UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549FORM 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 March 31, 2004 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________to ________________________
(Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934For the quarterly period ended June 30, 2004 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934For the transition period fromto Commission file number 1-16337
OIL STATES INTERNATIONAL, INC.
----------------------- (Exact(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)
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(Registrant’s telephone number, including area code)None
- -------------------------------------------------------------------------------- (Former(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
49,240,87949,397,916 shares of common stock outstanding as ofAprilJuly 30, 2004.1
OIL STATES INTERNATIONAL, INC.
INDEX
Page No. Part I --— FINANCIAL INFORMATIONPAGE NO. --------Item 1. Financial Statements: Condensed Consolidated Financial Statements 3 4 5 6–10 11–18 19 19 20 20 20 20 20 21 21–23 23 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 2
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In(In Thousands, Except Per Share Amounts)
THREE MONTHS ENDED ---------------------- MARCH 31, ---------------------- 2004 2003 --------- --------Revenues............................................ $ 204,190 $185,577 Costs and expenses: Cost of sales...................................... 161,297 144,968 Selling, general and administrative expenses....... 14,691 13,753 Depreciation and amortization expense.............. 8,572 6,458 Other operating expense ........................... 532 52 --------- -------- 185,092 165,231 --------- -------- Operating income..................................... 19,098 20,346 Interest income...................................... 81 70 Interest expense..................................... (1,647) (1,691) Other income ........................................ 145 105 --------- -------- Income before income taxes........................... 17,677 18,830 Income tax expense................................... (1,520) (5,461) --------- -------- Net income.......................................... $ 16,157 $ 13,369 ========= ======== Earnings per share: Basic............................................. $ 0.33 $ 0.28 Diluted........................................... $ 0.32 $ 0.27 Weighted average number of common shares outstanding: Basic.............................................. 49,129 48,463 Diluted............................................ 49,754 49,099
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.3
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.4
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.35
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (In Thousands)
MARCH 31, DECEMBER 31, 2004 2003 ----------- ----------- (UNAUDITED)ASSETS Current assets: Cash and cash equivalents............................... $ 20,665 $ 19,318 Accounts receivable, net................................ 159,004 137,484 Inventories, net........................................ 123,147 121,319 Prepaid expenses and other current assets............... 8,811 9,956 ----------- ------------ Total current assets.................................. 311,627 288,077 Property, plant, and equipment, net....................... 201,593 194,136 Goodwill, net............................................. 250,374 224,054 Other intangible assets, net.............................. 7,222 5,870 Other noncurrent assets................................... 5,050 5,049 ----------- ------------ Total assets......................................... $ 775,866 $ 717,186 =========== ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued liabilities................ $ 88,436 $ 89,243 Income taxes............................................ 5,142 3,020 Current portion of long-term debt....................... 853 873 Deferred revenue........................................ 8,394 4,784 Other current liabilities............................... 2,758 937 ----------- ------------ Total current liabilities............................ 105,583 98,857 Long-term debt.......................................... 174,406 136,246 Deferred income taxes................................... 16,313 19,411 Postretirement healthcare benefits...................... 2,594 2,662 Other liabilities....................................... 5,024 4,899 ----------- ------------ Total liabilities.................................... 303,920 262,075 Stockholders' equity: Common stock............................................ 492 492 Additional paid-in capital.............................. 334,244 333,855 Retained earnings....................................... 124,975 108,818 Accumulated other comprehensive income ................. 12,565 12,289 Treasury stock.......................................... (330) (343) ----------- ------------ Total stockholders' equity........................... 471,946 455,111 ----------- ------------ Total liabilities and stockholders' equity........... $ 775,866 $ 717,186 =========== ============The accompanying notes are an integral part of these financial statements. 4OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands)
THREE MONTHS ENDED MARCH 31, ------------------------------ 2004 2003 ---------- --------Cash flows from operating activities: Net income...................................................... $ 16,157 $ 13,369 Adjustments to reconcile net income to net cash from operating activities: Provision for loss on accounts receivable..................... 139 159 Depreciation and amortization................................. 8,572 6,458 Deferred income tax provision (benefit)....................... (5,108) 178 Other, net.................................................... 395 206 Changes in working capital.................................... (15,016) (19,064) ---------- -------- Net cash flows provided by operating activities............. 5,139 1,306 Cash flows from investing activities: Acquisitions of businesses, net of cash acquired................ (32,916) (236) Capital expenditures............................................ (8,896) (5,689) Proceeds from sale of equipment................................. 218 202 Other, net...................................................... 7 - ---------- -------- Net cash flows used in investing activities................. (41,587) (5,723) Cash flows from financing activities: Revolving credit borrowings (repayments)........................ 38,030 (147) Debt repayments................................................. (208) (252) Issuance of common stock........................................ 471 259 Other, net...................................................... (164) (394) ---------- -------- Net cash flows provided by (used in) financing activities... 38,129 (534) Effect of exchange rate changes on cash........................... (144) 488 ---------- -------- Net increase (decrease) in cash and cash equivalents from continuing operations............................................ 1,537 (4,463) Net cash used in discontinued operations.......................... (190) (44) Cash and cash equivalents, beginning of period.................... 19,318 11,118 ---------- -------- Cash and cash equivalents, end of period.......................... $ 20,665 $ 6,611 ========== ========The accompanying notes are an integral part of these consolidated financial statements. 5OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIESNOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS1. ORGANIZATION AND BASIS OF PRESENTATION
The accompanying unaudited consolidated
financialsfinancial 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'sCompany’s shares outstanding include all shares issuable upon the exercise of exchangeable shares of one of theCompany'sCompany’s Canadian subsidiaries.The calculation of diluted earnings per share include the effect of the
Company'sCompany’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"“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 theCompany'sCompany’s consolidated financial statements upon adoption.The financial statements included in this report should be read in conjunction with the
Company'sCompany’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.
6
2.3. DETAILS OF SELECTED BALANCE SHEET ACCOUNTS
Additional information regarding selected balance sheet accounts is presented below (in thousands):
MARCH 31, DECEMBER 31, 2004 2003 --------- ------------Accounts receivable, net: Trade............................................................... $ 132,287 $ 113,003 Unbilled revenue.................................................... 26,967 24,018 Other............................................................... 1,729 2,484 Allowance for doubtful accounts..................................... (1,979) (2,021) --------- ------------ $ 159,004 $ 137,484 ========= ============
MARCH 31, DECEMBER 31, 2004 2003 --------- ------------Inventories, net: Tubular goods....................................................... $ 59,758 $ 65,026 Other finished goods and purchased products......................... 25,780 26,286 Work in process..................................................... 26,003 20,117 Raw materials....................................................... 17,031 15,169 --------- ------------ Total inventories................................................... 128,572 126,598 Inventory reserves.................................................. (5,425) (5,279) --------- ------------ $ 123,147 $ 121,319 ========= ============
ESTIMATED MARCH 31, DECEMBER 31, USEFUL LIFE 2004 2003 ----------- --------- ------------Property, plant and equipment, net: Land.................................................... $ 5,218 $ 5,264 Buildings and leasehold improvements.................... 2-40 years 44,050 43,784 Machinery and equipment................................. 2-20 years 203,850 198,677 Rental tools............................................ 3-10 years 48,555 40,960 Office furniture and equipment.......................... 1-10 years 15,067 14,676 Vehicles................................................ 2-5 years 9,131 8,521 Construction in progress................................ 6,605 5,712 --------- ------------ Total property, plant and equipment..................... 332,476 317,594 Less: Accumulated depreciation.......................... (130,883) (123,458) -------- ------------ $ 201,593 $ 194,136 ========= ============
MARCH 31, DECEMBER 31, 2004 2003 --------- ------------Accounts payable and accrued liabilities: Trade accounts payable....................................... $ 62,005 $ 59,423 Accrued compensation......................................... 7,901 12,572 Accrued insurance............................................ 4,032 3,518 Accrued taxes, other than income taxes....................... 2,771 2,028 Reserves related to discontinued operations.................. 4,595 4,785 Other........................................................ 7,132 6,917 --------- ------------ $ 88,436 $ 89,243 ========= ============
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
7
Changes in the carrying amount of goodwill for the
threesix month period endedMarch 31,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 ........................ - 26,415 - 26,415 Foreign currency translation and other changes................................ 194 (289) - (95) --------- -------- ----------- ---------- Balance as of March 31, 2004.............. $ 74,994 $125,801 $ 49,579 $ 250,374 ========= ======== =========== ==========3.
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“Disclosures about Segments of an Enterprise and Related Information,"” the Company has identified the following reportable segments: Offshore Products, Wellsite Services and Tubular Services. TheCompany'sCompany’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
periodperiods endedMarch 31,June 30, 2004 and 2003 is summarized in the following table (in thousands):
OFFSHORE WELLSITE TUBULAR CORPORATE AND PRODUCTS SERVICES SERVICES ELIMINATIONS TOTAL -------- --------- -------- ------------- ----------Three months ended March 31, 2004 Revenues from unaffiliated customers....................... $ 41,888 $ 96,140 $ 66,162 $ - $ 204,190 ======== ========= ======== ============= ========== Depreciation and amortization.... 2,248 6,151 157 16 8,572 ======== ========= ======== ============= ========== Operating income (loss).......... (798) 17,520 3,767 (1,391) 19,098 ======== ========= ======== ============= ========== Capital expenditures............. 1,071 7,724 101 - 8,896 ======== ========= ======== ============= ========== Total assets..................... 256,435 371,888 136,285 11,258 775,866 ======== ========= ======== ============= ========== Three months ended March 31, 2003 Revenues from unaffiliated customers....................... $ 57,588 $ 78,838 $ 49,151 $ - $ 185,577 ======== ========= ======== ============= ========== Depreciation and amortization.... 1,833 4,453 159 13 6,458 ======== ========= ======== ============= ========== Operating income (loss).......... 5,627 15,080 959 (1,320) 20,346 ======== ========= ======== ============= ========== Capital expenditures............. 617 4,962 110 - 5,689 ======== ========= ======== ============= ========== Total assets..................... 236,873 282,980 137,795 10,136 667,784 ======== ========= ======== ============= ==========4.
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
8
5. COMPREHENSIVE INCOME AND CHANGES IN COMMON STOCK OUTSTANDING:
Comprehensive income for the three and six months ended
March 31,June 30, 2004 and 2003 was as follows (in thousands):
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 (2,695 ) 7,081 (2,419 ) 10,759
Total comprehensive income $ 9,460 $ 17,235 $ 25,893 $ 34,282
Shares of common stock outstanding – January 1, 2004 49,161,599 Shares issued upon exercise of stock options 237,067 Repurchase of shares which were cancelled (10,000 )(1)
Shares of common stock outstanding – June 30, 2004 49,388,666
THREE MONTHS ENDED MARCH 31, ----------------------- 2004 2003 ----------- ---------Comprehensive income: Net income................... $ 16,157 $ 13,369 Cumulative translation 276 3,678 ----------- --------- adjustment...................... Total comprehensive income... $ 16,433 $ 17,047 =========== =========
(1) Shares were purchased from an officer of commonthe Company pursuant to a provision in our 2001 Equity Participation Plan allowing the recipient of a restricted stockoutstanding - January 1, 2004.... 49,161,599 Shares issued upon exercise of stock options......... 53,780 Repurchaseaward to return the number of shareswhich were cancelled............ (10,000) ---------- Shareshaving the fair value equal to tax withholding due. The purpose ofcommonthe repurchase was solely to assist the officer in the satisfaction of tax liabilities he incurred in connection with the vesting of shares of restricted stockoutstanding - March 31, 2004..... 49,205,379 ==========in February 2004.85.6. STOCK-BASED COMPENSATION
In December 2002, the FASB issued SFAS No. 148,
"Accounting“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“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 theCompany'sCompany’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 life ranging from six to ten years. Because the exercise price of options granted under the Stock Option Plan have been equal to or greater than the market price of theCompany'sCompany’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, theCompany'sCompany’s net income and earnings per shareat March 31,for the three and six months ended June 30, 2004 and 2003, would have been as follows (in thousands, except per share amounts):
THREE MONTHS ENDED MARCH 31, ------------------------ 2004 2003Net income as reported............................. $16,157 $ 13,369 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects ..................................... (788) (499) ------- --------- Pro forma net income............................... $15,369 $ 12,870 ======= ========= Net income per share as reported: Basic............................................ $ 0.33 $ 0.28 Diluted.......................................... 0.32 0.27 Pro forma net income per share as if fair value method had been applied to all awards: Basic............................................ $ 0.31 $ 0.27 Diluted.......................................... 0.31 0.266
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, 2004 2003 2004 2003 Net income as reported $ 12,155 $ 10,154 $ 28,312 $ 23,523 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (615 ) (949 ) (1,408 ) (1,715 )
Pro forma net income $ 11,540 $ 9,205 $ 26,904 $ 21,808
Net income per share as reported: Basic $ 0.25 $ 0.21 $ 0.58 $ 0.49 Diluted 0.24 0.21 0.57 0.48 Pro forma net income per share as if fair value method had been applied to all awards: Basic $ 0.23 $ 0.19 $ 0.55 $ 0.45 Diluted 0.23 0.19 0.54 0.44 9
7. INCOME TAXES
Our primary deferred tax asset, which totaled approximately $22.1 million at December 31, 2003,
isprimarily related to $63.2 million in federal net operating loss carryforwards, or NOLs, as of that date. A valuation allowance of approximately $12 million was provided against the deferred tax asset associated with our NOLs at December 31, 2003. The NOLs will expire in varying amounts during the years 2008 through 2020 if they are not first used to offset taxable income generated by the Company. TheCompany'sCompany’s ability to utilize a significant portion of the NOLs is currently limited under Section 382 of the Internal Revenue Code due to a change of control that occurred during 1995. A successive change in control was triggered in 2003 pursuant to Section 382; however it did not significantly change theCompany'sCompany’s NOL utilization expectations.The
Company'sCompany’s income tax provision for the six months ended June 30, 2004 totaled $9.6 million, or 25.2% of pretax income. The Company’s income tax provision for the three months endedMarch 31,June 30, 2004 totaled$1.5$8.0 million, or8.6%39.8% of pretax income.Included in the first quarterThe six month June 30, 2004 income tax provisionisincluded a $5.4 million income tax benefit recorded in the first quarter related to the partial reversal of the$12 millionvaluation allowance applied against NOLs which were recorded as of the prior yearend, leaving a remaining valuation allowance of $6.6 million at March 31, 2004.end. Based uponthepositive earningsthatgenerated by the Companyhas generatedfor both financial and tax reporting purposes during the three-year period since its formation, the Companybelievesbelieved that itwillwould more likely than not generate sufficient taxable income in future years to realize the benefit of all but $6.6 million of the deferred tax asset associated with these net operating losses. Following the recognition of the $5.4 million income tax benefit during the first quarter, the Company has recognized the associated income tax benefit, on a cumulative basis, of approximately $44.2 million of its $63.2 million of available federal net operating loss carryforwards.9We currently estimate that our effective tax rate for the full year 2004 will approximate 30.0%. 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. Based upon the loss limitation provisions of Section 382, we should be able to utilize approximately $29 million of our NOLs to offset taxable income generated by the Company during the tax year ended December 31, 2004. 7.8. POSTRETIREMENT HEALTHCARE AND OTHER INSURANCE BENEFITS
The Company provides healthcare and other insurance benefits for approximately 360 eligible retired employees and dependent spouses. This plan is no longer available to current employees. The healthcare plans are contributory and contain other cost-sharing features such as deductibles, lifetime maximums, and co-payment requirements. The net periodic benefit cost, including the components therein, are not material.
8.9. COMMITMENTS AND CONTINGENCIES
We are a party to various pending or threatened claims, lawsuits and administrative proceedings seeking damages or other remedies concerning our commercial operations, products, employees and other matters, including occasional claims by individuals alleging exposure to hazardous materials as a result of our products or operations. Some of these claims relate to matters occurring prior to our acquisition of businesses, and some relate to businesses we have sold. In certain cases, we are entitled to indemnification from the sellers of businesses and in other cases, we have indemnified the buyers of businesses from us. Although we can give no assurance about the outcome of pending legal and administrative proceedings and the effect such outcomes may have on us, we believe that any ultimate liability resulting from the outcome of such proceedings, to the extent not otherwise provided for or covered by insurance, will not have a material adverse effect on our consolidated financial position, results of operations or liquidity.
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This quarterly report onForm 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“Item 1.Business"Business” including the risk factors discussed therein and the financial statement line item discussions set forth in"Item“Item 7.Management'sManagement’s Discussion and Analysis of Financial Condition and Results ofOperations"Operations” included in ourForm 10-K Annual Report for the year ended December 31, 2003 filed with the Securities and Exchange Commission on March 5, 2004 and Item 2., which follows.ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSManagement’s Discussion and Analysis of Financial Condition and Results of OperationsYou 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“Cautionary Statement Regarding Forward-LookingStatements"Statements” in our Annual Report on Form 10-K for the year ended December 31, 2003 filed with the Securities and Exchange Commission on March 5, 2004. 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 POLICIESCritical 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, 2003.
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.
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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 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. See also
"Note 6 -“Note 7 – IncomeTaxes"Taxes” and"Tax Matters"“Tax Matters” herein.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.
OVERVIEWOverview
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'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, which is driven largely by ourcustomers'customers’ outlook for longer-term future oil prices. 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 a broad range of casing and tubing. Sales of tubular products and services depend upon the overall level of drilling activity and the types of wells being drilled.Both well site and tubular services' activity is correlated to land and offshore drilling activity.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, 2003 2002 2001 2000 1999 Land 924 718 1,003 778 518 Offshore 108 113 153 140 106
Total U.S 1,032 831 1,156 918 624
Canada (1) 372 266 341 345 245
North America 1,404 1,097 1,497 1,263 869
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Average Rig Count for the Average Rig Count for the Three Months Ended June 30, Six Months Ended June 30, 2004 2003 2004 2003 Land 1,069 919 1,045 856 Offshore 95 109 96 109
Total U.S. 1,164 1,028 1,141 965
Canada (1) 201 203 365 348
North America 1,365 1,231 1,506 1,313
AVERAGE RIG COUNT FOR THE YEAR ENDED DECEMBER 31, --------------------------------------------- 2003 2002 2001 2000 1999 ------ ------ ----- ----- -----Land..................... 924 718 1,003 778 518 Offshore................. 108 113 153 140 106 ------ ------ ----- ----- ----- Total U.S................ 1,032 831 1,156 918 624 ------ ------ ----- ----- ----- Canada(1) ............... 372 266 341 345 245 ------ ------ ----- ----- ----- North America....... 1,404 1,097 1,497 1,263 869 ====== ====== ===== ===== =====12
AVERAGE RIG COUNT FOR THE THREE MONTHS ENDED MARCH 31, ---------------------------- 2004 2003 ------ ------Land........................................... 1,021 793 Offshore....................................... 98 108 ------ ------ Total U.S...................................... 1,119 901 ------ ------ Canada (1)..................................... 528 494 ------ ------ North America............................. 1,647 1,395 ====== ======- -------------- (1)Canadian rig counts typically increase during the peak winter drilling season. The average North American rig count in the quarter ended
March 31,June 30, 2004 increased252134 rigs, or18.1%10.9%, compared to the quarter endedMarch 31,June 30, 2003. This overall increase in activity, while tempered somewhat by seasonal declines in Canada and continued low activity levels in the U.S. Gulf of Mexico, did contribute to increased revenues in our well siteand tubularservices segments. Our well site services results for thefirstsecond quarter of 2004 also benefited from acquisitions made in our rental tool business in thelast six months,fourth quarter of 2003 and in January and April of 2004 (see “Liquidity and Capital Resources” on page 17), contributions from two newly built rigs working in West Texas, which started in December 2003 and February 2004, and higher year over year contributions from an international catering and facility management contract. Offshore products results weakened compared torecent quartersthe same quarter last year primarily due to decreased activity and revenues during the quarter, which also led to reduced cost absorption in several of thecompaniescompany’s manufacturing facilities. Additionally, offshore products margins were lower in the current period compared to last year due to lower activity levels and a less favorable mix of higher margin connector and other highly engineered products. However, offshoreproducts'products’ results improved sequentially and the outlook also improved during the quarter as our backlog grew to $98.7 million at June 30, 2004 compared to $76.9 million at March 31, 2004,compared toa 28% increase. Backlog totaled $62.6 million at December 31, 2003a 23% increase.and $80.2 million at June 30, 2003. We believe that the offshore construction and development business is characterized by lengthy projects and a long"lead-time"“lead-time” order cycle. While change in backlog levels from one quarter to the next does not necessarily evidence a long-term trend, we believe activity levels in our offshore products segment will increase in future quarters, given the growth in our backlog, when compared to the firstquarterhalf of 2004.On May 11, 2004, our OCTG subsidiary purchased the OCTG distribution business of Hunting Energy Services, L.P. (Hunting) for $46.4 million. Under the terms of the transaction, we purchased Hunting’s U.S. tubular inventory, assumed certain customer contracts and entered into supply and distribution relationships with Hunting. Substantially all of the purchase price was assigned to OCTG inventory acquired.
Our tubular services
groupsegment shipped67,300151,900 tons of OCTG in the first half of 2004 (84,600 tons in the second quarter of 2004) compared to 117,500 tons in the firstquarterhalf of2004 compared to 81,7002003 (60,900 tons in thefourthsecond quarter of2003 and 56,600 tons in the first quarter of 2003. Tubular2003). Our tubular services segment benefited from a30%22% year over year increase in average U.S. land drilling activity, the acquisition of the Hunting OCTG distribution business and a significant increase in OCTG prices during thequarter,quarter. These benefits were partially offset by reduced offshore activity in the U.S. Gulf of Mexico.Certain large fourth quarter 2003 tubular shipments did not reoccur in the first quarter of 2004 and resulted in lower comparative tons shipped in the current quarter.During the first
quarterhalf of 2004, the results generated by our Canadianremoteworkforce accommodations, catering andcateringlogistics operations benefited from strengthening of the Canadian currency. The Canadian dollar vs. U.S. dollar conversion rate averaged$0.76$0.75 in the firstquarterhalf of 2004 compared to$0.66$0.69 in the firstquarterhalf of 2003.The
Company'sCompany’s income tax provision for thethreesix months endedMarch 31,June 30, 2004 totaled$1.5$9.6 million, or8.6%25.2% of pretax income. For the second quarter of 2004, the Company’s income tax provision totaled $8.0 million, or 39.8% of pretax income. During the first quarter of 2004, the Company recognized a $5.4 million income tax benefit related to the reduction during the first quarter of a portion of the valuation allowance that has been applied against theCompany'sCompany’s net operating loss carryforwards. See"Tax Matters"“Tax Matters” discussion following.Management believes that fundamental oil and gas supply and demand factors will continue to support increased drilling activity in North America over time which should positively impact the Company, particularly its well site services and tubular services businesses. If oil and gas producers increase their view of longer term oil and gas prices based on current supply and demand fundamentals, we could expect increased expenditures for offshore exploration and development that could benefit our offshore products segment. However, there can be no assurance that these expectations will be realized.
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RESULTS OF OPERATIONS (IN MILLIONS, EXCEPT MARGIN PERCENTAGES)
THREE MONTHS ENDED MARCH 31, ----------------------- 2004 2003 --------- --------Revenues Well Site Services......................... $ 96.1 $ 78.8 Offshore Products.......................... 41.9 57.6 Tubular Services........................... 66.2 49.2 --------- -------- Total................................. $ 204.2 $ 185.6 ========= ======== Gross Margin Well Site Services......................... $ 29.8 $ 25.2 Offshore Products.......................... 7.2 12.5 Tubular Services........................... 5.9 2.9 --------- -------- Total................................. $ 42.9 $ 40.6 ========= ======== Gross Margin as a Percent of Revenues Well Site Services......................... 31.0% 32.0% Offshore Products.......................... 17.2% 21.7% Tubular Services........................... 8.9% 5.9% Total................................. 21.0% 21.9% Operating Income (Loss) Well Site Services......................... $ 17.5 $ 15.1 Offshore Products.......................... (0.8) 5.6 Tubular Services........................... 3.8 0.9 Corporate/Other............................ (1.4) (1.3) --------- -------- Total................................. $ 19.1 $ 20.3 ========= ========Results of Operations (in millions, except margin percentages)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, 2004 2003 2004 2003 Revenues Well Site Services $ 72.9 $ 52.9 $ 169.0 $ 131.7 Offshore Products 48.9 57.2 90.8 114.7 Tubular Services 100.4 53.5 166.6 102.7
Total $ 222.2 $ 163.6 $ 426.4 $ 349.1
Gross Margin Well Site Services $ 23.2 $ 17.9 $ 53.0 $ 43.2 Offshore Products 9.9 15.2 17.1 27.6 Tubular Services 13.1 3.1 19.0 6.0
Total $ 46.2 $ 36.2 $ 89.1 $ 76.8
Gross Margin as a Percent of Revenues Well Site Services 31.8 % 33.8 % 31.4 % 32.8 % Offshore Products 20.2 % 26.6 % 18.8 % 24.1 % Tubular Services 13.0 % 5.8 % 11.4 % 5.8 % Total 20.8 % 22.1 % 20.9 % 22.0 % Operating Income (Loss) Well Site Services $ 10.2 $ 7.0 $ 27.7 $ 22.1 Offshore Products 2.8 8.5 2.0 14.1 Tubular Services 10.6 1.2 14.3 2.2 Corporate/Other (1.9 ) (1.5 ) (3.3 ) (2.8 )
Total $ 21.6 $ 15.2 $ 40.7 $ 35.6
THREE MONTHS ENDED
MARCH 31,JUNE 30, 2004 COMPARED TO THREE MONTHS ENDEDMARCH 31,JUNE 30, 2003REVENUES.Revenues. Revenues increased
$18.6$58.6 million, or10.0%35.8%, to$204.2$222.2 million during the current quarter compared to revenues of$185.6$163.6 million during the quarter endedMarch 31,June 30, 2003. Tubular services revenues and tons shipped increased$17.0$46.9 million, or34.6%87.7%, and10,70023.7 tons, or18.9%38.9%, respectively, in the three months endedMarch 31,June 30, 2004 compared to revenues and tons shipped in the three months endedMarch 31,June 30, 2003 due to increased industry demand,andhigher OCTGprices.prices and contributions from the acquisition of the Hunting OCTG distribution business in May 2004. Well site services revenues increased$17.3$20.0 million, or22.0%37.8%,andwhile offshore products revenues decreased$15.7$8.3 million, or27.3%14.5%, during the same period. Well site services revenues increased compared to the prior year due primarily to increased drilling activity inCanada andthe United States, increased oil sands development in Canada, an international catering and facilities management contract, favorable Canadian dollar exchange rates, the impact of capital expenditures made since thefirstsecond quarter of 2003 and acquisitions, totaling$51.5$56.2 million, completed in thelast six months.fourth quarter of 2003 and in January and April of 2004. Offshore products revenues decreased as a result of lower activity supporting offshore production facility construction.GROSS MARGIN.Gross Margin. Our gross margins, which we calculate before a deduction for depreciation expense, increased
$2.3$10.0 million, or5.7%27.6%, from$40.6$36.2 million in the quarter endedMarch 31,June 30, 2003 to$42.9$46.2 million in the quarter endedMarch 31,June 30, 2004. Our overall gross margin as a percent of revenues decreased from21.9%22.1% in thefirstsecond quarter of 2003 to21.0%20.8% in the current quarter primarily because of a greater proportion of relatively low margin tubular services gross margins and lower offshore products grossmargins, offset by improvements in tubular services.margins. Well site services gross margins increased$4.6$5.3 million, or18.3%29.6%, to$29.8$23.2 million in the quarter endedMarch 31,June 30, 2004 compared to the quarter endedMarch 31,June 30, 2003. Within our well site services segment, shallow drilling and specialty rental toolbusinesses'businesses’ gross margins increased$1.5$0.5 million, or88.2%17.8%, and$1.5$2.3 million, or28.3%45.8%, respectively, during the quarter endedMarch 31,June 30, 2004 compared to the quarter endedMarch 31,June 30, 2003 as a result ofhigher utilizationthe addition ofourtwo drilling rigs in our shallow drilling business and14
contributions from rental tool acquisitions completed in the
last six months.fourth quarter of 2003 and in January and April 2004. Also in well site services, our work force accommodations, catering and logistics services and modular building construction services gross margins increased by$3.2$1.7 million, or21.3%21.7%, in the three months endedMarch 31,June 30, 2004 compared to the three months endedMarch 31,June 30, 2003 primarily because of increased camp and catering activity supporting oil sands development in Canadapartially offset by lower U.S. Gulf of Mexico accommodationsand an international cateringactivity.and facilities management contract. Our hydraulic workover gross marginsdecreasedincreased by$1.6$0.8 million, or50.0%34.5%, as a result of14decreasedincreased utilization, especially in the U.S. Gulf of Mexicothe Middle Eastand Venezuela. Our well site services gross margin percent decreased to31.0%31.8% in the current quarter compared to32.0%33.8% in thefirstsecond quarter of last year as a result of lower gross margins in our rental tool andhydraulic workoverremote accommodation businesseswhich were partially offsetcaused by product mix and decreased rental rates for some tools and equipment in our rental tool business and a greater amount of lower margin catering work in Canada compared to higherland drilling grossmarginpercentage.accommodation rentals.Offshore products gross margins decreased $5.3 million, or
42.4%34.9%, from$12.5$15.2 million in the three months endedMarch 31,June 30, 2003 to$7.2$9.9 million in the three months endedMarch 31,June 30, 2004 due to decreased activity and reduced fixed cost absorption. Additionally, offshore products margins were lower in the current period compared to last year due to lower activity levels and a less favorable mix of higher margin connector and other highly engineered products. These same factors were the primary reason that offshore products gross margin percent declined from21.7%26.6% of revenues in thefirstsecond quarter of 2003 to17.2%20.2% in thefirstsecond quarter of 2004.Tubular services gross margins increased to
$5.9$13.1 million, or8.9%13.0% of tubular services revenues, in the three months endedMarch 31,June 30, 2004 compared to$2.9$3.1 million, or5.9%5.8% of tubular services revenues, in the three months endedMarch 31,June 30, 2003 as a result of increased oil and gas drilling activity which increased demand for our tubular products and services,anda significant increase in OCTG prices during thequarter. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.quarter and the acquisition of the OCTG distribution business of Hunting for $46.4 million in May 2004.Selling, General and Administrative Expenses. During the three months ended
March 31,June 30, 2004, selling, general and administrative expenses (SG&A) totaled$14.7$15.9 million, or7.2%7.1% of revenues, compared to SG&A of$13.8$14.0 million, or7.4%8.5% of revenues, for the three months endedMarch 31,June 30, 2003. Increased SG&A expense associated with acquisitions completed since thefirst quarter of 2003, a non-recurring credit recorded to rent expense in the firstsecond quarter of 2003 and higherprofessional fees whichpostretirement benefit costs in the current year wereonlypartially offset by lower commissions expenseand postretirement benefit costsin 2004.DEPRECIATION AND AMORTIZATION.Depreciation and Amortization. Depreciation and amortization expense increased
$2.1$1.8 million in thefirstsecond quarter 2004 compared to thefirstsecond quarter 2003 due primarily to acquisitions of businesses completed in thelast six monthsfourth quarter of 2003 and in January and April of 2004 and capital expenditures made in the past year.OPERATING INCOME.Operating Income. Our operating income represents revenues less (i) cost of sales, (ii) selling, general and administrative expenses, (iii) depreciation and amortization expense, and (iv) other operating
expense.expense (income). Our operating incomedecreased $1.2increased $6.4 million, or5.9%42.1%, to$19.1 million for the three months ended March 31, 2004 from $20.3$21.6 million for the quarter endedMarch 31,June 30, 2004 from $15.2 million for the quarter ended June 30, 2003. Well site services operating income increased$2.4$3.2 million during the period. Offshore products operating income decreased$6.4$5.7 million while tubular services operating income increased$2.9$9.3 million.INTEREST EXPENSE.Interest Expense. Interest expense was
at approximately the same level forhigher by $0.1 million in the quarter endedMarch 31,June 30, 2004 compared to the quarter endedMarch 31,June 30, 2003. Increased interest expense attributable to higher debt levels resulting from acquisitions completed during thequarterfirst half of 2004 were partially offset by lower debt issuance cost amortization compared to the prior period.INCOME TAX EXPENSE.Income Tax Expense. Income tax expense totaled
$1.5$8.0 million, or8.6%39.8% of pretax income, during the quarter endedMarch 31,June 30, 2004 compared to$5.5$3.7 million, or29.0%26.4% of pretax income, during the quarter endedMarch 31,June 30, 2003. See"Tax Matters"“Tax Matters” discussion following.LIQUIDITY AND CAPITAL RESOURCES15
SIX MONTHS ENDED JUNE 30, 2004 COMPARED TO SIX MONTHS ENDED JUNE 30, 2003
Revenues. Revenues increased $77.3 million, or 22.1%, to $426.4 million during the first half of 2004 compared to revenues of $349.1 million during the six months ended June 30, 2003. Tubular services revenues and tons shipped increased $63.9 million, or 62.2%, and 34,600 tons, or 29.3%, respectively, in the six months ended June 30, 2004 compared to revenues and tons shipped in the six months ended June 30, 2003 due to increased industry demand, higher OCTG prices, and contributions from the acquisition of the Hunting OCTG distribution business in May 2004. Well site services revenues increased $37.3 million, or 28.3%, while offshore products revenues decreased $23.9 million, or 20.8%, during the same period. Well site services revenues increased compared to the prior year due primarily to increased drilling activity in the United States, increased oil sands development in Canada, an international catering and facilities management contract, favorable Canadian dollar exchange rates, the impact of capital expenditures made since the first half of 2003 and acquisitions, totaling $56.2 million, completed in the fourth quarter of 2003 and in January and April of 2004. Offshore products revenues decreased as a result of lower activity supporting offshore production facility construction.
Gross Margin. Our gross margins, which we calculate before a deduction for depreciation expense, increased $12.3 million, or 16.0%, from $76.8 million in the six months ended June 30, 2003 to $89.1 million in the six months ended June 30, 2004. Our overall gross margin as a percent of revenues decreased from 22.0% in the first half of 2003 to 20.9% in the first half of 2004 primarily because of a greater proportion of relatively low tubular services gross margins and lower offshore products gross margins. Well site services gross margins increased $9.8 million, or 22.7%, to $53.0 million in the six months ended June 30, 2004 compared to the six months ended June 30, 2003. Within our well site services segment, our shallow drilling and specialty rental tool businesses’ gross margins increased $1.9 million, or 42.7%, and $3.9 million, or 37.4%, respectively, during the six months ended June 30, 2004 compared to the first half of 2003 as a result of the addition of two drilling rigs in our shallow drilling business, higher utilization for all of our drilling rigs and contributions from rental tool acquisitions completed in the fourth quarter of 2003 and in January and April 2004. Also in well site services, our work force accommodations, catering and logistics services and modular building construction services gross margins increased by $4.9 million, or 21.4%, in the six months ended June 30, 2004 compared to the six months ended June 30, 2003 primarily because of increased camp and catering activity supporting oil sands development in Canada and an international catering and facilities management contract. Our hydraulic workover gross margins decreased by $0.8 million, or 15.3%, as a result of decreased utilization, especially in West Africa and the Middle East. Our well site services gross margin percent decreased to 31.4% in the six months ended June 30, 2004 compared to 32.8% in the six months ended June 30, 2003 as a result of lower gross margins in our rental tool and hydraulic workover businesses caused by product mix and decreased rental rates for some tools and equipment in our rental tool business and lower utilization of our hydraulic workover units.
Offshore products gross margins decreased $10.5 million, or 38.0%, from $27.6 million in the six months ended June 30, 2003 to $17.1 million in the six months ended June 30, 2004 due to decreased activity and reduced fixed cost absorption. Additionally, offshore products margins were lower in the current period compared to last year due to lower activity levels and a less favorable mix of higher margin connector and other highly engineered products. These same factors were the primary reason that offshore products gross margin percent declined from 24.1% of revenues in the first half of 2003 to 18.8% in the first half of 2004.
Tubular services gross margins increased to $19.0 million, or 11.4% of tubular services revenues, in the six months ended June 30, 2004 compared to $6.0 million, or 5.8% of tubular services revenues, in the six months ended June 30, 2003 as a result of increased oil and gas drilling activity which increased demand for our tubular products and services, a significant increase in OCTG prices during the quarter and the acquisition of the OCTG distribution business of Hunting for $46.4 million in May 2004.
Selling, General and Administrative Expenses. During the six months ended June 30, 2004, selling, general and administrative expenses (SG&A) totaled $30.6 million, or 7.2% of revenues, compared to SG&A of $27.7 million, or 7.9% of revenues, for the six months ended June 30, 2003. Increased SG&A expense associated with acquisitions completed since the first half of 2003 and higher postretirement benefit costs in the current year were partially offset by lower commissions expense in 2004.
Depreciation and Amortization. Depreciation and amortization expense increased $3.9 million in the first half of 2004 compared to the first half of 2003 due primarily to acquisitions of businesses completed since the first half of 2003 and capital expenditures made in the past year.
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Operating Income. Our operating income represents revenues less (i) cost of sales, (ii) selling, general and administrative expenses, (iii) depreciation and amortization expense, and (iv) other operating expense (income). Our operating income increased $5.1 million, or 14.3%, to $40.7 million for the six months ended June 30, 2004 from $35.6 million for the six months ended June 30, 2003. Well site services operating income increased $5.6 million during the period. Offshore products operating income decreased $12.1 million while tubular services operating income increased $12.1 million.
Interest Expense. Interest expense was higher by $0.1 million in the six months ended June 30, 2004 compared to the six months ended June 30, 2003. Increased interest expense attributable to higher debt levels resulting from acquisitions completed during the first half of 2004 were only partially offset by lower debt issuance cost amortization compared to the prior period.
Income Tax Expense. Income tax expense totaled $9.6 million, or 25.2% of pretax income, during the six months ended June 30, 2004 compared to $9.1 million, or 27.9% of pretax income, during the six months ended June 30, 2003. See “Tax Matters” discussion following.
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.
15Cash was provided by operations during the
threesix months endedMarch 31,June 30, 2004 and 2003 in the amounts of$5.1$58.4 million and$1.3$21.0 million, respectively. Cash provided by operations in 2004 was generated by our net income plus depreciation and amortizationwhich was partially offset by higherand positive working capitalinvested in our Canadian remote accommodations and catering operations.changes during 2004.Cash was used in investing activities during the
threesix months endedMarch 31,June 30, 2004 and 2003 in the amount of$41.6$98.8 million and$5.7$15.3 million, respectively. Capital expenditures totaled$8.9$20.8 million and$5.7$15.4 million during thethreesix months endedMarch 31,June 30, 2004 and 2003, respectively. Capital expenditures in both years consisted principally of purchases of assets for our well site services businesses and for expansion of our offshore products manufacturing capacity. Acquisitions totaled$32.9$79.4 million during thethreesix months endedMarch 31,June 30, 2004. During the firstquarterhalf of 2004, the Company completed the acquisition of severalrelatedrental tool companies, requiring a net cash payment of$32.9$37.6 million. These companies have been merged into our rental tool subsidiary, and will report through the well site services segment. In addition, we acquired the OCTG distribution business of Hunting which required a cash outlay of $41.7 million in May 2004. We currently expect capital expenditures tospend atotalofapproximately$35.0$55 million to $60 million during 2004 for maintenance and upgrade of our equipment and facilities and also to 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
$38.1$44.2 million was provided by financing activities during thethreesix months endedMarch 31,June 30, 2004, primarily as a result of revolving credit borrowings which were utilized for acquisitions.Our primary bank credit facility (the Credit Agreement)
providesprovided for $225 million of revolvingcredit. We havecredit until May 2004 when we exercised an option to increase the maximum borrowings under the Credit Agreement to $250million prior to its maturitymillion. This credit facility matures on October 30, 2007. The Credit Agreement contains customary financial covenants and restrictions, including restrictions on our ability to declare and pay dividends. Borrowings under the Credit Agreement are secured by a pledge of substantially all of our assets and the assets of our subsidiaries, and our obligations under the Credit Agreement are guaranteed by our significant subsidiaries. Borrowings under the Credit Agreement accrue interest at a rate equal to either LIBOR or another benchmark interest rate (at our election) plus an applicable margin based on our leverage ratio (as defined in the Credit Agreement). We must pay a quarterly commitment fee, based onthe Company'sour leverage ratio, on the unused commitments under the Credit Agreement.17
As of
March 31,June 30, 2004, we had$167.0$171.0 million outstanding under the Credit Agreement and an additional$11.4$11.1 million of outstanding letters of credit, leaving$46.6$67.9 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 provide for an additional aggregate borrowing capacity of $14.1 million. We had no borrowings outstanding under these facilities as ofMarch 31,June 30, 2004. Our total debt represented27.1%27.5% of our total capitalization atMarch 31,June 30, 2004. A total of $4.7 million of the consideration for the Hunting OCTG business acquisition is payable to the seller in the third quarter of 2004. This payment to Hunting, which is subject to adjustment in certain circumstances, is expected to be paid from operating cash flow or by utilizing our bank credit facility.We believe that cash from operations and available borrowings under our credit facilities will be sufficient to meet our liquidity needs for the foreseeable future.
The Company is currently negotiating a small strategic business acquisition that is probable of closing in the near term. Our borrowing capacity under the Credit Agreement, upon electing our option to increase the maximum borrowings to $250 million as discussed above, will be sufficient to fund the acquisition if it were to occur.If our plans or assumptions change or are inaccurate, or we make further 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 MATTERSTax Matters
Our primary deferred tax asset, which totaled approximately $22.1 million at December 31, 2003, is primarily related to $63.2 million in federal net operating loss carryforwards, or NOLs, as of that date. A valuation allowance of approximately $12 million was provided against the deferred tax asset associated with our NOLs at December 31, 2003. The NOLs will expire in varying amounts during the years 2008 through 2020 if they are not first used to offset taxable income
generated by the Company. The Company'sthat we generate. Our ability to utilize a significant portion of the NOLs is currently limited under Section 382 of the Internal Revenue Code due to a change of control that occurred during 1995. A successive change in control was triggered in 2003 pursuant to Section 382; however, it did not significantly changethe Company'sour NOL utilization expectations.16The Company'sOur income tax provision for the six months ended June 30, 2004 totaled $9.6 million, or 25.2% of pretax income. Our income tax provision for the three months ended
March 31,June 30, 2004 totaled$1.5$8.0 million, or8.61%39.8% of pretax income.Included in the first quarterThe six month June 30, 2004 income tax provisionisincluded a $5.4 million income tax benefit recorded in the first quarter related to the partial reversal of the$12 millionvaluation allowance applied against NOLsthereby leaving a remaining valuation allowancewhich were recorded as of$6.6 million at March 31, 2004.the prior year end. Based uponthepositive earnings thatthe Company haswe have generated for both financial and tax reporting purposes during the three-year period sinceitsour formation,the Company believeswe believed thatit willwe would more likely than not generate sufficient taxable income in future years to realize the benefit of all but $6.6 million of the deferred tax asset associated with these net operating losses. Following the recognition of the $5.4 million income tax benefit during the first quarter,the Company haswe have recognized the associated income tax benefit, on a cumulative basis, of approximately $44.2 million ofitsour $63.2 million of available federal net operating loss carryforwards.We currently estimate that our effective tax rate for the full year 2004 will approximate
30.0%32.3%. 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. Based upon the loss limitation provisions of Section 382, we should be able to utilize approximately $29 million of our NOLs to offset taxable incomegenerated by the Companythat we generate during the tax year ended December 31, 2004.RECENT ACCOUNTING PRONOUNCEMENTSRecent Accounting Pronouncements
In January 2003, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 46 (FIN 46),
"Consolidation“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“variable interestentities"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 thatentity'sentity’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 affectthe Company.us.18
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKQuantitative And Qualitative Disclosures About Market RiskInterest 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
March 31,June 30, 2004, we had floating rate obligations totaling approximately$167.0$171.0 million for amounts borrowed under our revolving credit facilities. These floating-rate obligations expose us to the risk of increased interest expense in the event of increases in short-term interest rates. If the floating interest rate were to increase by 1% fromMarch 31,June 30, 2004 levels, our consolidated interest expense would increase by a total of approximately $1.7 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, or the functional currency of our subsidiaries, which is not necessarily the U.S. dollar. 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. During the first
quarterhalf of 2004, we realized foreign exchange losses of$0.5$0.4 million primarily as a result of the strengthening of the UK pound versus the U.S. dollar. Our UK subsidiary had unhedged U.S. dollar denominated receivables and U.S. dollar cash balances that resulted in the majority of our foreign exchange losses during thequarter. 17first half of 2004. ITEM 4.
CONTROLS AND PROCEDURESControls and ProceduresAs 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 were effective as of
March 31,June 30, 2004 in ensuring that material information was 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. During the three months endedMarch 31,June 30, 2004, there were 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.1819
PART II
--— OTHER INFORMATIONITEM 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,
ANDUSE OF PROCEEDS(e)AND ISSUER PURCHASES OF EQUITY SECURITIESThe following table set forth certain information with respect to repurchases of our equity securities during the three months ended March 31, 2004:
- ------------------------------------------------------------------------------------------------------------------ (a) TOTAL (c) TOTAL NUMBER OF SHARES (d) MAXIMUM NUMBER (OR NUMBER OF (b) AVERAGE PURCHASED AS PART OF APPROXIMATE DOLLAR VALUE) OF SHARES PRICE PAID PUBLICLY ANNOUNCED PLANS SHARES THAT MAY YET BE PURCHASED PERIOD PURCHASED PER SHARE OR PROGRAMS UNDER THE PLANS OR PROGRAMS - ------------------------------------------------------------------------------------------------------------------Month #1 (January 1 to -- -- -- -- January 31, 2004) - ------------------------------------------------------------------------------------------------------------------ Month #2 (February 1 to 10,000* $13.90 -- -- February 29, 2004) - ------------------------------------------------------------------------------------------------------------------ Month #3 (March 1 to -- -- -- -- March 31, 2004) - ------------------------------------------------------------------------------------------------------------------ Total 10,000 $13.90 -- -- - ------------------------------------------------------------------------------------------------------------------- ---------- * We repurchased all of such shares from Mr. Douglas E. Swanson, our Chief Executive Officer, pursuant to a provision in our 2001 Equity Participation Plan allowing the recipient of a restricted stock award to return the number of shares having the fair value equal to tax withholding due. The purpose of the repurchase was solely to assist Mr. Swanson in the satisfaction of tax liabilities he incurred in connection with the vesting of shares of restricted stock in February 2004.None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NoneThe Company’s Annual Meeting of Stockholders was held on May 18, 2004 (1) to elect three Class III members of the Board of Directors to serve for three-year terms and (2) to ratify the appointment of Ernst & Young LLP as independent accountants for the year ended December 31, 2004.
The three Class III directors who were so elected were Martin Lambert, Mark G. Papa and Stephen A. Wells. The number of affirmative votes and the number of votes withheld for the directors so elected were:
Names Number of Affirmative Votes Number Withheld Martin Lambert 46,438,815 124,565 Mark G. Papa 46,480,529 82,854 Stephen A. Wells 46,379,032 184,351 Following the annual meeting L.E. Simmons, Douglas E. Swanson, Gary L. Rosenthal and Andrew L. Waite continued in their terms as directors.
The number of affirmative votes, the number of negative votes and the number of abstentions with respect to the ratification of the appointment of Ernst & Young LLP were as follows:
Number of Affirmative Votes Number of Negative Votes Abstentions 46,329,953 228,716 4,714 ITEM 5. OTHER INFORMATION
None
20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) INDEX OF EXHIBITS Exhibit No. Description 3.1 - Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Company's Annual Report on Form 10-K for the year ended December 31, 2000, as filed with the Commission on March 30, 2001). 3.2 - Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 to the Company's Annual Report on Form 10-K for the year ended December 31, 2000, as filed with the Commission on March 30, 2001). 3.3 - Certificate of Designations of Special Preferred Voting Stock of Oil States International, Inc. (incorporated by reference to Exhibit 3.3 to the Company's Annual Report on Form 10-K for the year ended December 31, 2000, as filed with the Commission on March 30, 2001). 4.1 - Form of common stock certificate (incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-1 (File No. 333-43400)). 4.2 - Amended and Restated Registration Rights Agreement (incorporated by reference to Exhibit 4.2 to the Company's Annual Report on Form 10-K for the year ended December 31, 2000, as filed with the Commission on March 30, 2001). 194.3 - 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** - Deferred Compensation Plan effective November 1, 2003. (incorporated by reference to Exhibit 10.6 to the Company's Annual Report on Form 10-K for the year ended December 31, 2003, as filed with the Commission on March 5, 2004). 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). 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 Agreement between Oil States International, Inc. and Named Executive Officer (Mr. Hughes) (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 (incorporated by reference to Exhibit 10.12 to the Company's Quarterly Report on Form 10Q for the three months ended September 30, 2003, as filed with the Commission on November 11, 2003.) 2010.13A** - 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** -
(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** — Deferred Compensation Plan effective November 1, 2003. (incorporated by reference to Exhibit 10.6 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2003, as filed with the Commission on March 5, 2004). 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 21
Exhibit No. Description 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). 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 Agreement between Oil States International, Inc. and Named Executive Officer (Mr. Hughes) (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 (incorporated by reference to Exhibit 10.12 to the Company’s Quarterly Report on Form 10Q for the three months ended September 30, 2003, as filed with the Commission on November 11, 2003.) 10.12A* — Incremental Assumption Agreement, dated as of May 10, 2004, among Oil States International, Inc., Wells Fargo, National Association and each of the other lenders listed as an Increasing Lender. 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, 2002). 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 Rules 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934. 31.2* — Certification of Chief Financial Officer of Oil States International, Inc. pursuant to Rules 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934. 32.1*** — Certification of Chief Executive Officer of Oil States International, Inc. pursuant to Rules 13a-14(b) or 15d-14(b) under the Securities Exchange Act of 1934. 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, 2002). 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 Rules 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934. 31.2* - Certification of Chief Financial Officer of Oil States International, Inc. pursuant to Rules 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934. 32.1*** - Certification of Chief Executive Officer of Oil States International, Inc. pursuant to Rules 13a-14(b) or 15d-14(b) under the Securities Exchange Act of 1934. 32.2*** - Certification of Chief Financial Officer of Oil States International, Inc. pursuant to Rules 13a-14(b) or 15d-14(b) under the Securities Exchange Act of 1934. - --------- * Filed herewith ** Management contracts or compensatory plans or arrangements *** Furnished herewith. (b) REPORTS ON FORM 8-K. (1) Form 8-K filed February 3, 2004 - Item 12. Results of Operations and Financial Condition (Quarter and Year ended December 31, 2003 Earnings Press Release) (2) Form 8-K filed April 29, 2004 - Item 12. Results of Operations and Financial Condition (Quarter ended March 31, 2004 Earnings Press Release) 21
Exhibit No. Description 32.2*** — Certification of Chief Financial Officer of Oil States International, Inc. pursuant to Rules 13a-14(b) or 15d-14(b) under the Securities Exchange Act of 1934.
* Filed herewith ** Management contracts or compensatory plans or arrangements *** Furnished herewith.
(b) REPORTS ON FORM 8-K.
(1) Form 8-K filed April 29, 2004 – Item 12. Results of Operations and Financial Condition (Quarter ended March 31, 2004 Earnings Press Release) 23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
OIL STATES INTERNATIONAL, INC. Date: May 7, 2004 By /s/ CINDY B. TAYLOR ------------------------------------- Cindy B. Taylor Senior Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer) Date: May 7, 2004 By /s/ ROBERT W. HAMPTON ------------------------------ Robert W. Hampton Vice President - Finance and Accounting and Secretary (Principal Accounting Officer) 22EXHIBIT
OIL STATES INTERNATIONAL, INC. Date: August 4, 2004 By /s/ CINDY B. TAYLOR Cindy B. Taylor Senior Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer) Date: August 4, 2004 By /s/ ROBERT W. HAMPTON Robert W. Hampton Vice President — Finance and Accounting and Secretary (Principal Accounting Officer) 24
INDEX
Exhibit No. Description 31.1* - Certification of Chief Executive Officer of Oil States International, Inc. pursuant to Rules 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934. 31.2* - Certification of Chief Financial Officer of Oil States International, Inc. pursuant to Rules 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934. 32.1*** - Certification of Chief Executive Officer of Oil States International, Inc. pursuant to Rules 13a-14(b) or 15d-14(b) under the Securities Exchange Act of 1934. 32.2*** - Certification of Chief Financial Officer of Oil States International, Inc. pursuant to Rules 13a-14(b) or 15d-14(b) under the Securities Exchange Act of 1934.TO 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** — Deferred Compensation Plan effective November 1, 2003. (incorporated by reference to Exhibit 10.6 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2003, as filed with the Commission on March 5, 2004). 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
Exhibit No. Description 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). 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 Agreement between Oil States International, Inc. and Named Executive Officer (Mr. Hughes) (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 (incorporated by reference to Exhibit 10.12 to the Company’s Quarterly Report on Form 10Q for the three months ended September 30, 2003, as filed with the Commission on November 11, 2003.) 10.12A* — Incremental Assumption Agreement, dated as of May 10, 2004, among Oil States International, Inc., Wells Fargo, National Association and each of the other lenders listed as an Increasing Lender. 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, 2002). 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 Rules 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934. 31.2* — Certification of Chief Financial Officer of Oil States International, Inc. pursuant to Rules 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934. 32.1*** — Certification of Chief Executive Officer of Oil States International, Inc. pursuant to Rules 13a-14(b) or 15d-14(b) under the Securities Exchange Act of 1934.
Exhibit No. Description 32.2*** — Certification of Chief Financial Officer of Oil States International, Inc. pursuant to Rules 13a-14(b) or 15d-14(b) under the Securities Exchange Act of 1934.
* Filed herewith ** Management contracts or compensatory plans or arrangements *** Furnished herewith.
(b) REPORTS ON FORM 8-K.
(1) Form 8-K filed April 29, 2004 – Item 12. Results of Operations and Financial Condition (Quarter ended March 31, 2004 Earnings Press Release)