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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 September 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.
---------------
(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, 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 is an accelerated filer (as
defined in Rule 12b - 2 of the Exchange Act).
YES [X] NO [ ]
The Registrant had 48,654,883 shares of common stock outstanding as of
October 31, 2003.
1
OIL STATES INTERNATIONAL, INC.
INDEX
PAGE NO.
--------
Part I -- FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Financial Statements
Unaudited Consolidated Statements of Income for the Three and
Nine Months Ended September 30, 2003 and 2002 3
Consolidated Balance Sheets - September 30, 2003 (unaudited) and
December 31, 2002 4
Unaudited Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 2003 and 2002 5
Notes to Unaudited Condensed Consolidated Financial Statements 6 - 10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 11 - 18
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18
Item 4. Controls and Procedures 18
Part II -- OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Changes in Securities and Use of Proceeds 19
Item 3. Default Upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 20
(a) Index of Exhibits 20 - 21
(b) Report on Form 8-K 22
Signature Page and Certifications 23 - 29
2
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Per Share Amounts)
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
SEPTEMBER 30, SEPTEMBER 30,
-------------------- ----------------------
2003 2002 2003 2002
-------- -------- --------- ---------
Revenues............................................ $177,170 $154,595 $ 526,310 $ 456,033
Costs and expenses:
Cost of sales..................................... 139,355 121,756 411,653 363,599
Selling, general and administrative expenses...... 14,306 12,697 42,037 36,888
Depreciation and amortization expense............. 6,978 5,942 20,347 16,871
Other operating expense (income).................. (162) 46 3 (69)
-------- -------- --------- ---------
160,477 140,441 474,040 417,289
-------- -------- --------- ---------
Operating income.................................... 16,693 14,154 52,270 38,744
Interest income..................................... 157 143 319 354
Interest expense.................................... (1,654) (1,158) (5,020) (3,172)
Other income ....................................... 248 30 509 354
-------- -------- --------- ---------
Income before income taxes.......................... 15,444 13,169 48,078 36,280
Income tax expense.................................. (4,110) (2,981) (13,221) (8,065)
-------- -------- --------- ---------
Net income.......................................... $ 11,334 $ 10,188 $ 34,857 $ 28,215
======== ======== ========= =========
Earnings per share:
Basic............................................. $ .23 $ .21 $ .72 $ .58
Diluted........................................... $ .23 $ .21 $ .71 $ .58
Weighted average number of common shares outstanding:
Basic............................................. 48,554 48,297 48,515 48,260
Diluted........................................... 49,212 48,934 49,155 48,827
The accompanying notes are an integral part of
these financial statements.
3
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
SEPTEMBER 30, DECEMBER 31,
ASSETS 2003 2002
------------ ------------
(UNAUDITED)
Current assets:
Cash and cash equivalents............................... $ 15,001 $ 11,118
Accounts receivable, net................................ 135,462 116,875
Inventories, net........................................ 132,584 118,338
Prepaid expenses and other current assets............... 6,958 9,475
------------ ------------
Total current assets.................................. 290,005 255,806
Property, plant, and equipment, net..................... 179,704 167,146
Goodwill, net........................................... 217,525 213,051
Other noncurrent assets................................. 8,838 8,213
------------ ------------
Total assets.......................................... $ 696,072 $ 644,216
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities................ $ 92,263 $ 84,049
Income taxes............................................ 5,700 1,229
Current portion of long-term debt....................... 841 913
Deferred revenue........................................ 7,885 8,949
Other current liabilities............................... 841 1,402
------------ ------------
Total current liabilities............................ 107,530 96,542
Long-term debt.......................................... 126,369 133,292
Deferred income taxes................................... 19,859 18,303
Postretirement healthcare benefits...................... 2,739 5,280
Other liabilities....................................... 4,393 3,220
------------ ------------
Total liabilities.................................... 260,890 256,637
Stockholders' equity:
Common stock............................................ 486 485
Additional paid-in capital.............................. 328,605 327,801
Retained earnings....................................... 99,243 64,386
Accumulated other comprehensive income (loss)........... 7,189 (4,921)
Treasury stock.......................................... (341) (172)
------------ ------------
Total stockholders' equity........................... 435,182 387,579
------------ ------------
Total liabilities and stockholders' equity........... $ 696,072 $ 644,216
============ ============
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)
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2003 2002
----------- ----------
Cash flows from operating activities:
Net income.................................................... $ 34,857 $ 28,215
Adjustments to reconcile net income to net cash from
operating activities:
Provision for loss on accounts receivable..................... 498 163
Depreciation and amortization................................. 20,347 16,871
Deferred income tax provision (benefit)....................... 67 (1,102)
Other, net.................................................... 1,000 1,155
Changes in working capital.................................... (17,145) 16,652
---------- ----------
Net cash flows provided by operating activities............. 39,624 61,954
Cash flows from investing activities:
Acquisitions of businesses, net of cash acquired.............. (2,743) (64,886)
Capital expenditures.......................................... (26,791) (16,282)
Proceeds from sale of equipment............................... 987 887
Other, net.................................................... (26) 64
---------- ----------
Net cash flows used in investing activities................. (28,573) (80,217)
Cash flows from financing activities:
Revolving credit borrowings (repayments)...................... (6,157) 27,356
Debt repayments............................................... (730) (3,953)
Issuance of common stock...................................... 790 461
Other, net.................................................... (488) (594)
---------- ----------
Net cash flows provided by (used in) financing activities... (6,585) 23,270
Effect of exchange rate changes on cash......................... (76) (477)
---------- ----------
Net increase in cash and cash equivalents from continuing
operations 4,390 4,530
Net cash used in discontinued operations........................ (507) (308)
Cash and cash equivalents, beginning of period.................. 11,118 4,982
---------- ----------
Cash and cash equivalents, end of period........................ $ 15,001 $ 9,204
========== ==========
The accompanying notes are an integral part of these
consolidated financial statements.
5
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED 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.
6
2. DETAILS OF SELECTED BALANCE SHEET ACCOUNTS
Additional information regarding selected balance sheet accounts is
presented below (in thousands):
SEPTEMBER 30, DECEMBER 31,
2003 2002
--------- ---------
Accounts receivable, net:
Trade............................................................... $ 109,581 $ 101,314
Unbilled revenue.................................................... 26,553 14,788
Other............................................................... 1,403 3,060
Allowance for doubtful accounts..................................... (2,075) (2,287)
--------- ---------
$ 135,462 $ 116,875
========= =========
SEPTEMBER 30, DECEMBER 31,
2003 2002
--------- ---------
Inventories, net:
Tubular goods....................................................... $ 73,190 $ 60,816
Other finished goods and purchased products......................... 21,297 22,339
Work in process..................................................... 28,637 25,678
Raw materials....................................................... 14,592 14,283
--------- ---------
Total inventories................................................... 137,716 123,116
Inventory reserves.................................................. (5,132) (4,778)
--------- ---------
$ 132,584 $ 118,338
========= =========
ESTIMATED SEPTEMBER 30, DECEMBER 31,
USEFUL LIFE 2003 2002
------------ --------- ---------
Property, plant and equipment, net:
Land.................................................... $ 4,908 $ 4,675
Buildings and leasehold improvements.................... 2-40 years 36,662 34,348
Machinery and equipment................................. 2-20 years 186,715 166,702
Rental tools............................................ 3-10 years 36,614 32,323
Office furniture and equipment.......................... 1-10 years 13,924 12,710
Vehicles................................................ 2-5 years 8,085 6,817
Construction in progress................................ 7,257 1,791
--------- ---------
Total property, plant and equipment..................... 294,165 259,366
Less: Accumulated depreciation.......................... (114,461) (92,220)
--------- ---------
$ 179,704 $ 167,146
========= ==========
SEPTEMBER 30, DECEMBER 31,
2003 2002
--------- ---------
Accounts payable and accrued liabilities:
Trade accounts payable............................................... $ 62,689 $ 52,212
Accrued compensation................................................. 9,790 13,674
Accrued insurance.................................................... 4,347 3,870
Accrued taxes, other than income taxes............................... 3,069 2,020
Reserves related to discontinued operations.......................... 4,550 5,216
Other................................................................ 7,818 7,057
--------- ---------
$ 92,263 $ 84,049
========= =========
7
Changes in the carrying amount of goodwill for the nine month period ended
September 30, 2003 are as follows (in thousands):
OFFSHORE WELLSITE TUBULAR
PRODUCTS SERVICES SERVICES TOTAL
--------- --------- ----------- ----------
Balance as of January 1, 2003............. $ 71,589 $ 91,883 $ 49,579 $ 213,051
Goodwill acquired ........................ -- 1,200 -- 1,200
Foreign currency translation and other 225 3,049 -- 3,274
--------- --------- ----------- ----------
changes................................
Balance as of September 30, 2003.......... $ 71,814 $ 96,132 $ 49,579 $ 217,525
========= ========= =========== ==========
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 nine
month periods ended September 30, 2003 and 2002 is summarized in the following
table (in thousands):
OFFSHORE WELL SITE TUBULAR CORPORATE AND
PRODUCTS SERVICES SERVICES ELIMINATIONS TOTAL
-------- --------- -------- ------------- ----------
Three months ended September 30, 2003
Revenues from unaffiliated $ 59,303 $ 56,560 $ 61,307 $ -- $ 177,170
======== ========= ======== ======== ==========
customers...........................
Depreciation and amortization.... 1,854 4,951 161 12 6,978
======== ========= ======== ======== ==========
Operating income (loss).......... 9,063 7,315 1,761 (1,446) 16,693
======== ========= ======== ======== ==========
Capital expenditures............. 3,623 7,704 8 64 11,399
======== ========= ======== ======== ==========
Total assets..................... 257,061 287,474 144,253 7,284 696,072
======== ========= ======== ======== ==========
Three months ended September 30, 2002
Revenues from unaffiliated $ 55,500 $ 44,268 $ 54,827 $ -- $ 154,595
======== ========= ======== ======== ==========
customers...........................
Depreciation and amortization.... 1,548 4,239 143 12 5,942
======== ========= ======== ======== ==========
Operating income (loss).......... 9,376 4,591 1,515 (1,328) 14,154
======== ========= ======== ======= ==========
Capital expenditures............. 1,550 4,841 31 -- 6,422
======== ========= ======== ======== ==========
Total assets..................... 233,083 245,292 130,626 2,820 611,821
======== ========= ======== ======== ==========
OFFSHORE WELL SITE TUBULAR CORPORATE AND
PRODUCTS SERVICES SERVICES ELIMINATIONS TOTAL
-------- --------- -------- ------------- ---------
Nine months ended September 30, 2003
Revenues from unaffiliated $ 174,050 $ 188,284 $ 163,976 $ -- $ 526,310
========= ========= ========= ========== =========
customers..............................
Depreciation and amortization........ 5,635 14,195 482 35 20,347
========= ========= ========= ========== =========
Operating income (loss).............. 23,200 29,426 3,951 (4,307) 52,270
========= ========= ========= ========== =========
Capital expenditures................. 8,883 17,664 166 78 26,791
========= ========= ========= ========== =========
Total assets......................... 257,061 287,474 144,253 7,284 696,072
========= ========= ========= ========== =========
Nine months ended September 30, 2002
Revenues from unaffiliated customers. $ 134,727 $ 161,747 $ 159,559 $ -- $ 456,033
========= ========= ========= ========== =========
Depreciation and amortization........ 4,237 12,167 432 35 16,871
========= ========= ========= ========== =========
Operating income (loss).............. 19,504 20,468 2,578 (3,806) 38,744
========= ========= ========= ========== =========
Capital expenditures................. 4,574 11,596 109 3 16,282
========= ========= ========= ========== =========
Total assets......................... 233,083 245,292 130,626 2,820 611,821
========= ========= ========= ========== =========
8
4. COMPREHENSIVE INCOME
Comprehensive income for the three and nine months ended September 30, 2003
and 2002 was as follows (in thousands):
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
2003 2002 2003 2002
---------- ---------- ---------- ----------
Comprehensive income:
Net income.......................... $ 11,334 $ 10,188 $ 34,857 $ 28,215
Cumulative translation adjustment... 549 (2,115) 11,308 1,140
Net change due to foreign currency
cash flow hedge................... 802 -- 802 --
---------- --------- --------- ----------
Total comprehensive income... $ 12,685 $ 8,073 $ 46,967 $ 29,355
========== ========= ========== ==========
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 September 30, 2003 and 2002, would have been as
follows (in thousands, except per share amounts):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ----------------------
2003 2002 2003 2002
--------- --------- -------- ---------
Net income as reported............................. $ 11,334 $ 10,188 $ 34,857 $ 28,215
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related
tax effects...................................... (982) (535) (2,697) (1,403)
--------- --------- -------- ---------
Pro forma net income............................... $ 10,352 $ 9,653 $ 32,160 $ 26,812
========= ========= ======== =========
Net income per share as reported:
Basic............................................ $ .23 $ .21 $ .72 $ .58
Diluted.......................................... .23 .21 .71 .58
Pro forma net income per share as if fair value
method had been applied to all awards:
Basic............................................ $ .21 $ .20 $ .66 $ .56
Diluted.......................................... .21 .20 .65 .55
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,
9
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.
10
This quarterly report on Form 10-Q contains forward-looking statements
within the meaning of Section 27A of the Securities Exchange Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. Actual results could differ
materially from those projected in the forward-looking statements as a result of
a number of important factors. For a discussion of important factors that could
affect our results, please refer to "Item 1. Business" including the risk
factors discussed therein and the financial statement line item discussions set
forth in "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations" included in our Form 10-K Annual Report for the year
ended December 31, 2002 filed with the Securities and Exchange Commission on
March 13, 2003 and Item 2, which follows.
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
11
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.
AVERAGE RIG COUNT FOR THE YEAR ENDED
DECEMBER 31,
------------------------------------------------
2002 2001 2000 1999 1998
----- ----- ----- ----- -----
US...................... 831 1,156 918 624 837
Canada (1).............. 266 341 345 245 259
----- ----- ----- ----- -----
North America...... 1,097 1,497 1,263 869 1,096
===== ===== ===== ===== =====
AVERAGE RIG COUNT FOR THE AVERAGE RIG COUNT FOR THE
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
2003 2002 2003 2002
----- ----- ----- -----
US...................... 1,088 853 1,006 826
Canada (1).............. 383 250 360 260
----- ----- ----- -----
North America...... 1,471 1,103 1,366 1,086
===== ===== ===== =====
- --------------------
(1) Canadian rig counts typically increase during the peak winter drilling
season.
The average North American rig count in the quarter ended September 30, 2003
increased 368 rigs, or 33.4%, compared to the quarter ended September 30, 2002.
This increase in activity drove increased revenues in our well site and tubular
services segments. Our results for the third quarter of 2003 also benefited from
continued strong deliveries for offshore construction and development projects
in our offshore products segment. However, new orders have not kept pace with
shipments in the first nine months of 2003. Our backlog was $72.9 million at
September 30, 2003 compared to $80.2 million at June 30, 2003 and $100.2 million
at December 31, 2002. We
12
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.
Our tubular services group shipped 69.8 thousand tons in the third quarter
of 2003 compared to 60.9 thousand tons in the second quarter of 2003 and 59.2
thousand tons in the third quarter of 2002, reflecting increased rig counts. For
the first nine months of 2003, tubular shipments totaled 186.8 thousand tons
compared to 170.9 thousand tons in the first nine months of 2002. Tubular
services volumes did not increase proportionate with the rig count and gross
margin as a percent of revenues was down in the third quarter of 2003 compared
to the same period in the prior year because of higher margin international
sales in 2002 that did not occur this year and a higher proportion of onshore
and relatively shallow wells drilled in the current year which typically
utilize less tubulars.
During the third quarter and first nine months 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 $0.72 in the third
quarter of 2003 compared to $0.64 in the third quarter of 2002. The Canadian
dollar vs. U.S. dollar conversion rate averaged $0.70 in the first nine months
of 2003 compared to $0.64 in the first nine months of 2002.
The third quarter and first nine 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 precisely determinable. Total
acquisition costs in the third quarter of 2002 were $71 million.
Management believes that fundamental oil and gas supply and demand factors
will continue to support 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- ---------------------
2003 2002 2003 2002
---- ---- ---- ----
Revenues
Well Site Services........................ $ 56.6 $ 44.3 $ 188.3 $ 161.7
Offshore Products......................... 59.3 55.5 174.0 134.7
Tubular Services.......................... 61.3 54.8 164.0 159.6
-------- -------- --------- ---------
Total............................... $ 177.2 $ 154.6 $ 526.3 $ 456.0
======== ======== ========= =========
Gross Margin
Well Site Services........................ $ 18.0 $ 13.8 $ 61.2 $ 47.3
Offshore Products......................... 16.2 15.5 43.8 36.3
Tubular Services.......................... 3.6 3.5 9.7 8.8
-------- -------- --------- ---------
Total................................ $ 37.8 $ 32.8 $ 114.7 $ 92.4
======== ======== ========= =========
Gross Margin as a Percent of Revenues
Well Site Services........................ 31.8% 31.2% 32.5% 29.3%
Offshore Products......................... 27.3% 27.9% 25.2% 26.9%
Tubular Services.......................... 5.9% 6.4% 5.9% 5.5%
Total................................ 21.3% 21.2% 21.8% 20.3%
Operating Income (Loss)
Well Site Services........................ $ 7.3 $ 4.6 $ 29.4 $ 20.4
Offshore Products......................... 9.1 9.4 23.2 19.5
Tubular Services.......................... 1.7 1.5 4.0 2.6
Corporate/Other........................... (1.4) (1.3) (4.3) (3.8)
-------- -------- ---------- ---------
Total................................ $ 16.7 $ 14.2 $ 52.3 $ 38.7
======== ======== ========= =========
13
THREE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 2002
REVENUES. Revenues increased $22.6 million, or 14.6%, to $177.2 million
during the current quarter compared to revenues of $154.6 million during the
quarter ended September 30, 2002. Tubular services revenues and tons shipped
increased $6.5 million, or 11.9%, and 10,600 tons, or 17.9%, respectively, in
the three months ended September 30, 2003 compared to revenues and tons shipped
in the three months ended September 30, 2002 due to increased industry drilling
which focused on shallow land drilling, a market segment characterized by lower
volumes and selling prices per ton of tubular goods, which lowered the Company's
overall revenue per ton shipped. In addition, the third quarter of 2002 results
included $4.5 million of higher margin international sales which did not occur
in the third quarter of 2003. Well site services revenues increased $12.3
million, or 27.8%, and offshore products revenues increased $3.8 million, or
6.8%, during the same period. Well site services revenues increased compared to
the prior year due primarily to increased drilling activity in Canada and the
United States, favorable Canadian dollar exchange rates and the impact of
acquisitions completed in the third quarter of 2002. 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 $17.6 million, or 14.4%, to $139.4
million for the quarter ended September 30, 2003 compared to $121.8 million in
the quarter ended September 30, 2002. Increased activity in our Canadian remote
accommodations and catering business, increased tubular shipments and increased
offshore products shipments were the principal reasons for the corresponding
increase in cost of sales during the period. Well site services cost of sales
increased $8.1 million, or 26.6%, in the third quarter of 2003 compared to the
third quarter of 2002. Tubular Services cost of sales increased by $6.4 million,
or 12.5%, in the third quarter of 2003 compared to the third quarter of 2002.
Offshore Products cost of sales increased by $3.1 million, or 7.8%, in the third
quarter 2003 compared to 2002.
GROSS MARGIN. Our gross margins, which we calculate before a deduction for
depreciation expense, increased $5.0 million, or 15.2%, from $32.8 million in
the quarter ended September 30, 2002 to $37.8 million in the quarter ended
September 30, 2003. Well site services gross margins increased $4.2 million, or
30.4%, to $18.0 million in the quarter ended September 30, 2003 compared to the
quarter ended September 30, 2002. Within our well site services segment, shallow
drilling and specialty rental tool businesses' gross margins increased $0.4
million, or 16.5%, and $1.3 million, or 32.2%, respectively, during the quarter
ended September 30, 2003 compared to the quarter ended September 30, 2002 as a
result of higher utilization of our drilling rigs and contributions from rental
tool acquisitions completed last year. Also in well site services, our work
force accommodations, catering and logistics services and modular building
construction services gross margins increased by $2.9 million, or 54.2%, in the
three months ended September 30, 2003 compared to the three months ended
September 30, 2002 because of increased camp and catering activity in Canada.
Offsetting these improvements were our hydraulic workover gross margins which
decreased by $0.4 million, or 16.8%, as a result of decreased utilization,
especially in the U.S. Gulf of Mexico, West Africa and Venezuela.
Offshore products gross margins increased $0.7 million, or 4.5%, from $15.5
million in the three months ended September 30, 2002 to $16.2 million in the
three months ended September 30, 2003 primarily due to increased revenues from
shipments and work in progress.
Tubular services gross margins increased to $3.6 million, or 5.9% of tubular
services revenues, in the three months ended September 30, 2003 compared to $3.5
million, or 6.4% of tubular services revenues, in the three months ended
September 30, 2002 as a result of increased oil and gas drilling activity which
increased demand for our tubular products and services and more than offset the
effect of having no higher margin international sales in the third quarter of
2003.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. During the three months ended
September 30, 2003, selling, general and administrative expenses (SG&A) totaled
$14.3 million, or 8.1% of revenues, compared to SG&A of $12.7, or 8.2% of
revenues, million for the three months ended September 30, 2002. Increased SG&A
expense associated with acquisitions completed in the third quarter of 2002 were
only partially offset by lower post employment benefit costs caused by the
settlement of certain plan liabilities during the current quarter.
14
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased $1.0 million in the third quarter 2003 compared to the third quarter
2002 due primarily to acquisitions of businesses completed in 2002 and capital
expenditures made during the fourth quarter 2002 and the first nine months 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 $2.5 million, or 17.6%, to $16.7 million for the three months ended
September 30, 2003 from $14.2 million for the quarter ended September 30, 2002.
Well site services operating income increased $2.7 million during the period.
Offshore products operating income decreased $0.3 million while tubular services
operating income increased $0.2 million.
INTEREST EXPENSE. Interest expense increased $0.5 million, or 42.8%, to $1.7
million for the quarter ended September 30, 2003 compared to $1.2 million for
the quarter ended September 30, 2002. Increased interest expense is primarily
attributable to higher debt levels resulting from acquisitions completed during
the third quarter 2002 and capital expenditures made since the third quarter of
2002.
INCOME TAX EXPENSE. Income tax expense totaled $4.1 million, or 26.6% of
pretax income, during the quarter ended September 30, 2003 compared to $3.0
million, or 22.6% of pretax income, during the quarter ended September 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.
NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 2002
REVENUES. Revenues increased $70.3 million, or 15.4%, to $526.3 million
during the nine months ended September 30, 2003 compared to revenues of $456.0
million during the nine months ended September 30, 2002. Tubular services
revenues increased $4.4 million, or 2.8%, in the nine months ended September 30,
2003 compared to the prior year as a result of greater quantities shipped caused
by higher rig counts partially offset by lower international sales and reduced
revenue per ton shipped caused by product mix oriented to shallow land drilling.
Well site services revenues increased $26.6 million, or 16.5%, and offshore
products revenues increased $39.3 million, or 29.2%, during the same period.
Well site services revenues increased compared to the prior year primarily due
to increased drilling activity in Canada and the United States, favorable
Canadian dollar exchange rates and the impact of acquisitions completed in the
third quarter of 2002. 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 $48.0 million, or 13.2%, to $411.6
million for the nine months ended September 30, 2003 compared to $363.6 million
in the nine months ended September 30, 2002. Offshore products cost of sales
increased from $98.4 million in the first nine months of 2002 to $130.2 million
in the first nine months of 2003, an increase of $31.8 million, or 32.3%.
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. Well
site services cost of sales increased $12.7 million, or 11.1%, in the first nine
months of 2003 compared to the prior year and tubular services cost of sales
increased $3.5 million, or 2.3%, in the first nine months of 2003 compared to
the prior year. Both of these segments' increases correlate to increased sales
as a result of increased North American rig counts.
GROSS MARGIN. Our gross margins, which we calculate before a deduction for
depreciation expense, increased $22.3 million, or 24.1%, from $92.4 million in
the nine months ended September 30, 2002 to $114.7 million in the nine months
ended September 30, 2003. Well site services gross margins increased $13.9
million, or 29.4%, to $61.2 million in the nine months ended September 30, 2003.
Within our well site services segment, shallow drilling and specialty rental
tool businesses' gross margins increased $2.5 million, or 52.9%, and $4.1
million, or 35.9%, respectively, during the nine months ended September 30, 2003
compared to the nine months ended September 30, 2002 as a result of increased
capacity and 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
$6.7 million, or 27.3%, in the nine months ended September 30, 2003 compared to
the nine months ended September 30, 2002 because of increased camp and catering
activity in Canada. Our hydraulic workover gross
15
margins increased by $0.6 million, or 7.7%, as a result of increased activity,
especially in the U.S. Gulf of Mexico during the first three months of 2003 and
in Algeria in the second and third quarter of this year.
Offshore products gross margins increased $7.5 million, or 20.7%, from $36.3
million in the nine months ended September 30, 2002 to $43.8 million in the nine
months ended September 30, 2003 primarily due to increased revenues from
shipments and work in progress. Our offshore products gross margin percentage
declined 1.7% 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 $9.7 million, or 5.9% of tubular services revenues in the nine months ended
September 30, 2003 compared to $8.8 million, or 5.5% of tubular services
revenues, in the nine months ended September 30, 2002 as a result of increased
oil and gas drilling activity which increased demand for our tubular products
and services, thereby resulting in margin improvement.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. During the nine months ended
September 30, 2003, selling, general and administrative expenses (SG&A) totaled
$42.0 million, or 8.0% of revenues, compared to SG&A of $36.9 million, or 8.1%
of revenues, for the nine months ended September 30, 2002. Increased SG&A
expense associated with acquisitions completed in the third quarter of 2002 were
only partially offset by lower post employment benefit costs caused by the
settlement of certain plan liabilities during the current year.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased $3.5 million in the first nine months of 2003 compared to the first
nine months of 2002 due primarily to acquisitions of businesses completed in
2002 and capital expenditures made during the fourth quarter 2002 and the first
nine months 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 $13.6 million, or 35.1%, to $52.3 million for the nine months ended
September 30, 2003 from $38.7 million in the nine month period ended September
30, 2002. Well site services operating income increased by $9.0 million, or
44.1%, while offshore products operating income increased by $3.7 million, or
19.0%. Tubular Services operating income was $4.0 million during the nine months
ended September 30, 2003 compared to $2.6 million for the nine months ended
September 30, 2002, an increase of $1.4 million, or 53.8%.
INTEREST EXPENSE. Interest expense increased $1.8 million, or 56.3%, to $5.0
million for the nine months ended September 30, 2003 compared to $3.2 million
for the nine months ended September 30, 2002. Increased interest expense was
primarily attributable to higher debt levels resulting from acquisitions
completed during the third quarter of 2002 and capital expenditures made since
the third quarter of 2002.
INCOME TAX EXPENSE. Income tax expense totaled $13.2 million, or 27.5% of
pretax income, during the nine months ended September 30, 2003 compared to $8.1
million, or 22.2% of pretax income, during the nine months ended September 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
and replacing our drilling rig, rental tool and workover assets, and 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
and proceeds from borrowings under our bank facilities.
Cash was provided by operations during the nine months ended September 30,
2003 and 2002 in the amounts of $39.6 million and $62.0 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 in 2003 compared to 2002, primarily in our tubular services
inventory and in our Canadian remote accommodations and catering business. Cash
provided by operations in 2002 benefited from a reduced investment in working
capital by our tubular services segment associated with the termination of a
foreign contract.
Cash was used in investing activities during the nine months ended September
30, 2003 and 2002 in the amount of $28.6 million and $80.2 million,
respectively.
16
Capital expenditures totaled $26.8 million and $16.3 million during the nine
months ended September 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.
Acquisitions totaled $2.7 million and $64.9 million, respectively, during the
nine months ended September 30, 2003 and 2002. We currently expect to spend a
total of approximately $45.5 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 $6.6 million was used in financing activities during the nine
months ended September 30, 2003, primarily as a result of debt repayments.
As of September 30, 2003, we had $116.0 million outstanding under our
primary bank credit facility and an additional $12.7 million of outstanding
letters of credit, leaving $39.0 million available to be drawn under the
facility. In addition, we have other floating rate bank credit facilities in the
U.S. and the U.K. that aggregated $10 million and had a balance of $2.5 million
outstanding at September 30, 2003. Our total debt represented 22.6% of our total
capitalization at September 30, 2003.
On October 30, 2003, we entered into, and consummated the closing of, a new
credit agreement that replaced the existing bank credit facility and which
provides for $225,000,000 of revolving credit. We have an option to increase the
maximum borrowings under the Credit Agreement to $250,000,000 prior to its
maturity on October 29, 2007. Borrowings under the Credit Agreement will be used
to refinance existing bank indebtedness, to fund future acquisitions and for
general corporate purposes. In connection with the closing of this new credit
agreement subsequent to September 30, 2003, the Company expects to write-off the
unamortized balance of debt issue costs associated with the old credit facility
totaling $1.5 million in the fourth quarter of 2003.
The Credit Agreement contains customary financial covenants. Borrowings
under the Credit Agreement are secured by a pledge of substantially all the
assets of the Company and its subsidiaries, and the Company's obligations under
the Credit Agreement are guaranteed by the Company's significant subsidiaries.
Borrowings under the Credit Agreement accrue interest at a rate equal to either
LIBOR or another benchmark interest rate (at the Company's election) plus an
applicable margin based on the Company's leverage ratio (as defined in the
Credit Agreement). The Company must pay a quarterly commitment fee, based on the
Company's leverage ratio, on the unused commitments under the Credit Agreement.
We believe that cash from operations and available borrowings under our new
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 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 totaled approximately $76 million at December 31, 2002. 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. 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
27.5%. 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.
17
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
connection with the closing of a new credit agreement subsequent to September
30, 2003, the Company expects to write-off the unamortized balance of debt issue
costs associated with the old credit facility totaling $1.5 million in the
fourth quarter of 2003. Such charge is no longer considered an extraordinary
loss in accordance with SFAS No. 4.
In January 2003, the Financial Accounting Standards Board issued
Interpretation No. 46, "Consolidation of Variable Interest Entities". This
Interpretation did not impact the Company's consolidated results of operations,
financial position or liquidity.
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 September 30, 2003, we had floating rate obligations totaling
approximately $118.5 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 September 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 September 30, 2003, we had foreign currency forward purchase
option contracts totaling $15.0 million, which hedged expected cash flows in our
UK operations. We have recorded other comprehensive income of $0.8 million in
the nine month period ended September 30, 2003 as a result of this contract.
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 changes in our internal control over
financial reporting (as defined in Rule 13a-15(f) of the Securities Exchange Act
of 1934) or in other factors which have materially affected our internal control
over financial reporting, or are reasonably likely to materially affect our
internal control over financial reporting subsequent to the date we carried out
our evaluation of such internal control.
18
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
None
ITEM 5. OTHER INFORMATION
None
19
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).
20
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, dated as of October 30, 2003, among
Oil States International, Inc., the Lenders named therein
and Wells Fargo Bank Texas, National Association, as
Administrative Agent and U.S. Collateral Agent; and Bank
of Nova Scotia, as Canadian Administrative Agent and
Canadian Collateral Agent; Hibernia National Bank and
Royal Bank of Canada, as Co-Syndication Agents and Bank
One, NA and Credit Lyonnais New York Branch, as
Co-Documentation Agents.
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 Rule 13a-14(a) under the
Securities Exchange Act of 1934.
31.2* -- Certification of Chief Financial Officer of Oil States
International, Inc. pursuant to Rule 13a-14(a) under the
Securities Exchange Act of 1934.
32.1*** -- Certification of Chief Executive Officer of Oil States
International, Inc. pursuant to, and Rule 13a-14(b) under
the Securities Exchange Act of 1934.
32.2*** -- Certification of Chief Financial Officer of Oil States
International, Inc. pursuant to, and Rule 13a-14(b) under
the Securities Exchange Act of 1934.
- ---------
* Filed herewith
** Management contracts or compensatory plans or arrangements
*** Furnished herewith.
21
(b) REPORTS ON FORM 8-K.
(1) Form 8-K dated October 28, 2003 - Item 12. Results of Operations and
Financial Condition (Quarter ended September 30, 2003 Earnings Press
Release)
(2) Form 8-K dated November 3, 2003 - Item 5. Other Events (New Credit
Agreement).
22
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: November 11, 2003 By /s/ CINDY B. TAYLOR
----------------- --------------------------------------
Cindy B. Taylor
Senior Vice President, Chief Financial
Officer and Treasurer (Principal
Financial Officer)
Date: November 11, 2003 By /s/ ROBERT W. HAMPTON
------------------ --------------------------------------
Robert W. Hampton
Vice President -- Finance and Accounting
and
Secretary (Principal Accounting Officer)
23
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).
24
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, dated as of October 30, 2003, among
Oil States International, Inc., the Lenders named therein
and Wells Fargo Bank Texas, National Association, as
Administrative Agent and U.S. Collateral Agent; and Bank
of Nova Scotia, as Canadian Administrative Agent and
Canadian Collateral Agent; Hibernia National Bank and
Royal Bank of Canada, as Co-Syndication Agents and Bank
One, NA and Credit Lyonnais New York Branch, as
Co-Documentation Agents.
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 Rule 13a-14(a) under the
Securities Exchange Act of 1934.
31.2* -- Certification of Chief Financial Officer of Oil States
International, Inc. pursuant to Rule 13a-14(a) under the
Securities Exchange Act of 1934.
32.1*** -- Certification of Chief Executive Officer of Oil States
International, Inc. pursuant to, and Rule 13a-14(b) under
the Securities Exchange Act of 1934.
32.2*** -- Certification of Chief Financial Officer of Oil States
International, Inc. pursuant to, and Rule 13a-14(b) under
the Securities Exchange Act of 1934.
- ---------
* Filed herewith
** Management contracts or compensatory plans or arrangements
*** Furnished herewith.
25