Edgar Filing: OIL STATES INTERNATIONAL, INC

ois_10q-033113.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 March 31, 2013

[ ]	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 54,963,080 shares of common stock, par value $0.01, outstanding and 3,837,938 shares of treasury stock as of April 24, 2013.

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 Month Periods Ended March 31, 2013 and 2012	3
Unaudited Condensed Consolidated Statements of Comprehensive Income for the Three Month Periods Ended March 31, 2013 and 2012	4
Consolidated Balance Sheets – March 31, 2013 (unaudited) and December 31, 2012	5
Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2013 and 2012	6
Notes to Unaudited Condensed Consolidated Financial Statements	7 – 21

Cautionary Statement Regarding Forward-Looking Statements	22

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	22 – 33

Item 3. Quantitative and Qualitative Disclosures About Market Risk	33

Item 4. Controls and Procedures	33 – 34


Part II -- OTHER INFORMATION

Item 1. Legal Proceedings	34

Item 1A. Risk Factors	34

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	35

Item 6. Exhibits	35

(a) Index of Exhibits	35 – 36

Signature Page	37

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 MARCH 31,
	2013			2012


Revenues	$	1,069,440		$	1,098,992

Costs and expenses:
Cost of sales and services		792,341			795,797
Selling, general and administrative expenses		54,888			47,739
Depreciation and amortization expense		66,915			50,665
Other operating (income) expense		(5,691	)		544
		908,453			894,745
Operating income		160,987			204,247

Interest expense, net of capitalized interest		(20,090	)		(17,944	)
Interest income		563			297
Equity in earnings (loss) of unconsolidated affiliates		(707	)		420
Other income		1,270			1,735
Income before income taxes		142,023			188,755
Income tax provision		(39,439	)		(53,283	)
Net income		102,584			135,472
Less: Net income attributable to noncontrolling interest		395			407
Net income attributable to Oil States International, Inc.	$	102,189		$	135,065

Net income per share attributable to Oil States International, Inc. common stockholders:
Basic	$	1.86		$	2.63
Diluted	$	1.85		$	2.43

Weighted average number of common shares outstanding:
Basic		54,808			51,430
Diluted		55,373			55,557

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 MARCH 31,
	2013			2012


Net income	$	102,584		$	135,472

Other comprehensive income (loss):
Foreign currency translation adjustment		(22,339	)		25,246
Unrealized gain on forward contracts, net of tax		210			--
Total other comprehensive income (loss)		(22,129	)		25,246

Comprehensive income		80,455			160,718
Comprehensive income attributable to noncontrolling interest		(366	)		(425	)
Comprehensive income attributable to Oil States International, Inc.	$	80,089		$	160,293

The accompanying notes are an integral part of

these financial statements.

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In Thousands)

	MARCH 31, 2013			DECEMBER 31, 2012
	(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents	$	325,969		$	253,172
Accounts receivable, net		795,355			832,785
Inventories, net		680,494			701,496
Prepaid expenses and other current assets		24,408			38,639
Total current assets		1,826,226			1,826,092

Property, plant, and equipment, net		1,885,144			1,852,126
Goodwill, net		521,426			520,818
Other intangible assets, net		142,525			146,103
Other noncurrent assets		93,699			94,823
Total assets	$	4,469,020		$	4,439,962

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:
Accounts payable	$	272,303		$	279,933
Accrued liabilities		96,643			107,906
Income taxes		27,257			29,588
Current portion of long-term debt and capitalized leases		30,245			30,480
Deferred revenue		71,540			66,311
Other current liabilities		8,394			4,314
Total current liabilities		506,382			518,532

Long-term debt and capitalized leases		1,241,663			1,279,805
Deferred income taxes		119,913			129,235
Other noncurrent liabilities		45,842			46,590
Total liabilities		1,913,800			1,974,162

Stockholders’ equity:
Oil States International, Inc. stockholders’ equity:
Common stock, $.01 par value, 200,000,000 shares authorized, 58,799,583 shares and 58,488,299 shares issued, respectively, and 54,961,645 shares and 54,695,473 shares outstanding, respectively		588			585
Additional paid-in capital		599,171			586,070
Retained earnings		2,001,384			1,899,195
Accumulated other comprehensive income		84,968			107,097
Common stock held in treasury at cost, 3,837,938 and 3,792,826 shares, respectively		(132,135	)		(128,542	)
Total Oil States International, Inc. stockholders’ equity		2,553,976			2,464,405
Noncontrolling interest		1,244			1,395
Total stockholders’ equity		2,555,220			2,465,800
Total liabilities and stockholders’ equity	$	4,469,020		$	4,439,962

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)

	THREE MONTHS ENDED MARCH 31,
	2013			2012

Cash flows from operating activities:
Net income	$	102,584		$	135,472
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		66,915			50,665
Deferred income tax provision		(8,977	)		1,727
Excess tax benefits from share-based payment arrangements		(3,322	)		(5,175	)
Gains on disposals of assets		(177	)		(1,326	)
Non-cash compensation charge		6,285			4,399
Accretion of debt discount		--			2,035
Amortization of deferred financing costs		2,019			1,800
Other, net		(3,162	)		(18	)
Changes in operating assets and liabilities, net of effect from acquired businesses:
Accounts receivable		29,000			(105,007	)
Inventories		17,824			(71,062	)
Accounts payable and accrued liabilities		(16,245	)		21,445
Taxes payable		21,155			33,731
Other current assets and liabilities, net		4,721			(1,469	)
Net cash flows provided by operating activities		218,620			67,217

Cash flows from investing activities:
Capital expenditures, including capitalized interest		(107,397	)		(101,402	)
Proceeds from disposition of property, plant and equipment		2,075			1,636
Other, net		108			(1,189	)
Net cash flows used in investing activities		(105,214	)		(100,955	)

Cash flows from financing activities:
Revolving credit borrowings and (repayments), net		(29,219	)		29,941
Term loan repayments		(7,526	)		(7,526	)
Debt and capital lease repayments		(110	)		(2,183	)
Issuance of common stock from share-based payment arrangements		3,498			6,775
Excess tax benefits from share-based payment arrangements		3,322			5,175
Shares added to treasury stock as a result of net share settlements due to vesting of restricted stock		(3,593	)		(3,410	)
Other, net		(200	)		(15	)
Net cash flows provided by (used in) financing activities		(33,828	)		28,757

Effect of exchange rate changes on cash		(6,770	)		3,966
Net change in cash and cash equivalents from continuing operations		72,808			(1,015	)
Net cash used in discontinued operations – operating activities		(11	)		(55	)
Cash and cash equivalents, beginning of period		253,172			71,721
Cash and cash equivalents, end of period	$	325,969		$	70,651

The accompanying notes are an integral part of these

financial statements.

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

1. ORGANIZATION AND BASIS OF PRESENTATION

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

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, 2012 (the 2012 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 February 2013, the FASB issued a new accounting standard related to the reporting of amounts reclassified out of accumulated other comprehensive income (OCI). Under this standard, an entity is required to provide information about the amounts reclassified out of accumulated OCI by component. In addition, an entity is required to present, either on the face of the financial statements or in the notes, significant amounts reclassified out of accumulated OCI by the respective line items of net income, but only if the amount reclassified is required to be reclassified in its entirety in the same reporting period. For amounts that are not required to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures that provide additional details about those amounts. This standard does not change the current requirements for reporting net income or other comprehensive income in the financial statements and was effective for interim and annual periods beginning on or after December 15, 2012. We adopted this standard in this Quarterly Report on Form 10-Q for the three month period ended March 31, 2013, and the adoption of this standard did not have a material effect on our consolidated financial statements.

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 at March 31, 2013 and December 31, 2012 is presented below (in thousands):

	MARCH 31, 2013			DECEMBER 31, 2012
Inventories, net:
Tubular goods	$	421,737		$	450,244
Other finished goods and purchased products		94,500			90,974
Work in process		66,026			64,267
Raw materials		111,286			107,356
Total inventories		693,549			712,841
Allowance for excess, damaged, remnant or obsolete inventory		(13,055	)		(11,345	)
	$	680,494		$	701,496

	MARCH 31, 2013			DECEMBER 31, 2012
Accounts receivable, net:
Trade	$	589,513		$	616,680
Unbilled revenue		206,827			218,229
Other		4,535			3,691
Total accounts receivable		800,875			838,600
Allowance for doubtful accounts		(5,520	)		(5,815	)
	$	795,355		$	832,785

	Estimated Useful Life (in years)			MARCH 31, 2013			DECEMBER 31, 2012
Property, plant and equipment, net:
Land				$	65,162		$	58,888
Accommodations assets	3	-	15		1,503,191			1,481,830
Buildings and leasehold improvements	3	-	40		195,224			194,676
Machinery and equipment	2	-	29		408,037			402,342
Completion services equipment	4	-	10		278,285			264,225
Office furniture and equipment	1	-	10		56,839			54,337
Vehicles	2	-	10		127,027			123,474
Construction in progress					177,665			149,665
Total property, plant and equipment					2,811,430			2,729,437
Accumulated depreciation					(926,286	)		(877,311	)
				$	1,885,144		$	1,852,126

	MARCH 31, 2013		DECEMBER 31, 2012
Accrued liabilities:
Accrued compensation	$	35,069	$	69,206
Insurance liabilities		12,213		11,411
Accrued taxes, other than income taxes		14,106		7,204
Accrued interest		18,934		4,042
Accrued commissions		4,469		3,763
Other		11,852		12,280
	$	96,643	$	107,906

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 MARCH 31,
	2013		2012

Basic earnings per share:
Net income attributable to Oil States International, Inc.	$	102,189	$	135,065

Weighted average number of shares outstanding		54,808		51,430

Basic earnings per share	$	1.86	$	2.63

Diluted earnings per share:
Net income attributable to Oil States International, Inc.	$	102,189	$	135,065

Weighted average number of shares outstanding		54,808		51,430
Effect of dilutive securities:
Options on common stock		391		578
2 3/8% Contingent Convertible Senior Subordinated Notes		--		3,361
Restricted stock awards and other		174		188

Total shares and dilutive securities		55,373		55,557

Diluted earnings per share	$	1.85	$	2.43

Our calculation of diluted earnings per share for the three months ended March 31, 2013 and 2012 excludes 392,905 shares and 343,500 shares, respectively, issuable pursuant to outstanding stock options and restricted stock awards, due to their antidilutive effect.

See Note 6 to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for a discussion of the conversion of our 2 3/8% Contingent Convertible Senior Subordinated Notes (2 3/8% Notes).

5. BUSINESS ACQUISITIONS AND GOODWILL

On December 14, 2012, we acquired all of the equity of Tempress Technologies, Inc. (Tempress) for purchase price consideration of $49.5 million consisting of $32.5 million in cash and contingent consideration of $17.0 million. The Company funded escrow accounts totaling $25.3 million related to the contingent consideration and seller transaction indemnities which are classified as “Other noncurrent assets” in our March 31, 2013 Consolidated Balance Sheet. Liabilities for contingent consideration and escrowed amounts potentially due to the seller total $22.3 million at March 31, 2013 and are classified as “Other noncurrent liabilities” in our Consolidated Balance Sheet. Headquartered in Kent, Washington, Tempress designs, develops and markets a suite of highly specialized, hydraulically-activated tools utilized during downhole completion activities. The operations of Tempress have been included in our well site services segment since the acquisition date.

On July 2, 2012, we acquired all of the operating assets of Piper Valve Systems, Ltd (Piper). Headquartered in Oklahoma City, Oklahoma, Piper designs and manufactures high pressure valves and manifold components for oil and gas industry projects offshore (surface and subsea) and onshore. Piper's valve technology complements our offshore products segment, allowing us to integrate their valve products and services into our existing subsea products such as pipeline end manifolds and terminals, increasing our suite of global deepwater product and service offerings. Subject to customary post-closing adjustments, total cash consideration was $48.0 million. The operations of Piper have been included in our offshore products segment since the acquisition date.

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(Continued)

Changes in the carrying amount of goodwill for the three month period ended March 31, 2013 are as follows (in thousands):

	Well Site Services
	Completion Services			Drilling Services			Subtotal			Accommodations		Offshore Products			Tubular Services			Total
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
Goodwill acquired and purchase price adjustments		31,254			--			31,254			--		17,757			--			49,011
Foreign currency translation and other changes		316			--			316			3,809		232			--			4,357
		106,753			--			106,753			295,132		118,933			--			520,818

Balance as of December 31, 2012
Goodwill		201,281			22,767			224,048			295,132		118,933			62,863			700,976
Accumulated Impairment Losses		(94,528	)		(22,767	)		(117,295	)		--		--			(62,863	)		(180,158	)
		106,753			--			106,753			295,132		118,933			--			520,818
Goodwill acquired and purchase price adjustments		1,255			--			1,255			--		(75	)		--			1,180
Foreign currency translation and other changes		(298	)		--			(298	)		75		(349	)		--			(572	)
		107,710			--			107,710			295,207		118,509			--			521,426
Balance as of March 31, 2013
Goodwill		202,238			22,767			225,005			295,207		118,509			62,863			701,584
Accumulated Impairment Losses		(94,528	)		(22,767	)		(117,295	)		--		--			(62,863	)		(180,158	)
	$	107,710		$	--		$	107,710		$	295,207	$	118,509		$	--		$	521,426

6. DEBT

As of March 31, 2013 and December 31, 2012, long-term debt consisted of the following (in thousands):

	March 31, 2013		December 31, 2012

U.S. revolving credit facility, which matures December 10, 2015, with available commitments up to $500 million; no borrowings outstanding during the three month period ended March 31, 2013	$	--	$	--

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 2.2% for the three month period ended March 31, 2013		165,000		170,000

Canadian revolving credit facility, which matures on December 10, 2015, with available commitments up to $250 million; no borrowings outstanding during the three month period ended March 31, 2013		--		--

Canadian term loan, which matures December 10, 2015, of $100 million; 2.5% of aggregate principal repayable per quarter; weighted average interest rate of 3.3% for the three month period ended March 31, 2013		81,562		85,786

Australian revolving credit facility, which matures December 10, 2015, with available commitments up to AUD$300 million and with a weighted average interest rate of 5.1% for the three month period ended March 31, 2013		18,767		47,803

6 1/2% senior unsecured notes - due June 2019		600,000		600,000

5 1/8% senior unsecured notes - due January 2023		400,000		400,000

Capital lease obligations and other debt		6,579		6,696
Total debt		1,271,908		1,310,285
Less: Current portion		30,245		30,480
Total long-term debt and capitalized leases	$	1,241,663	$	1,279,805

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(Continued)

5 1/8% Senior Unsecured Notes

On December 21, 2012, the Company sold $400 million aggregate principal amount of 5 1/8% Senior Notes due 2023 (5 1/8% Notes) through a private placement to qualified institutional buyers. The 5 1/8% Notes are senior unsecured obligations of the Company, are guaranteed by our material U.S. subsidiaries (the Guarantors), bear interest at a rate of 5 1/8% per annum and mature on January 1, 2023. At any time prior to January 15, 2016, the Company may redeem up to 35% of the 5 1/8% Notes at a redemption price of 105.125% of the principal amount, plus accrued and unpaid interest to the redemption date, with the proceeds of certain equity offerings. Prior to January 15, 2018, the Company may redeem some or all of the 5 1/8% 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 January 15, 2018, the Company may redeem some or all of the 5 1/8% 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 January 15,	% of Principal Amount
2018		102.563	%
2019		101.708	%
2020		100.854	%
2021 and thereafter		100.000	%

The Company utilized approximately $334 million of the net proceeds of the 5 1/8% Notes to repay borrowings under its U.S. revolving credit facility. The remaining net proceeds of approximately $61 million were utilized for general corporate purposes.

6 1/2% Senior Unsecured Notes

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 106.5% 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 and thereafter		100.000	%

The Company utilized approximately $515 million of the net proceeds of the 6 1/2% Notes to repay borrowings outstanding under its U.S. and Canadian credit facilities. The remaining net proceeds of approximately $75 million were utilized for general corporate purposes.

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(Continued)

2 3/8% Contingent Convertible Senior Notes

On May 17, 2012, the Company gave notice of the redemption of all of its outstanding 2 3/8% Notes due 2025 (2 3/8% Notes), 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 valued at $220.6 million.

An 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 March 31,
	2013		2012
Interest expense	$	--	$	3,074

As of March 31, 2013, the Company had approximately $326.0 million of cash and cash equivalents and $705.7 million of the Company’s U.S. and Canadian credit facilities available for future financing needs. The Company also had availability totaling AUD$282 million under its Australian credit facility. As of March 31, 2013, the Company had $44.3 million of outstanding letters of credit which reduced amounts available under its credit facilities.

Interest expense on the condensed consolidated statements of income was net of capitalized interest of $0.3 million for the three months ended March 31, 2013 and $1.2 million for the same period in 2012.

7. FAIR VALUE MEASUREMENTS

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

The fair values of the Company’s 6 1/2% Notes and 5 1/8% Notes are estimated based on quoted prices and analysis of similar instruments (Level 2 fair value measurements). The carrying values and fair values of these notes are as follows for the periods indicated (in thousands):

	March 31, 2013				December 31, 2012
	Carrying Value		Fair Value		Carrying Value		Fair Value
5 1/8% Notes
Principal amount due 2023	$	400,000	$	399,752	$	400,000	$	405,752

6 1/2% Notes
Principal amount due 2019	$	600,000	$	642,750	$	600,000	$	641,628

As of March 31, 2013, the carrying value of the Company's debt outstanding under its credit facilities was estimated to be at fair value.

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(Continued)

8. CHANGES IN COMMON STOCK OUTSTANDING

Shares of common stock outstanding – January 1, 2013	54,695,473
Shares issued upon exercise of stock options and vesting of restricted stock awards	311,284
Shares withheld for taxes on vesting of restricted stock awards and transferred to treasury	(45,112	)
Shares of common stock outstanding – March 31, 2013	54,961,645

9. STOCK BASED COMPENSATION

During the first three months of 2013, we granted restricted stock awards totaling 296,724 shares valued at a total of $23.8 million. Of the restricted stock awards granted in the first three months of 2013, a total of 262,757 awards vest in four equal annual installments beginning in February 2014, 30,314 awards are performance based awards that may vest in February 2016 in an amount that will depend on the Company’s achievement of specified performance objectives and 3,500 awards vest 100% in February 2014. 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 commencing January 1, 2013 and ending December 31, 2015. During the three months ended March 31, 2013, the Company also granted 71,500 units of phantom shares under the 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 2014 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 149,402 stock options with a ten-year term were awarded in the three months ended March 31, 2013 with an average exercise price of $80.25, a fair value of $4.2 million and that will vest in four equal annual installments starting in February 2014.

Stock based compensation pre-tax expense recognized in the three month periods ended March 31, 2013 and 2012 totaled $6.3 million and $4.4 million, or $0.08 and $0.06 per diluted share after tax, respectively. The total fair value of restricted stock awards that vested during the three months ended March 31, 2013 and 2012 was $15.9 million and $12.8 million, respectively. At March 31, 2013, $60.2 million of compensation cost related to unvested stock options and restricted stock awards attributable to future performance had not yet been recognized.

10. 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 months ended March 31, 2013 totaled $39.4 million, or 27.8% of pretax income, compared to income tax expense of $53.3 million, or 28.2% of pretax income, for the three months ended March 31, 2012. The effective tax rates for the three months ended March 31, 2013 and 2012 are comparable and are lower than U.S. statutory rates because of lower foreign tax rates.

11. 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 months ended March 31, 2013 and 2012 is summarized in the following table (in thousands):

	Revenues from unaffiliated customers		Depreciation and amortization		Operating income (loss)			Equity in earnings (loss) of unconsolidated affiliates			Capital expenditures		Total assets
Three months ended March 31, 2013
Well site services –
Completion services	$	137,366	$	15,195	$	28,659		$	--		$	20,466	$	576,634
Drilling services		40,203		5,752		4,080			--			7,567		163,002
Total well site services		177,569		20,947		32,739			--			28,033		739,636
Accommodations		296,667		41,088		94,906			--			69,917		2,157,727
Offshore products		201,290		4,043		32,136			(736	)		9,011		819,541
Tubular services		393,914		603		15,035			29			332		618,139
Corporate and eliminations		--		234		(13,829	)		--			104		133,977
Total	$	1,069,440	$	66,915	$	160,987		$	(707	)	$	107,397	$	4,469,020

	Revenues from unaffiliated customers		Depreciation and amortization		Operating income (loss)			Equity in earnings of unconsolidated affiliates		Capital expenditures		Total assets
Three months ended March 31, 2012
Well site services –
Completion services	$	135,554	$	11,439	$	33,794		$	--	$	18,526	$	493,458
Drilling services		47,407		5,071		7,459			--		8,563		129,973
Total well site services		182,961		16,510		41,253			--		27,089		623,431
Accommodations		301,820		29,951		119,025			--		63,908		1,889,393
Offshore products		185,720		3,418		32,501			185		9,986		684,271
Tubular services		428,491		571		22,421			235		15		702,983
Corporate and eliminations		--		215		(10,953	)		--		404		47,687
Total	$	1,098,992	$	50,665	$	204,247		$	420	$	101,402	$	3,947,765

12. COMMITMENTS AND CONTINGENCIES

The Company is a party to various pending or threatened claims, lawsuits and administrative proceedings seeking damages or other remedies concerning its commercial operations, products, employees and other matters, including warranty and product liability claims and occasional claims by individuals alleging exposure to hazardous materials as a result of its products or operations. Some of these claims relate to matters occurring prior to its acquisition of businesses, and some relate to businesses it has sold. In certain cases, the Company is entitled to indemnification from the sellers of businesses, and in other cases, it has indemnified the buyers of businesses from it. Although the Company can give no assurance about the outcome of pending legal and administrative proceedings and the effect such outcomes may have on it, management believes 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 its consolidated financial position, results of operations or liquidity.

13. CONDENSED CONSOLIDATED FINANCIAL INFORMATION

Certain wholly-owned subsidiaries, as detailed below (the Guarantor Subsidiaries), have guaranteed all of the 6 1/2% Notes and all of the 5 1/8% Notes. These guarantees are full and unconditional, subject to the following release provisions:

in connection with any sale, exchange or transfer (by merger, consolidation or otherwise) of the capital stock of that guarantor after which that guarantor is no longer a restricted subsidiary;

upon proper designation of a guarantor by the Company as an unrestricted subsidiary;

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(Continued)

upon the release or discharge of all outstanding guarantees by a guarantor of indebtedness of the Company and its restricted subsidiaries under any credit facility;

upon legal or covenant defeasance or satisfaction and discharge of the indenture; or

upon the dissolution of a guarantor, provided no event of default has occurred under the indentures and is continuing.

The following condensed consolidating financial information is included so that separate financial statements of the Guarantor Subsidiaries are not required to be filed with the Commission. The condensed consolidating financial information presents investments in both consolidated and unconsolidated affiliates using the equity method of accounting.

The following condensed consolidating financial information presents: condensed consolidating statements of income for each of the three month periods ended March 31, 2013 and 2012, condensed consolidating balance sheets as of March 31, 2013 and December 31, 2012 and the statements of cash flows for each of the three months ended March 31, 2013 and 2012 of (a) the Company, parent/guarantor, (b) Acute Technological Services, Inc., Capstar Holding, L.L.C., Capstar Drilling, Inc., General Marine Leasing, L.L.C., Oil States Energy Services L.L.C., Oil States Energy Services Holding, Inc., Oil States Energy Services International Holding, L.L.C., Oil States Management, Inc., Oil States Industries, Inc., Oil States Skagit SMATCO, L.L.C., PTI Group USA L.L.C., PTI Mars Holdco 1, L.L.C., Sooner Inc., Sooner Pipe, L.L.C., Sooner Holding Company and Tempress Technologies, Inc. (the Guarantor Subsidiaries), (c) the non-guarantor subsidiaries, (d) consolidating adjustments necessary to consolidate the Company and its subsidiaries and (e) the Company on a consolidated basis.

We have corrected the presentation of our condensed consolidating statements of income for the three month period ended March 31, 2012 and our statement of cash flows for the three month period ended March 31, 2012 to properly reflect the investment in and equity earnings of certain non-guarantor subsidiaries by certain guarantor subsidiaries in accordance with SEC Regulation S-X, which were previously only presented in the Parent/Guarantor column. We have also corrected other immaterial amounts previously disclosed to properly present (i) the activity and balances of a certain guarantor subsidiary in the Guarantor Subsidiaries column which was previously presented in the Parent/Guarantor column and (ii) the activity and balances of a certain non-guarantor subsidiary in the Non-Guarantors column which was previously presented in the Guarantor Subsidiaries column. The effect of these corrections increased net income for the Guarantor Subsidiaries by $56.6 million and decreased the net income for the Non-Guarantor Subsidiaries by $0.3 million for three month period ended March 31, 2012. These changes had no impact on consolidated results as previously reported.

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(Continued)

Condensed Consolidating Statements of Income and Comprehensive Income

	Three Months Ended March 31, 2013
	Oil States International, Inc. (Parent/ Guarantor)		Guarantor Subsidiaries		Other Subsidiaries (Non- Guarantors)		Consolidating Adjustments		Consolidated Oil States International, Inc.
	(In thousands)

REVENUES
Operating revenues	$	—	$	704,606	$	364,834	$	—	$	1,069,440
Intercompany revenues		—		5,506		733		(6,239)		—
Total revenues		—		710,112		365,567		(6,239)		1,069,440

OPERATING EXPENSES
Cost of sales and services		—		591,534		202,225		(1,418)		792,341
Intercompany cost of sales and services		—		4,046		707		(4,753)		—
Selling, general and administrative expenses		400		36,551		17,937		—		54,888
Depreciation and amortization expense		234		26,903		39,816		(38)		66,915
Other operating (income) expense		(154)		(4,016)		(1,521)		—		(5,691)
Operating income (loss)		(480)		55,094		106,403		(30)		160,987

Interest expense, net of capitalized interest		(18,227)		(180)		(16,848)		15,165		(20,090)
Interest income		4,816		46		10,866		(15,165)		563
Equity in earnings (loss) of unconsolidated affiliates		116,080		74,741		(736)		(190,792)		(707)
Other income		—		795		475		—		1,270
Income before income taxes		102,189		130,496		100,160		(190,822)		142,023
Income tax provision		—		(14,444)		(24,995)		—		(39,439)
Net income		102,189		116,052		75,165		(190,822)		102,584

Other comprehensive income:
Foreign currency translation adjustment		(22,339)		(15,022)		(14,989)		30,011		(22,339)
Unrealized gain on forward contracts		—		210		—		—		210
Total other comprehensive income		(22,339)		(14,812)		(14,989)		30,011		(22,129)

Comprehensive income		79,850		101,240		60,176		(160,811)		80,455
Comprehensive income attributable to noncontrolling interest		—		—		(348)		(18)		(366)
Comprehensive income attributable to Oil States International, Inc.	$	79,850	$	101,240	$	59,828	$	(160,829)	$	80,089

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(Continued)

Condensed Consolidating Statements of Income and Comprehensive Income

	Three Months Ended March 31, 2012
	Oil States International, Inc. (Parent/ Guarantor)		Guarantor Subsidiaries		Other Subsidiaries (Non- Guarantors)		Consolidating Adjustments		Consolidated Oil States International, Inc.
	(In thousands)

REVENUES
Operating revenues	$	—	$	753,222	$	345,770	$	—	$	1,098,992
Intercompany revenues		—		5,037		30		(5,067)		—
Total revenues		—		758,259		345,800		(5,067)		1,098,992

OPERATING EXPENSES
Cost of sales and services		—		611,156		186,424		(1,783)		795,797
Intercompany cost of sales and services		—		3,222		44		(3,266)		—
Selling, general and administrative expenses		431		30,975		16,333		—		47,739
Depreciation and amortization expense		215		21,086		29,369		(5)		50,665
Other operating (income)expense		(167)		(575)		1,286		—		544
Operating income (loss)		(479)		92,395		112,344		(13)		204,247

Interest expense		(16,837)		(218)		(18,446)		17,557		(17,944)
Interest income		5,072		22		12,759		(17,556)		297
Equity in earnings (loss) of unconsolidated affiliates		146,617		81,404		178		(227,779)		420
Other income		—		1,628		107		—		1,735
Income before income taxes		134,373		175,231		106,942		(227,791)		188,755
Income tax provision		692		(28,581)		(25,394)		—		(53,283)
Net income		135,065		146,650		81,548		(227,791)		135,472

Other comprehensive income:
Foreign currency translation adjustment		25,246		18,551		18,562		(37,113)		25,246
Total other comprehensive income		25,246		18,551		18,562		(37,113)		25,246

Comprehensive income		160,311		165,201		100,110		(264,904)		160,718
Comprehensive income attributable to noncontrolling interest		—		—		(420)		(5)		(425)
Comprehensive income attributable to Oil States International, Inc.	$	160,311	$	165,201	$	99,690	$	(264,909)	$	160,293

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(Continued)

Consolidating Balance Sheets

	March 31, 2013
	Oil States International, Inc. (Parent/ Guarantor)		Guarantor Subsidiaries		Other Subsidiaries (Non- Guarantors)		Consolidating Adjustments		Consolidated Oil States International, Inc.
	(In thousands)


ASSETS
Current assets:
Cash and cash equivalents	$	88,108	$	37,806	$	200,055	$	—	$	325,969
Accounts receivable, net		43		442,263		353,049		—		795,355
Inventories, net		—		562,723		117,771		—		680,494
Prepaid expenses and other current assets		2,419		12,526		9,463		—		24,408
Total current assets		90,570		1,055,318		680,338		—		1,826,226

Property, plant and equipment, net		1,792		591,952		1,293,361		(1,961)		1,885,144
Goodwill, net		—		222,790		298,636		—		521,426
Other intangible assets, net		—		56,843		85,682		—		142,525
Investments in unconsolidated affiliates		2,782,462		1,682,243		2,265		(4,457,962)		9,008
Long-term intercompany receivables (payables)		744,739		(367,644)		(377,099)		4		—
Other noncurrent assets		41,448		26,094		17,149		—		84,691
Total assets	$	3,661,011	$	3,267,596	$	2,000,332	$	(4,459,919)	$	4,469,020

LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	901	$	179,299	$	92,103	$	—	$	272,303
Accrued liabilities		31,044		35,158		30,437		4		96,643
Income taxes		(103,765)		110,235		20,787		—		27,257
Current portion of long-term debt and capitalized leases		20,022		296		9,927		—		30,245
Deferred revenue		—		54,460		17,080		—		71,540
Other current liabilities		—		8,106		288		—		8,394
Total current liabilities		(51,798)		387,554		170,622		4		506,382

Long-term debt and capitalized leases		1,145,019		6,130		90,514		—		1,241,663
Deferred income taxes		(1,094)		65,500		55,507		—		119,913
Other noncurrent liabilities		14,908		24,053		7,330		(449)		45,842
Total liabilities		1,107,035		483,237		323,973		(445)		1,913,800

Stockholders’ equity		2,553,976		2,784,359		1,675,280		(4,459,639)		2,553,976
Non-controlling interest		—		—		1,079		165		1,244
Total stockholders’ equity		2,553,976		2,784,359		1,676,359		(4,459,474)		2,555,220
Total liabilities and stockholders’ equity	$	3,661,011	$	3,267,596	$	2,000,332	$	(4,459,919)	$	4,469,020

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(Continued)

Condensed Consolidating Balance Sheets

	December 31, 2012
	Oil States International, Inc. (Parent/ Guarantor)		Guarantor Subsidiaries		Other Subsidiaries (Non- Guarantors)		Consolidating Adjustments		Consolidated Oil States International, Inc.
	(In thousands)


ASSETS
Current assets:
Cash and cash equivalents	$	3,222	$	57,205	$	192,745	$	—	$	253,172
Accounts receivable, net		431		486,975		345,379		—		832,785
Inventories, net		—		583,002		118,494		—		701,496
Prepaid expenses and other current assets		4,592		20,770		13,277		—		38,639
Total current assets		8,245		1,147,952		669,895		—		1,826,092

Property, plant and equipment, net		1,922		578,029		1,274,106		(1,931)		1,852,126
Goodwill, net		—		221,610		299,208		—		520,818
Other intangible assets, net		—		58,269		87,834		—		146,103
Investments in unconsolidated affiliates		2,658,946		1,621,536		3,000		(4,273,768)		9,714
Long-term intercompany receivables (payables)		855,354		(495,655)		(359,697)		(2)		—
Other noncurrent assets		40,989		25,984		18,136		—		85,109
Total assets	$	3,565,456	$	3,157,725	$	1,992,482	$	(4,275,701)	$	4,439,962

LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	1,847	$	180,849	$	97,237	$	—	$	279,933
Accrued liabilities		17,147		53,494		37,267		(2)		107,906
Income taxes		(95,930)		94,996		30,522		—		29,588
Current portion of long-term debt and capitalized leases		20,022		314		10,144		—		30,480
Deferred revenue		—		49,584		16,727		—		66,311
Other current liabilities		—		4,027		287		—		4,314
Total current liabilities		(56,914)		383,264		192,184		(2)		518,532

Long-term debt and capitalized leases		1,150,024		6,203		123,578		—		1,279,805
Deferred income taxes		(4,772)		80,481		53,526		—		129,235
Other noncurrent liabilities		12,713		26,906		7,420		(449)		46,590
Total liabilities		1,101,051		496,854		376,708		(451)		1,974,162

Stockholders’ equity		2,464,405		2,660,871		1,614,526		(4,275,397)		2,464,405
Non-controlling interest		—		—		1,248		147		1,395
Total stockholders’ equity		2,464,405		2,660,871		1,615,774		(4,275,250)		2,465,800
Total liabilities and stockholders’ equity	$	3,565,456	$	3,157,725	$	1,992,482	$	(4,275,701)	$	4,439,962

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(Continued)

Condensed Consolidating Statements of Cash Flows

	Three Months Ended March 31, 2013
	Oil States International, Inc. (Parent/ Guarantor)		Guarantor Subsidiaries		Other Subsidiaries (Non- Guarantors)		Consolidating Adjustments		Consolidated Oil States International, Inc.
	(In thousands)

NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES:	$	(11,814)	$	138,904	$	91,599	$	(69)	$	218,620

CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, including capitalized interest		(104)		(45,894)		(61,468)		69		(107,397)
Proceeds from disposition of property, plant and equipment		—		755		1,320		—		2,075
Payments for equity contributions		(22,248)		(955)		—		23,203		—
Other, net		(1)		107