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, 2004
COMMISSION FILE NO. 1-16337
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.)
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THREE ALLEN CENTER, 333 CLAY STREET, SUITE 4620, HOUSTON, TEXAS 77002
(Address of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(713) 652-0582
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EXCHANGE ON WHICH REGISTERED
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Common Stock, par value $.01 per share New York Stock Exchange
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SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
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 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 Registrant's 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. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes [X] No [ ]
State the aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant:
Voting common stock (as of June 30, 2004)................... $510,460,417 |
Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date:
As of February 11, Common Stock, par value $.01 per share 49,583,286 shares 2005 |
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Definitive Proxy Statement for the 2005 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.
TABLE OF CONTENTS
PART I
Item 1. Business.................................................... 2
Item 2. Properties.................................................. 18
Item 3. Legal Proceedings........................................... 19
Item 4. Submission of Matters to a Vote of Security Holders......... 20
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 20
Item 6. Selected Financial Data..................................... 22
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 24
Item 7A. Quantitative and Qualitative Disclosures about Market
Risk........................................................ 35
Item 8. Financial Statements and Supplementary Data................. 35
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure.................................... 35
Item 9A. Controls and Procedures..................................... 36
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 36
Item 11. Executive Compensation...................................... 36
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters.................. 37
Item 13. Certain Relationships and Related Transactions.............. 37
Item 14. Principal Accounting Fees and Services...................... 37
PART IV
Item 15. Exhibits and Financial Statement Schedules.................. 37
SIGNATURES................................................................... 41
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS................................... 43
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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. Management's Discussion and Analysis of Financial Condition and Results of Operations" below.
ITEM 1. BUSINESS
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 world's active oil and gas producing regions, including the Gulf of Mexico, U.S. onshore, Canada, West Africa, the Middle East, 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.
AVAILABLE INFORMATION
The Company maintains a website with the address www.oilstatesintl.com. The Company is not including the information contained on the Company's 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. The governance policies, including the Company's 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 the Nominating and Corporate Governance Committee) may also be viewed at the Company's 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 June 14, 2004, the Company filed the annual certification by our CEO that, as of the date of the certification, the Company was in compliance with the NYSE's corporate governance listing standards.
OUR BACKGROUND
Oil States International, Inc. was originally incorporated in July 1995 as CE Holdings, Inc. On August 1, 1995, CE Holdings, Inc. acquired Continental Emsco Company, an operator of oilfield supply stores, including its then wholly owned subsidiary Oil States Industries, Inc. (Oil States Industries). Oil States Industries is a manufacturer of offshore products.
In May 1996, Oil States Industries purchased the construction division of Hunting Oilfield Services, Ltd., which provides a variety of construction products and services to the offshore oil and gas industry as well as certain connector manufacturing technology. In November 1996, CE Holdings, Inc. changed its name to CONEMSCO, Inc. (Conemsco).
In July 1997, Conemsco purchased HydroTech Systems, Inc., a full service provider of engineered products to the offshore pipeline industry, and SMATCO Industries Inc., a manufacturer of marine winches for the offshore service boat industry. In December 1997, Conemsco purchased Gregory Rig Service & Sales Inc., a provider of drilling equipment and services.
In February 1998, Conemsco acquired Subsea Ventures, Inc. (SVI). SVI designs, manufactures and services auxiliary structures for subsea blowout preventors and subsea production systems. In April 1998, Conemsco acquired the assets of Klaper (UK) Limited, a provider of repair and maintenance services for blowout preventors and drilling risers used in offshore drilling.
In July 2000, Conemsco changed its name to Oil States International, Inc. In July 2000, Oil States International, Inc., 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 and references to "Oil States" are to Oil States International, Inc. and its subsidiaries prior to the Combination.
ACQUISITIONS
Since the completion of our initial public offering in February 2001, we have completed 22 acquisitions for total consideration of $202 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 the following six businesses for total consideration of approximately $72.1 million, which was financed primarily with borrowings under our credit facility:
- Southeastern Rentals LLC, based in Mississippi, Edge Wireline Rentals Inc. and certain affiliated companies, located in Louisiana, and J.V. Oilfield Rentals & Supply, Inc. and certain affiliated companies, located in Louisiana, all of which are suppliers of rental tools to the oil and gas service industry. These businesses were merged into our existing rental tool business included in our well site services segment.
- Barlow Hunt, Inc., based in Oklahoma, an elastomer molding company which has become part of our existing elastomer business included in the offshore products segment.
- Certain assets and related liabilities of Big Inch Marine Services, Inc., a Texas-based subsidiary of Stolt Offshore, Inc., which provides subsea pipeline equipment and repair services similar to those provided by us in the offshore products segment.
- Applied Hydraulic Systems, Inc., a Louisiana-based offshore crane manufacturer and crane repair service provider, which has become part of our offshore products segment.
In 2003, we spent $16.8 million, financed with borrowings under our credit facility, 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 January 2004, we completed the acquisition of several related rental tool companies for $34.8 million. The companies, based in South Texas, provide 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 $47.0 million, including a purchase price adjustment settled
in October 2004. In connection with the transaction, we purchased Hunting's U.S.
tubular inventory, assumed certain customer contracts and entered into supply
and distribution relationships with Hunting. Substantially all of the purchase
price was assigned to OCTG acquired. Hunting's distribution operations were
merged into our existing distribution operations in our tubular services
segment.
In January 2005, we announced that our land drilling subsidiary, Capstar Drilling, L.P., completed the acquisition of Elenburg Exploration Company, Inc. ("Elenburg"), a Wyoming based land drilling company, for $22.0 million. Elenburg has a fleet of seven rigs, and provides shallow land drilling services in Montana, Wyoming, Colorado and Utah.
All of the cash consideration utilized in our acquisitions has been funded by cash flow and amounts available under our existing bank credit facility. See Note 8 to the Consolidated Financial Statements.
OUR INDUSTRY
We operate in the oilfield service industry and provide products and services to oil and gas exploration and production companies for use in the drilling for and production of oil and gas. 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 11 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 is significantly affected by the North American rig count, had increased activity during 2001, saw decreased activity in 2002 and early 2003 and has seen increasing activity from 2003 through the current period. 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 an important impact on this segment's overall trends.
Our Offshore Products segment, which is more influenced by deepwater development activity and rig construction and repair, experienced increased activity during 2002 and 2003 as we shipped projects from our backlog which had increased in 2001 and 2002. In 2004, activity in this segment slowed; however, backlog increased during 2004.
Our Tubular Services business is influenced by some of the same factors as our Well Site Services. In addition, during 2004, this segment was significantly affected by increasing prices for steel products, including the oil country tubular goods ("OCTG") we sell.
OFFSHORE PRODUCTS
OVERVIEW
During the year ended December 31, 2004, we generated approximately 21% of our revenue and 7% 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, inspection and repair 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 and Singapore that support our offshore products segment.
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, 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 on the industry's 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 vessels, and on other marine vessels, floating rigs and jack-ups. Our products and services include:
- flexible bearings and connector products;
- subsea pipeline products;
- marine winches, mooring and lifting systems and rig equipment;
- blowout preventor stack assembly, integration, testing and repair services; and
- other products and services.
Flexible Bearings and Connector Products. We are the principal supplier of flexible bearings, or FlexJoints(R), 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(R) 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(R) 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 systems, are a significant means of producing oil and gas, particularly in deepwater environments. We provide many important products for the construction of these systems. 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(R) 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 segments to form long pipes offshore. A Spar is a floating vertical cylindrical structure which is approximately six to seven times longer than its diameter and is anchored in place. Our FlexJoints(R) are also used to attach the steel catenary risers to a Spar or FPSO.
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:
- forged steel Y-shaped connectors for joining two pipelines into one;
- pressure-balanced safety joints for protecting pipelines from anchor snags or a shifting sea-bottom;
- electrical isolation joints; and
- hot tap clamps that allow new pipelines to be joined into existing lines without interrupting the flow of petroleum product.
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:
- repair clamps used to seal leaks and restore the structural integrity of a pipeline;
- mechanical connectors used in repairing subsea pipelines without having to weld;
- flanges used to correct misalignment and swivel ring flanges; and
- pipe recovery tools for recovering dropped or damaged pipelines.
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(R) hydraulic system. The Hydra-Lok(R) 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.
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:
- elastomer consumable downhole products for onshore drilling and production;
- metal-elastomeric FlexJoints(R) used in a variety of military, marine and aircraft applications; and
- drum-clutches and brakes for heavy-duty power transmission in the mining, paper, logging and marine industries.
Backlog. Backlog in our offshore products segment was $97.5 million at December 31, 2004, compared to $62.6 million at December 31, 2003 and $100.1 million at December 31, 2002. We expect substantially all of our backlog at December 31, 2004 to be completed in 2005. Our offshore products backlog consists of firm
customer purchase orders for which satisfactory credit or financing arrangements 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, 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.
Our three largest customers in the offshore products markets in 2004 were BP plc, Noble Corporation and FMC Technologies, Inc. Our main competitors include Vetco Gray, Inc., FMC Technologies, Inc., Energy Cranes International, Ltd. and Rolls-Royce plc.
TUBULAR SERVICES
OVERVIEW
During the year ended December 31, 2004, we generated approximately 44% of our revenue and 39% of our operating income, before corporate charges, from our tubular services segment. Through this segment, we distribute oil country tubular goods, or OCTG, and provide associated OCTG finishing and logistics services to the oil and gas industry. Oil country tubular goods consist of downhole casing and production tubing. Through our tubular services segment, we:
- distribute a broad range of casing and tubing;
- provide threading, remediation, logistical and inventory services; and
- offer e-commerce pricing, ordering, tracking and financial reporting capabilities.
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 2004, we purchased from a single supplier 50% of the tubular goods we distributed and from three suppliers approximately 69% 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 and prevent caving during drilling operations. Casing is also used 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 six offices and facilities located near areas of oil and gas exploration and development activity. We have distribution relationships with most major domestic and international steel mills.
In this business, inventory management is critical to our success. We maintain on-the-ground inventory in 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.
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 for export to other countries, including Algeria, Angola, Cabinda, Cameroon, Canada, Chad, Columbia, Congo, Ecuador, Egypt, Guatemala, Pakistan, Trinidad, Venezuela and Yemen.
CUSTOMERS, SUPPLIERS AND COMPETITORS
Our three largest end-user customers in the tubular distribution market in 2004 were ChevronTexaco Corporation, Burlington Resources and ConocoPhillips. Our three largest suppliers were U.S. Steel Group, Maverick Tube Corporation and Grant Prideco. Although we have a leading market share position in tubular services distribution, the market is highly fragmented. Our main competitors in tubular distribution are Total Premier, Red Man Pipe & Supply Co., Inc. and Bourland and Leverich.
WELL SITE SERVICES
OVERVIEW
During the year ended December 31, 2004, we generated approximately 35% of our revenue and 54% of our operating income, before corporate charges, from our well site services segment. Our well site services segment provides 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. Our services include workover services, drilling services, rental equipment, work force accommodations, catering and logistics services and modular building construction services. We use our fleet of workover and drilling rigs, rental equipment, work force accommodation facilities and related equipment to service well sites for oil and natural gas companies. Our products and services are used in both onshore and offshore applications through the exploration, development, production and abandonment phases of a well's life. Additionally, our work force accommodations, catering and logistics services are employed in a variety of mining and related natural resource applications as well as forest fire fighting.
WELL SITE SERVICES MARKET
Demand for our workover and drilling rigs, rental equipment and work force accommodations, catering and logistics services has historically been tied to the level of expenditures by oil and gas producers which is a function of prices they receive for oil and gas. In general, we expect activity levels to continue to be highly correlated to oil and gas expenditures which is a function of many factors that affect well economics.
Demand for our workover services is impacted significantly by offshore activity both in the United States and international areas. Our hydraulic workover units compete with jackup rigs and conventional workover rigs for shallow water workover projects. Our hydraulic workover units can be operated, at times, at a lower cost than alternatives such as jack-up rigs. For example, costs to mobilize and set up our hydraulic workover units are lower than alternative equipment. Some operations on oil and gas wells under pressure situations require the use of a hydraulic workover unit. Conversely, when activity levels in the oil and gas business decline, our hydraulic units face more competition from larger equipment offered at lower prices which can become more competitive with our equipment.
Our rental equipment fleet which is primarily positioned to serve the U.S. Gulf of Mexico and onshore U.S. markets, is more production oriented and is dependent to a significant degree on the level of development and workover activities in our market areas. We rent our equipment to major and independent production companies and larger oil service companies to support both onshore and offshore operations. Recent capital expenditures and acquisitions have been more focused on onshore operations. We face competition from a diverse group of companies including many smaller companies.
PRODUCTS AND SERVICES
Workover Services. We provide our workover products and services primarily to customers in the U.S., Venezuela, the Middle East and West Africa, for both onshore and offshore applications. Workover products and services are used in operations on a producing well to restore or increase production. Workover services are typically used during the development, production and abandonment stages of the well. Our hydraulic workover units are used for workover operations and snubbing operations in pressure situations.
A hydraulic workover unit is a specially designed rig used for vertically moving tubulars in and out of a wellbore using hydraulic pressure. This unit is used for servicing wells with no pressure at the surface and also has the ability of working safely on wells under pressure. This feature allows these units to be used for underbalanced drilling and workover and also in well control applications. When the unit is snubbing, it is pushing pipe or tubulars into the well bore against well bore pressures. Because of their small size and ability to work on wells under pressure, hydraulic workover units offer some advantages over larger workover rigs and conventional drilling rigs. However, most wells where we perform workover service are wells with no pressure.
As of December 31, 2004, we had 28 "stand alone" hydraulic workover units. Of these 28 units, 15 were located in the U.S., six were located in the Middle East, five were located in Venezuela and two were located in West Africa. In addition, we had labor and maintenance contracts on two non-owned hydraulic workover units in Algeria. Typically, our hydraulic workover units are contracted on a short-term dayrate basis. As a result, utilization of our hydraulic workover units varies from period to period. Our utilization rate for hydraulic workover units was 29.1% during 2004 compared to 30.7% in 2003. As of December 31, 2004, eight of our hydraulic workover units were working or under contract. The length of time necessary to complete a job depends on many factors, including the number of wells and the type of workover or pressure control situation involved. Usage of our hydraulic workover units is also affected by the availability of trained personnel. With our current level of trained personnel, we estimate that we have the capability to crew and operate 10 to 12 simultaneous jobs involving our hydraulic workover units.
Our three largest customers in workover services in 2004 were Sonatrach, ChevronTexaco Corporation and Total S.A. Our main competitors in workover services are Halliburton Company, Cudd Pressure Control and Superior Energy Services.
Drilling Services. Our drilling services business is located in Odessa, Texas and Wooster, Ohio and provides drilling services for shallow to medium depths ranging from 2,000 to 10,000 feet. Drilling services are typically used during the exploration and development stages of a field. We have a total of 18 semi-automatic drilling rigs with hydraulic pipe handling booms and lift capacities ranging from 200,000 to 300,000 pounds. We added three of these drilling rigs in 2002, one in December 2003 and one in each of February and December 2004. Fourteen of these drilling rigs are located in Odessa, Texas and four are located in Wooster, Ohio. As of December 31, 2004, all 18 rigs were working or under contract. Utilization increased from 88.4% in 2003 to 90.5% in 2004. On January 31, 2005, we acquired Elenburg Exploration Company Inc. which has a fleet of seven rigs and provides shallow drilling services in Montana, Wyoming, Colorado and Utah.
We market our drilling services directly to a diverse customer base, consisting of both major and independent oil companies. Our largest customers in drilling services in 2004 included Energen Resources Corporation, Apache Corporation and Anadarko Petroleum Corporation. Our main competitors are Star Drilling, Rodric Drilling and Union Drilling, Inc. The land drilling business is highly fragmented and consists of a small number of large companies and many smaller companies.
Rental Equipment. Our rental equipment business provides a wide range of products for use in the offshore and onshore oil and gas industry, including:
- wireline and coiled tubing pressure control equipment;
- pipe recovery systems;
- gravel pack operations on well bores; and,
- surface control equipment and down-hole tools utilized by coiled tubing operators.
Our rental equipment is used during the exploration, development, production and abandonment stages. As of December 31, 2004, we provided rental equipment at 21 U.S. distribution points in Texas, Louisiana, Oklahoma, Mississippi, New Mexico and Wyoming. We provide rental equipment on a day rental basis with rates varying depending on the type of equipment and the length of time rented.
Our three largest customers in rental equipment in 2004 were Schlumberger Well Services, Baker Atlas and BP plc. Our competitors in rental equipment include Boyd Oil Tool Rentals, Superior Energy Services, Inc. and Supreme Energy Services, Inc.
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 accommodation, 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 mining in the Fort McMurray region of Northern Canada, diamond mining in Northern Canada and other mining ventures throughout the world, pipeline construction, forestry, offshore construction,
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 we also have catering and facilities management activities in other international areas. During the peak of our operating season, we typically provide these services in over 200 separate locations throughout the world with separate location populations ranging from 20 to 2000 persons.
Work Force Accommodations, Catering and Logistics Services. We sell and lease portable living quarters, galleys, diners and offices and provide portable generators, water, sewage systems and catering services as part of our work force services. We provide various client-specific building configurations to customers for use in both onshore and offshore applications. We provide our integrated work force logistics services to customers under long-term and short-term contractual arrangements.
Modular Building Construction. 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.
In 2004, our three largest customers in work force accommodations, catering, logistics and modular building construction were Syncrude Canada Ltd, SNC-Lavelin Group Inc. and Nabors Drilling. Our main competitors are Atco Structures Limited, Compass Group PLC and Aramark Corporation.
EMPLOYEES
As of December 31, 2004, we had approximately 3,936 full-time employees, 31% of whom are in our offshore products segment, 67% of whom are in our well site services segment and 2% of whom are in our tubular services segment. We are party to collective bargaining agreements covering 662 employees located in Canada and the United Kingdom as of December 31, 2004. 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, 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 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.
The federal Comprehensive Environmental Response, Compensation, and Liability Act, CERCLA or 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 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 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 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 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.
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:
- the level of demand for and supply of oil and gas;
- fluctuations in the prices of oil and gas;
- the level of drilling activity;
- the level of offshore oil and gas developmental activities;
- general economic conditions;
- our ability to find and retain skilled personnel;
- the availability of capital; and
- the other factors identified under the captions "Risks Related to Our Business Generally" and "Risks Related to Our Operations" that follow.
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 to explore for, develop and produce oil and gas. If these expenditures decline, our business will suffer. The industry's willingness to explore, develop and produce depends largely upon the availability of attractive drilling prospects and the prevailing view of future product prices. Many factors affect the supply and demand for oil and gas and therefore influence product prices, including:
- the level of production;
- the levels of oil and gas inventories;
- the expected cost of developing new reserves;
- the actual cost of finding and producing oil and gas;
- the availability of attractive oil and gas field prospects which may be affected by governmental actions or environmental activists which may restrict drilling;
- the availability of transportation infrastructure and refining capacity;
- depletion rates;
- the level of drilling activity;
- worldwide economic activity including growth in underdeveloped countries;
- 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;
- the impact of armed hostilities involving one or more oil producing nations;
- the cost of developing alternate energy sources;
- environmental regulation; and
- tax policies.
EXTENDED PERIODS OF LOW OIL PRICES OR UNSUCCESSFUL EXPLORATION RESULTS MAY DECREASE DEEPWATER EXPLORATION AND PRODUCTION ACTIVITY AND ADVERSELY AFFECT OUR BUSINESS.
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. If oil prices remain near or below those levels used to determine economic viability for an extended period of time, deepwater activity and our business will be adversely affected.
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.
DISRUPTIONS IN THE POLITICAL AND ECONOMIC CONDITIONS OF THE FOREIGN COUNTRIES
IN WHICH WE OPERATE COULD ADVERSELY AFFECT OUR BUSINESS.
We have operations in various international areas, including parts of Africa, South America and the Middle East. Our operations in these areas increase our exposure to risks of war, terrorist attacks, local economic conditions, political disruption, civil disturbance and governmental policies that may:
- disrupt our operations;
- restrict the movement of funds or limit repatriation of profits;
- lead to U.S. government or international sanctions; and
- limit access to markets for periods of time.
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 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. A significant increase in the wages paid by competing employers could result in a reduction of our skilled labor force, increases in the wage rates that we must pay or both. If either of these events were to occur, our cost structure could increase 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 CUSTOMERS 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, resulting in higher prices for tubular goods. 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. 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 from a distributor. 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 hydraulic well control and drilling operations and our offshore products business are significantly affected by stringent and complex foreign, federal, 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 have changed in the past, and they are likely to change in the future. If existing regulatory requirements or enforcement policies change, 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:
- issuance of administrative, civil and criminal penalties;
- denial or revocation of permits or other authorizations;
- reduction or cessation in operations; and
- performance of site investigatory, remedial or other corrective actions.
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:
- we may not be able to continue to obtain insurance on commercially reasonable terms;
- 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;
- the dollar amount of any liabilities may exceed our policy limits; and
- we may incur losses from interruption of our business that exceed our insurance coverage.
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 industry's largest oilfield services providers. These companies have greater financial resources than we do. In addition, our business, particularly our tubular services business, may face competition from business-to-business internet auction activities. 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. Our Canadian work force accommodations, catering and logistics operations are significantly focused on the winter months when the winter freeze in remote regions permits 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. As a result, 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(R) technology. We may not be able to successfully preserve these intellectual property rights in the future and these rights could be invalidated, circumvented or challenged. In addition, the laws of some foreign countries in which our products and services may be 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 Douglas E. Swanson and other 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, 2004, goodwill represented approximately 28% 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 4 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 2004, we purchased from a single supplier approximately 50% of the tubular goods we distributed and from three suppliers approximately 69% 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.
RISKS RELATED TO OUR RELATIONSHIP WITH SCF
L.E. SIMMONS, THROUGH SCF, EXERTS SIGNIFICANT INFLUENCE ON THE OUTCOME OF STOCKHOLDER VOTING AND MAY EXERCISE THIS VOTING POWER IN A MANNER ADVERSE TO OUR STOCKHOLDERS.
SCF-III, L.P. and SCF-IV, L.P., private equity funds that focus on investments in the energy industry (collectively, "SCF"), together hold approximately 18% of the outstanding common stock of our company as of February 24, 2005. L.E. Simmons, the chairman of our board of directors, is the sole owner of L.E. Simmons & Associates, Incorporated, the ultimate general partner of SCF. Accordingly, Mr. Simmons, through his ownership of the ultimate general partner of SCF, is in a position to exert significant influence on the outcome of matters requiring a stockholder vote, including the election of directors, adoption of amendments to our certificate of incorporation or bylaws or approval of transactions involving a change of control. The interests of Mr. Simmons may differ from those of our stockholders, and SCF may vote its common stock in a manner that may adversely affect our stockholders.
SCF'S OWNERSHIP INTEREST AND 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.
In addition to SCF's position of significant influence, 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.
TWO OF OUR DIRECTORS MAY HAVE CONFLICTS OF INTEREST BECAUSE THEY ARE ALSO DIRECTORS OR OFFICERS OF SCF. THE RESOLUTION OF THESE CONFLICTS OF INTEREST MAY NOT BE IN OUR OR OUR STOCKHOLDERS' BEST INTERESTS.
Two of our directors, L.E. Simmons and Andrew L. Waite, are also current directors or officers of L.E. Simmons & Associates, Incorporated, the ultimate general partner of SCF. This may create conflicts of interest because these directors have responsibilities to SCF and its owners. Their duties as directors or officers of L.E. Simmons & Associates, Incorporated may conflict with their duties as directors of our company regarding business dealings between SCF and us and other matters. The resolution of these conflicts may not always be in our or our stockholders' best interest.
THE AVAILABILITY OF SHARES OF OUR COMMON STOCK FOR FUTURE SALE COULD DEPRESS
OUR STOCK PRICE
Sales by SCF and other stockholders of a substantial number of shares of our common stock in the public markets, or the perception that such sales might occur, could have a material adverse effect on the price of our common stock or could impair our ability to obtain capital through an offering of equity securities. SCF has sold shares recently and made stock distributions to its partners and may continue to do so in the future. SCF's ownership percentage has decreased from 40% at February 27, 2004 to 18% at February 23, 2005.
ITEM 2. PROPERTIES
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................. 47,500 Molding facility for offshore
products
Tulsa, Oklahoma................. 74,600 Molding facility for offshore
products
Houma, Louisiana................ 153,000 Offshore products manufacturing
facility and yard
Houma, Louisiana (lease)........ 108,714 Offshore products manufacturing
facility and yard
Crosby, Texas................... 109 acres Tubular yard
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APPROXIMATE
SQUARE
LOCATION FOOTAGE/ACREAGE DESCRIPTION
-------- --------------- -----------
Belle Chasse, Louisiana......... 395,292 Accommodations manufacturing
facility and yard for well site
services
Lafayette, Louisiana (lease).... 9 acres Accommodations equipment repair
yard for well site services
Houma, Louisiana................ 62,470 Well control yard and office for
well site services
Houma, Louisiana................ 9,000 Well control office and training
for well site services
Broussard, Louisiana............ 18,875 Rental tool warehouse 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
Alvin, Texas.................... 36,150 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)......... 45,216 Offshore products manufacturing
facility
Macae, Brazil (lease)........... 6 acres Offshore products manufacturing
facility and yard
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
Edmonton, Alberta............... 31,000 Accommodations office and
warehouse 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
Peace River, Alberta (lease).... 80 acres Accommodations equipment yard for
well site services
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We have six tubular sales offices and a total of 21 rental tool supply and distribution points in Texas, Louisiana, New Mexico, Mississippi, Oklahoma and Wyoming. Most of these office locations 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 warranty and product liability claims and 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 insurance, will not have a material adverse effect on our 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 $439,000 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. The Company and independent counsel retained by the Company's audit committee conducted separate investigations consisting of interviews and a thorough examination of the facts and circumstances in this matter. The Company has voluntarily reported the results of its investigation to the Securities and Exchange Commission (the "SEC") and will fully cooperate with any requests for information received from the SEC.
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 2004.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
COMMON STOCK INFORMATION
Our authorized common stock consists of 200,000,000 shares of common stock. There were 49,583,286 shares of common stock outstanding as of February 11, 2005, including 276,183 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 11, 2005 was 58. 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 11, 2005 was $20.59 per share.
The following table sets forth the range of high and low sale prices of the Company's common stock.
SALES PRICE
-------------
HIGH LOW
----- -----
2003:
First Quarter............................................. 13.16 10.43
Second Quarter............................................ 13.85 9.95
Third Quarter............................................. 12.79 10.73
Fourth Quarter............................................ 14.84 11.85
2004:
First Quarter............................................. 16.35 12.75
Second Quarter............................................ 15.72 13.06
Third Quarter............................................. 19.05 15.21
Fourth Quarter............................................ 21.10 17.80
2005:
First Quarter (through February 11, 2005)................. 20.93 17.35
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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. The Company's Board of Directors has authorized the repurchase of shares of the Company's common stock, par value $.01 per share. The Board of Directors authorized the expenditure of up to $50 million to repurchase shares.
EQUITY COMPENSATION PLANS
The information relating to the Company's equity compensation plans required by Item 5 is incorporated by reference to such information as set forth Item 12. "Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters" contained herein.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data on the following pages include selected historical and unaudited pro forma financial information of our company as of and for each of the five years ended December 31, 2004. The following data should be read in conjunction with Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations and the Company's 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
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------
2004 2003 2002 2001 2000 2001 2000
-------- -------- -------- -------- -------- --------------- -----------
CONSOLIDATED
CONSOLIDATED PRO FORMA(1) AND COMBINED(5) COMBINED(5)
------------------------------ ------------------- --------------- -----------
Statements of Operations Data:
Revenue............................ $971,012 $723,681 $616,848 $719,722 $595,647 $671,205 $304,549
Expenses
Product costs, service and other
costs.......................... 774,638 573,114 487,053 582,934 482,662 537,792 217,601
Selling, general and
administrative................. 64,810 57,710 51,791 51,157 46,146 50,024 37,816
Depreciation and
amortization(2)................ 35,988 27,905 23,312 28,693 26,729 28,039 21,314
Other operating expense
(income)....................... 460 (215) 132 (347) (69) (346) (69)
-------- -------- -------- -------- -------- -------- --------
Operating income................... 95,116 65,167 54,560 57,285 40,179 55,696 27,887
-------- -------- -------- -------- -------- -------- --------
Net interest expense............... (7,304) (7,541) (4,394) (9,178) (9,260) (9,458) (11,504)
Other income....................... 956 1,028 867 87 89 88 89
-------- -------- -------- -------- -------- -------- --------
Income before income taxes......... 88,768 58,654 51,033 48,194 31,008 46,326 16,472
Income tax expense(3).............. (29,406) (14,222) (11,357) (2,090) (4,542) (2,054) (10,776)
-------- -------- -------- -------- -------- -------- --------
Income before minority interest.... 59,362 44,432 39,676 46,104 26,466 44,272 5,696
Minority interest.................. -- -- -- 4 (30) (1,596) (4,248)
-------- -------- -------- -------- -------- -------- --------
Net Income......................... $ 59,362 $ 44,432 $ 39,676 $ 46,108 $ 26,436 $ 42,676 $ 1,448
======== ======== ======== ======== ======== ======== ========
Net Income per common share
Basic............................ $ 1.20 $ 0.92 $ 0.82 $ 0.96 $ 0.55 $ 0.94 $ 0.05
======== ======== ======== ======== ======== ======== ========
Diluted.......................... $ 1.19 $ 0.90 $ 0.81 $ 0.95 $ 0.55 $ 0.93 $ 0.04
======== ======== ======== ======== ======== ======== ========
Average shares outstanding
Basic............................ 49,329 48,529 48,286 48,198 48,013 45,263 24,482
======== ======== ======== ======== ======== ======== ========
Diluted.......................... 50,027 49,215 48,890 48,619 48,358 46,045 26,471
======== ======== ======== ======== ======== ======== ========
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YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------
2004 2003 2002 2001 2000 2001 2000
--------- -------- -------- ------- ------- --------------- -----------
CONSOLIDATED
CONSOLIDATED PRO FORMA (1) AND COMBINED(5) COMBINED(5)
------------------------------- ----------------- --------------- -----------
Other Data:
EBITDA as defined(4)................... $ 132,060 $ 94,100 $ 78,739 $86,069 $66,967 $ 82,227 $ 45,042
Capital expenditures................... 60,041 41,261 26,086 29,671 21,383
Net cash provided by operating
activities........................... 97,167 58,703 45,375 54,872 33,937
Net cash used in investing activities,
including capital expenditures....... (137,713) (54,902) (89,428) (22,667) (22,377)
Net cash provided by (used in)
financing activities................. 38,816 4,319 50,381 (32,415) 304
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AT DECEMBER 31,
-------------------------------------------------------
2004 2003 2002 2001 2000
-------- -------- -------- -------- -----------
CONSOLIDATED COMBINED(5)
----------------------------------------- -----------
Balance Sheet Data:
Cash and cash equivalents................................ $ 19,740 $ 19,318 $ 11,118 $ 4,982 $ 4,821
Net property, plant and equipment........................ 227,343 194,136 167,146 150,090 143,468
Total assets............................................. 933,612 717,186 644,216 529,883 353,518
Long-term debt and capital leases, excluding current.
portion................................................ 173,887 136,246 133,292 73,939 102,614
Redeemable preferred stock of subsidiaries............... -- -- -- -- 25,293
Total stockholders' equity............................... 530,024 455,111 387,579 344,197 56,549
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(1) The unaudited pro forma statements of operations and other financial data for 2000 and 2001 give effect to:
- our initial public offering in February 2001 of 10,000,000 shares at $9.00 per share and the application of the net proceeds to us;
- our issuance of 4,275,555 shares of common stock to SCF in exchange for approximately $36.0 million of our indebtedness held by SCF (SCF Exchange) effected in connection with our initial public offering;
- the three-for-one reverse stock split of Oil States common stock effected in connection with our initial public offering;
- the combination of Oil States, HWC and PTI immediately prior to our initial public offering, excluding the minority interest of each company, as entities under common control from the dates such common control was established using reorganization accounting, which yields results similar to pooling of interest accounting;
- the acquisition of the minority interests of Oil States, HWC and PTI in the Combination using the purchase method of accounting as if the acquisition occurred on January 1, 2000 and 2001, respectively; and
- the acquisition of Sooner in the Combination using the purchase method of accounting as if the acquisition occurred on January 1, 2000 and 2001, respectively.
(2) In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard ("SFAS") No. 142, "Goodwill and Other Intangible Assets," which we adopted effective January 1, 2002. Under SFAS 142, goodwill and intangible assets deemed to have indefinite lives are no longer amortized but are subject to annual impairment tests. Accordingly, beginning in 2002, we no longer amortize goodwill. See "Risks Related to Our Operations -- If we have to write off a significant amount of goodwill, our earnings will be negatively affected" in "Item 1. Business" above.
(3) Our effective tax rate was affected significantly by our net operating loss carry forwards in years prior to 2004. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations -- Tax Matters" in this Annual Report on Form 10-K.
(4) 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,
---------------------------------------------------------------------------------
2004 2003 2002 2001 2000 2001 2000
-------- ------- ------- ------- ------- ---------------- -----------
CONSOLIDATED AND
CONSOLIDATED PRO FORMA(1) COMBINED(5) COMBINED(5)
---------------------------- ----------------- ---------------- -----------
Net income........... $ 59,362 $44,432 $39,676 $46,108 $26,436 $42,676 $ 1,448
Depreciation and
amortization....... 35,988 27,905 23,312 28,693 26,729 28,039 21,314
Interest expense,
net................ 7,304 7,541 4,394 9,178 9,260 9,458 11,504
Income taxes......... 29,406 14,222 11,357 2,090 4,542 2,054 10,776
-------- ------- ------- ------- ------- ------- -------
EBITDA as defined.... $132,060 $94,100 $78,739 $86,069 $66,967 $82,227 $45,042
======== ======= ======= ======= ======= ======= =======
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(5) Prior to our initial public offering in February 2001, SCF-III, L.P. owned majority interests in Oil States, HWC and PTI, and SCF-IV, L.P. owned a majority interest in Sooner. L. E. Simmons & Associates, Incorporated is the ultimate general partner of SCF-III, L.P. and SCF-IV, L.P. L.E. Simmons, the chairman of our board of directors, is the sole shareholder of L.E. Simmons & Associates, Incorporated. Immediately prior to the closing of our initial public offering, the Combination closed and HWC, PTI and Sooner merged with wholly owned subsidiaries of Oil States. As a result, HWC, Sooner and PTI became our wholly owned subsidiaries.
The financial results of Oil States, HWC and PTI have been combined from the beginning of calendar 2001 until February 14, 2001 using reorganization accounting, which yields results similar to the pooling of interests method and are the basis of the Combined Financial Information presented herein. The Consolidated and Combined Financial Information presented herein include the combined financial results of Oil States, HWC and PTI until February 14, 2001 and the Consolidated Financial Information of the Company thereafter.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis together with "Selected Financial Data" and our financial statements and the notes to those statements included elsewhere in this Annual Report on Form 10-K.
This discussion contains forward-looking statements based on our current expectations, assumptions, estimates and projections about us and our industry. These forward-looking statements involve risks and uncertainties. Our actual results could differ materially from those indicated in these forward-looking statements as a result of certain factors, as more fully described under "Cautionary Statement Regarding Forward-Looking Statements" in this Form 10-K. Except to the extent required by law, we undertake no obligation to update publicly any forward-looking statements, even if new information becomes available or other events occur in the future.
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.
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, warranty claims, contract claims and discontinued operations.
The determination of impairment on long-lived assets, including goodwill, is conducted when indicators of impairment are present. If such indicators were present, the determination of the amount of impairment would be based on 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, 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 record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. While we have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event we were to determine that we would be able to realize our deferred tax assets in the future in excess of our net recorded amount, an adjustment to the deferred tax asset would increase income in the period such determination was made. Likewise, should we determine that we would not likely be able to realize all or part of our net deferred tax asset in the future, an adjustment to the deferred tax asset would be charged to expense in the period such determination was made.
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.
OVERVIEW
We provide a broad range of products and services to the oil and gas industry through our offshore products, well site services and tubular 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 of our offshore products and services depend upon the development of
offshore production systems, repairs and upgrades of existing drilling rigs and construction of new drilling rigs. In this segment, we are particularly influenced by deepwater drilling and production activities, which is driven largely by our customers' outlook for longer-term future oil prices. In our well site services business segment, we provide hydraulic well control services, pressure control equipment and rental tools, drilling rigs and work force accommodations, catering and logistics services. Demand for our well site services depends upon the level of worldwide drilling and workover activity. We have also seen increased demand in our work force accommodation business as a result of oil sands development activities in Northern Alberta, Canada. Through our tubular services segment, we distribute a broad range of casing and tubing. Sales of tubular products and services depend upon the overall level of drilling activity, the types of wells being drilled and the level of OCTG pricing. Historically, tubular services gross margins expand during periods of rising OCTG prices and contract during periods of decreasing OCTG prices.
We have a diversified product and service offering which has exposure throughout the oil and gas cycle. Demand for our tubular services and well site services is highly correlated to movements in the rig count in the United States. The table below sets forth a summary of North American rig activity, as measured by Baker Hughes Incorporated, as of and for the periods indicated.
AVERAGE RIG COUNT FOR THE YEAR ENDED
DECEMBER 31,
-------------------------------------
2004 2003 2002 2001 2000
----- ----- ----- ----- -----
U.S. Land................................. 1,093 924 718 1,003 778
U.S. Offshore............................. 97 108 113 153 140
----- ----- ----- ----- -----
Total U.S. .................................. 1,190 1,032 831 1,156 918
Canada(1).................................... 369 372 266 341 345
----- ----- ----- ----- -----
Total North America....................... 1,559 1,404 1,097 1,497 1,263
===== ===== ===== ===== =====
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(1) Canadian rig counts typically increase during the peak winter drilling season.
The average North American rig count for the year ended December 31, 2004 increased 155 rigs, or 11%, compared to the year ended December 31, 2003. This overall increase in activity, while tempered somewhat by lower activity levels in the U.S. Gulf of Mexico did contribute to increased revenues in our well site services segment. Our well site services results for 2004 also benefited from acquisitions made in our rental tool business in the fourth quarter of 2003 and in January and April of 2004 (see "Liquidity and Capital Resources" on page 30), contributions from three newly built rigs working in West Texas, which started working in December 2003, February 2004 and December 2004, respectively, and the impact of pricing gains in certain business lines. The Canadian rig count was flat between 2003 and 2004; however, our operations benefited from increased activity in support of oil sands development and an international catering and facilities management contract. Offshore products results weakened compared to 2003 primarily due to decreased activity and revenues during the year, which also led to reduced cost absorption in several of the company's manufacturing facilities. Additionally, offshore products margins were lower in 2004 compared to 2003 due to a less favorable mix of higher margin connector products, and due to inefficiencies associated with various facility consolidations undertaken during 2004. However, offshore products' revenues have improved sequentially in the most recent three quarters and margins improved from the beginning of 2004. Backlog totaled $97.5 million at December 31, 2004, $87.3 million at September 30, 2004 and $62.6 at December 31, 2003. However, project mix in our December 31, 2004 backlog is still not weighted towards our higher margin connector products. We believe that the offshore construction and development business is characterized by lengthy projects and a long "lead-time" order cycle. While change in backlog levels from one quarter to the next does not necessarily evidence a long-term trend, we believe activity levels in our offshore products segment will increase in future quarters, given the growth in our backlog, when compared to December 31, 2003.
On May 11, 2004, our tubular services segment purchased the OCTG distribution business of Hunting Energy Services, L.P. (Hunting) for $47.0 million, including a purchase price adjustment settled in October
2004. Under the terms of the transaction, we purchased Hunting's U.S. tubular inventory, assumed certain customer contracts and entered into supply and distribution relationships with Hunting. Substantially all of the purchase price was assigned to the OCTG inventory acquired.
Our tubular services segment shipped 339.8 thousand tons of OCTG in 2004 compared to 269.0 thousand tons in 2003. Our tubular services segment benefited during 2004 from a 18% year over year increase in average U.S. land drilling activity, the acquisition of the Hunting OCTG distribution business and a significant increase in OCTG prices. Tubular services margins expanded during 2004 and reached historically high levels given the significant increase in OCTG prices coupled with strong demand. These benefits were partially offset by lower offshore activity in the U.S. Gulf of Mexico.
During 2004, the results generated by our Canadian workforce accommodations, catering and logistics operations benefited from strengthening of the Canadian currency. The Canadian dollar vs. U.S. dollar conversion rate averaged $0.77 in 2004 compared to $0.71 in 2003. The financial impact of the stronger Canadian dollar was greater when comparing the first quarter 2004 to 2003, a period of seasonal strength in Canada. Movement in the Canadian dollar vs. U.S. dollar exchange rates caused the majority of change in the cumulative translation adjustment.
The Company's income tax provision for the year 2004 totaled $29.4 million, or 33.1% of pretax income. Our effective tax rate increased in 2004 compared to 2003's effective tax rate of 24.2% because of the effect of greater NOL benefits recognized in the earlier period. See Note 7 to the Consolidated Financial Statements.
Management believes that fundamental oil and gas supply and demand factors will continue to support a high level of drilling activity in North America over time which should continue to positively impact the Company, particularly its well site services and tubular services businesses. We believe that oil and gas producers have increased their view of longer term oil and gas prices based on current supply and demand fundamentals, even though they are still at levels below current prices. As a result, our customers could increase their spending on deepwater offshore exploration and development which should benefit our offshore products segment. However, there can be no assurance that these expectations will be realized.
CONSOLIDATED RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
------------------------
2004 2003 2002
------ ------ ------
Revenues
Well site services....................................... $336.9 $256.1 $209.8
Offshore products........................................ 206.8 231.9 190.6
Tubular services......................................... 427.3 235.7 216.4
------ ------ ------
Total................................................. $971.0 $723.7 $616.8
====== ====== ======
Gross margin
Well site services....................................... $108.1 $ 80.9 $ 63.1
Offshore products........................................ 37.6 56.0 52.9
Tubular services......................................... 50.7 13.7 13.8
------ ------ ------
Total................................................. $196.4 $150.6 $129.8
====== ====== ======
Gross margin as a percent of revenues
Well site services....................................... 32.1% 31.6% 30.1%
Offshore products........................................ 18.2% 24.1% 27.8%
Tubular services......................................... 11.9% 5.8% 6.4%
Total................................................. 20.2% 20.8% 21.0%
Operating income (loss)
Well site services....................................... $ 55.5 $ 37.2 $ 27.4
Offshore products........................................ 7.2 27.9 27.3
Tubular services......................................... 40.9 6.0 5.4
Corporate/other.......................................... (8.5) (5.9) (5.5)
------ ------ ------
Total................................................. $ 95.1 $ 65.2 $ 54.6
====== ====== ======
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Within our well site services segment, we have four reportable business units as follows:
YEAR ENDED DECEMBER 31,
------------------------
2004 2003 2002
------ ------ ------
Revenues
Accommodations........................................... $190.0 $144.8 $117.6
Rental tools............................................. 66.9 43.2 35.7
Land drilling............................................ 46.4 35.6 27.5
Hydraulic workover....................................... 33.6 32.5 29.0
------ ------ ------
Total................................................. $336.9 $256.1 $209.8
====== ====== ======
Gross margin
Accommodations........................................... $ 55.5 $ 40.7 $ 29.6
Rental tools............................................. 30.4 21.4 18.4
Land drilling............................................ 14.6 10.3 6.3
Hydraulic workover....................................... 7.6 8.5 8.8
------ ------ ------
Total................................................. $108.1 $ 80.9 $ 63.1
====== ====== ======
Gross margin as a percent of revenues
Accommodations........................................... 29.2% 28.1% 25.2%
Rental tools............................................. 45.4% 49.5% 51.5%
Land drilling............................................ 31.5% 28.9% 22.9%
Hydraulic workover....................................... 22.6% 26.2% 30.3%
Total................................................. 32.1% 31.6% 30.1%
Operating income
Accommodations........................................... $ 33.6 $ 22.9 $ 16.6
Rental tools............................................. 10.7 5.5 6.0
Land drilling............................................ 10.5 6.8 3.6
Hydraulic workover....................................... 0.7 2.0 1.2
------ ------ ------
Total................................................. $ 55.5 $ 37.2 $ 27.4
====== ====== ======
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YEAR ENDED DECEMBER 31, 2004 COMPARED TO YEAR ENDED DECEMBER 31, 2003
Revenues. Revenues increased $247.3 million, or 34.2%, to $971.0 million during the year ended December 31, 2004 compared to revenues of $723.7 million during the year ended December 31, 2003. Tubular services revenues and tons shipped increased $191.6 million, or 81.3%, and 70.8 thousand tons, or 26.3%, respectively, in the year ended December 31, 2004 compared to revenues and tons shipped in the year ended December 31, 2003 due to increased industry demand, higher OCTG prices, and contributions from the acquisition of the Hunting OCTG distribution business which was closed in May 2004. Well site services revenues increased $80.8 million, or 31.6%, while offshore products revenues decreased $25.1 million, or 10.8%, during the same period. Well site services revenues increased compared to the prior year due primarily to increased drilling activity in the United States, increased oil sands development activity in Canada, an international catering and facilities management contract, favorable Canadian dollar exchange rates, the impact of capital expenditures made since December 31, 2003 and rental tool acquisitions which were acquired for total consideration of $50.1 million. These rental tool acquisitions were completed in the fourth quarter of 2003 and in January and April of 2004. Offshore products revenues decreased as a result of lower activity supporting offshore production facility construction given the typical lengthy time period between offshore discoveries and installation of production facilities.
Gross Margin. Our gross margins, which we calculate before a deduction for depreciation expense, increased $45.8 million, or 30.4%, from $150.6 million in the year ended December 31, 2003 to $196.4 million in the year ended December 31, 2004. Our overall gross margin as a percent of revenues was essentially flat in the current year compared to 2003. Well site services gross margins increased $27.2 million, or 33.6%, to $108.1 million in the year ended December 31, 2004 compared to the year ended December 31, 2003. Within our well site services segment, our shallow drilling and specialty rental tool businesses' gross margins increased $4.3 million, or 42.1%, and $9.0 million, or 42.4%, respectively, during the year ended December 31, 2004 compared to the year 2003. Three drilling rigs were added in our shallow drilling business (added in December 2003, February 2004 and December 2004). In addition, we realized higher utilization and footage drilling rates for all of our drilling rigs and contributions from rental tool acquisitions completed in the fourth quarter of 2003 and in January and April 2004. Also in well site services, our work force accommodations, catering and logistics services and modular building construction services gross margins increased by $14.8 million, or 36.4%, in the year ended December 31, 2004 compared to the year ended December 31, 2003 primarily because of increased camp and catering activity supporting oil sands development in Canada and an international catering and facilities management contract. Our hydraulic workover gross margins decreased by $0.9 million, or 10.8%, as a result of decreased utilization, especially in West Africa and the Middle East. Our well site services gross margin percent increased slightly to 32.1% in the year ended December 31, 2004 compared to 31.6% in the year ended December 31, 2003.
Offshore products gross margins decreased $18.4 million, or 32.9%, from $56.0 million in the year ended December 31, 2003 to $37.6 million in the year ended December 31, 2004 due to decreased activity, reduced fixed cost absorption and inefficiencies associated with various facilities consolidations undertaken during 2004. Additionally, offshore products margins were lower in the current period compared to last year due to a less favorable mix of higher margin connector products. These factors caused offshore products gross margin percent to decline from 24.1% of revenues in the year 2003 to 18.2% in the year 2004.
Tubular services gross margins increased to $50.7 million, or 11.9% of tubular services revenues, in the year ended December 31, 2004 compared to $13.7 million, or 5.8% of tubular services revenues, in the year ended December 31, 2003 as a result of increased oil and gas drilling activity which increased demand for our tubular products and services, a significant increase in OCTG prices during 2004 and the acquisition of the OCTG distribution business of Hunting for $47.0 million in May 2004, including a purchase price adjustment settled in October 2004. Tubular services margins expanded during 2004 and reached historically high levels given the significant increase in OCTG prices coupled with strong demand.
Selling, General and Administrative Expenses. During the year ended December 31, 2004, selling, general and administrative expenses (SG&A) totaled $64.8 million, or 6.7% of revenues, compared to SG&A of $57.7 million, or 8.0% of revenues, for the year ended December 31, 2003. SG&A expense increased primarily as a result of acquisitions completed in 2003 and 2004, higher postretirement benefit costs in the current year due to the recording of a gain upon settlement of plan liabilities in the prior year, higher professional fees and higher bonus accruals under the incentive compensation plan. The increase in professional fees was largely attributable to costs associated with Sarbanes-Oxley compliance.
Depreciation and Amortization. Depreciation and amortization expense increased $8.1 million in 2004 compared to 2003 due primarily to acquisitions of businesses completed since 2003 and capital expenditures made in the past year.
Operating Income. Our operating income represents revenues less (i) cost of sales, (ii) selling, general and administrative expenses, (iii) depreciation and amortization expense, and (iv) other operating expense (income). Our operating income increased $29.9 million, or 45.9%, to $95.1 million for the year ended December 31, 2004 from $65.2 million for the year ended December 31, 2003. Well site services operating income increased $18.3 million during the period. Offshore products operating income decreased $20.7 million while tubular services operating income increased $34.9 million. Corporate and other charges increased by $2.6 million in the current period.
Interest Expense. Interest expense was lower by $0.2 million in the year ended December 31, 2004 compared to the year ended December 31, 2003. Increased interest expense attributable to higher debt levels
resulting from acquisitions completed during the first half of 2004 and higher interest rates in 2004 was more than offset by lower debt issuance cost amortization compared to the prior period.
Income Tax Expense. Income tax expense totaled $29.4 million, or 33.1% of pretax income, during the year ended December 31, 2004 compared to $14.2 million, or 24.2% of pretax income, during the year ended December 31, 2003. See "Tax Matters" discussion following.
YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002
Revenues. Revenues increased $106.9 million, or 17.3%, to $723.7 million during the year ended December 31, 2003 compared to revenues of $616.8 million during the year ended December 31, 2002. Well site services revenues increased $46.3 million, or 22.1%, and offshore products revenues increased $41.3 million, or 21.7%, during the same period. Well site services revenues increased compared to the prior year primarily due to increased drilling activity in Canada and the United States, favorable Canadian dollar exchange rates, which strengthened compared to the U.S. dollar in 2003 compared to 2002 resulting in an increase of approximately $14.0 million, and the impact of acquisitions completed in the third quarter of 2002. Canadian expenses were also impacted by exchange rate movements in 2003 compared to 2002 and offset some of these revenue gains. Offshore products revenues increased primarily as a result of greater activity supporting offshore production facility construction, primarily in the U.S. Gulf of Mexico, and the impact of acquisitions completed in the third quarter of 2002. Tubular services revenues increased $19.3 million, or 8.9%, in the year ended December 31, 2003 compared to the prior year. This revenue increase resulted from greater quantities shipped caused by higher rig counts partially offset by lower international sales and reduced revenue per ton shipped caused by product mix oriented to shallow land drilling.
Gross Margin. Our gross margins, which we calculate before a deduction for depreciation expense, increased $20.8 million, or 16.0%, from $129.8 million in the year ended December 31, 2002 to $150.6 million in the year ended December 31, 2003.
Well site services gross margins increased $17.8 million, or 28.2%, to $80.9 million in the year ended December 31, 2003. Within our well site services segment, shallow drilling and specialty rental tool businesses' gross margins increased $4.0 million, or 61.9%, and $3.0 million, or 16.2%, respectively, during the year ended December 31, 2003 compared to the year ended December 31, 2002 primarily as a result of rigs added to the fleet and the rental tool acquisitions completed. Also in the well site services segment, our work force accommodations, catering and logistics services and modular building construction services gross margins increased by $11.1 million, or 37.5%, during the year ended December 31, 2003 compared to the year ended December 31, 2002 because of increased camp and catering activity in Canada and an international catering and facilities management contract. Our hydraulic workover gross margins decreased by $0.3 million, or 2.3%, as a result of decreased activity in Venezuela and a reclassification of certain field expenses, formerly classified as selling, general and administrative expenses, to operating expense. These decreases were almost fully offset by increased gross margin from work in Algeria, which commenced in late 2002. Gross margin as a percent of revenues in well site services increased from 30.1% in 2002 to 31.6% in 2003 primarily because of more profitable accommodations operations caused by higher activity levels.
Offshore products gross margins increased $3.1 million, or 5.9%, from $52.9 million in the year ended December 31, 2002 to $56.0 million during 2003 primarily due to increased revenues from shipments and work in progress. Our offshore products gross margin percentage declined by 3.7% due primarily to a greater percentage of lower-margin fabrication work compared to the prior period and to certain project losses incurred in our subsea pipeline operations and to reduced margins in our winch and crane businesses. Tubular services gross margins decreased to $13.7 million, or 5.8% of tubular services revenues in the year ended December 31, 2003 compared to $13.8 million, or 6.4% of tubular services revenues, in the year ended December 31, 2002 as a result of higher margin sales during 2002, especially in the fourth quarter, and foreign sales, which occurred primarily in the first half of 2002, and did not reoccur in 2003.
Selling, General and Administrative Expenses. During the year ended December 31, 2003, selling, general and administrative expenses (SG&A) totaled $57.7 million, or 8.0% of revenues, compared to SG&A of $51.8 million, or 8.4% of revenues, for the year ended December 31, 2002. Increased SG&A expense
primarily resulted from acquisitions completed in the third quarter of 2002. This increase was only partially offset by lower post employment benefit costs caused by the settlement of certain plan liabilities during 2003.
Depreciation and Amortization. Depreciation and amortization expense increased $4.6 million in 2003 compared to 2002 due primarily to acquisitions of businesses completed in 2002 and capital expenditures made in 2002 and 2003.
Operating Income. Our operating income represents revenues less (i) cost of sales, (ii) selling, general and administrative expenses and (iii) depreciation and amortization expense plus other operating income. Our operating income increased $10.6 million, or 19.4%, to $65.2 million for the year ended December 31, 2003 from $54.6 million during 2002. Well site services operating income increased by $9.8 million, or 35.8%, while offshore products operating income increased by $0.6 million, or 2.2%. Tubular Services operating income was $6.0 million during the year ended December 31, 2003 compared to $5.4 million for the year ended December 31, 2002, an increase of $0.6 million, or 11.1%. Corporate and other charges increased by $0.4 million in 2003 compared to 2002.
Interest Expense. Interest expense increased $3.0 million, or 61.2%, to $7.9 million for the year ended December 31, 2003 compared to $4.9 million for the year ended December 31, 2002. Increased interest expense was attributable to higher debt levels resulting from acquisitions completed during the third quarter of 2002, capital expenditures made during 2002 and 2003 and the write-off of $1.2 million, after taxes, of unamortized debt issue costs in the fourth quarter of 2003 upon the closing of a new bank credit agreement.
Income Tax Expense. Income tax expense totaled $14.2 million, or 24.2% of pretax income, during the year ended December 31, 2003 compared to $11.4 million, or 22.3% of pretax income, during the year ended December 31, 2002. Decreased amounts of net operating loss carryforwards available to offset taxable income resulted in a higher annual effective tax rate for the year 2003 compared to 2002.
LIQUIDITY AND CAPITAL RESOURCES
Our primary liquidity needs are to fund capital expenditures, such as expanding and upgrading our manufacturing facilities and equipment, building new drilling rigs, increasing and replacing rental tool and workover assets, and our accommodation units, 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 and proceeds from borrowings under our bank facilities.
Cash was provided by operations during the year ended December 31, 2004 and 2003 in the amounts of $97.2 million and $58.7 million, respectively. Cash provided by operations in 2004 was generated by our net income plus depreciation and amortization, net of working capital changes during 2004. Working capital changes used $6.4 million of operating cash flow in the year 2004 compared to $17.4 million in the comparable period in 2003.
Cash was used in investing activities during the years ended December 31, 2004 and 2003 in the amount of $137.7 million and $54.9 million, respectively. Capital expenditures totaled $60.0 million and $41.3 million during the years ended December 31, 2004 and 2003, respectively. Capital expenditures in both years consisted principally of purchases of assets for our well site services businesses and for consolidation of our offshore products manufacturing capacity. Acquisitions totaled $80.8 million during the year ended December 31, 2004. During 2004, the Company completed the acquisition of several rental tool companies $37.8 million, net of cash acquired. These companies have been merged into our rental tool subsidiary, and report through the well site services segment. In addition, we acquired the OCTG distribution business of Hunting which required a cash outlay of $47.0 million in 2004. These acquisitions resulted in increased working capital investments, particularly accounts receivable and inventory. We expect to fund future capital expenditures with internally generated funds and proceeds from borrowings under our revolving credit facilities.
Net cash of $38.8 million was provided by financing activities during the year ended December 31, 2004, primarily as a result of revolving credit borrowings which were utilized to fund acquisitions.
Our primary bank credit facility (the Credit Agreement) was amended, effective January 31, 2005, to increase our availability under the facility from $250 million to $325 million and extend the maturity from October 30, 2007 to January 31, 2010. The Credit Agreement 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, and 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). Our average borrowing rate for balances outstanding during 2004 was 3.6%. We must pay a quarterly commitment fee, based on our leverage ratio, on the unused commitments under the Credit Agreement.
As of December 31, 2004, we had $172.6 million outstanding under the Credit Agreement and an additional $10.8 million of outstanding letters of credit, leaving $66.6 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 additional aggregate borrowing capacity of $8.8 million. We had no borrowings outstanding under these facilities as of December 31, 2004. Our total debt represented 24.7% of our total capitalization at December 31, 2004. With the amended credit facility effective January 31, 2005, our availability has increased to approximately $126 million as of February 14, 2005, which is after the funding of our acquisition of Elenburg Exploration Company, Inc. for total consideration of $22 million (including cash of $21.3 million) on February 1, 2005. The Company's Board of Directors has authorized the repurchase of shares of the Company's common stock, par value $.01 per share. The Board of Directors authorized the expenditure of up to $50 million to repurchase shares.
We believe that cash from operations and available borrowings under our credit facilities will be sufficient to meet our liquidity needs for the foreseeable future. If our plans or assumptions change or are inaccurate, or 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 debt and lease obligations at December 31, 2004 (in thousands):
DUE IN LESS DUE IN DUE IN DUE AFTER
DECEMBER 31, 2004 TOTAL THAN 1 YEAR 1-3 YEARS 3-5 YEARS 5 YEARS
----------------- -------- ---------------- --------- ---------- ---------
Debt and lease obligations:
Long-term debt, including capital
leases............................. $174,115 $ 228 $173,841(1) $ 46 $ --
Non-cancelable operating leases...... 11,942 3,656 3,559 1,989 2,738
-------- ------ -------- ------ ------
Total contractual cash obligations... $186,057 $3,884 $177,400 $2,035 $2,738
======== ====== ======== ====== ======
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(1) The Company amended its bank credit agreement, effective January 31, 2005, to extend the maturity to the year 2010. See Note 5 to the Consolidated Financial Statements.
Our debt obligations at December 31, 2004 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, 2004. We do not have any off balance sheet arrangements.
TAX MATTERS
Our primary deferred tax asset, which totaled approximately $12.5 million at December 31, 2004, is related to $35.8 million in available federal net operating loss carryforwards, or NOLs, as of that date. A valuation allowance of approximately $5.1 million was provided against the deferred tax asset associated with our NOLs at December 31, 2004. The NOLs will expire in varying amounts during the years 2008 through 2020 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. A successive change in control was triggered in 2003 pursuant to Section 382; however, it did not significantly change our NOL utilization expectations.
Our income tax provision for the year ended December 31, 2004 totaled $29.4 million, or 33.1% of pretax income. The income tax provision for the year 2004 included a $6.9 million income tax benefit related to the partial reversal of the valuation allowance applied against NOLs which were recorded as of the prior year end. Based upon positive earnings that we have generated for both financial and tax reporting purposes since our formation, we believed that we would more likely than not generate sufficient taxable income in future years to realize the benefit of all but $5.1 million of the deferred tax asset associated with these net operating losses. Following the recognition of the $6.9 million income tax benefit during the year 2004, we have recognized the associated income tax benefit, on a cumulative basis, of approximately $21.2 million of our $35.8 million of available federal net operating loss carryforwards.
RECENT ACCOUNTING PRONOUNCEMENTS
In January 2003, the Financial Accounting Standards Board (FASB) issued
FASB Interpretation No. 46 (FIN 46) and, in December 2003, an amendment -- FIN
46(R) ("FIN 46") entitled, "Consolidation of Variable Interest Entities, an
interpretation of ARB No. 51." FIN 46 provides guidance on: 1) the
identification of entities for which control is achieved through means other
than through voting rights, known as "variable interest entities" (VIEs); and 2)
which business enterprise is the primary beneficiary and when it should
consolidate a VIE. This new requirement for consolidation applies to entities:
1) where the equity investors (if any) do not have a controlling financial
interest; or 2) whose equity investment at risk is insufficient to finance that
entity's activities without receiving additional subordinated financial support
from other parties. In addition, FIN 46 requires that both the primary
beneficiary and all other enterprises with a significant variable interest in a
VIE make additional disclosures. FIN 46 is effective for all new VIEs created or
acquired after January 31, 2003. For VIEs created or acquired prior to February
1, 2003, the provisions of FIN 46 must be applied for the first interim or
annual period ending after December 15, 2003. Implementation of FIN 46 did not
affect us.
In November 2004, the FASB issued Statement of Financial Accounting Standards No. 151, "Inventory Costs -- an amendment of ARB 43, Chapter 4" ("SFAS 151"). SFAS 151 clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material. Paragraph 5 of Accounting Research Bulletin ("ARB") 43, Chapter 4 "Inventory Pricing," previously stated that "...under certain circumstances, items such as idle facility expense, excessive spoilage, double freight, and rehandling costs may be so abnormal as to require treatment as current-period charges..." SFAS 151 requires that those items be recognized as current-period charges regardless of whether they meet the criterion of "so abnormal." In addition, SFAS 151 requires that the allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS 151 is effective for fiscal years beginning after June 15, 2005. The Company does not believe the implementation of SFAS 151 will have a material impact on the Company's financial position, results of operations or cash flows.
In December 2004, The FASB issued two FASB Staff Positions (FSP's) that provide accounting guidance on how companies should account for the effects of the American Jobs Creation Act of 2004 (the Act) that was signed into law on October 22, 2004. The Act could affect how companies report their deferred income tax balances. The first FSP is FSP FAS 109-1 (FAS 109-1); the second is FSP FAS 109-2 (FAS 109-2). In FAS 109-1, the FASB concludes that the tax relief (special tax deduction for domestic manufacturing) from the Act should be accounted for as a "special deduction" instead of a tax rate reduction. FAS 109-2 gives a company additional time to evaluate the effects of the Act on any plan for reinvestment or repatriation of foreign earnings for purposes of applying FASB Statement No. 109, "Accounting for Income Taxes." However, companies must provide certain disclosures if it chooses to utilize the additional time granted by the FASB. The company is still evaluating the impact, if any, these FSP's may have on its results of operations, financial condition or cash flows.
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.
Statement 123(R) must be adopted no later than July 1, 2005. We expect to adopt Statement 123(R) on July 1, 2005. The Company plans to adopt Statement 123(R) using the modified-prospective method, whereby compensation cost is recognized beginning with the effective date (a) based on the requirements of Statement 123(R) for all share-based payments granted after the effective date and (b) based on the requirements of Statement 123(R) for all awards granted to employees prior to the effective date of Statement 123(R) that remain unvested on the effective date.
As permitted by SFAS No. 123, the Company currently accounts for share-based payments to employees using the APB No. 25 intrinsic value method and, as such, generally recognizes no compensation cost for employee stock options. Accordingly, the adoption of SFAS No. 123(R)'s fair value method will have an impact on our results of operations, although it will have no impact on our overall financial position. Had we adopted SFAS No. 123(R) in prior periods, the impact of that standard would have approximated the impact of SFAS No. 123 as described in the disclosure of pro forma net income and earnings per share in Note 10 of the consolidated financial statements in this Annual Report on Form 10-K. Statement No 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. While the company cannot estimate what those amounts will be in the future (because they depend on, among other things, when employees exercise stock options), the amount of operating cash flows recognized in prior periods for such excess tax deductions for stock option exercises were $1.1 million, $1.8 million and $0.4 million in 2004, 2003 and 2002, respectively.
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, 2004, we had floating rate obligations totaling approximately $172.6 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, 2004 levels, our consolidated interest expense would increase by a total of approximately $1.7 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, 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 2004, we realized foreign exchange losses of $1.3 million primarily as a result of the strengthening of the UK pound versus the U.S. dollar. These losses are included in other operating expense (income) in the consolidated statements of income. Our UK subsidiary had U.S. dollar denominated receivables and U.S. dollar cash balances that resulted in the majority of our foreign exchange losses during 2004.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our consolidated financial statements and supplementary data of the Company appear on pages 41 through 66 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 12 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) DISCLOSURE CONTROLS AND PROCEDURES
Our Chief Executive Officer and Chief Financial Officer performed an evaluation of our disclosure controls and procedures, which have been designed to permit us to effectively identify and timely disclose important information. They concluded that the controls and procedures were effective as of December 31, 2004 to ensure that material information was accumulated and communicated to the Company's management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
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) Management's annual report on internal control over financial reporting.
The Company's management report on internal control over financial reporting is set forth in this Annual Report on Form 10K on Page 42 and is incorporated herein by reference.
(b) Attestation report of the registered public accounting firm.
The attestation report of Ernst & Young LLP, the Company's independent registered public accounting firm, on management's assessment of the effectiveness of the Company's internal control over financial reporting and the effectiveness of the Company's internal control over financial reporting is set forth in this Annual Report on Form 10K on Page 44 and is incorporated herein by reference.
(c) Changes in internal control over financial reporting.
There was no change in the Company's internal control over financial reporting during the Company's fourth fiscal quarter ended December 31, 2004 that has materially affected, or is reasonably likely to affect, the Company's internal control over financial reporting.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(1) Information concerning directors, including the Company's audit committee financial expert, appears in the Company's Definitive Proxy Statement for the 2005 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 Company's Definitive Proxy Statement for the 2005 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 Company's Definitive Proxy Statement for the 2005 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 Company's Definitive Proxy Statement for the 2005 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 Company's Definitive Proxy Statement for the 2005 Annual Meeting of Stockholders.
The table below provides information relating to our equity compensation plans as of December 31, 2004:
NUMBER OF SECURITIES
NUMBER OF SECURITIES REMAINING AVAILABLE FOR
TO BE ISSUED UPON WEIGHTED-AVERAGE FUTURE ISSUANCE UNDER
EXERCISE OF EXERCISE PRICE OF COMPENSATION PLANS
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*.................. 2,938,798 $10.93 1,329,802
Equity compensation plans
not approved by security
holders**................. N/A N/A N/A
--------- ------ ---------
Total....................... 2,938,798 $10.93 1,329,802
========= ====== =========
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* Relates to the Oil States International, Inc. 2001 Equity Participation Plan, as amended and restated. Our Board of Directors has approved an amendment to this plan to increase the number of shares authorized for issuance thereunder from 5,700,000 to 7,700,000. This increase, which is subject to stockholder approval, will be considered by our stockholders at the 2005 Annual Meeting.
** 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 Company's Definitive Proxy Statement for the 2005 Annual Meeting of Stockholders.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Information concerning principal accountant fees and services and the audit committee's preapproval policies and procedures appear in the Company's Definitive Proxy Statement for the 2005 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 41 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 Company's
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 Company's 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 Company's 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 Company's 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 Company's
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 Company's Annual Report on
Form 10-K for the year ended December 31, 2002, as filed
with the Commission on March 13, 2003).
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 Company's 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 Company's 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
Company's 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
Company's 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 (incorporated by reference to
Exhibit 10.5 to the Company's Annual Report on Form 10-K for
the year ended December 31, 2000, as filed with the
Commission on March 30, 2001).
10.6** -- Deferred Compensation Plan effective November 1, 2003.
(incorporated by reference to Exhibit 10.6 to the Company's
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 Company's 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 Company's 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 Company's 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 Company's
Registration Statement on Form S-1 (File No. 333-43400)).
|
EXHIBIT NO. DESCRIPTION
----------- -----------
10.11** -- Form of Change of Control Severance Plan for Selected
Members of Management (incorporated by reference to Exhibit
10.11 of the Company's 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 Company's
Quarterly Report on Form 10Q 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 Company's Quarterly Report on Form 10-Q for
the three months ended June 30, 2004, as filed with the
Commission on August 4, 2004).
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
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
Company's 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
Company's 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 Company's 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 Company's
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 Company's 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 Company's
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 Company's
2001 Equity Participation Plan
10.19**,* -- Form of Employee Non Qualified Stock Option Agreement under
the Company's 2001 Equity Participation Plan
10.20**,* -- Form of Restricted Stock Agreement under the Company's 2001
Equity Participation Plan
10.21**,* -- Non-Employee Director Compensation Summary
21.1* -- List of subsidiaries of the Company.
23.1* -- Consent of Independent Registered Public Accounting Firm.
|
EXHIBIT NO. DESCRIPTION
----------- -----------
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.
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
President and
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 March 1, 2005.
SIGNATURE TITLE
--------- -----
/s/ L.E. SIMMONS* Chairman of the Board
------------------------------------------------
L.E. Simmons*
/s/ DOUGLAS E. SWANSON Director, President and Chief Executive Officer
------------------------------------------------ (Principal Executive Officer)
Douglas E. Swanson
/s/ CINDY B. TAYLOR Senior Vice President, Chief Financial Officer
------------------------------------------------ and Treasurer
Cindy B. Taylor (Principal Financial Officer)
/s/ ROBERT W. HAMPTON Vice President -- Finance and Accounting and
------------------------------------------------ Secretary (Principal Accounting Officer)
Robert W. Hampton
MARTIN LAMBERT* Director
------------------------------------------------
Martin Lambert*
/s/ S. JAMES NELSON, JR.* Director
------------------------------------------------
S. James Nelson, Jr.*
MARK G. PAPA* Director
------------------------------------------------
Mark G. Papa*
GARY L. ROSENTHAL* Director
------------------------------------------------
Gary L. Rosenthal*
/s/ ANDREW L. WAITE* Director
------------------------------------------------
Andrew L. Waite*
|
SIGNATURE TITLE
--------- -----
STEPHEN A. WELLS* Director
------------------------------------------------
Stephen A. Wells*
*By: /s/ CINDY B. TAYLOR
------------------------------------------------
Cindy B. Taylor,
pursuant to a power of
attorney filed as Exhibit 24.1 to this
Annual Report on Form 10-K
|
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Management's Annual Report on Internal Control Over Financial Reporting....................................... 44 Report of Independent Registered Public Accounting Firm on Consolidated Financial Statements......................... 45 Report of Independent Registered Public Accounting Firm on Management's Assessment of the Effectiveness of the Company's Internal Control Over Financial Reporting and on the Effectiveness of the Company's Internal Control Over Financial Reporting....................................... 46 Consolidated Statements of Income for the Years Ended December 31, 2004, 2003, and 2002......................... 47 Consolidated Balance Sheets at December 31, 2004 and 2003... 48 Consolidated Statements of Stockholders' Equity and Comprehensive Income for the Years Ended December 31, 2004, 2003 and 2002....................................... 49 Consolidated Statements of Cash Flows for the Years Ended December 31, 2004, 2003, and 2002......................... 50 Notes to Consolidated Financial Statements.................. 51 |
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
MANAGEMENT'S ANNUAL REPORT ON INTERNAL CONTROL
OVER FINANCIAL REPORTING
TO THE STOCKHOLDERS AND BOARD OF DIRECTORS OF OIL STATES INTERNATIONAL, INC.:
The management of Oil States International, Inc. 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 Company's 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. management assessed the effectiveness of the Company's internal control over financial reporting as of December 31, 2004. In making this assessment, it 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, 2004, the Company's 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 of the Company's internal control over financial reporting. This report appears on Page 46.
OIL STATES INTERNATIONAL, INC.
Houston, Texas
March 1, 2005
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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, 2004 and 2003, 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, 2004. These financial statements are the responsibility of the Company's 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, 2004 and 2003, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company's internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control -- Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 1, 2005 expressed an unqualified opinion thereon.
ERNST & YOUNG LLP
Houston, Texas
March 1, 2005
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF OIL STATES INTERNATIONAL, INC.:
We have audited management's assessment, included in the accompanying Management's Annual Report on Internal Control Over Financial Reporting, that Oil States International, Inc. and subsidiaries (the "Company") maintained effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). The Company's 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 management's assessment and an opinion on the effectiveness of the Company's 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 management's 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 company's 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 company's 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 company's 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, management's assessment that the Company maintained effective internal control over financial reporting as of December 31, 2004 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, 2004 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, 2004 and 2003 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, 2004 and our report dated March 1, 2005 expressed an unqualified opinion thereon.
ERNST & YOUNG LLP
Houston, Texas
March 1, 2005
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31,
------------------------------
2004 2003 2002
-------- -------- --------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
Revenues:
Product................................................... $607,387 $442,238 $391,067
Service and other......................................... 363,625 281,443 225,781
-------- -------- --------
971,012 723,681 616,848
-------- -------- --------
Costs and expenses:
Product costs............................................. 521,152 379,854 331,380
Service and other costs................................... 253,486 193,260 155,673
Selling, general and administrative expenses.............. 64,810 57,710 51,791
Depreciation expense...................................... 33,671 26,736 22,825
Amortization expense...................................... 2,317 1,169 487
Other operating expense (income).......................... 460 (215) 132
-------- -------- --------
875,896 658,514 562,288
-------- -------- --------
Operating income............................................ 95,116 65,167 54,560
Interest expense............................................ (7,667) (7,930) (4,863)
Interest income............................................. 363 389 469
Other income................................................ 956 1,028 867
-------- -------- --------
Income before income taxes.................................. 88,768 58,654 51,033
Income tax provision........................................ (29,406) (14,222) (11,357)
-------- -------- --------
Net income attributable to common shares.................... $ 59,362 $ 44,432 $ 39,676
======== ======== ========
Basic net income per share.................................. $ 1.20 $ 0.92 $ 0.82
Diluted net income per share................................ $ 1.19 $ 0.90 $ 0.81
Weighted average number of common shares outstanding (in
thousands):
Basic..................................................... 49,329 48,529 48,286
Diluted................................................... 50,027 49,215 48,890
|
The accompanying notes are an integral part of these financial statements.
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
---------------------
2004 2003
--------- ---------
(IN THOUSANDS, EXCEPT
SHARE AMOUNTS)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 19,740 $ 19,318
Accounts receivable, net.................................. 198,297 137,484
Inventories, net.......................................... 209,825 121,319
Prepaid expenses and other current assets................. 7,322 9,956
-------- --------
Total current assets................................... 435,184 288,077
Property, plant and equipment, net.......................... 227,343 194,136
Goodwill, net............................................... 258,046 224,054
Other noncurrent assets..................................... 13,039 10,919
-------- --------
Total assets........................................... $933,612 $717,186
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities.................. $159,265 $ 89,243
Income taxes.............................................. 5,821 3,020
Current portion of long-term debt......................... 228 873
Deferred revenue.......................................... 25,420 4,784
Other current liabilities................................. 2,296 937
-------- --------
Total current liabilities.............................. 193,030 98,857
Long-term debt............................................ 173,887 136,246
Deferred income taxes..................................... 28,871 19,411
Other liabilities......................................... 7,800 7,561
-------- --------
Total liabilities...................................... 403,588 262,075
Stockholders' equity:
Common stock, $.01 par value, 200,000,000 shares
authorized, 49,577,786 shares and 49,161,599 shares
issued and outstanding, respectively................... 496 492
Additional paid-in capital................................ 338,906 333,855
Retained earnings......................................... 168,180 108,818
Accumulated other comprehensive income.................... 22,759 12,289
Common stock held in treasury at cost, 31,028 and 33,423
shares, respectively................................... (317) (343)
-------- --------
Total stockholders' equity............................. 530,024 455,111
-------- --------
Total liabilities and stockholders' equity............. $933,612 $717,186
======== ========
|
The accompanying notes are an integral part of these financial statements.
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, 2001.... $483 $326,031 $ 24,710 $(7,027) $ --
Net income.................. 39,676 $39,676
Currency translation
adjustment............... 2,106 2,106
-------
Comprehensive income........ $41,782
=======
Exercise of stock options,
including tax benefit.... 2 1,619
Amortization of restricted
stock compensation....... 378
Stock acquired in deferred
compensation plan........ (172)
Other....................... (227)
---- -------- -------- ------- -----
BALANCE, DECEMBER 31, 2002.... 485 327,801 64,386 (4,921) (172)
Net income.................. 44,432 $44,432
Currency translation
adjustment............... 17,210 17,210
-------
Comprehensive income........ $61,642
=======
Exercise of stock options,
including tax benefit.... 7 5,842
Stock issuance costs........ (338)
Amortization of restricted
stock compensation....... 450
Stock acquired in deferred
compensation plan........ (171)
Other....................... 100
---- -------- -------- ------- -----
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)
==== ======== ======== ======= =====
|
The accompanying notes are an integral part of these financial statements.
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
-------------------------------
2004 2003 2002
--------- -------- --------
(IN THOUSANDS)
Cash flows from operating activities:
Net income................................................ $ 59,362 $ 44,432 $ 39,676
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 35,988 27,905 23,312
Deferred income tax provision.......................... 6,870 714 4,897
Provision for loss on accounts receivable.............. 419 702 130
Deferred financing cost amortization................... 490 2,303 1,110
Gain on disposal of assets............................. (378) (492) (142)
Equity in earnings of unconsolidated subsidiary........ (180) (355) (632)
Other, net............................................. 1,026 913 839
Changes in operating assets and liabilities, net of effect
from acquired businesses:
Accounts receivable.................................... (56,120) (12,880) 10,576
Inventories............................................ (41,587) 194 (29,273)
Accounts payable and accrued liabilities............... 67,251 96 (1,836)
Taxes payable.......................................... 2,559 988 (3,111)
Other current assets and liabilities, net.............. 21,467 (5,817) (171)
--------- -------- --------
Net cash flows provided by operating activities........ 97,167 58,703 45,375
Cash flows from investing activities:
Acquisitions of businesses, net of cash acquired.......... (80,806) (16,286) (64,847)
Capital expenditures...................................... (60,041) (41,261) (26,086)
Proceeds from sale of equipment........................... 3,197 2,671 1,432
Other, net................................................ (63) (26) 73
--------- -------- --------
Net cash flows used in investing activities............ (137,713) (54,902) (89,428)
Cash flows from financing activities:
Revolving credit borrowings............................... 43,900 4,209 54,786
Debt and capital lease repayments......................... (8,934) (1,757) (4,070)
Issuance of common stock.................................. 3,968 4,177 1,205
Payment of offering and financing costs................... (81) (2,310) (1,560)
Other, net................................................ (37) -- 20
--------- -------- --------
Net cash flows provided by financing activities........... 38,816 4,319 50,381
Effect of exchange rate changes on cash and cash
equivalents............................................... 2,737 1,101 111
--------- -------- --------
Net increase in cash and cash equivalents from continuing
operations................................................ 1,007 9,221 6,439
Net cash used in discontinued operations.................... (585) (1,021) (303)
Cash and cash equivalents, beginning of year................ 19,318 11,118 4,982
--------- -------- --------
Cash and cash equivalents, end of year...................... $ 19,740 $ 19,318 $ 11,118
========= ======== ========
|
The accompanying notes are an integral part of these financial statements.
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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), a subsidiary of Oil States, 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 and Singapore.
PTI GROUP, INC.
PTI is located in Alberta, Canada and is a supplier of integrated housing, food, site management and logistics support services to remote sites utilized by natural resources and other industries primarily in Canada, Europe, the Middle East and the United States.
HWC ENERGY SERVICES, INC.
HWC provides worldwide well control services, drilling services and rental equipment to the oil and gas industry. HWC operates primarily in Texas, Louisiana, Ohio, Oklahoma, New Mexico and Wyoming, along with foreign operations conducted in Venezuela, the Middle East, and Africa. Its hydraulic well control operations provide, globally, hydraulic workover (snubbing) units for emergency well control situations and, in selected markets, various hydraulic well control solutions involving well drilling and workover and completion activities. In West Texas and Ohio, HWC operates, through its subsidiary Capstar Drilling, L.P., shallow well drilling rigs with automated pipe handling capabilities. Specialty Rental Tools and Supply, L.P., a subsidiary of HWC, provides rental equipment for drilling and workover operations in Texas, Louisiana, Mississippi, New Mexico, Oklahoma and Wyoming.
SOONER, INC.
Sooner 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.
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
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 on the accompanying consolidated balance sheets approximate their fair values.
INVENTORIES
Inventories consist of tubular and other oilfield products, manufactured equipment, spare parts for manufactured equipment and supplies for remote accommodation facilities. Inventories include raw materials, labor, 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 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 $18.3 million and $18.0 million at December 31, 2004 and 2003, respectively. The amount of accumulated amortization of goodwill increased in 2004 compared to 2003 because of changes in foreign currency exchange rates.
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 management's 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 Company's review, the carrying value of its assets are recoverable and no impairment losses have been recorded for the periods presented.
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. 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.
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 $5 million at December 31, 2003. The Company had no such contracts outstanding at 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 $1.3 million loss in 2004, a $0.2 million gain in 2003 and a $0.1 million loss in 2001 and are included in other operating expense (income).
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 rental equipment and 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 revenues. For drilling contracts based on footage drilled, we recognize revenues as footage is drilled.
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.
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 Company's 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
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 69% of our oilfield tubular goods from three suppliers in 2004, with the largest supplier representing 50% 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 Company's 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 Company's customers were to deteriorate, adversely affecting their ability to make payments, additional allowances would be required.
EARNINGS PER SHARE
The Company's basic income per share (EPS) amounts have been computed based on the average number of common shares outstanding, including 277,183 and 340,971 shares of common stock as of December 31, 2004 and 2003, respectively, issuable upon exercise of exchangeable shares of one of the Company's Canadian subsidiaries. These exchangeable shares, which were issued to certain former shareholders of PTI in connection with the Company's IPO and the combination of PTI into the Company, are intended to have characteristics essentially equivalent to the Company's 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 Company's outstanding stock options under the treasury stock method. All shares awarded under the Company's Equity Participation Plan are included in the Company's fully diluted shares.
STOCK-BASED COMPENSATION
The Company accounts for its stock-based compensation plans under the principles prescribed by the Accounting Principles Board's Opinion No. 25 ("APB No. 25"), "Accounting for Stock Issued to Employees." Stock options awarded under the Equity Participation Plan normally do not result in recognition of compensation expense. However, 100,000 shares of restricted stock awarded under the Equity Participation Plan in February 2001 were considered to be compensatory in nature. Accordingly, the Company recognized $0.3 million of non-cash general and administrative expenses for that award in each of the two years ended December 31, 2003 and less than $0.1 million in 2004. An additional $0.1 million was recognized in 2004 and
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2003 for a stock option performance award. The Company accounts for assets held in a rabbi trust for certain participants under the Company's deferred compensation plan in accordance with EITF 97-14. See Note 10.
GUARANTEES
The Company adopted FASB Interpretation No. 45 (FIN 45), "Guarantor's Accounting and Disclosure Requirements for Guarantees, including Indirect Indebtedness of Others," during 2003. FIN 45 requires disclosures and accounting for the Company's 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,
----------------
2004 2003
------- ------
Beginning balance........................................... $ 1,135 $ 845
Provisions for warranty..................................... 2,217 1,159
Consumption of reserves..................................... (1,333) (912)
Translation and other changes............................... 21 43
------- ------
Ending balance.............................................. $ 2,040 $1,135
======= ======
|
Current warranty provisions are typically related to the current year's sales, while warranty consumption is associated with current and prior year's 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.
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, 2004, the maximum potential amount of future payments that the Company could be required to make under these guarantee agreements was approximately $11.1 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
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
recognized on the percentage-of-completion method, 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, 2004 and 2003 represent an estimate of the remaining contingent liabilities associated with the Company's exit from those businesses.
3. DETAILS OF SELECTED BALANCE SHEET ACCOUNTS
Additional information regarding selected balance sheet accounts at December 31, 2004 and 2003, is presented below (in thousands):
2004 2003
-------- --------
Accounts receivable:
Trade..................................................... $177,784 $113,003
Unbilled revenue.......................................... 21,431 24,018
Other..................................................... 605 2,484
Allowance for doubtful accounts........................... (1,523) (2,021)
-------- --------
$198,297 $137,484
======== ========
|
2004 2003
-------- --------
Inventories:
Tubular goods............................................. $123,555 $ 65,026
Other finished goods and purchased products............... 29,255 26,286
Work in process........................................... 39,936 20,117
Raw materials............................................. 21,978 15,169
-------- --------
Total inventories...................................... 214,724 126,598
Inventory reserves........................................ (4,899) (5,279)
-------- --------
$209,825 $121,319
======== ========
|
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ESTIMATED
USEFUL LIFE 2004 2003
----------- --------- ---------
Property, plant and equipment:
Land............................................ $ 5,909 $ 5,264
Buildings and leasehold improvements............ 5-40 years 43,482 43,784
Machinery and equipment......................... 2-20 years 236,266 198,677
Rental tools.................................... 3-15 years 56,572 40,960
Office furniture and equipment.................. 1-10 years 14,238 14,676
Vehicles........................................ 2-5 years 11,036 8,521
Construction in progress........................ 12,841 5,712
--------- ---------
Total property, plant and equipment.......... 380,344 317,594
Less: Accumulated depreciation.................. (153,001) (123,458)
--------- ---------
$ 227,343 $ 194,136
========= =========
|
2004 2003
-------- -------
Accounts payable and accrued liabilities:
Trade accounts payable.................................... $124,193 $59,423
Accrued compensation...................................... 13,589 12,572
Accrued insurance......................................... 4,261 3,518
Accrued taxes, other than income taxes.................... 3,310 2,028
Reserves related to discontinued operations............... 4,200 4,785
Other..................................................... 9,712 6,917
-------- -------
$159,265 $89,243
======== =======
|
4. RECENT ACCOUNTING PRONOUNCEMENTS
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 "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 recognize an impairment charge for any amount by which the carrying amount of a reporting unit's goodwill exceeds the unit's fair value. The Company uses comparative market multiples to establish fair values.
The Company amortizes the cost of other intangibles over their estimated useful lives unless such lives are deemed indefinite. Amortizable intangible assets are tested 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.
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Changes in the carrying amount of goodwill for the year ended December 31, 2004 and 2003, are as follows (in thousands):
OFFSHORE WELLSITE TUBULAR
PRODUCTS SERVICES SERVICES TOTAL
-------- -------- -------- --------
Balance as of December 31, 2002.............. $71,589 $ 91,883 $49,579 $213,051
Goodwill acquired............................ 2,622 3,910 -- 6,532
Foreign currency translation and other
changes.................................... 589 3,882 4,471
------- -------- ------- --------
Balance as of December 31, 2003.............. $74,800 $ 99,675 $49,579 $224,054
Goodwill acquired............................ 337 29,613 2,025 31,975
Foreign currency translation and other
changes.................................... 445 1,572 -- 2,017
------- -------- ------- --------
Balance as of December 31, 2004.............. $75,582 $130,860 $51,604 $258,046
======= ======== ======= ========
|
Goodwill deductible for tax purposes totals approximately $18.6 million at December 31, 2004. The following table presents the total amount assigned and the total amount amortized for major intangible asset classes as of December 31, 2004 and 2003 (in thousands):
DECEMBER 31, 2004 DECEMBER 31, 2003
----------------------------- -----------------------------
GROSS CARRYING ACCUMULATED GROSS CARRYING ACCUMULATED
AMOUNT AMORTIZATION AMOUNT AMORTIZATION
-------------- ------------ -------------- ------------
Amortizable intangible assets
Non-compete agreements.......... $ 9,209 $3,456 $6,375 $1,554
Other........................... 1,706 351 1,210 161
------- ------ ------ ------
$10,915 $3,807 $7,585 $1,715
======= ====== ====== ======
|
The weighted average remaining amortization period for all intangible assets, other than goodwill, is 3.6 years and 4.4 years as of December 31, 2004 and 2003, respectively. Total amortization expense is expected to be $2.3 million, $2.2 million and $1.7 million in 2005, 2006 and 2007, respectively.
In January 2003, the Financial Accounting Standards Board (FASB) issued
FASB Interpretation No. 46 (FIN 46) and, in December 2003, an amendment -- FIN
46(R) ("FIN 46") entitled, "Consolidation of Variable Interest Entities, an
interpretation of ARB No. 51." FIN 46 provides guidance on: 1) the
identification of entities for which control is achieved through means other
than through voting rights, known as "variable interest entities" (VIEs); and 2)
which business enterprise is the primary beneficiary and when it should
consolidate a VIE. This new requirement for consolidation applies to entities:
1) where the equity investors (if any) do not have a controlling financial
interest; or 2) whose equity investment at risk is insufficient to finance that
entity's activities without receiving additional subordinated financial support
from other parties. In addition, FIN 46 requires that both the primary
beneficiary and all other enterprises with a significant variable interest in a
VIE make additional disclosures. FIN 46 is effective for all new VIEs created or
acquired after January 31, 2003. For VIEs created or acquired prior to February
1, 2003, the provisions of FIN 46 must be applied for the first interim or
annual period ending after December 15, 2003. Implementation of FIN 46 did not
affect the Company.
In November 2004, the FASB issued Statement of Financial Accounting
Standards No. 151, "Inventory Costs -- an amendment of ARB 43, Chapter 4" ("SFAS
151"). SFAS 151 clarifies the accounting for abnormal amounts of idle facility
expense, freight, handling costs and wasted material. Paragraph 5 of Accounting
Research Bulletin ("ARB") 43, Chapter 4 "Inventory Pricing," previously stated
that "...under certain circumstances, items such as idle facility expense,
excessive spoilage, double freight, and rehandling costs may be so abnormal as
to require treatment as current-period charges..." SFAS 151 requires that those
items be recognized as current-period charges regardless of whether they meet
the criterion of "so abnormal."
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In addition, SFAS 151 requires that the allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS 151 is effective for fiscal years beginning after June 15, 2005. The Company does not believe the implementation of SFAS 151 will have a material impact on the Company's financial position, results of operations or cash flows.
In December 2004, The FASB issued two FASB Staff Positions (FSP's) that provide accounting guidance on how companies should account for the effects of the American Jobs Creation Act of 2004 (the Act) that was signed into law on October 22, 2004. The Act could affect how companies report their deferred income tax balances. The first FSP is FSP FAS 109-1 (FAS 109-1); the second is FSP FAS 109-2 (FAS 109-2). In FAS 109-1, the FASB concludes that the tax relief (special tax deduction for domestic manufacturing) from the Act should be accounted for as a "special deduction" instead of a tax rate reduction. FAS 109-2 gives a company additional time to evaluate the effects of the Act on any plan for reinvestment or repatriation of foreign earnings for purposes of applying FASB Statement No. 109, "Accounting for Income Taxes." However, companies must provide certain disclosures if they choose to utilize the additional time granted by the FASB. The company is still evaluating the impact, if any, these FSP's may have on its results of operations, financial condition or cash flows.
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.
Statement 123(R) must be adopted no later than July 1, 2005. We expect to adopt Statement 123(R) on July 1, 2005. The Company plans to adopt Statement 123(R) using the modified-prospective method, whereby compensation cost is recognized beginning with the effective date (a) based on the requirements of Statement 123(R) for all share-based payments granted after the effective date and (b) based on the requirements of Statement 123(R) for all awards granted to employees prior to the effective date of Statement 123(R) that remain unvested on the effective date.
As permitted by SFAS No. 123, the Company currently accounts for share-based payments to employees using the APB No. 25 intrinsic value method and, as such, generally recognizes no compensation cost for employee stock options. Accordingly, the adoption of SFAS No. 123(R)'s fair value method will have an impact on our results of operations, although it will have no impact on our overall financial position. Had we adopted SFAS No. 123(R) in prior periods, the impact of that standard would have approximated the impact of SFAS No. 123 as described in the disclosure of pro forma net income and earnings per share in Note 10 of this Annual Report on Form 10-K. Statement No 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. While the company cannot estimate what those amounts will be in the future (because they depend on, among other things, when employees exercise stock options), the amount of operating cash flows recognized in prior periods for such excess tax deductions for stock option exercises were $1.1 million, $1.8 million and $0.4 million in 2004, 2003 and 2002, respectively.
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. LONG-TERM DEBT
As of December 31, 2004 and 2003, long-term debt consisted of the following (in thousands):
2004 2003
-------- --------
US revolving credit facility, with available commitments up
to $205 million; secured by substantially all assets;
commitment fee on unused portion was 0.375% per annum in
2004 and ranged from 0.375% to 0.5% per annum in 2003;
variable interest rate payable monthly based on prime or
LIBOR plus applicable percentage; weighted average rate
was 3.58% for 2004 and 3.52% for 2003..................... $172,600 $128,700
Canadian revolving credit facility, with available
commitments up to $45 million; secured by substantially
all assets; variable interest rate payable monthly based
on the Canadian prime rate or Bankers Acceptance discount
rate plus applicable percentage; weighted average rate was
4.6% for 2004 and 5.5% for 2003........................... -- --
Subordinated notes payable due November 30, 2005; interest
accrues at 7.00% annually; principal and interest are
payable at a fixed amount for each day the acquired
equipment is utilized; amounts paid in full in November
2004...................................................... -- 3,497
Subordinated unsecured notes payable due September 26, 2007;
interest accrues at 5% and is payable at maturity......... 1,010 1,092
Obligations under capital leases............................ 505 3,818
Other notes payable in monthly installments of principal and
interest at various interest rates........................ -- 12
-------- --------
Total debt............................................. 174,115 137,119
Less: current maturities.................................... 228 873
-------- --------
Total long-term debt................................... $173,887 $136,246
======== ========
|
Scheduled maturities of combined long-term debt as of December 31, 2004, are as follows (in thousands):
2005........................................................ $ 228
2006........................................................ 163
2007........................................................ 173,678(1)
2008........................................................ 33
2009........................................................ 13
Thereafter.................................................. --
--------
$174,115
========
|
(1) The Company amended its bank credit agreement, effective January 31, 2005, to extend the maturity to the year 2010.
The Company's capital leases consist primarily of plant facilities and equipment. The value of capitalized leases and the related accumulated depreciation totaled $3.1 million and $1.6 million, respectively, at December 31, 2004. The value of capitalized leases and the related accumulated depreciation totaled $4.3 million and $1.5 million, respectively, at December 31, 2003.
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CURRENT DEBT INSTRUMENTS
On October 30, 2003, the Company replaced its existing credit facility with
a $225.0 million senior secured revolving credit facility with a group of banks.
Up to $45.0 million of the credit facility is available in the form of loans
denominated in Canadian dollars and may be made to the Company's principal
Canadian operating subsidiaries. In May 2004, the Company exercised an option to
increase the maximum borrowings under the credit facility to $250 million. The
facility was to mature on October 30, 2007, unless extended for up to one
additional year period with the consent of the lenders. See Note
14 -- Subsequent Events for Information related to an amendment to the credit
facility. Amounts borrowed under this facility bear interest, at the Company's
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 1.5% to 2.5%; or
- an alternate base rate equal to the higher of the bank's prime rate and the federal funds effective rate plus 0.5% (or, in the case of Canadian dollar denominated loans, the Canadian Prime Rate) plus a margin ranging from 0.5% to 1.5%, depending upon the ratio of total debt to EBITDA as defined in the credit facility.
Commitment fees ranging from 0.375% to 0.5% per year are paid on the undrawn portion of the facility, depending upon our leverage ratio.
The credit facility is guaranteed by all of the Company's active domestic subsidiaries and, in some cases, the Company's Canadian and other foreign subsidiaries. The credit facility is secured by a first priority lien on all the Company's inventory, accounts receivable and other material tangible and intangible assets, as well as those of the Company's 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 restrict the Company's ability to borrow additional funds, encumber assets, pay dividends, sell assets except in the normal course of business and enter into other significant transactions.
Under the Company's 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, 2004, we had $172.6 million outstanding under this facility and an additional $10.8 million of outstanding letters of credit leaving $66.6 million available to be drawn under the facility.
In conjunction with executing the senior secured revolving credit facility on October 30, 2003, the Company recognized additional non-cash interest expense of $1.2 million, after taxes, for the write-off of deferred financing costs related to its prior credit facility.
On February 26, 2004 the Company renewed its overdraft credit facility providing for borrowings totaling L2.0 million for UK operations. Interest is payable quarterly at a margin of 1.5% per annum over the bank's variable base rate. All borrowings under this facility are payable on demand. No amounts were outstanding under this facility at December 31, 2004.
6. RETIREMENT PLANS
The Company sponsors a defined contribution plan. Participation in these
plans is available to substantially all employees. The Company recognized
expense of $3.1 million, $2.9 million and $2.5 million, respectively, related to
its various defined contribution plans during the years ended December 31, 2004,
2003 and 2002, respectively.
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. INCOME TAXES
Consolidated pre-tax income for the years ended December 31, 2004, 2003 and 2002 consisted of the following (in thousands):
2004 2003 2002
------- ------- -------
US operations........................................... $56,827 $22,984 $26,118
Foreign operations...................................... 31,941 35,670 24,915
------- ------- -------
Total................................................. $88,768 $58,654 $51,033
======= ======= =======
|
The components of the income tax provision for the years ended December 31, 2004, 2003 and 2002 consisted of the following (in thousands):
2004 2003 2002
------- ------- -------
Current:
Federal............................................... $ 5,218 $ 2,047 $(3,797)
State................................................. 1,929 464 1,482
Foreign............................................... 15,308 10,997 8,775
------- ------- -------
22,455 13,508 6,460
------- ------- -------
Deferred:
Federal............................................... 4,492 (918) 3,209
State................................................. 506 256 374
Foreign............................................... 1,953 1,376 1,314
------- ------- -------
6,951 714 4,897
------- ------- -------
Total Provision.................................... $29,406 $14,222 $11,357
======= ======= =======
|
The provision for taxes differs from an amount computed at statutory rates as follows for the years ended December 31, 2004, 2003 and 2002 (in thousands):
2004 2003 2002
------- ------- -------
Federal tax expense at statutory rates.................. $31,069 $20,529 $17,860
Foreign income tax rate differential.................... 1,917 610 2,029
Nondeductible expenses.................................. 1,953 1,068 435
State tax expense, net of federal benefits.............. 1,583 468 1,208
Manufacturing and processing profits deduction.......... (1,204) (723) (660)
Adjustment of valuation allowance....................... (6,928) (7,722) (8,452)
Other, net.............................................. 1,016 (8) (1,063)
------- ------- -------
Net income tax provision.............................. $29,406 $14,222 $11,357
======= ======= =======
|
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, 2004 and 2003 are as follows (in thousands):
2004 2003
-------- --------
Deferred tax assets:
Net operating loss carryforward........................... $ 12,522 $ 22,134
Allowance for doubtful accounts........................... 484 537
Inventory reserves........................................ 1,194 1,177
Employee benefits......................................... 3,029 4,183
Intangibles............................................... 183 750
Other reserves............................................ 1,704 608
Accrued liabilities....................................... -- 441
Other..................................................... 5,239 3,441
-------- --------
Gross deferred tax asset.................................. 24,355 33,271
Less: valuation allowance................................. (5,102) (12,030)
-------- --------
Net deferred tax asset.................................... 19,253 21,241
-------- --------
Deferred tax liabilities:
Depreciation.............................................. (39,392) (34,423)
Unearned revenue.......................................... (704) (554)
Inventory................................................. (881) (619)
Accrued liabilities....................................... (1,392) --
Other..................................................... (2,780) (1,939)
-------- --------
Deferred tax liability.................................... (45,149) (37,535)
-------- --------
Net deferred tax liability............................. $(25,896) $(16,294)
======== ========
|
Reclassifications of the Company's deferred tax balance based on net current items and net non-current items as of December 31, 2004 and 2003 are as follows (in thousands):
2004 2003
-------- --------
ASSETS
Current deferred tax asset.................................. $ 3,110 $ 3,117
LIABILITIES
Current deferred tax liability.............................. (135) --
Long term deferred tax liability............................ (28,871) (19,411)
-------- --------
Net deferred tax liability.................................. $(25,896) $(16,294)
======== ========
|
Our primary deferred tax asset, which totaled approximately $12.5 million at December 31, 2004, is related to $35.8 million in available federal net operating loss carryforwards, or NOLs, as of that date. A valuation allowance of approximately $5.1 million was provided against the deferred tax asset associated with our NOLs at December 31, 2004. The NOLs will expire in varying amounts during the years 2010 through 2020 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. A successive change in control was triggered in 2003 pursuant to Section 382; however, it did not significantly change our NOL utilization expectations.
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Our income tax provision for the year ended December 31, 2004 totaled $29.4 million, or 33.1% of pretax income. The income tax provision for the year 2004 included a $6.9 million income tax benefit related to the partial reversal of the valuation allowance applied against NOLs which were recorded as of the prior year end. Based upon positive earnings that we have generated for both financial and tax reporting purposes since our formation, we believed that we would more likely than not generate sufficient taxable income in future years to realize the benefit of all but $5.1 million of the deferred tax asset associated with these net operating losses. Following the recognition of the $6.9 million income tax benefit during the year 2004, we have recognized the associated income tax benefit, on a cumulative basis, of approximately $21.2 million of our $35.8 million of available federal net operating loss carryforwards. The Company has federal alternative minimum tax net operating loss carryforwards of $18.9 million, which will expire in the years 2010 through 2020.
The Company has $2.9 million of net operating loss carryforwards associated with its Canadian subsidiary's Chilean operations as of December 31, 2004. These losses may be carried forward indefinitely; however, such losses may only be used to offset future Chilean taxable income. Accordingly, the Company has provided a full valuation allowance against the associated deferred tax asset.
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 $126.0 million at December 31, 2004. 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 year ended December 31, 2004, the Company recognized a tax benefit triggered by employee exercises of stock options totaling $1.1 million. Such benefit was credited to additional paid-in capital.
In October 2004, the American Jobs Creation Act of 2004 (the "Jobs Act") was signed into law which introduced a special one-time dividends received deduction on the repatriation of foreign earnings to a U.S. taxpayer (repatriation provision), provided certain criteria are met. The Act provides for a special one-time deduction of 85 percent of certain foreign earnings that are repatriated in either the Company's last tax year that began before the enactment date, or the first tax year that begins during the one-year period beginning on the date of enactment. The maximum amount of the Company's foreign earnings that qualify for temporary deduction is $69.6 million.
The Company is in the process of evaluating whether it will repatriate foreign earnings under the repatriation provisions of the Jobs Act, and if so, the amount that will be repatriated. The range of reasonably possible amounts that the Company is considering for repatriation, which would be eligible for the temporary deduction, is zero to $69.6 million. The Company is awaiting the issuance of further regulatory guidance and passage of statutory technical corrections with respect to certain provisions in the Jobs Act prior to determining the amounts it will repatriate, if any. The Company expects to determine the amounts and sources of foreign earnings to be repatriated, if any, in 2005.
The Company is not yet in a position to determine the impact of a qualifying repatriation, should it choose to make one, on its income tax expense for 2005, the amount of its indefinitely reinvested foreign earnings, the range of income tax effects or the amount of its deferred tax liability with respect to foreign earnings.
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
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
examination or audit of its tax returns would have a material adverse effect on its operating results, financial condition or liquidity.
8. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the years ended December 31, 2004, 2003 and 2002 for interest and income taxes was as follows (in thousands):
2004 2003 2002
------- ------- ------
Interest................................................. $ 6,840 $ 7,721 $4,728
Income taxes, net of refunds............................. $18,892 $12,901 $9,446
|
Components of cash used for acquisitions as reflected in the consolidated statements of cash flows for the years ended December 31, 2004, 2003 and 2002 are summarized as follows (in thousands):
2004 2003 2002
------- ------- --------
Fair value of assets acquired and goodwill............. $93,094 $18,868 $ 85,132
Liabilities assumed.................................... (5,825) (2,000) (13,122)
Noncash consideration.................................. (4,637) -- (1,950)
Less: cash acquired.................................... (1,826) (582) (5,213)
------- ------- --------
Cash used in acquisition of businesses................. $80,806 $16,286 $ 64,847
======= ======= ========
|
In connection with an acquisition made in 2004, the Company had a non-cash transaction consisting of the issuance of a $4.6 million note payable to a seller. In connection with acquisitions made in 2002, the Company had non-cash transactions consisting of the issuance of $2.0 million of notes payable and the assumption of a capital lease totaling $3.3 million.
In 2002, we acquired the following six businesses for total consideration of $72.1 million, which was financed primarily with borrowings under our credit facility:
- Southeastern Rentals LLC, based in Mississippi, Edge Wireline Rentals Inc. and certain affiliated companies, located in Louisiana, and J.V. Oilfield Rentals & Supply, Inc. and certain affiliated companies, located in Louisiana, all of which are suppliers of rental tools to the oil and gas service industry. These businesses were merged into our existing rental tool business included in our well site services segment.
- Barlow Hunt, Inc., based in Oklahoma, an elastomer molding company which has become part of our existing elastomer business is included in the offshore products segment.
- Certain assets and related liabilities of Big Inch Marine Services, Inc., a Texas-based subsidiary of Stolt Offshore, Inc., which provides subsea pipeline equipment and repair services similar to those provided by us in the offshore products segment.
- Applied Hydraulic Systems, Inc., a Louisiana-based offshore crane manufacturer and crane repair service provider, which has become part of our offshore products segment.
In 2003, we spent $16.8 million, including acquisition costs, 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.
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In January 2004, we completed the acquisition of several related rental tool companies for $34.8 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 $47.0 million, including a purchase price adjustment settled in October 2004. In connection with the transaction, we purchased Hunting's U.S. tubular inventory, assumed certain customer contracts and entered into supply and distribution relationships with Hunting for the future. Hunting's distribution operations were merged into our tubular services segment.
In October 2004, our offshore products segment acquired a small business for $0.4 million which has become part of our existing elastomers business.
9. 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, 2004, are as follows (in thousands):
OPERATING
LEASES
---------
2005........................................................ $ 3,656
2006........................................................ 2,070
2007........................................................ 1,489
2008........................................................ 1,037
2009........................................................ 952
Thereafter.................................................. 2,738
-------
Total..................................................... $11,942
=======
|
Rental expense under operating leases was $4.5 million, $4.9 million and $4.3 million for the years ended December 31, 2004, 2003 and 2002, respectively.
As of December 31, 2003, the Company had entered into forward purchase option contracts through February 25, 2004 with a bank totaling $5.0 million for the purchase of foreign currency as a hedge to expected future billings. In 2004 we realized a gain of $0.9 million upon settlement of our forward option purchase contract. No such contracts were outstanding at December 31, 2004.
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.
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On February 18, 2005, the Company announced that it had conducted an internal investigation prompted by the discovery of over billings totaling $439,000 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. The Company and independent counsel retained by the Company's audit committee conducted separate investigations consisting of interviews and a thorough examination of the facts and circumstances in this matter. The Company has voluntarily reported the results of its investigation to the Securities and Exchange Commission (the "SEC") and will fully cooperate with any requests for information received from the SEC.
10. STOCK-BASED COMPENSATION
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation," which requires the Company to record stock-based compensation at fair value. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock Based Compensation -- Transition and Disclosure." The Company has adopted the disclosure requirements of SFAS No. 148 and has elected to record employee compensation expense utilizing the intrinsic value method permitted under Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees."
The Company accounts for its employee stock-based compensation plan under APB Opinion No. 25 and its related interpretations. Accordingly, any deferred compensation expense would be recorded for stock options based on the excess of the market value of the common stock on the date the options were granted over the aggregate exercise price of the options. This deferred compensation would be amortized over the vesting period of each option. The Company is authorized to grant common stock based awards covering 5,700,000 shares of common stock under the 2001 Equity Participation Plan, as amended and restated, (the Equity Participation Plan), to employees, consultants and directors with amounts, exercise prices and vesting schedules determined by the Company's compensation committee of its Board of Directors. All option grants made from February 2001 to December 2004 have been priced at the closing price on the day of grant, vest 25% per year and have a life ranging from 6 to 10 years. Because the exercise price of options granted under the Equity Participation Plan have been equal to or greater than the market price of the Company's stock on the date of grant, no compensation expense related to this plan has been recorded. Had compensation expense for its Equity Participation Plan been determined consistent with SFAS No. 123 utilizing the fair value method, the Company's net income and earnings per share at December 31, 2004, 2003 and 2002, would have been as follows (in thousands, except per share amounts):
2004 2003 2002
------- ------- -------
Net income attributable to common shares as reported.... $59,362 $44,432 $39,676
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all
awards, net of related tax effects.................... (2,478) (2,195) (1,950)
------- ------- -------
Pro forma net income.................................... $56,884 $42,237 $37,726
======= ======= =======
Net income attributable to common shares, as reported:
Basic................................................. $ 1.20 $ 0.92 $ 0.82
Diluted............................................... 1.19 0.90 0.81
Pro forma net income attributable to common shares, as
if fair value method had been applied to all awards:
Basic................................................. $ 1.15 $ 0.87 $ 0.78
Diluted............................................... 1.14 0.86 0.77
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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, 2004:
STOCK OPTION PLAN
--------------------------
WEIGHTED
AVERAGE
OPTIONS EXERCISE PRICE
--------- --------------
Balance at December 31, 2001................................ 2,055,492 8.24
Granted................................................... 730,250 8.27
Exercised................................................. (190,951) 6.31
Forfeited................................................. (155,718) 8.19
---------
Balance at December 31, 2002................................ 2,439,073 8.40
Granted................................................... 1,020,750 11.31
Exercised................................................. (638,442) 6.39
Forfeited................................................. (140,638) 12.28
---------
Balance at December 31, 2003................................ 2,680,743 9.70
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
Exercisable at December 31, 2002............................ 976,605 8.22
Exercisable at December 31, 2003............................ 805,050 9.18
Exercisable at December 31, 2004............................ 958,375 9.31
|
The following table summarizes information for stock options outstanding at December 31, 2004:
OPTIONS OUTSTANDING
------------------------------------ OPTIONS EXERCISABLE
WEIGHTED ----------------------
NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED
OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
AS OF CONTRACTUAL EXERCISE AS OF EXERCISE
RANGE OF EXERCISE PRICES 12/31/2004 LIFE PRICE 12/31/2004 PRICE
------------------------ ----------- ----------- -------- ----------- --------
$5.2000 - $7.8000............. 115,268 0.94 $ 6.2101 115,268 $ 6.2101
$8.0000 - $8.0000............. 520,241 7.12 $ 8.0000 230,377 $ 8.0000
$8.3300 - $9.0000............. 562,600 6.21 $ 8.8837 371,975 $ 8.8869
$9.1000 - $10.5100............ 51,480 2.54 $ 9.9530 39,606 $ 9.7860
$11.4900 - $11.4900........... 741,874 8.15 $11.4900 157,814 $11.4900
$11.6500 - $30.0000........... 947,335 5.43 $13.9539 43,335 $19.6677
--------- ---- -------- ------- --------
$5.2000 - $30.0000............ 2,938,798 6.34 $10.9335 958,375 $ 9.3050
|
At December 31, 2004, 1,329,802 shares were available for future grant under the Stock Option Plan.
The weighted average fair values of options granted during 2004, 2003, and 2002 were $5.18, $4.55, and $5.31 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 2004, 2003, and 2002, respectively: risk-free interest rates of 3.1%, 3.0%, and 5.2%, no expected dividend yield, expected lives of 5.0, 5.5, and 10.0 years, and an expected volatility of 37%, 37% and 45%.
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DEFERRED COMPENSATION PLAN
The Company maintains a deferred compensation plan ("Deferred Compensation Plan"). This plan is available to directors and certain officers and managers of the Company. The plan allows participants to defer all or a portion of their directors fees and/or salary and annual bonuses, as applicable, and it permits the Company to make discretionary contributions to any participant's account. Since inception of the Plan, this discretionary contribution provision has been limited to a matching of the employee participants contribution on a basis equivalent to matching permitted under the Company's 401(k) Retirement Savings Plan. All contributions to the participants' accounts vest immediately. The Deferred Compensation Plan does not have dollar limits on tax-deferred contributions. The assets of the Deferred Compensation Plan are held in a Rabbi Trust ("Trust") and, therefore, are available to satisfy the claims of the Company's creditors in the event of bankruptcy or insolvency of the Company. Participants have the ability to direct the Plan Administrator to invest the assets in their accounts, including any discretionary contributions by the Company, in pre-approved mutual funds held by the Trust. Prior to November 1, 2003, participants also had the ability to direct the Plan Administrator to invest the assets in their accounts in Company common stock. In addition, participants currently have the right to request that the Plan Administrator re-allocate the portfolio of investments (i.e. cash or mutual funds) in the participants' individual accounts within the Trust. Current balances invested in Company common stock may not be further increased. Company contributions are in the form of cash. Distributions from the plan are generally made upon the participants' termination as a director and/or employee, as applicable, of the Company. Participants receive payments from the Plan in cash. At December 31, 2004, the balance of the assets in the Trust totaled $3.5 million, including 31,028 shares of common stock of the Company reflected as treasury stock at a value of $0.3 million. The Company accounts for the Deferred Compensation Plan in accordance with EITF 97-14, "Accounting for Deferred Compensation Arrangements Where Amounts Earned are Held in a Rabbi Trust and Invested."
Assets of the Trust, other than common stock of the Company, are invested in nine funds covering a variety of securities and investment strategies. These mutual funds are publicly quoted and reported at market value. The Company accounts for these investments in accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." The Trust also holds common shares of the Company. The Company's common stock that is held by the Trust has been classified as treasury stock in the stockholders' equity section of the consolidated balance sheet. The market value of the assets held by the Trust, exclusive of the market value of the shares of the Company's common stock that are reflected as treasury stock, at December 31, 2004 was $3.2 million and is classified as "Other noncurrent assets" in the consolidated balance sheet. Amounts payable to the plan participants at December 31, 2004, including the market value of the shares of the Company's common stock that are reflected as treasury stock, was $3.8 million and is classified as "Other liabilities" in the consolidated balance sheet.
In accordance with EITF 97-14, all market value fluctuations of the Trust assets have been reflected in the consolidated statements of income. Increases or decreases in the value of the plan assets, exclusive of the shares of common stock of the Company, have been included as compensation adjustments in the respective statements of income. Increases or decreases in the market value of the deferred compensation liability, including the shares of common stock of the Company held by the Trust, while recorded as treasury stock, are also included as compensation adjustments in the consolidated statements of income. In response to the changes in total market value of the Company's common stock held by the Trust, the Company recorded net compensation expense adjustments of $0.2 million in 2004 and $0.1 million in both 2003 and 2002.
11. SEGMENT AND RELATED INFORMATION
In accordance with SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," the Company has identified the following reportable segments: offshore products, wellsite services and tubular services. The Company's reportable segments are strategic business units that offer
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
different products and services. They are managed separately because each business requires different technology and marketing strategies. Most of the businesses were acquired as a unit, and the management at the time of the acquisition was retained.
Financial information by industry segment for each of the three years ended December 31, 2004, 2003 and 2002, is summarized in the following table in thousands. The accounting policies of the segments are the same as those described in the summary of significant accounting policies.
CORPORATE
OFFSHORE WELLSITE TUBULAR AND
PRODUCTS SERVICES SERVICES ELIMINATIONS TOTAL
-------- -------- -------- ------------ --------
2004
Revenues from unaffiliated
customers................. $206,791 $336,907 $427,314 $ -- $971,012
Depreciation and
amortization.............. 8,966 26,277 680 65 35,988
Operating income (loss)...... 7,225 55,466 40,928 (8,503) 95,116
Cash capital expenditures.... 7,829 51,896 258 58 60,041
Total assets................. 279,361 401,229 243,339 9,683 933,612
2003
Revenues from unaffiliated
customers................. $231,897 $256,060 $235,724 $ -- $723,681
Depreciation and
amortization.............. 7,765 19,448 642 50 27,905
Operating income (loss)...... 27,850 37,245 5,949 (5,877) 65,167
Cash capital expenditures.... 10,778 30,178 188 117 41,261
Total assets................. 257,227 308,266 139,305 12,388 717,186
2002
Revenues from unaffiliated
customers................. $190,638 $209,842 $216,368 $ -- $616,848
Depreciation and
amortization.............. 6,056 16,562 593 101 23,312
Operating income (loss)...... 27,249 27,372 5,442 (5,503) 54,560
Cash capital expenditures.... 6,593 19,302 187 4 26,086
Total assets................. 242,701 254,949 137,112 9,454 644,216
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OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Financial information by geographic segment for each of the three years ended December 31, 2004, 2003 and 2002, is summarized below in thousands. Revenues in the US include export sales. Revenues are attributable to countries based on the location of the entity selling the products or performing the services. Total assets are attributable to countries based on the physical location of the entity and its operating assets and do not include intercompany balances.
UNITED UNITED OTHER
STATES CANADA KINGDOM NON-US TOTAL
-------- -------- ------- ------- --------
2004
Revenues from unaffiliated
customers.................... $726,046 $171,378 $39,831 $33,757 $971,012
Long-lived assets............... 364,341 104,921 17,940 11,226 498,428
2003
Revenues from unaffiliated
customers.................... $511,895 $126,352 $56,556 $28,878 $723,681
Long-lived assets............... 317,605 82,529 17,969 11,006 429,109
2002
Revenues from unaffiliated
customers.................... $427,578 $ 96,087 $53,023 $40,160 $616,848
Long-lived assets............... 292,056 67,721 16,184 12,449 388,410
|
No customers accounted for more than 10% of the Company's revenues in any of the years ended December 31, 2004, 2003 and 2002.
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following table summarizes quarterly financial information for 2004, 2003 and 2002 (in thousands, except per share amounts):
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
2004
Revenues(1).............................. $204,190 $222,182 $251,538 $293,102
Gross profit*............................ 42,893 46,167 54,017 53,297
Net income............................... 16,156 12,155 15,513 15,538
Basic earnings per share................. 0.33 0.25 0.31 0.31
Diluted earnings per share............... 0.32 0.24 0.31 0.31
2003
Revenues(1).............................. $185,577 $163,564 $177,170 $197,370
Gross profit*............................ 40,609 36,233 37,815 35,910
Net income............................... 13,369 10,154 11,334 9,575
Basic earnings per share................. 0.28 0.21 0.23 0.20
Diluted earnings per share............... 0.27 0.21 0.23 0.19
2002
Revenues(1).............................. $150,600 $150,839 $154,595 $160,814
Gross profit*............................ 30,447 29,149 32,839 37,360
Net income............................... 9,808 8,219 10,188 11,461
Basic earnings per share................. 0.20 0.17 0.21 0.24
Diluted earnings per share:.............. 0.20 0.17 0.21 0.23
|
* Represents "revenues" less "product costs" and "service and other costs" included in the Company's consolidated statements of operations.
(1) The Company's business in the well site services segment, particularly in Canada, is seasonal with the highest activity occurring in the winter months.
OIL STATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. VALUATION ALLOWANCES
Activity in the valuation accounts was as follows (in thousands):
BALANCE AT CHARGED TO TRANSLATION BALANCE AT
BEGINNING COSTS AND AND OTHER, END OF
OF PERIOD EXPENSES DEDUCTIONS NET PERIOD
---------- ---------- ---------- ----------- ----------
Year Ended December 31, 2004:
Allowance for doubtful
accounts receivable........ $2,021 $ 419 $ (938) $ 21 $1,523
Reserve for inventories....... 5,279 109 (610) 121 4,899
Reserves related to
discontinued operations.... 4,785 -- (585) -- 4,200
Year Ended December 31, 2003:
Allowance for doubtful
accounts receivable........ $2,287 $ 702 $ (633) $(335) $2,021
Reserve for inventories....... 4,778 380 (29) 150 5,279
Reserves related to
discontinued operations.... 5,757 -- (972) -- 4,785
Year Ended December 31, 2002:
Allowance for doubtful
accounts receivable........ $2,733 $ 221 $(1,266) $ 599 $2,287
Reserve for inventories....... 5,697 (198) (810) 89 4,778
Reserves related to
discontinued operations.... 6,109 -- (352) -- 5,757
|
14. SUBSEQUENT EVENTS
In February 2005, the Company completed the acquisition of Elenburg Exploration Company, Inc. (Elenburg) for total consideration of $22.0 million. The cash portion of the purchase price ($21.3 million) was funded by the Company's existing credit lines. Elenburg, which is a Wyoming based land drilling company, will become part of our well site services segment. Elenburg owns seven drilling rigs that operate primarily in Montana, Wyoming, Colorado and Utah.
On January 31, 2005, the Company amended its existing revolving credit facility with its current group of lenders. Under terms of the amendment, Oil States increased the facility to $325 million from $250 million and extended the term of the facility through January 2010. The amendment also adjusted several covenants and lowered borrowing rates across the pricing grid.
The Company's Board of Directors has authorized the repurchase of shares of the Company's common stock, par value $.01 per share. The Board of Directors authorized the expenditure of up to $50 million to repurchase shares.
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
----------- -----------
3.1 -- Amended and Restated Certificate of Incorporation
(incorporated by reference to Exhibit 3.1 to the Company's
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 Company's 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 Company's 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 Company's 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 Company's
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 Company's Annual Report on
Form 10-K for the year ended December 31, 2002, as filed
with the Commission on March 13, 2003).
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 Company's 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 Company's 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
Company's 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
Company's 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 (incorporated by reference to
Exhibit 10.5 to the Company's Annual Report on Form 10-K for
the year ended December 31, 2000, as filed with the
Commission on March 30, 2001).
10.6** -- Deferred Compensation Plan effective November 1, 2003.
(incorporated by reference to Exhibit 10.6 to the Company's
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 Company's 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 Company's 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 Company's 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 Company's
Registration Statement on Form S-1 (File No. 333-43400)).
|
EXHIBIT NO. DESCRIPTION
----------- -----------
10.11** -- Form of Change of Control Severance Plan for Selected
Members of Management (incorporated by reference to Exhibit
10.11 of the Company's 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 Company's
Quarterly Report on Form 10Q 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 Company's Quarterly Report on Form 10-Q for
the three months ended June 30, 2004, as filed with the
Commission on August 4, 2004).
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
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
Company's 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
Company's 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 Company's 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 Company's
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 Company's 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 Company's
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 Company's
2001 Equity Participation Plan
10.19**,* -- Form of Employee Non Qualified Stock Option Agreement under
the Company's 2001 Equity Participation Plan
10.20**,* -- Form of Restricted Stock Agreement under the Company's 2001
Equity Participation Plan
10.21**,* -- Non-Employee Director Compensation Summary
21.1* -- List of subsidiaries of the Company.
23.1* -- Consent of Independent Registered Public Accounting Firm.
24.1* -- Powers of Attorney for Directors.
|
EXHIBIT NO. DESCRIPTION
----------- -----------
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.
EXHIBIT 10.12B
AMENDMENT NO. 1
This Amendment No. 1 dated as of January 31, 2005 (this "Amendment") is among Oil States International, Inc., a Delaware corporation (the "U.S. Borrower"), PTI Group Inc., a corporation amalgamated under the laws of the Province of Alberta (the "Canadian Borrower" and, together with the U.S. Borrower, the "Borrowers"), each of the Guarantors, the lenders party to the Credit Agreement described below (the "Lenders"), Wells Fargo Bank, N.A., as successor to Wells Fargo Bank Texas, National Association ("Wells Fargo"), as administrative agent (in such capacity, the "Administrative Agent") for the Lenders, and The Bank of Nova Scotia ("BNS"), as administrative agent (in such capacity, the "Canadian Administrative Agent") for the Canadian Lenders (as defined in Credit Agreement described below).
INTRODUCTION
A. The Borrowers, the Lenders and the Agents are parties to the Credit Agreement dated as of October 30, 2003 (the "Credit Agreement").
B. The Borrower has requested that the Lenders agree to (1) increase the Total U.S. Commitments to $280,000,000, (2) extend the Maturity Date from October 30, 2007 to January 31, 2010 and (3) make certain other amendments to the Credit Agreement.
THEREFORE, the Borrower, the Agents and the Lenders hereby agree as follows:
Section 1. Definitions. Unless otherwise defined in this Amendment, terms used in this Amendment that are defined in the Credit Agreement shall have the meanings assigned to such terms in the Credit Agreement.
Section 2. Amendments. The Credit Agreement shall be amended as follows:
(a) The second paragraph of the Credit Agreement shall be amended by replacing "U.S.$205,000,000" with "U.S.$280,000,000".
(b) Section 1.01 of the Credit Agreement shall be amended as follows:
(i) the definition of "Adjusted LIBO Rate" shall be amended by replacing "1/16" with "1/100";
(ii) the definition of "Administrative Fee Letter" shall be amended by replacing "September 17, 2003" with "December 13, 2004";
(iii) the definition of "Applicable Percentage" shall be amended by replacing the table set forth therein in its entirety as follows:
ABR, Canadian Prime Rate Commitment
Leverage Ratio Eurocurrency/B/A Spread and U.S. Base Rate Spread Fee Percentage
Category 1
Less than 1.00 to 1.00 0.75% 0% 0.20%
Category 2
Greater than or equal to 1.00% 0% 0.25%
1.00 to 1.00 but less than
1.50 to 1.00
Category 3
Greater than or equal to 1.25% 0.25% 0.30%
1.50 to 1.00 but less than
2.00 to 1.00
Category 4
Greater than or equal to 1.50% 0.50% 0.375%
2.00 to 1.00 but less than
2.50 to 1.00
Category 5
Greater than or equal to 1.75% 0.75% 0.375%
2.50 to 1.00
|
(iv) the definition of "Calculation Date" shall be amended by adding (A) "or an Alternative Currency" after "Canadian dollars" in the fourth line thereof and (B) "or Letters of Credit denominated in Alternative Currencies" after "Canadian dollars" in the eighth line thereof;
(v) the definition of "Exchange Rate" shall be amended by adding (A) "or the Applicable Alternative Currency" after "Canadian dollars" in the second line thereof and (B) "or Alternative Currencies" after "Canadian dollars" in the fourteenth line thereof;
(vi) the definition of "Letter of Credit" shall be amended by replacing the second sentence thereof in its entirety as follows:
A Letter of Credit shall be a "U.S. Letter of Credit" if issued for the account of the U.S. Borrower in U.S. dollars or an Alternative Currency, and a "Canadian Letter of Credit" if issued for the account of the Canadian Borrower in Canadian dollars.
(vii) the definition of "Maturity Date" shall be amended in its entirety to mean "January 31, 2010";
(viii) the definition of "Mortgaged Properties" shall be amended in its entirety to read as follows:
"Mortgaged Properties" shall mean the owned real properties of the Loan Parties specified on Schedule 1.01(d).
(ix) the definition of "Mortgages" shall be amended in its entirety to read as follows:
"Mortgages" shall mean the mortgages, deeds of trust, debentures and other security documents delivered pursuant to clause (i) of Section 4.02(m).
(x) the definition of "U.S. Credit Exposure" is amended by adding "the U.S. Dollar Equivalent of" before "the aggregate amount at such time of such U.S. Lender's U.S. L/C Exposure" in the third line thereof;
(xi) the definition of "U.S. Dollar Equivalent" is amended by adding "or an Alternative Currency" after "Canadian dollars" in the second line thereof;
(xii) the definition of "U.S. L/C Exposure" is amended by adding (A) "the U.S. Dollar Equivalent of" before "the aggregate undrawn amount of all outstanding U.S. Letters of Credit at such time" in subsection (a) thereof and (B) "the U.S. Dollar Equivalent of" before "the aggregate principal amount of all L/C Disbursements in respect of U.S. Letters of Credit" in subsection (b) thereof;
(xiii) the definition of "Wells Fargo" shall be amended to mean "Wells Fargo Bank, N.A.";
(xiv) the definitions of "Debt Service Coverage Ratio", "Incremental Assumption Agreement", "Incremental Commitment", "Incremental Commitment Amount", "Incremental Lender" and "Maintenance Capital Expenditures" shall be deleted; and
(xv) the following new definitions shall be added in alphabetical order:
"Alternative Currency" means each of Euro, Pounds Sterling, Japanese Yen, Singapore Dollar, Australian Dollar, Hong Kong Dollar and each other currency (other than U.S. dollars or Canadian dollars) that is approved in accordance with Section 1.06.
"Interest Coverage Ratio" for any period shall mean the ratio of (a) Consolidated EBITDA for such period to (b) Consolidated Interest Expense for the U.S. Borrower and the Subsidiaries for such period. Solely for purposes of this definition, if, at any time the Interest Coverage Ratio is being determined, either Borrower or any Subsidiary shall have completed a Permitted Acquisition or Asset Sale since the beginning of the relevant four fiscal quarter period, the Interest Coverage Ratio shall be determined on a pro forma basis (using the criteria therefor described in Section 6.04(i)) as if such Permitted Acquisition or Asset Sale, and any related incurrence or repayment of Indebtedness, had occurred at the beginning of such period.
"Tangible Net Worth" shall mean, at any time, Consolidated Net Worth at such time less assets that are considered to be intangible assets under GAAP, including customer lists, goodwill, computer software, copyrights, trade names, trademarks, patents, franchises, licenses, unamortized deferred charges, unamortized debt discount and capitalized research and development costs.
(c) Section 1.05 shall be amended by adding "or any other Alternative Currency" at the end thereof.
(d) A new Section 1.06 shall be added as follows:
SECTION 1.06. ADDITIONAL ALTERNATIVE CURRENCIES. The Borrowers may from time to time request that Letters of Credit be issued in a currency other than those specifically listed in the definition of "Alternative Currency;" provided that such requested currency is a lawful currency that is readily available and freely transferable and convertible into U.S. dollars. Such request shall be subject to the approval of the Administrative Agent and the Applicable Issuing Bank. Any such request shall be made to the Administrative Agent not later than 11:00 a.m., ten Business Days prior to the date of the requested Letter of Credit (or such other time or date as may be agreed by the Administrative Agent and the Applicable Issuing Bank, in its or their sole discretion). The Administrative Agent shall promptly notify the Applicable Issuing Bank thereof. The Applicable Issuing Bank shall notify the Administrative Agent, not later than 11:00 a.m., five Business Days after receipt of such request whether it consents, in its sole discretion, to the issuance of Letters of Credit, as the case may be, in such requested currency. Any failure by the Applicable Issuing Bank to respond to such request within the time period specified in the preceding sentence shall be deemed to be a refusal by such Issuing Bank to issue the requested Letters of Credit in such requested currency at that time. If the Administrative Agent and the Applicable Issuing Bank consent to the issuance of Letters of Credit in such requested currency, the Administrative Agent shall so notify the Borrowers and such currency shall thereupon be deemed for all purposes to be an Alternative Currency hereunder for purposes of any Letter of Credit issuances. If the Administrative Agent shall fail to obtain consent to any request for an additional currency under this Section 1.06, the Administrative Agent shall promptly so notify the Borrowers.
(e) Section 2.09(d) shall be deleted in its entirety.
(f) Section 2.20(a) shall be amended by deleting subsection (iv) thereof and replacing it in its entirety with "(iv) [intentionally omitted]";
(g) Section 2.21 shall be amended as follows:
(i) Subsection (a) thereof shall be amended by adding "denominated in U.S. dollars, Canadian dollars, or in one or more Alternative Currencies" after "Letter of Credit" in the second line thereof;
(ii) The first sentence of subsection (b) thereof shall be replaced in its entirety as follows:
In order to request the issuance of a Letter of Credit denominated in dollars, Canadian dollars or an Alternative Currency (or to amend, renew or extend an existing Letter of Credit issued in dollars, Canadian dollars or an Alternative Currency), the applicable Borrower shall hand deliver or fax to the Applicable Issuing Bank and the Administrative Agent (reasonably in advance of the requested date of issuance, amendment, renewal or extension) a notice requesting the issuance of a Letter of Credit, or identifying the Letter of Credit to be amended, renewed or extended, the date of issuance, amendment, renewal or extension, the date on which such Letter of Credit is to expire (which shall comply with paragraph (c) below), the amount and currency of such Letter of Credit, the name and address of the beneficiary thereof and such other information as shall be necessary to prepare such Letter of Credit. In order to request the issuance of a Letter of Credit in a currency other than those specifically listed in the definition of "Alternative Currency", the applicable Borrower shall follow the procedures set forth in Section 1.06 hereof.
(iii) Subsection (c) thereof shall be amended in its entirety as follows:
(c) Expiration Date. Each Letter of Credit shall have an expiration date not later than the earlier of three years after the date of the issuance of such Letter of Credit and the date that is 12 months after the Maturity Date; provided that 90 days prior to the Maturity Date the Borrowers shall deposit in an account with the U.S. Collateral Agent or the Canadian Collateral Agent, as the case may be, for the benefit of the U.S. Lenders or Canadian Lenders, as the case may be, an amount in cash equal to at least 105% of the U.S. L/C Exposure or the Canadian L/C Exposure, respectively, as of such date. Such deposit shall be held by the U.S. Collateral Agent or the Canadian Collateral Agent, as the case may be, as collateral for the payment and performance of the Obligations. Such Collateral Agent shall have exclusive dominion and control, including the exclusive right of withdrawal, over such account. Other than any interest earned on the investment of such deposits in Permitted Investments, which investments shall be made at the option and sole discretion of such Collateral Agent, such deposits shall not bear interest. Interest or profits, if any, on such investments shall accumulate in such account. Moneys in such account shall (i) automatically be applied by the Applicable Administrative Agent to reimburse the Applicable Issuing Bank for L/C Disbursements for which it has not been reimbursed, (ii) be held for the satisfaction of the reimbursement obligations of the applicable Borrower for the U.S. L/C Exposure or the Canadian L/C Exposure, as
applicable, at such time, (iii) if the maturity of the Loans has been accelerated, be applied to satisfy the Obligations and (iv) provided that no Event of Default has occurred and is continuing, be released to the Borrowers to the extent that the funds on deposit exceed 105% of the U.S. L/C Exposure or the Canadian L/C Exposure, respectively.
(h) Section 2.23 is deleted in its entirety;
(i) Section 3.23 is deleted in its entirety;
(j) Section 5.04(c) is deleted in its entirety and replaced with "[Intentionally omitted]";
(k) Section 5.04(f) is deleted in its entirety and replaced with "[Intentionally omitted]";
(l) Section 5.09 is amended by (i) replacing each occurrence therein of "including real and other properties" with "including properties other than real properties" and (ii) deleting the second to last sentence thereof;
(m) Section 6.01 shall be amended as follows:
(i) Subsection (j) thereof shall be amended by replacing "10% of the U.S. Borrower's Consolidated Net Worth calculated on the date of incurrence as of the most recent fiscal quarter for which financial statements are available" with "$200,000,000"; and
(ii) Subsection (k) thereof shall be amended by replacing "5%" with "10%";
(n) Section 6.02(m) shall be amended by replacing "U.S.$2,500,000" with "U.S.$20,000,000";
(o) Section 6.04 shall be amended as follows:
(i) Subsection (i) thereof shall be amended by replacing (A) "2.0 to 1.0" with "2.5 to 1.0" and (B) "10%" with "15%"; and
(ii) Subsection (l) thereof shall be amended by replacing "U.S.$10,000,000" with "the greater of (i) U.S.$50,000,000 at any time outstanding or (ii) 15% of the U.S. Borrower's Tangible Net Worth calculated on the date of such investment, loan or advance as of the most recent fiscal quarter for which financial statements are available";
(p) Section 6.05(b) shall be amended by replacing "5%" with "10%";
(q) Section 6.06(a)(iii) shall be amended in its entirety as follows:
(iii) so long as no Event of Default or Default shall have occurred and be continuing or result therefrom and so long as U.S.$10,000,000 of the Total
Commitment is unused and available, the U.S. Borrower and, with respect to the Exchangeable Shares, PTI Holdco (with funds advanced by the U.S. Borrower) may (A) if the Leverage Ratio is less than 2.5 to 1.0 both before and after giving pro forma effect to such Restricted Payment, make Restricted Payments in any amount; (B) if the Leverage Ratio is greater than or equal to 2.5 to 1.0 both before and after giving pro forma effect to such Restricted Payment, make Restricted Payments in an aggregate amount of the excess of (x) U.S.$20,000,000 over (y) the aggregate amount expended to prepay, purchase or otherwise retire or acquire for value Subordinated Indebtedness prior to the stated maturity thereof (the "Permitted Amount"); and (C) if the Leverage Ratio is less than 2.5 to 1.0 before but greater than or equal to 2.5 to 1.0 after giving pro forma effect to such Restricted Payment, then to the extent that such Restricted Payment results in the Leverage Ratio being greater than or equal to 2.5 to 1.0, make Restricted Payments in an aggregate amount of the Permitted Amount until the Leverage Ratio is less than 2.5 to 1.0 as of the end of any fiscal quarter, and thereafter subsection (A) above shall apply.
(r) Section 6.10 shall be amended in its entirety as follows:
SECTION 6.10. INTEREST COVERAGE RATIO. Permit the Interest Coverage Ratio for any period of four consecutive fiscal quarters of the U.S. Borrower, in each case taken as one accounting period, to be less than 3.0 to 1.0.
(s) Section 9.04(b) shall be amended by deleting "and" before subsection (iii) thereof and adding the following new subsection (iv):
and (iv) any Lender making such an assignment may assign any percentage of a Class of Loans and its Commitments related thereto without respect to the percentage assigned, if any, of any other Class of Loans and related Commitments.
(t) A new Section 9.18 is hereby added as follows:
SECTION 9.18. RELEASE OF COLLATERAL. Notwithstanding anything herein or in any Loan Document to the contrary, if (a) all Commitments have expired or been terminated; (b) all Obligations except for obligations under Letters of Credit have been paid; and (c) all outstanding Letters of Credit have been cash collateralized pursuant to the terms of Section 2.21(c), then the U.S. Collateral Agent and the Canadian Collateral Agent, as the case may be, shall cause all Liens on all Collateral (except for Liens on the cash collateral posted pursuant to Section 2.21(c)) to be released.
(u) Schedule 2.01 to the Credit Agreement shall be amended in its entirety with Schedule 2.01 attached to this Amendment.
(v) Exhibit I to the Credit Agreement shall be amended in its entirety with Exhibit I attached to this Amendment.
Section 3. Representations and Warranties. The Borrowers represent and warrant to the Administrative Agent and the Lenders that:
(a) the representations and warranties set forth in Article III of the Credit Agreement and in each other Loan Document are true and correct in all material respects on and as of the date hereof with the same effect as though made on and as of such date, except to the extent such representations and warranties expressly relate to an earlier date;
(b) each Borrower and each other Loan Party are in compliance with all the terms and provisions set forth in the Credit Agreement and in each other Loan Document on its part to be observed or performed, and as of the date hereof, no Event of Default or Default has occurred and is continuing;
(c) there has been no material adverse change in the business, assets, operations, condition (financial or otherwise) or prospects of the Borrowers and the Subsidiaries, taken as a whole, since December 31, 2003; and
(d) (i) the execution, delivery, and performance of this Amendment are within the corporate power and authority of the Borrowers and have been duly authorized by appropriate proceedings, and (ii) this Amendment constitutes a legal, valid, and binding obligation of the Borrowers, enforceable in accordance with its terms, except as limited by applicable bankruptcy, insolvency, reorganization, moratorium, or similar laws affecting the rights of creditors generally and general principles of equity.
Section 4. Effectiveness. This Amendment shall become effective, and the Credit Agreement shall be amended as provided in this Amendment, upon the occurrence of the following conditions precedent:
(a) the Agents shall have received, on behalf of themselves, the Lenders and the Issuing Banks;
(i) duly and validly executed originals of this Amendment to the Administrative Agent;
(ii) if requested by any Lender, a new promissory note or promissory notes payable to such Lender in the amount of its U.S. Commitment and/or Canadian Commitment, as applicable, and in form and substance reasonably acceptance to the Applicable Administrative Agent and the applicable Borrower;
(iii) a favorable written opinion of (A) Vinson & Elkins L.L.P., U.S. counsel for the Borrowers, and (B) Fraser Milner Casgrain, Canadian counsel to the Canadian Borrower, in each case (1) dated the date of this Amendment, (2) addressed to the Issuing Banks, the Administrative Agents and the Lenders, and (3) covering such matters relating to the Loan Documents as the Administrative Agent shall reasonably request;
(iv) a certificate as to the good standing or tax status of each Loan Party as of a recent date, from the Secretary of State or other relevant Governmental Authority of the state or jurisdiction of its organization;
(v) a certificate of the Secretary or Assistant Secretary of each Loan Party dated the date of this Amendment and certifying (A) that that there have been no changes to the organizational documents of such Loan Party since the Closing Date or attaching such amendments, (B) that attached thereto is a true and complete copy of resolutions duly adopted by the Board of Directors of such Loan Party authorizing the execution, delivery and performance of this Amendment and the other Loan Documents to which such person is a party and that such resolutions have not been modified, rescinded or amended and are in full force and effect, and (C) as to the incumbency and specimen signature of each officer executing this Amendment or any Loan Document or any other document delivered in connection herewith on behalf of such Loan Party;
(vi) a certificate, dated the date of this Amendment and signed by a Financial Officer of the U.S. Borrower, confirming compliance with Section 3(a), (b) and (c) of this Amendment;
(vii) each document (including each financing statement) required by law or reasonably requested any Collateral Agent to be filed, registered or recorded in order to create in favor of the Applicable Collateral Agent for the benefit of the Secured Parties a valid, legal and perfected first-priority security interest in and lien on the Collateral (subject to any Lien expressly permitted by Section 6.02) described in such agreement shall have been delivered to the Applicable Collateral Agent; and
(viii) such other documents, governmental certificates, agreements, and lien searches as any Lender or any Agent may reasonably request;
(b) the Administrative Agent shall have received all Fees and other amounts due and payable on or prior to the date of this Amendment, including, to the extent invoiced, reimbursement or payment of all out-of-pocket expenses (including, without limitation, the reasonable fees, charges and disbursements of counsel for the Administrative Agent) required to be reimbursed or paid by the Borrowers hereunder or under any other Loan Document; and
(c) all requisite Governmental Authorities and third parties shall have approved or consented to the transactions contemplated hereby to the extent required and there shall be no litigation, governmental or judicial action, actual or threatened, that could reasonably be expected to restrain, prevent or impose burdensome conditions on the transactions contemplated hereby.
Section 5. Reaffirmation of Guaranty and Liens.
(a) Each Subsidiary of the U.S. Borrower that is listed on the signature pages to this Amendment (each, a "Guarantor") (i) is party to a Guarantee Agreement, guaranteeing payment of the Obligations, (ii) has reviewed the Amendment and related documents, and (iii) waives any defenses to the enforcement of its Guaranty that it may have, and agrees that according to its terms such Guarantee will continue in full force and effect to guaranty the Obligations under the
Loan Documents, as the same may be amended, supplemented, or otherwise modified, and such other amounts in accordance with the terms of such Guaranty.
(b) The Borrowers and each Guarantor (i) are parties to certain
Security Documents securing and supporting the Obligations, (ii) have reviewed
the Amendment and related documents, and (iii) waives any defenses that it may
have to the enforcement of the Security Documents to which they are party, and
that according to their terms the Security Documents to which they are party
will continue in full force and effect to secure the Obligations under the Loan
Documents, as the same may be amended, supplemented, or otherwise modified, and
(iv) acknowledge, represent, and warrant that the liens and security interests
created by the Security Documents are valid and subsisting and create a first
priority perfected security interest subject to Liens expressly permitted by
Section 6.02 in the Collateral to secure the Obligations.
(c) The delivery of this Amendment does not indicate or establish a requirement that any Guarantee or Security Document requires any Borrower's or any Guarantor's approval of amendments to the Credit Agreement, but has been furnished to the Agents and the Lenders as a courtesy at the Administrative Agent's request.
Section 6. Effect on Credit Documents.
(a) Except as amended herein, the Credit Agreement and the Loan Documents remain in full force and effect as originally executed, and nothing herein shall act as a waiver of any of the Administrative Agent's or Lenders' rights under the Loan Documents, as amended, including the waiver of any Default or Event of Default, however denominated.
(b) This Amendment is a Loan Document for the purposes of the provisions of the other Loan Documents. Without limiting the foregoing, any breach of representations, warranties, and covenants under this Amendment may be a Default or Event of Default under other Loan Documents.
Section 7. Choice of Law. This Amendment shall be governed by and construed and enforced in accordance with the laws of the State of Texas.
Section 8. Counterparts. This Amendment may be signed in any number of counterparts, each of which shall be an original. Delivery of an executed signature page to this Amendment by facsimile transmission shall be as effective as delivery of a manually signed counterpart of this Amendment.
[The remainder of this page has been left blank intentionally.]
EXECUTED to be effective as of the date first above written.
BORROWER:
OIL STATES INTERNATIONAL, INC.
PTI GROUP INC.
A - Z TERMINAL CORPORATION
GENERAL MARINE LEASING, LLC
HWC ENERGY SERVICES, INC.
HWC LIMITED
HYDRAULIC WELL CONTROL, LLC
OIL STATES MANAGEMENT, INC.
SOONER HOLDING COMPANY
SOONER INC.
SOONER PIPE GP, L.L.C.,
By: Sooner, Inc.
its sole member
SOONER PIPE LP, L.L.C., by its Manager
CAPSTAR DRILLING, L.P.
CAPSTAR DRILLING GP, L.L.C.
By: HWC Energy Services, Inc.
its sole member
SPECIALTY RENTAL TOOLS & Supply, L.P.
By: HWC Energy Services, Inc.
its general partner
each by
Signature Page to Amendment No. 1
(Oil States International, Inc.)
OIL STATES SKAGIT SMATCO, LLC
OIL STATES INDUSTRIES, INC.
each by
CAPSTAR DRILLING LP, L.L.C.
CROWN CAMP SERVICES, INC.
PTI INTERNATIONAL INC.
PTI PREMIUM CAMP SERVICES LTD.
TRAVCO INDUSTRIAL HOUSING LTD.
CROWN CAMP SERVICES LTD.
PTI CAMP INSTALLATIONS LTD.
PTI INTERNATIONAL LTD.
892493 ALBERTA INC.
each by
Signature Page to Amendment No. 1
(Oil States International, Inc.)
WELLS FARGO BANK, N.A., as a U.S.
Lender and Administrative Agent
Signature Page to Amendment No. 1
(Oil States International, Inc.)
THE BANK OF NOVA SCOTIA, as a Canadian Lender and as Canadian Administrative Agent,
Title:
Signature Page to Amendment No. 1
(Oil States International, Inc.)
SCOTIABANC INC., as a U.S. Lender
Title:
Signature Page to Amendment No. 1
(Oil States International, Inc.)
HIBERNIA NATIONAL BANK, as a U.S.
Lender
Title:
Signature Page to Amendment No. 1
(Oil States International, Inc.)
ROYAL BANK OF CANADA, as a U.S. Lender
Title:
Signature Page to Amendment No. 1
(Oil States International, Inc.)
ROYAL BANK OF CANADA, as a Canadian Lender
Title:
Signature Page to Amendment No. 1
(Oil States International, Inc.)
JPMORGAN CHASE BANK, N.A., as a U.S.
Lender and a Canadian Lender
Title:
Signature Page to Amendment No. 1
(Oil States International, Inc.)
CALYON NEW YORK BRANCH, as a U.S.
Lender
Title:
Title:
Signature Page to Amendment No. 1
(Oil States International, Inc.)
CREDIT SUISSE FIRST BOSTON, ACTING
THROUGH ITS CAYMAN ISLANDS BRANCH, as
a U.S. Lender
Title:
Title:
Signature Page to Amendment No. 1
(Oil States International, Inc.)
CREDIT SUISSE FIRST BOSTON TORONTO
BRANCH, as a Canadian Lender
Title:
Title:
Signature Page to Amendment No. 1
(Oil States International, Inc.)
THE TORONTO-DOMINION BANK, as a U.S.
Lender
Title:
Signature Page to Amendment No. 1
(Oil States International, Inc.)
THE TORONTO-DOMINION BANK, as a
Canadian Lender
Title:
Signature Page to Amendment No. 1
(Oil States International, Inc.)
SOUTHWEST BANK OF TEXAS, N.A., as a
U.S. Lender
Title:
Signature Page to Amendment No. 1
(Oil States International, Inc.)
BANK OF SCOTLAND, as a U.S. Lender
Title:
Signature Page to Amendment No. 1
(Oil States International, Inc.)
BARCLAYS BANK PLC, as a U.S. Lender
Title:
Signature Page to Amendment No. 1
(Oil States International, Inc.)
SCHEDULE 2.01
LENDERS AND COMMITMENTS
COMMITMENTS
U.S. Canadian Total
Bank Commitment Commitment Commitment
------------------------------- ---------- ---------- ----------
Wells Fargo Bank, N.A. $50,000,000 $0 $50,000,000
Royal Bank of Canada $22,750,000 $10,000,000 $32,750,000
Hibernia National Bank $32,750,000 $0 $32,750,000
JPMorgan Chase Bank, N.A. $22,750,000 $10,000,000 $32,750,000
Calyon New York Branch $32,750,000 $0 $32,750,000
The Bank of Nova Scotia $0 $10,000,000 $10,000,000
Scotiabanc Inc. $14,000,000 $0 $14,000,000
Credit Suisse First Boston $19,000,000 $5,000,000 $24,000,000
Southwest Bank of Texas, N.A. $24,000,000 $0 $24,000,000
The Toronto-Dominion Bank $14,000,000 $10,000,000 $24,000,000
Bank of Scotland $24,000,000 $0 $24,000,000
Barclays Bank PLC $24,000,000 $0 $24,000,000
TOTAL $280,000,000 $45,000,000 $325,000,000
|
EXHIBIT I
[Form of]
COMPLIANCE CERTIFICATE
The undersigned, on behalf of the U.S. Borrower, hereby certifies and warrants that [ ] is a Financial Officer of the U.S. Borrower and that, as such, he or she is authorized to execute this certificate for and on behalf of the U.S. Borrower. Except as otherwise disclosed to the Administrative Agent in writing pursuant to the Credit Agreement, to the best knowledge of the undersigned, at no time during the period from [ ] through [ ] (the "Certificate Period") did a Default or an Event of Default exist.
Covenant Maximum/Minimum Actual
-------- --------------- ------
(a) In accordance with the covenant set forth in Maximum
Section 6.05(b) of the Credit Agreement, the fair
market value of all assets sold, transferred, leased $_________ (1) $[ ]
or disposed of pursuant to Section 6.05(b) from and
including the Closing Date through and including the
last day of the Certificate Period in the aggregate
was:
(b) In accordance with the covenant set forth in Maximum
Section 6.06(a)(ii) of the Credit Agreement, in the
most recent fiscal year, the aggregate amount of U.S.$5,000,000 $[ ]
Equity Interests repurchased from, and payments made
to, employees of the U.S. Borrower or a Canadian
Subsidiary as permitted by Section 6.06(a)(ii).
(c) In accordance with the covenant set forth in Maximum
Section 6.06(a)(iii) of the Credit Agreement, the
aggregate amount of Restricted Payments made by the $__________(2) $[ ]
U.S. Borrower and PTI Holdco in the most recent fiscal
year was:
(d) In accordance with the covenant set forth in Minimum
Section 6.10 of the Credit Agreement, the Interest
Coverage Ratio of the U.S. Borrower, for previous four 3.00 to 1.00 [ ]
consecutive fiscal quarters (taken as one accounting
period), was:
|
(1) This figure should be equal to 10% of Consolidated Net Worth calculated on the date of incurrence as of the most recent fiscal quarter for which financial statements are available in the aggregate.
(2) If the Leverage Ratio is greater than 2.5 to 1.0, this figure should not exceed the excess of (x) $20,000,000 over (y) the aggregate amount expended in such fiscal year to prepay, purchase or otherwise retire or acquire for value Subordinated Indebtedness prior to the stated maturity thereof.
Exhibit I Page -29-
(e) In accordance with the covenant set forth in Maximum
Section 6.11 of the Credit Agreement, the Leverage
Ratio, as of the last day of the Certificate Period, 3.00 to 1.00 [ ]
was:
(f) In accordance with the covenant set forth in Minimum
Section 6.12 of the Credit Agreement, the Consolidated
Net Worth as of the last day of the Certificate Period [ ]
was: $____________(3)
|
A calculation sheet reflecting the above-computations is attached hereto as Schedule 1.
IN WITNESS WHEREOF, the undersigned has executed and delivered this certificate, this ____ day of [ ], [ ].
OIL STATES INTERNATIONAL, INC.,
Title:
(3) This figure should be equal to the sum of (A) 85% of Consolidated
Net Worth as of September 30, 2003, plus (B) 50% of Consolidated Net Income (if
positive) for the U.S. Borrower and the Subsidiaries for each fiscal quarter
ending after the Closing Date and on or prior to the date as to which the
compliance with Section 6.12 of the Credit Agreement is being determined, plus
(c) 75% of the Net Cash Proceeds from any Equity Issuance.
Exhibit I Page -30-
SCHEDULE 1
to
EXHIBIT I
CALCULATION SHEET
Exhibit I Page -31-
EXHIBIT 10.18
DIRECTOR STOCK OPTION AGREEMENT
AGREEMENT made this x day of x, 200x, ("Date of Grant") between OIL STATES INTERNATIONAL, INC., a Delaware corporation (the "Company"), and DIRECTOR NAME ("Director").
To carry out the purposes of the 2001 EQUITY PARTICIPATION PLAN OF OIL STATES INTERNATIONAL, INC. (the "Plan"), by affording Director the opportunity to purchase shares of the common stock of the Company, par value $.01 per share ("Stock"), and in consideration of the mutual agreements and other matters set forth herein and in the Plan, the Company and Director hereby agree as follows:
1. GRANT OF OPTION. The Company hereby irrevocably grants to Director the right and option ("Option") to purchase all or any part of an aggregate of NUMBER shares of Stock, on the terms and conditions set forth herein and in the Plan, which Plan is incorporated herein by reference as a part of this Agreement. In the event of any conflict between the terms of this Agreement and the Plan, the Plan shall control. Capitalized terms used but not defined in this Agreement shall have the meaning attributed to such terms in the Plan, unless the context otherwise requires. This Option shall not be treated as an incentive stock option, within the meaning of section 422(b) of the Internal Revenue Code of 1986, as amended (the "Code").
2. PURCHASE PRICE. The purchase price of Stock purchased pursuant to the exercise of this Option shall be $x per share, which has been determined to be not less than the fair market value of the Stock at the Date of Grant of this Option. For all purposes of this Agreement, fair market value of Stock shall be determined in accordance with the provisions of the Plan.
3. EXERCISE OF OPTION. Subject to the earlier expiration of this Option as herein provided, this Option may be exercised, by written notice to the Company at its principal executive office addressed to the attention of its Corporate Secretary at any time and from time to time after the Date of Grant, but, except as otherwise provided below, this Option shall not be exercisable for more than a percentage of the aggregate number of shares offered by this Option determined by the number of annual meetings of the stockholders of the Company from the Date of Grant to the date of such exercise, in accordance with the following schedule:
ANNUAL MEETING OF STOCKHOLDERS PERCENTAGE OF SHARES
FOLLOWING DATE OF GRANT THAT MAY BE PURCHASED
----------------------- ---------------------
Before First 0%
First 25%
Second 50%
Third 75%
Fourth or thereafter 100%
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Notwithstanding the foregoing, if a Change of Control of the Company (as defined in the Plan) occurs, this Option will automatically become fully vested immediately prior to such Change of Control (or such earlier time as may be set by the Committee appointed to administer the Plan).
This Option will terminate and cease to be exercisable upon the date upon which Director's membership on the Board and terminates, except that:
(a) If Director's membership on the Board terminates by reason of disability (within the meaning of section 22(e)(3) of the Code), this Option may be exercised in full by Director at any time during the period of one year following such termination, or by Director's estate (or the person who acquires this Option by will or the laws of descent and distribution or otherwise by reason of the death of Director) during a one year period following Director's death if Director dies during the one year period following such termination.
(b) If Director dies while a member of the Board, Director's estate, or the person who acquires this Option by will or the laws of descent and distribution or otherwise by reason of the death of Director, may exercise this Option in full at any time during the period of one year following the date of Director's death.
(c) If Director's membership on the Board terminates for any reason other than as described in (a) or (b) above, this Option may be exercised by Director at any time during the period of three months following such termination, or by Director's estate (or the person who acquires this Option by will or the laws of descent and distribution or otherwise by reason of the death of Director) during a period of one year following Director's death if Director dies during such three-month period, but in each case only as to the number of shares Director was entitled to purchase hereunder as of the date Director's membership so terminates.
This Option shall not be exercisable in any event after the expiration of ten years from the Date of Grant. The purchase price of shares as to which this Option is exercised shall be paid in full at the time of exercise (a) in cash (including check, bank draft or money order payable to the order of the Company), (b) by constructively tendering to the Company shares of Stock having a fair market value equal to the purchase price and which shares, if acquired pursuant to a Company granted option, have been held by Director for more than six months, (c) if the Stock is readily tradeable on a national securities market, through a "cashless-broker" exercise in accordance
with a Company-established policy or program for the same, or (d) any combination of the foregoing. No fraction of a share of Stock shall be issued by the Company upon exercise of an Option or accepted by the Company in payment of the exercise price thereof; rather, Director shall provide a cash payment for such amount as is necessary to effect the issuance and acceptance of only whole shares of Stock. Unless and until a certificate or certificates representing such shares shall have been issued by the Company to Director, Director (or the person permitted to exercise this Option in the event of Director's death) shall not be or have any of the rights or privileges of a shareholder of the Company with respect to shares acquirable upon an exercise of this Option.
4. STATUS OF STOCK. The Company intends to register for issuance under the Securities Act of 1933, as amended (the "Act"), the shares of Stock acquirable upon exercise of this Option, and to keep such registration effective throughout the period this Option is exercisable. In the absence of such effective registration or an available exemption from registration under the Act, issuance of shares of Stock acquirable upon exercise of this Option will be delayed until registration of such shares is effective or an exemption from registration under the Act is available. The Company intends to use its reasonable best efforts to ensure that no such delay will occur. In the event exemption from registration under the Act is available upon an exercise of this Option, Director (or the person permitted to exercise this Option in the event of Director's death or incapacity), if requested by the Company to do so, will execute and deliver to the Company in writing an agreement containing such provisions as the Company may require to assure compliance with applicable securities laws.
Director agrees that the shares of Stock which Director may acquire by exercising this Option will not be sold or otherwise disposed of in any manner which would constitute a violation of any applicable securities laws, whether federal or state. Director also agrees (i) that the certificates representing the shares of Stock purchased under this Option may bear such legend or legends as the Committee deems appropriate in order to assure compliance with applicable securities laws, and (ii) that the Company may refuse to register the transfer of the shares of Stock purchased under this Option on the stock transfer records of the Company if such proposed transfer would in the opinion of counsel satisfactory to the Company constitute a violation of any applicable securities laws and (iii) that the Company may give related instructions to its transfer agent, if any, to stop registration of the transfer of the shares of Stock purchased under this Option.
5. MEMBERSHIP ON THE BOARD. Director shall be considered to be a member of the Board as long as he remains a Director or consultant of the Company or any of its Affiliates.
6. BINDING EFFECT. This Agreement shall be binding upon and inure to the benefit of any successors to the Company and all persons lawfully claiming under Director.
7. GOVERNING LAW. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Texas, without regard to conflict of laws principles thereof.
IN WITNESS WHEREOF, the Company has caused this Agreement to be duly executed by its officer thereunto duly authorized, and Director has executed this Agreement, all as of the day and year first above written.
OIL STATES INTERNATIONAL, INC.
EXHIBIT 10.19
NONQUALIFIED STOCK OPTION AGREEMENT
AGREEMENT made this x day of x, 200x, between OIL STATES INTERNATIONAL, INC., a Delaware corporation (the "Company"), and EMPLOYEE NAME ("Employee").
To carry out the purposes of the 2001 EQUITY PARTICIPATION PLAN OF OIL STATES INTERNATIONAL, INC. (the "Plan"), by affording Employee the opportunity to purchase shares of the common stock of the Company, par value $.01 per share ("Stock"), and in consideration of the mutual agreements and other matters set forth herein and in the Plan, the Company and Employee hereby agree as follows:
1. GRANT OF OPTION. The Company hereby irrevocably grants to Employee the right and option ("Option") to purchase all or any part of an aggregate of NUMBER shares of Stock, on the terms and conditions set forth herein and in the Plan, which Plan is incorporated herein by reference as a part of this Agreement. In the event of any conflict between the terms of this Agreement and the Plan, the Plan shall control. Capitalized terms used but not defined in this Agreement, shall have the meaning attributed to such terms under the Plan, unless the context requires otherwise. This Option shall not be treated as an incentive stock option, within the meaning of section 422(b) of the Internal Revenue Code of 1986, as amended (the "Code").
2. PURCHASE PRICE. The purchase price of Stock purchased pursuant to the exercise of this Option shall be $x per share, which has been determined to be not less than the fair market value of the Stock at the date of grant of this Option. For all purposes of this Agreement, fair market value of Stock shall be determined in accordance with the provisions of the Plan.
3. EXERCISE OF OPTION. Subject to the earlier expiration of this Option as herein provided, this Option may be exercised, by written notice to the Company at its principal executive office addressed to the attention of its Corporate Secretary at any time and from time to time after the date of grant hereof, but, except as otherwise provided below, this Option shall not be exercisable for more than a percentage of the aggregate number of shares offered by this Option determined by the number of full years from the date of grant hereof to the date of such exercise, in accordance with the following schedule:
PERCENTAGE OF SHARES
NUMBER OF FULL YEARS THAT MAY BE PURCHASED
-------------------- ---------------------
Less than 1 year 0%
1 year 25%
2 years 50%
3 years 75%
4 years or more 100%
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This Option will terminate and cease to be exercisable upon Employee's termination of employment with the Company, except that:
(a) If Employee's employment with the Company terminates by reason of disability (within the meaning of section 22(e)(3) of the Code) or retirement, this Option may be exercised in full by Employee at any time during the period of one year following such termination, or by Employee's estate (or the person who acquires this Option by will or the laws of descent and distribution or otherwise by reason of the death of Employee) during a one year period following Employee's death if Employee dies during the one year period following such termination. As used in this paragraph, "retirement" shall mean the termination of Employee's employment with the Company for reasons other than cause (as defined in (c) below) on or after attainment of age 65 or, with the express written consent of the Committee, on or after the age of 55.
(b) If Employee dies while in the employ of the Company, Employee's estate, or the person who acquires this Option by will or the laws of descent and distribution or otherwise by reason of the death of Employee, may exercise this Option in full at any time during the period of one year following the date of Employee's death.
(c) If Employee's employment with the Company terminates for any reason other than as described in (a) or (b) above, unless such employment is terminated for cause, this Option may be exercised by Employee at any time during the period of three months following such termination, or by Employee's estate (or the person who acquires this Option by will or the laws of descent and distribution or otherwise by reason of the death of Employee) during a period of one year following Employee's death if Employee dies during such three-month period, but in each case only as to the number of shares Employee was entitled to purchase hereunder as of the date Employee's employment so terminates. As used in this paragraph, the term "cause" shall mean Employee (i) has been convicted of a misdemeanor involving moral turpitude or of a felony, (ii) has engaged in gross negligence or willful misconduct in the performance of the duties of Employee's employment, (iii) has willfully disregarded any written corporate policies established by the Company, or (iv) has materially breached any material provision of any written agreement between Employee and the Company or any of its Affiliates.
This Option shall not be exercisable in any event after the expiration of six years from the date of grant hereof. The purchase price of shares as to which this Option is exercised shall be paid in full at the time of exercise (a) in cash (including check, bank draft or money order payable to the order of the Company), (b) by constructively tendering to the Company shares of Stock having a fair market value equal to the purchase price and which shares, if acquired pursuant to a Company granted option, have been held by Employee for more than six months, (c) if the Stock is readily tradeable on a national securities market, through a "cashless-broker" exercise in accordance with a Company-established policy or program for the same, or (d) any combination of the foregoing. No fraction of a share of Stock shall be issued by the Company upon exercise of an Option or accepted by the Company in payment of the exercise price thereof; rather, Employee shall provide a cash payment for such amount as is necessary to affect the issuance and acceptance of only whole shares of Stock. Unless and until a certificate or
certificates representing such shares shall have been issued by the Company to Employee, Employee (or the person permitted to exercise this Option in the event of Employee's death) shall not be or have any of the rights or privileges of a shareholder of the Company with respect to shares acquirable upon an exercise of this Option.
4. WITHHOLDING OF TAX. To the extent that the exercise of this Option or the disposition of shares of Stock acquired by exercise of this Option results in compensation income to Employee for federal or state income tax purposes, Employee shall deliver to the Company at the time of such exercise or disposition such amount of money or, with the consent of the Committee, shares of Stock as the Company may require to meet its minimum withholding obligations under applicable tax laws or regulations, provided that if, when the Option is exercised, Employee is subject to Section 16(b) of the Securities Exchange Act of 1934, as amended, by reason of being a current or former officer or director of the Company or an Affiliate, Employee may direct the Company to withhold a number of Option shares for the exercise sufficient to satisfy such minimum tax withholding requirements. No exercise of this Option shall be effective until Employee (or the person entitled to exercise the option, as applicable) has made arrangements approved by the Company to satisfy all applicable minimum tax withholding requirements of the Company.
5. STATUS OF STOCK. The Company has registered for issuance under the Securities Act of 1933, as amended (the "Act"), the shares of Stock acquirable upon exercise of this Option, and intends to keep such registration effective throughout the period this Option is exercisable. In the absence of such effective registration or an available exemption from registration under the Act, issuance of shares of Stock acquirable upon exercise of this Option will be delayed until registration of such shares is effective or an exemption from registration under the Act is available. The Company intends to use its reasonable best efforts to ensure that no such delay will occur. In the event exemption from registration under the Act is available upon an exercise of this Option, Employee (or the person permitted to exercise this Option in the event of Employee's death or incapacity), if requested by the Company to do so, will execute and deliver to the Company in writing an agreement containing such provisions as the Company may require to assure compliance with applicable securities laws.
Employee agrees that the shares of Stock which Employee may acquire by exercising this Option will not be sold or otherwise disposed of in any manner which would constitute a violation of any applicable securities laws, whether federal or state. Employee also agrees (i) that the certificates representing the shares of Stock purchased under this Option may bear such legend or legends as the Committee deems appropriate in order to assure compliance with applicable securities laws, and (ii) that the Company may refuse to register the transfer of the shares of Stock purchased under this Option on the stock transfer records of the Company if such proposed transfer would in the opinion of counsel satisfactory to the Company constitute a violation of any applicable securities laws and (iii) that the Company may give related instructions to its transfer agent, if any, to stop registration of the transfer of the shares of Stock purchased under this Option.
6. EMPLOYMENT RELATIONSHIP. Employee shall be considered to be in the employment of the Company as long as Employee remains an Employee, Director or consultant of the Company or any of its Affiliates. Any question as to whether and when there has been a termination of such employment, and the cause of such termination, shall be determined by the Committee and its determination shall be final.
7. BINDING EFFECT. This Agreement shall be binding upon and inure to the benefit of any successors to the Company and all persons lawfully claiming under Employee.
8. GOVERNING LAW. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Texas, without regard to conflicts of law principles thereof.
IN WITNESS WHEREOF, the Company has caused this Agreement to be duly executed by its officer thereunto duly authorized, and Employee has executed this Agreement, all as of the day and year first above written.
OIL STATES INTERNATIONAL, INC.
EXHIBIT 10.20
RESTRICTED STOCK AGREEMENT
THIS AGREEMENT is made as of X xx, 2xxx (the "Effective Date") between Oil States International, Inc., a Delaware corporation (the "Company"), and EMPLOYEE ("Employee").
To carry out the purposes of The 2001 Equity Participation Plan of Oil States International, Inc. (the "Plan"), by affording Employee the opportunity to acquire shares of common stock of the Company ("Stock"), and in consideration of the mutual agreements and other matters set forth herein and in the Plan, the Company and Employee hereby agree as follows:
1. AWARD OF SHARES. Upon execution of this Agreement, the Company shall issue XXX shares of Stock to Employee. Employee acknowledges receipt of a copy of the Plan, and agrees that this award of Stock shall be subject to all of the terms and conditions set forth herein and in the Plan, including future amendments thereto, if any, pursuant to the terms thereof, which Plan is incorporated herein by reference as a part of this Agreement. In the event of any conflict between the terms of this Agreement and the Plan, the terms of the Plan shall govern.
2. FORFEITURE RESTRICTIONS. The Stock issued to Employee pursuant to
this Agreement may not be sold, assigned, pledged, exchanged, hypothecated or
otherwise transferred, encumbered or disposed of to the extent then subject to
the Forfeiture Restrictions (as hereinafter defined), and in the event of
termination of Employee's employment with the Company for any reason (other than
as provided below), automatically upon such termination Employee shall, for no
consideration, forfeit to the Company all Stock to the extent then subject to
the Forfeiture Restrictions. The prohibition against transfer and the obligation
to forfeit and surrender Stock to the Company upon termination of employment are
herein referred to as "Forfeiture Restrictions," and the shares which are then
subject to the Forfeiture Restrictions are herein sometimes referred to as
"Restricted Shares." The Forfeiture Restrictions shall be binding upon and
enforceable against any transferee of the Stock. The Forfeiture Restrictions
shall lapse as to Stock issued to Employee pursuant to this Agreement as
follows: (a) with respect to 1/4 of the Restricted Shares, on the first
anniversary of the Effective Date, (b) with respect to 1/4 of the Restricted
Shares, on the second anniversary of the Effective Date, (c) with respect to 1/4
of the Restricted Shares, on the third anniversary of the Effective Date, and
(d) with respect to 1/4 of the Restricted Shares, on the fourth anniversary of
the Effective Date. Notwithstanding the foregoing, the Forfeiture Restrictions
shall lapse as to all of the Stock on (i) the date a Change of Control occurs or
(ii) the termination of Employee's employment due to his death or a disability
that entitles Employee to receive benefits under a long term disability plan of
the Company.
3. CERTIFICATES. A certificate evidencing the Restricted Shares shall be issued by the Company in Employee's name, pursuant to which Employee shall have voting rights and shall be entitled to receive dividends and other distributions (provided, however, that dividends or other distributions paid in any form other than cash shall be subject to the Forfeiture Restrictions). The certificate shall bear the following legend:
The shares evidenced by this certificate have been issued pursuant to an agreement made as of XX xx, 2xxx, a copy of which is attached hereto and incorporated herein, between the Company and the registered holder of the shares, and are subject to forfeiture to the Company under certain circumstances described in such agreement. The sale, assignment, pledge or other transfer of the shares of stock evidenced by this certificate is prohibited under the terms and conditions of such agreement, and such shares may not be sold, assigned, pledged or otherwise transferred except as provided in such agreement.
The Company may cause the certificate to be delivered upon issuance to the Secretary of the Company as a depository for safekeeping until the forfeiture occurs or the Forfeiture Restrictions lapse pursuant to the terms of this Agreement. Upon request of the Company, Employee shall deliver to the Company a stock power, endorsed in blank, relating to the Restricted Shares then subject to the Forfeiture Restrictions. Upon the lapse of the Forfeiture Restrictions without forfeiture, the Company shall cause a new certificate or certificates to be issued for the remaining Stock after the Company's tax withholding obligation has been satisfied pursuant to paragraph 5, without legend in the name of Employee in exchange for the certificate evidencing the Restricted Shares.
4. CONSIDERATION. It is understood that the consideration for the issuance of Restricted Shares shall be Employee's agreement to render future services to the Company, which services shall have a value not less than the par value of such Restricted Shares.
5. WITHHOLDING OF TAX. To the extent that the receipt of the Restricted Shares results in compensation income to Employee for federal or state tax purposes, Employee shall deliver to the Company at the time of such receipt, such amount of money or shares of unrestricted Stock as the Company may require to meet its withholding obligation under applicable tax laws or regulations, and, if Employee fails to do so, the Company is authorized to withhold from any cash or Stock remuneration then or thereafter payable to Employee any tax required to be withheld by reason of such resulting compensation income. To the extent that the lapse of any Forfeiture Restrictions results in compensation income to Employee for federal or state tax purposes and Employee has not otherwise made arrangements to satisfy its withholding obligation, the Company shall withhold from the Restricted Shares such shares as the Company may require to meet its withholding obligations under applicable tax laws or regulations.
6. STATUS OF STOCK. Employee agrees that the Restricted Shares will not be sold or otherwise disposed of in any manner that would constitute a violation of any applicable federal or state securities laws. Employee also agrees (i) that the certificates representing the Restricted Shares may bear such legend or legends as the Committee deems appropriate in order to ensure compliance with applicable securities laws, (ii) that the Company may refuse to register the transfer of the Restricted Shares on the stock transfer records of the Company if such proposed transfer would in the opinion of counsel satisfactory to the Company constitute a violation of any applicable securities law and (iii) that the Company may give related instructions to its transfer agent, if any, to stop registration of the transfer of the Restricted Shares.
7. EMPLOYMENT RELATIONSHIP. For purposes of this Agreement, Employee shall be considered to be in the employment of the Company as long as Employee remains an employee of the Company, any parent or subsidiary entity of the Company or any successor to any of the foregoing. Any question as to whether and when there has been a termination of such employment, and the cause of such termination, shall be determined by the Committee, and its determination shall be final.
8. COMMITTEE'S POWERS. No provision contained in this Agreement shall in any way terminate, modify or alter, or be construed or interpreted as terminating, modifying or altering any of the powers, rights or authority vested in the Committee pursuant to the terms of the Plan, including, without limitation, the Committee's rights to make certain determinations and elections with respect to the Restricted Shares.
9. BINDING EFFECT. This Agreement shall be binding upon and inure to the benefit of any successors to the Company and all persons lawfully claiming under Employee.
10. NON-ALIENATION. Employee shall not have any right to pledge, hypothecate, anticipate or assign this Agreement or the rights hereunder, except by will or the laws of descent and distribution.
11. NOT A CONTRACT OF EMPLOYMENT. This Agreement shall not be deemed to constitute a contract of employment, nor shall any provision hereof affect (a) the right of the Company to discharge Employee at will or (b) the terms and conditions of any other agreement between the Company and Employee except as expressly provided herein.
12. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original, but all of which together will constitute one and the same Agreement.
13. GOVERNING LAW. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Delaware.
IN WITNESS WHEREOF, the Company has caused this Agreement to be duly executed by an officer thereunto duly authorized, and Employee has executed this Agreement, all effective as of the Effective Date.
OIL STATES INTERNATIONAL, INC.
EXHIBIT 10.21
NON-EMPLOYEE DIRECTOR COMPENSATION SUMMARY
OIL STATES INTERNATIONAL, INC.
Non-employee directors of Oil States International, Inc. receive the following compensation:
o Annual retainer of $30,000 for board membership, paid quarterly in arrears
o Annual retainer of $15,000 for service as the Audit Committee Chairperson, paid quarterly in arrears
o Annual retainer of $10,000 for service as the Compensation or Nominating and Corporate Governance Committee Chairperson, payable quarterly in arrears
o Annual retainer of $7,500 for service as a member of the Audit Committee, other than Chairperson, payable quarterly in arrears
o Annual retainer of $5,000 for service as a member of the Compensation or Nominating and Corporate Governance Committees, not a Chairperson, payable quarterly in arrears
o Meeting fees
o $1,500 for each Board meeting attended
o $1,500 for each Committee meeting attended
o Reimbursement for expenses incurred in attending meetings
o Participation in the Company's 2001 Equity Participation Plan
Under current guidelines, newly elected directors receive options to purchase 5,000 shares of our common stock upon their initial election. Directors receive additional options to purchase 5,000 shares at each annual meeting after which they continue to serve. These options are granted under the 2001 Equity Participation Plan, vest in four equal annual installments and expire ten years from the date of grant. In the event of a change in control, the options vest in accordance with the terms of the grant agreements. The exercise price of these options is the fair market value at the date of grant. The Compensation Committee of the Board of Directors has recently recommended, subject to approval at the next Annual Meeting of Shareholders, that the Company's 2001 Equity Participation Plan be amended to allow equity awards to Directors on the same basis as employees. All of our directors are reimbursed for reasonable out-of-pocket expense incurred in attending meetings of our Board of Directors or committees and for other reasonable expenses related to the performance of their duties as directors. Directors may also participate in the Company's nonqualified deferred compensation plan that permits a participant to defer all or a part of their cash compensation from the Company until the termination of their status as a director.
.
.
.
EXHIBIT 21.1
OIL STATES INTERNATIONAL, INC.
SUBSIDIARIES
SUBSIDIARY STATE/COUNTRY ---------- ------------- Capstar Drilling, L.P. Texas Crown Camp Services Ltd Alberta, Canada General Marine Leasing, L.L.C. Delaware HWCES International Cayman Islands HWC Energy Services, Inc. Delaware HWC Limited Louisiana Hydraulic Well Control, L.L.C. Delaware Oil States Industries, Inc. Delaware Oil States Industries (Asia) Pte Ltd Singapore Oil States Industries (UK) Limited United Kingdom Oil States Skagit SMATCO L.L.C. Delaware PTI Group, Inc. Alberta, Canada PTI Premium Camp Services Ltd. Alberta, Canada Sooner Inc. Delaware Sooner Pipe Inc. Oklahoma A-Z Terminal Corporation Oklahoma Specialty Rental Tools & Supply, L.P. Texas Travco Industrial Housing Ltd. Alberta, Canada |
EXHIBIT 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in this Annual Report (Form 10-K) of Oil States International, Inc. of our report dated March 1, 2005, with respect to the consolidated financial statements of Oil States International, Inc., included in the 2004 Annual Report to Shareholders of Oil States International, Inc.
We consent to the incorporation by reference in the following Registration Statements:
1) Registration Statement (Form S-3 No. 333-83852) of Oil States International, Inc.
2) Registration Statements (Form S-8 No. 333-57960 and Form S-8 No. 333-97041) pertaining to the 2001 Equity Participation Plan of Oil States International, Inc. and
3) Registration Statement (Form S-8 No. 333-63050), pertaining to the Deferred Compensation Plan of Oil States International, Inc.;
of our report dated March 1, 2005, with respect to the consolidated financial statements of Oil States International, Inc. incorporated herein by reference, and our report dated March 1, 2005, with respect to Oil States International, Inc. management's assessment of the effectiveness of internal control over financial reporting and the effectiveness of internal control over financial reporting of Oil States International, Inc., included in this Annual Report (Form 10-K) of Oil States International, Inc.
/s/ ERNST & YOUNG LLP
-------------------------------
Ernst & Young LLP
Houston, Texas
March 1, 2005
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EXHIBIT 24.1
POWER OF ATTORNEY
The undersigned directors of Oil States International, Inc. (the "Company") do hereby constitute and appoint Douglas E. Swanson and Cindy B. Taylor, and each of them, with full power of substitution, our true and lawful attorneys-in-fact and agents to do any and all acts and things in our name and behalf in our capacities as directors, and to execute any and all instruments for us and in our names in such capacities indicated below which such person may deem necessary or advisable to enable the Company to comply with the Securities Exchange Act of 1934, as amended and any rules, regulations and requirements of the Securities and Exchange Commission, in connection with the Company's annual report on Form 10-K for the year ended December 31, 2004, including specifically, but not limited to, power and authority to sign for us, or any of us, in our capacities indicated below and any and all amendments thereto; and we do hereby ratify and confirm all that such person or persons shall do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, each of the undersigned have executed this Power of Attorney as of the dates set forth beside their respective names below.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ L. E. Simmons Chairman of the Board March 1, 2005
------------------------------------
L. E. Simmons
/s/ Martin Lambert Director March 1, 2005
------------------------------------
Martin Lambert
/s/ S. James Nelson Director March 1, 2005
-----------------------------------
S. James Nelson
/s/ Mark G. Papa Director March 1, 2005
------------------------------------
Mark G. Papa
/s/ Gary L. Rosenthal Director March 1, 2005
------------------------------------
Gary L. Rosenthal
/s/ Andrew L. Waite Director March 1, 2005
------------------------------------
Andrew L. Waite
/s/ Stephen A. Wells Director March 1, 2005
-----------------------------------
Stephen A. Wells
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EXHIBIT 31.1
CERTIFICATION OF
CHIEF EXECUTIVE OFFICER
OF OIL STATES INTERNATIONAL, INC.
PURSUANT TO RULE 13a - 14(a) UNDER THE
SECURITIES EXCHANGE ACT OF 1934
I, Douglas E. Swanson, certify that:
1. I have reviewed this Annual Report on Form 10-K of Oil States International, Inc. ("Registrant");
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;
4. The Registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules 13a
- 15(f) and 15d - 15(f)) for the Registrant and we have:
a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b. designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
c. evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d. disclosed in this report any change in the Registrant's internal control over financial reporting that occurred during the Registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting; and
5. The Registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant's auditors and the audit committee of the Registrant's Board of Directors (or persons performing the equivalent functions):
a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize and report financial information; and
b. any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal control over financial reporting.
Date: March 1, 2005
/s/ Douglas E. Swanson
-------------------------------------
Douglas E. Swanson
President and Chief Executive Officer
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EXHIBIT 31.2
CERTIFICATION OF
CHIEF FINANCIAL OFFICER
OF OIL STATES INTERNATIONAL, INC.
PURSUANT TO RULE 13a - 14(a) UNDER THE
SECURITIES EXCHANGE ACT OF 1934
I, Cindy B. Taylor, certify that:
1. I have reviewed this Annual Report on Form 10-K of Oil States International, Inc. ("Registrant");
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;
4. The Registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules 13a
- 15(f) and 15d - 15(f)) for the Registrant and we have:
a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b. designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
c. evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d. disclosed in this report any change in the Registrant's internal control over financial reporting that occurred during the Registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting; and
5. The Registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant's auditors and the audit committee of the Registrant's Board of Directors (or persons performing the equivalent functions):
a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize and report financial information; and
b. any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal control over financial reporting.
Date: March 1, 2005
/s/ Cindy B. Taylor
-------------------------------
Cindy B. Taylor
Senior Vice President and Chief
Financial Officer
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EXHIBIT 32.1
CERTIFICATION OF
CHIEF EXECUTIVE OFFICER
OF OIL STATES INTERNATIONAL, INC.
PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 AND RULE 13a - 14(b) UNDER THE SECURITIES EXCHANGE ACT OF 1934
In connection with the Annual Report on Form 10-K for the annual period ended December 31, 2004 filed with the Securities and Exchange Commission (the "Report"), I, Douglas E. Swanson, President and Chief Executive Officer of Oil States International, Inc. (the "Company"), hereby certify, to the best of my knowledge, that:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ Douglas E. Swanson -------------------------------------- Name: Douglas E. Swanson Date: March 1, 2005 |
EXHIBIT 32.2
CERTIFICATION OF
CHIEF FINANCIAL OFFICER
OF OIL STATES INTERNATIONAL, INC.
PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 AND RULE 13a - 14(b) UNDER THE SECURITIES EXCHANGE ACT OF 1934
In connection with the Annual Report on Form 10-K for the annual period ended December 31, 2004 filed with the Securities and Exchange Commission (the "Report"), I, Cindy B. Taylor, Senior Vice President and Chief Financial Officer of Oil States International, Inc. (the "Company"), hereby certify, to the best of my knowledge, that:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ Cindy B. Taylor --------------------------------- Name: Cindy B. Taylor Date: March 1, 2005 |