 2003 consisted
principally of purchases of assets for our well site services businesses and for
expansion of our offshore products manufacturing capacity. We currently expect
to spend a total of approximately $44.3 million during 2003 to upgrade our
equipment and facilities and expand our product and service offerings. We expect
to fund these capital expenditures with internally generated funds and proceeds
from borrowings under our revolving credit facilities.

Net cash of $3.8 million was used in financing activities during the six
months ended June 30, 2003, primarily as a result of debt repayments.

As of June 30, 2003, we had $120.0 million outstanding under our primary
bank credit facility and an additional $10.8 million of outstanding letters of
credit, leaving $36.9 million available to be drawn under the facility. In
addition, we have another floating rate bank credit facility in the UK that had
a balance of $1.0 million at June 30, 2003. Our total debt represented 23.6% of
our total capitalization at June 30, 2003.

We believe that cash from operations and available borrowings under our
credit facility will be sufficient to meet our liquidity needs for the
foreseeable future. If our plans or assumptions change or are inaccurate, or we
make any

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acquisitions, we may need to raise additional capital. However, there is no
assurance that we will be able to raise additional funds or be able to raise
such funds on favorable terms.

TAX MATTERS

For the year ended December 31, 2002, we had deferred tax assets, net of
deferred tax liabilities, of approximately $5.2 million for federal income tax
purposes before application of valuation allowances. After the application of
valuation allowances, we had a net deferred tax liability of $14.5 million. Our
primary deferred tax assets are net operating loss carry forwards, or NOLs,
which total approximately $76 million. A valuation allowance is currently
provided against the majority of our NOLs. The NOLs expire over a period through
2020. A portion of our NOLs are currently limited under Section 382 of the
Internal Revenue Code due to a change of ownership that occurred during 1995. In
2003, approximately $39 million of NOLs are available for use if sufficient
income is generated. However, a successive change in ownership was triggered in
2003 pursuant to Section 382 upon the completion of a secondary offering of
stock by two major shareholders. As a result, the amount of NOLs available for
use in 2003 were reduced to approximately $26 million. This change increases our
cash taxes payable. See Note 10 to our Consolidated and Combined Financial
Statements included in our Annual Report on Form 10-K for the year ended
December 31, 2002.

We currently estimate that our 2003 effective tax rate will approximate 28%.
Our actual effective tax rate could differ materially from this estimate, which
is subject to a number of uncertainties, including future taxable income
projections, the amount of income attributable to domestic versus foreign
sources, the amount of capital expenditures and any changes in applicable tax
laws and regulations.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 2001, the Financial Accounting Standards Board issued SFAS No. 143,
"Accounting for Asset Retirement Obligations." We adopted this statement
effective January 1, 2003 and it did not have a material impact on our financial
statements.

In April 2002, the Financial Accounting Standards Board issued SFAS No. 145
which, among other things, rescinded SFAS No. 4, "Reporting Gains and Losses
from Extinguishment of Debt." We adopted this statement effective January 1,
2003 and it did not have a material impact on our financial statements.

In January 2003, the Financial Accounting Standards Board issued
Interpretation No. 46, "Consolidation of Variable Interest Entities". This
Interpretation did not impact the Company.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk. We have long-term debt and revolving lines of credit
subject to the risk of loss associated with movements in interest rates.

As of June 30, 2003, we had floating rate obligations totaling approximately
$121.0 million for amounts borrowed under our revolving credit facilities. These
floating-rate obligations expose us to the risk of increased interest expense in
the event of increases in short-term interest rates. If the floating interest
rate were to increase by 1% from June 30, 2003 levels, our consolidated interest
expense would increase by a total of approximately $1.2 million annually.

Foreign Currency Exchange Rate Risk. Our operations are conducted in various
countries around the world in a number of different currencies. As such, our
earnings are subject to movements in foreign currency exchange rates when
transactions are denominated in currencies other than the U.S. dollar, which is
our functional currency. In order to mitigate the effects of exchange rate
risks, we generally pay a portion of our expenses in local currencies and a
substantial portion of our contracts provide for collections from customers in
U.S. dollars. As of June 30, 2003, we had foreign currency forward purchase
option contracts totaling $15.0 million, which hedged receivables and expected
cash flows in our UK operations. We have incurred no material gains or losses
from foreign currency hedging activities.

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ITEM 4. CONTROLS AND PROCEDURES

As of the end of the period covered by this Quarterly Report on Form 10-Q,
we carried out an evaluation, under the supervision and with the participation
of our management, including our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange
Act of 1934). Based upon that evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures are
effective in ensuring that material information is accumulated and communicated
to management, and made known to our Chief Executive Officer and Chief Financial
Officer, on a timely basis to allow disclosure as required in this Quarterly
Report on Form 10-Q. There have been no significant changes in our internal
controls or in other factors which could significantly affect internal controls
subsequent to the date we carried out our evaluation.

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PART II -- OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We are a party to various pending or threatened claims, lawsuits and
administrative proceedings seeking damages or other remedies concerning our
commercial operations, products, employees and other matters, including
occasional claims by individuals alleging exposure to hazardous materials as a
result of our products or operations. Some of these claims relate to matters
occurring prior to our acquisition of businesses, and some relate to businesses
we have sold. In certain cases, we are entitled to indemnification from the
sellers of businesses and in other cases, we have indemnified the buyers of
businesses from us. Although we can give no assurance about the outcome of
pending legal and administrative proceedings and the effect such outcomes may
have on us, we believe that any ultimate liability resulting from the outcome of
such proceedings, to the extent not otherwise provided for or covered by
insurance, will not have a material adverse effect on our consolidated financial
position, results of operations or liquidity.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

None

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The Company's Annual Meeting of Stockholders was held on May 13, 2003
(1) to elect two Class I members of the Board of Directors to serve for
three-year terms and (2) to ratify the appointment of Ernst & Young LLP as
independent accountants for the year ended December 31, 2003.

The two Class I directors who were so elected were Gary L. Rosenthal
and Andrew L. Waite. The number of affirmative votes and the number of votes
withheld for the directors so elected were:

The number of affirmative votes, the number of negative votes and the
number of abstentions with respect to the ratification of the appointment of
Ernst & Young LLP were as follows:

ITEM 5. OTHER INFORMATION

The following disclosure is being provided in accordance with the
Securities and Exchange Commission's filing guidance regarding the provision of
notice of certain information relating to a pension fund blackout period
pursuant to new Item 11 of Form 8-K.

Our insider trading policy generally prohibits all of our directors,
officers and employees from trading in our securities during the period
beginning on the last day of a fiscal quarter and ending 24 hours after the
release of our earnings announcement for that fiscal quarter. As a result, there
was a general prohibition on trading in our securities by all of our directors,
officers and employees from June 30, 2003 until July 30, 2003 in connection with
our quarterly earnings announcement for the quarter ended June 30, 2003. As a
consequence of this general prohibition, there was also a "blackout period" (as
defined in Regulation BTR promulgated under the Securities Exchange Act of 1934)
with respect to our Deferred Compensation Plan during the same period, during
which the

19

participants in the plan were prohibited from investing new deferrals in our
common stock investment option under the plan and from transferring or
reallocating prior deferrals from or to our common stock investment option.

Inquiries about the blackout period may be directed to Cindy B. Taylor
by phone at (713) 652-0582 or in writing to Oil States International, Inc.,
Three Allen Center, 333 Clay Street, Suite 3460, Houston, Texas 77002.

20

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) INDEX OF EXHIBITS

EXHIBIT NO. Description

3.1 -- Amended and Restated Certificate of Incorporation
(incorporated by reference to Exhibit 3.1 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 2000, as filed with the Commission on March
30, 2001).

3.2 -- Amended and Restated Bylaws (incorporated by reference to
Exhibit 3.2 to the Company's Annual Report on Form 10-K
for the year ended December 31, 2000, as filed with the
Commission on March 30, 2001).

3.3 -- Certificate of Designations of Special Preferred Voting
Stock of Oil States International, Inc. (incorporated by
reference to Exhibit 3.3 to the Company's Annual Report
on Form 10-K for the year ended December 31, 2000, as
filed with the Commission on March 30, 2001).

4.1 -- Form of common stock certificate (incorporated by
reference to Exhibit 4.1 to the Company's Registration
Statement on Form S-1 (File No. 333-43400)).

4.2 -- Amended and Restated Registration Rights Agreement
(incorporated by reference to Exhibit 4.2 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 2000, as filed with the Commission on March
30, 2001).

4.3 -- First Amendment to the Amended and Restated Registration
Rights Agreement dated May 17, 2002 (incorporated by
reference to Exhibit 4.3 to the Company's Annual Report
on Form 10-K for the year ended December 31, 2002, as
filed with the Commission on March 13, 2003).

10.1 -- Combination Agreement dated as of July 31, 2000 by and
among Oil States International, Inc., HWC Energy
Services, Inc., Merger Sub-HWC, Inc., Sooner Inc., Merger
Sub-Sooner, Inc. and PTI Group Inc. (incorporated by
reference to Exhibit 10.1 to the Company's Registration
Statement on Form S-1 (File No. 333-43400)).

10.2 -- Plan of Arrangement of PTI Group Inc. (incorporated by
reference to Exhibit 10.2 to the Company's Annual Report
on Form 10-K for the year ended December 31, 2000, as
filed with the Commission on March 30, 2001).

10.3 -- Support Agreement between Oil States International, Inc.
and PTI Holdco (incorporated by reference to Exhibit 10.3
to the Company's Annual Report on Form 10-K for the year
ended December 31, 2000, as filed with the Commission on
March 30, 2001).

10.4 -- Voting and Exchange Trust Agreement by and among Oil
States International, Inc., PTI Holdco and Montreal Trust
Company of Canada (incorporated by reference to Exhibit
10.4 to the Company's Annual Report on Form 10-K for the
year ended December 31, 2000, as filed with the
Commission on March 30, 2001).

10.5** -- 2001 Equity Participation Plan (incorporated by reference
to Exhibit 10.5 to the Company's Annual Report on Form
10-K for the year ended December 31, 2000, as filed with
the Commission on March 30, 2001).

10.6** -- Form of Deferred Compensation Plan (incorporated by
reference to Exhibit 10.6 to the Company's Registration
Statement on Form S-1 (File No. 333-43400)).

10.7** -- Annual Incentive Compensation Plan (incorporated by
reference to Exhibit 10.7 to the Company's Annual Report
on Form 10-K for the year ended December 31, 2000, as
filed with the Commission on March 30, 2001).

10.8** -- Executive Agreement between Oil States International,
Inc. and Douglas E. Swanson (incorporated by reference to
Exhibit 10.8 to the Company's Annual Report on Form 10-K
for the year ended December 31, 2000, as filed with the
Commission on March 30, 2001).

21

10.9** -- Executive Agreement between Oil States International,
Inc. and Cindy B. Taylor (incorporated by Reference to
Exhibit 10.9 to the Company's Annual Report on Form 10-K
for the year ended December 31, 2000, as filed with the
Commission on March 30, 2001).

10.10** -- Form of Executive Agreements between Oil States
International, Inc. and Named Executive Officers (Messrs.
Hughes and Chaddick) (incorporated by reference to
Exhibit 10.10 of the Company's Registration Statement on
Form S-1 (File No. 333-43400)).

10.11** -- Form of Change of Control Severance Plan for Selected
Members of Management (incorporated by reference to
Exhibit 10.11 of the Company's Registration Statement on
Form S-1 (File No. 333-43400)).

10.12 -- Credit Agreement among Oil States International, Inc.,
PTI Group Inc., the Lenders named therein, Credit Suisse
First Boston, Credit Suisse First Boston Canada, Hibernia
National Bank and Royal Bank of Canada (incorporated by
reference to Exhibit 10.12 of the Company's Registration
Statement on Form S-1 (File No. 333-43400)).

10.12.1 -- Amendment No. 1, dated as of September 23, 2002, to the
Credit Agreement, dated as of February 14, 2001 by and
among the Company, PTI Group Inc., the Lenders named
therein, Credit Suisse First Boston, as Administrative
Agent and U.S. Collateral Agent, and Credit Suisse First
Boston (formerly Credit Suisse First Boston Canada), as
Canadian Administrative Agent and Canadian Collateral
Agent (the "Credit Agreement") (incorporated by reference
to Exhibit 10.1 to the Company's Current Report on Form
8-K filed with the Commission on February 14, 2003).

10.12.2 -- Amendment No. 2, dated as of December 12, 2002, to the
Credit Agreement (incorporated by reference to Exhibit
10.2 to the Company's Current Report on Form 8-K filed
with the Commission on February 14, 2003).

10.13A** -- Restricted Stock Agreement, dated February 8, 2001,
between Oil States International, Inc. and Douglas E.
Swanson (incorporated by reference to Exhibit 10.13A to
the Company's Quarterly Report on Form 10-Q for the three
months ended March 31, 2002, as filed with the Commission
on May 15, 2001).

10.13B** -- Restricted Stock Agreement, dated February 22, 2001,
between Oil States International, Inc. and Douglas E.
Swanson (incorporated by reference to Exhibit 10.13B to
the Company's Quarterly Report on Form 10-Q for the three
months ended March 31, 2002, as filed with the Commission
on May 15, 2001).

10.14** -- Form of Indemnification Agreement (incorporated by
reference to Exhibit 10.14 of the Company's Registration
Statement on Form S-1 (File No. 333-43400)).

10.15** -- Form of Executive Agreement between Oil States
International, Inc. and named Executive Officer (Mr.
Slator) (incorporated by reference to Exhibit 10.16 to
the Company's Annual Report on Form 10-K for the year
ended December 31, 2001, as filed with the Commission on
March 1, 2002).

10.16** -- Douglas E. Swanson contingent option award dated as of
February 11, 2002 (incorporated by reference to Exhibit
10.17 to the Company's Quarterly Report on Form 10-Q for
the three months ended September 30, 2002 as filed with
the Commission on November 13, 2002).

10.17** -- Form of Executive Agreement between Oil States
International, Inc. and named executive officer (Mr.
Trahan) (incorporated by reference to Exhibit 10.16 to
the Company's Quarterly Report on Form 10-Q for the three
months ended June 30, 2002, as filed with the Commission
on August 13, 2002).

31.1* -- Certification of Chief Executive Officer of Oil States
International, Inc. pursuant to 15 U.S.C. Section 7241,
as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.

31.2* -- Certification of Chief Financial Officer of Oil States
International, Inc. pursuant to 15 U.S.C. Section 7241,
as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.

22

32.1* -- Certification of Chief Executive Officer of Oil States
International, Inc. pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.

32.2* -- Certification of Chief Financial Officer of Oil States
International, Inc. pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.

- ----------

* Filed herewith

** Management contracts or compensatory plans or arrangements.

(b) REPORTS ON FORM 8-K.

(1) Form 8-K dated July 29, 2003 - Item 12. Results of Operations and
Financial Condition (Quarter ended June 30, 2003 Earnings Press
Release).

23

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

OIL STATES INTERNATIONAL, INC.

Date: August 12, 2003 By /s/ CINDY B. TAYLOR
--------------- --------------------------------------------
Cindy B. Taylor
Senior Vice President, Chief Financial Officer
and Treasurer (Principal Financial Officer)

Date: August 12, 2003 By /s/ ROBERT W. HAMPTON
--------------- --------------------------------------------
Robert W. Hampton
Vice President -- Finance and Accounting and
Secretary (Principal Accounting Officer)

24

INDEX TO EXHIBITS

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* Filed herewith