##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2008
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission file number: 001-31346
 W-H Energy Services, Inc.
 (Exact name of registrant as specified in its charter)
 Texas
    
    76-0281502(State or other jurisdiction of
    
    (IRS Employerincorporation or organization)
    
    Identification No.)
 2000 West Sam Houston Parkway South,
Suite 500
Houston, Texas 77042  (Address of principal executive offices and zip code)
 (713) 974-9071  (Registrants telephone number, including area code)
 þ o
  Large accelerated filer þ
    
    Accelerated filer o
    
    Non-accelerated filer   o
(Do not check if a smaller reporting company)
    
    Smaller Reporting Company o
 o þ




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##### 



W-H ENERGY SERVICES, INC.
 INDEX
 PagePART IFINANCIAL INFORMATIONItem 1.
    
    Financial Statements
    
    
    3Consolidated Balance Sheets (unaudited)  June 30, 2008 and December 31, 2007
    
    
    3Consolidated Statements of Operations and Comprehensive Income (unaudited)
Three months and six months ended June 30, 2008 and 2007
    
    
    4Consolidated Statements of Cash Flows (unaudited)  Six months ended June
30, 2008 and 2007
    
    
    5Notes to Consolidated Financial Statements (unaudited)
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition
And Results of Operations
    
    
    14Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    21Item 4.
    
    Controls and Procedures
    
    
    22PART IIOTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    22Item 1A.
    
    Risk Factors
    
    
    23Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    23Item 6.
    
    Exhibits
    
    
    23Signatures
    
    
    24Certification of CEO Pursuant to Section 302Certification of CFO Pursuant to Section 302Certification of CEO Pursuant to Section 1350Certification of CFO Pursuant to Section 1350
  2




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##### Table of Contents



PART I
FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 W-H ENERGY SERVICES, INC.
 
 CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
(Unaudited)
 June 30,
    
    
    December 31,2008
    
    
    2007Current Assets:Cash and cash equivalents
    
    $
    30,943
    
    
    $
    23,076Accounts receivable, net of allowance of $6,343 and $6,696, respectively
    
    
    281,437
    
    
    
    252,313Inventories
    
    
    119,232
    
    
    
    102,584Deferred income taxes
    
    
    15,747
    
    
    
    13,401Prepaid expenses and other
    
    
    15,309
    
    
    
    15,479Total current assets
    
    
    462,668
    
    
    
    406,853Property and equipment, net
    
    
    516,302
    
    
    
    448,913Goodwill, net
    
    
    171,050
    
    
    
    135,928Other assets, net
    
    
    28,553
    
    
    
    15,336Total assets
    
    $
    1,178,573
    
    
    $
    1,007,030Current Liabilities:Accrued liabilities
    
    $
    62,980
    
    
    $
    62,059Accounts payable
    
    
    64,705
    
    
    
    54,756Total current liabilities
    
    
    127,685
    
    
    
    116,815Long-term debt
    
    
    225,149
    
    
    
    150,000Deferred income taxes
    
    
    74,833
    
    
    
    73,526Other long-term obligations
    
    
    9,669
    
    
    
    11,161Commitments and ContingenciesShareholders Equity:Preferred stock, $0.01 par value, 10,000 shares authorized, none issued and outstanding
    
    
    
    
    
    
    Common stock, $0.0001 par value, 100,000 shares authorized 30,977 and 30,699 shares
issued and outstanding, respectively
    
    
    3
    
    
    
    3Additional paid-in capital
    
    
    301,929
    
    
    
    293,424Other comprehensive income
    
    
    5,689
    
    
    
    6,291Retained earnings
    
    
    433,616
    
    
    
    355,810Total shareholders equity
    
    
    741,237
    
    
    
    655,528Total liabilities and shareholders equity
    
    $
    1,178,573
    
    
    $
    1,007,030
  3




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##### Table of Contents



W-H ENERGY SERVICES, INC.
 
 CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(In thousands, except per share amounts)
(Unaudited)
 For the Three Months
    
    
    For the Six MonthsEnded June 30,
    
    
    Ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Revenues
    
    $
    346,937
    
    
    $
    277,752
    
    
    $
    647,905
    
    
    $
    550,639Costs and expenses:Cost of revenues
    
    
    191,276
    
    
    
    145,386
    
    
    
    355,314
    
    
    
    292,805Selling, general and administrative
    
    
    50,874
    
    
    
    44,964
    
    
    
    97,044
    
    
    
    88,244Transaction related costs (Note 1)
    
    
    5,350
    
    
    
    
    
    
    
    5,350
    
    
    
    Research and development
    
    
    6,849
    
    
    
    5,485
    
    
    
    12,943
    
    
    
    10,201Depreciation and amortization
    
    
    24,671
    
    
    
    19,162
    
    
    
    47,988
    
    
    
    36,714Total costs and expenses
    
    
    279,020
    
    
    
    214,997
    
    
    
    518,639
    
    
    
    427,964Operating income
    
    
    67,917
    
    
    
    62,755
    
    
    
    129,266
    
    
    
    122,675Other (income) expense:Interest expense, net
    
    
    2,770
    
    
    
    1,896
    
    
    
    5,178
    
    
    
    3,889Other (income) expense, net
    
    
    (4
    )
    
    
    (70
    )
    
    
    (12
    )
    
    
    (41
    )Income before income taxes
    
    
    65,151
    
    
    
    60,929
    
    
    
    124,100
    
    
    
    118,827Provision for income taxes
    
    
    24,405
    
    
    
    21,855
    
    
    
    46,294
    
    
    
    43,929Net income
    
    $
    40,746
    
    
    $
    39,074
    
    
    $
    77,806
    
    
    $
    74,898Comprehensive income:Net income
    
    $
    40,746
    
    
    $
    39,074
    
    
    $
    77,806
    
    
    $
    74,898Increase (decrease) in interest rate swap valuations
    
    
    2,126
    
    
    
    989
    
    
    
    (633
    )
    
    
    416Foreign currency translation adjustment
    
    
    333
    
    
    
    16
    
    
    
    31
    
    
    
    194Comprehensive income
    
    $
    43,205
    
    
    $
    40,079
    
    
    $
    77,204
    
    
    $
    75,508Earnings per share:Basic
    
    $
    1.33
    
    
    $
    1.29
    
    
    $
    2.54
    
    
    $
    2.48Diluted
    
    $
    1.29
    
    
    $
    1.25
    
    
    $
    2.48
    
    
    $
    2.42Number of shares used in calculation of earnings per share:Basic
    
    
    30,670
    
    
    
    30,315
    
    
    
    30,622
    
    
    
    30,196Diluted
    
    
    31,480
    
    
    
    31,140
    
    
    
    31,389
    
    
    
    31,008
  4




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W-H ENERGY SERVICES, INC.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 For the Six MonthsEnded June 30,2008
    
    
    2007Cash Flows from Operating Activities:Net income
    
    $
    77,806
    
    
    $
    74,898Adjustments to reconcile net income to cash provided by operating activities Depreciation and amortization
    
    
    47,988
    
    
    
    36,714Provision for doubtful accounts
    
    
    (284
    )
    
    
    813Gain on sales of equipment
    
    
    (15,623
    )
    
    
    (10,689
    )Deferred tax provision
    
    
    (1,428
    )
    
    
    (2,365
    )Share-based compensation
    
    
    3,330
    
    
    
    2,888Amortization of deferred financing costs
    
    
    262
    
    
    
    287Excess tax benefit from share-based compensation
    
    
    (2,725
    )
    
    
    (3,434
    )Changes in operating assets and liabilities, excluding effects of acquisitions Accounts receivable, net
    
    
    (26,161
    )
    
    
    (29,875
    )Inventories
    
    
    (15,806
    )
    
    
    (15,112
    )Prepaid expenses and other
    
    
    540
    
    
    
    (6,917
    )Other assets, net
    
    
    140
    
    
    
    976Accounts payable, accrued liabilities and other
    
    
    9,101
    
    
    
    (2,920
    )Net cash provided by operating activities
    
    
    77,140
    
    
    
    45,264Cash Flows from Investing Activities:Additions to property and equipment
    
    
    (120,081
    )
    
    
    (97,776
    )Acquisition of businesses, net of cash acquired
    
    
    (56,039
    )
    
    
    (12,583
    )Proceeds from sales of equipment
    
    
    26,539
    
    
    
    21,137Net cash used in investing activities
    
    
    (149,581
    )
    
    
    (89,222
    )Cash Flows from Financing Activities:Proceeds from the issuance of debt
    
    
    138,720
    
    
    
    76,931Payments on debt
    
    
    (63,571
    )
    
    
    (56,856
    )Proceeds from the exercise of stock options
    
    
    2,450
    
    
    
    5,205Excess tax benefit from share-based compensation
    
    
    2,725
    
    
    
    3,434Net cash provided by financing activities
    
    
    80,324
    
    
    
    28,714Effect of exchange rate changes on cash
    
    
    (16
    )
    
    
    258Net increase (decrease) in cash and cash equivalents
    
    
    7,867
    
    
    
    (14,986
    )Cash and cash equivalents, beginning of period
    
    
    23,076
    
    
    
    36,329Cash and cash equivalents, end of period
    
    $
    30,943
    
    
    $
    21,343
  5




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##### Table of Contents



W-H ENERGY SERVICES, INC.
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 1. Business Organization
 Description of Company
  Proposed Acquisition of W-H by Smith International, Inc.
  
    
    $56.10 in cash, without interest, and 0.48 shares of Smiths common stock, par value $1.00
per share, including the associatedpreferred share purchase rights (Smith Common Stock); or
    
    $93.55 in cash, without interest (the All-Cash Consideration); or
    
    1.1990 shares of Smith Common Stock (the All-Stock Consideration),
   2 3
 6




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##### Table of Contents



Basis of Presentation
  Accounting Policies and Procedures
 Fair Value Measurements, Effective Date of FASB Statement No. 157,
 The Fair Value Option for Financial
Assets and Financial Liabilities  including an amendment of FASB Statement No. 115 Accounting for
Derivative Instruments and Hedging Activities
 Business Combinations
 7




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##### Table of Contents



2. Acquisitions
  Net assets acquired:Current assets
    
    $
    3,841Property and equipment
    
    
    4,929Goodwill
    
    
    30,384Other intangibles and other assets
    
    
    11,403Current liabilities
    
    
    (616
    )Net assets acquired
    
    $
    49,941
   3. Earnings per Share
  8




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##### Table of Contents



Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Basic weighted average shares outstanding
    
    
    30,670
    
    
    
    30,315
    
    
    
    30,622
    
    
    
    30,196Dilutive effect of stock options and
restricted shares
    
    
    810
    
    
    
    825
    
    
    
    767
    
    
    
    812Diluted weighted average shares outstanding
    
    
    31,480
    
    
    
    31,140
    
    
    
    31,389
    
    
    
    31,008
 4. Inventories
  June 30, 2008
    
    
    December 31, 2007Finished goods
    
    $
    85,250
    
    
    $
    73,999Work-in-process
    
    
    12,261
    
    
    
    10,937Raw materials and supplies
    
    
    32,022
    
    
    
    27,227Inventory reserve
    
    
    (10,301
    )
    
    
    (9,579
    )Inventories
    
    $
    119,232
    
    
    $
    102,584
 5. Credit Facility
      9




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6. Fair Value Disclosures
       Level 1
    
    
    Level 2
    
    
    Level 3
    
    
    TotalAssets:
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Liabilities:Interest rate swaps
    
    $
    
    
    
    $
    2,425
    
    
    $
    
    
    
    $
    2,425
  Interest Rate Swaps
  7. Litigation
  10




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##### Table of Contents



8. Shareholders Equity
 Stock options
  Weighted AverageNumber of
    
    Weighted Average
    
    Remaining
    
    AggregateOptions
    
    Price per Share
    
    Contractual Term
    
    Intrinsic Value(Years)
    
    (Amounts in thousands)Outstanding at December 31, 2007
    
    
    1,565,138
    
    
    $
    16.76Granted
    
    
    
    
    
    
    Exercised
    
    
    (137,300
    )
    
    
    19.65
    
    
    
    
    
    
    $
    7,525Expired/canceled
    
    
    (36,250
    )
    
    
    19.44Outstanding at June 30, 2008
    
    
    1,391,588
    
    
    
    16.41
    
    
    
    4.1
    
    
    
    100,393Exercisable at June 30, 2008
    
    
    1,205,713
    
    
    
    15.50
    
    
    
    3.7
    
    
    
    96,746
 Restricted Stock
   WeightedAverageNumber of
    
    
    Fair ValueShares
    
    
    Per ShareNonvested balance at December 31, 2007
    
    
    148,084
    
    
    $
    53.05Granted
    
    
    154,500
    
    
    
    55.17Vested
    
    
    (41,000
    )
    
    
    52.53Forfeited
    
    
    (1,500
    )
    
    
    56.36Nonvested balance at June 30, 2008
    
    
    260,084
    
    
    $
    52.74
 9. Operating Segments
  Drilling Related Products and Services
  Completion and Workover Related Products and Services
  11




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##### Table of Contents



Summary Information
   Drilling
    
    Completion
    
    Corporate
    
    TotalRevenues
    
    $
    222,984
    
    
    $
    123,953
    
    
    $
    
    
    
    $
    346,937Operating income
    
    
    43,242
    
    
    
    34,842
    
    
    
    (10,167
    )
    
    
    67,917Depreciation and amortization
    
    
    14,899
    
    
    
    9,709
    
    
    
    63
    
    
    
    24,671Total assets
    
    
    765,202
    
    
    
    375,212
    
    
    
    38,159
    
    
    
    1,178,573Capital expenditures
    
    
    43,840
    
    
    
    18,113
    
    
    
    35
    
    
    
    61,988
  Drilling
    
    Completion
    
    Corporate
    
    TotalRevenues
    
    $
    179,141
    
    
    $
    98,611
    
    
    $
    
    
    
    $
    277,752Operating income
    
    
    41,307
    
    
    
    26,032
    
    
    
    (4,584
    )
    
    
    62,755Depreciation and amortization
    
    
    11,600
    
    
    
    7,493
    
    
    
    69
    
    
    
    19,162Total assets
    
    
    578,163
    
    
    
    320,623
    
    
    
    39,087
    
    
    
    937,873Capital expenditures
    
    
    28,681
    
    
    
    21,428
    
    
    
    426
    
    
    
    50,535
  Drilling
    
    Completion
    
    Corporate
    
    TotalRevenues
    
    $
    417,237
    
    
    $
    230,668
    
    
    $
    
    
    
    $
    647,905Operating income
    
    
    80,835
    
    
    
    63,289
    
    
    
    (14,858
    )
    
    
    129,266Depreciation and amortization
    
    
    28,962
    
    
    
    18,899
    
    
    
    127
    
    
    
    47,988Total assets
    
    
    765,202
    
    
    
    375,212
    
    
    
    38,159
    
    
    
    1,178,573Capital expenditures
    
    
    75,843
    
    
    
    44,185
    
    
    
    53
    
    
    
    120,081
  Drilling
    
    Completion
    
    Corporate
    
    TotalRevenues
    
    $
    358,402
    
    
    $
    192,237
    
    
    $
    
    
    
    $
    550,639Operating income
    
    
    80,289
    
    
    
    51,884
    
    
    
    (9,498
    )
    
    
    122,675Depreciation and amortization
    
    
    22,173
    
    
    
    14,426
    
    
    
    115
    
    
    
    36,714Total assets
    
    
    578,163
    
    
    
    320,623
    
    
    
    39,087
    
    
    
    937,873Capital expenditures
    
    
    54,593
    
    
    
    42,530
    
    
    
    653
    
    
    
    97,776
 12




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Revenues
 For the Three Months
    
    
    For the Six MonthsEnded June 30,
    
    
    Ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007United States
    
    $
    315,597
    
    
    $
    249,898
    
    
    $
    585,537
    
    
    $
    487,185North Sea
    
    
    10,875
    
    
    
    12,923
    
    
    
    24,577
    
    
    
    28,723Other
    
    
    20,465
    
    
    
    14,931
    
    
    
    37,791
    
    
    
    34,731Total
    
    $
    346,937
    
    
    $
    277,752
    
    
    $
    647,905
    
    
    $
    550,639
 Operating Income
 For the Three Months
    
    
    For the Six MonthsEnded June 30,
    
    
    Ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007United States
    
    $
    62,422
    
    
    $
    57,304
    
    
    $
    117,223
    
    
    $
    111,035North Sea
    
    
    1,090
    
    
    
    2,864
    
    
    
    3,997
    
    
    
    4,616Other
    
    
    4,405
    
    
    
    2,587
    
    
    
    8,046
    
    
    
    7,024Total
    
    $
    67,917
    
    
    $
    62,755
    
    
    $
    129,266
    
    
    $
    122,675
 Property and equipment, net
 June 30,
    
    
    December 31,2008
    
    
    2007United States
    
    $
    469,470
    
    
    $
    404,111North Sea
    
    
    13,088
    
    
    
    13,588Other
    
    
    33,744
    
    
    
    31,214Total
    
    $
    516,302
    
    
    $
    448,913
 13




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Forward-Looking Statements
  Proposed Acquisition of W-H by Smith International, Inc.
  
    
    $56.10 in cash, without interest, and 0.48 shares of Smiths common stock, par value $1.00
per share, including the associatedpreferred share purchase rights (Smith Common Stock); or
    
    $93.55 in cash, without interest (the All-Cash Consideration); or
    
    1.1990 shares of Smith Common Stock (the All-Stock Consideration),
   2 3
 14




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Overview of Our Products and Services
     Drilling Related Products and Services
   15




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##### Table of Contents



® ® 1 4 ® 1 2 ®
 tm 3 4 3 4 1 2 tm tm tm tm tm tm tm 3 4
 Completion and Workover Related Products and Services
   Results of Operations
  Three Months Ended June 30, 2008 Compared to the Three Months Ended June 30, 2007
 Revenues.
  16




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##### Table of Contents




    
    a 6% higher average number of rotary rigs operating in the United States resulting in an
increase in demand for our drilling fluids products, directional drilling services and
technologically advanced services and tools and rental tools;
    
    our larger asset base resulting from our capital expenditure investments;
    
    our onshore geographic expansion;
    
    increases in pricing, particularly for certain drilling fluids products; and
    
    a full quarter of results from Sup-R-Jar which was acquired during the first quarter of
2008.
  
    
    higher demand for our cased-hole wireline services, completion fluid products and coiled
tubing services as a result of an overall increase in activity levels;
    
    an increase in our coiled tubing and cased-hole wireline fleets and other capital
expenditure investments; and
    
    our onshore geographic expansion.
 Cost of Revenues.
 Selling, General and Administrative Expenses.
 Transaction Related Costs.
 Research and Development Expenses. ®
 Depreciation and Amortization.
 17




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##### Table of Contents



Interest and Other Expense.
 Provision for Income Taxes.
 Six Months Ended June 30, 2008 Compared to the Six Months Ended June 30, 2007
 Revenues.
  
    
    a 4% higher average number of rotary rigs operating in the United States resulting in an
increase in demand for our drilling fluids products, directional drilling services and
technologically advanced services and tools and rental tools;
    
    our larger asset base resulting from our capital expenditure investments;
    
    our onshore geographic expansion;
    
    increases in pricing, particularly for certain drilling fluids products; and
    
    results from Sup-R-Jar which was acquired during the first quarter of 2008.
  
    
    higher demand for our cased-hole wireline services, completion fluid products and coiled
tubing services as a result of an overall increase in activity levels;
    
    an increase in our coiled tubing and cased-hole wireline fleets and other capital
expenditure investments; and
    
    our onshore geographic expansion.
 Cost of Revenues.
 Selling, General and Administrative Expenses.
 18




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##### Table of Contents



Transaction Related Costs.
 Research and Development Expenses. ®
 Depreciation and Amortization.
 Interest and Other Expense.
 Provision for Income Taxes.
 Recent Accounting Pronouncements
 Fair Value Measurements, Effective Date of FASB Statement No. 157,
 The Fair Value Option for Financial Assets
and Financial Liabilities  including an amendment of FASB Statement No. 115 Accounting for Derivative
Instruments and Hedging Activities
 Business Combinations
 19




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Liquidity and Capital Resources
  Cash flow
     20




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##### Table of Contents



Capital resources
 Credit Agreement
   Future capital requirements
  Off balance sheet arrangements
  
 Item 3. Quantitative and Qualitative Disclosures about Market Risk
  Interest Rate Risk.
 Foreign Currency Exchange Risk.
 Stock Price Volatility.
 21




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##### Table of Contents



Item 4. Controls and Procedures
 Disclosure Controls and Procedures.
 Internal Control over Financial Reporting.
  
 PART II
OTHER INFORMATION
 
 Item 1. Legal Proceedings.
 The Booth Family Trust v. White, et al.
  22




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##### Table of Contents



Item 1A. Risk Factors
  We are subject to a variety of risks associated with the Acquisition transaction, including risks
associated with contractual constraints on our operating flexibility, uncertainties surrounding the
transaction, diversion of our managements attention from our normal operations and similar risks.
  
 Item 4. Submission of Matters to a Vote of Security Holders
   For
    
    WithheldKenneth T. White, Jr.
    
    
    26,331,361
    
    
    
    813,048John R. Brock
    
    
    25,603,370
    
    
    
    1,541,039James D. Lightner
    
    
    25,608,099
    
    
    
    1,536,310Christopher Mills
    
    
    19,747,694
    
    
    
    7,396,715Milton L. Scott
    
    
    24,422,308
    
    
    
    2,722,101Robert H. Whilden, Jr.
    
    
    26,337,779
    
    
    
    806,630
 
 Item 6. Exhibits
  23




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##### Table of Contents



SIGNATURES
  W-H Energy Services, Inc.By:
    /s/                
Kenneth T. White, Jr.Kenneth T. White, Jr.Chairman of the Board, President and Chief
Executive Officer(Principal Executive Officer)  By:
    /s/                Ernesto Bautista, IIIErnesto Bautista, IIIVice President and Chief Financial Officer
(Principal Financial and Accounting Officer)  24




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##### Table of Contents



EXHIBIT INDEX
 2.1
    
    
    
    Agreement and Plan of Merger dated as of June 3, 2008 among W-H Energy Services, Inc., Smith
International, Inc. and Whitehall Acquisition Corp. (incorporated by reference to W-Hs Current Report
on Form 8-K filed with the Commission on June 5, 2008).31.1*
    
    
    
    Certification of Chief Executive Officer of W-H Energy Services, Inc. pursuant to Section 302 of the
Sarbanes-Oxley Act of 200231.2*
    
    
    
    Certification of Chief Financial Officer of W-H Energy Services, Inc. pursuant to Section 302 of the
Sarbanes-Oxley Act of 200232.1*
    
    
    
    Certification of Chief Executive Officer of W-H Energy Services, Inc. pursuant 18 U.S.C. Section 135032.2*
    
    
    
    Certification of Chief Financial Officer of W-H Energy Services, Inc. pursuant 18 U.S.C. Section 1350
 
 *
    
    Filed herewith