OIS

Business Context and Reporting Period

Company: Oil States International, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2002
Business Overview: The Company provides products and services to the oil and gas industry through three reportable segments: Offshore Products, Wellsite Services, and Tubular Services. Operations are highly cyclical and dependent on drilling activity and energy prices.

Key Financial Metrics

Note: Nine-month 2001 figures are presented on a Pro Forma basis to reflect the combination of entities as of Jan 1, 2001.

Material Changes vs. Prior Period

• Revenue Decline: Revenues decreased 10.9% in Q3 2002 and 15.6% in the first nine months of 2002 compared to the prior year. This was primarily driven by a 36.5% drop in Tubular Services and a 20.6% drop in Wellsite Services due to reduced drilling activity in North America.
• Offshore Growth: Offshore Products revenues increased 76.8% in Q3 and 44.4% in the nine-month period, driven by deepwater construction and production facility activity.
• Profitability: Operating income increased 6.8% in Q3 2002 despite revenue declines, largely due to the adoption of FAS 142 which eliminated goodwill amortization. However, operating income for the nine-month period decreased 13.0% on a pro forma basis.
• Acquisitions: The Company acquired six businesses in the first nine months of 2002 for approximately $72.5 million, primarily in cash, adding to the Wellsite and Offshore segments.
• Interest Expense: Interest expense decreased significantly (47.6% in Q3, 58.0% in nine months) due to lower debt levels and interest rates.

Guidance, Outlook, and Risks

• Outlook: Management expects a 12-15% revenue decline for the full year 2002 compared to pro forma 2001 levels, based on forecasts of energy prices and drilling activity.
• Backlog: Offshore Products backlog increased to $104.0 million as of September 30, 2002, with approximately 56% expected to be completed by year-end.
• Capital Expenditures: Expected total capital expenditures for 2002 are approximately $28.3 million (excluding acquisitions), funded by internally generated funds.
• Liquidity: As of September 30, 2002, the Company had $95.8 million outstanding under its bank credit facility with $46.5 million available. Management believes cash from operations and borrowings are sufficient for foreseeable needs.
• Risks:
  • Cyclicality: Demand is highly sensitive to oil and gas prices and rig counts.
  • Legal: The Company is a defendant in two asbestos-related cases; management does not believe these will have a material adverse effect.
  • Market Risk: Exposure to floating interest rates on approximately $97 million of debt and foreign currency exchange rate fluctuations.

Investor Verification Checklist

• Drilling Activity Correlation: Verify the correlation between the reported revenue decline and the Baker Hughes rig count data (North American rig count averaged 1,086 in the first nine months of 2002 vs. 1,569 in 2001).
• Goodwill Accounting Impact: Confirm the impact of FAS 142 adoption on net income, which eliminated approximately $8.0 million in annual goodwill amortization.
• Acquisition Integration: Review the performance of the six businesses acquired in 2002 (total consideration ~$72.5 million) to assess integration success and accretion.
• Offshore Backlog Realization: Monitor the realization of the $104.0 million Offshore Products backlog, specifically the 56% expected to be recognized in Q4 2002.
• Debt Covenants: Review the terms of the $150 million senior secured revolving credit facility to ensure compliance with covenants given the current debt levels.