OIL STATES INTERNATIONAL INC - 10-Q Quarterly Report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


(Mark One)
[X]		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the quarterly period ended June 30, 2004

		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 49,397,916 shares of common stock outstanding as of July 30, 2004.

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In Thousands, Except Per Share Amounts)


	THREE MONTHS ENDED						SIX MONTHS ENDED
	JUNE 30,						JUNE 30,
	2004			2003			2004			2003
Revenues	$	222,182		$	163,564		$	426,372		$	349,141
Costs and expenses:
Cost of sales		176,015			127,331			337,313			272,298
Selling, general and administrative expenses		15,883			13,977			30,573			27,731
Depreciation and amortization expense		8,744			6,911			17,316			13,369
Other operating expense (income)		(107	)		114			425			166

		200,535			148,333			385,627			313,564

Operating income		21,647			15,231			40,745			35,577
Interest income		75			92			156			162
Interest expense		(1,822	)		(1,675	)		(3,470	)		(3,366	)
Other income		292			157			437			262

Income before income taxes		20,192			13,805			37,868			32,635
Income tax expense		(8,037	)		(3,651	)		(9,556	)		(9,112	)

Net income	$	12,155		$	10,154		$	28,312		$	23,523

Earnings per share:
Basic	$	.25		$	.21		$	.58		$	.49
Diluted	$	.24		$	.21		$	.57		$	.48
Weighted average number of common shares outstanding:
Basic		49,248			48,527			49,189			48,495
Diluted		49,869			49,153			49,812			49,126

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

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In Thousands)


	JUNE 30,			DECEMBER 31,
	2004			2003
	(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents	$	22,721		$	19,318
Accounts receivable, net		143,564			137,484
Inventories, net		180,938			121,319
Prepaid expenses and other current assets		7,341			9,956

Total current assets		354,564			288,077
Property, plant, and equipment, net		203,585			194,136
Goodwill, net		255,101			224,054
Other intangible assets, net		8,044			5,870
Other noncurrent assets		5,351			5,049

Total assets	$	826,645		$	717,186

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued liabilities	$	117,894		$	89,243
Income taxes		6,557			3,020
Current debt		5,472			873
Deferred revenue		7,018			4,784
Other current liabilities		2,491			937

Total current liabilities		139,432			98,857
Long-term debt		178,236			136,246
Deferred income taxes		18,366			19,411
Other liabilities		7,493			7,561

Total liabilities		343,527			262,075
Stockholders’ equity:
Common stock		494			492
Additional paid-in capital		335,946			333,855
Retained earnings		137,130			108,818
Accumulated other comprehensive income		9,870			12,289
Treasury stock		(322	)		(343	)

Total stockholders’ equity		483,118			455,111

Total liabilities and stockholders’ equity	$	826,645		$	717,186

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

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)


	SIX MONTHS ENDED JUNE 30,
	2004			2003
Cash flows from operating activities:
Net income	$	28,312		$	23,523
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization		17,316			13,369
Deferred income tax provision (benefit)		(2,645	)		193
Other, net		941			937
Changes in working capital		14,506			(17,052	)

Net cash flows provided by operating activities		58,430			20,970
Cash flows from investing activities:
Acquisitions of businesses, net of cash acquired		(79,371	)		(288	)
Capital expenditures		(20,836	)		(15,393	)
Proceeds from sale of equipment		1,446			415
Other, net		(1	)		(3	)

Net cash flows used in investing activities		(98,762	)		(15,269	)
Cash flows from financing activities:
Revolving credit borrowings (repayments)		42,681			(3,556	)
Borrowings		102			—
Debt repayments		(506	)		(491	)
Issuance of common stock		2,156			636
Other, net		(220	)		(412	)

Net cash flows provided by (used in) financing activities		44,213			(3,823	)
Effect of exchange rate changes on cash		(112	)		1,211

Net increase in cash and cash equivalents from continuing operations		3,769			3,089
Net cash used in discontinued operations		(366	)		(168	)
Cash and cash equivalents, beginning of period		19,318			11,118

Cash and cash equivalents, end of period	$	22,721		$	14,039

Non-cash financing activities:
Short term borrowing for tubular services acquisition	$	4,675		$	—

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

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS

1. ORGANIZATION AND BASIS OF PRESENTATION

The accompanying unaudited consolidated financial 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.

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, 2003.

2. RECENT ACCOUNTING PRONOUNCEMENTS

In January 2003, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 46 (FIN 46), “Consolidation of Variable Interest Entities, an interpretation of ARB No. 51.” FIN 46 provides guidance on: 1) the identification of entities for which control is achieved through means other than through voting rights, known as “variable interest entities” (VIEs); and 2) which business enterprise is the primary beneficiary and when it should consolidate a VIE. This new requirement for consolidation applies to entities: 1) where the equity investors (if any) do not have a controlling financial interest; or 2) whose equity investment at risk is insufficient to finance that entity’s activities without receiving additional subordinated financial support from other parties. In addition, FIN 46 requires that both the primary beneficiary and all other enterprises with a significant variable interest in a VIE make additional disclosures. FIN 46 is effective for all new VIEs created or acquired after January 31, 2003. For VIEs created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period ending after December 15, 2003. Certain disclosures are effective immediately. Implementation of FIN 46 did not affect the Company.

3. DETAILS OF SELECTED BALANCE SHEET ACCOUNTS

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


	JUNE 30,			DECEMBER 31,
	2004			2003
Accounts receivable, net:
Trade	$	120,049		$	113,003
Unbilled revenue		23,785			24,018
Other		1,792			2,484
Allowance for doubtful accounts		(2,062	)		(2,021	)

	$	143,564		$	137,484


	JUNE 30,			DECEMBER 31,
	2004			2003
Inventories, net:
Tubular goods	$	111,585		$	65,026
Other finished goods and purchased products		29,036			26,286
Work in process		27,169			20,117
Raw materials		18,655			15,169

Total inventories		186,445			126,598
Inventory reserves		(5,507	)		(5,279	)

	$	180,938		$	121,319


	ESTIMATED	JUNE 30,			DECEMBER 31,
	USEFUL LIFE	2004			2003
Property, plant and equipment, net:
Land		$	5,182		$	5,264
Buildings and leasehold improvements	2-40 years		44,562			43,784
Machinery and equipment	2-20 years		208,717			198,677
Rental tools	3-10 years		52,671			40,960
Office furniture and equipment	1-10 years		15,873			14,676
Vehicles	2-5 years		9,691			8,521
Construction in progress			4,080			5,712

Total property, plant and equipment			340,776			317,594
Less: Accumulated depreciation			(137,191	)		(123,458	)

		$	203,585		$	194,136


	JUNE 30,		DECEMBER 31,
	2004		2003
Accounts payable and accrued liabilities:
Trade accounts payable	$	89,088	$	59,423
Accrued compensation		8,824		12,572
Accrued insurance		4,692		3,518
Accrued taxes, other than income taxes		3,969		2,028
Reserves related to discontinued operations		4,419		4,785
Other		6,902		6,917

	$	117,894	$	89,243

Changes in the carrying amount of goodwill for the six month period ended June 30, 2004 are as follows (in thousands):


	OFFSHORE		WELLSITE			TUBULAR
	PRODUCTS		SERVICES			SERVICES		TOTAL
Balance as of January 1, 2004	$	74,800	$	99,675		$	49,579	$	224,054
Goodwill acquired		—		29,534			2,025		31,559
Foreign currency translation and other changes		253		(765	)		—		(512	)

Balance as of June 30, 2004	$	75,053	$	128,444		$	51,604	$	255,101

4. SEGMENT AND RELATED INFORMATION

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

Financial information by industry segment for each of the three and six months periods ended June 30, 2004 and 2003 is summarized in the following table (in thousands):


	OFFSHORE		WELL SITE		TUBULAR		CORPORATE AND
	PRODUCTS		SERVICES		SERVICES		ELIMINATIONS			TOTAL
Three months ended June 30, 2004
Revenues from unaffiliated customers	$	48,940	$	72,850	$	100,392	$	—		$	222,182

Depreciation and amortization		2,047		6,508		176		13			8,744

Operating income (loss)		2,816		10,164		10,562		(1,895	)		21,647

Capital expenditures		2,729		9,170		41		—			11,940

Total assets		259,680		359,584		198,016		9,365			826,645

Three months ended June 30, 2003
Revenues from unaffiliated customers	$	57,160	$	52,885	$	53,519	$	—		$	163,564

Depreciation and amortization		1,947		4,790		162		12			6,911

Operating income (loss)		8,510		7,031		1,231		(1,541	)		15,231

Capital expenditures		4,644		5,003		48		9			9,704

Total assets		247,984		275,998		143,114		8,033			675,129


	OFFSHORE		WELL SITE		TUBULAR		CORPORATE AND
	PRODUCTS		SERVICES		SERVICES		ELIMINATIONS			TOTAL
Six months ended June 30, 2004
Revenues from unaffiliated customers	$	90,828	$	168,990	$	166,554	$	—		$	426,372

Depreciation and amortization		4,296		12,658		333		29			17,316

Operating income (loss)		2,019		27,684		14,329		(3,287	)		40,745

Capital expenditures		3,801		16,893		142		—			20,836

Total assets		259,680		359,584		198,016		9,365			826,645

Six months ended June 30, 2003
Revenues from unaffiliated customers	$	114,748	$	131,724	$	102,669	$	—		$	349,141

Depreciation and amortization		3,781		9,243		321		24			13,369

Operating income (loss)		14,137		22,111		2,190		(2,861	)		35,577

Capital expenditures		5,261		9,960		158		14			15,393

Total assets		247,984		275,998		143,114		8,033			675,129


	Page No.
Part I — FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Financial Statements
Unaudited Condensed Consolidated Statements of Income for the Three and Six Months Ended June 30, 2004 and 2003		3
Consolidated Balance Sheets –June 30, 2004 (unaudited) and December 31, 2003		4
Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2004 and 2003		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		19
Item 4. Controls and Procedures		19
Part II — OTHER INFORMATION		20
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds		20
Item 3. Default Upon Senior Securities		20
Item 4. Submission of Matters to a Vote of Security Holders		20
Item 5. Other Information		20
Item 6. Exhibits and Reports on Form 8-K		21
(a) Index of Exhibits		21–23
(b) Report on Form 8-K		23
Signature Page		24
Incremental Assumption Agreement
Certification of CEO pursuant to Rules 13a-14a/15d-14a
Certification of CFO pursuant to Rules 13a-14a/15d-14a
Certification of CEO pursuant to Rules 13a-14b/15d-14b
Certification of CFO pursuant to Rules 13a-14b/15d-14b

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	THREE MONTHS				SIX MONTHS
	ENDED JUNE 30,				ENDED JUNE 30,
	2004		2003		2004		2003
Comprehensive income:
Net income	$	12,155	$	10,154	$	28,312	$	23,523
Cumulative translation adjustment</