UNITED STATES 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

	[X]	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the quarterly period ended September 30, 2014

 

OR

	[  ]	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the transition period from _________________________ to

 

Commission file number: 001-16337

 

OIL STATES INTERNATIONAL, INC.

 

---

 

(Exact name of registrant as specified in its charter)

 

	Delaware	76-0476605
	(State or other jurisdiction of	(I.R.S. Employer
	incorporation or organization)	Identification No.)
	Three Allen Center, 333 Clay Street, Suite 4620,	77002
	Houston, Texas	(Zip Code)
	(Address of principal executive offices)

 

(713) 652-0582

---

 (Registrant’s telephone number, including area code)

None

---

 (Former name, former address and former fiscal year,

if changed since last report)

 

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

YES [ X ]             NO [  ]

 

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

YES [ X ]             NO [  ]

 

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

(Check one):

Large Accelerated Filer [X]	Accelerated Filer [  ]
Non-Accelerated Filer [  ] (Do not check if a smaller reporting company)	Smaller Reporting Company [  ]

 

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

YES [ X ]             NO [  ]

 

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

 

 

OIL STATES INTERNATIONAL, INC.

 

INDEX

 

		Page No.
	Part I -- FINANCIAL INFORMATION
Item 1.	Financial Statements:
	Condensed Consolidated Financial Statements
	Unaudited Condensed Consolidated Statements of Income	3
	Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss)	4
	Consolidated Balance Sheets	5
	Unaudited Condensed Consolidated Statements of Cash Flows	6
	Unaudited Condensed Consolidated Statement of Stockholders’ Equity	7
	Notes to Unaudited Condensed Consolidated Financial Statements	8 – 20
Cautionary Statement Regarding Forward-Looking Statements		21
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21 – 32
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	32
Item 4.	Controls and Procedures	32 – 33
	Part II -- OTHER INFORMATION
Item 1.	Legal Proceedings	33
Item 1A.	Risk Factors	33
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	33
Item 6.	Exhibits	34
	(a) Index of Exhibits	34 – 35
Signature Page		36

  

 

PART I -- FINANCIAL INFORMATION

 

ITEM 1. Financial Statements

 

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

 

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In Thousands, Except Per Share Amounts)

  

		THREE MONTHS ENDED								NINE MONTHS ENDED
		SEPTEMBER 30,								SEPTEMBER 30,
		2014				2013				2014				2013
Revenues		$	471,032			$	438,176			$	1,335,876			$	1,207,824
Costs and expenses:
Cost of sales and services			306,497				301,702				886,777				835,471
Selling, general and administrative expenses			43,734				38,531				128,181				110,600
Depreciation and amortization expense			31,076				28,206				92,970				80,035
Other operating (income) expense			(1,887	)			3,981				9,524				6,329
			379,420				372,420				1,117,452				1,032,435
Operating income			91,612				65,756				218,424				175,389
Interest expense			(1,602	)			(9,983	)			(15,500	)			(30,130	)
Interest income			150				159				411				460
Loss on extinguishment of debt			30				(2,058	)			(100,380	)			(2,058	)
Equity in earnings (losses) of unconsolidated affiliates			74				73				292				(758	)
Other income			161				617				2,279				1,765
Income from continuing operations before income taxes			90,425				54,564				105,526				144,668
Income tax expense			(32,048	)			(19,081	)			(36,545	)			(51,692	)
Net income from continuing operations			58,377				35,483				68,981				92,976
Net income (loss) from discontinued operations, net of tax (including a net gain on disposal of $84,209 in the third quarter of 2013)			(1,467	)			132,250				51,571				253,500
Net income			56,910				167,733				120,552				346,476
Less: Net income (loss) attributable to noncontrolling interest			(10	)			(7	)			8				22
Net income attributable to Oil States International, Inc.		$	56,920			$	167,740			$	120,544			$	346,454
Net income (loss) attributable to Oil States International, Inc.:
Continuing operations		$	58,387			$	35,490			$	68,973			$	92,954
Discontinued operations			(1,467	)			132,250				51,571				253,500
Net income attributable to Oil States International, Inc.		$	56,920			$	167,740			$	120,544			$	346,454
Basic net income (loss) per share attributable to Oil States International, Inc. common stockholders from:
Continuing operations		$	1.08			$	0.64			$	1.28			$	1.69
Discontinued operations			(0.03	)			2.40				0.95				4.61
Net income		$	1.05			$	3.04			$	2.23			$	6.30
Diluted net income (loss) per share attributable to Oil States International, Inc. common stockholders from:
Continuing operations		$	1.07			$	0.64			$	1.27			$	1.67
Discontinued operations			(0.02	)			2.37				0.95				4.57
Net income		$	1.05			$	3.01			$	2.22			$	6.24
Weighted average number of common shares outstanding:
Basic			52,979				55,092				53,119				54,987
Diluted			53,294				55,672				53,422				55,542

 

 

The accompanying notes are an integral part of

these financial statements.

 

 

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

 

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In Thousands)

 

 

 

		THREE MONTHS ENDED								NINE MONTHS ENDED
		SEPTEMBER 30,								SEPTEMBER 30,
		2014				2013				2014				2013
Net income		$	56,910			$	167,733			$	120,552			$	346,476
Other comprehensive income (loss):
Foreign currency translation adjustment			(13,144	)			44,693				10,301				(125,407	)
Unrealized gain (loss) on forward contracts, net of tax			3				(190	)			4				(74	)
Total other comprehensive income (loss)			(13,141	)			44,503				10,305				(125,481	)
Comprehensive income			43,769				212,236				130,857				220,995
Less: Comprehensive income (loss) attributable to noncontrolling interest			(10	)			26				(16	)			(19	)
Comprehensive income attributable to Oil States International, Inc.		$	43,779			$	212,210			$	130,873			$	221,014

 

The accompanying notes are an integral part of

these financial statements. 

 

 

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

(In Thousands)

 

 

		SEPTEMBER 30,				DECEMBER 31,
		2014				2013
		(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents		$	69,800			$	599,306
Accounts receivable, net			506,508				620,333
Inventories, net			247,092				266,552
Prepaid expenses and other current assets			22,368				39,716
Total current assets			845,768				1,525,907
Property, plant, and equipment, net			627,465				1,902,789
Goodwill, net			252,880				513,650
Other intangible assets, net			52,238				133,531
Other noncurrent assets			25,118				55,384
Total assets		$	1,803,469			$	4,131,261
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	101,706			$	149,079
Accrued liabilities			79,693				132,046
Income taxes			12,589				32,679
Current portion of long-term debt and capitalized leases			505				529
Deferred revenue			48,755				50,366
Other current liabilities			11,853				9,137
Total current liabilities			255,101				373,836
Long-term debt and capitalized leases			178,040				972,692
Deferred income taxes			19,121				122,821
Other noncurrent liabilities			16,761				36,618
Total liabilities			469,023				1,505,967
Stockholders’ equity:
Oil States International, Inc. stockholders’ equity:
Common stock, $.01 par value, 200,000,000 shares authorized, 60,783,119 shares and 59,777,766 shares issued, respectively, and 54,017,285 shares and 54,767,284 shares outstanding, respectively			608				592
Additional paid-in capital			674,435				637,438
Retained earnings			1,080,955				2,320,453
Accumulated other comprehensive loss			(11,851	)			(85,675	)
Common stock held in treasury at cost, 6,765,834 and 5,010,482 shares, respectively			(409,875	)			(249,391	)
Total Oil States International, Inc. stockholders’ equity			1,334,272				2,623,417
Noncontrolling interest			174				1,877
Total stockholders’ equity			1,334,446				2,625,294
Total liabilities and stockholders’ equity		$	1,803,469			$	4,131,261

 

The accompanying notes are an integral part of

these financial statements.

 

 

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

 

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

CONTINUING AND DISCONTINUED OPERATIONS

(In Thousands)

 

		NINE MONTHS ENDED SEPTEMBER 30,
		2014				2013
Cash flows from operating activities:
Net income		$	121,119			$	347,540
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			160,520				206,155
Deferred income tax provision			(1,735	)			(707	)
Excess tax benefits from share-based payment arrangements			(4,585	)			(5,447	)
Gain on sale of business			--				(84,209	)
Gain on disposals of assets			(923	)			(3,871	)
Non-cash compensation charge			22,220				22,938
Amortization of deferred financing costs			2,896				5,937
Loss on extinguishment of debt			103,836				3,265
Other, net			5,183				640
Changes in operating assets and liabilities, net of effect from acquired businesses and net assets of Civeo that were distributed to stockholders:
Accounts receivable			(68,106	)			53,386
Inventories			(7,030	)			34,028
Accounts payable and accrued liabilities			(14,463	)			(24,449	)
Taxes payable			(48,875	)			16,603
Other operating assets and liabilities, net			32,423				10,868
Net cash flows provided by operating activities			302,480				582,677
Cash flows from investing activities:
Capital expenditures, including capitalized interest			(262,619	)			(355,639	)
Acquisitions of businesses, net of cash acquired			193				(1,771	)
Proceeds from sale of business			--				600,000
Proceeds from disposition of property, plant and equipment			4,077				8,535
Other, net			(1,462	)			81
Net cash flows (used in) provided by investing activities			(259,811	)			251,206
Cash flows from financing activities:
Revolving credit borrowings and (repayments), net			171,734				(47,901	)
Repayment of 6 1/2% Senior Notes			(630,307	)			--
Repayment of 5 1/8% Senior Notes			(419,794	)			--
Term loan repayments			--				(252,762	)
Debt and capital lease repayments			(407	)			(2,181	)
Issuance of common stock from share-based payment arrangements			8,844				14,172
Purchase of treasury stock			(162,053	)			(11,889	)
Excess tax benefits from share-based payment arrangements			4,585				5,447
Payment of financing costs			(12,530	)			(203	)
Shares added to treasury stock as a result of net share settlements due to vesting of restricted stock			(5,048	)			(4,161	)
Term borrowings of Civeo			775,000				--
Cash balances of Civeo in Spin-Off			(298,536	)			--
Net cash flows used in financing activities			(568,512	)			(299,478	)
Effect of exchange rate changes on cash			(3,663	)			(11,598	)
Net change in cash and cash equivalents			(529,506	)			522,807
Cash and cash equivalents, beginning of period			599,306				253,172
Cash and cash equivalents, end of period		$	69,800			$	775,979

 

The accompanying notes are an integral part of these

financial statements.

 

 

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

(In Thousands)

 

		Common Stock				Additional Paid-In Capital				Retained Earnings				Accumulated Other Comprehensive Income (Loss)				Treasury Stock				Noncontrolling Interest				Total Stockholders' Equity
Balance, December 31, 2013		$	592			$	637,438			$	2,320,453			$	(85,675	)		$	(249,391	)		$	1,877			$	2,625,294
Net income											120,544												8				120,552
Currency translation adjustment															10,301								(24	)			10,277
Other comprehensive income															4												4
Dividends declared																							(489	)			(489	)
Exercise of stock options, including tax benefit			2				13,427																				13,429
Amortization of restricted stock compensation							17,994																				17,994
Stock option expense							2,858																				2,858
Surrender of stock to pay taxes on restricted stock awards			2				(2	)											(5,048	)							(5,048	)
Stock acquired for cash																			(155,437	)							(155,437	)
Exercise of stock options/stock awards released – discontinued operations							2,727																				2,727
Net income from noncontrolling interests – discontinued operations																							567				567
Spin-Off of Civeo											(1,360,042	)			63,519								(1,765	)			(1,298,288	)
Other			12				(7	)											1								6
Balance, September 30, 2014		$	608			$	674,435			$	1,080,955			$	(11,851	)		$	(409,875	)		$	174			$	1,334,446

 

  

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

 

 

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS 

 

1.	ORGANIZATION AND BASIS OF PRESENTATION

 

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

 

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

 

In September 2013, the Company entered into a Stock Purchase Agreement with Marubeni-Itochu Tubulars America, Inc. (Marubeni-Itochu) for the sale of Sooner, Inc. and its subsidiaries (Sooner), which comprised the entirety of the Company’s tubular services segment. The results of operations for our tubular services segment have been classified as discontinued operations for all periods presented.

 

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

 

The financial statements included in this report should be read in conjunction with the Company’s audited financial statements and accompanying notes included in its Annual Report on Form 10-K for the year ended December 31, 2013 (the 2013 Form 10-K).

 

2.	SPIN-OFF OF ACCOMMODATIONS BUSINESS (CIVEO)

 

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

 

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

 

 

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(Continued)

 

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

 

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

 

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

 

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

 

 

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(Continued)

 

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

 

ASSETS
Current assets:
Cash and cash equivalents		$	298,536
Accounts receivable, net			172,937
Inventories, net			23,669
Prepaid expenses and other current assets			24,888
Total current assets of discontinued operations			520,030
Property, plant, and equipment, net			1,391,458
Goodwill, net			268,464
Other intangible assets, net			75,105
Other noncurrent assets			30,846
Total assets of discontinued operations		$	2,285,903
LIABILITIES
Current liabilities:
Accounts payable			52,441
Accrued liabilities			23,784
Income taxes			897
Deferred revenue			22,456
Other current liabilities			256
Total current liabilities of discontinued operations			99,834
Long-term debt			775,000
Deferred income taxes			85,328
Other noncurrent liabilities			27,453
Total liabilities of discontinued operations		$	987,615

 

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

 

3.	RECENT ACCOUNTING PRONOUNCEMENTS

 

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (the FASB), which are adopted by the Company as of the specified effective date. Unless otherwise discussed, management believes that the impact of recently issued standards, which are not yet effective, will not have a material impact on the Company’s consolidated financial statements upon adoption.

 

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

 

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

 

 

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(Continued)

 

4.	DETAILS OF SELECTED BALANCE SHEET ACCOUNTS

 

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

 

		SEPTEMBER 30,				DECEMBER 31,
		2014				2013
Accounts receivable, net:
Trade		$	325,351			$	456,114
Unbilled revenue			182,936				163,766
Other			5,148				7,987
Total accounts receivable			513,435				627,867
Allowance for doubtful accounts			(6,927	)			(7,534	)
		$	506,508			$	620,333

 

		SEPTEMBER 30,				DECEMBER 31,
		2014				2013
Inventories, net:
Finished goods and purchased products		$	90,178			$	91,909
Work in process			55,161				72,903
Raw materials			112,636				111,280
Total inventories			257,975				276,092
Allowance for excess, damaged, or obsolete inventory			(10,883	)			(9,540	)
		$	247,092			$	266,552

 

		Estimated				SEPTEMBER 30,				DECEMBER 31,
		Useful Life (in years)				2014				2013
Property, plant and equipment, net:
Land						$	26,929			$	76,545
Accommodations assets			--				--				1,535,407
Buildings and leasehold improvements		3-40					172,477				204,455
Machinery and equipment		2-29					434,544				434,578
Completion services equipment		4-10					368,161				314,445
Office furniture and equipment		1-10					28,935				57,026
Vehicles		2-10					125,011				140,156
Construction in progress							66,900				172,252
Total property, plant and equipment							1,222,957				2,934,864
Accumulated depreciation							(595,492	)			(1,032,075	)
						$	627,465			$	1,902,789

 

		SEPTEMBER 30,				DECEMBER 31,
		2014				2013
Accrued liabilities:
Accrued compensation		$	43,620			$	71,535
Insurance liabilities			12,789				13,198
Accrued taxes, other than income taxes			8,812				7,619
Accrued interest			108				11,931
Accrued commissions			3,908				3,654
Accrued treasury stock repurchase			782				7,397
Other			9,674				16,712
		$	79,693			$	132,046

 

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

 

 

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(Continued) 

 

 

5.	ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

 

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

 

6.	EARNINGS PER SHARE

 

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

 

		THREE MONTHS ENDED SEPTEMBER 30,
		2014								2013
		Income				Shares				Income				Shares
Basic:
Net income attributable to Oil States International, Inc.		$	56,920							$	167,740
Less: Undistributed net income allocable to participating securities			(1,187	)							--
Undistributed net income applicable to common stockholders			55,733								167,740
Less: Loss (income) from discontinued operations, net of tax			1,467								(132,250	)
Add: Undistributed net loss from discontinued operations allocable to participating securities			(31	)							--
Income from continuing operations applicable to Oil States International, Inc. common stockholders – Basic		$	57,169				52,979			$	35,490				55,092
Diluted:
Income from continuing operations applicable to Oil States International, Inc. common stockholders – Basic		$	57,169				52,979			$	35,490				55,092
Effect of dilutive securities:
Undistributed net income reallocated to participating securities			7				--				--				--
Options on common stock			--				298				--				323
Restricted stock awards and other			--				17				--				257
Income from continuing operations applicable to Oil States International, Inc. common stockholders – Diluted			57,176				53,294				35,490				55,672
(Loss) income from discontinued operations, net of tax, applicable to Oil States International, Inc. common stockholders			(1,436	)							132,250
Undistributed net income reallocated to participating securities			--								--
Net income attributable to Oil States International, Inc. common stockholders – Diluted		$	55,740				53,294			$	167,740				55,672

  

 

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(Continued) 

 

		NINE MONTHS ENDED SEPTEMBER 30,
		2014								2013
		Income				Shares				Income				Shares
Basic:
Net income attributable to Oil States International, Inc.		$	120,544							$	346,454
Less: Undistributed net income allocable to participating securities			(1,846	)							--
Undistributed net income applicable to common stockholders			118,698								346,454
Less: Income from discontinued operations, net of tax			(51,571	)							(253,500	)
Add: Undistributed net income from discontinued operations allocable to participating securities			790								-
Income from continuing operations applicable to Oil States International, Inc. common stockholders – Basic		$	67,917				53,119			$	92,954				54,987
Diluted:
Income from continuing operations applicable to Oil States International, Inc. common stockholders – Basic		$	67,917				53,119			$	92,954				54,987
Effect of dilutive securities:
Undistributed net income reallocated to participating securities			6				--				--				--
Options on common stock			--				286				--				351
Restricted stock awards and other			--				17				--				204
Income from continuing operations applicable to Oil States International, Inc. common stockholders – Diluted			67,923				53,422				92,954				55,542
Income from discontinued operations, net of tax, applicable to Oil States International, Inc. common stockholders			50,781								253,500
Undistributed net income reallocated to participating securities			4								--
Net income attributable to Oil States International, Inc. common stockholders – Diluted		$	118,708				53,422			$	346,454				55,542

 

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

 

7.	BUSINESS ACQUISITIONS AND GOODWILL

 

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

 

 

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(Continued) 

 

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

 

		Well Site Services
		Completion Services				Drilling Services				Subtotal				Accommodations				Offshore Products				Total
Balance as of December 31, 2012
Goodwill		$	201,281			$	22,767			$	224,048			$	295,132			$	118,933			$	638,113
Accumulated Impairment Losses			(94,528	)			(22,767	)			(117,295	)			--				--				(117,295	)
			106,753				--				106,753				295,132				118,933				520,818
Goodwill acquired and purchase price adjustments			1,576				--				1,576				--				26,179				27,755
Foreign currency translation and other changes			(946	)			--				(946	)			(34,076	)			99				(34,923	)
			107,383				--				107,383				261,056				145,211				513,650
Balance as of December 31, 2013
Goodwill			201,911				22,767				224,678				261,056				145,211				630,945
Accumulated Impairment Losses			(94,528	)			(22,767	)			(117,295	)			--				--				(117,295	)
			107,383				--				107,383				261,056				145,211				513,650
Spin-Off of Civeo			--				--				--				(268,463	)			--				(268,463	)
Goodwill acquired and purchase price adjustments			194				--				194				--				907				1,101
Foreign currency translation and other changes			(699	)			--				(699	)			7,407				(116	)			6,592
			106,878				--				106,878				--				146,002				252,880
Balance as of September 30, 2014
Goodwill			201,406				22,767				224,173				--				146,002				370,175
Accumulated Impairment Losses			(94,528	)			(22,767	)			(117,295	)			--				--				(117,295	)
		$	106,878			$	--			$	106,878			$	--			$	146,002			$	252,880

 

 

8.	DISCONTINUED OPERATIONS

 

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

 

On September 6, 2013, the Company entered into a Stock Purchase Agreement with Marubeni-Itochu for the sale of Sooner, which comprised the entirety of the Company’s tubular services segment. Total consideration received by the Company was $600 million. We recognized a net gain on disposal of $128.6 million ($84.2 million after-tax) in the three months ended September 30, 2013.

 

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

 

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

 

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

 

 

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(Continued) 

 

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

 

		Three Months Ended				Three Months Ended				Nine Months Ended				Nine Months Ended
		September 30, 2014				September 30, 2013				September 30, 2014				September 30, 2013
Revenues
Accommodations		$	--			$	246,280			$	404,132			$	787,161
Tubular services		$	--			$	273,637			$	--			$	1,073,096
Income (loss) from Accommodations discontinued operations:
Income from discontinued operations before income taxes		$	512			$	49,549			$	62,436			$	178,792
Income tax expense			(1,965	)			(7,612	)			(11,063	)			(34,737	)
Net (loss) income from discontinued operations, net of tax		$	(1,453	)		$	41,937			$	51,373			$	144,055
Income (loss) from Tubular services discontinued operations:
(Loss) Income from discontinued operations before income taxes		$	(21	)		$	10,463			$	315			$	40,964
Income tax (expense) benefit			7				(4,359	)			(118	)			(15,728	)
Net (loss) income from discontinued operations, net of tax		$	(14	)		$	6,104			$	197			$	25,236

 

9.

DEBT

 

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

 

		September 30, 2014				December 31, 2013
Revolving credit facility, which matures May 28, 2019, with available commitments up to $600 million and with a weighted average interest rate of 1.8% for the nine month period ended September 30, 2014		$	171,734			$	--
6 1/2% Senior Unsecured Notes, which were repaid in full during the three month period ended June 30, 2014; original due date of June 2019			--				600,000
5 1/8% Senior Unsecured Notes, which were repaid in full during the three month period ended June 30, 2014; original due date of January 2023			--				366,000
Capital lease obligations and other debt			6,811				7,221
Total debt			178,545				973,221
Less: Current portion			505				529
Total long-term debt and capitalized leases		$	178,040			$	972,692

  

 

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(Continued) 

 

Credit Facility

 

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

 

5 1/8% Senior Unsecured Notes

 

On December 21, 2012, the Company sold $400 million aggregate principal amount of 5 1/8% Senior Notes due 2023 (5 1/8% Notes) through a private placement to qualified institutional buyers. In the fourth quarter of 2013, the Company repurchased $34.0 million aggregate principal amount of the 5 1/8% Notes and, in connection with the Spin-Off, repurchased the remaining $366.0 million aggregate principal amount in the second quarter of 2014 primarily through a tender offer. This tender offer was funded with the proceeds of the $750 million special cash dividend paid to us by Civeo in connection with the Spin-Off, using the proceeds from the $775 million term loan entered into by Civeo immediately prior to the consummation of the Spin-Off, and borrowings under our new Credit Agreement and available cash on hand.   

 

6 1/2% Senior Unsecured Notes

 

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

 

Loss on Extinguishment of Debt

 

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

 

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

 

 

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(Continued) 

 

10.	FAIR VALUE MEASUREMENTS

 

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

 

The fair values of the Company’s 6 1/2% Notes and 5 1/8% Notes were estimated based on quoted prices and analysis of similar instruments (Level 2 fair value measurements). The December 31, 2013 carrying values and fair values of these Notes were as follows (in thousands):

 

		Carrying				Fair
		Value				Value
5 1/8% Notes
Principal amount originally due 2023		$	366,000			$	411,066
6 1/2% Notes
Principal amount originally due 2019		$	600,000			$	639,378

 

11.	CHANGES IN COMMON STOCK OUTSTANDING

 

Shares of common stock outstanding – January 1, 2014			54,767,284
Repurchase of shares – transferred to treasury			(1,704,127	)
Shares issued upon conversion of restricted stock awards as a result of the Spin-Off			565,141
Shares issued upon granting of restricted stock awards, net of forfeitures			205,046
Shares issued upon exercise of stock options			225,753
Shares withheld for taxes on vesting of restricted stock awards and transferred to treasury			(51,225	)
Shares issued upon vesting of deferred stock units			9,413
Shares of common stock outstanding – September 30, 2014			54,017,285

 

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

 

12.	STOCK BASED COMPENSATION

 

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

 

 

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(Continued) 

 

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

 

		Stock Options				Restricted Stock
		Number of Shares				Awards
Outstanding at January 1, 2014			896,905				696,991
Granted			118,950				293,952
Options Exercised/Stock Vested			(225,753	)			(237,812	)
Cancelled			(14,875	)			(25,993	)