OIS

Business Context and Reporting Period

Company: Oil States International, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2001
Business Overview: The Company provides products and services to the oil and gas industry through three segments: Offshore Products, Wellsite Services, and Tubular Services (added via acquisition). Demand is cyclical and dependent on oil/gas prices and drilling activity.

Key Financial Metrics

Note: Debt figures derived from Balance Sheet (Current portion of long-term debt + Long-term debt). Working Capital = Current Assets - Current Liabilities.

Material Changes vs. Prior Period

• Revenue Growth: Revenues for the nine months ended September 30, 2001, increased 119.7% to $491.8 million compared to $223.9 million in the prior year. This was primarily driven by the acquisition of Sooner Inc. (Tubular Services) in February 2001, which contributed $217.1 million in revenue.
• Profitability: Operating income increased 116.1% to $43.0 million for the nine-month period. Net income attributable to common shares turned from a loss of $130,000 in 2000 to a profit of $31.6 million in 2001.
• Debt Reduction: Total debt decreased significantly from $140.2 million at December 31, 2000, to $96.6 million at September 30, 2001. Proceeds from the February 2001 Initial Public Offering (IPO) were used to repay $43.7 million of subordinated debt and redeem $21.8 million of preferred stock.
• Segment Performance: Wellsite Services operating income increased $13.7 million year-over-year. Offshore Products moved from an operating loss of $3.4 million in 2000 to income of $4.7 million in 2001.

Guidance, Outlook, and Risks

• Market Outlook: Management notes that while oil prices have increased from 1999 lows, recent declines in oil and natural gas prices due to economic slowdowns and high inventories have caused the rig count to fall below prior-year levels. This uncertainty may impact near-term activity and profitability.
• Capital Expenditures: The Company expects to spend approximately $27 million in total capital expenditures for 2001 to upgrade equipment and expand offerings. Funding is expected from operating cash flow and a new $150 million senior secured revolving credit facility.
• Accounting Changes: The Company will adopt SFAS No. 142 (Goodwill and Other Intangible Assets) in 2002. This will eliminate goodwill amortization, expected to increase net income by approximately $8.0 million annually, though goodwill will be subject to annual impairment tests.
• Risks: Key risks include the cyclical nature of the oil and gas industry, sensitivity to oil/gas prices, and the potential for inventory write-downs if pricing falls below carrying amounts. The Company also faces interest rate risk on floating-rate debt.
• Unusual Items: An extraordinary loss of $784,000 was recorded in the nine months ended September 30, 2001, related to debt restructuring costs (prepayment penalties and write-off of unamortized debt issue costs).

Investor Verification Checklist

• Acquisition Impact: Verify the sustainability of revenue growth post-Sooner acquisition, as a significant portion of the year-over-year increase is attributable to this new segment.
• Debt Covenants: Review compliance with the new $150 million credit facility covenants, specifically the EBITDA to interest expense ratio (min 3.0:1) and total debt to EBITDA ratio (max 3.5:1).
• Inventory Levels: Assess the $99.1 million inventory balance against current oil price trends to evaluate potential impairment risks.
• Tax Rate Volatility: Note the low effective tax rate (approx. 4% in 2001) driven by Net Operating Loss (NOL) utilization; verify the projected 22% rate for 2002.
• Goodwill Amortization: Confirm the impact of the upcoming SFAS 142 adoption on future earnings, specifically the removal of ~$8 million in annual amortization expense.