Edgar Filing: OIL STATES INTERNATIONAL, INC

ois20140331_10q.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, 2014

[ ]

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 incorporation or organization)	(I.R.S. Employer 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 53,056,361 shares of common stock, par value $0.01, outstanding and 6,428,033 shares of treasury stock as of May 1, 2014.

OIL STATES INTERNATIONAL, INC.

INDEX

		Page No.
	Part I -- FINANCIAL INFORMATION

Item 1.	Financial Statements:

	Condensed Consolidated Financial Statements
	Unaudited Condensed Consolidated Statements of Income for the Three Month Periods Ended March 31, 2014 and 2013	3
	Unaudited Condensed Consolidated Statements of Comprehensive Income for the Three Month Periods Ended March 31, 2014 and 2013	4
	Consolidated Balance Sheets –March 31, 2014 (unaudited) and December 31, 2013	5
	Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2014 and 2013	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	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	35–36

	(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,
	2014			2013

Revenues	$	657,982		$	675,527

Costs and expenses:
Cost of sales and services		415,826			418,389
Selling, general and administrative expenses		56,545			50,017
Depreciation and amortization expense		70,386			66,312
Other operating expense (income)		1,582			(5,691	)
		544,339			529,027
Operating income		113,643			146,500

Interest expense, net of capitalized interest		(17,104	)		(20,090	)
Interest income		917			563
Equity in earnings (losses) of unconsolidated affiliates		97			(735	)
Other income		1,669			1,072
Income from continuing operations before income taxes		99,222			127,310
Income tax provision		(27,531	)		(33,751	)
Net income from continuing operations		71,691			93,559
Net income from discontinued operations, net of tax		182			9,025
Net income		71,873			102,584
Less: Net income attributable to noncontrolling interest		369			395
Net income attributable to Oil States International, Inc.	$	71,504		$	102,189

Net income attributable to Oil States International, Inc.:
Continuing operations	$	71,322		$	93,164
Discontinued operations		182			9,025
Net income attributable to Oil States International, Inc.	$	71,504		$	102,189

Basic net income per share attributable to Oil States International, Inc. common stockholders from:
Continuing operations	$	1.33		$	1.70
Discontinued operations		--			0.16
Net income	$	1.33		$	1.86

Diluted net income per share attributable to Oil States International, Inc. common stockholders from:
Continuing operations	$	1.32		$	1.69
Discontinued operations		--			0.16
Net income	$	1.32		$	1.85

Weighted average number of common shares outstanding:
Basic		53,288			54,808
Diluted		53,588			55,373

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,
	2014			2013

Net income	$	71,873		$	102,584

Other comprehensive income (loss):
Foreign currency translation adjustment		(20	)		(22,339	)
Unrealized gain on forward contracts, net of tax		--			210
Total other comprehensive loss		(20	)		(22,129	)

Comprehensive income		71,853			80,455
Comprehensive income attributable to noncontrolling interest		(304	)		(366	)
Comprehensive income attributable to Oil States International, Inc.	$	71,549		$	80,089

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

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In Thousands)

	MARCH 31,			DECEMBER 31,
	2014			2013
	(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents	$	454,873		$	599,306
Accounts receivable, net		631,025			620,333
Inventories, net		271,378			266,552
Prepaid expenses and other current assets		42,176			39,716
Total current assets		1,399,452			1,525,907

Property, plant, and equipment, net		1,938,283			1,902,789
Goodwill, net		519,766			513,650
Other intangible assets, net		132,195			133,531
Other noncurrent assets		56,391			55,384
Total assets	$	4,046,087		$	4,131,261

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:
Accounts payable	$	152,153		$	149,079
Accrued liabilities		98,514			132,046
Income taxes		25,417			32,679
Current portion of long-term debt and capitalized leases		529			529
Deferred revenue		53,388			50,366
Other current liabilities		14,102			9,137
Total current liabilities		344,103			373,836

Long-term debt and capitalized leases		972,562			972,692
Deferred income taxes		115,931			122,821
Other noncurrent liabilities		40,762			36,618
Total liabilities		1,473,358			1,505,967

Stockholders’ equity:
Oil States International, Inc. stockholders’ equity:
Common stock, $.01 par value, 200,000,000 shares authorized, 59,478,369 shares and 59,192,051 shares issued, respectively, and 53,050,411 shares and 54,181,569 shares outstanding, respectively		595			592
Additional paid-in capital		651,643			637,438
Retained earnings		2,391,957			2,320,453
Accumulated other comprehensive loss		(85,695	)		(85,675	)
Common stock held in treasury at cost, 6,427,958 and 5,010,482 shares, respectively		(387,952	)		(249,391	)
Total Oil States International, Inc. stockholders’ equity		2,570,548			2,623,417
Noncontrolling interest		2,181			1,877
Total stockholders’ equity		2,572,729			2,625,294
Total liabilities and stockholders’ equity	$	4,046,087		$	4,131,261

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

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

	THREE MONTHS ENDED MARCH 31,
	2014			2013
Cash flows from operating activities:
Net income	$	71,873		$	102,584
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		70,386			66,915
Deferred income tax provision		(6,253	)		(8,977	)
Excess tax benefits from share-based payment arrangements		(1,660	)		(3,322	)
Provision for loss on receivables		1,920			226
Non-cash compensation charge		7,375			6,285
Amortization of deferred financing costs		1,627			2,019
Other, net		(293	)		(3,565	)
Changes in operating assets and liabilities, net of effect from acquired businesses:
Accounts receivable		(17,325	)		29,000
Inventories		(6,372	)		17,824
Accounts payable and accrued liabilities		(19,985	)		(16,256	)
Taxes payable		(3,656	)		21,155
Other operating assets and liabilities, net		7,674			4,721
Net cash flows provided by operating activities		105,311			218,609

Cash flows from investing activities:
Capital expenditures, including capitalized interest		(103,427	)		(107,397	)
Proceeds from disposition of property, plant and equipment		2,210			2,075
Other, net		(385	)		108
Net cash flows used in investing activities		(101,602	)		(105,214	)

Cash flows from financing activities:
Revolving credit borrowings and (repayments), net		--			(29,219	)
Term loan repayments		--			(7,526	)
Debt and capital lease repayments		(129	)		(110	)
Issuance of common stock from share-based payment arrangements		3,346			3,498
Purchase of treasury stock		(141,043	)		--
Excess tax benefits from share-based payment arrangements		1,660			3,322
Shares added to treasury stock as a result of net share settlements due to vesting of restricted stock		(4,915	)		(3,593	)
Other, net		(2	)		(200	)
Net cash flows used in financing activities		(141,083	)		(33,828	)

Effect of exchange rate changes on cash		(7,059	)		(6,770	)
Net change in cash and cash equivalents		(144,433	)		72,797
Cash and cash equivalents, beginning of period		599,306			253,172

Cash and cash equivalents, end of period	$	454,873		$	325,969

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.

In September 2013, the Company entered into a Stock Purchase Agreement with Marubeni-Itochu Tubulars America, Inc. (Marubeni-Itochu) for the sale of Sooner, Inc. and its subsidiaries (Sooner), which comprised the entirety of the Company’s tubular services segment. The unaudited Condensed Consolidated Statements of Income for all periods presented have been reclassified to reflect the presentation of discontinued operations. Unless otherwise indicated, all disclosures and amounts in the Notes to Unaudited Condensed Consolidated Financial Statements relate to the Company’s continuing operations.

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

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

2.	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.

3.	DETAILS OF SELECTED BALANCE SHEET ACCOUNTS

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

	MARCH 31,			DECEMBER 31,
	2014			2013
Accounts receivable, net:
Trade	$	434,445		$	456,114
Unbilled revenue		199,407			163,766
Other		6,993			7,987
Total accounts receivable		640,845			627,867
Allowance for doubtful accounts		(9,820	)		(7,534	)
	$	631,025		$	620,333

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(Continued)

	MARCH 31,			DECEMBER 31,
	2014			2013
Inventories, net:
Finished goods and purchased products	$	106,217		$	91,909
Work in process		62,557			72,903
Raw materials		112,974			111,280
Total inventories		281,748			276,092
Allowance for excess, damaged, or obsolete inventory		(10,370	)		(9,540	)
	$	271,378		$	266,552

	Estimated	MARCH 31,			DECEMBER 31,
	Useful Life (years)	2014			2013
Property, plant and equipment, net:
Land		$	79,457		$	76,545
Accommodations assets	3-15		1,550,014			1,535,407
Buildings and leasehold improvements	3-40		211,516			204,455
Machinery and equipment	2-29		443,621			434,578
Completion services equipment	4-10		329,543			314,445
Office furniture and equipment	1-10		60,652			57,026
Vehicles	2-10		141,127			140,156
Construction in progress			205,945			172,252
Total property, plant and equipment			3,021,875			2,934,864
Accumulated depreciation			(1,083,592	)		(1,032,075	)
		$	1,938,283		$	1,902,789

	MARCH 31,		DECEMBER 31,
	2014		2013
Accrued liabilities:
Accrued compensation	$	39,260	$	71,535
Insurance liabilities		12,974		13,198
Accrued taxes, other than income taxes		11,599		7,619
Accrued interest		16,987		11,931
Accrued commissions		4,212		3,654
Accrued treasury stock repurchase		--		7,397
Other		13,482		16,712
	$	98,514	$	132,046

4.	ACCUMULATED OTHER COMPREHENSIVE LOSS

Our accumulated other comprehensive loss was $85.7 million at March 31, 2014 and December 31, 2013 primarily as a result of foreign currency exchange rate differences. Changes in the other comprehensive loss during the first quarter of 2014 were essentially offsetting due to the Canadian dollar decreasing in value compared to the U.S. dollar and the Australian dollar increasing in value compared to the U.S. dollar. Excluding intercompany balances, our Canadian dollar and Australian dollar functional currency net assets totaled approximately C$1.0 billion and A$970 million, respectively, at March 31, 2014.

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(Continued)

5.	EARNINGS PER SHARE

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

	THREE MONTHS ENEDED MARCH 31,
	2014					2013
	Income			Shares		Income			Shares
Basic:
Net income attributable to Oil States International, Inc.	$	71,504				$	102,189
Less: Undistributed net income allocable to participating securities		(781	)				--
Undistributed net income applicable to common stockholders		70,723					102,189
Less: Income from discontinued operations, net of tax		(182	)				(9,025	)
Add: Undistributed net income from discontinued operations allocable to participating securities		2					--
Income from continuing operations applicable to Oil States International, Inc. common stockholders – Basic	$	70,543			53,288	$	93,164			54,808
Diluted:
Income from continuing operations applicable to Oil States International, Inc. common stockholders – Basic	$	70,543			53,288	$	93,164			54,808
Effect of dilutive securities:
Undistributed net income reallocated to participating securities		4			--		--			--
Options on common stock		--			283		--			391
Restricted stock awards and other		--			17		--			174
Income from continuing operations applicable to Oil States International, Inc. common stockholders – Diluted		70,547			53,588		93,164			55,373
Income from discontinued operations, net of tax, applicable to Oil States International, Inc. common stockholders		180					9,025
Undistributed net income reallocated to participating securities		--					--
Net income attributable to Oil States International, Inc. common stockholders – Diluted	$	70,727			53,588	$	102,189			55,373

Our calculations of diluted earnings per share for the three months ended March 31, 2014 and 2013 exclude 198,405 shares and 392,905 shares, respectively, issuable pursuant to outstanding stock options and restricted stock awards, due to their antidilutive effect.

6.	BUSINESS ACQUISITIONS AND GOODWILL

On December 2, 2013, we acquired all of the operating assets of Quality Connector Systems, LLC (QCS). Headquartered in Houston, Texas, QCS designs, manufactures and markets a portfolio of proprietary deep and shallow water pipeline connectors for subsea pipeline construction, repair and expansion projects. Subject to customary post-closing adjustments, total cash consideration was $42.5 million. The operations of QCS have been included in our offshore products segment since the acquisition date.

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(Continued)

Changes in the carrying amount of goodwill for the three month period ended March 31, 2014 were as follows (in thousands):

	Well Site Services
	Completion Services			Drilling Services			Subtotal			Accommodations			Offshore Products		Total
Balance as of December 31, 2012
Goodwill	$	201,281		$	22,767		$	224,048		$	295,132		$	118,933	$	638,113
Accumulated Impairment Losses		(94,528	)		(22,767	)		(117,295	)		--			--		(117,295	)
		106,753			--			106,753			295,132			118,933		520,818
Goodwill acquired and purchase price adjustments		1,576			--			1,576			--			26,179		27,755
Foreign currency translation and other changes		(946	)		--			(946	)		(34,076	)		99		(34,923	)
		107,383			--			107,383			261,056			145,211		513,650

Balance as of December 31, 2013
Goodwill		201,911			22,767			224,678			261,056			145,211		630,945
Accumulated Impairment Losses		(94,528	)		(22,767	)		(117,295	)		--			--		(117,295	)
		107,383			--			107,383			261,056			145,211		513,650
Goodwill acquired and purchase price adjustments		194			--			194			--			--		194
Foreign currency translation and other changes		(517	)		--			(517	)		6,402			37		5,922
		107,060			--			107,060			267,458			145,248		519,766

Balance as of March 31, 2014
Goodwill		201,588			22,767			224,355			267,458			145,248		637,061
Accumulated Impairment Losses		(94,528	)		(22,767	)		(117,295	)		--			--		(117,295	)
	$	107,060		$	--		$	107,060		$	267,458		$	145,248	$	519,766

7.	DISCONTINUED OPERATIONS

On September 6, 2013, the Company entered into a Stock Purchase Agreement with Marubeni-Itochu for the sale of Sooner, which comprised the entirety of the Company’s tubular services segment. Total consideration received by the Company was $600 million. We recognized a net gain on disposal of $128.4 million ($84.0 million after-tax) in 2013.

In connection with this transaction, the parties entered into a transition services agreement for the Company to provide certain information technology applications and infrastructure and various administrative services to Sooner during the transition period in exchange for monthly service fees. The transition services agreement expired on February 28, 2014. The cash flows from the disposed business to the Company resulting from the transition services agreement are not significant and did not constitute a significant continuing involvement in Sooner.

Sooner, which had previously been presented as a separate reporting unit, meets the criteria for being reported as a discontinued operation and has been reclassified from continuing operations. Discontinued operations for the three months ended March 31, 2013 reflect the operating results of Sooner while discontinued operations for the three months ended March 31, 2014 consist primarily of adjustments related to the revaluation of outstanding equity options and awards for Sooner employees.

The following table provides the components of net income from discontinued operations, net of tax (in thousands).

	Three Months Ended			Three Months Ended
	March 31 2014			March 31, 2013

Revenues	$	--		$	393,913
Income from discontinued operations before income taxes		257			14,714
Income tax provision		(75	)		(5,689	)
Net income from discontinued operations, net of tax	$	182		$	9,025

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(Continued)

DEBT

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

	March 31, 2014		December 31, 2013
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, 2014	$	--	$	--

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, 2014		--		--

Australian revolving credit facility, which matures December 10, 2015, with available commitments up to AUD$300 million; no borrowings outstanding during the three month period ended March 31, 2014		--		--

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

5 1/8% senior unsecured notes - due January 2023		366,000		366,000

Capital lease obligations and other debt		7,091		7,221
Total debt		973,091		973,221
Less: Current portion		529		529
Total long-term debt and capitalized leases	$	972,562	$	972,692

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.

In the fourth quarter of 2013, the Company repurchased $34.0 million aggregate principal amount of the 5 1/8% Notes. See Note 15 to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for additional discussion regarding our 5 1/8% Notes as they relate to the proposed spin-off of our accommodations segment.

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(Continued)

6 1/2% Senior Unsecured Notes

On June 1, 2011, the Company sold $600 million aggregate principal amount of 6 1/2% Senior Notes due 2019 (6 1/2% Notes) through a private placement to qualified institutional buyers. 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. See Note 15 to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for additional discussion regarding our 5 1/8% Notes as it relates to the proposed spin-off of our accommodations segment.

As of March 31, 2014, the Company had approximately $454.9 million of cash and cash equivalents and $717.1 million of the Company’s U.S. and Canadian credit facilities available for future financing needs. The Company also had availability totaling A$300 million under its Australian credit facility. As of March 31, 2014, the Company had $32.9 million of outstanding letters of credit which reduced amounts available under its credit facilities.

Interest expense on the condensed consolidated statements of income is net of capitalized interest of $0.3 million for the three months ended March 31, 2014 and $0.3 million for the same period in 2013.

9.	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, 2014				December 31, 2013
	Carrying		Fair		Carrying		Fair
	Value		Value		Value		Value
5 1/8% Notes
Principal amount due 2023	$	366,000	$	411,750	$	366,000	$	411,066

6 1/2% Notes
Principal amount due 2019	$	600,000	$	632,628	$	600,000	$	639,378

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(Continued)

10.

CHANGES IN COMMON STOCK OUTSTANDING

Shares of common stock outstanding – January 1, 2014	54,181,569
Repurchase of shares – transferred to treasury	(1,368,086	)
Shares issued upon exercise of stock options and vesting of restricted stock awards	286,318
Shares withheld for taxes on vesting of restricted stock awards and transferred to treasury	(49,390	)
Shares of common stock outstanding – March 31, 2014	53,050,411

11.

STOCK BASED COMPENSATION

During the first three months of 2014, we granted restricted stock awards totaling 225,942 shares valued at a total of $22.7 million. Of the restricted stock awards granted in the first three months of 2014, a total of 222,815 awards vest in four equal annual installments beginning in February 2015 and 3,000 awards vest 100% in February 2015. During the three months ended March 31, 2014, the Company also granted 65,650 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 2015 and are accounted for as a liability that is remeasured at each reporting date until paid. The amount of compensation costs recognized for these liability awards is equal to the amount of cash paid upon settlement. 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 118,950 stock options with a ten-year term were awarded in the three months ended March 31, 2014 with an average exercise price of $100.43, a fair value of $3.8 million and that will vest in four equal annual installments starting in February 2015.

Stock based compensation pre-tax expense from continuing operations recognized in the three month periods ended March 31, 2014 and 2013 totaled $8.0 million and $6.5 million, or $0.11 and $0.09 per diluted share after tax, respectively. The total fair value of restricted stock awards that vested during the three months ended March 31, 2014 and 2013 was $18.1 million and $11.7 million, respectively. At March 31, 2014, $58.4 million of compensation cost related to unvested stock options and restricted stock awards attributable to future performance or vesting conditions had not yet been recognized.

12.

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, 2014 totaled $27.5 million, or 27.7% of pretax income, compared to income tax expense of $33.8 million, or 26.5% of pretax income, for the three months ended March 31, 2013. The increase in the effective tax rate from the prior year was largely the result of higher domestic earnings as a percentage of total earnings and an increase to the state effective tax rate. Our domestic earnings are taxed at a higher rate than our foreign earnings. The effective tax rates are lower than U.S. statutory rates because of lower foreign income tax rates.

13.

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 and offshore products. 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 Steam-Assisted Gravity Drainage (SAGD) and 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, typically followed by lower activity during Spring break-up in the second quarter.

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(Continued)

Financial information by business segment for continuing operations for each of the three months ended March 31, 2014 and 2013 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, 2014
Well site services –
Completion services	$	146,462	$	17,944	$	31,045		$	-	$	23,013	$	596,020
Drilling services		46,564		6,884		5,795			-		7,114		143,498
Total well site services		193,026		24,828		36,840			-		30,127		739,518
Accommodations		252,744		39,599		56,258			-		63,525		2,195,566
Offshore products		212,212		5,695		37,348			97		9,563		956,986
Corporate and eliminations		-		264		(16,803	)		-		212		154,017
Total	$	657,982	$	70,386	$	113,643		$	97	$	103,427	$	4,046,087

	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		296,668		41,088		94,906			-			69,917		2,157,727
Offshore products		201,290		4,043		32,136			(735	)		9,011		819,541
Corporate and eliminations		-		234		(13,281	)		-			104		133,977
Total	$	675,527	$	66,312	$	146,500		$	(735	)	$	107,065	$	3,850,881

14.

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 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 indemnity or insurance, will not have a material adverse effect on our consolidated financial position, results of operations or liquidity.

15.

PLANNED SPIN-OFF OF ACCOMMODATIONS BUSINESS

On July 30, 2013, we announced that our Board of Directors approved pursuing the spin-off of our accommodations business into a stand-alone, publicly traded corporation (Civeo Corporation, or Civeo) through a tax-free distribution of the accommodations business to the Company’s shareholders. The objective of the spin-off is to more effectively focus on two distinct businesses, achieve lower cost of capital for our accommodations business, to pursue more tailored and aggressive growth strategies and optimize operating efficiencies among other objectives. In connection with the spin-off, we received a private letter ruling from the Internal Revenue Service on the tax-free status of the spin-off transaction. The spin-off is subject to market conditions, the completion of a review by the Commission of an amended Form 10 filed by Civeo, the execution of a separation and distribution agreement and other agreements and final approval of our Board of Directors and is expected to be completed by the end of the second quarter of 2014. In connection with the proposed spin-off, we anticipate that we will refinance our existing debt. Specifically, we intend to commence a tender offer for any and all of our outstanding 5 1/8% Notes and 6 1/2% Notes. We intend to fund this tender offer in part with the proceeds of a cash dividend to be paid to us by Civeo immediately prior to the consummation of the proposed spin-off. We anticipate that this cash dividend will be within a range of $650.0 million to $850.0 million. In connection with the spin-off, we also intend to refinance our existing credit facilities with a single, U.S. revolving credit facility. Refer to Note 8 – Debt and Note 9 – Fair Value Measurements for additional details regarding the Company’s debt. Civeo will be spun-off as a C-Corporation. Civeo’s Board of Directors may continue to assess the feasibility and advisability of a potential future conversion into a real estate investment trust (REIT).

OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

(Continued)

16.

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;

●

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, 2014 and 2013, condensed consolidating balance sheets as of March 31, 2014 and December 31, 2013 and the statements of cash flows for each of the three months ended March 31, 2014 and 2013 of (a) the Company, parent/guarantor, (b) Acute Technological Services, Inc., Capstar Holding, L.L.C., Capstar Drilling, Inc., General Marine Leasing, LLC, Oil States Energy Services L.L.C., Oil States Energy Services Holding, Inc., OSES International Holding, L.L.C., Oil States Management, Inc., Oil States Industries, Inc., Oil States Skagit SMATCO, LLC, PTI Group USA LLC, PTI Mars Holdco 1, LLC 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.

With our sale of Sooner, Inc. on September 6, 2013, it is no longer a Guarantor Subsidiary. The Condensed Consolidated Statements of Income and Balance Sheets have been reclassified for all periods presented to reflect only the Company’s continuing operations.

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, 2014
	Oil States						Other						Consolidated Oil
	International,						Subsidiaries						States
	Inc. (Parent/			Guarantor			(Non-			Consolidating			International,
	Guarantor)			Subsidiaries			Guarantors)			Adjustments			Inc.
	(In thousands)

REVENUES
Operating revenues	$	—		$	344,145		$	313,837		$	—		$	657,982
Intercompany revenues		—			9,087			21,277			(30,364	)		—
Total revenues		—			353,232			335,114			(30,364			657,982

OPERATING EXPENSES
Cost of sales and services		—			232,431			187,032			(3,637	)		415,826
Intercompany cost of sales and services		—			5,844			19,303			(25,147	)		—
Selling, general and administrative expenses		449			36,437			19,659			—			56,545
Depreciation and amortization expense		264			32,318			37,845			(41	)		70,386
Other operating expense (income)		(339	)		1,312			609			—			1,582
Operating income (loss)		(374	)		44,890			70,666			(1,539	)		113,643

Interest expense, net of capitalized interest		(16,442	)		(145	)		(12,648	)		12,131			(17,104	)
Interest income		4,295			53			8,700			(12,131	)		917
Equity in earnings (loss) of unconsolidated affiliates		84,141			50,301			97			(134,442	)		97
Other income		—			641			1,028			—			1,669
Income from continuing operations before income taxes		71,620			95,740			67,843			(135,981	)		99,222
Income tax provision		—			(10,480	)		(17,051	)		—			(27,531	)
Net income from continuing operations		71,620			85,260			50,792			(135,981	)		71,691
Net income from discontinued operations, net of tax		(116	)		298			—			—			182
Net income		71,504			85,558			50,792			(135,981	)		71,873

Other comprehensive income (loss):
Foreign currency translation adjustment		(20	)		11,492			12,701			(24,193	)		(20	)
Total other comprehensive income (loss)		(20	)		11,492			12,701			(24,193	)		(20	)

Comprehensive income		71,484			97,050			63,493			(160,174	)		71,853
Comprehensive income attributable to noncontrolling interest		—			—			(292	)		(12	)		(304	)
Comprehensive income attributable to Oil States International, Inc.	$	71,484		$	97,050		$	63,201		$	(160,186	)	$	71,549

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

REVENUES
Operating revenues	$	—		$	310,693		$	364,834		$	—		$	675,527
Intercompany revenues		—			5,506			733			(6,239	)		—
Total revenues		—			316,199			365,567			(6,239	)		675,527

OPERATING EXPENSES
Cost of sales and services		—			217,582			202,225			(1,418	)		418,389
Intercompany cost of sales and services		—			4,046			707			(4,753	)		—
Selling, general and administrative expenses		400			31,680			17,937			—			50,017
Depreciation and amortization expense		234			26,300			39,816			(38	)		66,312
Other operating expense (income)		(154	)		(4,016	)		(1,521	)		—			(5,691	)
Operating income (loss)		(480	)		40,607			106,403			(30	)		146,500

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			74,712			(735	)		(190,792	)		(735	)
Other income		—			597			475			—			1,072
Income from continuing operations before income taxes		102,189			115,782			100,161			(190,822	)		127,310
Income tax provision		—			(8,755	)		(24,996	)		—			(33,751	)
Net income from continuing operations		102,189			107,027			75,165			(190,822	)		93,559
Net income from discontinued operations, net of tax		—			9,025			—			—			9,025
Net income		102,189			116,052			75,165			(190,822	)		102,584

Other comprehensive income (loss):
Foreign currency translation adjustment		(22,339	)		(15,022	)		(14,989	)		30,011