XNYS:OIS Oil States International Inc Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2012
 
OR
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the transition period from _________________________ to_________________________
 
Commission file number:  001-16337
 
OIL STATES INTERNATIONAL, INC.
 

 
(Exact name of registrant as specified in its charter)
 
Delaware
76-0476605
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)
   
Three Allen Center, 333 Clay Street, Suite 4620,
77002
Houston, Texas
(Zip Code)
(Address of principal executive offices)
 
 
(713) 652-0582

(Registrant’s telephone number, including area code)
None

(Former name, former address and former fiscal year,
if changed since last report)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES  [X]                   NO  [  ]
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files)
YES  [X]                   NO  [  ]
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of "accelerated filer," "large accelerated filer" and "smaller reporting company in Rule 12b-2 of the Exchange Act.
  (Check one):  
Large Accelerated Filer   [X]   Accelerated Filer [  ]
     
Non-Accelerated Filer [  ] (Do not check if a smaller reporting company)  Smaller Reporting Company [  ]
                     
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES  [  ]                  NO  [X ]
 
The Registrant had 54,741,285 shares of common stock, par value $0.01, outstanding and 3,565,490 shares of treasury stock as of August 2, 2012.
 
 
1

 
 
OIL STATES INTERNATIONAL, INC.
 
INDEX
 
 
 
Page No.
 
Part I -- FINANCIAL INFORMATION
 
     
Item 1.
Financial Statements:
 
     
 
Condensed Consolidated Financial Statements
 
 
Unaudited Condensed Consolidated Statements of Income for the Three and Six Month Periods Ended June 30, 2012 and 2011
3
 
Unaudited Condensed Consolidated Statements of Comprehensive Income for the Three and Six Month Periods Ended June 30, 2012 and 2011
4
 
Consolidated Balance Sheets – June 30, 2012 (unaudited) and December 31, 2011
5
 
Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months EndedJune 30, 2012 and 2011
6
 
Notes to Unaudited Condensed Consolidated Financial Statements
7 – 24
     
Cautionary Statement Regarding Forward-Looking Statements
25
     
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
25 – 36
     
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
36 – 37
     
Item 4.
Controls and Procedures
37
     
     
 
Part II -- OTHER INFORMATION
 
     
Item 1.
Legal Proceedings
37 – 38
     
Item 1A.
Risk Factors
38
     
Item 2. Purchases of Equity Securities by the Issuer and Affiliated Purchasers 39
     
Item 6.
Exhibits
39
     
 
(a) Index of Exhibits
39 – 40
     
Signature Page
41
 
 
2

 
 
PART I -- FINANCIAL INFORMATION
 
ITEM 1.  Financial Statements
 
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
 
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Per Share Amounts)
 
 
   
THREE MONTHS ENDED
JUNE 30,
   
SIX MONTHS ENDED
JUNE 30,
 
   
2012
   
2011
   
2012
   
2011
 
                         
                         
Revenues
  $ 1,091,088     $ 820,317     $ 2,190,080     $ 1,580,758  
                                 
Costs and expenses:
                               
Cost of sales and services
    819,164       616,778       1,614,961       1,191,176  
Selling, general and administrative expenses
    48,853       42,765       96,592       86,472  
Depreciation and amortization expense
    54,218       45,238       104,884       90,390  
Other operating (income) expense
    (407 )     373       137       2,781  
      921,828       705,154       1,816,574       1,370,819  
Operating income
    169,260       115,163       373,506       209,939  
                                 
Interest expense, net of capitalized interest
    (17,937 )     (12,532 )     (35,880 )     (22,781 )
Interest income
    242       235       539       1,248  
Equity in earnings of unconsolidated affiliates
    220       2       640       53  
Other income
    4,308       488       6,044       631  
Income before income taxes
    156,093       103,356       344,849       189,090  
Income tax expense
    (44,617 )     (28,887 )     (97,901 )     (52,270 )
Net income
    111,476       74,469       246,948       136,820  
Less: Net income attributable to noncontrolling interest
    242       226       650       500  
Net income attributable to Oil States International, Inc.
  $ 111,234     $ 74,243     $ 246,298     $ 136,320  
                                 
Net income per share attributable to Oil States International, Inc. common stockholders
                               
Basic
  $ 2.15     $ 1.45     $ 4.78     $ 2.67  
Diluted
  $ 2.01     $ 1.34     $ 4.45     $ 2.48  
                                 
Weighted average number of common shares outstanding:
                               
Basic
    51,637       51,231       51,533       51,083  
Diluted
    55,251       55,270       55,404       55,061  
 
The accompanying notes are an integral part of
these financial statements.
 
 
3

 
 
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
 
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In Thousands)
 
 
   
THREE MONTHS ENDED
JUNE 30,
   
SIX MONTHS ENDED
JUNE 30,
 
   
2012
   
2011
   
2012
   
2011
 
                         
                         
Net income
  $ 111,476     $ 74,469     $ 246,948     $ 136,820  
                                 
Other comprehensive income (loss):
                               
Foreign currency translation adjustment
    (28,283 )     35,052       (3,037 )     65,715  
Total other comprehensive income (loss)
    (28,283 )     35,052       (3,037 )     65,715  
                                 
Comprehensive income
    83,193       109,521       243,911       202,535  
Comprehensive income attributable to noncontrolling interest
    (215 )     (239 )     (640 )     (538 )
Comprehensive income attributable to Oil States International, Inc.
  $ 82,978     $ 109,282     $ 243,271     $ 201,997  
 
The accompanying notes are an integral part of
these financial statements.
 
 
4

 
 
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
 
CONSOLIDATED BALANCE SHEETS
(In Thousands)
 
 
 
 
JUNE 30,
2012
   
DECEMBER 31,
2011
 
   
(UNAUDITED)
       
             
ASSETS            
             
Current assets:
           
Cash and cash equivalents
  $ 114,391     $ 71,721  
Accounts receivable, net
    831,424       732,240  
Inventories, net
    733,803       653,698  
Prepaid expenses and other current assets
    21,568       32,000  
Total current assets
    1,701,186       1,489,659  
                 
Property, plant, and equipment, net
    1,657,189       1,557,088  
Goodwill, net
    467,099       467,450  
Other intangible assets, net
    121,014       127,602  
Other noncurrent assets
    63,201       61,842  
Total assets
  $ 4,009,689     $ 3,703,641  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
                 
Current liabilities:
               
Accounts payable
  $ 297,476     $ 252,209  
Accrued liabilities
    88,265       96,748  
Income taxes
    25,617       10,395  
Current portion of long-term debt and capitalized leases
    32,262       34,435  
Deferred revenue
    71,779       75,497  
Other current liabilities
    4,322       5,665  
Total current liabilities
    519,721       474,949  
                 
Long-term debt and capitalized leases
    1,130,592       1,142,505  
Deferred income taxes
    107,358       97,377  
Other noncurrent liabilities
    26,449       25,538  
Total liabilities
    1,784,120       1,740,369  
                 
Stockholders’ equity:
               
Oil States International, Inc. stockholders’ equity:                
Common stock, $.01 par value, 200,000,000 shares authorized, 55,266,720 shares and 54,803,539 shares issued, respectively, and 51,701,473 shares and 51,288,750 shares outstanding, respectively
    553       548  
Additional paid-in capital
    568,729       545,730  
Retained earnings
    1,696,884       1,450,586  
Accumulated other comprehensive income
    71,334       74,371  
Treasury stock, at cost, 3,565,247 and 3,514,789 shares, respectively
    (113,171 )     (109,079 )
Total Oil States International, Inc. stockholders’ equity
    2,224,329       1,962,156  
Noncontrolling interest
    1,240       1,116  
Total stockholders’ equity
    2,225,569       1,963,272  
Total liabilities and stockholders’ equity
  $ 4,009,689     $ 3,703,641  
 
The accompanying notes are an integral part of
these financial statements.
 
 
5

 
 
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
 
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
 
 
 
SIX MONTHS
ENDED JUNE 30,
 
 
 
2012
   
2011
 
             
Cash flows from operatinqg activities:
           
Net income
  $ 246,948     $ 136,820  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
    104,884       90,390  
Deferred income tax provision
    4,991       10,788  
Excess tax benefits from share-based payment arrangements
    (6,014 )     (6,198 )
Gains on disposals of assets
    (4,851 )     (763 )
Non-cash compensation charge
    9,189       7,198  
Accretion of debt discount
    4,106       3,823  
Amortization of deferred financing costs
    3,600       2,914  
Other, net
    (547 )     (126 )
Changes in operating assets and liabilities, net of effect from acquired businesses:
               
Accounts receivable
    (99,243 )     (66,481 )
Inventories
    (79,781 )     (88,781 )
Accounts payable and accrued liabilities
    36,199       7,802  
Taxes payable
    29,137       9,977  
Other current assets and liabilities, net
    2,707       (10,728 )
Net cash flows provided by operating activities
    251,325       96,635  
                 
Cash flows from investing activities:
               
Capital expenditures, including capitalized interest
    (199,983 )     (230,253 )
Acquisitions of businesses, net of cash acquired
    --       (212 )
Proceeds from disposition of property, plant and equipment
    5,225       1,435  
Other, net
    (1,650 )     (2,285 )
Net cash flows used in investing activities
    (196,408 )     (231,315 )
                 
Cash flows from financing activities:
               
Revolving credit borrowings and (repayments), net
    (951 )     (428,682 )
6 1/2% senior notes issued
    --       600,000  
Term loan repayments
    (14,944 )     (7,494 )
Debt and capital lease repayments
    (2,312 )     (587 )
Issuance of common stock from share-based payment arrangements
    7,801       9,792  
Excess tax benefits from share-based payment arrangements
    6,014       6,198  
Payment of financing costs
    (23 )     (12,640 )
Tax withholdings related to net share settlements of restricted stock
    (4,092 )     (2,456 )
Net cash flows provided by (used in) financing activities
    (8,507 )     164,131  
                 
Effect of exchange rate changes on cash
    (3,461 )     (2,399 )
Net increase in cash and cash equivalents from continuing operations
    42,949       27,052  
Net cash used in discontinued operations – operating activities
    (279 )     (98 )
Cash and cash equivalents, beginning of period
    71,721       96,350  
                 
Cash and cash equivalents, end of period
  $ 114,391     $ 123,304   
 
The accompanying notes are an integral part of these
financial statements.
 
 
6

 
 
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Continued)
 
1.     ORGANIZATION AND BASIS OF PRESENTATION
 
The accompanying unaudited condensed consolidated financial statements of Oil States International, Inc. and its wholly-owned subsidiaries (referred to in this report as we or the Company) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the Commission) pertaining to interim financial information. Certain information in footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP) have been condensed or omitted pursuant to these rules and regulations. The unaudited financial statements included in this report reflect all the adjustments, consisting of normal recurring adjustments, which the Company considers necessary for a fair presentation of the results of operations for the interim periods covered and for the financial condition of the Company at the date of the interim balance sheet. Results for the interim periods are not necessarily indicative of results for the full year.
 
The preparation of condensed consolidated financial statements in conformity with GAAP requires the use of estimates and assumptions by management in determining the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.  If the underlying estimates and assumptions, upon which the financial statements are based, change in future periods, actual amounts may differ from those included in the accompanying condensed consolidated financial statements.
 
The financial statements included in this report should be read in conjunction with the Company’s audited financial statements and accompanying notes included in its Annual Report on Form 10-K for the year ended December 31, 2011 (the 2011 Form 10-K).
 
2.     RECENT ACCOUNTING PRONOUNCEMENTS
 
From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (the FASB), which are adopted by the Company as of the specified effective date.  Unless otherwise discussed, management believes that the impact of recently issued standards, which are not yet effective, will not have a material impact on the Company’s consolidated financial statements upon adoption.
 
In June 2011, the FASB issued amendments to disclosure requirements for the presentation of comprehensive income.  This guidance eliminates the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity.  The amendments require that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present total other comprehensive income, the components of other comprehensive income, and the total of comprehensive income.  The amendments should be applied retrospectively. For public entities, the amendments were effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The amendments do not require any transition disclosures. In December 2011, the FASB issued an amendment deferring the effective date of the requirement to present reclassification adjustments out of accumulated other comprehensive income on the face of the consolidated statement of income.  We adopted this standard in the quarterly Report on Form 10-Q for the three month period ended March 31, 2012.
 
 
7

 
 
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Continued)
 
 
3.     DETAILS OF SELECTED BALANCE SHEET ACCOUNTS
 
Additional information regarding selected balance sheet accounts is presented below (in thousands):
 
   
JUNE 30,
2012
   
DECEMBER 31,
2011
 
Accounts receivable, net:
           
Trade
  $ 615,924     $ 553,481  
Unbilled revenue
    217,190       180,273  
Other
    1,979       2,449  
Total accounts receivable
    835,093       736,203  
Allowance for doubtful accounts
    (3,669 )     (3,963 )
    $ 831,424     $ 732,240  
 
   
JUNE 30,
2012
   
DECEMBER 31,
2011
Inventories, net:
         
Tubular goods
  $ 476,650     $ 420,519  
Other finished goods and purchased products
    86,661       80,184  
Work in process
    70,690       76,353  
Raw materials
    111,864       86,672  
Total inventories
    745,865       663,728  
Allowance for obsolescence
    (12,062 )     (10,030 )
    $ 733,803     $ 653,698  
 
 
 
ESTIMATED
USEFUL LIFE
(years)
 
JUNE 30,
2012
   
DECEMBER 31,
2011
 
Property, plant and equipment, net:
                 
Land
        $ 49,282     $ 48,989  
Accommodations assets (1)
2 - 15      1,251,663       1,160,661  
Buildings and leasehold improvements (1)
1
-
40     171,177       154,233  
Machinery and equipment
1
-
29     375,128       355,798  
Rental tools
4
-
10     227,195       199,084  
Office furniture and equipment
1
-
10     51,075       48,081  
Vehicles
2
-
10     111,993       100,554  
Construction in progress
          186,619       166,371  
Total property, plant and equipment
          2,424,132       2,233,771  
Accumulated depreciation
          (766,943 )     (676,683 )
          $ 1,657,189     $ 1,557,088  
 
 
 
 
JUNE 30,
2012
   
DECEMBER 31,
2011
 
Accrued liabilities:
           
Accrued compensation
  $ 48,061     $ 61,394  
Accrued interest
    5,804       6,035  
Insurance liabilities
    12,558       12,396  
Accrued taxes, other than income taxes
    10,179       5,889  
Liabilities related to discontinued operations
    1,846       2,125  
Other
    9,817       8,909  
    $ 88,265     $ 96,748  
 
 
(1)
As of December 31, 2011, we have reclassified $54.7 million in buildings and leasehold improvements to accommodations assets for comparability purposes.
 
 
8

 
 
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Continued)
 
4.    EARNINGS PER SHARE
 
The calculation of earnings per share attributable to the Company is presented below (in thousands, except per share amounts):
 
   
THREE MONTHS ENDED
JUNE 30,
   
SIX MONTHS ENDED
JUNE 30,
 
   
2012
   
2011
   
2012
   
2011
 
                         
Basic earnings per share:
                       
Net income attributable to Oil States International, Inc.
  $ 111,234     $ 74,243     $ 246,298     $ 136,320  
                                 
Weighted average number of shares outstanding
    51,637       51,231       51,533       51,083  
                                 
Basic earnings per share
  $ 2.15     $ 1.45     $ 4.78     $ 2.67  
                                 
Diluted earnings per share:
                               
Net income attributable to Oil States International, Inc.
  $ 111,234     $ 74,243     $ 246,298     $ 136,320  
                                 
Weighted average number of shares outstanding
    51,637       51,231       51,533       51,083  
Effect of dilutive securities:
                               
Options on common stock
    484       679       531       703  
2 3/8% Convertible Senior Subordinated Notes
    3,030       3,200       3,196       3,094  
Restricted stock awards and other
    100       160       144       181  
                                 
Total shares and dilutive securities
    55,251       55,270       55,404       55,061  
                                 
Diluted earnings per share
  $ 2.01     $ 1.34     $ 4.45     $ 2.48  
 
Our calculation of diluted earnings per share for the three and six months ended June 30, 2012 excludes 625,565 shares and 484,533 shares, respectively, issuable pursuant to outstanding stock options and restricted stock awards, due to their antidilutive effect.  Our calculation of diluted earnings per share for the three and six months ended June 30, 2011 excludes 178,855 shares and 177,702 shares, respectively, issuable pursuant to outstanding stock options and restricted stock awards due to their antidilutive effect.
 
 
9

 
 
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Continued)
 
5.     BUSINESS ACQUISITIONS AND GOODWILL
 
See Note 13 to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form  10-Q.
 
Changes in the carrying amount of goodwill for the six month period ended June 30, 2012 are as follows (in thousands):
 
   
Well Site Services
                         
   
Rental
Tools
and
Services
   
Drilling Services
   
Subtotal
   
Accommodations
   
Offshore
Products
   
Tubular
Services
   
Total
 
Balance as of December 31, 2010                                          
Goodwill
  $ 170,034     $ 22,767     $ 192,801     $ 299,062     $ 100,654     $ 62,863     $ 655,380  
Accumulated Impairment Losses
    (94,528 )     (22,767 )     (117,295 )     --       --       (62,863 )     (180,158 )
      75,506       --       75,506       299,062       100,654       --       475,222  
Goodwill acquired and purchase price adjustments
    --       --       --       (9,826 )     315       --       (9,511 )
Foreign currency translation and other changes
    (323 )     --       (323 )     2,087       (25 )     --       1,739  
      75,183       --       75,183       291,323       100,944       --       467,450  
                                                         
Balance as of December 31, 2011
                                                       
Goodwill
    169,711       22,767       192,478       291,323       100,944       62,863       647,608  
Accumulated Impairment Losses
    (94,528 )     (22,767 )     (117,295 )     --       --       (62,863 )     (180,158 )
 
    75,183       --       75,183       291,323       100,944       --       467,450  
Foreign currency translation and other changes
    (29 )     --       (29 )     (373 )     51       --       (351 )
      75,154       --       75,154       290,950       100,995       --       467,099  
Balance as of June 30, 2012
                                                       
Goodwill
    169,682       22,767       192,449       290,950       100,995       62,863       647,257  
Accumulated Impairment Losses
    (94,528 )     (22,767 )     (117,295 )     --       --       (62,863 )     (180,158 )
    $ 75,154     $ --     $ 75,154     $ 290,950     $ 100,995     $ --     $ 467,099  
 
 
6.     DEBT
 
As of June 30, 2012 and December 31, 2011, long-term debt consisted of the following (in thousands):
 
   
June 30,
2012
   
December 31,
2011
 
   
(Unaudited)
       
             
U.S. revolving credit facility, which matures December 10, 2015, with available commitments up to $500 million and with a weighted average interest rate of 3.1% for the six month period ended June 30, 2012
  $ 73,500     $ 68,065  
U.S. term loan, which matures December 10, 2015, of $200 million; 2.5% of aggregate principal repayable per quarter; weighted average interest rate of 2.5% for the six month period ended June 30, 2012
    180,000       190,000  
Canadian revolving credit facility, which matures on December 10, 2015, with available commitments up to $250 million and with a weighted average interest rate of 4.3% for the six month period ended June 30, 2012
    --       --  
Canadian term loan, which matures December 10, 2015, of $100 million; 2.5% of aggregate principal repayable per quarter; weighted average interest rate of 3.5% for the six month period ended June 30, 2012
    88,675       93,795  
Australian revolving credit facility, which matures November 30, 2013, with available commitments up to A$150 million and with a weighted average interest rate of 6.4% for the six month period ended June 30, 2012
    36,850       43,050  
6 1/2% senior unsecured notes - due June 2019
    600,000       600,000  
2 3/8% contingent convertible senior subordinated notes, net due 2025
    174,990       170,884  
Subordinated unsecured notes payable to sellers of businesses, fixed interest rate of 6%, which mature in December 2012
    2,000       4,000  
Capital lease obligations and other debt
    6,839       7,146  
Total debt
    1,162,854       1,176,940  
Less: Current portion
    32,262       34,435  
Total long-term debt and capitalized leases
  $ 1,130,592     $ 1,142,505  
 
 
10

 
 
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Continued)
 
On June 1, 2011, the Company sold $600 million aggregate principal amount of 6 1/2% senior unsecured notes (6 1/2% Notes) due 2019 through a private placement to qualified institutional buyers.
 
The 6 1/2% Notes are senior unsecured obligations of the Company, are guaranteed by our material U.S. subsidiaries (the Guarantors), bear interest at a rate of 6 1/2% per annum and mature on June 1, 2019.  At any time prior to June 1, 2014, the Company may redeem up to 35% of the 6 1/2% Notes at a redemption price of 106.500% of the principal amount, plus accrued and unpaid interest to the redemption date, with the proceeds of certain equity offerings. Prior to June 1, 2014, the Company may redeem some or all of the 6 1/2% Notes for cash at a redemption price equal to 100% of their principal amount plus an applicable make-whole premium and accrued and unpaid interest to the redemption date. On and after June 1, 2014, the Company may redeem some or all of the 6 1/2% Notes at redemption prices (expressed as percentages of principal amount), plus accrued and unpaid interest to the redemption date.  The optional redemption prices as a percentage of principal amount are as follows:
 
Twelve Month Period Beginning
June 1,
 
% of Principal
Amount
2014
  104.875%
2015
  103.250%
2016
  101.625%
2017
  100.000%
 
The Company utilized approximately $515 million of the net proceeds of the 6 1/2% Note offering in June 2011 to repay borrowings outstanding under its U.S. and Canadian credit facilities (as defined below).  The remaining net proceeds of approximately $75 million were utilized for general corporate purposes.

 
On May 17, 2012, the Company gave notice of the redemption of all of its outstanding 2 3/8% Contingent Convertible Senior Subordinated Notes (2 3/8% Notes) due 2025, totaling $174,990,000 at a redemption price equal to 100% of the principal amount thereof plus accrued interest. In July 2012, rather than having their 2 3/8% Notes redeemed, on or prior to July 5, 2012, holders of $174,990,000 aggregate principal amount of the 2 3/8% Notes converted their 2 3/8% Notes and received cash up to the principal amount and 3,012,380 shares of the Company’s Common Stock.  As of June 30, 2012, we classified the $175.0 million principal amount of our 2 3/8% Notes as a noncurrent liability based on our ability and intent to refinance the 2 3/8% Notes utilizing borrowings available under our senior secured credit facilities.  See Note 13 to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.   
 
The following table presents the carrying amount of our 2 3/8% Notes in our condensed consolidated balance sheets (in thousands):
 
   
June 30, 2012
   
December 31, 2011
 
             
Carrying amount of the equity component in additional paid-in capital
  $ 28,434     $ 28,434  
                 
Principal amount of the liability component
  $ 174,990     $ 174,990  
Less: Unamortized discount
    --       4,106  
Net carrying amount of the liability component
  $ 174,990     $ 170,884  
 
The discount on the 2 3/8% Notes was fully amortized as of June 30, 2012 in consideration of the expected conversion of these notes in July 2012.
 
 
11

 
 
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Continued)
 
The effective interest rate of 7.17% was applied as of the issuance date for our 2 3/8% Notes in accordance with ASC 470-20 – Debt with Conversion and Other Options.  Interest expense on the 2 3/8% Notes, excluding amortization of debt issue costs, was as follows (in thousands):
 
   
Three months ended
June 30,
   
Six months ended
June 30,
 
                         
   
2012
   
2011
   
2012
   
2011
 
Interest expense
  $ 3,111     $ 2,968     $ 6,185     $ 5,901  
 
 
   
June 30, 2012
 
       
Remaining period over which discount will be amortized
 
Discount is fully amortized
 
Conversion price                                                                                  
  $ 31.75  
Number of shares to be delivered upon conversion (1)
    2,868,143  
Conversion value in excess of principal amount (in thousands) (1)
  $ 189,871  
Derivative transactions entered into in connection with the convertible notes 
 
None
 
 
 
 
(1)
Calculation is based on the Company’s June 29, 2012 closing stock price of $66.20.  See Note 13 to the Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.
 
On July 13, 2011, The MAC Services Group Pty Limited (The MAC) entered into a A$150 million revolving loan facility governed by a Facility Agreement (the Facility Agreement) between The MAC and National Australia Bank Limited, which is guaranteed by the Company. The Facility Agreement amended The MAC’s existing A$75 million revolving loan facility on substantially the same terms, including the maturity date of the Facility Agreement of November 30, 2013.  As of June 30, 2012, we had A$36 million outstanding under the Australian credit facility leaving A$114 million available to be drawn under this facility.
 
The Company’s financial instruments consist of cash and cash equivalents, investments, receivables, payables, and debt instruments. The Company believes that the carrying values of these instruments, other than our 2 3/8% Notes and our 6 1/2% Notes, on the accompanying consolidated balance sheets approximate their fair values.
 
The fair values of our 2 3/8% and 6 1/2 % Notes are estimated based on quoted prices and analysis of similar debt instruments (Level 2 fair value measurements).  The Company changed from a Level 1 fair value measurement standard to a Level 2 fair value measurement standard in the second quarter of 2012 in consideration of the daily trading volume of our debt instruments.  The carrying values and fair values of these notes were as follows (in thousands):
 
         
June 30, 2012
   
December 31, 2011
 
   
Interest
Rate
   
Carrying
Value
   
Fair
Value
   
Carrying
Value
   
Fair
Value
 
6 1/2% Notes
                             
Principal amount due 2019
    6 1/2%     $ 600,000     $ 636,000     $ 600,000     $ 625,128  
                                         
2 3/8% Notes
                                       
Principal amount due 2025
    2 3/8%     $ 174,990     $ 366,693     $ 174,990     $ 411,396  
  Less:  unamortized discount
            -       -       4,106       -  
  Net value                                  
          $ 174,990     $ 366,693     $ 170,884     $ 411,396  
 
As of June 30, 2012, the estimated fair value of the Company's debt outstanding under its credit facilities was estimated to be at fair value.
 
As June 30, 2012, the Company had approximately $114.4 million of cash and cash equivalents and $648.6 million of the Company’s U.S. and Canadian credit facilities available for future financing needs.  The Company also had availability totaling A$114 million under its Australian credit facility.  As of June 30, 2012, we had $31.8 million of outstanding letters of credit.
 
 
12

 
 
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Continued)
 
Interest expense on the condensed consolidated statements of income is net of capitalized interest of $1.2 million and $2.5 million, respectively, for the three and six months ended June 30, 2012 and $1.0 million and $2.5 million, respectively, for the same periods in 2011.
 
7.     CHANGES IN COMMON STOCK OUTSTANDING
 
Shares of common stock outstanding – January 1, 2012
    51,288,750  
Shares issued upon exercise of stock options and vesting of restricted stock awards
    463,181  
Shares withheld for taxes on vesting of restricted stock awards and transferred to treasury
    (50,458 )
Shares of common stock outstanding – June 30, 2012
    51,701,473  
 
8.     STOCK BASED COMPENSATION
 
During the first six months of 2012, we granted restricted stock awards totaling 289,993 shares valued at a total of $24.3 million.  Of the restricted stock awards granted in the first half of 2012, a total of 206,000 awards vest in four equal annual installments beginning in February 2013, 47,625 awards are performance shares that may vest in February 2015 in an amount that will depend on the Company’s achievement of specified performance objectives, 23,625 awards vest 100% in February 2016 and 12,464 awards vest 100% in May 2013.  The performance based awards have a performance criteria that will be measured based upon the Company’s achievement levels of average after-tax annual return on invested capital for the three year period 2012 to 2014.  During the six months ended June 30, 2012, the Company also granted 54,950 units of phantom shares under the newly created Canadian Long-Term Incentive Plan, which provides for the granting of units of phantom shares to key Canadian employees. These awards vest in three equal annual installments beginning in February 2013 and are accounted for as a liability.  Participants granted units of phantom shares are entitled to a lump sum cash payment equal to the fair market value of a share of the Company’s Common Stock on the vesting date.  A total of 155,250 stock options with a ten-year term were awarded in the six months ended June 30, 2012 with an average exercise price of $84.52 that will vest in four equal annual installments starting in February 2013.
 
Stock based compensation pre-tax expense recognized in the six month periods ended June 30, 2012 and 2011 totaled $9.2 million and $7.2 million, or $0.12 and $0.10 per diluted share after tax, respectively.  Stock based compensation pre-tax expense recognized in the three month periods ended June 30, 2012 and 2011 totaled $4.8 million and $3.8 million, or $0.07 and $0.05 per diluted share after tax, respectively.  The total fair value of restricted stock awards that vested during the six months ended June 30, 2012 and 2011 was $15.6 million and $12.2 million, respectively. At June 30, 2012, $44.8 million of compensation cost related to unvested stock options and restricted stock awards attributable to future performance had not yet been recognized.
 
9.     INCOME TAXES
 
Income tax expense for interim periods is based on estimates of the effective tax rate for the entire fiscal year.  The Company’s income tax provision for the three and six months ended June 30, 2012 totaled $44.6 million, or 28.6% of pretax income, and $97.9 million, or 28.4% of pretax income, respectively, compared to $28.9 million, or 27.9% of pretax income, and $52.3 million, or 27.6% of pretax income, respectively, for the three and six months ended June 30, 2011.  The modest increase in the effective tax rate from the prior year was largely the result of higher domestic earnings as a percentage of total earnings.  Our domestic earnings are taxed at a higher rate than our foreign earnings.
 
10.   SEGMENT AND RELATED INFORMATION
 
In accordance with current accounting standards regarding disclosures about segments of an enterprise and related information, the Company has identified the following reportable segments: well site services, accommodations, offshore products and tubular services.  The Company’s reportable segments represent strategic business units that offer different products and services.  They are managed separately because each business requires different technologies and marketing strategies.  Most of the businesses were initially acquired as a unit, and the management at the time of the acquisition was retained.  Subsequent acquisitions have been direct extensions to our business segments.  Separate business lines within the well site services segment have been disclosed to provide additional detail for that segment.  Results of a portion of our accommodations segment supporting traditional oil and natural gas drilling activities are impacted by seasonally higher activity during the Canadian winter drilling season occurring in the first calendar quarter.
 
 
13

 
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Continued)

Financial information by business segment for each of the three and six months ended June 30, 2012 and 2011 is summarized in the following table (in thousands):
 
   
Revenues
from
unaffiliated
customers
   
Depreciation
and
amortization
   
 
Operating
income (loss)
   
Equity in
earnings of
unconsolidated
affiliates
   
 
Capital
expenditures
   
Total assets
 
Three months ended June 30, 2012
                                   
Well site services –
                                   
Rental tools and services
  $ 125,079     $ 12,433     $ 28,974     $ --     $ 19,349     $ 489,942  
Drilling services
    51,456       5,950       8,358       --       4,961       131,273  
Total well site services
    176,535       18,383       37,332       --       24,310       621,215  
Accommodations
    260,966       31,609       83,207       --       62,217       1,928,076  
Offshore products
    191,638       3,434       36,589       67       10,977       704,508  
Tubular services
    461,949       573       24,054       153       281       714,130  
Corporate and eliminations
    --        219       (11,922 )     --       796       41,760  
Total
  $ 1,091,088     $ 54,218     $ 169,260     $ 220     $ 98,581     $ 4,009,689  
 
   
Revenues
from
unaffiliated
customers
   
 
Depreciation and amortization
   
 
 
Operating income (loss)
   
Equity in
earnings of
unconsolidated
affiliates
   
 
 
Capital
expenditures
   
Total assets
 
Three months ended June 30, 2011
                                   
Well site services –
                                   
Rental tools and services
  $ 112,658     $ 10,299     $ 25,103     $ --     $ 18,654     $ 410,370  
Drilling services
    40,998       4,806       6,370       --       5,754       116,672  
Total well site services
    153,656       15,105       31,473       --       24,408       527,042  
Accommodations
    202,943       26,195       57,750       (1 )     106,873       1,700,385  
Offshore products
    131,742       3,358       18,770       (228 )     3,519       588,472  
Tubular services
    331,976       377       16,956       231       2,780       521,675  
Corporate and eliminations
    --       203       (9,786 )     --       64       87,480  
Total
  $ 820,317     $ 45,238     $ 115,163     $ 2     $ 137,644     $ 3,425,054  
 
   
Revenues
from
unaffiliated
customers
   
Depreciation and
amortization
   
 
Operating
income (loss)
   
Equity in
earnings of
unconsolidated
affiliates
   
 
Capital
expenditures
   
Total assets
 
Six months ended June 30, 2012
                                   
Well site services –
                                   
Rental tools and services
  $ 260,633     $ 23,873     $ 62,768     $ --     $ 37,874     $ 489,942  
Drilling services
    98,862       11,021       15,817       --       13,524       131,273  
Total well site services
    359,495       34,894       78,585       --       51,398       621,215  
Accommodations
    562,786       61,560       202,232       --       126,125       1,928,076  
Offshore products
    377,358       6,852