e10vk
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
Form 10-K
ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 2006
Commission file
no. 1-16337
Oil States International,
Inc.
(Exact name of registrant as
specified in its charter)
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Delaware
(State or other
Jurisdiction of
Incorporation or Organization)
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76-0476605
(I.R.S. Employer
Identification No.)
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Three Allen Center, 333 Clay Street, Suite 4620,
Houston, Texas 77002
(Address of Principal Executive
Offices) (Zip Code)
Registrants telephone number, including area code:
(713) 652-0582
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Exchange on Which Registered
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Common Stock, par value
$.01 per share
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New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the Registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes þ No o
Indicate by check mark if the Registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of Registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
form 10-K. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer (as defined in Exchange Act
Rule 12b-2).
Large Accelerated
Filer þ Accelerated
Filer o Non-Accelerated
Filer o
Indicate by check mark whether the Registrant is a shell company
(as defined in
Rule 12b-2
of the
Act. Yes o No þ
State the aggregate market value of the voting and non-voting
common equity held by non-affiliates of the registrant:
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Voting common stock (as of
June 30, 2006)
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$
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1,648,810,748
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Indicate the number of shares outstanding of each of the
registrants classes of common stock, as of the latest
practicable date:
As of February 9, 2007 Common
Stock, par value $.01 per
share 49,298,922 shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrants Definitive Proxy Statement for
the 2007 Annual Meeting of Stockholders, which the Registrant
intends to file with the Securities and Exchange Commission not
later than 120 days after the end of the fiscal year
covered by this
Form 10-K,
are incorporated by reference into Part III of this
Form 10-K.
PART I
This Annual Report on
Form 10-K
contains forward-looking statements within the meaning of
Section 27A of the Securities Exchange Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. Actual
results could differ materially from those projected in the
forward-looking statements as a result of a number of important
factors. For a discussion of important factors that could affect
our results, please refer to Item 1. Business
including the risk factors discussed therein and the financial
statement line item discussions set forth in Item 7.
Managements Discussion and Analysis of Financial Condition
and Results of Operations below.
Cautionary
Statement Regarding Forward-Looking Statements
We include the following cautionary statement to take advantage
of the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995 for any forward-looking
statement made by us, or on our behalf. The factors identified
in this cautionary statement are important factors (but not
necessarily all of the important factors) that could cause
actual results to differ materially from those expressed in any
forward-looking statement made by us, or on our behalf. You can
typically identify forward-looking statements by the use of
forward-looking words such as may, will,
could, project, believe,
anticipate, expect,
estimate, potential, plan,
forecast, and other similar words. All statements
other than statements of historical facts contained in this
Annual Report on
Form 10-K,
including statements regarding our future financial position,
budgets, capital expenditures, projected costs, plans and
objectives of management for future operations and possible
future acquisitions, are forward-looking statements. Where any
such forward-looking statement includes a statement of the
assumptions or bases underlying such forward-looking statement,
we caution that, while we believe such assumptions or bases to
be reasonable and make them in good faith, assumed facts or
bases almost always vary from actual results. The differences
between assumed facts or bases and actual results can be
material, depending upon the circumstances.
Where, in any forward-looking statement, we, or our management,
express an expectation or belief as to the future results, such
expectation or belief is expressed in good faith and believed to
have a reasonable basis. However, there can be no assurance that
the statement of expectation or belief will result or be
achieved or accomplished. Taking this into account, the
following are identified as important factors that could cause
actual results to differ materially from those expressed in any
forward-looking statement made by, or on behalf of, our company:
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the level of demand for and supply of oil and gas;
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fluctuations in the prices of oil and gas;
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the level of drilling activity;
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the level of offshore oil and gas developmental activities;
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general economic conditions;
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our ability to find and retain skilled personnel;
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the availability of capital; and
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the other factors identified under the captions Risks
Related to Our Business Generally and Risks Related
to Our Operations that follow.
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Our
Company
Oil States International, Inc. (the Company),
through its subsidiaries, is a leading provider of specialty
products and services to oil and gas drilling and production
companies throughout the world. We operate in a substantial
number of the worlds active oil and gas producing regions,
including the Gulf of Mexico, U.S. onshore, West Africa,
the North Sea, Canada, South America and Southeast Asia. Our
customers include many of the major and independent oil and gas
companies and other oilfield service companies. We operate in
three principal business segments offshore products,
tubular services and well site services and have
established a leadership position in each.
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Available
Information
The Company maintains a website with the address
www.oilstatesintl.com. The Company is not including the
information contained on the Companys website as a part
of, or incorporating it by reference into, this Annual Report on
Form 10-K.
The Company makes available free of charge through its website
its Annual Report on
Form 10-K,
quarterly reports on
Form 10-Q
and current reports on
Form 8-K,
and amendments to these reports, as soon as reasonably
practicable after the Company electronically files such material
with, or furnishes such material to, the Securities and Exchange
Commission (SEC). The Board of Directors of the Company
documented its governance practices by adopting several
corporate governance policies. These governance policies,
including the Companys corporate governance guidelines and
its code of business conduct and ethics, as well as the charters
for the committees of the Board (Audit Committee, Compensation
Committee and Nominating and Corporate Governance Committee) may
also be viewed at the Companys website. Copies of such
documents will be sent to shareholders free of charge upon
written request of the corporate secretary at the address shown
on the cover page of this
Form 10-K.
In accordance with New York Stock Exchange (NYSE) Rules, on
May 26, 2006, the Company filed the annual certification by
our CEO that, as of the date of the certification, the Company
was in compliance with the NYSEs corporate governance
listing standards.
Our
Background
Oil States International, Inc. was originally incorporated in
July 1995. In July 2000, Oil States International, Inc.,
including its principal operating subsidiaries, Oil States
Industries, Inc. (Oil States Industries), HWC Energy Services,
Inc. (HWC), PTI Group Inc. (PTI) and Sooner Inc. (Sooner)
entered into a Combination Agreement (the Combination Agreement)
providing that, concurrently with the closing of our initial
public offering, HWC, PTI and Sooner would merge with wholly
owned subsidiaries of Oil States (the Combination). As a result,
HWC, PTI and Sooner became wholly owned subsidiaries of Oil
States in February 2001. In this Annual Report on
Form 10-K,
references to the Company or to we,
us, our, and similar terms are to Oil
States International, Inc. and its subsidiaries following the
Combination.
Acquisitions
Since the completion of our initial public offering in February
2001, we have completed 31 acquisitions for total consideration
of $355 million. Acquisitions of other oil service
businesses have been an important aspect of our growth strategy
and plans to increase shareholder value.
In 2002, we acquired six businesses for total consideration of
approximately $72.1 million. Three of these businesses were
rental tool companies added to our well site services segment.
An elastomer molding company, certain assets and related
liabilities of a subsea pipeline equipment and repair services
company and an offshore crane manufacturer and crane repair
service provider were acquired and became part of our offshore
products segment.
In 2003, we spent $16.8 million to acquire five businesses.
Three of the businesses were rental tool companies acquired for
a total consideration of $10.5 million. The acquired rental
tool companies conduct operations in South Texas and Louisiana
and were combined with our existing rental tool business within
our well site services segment. The remaining two businesses,
acquired for aggregate consideration of $6.3 million, were
combined with our offshore products segment.
In 2004, we acquired six rental tool businesses, a tubular
distribution business and a small tooling line for total
consideration of $89.1 million. In January 2004, we
acquired the stock of five related rental tool companies for
$36.6 million and in April 2004 we acquired the assets of a
rental tool business for $4.8 million. In May 2004, we
purchased an oil country tubular goods (OCTG)
distribution business for $47.2 million. In October 2004,
we acquired a tooling product line into our offshore products
segment for $0.5 million.
In 2005, we completed nine acquisitions for total consideration
of $158.6 million. In our well site services segment we
acquired a Wyoming based land drilling company, five related
entities providing wellhead isolation equipment and services,
and a Canadian manufacturer of work force accommodations. Our
tubular services segment acquired a Texas based OCTG
distributor, and our offshore products segment acquired a small
product line.
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In August 2006, we acquired three drilling rigs operating in
West Texas for total consideration of $14.0 million,
including a note payable to the seller of $0.5 million. The
rigs acquired, which are classified as part of our capital
expenditures in 2006, were added to our existing West Texas
drilling fleet in our drilling services business.
Workover
Services Business Transaction
Effective March 1, 2006, we completed a transaction to
combine our workover services business with Boots &
Coots International Well Control, Inc. (AMEX: WEL)
(Boots & Coots) in exchange for
26.5 million shares of Boots & Coots common stock
and senior subordinated promissory notes totaling
$21.2 million. Our workover services business was part of
our well site services segment prior to the combination.
As a result of the closing of the transaction, we acquired
approximately 26.5 million shares of Boots & Coots
common stock, which currently represent 44.6% of its outstanding
common stock. The senior subordinated promissory notes received
in the transaction bear a fixed annual interest rate of 10% and
mature four and one half years from the closing of the
transaction. In connection with this transaction, we also
entered into a Registration Rights Agreement requiring
Boots & Coots to file a shelf registration statement
within 30 days for all of the Boots & Coots shares
we received in the transaction and also allowing us certain
rights to include our shares of common stock of Boots &
Coots in a registration statement filed by Boots &
Coots. The shelf registration statement has been filed by
Boots & Coots and was declared effective in the fourth
quarter of 2006. The transaction terms also allowed us to
designate three additional members to Boots &
Coots existing five-member Board of Directors. All three
directors designated by us have joined the Boots &
Coots Board of Directors as of January 1, 2007.
The transaction resulted in a non-cash pretax gain of
$20.7 million of which $9.4 million has not been
recognized in accordance with the guidance set forth in Emerging
Issues Task Force Issue
No. 01-2
covering gain recognition involving non-cash transactions and
retained equity interests. After the gain adjustment and income
taxes, the transaction had a $5.9 million, or
$0.12 per diluted share, impact on net income and earnings
per share, respectively, in 2006. We account for our investment
in Boots & Coots utilizing the equity method of
accounting. Differences between Boots & Coots
total book equity after the transaction, net to our interest,
and the carrying value of our investment in Boots &
Coots are principally attributable to the unrecognized gain on
the sale of the workover services business and to goodwill.
On February 9, 2007, Boots & Coots announced it
had filed a registration statement to sell 26 million
shares of common stock including 13 million shares we own.
The closing price of Boots & Coots common stock on the
date of the announcement was $2.26. We own a total of
26.5 million shares of Boots & Coots common stock
with a carrying value of $1.31 per share as of
December 31, 2006. There can be no assurance about the
timing of this announced stock sale or whether this transaction
will ultimately take place.
Our
Industry
We operate in the oilfield services industry and provide a broad
range of products and services to our customers through our
offshore products, tubular services and well site services
business segments. Demand for our products and services is
cyclical and substantially dependent upon activity levels in the
oil and gas industry, particularly our customers
willingness to spend capital on the exploration and development
of oil and gas reserves. Demand for our products and services by
our customers is highly sensitive to current and expected oil
and natural gas prices. See Note 14 to our Consolidated
Financial Statements included in this Annual Report on
Form 10-K
for financial information by segment and a geographical breakout
of revenues and long-lived assets.
Our financial results reflect the cyclical nature of the
oilfield services business. Since 2001, there have been periods
of increasing and decreasing activity in each of our operating
segments.
Our Well Site Services businesses, which are significantly
affected by the North American rig count, saw decreased activity
in 2002 and early 2003 and saw increasing activity from 2003
through 2006. Acquisitions and capital expenditures made in this
segment have created additional growth opportunities. In
addition, the increased activity supporting oil sands
developments in northern Alberta, Canada by our work force
accommodations, catering and logistics business in this segment
have had a positive impact on this segments overall trends.
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Our Offshore Products segment, which is more influenced by
deepwater development activity and rig construction and repair,
experienced increased activity during 2003 as we shipped
projects from our backlog which had increased in 2002. In 2004,
activity in this segment slowed; however, backlog has increased
significantly from 2004 to 2006 and is at record high levels
currently, which has resulted in improved operating results
during 2005 and 2006.
Our Tubular Services business is influenced by some of the same
factors as our Well Site Services. In addition, during 2004 and
2005, this segment was positively affected in a significant
manner by increasing prices for steel products, including the
OCTG we sell. During 2006, prices for steel products remained
comparatively stable compared to the previous two years.
Well Site
Services
Overview
During the year ended December 31, 2006, we generated
approximately 34% of our revenue and 61% of our operating
income, before corporate charges, from our well site services
segment. Our well site services segment includes a broad range
of products and services that are used to establish and maintain
the flow of oil and gas from a well throughout its lifecycle and
to accommodate personnel in remote locations. Our services
include drilling services, rental equipment, work force
accommodations, catering and logistics services and modular
building construction services. We use our fleet of drilling
rigs, rental equipment and work force accommodation facilities
to serve our customers at well sites and project development
locations. Our products and services are used in both onshore
and offshore applications throughout the exploration,
development, production and abandonment phases of a wells
life. Additionally, our work force accommodations, catering and
logistics services are employed to support work forces in a
variety of mining and related natural resource applications as
well as forest fire fighting and disaster relief efforts.
Well
Site Services Market
Demand for our drilling rigs, rental equipment and work force
accommodations, catering and logistics services has historically
been tied to the level of activity by oil and gas
explorationists and producers. The primary driver for this
activity is the price of oil and natural gas. Activity levels
have been and we expect will continue to be highly correlated
with hydrocarbon commodity prices.
Products
and Services
Drilling Services. Our drilling services
business is located in Odessa, Texas, Wooster, Ohio and Casper,
Wyoming and provides drilling services for shallow to medium
depths ranging from 2,000 to 11,500 feet. Drilling services
are typically used during the exploration and development stages
of a field. We have a total of 32 semi-automatic drilling rigs
with hydraulic pipe handling booms and lift capacities ranging
from 200,000 to 300,000 pounds. Twenty of these drilling rigs
are located in Odessa, Texas, eight in the Rocky Mountains
region and four are located in Wooster, Ohio. On
December 31, 2006, 25 rigs were working or under contract.
Utilization increased slightly from 87.8% in 2005 to 90.0% in
2006. We have assembled seven of our new rigs that have been
added to our fleet during 2003 through 2006 in our Odessa, Texas
facility with components purchased from specialty vendors. Two
additional rigs were under construction in Odessa, Texas at
December 31, 2006, both of which are expected to commence
two-year contracts with an independent E&P company in the
Rocky Mountains region by July and September 2007. In August
2006, we acquired three drilling rigs from Eagle Rock Drilling
which were added to our existing West Texas drilling fleet. We
may continue to add rigs depending upon our market outlook.
We market our drilling services directly to a diverse customer
base, consisting of both major and independent oil companies.
During 2005 we switched from billing on a footage basis to
billing on a dayrate basis for many of our drilling rigs. Under
a daywork drilling contract, the customer pays for certain costs
that the Company would normally provide when drilling on a
footage basis, and the customer assumes more risk than on a
footage basis. Depending on market conditions and availability
of drilling rigs, we may see changes in pricing, utilization and
contract terms, which could include requests for footage
contracts. The land drilling business is highly fragmented and
consists of a small number of large companies and many smaller
companies.
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Rental Equipment. Our rental equipment
business provides a wide range of products for use in the
offshore and onshore oil and gas industry, including:
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wireline and coiled tubing pressure control equipment;
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wellhead isolation equipment;
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pipe recovery systems;
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thru-tubing fishing services;
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gravel pack operations on well bores; and,
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surface control equipment and down-hole tools utilized by coiled
tubing operators.
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Our rental equipment is used during the exploration,
development, production and abandonment stages. As of
December 31, 2006, we provided rental equipment at 53
U.S. distribution points in Texas, Louisiana, Oklahoma,
Arkansas, Mississippi, New Mexico, Wyoming, California,
Colorado, North Dakota, Utah, Canada, Mexico and Argentina. We
provide rental equipment on a day rental basis with rates
varying depending on the type of equipment and the length of
time rented. In certain operations, we also provide service
personnel in connection with the equipment rental. We own
patents covering some of our rental tools, particularly, in our
wellhead isolation equipment product line.
Work Force Accommodations, Catering and Logistics and Modular
Building Construction. We are a large provider of
integrated products and services to support workers in remote
locations, including work force accommodations, food services,
remote site management services and modular building
construction. We provide complete design, manufacture,
installation, operation and redeployment logistics services for
oil and gas drilling, oil sands development in the
Fort McMurray region of Northern Canada, offshore
construction and diamond mining in Northern Canada. We have also
provided these services for other mining ventures throughout the
world, pipeline construction, forestry and firefighting
operations, disaster relief services and support services for
military operations on a worldwide basis. Our work force
products and service operations are primarily focused in Canada
and the Gulf of Mexico although, in the past, we have also
performed catering and facilities management services in other
international areas including the Middle East, Europe, Asia and
South America. During the peak of our operating season, we
typically provide these services in over 200 separate locations
with separate location populations ranging from 20 to 2,000
persons. Much of our business line growth and profitability in
2005 and 2006 has been generated from capital investments that
we have made in accommodations that support our customers who
are developing prospects in the oil sands region of Canada.
During 2005 and 2006, we invested capital of $56.5 million
in two lodges which accommodate up to 1,548 personnel in the oil
sands region. Furthermore, 33% of our planned capital
expenditures in 2007 are expected to be spent on accommodations
supporting oil sands projects in the Fort McMurray region.
We design, construct and install a variety of portable modular
buildings, including housing, kitchens, recreational units and
offices for lease or sale to the Canadian and Gulf of Mexico
markets. Our designers work closely with our clients to build
structures that best serve their needs.
Offshore
Products
Overview
During the year ended December 31, 2006, we generated
approximately 20% of our revenue and 18% of our operating
income, before corporate charges, from our offshore products
segment. Through this segment, we design and manufacture a
number of cost-effective, technologically advanced products for
the offshore energy industry. In addition, we have other lower
margin products and services such as fabrication and inspection
services. Our products and services are used in both shallow and
deepwater producing regions and include flex-element technology,
advanced connector systems, blow-out preventor stack integration
and repair services, deepwater mooring and lifting systems,
offshore equipment and installation services and subsea pipeline
products. We have facilities in Arlington, Houston and Lampasas,
Texas; Houma, Louisiana; Tulsa, Oklahoma; Scotland; Brazil;
England; Singapore and Thailand that support our offshore
products segment.
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Offshore
Products Market
The market for our offshore products and services depends
primarily upon development of infrastructure for offshore
production activities, drilling rig refurbishments and upgrades
and new rig construction. As demand for oil and gas increases
and related drilling and production increases in offshore areas
throughout the world, particularly in deeper water, we expect
spending on these activities to increase.
The upgrade of existing rigs to equip them with the capability
to drill in deeper water and withstand harsh operating
conditions, the construction of new deepwater-capable rigs, and
the installation of fixed or floating production systems require
specialized products and services like the ones we provide.
Products
and Services
Our offshore products segment provides a broad range of products
and services for use in offshore drilling and development
activities. In addition, this segment provides onshore oil and
gas, defense and general industrial products and services. Our
offshore products segment is dependent in part on the
industrys continuing innovation and creative applications
of existing technologies.
We design and build manufacturing and testing systems for many
of our new products and services. These testing and
manufacturing facilities enable us to provide reliable,
technologically advanced products and services. Our Aberdeen
facility provides structural testing including full-scale
product simulations.
Offshore Development and Drilling
Activities. We design, manufacture, fabricate,
inspect, assemble, repair, test and market subsea equipment and
offshore vessel and rig equipment. Our products are components
of equipment used for the drilling and production of oil and gas
wells on offshore fixed platforms and mobile production units,
including floating platforms and floating production, storage
and offloading (FPSO) vessels, and on other marine vessels,
floating rigs and
jack-ups.
Our products and services include:
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flexible bearings and connector products;
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subsea pipeline products;
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marine winches, mooring and lifting systems and rig equipment;
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conductor casing connections and pipe;
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drilling riser repair services;
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blowout preventor stack assembly, integration, testing and
repair services; and
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other products and services.
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Flexible Bearings and Connector Products. We
are the principal supplier of flexible bearings, or
FlexJoints®,
to the offshore oil and gas industry. We also supply connections
and fittings that join lengths of large diameter conductor or
casing used in offshore drilling operations.
FlexJoints®
are flexible bearings that permit movement of riser pipes or
tension leg platform tethers under high tension and pressure.
They are used on drilling, production and export risers and are
used increasingly as offshore production moves to deeper water
areas. Drilling riser systems provide the vertical conduit
between the floating drilling vessel and the subsea wellhead.
Through the drilling riser, equipment is guided into the well
and drilling fluids are returned to the surface. Production
riser systems provide the vertical conduit from the subsea
wellhead to the floating production platform. Oil and gas flows
to the surface for processing through the production riser.
Export risers provide the vertical conduit from the floating
production platform to the subsea export pipelines.
FlexJoints®
are a critical element in the construction and operation of
production and export risers on floating production systems in
deepwater.
Floating production systems, including Tension Leg Platforms,
Spars and FPSO facilities, are a significant means of producing
oil and gas, particularly in deepwater environments. We provide
many important products for the construction of these
facilities. A tension leg platform is a floating platform that
is moored by vertical pipes, or tethers, attached to both the
platform and the sea floor. Our
FlexJoint®
tether bearings are used at the top and bottom connections of
each of the tethers, and our Merlin connectors are used to join
shorter pipe sections to form long pipes offshore. A Spar is a
floating vertical cylindrical structure which is approximately
six to seven times longer
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than its diameter and is anchored in place. Our
FlexJoints®
are also used to attach the steel catenary risers to a Spar or
FPSO and for use on import or export risers.
Subsea Pipeline Products. We design and
manufacture a variety of fittings and connectors used in
offshore oil and gas pipelines. Our products are used for new
construction, maintenance and repair applications. New
construction fittings include:
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forged steel Y-shaped connectors for joining two pipelines into
one;
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pressure-balanced safety joints for protecting pipelines and
related equipment from anchor snags or a shifting sea-bottom;
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electrical isolation joints; and
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hot tap clamps that allow new pipelines to be joined into
existing lines without interrupting the flow of petroleum
product.
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We provide diverless connection systems for subsea flowlines and
pipelines. Our
HydroTech®
collet connectors provide a high-integrity, proprietary
metal-to-metal
sealing system for the final
hook-up of
deep offshore pipelines and production systems. They also are
used in diverless pipeline repair systems and in future pipeline
tie-in systems. Our lateral tie-in sled, which is installed with
the original pipeline, allows a subsea tie-in to be made quickly
and efficiently using proven
HydroTech®
connectors without costly offshore equipment mobilization and
without shutting off product flow.
We provide pipeline repair hardware, including deepwater
applications beyond the depth of diver intervention. Our
products include:
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repair clamps used to seal leaks and restore the structural
integrity of a pipeline;
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mechanical connectors used in repairing subsea pipelines without
having to weld;
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flanges used to correct misalignment and swivel ring
flanges; and
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pipe recovery tools for recovering dropped or damaged pipelines.
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Marine Winches, Mooring and Lifting Systems and Rig
Equipment. We design, engineer and manufacture
marine winches, mooring and lifting systems and rig equipment.
Our
Skagit®
winches are specifically designed for mooring floating and
semi-submersible drilling rigs and positioning pipelay and
derrick barges, anchor handling boats and
jack-ups,
while our
Nautilus®
marine cranes are used on production platforms throughout the
world. We also design and fabricate rig equipment such as
automatic pipe racking and blow-out preventor handling
equipment. Our engineering teams, manufacturing capability and
service technicians who install and service our products provide
our customers with a broad range of equipment and services to
support their operations. Aftermarket service and support of our
installed base of equipment to our customers is also an
important source of revenues to us.
BOP Stack Assembly, Integration, Testing and Repair
Services. We design and fabricate lifting and
protection frames and offer system integration of blow-out
preventor stacks and subsea production trees. We can provide
complete turnkey and design fabrication services. We also design
and manufacture a variety of custom subsea equipment, such as
riser flotation tank systems, guide bases, running tools and
manifolds. In addition, we also offer blow-out preventor and
drilling riser testing and repair services.
Other Products and Services. We provide
equipment for securing subsea structures and offshore platform
jackets, including our
Hydra-Lok®
hydraulic system. The
Hydra-Lok®
tool, which has been successfully used at depths of
3,000 feet, does not require diver intervention or guide
lines.
We also provide cost-effective, standardized leveling systems
for offshore structures that are anchored by foundation piles,
including subsea templates, subsea manifolds and platform
jackets.
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Our offshore products segment also produces a variety of
products for use in applications other than in the offshore oil
and gas industry. For example, we provide:
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elastomer consumable downhole products for onshore drilling and
production;
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metal-elastomeric
FlexJoints®
used in a variety of military and marine applications; and
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drum-clutches and brakes for heavy-duty power transmission in
the mining, paper, logging and marine industries.
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Backlog. Backlog in our offshore products
segment was $349.3 million at December 31, 2006,
compared to $110.7 million at December 31, 2005 and
$97.5 million at December 31, 2004. We expect the
majority of our backlog at December 31, 2006 to be
completed in 2007. Our offshore products backlog consists of
firm customer purchase orders for which contractual commitments
exist and delivery is scheduled. In some instances, these
purchase orders are cancelable by the customer, subject to the
payment of termination fees
and/or the
reimbursement of our costs incurred. Although our backlog is an
important indicator of future offshore products shipments and
revenues, backlog as of any particular date may not be
indicative of our actual operating results for any future
period. We believe that the offshore construction and
development business is characterized by lengthy projects and a
long lead-time order cycle. The change in backlog
levels from one period to the next does not necessarily evidence
a long-term trend.
Regions
of Operations
Our offshore products segment provides products and services to
customers in the major offshore oil and gas producing regions of
the world, including the Gulf of Mexico, West Africa,
Azerbaijan, the North Sea, Brazil and Southeast Asia.
Customers
and Competitors
We market our products and services to a broad customer base,
including the direct end users, engineering and design
companies, prime contractors, and at times, our competitors
through outsourcing arrangements.
Tubular
Services
Overview
During the year ended December 31, 2006, we generated
approximately 46% of our revenue and 21% of our operating
income, before corporate charges, from our tubular services
segment. Through this segment, we distribute OCTG and provide
associated OCTG finishing and logistics services to the oil and
gas industry. OCTG consist of downhole casing and production
tubing. Through our tubular services segment, we:
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distribute a broad range of casing and tubing;
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provide threading, remediation, logistical and inventory
services; and
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offer
e-commerce
pricing, ordering, tracking and financial reporting capabilities.
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We serve a customer base ranging from major oil companies to
small independents. Through our key relationships with more than
20 domestic and foreign manufacturers and related service
providers and suppliers of OCTG, we deliver tubular products and
ancillary services to oil and gas companies, drilling
contractors and consultants predominantly in the United States.
The OCTG distribution market is highly fragmented and
competitive, and is focused in the United States. We purchase
tubular goods from a variety of sources. However, during 2006,
we purchased from a single domestic supplier 46% of the tubular
goods we distributed and from three domestic suppliers
approximately 79% of such tubular goods.
OCTG
Market
Our tubular services segment primarily distributes casing and
tubing. Casing forms the structural wall in oil and gas wells to
provide support, control pressure and prevent caving during
drilling operations. Casing is also used
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to protect water-bearing formations during the drilling of a
well. Casing is generally not removed after it has been
installed in a well. Production tubing, which is used to bring
oil and gas to the surface, may be replaced during the life of a
producing well.
A key indicator of domestic demand for OCTG is the average
number of drilling rigs operating in the United States. The OCTG
market at any point in time is also affected by the level of
inventories maintained by manufacturers, distributors and end
users. Demand for tubular products is positively impacted by
increased drilling of deeper, horizontal and offshore wells.
Deeper wells require incremental tubular footage and enhanced
mechanical capabilities to ensure the integrity of the well.
Premium tubulars are used in horizontal drilling to withstand
the increased bending and compression loading associated with a
horizontal well. Operators typically specify premium tubulars
for the completion of offshore wells.
Products
and Services
Tubular Products and Services. We distribute
various types of OCTG produced by both domestic and foreign
manufacturers to major and independent oil and gas exploration
and production companies and other OCTG distributors. We do not
manufacture any of the tubular goods that we distribute. As a
result, gross margins in this segment are generally lower than
those reported by our other segments. We operate our tubular
services segment from a total of eight offices and facilities
located near areas of oil and gas exploration and development
activity. We have distribution relationships with most major
domestic and certain international steel mills.
In this business, inventory management is critical to our
success. We maintain
on-the-ground
inventory in approximately 60 yards located in the United
States, giving us the flexibility to fill our customers
orders from our own stock or directly from the manufacturer. We
have a proprietary inventory management system, designed
specifically for the OCTG industry, that enables us to track our
product shipments down to the individual joint of pipe.
A-Z
Terminal. Our
A-Z Terminal
pipe maintenance and storage facility in Crosby, Texas is
equipped to provide a full range of tubular services, giving us
strong customer service capabilities. Our
A-Z Terminal
is on 109 acres, is an ISO 9001-certified facility and has
more than 1,400 pipe racks and two double-ended thread lines. We
have exclusive use of a permanent third-party inspection center
within the facility. The facility also includes indoor chrome
storage capability and patented pipe cleaning machines.
We offer services at our
A-Z Terminal
facility typically outsourced by other distributors, including
the following: threading, inspection, cleaning, cutting,
logistics, rig returns, installation of float equipment and
non-destructive testing.
Other Facilities. We also offer tubular
services at our facilities in Midland, Texas and Godley, Texas
which were added in the Phillips acquisition. Our Midland, Texas
facility covers approximately 60 acres and has more than
400 pipe racks. Our Godley, Texas facility, which services the
Barnett shale area, has approximately 60 pipe racks on
approximately 13 developed acres and is serviced by a rail spur.
Independent third party inspection companies operate within
these facilities.
Tubular Products and Services Sales
Arrangements. We provide our tubular products and
logistics services through a variety of arrangements, including
spot market sales and alliances. We provide some of our tubular
products and services to independent and major oil and gas
companies under alliance arrangements. Although our alliances
are generally not as profitable as the spot market and can be
cancelled by the customer, they provide us with more stable and
predictable revenues and an improved ability to forecast
required inventory levels, which allows us to manage our
inventory more efficiently.
Regions
of Operations
Our tubular services segment provides tubular products and
services principally to customers in the United States both for
land and offshore applications. However, we also sell a small
percentage for export to other countries, including Brazil,
Cameroon, Chad, Columbia, Congo, Ecuador, Egypt, Equatorial
Guinea, Gabon, Germany, Guatemala, Hungary, Netherlands, Russia,
Scotland, Trinidad, Tunisia and Venezuela.
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Customers,
Suppliers and Competitors
Our three largest end-user customers in the tubular distribution
market in 2006 were ConocoPhillips, ChevronTexaco Corporation
and Chesapeake Energy Corporation. Our three largest suppliers
were U.S. Steel Group, Lone Star Steel and Tenaris Global
Services USA Corporation (formerly Maverick Tube Corporation).
Although we have a leading market share position in tubular
services distribution, the market is highly fragmented. Our main
competitors in tubular distribution are privately owned
distributors including Premier Pipe L.P., Red Man
Pipe & Supply Co., Inc., Bourland and Leverich and
Pipeco Services.
Employees
As of December 31, 2006, we had approximately
5,124 full-time employees, 33% of whom are in our offshore
products segment, 64% of whom are in our well site services
segment, 2% of whom are in our tubular services segment and 1%
of whom are in our corporate headquarters. We are party to
collective bargaining agreements covering 688 employees located
in Canada and the United Kingdom as of December 31, 2006.
We believe relations with our employees are good.
Government
Regulation
Our business is significantly affected by foreign, federal,
state and local laws and regulations relating to the oil and
natural gas industry, worker safety and environmental
protection. Changes in these laws, including more stringent
regulations and increased levels of enforcement of these laws
and regulations, could significantly affect our business. We
cannot predict changes in the level of enforcement of existing
laws and regulations or how these laws and regulations may be
interpreted or the effect changes in these laws and regulations
may have on us or our future operations or earnings. We also are
not able to predict whether additional laws and regulations will
be adopted.
We depend on the demand for our products and services from oil
and natural gas companies. This demand is affected by changing
taxes, price controls and other laws and regulations relating to
the oil and gas industry generally, including those specifically
directed to oilfield and offshore operations. The adoption of
laws and regulations curtailing exploration and development
drilling for oil and natural gas in our areas of operation could
also adversely affect our operations by limiting demand for our
products and services. We cannot determine the extent to which
our future operations and earnings may be affected by new
legislation, new regulations or changes in existing regulations
or enforcement.
Some of our employees who perform services on offshore platforms
and vessels are covered by the provisions of the Jones Act, the
Death on the High Seas Act and general maritime law. These laws
operate to make the liability limits established under
states workers compensation laws inapplicable to
these employees and permit them or their representatives
generally to pursue actions against us for damages or
job-related injuries with no limitations on our potential
liability.
Our operations are subject to numerous foreign, federal, state
and local environmental laws and regulations governing the
release
and/or
discharge of materials into the environment or otherwise
relating to environmental protection. Numerous governmental
agencies issue regulations to implement and enforce these laws,
for which compliance is often costly and difficult. The
violation of these laws and regulations may result in the denial
or revocation of permits, issuance of corrective action orders,
assessment of administrative and civil penalties, and even
criminal prosecution. We believe that we are in substantial
compliance with applicable environmental laws and regulations.
Further, we do not anticipate that compliance with existing
environmental laws and regulations will have a material effect
on our consolidated financial statements. However, there can be
no assurance that substantial costs for compliance will not be
incurred in the future. Moreover, it is possible that other
developments, such as the adoption of stricter environmental
laws, regulations and enforcement policies or more stringent
enforcement of existing environmental laws and regulations,
could result in additional costs or liabilities that we cannot
currently quantify.
We generate wastes, including hazardous wastes, that are subject
to the federal Resource Conservation and Recovery Act, or RCRA,
and comparable state statutes. The United States Environmental
Protection Agency, or
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EPA, and state agencies have limited the approved methods of
disposal for some types of hazardous and nonhazardous wastes.
Some wastes handled by us in our field service activities that
currently are exempt from treatment as hazardous wastes may in
the future be designated as hazardous wastes under
RCRA or other applicable statutes. This would subject us to more
rigorous and costly operating and disposal requirements.
With regard to our U.S. operations, the federal
Comprehensive Environmental Response, Compensation, and
Liability Act, or CERCLA, also know as the Superfund
law, and comparable state statutes impose liability, without
regard to fault or legality of the original conduct, on classes
of persons that are considered to have contributed to the
release of a hazardous substance into the environment. These
persons include the owner or operator of the disposal site or
the site where the release occurred and companies that disposed
of or arranged for the disposal of the hazardous substances at
the site where the release occurred. Under CERCLA, these persons
may be subject to joint and several liability for the costs of
cleaning up the hazardous substances that have been released
into the environment and for damages to natural resources, and
it is not uncommon for neighboring landowners and other third
parties to file claims for personal injury and property damage
allegedly caused by the hazardous substances released into the
environment. We currently have operations in the United States
on properties where activities involving the handling of
hazardous substances or wastes may have been conducted prior to
our operations on such properties or by third parties whose
operations were not under our control. These properties may be
subject to CERCLA, RCRA and analogous state laws. Under these
laws and related regulations, we could be required to remove or
remediate previously discarded hazardous substances and wastes
or property contamination that was caused by these third
parties. These laws and regulations may also expose us to
liability for our acts that were in compliance with applicable
laws at the time the acts were performed.
In the course of our domestic operations, some of our equipment
may be exposed to naturally occurring radiation associated with
oil and gas deposits, and this exposure may result in the
generation of wastes containing naturally occurring radioactive
materials or NORM. NORM wastes exhibiting trace
levels of naturally occurring radiation in excess of established
state standards are subject to special handling and disposal
requirements, and any storage vessels, piping, and work area
affected by NORM may be subject to remediation or restoration
requirements. Because many of the properties presently or
previously owned, operated, or occupied by us have been used for
oil and gas production operations for many years, it is possible
that we may incur costs or liabilities associated with elevated
levels of NORM.
The Federal Water Pollution Control Act and analogous state laws
impose restrictions and strict controls regarding the discharge
of pollutants into state waters or waters of the United States.
The discharge of pollutants into jurisdictional waters is
prohibited unless the discharge is permitted by the EPA or
applicable state agencies. Many of our domestic properties and
operations require permits for discharges of wastewater
and/or
stormwater, and we have a system for securing and maintaining
these permits. In addition, the Oil Pollution Act of 1990
imposes a variety of requirements on responsible parties related
to the prevention of oil spills and liability for damages,
including natural resource damages, resulting from such spills
in waters of the United States. A responsible party includes the
owner or operator of a facility or vessel, or the lessee or
permittee of the area in which an offshore facility is located.
The Federal Water Pollution Control Act and analogous state laws
provide for administrative, civil and criminal penalties for
unauthorized discharges and, together with the Oil Pollution
Act, impose rigorous requirements for spill prevention and
response planning, as well as substantial potential liability
for the costs of removal, remediation, and damages in connection
with any unauthorized discharges.
Some of our operations also result in emissions of regulated air
pollutants. The federal Clean Air Act and analogous state laws
require permits for facilities in the United States that have
the potential to emit substances into the atmosphere that could
adversely affect environmental quality. Failure to obtain a
permit or to comply with permit requirements could result in the
imposition of substantial administrative, civil and even
criminal penalties.
In response to recent studies suggesting that emissions of
certain gases may be contributing to warming of the Earths
atmosphere, many foreign nations, including Canada, have agreed
to limit emissions of these gases, generally referred to as
greenhouse gases, pursuant to the United Nations
Framework Convention on Climate Change, also known as the
Kyoto Protocol. Methane, a primary component of
natural gas, and carbon dioxide a byproduct of the burning of
fossil fuels, are examples of greenhouse gases. Although the
United States is not participating in the Kyoto Protocol, the
current session of Congress is considering climate change
legislation, with
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multiple bills having already been introduced in the Senate that
propose to restrict greenhouse gas emissions. By comparison,
several states have already adopted legislation, regulations
and/or
regulatory initiatives to reduce emissions of greenhouse gases.
Also, on November 29, 2006, the U.S. Supreme Court
heard arguments on a case appealed from the U.S. Circuit
Court of Appeals for the District Columbia, Massachusetts,
et al. v. EPA, in which the appellate court held that
the U.S. Environmental Protection Agency had discretion
under the federal Clean Air Act to refuse to regulate carbon
dioxide emissions from mobile sources. Passage of climate change
legislation by Congress or a Supreme Court reversal of the
appellate decision could result in federal regulation of carbon
dioxide emissions and other greenhouse gases. Also, any federal
or state restrictions on emissions of greenhouse gases that may
be imposed in areas of the United States in which we conduct
business could adversely affect our operations and demand for
our services.
Our operations outside of the United States are potentially
subject to similar foreign governmental controls relating to
protection of the environment. We believe that, to date, our
operations outside of the United States have been in substantial
compliance with existing requirements of these foreign
governmental bodies and that such compliance has not had a
material adverse effect on our operations. However, there is no
assurance that this trend of compliance will continue in the
future or that such compliance will not be material. For
instance, any future restrictions on emissions of greenhouse
gases that are imposed in foreign countries in which we operate,
such as in Canada, pursuant to the Kyoto Protocol or other
locally enforceable requirements could adversely affect demand
for our services.
Risks
Related to Our Business Generally
Decreased
oil and gas industry expenditure levels will adversely affect
our results of operations.
We depend upon the oil and gas industry and its ability and
willingness to make expenditures which are directly affected by
trends in oil and natural gas prices. Demand for our products
and services is particularly sensitive to the level of
exploration, development and production activity of, and the
corresponding capital spending by, oil and natural gas
companies, including national oil companies. If our
customers expenditures decline, our business will suffer.
The industrys willingness to explore, develop and produce
depends largely upon the availability of attractive drilling
prospects and the prevailing view of future product prices.
Prices for oil and natural gas are subject to large fluctuations
in response to relatively minor changes in the supply of and
demand for oil and natural gas, market uncertainty, and a
variety of other factors that are beyond our control. A sudden
or long term decline in product pricing could materially
adversely affect our results of operations. Any prolonged
reduction in oil and natural gas prices will depress levels of
exploration, development, and production activity, often
reflected as reductions in rig counts. Such lower activity
levels could materially adversely affect our revenue and
profitability. Many factors affect the supply and demand for oil
and gas and therefore influence product prices, including:
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the level of production;
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the levels of oil and gas inventories;
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the expected cost of developing new reserves;
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the actual cost of finding and producing oil and gas;
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the availability of attractive oil and gas field prospects which
may be affected by governmental actions or environmental
activists which may restrict drilling;
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the availability of transportation infrastructure, refining
capacity and shifts in end-customer preferences toward fuel
efficiency and the use of natural gas;
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depletion rates;
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the level of drilling activity;
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global weather conditions and natural disasters;
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worldwide economic activity including growth in underdeveloped
countries, including China and India;
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national government political requirements, including the
ability of the Organization of Petroleum Exporting Companies
(OPEC) to set and maintain production levels and prices for oil
and government policies which could nationalize or expropriate
oil and gas exploration, production, refining or transportation
assets;
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the impact of armed hostilities involving one or more oil
producing nations;
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the timing and extent of alternative energy sources, including
liquefied natural gas (LNG);
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environmental regulation; and
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tax policies.
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Extended
periods of low oil prices or unsuccessful exploration results
may decrease deepwater exploration and production activity and
adversely affect our business. Similarly, any such extended
periods of low oil prices could adversely affect the level of
expenditures for oil sands development and production in
Canada.
Our offshore products segment depends on exploration and
production expenditures in deepwater areas. Because deepwater
projects are more capital intensive and take longer to generate
first production than shallow water and onshore projects, the
economic analyses conducted by exploration and production
companies typically assume lower prices for production from such
projects to determine economic viability over the long term. The
economic analyses conducted by exploration and production
companies for very large oil sands developments are similar to
those performed for deepwater projects with respect to oil price
assumptions. Perceptions of longer-term lower oil prices by
these companies can reduce or defer major expenditures given the
long-term nature of many large scale development projects, which
could adversely affect our revenues and profitability.
Because
the oil and gas industry is cyclical, our operating results may
fluctuate.
Oil prices have been and are expected to remain volatile. This
volatility causes oil and gas companies and drilling contractors
to change their strategies and expenditure levels. We have
experienced in the past, and we may experience in the future,
significant fluctuations in operating results based on these
changes.
We do
business in international jurisdictions whose regulatory
environments and compliance regimes differ from those in the
United States. Our business may suffer because our efforts to
comply with United States laws and regulations could restrict
our ability to do business in international jurisdictions,
relative to our competitors who are not subject to United States
laws and regulations.
Our international business operations include projects in
countries where governmental corruption has been known to exist
and where our competitors who are not subject to United States
laws and regulations, such as the Foreign Corrupt Practices Act,
can gain competitive advantages over us by securing business
awards, licenses or other preferential treatment in those
jurisdictions using methods that United States law and
regulations prohibit us from using. For example, our
non-U.S. competitors
are not subject to the anti-bribery restrictions of the Foreign
Corrupt Practices Act, which make it illegal to give anything of
value to foreign officials or employees or agents of nationally
owned oil companies in order to obtain or retain any business or
other advantage. We may be subject to competitive disadvantages
to the extent that our competitors are able to secure business,
licenses or other preferential treatment by making payments to
government officials and others in positions of influence.
While we and our subsidiaries are committed to conducting
business in a legal and ethical manner, there is a risk of
violating the U.S. Foreign Corrupt Practices Act or other
applicable anti-corruption regulations that generally prohibit
the making of improper payments to foreign officials for the
purpose of obtaining or retaining business. Violations of these
laws could result in monetary penalties against us or our
subsidiaries and could damage our reputation and, therefore, our
ability to do business.
We
might be unable to employ a sufficient number of technical
personnel.
Many of the products that we sell, especially in our offshore
products segment, are complex and highly engineered and often
must perform in harsh conditions. We believe that our success
depends upon our ability to
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employ and retain technical personnel with the ability to
design, utilize and enhance these products. In addition, our
ability to expand our operations depends in part on our ability
to increase our skilled labor force. The demand for skilled
workers is high, and the supply is limited. We have already
experienced high demand and increased wages for labor forces
serving our well site services segment, notably in our
accommodations business in Canada. Significant increases in the
wages paid by competing employers could further result in a
reduction of our skilled labor force, increases in the wage
rates that we must pay or both. When these events occur, our
cost structure increases and our growth potential could be
impaired.
The
level and pricing of tubular goods imported into the United
States could decrease demand for our tubular goods inventory and
adversely impact our results of operations. Also, if steel mills
were to sell a substantial amount of goods directly to end users
in the United States, our results of operations could be
adversely impacted.
U.S. law currently restricts imports of low-cost tubular
goods from a number of foreign countries into the
U.S. tubular goods market. If these restrictions were to be
lifted or if the level of imported low-cost tubular goods were
to otherwise increase, our tubular services segment could be
adversely affected to the extent that we then have higher-cost
tubular goods in inventory or if prices and margins are driven
down by increased supplies of tubular goods. If prices were to
decrease significantly, we might not be able to profitably sell
our inventory of tubular goods. In addition, significant price
decreases could result in a longer holding period for some of
our inventory, which could also have a material adverse effect
on our tubular services segment.
We do not manufacture any of the tubular goods that we
distribute. Historically, users of tubular goods in the United
States, in contrast to outside the United States, have purchased
tubular goods through distributors. If customers were to
purchase tubular goods directly from steel mills, our results of
operations could be adversely impacted.
We are
subject to extensive and costly environmental laws and
regulations that may require us to take actions that will
adversely affect our results of operations.
Our drilling operations and our offshore products business are
significantly affected by stringent and complex foreign,
federal, provincial, state and local laws and regulations
governing the discharge of substances into the environment or
otherwise relating to environmental protection. We could be
exposed to liability for cleanup costs, natural resource damages
and other damages as a result of our conduct that was lawful at
the time it occurred or the conduct of, or conditions caused by,
prior operators or other third parties. Environmental laws and
regulations are subject to change in the future, possibly
resulting in more stringent requirements. If existing regulatory
requirements or enforcement policies change or are more
stringently enforced, we may be required to make significant
unanticipated capital and operating expenditures.
Any failure by us to comply with applicable environmental laws
and regulations may result in governmental authorities taking
actions against our business that could adversely impact our
operations and financial condition, including the:
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issuance of administrative, civil and criminal penalties;
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denial or revocation of permits or other authorizations;
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reduction or cessation in operations; and
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performance of site investigatory, remedial or other corrective
actions.
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We may
not have adequate insurance for potential
liabilities.
Our operations are subject to many hazards. We face the
following risks under our insurance coverage:
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we may not be able to continue to obtain insurance on
commercially reasonable terms;
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we may be faced with types of liabilities that will not be
covered by our insurance, such as damages from environmental
contamination or terrorist attacks;
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the dollar amount of any liabilities may exceed our policy
limits; and
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we may incur losses from interruption of our business that
exceed our insurance coverage.
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Even a partially uninsured claim, if successful and of
significant size, could have a material adverse effect on our
results of operations or consolidated financial position.
We are
subject to litigation risks that may not be covered by
insurance.
In the ordinary course of business, we become the subject of
various claims, lawsuits and administrative proceedings seeking
damages or other remedies concerning our commercial operations,
products, employees and other matters, including occasional
claims by individuals alleging exposure to hazardous materials
as a result of our products or operations. Some of these claims
relate to the activities of businesses that we have sold, and
some relate to the activities of businesses that we have
acquired, even though these activities may have occurred prior
to our acquisition of such businesses. We maintain insurance to
cover many of our potential losses, and we are subject to
various self-retentions and deductibles under our insurance. It
is possible, however, that a judgment could be rendered against
us in cases in which we could be uninsured and beyond the
amounts that we currently have reserved or anticipate incurring
for such matters.
We
might be unable to compete successfully with other companies in
our industry.
We sell our products and services in competitive markets. In
some of our business segments, we compete with the oil and gas
industrys largest oilfield services providers. These
companies have greater financial resources than we do. Our
business will be adversely affected to the extent that these
providers are successful in reducing purchases of our products
and services.
Risks
Related to Our Operations
We are
susceptible to seasonal earnings volatility due to adverse
weather conditions in our regions of operations.
Our operations are directly affected by seasonal differences in
weather in the areas in which we operate, most notably in Canada
and the Gulf of Mexico. A portion of our Canadian work force
accommodations, catering and logistics operations is conducted
during the winter months when the winter freeze in remote
regions is required for exploration and production activity to
occur. The spring thaw in these frontier regions restricts
operations in the spring months and, as a result, adversely
affects our operations and sales of products and services in the
second and third quarters. Our operations in the Gulf of Mexico
are also affected by weather patterns. Weather conditions in the
Gulf Coast region generally result in higher drilling activity
in the spring, summer and fall months with the lowest activity
in the winter months. In addition, summer and fall drilling
activity can be restricted due to hurricanes and other storms
prevalent in the Gulf of Mexico and along the Gulf Coast. For
example, during 2005, a significant disruption occurred in oil
and gas drilling and production operations in the U.S. Gulf
of Mexico due to damage inflicted by hurricanes Katrina and
Rita. As a result of these seasonal differences, full year
results are not likely to be a direct multiple of any particular
quarter or combination of quarters.
We
might be unable to protect our intellectual property
rights.
We rely on a variety of intellectual property rights that we use
in our offshore products and well site services segments,
particularly our patents relating to our
FlexJoint®
technology and intervention tools utilized in the completion or
workover of oil and gas wells. The market success of our
technologies will depend, in part, on our ability to obtain and
enforce our proprietary rights in these technologies, to
preserve rights in our trade secret and non-public information,
and to operate without infringing the proprietary rights of
others. We may not be able to successfully preserve these
intellectual property rights in the future and these rights
could be invalidated, circumvented or challenged. If any of our
patents or other intellectual property rights are determined to
be invalid or unenforceable, or if a court limits the scope of
claims in a patent or fails to recognize our trade secret
rights, our competitive advantages could be significantly
reduced in the relevant technology, allowing competition for our
customer base to increase. In addition, the laws of some foreign
countries in which our products and services may be
17
sold do not protect intellectual property rights to the same
extent as the laws of the United States. The failure of our
company to protect our proprietary information and any
successful intellectual property challenges or infringement
proceedings against us could adversely affect our competitive
position.
If we
do not develop new competitive technologies and products, our
business and revenues may be adversely affected.
The market for our offshore products is characterized by
continual technological developments to provide better
performance in increasingly greater depths and harsher
conditions. If we are not able to design, develop and produce
commercially competitive products in a timely manner in response
to changes in technology, our business and revenues will be
adversely affected.
Loss
of key members of our management could adversely affect our
business.
We depend on the continued employment and performance of key
members of management. If any of our key managers resign or
become unable to continue in their present roles and are not
adequately replaced, our business operations could be materially
adversely affected. We do not maintain key man life
insurance for any of our officers.
If we
have to write off a significant amount of goodwill, our earnings
will be negatively affected.
As of December 31, 2006, goodwill represented approximately
21% of our total assets. We have recorded goodwill because we
paid more for some of our businesses than the fair market value
of the tangible and separately measurable intangible net assets
of those businesses. Current accounting standards, which were
effective January 1, 2002, require a periodic review of
goodwill for impairment in value and a non-cash charge against
earnings with a corresponding decrease in stockholders
equity if circumstances indicate that the carrying amount will
not be recoverable (see Note 6 to our Consolidated
Financial Statements included in this Annual Report on
Form 10-K).
If we
were to lose a significant supplier of our tubular goods, we
could be adversely affected.
During 2006, we purchased from a single domestic supplier
approximately 46% of the tubular goods we distributed and from
three domestic suppliers approximately 79% of such tubular
goods. We do not have contracts with any of these suppliers. If
we were to lose any of these suppliers or if production at one
or more of the suppliers were interrupted, our tubular services
segment and our overall business, financial condition and
results of operations could be adversely affected. If the extent
of the loss or interruption were sufficiently large, the impact
on us would be material.
During
periods of strong demand, we may be unable to obtain critical
project materials on a timely basis.
Our operations depend on our ability to procure on a timely
basis certain project materials, such as forgings, to complete
projects in an efficient manner. Our inability to procure
critical materials during times of strong demand could have a
material adverse effect on our business and operations.
Provisions
contained in our certificate of incorporation and bylaws could
discourage a takeover attempt, which may reduce or eliminate the
likelihood of a change of control transaction and, therefore,
the ability of our stockholders to sell their shares for a
premium.
Provisions contained in our certificate of incorporation and
bylaws, such as a classified board, limitations on the removal
of directors, on stockholder proposals at meetings of
stockholders and on stockholder action by written consent and
the inability of stockholders to call special meetings, could
make it more difficult for a third party to acquire control of
our company. Our certificate of incorporation also authorizes
our board of directors to issue preferred stock without
stockholder approval. If our board of directors elects to issue
preferred stock, it could increase the difficulty for a third
party to acquire us, which may reduce or eliminate our
stockholders ability to sell their shares of common stock
at a premium.
|
|
Item 1B.
|
Unresolved
Staff Comments
|
None.
18
The following table presents information about our principal
properties and facilities. Except as indicated below, we own all
of these properties or facilities.
|
|
|
|
|
|
|
|
|
Approximate
|
|
|
|
|
|
Square
|
|
|
|
Location
|
|
Footage/Acreage
|
|
|
Description
|
|
United States:
|
|
|
|
|
|
|
Houston, Texas (lease)
|
|
|
9,342
|
|
|
Principal executive offices
|
Arlington, Texas
|
|
|
11,264
|
|
|
Offshore products business office
|
Arlington, Texas
|
|
|
55,853
|
|
|
Offshore products manufacturing
facility
|
Arlington, Texas (lease)
|
|
|
63,272
|
|
|
Offshore products manufacturing
facility
|
Arlington, Texas
|
|
|
44,780
|
|
|
Elastomer technology center for
offshore products
|
Arlington, Texas
|
|
|
60,000
|
|
|
Molding and aerospace facilities
for offshore products
|
Houston, Texas (lease)
|
|
|
25,638
|
|
|
Offshore products business office
|
Houston, Texas
|
|
|
25 acres
|
|
|
Offshore products manufacturing
facility and yard
|
Lampasas, Texas
|
|
|
48,500
|
|
|
Molding facility for offshore
products
|
Lampasas, Texas (lease)
|
|
|
20,000
|
|
|
Warehouse for offshore products
|
Tulsa, Oklahoma
|
|
|
74,600
|
|
|
Molding facility for offshore
products
|
Tulsa, Oklahoma (lease)
|
|
|
14,000
|
|
|
Molding facility for offshore
products
|
Houma, Louisiana
|
|
|
170,500
|
|
|
Offshore products manufacturing
facility and yard
|
Houma, Louisiana (lease)
|
|
|
20,000
|
|
|
Offshore products manufacturing
facility and yard
|
Houston, Texas (lease)
|
|
|
9,945
|
|
|
Tubular services business office
|
Tulsa, Oklahoma (lease)
|
|
|
11,955
|
|
|
Tubular services business office
|
Midland, Texas
|
|
|
60 acres
|
|
|
Tubular yard
|
Godley, Texas
|
|
|
13 acres
|
|
|
Tubular yard
|
Crosby, Texas
|
|
|
109 acres
|
|
|
Tubular yard
|
Belle Chasse, Louisiana (own and
lease)
|
|
|
427,020
|
|
|
Accommodations manufacturing
facility and yard for well site services
|
Odessa, Texas
|
|
|
7,847
|
|
|
Office and warehouse in support of
drilling operations for well site services
|
Wooster, Ohio (leased)
|
|
|
6,400
|
|
|
Office and warehouse in support of
drilling operations for well site services
|
Casper, Wyoming
|
|
|
7 acres
|
|
|
Office, shop and yard in support of
drilling operations
|
Billings, Montana (lease)
|
|
|
12 acres
|
|
|
Office, shop and yard in support of
drilling operations
|
Alvin, Texas
|
|
|
36,150
|
|
|
Rental tool warehouse for well site
services
|
Oklahoma City, Oklahoma
|
|
|
4 acres
|
|
|
Rental tool warehouse, shop and
office for well site services
|
Broussard, Louisiana
|
|
|
18,875
|
|
|
Rental tool warehouse for well site
services
|
International:
|
|
|
|
|
|
|
Aberdeen, Scotland (lease)
|
|
|
4.5 acres
|
|
|
Offshore products manufacturing
facility and yard
|
Bathgate, Scotland
|
|
|
3 acres
|
|
|
Offshore products manufacturing
facility and yard
|
Barrow-in-Furness,
England (own and lease)
|
|
|
90,000
|
|
|
Offshore products service facility
and yard
|
Singapore, Asia (lease)
|
|
|
43,514
|
|
|
Offshore products manufacturing
facility
|
Macae, Brazil (lease)
|
|
|
6 acres
|
|
|
Offshore products manufacturing
facility and yard
|
Rayong Province, Thailand (lease)
|
|
|
10,000
|
|
|
Offshore products service facility
|
Nisku, Alberta
|
|
|
8.58 acres
|
|
|
Accommodations manufacturing
facility for well site services
|
Nisku, Alberta (lease)
|
|
|
10.24 acres
|
|
|
Accommodations manufacturing
facility for well site services
|
Spruce Grove, Alberta
|
|
|
15,000
|
|
|
Accommodations facility and
equipment yard for well site services
|
Grande Prairie, Alberta
|
|
|
14.69 acres
|
|
|
Accommodations facility and
equipment yard for well site services
|
Grimshaw Alberta (lease)
|
|
|
20 acres
|
|
|
Accommodations equipment yard for
well site services
|
Edmonton, Alberta
|
|
|
33 acres
|
|
|
Accommodations manufacturing
facility for well site services
|
Edmonton, Alberta (lease)
|
|
|
72,456
|
|
|
Accommodations office and warehouse
for well site services
|
Red Deer, Alberta
|
|
|
35,000
|
|
|
Rental tool business office for
well site services
|
We have six tubular sales offices and a total of 53 rental
tool supply and distribution points in Texas, Louisiana, New
Mexico, Mississippi, Oklahoma, Wyoming, California, Colorado,
North Dakota, Utah, Arkansas, Canada,
19
Mexico and Argentina. Most of these office locations are leased
and provide sales, technical support and personnel services to
our customers. We also have various offices supporting our
business segments which are both owned and leased.
|
|
Item 3.
|
Legal
Proceedings
|
We are a party to various pending or threatened claims, lawsuits
and administrative proceedings seeking damages or other remedies
concerning our commercial operations, products, employees and
other matters, including occasional claims by individuals
alleging exposure to hazardous materials as a result of our
products or operations. Some of these claims relate to matters
occurring prior to our acquisition of businesses, and some
relate to businesses we have sold. In certain cases, we are
entitled to indemnification from the sellers of businesses and
in other cases, we have indemnified the buyers of businesses
from us. Although we can give no assurance about the outcome of
pending legal and administrative proceedings and the effect such
outcomes may have on us, we believe that any ultimate liability
resulting from the outcome of such proceedings, to the extent
not otherwise provided for or covered by indemnity or insurance,
will not have a material adverse effect on our consolidated
financial position, results of operations or liquidity.
On February 18, 2005, we announced that we had conducted an
internal investigation prompted by the discovery of over
billings totaling approximately $400,000 by one of our
subsidiaries (the Subsidiary) to a government owned
oil company in South America. The over billings were detected by
the Company during routine financial review procedures, and
appropriate financial statement adjustments were included in our
previously reported fourth quarter 2004 results. We and
independent counsel retained by our Audit Committee conducted
separate investigations consisting of interviews and a thorough
examination of the facts and circumstances in this matter. We
voluntarily reported the results of our investigation to the
Securities and Exchange Commission (the SEC) and fully
cooperated with requests for information received from the SEC.
On October 31, 2005, our counsel received a Wells
Notice from the SEC staff indicating that it made a
preliminary decision to recommend that the SEC bring a civil
action against the Company alleging violations of provisions of
the Securities and Exchange Act of 1934 (the Act) relating to
the maintenance of books, records and internal accounting
controls and procedures as set forth in
Sections 13(b)(2)(A) and (B) of the Act. The Company
reached a settlement agreement with the SEC on April 27,
2006. The Company consented to an Order by the SEC (the Order),
without admitting or denying the findings in the Order, that
required the Company to cease and desist from committing or
causing violations of the books and records and
internal control provisions of the Act. The
settlement did not require the Company to pay a monetary penalty.
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
No matters were submitted to a vote of security holders during
the fourth quarter of 2006.
PART II
|
|
Item 5.
|
Market
for Registrants Common Equity, Related Stockholder
Matters, and Issuer Purchases of Equity Securities
|
Common
Stock Information
Our authorized common stock consists of 200,000,000 shares
of common stock. There were 49,298,922 shares of common
stock outstanding as of February 9, 2007, including
256,787 shares of common stock issuable upon exercise of
exchangeable shares of one of our Canadian subsidiaries. These
exchangeable shares, which were issued to certain former
shareholders of PTI in the Combination, are intended to have
characteristics essentially equivalent to our common stock prior
to the exchange. For purposes of this Annual Report on
Form 10-K,
we have treated the shares of common stock issuable upon
exchange of the exchangeable shares as outstanding. The
approximate number of record holders of our common stock as of
February 9, 2007 was 50. Our common stock is traded on the
New York Stock Exchange under the ticker symbol OIS. The closing
price of our common stock on February 9, 2007 was
$29.47 per share.
20
The following table sets forth the range of high and low sale
prices of our common stock.
|
|
|
|
|
|
|
|
|
|
|
Sales Price
|
|
|
|
High
|
|
|
Low
|
|
2005:
|
|
|
|
|
|
|
|
|
First Quarter
|
|
|
22.35
|
|
|
|
17.35
|
|
Second Quarter
|
|
|
26.00
|
|
|
|
19.29
|
|
Third Quarter
|
|
|
39.22
|
|
|
|
24.89
|
|
Fourth Quarter
|
|
|
37.57
|
|
|
|
29.01
|
|
2006:
|
|
|
|
|
|
|
|
|
First Quarter
|
|
|
42.20
|
|
|
|
31.34
|
|
Second Quarter
|
|
|
43.87
|
|
|
|
29.15
|
|
Third Quarter
|
|
|
35.27
|
|
|
|
25.00
|
|
Fourth Quarter
|
|
|
35.61
|
|
|
|
25.08
|
|
2007:
|
|
|
|
|
|
|
|
|
First Quarter (through
February 9, 2007)
|
|
|
32.05
|
|
|
|
26.92
|
|
We have not declared or paid any cash dividends on our common
stock since our initial public offering and do not intend to
declare or pay any cash dividends on our common stock in the
foreseeable future. Furthermore, our existing credit facilities
restrict the payment of dividends. Any future determination as
to the declaration and payment of dividends will be at the
discretion of our Board of Directors and will depend on then
existing conditions, including our financial condition, results
of operations, contractual restrictions, capital requirements,
business prospects and other factors that our Board of Directors
considers relevant. During the first quarter of 2005, our Board
of Directors authorized the repurchase of up to $50 million
of our common stock, par value $.01 per share, over a two
year period. On August 25, 2006, an additional
$50 million was approved for the repurchase program and the
duration of the program was extended to August 31, 2008.
Through February 9, 2007, we have repurchased
1,824,432 shares of our common stock for $50.0 million
under the repurchase program, leaving $50 million available
for future share repurchases.
21
PERFORMANCE
GRAPH
The following performance graph and chart compare the cumulative
total stockholder return on the Companys common stock to
the cumulative total return on the Standard &
Poors 500 Stock Index and Philadelphia OSX Index, an index
of oil and gas related companies which represent an industry
composite of the Companys peer group, for the period from
December 31, 2001 to December 31, 2006. The graph and
chart show the value at the dates indicated of $100 invested at
December 31, 2001 and assume the reinvestment of all
dividends.
COMPARISON
OF 5 YEAR CUMULATIVE TOTAL RETURN*
AMONG OIL STATES INTERNATIONAL, INC., THE S & P 500
INDEX
AND THE PHLX OIL SERVICE SECTOR INDEX (OSX)
Oil States International - NYSE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative Total Return
|
|
|
|
12/01
|
|
|
12/02
|
|
|
12/03
|
|
|
12/04
|
|
|
12/05
|
|
|
12/06
|
|
|
OIL STATES INTERNATIONAL, INC
|
|
$
|
100.00
|
|
|
$
|
141.76
|
|
|
$
|
153.19
|
|
|
$
|
211.98
|
|
|
$
|
348.13
|
|
|
$
|
354.18
|
|
S & P 500
|
|
|
100.00
|
|
|
|
77.90
|
|
|
|
100.24
|
|
|
|
111.15
|
|
|
|
116.61
|
|
|
|
135.03
|
|
PHLX OIL SERVICE SECTOR (OSX)
|
|
|
100.00
|
|
|
|
91.27
|
|
|
|
105.49
|
|
|
|
142.69
|
|
|
|
214.08
|
|
|
|
242.69
|
|
|
|
|
* |
|
$100 invested on
12/31/01 in
stock or index-including reinvestment of dividends. Fiscal year
ending December 31. |
|
|
|
(1) |
|
This graph is not soliciting material, is not deemed
filed with the SEC and is not to be incorporated by reference in
any filing by us under the Securities Act of 1933, as amended
(the Securities Act), or the Exchange Act, whether
made before or after the date hereof and irrespective of any
general incorporation language in any such filing. |
|
(2) |
|
The stock price performance shown on the graph is not
necessarily indicative of future price performance. Information
used in the graph was obtained from Research Data Group, Inc., a
source believed to be reliable, but we are not responsible for
any errors or omissions in such information. |
Copyright
©
2007, Standard & Poors, a division of The
McGraw-Hill Companies, Inc. All rights reserved.
www.researchdatagroup.com/S&P.htm
22
Equity
Compensation Plans
The information relating to our equity compensation plans
required by Item 5 is incorporated by reference to such
information as set forth in Item 12. Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters contained herein.
Unregistered
Sales of Equity Securities and Use of Proceeds
None
Purchases
of Equity Securities by the Issuer and Affiliated
Purchases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximate
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar Value
|
|
|
|
|
|
|
|
|
|
Total Number of
|
|
|
of Shares
|
|
|
|
|
|
|
|
|
|
Shares Purchased
|
|
|
Remaining to
|
|
|
|
|
|
|
|
|
|
as Part of the Share
|
|
|
be Purchased
|
|
|
|
Total Number of
|
|
|
Average Price
|
|
|
Repurchase
|
|
|
Under the Share Repurchase
|
|
Period
|
|
Shares Purchased
|
|
|
Paid per Share
|
|
|
Program
|
|
|
Program
|
|
|
October 1, 2006
October 31, 2006
|
|
|
|
|
|
|
|
|
|
|
1,524,432
|
|
|
$
|
59,916,900
|
|
|
|
|
|
November 1, 2006
November 30, 2006
|
|
|
|
|
|
|
|
|
|
|
1,524,432
|
|
|
$
|
59,916,900
|
|
|
|
|
|
December 1, 2006
December 30, 2006
|
|
|
300,000
|
|
|
$
|
32.92
|
|
|
|
1,824,432
|
|
|
$
|
50,030,463
|
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
300,000
|
|
|
$
|
32.92
|
|
|
|
1,824,432
|
|
|
$
|
50,030,463
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
On March 2, 2005, we announced a share repurchase program
of up to $50,000,000 over a two year period. On August 25,
2006, we announced the authorization of an additional
$50,000,000 and the extension of the program to August 31,
2008. |
23
|
|
Item 6.
|
Selected
Financial Data
|
The selected financial data on the following pages include
selected historical financial information of our company as of
and for each of the five years ended December 31, 2006. The
following data should be read in conjunction with Item 7,
Managements Discussion and Analysis of Financial Condition
and Results of Operations and the Companys financial
statements, and related notes included in Item 8, Financial
Statements and Supplementary Data of this Annual Report on
Form 10-K.
Selected
Financial Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
1,923,357
|
|
|
$
|
1,531,636
|
|
|
$
|
971,012
|
|
|
$
|
723,681
|
|
|
$
|
616,848
|
|
Costs and Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product costs, service and other
costs
|
|
|
1,467,988
|
|
|
|
1,206,187
|
|
|
|
774,638
|
|
|
|
573,114
|
|
|
|
487,053
|
|
Selling, general and administrative
|
|
|
107,216
|
|
|
|
84,672
|
|
|
|
64,810
|
|
|
|
57,710
|
|
|
|
51,791
|
|
Depreciation and amortization
|
|
|
54,340
|
|
|
|
46,704
|
|
|
|
35,988
|
|
|
|
27,905
|
|
|
|
23,312
|
|
Other operating expense (income)
|
|
|
(4,124
|
)
|
|
|
(488
|
)
|
|
|
460
|
|
|
|
(215
|
)
|
|
|
132
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
297,937
|
|
|
|
194,561
|
|
|
|
95,116
|
|
|
|
65,167
|
|
|
|
54,560
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(19,389
|
)
|
|
|
(13,903
|
)
|
|
|
(7,667
|
)
|
|
|
(7,930
|
)
|
|
|
(4,863
|
)
|
Interest income
|
|
|
2,506
|
|
|
|
475
|
|
|
|
363
|
|
|
|
389
|
|
|
|
469
|
|
Equity in earnings of
unconsolidated affiliates
|
|
|
7,148
|
|
|
|
1,276
|
|
|
|
361
|
|
|
|
354
|
|
|
|
293
|
|
Sale of workover services business
|
|
|
11,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income
|
|
|
2,195
|
|
|
|
98
|
|
|
|
595
|
|
|
|
674
|
|
|
|
574
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
301,647
|
|
|
|
182,507
|
|
|
|
88,768
|
|
|
|
58,654
|
|
|
|
51,033
|
|
Income tax expense(1)
|
|
|
(104,013
|
)
|
|
|
(60,694
|
)
|
|
|
(29,406
|
)
|
|
|
(14,222
|
)
|
|
|
(11,357
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
197,634
|
|
|
$
|
121,813
|
|
|
$
|
59,362
|
|
|
$
|
44,432
|
|
|
$
|
39,676
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
3.99
|
|
|
$
|
2.47
|
|
|
$
|
1.20
|
|
|
$
|
0.92
|
|
|
$
|
0.82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
3.89
|
|
|
$
|
2.41
|
|
|
$
|
1.19
|
|
|
$
|
0.90
|
|
|
$
|
0.81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
49,519
|
|
|
|
49,344
|
|
|
|
49,329
|
|
|
|
48,529
|
|
|
|
48,286
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
50,773
|
|
|
|
50,479
|
|
|
|
50,027
|
|
|
|
49,215
|
|
|
|
48,890
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
Other Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA, as defined(2)
|
|
$
|
372,870
|
|
|
$
|
242,639
|
|
|
$
|
132,060
|
|
|
$
|
94,100
|
|
|
$
|
78,739
|
|
Capital expenditures, including
capitalized interest
|
|
|
129,591
|
|
|
|
83,392
|
|
|
|
60,041
|
|
|
|
41,261
|
|
|
|
26,086
|
|
Net cash provided by operating
activities
|
|
|
137,367
|
|
|
|
33,398
|
|
|
|
97,167
|
|
|
|
58,703
|
|
|
|
45,375
|
|
Net cash used in investing
activities, including capital expenditures
|
|
|
(114,248
|
)
|
|
|
(229,881
|
)
|
|
|
(137,713
|
)
|
|
|
(54,902
|
)
|
|
|
(89,428
|
)
|
Net cash provided by (used in)
financing activities
|
|
|
(11,201
|
)
|
|
|
195,269
|
|
|
|
38,816
|
|
|
|
4,319
|
|
|
|
50,381
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
28,396
|
|
|
$
|
15,298
|
|
|
$
|
19,740
|
|
|
$
|
19,318
|
|
|
$
|
11,118
|
|
Total current assets
|
|
|
783,989
|
|
|
|
663,744
|
|
|
|
435,184
|
|
|
|
288,077
|
|
|
|
255,806
|
|
Net property, plant and equipment
|
|
|
358,716
|
|
|
|
310,452
|
|
|
|
227,343
|
|
|
|
194,136
|
|
|
|
167,146
|
|
Total assets
|
|
|
1,571,094
|
|
|
|
1,342,872
|
|
|
|
933,612
|
|
|
|
717,186
|
|
|
|
644,216
|
|
Long-term debt and capital leases,
excluding current portion
|
|
|
391,729
|
|
|
|
402,109
|
|
|
|
173,887
|
|
|
|
136,246
|
|
|
|
133,292
|
|
Total stockholders equity
|
|
|
839,836
|
|
|
|
633,984
|
|
|
|
530,024
|
|
|
|
455,111
|
|
|
|
387,579
|
|
|
|
|
(1) |
|
Our effective tax rate was affected by our net operating loss
carry forwards in certain of the periods presented. |
|
(2) |
|
The term EBITDA as defined consists of net income plus interest,
taxes, depreciation and amortization. EBITDA as defined is not a
measure of financial performance under generally accepted
accounting principles. You should not consider it in isolation
from or as a substitute for net income or cash flow measures
prepared in accordance with generally accepted accounting
principles or as a measure of profitability or liquidity.
Additionally, EBITDA as defined may not be comparable to other
similarly titled measures of other companies. The Company has
included EBITDA as defined as a supplemental disclosure because
its management believes that EBITDA as defined provides useful
information regarding its ability to service debt and to fund
capital expenditures and provides investors a helpful measure
for comparing its operating performance with the performance of
other companies that have different financing and capital
structures or tax rates. The Company uses EBITDA as defined to
compare and to monitor the performance of its business segments
to other comparable public companies and as one of the primary
measures to benchmark for the award of incentive compensation
under its annual incentive compensation plan. |
We believe that net income is the financial measure calculated
and presented in accordance with generally accepted accounting
principles that is most directly comparable to EBITDA as
defined. The following table reconciles EBITDA as defined with
our net income, as derived from our financial information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
Net income
|
|
$
|
197,634
|
|
|
$
|
121,813
|
|
|
$
|
59,362
|
|
|
$
|
44,432
|
|
|
$
|
39,676
|
|
Depreciation and amortization
|
|
|
54,340
|
|
|
|
46,704
|
|
|
|
35,988
|
|
|
|
27,905
|
|
|
|
23,312
|
|
Interest expense, net
|
|
|
16,883
|
|
|
|
13,428
|
|
|
|
7,304
|
|
|
|
7,541
|
|
|
|
4,394
|
|
Income taxes
|
|
|
104,013
|
|
|
|
60,694
|
|
|
|
29,406
|
|
|
|
14,222
|
|
|
|
11,357
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA, as defined
|
|
$
|
372,870
|
|
|
$
|
242,639
|
|
|
$
|
132,060
|
|
|
$
|
94,100
|
|
|
$
|
78,739
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ITEM 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
You should read the following discussion and analysis together
with our consolidated financial statements and the notes to
those statements included elsewhere in this Annual Report on
Form 10-K.
Overview
We provide a broad range of products and services to the oil and
gas industry through our offshore products, tubular services and
well site services business segments. Demand for our products
and services is cyclical and substantially dependent upon
activity levels in the oil and gas industry, particularly our
customers willingness to spend capital on the exploration
for and development of oil and gas reserves. Demand for our
products and services by our customers is highly sensitive to
current and expected oil and natural gas prices. Generally, our
tubular services and well site services segments respond more
rapidly to shorter-term movements in oil and natural gas prices
than our offshore products segment. Our offshore products
segment provides highly engineered and technically designed
products for offshore oil and gas development and production
systems and facilities. Sales
25
of our offshore products and services depend upon the
development of offshore production systems, repairs and upgrades
of existing offshore drilling rigs and construction of new
offshore drilling rigs. In this segment, we are particularly
influenced by deepwater drilling and production activities,
which are driven largely by our customers longer-term
outlook for oil prices. Through our tubular services segment, we
distribute a broad range of casing and tubing. Sales and gross
margins of our tubular services segment depend upon the overall
level of drilling activity, the types of wells being drilled
(for example, deepwater wells usually require higher priced
seamless alloy tubulars) and the level of OCTG inventory and
pricing. Historically, tubular services gross margin
expands during periods of rising OCTG prices and contracts
during periods of decreasing OCTG prices. In our well site
services business segment, we provide land drilling services,
work force accommodations, catering and logistics services and
rental tools. Demand for our drilling services is driven by land
drilling activity in Texas, New Mexico, Ohio and in the Rocky
Mountains area in the U.S. Our rental tools and services
depend primarily upon the level of drilling, completion and
workover activity in the U.S. and Canada. Our accommodations
business is conducted primarily in Canada and its activity
levels have historically been driven by oil and gas drilling and
mining activities. However, we have seen increased demand in our
work force accommodation business as a result of oil sands
development activities in Northern Alberta, Canada. Effective
March 1, 2006, we completed a transaction to combine our
workover services business with Boots & Coots which
resulted in our acquiring a 45.6% equity interest in
Boots & Coots (see Note 7 to the Consolidated
Financial Statements included in this Annual Report on Form
10-K).
We have a diversified product and service offering which has
exposure to activities conducted throughout the oil and gas
cycle. Demand for our tubular services and well site services
segments are highly correlated to changes in the drilling rig
count in the United States and Canada. The table below sets
forth a summary of North American rig activity, as measured by
Baker Hughes Incorporated, for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Rig Count for
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
U.S. Land
|
|
|
1,559
|
|
|
|
1,294
|
|
|
|
1,093
|
|
|
|
924
|
|
|
|
718
|
|
U.S. Offshore
|
|
|
90
|
|
|
|
89
|
|
|
|
97
|
|
|
|
108
|
|
|
|
113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total U.S.
|
|
|
1,649
|
|
|
|
1,383
|
|
|
|
1,190
|
|
|
|
1,032
|
|
|
|
831
|
|
Canada
|
|
|
470
|
|
|
|
458
|
|
|
|
369
|
|
|
|
372
|
|
|
|
266
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total North America
|
|
|
2,119
|
|
|
|
1,841
|
|
|
|
1,559
|
|
|
|
1,404
|
|
|
|
1,097
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The average North American rig count for the year ended
December 31, 2006 increased by 278 rigs, or 15.1%, compared
to the year ended December 31, 2005. This overall increase
in activity, while tempered somewhat by flat activity levels in
the U.S. Gulf of Mexico, contributed to increased revenues
in our tubular services and well site services segments in 2006.
The North American rig count and related oil service activity
has remained at high levels generally, although the Canadian rig
count in 2007 to-date is down 11.4% from the comparable period
in 2006.
Our well site services segment results for the year 2006 also
benefited from capital spending, which aggregated
$117.4 million in the year ended December 31, 2006,
the acquisition of Elenburg on February 1, 2005 for total
consideration of $22.1 million, the acquisition of Stinger
on May 1, 2005 and June 1, 2005 for total
consideration of $96.1 million and the impact of increased
activity levels and pricing gains in certain business lines.
On June 2, 2005 we acquired all of the outstanding stock of
Phillips Casing and Tubing, L.P. (Phillips) for total
consideration of $31.2 million. This acquisition resulted
in increased OCTG inventory and revenues from the date of
acquisition. Our tubular services segment shipped 481,900 tons
of OCTG in 2006 (118,400 tons in the fourth quarter of
2006) compared to 405,300 tons in 2005 (118,600 tons in the
fourth quarter of 2005). Our tubular services segment also
benefited in the past year from a 20.5% year over year increase
in average U.S. land drilling activity.
Management believes that, based on the current economic
environment, oil and gas producers will continue to explore for
and develop oil and gas reserves at an active pace in spite of a
decline in current U.S. domestic natural gas prices, which
reflect high storage levels compared to the prior five year
historical range, given their longer term views of supply and
demand fundamentals. Management estimates that approximately 60%
of the Companys revenues are dependent on North American
natural gas drilling and completion activity. We estimate that
our
26
profitability is more evenly impacted by oil price driven
activity and natural gas price driven activity. Our customers
have increased their spending and commitments for deepwater
offshore exploration and development which has benefited our
offshore products segment. Our customers have also announced
significant levels of expenditures for oil sands related
projects in Canada. However, there can be no assurance that
these trends will continue and there is a risk that lower energy
prices for sustained periods could negatively impact drilling
and completion activity and, correspondingly, reduce oil and gas
expenditures. Such a decline would be adverse to our business.
In addition, particularly in our well site services segment, we
must continue to monitor industry capacity additions in
relationship to our own capital expenditures and expected
returns, considering project risks and expected cash flows from
such investments. In tubular services, we continue to monitor
industry wide OCTG inventory levels, mill shipments, OCTG
pricing and our inventory turnover levels.
Consolidated
Results of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
Variance
|
|
|
|
|
|
Variance
|
|
|
|
|
|
|
|
|
|
2006 vs. 2005
|
|
|
|
|
|
2005 vs. 2004
|
|
|
|
2006
|
|
|
2005
|
|
|
$
|
|
|
%
|
|
|
2004
|
|
|
$
|
|
|
%
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Well site services
Accommodations
|
|
$
|
314.0
|
|
|
$
|
287.3
|
|
|
$
|
26.7
|
|
|
|
9
|
%
|
|
$
|
190.0
|
|
|
$
|
97.3
|
|
|
|
51
|
%
|
Rental Tools
|
|
|
200.6
|
|
|
|
134.8
|
|
|
|
65.8
|
|
|
|
49
|
%
|
|
|
66.9
|
|
|
|
67.9
|
|
|
|
101
|
%
|
Drilling and Other
|
|
|
134.5
|
|
|
|
86.7
|
|
|
|
47.8
|
|
|
|
55
|
%
|
|
|
46.4
|
|
|
|
40.3
|
|
|
|
87
|
%
|
Workover Services
|
|
|
8.6
|
|
|
|
39.9
|
|
|
|
(31.3
|
)
|
|
|
(78
|
)%
|
|
|
33.6
|
|
|
|
6.3
|
|
|
|
19
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Well Site Services
|
|
|
657.7
|
|
|
|
548.7
|
|
|
|
109.0
|
|
|
|
20
|
%
|
|
|
336.9
|
|
|
|
211.8
|
|
|
|
63
|
%
|
Offshore Products
|
|
|
389.7
|
|
|
|
271.2
|
|
|
|
118.5
|
|
|
|
44
|
%
|
|
|
206.8
|
|
|
|
64.4
|
|
|
|
31
|
%
|
Tubular services
|
|
|
876.0
|
|
|
|
711.7
|
|
|
|
164.3
|
|
|
|
23
|
%
|
|
|
427.3
|
|
|
|
284.4
|
|
|
|
67
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,923.4
|
|
|
$
|
1,531.6
|
|
|
$
|
391.8
|
|
|
|
26
|
%
|
|
$
|
971.0
|
|
|
$
|
560.6
|
|
|
|
58
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product costs; Service and other
costs (Cost of sales and service)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Well site services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accommodations
|
|
$
|
208.6
|
|
|
$
|
221.1
|
|
|
$
|
(12.5
|
)
|
|
|
(6
|
)%
|
|
$
|
134.5
|
|
|
$
|
86.6
|
|
|
|
64
|
%
|
Rental Tools
|
|
|
94.4
|
|
|
|
68.4
|
|
|
|
26.0
|
|
|
|
38
|
%
|
|
|
36.5
|
|
|
|
31.9
|
|
|
|
87
|
%
|
Drilling and Other
|
|
|
69.1
|
|
|
|
53.9
|
|
|
|
15.2
|
|
|
|
28
|
%
|
|
|
31.8
|
|
|
|
22.1
|
|
|
|
69
|
%
|
Workover Services
|
|
|
5.3
|
|
|
|
28.1
|
|
|
|
(22.8
|
)
|
|
|
(81
|
)%
|
|
|
25.9
|
|
|
|
2.2
|
|
|
|
8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Well Site Services
|
|
|
377.4
|
|
|
|
371.5
|
|
|
|
5.9
|
|
|
|
2
|
%
|
|
|
228.7
|
|
|
|
142.8
|
|
|
|
62
|
%
|
Offshore Products
|
|
|
293.9
|
|
|
|
209.5
|
|
|
|
84.4
|
|
|
|
40
|
%
|
|
|
169.2
|
|
|
|
40.3
|
|
|
|
24
|
%
|
Tubular services
|
|
|
796.7
|
|
|
|
625.2
|
|
|
|
171.5
|
|
|
|
27
|
%
|
|
|
376.7
|
|
|
|
248.5
|
|
|
|
66
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,468.0
|
|
|
$
|
1,206.2
|
|
|
$
|
261.8
|
|
|
|
22
|
%
|
|
$
|
774.6
|
|
|
$
|
431.6
|
|
|
|
56
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
Variance
|
|
|
|
|
|
Variance
|
|
|
|
|
|
|
|
|
|
2006 vs. 2005
|
|
|
|
|
|
2005 vs. 2004
|
|
|
|
2006
|
|
|
2005
|
|
|
$
|
|
|
%
|
|
|
2004
|
|
|
$
|
|
|
%
|
|
|
Gross margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Well site services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accommodations
|
|
$
|
105.4
|
|
|
$
|
66.2
|
|
|
$
|
39.2
|
|
|
|
59
|
%
|
|
$
|
55.5
|
|
|
$
|
10.7
|
|
|
|
19
|
%
|
Rental Tools
|
|
|
106.2
|
|
|
|
66.4
|
|
|
|
39.8
|
|
|
|
60
|
%
|
|
|
30.4
|
|
|
|
36.0
|
|
|
|
118
|
%
|
Drilling and Other
|
|
|
65.4
|
|
|
|
32.8
|
|
|
|
32.6
|
|
|
|
99
|
%
|
|
|
14.6
|
|
|
|
18.2
|
|
|
|
125
|
%
|
Workover Services
|
|
|
3.3
|
|
|
|
11.8
|
|
|
|
(8.5
|
)
|
|
|
(72
|
)%
|
|
|
7.7
|
|
|
|
4.1
|
|
|
|
53
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Well Site Services
|
|
|
280.3
|
|
|
|
177.2
|
|
|
|
103.1
|
|
|
|
58
|
%
|
|
|
108.2
|
|
|
|
69.0
|
|
|
|
64
|
%
|
Offshore Products
|
|
|
95.8
|
|
|
|
61.7
|
|
|
|
34.1
|
|
|
|
55
|
%
|
|
|
37.6
|
|
|
|
24.1
|
|
|
|
64
|
%
|
Tubular services
|
|
|
79.3
|
|
|
|
86.5
|
|
|
|
(7.2
|
)
|
|
|
(8
|
)%
|
|
|
50.6
|
|
|
|
35.9
|
|
|
|
71
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
455.4
|
|
|
$
|
325.4
|
|
|
$
|
130.0
|
|
|
|
40
|
%
|
|
$
|
196.4
|
|
|
$
|
129.0
|
|
|
|
66
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin as a percent of
revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Well site services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accommodations
|
|
|
34
|
%
|
|
|
23
|
%
|
|
|
|
|
|
|
|
|
|
|
29
|
%
|
|
|
|
|
|
|
|
|
Rental Tools
|
|
|
53
|
%
|
|
|
49
|
%
|
|
|
|
|
|
|
|
|
|
|
45
|
%
|
|
|
|
|
|
|
|
|
Drilling and Other
|
|
|
49
|
%
|
|
|
38
|
%
|
|
|
|
|
|
|
|
|
|
|
31
|
%
|
|
|
|
|
|
|
|
|
Workover Services
|
|
|
38
|
%
|
|
|
30
|
%
|
|
|
|
|
|
|
|
|
|
|
23
|
%
|
|
|
|
|
|
|
|
|
Total Well Site Services
|
|
|
43
|
%
|
|
|
32
|
%
|
|
|
|
|
|
|
|
|
|
|
32
|
%
|
|
|
|
|
|
|
|
|
Offshore Products
|
|
|
25
|
%
|
|
|
23
|
%
|
|
|
|
|
|
|
|
|
|
|
18
|
%
|
|
|
|
|
|
|
|
|
Tubular services
|
|
|
9
|
%
|
|
|
12
|
%
|
|
|
|
|
|
|
|
|
|
|
12
|
%
|
|
|
|
|
|
|
|
|
Total
|
|
|
24
|
%
|
|
|
21
|
%
|
|
|
|
|
|
|
|
|
|
|
20
|
%
|
|
|
|
|
|
|
|
|
We reported net income for the year ended December 31, 2006
of $197.6 million, or $3.89 per diluted share. These
results compare to $121.8 million, or $2.41 per
diluted share, reported for the year ended December 31,
2005 and $59.4 million, or $1.19 per diluted share,
for the year ended December 31, 2004. With continuing
strong activity and contributions from acquisitions and capital
investments, we recognized
year-over-year
growth in revenues of 26% in 2006 and 58% 2005. Net income in
2006 included the recognition of a non-cash, pre-tax gain of
$11.3 million, or an after-tax gain of $0.12 per
diluted share, on the sale of the Companys workover
services business to Boots & Coots.
Revenues. Consolidated revenues increased
$391.8 million in 2006 as a result of increased well site
services revenues of $109.0 million, or 20%; increased
offshore products revenues of $118.5 million, or 44%; and
increased tubular services revenues of $164.3 million, or
23%. Consolidated revenues increased $560.6 million in 2005
compared to 2004 as a result of increased well site services
revenues of $211.8 million, or 63%; increased offshore
products revenues of $64.4 million, or 31%, and increased
tubular services revenues of $284.4 million, or 67%.
Well site services revenues increased in both 2006 and 2005 due
to
year-over-year
improvements in North American drilling and completion activity,
contributions from capital expenditures in both years and
acquisitions. These increases were partially offset by the sale
of the hydraulic workover business completed in the first
quarter of 2006. In addition, prices realized for our rental
tools and our drilling and other services improved in 2006 and
2005 compared to prior years, and we experienced increased
activity in support of the oil sands developments in Canada in
2005.
Offshore products revenues increased in both 2006 and 2005 due
to increased deepwater development spending and capital
equipment upgrades by our customers.
Our offshore products backlog totaled $349.3 million at
December 31, 2006, $110.7 million at December 31,
2005 and $97.5 million at December 31, 2004. We
believe that the deepwater construction and development business
is characterized by lengthy projects and a long
lead-time order cycle. While changes in backlog
levels from one period to the next do not necessarily evidence a
long-term trend, we believe activity levels in our offshore
28
products segment will increase in future periods, given the
growth in our backlog, when compared to year end 2005 and 2004
levels.
Tubular services revenues increased 23% in 2006 compared to 2005
due to increased U.S. drilling activity and contributions
from an acquisition that closed in June 2005. For the year ended
December 31, 2006, tons shipped increased by 19% compared
to the same period in 2005. Our average OCTG selling prices
increased 3.5% from the year 2005 to the year 2006. Tubular
services revenues increased 67% in 2005 compared to 2004 due to
increased industry demand, higher OCTG prices and contributions
from acquisitions completed in May 2004 and June 2005. Our
average OCTG selling prices increased 40% from the year 2004 to
the year 2005.
Cost of Sales and Service. Our consolidated
cost of sales and services increased $261.8 million, or
22%, in 2006 compared to 2005 as a result of increases at well
site services of $5.9 million, or 2%, at offshore products
of $84.4 million, or 40%, and at tubular services of
$171.5 million, or 27%. Our consolidated cost of sales and
services increased $431.6 million, or 56%, in 2005 compared
to 2004 as a result of increases at well site services of
$142.8 million, or 62%, at offshore products of
$40.3 million, or 24%, and at tubular services of
$248.5 million, or 66%. Generally, the increases in our
cost of sales and services in both 2006 and 2005 were in line
with our increases in revenues resulting in consistent
consolidated gross margins.
The increase in cost of sales and services at our tubular
services business in 2006 compared to 2005 was slightly higher
than the increase in revenues for the same period due to an
increase in relatively low margin carbon grade sales when
compared to premium grade OCTG sales and less frequent OCTG mill
price increases in 2006 when compared to 2005.
Accommodations cost of sales and services decreased for the year
ended December 31, 2006 compared to 2005 and increased for
the year ended December 31, 2005 compared to 2004. In 2005,
a large fabrication project was delivered to a customer on a
sale basis. In 2004 and 2006, our revenues consisted of a higher
mix of service revenue which has a lower cost element.
Selling, General and Administrative
Expenses. Selling, general and administrative
expenses (SG&A) increased $22.5 million, or 26.6%, in
the year ended December 31, 2006 compared to the same
period in 2005. During the year ended December 31, 2006,
SG&A totaled $107.2 million, or 5.6% of revenues,
compared to SG&A of $84.7 million, or 5.5% of revenues,
for the year ended December 31, 2005. Increased SG&A
expense associated with acquisitions, higher ad valorem taxes
for OCTG inventory, increased incentive compensation accruals,
and higher stock compensation costs due, in part, to the
adoption of SFAS 123R were the primary factors causing the
increased SG&A in 2006 compared to 2005.
SG&A increased $19.9 million, or 30.6%, in 2005
compared to the same period in 2004. During the year ended
December 31, 2005, SG&A totaled $84.7 million, or
5.5% of revenues, compared to SG&A of $64.8 million, or
6.7% of revenues, for the year ended December 31, 2004.
Increased SG&A expense associated with acquisitions
completed since 2004, higher ad valorem taxes for increased
levels of OCTG inventory, increased incentive compensation
expense, and higher professional fees associated with
Sarbanes-Oxley compliance were the primary factors causing
increased SG&A in 2005 compared to 2004.
Depreciation and Amortization. Depreciation
and amortization expense increased $7.6 million, or 16.3%,
in the year ended December 31, 2006 compared to the same
period in 2005. Depreciation and amortization expense increased
$10.7 million, or 29.8%, in 2005 compared to 2004.
Depreciation and amortization expense increased in 2006 and 2005
due primarily to acquisitions and capital expenditures.
Operating Income. Consolidated operating
income increased $103.4 million, or 53%, in 2006 compared
to 2005 as a result of increases at well site services of
$90.7 million, or 87%, and at offshore products of
$29.4 million, or 111%, which were partially offset by
decreased tubular services operating income of
$8.4 million, or 11%. Consolidated operating income
increased $99.5 million, or 105%, in 2005 compared to 2004
as a result of increases at well site services of
$49.2 million, or 89%, at offshore products of
$19.3 million, or 268%, and at tubular services of
$34.0 million, or 83%.
Interest Expense and Interest Income. Interest
expense increased $5.5 million, or 39.5%, for the year
ended December 31, 2006 compared to the year ended
December 31, 2005. Interest expense increased
$6.2 million, or
29
81.3%, for the year ended December 31, 2005 compared to the
year ended December 31, 2004. Interest expense increased
due to higher debt levels resulting from acquisitions and
capital expenditures, combined with higher interest rates. The
weighted average interest rate on the Companys revolving
credit facility was 6.4% for 2006, 4.7% for 2005 and 3.6% for
2004. Interest income increased in 2006 primarily because of the
notes receivable resulting from the sale of our hydraulic
workover business (see Note 7 to the Consolidated Financial
Statements included in this Annual Report on Form 10-K).
Equity in Earnings of Unconsolidated
Affiliates. Our equity in earnings of
unconsolidated affiliates is higher in 2006 than 2005 primarily
because of the sale of our workover services business and
resultant interest in Boots & Coots common stock, which
we account for under the equity method (see Note 7 to the
Consolidated Financial Statements included in this Annual Report
on Form 10-K). Our equity in earnings of unconsolidated
affiliates increased in 2005 compared to 2004 due primarily to
an equity affiliate in the OCTG business that experienced higher
profitability in 2005 compared to 2004.
Income Tax Expense. Our income tax provision
for the year ended December 31, 2006 totaled
$104.0 million, or 34.5% of pretax income, compared to
$60.7 million, or 33.3% of pretax income, for the year
ended December 31, 2005 and $29.4 million, or 33.1% of
pretax income during the year ended December 31, 2004. See
Managements Discussion and Analysis of Financial
Condition and Results of Operations Tax
Matters discussion below.
Liquidity
and Capital Resources
Our primary liquidity needs are to fund capital expenditures,
such as expanding our accommodations facilities, expanding and
upgrading our manufacturing facilities and equipment, adding
drilling rigs and increasing and replacing rental tool assets,
funding new product development and funding general working
capital needs. In addition, capital is needed to fund strategic
business acquisitions. Our primary sources of funds have been
cash flow from operations, proceeds from borrowings under our
bank facilities and proceeds from our $175 million
convertible note offering in 2005 (see Note 8 to
Consolidated Financial Statements included in this Annual Report
on
Form 10-K).
Cash totaling $137.4 million was provided by operations
during the year ended December 31, 2006 compared to cash
totaling $33.4 million provided by operations during the
year ended December 31, 2005. During 2006,
$95.1 million was used to fund working capital due in part
to increases in receivables and inventories in our offshore
products segment given the growth in activity.
Cash was used in investing activities during the years ended
December 31, 2006 and 2005 in the amount of
$114.2 million and $229.9 million, respectively.
Capital expenditures, including capitalized interest, totaled
$129.1 million and $83.4 million during the years
ended December 31, 2006 and 2005, respectively. Capital
expenditures in both years consisted principally of purchases of
assets for our well site services segment. Capital expenditures
for wellsite services in 2006 included $59.5 million in
accommodations, $32.6 million in drilling services
(including $13.1 million for the acquisition of three
drilling rigs from Eagle Rock Drilling) and $24.5 million
in rental tools. In 2005, we spent $36.8 million in
accommodations, $14.0 million in drilling services and
$19.8 million in rental tools. In addition, we completed
various acquisitions totaling $147.6 million net of cash
acquired, during 2005.
On February 1, 2005, we completed the acquisition of
Elenburg Exploration Company, Inc. (Elenburg), a Wyoming based
land drilling company for cash consideration of
$21.3 million, net of cash acquired and including
transaction costs, but excluding a note payable to the former
owners of $0.8 million. At the time of acquisition,
Elenburg owned and operated 7 rigs which provided shallow land
drilling services in Montana, Wyoming, Colorado, and Utah.
Effective May 1, 2005 we acquired Stinger Wellhead
Protection, Inc., certain affiliated companies and related
intellectual property and, effective June 1, 2005, we
completed the acquisition of Stingers international
operations (collectively, Stinger) for cash consideration of
$84.7 million, net of cash acquired and including
transaction costs, but excluding a note payable to the former
owners of $5.0 million. Stinger provides wellhead isolation
equipment and services through its 30 locations in the United
States, Canada, Central and South America. Stingers
patented equipment is utilized during pressure pumping
operations and isolates the customers blow-out preventers
or
30
wellheads from the pressure and abrasion experienced during the
fracturing process of an oil or gas well. The Stinger
acquisition expanded our rental tool and services capabilities,
especially in the pressure pumping market.
On June 2, 2005, we purchased Phillips Casing and Tubing,
L.P. (Phillips) for cash consideration of $31.2 million,
including transaction costs. Phillips distributes OCTG primarily
carbon ERW (electronic resistance welded) pipe, from its
facilities in Midland and Godley, Texas.
On June 6, 2005, we acquired Noble Structures, Inc. for
cash consideration of $7.9 million, including transaction
costs, but excluding a note payable of $0.8 million. The
acquisition expanded our accommodations manufacturing
capabilities in Canada in order to meet increased demand for
remote site facilities, principally in the oil sands region.
The cash consideration paid for all of our acquisitions in the
period was initially funded utilizing our existing bank credit
facility and a $25 million bridge loan. The bridge loan was
subsequently repaid with proceeds from the
23/8% convertible
notes sold in June 2005 (see Note 8 to the Consolidated
Financial Statements included in this annual report on
Form 10-K).
On February 9, 2007, Boots & Coots announced it
had filed a registration statement to sell 26 million
shares of common stock including 13 million shares we own.
The closing price of Boots & Coots common stock on the
date of the announcement was $2.26. We own a total of
26.5 million shares of Boots & Coots common stock
with a carrying value of $1.31 per share as of
December 31, 2006. There can be no assurance about the
timing of this announced stock sale or whether this transaction
will ultimately take place.
We currently expect to spend a total of approximately
$203 million for capital expenditures during 2007 to expand
our product and service offering, and for maintenance and
upgrade of our equipment and facilities. We expect to fund these
capital expenditures with internally generated funds and
proceeds from borrowings under our revolving credit facilities.
Net cash of $11.2 million was used in financing activities
during the year ended December 31, 2006, primarily as a
result of treasury stock purchases and debt repayments partially
offset by proceeds from stock option exercises. A total of
$195.3 million was provided by financing activities during
the year ended December 31, 2005, primarily as a result of
our issuance of $175.0 million of contingent convertible
senior notes (see Note 8 to the Consolidated Financial
Statements included in this Annual Report on
Form 10-K).
During the first quarter of 2005, our Board of Directors
authorized the repurchase of up to $50 million of our
common stock, par value $.01 per share, over a two year
period. On August 25, 2006, an additional $50 million
was approved and the duration of the program was extended to
August 31, 2008. Through December 31, 2006, a total of
$50 million of our stock (1,824,432 shares), has been
repurchased under this program, leaving a total of up to
approximately $50 million remaining available under the
program.
On December 5, 2006, we amended our existing credit
agreement dated as of October 30, 2003 (the Credit
Agreement). The amendment to the Credit Agreement increased the
total commitments under the Credit Agreement from
$325 million to $400 million and extended the maturity
of the Credit Agreement to December 5, 2011. The Credit
Agreement permits the Company incremental borrowings of up to
$100 million under the Credit Agreement, subject to lender
approval, on the same terms and conditions. The Credit
Agreement, which governs our credit facility, contains customary
financial covenants and restrictions, including restrictions on
our ability to declare and pay dividends. Borrowings under the
Credit Agreement are secured by a pledge of substantially all of
our assets and the assets of our subsidiaries. Our obligations
under the Credit Agreement are guaranteed by our significant
subsidiaries. Borrowings under the Credit Agreement accrue
interest at a rate equal to either LIBOR or another benchmark
interest rate (at our election) plus an applicable margin based
on our leverage ratio (as defined in the Credit Agreement). We
must pay a quarterly commitment fee, based on our leverage
ratio, on the unused commitments under the Credit Agreement.
During the year 2006, our applicable margin over LIBOR ranged
from 0.75% to 1.25% and it was 0.75% as of December 31,
2006. Our weighted average interest rate paid under the Credit
Agreement was 6.2% during the year ended December 31, 2006
and 4.6% for the year ended December 31, 2005.
31
As of December 31, 2006, we had $215.4 million
outstanding under the Credit Facility and an additional
$10.7 million of outstanding letters of credit, leaving
$173.9 million available to be drawn under the facility. In
addition, we have other floating rate bank credit facilities in
the U.S. and the U.K. that provide for an aggregate borrowing
capacity of $9.0 million. As of December 31, 2006, we
had $1.0 million outstanding under these other facilities
and an additional $0.6 million of outstanding letters of
credit leaving $7.4 million available to be drawn under
these facilities. Our total debt represented 32.2% of the total
of debt and shareholders equity at December 31, 2006.
We believe that cash from operations and available borrowings
under our credit facilities will be sufficient to meet our
liquidity needs in the coming twelve months. If our plans or
assumptions change or are inaccurate, or if we make further
acquisitions, we may need to raise additional capital. However,
there is no assurance that we will be able to raise additional
funds or be able to raise such funds on favorable terms.
The following summarizes our contractual obligations at
December 31, 2006 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due in Less
|
|
|
Due in
|
|
|
Due in
|
|
|
Due After
|
|
December 31, 2006
|
|
Total
|
|
|
Than 1 Year
|
|
|
1-3 Years
|
|
|
3 - 5 Years
|
|
|
5 Years
|
|
|
Contractual obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt, including capital
leases
|
|
$
|
398,602
|
|
|
$
|
6,873
|
|
|
$
|
339
|
|
|
$
|
216,390
|
|
|
$
|
175,000
|
|
Non-cancelable operating leases
|
|
|
26,409
|
|
|
|
5,824
|
|
|
|
11,066
|
|
|
|
2,182
|
|
|
|
7,337
|
|
Purchase obligations
|
|
|
97,864
|
|
|
|
93,307
|
|
|
|
4,557
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual cash obligations
|
|
$
|
522,875
|
|
|
$
|
106,004
|
|
|
$
|
15,962
|
|
|
$
|
218,572
|
|
|
$
|
182,337
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our debt obligations at December 31, 2006 are included in
our consolidated balance sheet, which is a part of our
consolidated financial statements included in this Annual Report
on
Form 10-K.
We have not entered into any material leases subsequent to
December 31, 2006.
Off-Balance
Sheet Arrangements
As of December 31, 2006, we had no off-balance sheet
arrangements as defined in Item 303(a)(4) of Regulation S-K.
Tax
Matters
Our primary deferred tax asset, which totaled $8.2 million
at December 31, 2006, is related to $23.4 million in
available federal net operating loss carryforwards, or NOLs, as
of that date. The NOLs will expire in varying amounts during the
years 2010 through 2011 if they are not first used to offset
taxable income that we generate. Our ability to utilize a
significant portion of the NOLs is currently limited under
Section 382 of the Internal Revenue Code due to a change of
control that occurred during 1995. We currently believe that
substantially all of our NOLs will be utilized.
Our income tax provision for the year ended December 31,
2006 totaled $104.0 million, or 34.5% of pretax income.
During the year ended December 31, 2006, the Company
recognized a tax benefit triggered by employee exercises of
stock options totaling $5.0 million. Such benefit was
credited to additional paid-in capital. Our income tax provision
for the year ended December 31, 2005 totaled
$60.7 million, or 33.3% of pretax income. The income tax
provision for the year 2005 included a $4.7 million income
tax benefit related to the reversal of substantially all of the
remaining valuation allowance applied against NOLs which were
recorded as of the prior year end.
Critical
Accounting Policies
In our selection of critical accounting policies, our objective
is to properly reflect our financial position and results of
operations in each reporting period in a manner that will be
understood by those who utilize our financial statements. Often
we must use our judgment about uncertainties.
There are several critical accounting policies that we have put
into practice that have an important effect on our reported
financial results.
32
We have contingent liabilities and future claims for which we
have made estimates of the amount of the eventual cost to
liquidate these liabilities or claims. These liabilities and
claims sometimes involve threatened or actual litigation where
damages have been quantified and we have made an assessment of
our exposure and recorded a provision in our accounts to cover
an expected loss. Other claims or liabilities have been
estimated based on our experience in these matters and, when
appropriate, the advice of outside counsel or other outside
experts. Upon the ultimate resolution of these uncertainties,
our future reported financial results will be impacted by the
difference between our estimates and the actual amounts paid to
settle a liability. Examples of areas where we have made
important estimates of future liabilities include litigation,
taxes, fines, penalties, interest, warranty claims, contract
claims and discontinued operations.
The assessment of impairment on long-lived assets, including
goodwill and investments in unconsolidated subsidiaries, is
conducted whenever changes in the facts and circumstances
indicate a loss in value has occurred. The determination of the
amount of impairment, which is other than a temporary decline in
value, would be based on quoted market prices, if available, or
upon our judgments as to the future operating cash flows to be
generated from these assets throughout their estimated useful
lives. Our industry is highly cyclical and our estimates of the
period over which future cash flows will be generated, as well
as the predictability of these cash flows and our determination
of whether an other than temporary decline in value of our
investment has occurred, can have a significant impact on the
carrying value of these assets and, in periods of prolonged down
cycles, may result in impairment charges.
We recognize revenue and profit as work progresses on long-term,
fixed price contracts using the
percentage-of-completion
method, which relies on estimates of total expected contract
revenue and costs. We follow this method since reasonably
dependable estimates of the revenue and costs applicable to
various stages of a contract can be made. Recognized revenues
and profit are subject to revisions as the contract progresses
to completion. Revisions in profit estimates are charged to
income or expense in the period in which the facts and
circumstances that give rise to the revision become known.
Provisions for estimated losses on uncompleted contracts are
made in the period in which losses are determined.
Our valuation allowances, especially related to potential bad
debts in accounts receivable and to obsolescence or market value
declines of inventory, involve reviews of underlying details of
these assets, known trends in the marketplace and the
application of historical factors that provide us with a basis
for recording these allowances. If market conditions are less
favorable than those projected by management, or if our
historical experience is materially different from future
experience, additional allowances may be required. We have, in
past years, recorded a valuation allowance to reduce our
deferred tax assets to the amount that is more likely than not
to be realized. See Note 10 Income Taxes in the
Consolidated Financial Statements included in this Annual Report
on Form 10-K and Tax Matters herein.
The selection of the useful lives of many of our assets requires
the judgments of our operating personnel as to the length of
these useful lives. Should our estimates be too long or short,
we might eventually report a disproportionate number of losses
or gains upon disposition or retirement of our long-lived
assets. We believe our estimates of useful lives are appropriate.
Since the adoption of SFAS No. 123R, we are required
to estimate the fair value of stock compensation made pursuant
to awards under our 2001 Equity Participation Plan (Plan). An
initial estimate of fair value of each stock option or
restricted stock award determines the amount of stock
compensation expense we will recognize in the future. To
estimate the value of stock option awards under the Plan, we
have selected a fair value calculation model. We have chosen the
Black Scholes closed form model to value stock
options awarded under the Plan. We have chosen this model
because our option awards have been made under straightforward
and consistent vesting terms, option prices and option lives.
Utilizing the Black Scholes model requires us to estimate the
length of time options will remain outstanding, a risk free
interest rate for the estimated period options are assumed to be
outstanding, forfeiture rates, future dividends and the
volatility of our common stock. All of these assumptions affect
the amount and timing of future stock compensation expense
recognition. We will continually monitor our actual experience
and change assumptions for future awards as we consider
appropriate.
33
Recent
Accounting Pronouncements
On December 16, 2004, the FASB issued FASB Statement
No. 123 (revised 2004), Share-Based Payment, which is a
revision of FASB Statement No. 123, Accounting for
Stock-Based Compensation. Statement 123(R) supersedes APB
Opinion No. 25, Accounting for Stock Issued to Employees,
and amends FASB Statement No. 95, Statement of Cash Flows.
Generally, the approach in Statement 123(R) is similar to
the approach described in Statement 123. However,
Statement 123(R) requires all share-based payments to
employees, including grants of employee stock options, to be
recognized in the income statement based on their fair values.
Pro forma disclosure is no longer an acceptable alternative.
We adopted Statement of Financial Accounting Standards
No. 123R (SFAS 123R) effective January 1, 2006.
This pronouncement requires companies to measure the cost of
employee services received in exchange for an award of equity
instruments (typically stock options) based on the grant-date
fair value of the award. The fair value is estimated using
option-pricing models. The resulting cost is recognized over the
period during which an employee is required to provide service
in exchange for the awards, usually the vesting period. Prior to
the adoption of SFAS 123R, this accounting treatment was
optional with pro forma disclosures required. We adopted
SFAS 123R using the modified prospective transition method
(see Note 13 to the Consolidated Financial Statements
included in this Annual Report on Form 10-K).
In May 2005, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS)
No. 154, Accounting Changes and Error Corrections, a
replacement of APB Opinion No. 20 and FASB Statement
No. 3. Among other changes, this Statement requires
retrospective application for voluntary changes in accounting
principles, unless it is impractical to do so. Guidance is
provided on how to account for changes when retrospective
application is impractical. This Statement is effective on a
prospective basis beginning January 1, 2006.
In September 2006, the FASB issued Statement of Financial
Accounting Standards No. 157 (SFAS 157), Fair
Value Measurements, which defines fair value, establishes
guidelines for measuring fair value and expands disclosures
regarding fair value measurements. SFAS 157 does not
require any new fair value measurements but rather eliminates
inconsistencies in guidance found in various prior accounting
pronouncements. SFAS 157 is effective for fiscal years
beginning after November 15, 2007. Early adoption is
permitted, provided the company has not yet issued financial
statements, including for interim periods, for that fiscal year.
The Company plans to adopt the provisions of SFAS 157 in
2008 and, when adopted, does not expect the adoption of
SFAS 157 to have a material impact on its results from
operations or financial position.
In June 2006, the FASB issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes an
interpretation of FASB Statement No. 109 (FIN 48),
which clarifies the accounting and disclosure for uncertain tax
positions, as defined. FIN 48 requires companies to meet a
more-likely-than-not threshold (i.e. greater than
50 percent likelihood of a tax position being sustained
under examination) prior to recording a benefit for their tax
position. FIN 48 seeks to reduce the diversity in practice
associated with certain aspects of the recognition and
measurement related to accounting for income taxes. This
interpretation is effective for fiscal years beginning after
December 15, 2006. The Company has not yet determined the
impact this interpretation will have on its results from
operations or financial position.
|
|
ITEM 7A.
|
Quantitative
And Qualitative Disclosures About Market Risk
|
Interest Rate Risk. We have long-term debt and
revolving lines of credit subject to the risk of loss associated
with movements in interest rates. As of December 31, 2006,
we had floating rate obligations totaling approximately
$215.4 million for amounts borrowed under our revolving
credit facilities. These floating-rate obligations expose us to
the risk of increased interest expense in the event of increases
in short-term interest rates. If the floating interest rate were
to increase by 1% from December 31, 2006 levels, our
consolidated interest expense would increase by a total of
approximately $2.2 million annually.
Foreign Currency Exchange Rate Risk. Our
operations are conducted in various countries around the world
in a number of different currencies. As such, our earnings are
subject to movements in foreign currency exchange rates when
transactions are denominated in currencies other than the
U.S. dollar, which is our functional currency,
34
or the functional currency of our subsidiaries, which is not
necessarily the U.S. dollar. In order to mitigate the
effects of exchange rate risks, we generally pay a portion of
our expenses in local currencies and a substantial portion of
our contracts provide for collections from customers in
U.S. dollars. During 2006, our realized foreign exchange
losses were $0.4 million and are included in other
operating expense (income) in the consolidated statements of
income.
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
Our consolidated financial statements and supplementary data of
the Company appear on pages 43 through 74 of this Annual
Report on
Form 10-K
and are incorporated by reference into this Item 8.
Selected quarterly financial data is set forth in Note 15
to our Consolidated Financial Statements, which is incorporated
herein by reference.
|
|
Item 9.
|
Changes
in and Disagreements With Accountants on Accounting and
Financial Disclosure
|
There were no changes in or disagreements on any matters of
accounting principles or financial statement disclosure between
us and our independent auditors during our two most recent
fiscal years or any subsequent interim period.
|
|
Item 9A.
|
Controls
and Procedures
|
|
|
(i)
|
Evaluation
of Disclosure Controls and Procedures
|
Evaluation of Disclosure Controls and
Procedures. As of the end of the period covered
by this Annual Report on
Form 10-K,
we carried out an evaluation, under the supervision and with the
participation of our management, including our Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures
(as defined in
Rule 13a-15(e)
of the Securities Exchange Act of 1934, as amended). Based upon
that evaluation, our Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures
were effective as of December 31, 2006 in ensuring that
material information was accumulated and communicated to
management, and made known to our Chief Executive Officer and
Chief Financial Officer, on a timely basis to allow disclosure
as required in this Annual Report on
Form 10-K.
Pursuant to section 906 of The Sarbanes-Oxley Act of 2002,
our Chief Executive Officer and Chief Financial Officer have
provided certain certifications to the Securities and Exchange
Commission. These certifications accompanied this report when
filed with the Commission, but are not set forth herein.
(ii) Internal
Control Over Financial Reporting
|
|
(a)
|
Managements
annual report on internal control over financial
reporting.
|
The Companys management report on internal control over
financial reporting is set forth in this Annual Report on
Form 10-K
on Page 43 and is incorporated herein by reference.
|
|
(b)
|
Attestation
report of the registered public accounting firm.
|
The attestation report of Ernst & Young LLP, the
Companys independent registered public accounting firm, on
managements assessment of the effectiveness of the
Companys internal control over financial reporting and the
effectiveness of the Companys internal control over
financial reporting is set forth in this Annual Report on
Form 10-K
on Page 45 and is incorporated herein by reference.
|
|
(c)
|
Changes
in internal control over financial reporting.
|
There was no change in the Companys internal control over
financial reporting during the Companys fourth fiscal
quarter ended December 31, 2006 that has materially
affected, or is reasonably likely to affect, the Companys
internal control over financial reporting.
35
Item 9B. Other
Information
There was no information required to be disclosed in a report on
Form 8-K
during the fourth quarter of 2006 that was not reported on a
Form 8-K
during such time.
PART III
|
|
Item 10.
|
Directors
and Executive Officers of the Registrant
|
(1) Information concerning directors, including the
Companys audit committee financial expert, appears in the
Companys Definitive Proxy Statement for the 2007 Annual
Meeting of Stockholders, under Election of
Directors. This portion of the Definitive Proxy Statement
is incorporated herein by reference.
(2) Information with respect to executive officers appears
in the Companys Definitive Proxy Statement for the 2007
Annual Meeting of Stockholders, under Executive Officers
of the Registrant. This portion of the Definitive Proxy
Statement is incorporated herein by reference.
(3) Information concerning Section 16(a) beneficial
ownership reporting compliance appears in the Companys
Definitive Proxy Statement for the 2007 Annual Meeting of
Stockholders, under Section 16(a) Beneficial
Ownership Reporting Compliance. This portion of the
Definitive Proxy Statement is incorporated herein by reference.
|
|
Item 11.
|
Executive
Compensation
|
The information required by Item 11 hereby is incorporated
by reference to such information as set forth in the
Companys Definitive Proxy Statement for the 2007 Annual
Meeting of Stockholders.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
The information required by Item 12 hereby is incorporated
by reference to such information as set forth in the
Companys Definitive Proxy Statement for the 2007 Annual
Meeting of Stockholders.
The table below provides information relating to our equity
compensation plans as of December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Securities
|
|
|
|
|
|
|
|
|
|
Remaining Available for
|
|
|
|
Number of Securities to
|
|
|
Weighted-Average
|
|
|
Future Issuance Under
|
|
|
|
be Issued Upon Exercise
|
|
|
Exercise Price of
|
|
|
Compensation Plans
|
|
|
|
of Outstanding Options,
|
|
|
Outstanding Options,
|
|
|
(Excluding Securities
|
|
Plan Category
|
|
Warrants and Rights
|
|
|
Warrants and Rights
|
|
|
Reflected in First Column)
|
|
|
Equity compensation plans
|
|
|
|
|
|
|
|
|
|
|
|
|
approved by security
|
|
|
|
|
|
|
|
|
|
|
|
|
holders
|
|
|
2,420,552
|
|
|
$
|
18.73
|
|
|
|
2,173,103
|
|
Equity compensation plans not
approved by security holders*
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2,420,552
|
|
|
$
|
18.73
|
|
|
|
2,173,103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We do not have any equity compensation plans not approved by our
stockholders.
|
|
|
Item 13.
|
Certain
Relationships and Related Transactions
|
The information required by Item 13 hereby is incorporated
by reference to such information as set forth in the
Companys Definitive Proxy Statement for the 2007 Annual
Meeting of Stockholders.
36
|
|
Item 14.
|
Principal
Accounting Fees and Services
|
Information concerning principal accountant fees and services
and the audit committees preapproval policies and
procedures appear in the Companys Definitive Proxy
Statement for the 2007 Annual Meeting of Stockholders under the
heading Fees Paid to Ernst & Young LLP and
is incorporated herein by reference.
PART IV
|
|
Item 15.
|
Exhibits
and Financial Statement Schedules
|
(a) Index to Financial Statements, Financial Statement
Schedules and Exhibits
(1) Financial Statements: Reference is
made to the index set forth on page 45 of this Annual
Report on
Form 10-K.
(2) Financial Statement Schedules: No
schedules have been included herein because the information
required to be submitted has been included in the Consolidated
Financial Statements or the Notes thereto, or the required
information is inapplicable.
(3) Index of Exhibits: See Index of
Exhibits, below, for a list of those exhibits filed herewith,
which index also includes and identifies management contracts or
compensatory plans or arrangements required to be filed as
exhibits to this Annual Report on
Form 10-K
by Item 601(10)(iii) of
Regulation S-K.
(b) Index of Exhibits
|
|
|
|
|
|
|
Exhibit No.
|
|
|
|
Description
|
|
|
3
|
.1
|
|
|
|
Amended and Restated Certificate
of Incorporation (incorporated by reference to Exhibit 3.1
to the Companys Annual Report on
Form 10-K
for the year ended December 31, 2000, as filed with the
Commission on March 30, 2001).
|
|
3
|
.2
|
|
|
|
Amended and Restated Bylaws
(incorporated by reference to Exhibit 3.2 to the
Companys Annual Report on
Form 10-K
for the year ended December 31, 2000, as filed with the
Commission on March 30, 2001).
|
|
3
|
.3
|
|
|
|
Certificate of Designations of
Special Preferred Voting Stock of Oil States International, Inc.
(incorporated by reference to Exhibit 3.3 to the
Companys Annual Report on
Form 10-K
for the year ended December 31, 2000, as filed with the
Commission on March 30, 2001).
|
|
4
|
.1
|
|
|
|
Form of common stock certificate
(incorporated by reference to Exhibit 4.1 to the
Companys Registration Statement on
Form S-1
(File
No. 333-43400)).
|
|
4
|
.2
|
|
|
|
Amended and Restated Registration
Rights Agreement (incorporated by reference to Exhibit 4.2
to the Companys Annual Report on
Form 10-K
for the year ended December 31, 2000, as filed with the
Commission on March 30, 2001).
|
|
4
|
.3
|
|
|
|
First Amendment to the Amended and
Restated Registration Rights Agreement dated May 17, 2002
(incorporated by reference to Exhibit 4.3 to the
Companys Annual Report on
Form 10-K
for the year ended December 31, 2002, as filed with the
Commission on March 13, 2003).
|
|
4
|
.4
|
|
|
|
Registration Rights Agreement
dated as of June 21, 2005 by and between Oil States
International, Inc. and RBC Capital Markets Corporation
(incorporated by reference to Oil States Current Report on
Form 8-K
filed with the Securities and Exchange Commission on
June 23, 2005).
|
|
4
|
.5
|
|
|
|
Indenture dated as of
June 21, 2005 by and between Oil States International, Inc.
and Wells Fargo Bank, National Association, as trustee
(incorporated by reference to Oil States Current Report on
Form 8-K
filed with the Securities and Exchange Commission on
June 23, 2005).
|
|
4
|
.6
|
|
|
|
Global Notes representing
$175,000,000 aggregate principal amount of
23/8%
Contingent Convertible Senior Notes due 2025 (incorporated by
reference to Section 2.2 of Exhibit 4.5 hereof)
(incorporated by reference to Oil States Current Reports
on
Form 8-K
filed with the Securities and Exchange Commission on
June 23, 2005 and July 13, 2005).
|
37
|
|
|
|
|
|
|
Exhibit No.
|
|
|
|
Description
|
|
|
10
|
.1
|
|
|
|
Combination Agreement dated as of
July 31, 2000 by and among Oil States International, Inc.,
HWC Energy Services, Inc., Merger
Sub-HWC,
Inc., Sooner Inc., Merger
Sub-Sooner,
Inc. and PTI Group Inc. (incorporated by reference to
Exhibit 10.1 to the Companys Registration Statement
on
Form S-1
(File
No. 333-43400)).
|
|
10
|
.2
|
|
|
|
Plan of Arrangement of PTI Group
Inc. (incorporated by reference to Exhibit 10.2 to the
Companys Annual Report on
Form 10-K
for the year ended December 31, 2000, as filed with the
Commission on March 30, 2001).
|
|
10
|
.3
|
|
|
|
Support Agreement between Oil
States International, Inc. and PTI Holdco (incorporated by
reference to Exhibit 10.3 to the Companys Annual
Report on
Form 10-K
for the year ended December 31, 2000, as filed with the
Commission on March 30, 2001).
|
|
10
|
.4
|
|
|
|
Voting and Exchange
Trust Agreement by and among Oil States International,
Inc., PTI Holdco and Montreal Trust Company of Canada
(incorporated by reference to Exhibit 10.4 to the
Companys Annual Report on
Form 10-K
for the year ended December 31, 2000, as filed with the
Commission on March 30, 2001).
|
|
10
|
.5**
|
|
|
|
2001 Equity Participation Plan as
amended and restated effective February 16, 2005
(incorporated by reference to Exhibit 10.5 to the
Companys Annual Report on
Form 10-K
for the year ended December 31, 2005, as filed with the
Commission on March 2, 2006).
|
|
10
|
.6**
|
|
|
|
Deferred Compensation Plan
effective November 1, 2003 (incorporated by reference to
Exhibit 10.6 to the Companys Annual Report on
Form 10-K
for the year ended December 31, 2003, as filed with the
Commission on March 5, 2004).
|
|
10
|
.7**
|
|
|
|
Annual Incentive Compensation Plan
(incorporated by reference to Exhibit 10.7 to the
Companys Annual Report on
Form 10-K
for the year ended December 31, 2000, as filed with the
Commission on March 30, 2001).
|
|
10
|
.8**
|
|
|
|
Executive Agreement between Oil
States International, Inc. and Douglas E. Swanson (incorporated
by reference to Exhibit 10.8 to the Companys Annual
Report on
Form 10-K
for the year ended December 31, 2000, as filed with the
Commission on March 30, 2001).
|
|
10
|
.9**
|
|
|
|
Executive Agreement between Oil
States International, Inc. and Cindy B. Taylor (incorporated by
Reference to Exhibit 10.9 to the Companys Annual
Report on
Form 10-K
for the year ended December 31, 2000, as filed with the
Commission on March 30, 2001).
|
|
10
|
.10**
|
|
|
|
Form of Executive Agreement
between Oil States International, Inc. and Named Executive
Officer (Mr. Hughes) (incorporated by reference to
Exhibit 10.10 of the Companys Registration Statement
on
Form S-1
(File
No. 333-43400)).
|
|
10
|
.11**
|
|
|
|
Form of Change of Control
Severance Plan for Selected Members of Management (incorporated
by reference to Exhibit 10.11 of the Companys
Registration Statement on
Form S-1
(File
No. 333-43400)).
|
|
10
|
.12
|
|
|
|
Credit Agreement, dated as of
October 30, 2003, among Oil States International, Inc., the
Lenders named therein and Wells Fargo Bank Texas, National
Association, as Administrative Agent and U.S. Collateral
Agent; and Bank of Nova Scotia, as Canadian Administrative Agent
and Canadian Collateral Agent; Hibernia National Bank and Royal
Bank of Canada, as Co-Syndication Agents and Bank One, NA and
Credit Lyonnais New York Branch, as Co-Documentation Agents
(incorporated by reference to Exhibit 10.12 to the
Companys Quarterly Report on
Form 10-Q
for the three months ended September 30, 2003, as filed
with the Commission on November 11, 2003.)
|
|
10
|
.12A
|
|
|
|
Incremental Assumption Agreement,
dated as of May 10, 2004, among Oil States International,
Inc., Wells Fargo, National Association and each of the other
lenders listed as an Increasing Lender (incorporated by
reference to Exhibit 10.12A to the Companys Quarterly
Report on
Form 10-Q
for the three months ended June 30, 2004, as filed with the
Commission on August 4, 2004).
|
38
|
|
|
|
|
|
|
Exhibit No.
|
|
|
|
Description
|
|
|
10
|
.12B
|
|
|
|
Amendment No. 1, dated as of
January 31, 2005, to the Credit Agreement among Oil States
International, Inc., the lenders named therein and Wells Fargo
Bank, Texas, National Association, as Administrative Agent and
U.S. Collateral Agent; and Bank of Nova Scotia, as Canadian
Administrative Agent and Canadian Collateral Agent; Hibernia
National Bank and Royal Bank of Canada, as Co-Syndication Agents
and Bank One, NA and Credit Lyonnais New York Branch, as
Co-Documentation Agents (incorporated by reference to
Exhibit 10.12b to the Companys Annual Report on
Form 10-K
for the year ended December 31, 2004, as filed with the
Commission on March 2, 2005).
|
|
10
|
.12C
|
|
|
|
Amendment No. 2, dated as of
December 5, 2006, to the Credit Agreement among Oil States
International, Inc., the lenders named therein and Wells Fargo
Bank, N.A., as Lead Arranger, U.S. Administrative Agent and
U.S. Collateral Agent; and The Bank of Nova Scotia, as
Canadian Administrative Agent and Canadian Collateral Agent;
Capital One N.A. and Royal Bank of Canada, as Co-Syndication
Agents and JP Morgan Chase Bank, N.A. and Calyon New York
Branch, as Co-Documentation Agents (incorporated by reference to
Exhibit 10.12C to the Companys Current Report on
Form 8-K
filed with the Securities and Exchange Commission on
December 7, 2006).
|
|
10
|
.13A**
|
|
|
|
Restricted Stock Agreement, dated
February 8, 2001, between Oil States International, Inc.
and Douglas E. Swanson (incorporated by reference to
Exhibit 10.13A to the Companys Quarterly Report on
Form 10-Q
for the three months ended March 31, 2001, as filed with
the Commission on May 15, 2001).
|
|
10
|
.13B**
|
|
|
|
Restricted Stock Agreement, dated
February 22, 2001, between Oil States International, Inc.
and Douglas E. Swanson (incorporated by reference to
Exhibit 10.13B to the Companys Quarterly Report on
Form 10-Q
for the three months ended March 31, 2002, as filed with
the Commission on May 15, 2002).
|
|
10
|
.14**
|
|
|
|
Form of Indemnification Agreement
(incorporated by reference to Exhibit 10.14 to the
Companys Quarterly Report on
Form 10-Q
for the quarter ended September 30, 2004, as filed with the
Commission on November 5, 2004).
|
|
10
|
.15**
|
|
|
|
Form of Executive Agreement
between Oil States International, Inc. and named Executive
Officer (Mr. Slator) (incorporated by reference to
Exhibit 10.16 to the Companys Annual Report on
Form 10-K
for the year ended December 31, 2001, as filed with the
Commission on March 1, 2002).
|
|
10
|
.16**
|
|
|
|
Douglas E. Swanson contingent
option award dated as of February 11, 2002 (incorporated by
reference to Exhibit 10.17 to the Companys Quarterly
Report on
Form 10-Q
for the three months ended September 30, 2002 as filed with
the Commission on November 13, 2002).
|
|
10
|
.17**
|
|
|
|
Form of Executive Agreement
between Oil States International, Inc. and named executive
officer (Mr. Trahan) (incorporated by reference to
Exhibit 10.16 to the Companys Quarterly Report on
Form 10-Q
for the three months ended June 30, 2002, as filed with the
Commission on August 13, 2002).
|
|
10
|
.18**
|
|
|
|
Form of Director Stock Option
Agreement under the Companys 2001 Equity Participation
Plan (incorporated by reference to Exhibit 10.18 to the
Companys Annual Report on
Form 10-K
for the year ended December 31, 2004, as filed with the
Commission on March 2, 2005).
|
|
10
|
.19**
|
|
|
|
Form of Employee Non Qualified
Stock Option Agreement under the Companys 2001 Equity
Participation Plan (incorporated by reference to
Exhibit 10.19 to the Companys Annual Report on
Form 10-K
for the year ended December 31, 2004, as filed with the
Commission on March 2, 2005).
|
|
10
|
.20**
|
|
|
|
Form of Restricted Stock Agreement
under the Companys 2001 Equity Participation Plan
(incorporated by reference to Exhibit 10.20 to the
Companys Annual Report on
Form 10-K
for the year ended December 31, 2004, as filed with the
Commission on November 15, 2006).
|
|
10
|
.21**
|
|
|
|
Non-Employee Director Compensation
Summary (incorporated by reference to Exhibit 10.21 to the
Companys Report on
Form 8-K
as filed with the Commission on May 24, 2005).
|
|
10
|
.22**
|
|
|
|
Form of Executive Agreement
between Oil States International, Inc. and named executive
officer (Mr. Cragg) (incorporated by reference to
Exhibit 10.22 to the Companys Quarterly Report on
Form 10-Q
for the quarter ended March 31, 2005, as filed with the
Commission on April 29, 2005).
|
39
|
|
|
|
|
|
|
Exhibit No.
|
|
|
|
Description
|
|
|
10
|
.23**
|
|
|
|
Form of Non-Employee Director
Restricted Stock Agreement under the Companys 2001 Equity
Participation Plan (incorporated by reference to
Exhibit 22.2 to the Companys Report of
Form 8-K,
as filed with the Commission on May 24, 2005).
|
|
10
|
.24**
|
|
|
|
Form of Executive Agreement
between Oil States International, Inc. and named executive
officer (Bradley Dodson) effective October 10, 2006
(incorporated by reference to Exhibit 10.24 to the
Companys Quarterly Report on Form 10Q for the quarter
ended September 30, 2006, as filed with the Commission on
November 3, 2006).
|
|
21
|
.1*
|
|
|
|
List of subsidiaries of the
Company.
|
|
23
|
.1*
|
|
|
|
Consent of Independent Registered
Public Accounting Firm.
|
|
24
|
.1*
|
|
|
|
Powers of Attorney for Directors.
|
|
31
|
.1*
|
|
|
|
Certification of Chief Executive
Officer of Oil States International, Inc. pursuant to
Rules 13a-14(a)
or 15d-14(a)
under the Securities Exchange Act of 1934.
|
|
31
|
.2*
|
|
|
|
Certification of Chief Financial
Officer of Oil States International, Inc. pursuant to
Rules 13a-14(a)
or 15d-14(a)
under the Securities Exchange Act of 1934.
|
|
32
|
.1***
|
|
|
|
Certification of Chief Executive
Officer of Oil States International, Inc. pursuant to
Rules 13a-14(b)
or 15d-14(b)
under the Securities Exchange Act of 1934.
|
|
32
|
.2***
|
|
|
|
Certification of Chief Financial
Officer of Oil States International, Inc. pursuant to
Rules 13a-14(b)
or 15d-14(b)
under the Securities Exchange Act of 1934.
|
|
|
|
* |
|
Filed herewith |
|
** |
|
Management contracts or compensatory plans or arrangements |
|
*** |
|
Furnished herewith. |
40
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
OIL STATES INTERNATIONAL, INC.
|
|
|
|
By:
|
/s/ DOUGLAS
E. SWANSON
|
Douglas E. Swanson
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed by the following persons on
behalf of the registrant in the capacities indicated on
February 28, 2007.
|
|
|
|
|
Signature
|
|
Title
|
|
/s/ STEPHEN
A. WELLS*
Stephen
A. Wells
|
|
Chairman of the Board
|
|
|
|
/s/ DOUGLAS
E. SWANSON
Douglas
E. Swanson
|
|
Director, Chief Executive
Officer
(Principal Executive Officer)
|
|
|
|
/s/ BRADLEY
J. DODSON
Bradley
J. Dodson
|
|
Vice President, Chief Financial
Officer
and Treasurer (Principal Financial Officer)
|
|
|
|
/s/ ROBERT
W. HAMPTON
Robert
W. Hampton
|
|
Senior Vice President
Accounting and Secretary(Principal Accounting Officer)
|
|
|
|
MARTIN
LAMBERT*
Martin
Lambert
|
|
Director
|
|
|
|
S.
JAMES
NELSON, JR.*
S.
James Nelson, Jr.
|
|
Director
|
|
|
|
MARK
G. PAPA*
Mark
G. Papa
|
|
Director
|
|
|
|
GARY
L. ROSENTHAL*
Gary
L. Rosenthal
|
|
Director
|
|
|
|
WILLIAM
T. VAN KLEEF*
William
T. Van Kleef
|
|
Director
|
|
|
|
|
|
*By:
|
|
/s/ BRADLEY
J. DODSON*
Bradley
J. Dodson, pursuant to a power of attorney filed as
Exhibit 24.1 to this Annual Report on
Form 10-K
|
|
|
41
OIL
STATES INTERNATIONAL, INC. AND SUBSIDIARIES
OVER
FINANCIAL REPORTING
To the Stockholders and Board of Directors of Oil States
International, Inc.:
The management of Oil States International, Inc. and
subsidiaries (Oil States International, Inc. or the Company) is
responsible for establishing and maintaining adequate internal
control over financial reporting. Oil States International,
Inc.s internal control system was designed to provide
reasonable assurance to the Companys management and Board
of Directors regarding the preparation and fair presentation of
published financial statements.
All internal control systems, no matter how well designed, have
inherent limitations. Therefore, even those systems determined
to be effective can provide only reasonable assurance with
respect to financial statement preparation and presentation.
Oil States International, Inc.s management assessed the
effectiveness of the Companys internal control over
financial reporting as of December 31, 2006. In making this
assessment, management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO) in Internal Control Integrated Framework.
Based on our assessment we believe that, as of December 31,
2006, the Companys internal control over financial
reporting is effective based on those criteria.
Oil States International, Inc.s independent registered
public accounting firm has audited our assessment and the
effectiveness of the Companys internal control over
financial reporting. This report appears on Page 45.
OIL STATES INTERNATIONAL, INC.
Houston, Texas
43
OIL
STATES INTERNATIONAL, INC. AND SUBSIDIARIES
To the Board of Directors and Stockholders of Oil States
International, Inc.:
We have audited the accompanying consolidated balance sheets of
Oil States International, Inc. and subsidiaries (the
Company) as of December 31, 2006 and 2005, and
the related consolidated statements of income,
stockholders equity and comprehensive income, and cash
flows for each of the three years in the period ended
December 31, 2006. These financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of the Company at December 31, 2006 and
2005, and the consolidated results of its operations and its
cash flows for each of the three years in the period ended
December 31, 2006, in conformity with U.S. generally
accepted accounting principles.
As discussed in Note 4 to the consolidated financial
statements, effective January 1, 2006 the Company adopted
the provisions of Statement of Financial Accounting Standards
No. 123 (revised 2004), Share-Based Payment.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of the Companys internal control over
financial reporting as of December 31, 2006, based on
criteria established in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission and our report dated February 23,
2007 expressed an unqualified opinion thereon.
ERNST & YOUNG LLP
Houston, Texas
February 23, 2007
44
OIL
STATES INTERNATIONAL, INC. AND SUBSIDIARIES
To the Board of Directors and Stockholders of Oil States
International, Inc.:
We have audited managements assessment, included in the
accompanying Managements Annual Report on Internal Control
Over Financial Reporting, that Oil States International, Inc.
and subsidiaries (Oil States International, Inc., or the
Company) maintained effective internal control over
financial reporting as of December 31, 2006, based on
criteria established in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission (the COSO criteria). The Companys
management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our
responsibility is to express an opinion on managements
assessment and an opinion on the effectiveness of the
Companys internal control over financial reporting based
on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating
managements assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, managements assessment that the Company
maintained effective internal control over financial reporting
as of December 31, 2006 is fairly stated, in all material
respects, based on the COSO criteria. Also, in our opinion, the
Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2006
based on the COSO criteria.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
accompanying consolidated balance sheets of the Company as of
December 31, 2006 and 2005 and the related consolidated
statements of income, stockholders equity and other
comprehensive income and cash flows for each of the three years
in the period ended December 31, 2006 and our report dated
February 23, 2007 expressed an unqualified opinion thereon.
ERNST & YOUNG LLP
Houston, Texas
February 23, 2007
45
OIL
STATES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
$
|
1,232,149
|
|
|
$
|
946,907
|
|
|
$
|
607,387
|
|
Service and other
|
|
|
691,208
|
|
|
|
584,729
|
|
|
|
363,625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,923,357
|
|
|
|
1,531,636
|
|
|
|
971,012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Product costs
|
|
|
1,082,379
|
|
|
|
808,833
|
|
|
|
521,152
|
|
Service and other costs
|
|
|
385,609
|
|
|
|
397,354
|
|
|
|
253,486
|
|
Selling, general and
administrative expenses
|
|
|
107,216
|
|
|
|
84,672
|
|
|
|
64,810
|
|
Depreciation and amortization
expense
|
|
|
54,340
|
|
|
|
46,704
|
|
|
|
35,988
|
|
Other operating expense (income)
|
|
|
(4,124
|
)
|
|
|
(488
|
)
|
|
|
460
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,625,420
|
|
|
|
1,337,075
|
|
|
|
875,896
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
297,937
|
|
|
|
194,561
|
|
|
|
95,116
|
|
Interest expense
|
|
|
(19,389
|
)
|
|
|
(13,903
|
)
|
|
|
(7,667
|
)
|
Interest income
|
|
|
2,506
|
|
|
|
475
|
|
|
|
363
|
|
Equity in earnings of
unconsolidated affiliates
|
|
|
7,148
|
|
|
|
1,276
|
|
|
|
361
|
|
Sale of workover services business
|
|
|
11,250
|
|
|
|
|
|
|
|
|
|
Other income
|
|
|
2,195
|
|
|
|
98
|
|
|
|
595
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
301,647
|
|
|
|
182,507
|
|
|
|
88,768
|
|
Income tax provision
|
|
|
(104,013
|
)
|
|
|
(60,694
|
)
|
|
|
(29,406
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common
shares
|
|
$
|
197,634
|
|
|
$
|
121,813
|
|
|
$
|
59,362
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share
|
|
$
|
3.99
|
|
|
$
|
2.47
|
|
|
$
|
1.20
|
|
Diluted net income per share
|
|
$
|
3.89
|
|
|
$
|
2.41
|
|
|
$
|
1.19
|
|
Weighted average number of common
shares outstanding (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
49,519
|
|
|
|
49,344
|
|
|
|
49,329
|
|
Diluted
|
|
|
50,773
|
|
|
|
50,479
|
|
|
|
50,027
|
|
The accompanying notes are an integral part of these financial
statements.
46
OIL
STATES INTERNATIONAL, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands, except
|
|
|
|
share amounts)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
28,396
|
|
|
$
|
15,298
|
|
Accounts receivable, net
|
|
|
351,701
|
|
|
|
274,070
|
|
Inventories, net
|
|
|
386,182
|
|
|
|
360,926
|
|
Prepaid expenses and other current
assets
|
|
|
17,710
|
|
|
|
13,450
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
783,989
|
|
|
|
663,744
|
|
Property, plant and equipment, net
|
|
|
358,716
|
|
|
|
310,452
|
|
Goodwill, net
|
|
|
331,804
|
|
|
|
339,703
|
|
Investments in unconsolidated
affiliates
|
|
|
38,079
|
|
|
|
2,265
|
|
Other noncurrent assets
|
|
|
58,506
|
|
|
|
26,708
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,571,094
|
|
|
$
|
1,342,872
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued
liabilities
|
|
$
|
199,842
|
|
|
$
|
214,504
|
|
Income taxes
|
|
|
11,376
|
|
|
|
7,023
|
|
Current portion of long-term debt
|
|
|
6,873
|
|
|
|
3,901
|
|
Deferred revenue
|
|
|
58,645
|
|
|
|
34,046
|
|
Other current liabilities
|
|
|
3,680
|
|
|
|
3,223
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
280,416
|
|
|
|
262,697
|
|
Long-term debt
|
|
|
391,729
|
|
|
|
402,109
|
|
Deferred income taxes
|
|
|
38,020
|
|
|
|
35,259
|
|
Other liabilities
|
|
|
21,093
|
|
|
|
8,823
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
731,258
|
|
|
|
708,888
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Common stock, $.01 par value,
200,000,000 shares authorized, 49,296,740 shares and
49,179,258 shares issued and outstanding, respectively
|
|
|
511
|
|
|
|
504
|
|
Additional paid-in capital
|
|
|
372,043
|
|
|
|
350,667
|
|
Retained earnings
|
|
|
487,627
|
|
|
|
289,993
|
|
Accumulated other comprehensive
income
|
|
|
30,183
|
|
|
|
23,137
|
|
Common stock held in treasury at
cost, 1,863,800 and 1,214,432 shares, respectively
|
|
|
(50,528
|
)
|
|
|
(30,317
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
839,836
|
|
|
|
633,984
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
stockholders equity
|
|
$
|
1,571,094
|
|
|
$
|
1,342,872
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial
statements.
47
OIL
STATES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS EQUITY
AND COMPREHENSIVE INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
Comprehensive
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
Paid-In
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Income
|
|
|
Treasury
|
|
|
|
|
|
|
Stock
|
|
|
Capital
|
|
|
Earnings
|
|
|
Income
|
|
|
(Loss)
|
|
|
Stock
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Balance, December 31,
2003
|
|
|
492
|
|
|
|
333,855
|
|
|
|
108,818
|
|
|
|
|
|
|
|
12,289
|
|
|
|
(343
|
)
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
59,362
|
|
|
$
|
59,362
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,470
|
|
|
|
10,470
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
69,832
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options,
including tax benefit
|
|
|
4
|
|
|
|
4,792
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of restricted stock
compensation
|
|
|
|
|
|
|
109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock sold in deferred compensation
plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31,
2004
|
|
|
496
|
|
|
|
338,906
|
|
|
|
168,180
|
|
|
|
|
|
|
|
22,759
|
|
|
|
(317
|
)
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
121,813
|
|
|
$
|
121,813
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
418
|
|
|
|
418
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(40
|
)
|
|
|
(40
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
122,191
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options,
including tax benefit
|
|
|
8
|
|
|
|
11,204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of restricted stock
compensation
|
|
|
|
|
|
|
557
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock acquired for cash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(30,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31,
2005
|
|
|
504
|
|
|
|
350,667
|
|
|
|
289,993
|
|
|
|
|
|
|
|
23,137
|
|
|
|
( 30,317
|
)
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
197,634
|
|
|
$
|
197,634
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,016
|
|
|
|
7,016
|
|
|
|
|
|
|
|
|
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
204,680
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options,
including tax benefit
|
|
|
7
|
|
|
|
13,494
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of restricted stock
compensation
|
|
|
|
|
|
|
1,949
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock award
|
|
|
|
|
|
|
140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(303
|
)
|
|
|
|
|
Stock option expense
|
|
|
|
|
|
|
5,647
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock acquired for cash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(19,970
|
)
|
|
|
|
|
Stock sold in deferred compensation
plan
|
|
|
|
|
|
|
146
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31,
2006
|
|
$
|
511
|
|
|
$
|
372,043
|
|
|
$
|
487,627
|
|
|
|
|
|
|
$
|
30,183
|
|
|
$
|
(50,528
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial
statements.
48
OIL
STATES INTERNATIONAL, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Cash flows from operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
197,634
|
|
|
$
|
121,813
|
|
|
$
|
59,362
|
|
Adjustments to reconcile net income
to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
54,340
|
|
|
|
46,704
|
|
|
|
35,988
|
|
Deferred income tax provision
(credit)
|
|
|
755
|
|
|
|
(3,082
|
)
|
|
|
6,870
|
|
Excess tax benefits from
share-based payment arrangements
|
|
|
(5,007
|
)
|
|
|
|
|
|
|
|
|
Tax benefit of option exercises
|
|
|
|
|
|
|
3,660
|
|
|
|
1,117
|
|
Non-cash gain on sale of workover
services business
|
|
|
(11,250
|
)
|
|
|
|
|
|
|
|
|
Provision for loss on accounts
receivable
|
|
|
1,475
|
|
|
|
877
|
|
|
|
419
|
|
Deferred financing cost amortization
|
|
|
1,251
|
|
|
|
872
|
|
|
|
490
|
|
Loss (gain) on disposal of assets
|
|
|
(7,707
|
)
|
|
|
970
|
|
|
|
(378
|
)
|
Equity in earnings of
unconsolidated subsidiaries
|
|
|
(7,148
|
)
|
|
|
(1,276
|
)
|
|
|
(180
|
)
|
Non-cash compensation charge
|
|
|
7,595
|
|
|
|
558
|
|
|
|
109
|
|
Other, net
|
|
|
562
|
|
|
|
546
|
|
|
|
(200
|
)
|
Changes in operating assets and
liabilities, net of effect from acquired businesses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(88,429
|
)
|
|
|
(49,861
|
)
|
|
|
(56,120
|
)
|
Inventories
|
|
|
(22,569
|
)
|
|
|
(128,087
|
)
|
|
|
(41,587
|
)
|
Accounts payable and accrued
liabilities
|
|
|
(18,593
|
)
|
|
|
39,206
|
|
|
|
67,251
|
|
Taxes payable
|
|
|
11,621
|
|
|
|
(2,505
|
)
|
|
|
2,559
|
|
Other current assets and
liabilities, net
|
|
|
22,837
|
|
|
|
3,003
|
|
|
|
21,467
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows provided by
operating activities
|
|
|
137,367
|
|
|
|
33,398
|
|
|
|
97,167
|
|
Cash flows from investing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions of businesses, net of
cash acquired
|
|
|
(99
|
)
|
|
|
(147,608
|
)
|
|
|
(80,806
|
)
|
Cash balances of workover services
business sold
|
|
|
(4,366
|
)
|
|
|
|
|
|
|
|
|
Capital expenditures, including
capitalized interest
|
|
|
(129,090
|
)
|
|
|
(83,392
|
)
|
|
|
(60,041
|
)
|
Proceeds from sale of buildings and
equipment
|
|
|
20,907
|
|
|
|
2,275
|
|
|
|
3,197
|
|
Other, net
|
|
|
(1,600
|
)
|
|
|
(1,156
|
)
|
|
|
(63
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows used in investing
activities
|
|
|
(114,248
|
)
|
|
|
(229,881
|
)
|
|
|
(137,713
|
)
|
Cash flows from financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving credit borrowings
(repayments)
|
|
|
(6,617
|
)
|
|
|
49,885
|
|
|
|
43,900
|
|
Contingent convertible notes issued
|
|
|
|
|
|
|
175,000
|
|
|
|
|
|
Bridge loan and other borrowings
|
|
|
|
|
|
|
25,000
|
|
|
|
102
|
|
Debt repayments
|
|
|
(2,284
|
)
|
|
|
(25,641
|
)
|
|
|
(8,934
|
)
|
Issuance of common stock
|
|
|
8,509
|
|
|
|
7,552
|
|
|
|
3,968
|
|
Purchase of treasury stock
|
|
|
(15,056
|
)
|
|
|
(30,000
|
)
|
|
|
|
|
Excess tax benefits from share
based payment arrangements
|
|
|
5,007
|
|
|
|
|
|
|
|
|
|
Payment of financing costs
|
|
|
(580
|
)
|
|
|
(6,527
|
)
|
|
|
(81
|
)
|
Other, net
|
|
|
(180
|
)
|
|
|
|
|
|
|
(139
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows provided by (used
in) financing activities
|
|
|
(11,201
|
)
|
|
|
195,269
|
|
|
|
38,816
|
|
Effect of exchange rate changes on
cash
|
|
|
1,350
|
|
|
|
(2,555
|
)
|
|
|
2,737
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash
equivalents from continuing operations
|
|
|
13,268
|
|
|
|
(3,769
|
)
|
|
|
1,007
|
|
Net cash used in discontinued
operations operating activities
|
|
|
(170
|
)
|
|
|
(673
|
)
|
|
|
(585
|
)
|
Cash and cash equivalents,
beginning of year
|
|
|
15,298
|
|
|
|
19,740
|
|
|
|
19,318
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of
year
|
|
$
|
28,396
|
|
|
$
|
15,298
|
|
|
$
|
19,740
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial
statements.
49
OIL
STATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
1.
|
Organization
and Basis of Presentation
|
The consolidated financial statements include the accounts of
Oil States International, Inc. (Oil States or the Company) and
its consolidated subsidiaries. Investments in unconsolidated
affiliates, in which the Company is able to exercise significant
influence, are accounted for using the equity method. On
February 14, 2001, the Company acquired three companies
(HWC Energy Services, Inc. HWC; PTI Group,
Inc. PTI and Sooner Inc. Sooner). All
significant intercompany accounts and transactions between the
Company and its consolidated subsidiaries have been eliminated
in the accompanying consolidated financial statements. The
Company is principally comprised of the following entities and
their respective subsidiaries.
Oil
States Industries, Inc.
Oil States Industries, Inc. (OSI), which comprises our offshore
products segment, is a subsidiary of Oil States and is a leading
designer and manufacturer of a diverse range of products for
offshore platforms, subsea pipelines, and defense and general
industrial applications. Major product lines include flexible
bearings, advanced connectors, winches, mooring and lifting
systems, services for installing and removing offshore
platforms, downhole production equipment, and custom molded
products. Sales are made primarily to major oil companies, large
and small independent oil and gas companies, drilling
contractors, and well service and workover operators on a
worldwide basis. OSI has facilities in Arlington, Houston and
Lampasas, Texas; Houma, Louisiana; Tulsa, Oklahoma; Scotland;
Brazil; England; Singapore and Thailand.
PTI
Group, Inc.
PTI, which is part of our well site services segment, is located
in Alberta, Canada and is a supplier of integrated housing,
food, site management and logistics support services to remote
sites utilized by extractive and other industries primarily in
Canada, Europe, the Middle East and the United States.
Oil
States Energy Services, Inc. (formerly, HWC Energy Services,
Inc.)
Oil States Energy Services, Inc. (OSES), which is part of our
well site services segment, provides drilling services and
rental equipment to the oil and gas industry. In West Texas,
Ohio, and the Rocky Mountains area, OSES operates, through its
subsidiaries Capstar Drilling, L.P. and Elenburg Exploration
Company, shallow to medium depth drilling rigs with automated
pipe handling capabilities. Specialty Rental Tools and Supply,
L.P., a subsidiary of OSES, provides rental equipment for
drilling and workover operations in Texas, Louisiana,
Mississippi, New Mexico, Oklahoma, Arkansas and Wyoming. Stinger
Wellhead Protection, Inc. and affiliates (Stinger), a subsidiary
of OSES, provides wellhead isolation equipment and services in
the U.S., Canada, South America and Central America.
Sooner,
Inc.
Sooner, which comprises our tubular services segment, is a
distributor of oilfield tubular products with operations located
primarily in the United States. The majority of sales are to
large fully integrated and independent oil companies
headquartered in the U.S.
|
|
2.
|
Summary
of Significant Accounting Policies
|
Cash
and Cash Equivalents
The Company considers all highly liquid investments purchased
with an original maturity of three months or less to be cash
equivalents.
50
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Fair
Value of Financial Instruments
The Companys financial instruments consist of cash and
cash equivalents, investments, receivables, notes receivable,
payables, and debt instruments. The Company believes that the
carrying values of these instruments, other than our fixed rate
contingent convertible senior notes, on the accompanying
consolidated balance sheets approximate their fair values.
The fair value of our
23/8%
contingent convertible senior notes is estimated based on prices
quoted from third-party financial institutions. The carrying and
fair values of these notes are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
Interest
|
|
|
Carrying
|
|
|
Fair
|
|
|
Carrying
|
|
|
Fair
|
|
|
|
Rate
|
|
|
Value
|
|
|
Value
|
|
|
Value
|
|
|
Value
|
|
|
23/8%
contingent convertible senior notes due 2025
|
|
|
23/8
|
%
|
|
$
|
175,000
|
|
|
$
|
218,094
|
|
|
$
|
175,000
|
|
|
$
|
212,741
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories
Inventories consist of tubular and other oilfield products,
manufactured equipment, spare parts for manufactured equipment,
raw materials and supplies and raw materials for remote
accommodation facilities. Inventories include raw materials,
labor, subcontractor charges and manufacturing overhead and are
carried at the lower of cost or market. The cost of inventories
is determined on an average cost or specific-identification
method.
Property,
Plant, and Equipment
Property, plant, and equipment are stated at cost, or at
estimated fair market value at acquisition date if acquired in a
business combination, and depreciation is computed, for assets
owned or recorded under capital lease, using the straight-line
method over the estimated useful lives of the assets. Leasehold
improvements are capitalized and amortized over the lesser of
the life of the lease or the estimated useful life of the asset.
Expenditures for repairs and maintenance are charged to expense
when incurred. Expenditures for major renewals and betterments,
which extend the useful lives of existing equipment, are
capitalized and depreciated. Upon retirement or disposition of
property and equipment, the cost and related accumulated
depreciation are removed from the accounts and any resulting
gain or loss is recognized in the statements of income.
Goodwill
Goodwill represents the excess of the purchase price for
acquired businesses over the allocated value of the related net
assets. Goodwill is stated net of accumulated amortization of
$17.4 million at December 31, 2006 and
$18.3 million at December 31, 2005.
Impairment
of Long-Lived Assets
In compliance with Statement of Financial Accounting Standards
(SFAS) No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets the recoverability of the
carrying values of property, plant and equipment is assessed at
a minimum annually, or whenever, in managements judgment,
events or changes in circumstances indicate that the carrying
value of such assets may not be recoverable based on estimated
future cash flows. If this assessment indicates that the
carrying values will not be recoverable, as determined based on
undiscounted cash flows over the remaining useful lives, an
impairment loss is recognized. The impairment loss equals the
excess of the carrying value over the fair value of the asset.
The fair value of the asset is based on prices of similar
assets, if available, or discounted cash flows. Based on the
Companys review, the carrying value of its assets are
recoverable and no impairment losses have been recorded for the
periods presented.
51
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Foreign
Currency and Other Comprehensive Income
Gains and losses resulting from balance sheet translation of
foreign operations where a foreign currency is the functional
currency are included as a separate component of accumulated
other comprehensive income within stockholders equity
representing substantially all of the balances within
accumulated other comprehensive income. Gains and losses
resulting from balance sheet translation of foreign operations
where the U.S. dollar is the functional currency are
included in the consolidated statements of income as incurred.
Foreign
Exchange Risk
A portion of revenues, earnings and net investments in foreign
affiliates are exposed to changes in foreign exchange rates. We
seek to manage our foreign exchange risk in part through
operational means, including managing expected local currency
revenues in relation to local currency costs and local currency
assets in relation to local currency liabilities. Foreign
exchange risk is also managed through the use of derivative
financial instruments and foreign currency denominated debt.
These financial instruments serve to protect net income against
the impact of the translation into U.S. dollars of certain
foreign exchange denominated transactions. The financial
instruments employed to manage foreign exchange risk consisted
of forward exchange contracts with notional amounts of
$1.5 million at December 31, 2005. The Company had no
such contracts outstanding at December 31, 2006 or
December 31, 2004. Net gains or losses from foreign
currency exchange contracts that are designated as hedges are
recognized in the income statement to offset the foreign
currency gain or loss on the underlying transaction. Exchange
gains and losses have totaled $0.4 million loss in 2006, a
$0.2 million gain in 2005 and a $1.3 million loss in
2004 and are included in other operating expense (income).
Interest
Capitalization
Interest costs for the construction of certain long-term assets
are capitalized and amortized over the related assets
estimated useful lives. For the year ended December 31,
2006, $0.1 million was capitalized. No interest was
capitalized in 2005 or 2004.
Revenue
and Cost Recognition
Revenue from the sale of products, not accounted for utilizing
the
percentage-of-completion
method, is recognized when delivery to and acceptance by the
customer has occurred, when title and all significant risks of
ownership have passed to the customer, collectibility is
probable and pricing is fixed and determinable. Our product
sales terms do not include significant post delivery
obligations. For significant projects built to customer
specifications, revenues are recognized under the
percentage-of-completion
method, measured by the percentage of costs incurred to date to
estimated total costs for each contract
(cost-to-cost
method). Billings on such contracts in excess of costs incurred
and estimated profits are classified as deferred revenue.
Management believes this method is the most appropriate measure
of progress on large contracts. Provisions for estimated losses
on uncompleted contracts are made in the period in which such
losses are determined. In drilling services and rental tool
services, revenues are recognized based on a periodic (usually
daily) rental rate or when the services are rendered. Proceeds
from customers for the cost of oilfield rental equipment that is
damaged or lost downhole are reflected as gains or losses on the
disposition of assets. For drilling services contracts based on
footage drilled, we recognize revenues as footage is drilled.
Revenues exclude taxes assessed based on revenues such as sales
or value added taxes.
Cost of goods sold includes all direct material and labor costs
and those costs related to contract performance, such as
indirect labor, supplies, tools and repairs. Selling, general,
and administrative costs are charged to expense as incurred.
52
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Income
Taxes
The Company follows the liability method of accounting for
income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes. Under this method,
deferred income taxes are recorded based upon the differences
between the financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and
laws that will be in effect when the underlying assets or
liabilities are recovered or settled.
When the Companys earnings from foreign subsidiaries are
considered to be indefinitely reinvested, no provision for
U.S. income taxes is made for these earnings. If any of the
subsidiaries have a distribution of earnings in the form of
dividends or otherwise, the Company would be subject to both
U.S. income taxes (subject to an adjustment for foreign tax
credits) and withholding taxes payable to the various foreign
countries.
In accordance with SFAS No. 109, the Company records a
valuation reserve in each reporting period when management
believes that it is more likely than not that any deferred tax
asset created will not be realized. Management will continue to
evaluate the appropriateness of the reserve in the future based
upon the operating results of the Company.
Receivables
and Concentration of Credit Risk, Concentration of
Suppliers
Based on the nature of its customer base, the Company does not
believe that it has any significant concentrations of credit
risk other than its concentration in the oil and gas industry.
The Company evaluates the credit-worthiness of its major new and
existing customers financial condition and, generally, the
Company does not require significant collateral from its
domestic customers.
We purchased 79% of our oilfield tubular goods from three
suppliers in 2006, with the largest supplier representing 46% of
our purchases in the period. The loss of any significant
supplier in our tubular services segment could adversely affect
us.
Allowances
for Doubtful Accounts
The Company maintains allowances for doubtful accounts for
estimated losses resulting from the inability of the
Companys customers to make required payments. If a trade
receivable is deemed to be uncollectible, such receivable is
charged-off against the allowance for doubtful accounts. The
Company considers the following factors when determining if
collection of revenue is reasonably assured: customer
credit-worthiness, past transaction history with the customer,
current economic industry trends and changes in customer payment
terms. If the Company has no previous experience with the
customer, the Company typically obtains reports from various
credit organizations to ensure that the customer has a history
of paying its creditors. The Company may also request financial
information, including financial statements or other documents
to ensure that the customer has the means of making payment. If
these factors do not indicate collection is reasonably assured,
the Company would require a prepayment or other arrangement to
support revenue recognition and recording of a trade receivable.
If the financial condition of the Companys customers were
to deteriorate, adversely affecting their ability to make
payments, additional allowances would be required.
Earnings
per Share
The Companys basic income per share (EPS) amounts have
been computed based on the average number of common shares
outstanding, including 256,787 and 267,348 shares of common
stock as of December 31, 2006 and 2005, respectively,
issuable upon exercise of exchangeable shares of one of the
Companys Canadian subsidiaries. These exchangeable shares,
which were issued to certain former shareholders of PTI in
connection with the Companys IPO and the combination of
PTI into the Company, are intended to have characteristics
essentially equivalent to the Companys common stock prior
to the exchange. We have treated the shares of common stock
issuable upon exchange of the exchangeable shares as
outstanding. Diluted EPS amounts include the effect of the
53
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Companys outstanding stock options under the treasury
stock method. All shares of restricted stock awarded under the
Companys Equity Participation Plan are included in the
Companys fully diluted shares.
Shares assumed issued upon conversion of the Companys
23/8%
Contingent Convertible Notes averaged 391,434 and 87,210 during
the years ended December 31, 2006 and December 31,
2005, respectively, and are included in the calculation of fully
diluted earnings per share.
Stock-Based
Compensation
We adopted Statement of Financial Accounting Standards
No. 123R (SFAS 123R) effective January 1, 2006.
This pronouncement requires companies to measure the cost of
employee services received in exchange for an award of equity
instruments (typically stock options) based on the grant-date
fair value of the award. The fair value is estimated using
option-pricing models. The resulting cost is recognized over the
period during which an employee is required to provide service
in exchange for the awards, usually the vesting period. Prior to
the adoption of SFAS 123R, this accounting treatment was
optional with pro forma disclosures required. During the year
ended December 31, 2006, the Company recognized non-cash
general and administrative expenses for stock options and
restricted stock awards totaling $7.6 million. Prior to the
adoption of SFAS 123R, only shares of restricted stock
awarded under the Equity Participation Plan were considered to
be compensatory in nature. Accordingly, the Company recognized
non-cash general and administrative expenses for restricted
stock awards that totaled $0.6 million and
$0.1 million in the years ended December 31, 2005 and
2004, respectively. An additional $0.1 million was
recognized in 2004 for a stock option performance award. The
Company accounts for assets held in a rabbi trust for certain
participants under the Companys deferred compensation plan
in accordance with
EITF 97-14.
See Note 13.
Guarantees
The Company applies FASB Interpretation No. 45
(FIN 45), Guarantors Accounting and Disclosure
Requirements for Guarantees, including Indirect Indebtedness of
Others, for the Companys obligations under certain
guarantees.
Pursuant to FIN 45, the Company is required to disclose the
changes in product warranty reserves. Some of our products in
our offshore products and accommodations businesses are sold
with a warranty, generally between 12 to 18 months. Parts
and labor are covered under the terms of the warranty agreement.
Warranty provisions are based on historical experience by
product, configuration and geographic region.
Changes in the warranty reserves were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Beginning balance
|
|
$
|
1,527
|
|
|
$
|
2,040
|
|
Provisions for warranty
|
|
|
4,222
|
|
|
|
3,676
|
|
Consumption of reserves
|
|
|
(4,109
|
)
|
|
|
(4,305
|
)
|
Translation and other changes
|
|
|
16
|
|
|
|
116
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
1,656
|
|
|
$
|
1,527
|
|
|
|
|
|
|
|
|
|
|
Current warranty provisions are typically related to the current
years sales, while warranty consumption is associated with
current and prior years net sales. During 2004, the
Company recorded a $1.0 million increase in its warranty
reserves related to a potential warranty claim associated with
an international subsea pipeline project installed during 2000
in addition to smaller accruals of a more recurring nature. The
international subsea pipeline project warranty issue was settled
in 2005 for an amount approximately equal to the amount reserved
for this issue.
54
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
During the ordinary course of business, the Company also
provides standby letters of credit or other guarantee
instruments to certain parties as required for certain
transactions initiated by either the Company or its
subsidiaries. As of December 31, 2006, the maximum
potential amount of future payments that the Company could be
required to make under these guarantee agreements was
approximately $11.3 million. The Company has not recorded
any liability in connection with these guarantee arrangements
beyond that required to appropriately account for the underlying
transaction being guaranteed. The Company does not believe,
based on historical experience and information currently
available, that it is probable that any amounts will be required
to be paid under these guarantee arrangements.
Reclassifications
Certain amounts in prior years financial statements have
been reclassified to conform with the current year presentation.
Use of
Estimates
The preparation of consolidated financial statements in
conformity with accounting principles generally accepted in the
United States 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. Examples of a few such estimates include the costs
associated with the disposal of discontinued operations,
including potential future adjustments as a result of
contractual agreements, revenue and income recognized on the
percentage-of-completion
method, estimate of the Companys share of earnings from
equity method investments, the valuation allowance recorded on
net deferred tax assets, warranty, inventory and bad debt
reserves. Actual results could differ from those estimates.
Discontinued
Operations
Prior to our initial public offering in February 2001, we sold
businesses and reported the operating results of those
businesses as discontinued operations. Existing reserves related
to the discontinued operations as of December 31, 2006 and
2005 represent an estimate of the remaining contingent
liabilities associated with the Companys exit from those
businesses.
|
|
3.
|
Details
of Selected Balance Sheet Accounts
|
Additional information regarding selected balance sheet accounts
at December 31, 2006 and 2005 is presented below (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Accounts receivable:
|
|
|
|
|
|
|
|
|
Trade
|
|
$
|
269,136
|
|
|
$
|
236,936
|
|
Unbilled revenue
|
|
|
83,782
|
|
|
|
36,789
|
|
Other
|
|
|
1,726
|
|
|
|
2,514
|
|
Allowance for doubtful accounts
|
|
|
(2,943
|
)
|
|
|
(2,169
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
351,701
|
|
|
$
|
274,070
|
|
|
|
|
|
|
|
|
|
|
55
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Inventories:
|
|
|
|
|
|
|
|
|
Tubular goods
|
|
$
|
261,785
|
|
|
$
|
274,232
|
|
Other finished goods and purchased
products
|
|
|
50,095
|
|
|
|
35,716
|
|
Work in process
|
|
|
45,848
|
|
|
|
30,288
|
|
Raw materials
|
|
|
35,642
|
|
|
|
26,412
|
|
|
|
|
|
|
|
|
|
|
Total inventories
|
|
|
393,370
|
|
|
|
366,648
|
|
Inventory reserves
|
|
|
(7,188
|
)
|
|
|
(5,722
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
386,182
|
|
|
$
|
360,926
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
|
|
|
|
Useful Life
|
|
|
2006
|
|
|
2005
|
|
|
Property, plant and equipment:
|
|
|
|
|
|
|
|
|
|
|
|
|
Land
|
|
|
|
|
|
$
|
9,112
|
|
|
$
|
9,576
|
|
Buildings and leasehold
improvements
|
|
|
5-50 years
|
|
|
|
77,853
|
|
|
|
60,049
|
|
Machinery and equipment
|
|
|
2-20 years
|
|
|
|
326,977
|
|
|
|
292,713
|
|
Rental tools
|
|
|
1-10 years
|
|
|
|
64,178
|
|
|
|
72,327
|
|
Office furniture and equipment
|
|
|
1-10 years
|
|
|
|
18,832
|
|
|
|
16,231
|
|
Vehicles
|
|
|
4-10 years
|
|
|
|
31,541
|
|
|
|
26,035
|
|
Construction in progress
|
|
|
|
|
|
|
18,811
|
|
|
|
22,283
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total property, plant and equipment
|
|
|
|
|
|
|
547,304
|
|
|
|
499,214
|
|
Less: Accumulated depreciation
|
|
|
|
|
|
|
(188,588
|
)
|
|
|
(188,762
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
358,716
|
|
|
$
|
310,452
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense was $50.5 million, $43.3 million
and $33.7 million in the years ended December 31,
2006, 2005 and 2004, respectively.
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Accounts payable and accrued
liabilities:
|
|
|
|
|
|
|
|
|
Trade accounts payable
|
|
$
|
142,204
|
|
|
$
|
168,445
|
|
Accrued compensation
|
|
|
29,058
|
|
|
|
22,529
|
|
Accrued insurance
|
|
|
5,836
|
|
|
|
4,820
|
|
Accrued taxes, other than income
taxes
|
|
|
3,317
|
|
|
|
4,354
|
|
Reserves related to discontinued
operations
|
|
|
3,357
|
|
|
|
3,527
|
|
Other
|
|
|
16,070
|
|
|
|
10,829
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
199,842
|
|
|
$
|
214,504
|
|
|
|
|
|
|
|
|
|
|
|
|
4.
|
Recent
Accounting Pronouncements
|
We adopted Statement of Financial Accounting Standards
No. 123R (SFAS 123R) effective January 1, 2006.
This pronouncement requires companies to measure the cost of
employee services received in exchange for an award of equity
instruments (typically stock options) based on the grant-date
fair value of the award. The fair value is estimated using
option-pricing models. The resulting cost is recognized over the
period during which an employee is required to provide service
in exchange for the awards, usually the vesting period. Prior to
the adoption
56
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
of SFAS 123R, this accounting treatment was optional with
pro forma disclosures required. We adopted SFAS 123R using
the modified prospective transition method. See Note 13.
In May 2005, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS)
No. 154, Accounting Changes and Error Corrections, a
replacement of APB Opinion No. 20 and FASB Statement
No. 3. Among other changes, this Statement requires
retrospective application for voluntary changes in accounting
principles, unless it is impractical to do so. Guidance is
provided on how to account for changes when retrospective
application is impractical. This Statement was effective
beginning January 1, 2006.
In September 2006, the FASB issued Statement of Financial
Accounting Standards No. 157 (SFAS 157), Fair
Value Measurements, which defines fair value, establishes
guidelines for measuring fair value and expands disclosures
regarding fair value measurements. SFAS 157 does not
require any new fair value measurements but rather eliminates
inconsistencies in guidance found in various prior accounting
pronouncements. SFAS 157 is effective for fiscal years
beginning after November 15, 2007. Earlier adoption is
permitted, provided the company has not yet issued financial
statements, including for interim periods, for that fiscal year.
The Company plans to adopt the provisions of SFAS 157 in
2008 and does not expect the adoption of SFAS 157 to have a
material impact on its results from operations or financial
position.
In June 2006, the FASB issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes an
interpretation of FASB Statement No. 109 (FIN 48),
which clarifies the accounting and disclosure for uncertain tax
positions, as defined. FIN 48 requires companies to meet a
more-likely-than-not threshold (i.e. greater than
50 percent likelihood of a tax position being sustained
under examination) prior to recording a benefit for their tax
position. FIN 48 seeks to reduce the diversity in practice
associated with certain aspects of the recognition and
measurement related to accounting for income taxes. This
interpretation is effective for fiscal years beginning after
December 15, 2006. The Company has not yet determined the
impact this interpretation will have on its results from
operations or financial position.
|
|
5.
|
Earnings
Per Share (EPS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands, except per share data)
|
|
|
Basic earnings per
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
197,634
|
|
|
$
|
121,813
|
|
|
$
|
59,362
|
|
Weighted average number of shares
outstanding
|
|
|
49,519
|
|
|
|
49,344
|
|
|
|
49,329
|
|
Basic earnings per share
|
|
$
|
3.99
|
|
|
$
|
2.47
|
|
|
$
|
1.20
|
|
Diluted earnings per
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
197,634
|
|
|
$
|
121,813
|
|
|
$
|
59,362
|
|
Weighted average number of shares
outstanding (basic)
|
|
|
49,519
|
|
|
|
49,344
|
|
|
|
49,329
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Options on common stock
|
|
|
807
|
|
|
|
973
|
|
|
|
662
|
|
23/8%
contingent convertible notes
|
|
|
391
|
|
|
|
87
|
|
|
|
|
|
Restricted stock
|
|
|
56
|
|
|
|
75
|
|
|
|
36
|
|
Total shares and diluted securities
|
|
|
50,773
|
|
|
|
50,479
|
|
|
|
50,027
|
|
Diluted earnings per share
|
|
$
|
3.89
|
|
|
$
|
2.41
|
|
|
$
|
1.19
|
|
|
|
6.
|
Goodwill
and Other Intangible Assets
|
Effective January 1, 2002, the Company adopted
SFAS No. 142, Goodwill and Other Intangible
Assets (SFAS No. 142). In connection with the
adoption of SFAS No. 142, the Company ceased
amortizing goodwill. Under SFAS No. 142, goodwill is
no longer amortized but is tested for impairment using a fair
value approach, at the
57
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
reporting unit level. A reporting unit is the
operating segment, or a business one level below that operating
segment (the component level) if discrete financial
information is prepared and regularly reviewed by management at
the component level. We have six reporting units as of
December 31, 2006, a decrease of one since
December 31, 2005 due to the sale of our workover services
business (See Note 7). Goodwill is allocated to each of the
reporting units based on actual acquisitions made by the Company
and its subsidiaries. We would recognize an impairment charge
for any amount by which the carrying amount of a reporting
units goodwill exceeds the units fair value. The
Company uses comparative market multiples to establish fair
values. The Company has never recognized a goodwill impairment.
The Company amortizes the cost of other intangibles over their
estimated useful lives unless such lives are deemed indefinite.
Amortizable intangible assets are reviewed for impairment based
on undiscounted cash flows and, if impaired, written down to
fair value based on either discounted cash flows or appraised
values. Intangible assets with indefinite lives are tested for
impairment and written down to fair value as required. No
provision for impairment was required based on the evaluations
performed.
Changes in the carrying amount of goodwill for the year ended
December 31, 2006 and 2005 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Offshore
|
|
|
Wellsite
|
|
|
Tubular
|
|
|
|
|
|
|
Products
|
|
|
Services
|
|
|
Services
|
|
|
Total
|
|
|
Balance as of December 31,
2004
|
|
$
|
75,582
|
|
|
$
|
130,860
|
|
|
$
|
51,604
|
|
|
$
|
258,046
|
|
Goodwill acquired
|
|
|
2
|
|
|
|
69,320
|
|
|
|
10,799
|
|
|
|
80,121
|
|
Foreign currency translation and
other changes
|
|
|
(662
|
)
|
|
|
2,586
|
|
|
|
(388
|
)
|
|
|
1,536
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31,
2005
|
|
|
74,922
|
|
|
|
202,766
|
|
|
|
62,015
|
|
|
|
339,703
|
|
Goodwill acquired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation and
other changes
|
|
|
794
|
|
|
|
(9,131
|
)(1)
|
|
|
438
|
|
|
|
(7,899
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31,
2006
|
|
$
|
75,716
|
|
|
$
|
193,635
|
|
|
$
|
62,453
|
|
|
$
|
331,804
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Effective March 1, 2006, the Company sold its workover
services business See Note 7. A total of $9,340
of goodwill was removed in connection with the workover services
business sold and considered in the calculation of the gain
recognized in that transaction. The remainder of this change for
well site services relates to foreign currency and other changes. |
The portion of goodwill deductible for tax purposes totals
approximately $1.3 million at December 31, 2006. The
following table presents the total amount assigned and the total
amount amortized for major intangible asset classes as of
December 31, 2006 and 2005 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
December 31, 2005
|
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amortizable intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-compete agreements
|
|
$
|
14,644
|
|
|
$
|
9,279
|
|
|
$
|
14,282
|
|
|
$
|
6,206
|
|
Patents and other
|
|
|
7,824
|
|
|
|
1,713
|
|
|
|
7,784
|
|
|
|
981
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
22,468
|
|
|
$
|
10,992
|
|
|
$
|
22,066
|
|
|
$
|
7,187
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets, other than goodwill, are included within
Other noncurrent assets in the Consolidated Balance Sheet. The
weighted average remaining amortization period for all
intangible assets, other than goodwill and indefinite lived
intangibles, is 6.5 years and 6.7 years as of
December 31, 2006 and 2005, respectively. Total
amortization expense is expected to be $3.6 million,
$2.2 million, $1.6 million, $0.8 million and
$0.4 million in
58
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
2007, 2008, 2009, 2010 and 2011, respectively. Amortization
expense was $3.9 million, $3.4 million and
$2.3 million in the years ended December 31, 2006,
2005 and 2004, respectively.
|
|
7.
|
Workover
Services Business Transaction, Investment in Boots &
Coots and Notes Receivable from Boots &
Coots
|
Effective March 1, 2006, we completed a transaction to
combine our workover services business with Boots &
Coots in exchange for 26.5 million shares of
Boots & Coots common stock and senior subordinated
promissory notes totaling $21.2 million. Our workover
services business was part of our well site services segment
prior to the combination.
As a result of the closing of the transaction, we acquired
approximately 45.6% of the outstanding common stock of
Boots & Coots. Stock issued by Boots & Coots
subsequent to March 1, 2006 has reduced the Companys
ownership percentage to 44.6% at December 31, 2006. The
senior subordinated promissory notes received in the transaction
bear a fixed annual interest rate of 10% and mature four and one
half years from the closing of the transaction. The notes are
included in Other Noncurrent Assets in the Consolidated Balance
Sheet. In connection with this transaction, we also entered into
a Registration Rights Agreement requiring Boots & Coots
to file a shelf registration statement within 30 days for
all of the Boots & Coots shares we received in the
transaction and also allowing us certain rights to include our
shares of common stock of Boots & Coots in a
registration statement filed by Boots & Coots. The
shelf registration statement has been filed by Boots &
Coots and was declared effective in the fourth quarter of 2006.
The transaction terms also allowed us to designate three
additional members to Boots & Coots existing
five-member Board of Directors. All three directors designated
by us have joined the Boots & Coots Board of Directors
as of January 1, 2007.
The transaction resulted in a non-cash pretax gain of
$20.7 million of which $9.4 million has not been
recognized in accordance with the guidance in Emerging Issues
Task Force Issue
No. 01-2
covering gain recognition involving non-cash transactions and
retained equity interests. After the gain adjustment and income
taxes, the transaction had a $5.9 million, or
$0.12 per diluted share, impact on net income and earnings
per share, respectively, in the first quarter of 2006. We
account for our investment in Boots & Coots utilizing
the equity method of accounting. Differences between
Boots & Coots total book equity after the
transaction, net to the Companys interest, and the
carrying value of our investment in Boots & Coots are
principally attributable to the unrecognized gain on the sale of
the workover services business and to goodwill. At
December 31, 2006, our investment in Boots & Coots
totaled $34.6 million and is included within Investments in
unconsolidated affiliates in the Consolidated Balance Sheet. The
aggregate market value of Boots & Coots shares owned as
of December 31, 2006 was $59.3 million.
59
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As of December 31, 2006 and 2005, long-term debt consisted
of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
US revolving credit facility, with
available commitments up to $300 million; secured by
substantially all of our assets; commitment fee on unused
portion ranged from 0.25% to 0.375% per annum in 2006 and
2005; variable interest rate payable monthly based on prime or
LIBOR plus applicable percentage; weighted average rate was 6.4%
for 2006 and 4.7% for 2005
|
|
$
|
186,200
|
|
|
$
|
179,600
|
|
Canadian revolving credit
facility, with available commitments up to $100 million;
secured by substantially all of our assets; variable interest
rate payable monthly based on the Canadian prime rate or Bankers
Acceptance discount rate plus applicable percentage; weighted
average rate was 5.4% for 2006 and 4.3% for 2005
|
|
|
29,177
|
|
|
|
42,885
|
|
23/8%
contingent convertible senior notes due 2025
|
|
|
175,000
|
|
|
|
175,000
|
|
Subordinated unsecured notes
payable to sellers of businesses, interest ranging from 5% to
6%, maturing in 2006 and 2007
|
|
|
6,689
|
|
|
|
7,493
|
|
Other revolving bank debt, with
available commitments up to $5 million, weighted average
rate was 8.25% for 2006
|
|
|
978
|
|
|
|
|
|
Obligations under capital leases
|
|
|
515
|
|
|
|
509
|
|
Other notes payable in monthly
installments of principal and interest at various interest rates
|
|
|
43
|
|
|
|
523
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
398,602
|
|
|
|
406,010
|
|
Less: current maturities
|
|
|
6,873
|
|
|
|
3,901
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
$
|
391,729
|
|
|
$
|
402,109
|
|
|
|
|
|
|
|
|
|
|
Scheduled maturities of combined long-term debt as of
December 31, 2006, are as follows (in thousands):
|
|
|
|
|
2007
|
|
$
|
6,873
|
|
2008
|
|
|
157
|
|
2009
|
|
|
109
|
|
2010
|
|
|
73
|
|
2011
|
|
|
216,390
|
|
Thereafter
|
|
|
175,000
|
|
|
|
|
|
|
|
|
$
|
398,602
|
|
|
|
|
|
|
The Companys capital leases consist primarily of plant
facilities and equipment. The value of capitalized leases and
the related accumulated depreciation totaled $1.0 million
and $0.5 million, respectively, at December 31, 2006.
The value of capitalized leases and the related accumulated
depreciation totaled $2.2 million and $1.3 million,
respectively, at December 31, 2005.
23/8%
Contingent Convertible Senior Notes
On June 15, 2005, the Company sold $125 million
aggregate principal amount of
23/8%
contingent convertible senior notes due 2025 through a placement
to qualified institutional buyers pursuant to the SECs
Rule 144A. The Company granted the initial purchaser of the
notes a
30-day
option to purchase up to an additional $50 million
60
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
aggregate principal amount of the notes. This option was
exercised in July 2005 and an additional $50 million of the
notes were sold at that time.
The notes are senior unsecured obligations of the Company and
bear interest at a rate of
23/8% per
annum. The notes mature on July 1, 2025, and may not be
redeemed by the Company prior to July 6, 2012. Holders of
the notes may require the Company to repurchase some or all of
the notes on July 1, 2012, 2015, and 2020. The notes
provide for a net share settlement, and therefore may be
convertible, under certain circumstances, into a combination of
cash, up to the principal amount of the notes, and common stock
of the company, if there is any excess above the principal
amount of the notes, at an initial conversion price of
$31.75 per share. Shares underlying the notes were included
in the calculation of diluted earnings per share during the year
because the Companys stock price exceeded the initial
conversion price of $31.75 during the period. The terms of the
notes require that the Companys stock price in any
quarter, for any period prior to July 1, 2023, be above
120% of the initial conversion price (or $38.10 per share)
for at least 20 trading days in a defined period before the
notes are convertible. Assuming the stock price contingency
feature is met and the holders of the notes elect to convert
when the stock price is $38.10 per share, the Company would
be required to deliver $175 million in cash plus accrued
interest and approximately 919,000 shares of common stock.
The notes were not callable by the Company or convertible by the
note holders at anytime in 2006. In connection with the note
offering, the Company agreed to register the notes within
180 days of their issuance and to keep the registration
effective for up to two years subsequent to the initial issuance
of the notes. The notes were so registered in November 2005. If
the Company does not keep the registration statement effective
for approximately the next eighteen months, additional
contingent interest would have to be paid to the note holders,
subject to certain provisions. The maximum amount of contingent
interest that could potentially inure to the note holders during
such time period is not material to the consolidated financial
position or the results of operations of the Company.
The Company utilized $30 million of the net proceeds of the
offering on June 15, 2005 to repurchase
1,183,432 shares of its common stock and the remaining
portion of the net proceeds to repay a $25.0 million bridge
loan and to repay approximately $66.0 million of borrowings
under its senior secured credit facility. Net proceeds of the
additional notes sold in July 2005, totaling $48.5 million,
were utilized to repay borrowings under the Companys
senior secured credit facility.
On May 11, 2005 the Company borrowed $25 million under
a bridge loan with a bank which was due in 2010. The loan was
unsecured and was repaid in full on June 21, 2005. The
average interest rate on this bridge loan for the period it was
outstanding was 6.0%.
Revolving
Credit Facility
On December 5, 2006, the Company amended its Credit
Agreement dated October 30, 2003. The Companys credit
facility totals $400 million. Under this senior secured
revolving credit facility with a group of banks, up to
$100 million is available in the form of loans denominated
in Canadian dollars and may be made to the Companys
principal Canadian operating subsidiaries. The facility matures
on December 5, 2011. The Credit Agreement permits the
Company incremental borrowings of up to $100 million under
the Credit Agreement, subject to lender approval, on the same
terms and conditions. Amounts borrowed under this facility bear
interest, at the Companys election, at either:
|
|
|
|
|
a variable rate equal to LIBOR (or, in the case of Canadian
dollar denominated loans, the Bankers Acceptance discount
rate) plus a margin ranging from 0.5% to 1.25%; or
|
|
|
|
an alternate base rate equal to the higher of the banks
prime rate and the federal funds effective rate (or, in the case
of Canadian dollar denominated loans, the Canadian Prime Rate).
|
Commitment fees ranging from 0.175% to 0.25% per year are
paid on the undrawn portion of the facility, depending upon our
leverage ratio.
61
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The credit facility is guaranteed by all of the Companys
active domestic subsidiaries and, in some cases, the
Companys Canadian and other foreign subsidiaries. The
credit facility is secured by a first priority lien on all the
Companys inventory, accounts receivable and other material
tangible and intangible assets, as well as those of the
Companys active subsidiaries. However, no more than 65% of
the voting stock of any foreign subsidiary is required to be
pledged if the pledge of any greater percentage would result in
adverse tax consequences.
The credit facility contains negative covenants that limit the
Companys ability to borrow additional funds, encumber
assets, pay dividends, sell assets and enter into other
significant transactions.
Under the Companys credit facility, the occurrence of
specified change of control events involving our company would
constitute an event of default that would permit the banks to,
among other things, accelerate the maturity of the facility and
cause it to become immediately due and payable in full.
As of December 31, 2006, we had $215.4 million
outstanding under this facility and an additional
$10.7 million of outstanding letters of credit leaving
$173.9 million available to be drawn under the facility.
On January 11, 2005 the Company renewed its overdraft
credit facility providing for borrowings totaling
£2.0 million for UK operations. Interest is payable
quarterly at a margin of 1.5% per annum over the
banks variable base rate. All borrowings under this
facility are payable on demand. No amounts were outstanding
under this facility at December 31, 2006. Letters of credit
totaling £0.3 million were outstanding as of
December 31, 2006, leaving £1.7 million available
to be drawn under this facility.
The Company maintains an additional revolving credit facility
with a bank. A total of $1.0 million was outstanding under
this facility as of December 31, 2006. This facility
consists of a swing line with a bank, borrowings under which are
used for working capital efficiencies.
The Company sponsors defined contribution plans. Participation
in these plans is available to substantially all employees. The
Company recognized expense of $5.4 million,
$4.3 million and $3.1 million, respectively, related
to its various defined contribution plans during the years ended
December 31, 2006, 2005 and 2004, respectively.
Consolidated pre-tax income for the years ended
December 31, 2006, 2005 and 2004 consisted of the following
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
US operations
|
|
$
|
206,288
|
|
|
$
|
124,368
|
|
|
$
|
56,827
|
|
Foreign operations
|
|
|
95,359
|
|
|
|
58,139
|
|
|
|
31,941
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
301,647
|
|
|
$
|
182,507
|
|
|
$
|
88,768
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The components of the income tax provision for the years ended
December 31, 2006, 2005 and 2004 consisted of the following
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
69,849
|
|
|
$
|
40,385
|
|
|
$
|
5,218
|
|
State
|
|
|
4,172
|
|
|
|
3,621
|
|
|
|
1,929
|
|
Foreign
|
|
|
30,193
|
|
|
|
19,770
|
|
|
|
15,308
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
104,214
|
|
|
|
63,776
|
|
|
|
22,455
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
3,017
|
|
|
|
(2,451
|
)
|
|
|
4,492
|
|
State
|
|
|
(762
|
)
|
|
|
(1,274
|
)
|
|
|
506
|
|
Foreign
|
|
|
(2,456
|
)
|
|
|
643
|
|
|
|
1,953
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(201
|
)
|
|
|
(3,082
|
)
|
|
|
6,951
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Provision
|
|
$
|
104,013
|
|
|
$
|
60,694
|
|
|
$
|
29,406
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The provision for taxes differs from an amount computed at
statutory rates as follows for the years ended December 31,
2006, 2005 and 2004 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Federal tax expense at statutory
rates
|
|
$
|
105,576
|
|
|
$
|
63,877
|
|
|
$
|
31,069
|
|
Foreign income tax rate
differential
|
|
|
(2,880
|
)
|
|
|
244
|
|
|
|
1,917
|
|
Reduced foreign tax rates
|
|
|
(2,168
|
)
|
|
|
|
|
|
|
|
|
Nondeductible expenses
|
|
|
149
|
|
|
|
440
|
|
|
|
1,953
|
|
State tax expense, net of federal
benefits
|
|
|
2,051
|
|
|
|
2,314
|
|
|
|
1,583
|
|
Domestic manufacturing deduction
|
|
|
(872
|
)
|
|
|
(365
|
)
|
|
|
|
|
Manufacturing and processing
profits deduction
|
|
|
|
|
|
|
|
|
|
|
(1,204
|
)
|
Adjustment of valuation allowance
|
|
|
|
|
|
|
(4,681
|
)
|
|
|
(6,928
|
)
|
Dividend income
foreign affiliate
|
|
|
1,542
|
|
|
|
|
|
|
|
|
|
Gain on sale of affiliated company
stock
|
|
|
1,405
|
|
|
|
|
|
|
|
|
|
Other, net
|
|
|
(790
|
)
|
|
|
(1,135
|
)
|
|
|
1,016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income tax provision
|
|
$
|
104,013
|
|
|
$
|
60,694
|
|
|
$
|
29,406
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
63
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The significant items giving rise to the deferred tax assets and
liabilities as of December 31, 2006 and 2005 are as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforward
|
|
$
|
8,198
|
|
|
$
|
9,753
|
|
Allowance for doubtful accounts
|
|
|
897
|
|
|
|
603
|
|
Inventory reserves
|
|
|
3,384
|
|
|
|
2,495
|
|
Employee benefits
|
|
|
6,905
|
|
|
|
3,883
|
|
Intangibles
|
|
|
564
|
|
|
|
257
|
|
Other reserves
|
|
|
282
|
|
|
|
227
|
|
Deferred revenue
|
|
|
1,995
|
|
|
|
|
|
Other
|
|
|
2,183
|
|
|
|
2,469
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax asset
|
|
|
24,408
|
|
|
|
19,687
|
|
Less: valuation allowance
|
|
|
(421
|
)
|
|
|
(421
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
|
23,987
|
|
|
|
19,266
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
(42,495
|
)
|
|
|
(44,926
|
)
|
Deferred revenue
|
|
|
|
|
|
|
(395
|
)
|
Inventory
|
|
|
(1,241
|
)
|
|
|
(1,644
|
)
|
Accrued liabilities
|
|
|
(1,913
|
)
|
|
|
(1,766
|
)
|
Basis difference of investments
|
|
|
(7,681
|
)
|
|
|
|
|
Other
|
|
|
(3,904
|
)
|
|
|
(3,567
|
)
|
|
|
|
|
|
|
|
|
|
Deferred tax liability
|
|
|
(57,234
|
)
|
|
|
(52,298
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax liability
|
|
$
|
(33,247
|
)
|
|
$
|
(33,032
|
)
|
|
|
|
|
|
|
|
|
|
Reclassifications of the Companys deferred tax balance
based on net current items and net non-current items as of
December 31, 2006 and 2005 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Current deferred tax asset
|
|
$
|
4,773
|
|
|
$
|
2,227
|
|
Long term deferred tax liability
|
|
|
(38,020
|
)
|
|
|
(35,259
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax liability
|
|
$
|
(33,247
|
)
|
|
$
|
(33,032
|
)
|
|
|
|
|
|
|
|
|
|
Our primary deferred tax asset, which totaled $8.2 million
at December 31, 2006, is related to $23.4 million in
available federal net operating loss carryforwards, or NOLs, as
of that date. The NOLs will expire in varying amounts during the
years 2010 through 2011 if they are not first used to offset
taxable income that we generate. Our ability to utilize a
significant portion of the available NOLs is currently limited
under Section 382 of the Internal Revenue Code due to a
change of control that occurred during 1995. We currently
believe that substantially all of our NOLs will be utilized. The
Company has federal alternative minimum tax net operating loss
carryforwards of $6.0 million, which will expire in the
years 2011 through 2020.
Our income tax provision for the year ended December 31,
2006 totaled $104.0 million, or 34.5% of pretax income.
During the year ended December 31, 2006, the Company
recognized a tax benefit triggered by employee exercises of
stock options totaling $5.0 million. Such benefit was
credited to additional paid-in capital. Our income
64
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
tax provision for the year ended December 31, 2005 totaled
$60.7 million, or 33.3% of pretax income. The income tax
provision for the year 2005 included a $4.7 million income
tax benefit related to the reversal of substantially all of the
remaining valuation allowance applied against NOLs which were
recorded as of the prior year end.
Appropriate U.S. and foreign income taxes have been provided for
earnings of foreign subsidiary companies that are expected to be
remitted in the near future. The cumulative amount of
undistributed earnings of foreign subsidiaries that the Company
intends to permanently reinvest and upon which no deferred US
income taxes have been provided is $260 million at
December 31, 2006 the majority of which has been generated
in Canada. Upon distribution of these earnings in the form of
dividends or otherwise, the Company may be subject to US income
taxes (subject to adjustment for foreign tax credits) and
foreign withholding taxes. It is not practical, however, to
estimate the amount of taxes that may be payable on the eventual
remittance of these earnings after consideration of available
foreign tax credits.
During the fourth quarter of 2006, the Internal Revenue Service
(the IRS) began an audit of the Companys 2004
consolidated federal income tax return. We are in the early
stages of this audit and information has been supplied, as
requested.
The American Jobs Creation Act of 2004 that was signed into law
in October 2004, introduced a requirement for companies to
disclose any penalties imposed on them or any of their
consolidated subsidiaries by the IRS for failing to satisfy tax
disclosure requirements relating to reportable
transactions. During the year ended December 31,
2006, no penalties were imposed on the Company or its
consolidated subsidiaries for failure to disclose reportable
transactions to the IRS.
The Company files tax returns in the jurisdictions in which they
are required. All of these returns are subject to examination or
audit and possible adjustment as a result of assessments by
taxing authorities. The Company believes that it has recorded
sufficient tax liabilities and does not expect the resolution of
any examination or audit of its tax returns would have a
material adverse effect on its operating results, financial
condition or liquidity.
|
|
11.
|
Supplemental
Cash Flow Information
|
Cash paid during the years ended December 31, 2006, 2005
and 2004 for interest and income taxes was as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Interest (net of amounts
capitalized)
|
|
$
|
17,262
|
|
|
$
|
10,589
|
|
|
$
|
6,840
|
|
Income taxes, net of refunds
|
|
$
|
92,620
|
|
|
$
|
62,130
|
|
|
$
|
18,892
|
|
Non-cash investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Receipt of stock and notes for
hydraulic workover services business in merger transaction, net
of unrecognized gain of $9.4 million (See Note 7)
|
|
$
|
50,105
|
|
|
$
|
|
|
|
$
|
|
|
Non-cash financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings and assumption of
liabilities for business and asset acquisition and related
intangibles
|
|
$
|
514
|
|
|
$
|
6,554
|
|
|
$
|
4,637
|
|
Acquisition of treasury stock with
settlement date in 2007
|
|
|
4,913
|
|
|
|
|
|
|
|
|
|
65
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Components of cash used for acquisitions as reflected in the
consolidated statements of cash flows for the years ended
December 31, 2006, 2005 and 2004 are summarized as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Fair value of assets acquired and
goodwill
|
|
$
|
99
|
|
|
$
|
192,589
|
|
|
$
|
93,094
|
|
Liabilities assumed
|
|
|
|
|
|
|
(32,052
|
)
|
|
|
(5,825
|
)
|
Noncash consideration
|
|
|
|
|
|
|
(6,554
|
)
|
|
|
(4,637
|
)
|
Less: cash acquired
|
|
|
|
|
|
|
(6,375
|
)
|
|
|
(1,826
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash used in acquisition of
businesses
|
|
$
|
99
|
|
|
$
|
147,608
|
|
|
$
|
80,806
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In January 2004, we completed the acquisition of several related
rental tool companies for $36.6 million. The companies,
based in South Texas are leading providers of thru-tubing
services and ancillary equipment rentals. These companies have
been combined with our rental tool subsidiary, and report
through the well site services segment. We completed an
additional acquisition of a rental tool company in April 2004
for $4.8 million. In May 2004, we purchased the oil country
tubular goods (OCTG) distribution business of
Hunting Energy Services, L.P., a wholly-owned affiliate of
Hunting plc, for $47.2 million, including a purchase price
adjustment settled in October 2004. In connection with the
transaction, we purchased Huntings U.S. tubular
inventory, assumed certain customer contracts and entered into
supply and distribution relationships with Hunting for the
future. Huntings distribution operations were merged into
our tubular services segment. In October 2004, our offshore
products segment acquired a small business for $0.5 million
which has become part of our existing elastomers business.
On February 1, 2005, the Company completed the acquisition
of Elenburg Exploration Company, Inc. (Elenburg), a Wyoming
based land drilling company for cash consideration of
$22.1 million, including transaction costs, plus a note
payable to the former owners of $0.8 million. At the date
of acquisition, Elenburg owned and operated 7 rigs which
provided shallow land drilling services in Montana, Wyoming,
Colorado, and Utah. The Elenburg acquisition allowed us to
expand our drilling business into different geographic areas.
The operations of Elenburg have been included in the drilling
services business within the well site services segment.
Effective May 1, 2005 and June 1, 2005 we acquired
Stinger Wellhead Protection, Inc., certain affiliated companies
and related intellectual property, (collectively, Stinger) for
consideration of $96.1 million, including transaction costs
and a note payable to the former owners of $5.0 million.
Stinger provides wellhead isolation equipment and services
through its 30 locations in the United States, Canada, Central
and South America. Stingers patented equipment is utilized
during pressure pumping operations and isolates the
customers blow-out preventers or wellheads from the
pressure and abrasion experienced during the fracturing process
of an oil or gas well. The Stinger acquisition expanded our
rental tool and services capabilities, especially in the
pressure pumping market. The operations of Stinger have been
included in the rental tools business within the well site
services segment.
On June 2, 2005, we purchased Phillips Casing and Tubing,
L.P. (Phillips) for cash consideration of $31.2 million,
net of cash acquired and including transaction costs. Phillips
distributes OCTG primarily carbon ERW (electronic resistance
welded) pipe, from its facilities in Midland and Godley, Texas.
The operations of Phillips have been combined with our tubular
services segment.
On June 6, 2005, we acquired Noble Structures, Inc. (Noble)
for cash consideration of $8.7 million, plus a note payable
of $0.8 million. The acquisition expanded the
Companys accommodation manufacturing capabilities in
Canada in order to meet increased demand for remote site
facilities, principally in the oil sands region. The operations
of Noble have been included in the accommodations business
within our well site services segment.
In December 2005, we acquired a product line into our offshore
products segment for cash consideration of $0.4 million.
In August 2006, we acquired three drilling rigs operating in
West Texas from Eagle Rock Drilling for total consideration of
$14.0 million, including a note payable to the seller of
$0.5 million. The rigs acquired, which are
66
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
classified as part of our capital expenditures in 2006, were
added to our existing West Texas drilling fleet in our drilling
services business.
|
|
12.
|
Commitments
and Contingencies
|
The Company leases a portion of its equipment, office space,
computer equipment, automobiles and trucks under leases which
expire at various dates.
Minimum future operating lease obligations in effect at
December 31, 2006, are as follows (in thousands):
|
|
|
|
|
|
|
Operating
|
|
|
|
Leases
|
|
|
2007
|
|
$
|
5,824
|
|
2008
|
|
|
4,522
|
|
2009
|
|
|
3,707
|
|
2010
|
|
|
2,837
|
|
2011
|
|
|
2,182
|
|
Thereafter
|
|
|
7,337
|
|
|
|
|
|
|
Total
|
|
$
|
26,409
|
|
|
|
|
|
|
Rental expense under operating leases was $6.7 million,
$5.7 million and $4.5 million for the years ended
December 31, 2006, 2005 and 2004, respectively.
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.
On February 18, 2005, the Company announced that it had
conducted an internal investigation prompted by the discovery of
over billings totaling approximately $400,000 by one of its
subsidiaries (the Subsidiary) to a government owned
oil company in South America. The over billings were detected by
the Company during routine financial review procedures, and
appropriate financial statement adjustments were included in its
previously reported fourth quarter 2004 results. We and
independent counsel retained by our Audit Committee conducted
separate investigations consisting of interviews and a thorough
examination of the facts and circumstances in this matter. We
voluntarily reported the results of our investigation to the
Securities and Exchange Commission (the SEC) and we
fully cooperated with requests for information received from the
SEC. On October 31, 2005, the Companys counsel
received a Wells Notice from the staff of the SEC
indicating that it made a preliminary decision to recommend that
the SEC bring a civil action against the Company alleging
violations of provisions of the Securities and Exchange Act of
1934 (the Act) relating to the maintenance of books, records and
internal accounting controls and procedures as set forth in
Sections 13(b)(2)(A) and (B) of the Act. The Company
reached a settlement agreement with the SEC on April 27,
2006. The Company consented to an Order by the SEC (the Order),
without admitting or denying the findings in the Order, that
required the Company to cease and desist from committing or
causing violations of the books and records and
internal control provisions of the Act. The
settlement did not require the Company to pay a monetary penalty.
67
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
13.
|
Stock-Based
Compensation
|
We adopted SFAS 123R effective January 1, 2006. This
pronouncement requires companies to measure the cost of employee
services received in exchange for an award of equity instruments
(typically stock options) based on the grant-date fair value of
the award. The fair value is estimated using option-pricing
models. The resulting cost is recognized over the period during
which an employee is required to provide service in exchange for
the awards, usually the vesting period. Prior to the adoption of
SFAS 123R, this accounting treatment was optional with pro
forma disclosures required. We adopted SFAS 123R using the
modified prospective transition method, which is explained below.
SFAS 123R is effective for all stock options we grant
beginning January 1, 2006. For those stock option awards
granted prior to January 1, 2006, but for which the vesting
period is not complete, we used the modified prospective
transition method permitted by SFAS 123R. Under this method
of accounting, the remaining unamortized value of non-vested
options will be expensed over the remaining vesting period using
the grant-date fair values. Our options typically vest in equal
annual installments over a four year service period. Expense
related to an option grant is recognized on a straight line
basis over the specific vesting period for those options.
The fair value of options is determined at the grant date using
a Black-Scholes option pricing model, which requires us to make
several assumptions, including risk-free interest rate, dividend
yield, volatity and expected term. The risk-free interest rate
is based on the U.S. Treasury yield curve in effect for the
expected term of the option at the time of grant. The dividend
yield on our common stock is assumed to be zero since we do not
pay dividends and have no current plans to do so in the future.
The expected market price volatility of our common stock is
based on an estimate made by us that considers the historical
and implied volatility of our common stock as well as a peer
group of companies over a time period equal to the expected term
of the option. The expected life of the options awarded in 2006
was based on a formula considering the vesting period and term
of the options awarded as permitted by U.S. Securities and
Exchange Commission regulations.
68
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes stock option activity for each of
the three years ended December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Aggregate
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
Intrinsic
|
|
|
|
|
|
|
Average
|
|
|
Contractual
|
|
|
Value
|
|
|
|
Options
|
|
|
Exercise Price
|
|
|
Life (Years)
|
|
|
(Thousands)
|
|
|
Balance at December 31, 2003
|
|
|
2,680,743
|
|
|
|
9.70
|
|
|
|
6.0
|
|
|
$
|
11,802
|
|
Granted
|
|
|
911,000
|
|
|
|
13.75
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(426,187
|
)
|
|
|
8.96
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(226,758
|
)
|
|
|
11.39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004
|
|
|
2,938,798
|
|
|
|
10.93
|
|
|
|
5.5
|
|
|
$
|
24,754
|
|
Granted
|
|
|
674,375
|
|
|
|
21.44
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(784,904
|
)
|
|
|
9.62
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(134,208
|
)
|
|
|
16.80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
|
2,694,061
|
|
|
|
13.65
|
|
|
|
4.9
|
|
|
|
48,564
|
|
Granted
|
|
|
515,000
|
|
|
|
35.17
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(728,759
|
)
|
|
|
11.68
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(58,000
|
)
|
|
|
17.70
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(1,750
|
)
|
|
|
10.63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
|
2,420,552
|
|
|
|
18.73
|
|
|
|
4.7
|
|
|
|
34,173
|
|
Exercisable at December 31,
2004
|
|
|
958,375
|
|
|
|
9.31
|
|
|
|
5.1
|
|
|
|
9,766
|
|
Exercisable at December 31,
2005
|
|
|
916,807
|
|
|
|
9.89
|
|
|
|
4.9
|
|
|
|
20,027
|
|
Exercisable at December 31,
2006
|
|
|
1,107,432
|
|
|
|
12.26
|
|
|
|
4.8
|
|
|
|
22,113
|
|
The total intrinsic value of options exercised during 2006, 2005
and 2004 were $18.3 million, $13.1 million and
$3.0 million, respectively. Cash received by the Company
from option exercises during the 2006, 2005 and 2004 totaled
$8.5 million, $7.5 million and $4.0 million,
respectively.
The weighted average fair values of options granted during 2006,
2005, and 2004 were $12.89, $8.32, and $5.18 per share,
respectively. The fair value of each option grant is estimated
on the date of grant using the Black-Scholes option pricing
model with the following weighted average assumptions used for
grants in 2006, 2005, and 2004, respectively: risk-free weighted
interest rates of 4.6%, 3.9%, and 3.1%, no expected dividend
yield, expected lives of 4.3, 5.0, and 5.0 years, and an
expected volatility of 37%, 37% and 37%.
The following table summarizes information for stock options
outstanding at December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
Number
|
|
|
Weighted
|
|
|
Weighted
|
|
|
Number
|
|
|
Weighted
|
|
|
|
Outstanding
|
|
|
Average
|
|
|
Average
|
|
|
Exercisable
|
|
|
Average
|
|
Range of Exercise
|
|
as of
|
|
|
Remaining
|
|
|
Exercise
|
|
|
as of
|
|
|
Exercise
|
|
Prices
|
|
12/31/2006
|
|
|
Contractual Life
|
|
|
Price
|
|
|
12/31/2006
|
|
|
Price
|
|
|
$ 8.00 - $10.51
|
|
|