Edgar Filing: OIL STATES INTERNATIONAL, INC

osii_10q-063012.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2012

[ ]	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________________________ to_________________________

Commission file number: 001-16337

OIL STATES INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

Delaware	76-0476605
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

Three Allen Center, 333 Clay Street, Suite 4620,	77002
Houston, Texas	(Zip Code)
(Address of principal executive offices)

(713) 652-0582

(Registrant’s telephone number, including area code)

None

(Former name, former address and former fiscal year,

if changed since last report)

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

YES [X] NO [ ]

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

YES [X] NO [ ]

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

	(Check one):
Large Accelerated Filer [X]		Accelerated Filer [ ]

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

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

YES [ ] NO [X ]

The Registrant had 54,741,285 shares of common stock, par value $0.01, outstanding and 3,565,490 shares of treasury stock as of August 2, 2012.

OIL STATES INTERNATIONAL, INC.

INDEX

		Page No.
	Part I -- FINANCIAL INFORMATION

Item 1.	Financial Statements:

	Condensed Consolidated Financial Statements
	Unaudited Condensed Consolidated Statements of Income for the Three and Six Month Periods Ended June 30, 2012 and 2011	3
	Unaudited Condensed Consolidated Statements of Comprehensive Income for the Three and Six Month Periods Ended June 30, 2012 and 2011	4
	Consolidated Balance Sheets – June 30, 2012 (unaudited) and December 31, 2011	5
	Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months EndedJune 30, 2012 and 2011	6
	Notes to Unaudited Condensed Consolidated Financial Statements	7 – 24

Cautionary Statement Regarding Forward-Looking Statements		25

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25 – 36

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	36 – 37

Item 4.	Controls and Procedures	37


	Part II -- OTHER INFORMATION

Item 1.	Legal Proceedings	37 – 38

Item 1A.	Risk Factors	38

Item 2.	Purchases of Equity Securities by the Issuer and Affiliated Purchasers	39

Item 6.	Exhibits	39

	(a) Index of Exhibits	39 – 40

Signature Page		41

PART I -- FINANCIAL INFORMATION

ITEM 1. Financial Statements

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In Thousands, Except Per Share Amounts)

	THREE MONTHS ENDED JUNE 30,						SIX MONTHS ENDED JUNE 30,
	2012			2011			2012			2011


Revenues	$	1,091,088		$	820,317		$	2,190,080		$	1,580,758

Costs and expenses:
Cost of sales and services		819,164			616,778			1,614,961			1,191,176
Selling, general and administrative expenses		48,853			42,765			96,592			86,472
Depreciation and amortization expense		54,218			45,238			104,884			90,390
Other operating (income) expense		(407	)		373			137			2,781
		921,828			705,154			1,816,574			1,370,819
Operating income		169,260			115,163			373,506			209,939

Interest expense, net of capitalized interest		(17,937	)		(12,532	)		(35,880	)		(22,781	)
Interest income		242			235			539			1,248
Equity in earnings of unconsolidated affiliates		220			2			640			53
Other income		4,308			488			6,044			631
Income before income taxes		156,093			103,356			344,849			189,090
Income tax expense		(44,617	)		(28,887	)		(97,901	)		(52,270	)
Net income		111,476			74,469			246,948			136,820
Less: Net income attributable to noncontrolling interest		242			226			650			500
Net income attributable to Oil States International, Inc.	$	111,234		$	74,243		$	246,298		$	136,320

Net income per share attributable to Oil States International, Inc. common stockholders
Basic	$	2.15		$	1.45		$	4.78		$	2.67
Diluted	$	2.01		$	1.34		$	4.45		$	2.48

Weighted average number of common shares outstanding:
Basic		51,637			51,231			51,533			51,083
Diluted		55,251			55,270			55,404			55,061

The accompanying notes are an integral part of

these financial statements.

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In Thousands)

	THREE MONTHS ENDED JUNE 30,						SIX MONTHS ENDED JUNE 30,
	2012			2011			2012			2011


Net income	$	111,476		$	74,469		$	246,948		$	136,820

Other comprehensive income (loss):
Foreign currency translation adjustment		(28,283	)		35,052			(3,037	)		65,715
Total other comprehensive income (loss)		(28,283	)		35,052			(3,037	)		65,715

Comprehensive income		83,193			109,521			243,911			202,535
Comprehensive income attributable to noncontrolling interest		(215	)		(239	)		(640	)		(538	)
Comprehensive income attributable to Oil States International, Inc.	$	82,978		$	109,282		$	243,271		$	201,997

The accompanying notes are an integral part of

these financial statements.

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In Thousands)

	JUNE 30, 2012			DECEMBER 31, 2011
	(UNAUDITED)

ASSETS

Current assets:
Cash and cash equivalents	$	114,391		$	71,721
Accounts receivable, net		831,424			732,240
Inventories, net		733,803			653,698
Prepaid expenses and other current assets		21,568			32,000
Total current assets		1,701,186			1,489,659

Property, plant, and equipment, net		1,657,189			1,557,088
Goodwill, net		467,099			467,450
Other intangible assets, net		121,014			127,602
Other noncurrent assets		63,201			61,842
Total assets	$	4,009,689		$	3,703,641

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:
Accounts payable	$	297,476		$	252,209
Accrued liabilities		88,265			96,748
Income taxes		25,617			10,395
Current portion of long-term debt and capitalized leases		32,262			34,435
Deferred revenue		71,779			75,497
Other current liabilities		4,322			5,665
Total current liabilities		519,721			474,949

Long-term debt and capitalized leases		1,130,592			1,142,505
Deferred income taxes		107,358			97,377
Other noncurrent liabilities		26,449			25,538
Total liabilities		1,784,120			1,740,369

Stockholders’ equity:
Oil States International, Inc. stockholders’ equity:
Common stock, $.01 par value, 200,000,000 shares authorized, 55,266,720 shares and 54,803,539 shares issued, respectively, and 51,701,473 shares and 51,288,750 shares outstanding, respectively		553			548
Additional paid-in capital		568,729			545,730
Retained earnings		1,696,884			1,450,586
Accumulated other comprehensive income		71,334			74,371
Treasury stock, at cost, 3,565,247 and 3,514,789 shares, respectively		(113,171	)		(109,079	)
Total Oil States International, Inc. stockholders’ equity		2,224,329			1,962,156
Noncontrolling interest		1,240			1,116
Total stockholders’ equity		2,225,569			1,963,272
Total liabilities and stockholders’ equity	$	4,009,689		$	3,703,641

The accompanying notes are an integral part of

these financial statements.

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

	SIX MONTHS ENDED JUNE 30,
	2012			2011

Cash flows from operatinqg activities:
Net income	$	246,948		$	136,820
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		104,884			90,390
Deferred income tax provision		4,991			10,788
Excess tax benefits from share-based payment arrangements		(6,014	)		(6,198	)
Gains on disposals of assets		(4,851	)		(763	)
Non-cash compensation charge		9,189			7,198
Accretion of debt discount		4,106			3,823
Amortization of deferred financing costs		3,600			2,914
Other, net		(547	)		(126	)
Changes in operating assets and liabilities, net of effect from acquired businesses:
Accounts receivable		(99,243	)		(66,481	)
Inventories		(79,781	)		(88,781	)
Accounts payable and accrued liabilities		36,199			7,802
Taxes payable		29,137			9,977
Other current assets and liabilities, net		2,707			(10,728	)
Net cash flows provided by operating activities		251,325			96,635

Cash flows from investing activities:
Capital expenditures, including capitalized interest		(199,983	)		(230,253	)
Acquisitions of businesses, net of cash acquired		--			(212	)
Proceeds from disposition of property, plant and equipment		5,225			1,435
Other, net		(1,650	)		(2,285	)
Net cash flows used in investing activities		(196,408	)		(231,315	)

Cash flows from financing activities:
Revolving credit borrowings and (repayments), net		(951	)		(428,682	)
6 1/2% senior notes issued		--			600,000
Term loan repayments		(14,944	)		(7,494	)
Debt and capital lease repayments		(2,312	)		(587	)
Issuance of common stock from share-based payment arrangements		7,801			9,792
Excess tax benefits from share-based payment arrangements		6,014			6,198
Payment of financing costs		(23	)		(12,640	)
Tax withholdings related to net share settlements of restricted stock		(4,092	)		(2,456	)
Net cash flows provided by (used in) financing activities		(8,507	)		164,131

Effect of exchange rate changes on cash		(3,461	)		(2,399	)
Net increase in cash and cash equivalents from continuing operations		42,949			27,052
Net cash used in discontinued operations – operating activities		(279	)		(98	)
Cash and cash equivalents, beginning of period		71,721			96,350

Cash and cash equivalents, end of period	$	114,391		$	123,304

The accompanying notes are an integral part of these

financial statements.

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(Continued)

1. ORGANIZATION AND BASIS OF PRESENTATION

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

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

The financial statements included in this report should be read in conjunction with the Company’s audited financial statements and accompanying notes included in its Annual Report on Form 10-K for the year ended December 31, 2011 (the 2011 Form 10-K).

2. RECENT ACCOUNTING PRONOUNCEMENTS

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

In June 2011, the FASB issued amendments to disclosure requirements for the presentation of comprehensive income. This guidance eliminates the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendments require that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present total other comprehensive income, the components of other comprehensive income, and the total of comprehensive income. The amendments should be applied retrospectively. For public entities, the amendments were effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The amendments do not require any transition disclosures. In December 2011, the FASB issued an amendment deferring the effective date of the requirement to present reclassification adjustments out of accumulated other comprehensive income on the face of the consolidated statement of income. We adopted this standard in the quarterly Report on Form 10-Q for the three month period ended March 31, 2012.

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(Continued)

3. DETAILS OF SELECTED BALANCE SHEET ACCOUNTS

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

	JUNE 30, 2012			DECEMBER 31, 2011
Accounts receivable, net:
Trade	$	615,924		$	553,481
Unbilled revenue		217,190			180,273
Other		1,979			2,449
Total accounts receivable		835,093			736,203
Allowance for doubtful accounts		(3,669	)		(3,963	)
	$	831,424		$	732,240

	JUNE 30, 2012			DECEMBER 31, 2011
Inventories, net:
Tubular goods	$	476,650		$	420,519
Other finished goods and purchased products		86,661			80,184
Work in process		70,690			76,353
Raw materials		111,864			86,672
Total inventories		745,865			663,728
Allowance for obsolescence		(12,062	)		(10,030	)
	$	733,803		$	653,698

	ESTIMATED USEFUL LIFE (years)			JUNE 30, 2012			DECEMBER 31, 2011
Property, plant and equipment, net:
Land				$	49,282		$	48,989
Accommodations assets (1)	2	-	15		1,251,663			1,160,661
Buildings and leasehold improvements (1)	1	-	40		171,177			154,233
Machinery and equipment	1	-	29		375,128			355,798
Rental tools	4	-	10		227,195			199,084
Office furniture and equipment	1	-	10		51,075			48,081
Vehicles	2	-	10		111,993			100,554
Construction in progress					186,619			166,371
Total property, plant and equipment					2,424,132			2,233,771
Accumulated depreciation					(766,943	)		(676,683	)
				$	1,657,189		$	1,557,088

	JUNE 30, 2012		DECEMBER 31, 2011
Accrued liabilities:
Accrued compensation	$	48,061	$	61,394
Accrued interest		5,804		6,035
Insurance liabilities		12,558		12,396
Accrued taxes, other than income taxes		10,179		5,889
Liabilities related to discontinued operations		1,846		2,125
Other		9,817		8,909
	$	88,265	$	96,748

(1)

As of December 31, 2011, we have reclassified $54.7 million in buildings and leasehold improvements to accommodations assets for comparability purposes.

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(Continued)

4. EARNINGS PER SHARE

The calculation of earnings per share attributable to the Company is presented below (in thousands, except per share amounts):

	THREE MONTHS ENDED JUNE 30,				SIX MONTHS ENDED JUNE 30,
	2012		2011		2012		2011

Basic earnings per share:
Net income attributable to Oil States International, Inc.	$	111,234	$	74,243	$	246,298	$	136,320

Weighted average number of shares outstanding		51,637		51,231		51,533		51,083

Basic earnings per share	$	2.15	$	1.45	$	4.78	$	2.67

Diluted earnings per share:
Net income attributable to Oil States International, Inc.	$	111,234	$	74,243	$	246,298	$	136,320

Weighted average number of shares outstanding		51,637		51,231		51,533		51,083
Effect of dilutive securities:
Options on common stock		484		679		531		703
2 3/8% Convertible Senior Subordinated Notes		3,030		3,200		3,196		3,094
Restricted stock awards and other		100		160		144		181

Total shares and dilutive securities		55,251		55,270		55,404		55,061

Diluted earnings per share	$	2.01	$	1.34	$	4.45	$	2.48

Our calculation of diluted earnings per share for the three and six months ended June 30, 2012 excludes 625,565 shares and 484,533 shares, respectively, issuable pursuant to outstanding stock options and restricted stock awards, due to their antidilutive effect. Our calculation of diluted earnings per share for the three and six months ended June 30, 2011 excludes 178,855 shares and 177,702 shares, respectively, issuable pursuant to outstanding stock options and restricted stock awards due to their antidilutive effect.

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(Continued)

5. BUSINESS ACQUISITIONS AND GOODWILL

See Note 13 to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.

Changes in the carrying amount of goodwill for the six month period ended June 30, 2012 are as follows (in thousands):

	Well Site Services
	Rental Tools and Services			Drilling Services			Subtotal			Accommodations			Offshore Products			Tubular Services			Total
Balance as of December 31, 2010
Goodwill	$	170,034		$	22,767		$	192,801		$	299,062		$	100,654		$	62,863		$	655,380
Accumulated Impairment Losses		(94,528	)		(22,767	)		(117,295	)		--			--			(62,863	)		(180,158	)
		75,506			--			75,506			299,062			100,654			--			475,222
Goodwill acquired and purchase price adjustments		--			--			--			(9,826	)		315			--			(9,511	)
Foreign currency translation and other changes		(323	)		--			(323	)		2,087			(25	)		--			1,739
		75,183			--			75,183			291,323			100,944			--			467,450

Balance as of December 31, 2011
Goodwill		169,711			22,767			192,478			291,323			100,944			62,863			647,608
Accumulated Impairment Losses		(94,528	)		(22,767	)		(117,295	)		--			--			(62,863	)		(180,158	)
		75,183			--			75,183			291,323			100,944			--			467,450
Foreign currency translation and other changes		(29	)		--			(29	)		(373	)		51			--			(351	)
		75,154			--			75,154			290,950			100,995			--			467,099
Balance as of June 30, 2012
Goodwill		169,682			22,767			192,449			290,950			100,995			62,863			647,257
Accumulated Impairment Losses		(94,528	)		(22,767	)		(117,295	)		--			--			(62,863	)		(180,158	)
	$	75,154		$	--		$	75,154		$	290,950		$	100,995		$	--		$	467,099

6. DEBT

As of June 30, 2012 and December 31, 2011, long-term debt consisted of the following (in thousands):

	June 30, 2012		December 31, 2011
	(Unaudited)

U.S. revolving credit facility, which matures December 10, 2015, with available commitments up to $500 million and with a weighted average interest rate of 3.1% for the six month period ended June 30, 2012	$	73,500	$	68,065
U.S. term loan, which matures December 10, 2015, of $200 million; 2.5% of aggregate principal repayable per quarter; weighted average interest rate of 2.5% for the six month period ended June 30, 2012		180,000		190,000
Canadian revolving credit facility, which matures on December 10, 2015, with available commitments up to $250 million and with a weighted average interest rate of 4.3% for the six month period ended June 30, 2012		--		--
Canadian term loan, which matures December 10, 2015, of $100 million; 2.5% of aggregate principal repayable per quarter; weighted average interest rate of 3.5% for the six month period ended June 30, 2012		88,675		93,795
Australian revolving credit facility, which matures November 30, 2013, with available commitments up to A$150 million and with a weighted average interest rate of 6.4% for the six month period ended June 30, 2012		36,850		43,050
6 1/2% senior unsecured notes - due June 2019		600,000		600,000
2 3/8% contingent convertible senior subordinated notes, net due 2025		174,990		170,884
Subordinated unsecured notes payable to sellers of businesses, fixed interest rate of 6%, which mature in December 2012		2,000		4,000
Capital lease obligations and other debt		6,839		7,146
Total debt		1,162,854		1,176,940
Less: Current portion		32,262		34,435
Total long-term debt and capitalized leases	$	1,130,592	$	1,142,505

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(Continued)

On June 1, 2011, the Company sold $600 million aggregate principal amount of 6 1/2% senior unsecured notes (6 1/2% Notes) due 2019 through a private placement to qualified institutional buyers.

The 6 1/2% Notes are senior unsecured obligations of the Company, are guaranteed by our material U.S. subsidiaries (the Guarantors), bear interest at a rate of 6 1/2% per annum and mature on June 1, 2019. At any time prior to June 1, 2014, the Company may redeem up to 35% of the 6 1/2% Notes at a redemption price of 106.500% of the principal amount, plus accrued and unpaid interest to the redemption date, with the proceeds of certain equity offerings. Prior to June 1, 2014, the Company may redeem some or all of the 6 1/2% Notes for cash at a redemption price equal to 100% of their principal amount plus an applicable make-whole premium and accrued and unpaid interest to the redemption date. On and after June 1, 2014, the Company may redeem some or all of the 6 1/2% Notes at redemption prices (expressed as percentages of principal amount), plus accrued and unpaid interest to the redemption date. The optional redemption prices as a percentage of principal amount are as follows:

Twelve Month Period Beginning June 1,		% of Principal Amount
2014		104.875%
2015		103.250%
2016		101.625%
2017		100.000%

The Company utilized approximately $515 million of the net proceeds of the 6 1/2% Note offering in June 2011 to repay borrowings outstanding under its U.S. and Canadian credit facilities (as defined below). The remaining net proceeds of approximately $75 million were utilized for general corporate purposes.

On May 17, 2012, the Company gave notice of the redemption of all of its outstanding 2 3/8% Contingent Convertible Senior Subordinated Notes (2 3/8% Notes) due 2025, totaling $174,990,000 at a redemption price equal to 100% of the principal amount thereof plus accrued interest. In July 2012, rather than having their 2 3/8% Notes redeemed, on or prior to July 5, 2012, holders of $174,990,000 aggregate principal amount of the 2 3/8% Notes converted their 2 3/8% Notes and received cash up to the principal amount and 3,012,380 shares of the Company’s Common Stock. As of June 30, 2012, we classified the $175.0 million principal amount of our 2 3/8% Notes as a noncurrent liability based on our ability and intent to refinance the 2 3/8% Notes utilizing borrowings available under our senior secured credit facilities. See Note 13 to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.

The following table presents the carrying amount of our 2 3/8% Notes in our condensed consolidated balance sheets (in thousands):

	June 30, 2012		December 31, 2011

Carrying amount of the equity component in additional paid-in capital	$	28,434	$	28,434

Principal amount of the liability component	$	174,990	$	174,990
Less: Unamortized discount		--		4,106
Net carrying amount of the liability component	$	174,990	$	170,884

The discount on the 2 3/8% Notes was fully amortized as of June 30, 2012 in consideration of the expected conversion of these notes in July 2012.

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(Continued)

The effective interest rate of 7.17% was applied as of the issuance date for our 2 3/8% Notes in accordance with ASC 470-20 – Debt with Conversion and Other Options. Interest expense on the 2 3/8% Notes, excluding amortization of debt issue costs, was as follows (in thousands):

	Three months ended June 30,				Six months ended June 30,

	2012		2011		2012		2011
Interest expense	$	3,111	$	2,968	$	6,185	$	5,901

	June 30, 2012

Remaining period over which discount will be amortized	Discount is fully amortized
Conversion price	$	31.75
Number of shares to be delivered upon conversion (1)		2,868,143
Conversion value in excess of principal amount (in thousands) (1)	$	189,871
Derivative transactions entered into in connection with the convertible notes	None

(1)

Calculation is based on the Company’s June 29, 2012 closing stock price of $66.20. See Note 13 to the Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.

On July 13, 2011, The MAC Services Group Pty Limited (The MAC) entered into a A$150 million revolving loan facility governed by a Facility Agreement (the Facility Agreement) between The MAC and National Australia Bank Limited, which is guaranteed by the Company. The Facility Agreement amended The MAC’s existing A$75 million revolving loan facility on substantially the same terms, including the maturity date of the Facility Agreement of November 30, 2013. As of June 30, 2012, we had A$36 million outstanding under the Australian credit facility leaving A$114 million available to be drawn under this facility.

The Company’s financial instruments consist of cash and cash equivalents, investments, receivables, payables, and debt instruments. The Company believes that the carrying values of these instruments, other than our 2 3/8% Notes and our 6 1/2% Notes, on the accompanying consolidated balance sheets approximate their fair values.

The fair values of our 2 3/8% and 6 1/2 % Notes are estimated based on quoted prices and analysis of similar debt instruments (Level 2 fair value measurements). The Company changed from a Level 1 fair value measurement standard to a Level 2 fair value measurement standard in the second quarter of 2012 in consideration of the daily trading volume of our debt instruments. The carrying values and fair values of these notes were as follows (in thousands):

			June 30, 2012				December 31, 2011
	Interest Rate		Carrying Value		Fair Value		Carrying Value		Fair Value
6 1/2% Notes
Principal amount due 2019		6 1/2%	$	600,000	$	636,000	$	600,000	$	625,128

2 3/8% Notes
Principal amount due 2025		2 3/8%	$	174,990	$	366,693	$	174,990	$	411,396
Less: unamortized discount				-		-		4,106		-
Net value			$	174,990	$	366,693	$	170,884	$	411,396

As of June 30, 2012, the estimated fair value of the Company's debt outstanding under its credit facilities was estimated to be at fair value.

As June 30, 2012, the Company had approximately $114.4 million of cash and cash equivalents and $648.6 million of the Company’s U.S. and Canadian credit facilities available for future financing needs. The Company also had availability totaling A$114 million under its Australian credit facility. As of June 30, 2012, we had $31.8 million of outstanding letters of credit.

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(Continued)

Interest expense on the condensed consolidated statements of income is net of capitalized interest of $1.2 million and $2.5 million, respectively, for the three and six months ended June 30, 2012 and $1.0 million and $2.5 million, respectively, for the same periods in 2011.

7. CHANGES IN COMMON STOCK OUTSTANDING

Shares of common stock outstanding – January 1, 2012	51,288,750
Shares issued upon exercise of stock options and vesting of restricted stock awards	463,181
Shares withheld for taxes on vesting of restricted stock awards and transferred to treasury	(50,458	)
Shares of common stock outstanding – June 30, 2012	51,701,473

8. STOCK BASED COMPENSATION

During the first six months of 2012, we granted restricted stock awards totaling 289,993 shares valued at a total of $24.3 million. Of the restricted stock awards granted in the first half of 2012, a total of 206,000 awards vest in four equal annual installments beginning in February 2013, 47,625 awards are performance shares that may vest in February 2015 in an amount that will depend on the Company’s achievement of specified performance objectives, 23,625 awards vest 100% in February 2016 and 12,464 awards vest 100% in May 2013. The performance based awards have a performance criteria that will be measured based upon the Company’s achievement levels of average after-tax annual return on invested capital for the three year period 2012 to 2014. During the six months ended June 30, 2012, the Company also granted 54,950 units of phantom shares under the newly created Canadian Long-Term Incentive Plan, which provides for the granting of units of phantom shares to key Canadian employees. These awards vest in three equal annual installments beginning in February 2013 and are accounted for as a liability. Participants granted units of phantom shares are entitled to a lump sum cash payment equal to the fair market value of a share of the Company’s Common Stock on the vesting date. A total of 155,250 stock options with a ten-year term were awarded in the six months ended June 30, 2012 with an average exercise price of $84.52 that will vest in four equal annual installments starting in February 2013.

Stock based compensation pre-tax expense recognized in the six month periods ended June 30, 2012 and 2011 totaled $9.2 million and $7.2 million, or $0.12 and $0.10 per diluted share after tax, respectively. Stock based compensation pre-tax expense recognized in the three month periods ended June 30, 2012 and 2011 totaled $4.8 million and $3.8 million, or $0.07 and $0.05 per diluted share after tax, respectively. The total fair value of restricted stock awards that vested during the six months ended June 30, 2012 and 2011 was $15.6 million and $12.2 million, respectively. At June 30, 2012, $44.8 million of compensation cost related to unvested stock options and restricted stock awards attributable to future performance had not yet been recognized.

9. INCOME TAXES

Income tax expense for interim periods is based on estimates of the effective tax rate for the entire fiscal year. The Company’s income tax provision for the three and six months ended June 30, 2012 totaled $44.6 million, or 28.6% of pretax income, and $97.9 million, or 28.4% of pretax income, respectively, compared to $28.9 million, or 27.9% of pretax income, and $52.3 million, or 27.6% of pretax income, respectively, for the three and six months ended June 30, 2011. The modest increase in the effective tax rate from the prior year was largely the result of higher domestic earnings as a percentage of total earnings. Our domestic earnings are taxed at a higher rate than our foreign earnings.

10. SEGMENT AND RELATED INFORMATION

In accordance with current accounting standards regarding disclosures about segments of an enterprise and related information, the Company has identified the following reportable segments: well site services, accommodations, offshore products and tubular services. The Company’s reportable segments represent strategic business units that offer different products and services. They are managed separately because each business requires different technologies and marketing strategies. Most of the businesses were initially acquired as a unit, and the management at the time of the acquisition was retained. Subsequent acquisitions have been direct extensions to our business segments. Separate business lines within the well site services segment have been disclosed to provide additional detail for that segment. Results of a portion of our accommodations segment supporting traditional oil and natural gas drilling activities are impacted by seasonally higher activity during the Canadian winter drilling season occurring in the first calendar quarter.

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(Continued)

Financial information by business segment for each of the three and six months ended June 30, 2012 and 2011 is summarized in the following table (in thousands):

	Revenues from unaffiliated customers		Depreciation and amortization		Operating income (loss)			Equity in earnings of unconsolidated affiliates		Capital expenditures		Total assets
Three months ended June 30, 2012
Well site services –
Rental tools and services	$	125,079	$	12,433	$	28,974		$	--	$	19,349	$	489,942
Drilling services		51,456		5,950		8,358			--		4,961		131,273
Total well site services		176,535		18,383		37,332			--		24,310		621,215
Accommodations		260,966		31,609		83,207			--		62,217		1,928,076
Offshore products		191,638		3,434		36,589			67		10,977		704,508
Tubular services		461,949		573		24,054			153		281		714,130
Corporate and eliminations		--		219		(11,922	)		--		796		41,760
Total	$	1,091,088	$	54,218	$	169,260		$	220	$	98,581	$	4,009,689

	Revenues from unaffiliated customers		Depreciation and amortization		Operating income (loss)			Equity in earnings of unconsolidated affiliates			Capital expenditures		Total assets
Three months ended June 30, 2011
Well site services –
Rental tools and services	$	112,658	$	10,299	$	25,103		$	--		$	18,654	$	410,370
Drilling services		40,998		4,806		6,370			--			5,754		116,672
Total well site services		153,656		15,105		31,473			--			24,408		527,042
Accommodations		202,943		26,195		57,750			(1	)		106,873		1,700,385
Offshore products		131,742		3,358		18,770			(228	)		3,519		588,472
Tubular services		331,976		377		16,956			231			2,780		521,675
Corporate and eliminations		--		203		(9,786	)		--			64		87,480
Total	$	820,317	$	45,238	$	115,163		$	2		$	137,644	$	3,425,054

	Revenues from unaffiliated customers		Depreciation and amortization		Operating income (loss)			Equity in earnings of unconsolidated affiliates		Capital expenditures		Total assets
Six months ended June 30, 2012
Well site services –
Rental tools and services	$	260,633	$	23,873	$	62,768		$	--	$	37,874	$	489,942
Drilling services		98,862		11,021		15,817			--		13,524		131,273
Total well site services		359,495		34,894		78,585			--		51,398		621,215
Accommodations		562,786		61,560		202,232			--		126,125		1,928,076
Offshore products		377,358		6,852		69,090			252		20,963		704,508
Tubular services		890,441		1,144		46,475			388		296		714,130
Corporate and eliminations		--		434		(22,876	)		--		1,201		41,760
Total	$	2,190,080	$	104,884	$	373,506		$	640	$	199,983	$	4,009,689

Revenues

from

unaffiliated

customers

Depreciation and

amortization

Operating

income (loss)

Equity in

earnings of

unconsolidated

affiliates

Capital

expenditures