e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2007
or
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission File No. 1-2960
Newpark Resources, Inc.
(Exact name of registrant as specified in its charter)
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Delaware
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72-1123385 |
(State or other jurisdiction of
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(I.R.S. Employer |
incorporation or organization)
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Identification No.) |
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2700 Research Forest Drive, Suite 100 |
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The Woodlands, Texas
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77381 |
(Address of principal executive offices)
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(Zip Code) |
(281) 362-6800
(Registrants telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant is a large accelerated file, an accelerated filer or
a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule
12b-2 of the Exchange Act. (Check one)
Large accelerated filer
o Accelerated filer þ Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes o No þ
As of October 24, 2007, a total of 90,100,704 shares of Common Stock, $0.01 par value per share,
were outstanding.
NEWPARK RESOURCES, INC.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE AND NINE MONTHS ENDED
September 30, 2007
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act
of 1934, as amended, and the Private Securities Litigation Reform Act of 1995, as amended. We also
may provide oral or written forward-looking statements in other materials we release to the public.
The words anticipates, believes, estimates, expects, plans, intends, and similar
expressions are intended to identify these forward-looking statements but are not the exclusive
means of identifying them. These forward-looking statements reflect the current views of our
management; however, various risks, uncertainties and contingencies, including the risks identified
in Item 1A, Risk Factors, in Part I of our Annual Report on Form 10-K for the year ended December
31, 2006, and those set forth from time to time in our filings with the Securities and Exchange
Commission, could cause our actual results, performance or achievements to differ materially from
those expressed in, or implied by, these statements, including the success or failure of our
efforts to implement our business strategy.
We assume no obligation to update publicly any forward-looking statements, whether as a result
of new information, future events or otherwise, except as required by securities laws. In light of
these risks, uncertainties and assumptions, the forward-looking events discussed in this Quarterly
Report on Form 10-Q might not occur.
For further information regarding these and other factors, risks and uncertainties affecting
us, we refer you to the risk factors set forth in Part I of our Annual Report on Form 10-K for the
year ended December 31, 2006.
2
PART I
ITEM 1. Financial Statements
Newpark Resources, Inc.
Consolidated Balance Sheets
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September 30, |
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December 31, |
|
(In thousands, except share data) |
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2007 |
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2006 |
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|
(Unaudited) |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
|
$ |
7,412 |
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$ |
12,736 |
|
Receivables, net |
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|
142,141 |
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|
141,790 |
|
Inventories |
|
|
108,319 |
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|
107,778 |
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Deferred tax asset |
|
|
20,076 |
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|
23,001 |
|
Prepaid expenses and other current assets |
|
|
16,566 |
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|
12,176 |
|
Assets of discontinued operations |
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87,780 |
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|
102,365 |
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|
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|
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Total current assets |
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382,294 |
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|
399,846 |
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Property, plant and equipment, net |
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|
160,319 |
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|
152,207 |
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Goodwill |
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62,028 |
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|
54,624 |
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Deferred tax asset |
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|
|
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|
7,096 |
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Other intangible assets, net |
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17,503 |
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|
8,236 |
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Other assets |
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7,052 |
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7,440 |
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|
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$ |
629,196 |
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$ |
629,449 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current liabilities: |
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Foreign bank lines of credit |
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$ |
5,928 |
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$ |
10,938 |
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Current maturities of long-term debt |
|
|
3,066 |
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|
4,058 |
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Accounts payable |
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|
45,815 |
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37,087 |
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Accrued liabilities |
|
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35,299 |
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|
40,439 |
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Liabilities of discontinued operations |
|
|
11,554 |
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|
11,403 |
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|
|
|
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|
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Total current liabilities |
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101,662 |
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|
103,925 |
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|
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Long-term debt, less current portion |
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|
169,252 |
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|
198,037 |
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Deferred tax liability |
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|
858 |
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|
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Other non-current liabilities |
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|
4,591 |
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|
4,344 |
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|
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Total liabilities |
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276,363 |
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306,306 |
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Stockholders equity: |
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Common Stock, $0.01 par value, 100,000,000 shares
authorized, 90,092,704 and 89,675,292 shares issued
and outstanding, respectively |
|
|
901 |
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|
897 |
|
Paid-in capital |
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|
448,940 |
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444,763 |
|
Accumulated other comprehensive income |
|
|
14,283 |
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|
7,940 |
|
Retained deficit |
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|
(111,291 |
) |
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|
(130,457 |
) |
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|
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|
|
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|
|
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Total stockholders equity |
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352,833 |
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323,143 |
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|
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$ |
629,196 |
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$ |
629,449 |
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|
See Accompanying Notes to Unaudited Consolidated Condensed Financial Statements
3
Newpark Resources, Inc.
Consolidated Statements of Operations
(Unaudited)
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Three Months Ended |
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Nine Months Ended |
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September 30, |
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September 30, |
|
(In thousands, except per share data) |
|
2007 |
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2006 |
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|
2007 |
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2006 |
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Revenues |
|
$ |
153,778 |
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|
$ |
147,618 |
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$ |
453,024 |
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$ |
435,160 |
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|
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|
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|
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Cost of revenues |
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133,756 |
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122,846 |
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393,176 |
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376,028 |
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|
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|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
20,022 |
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|
24,772 |
|
|
|
59,848 |
|
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|
59,132 |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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General and administrative expenses |
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4,567 |
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|
5,050 |
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|
17,833 |
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13,842 |
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Operating income |
|
|
15,455 |
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|
|
19,722 |
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|
|
42,015 |
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|
|
45,290 |
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|
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|
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Foreign currency exchange (gain) loss |
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|
(57 |
) |
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|
16 |
|
|
|
(279 |
) |
|
|
(496 |
) |
Interest expense, net |
|
|
3,950 |
|
|
|
6,160 |
|
|
|
12,182 |
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|
15,210 |
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|
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Income from continuing operations
before income taxes |
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|
11,562 |
|
|
|
13,546 |
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|
30,112 |
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|
30,576 |
|
Provision for income taxes |
|
|
3,950 |
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|
|
3,813 |
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|
|
10,586 |
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|
9,936 |
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|
|
|
|
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|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Income from continuing operations |
|
|
7,612 |
|
|
|
9,733 |
|
|
|
19,526 |
|
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|
20,640 |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
(Loss) income from discontinued
operations, net of tax |
|
|
(229 |
) |
|
|
(11,998 |
) |
|
|
2,563 |
|
|
|
(10,797 |
) |
Loss from disposal of discontinued
operations, net of tax |
|
|
|
|
|
|
|
|
|
|
(2,173 |
) |
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Net income (loss) |
|
$ |
7,383 |
|
|
$ |
(2,265 |
) |
|
$ |
19,916 |
|
|
$ |
9,843 |
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|
|
|
|
|
|
|
|
|
|
|
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|
|
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|
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|
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|
|
|
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|
Weighted average shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
90,085 |
|
|
|
89,417 |
|
|
|
89,965 |
|
|
|
89,281 |
|
Diluted |
|
|
90,542 |
|
|
|
89,658 |
|
|
|
90,503 |
|
|
|
89,872 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
0.08 |
|
|
$ |
0.11 |
|
|
$ |
0.22 |
|
|
$ |
0.23 |
|
(Loss) income from discontinued |
|
|
(0.00 |
) |
|
|
(0.14 |
) |
|
|
0.00 |
|
|
|
(0.12 |
) |
|
|
|
|
|
|
|
|
|
|
|
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|
Income (loss) per share |
|
$ |
0.08 |
|
|
$ |
(0.03 |
) |
|
$ |
0.22 |
|
|
$ |
0.11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Accompanying Notes to Unaudited Consolidated Condensed Financial Statements
4
Newpark Resources, Inc.
Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
(In thousands) |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Net income (loss) |
|
$ |
7,383 |
|
|
$ |
(2,265 |
) |
|
$ |
19,916 |
|
|
$ |
9,843 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in fair value of interest rate
swap and cap, net of tax |
|
|
84 |
|
|
|
(378 |
) |
|
|
(88 |
) |
|
|
(378 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments |
|
|
2,255 |
|
|
|
426 |
|
|
|
6,431 |
|
|
|
1,391 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) |
|
$ |
9,722 |
|
|
$ |
(2,217 |
) |
|
$ |
26,259 |
|
|
$ |
10,856 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
Accompanying Notes to Unaudited Consolidated Condensed Financial
Statements
5
Newpark Resources, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
|
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Nine Months Ended |
|
|
|
September 30, |
|
(In thousands) |
|
2007 |
|
|
2006 |
|
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
19,916 |
|
|
$ |
9,843 |
|
Adjustments to reconcile net income to net cash provided by operations: |
|
|
|
|
|
|
|
|
Net (income) loss from discontinued operations |
|
|
(2,563 |
) |
|
|
10,797 |
|
Net loss on disposal of discontinued operations |
|
|
2,173 |
|
|
|
|
|
Depreciation and amortization |
|
|
14,835 |
|
|
|
15,908 |
|
Stock-based compensation expense |
|
|
2,270 |
|
|
|
1,711 |
|
Provision for deferred income taxes |
|
|
8,385 |
|
|
|
2,564 |
|
Provision for doubtful accounts |
|
|
530 |
|
|
|
1,074 |
|
Loss (gain) on sale of assets |
|
|
193 |
|
|
|
(614 |
) |
Change in assets and liabilities: |
|
|
|
|
|
|
|
|
Decrease (increase) in accounts and notes receivable |
|
|
3,872 |
|
|
|
(21,420 |
) |
Increase in inventories |
|
|
(1,340 |
) |
|
|
(24,593 |
) |
Increase in other assets |
|
|
(3,994 |
) |
|
|
(3,752 |
) |
Increase (decrease) in accounts payable |
|
|
7,606 |
|
|
|
(5,546 |
) |
(Decrease) Increase in accrued liabilities and other |
|
|
(4,099 |
) |
|
|
11,463 |
|
|
|
|
|
|
|
|
Net operating activities of continuing operations |
|
|
47,784 |
|
|
|
(2,565 |
) |
Net operating activities of discontinued operations |
|
|
15,018 |
|
|
|
10,388 |
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
62,802 |
|
|
|
7,823 |
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
(13,227 |
) |
|
|
(20,162 |
) |
Proceeds from sale of property, plant and equipment |
|
|
888 |
|
|
|
1,210 |
|
Business acquisitions |
|
|
(21,919 |
) |
|
|
|
|
Insurance proceeds from property, plant and equipment claim |
|
|
|
|
|
|
3,471 |
|
|
|
|
|
|
|
|
Net investing activities of continuing operations |
|
|
(34,258 |
) |
|
|
(15,481 |
) |
Net investing activities of discontinued operations |
|
|
153 |
|
|
|
(9,246 |
) |
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(34,105 |
) |
|
|
(24,727 |
) |
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Net (payments) borrowings on lines of credit |
|
|
(15,766 |
) |
|
|
17,078 |
|
Proceeds from long-term financing |
|
|
|
|
|
|
150,000 |
|
Payments on notes payable and long-term debt, net |
|
|
(20,806 |
) |
|
|
(156,217 |
) |
Proceeds from exercise of stock options and ESPP |
|
|
2,016 |
|
|
|
4,385 |
|
Excess tax benefit from exercise of stock options |
|
|
|
|
|
|
640 |
|
|
|
|
|
|
|
|
Net financing activities of continuing operations |
|
|
(34,556 |
) |
|
|
15,886 |
|
Net financing activities of discontinued operations |
|
|
(45 |
) |
|
|
(646 |
) |
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities |
|
|
(34,601 |
) |
|
|
15,240 |
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes |
|
|
580 |
|
|
|
226 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents |
|
|
(5,324 |
) |
|
|
(1,438 |
) |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period |
|
|
12,736 |
|
|
|
7,344 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
7,412 |
|
|
$ |
5,906 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Paid for: |
|
|
|
|
|
|
|
|
Income taxes (net of refunds) |
|
$ |
4,686 |
|
|
$ |
2,391 |
|
Interest |
|
$ |
12,486 |
|
|
$ |
14,696 |
|
See Accompanying Notes to Unaudited Consolidated Condensed Financial Statements
6
NEWPARK RESOURCES, INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Note 1 Basis of Presentation and Significant Accounting Policies
The accompanying unaudited consolidated condensed financial statements of Newpark Resources,
Inc. and our wholly-owned subsidiaries, which we refer to as we, our or us, have been
prepared in accordance with Rule 10-01 of Regulation S-X for interim financial statements required
to be filed with the Securities and Exchange Commission and do not include all information and
footnotes required by generally accepted accounting principles for complete financial statements.
These consolidated condensed financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for
the year ended December 31, 2006. The results of operations for the three and nine months ended
September 30, 2007 are not necessarily indicative of the results to be expected for the entire
year.
In the opinion of management, the accompanying unaudited consolidated condensed financial
statements reflect all adjustments necessary to present fairly our financial position as of
September 30, 2007, and the results of our operations and our cash flows for the three and nine
months ended September 30, 2007 and 2006. All adjustments are of a normal recurring nature. Our
balance sheet at December 31, 2006 has been derived from the audited financial statements at that
date. We have reclassified certain amounts related to discontinued operations previously reported
to conform with the presentation at September 30, 2007.
The preparation of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. For further information, see Note 1 in our
Annual Report on Form 10-K for the year ended December 31, 2006.
In
September 2006, the FASB issued SFAS No. 157 Fair Value Measurements (SFAS 157). This
standard defines fair value, establishes a framework for measuring fair value in accounting
principles generally accepted in the United States of America and expands disclosure about fair
value measurements. This pronouncement applies whenever other accounting standards require or
permit assets or liabilities to be measured at fair value. Accordingly, this statement does not
require any new fair value measurement. This statement is effective for fiscal years beginning
after November 15, 2007 and interim periods within those fiscal
years. We are currently
assessing the impact of applying SFAS 157 on the Companys consolidated financial statements.
In February 2007, the Financial Accounting Standards Board
(FASB) issued Statement of
Financial Accounting Standard No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities Including an Amendment of FASB Statement
No. 115 (SFAS 159). This
standard provides companies with an option to measure, at specified election dates, many financial
instruments and certain other items at fair value that are not currently measured at fair value. A
company will report unrealized gains and losses on items for which the fair value option has been
elected in earnings at each subsequent reporting date. This Statement also establishes
presentation and disclosure requirements designed to facilitate comparisons between entities that
choose different measurement attributes for similar types of assets and liabilities. SFAS 159 is
effective as of the beginning of an entitys first fiscal year that begins after November 15, 2007.
We are currently assessing the impact of applying SFAS 159s elective fair value option on
the Companys consolidated financial statements.
7
Note 2 Discontinued Operations
During October 2007, we entered into a definitive agreement to sell our U.S. Environmental
Services business for $81.5 million in cash, and potentially an additional $8 million under the
terms of the five-year earn out provision in the agreement. The sale is expected to close during
the fourth quarter of 2007 subject to regulatory approval, completion of environmental due
diligence and other customary requirements. In conjunction with this action, we exited certain
Environmental Services activities in the Canadian market during the third quarter of 2007, which
resulted in charges of $1.1 million ($0.6 million after-tax), including $0.5 million for the
impairment of goodwill. As a result of these developments, we reclassified all assets, liabilities
and results of our U.S. and Canadian Environmental Services operations to discontinued operations
for all periods presented.
During the third quarter of 2007, we completed the sale of a sawmill facility that supplies
wood products to third parties and provides wooden mat materials for our Mats and Integrated
Services segment. As a result of this sale agreement, which was executed during the second quarter
of 2007, we recorded an impairment loss on the pending sale of discontinued operations of $3.2
million ($2.2 million after-tax).
During 2006, we decided to shut down the operations of Newpark Environmental Water Solutions,
LLC (NEWS), and dispose of the assets related to this operation along with the disposal and water
treatment operations in Wyoming which existed prior to the start up of NEWS. The operations ceased
at these facilities during the fourth quarter of 2006, and all remaining assets of these businesses
are held for sale. As a result of separate agreements entered into during 2007 to sell
substantially all remaining assets and settle outstanding claims related to the NEWS business, a
$0.9 million charge ($0.6 million after-tax) was recorded during the second quarter of 2007.
We reclassified all assets, liabilities and the results of operations for the above businesses
to discontinued operations for all periods presented. Summarized results of operations from
discontinued operations are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
(In thousands) |
|
September 30, |
|
September 30, |
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
Revenues |
|
$ |
17,080 |
|
|
$ |
22,523 |
|
|
$ |
60,468 |
|
|
$ |
66,577 |
|
(Loss)
income from discontinued
operations before
income taxes |
|
|
(431 |
) |
|
|
(17,272 |
) |
|
|
4,830 |
|
|
|
(15,544 |
) |
(Loss) income from discontinued
operations, net of
tax |
|
|
(229 |
) |
|
|
(11,998 |
) |
|
|
2,563 |
|
|
|
(10,797 |
) |
Loss from disposal
of discontinued
operations, before
tax |
|
|
|
|
|
|
|
|
|
|
(4,095 |
) |
|
|
|
|
Loss from disposal
of discontinued
operations, net of
tax |
|
|
|
|
|
|
|
|
|
|
(2,173 |
) |
|
|
|
|
8
Assets and liabilities of discontinued operations are as follows as of September 30, 2007 and
December 31, 2006:
|
|
|
|
|
|
|
|
|
(In thousands) |
|
September 30, 2007 |
|
|
December 31, 2006 |
|
Current assets |
|
$ |
12,154 |
|
|
$ |
19,878 |
|
Property, plant and equipment |
|
|
71,804 |
|
|
|
75,836 |
|
Other assets |
|
|
3,822 |
|
|
|
6,651 |
|
|
|
|
|
|
|
|
Assets of discontinued operations |
|
$ |
87,780 |
|
|
$ |
102,365 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
8,555 |
|
|
$ |
8,837 |
|
Accrued liabilities |
|
|
2,746 |
|
|
|
2,268 |
|
Other liabilities |
|
|
253 |
|
|
|
298 |
|
|
|
|
|
|
|
|
Liabilities of discontinued operations |
|
$ |
11,554 |
|
|
$ |
11,403 |
|
|
|
|
|
|
|
|
Note 3 Earnings per Share
The following table presents the reconciliation of the numerator and denominator for
calculating income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
(In thousands, except per share amounts) |
|
September 30, |
|
|
September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Net income (loss) |
|
$ |
7,383 |
|
|
$ |
(2,265 |
) |
|
$ |
19,916 |
|
|
$ |
9,843 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares outstanding |
|
|
90,085 |
|
|
|
89,417 |
|
|
|
89,965 |
|
|
|
89,281 |
|
Add: Net effect of dilutive stock
options, warrants and restricted stock |
|
|
457 |
|
|
|
241 |
|
|
|
538 |
|
|
|
591 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted weighted average number of
common shares outstanding |
|
|
90,542 |
|
|
|
89,658 |
|
|
|
90,503 |
|
|
|
89,872 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted income (loss) per share |
|
$ |
0.08 |
|
|
$ |
(0.03 |
) |
|
$ |
0.22 |
|
|
$ |
0.11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three and nine months ended September 30, 2007, we had dilutive stock options of
approximately 0.9 million shares and 1.2 million shares, respectively, which were assumed to be
exercised using the treasury stock method. For the nine months ended September 30, 2006, we had
dilutive stock options and warrants of approximately 2.2 million shares which were assumed to be
exercised using the treasury stock method. The resulting net effects of stock options and warrants
were used in calculating diluted income per share for these periods.
During the three and nine months ended September 30, 2007, we issued 22,834 shares and 341,396
shares in conjunction with the exercise of stock options, respectively. During the nine months
ended September 30, 2007, we issued 50,000 shares in conjunction with the vesting of time
restricted shares.
Options and warrants to purchase a total of approximately 4.7 million shares and 3.9 million
shares, of common stock were outstanding during the three and nine months ended September 30, 2007,
respectively, but were not included in the computation of diluted income per share because they
were anti-dilutive. Options and warrants to purchase a total of approximately 5.9 million
9
shares and 4.0 million shares, of common stock were outstanding during the three and nine
months ended September 30, 2006, respectively, but were not included in the computation of diluted
income per share because they were anti-dilutive.
On June 1, 2000, we completed the sale of 120,000 shares of Series B Convertible Preferred
Stock, $0.01 par value per share (the Series B Preferred Stock), and a warrant (the Series B
Warrant) to purchase up to 1,900,000 shares of our Common Stock at an exercise price of $10.075
per share, subject to anti-dilution adjustments. Prior to 2007, all outstanding shares of the
Series B Preferred Stock were converted to Common Stock. The Series B Warrant was originally
issued with a seven year life, expiring June 1, 2007. This warrant contains certain registration
provisions, which, if not met, reduce the exercise price of the warrants by 2.5%, compounding
annually, and extending the term of the warrant. As of September 30, 2007, the Series B Warrant,
as adjusted for certain anti-dilution provisions, remains outstanding and provides for the right to
purchase up to 1,928,972 shares of our Common Stock at an exercise price of $9.43. We are
currently not in compliance with the registration provisions and do not currently expect to
establish an effective registration of this warrant until November 2007. Upon completion of the
registration, the remaining life of the warrant will be approximately 16 months.
Note 4 Acquisition
In August 2007, we completed the acquisition of substantially all of the assets and operations
of SEM Construction Company (SEM), headquartered in Grand Junction, Colorado. SEM is a
full-service well site construction company engaged in construction, reclamation, maintenance, and
general rig work for the oil and gas industry at drilling locations throughout Western Colorado.
SEM is reported within the Mats and Integrated Services segment and generated sales of $1.2 million
during the third quarter of 2007.
Total cash consideration paid during the third quarter was $21.3 million which was funded by
borrowing on our revolving credit facility. The final purchase price is subject to adjustment for
actual working capital conveyed at closing, for which $0.3 million is expected to be paid during
the fourth quarter of 2007.
The following table summarizes the estimated fair value of the assets acquired at the date of
acquisition:
|
|
|
|
|
|
|
August 31, |
|
(In thousands) |
|
2007 |
|
Receivables, net |
|
$ |
2,093 |
|
Property, plant and equipment |
|
|
4,800 |
|
Goodwill |
|
|
4,576 |
|
Employment and non-compete agreements (4.5 year life) |
|
|
1,914 |
|
Customer relationships (10.6 year life) |
|
|
8,294 |
|
|
|
|
|
Purchase price allocated |
|
$ |
21,677 |
|
|
|
|
|
We are accounting for this acquisition using the purchase method of accounting and are in the
process of finalizing the valuations of certain assets acquired; consequently, the initial
allocation of the purchase price is preliminary and subject to change for a period of one year
following the acquisition, although management believes it is materially accurate as of September
30, 2007.
10
Note 5 Receivables, net
Receivables consisted of the following at September 30, 2007 and December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
(In thousands) |
|
2007 |
|
|
2006 |
|
Trade receivables |
|
$ |
120,441 |
|
|
$ |
118,480 |
|
Unbilled revenues |
|
|
24,651 |
|
|
|
22,891 |
|
Notes and other receivables |
|
|
431 |
|
|
|
2,735 |
|
|
|
|
|
|
|
|
Gross accounts receivables |
|
|
145,523 |
|
|
|
144,106 |
|
Allowance for doubtful accounts |
|
|
(3,382 |
) |
|
|
(2,316 |
) |
|
|
|
|
|
|
|
Receivables, net |
|
$ |
142,141 |
|
|
$ |
141,790 |
|
|
|
|
|
|
|
|
Note 6 Inventory
Inventory consisted of the following at September 30, 2007 and December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
(In thousands) |
|
2007 |
|
|
2006 |
|
Finished goods-composite mats |
|
$ |
5,360 |
|
|
$ |
14,458 |
|
|
|
|
|
|
|
|
Raw materials and components: |
|
|
|
|
|
|
|
|
Drilling fluids raw material and components |
|
|
97,151 |
|
|
|
89,240 |
|
Supplies and other |
|
|
5,808 |
|
|
|
4,080 |
|
|
|
|
|
|
|
|
Total raw materials and components |
|
|
102,959 |
|
|
|
93,320 |
|
|
|
|
|
|
|
|
Total inventory |
|
$ |
108,319 |
|
|
$ |
107,778 |
|
|
|
|
|
|
|
|
Note 7 Commitments and Contingencies
Shareholder Litigation
Settlement of Shareholder Derivative and Class Action Litigation
On April 13, 2007, we announced that, subject to court approval, we had reached a settlement
of our pending derivative and class action litigation described below. The settlement received
final approval from the U.S. District Court for the Eastern District of Louisiana on October 9,
2007. Under the terms of the settlement, we paid $1.6 million, and our directors and officers
liability insurance carrier paid $8.3 million. A portion of these amounts will be used to pay
administration costs and legal fees. This settlement resolves all pending shareholder class and
derivative litigation against us, our former and current directors, and former officers. As part
of the settlement, however, we preserved certain claims against our former Chief Executive Officer
and Chief Financial Officer for matters arising from the potential invoicing irregularities at
Soloco Texas, LP and the backdating of stock options. The history and nature of this litigation is
set forth below.
11
Derivative Actions
On August 17, 2006, a shareholder derivative action was filed in the 24th Judicial
District Court for the Parish of Jefferson, captioned: Victor Dijour, Derivatively on
Behalf of Nominal Defendant Newpark Resources, Inc., v. James D. Cole, et al. On August 28,
2006, a second shareholder derivative action was filed in the 24th Judicial District Court
for the Parish of Jefferson, captioned: James Breaux, Derivatively on Behalf of Nominal
Defendant Newpark Resources, Inc., v. James D. Cole, et al. These actions, which are
substantially similar, were brought, allegedly for the benefit of us, in which we are sued
as a nominal defendant in each of these actions, against James D. Cole, our former Chief
Executive Officer and director; Matthew W. Hardey, our former Chief Financial Officer;
William Thomas Ballantine, our former Chief Operating Officer, President and director; and
directors David P. Hunt, Alan J. Kaufman, Roger C. Stull and James H. Stone. The plaintiffs
in these respective actions allege improper backdating of stock option grants to our
executives, improper recording and accounting of the backdated stock option grants and
producing and disseminating false financial statements and other SEC filings to our
shareholders and the market. The plaintiffs do not seek any recovery against us. Instead,
they seek unspecified damages from the individual defendants on our behalf for alleged
breach of fiduciary duty, and against Messrs. Cole and Hardey, and also against
Mr. Ballantine in the second shareholder derivative action, for alleged unjust enrichment.
These two cases were voluntarily dismissed without prejudice by the plaintiffs on December
29, 2006 and have subsequently been re-filed in the U.S. District Court for the Eastern
District of Louisiana. The complaints in the re-filed cases are virtually identical to the
complaints filed in the Galchutt and Pomponi cases described below.
On October 5, 2006, a third shareholder derivative action was filed in the U.S.
District Court, Eastern District of Louisiana, captioned: Vincent Pomponi, Derivatively on
Behalf of Newpark Resources, Inc., v. James D. Cole, et al. On October 6, 2006, a fourth
derivative action was filed in the U.S. District Court, Eastern District of Louisiana,
captioned: David Galchutt, Derivatively on Behalf of Newpark Resources, Inc., v. James D.
Cole, et al. These complaints are virtually identical and were brought, allegedly for the
benefit of us, in which we are sued as a nominal defendant, against Messrs. Cole and Hardey
and current and previous directors Hunt, Kaufman, Stone, Stull, Jerry W. Box, F. Walker
Tucei, Jr., Gary L. Warren, Ballantine, Michael Still, Dibo Attar, Phillip S. Sassower,
Lawrence I. Schneider and David C. Baldwin, alleging improper financial reporting and
backdating of stock option grants to our employees. The plaintiffs do not seek any recovery
against us. Instead, they seek unspecified damages from Messrs. Cole and Hardey for alleged
disgorgement under the Sarbanes-Oxley Act of 2002 and alleged rescission, against Messrs.
Hardey, Hunt, Kaufman, Stone, Ballantine, Still, Attar, Sassower, Schneider, and Baldwin for
alleged violation of Section 14(a) of the Securities Exchange Act of 1934, which we refer to
as the Exchange Act, and against all of the individual defendants on behalf of us for
alleged unjust enrichment, breach of fiduciary duty, abuse of control, gross mismanagement,
waste of corporate assets, and constructive trust. All four derivative actions are
consolidated in Judge Livaudais court.
Pursuant to previously existing indemnification agreements, we have advanced to the
officer and director defendants the fees they have incurred to defend themselves, subject to
repayment in the event of a determination that they are not entitled to indemnification. We
have also agreed to advance to the former directors the fees they have incurred to defend
themselves subject to certain restrictions on reasonableness and agreements to repay in the
event of a determination that they are not entitled to indemnification.
Our Board of Directors formed a Special Litigation Committee consisting of David C.
Anderson and James W. McFarland, recently elected independent directors who are not named in
any of the derivative actions, to review the allegations in these actions and in any other
derivative actions that may be filed that involve the same subject matter, and the
12
Special Litigation Committee retained outside counsel to assist it. After conducting
its investigation and analysis of the claims made in the derivative actions, the Special
Litigation Committee approved the settlement of the derivative actions on the terms outlined
above. The Special Litigation Committee recommended that we preserve our causes of action
against Messrs. Cole and Hardey, but that we not pursue claims against any other officer or
director of our company named in the derivative actions.
Class Action Lawsuit
Between April 21, 2006 and May 9, 2006, five lawsuits asserting claims against us for
violation of Section 10(b) of the Exchange Act, and SEC Rule 10b-5 were filed in the U.S.
District Court for the Eastern District of Louisiana. All five lawsuits have been
transferred to Judge Marcel Livaudais who has consolidated these actions as In re: Newpark
Resources, Inc. Securities Litigation. Following the filing of the Amendment No. 2 to our
Annual Report on Form 10-K/A for 2005 (filed on October 10, 2006), the plaintiffs filed (on
November 9, 2006) a Consolidated Class Action Complaint for Securities Fraud (the
Consolidated Class Complaint) against us and the following directors and officers: James
Cole, Matthew Hardey, Thomas Ballantine, David Hunt, Alan Kaufman, James Stone, Roger Stull
and Jerry Box. The Consolidated Class Complaint alleges that we and the individual
defendants made false and misleading statements in violation of Sections 10(b) and 20(a) of
the Exchange Act. These allegations arise from our disclosure of an internal investigation
into potential irregularities in the processing and payment of invoices at one of our
subsidiaries, Soloco Texas, LP, and alleged improper granting, recording and accounting of
backdated grants of our stock options to our executives. The Consolidated Class Complaint
does not specify the damages sought by the Plaintiffs.
Pursuant to previously existing indemnification agreements, we have advanced to the
officer and director defendants the fees they have incurred to defend themselves, subject to
repayment in the event of a determination that they are not entitled to indemnification.
13
James D. Cole Demand Letter
By letter dated April 25, 2007, counsel for James D. Cole, our former Chief Executive Officer
and former director, notified us that Mr. Cole is pursuing claims against us for breach of his
employment agreement and other causes of action. Mr. Cole seeks recovery of approximately $3.1
million purportedly due under his employment agreement and reimbursement of certain defense costs
incurred in connection with the shareholder litigation and our internal investigation. Mr. Cole
also claims that he is entitled to the sum of $640,000 pursuant to the non-compete provision of his
employment agreement. We believe that Mr. Coles claims regarding his employment agreement are
without merit and intend to vigorously defend any action brought by him. The employment agreement
with Mr. Cole provides for arbitration of certain disputes and Mr. Cole has recently notified us
that he has submitted his employment agreement claims to arbitration.
Matthew Hardey Lawsuit
On November 2, 2007, we were served with a lawsuit filed on
behalf of Matthew Hardey, our former Chief Financial Officer, against
Newpark Resources and Paul Howes. The lawsuit was filed on October 9, 2007, in the 24th Judicial
District Court in Jefferson Parish, Louisiana. The lawsuit includes a variety of allegations
arising from our internal investigation and Mr. Hardeys termination, including breach of contract,
unfair trade practices, defamation, and negligence. The lawsuit does not specify the amount of
damages being sought by Mr. Hardey. We dispute the allegations in the lawsuit and intend to
vigorously defend our position.
Other Matters
In response to our announcement to exit the business activities of NEWS, we received a letter
from counsel for the Mexican company in September 2006 demanding the return of certain equipment
and pay it an aggregate of $4.0 million for the period that this equipment was utilized, technical
support and administrative costs, unreimbursed costs of the equipment, and lost profits due to the
Mexican companys dedication of time to our water treatment business. We have resolved this claim
by returning certain equipment belonging to the Mexican company and providing to them certain
assets from the former NEWS operations, which was completed during the third quarter of 2007. A
charge of $0.4 million was recorded in the second quarter of 2007 related to the decommissioning of
one of the former NEWS facilities and our obligations to return the equipment.
We have also been advised that the Securities and Exchange Commission (SEC) has opened a
formal investigation into the matters disclosed in Amendment No. 2 to our Annual Report on Form
10-K/A filed on October 10, 2006. We are cooperating with the SEC in their investigation.
In addition, we and our subsidiaries are involved in litigation and other claims or
assessments on matters arising in the normal course of business. In the opinion of management, any
recovery or liability in these matters should not have a material effect on our results of
operations or financial position.
14
Note 8 Segment Data
Summarized financial information concerning our reportable segments is shown in the following
table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
(In thousands) |
|
September 30, |
|
|
September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Revenues by segment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fluids Systems and Engineering |
|
$ |
129,986 |
|
|
$ |
125,130 |
|
|
$ |
386,447 |
|
|
$ |
352,287 |
|
Mats and Integrated Services |
|
|
23,792 |
|
|
|
22,488 |
|
|
|
66,577 |
|
|
|
82,873 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
153,778 |
|
|
$ |
147,618 |
|
|
$ |
453,024 |
|
|
$ |
435,160 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fluids Systems and Engineering |
|
$ |
15,467 |
|
|
$ |
20,178 |
(1) |
|
$ |
48,420 |
|
|
$ |
45,981 |
(1) |
Mats and Integrated Services |
|
|
4,555 |
|
|
|
4,594 |
|
|
|
11,428 |
|
|
|
13,151 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment operating income |
|
|
20,022 |
|
|
|
24,772 |
|
|
|
59,848 |
|
|
|
59,132 |
|
General and administrative expenses |
|
|
4,567 |
|
|
|
5,050 |
|
|
|
17,833 |
|
|
|
13,842 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income |
|
$ |
15,455 |
|
|
$ |
19,722 |
|
|
$ |
42,015 |
|
|
$ |
45,290 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes $3.5 million and $4.3 million of insurance recoveries as a result of
Hurricanes Katrina and Rita in the three and nine months ended September 30, 2006,
respectively. |
Note 9 Uncertain Tax Positions
On January 1, 2007, we adopted Financial Accounting Standards Board (FASB) Interpretation
No. 48, Accounting for Uncertainty in Income Taxes an interpretation of FASB Statement No. 109
(FIN 48). As a result of the implementation of FIN 48, we performed a comprehensive review of
possible uncertain tax positions in accordance with recognition standards established by FIN 48.
As a result of the implementation of FIN 48, we recognized a liability of approximately
$0.8 million resulting in a corresponding increase to the retained deficit balance.
We recognize accrued interest and penalties related to uncertain tax positions in interest and
general and administrative expenses, respectively. No interest or penalties have been accrued due
to tax net operating loss carry forwards.
Our United States and international income tax returns for 2003 and subsequent years remain
subject to examination by tax authorities.
15
ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of our financial condition, results of operations, liquidity and
capital resources should be read together with our consolidated financial statements and Notes to
Consolidated Financial Statements contained in this report as well as our Annual Report on Form
10-K for the year ended December 31, 2006.
We are a diversified oil and gas industry supplier and we currently have two operating
segments: Fluids Systems and Engineering and Mats and Integrated Services. We provide these
products and services principally to the oil and gas exploration and production (E&P) industry in
the U.S. Gulf Coast, West Texas, U.S. Mid-continent, U.S. Rocky Mountains, Canada, Mexico, Brazil
and areas of Europe and North Africa surrounding the Mediterranean Sea. Further, we are expanding
our presence outside the E&P sector, particularly in Mats and Integrated Services, where we are
marketing to utilities, municipalities, and government sectors.
Following a comprehensive review of all of our businesses in the first quarter of 2007, we
decided to explore strategic alternatives with regards to our Environmental Services business,
which was historically reported as a third segment to our business. Subsequently, we initiated a
sale process for this business and entered into an agreement in October 2007 to sell the U.S.
Environmental Services business for $81.5 million in cash and potentially an additional $8 million
which can be earned under a five-year earn out provision. This sale is expected to close during
the fourth quarter of 2007. In conjunction with this process, we decided to exit certain
Environmental Services activities within the Canadian market during the third quarter of 2007,
which resulted in a $1.1 million charge, including $0.5 million for the impairment of goodwill. As
a result of these developments, we reclassified all assets, liabilities and results of operations
of our U.S. and Canadian Environmental Services business to discontinued operations for all periods
presented.
The decision to sell the Environmental Services business is part of our strategic plan to
focus our attention and capital on our Fluids Systems and Engineering and Mats and Integrated
Services businesses. In August 2007, we completed the acquisition of substantially all of the
assets and operations of SEM Construction Company (SEM), for cash consideration of $21.3 million.
SEM is a full-service well site construction company engaged in construction, reclamation,
maintenance, and general rig work for the oil and gas industry at drilling locations throughout
Western Colorado and is reported within the Mats and Integrated Services segment.
Also during August 2007, we completed the sale of a sawmill facility for $4.1 million, which
was historically reported within the Mats & Integrated Services segment. As a result of the sales
agreement for this transaction, we recorded an impairment loss on the sale of discontinued
operations of $3.2 million ($2.2 million after-tax) in the second quarter of 2007 and reclassified
all assets, liabilities and results of operations to discontinued operations, for all periods
presented.
In October 2007, we received final court approval of the previously announced settlement of
our pending derivative and class action litigation. Under the terms of the settlement, we paid
$1.6 million, and our directors and officers liability insurance carrier paid $8.3 million. The
settlement resolves all pending shareholder class and derivative litigation against us, our former
and current directors, and our former officers. As part of the settlement, however, we preserved
certain claims against our former Chief Executive Officer and Chief Financial Officer for matters
arising from the potential invoicing irregularities at Soloco Texas, LP and the backdating of stock
options. As of September 30, 2007, we have accrued our estimated costs required to conclude this
settlement.
Results of Operations
Our operating results depend in large measure on oil and gas drilling activity levels in the
markets we serve, as well as on the depth of drilling, which governs the revenue potential of each
16
well. These levels, in turn, depend on oil and gas commodity pricing, inventory levels and product
demand. Rig count data is the most widely accepted indicator of drilling activity. Key average
rig count data for the last seven quarters is listed in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1Q06 |
|
2Q06 |
|
3Q06 |
|
4Q06 |
|
1Q07 |
|
2Q07 |
|
3Q07 |
U.S. rig count |
|
|
1,521 |
|
|
|
1,635 |
|
|
|
1,721 |
|
|
|
1,719 |
|
|
|
1,734 |
|
|
|
1,757 |
|
|
|
1,789 |
|
Canadian rig count |
|
|
661 |
|
|
|
292 |
|
|
|
490 |
|
|
|
441 |
|
|
|
521 |
|
|
|
144 |
|
|
|
347 |
|
|
Derived from Baker Hughes Incorporated |
Summarized financial information concerning our reportable segments is shown in the following
table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
(In thousands) |
|
September 30, |
|
|
September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Revenues by segment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fluids Systems and Engineering |
|
$ |
129,986 |
|
|
$ |
125,130 |
|
|
$ |
386,447 |
|
|
$ |
352,287 |
|
Mats and Integrated Services |
|
|
23,792 |
|
|
|
22,488 |
|
|
|
66,577 |
|
|
|
82,873 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
153,778 |
|
|
$ |
147,618 |
|
|
$ |
453,024 |
|
|
$ |
435,160 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fluids Systems and Engineering |
|
$ |
15,467 |
|
|
$ |
20,178 |
(1) |
|
$ |
48,420 |
|
|
$ |
45,981 |
(1) |
Mats and Integrated Services |
|
|
4,555 |
|
|
|
4,594 |
|
|
|
11,428 |
|
|
|
13,151 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment operating income |
|
|
20,022 |
|
|
|
24,772 |
|
|
|
59,848 |
|
|
|
59,132 |
|
General and administrative expenses |
|
|
4,567 |
|
|
|
5,050 |
|
|
|
17,833 |
|
|
|
13,842 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income |
|
$ |
15,455 |
|
|
$ |
19,722 |
|
|
$ |
42,015 |
|
|
$ |
45,290 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Operating Margin: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fluids Systems and Engineering |
|
|
11.9 |
% |
|
|
16.1 |
% |
|
|
12.5 |
% |
|
|
13.1 |
% |
Mats and Integrated Services |
|
|
19.1 |
% |
|
|
20.4 |
% |
|
|
17.2 |
% |
|
|
15.9 |
% |
|
|
|
(1) |
|
Includes $3.5 million and $4.3 million of insurance recoveries as a result of
Hurricanes Katrina and Rita in the three and nine months ended September 30, 2006,
respectively. |
The amounts above are shown net of intersegment transfers.
17
Quarter Ended September 30, 2007 Compared to Quarter Ended September 30, 2006
Fluids Systems and Engineering
Revenues
Total revenues by region for this segment were as follows for the three months ended
September 30, 2007 and 2006 (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change |
|
|
2007 |
|
2006 |
|
$ |
|
% |
Drilling fluid sales and
engineering: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
$ |
77.6 |
|
|
$ |
80.8 |
|
|
$ | (3.2 |
) |
|
|
(4 |
)% |
Mediterranean |
|
|
25.5 |
|
|
|
15.7 |
|
|
|
9.8 |
|
|
|
62 |
|
|
|
|
|
|
|
|
Total drilling fluid sales
and engineering |
|
|
103.1 |
|
|
|
96.5 |
|
|
|
6.6 |
|
|
|
7 |
|
Completion fluids and services |
|
|
16.9 |
|
|
|
17.9 |
|
|
|
(1.0 |
) |
|
|
(5 |
) |
Industrial materials |
|
|
10.0 |
|
|
|
10.7 |
|
|
|
(0.7 |
) |
|
|
(7 |
) |
|
|
|
|
|
|
|
Total |
|
$ |
130.0 |
|
|
$ |
125.1 |
|
|
$ |
4.9 |
|
|
|
4 |
% |
|
|
|
|
|
|
|
North American drilling fluid sales and engineering revenues decreased 4% to $77.6 million for
the quarter ended September 30, 2007, as compared to $80.8 million for the quarter ended
September 30, 2006. Overall North American rig activity decreased 3%, while the average number of
North American rigs serviced by this business segment decreased by 10%. This decrease in rigs
serviced is primarily related to the weak Canadian market, as well as a lower level of drilling
activity in the regions that we serve and a lower level of drilling activity within our customer
base in the U.S. market. The decrease in number of rigs serviced is partially offset by a 7% increase in our average
revenue per rig, resulting from our focused efforts to concentrate on deeper and more complex
wells, including the off-shore Gulf Coast markets.
In the quarter ended September 30, 2007, our Mediterranean revenues increased 62% over the
same period in 2006. This increase was driven by increased rig activity and continued penetration
into the North African and Eastern European markets.
Revenues in our completion fluids and industrial materials businesses decreased $1.7 million
for the quarter ended September 30, 2007, or 6%, as compared to the same period in 2006.
Operating Income
Operating income for this segment decreased $4.7 million for the quarter ended
September 30, 2007 on a $4.9 million increase in revenues, compared to the same period in 2006,
resulting in a decline in operating margin from 16.1% to 11.9%. The third quarter of 2006
included $3.5 million of insurance recoveries from Hurricanes Katrina and Rita. Excluding the
insurance recoveries, the operating profit in the North American business units decreased by $2.9
million on a $4.9 million decrease in revenues, reflecting the impact of higher operating costs,
including significant increases in barite transportation costs. This decrease was partially offset
by a $1.7 million increase in Mediterranean operating income generated on a $9.8 million increase
in revenues, as the incremental gross profits generated by the higher sales were partially offset
by higher transportation and other operating costs.
18
Mats and Integrated Services
Revenues
Total revenues for this segment consisted of the following for the three months ended
September 30, 2007 and 2006 (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change |
|
|
2007 |
|
2006 |
|
$ |
|
% |
Mat rental and integrated services |
|
$ |
15.6 |
|
|
$ |
16.2 |
|
|
$ |
(0.6 |
) |
|
|
(4 |
%) |
Mat sales |
|
|
7.7 |
|
|
|
5.8 |
|
|
|
1.9 |
|
|
|
33 |
|
Non-oilfield services and other |
|
|
0.5 |
|
|
|
0.4 |
|
|
|
0.1 |
|
|
|
25 |
|
|
|
|
|
|
|
|
Total |
|
$ |
23.8 |
|
|
$ |
22.4 |
|
|
$ |
1.4 |
|
|
|
6 |
% |
|
|
|
|
|
|
|
Total mat rental and integrated services revenues decreased by $0.6 million in the quarter
ended September 30, 2007, compared to the same period in 2006 as the impact of the lower rental
volume driven by weakness in the Gulf Coast rig count was partially offset by higher activity in
other areas, improved pricing, and $1.2 million of sales generated by the SEM business acquired in
August 2007. Oilfield mat rental volume decreased 13% for the quarter ended September 30, 2007
compared to the same period in 2006, while the average price per square foot increased 4%.
Mat sales primarily consist of export sales of composite mats to various international markets
and wooden mats to Canada. The increase in mat sales is attributable to a $3.4 million increase in
composite mats sales, partially offset by lower wooden mat sales in the weak Canadian market.
Operating Income
Mats and Integrated Services operating income was unchanged at $4.6 million for the quarter
ended September 30, 2007 on a $1.4 million increase in revenues, compared to the same period in
2006, reflecting a decrease in operating margins to 19.1% from 20.4%. The decrease in operating
margin is primarily attributable to the change in sales mix, as certain overhead and administrative
costs associated with the mat rental and integrated services remain relatively fixed, despite a
decrease in sales volume.
General and Administrative Expense
General and administrative expense decreased $0.5 million to $4.6 million for the quarter
ended September 30, 2007 from the comparable period of 2006. The decrease in spending is primarily
attributable to $0.8 million of consulting fees in the quarter ended September 30, 2006 associated
with strategic planning projects. This decrease is partially offset by higher share-based
compensation expense during the quarter ended September 30, 2007.
Interest Expense, net
Interest expense, net totaled $3.9 million for the quarter ended September 30, 2007 compared
to $6.2 million for the quarter ended September 30, 2006. The quarter ended September 30, 2006
included $1.2 million of charges associated with prepayment penalties under barite financing
agreements and the write-off of unamortized debt issuance costs. The remainder of the decrease is
attributable to lower debt balances in 2007.
19
Provision for Income Taxes
We recorded an income tax provision of $3.9 million, reflecting an income tax rate of 34.1% in
the quarter ended September 30, 2007, compared to an income tax provision of $3.8 million,
reflecting an income tax rate of 28.1% in the quarter ended
September 30, 2006. The higher income tax rate in 2007 is
primarily attributable to the impact of higher state tax rates along
with discrete tax benefits recorded in 2006 that did not recur in
2007.
Discontinued Operations
As described above, discontinued operations includes all of the assets, liabilities and
results of operations associated with the former Environmental Services segment, as well as the
sawmill facility sold in August 2007, which was historically reported within the Mats & Integrated
Services segment.
Also, during 2006, we announced the decision to shut down of operations of Newpark
Environmental Water Solutions, LLC (NEWS), and dispose of the assets related to this operation
along with the disposal and water treatment operations in Wyoming which existed prior to the start
up of NEWS. The operations ceased at these facilities during the fourth quarter of 2006, and all
remaining assets of these businesses are held for sale. As a result, all assets, liabilities and
continuing exit costs of this business are reported as discontinued operations.
During the quarter ended September 30, 2007, discontinued operations generated a pre-tax
operating loss of $0.4 million. This loss included $0.9 million of operating losses from the
sawmill facility prior to the August 2007 sale and $0.3 million on-going costs associated with the
satisfaction of liabilities in the exited NEWS business. These losses were partially offset by
$0.8 million of pre-tax income generated by the Environmental Services business, which included
$1.9 million of earnings from the U.S. operation, offset by a $1.1 million loss resulting from
impairments and other exit costs in the Canadian operation.
During the quarter ended September 30, 2006, discontinued operations generated a pre-tax
operating loss of $17.3 million. This loss included a $17.8 million impairment related to the shut
down of the NEWS business. The total NEWS loss of $19.3 million was partially offset by $2.2
million of pre-tax income generated by the Environmental Services business, and a $0.2 million loss
from the sawmill facility.
Nine Months Ended September 30, 2007 Compared to Nine Months Ended September 30, 2006
Fluids Systems and Engineering
Revenues
Total revenues by region for this segment were as follows for the nine months ended September
30, 2007 and 2006 (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change |
|
|
2007 |
|
2006 |
|
$ |
|
% |
Drilling fluid sales and
engineering: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
$ |
239.5 |
|
|
$ |
227.0 |
|
|
$ |
12.5 |
|
|
|
6 |
% |
Mediterranean |
|
|
60.8 |
|
|
|
42.0 |
|
|
|
18.8 |
|
|
|
45 |
|
|
|
|
|
|
|
|
Total drilling fluid sales
and engineering |
|
|
300.3 |
|
|
|
269.0 |
|
|
|
31.3 |
|
|
|
12 |
|
Completion fluids and services |
|
|
53.9 |
|
|
|
53.3 |
|
|
|
0.6 |
|
|
|
1 |
|
Industrial materials |
|
|
32.2 |
|
|
|
30.0 |
|
|
|
2.2 |
|
|
|
7 |
|
|
|
|
|
|
|
|
Total |
|
$ |
386.4 |
|
|
$ |
352.3 |
|
|
$ |
34.1 |
|
|
|
10 |
% |
|
|
|
|
|
|
|
North American drilling fluid sales and engineering revenues increased 6% to $239.5 million
20
for the nine months ended September 30, 2007, as compared to $227.0 million for the nine months
ended September 30, 2006. Overall North American rig activity decreased 2% while the average
number of North American rigs serviced by this business segment decreased by 8%. This decrease in
rigs serviced is primarily related to the weak Canadian market as well as a lower level of drilling
activity in the regions that we serve and a lower level of drilling activity within our customer
base in the U.S. market. The decrease in number of rigs serviced is partially offset by a 15% increase in our average
revenue per rig, resulting from our focused efforts to concentrate on deeper and more complex
wells, including the off-shore Gulf Coast markets.
In the nine months ended September 30, 2007, our Mediterranean revenues increased 45% over the
same period in 2006. This increase was driven by increased rig activity and continued penetration
into the North African and Eastern European markets.
Revenues in our completion fluids and industrial materials businesses increased $2.8 million
for the nine months ended September 30, 2007, or 3%, as compared to the same period in 2006.
Operating Income
Operating income for this segment increased $2.4 million for the nine months ended
September 30, 2007 on a $34.1 million increase in revenues, compared to the same period in 2006,
resulting in a decline in operating margin from 13.1% to 12.5%. The nine months ended
September 30, 2006 included $4.3 million of insurance recoveries from Hurricanes Katrina and Rita.
Excluding this item, the operating profit in the North American business units increased $1.1
million on a $15.1 million decrease in revenues, reflecting the impact of higher operating costs,
including significantly higher barite transportation costs, as well as the continued operating
costs in the Canadian business which have remained relatively flat, despite the decline in sales
volumes. The Mediterranean operating income increased $5.6 million on an $18.8 million increase in
revenues.
Mats and Integrated Services
Revenues
Total revenues for this segment consisted of the following for the nine months ended September
30, 2007 and 2006 (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change |
|
|
2007 |
|
2006 |
|
$ |
|
% |
|
|
|
Mat rental and integrated services |
|
$ |
46.6 |
|
|
$ |
42.6 |
|
|
$ |
4.0 |
|
|
|
9 |
% |
Mat sales |
|
|
16.6 |
|
|
|
37.6 |
|
|
|
(21.0 |
) |
|
|
(56 |
) |
Non-oilfield services |
|
|
3.4 |
|
|
|
2.7 |
|
|
|
0.7 |
|
|
|
26 |
|
|
|
|
|
|
|
|
Total |
|
$ |
66.6 |
|
|
$ |
82.9 |
|
|
$ |
(16.3 |
) |
|
|
(20 |
%) |
|
|
|
|
|
|
|
Total mat rental and integrated services increased by $4.0 million in the nine months ended
September 30, 2007, compared to the same period in 2006, as the impact of the lower rental volume
was more than offset by improved pricing combined with a higher mix of re-rental activity and
services. Oilfield mat rental volume decreased 17% for the nine months ended September 30, 2007
compared to the same period in 2006, while the average price per square foot increased 17%.
Mat sales primarily consist of composite mats to international markets and export sales of
wooden mats to Canada. The decline in mat sales is primarily attributable to a $17.9 million
decrease in Canadian sales, due to lower drilling activity and non-recurring wooden mat sales
recorded in the nine months ended September 30, 2006. Composite mat export sales were also down in
the nine months ended September 30, 2007 from the comparable period of 2006.
21
Operating Income
Mats and Integrated Services operating income declined $1.7 million for the nine months ended
September 30, 2007 on a $16.3 million decrease in revenues, compared to the same period in 2006.
Operating margins improved to 17.2% for the nine months ended September 30, 2007 as compared to
15.9% for the same period in 2006. The improvement in operating margin is primarily attributable
to favorable pricing and strong market conditions experienced in the first quarter of 2007,
combined with $1.4 million of cost reductions achieved in 2007, resulting from organizational
restructuring and general and administrative workforce reductions completed during the first
quarter of 2007.
General and Administrative Expense
General and administrative expense increased $4.0 million to $17.8 million for the nine months
ended September 30, 2007 from the comparable period of 2006. The nine months ended September
30, 2007 included $3.4 million of legal expenses related to the shareholder class action and
derivative litigation, including a $1.6 million settlement charge. The nine months ended September
30, 2006 included $2.0 million of expenses related to the internal investigation conducted by our
Audit Committee which resulted in the restatement of financial statements for the year ended
December 31, 2005. The remaining spending increase of $2.6 million is primarily attributable to an
increase in salaries and other employee related costs resulting from the relocation of the
corporate office and the addition of new corporate executive officers and staff positions.
Interest Expense, net
Interest expense, net totaled $12.2 million for the nine months ended September 30, 2007 as
compared to $15.2 million for the comparable period of 2006. The nine months ended September 30,
2006 included $1.2 million of charges associated with prepayment penalties under barite financing
agreements and the write-off of unamortized debt issuance costs. The remainder of the decrease is
attributable to lower debt balances in 2007.
Provision for Income Taxes
For the nine months ended September 30, 2007, we recorded an income tax provision of $10.6
million, reflecting an income tax rate of 35.1%. For the nine months ended September 30, 2006, we
recorded an income tax provision of $9.9 million, reflecting an income tax rate of 32.5%. The
higher income tax rate in 2007 is primarily attributable to the impact of higher
state tax rates along with discrete tax benefits recorded in 2006 that did not recur in 2007.
Discontinued Operations
During the nine months ended September 30, 2007, discontinued operations generated pre-tax
income of $4.2 million ($2.3 million after-tax). The Environmental Services business generated
$6.9 million of pre-tax income, which includes $8.0 million of earnings from the U.S. operation,
offset by a $1.1 million loss resulting of impairments and other exit costs in the Canadian
operation. This income was partially offset by operating losses of $1.0 million from the sawmill
facility prior to the August 2007 sale and $1.7 million of losses from the exited NEWS business.
During the nine months ended September 30, 2006, discontinued operations generated a pre-tax
loss of $15.5 million ($10.8 million after-tax). The NEWS business generated a $21.2 million
pre-tax loss including a $17.8 million impairment associated with the shut down of this business.
This was partially offset by $6.7 million of pre-tax income generated by the Environmental Services
business, while the sawmill facility generated a $1.0 million loss.
22
Pre-tax losses from the disposal of discontinued operations were $3.2 million ($2.2 million
after-tax) for the nine months ended September 30, 2007, reflecting the impairment of the sawmill
facility assets to sales price during the second quarter of 2007.
Liquidity and Capital Resources
Cash generated from operating activities during the nine months ended September 30, 2007
totaled $62.8 million. Net income adjusted for non-cash items generated $45.7 million of cash
during the period, while cash provided by operating activities of
discontinued operations was $15.0
million, and changes in working capital provided $2.0 million of cash.
Net
cash used in investing activities was $34.1 million, including
$13.2 million of capital
expenditures and $21.9 million associated with acquisitions.
This was partially offset by $1.0
million of net cash provided by disposals and discontinued operations.
Net cash used in financing activities during the nine months ended September 30, 2007 totaled
$34.6 million and included $36.6 million in net debt repayments. These repayments were primarily
funded by net income, $5.3 million reduction in idle cash balances, along with $2.0 million in
proceeds from employee stock plans.
We anticipate that our working capital requirements for continuing operations will remain
consistent with the changes in revenue in the near term. Cash generated by net income, the
anticipated sale of the Environmental Services business, along with our continued focus on
improving our collection cycle are expected to be adequate to fund this increase in working
capital.
Our long term capitalization was as follows as of:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
Long-term debt: |
|
|
|
|
|
|
|
|
Term Credit Facility |
|
$ |
133,316 |
|
|
$ |
148,125 |
|
Credit facility-revolver |
|
|
35,282 |
|
|
|
44,825 |
|
Other, primarily mat financing |
|
|
654 |
|
|
|
5,087 |
|
|
|
|
|
|
|
|
Total long-term debt, less current portion |
|
|
169,252 |
|
|
|
198,037 |
|
Stockholders equity |
|
|
352,833 |
|
|
|
323,143 |
|
|
|
|
|
|
|
|
Total capitalization |
|
$ |
522,085 |
|
|
$ |
521,180 |
|
|
|
|
|
|
|
|
Long-term debt to long-term capitalization |
|
|
32.4 |
% |
|
|
38.0 |
% |
|
|
|
|
|
|
|
In August 2006, we entered into a Term Credit Facility, which has an aggregate face amount of
$150.0 million, a five-year term and a current interest rate of LIBOR plus 3.00%, based on our
corporate family ratings by Moodys and Standard & Poors. The maturity date of the Term Credit
Facility is August 18, 2011.
In December 2006, we entered into a Revolving Credit Facility, which has a maximum aggregate
face amount of $100.0 million and matures on June 25, 2011. The Revolving Credit Facility is
secured by a first lien on our U.S. accounts receivable and inventory and by a second lien on our
U.S. tangible and intangible assets. Availability under the Revolving Credit Facility is based on
a percentage of our eligible consolidated accounts receivable and inventory as defined in the
Revolving Credit Facility.
At September 30, 2007, we had $35.3 million outstanding under the $100 million Revolving
Credit Facility and $3.7 million in letters of credit issued and outstanding, leaving $61.0 million
of availability. The Revolving Credit Facility bears interest at our choice of either a specified
prime rate (7.75% at September 30, 2007), or a LIBOR rate plus a spread determined quarterly based
upon the amount of the prior quarter average availability under the Revolving Credit Facility
(6.91% at
23
September 30, 2007). The weighted average interest rates on the outstanding balances under the
credit facilities as of September 30, 2007 and December 31, 2006 were 7.11% and 7.63%,
respectively.
Both the Term Credit Facility and Revolving Credit Facility contain a fixed charge coverage
ratio covenant and a debt to EBITDA ratio. As of September 30, 2007, we were in compliance with
the financial covenants contained in these facilities. The Term Credit Facility and the Revolving
Credit Facility also contain covenants that significantly limit our ability to pay dividends on our
common stock, incur additional debt and repurchase our common stock.
With respect to additional off-balance sheet liabilities, we lease most of our office and
warehouse space, barges, rolling stock and certain pieces of operating equipment under operating
leases.
Except as described in the preceding paragraphs, we are not aware of any material
expenditures, significant balloon payments or other payments on long-term obligations or any other
demands or commitments, including off-balance sheet items to be incurred within the next 12 months.
Inflation has not materially impacted our revenues or income.
Critical Accounting Estimates
Our consolidated financial statements are prepared in accordance with U.S. generally accepted
accounting principles, which requires us to make assumptions, estimates and judgments that affect
the amounts reported. We periodically evaluate our estimates and judgments related to
uncollectible accounts and notes receivable, customer returns, reserves for obsolete and slow
moving inventory, impairments of long-lived assets, including goodwill and other intangibles and
our valuation allowance for deferred tax assets. Our estimates are based on historical experience
and on our future expectations that we believe to be reasonable. The combination of these factors
forms the basis for making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from our current estimates and
those differences may be material.
For additional discussion of our critical accounting estimates and policies, see Managements
Discussion and Analysis of Financial Condition and Results of Operations included in our Annual
Report on Form 10-K for the year ended December 31, 2006. Our critical accounting policies have
not changed materially since December 31, 2006, except for the adoption of Interpretation No. 48,
Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement No. 109 which we
refer to as FIN 48, in Note 9 to our unaudited condensed consolidated financial statements
included in this Quarterly Report on Form 10-Q.
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to market risk from changes in interest rates and changes in foreign currency
rates. A discussion of our primary market risk exposure in financial instruments is presented
below.
Interest Rate Risk
Our policy historically has been to manage exposure to interest rate fluctuations by using a
combination of fixed and variable-rate debt. At September 30, 2007, we had total debt outstanding
of $178.2 million, all of which is subject to variable rate terms.
Our Term Credit Agreement requires that we enter into, and thereafter maintain, interest rate
management transactions, such as interest rate swap arrangements, to the extent necessary to
provide that at least 50% of the aggregate principal amount of the Term Credit Facility is subject
to
24
either a fixed interest rate or interest rate protection for a period of not less than three
years from the date of execution. To satisfy this requirement, we entered into an interest rate
swap arrangement for the period from September 22, 2006 through March 22, 2008, which fixes the
LIBOR rate applicable to 100% of the principle amount under the Term Credit Facility at 5.35% plus
a spread based on our corporate family ratings by Moodys and Standard & Poors. In addition, we
entered into an interest rate cap arrangement that provides for a maximum LIBOR rate of 6.00% on
the principal amount of $68.9 million for the period from March 22, 2008 through September 22,
2009. We paid a fee of $170,000 for the interest rate cap arrangement. Through this swap
arrangement, we have effectively fixed the interest rate on $133.3 million, or 74.8%, of our total
debt outstanding as of September 30, 2007.
The fair value of the Term Credit Facility totaled $130.7 million at September 30, 2007, as
compared to the recorded balance of $133.3 million. The fair value of the interest rate swap is a
$0.2 million asset as of September 30, 2007. The fair value of the interest rate cap is $22,000 as
of September 30, 2007 as compared to the original cost of $170,000.
As of September 30, 2007, Ava, S.p.A, our European fluids systems and engineering subsidiary,
which we refer to as Ava, had a swap arrangement in which Ava received a floating rate from a bank
and paid a rate which varied based on inflation. Under the terms of the swap, Ava receives an
annual payment from the bank based on a Euro notional amount of 4.0 million times the Euribor rate
in effect as of the end of the determination period, and pays an annual amount to the bank based on
the notional amount times a rate which varies according to both the Euribor rate and the published
inflation rate for the Euro area. This arrangement requires annual settlements and matures in
February 2015. At September 30, 2007, the fair value of this arrangement represents a liability of
approximately $0.7 million.
The remaining $38.6 million of debt outstanding at September 30, 2007 bears interest at a
floating rate. At September 30, 2007, the weighted average interest rate under our floating-rate
debt was approximately 7.10%. A 200 basis point increase in market interest rates during 2007 would
cause our annual interest expense to increase approximately $0.4 million, net of taxes, resulting
in less than a $0.01 per diluted share reduction in annual earnings.
Foreign Currency
Our principal foreign operations are conducted in Canada, Brazil and in areas surrounding the
Mediterranean Sea. We have foreign currency exchange risks associated with these operations, which
are conducted principally in the foreign currency of the jurisdictions in which we operate.
Historically, we have not used off-balance sheet financial hedging instruments to manage foreign
currency risks when we enter into a transaction denominated in a currency other than our local
currencies because the dollar amount of these transactions has not warranted our using hedging
instruments. However, during the quarter ended March 31, 2005, our Canadian subsidiary committed
to purchase approximately $2.0 million of barite from one of our U.S. subsidiaries and we entered
into a foreign currency forward contract arrangement to reduce its exposure to foreign currency
fluctuations related to this commitment. During the quarter ended March 31, 2007, this contract
expired and we have not entered into a similar contract.
ITEM 4. Controls and Procedures
(a) We maintain disclosure controls and procedures designed to ensure that information required
to be disclosed in our reports under the Securities Exchange Act of 1934, as amended, is
recorded, processed, summarized and reported within the time periods specified in the SECs
rules and forms, and that such information is accumulated and communicated to our management,
including our principle executive officer and principal financial officer, as appropriate, to
allow timely decisions regarding required disclosure. Our management, with the participation and
oversight of our principle executive officer and principal financial officer, evaluated the
design and effectiveness of our disclosure controls and procedures as of the end of
25
the period covered by this report. Based on that evaluation, our principal executive officer and
our principal financial officer concluded that our disclosure controls and procedures were
effective as of September 30, 2007.
(c) Our management assessed the effectiveness of our internal control over financial reporting
as of December 31, 2006. In making this assessment, we used the framework set forth by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) entitled Internal
Controls Integrated Framework. As previously reported in our Annual Report on Form 10-K for
the year ended December 31, 2006, in conducting this evaluation, the following material
weaknesses were identified in our internal control over financial reporting:
|
§ |
|
Management did not adequately monitor certain control practices to foster an
environment that allowed for a consistent and open flow of information and
communication between those who initiated transactions and those who were responsible
for the financial reporting of those transactions, principally at one of our
subsidiaries, Soloco Texas, LP. This control deficiency resulted in 2006 adjustments
that were recorded by management and related to accounts receivable and revenues; and |
|
|
§ |
|
Management did not maintain effective controls over the recording of intangible
assets. This control deficiency resulted in 2006 adjustments that were recorded by
management and related to intangible assets and cost of revenues. |
We implemented certain corrective actions in 2006, as disclosed in our Annual Report on Form 10-K
for the year ended December 31, 2006. In order to further address the identified material
weaknesses, management implemented additional corrective measures during 2007 including:
|
§ |
|
We have distributed our Corporate Compliance and Business Ethics Manual (Manual)
to all U.S. employees and are in the process of distributing the Manual to our
international employees. We have also established a process to train all management
level employees regarding the policies in the Manual and have established procedures
for employees to certify they have read and understand the policies. |
|
|
§ |
|
We have activated our enhanced fraud hotline. We have also implemented an education
campaign to inform employees of the hotline and its availability. |
|
|
§ |
|
We have implemented procedures to provide assurances that no side agreements exist
between us, our subsidiaries or employees and our significant vendors or customers. |
|
|
§ |
|
We have further strengthened our controls in our Mats and integrated services
segment surrounding the purchasing of products and services, particularly as they
relate to receiving products at the operating locations. |
|
|
§ |
|
We have implemented a policy that requires senior division management approval prior
to entering into any transaction to sell products or services to a customer that is
also a vendor. |
|
|
§ |
|
Our Intellectual Property Committee, which was established in 2006 and became
operational in 2007, is responsible for the oversight and review of the establishment
of intangible assets on our books, setting of the useful lives of intangible assets,
the periodic review of the useful lives of intangible assets and the periodic review
for potential impairment of intangible assets. This committee meets on a quarterly
basis to review our intangible assets. |
We believe that the corrective actions described above, taken together with the corrective actions
taken in 2006, remedied the identified material weaknesses described above, and have improved both
our disclosure controls and procedures and internal control over financial reporting. However,
these controls have not been tested as extensively as required for the annual evaluation under
Section 404 of the Sarbanes-Oxley Act of 2002. Additionally, there may be some additional control
procedures implemented in the future to further strengthen the controls over financial reporting
26
There were no changes in our internal control over financial reporting during the quarter ended
September 30, 2007, that materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
PART II
ITEM 1. Legal Proceedings
The information set forth in the legal proceedings section of Note 7, Commitments and
Contingencies, to our consolidated financial statements included in this Quarterly Report on Form
10-Q is incorporated by reference into this Item 1.
ITEM 1A. Risk Factors
There have been no material changes during the period ended September 30, 2007 in our risk
factors as set forth in Item 1A of our Annual Report on Form 10-K for the year ended
December 31, 2006.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
|
(a) |
|
None. |
|
|
(b) |
|
None. |
|
|
(c) |
|
None. |
ITEM 3. Defaults Upon Senior Securities
Not applicable.
ITEM 4. Submission of Matters to a Vote of Security Holders
Not applicable.
ITEM 5. Other Information
Not applicable.
ITEM 6. Exhibits
|
10.1 |
|
Memberships Interests Agreement by and among Newpark Resources, Inc., Newpark
Drilling Fluids, LLC, Newpark Texas LLC, Trinity TLM Acquisitions, LLC and Trinity
Storage Services, LP. |
|
|
31.1 |
|
Certification of Paul L. Howes pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. |
|
|
31.2 |
|
Certification of James E. Braun pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. |
|
|
32.1 |
|
Certification of Paul L. Howes pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. |
|
|
32.2 |
|
Certification of James E. Braun pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. |
27
NEWPARK RESOURCES, INC.
SIGNATURES
Pursuant to the requirements 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.
Date: November 6, 2007
|
|
|
|
|
|
NEWPARK RESOURCES, INC.
|
|
|
By: |
/s/ Paul L. Howes
|
|
|
|
Paul L. Howes, President and |
|
|
|
Chief Executive Officer
(Principal Executive Officer) |
|
|
|
|
|
|
By: |
/s/ James E. Braun
|
|
|
|
James E. Braun, Vice President and |
|
|
|
Chief Financial Officer
(Principal Financial Officer) |
|
|
|
|
|
|
By: |
/s/ Gregg Piontek
|
|
|
|
Gregg Piontek, Vice President, Controller and |
|
|
|
Chief Accounting Officer
(Principal Accounting Officer) |
|
28
Exhibit Index
10.1 |
|
Memberships Interests Agreement by and among Newpark Resources, Inc., Newpark
Drilling Fluids, LLC, Newpark Texas LLC, Trinity TLM Acquisitions, LLC and Trinity
Storage Services, LP. |
|
31.1 |
|
Certification of Paul L. Howes pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. |
|
31.2 |
|
Certification of James E. Braun pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. |
|
32.1 |
|
Certification of Paul L. Howes pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. |
|
32.2 |
|
Certification of James E. Braun pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. |