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Table of Contents

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2011
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 No. 1-2960
Newpark Resources, Inc.
(Exact name of registrant as specified in its charter)
     
Delaware   72-1123385
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification No.)
     
2700 Research Forest Drive, Suite 100    
The Woodlands, Texas   77381
(Address of principal executive offices)   (Zip Code)
(281) 362-6800
(Registrant’s telephone number, including area code)
Not Applicable
(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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “small reporting company” in Rule 12b-2 of the Exchange Act.
             
Large accelerated filer o   Accelerated filer þ   Non-accelerated filer o (Do not check if a smaller reporting company)   Smaller reporting company 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 17, 2011, a total of 91,138,722 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, 2011
                 
Item         Page  
Number     Description   Number  
       
 
       
               
       
 
       
  1            
       
 
       
            3  
       
 
       
            4  
       
 
       
            5  
       
 
       
            6  
       
 
       
            7  
       
 
       
  2         12  
       
 
       
  3         23  
       
 
       
  4         24  
       
 
       
               
       
 
       
  1         24  
       
 
       
  1A         24  
       
 
       
  2         25  
       
 
       
  3         25  
       
 
       
  4         25  
       
 
       
  5         25  
       
 
       
  6         26  
       
 
       
            27  
       
 
       
 Exhibit 31.1
 Exhibit 31.2
 Exhibit 32.1
 Exhibit 32.2
 Exhibit 99.1
 EX-101 INSTANCE DOCUMENT
 EX-101 SCHEMA DOCUMENT
 EX-101 CALCULATION LINKBASE DOCUMENT
 EX-101 LABELS LINKBASE DOCUMENT
 EX-101 PRESENTATION LINKBASE DOCUMENT
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 in Part II of this Quarterly Report, Item 1A, “Risk Factors,” in Part I of our Annual Report on Form 10-K for the year ended December 31, 2010, 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, 2010.

 

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PART I FINANCIAL INFORMATION
ITEM 1.  
Financial Statements
Newpark Resources, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
                 
    September 30,     December 31,  
(In thousands, except share data)   2011     2010  
 
               
ASSETS
               
Cash and cash equivalents
  $ 62,902     $ 83,010  
Receivables, net
    253,595       196,799  
Inventories
    156,445       123,028  
Deferred tax asset
    13,230       27,654  
Prepaid expenses and other current assets
    17,052       10,036  
 
           
Total current assets
    503,224       440,527  
 
               
Property, plant and equipment, net
    228,866       212,655  
Goodwill
    74,881       62,307  
Other intangible assets, net
    21,908       13,072  
Other assets
    7,863       8,781  
 
           
Total assets
  $ 836,742     $ 737,342  
 
           
 
               
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Short-term debt
  $ 1,635     $ 1,606  
Accounts payable
    94,672       66,316  
Accrued liabilities
    51,015       43,234  
 
           
Total current liabilities
    147,322       111,156  
 
               
Long-term debt, less current portion
    172,908       172,987  
Deferred tax liability
    36,526       31,549  
Other noncurrent liabilities
    4,332       4,303  
 
           
Total liabilities
    361,088       319,995  
 
           
 
               
Commitments and contingencies (Note 7)
               
 
               
Common stock, $0.01 par value, 200,000,000 shares authorized 93,937,660 and 93,143,102 shares issued, respectively
    939       931  
Paid-in capital
    474,043       468,503  
Accumulated other comprehensive income
    3,605       8,581  
Retained earnings (deficit)
    13,097       (45,034 )
Treasury stock, at cost; 2,798,940 and 2,766,912 shares, respectively
    (16,030 )     (15,634 )
 
           
Total stockholders’ equity
    475,654       417,347  
 
           
Total liabilities and stockholders’ equity
  $ 836,742     $ 737,342  
 
           
See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements

 

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Table of Contents

Newpark Resources, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
                                 
    Three Months Ended September 30,     Nine Months Ended September 30,  
(In thousands, except per share data)   2011     2010     2011     2010  
 
                               
Revenues
  $ 261,193     $ 179,278     $ 694,666     $ 521,428  
 
                               
Cost of revenues
    201,272       145,224       539,185       424,041  
Selling, general and administrative expenses
    20,802       16,662       57,770       47,435  
Other operating income, net
    (60 )     (2,140 )     (1,012 )     (3,185 )
 
                       
 
                               
Operating income
    39,179       19,532       98,723       53,137  
 
                               
Foreign currency exchange loss (gain)
    485       1,184       340       (640 )
Interest expense, net
    2,464       3,278       6,821       7,654  
 
                       
 
                               
Income from operations before income taxes
    36,230       15,070       91,562       46,123  
Provision for income taxes
    13,233       6,836       33,431       19,267  
 
                       
Net income
  $ 22,997     $ 8,234     $ 58,131     $ 26,856  
 
                       
 
                               
 
                               
Income per common share — basic
  $ 0.25     $ 0.09     $ 0.65     $ 0.30  
Income per common share — diluted
  $ 0.23     $ 0.09     $ 0.58     $ 0.30  
See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements

 

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Table of Contents

Newpark Resources, Inc.
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
                                 
    Three Months Ended September 30,     Nine Months Ended September 30,  
(In thousands)   2011     2010     2011     2010  
 
                               
Net income
  $ 22,997     $ 8,234     $ 58,131     $ 26,856  
 
                               
Settlement of interest rate swap, net of tax
          819             858  
Foreign currency translation adjustments
    (11,977 )     6,503       (4,976 )     (1,864 )
 
                       
 
                               
Comprehensive income
  $ 11,020     $ 15,556     $ 53,155     $ 25,850  
 
                       
See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements

 

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Table of Contents

Newpark Resources, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
                 
    Nine Months Ended September 30,  
(In thousands)   2011     2010  
Cash flows from operating activities:
               
Net income
  $ 58,131     $ 26,856  
Adjustments to reconcile net income to net cash provided by (used in) operations:
               
Impairment charges
          225  
Depreciation and amortization
    21,162       20,382  
Stock-based compensation expense
    3,396       2,899  
Provision for deferred income taxes
    16,363       13,551  
Provision for doubtful accounts
    1,165       602  
Loss (gain) on sale of assets
    22       (183 )
Change in assets and liabilities:
               
Increase in receivables
    (57,603 )     (54,568 )
Increase in inventories
    (27,921 )     (3,100 )
Increase in other assets
    (5,226 )     (1,458 )
Increase in accounts payable
    28,893       6,638  
(Decrease) increase in accrued liabilities and other
    (3,655 )     14,264  
 
           
Net cash provided by operating activities
    34,727       26,108  
 
               
Cash flows from investing activities:
               
Capital expenditures
    (28,136 )     (7,412 )
Business acquisition, net of cash acquired
    (26,775 )      
Proceeds from sale of property, plant and equipment
    434       1,161  
 
           
Net cash used in investing activities
    (54,477 )     (6,251 )
 
               
Cash flows from financing activities:
               
Borrowings on lines of credit
    5,891       133,121  
Payments on lines of credit
    (5,754 )     (155,726 )
Proceeds from employee stock plans
    1,768       3,559  
Purchase of treasury stock
    (599 )     (153 )
Post-closing payment for business acquisition
    (2,055 )      
Other financing activities
    (147 )     (342 )
 
           
Net cash used in financing activities
    (896 )     (19,541 )
 
               
Effect of exchange rate changes on cash
    538       252  
 
           
 
               
Net (decrease) increase in cash and cash equivalents
    (20,108 )     568  
Cash and cash equivalents at beginning of period
    83,010       11,534  
 
           
 
               
Cash and cash equivalents at end of period
  $ 62,902     $ 12,102  
 
           
 
               
Cash paid for:
               
Income taxes (net of refunds)
  $ 20,752     $ 5,356  
Interest
  $ 3,775     $ 6,424  
See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements

 

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NEWPARK RESOURCES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
Note 1 — Basis of Presentation and Significant Accounting Policies
The accompanying unaudited condensed consolidated 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 (“SEC”), and do not include all information and footnotes required by the accounting principles generally accepted in the United States (“U.S. GAAP”) for complete financial statements. These unaudited condensed consolidated 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, 2010. Our fiscal year end is December 31, our third quarter represents the three month period ended September 30 and our first nine months represents the nine month period ended September 30. The results of operations for the third quarter and first nine months of 2011 are not necessarily indicative of the results to be expected for the entire year. Unless otherwise stated, all currency amounts are stated in U.S. dollars.
In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments necessary to present fairly our financial position as of September 30, 2011, the results of our operations for the third quarter and first nine months of 2011 and 2010, and our cash flows for the first nine months of 2011 and 2010. All adjustments are of a normal recurring nature. Our balance sheet at December 31, 2010 is derived from the audited consolidated financial statements at that date.
The preparation of financial statements in conformity with U.S. GAAP 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, 2010.
New Accounting Standards
Each reporting period we consider all newly issued but not yet adopted accounting and reporting guidance applicable to our operations and the preparation of our consolidated financial statements. We do not believe that any issued accounting and reporting guidance we have not yet adopted will have a material impact on our financial statements at the time they may be adopted.

 

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Note 2 — Earnings per Share
The following table presents the reconciliation of the numerator and denominator for calculating earnings per share:
                                 
    Third Quarter     First Nine Months  
(In thousands, except per share data)   2011     2010     2011     2010  
 
                               
Basic EPS:
                               
Net income
  $ 22,997     $ 8,234     $ 58,131     $ 26,856  
 
                       
 
                               
Weighted average number of common shares outstanding
    90,212       89,334       89,877       88,938  
 
                       
 
                               
Basic income per common share
  $ 0.25     $ 0.09     $ 0.65     $ 0.30  
 
                       
 
                               
Diluted EPS:
                               
Net income
  $ 22,997     $ 8,234     $ 58,131     $ 26,856  
Assumed conversion of Senior Notes
    1,236             3,674        
 
                       
Adjusted net income
  $ 24,233     $ 8,234     $ 61,805     $ 26,856  
 
                       
 
                               
Weighted average number of common shares outstanding-basic
    90,212       89,334       89,877       88,938  
Add: Dilutive effect of stock options and
                               
restricted stock awards
    1,025       1,223       883       697  
Dilutive effect of Senior Notes
    15,682             15,682        
 
                       
 
                               
Diluted weighted average number of common shares outstanding
    106,919       90,557       106,442       89,635  
 
                       
 
                               
Diluted income per common share
  $ 0.23     $ 0.09     $ 0.58     $ 0.30  
 
                       
 
                               
Stock options and warrants excluded from calculation of diluted earnings per share because anti-dilutive for the period
    2,862       2,167       3,913       3,941  
 
                       
Weighted average dilutive stock options and restricted stock outstanding totaled approximately 4.5 million and 5.0 million shares, for the third quarter of 2011 and 2010, respectively, and 3.1 million and 3.3 million shares for the first nine months of 2011 and 2010, respectively. The resulting net effect of stock options and restricted stock were used in calculating diluted earnings per share for the period.
In June 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. As of September 30, 2011, the Series B Warrant, as adjusted for anti-dilution provisions, remains outstanding and provides for the right to purchase up to approximately 2.1 million shares of our common stock at an exercise price of $8.97, and expires in February 2012.
Note 3 — Stock-Based Compensation
During the second quarter of 2011, the Compensation Committee of our Board of Directors approved equity-based compensation to executive officers and other key employees. These awards included a grant of 484,586 time-vesting shares of stock, which vest equally over a three-year period. The fair value on the date of grant for these awards was $9.13 per share. Non-employee directors received shares of restricted stock totaling 68,455 shares, which will vest in full on the first anniversary of the grant date.
Additionally, 725,643 stock options were granted to executive officers and other key employees at an exercise price of $9.13, which provide for equal vesting over a three-year period with a term of ten years. The estimated fair value of the stock options on the grant date using the Black-Scholes option-pricing model was $5.00. The assumptions used in the Black-Scholes model included a risk free interest rate of 1.59%, expected life of 5.22 years and expected volatility of 63.1%.

 

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Note 4 — Acquisition
In April 2011, we completed the acquisition of the drilling fluids and engineering services business from Rheochem PLC, a publicly-traded Australian-based oil and gas company. The acquired business provides drilling fluids and related engineering services to the oil and gas exploration and geothermal industries with operations in Australia, New Zealand and India. Total cash paid was AUD$27.2 million ($28.8 million), including third quarter payments of AUD$0.8 million ($0.8 million) based on a true-up of the final working capital conveyed at closing and AUD$2.0 million ($2.1 million) related to a six month earn-out provision in the agreement. Additional consideration may also be payable based on financial results of the acquired business over a one year earn-out period, up to a maximum additional consideration of AUD$19.3 million (approximately $18.8 million at the current exchange rate).
The transaction has been accounted for using the acquisition method of accounting and accordingly, assets acquired and liabilities assumed were recorded at their fair values as of the acquisition date. The excess of the total consideration, including projected additional consideration, was recorded as goodwill and includes the value of the access to markets in Asia Pacific and an assembled workforce. While the preliminary purchase price allocation has been completed, the allocation of the purchase price is subject to change for a period of one year following the acquisition. Through the on-going evaluation of the preliminary purchase price allocation during the third quarter of 2011, we identified a $2.0 million increase in identifiable intangible assets acquired and a $1.3 million increase in liabilities assumed, which resulted in a corresponding $0.7 million decrease in goodwill arising from the transaction.
The following table summarizes the amounts recognized for assets acquired and liabilities assumed, as of the April 2011 acquisition date.
         
(In thousands)        
 
       
Cash and cash equivalents
  $ 315  
Receivables
    3,316  
Inventories
    7,166  
Prepaid expenses and other current assets
    773  
Property, plant and equipment, net
    9,465  
Goodwill
    12,976  
Customer relationships (11 year life)
    10,492  
Tradename (5 year life)
    700  
Other assets
    510  
 
     
Total assets acquired
  $ 45,713  
 
     
 
       
Accounts payable
  $ 717  
Accrued liabilities
    15,377  
Deferred tax liability
    3,432  
Other noncurrent liabilities
    271  
 
     
Total liabilities assumed
  $ 19,797  
 
     
 
       
Total cash conveyed at closing
  $ 25,916  
 
     
The accrued liabilities at the date of acquisition in the table above, includes $13.8 million reflecting anticipated post-closing payments to the seller under the terms of the agreement, of which $2.9 million was paid during the third quarter of 2011.
Our operating results include $1.0 million of acquisition-related costs in the first nine months of 2011, substantially all of which were incurred prior to the third quarter. Proforma results of operation for the acquired business have not been presented as the effect of this acquisition is not material to our consolidated financial statements.

 

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Note 5 — Receivables and Inventories
Receivables — Receivables consist of the following:
                 
    September 30,     December 31,  
(In thousands)   2011     2010  
 
               
Gross trade receivables
  $ 243,574     $ 193,349  
Allowance for doubtful accounts
    (2,055 )     (5,839 )
 
           
Net trade receivables
    241,519       187,510  
 
               
Other receivables
    12,076       9,289  
 
           
 
               
Total receivables, net
  $ 253,595     $ 196,799  
 
           
During 2011, $5.2 million of fully reserved trade receivables were written off against the allowance for doubtful accounts.
Inventories — Our inventories include $155.4 million and $122.5 million of raw materials and components for our drilling fluids systems at September 30, 2011 and December 31, 2010, respectively. The remaining balance consists primarily of composite mat finished goods.
Note 6 — Financing Arrangements and Fair Value of Financial Instruments
Our financing arrangements include $172.5 million of unsecured convertible senior notes (“Senior Notes”) and a $150.0 million revolving credit facility, of which no borrowings were outstanding at September 30, 2011. The Senior Notes bear interest at a rate of 4.0% per year, payable semi-annually in arrears on April 1 and October 1 of each year, beginning April 1, 2011. Holders may convert the Senior Notes at their option at any time prior to the close of business on the business day immediately preceding the October 1, 2017 maturity date. The conversion rate is initially 90.8893 shares of our common stock per $1,000 principal amount of Senior Notes (equivalent to an initial conversion price of $11.00 per share of common stock), subject to adjustment in certain circumstances. Upon conversion, the Senior Notes will be settled in shares of our common stock. We may not redeem the Senior Notes prior to their maturity date.
Our financial instruments include cash and cash equivalents, receivables, payables and debt. We believe the carrying values of these instruments, with the exception of our Senior Notes, approximated their fair values at September 30, 2011 and December 31, 2010. The estimated fair value of our Senior Notes is $163.9 million at September 30, 2011 and $157.0 million at December 31, 2010, based on quoted market prices at these respective dates.
Note 7 — Commitments and Contingencies
In the ordinary course of conducting our business, we become involved in litigation and other claims from private party actions, as well as judicial and administrative proceedings involving governmental authorities at the federal, state and local levels. In the opinion of management, any liability in these matters should not have a material effect on our consolidated financial statements.

 

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Note 8 — Segment Data
Summarized operating results for our reportable segments is shown in the following table (net of inter-segment transfers):
                                 
    Third Quarter     First Nine Months  
(In thousands)   2011     2010     2011     2010  
 
                               
Revenues
                               
Fluids systems and engineering
  $ 216,160     $ 148,140     $ 577,832     $ 434,984  
Mats and integrated services
    30,179       18,186       81,035       48,787  
Environmental services
    14,854       12,952       35,799       37,657  
 
                       
Total revenues
  $ 261,193     $ 179,278     $ 694,666     $ 521,428  
 
                       
 
                               
Operating income (loss)
                               
Fluids systems and engineering
  $ 25,648     $ 11,845     $ 65,639     $ 39,423  
Mats and integrated services
    14,509       8,592 (1)     41,023       16,342 (1) (2)
Environmental services
    4,958       3,944       9,558       10,847  
Corporate office
    (5,936 )     (4,849 )     (17,497 )     (13,475 )
 
                       
Operating income
  $ 39,179     $ 19,532     $ 98,723     $ 53,137  
 
                       
     
(1)  
Includes $2.2 million of income related to a lawsuit settlement against a former raw materials vendor.
 
(2)  
Includes $0.9 million of other income reflecting proceeds from insurance claims related to Hurricane Ike in 2008.
 Total assets by reportable segment as of September 30, 2011 and December 31, 2010 are as follows:
                 
    September 30,     December 31,  
(In thousands)   2011     2010  
 
               
Fluids systems and engineering
  $ 599,048 (3)   $ 476,677  
Mats and integrated services
    82,922       79,957  
Environmental services
    72,173       69,058  
Corporate office
    82,599       111,650  
 
           
Total assets
  $ 836,742     $ 737,342  
 
           
     
(3)  
Includes $45.7 million in assets acquired in the April 2011 acquisition as described in “Note 4-Acquisition”.

 

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ITEM 2.  
Management’s 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 unaudited condensed consolidated financial statements and notes to unaudited condensed consolidated financial statements contained in this report as well as our Annual Report on Form 10-K for the year ended December 31, 2010. Our third quarter represents the three month period ended September 30, and our first nine months represents the nine month period ended September 30. Unless otherwise stated, all currency amounts are stated in U.S. dollars.
Overview
We are a diversified oil and gas industry supplier with three reportable segments: Fluids Systems and Engineering, Mats and Integrated Services, and Environmental Services. We provide these products and services primarily to the oil and gas exploration (“E&P”) industry domestically in the U.S. Gulf Coast, West Texas, Oklahoma, East Texas, North Louisiana, Rocky Mountains and Northeast regions, as well as internationally in certain areas of Europe, North Africa, Brazil, Canada and following our April 2011 acquisition in the Asia Pacific region, (as described below). Further, we established a presence outside the E&P sector, particularly in Mats and Integrated Services, where we are marketing to utilities, municipalities and government sectors. Our North American operations generated 78% of total reported revenues for the first nine months of 2011, and our consolidated revenues by segment are as follows:
                 
    First Nine        
    Months        
(In thousands)   2011 Revenues     %  
 
               
Fluids systems and engineering
  $ 577,832       83 %
Mats and integrated services
    81,035       12 %
Environmental services
    35,799       5 %
 
           
Total revenues
  $ 694,666       100 %
 
           
In North America, we have continued the introduction of EvolutionTM, our high performance water-based drilling fluid system launched in 2010, which we believe provides superior performance and environmental benefits to our customers, as compared to traditional fluids systems used in the industry. After the initial introduction into the Haynesville shale last year, the system is now being used by customers in several major North American drilling basins. Revenues from wells using the Evolution system were $17 million in the third quarter of 2011 and $44 million in the first nine months of 2011.
In April 2011, we completed the acquisition of the drilling fluids and engineering services business from Rheochem PLC, a publicly-traded Australian-based oil and gas company. The acquired business provides drilling fluids and related engineering services with operations in Australia, New Zealand and India. Total cash paid was AUD$27.2 million ($28.8 million), including third quarter payments of AUD$0.8 million ($0.8 million) based on a true-up of the final working capital conveyed at closing and AUD $2.0 million ($2.1 million) related to a six month earn-out provision in the agreement. Additional consideration may also be payable based on financial results of the acquired business over a one year earn-out period, up to a maximum additional consideration of AUD$19.3 million (approximately $18.8 million at the current exchange rate). Following the April 2011 acquisition, this business has generated $15.1 million of revenues, including $8.5 million in the third quarter.
Our operating results depend, to a large extent, on oil and gas drilling activity levels in the markets we serve, as well as the depth of drilling, which governs the revenue potential of each well. The drilling activity in turn, depends on oil and gas commodity pricing, inventory levels and demand, and more recently, regulatory actions affecting operations in the Gulf of Mexico.

 

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Rig count data is the most widely accepted indicator of drilling activity. Average North American rig count data for the third quarter and first nine months of 2011, as compared to the comparable period of 2010 is as follows:
                                 
    Third Quarter     2011 vs 2010  
    2011     2010     Count     %  
 
                               
U.S. Rig Count
    1,944       1,618       326       20 %
Canadian Rig Count
    441       360       81       23 %
 
                       
North America
    2,385       1,978       407       21 %
 
                       
                                 
    First Nine Months     2011 vs 2010  
    2011     2010     Count     %  
 
                               
U.S. Rig Count
    1,835       1,486       349       23 %
Canadian Rig Count
    401       324       77       24 %
 
                       
North America
    2,236       1,810       426       24 %
 
                       
 
     
Source: Baker Hughes Incorporated
In April 2010, the Deepwater Horizon drilling rig sank in the Gulf of Mexico after an explosion and fire, resulting in the discharge of oil from the well. Following the Deepwater Horizon oil spill, the Department of Interior of the U.S. government took several actions aimed at restricting and temporarily prohibiting certain drilling activity in the Gulf of Mexico. While the Department of Interior has since announced the formal end of the drilling moratorium placed in effect in May 2010, increased permitting requirements are applicable to both shallow water and deepwater drilling activities. As a result, the near-term outlook for drilling activity in the Gulf of Mexico remains uncertain.
Third Quarter of 2011 Compared to Third Quarter of 2010
Results of Operations
Summarized results of operations for the third quarter of 2011 compared to the third quarter of 2010 are as follows:
                                 
    Third Quarter     2011 vs 2010  
(In thousands)   2011     2010     $     %  
 
                               
Revenues
  $ 261,193     $ 179,278     $ 81,915       46 %
 
                               
Cost of revenues
    201,272       145,224       56,048       39 %
Selling, general and administrative expenses
    20,802       16,662       4,140       25 %
Other operating income, net
    (60 )     (2,140 )     2,080       (97 %)
 
                       
 
                               
Operating income
    39,179       19,532       19,647       101 %
 
                               
Foreign currency exchange loss
    485       1,184       (699 )     (59 %)
Interest expense, net
    2,464       3,278       (814 )     (25 %)
 
                       
 
                               
Income from operations before income taxes
    36,230       15,070       21,160       140 %
Provision for income taxes
    13,233       6,836       6,397       94 %
 
                       
 
                               
Net income
  $ 22,997     $ 8,234     $ 14,763       179 %
 
                       

 

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Revenues
Revenues increased 46% to $261.2 million in the third quarter of 2011, compared to $179.3 million in the third quarter of 2010. This $81.9 million improvement includes a $70.2 million (50%) increase in revenues in North America, largely driven by the 21% improvement in the North America rig count. Revenues from our international operations increased by $11.7 million (30%), primarily attributable to $8.5 million of revenues generated in our Asia Pacific region, following the April 2011 acquisition described above. Additional information regarding the change in revenues is provided within the operating segment results below.
Cost of revenues
Cost of revenues increased 39% to $201.3 million in the third quarter of 2011, as compared to $145.2 million in the third quarter of 2010. The increase is primarily driven by the 46% increase in revenues. Additional information regarding the change in cost of revenues is provided within the operating segment results below.
Selling, general and administrative expenses
Selling, general and administrative expenses increased $4.1 million to $20.8 million in the third quarter of 2011 from $16.7 million for the third quarter of 2010. The increase includes $1.1 million in the corporate office, largely attributable to higher performance-based employee incentive compensation. In addition, expenses in the fluids systems and engineering segment were up $2.3 million, including $1.3 million of third quarter 2011 expenses associated with the Asia Pacific business unit acquired in April 2011.
Other operating income, net
Other operating income was $0.1 million in the third of 2011, compared to $2.1 million in the third quarter of 2010. The third quarter of 2010 included a $2.2 million gain, reflecting net proceeds from the settlement of a lawsuit in our Mats and Integrated Services segment.
Foreign currency exchange
Foreign currency exchange primarily reflects the impact of currency translations on assets and liabilities held in our foreign operations that are denominated in currencies other than functional currencies. Our foreign operations have a portion of their cash and accounts receivable that are denominated in U.S. dollars. During the third quarter of 2011 and 2010, our foreign currency exchange transactions were unfavorably impacted by the strengthening U.S. dollar as compared to other currencies in our foreign operations.
Provision for income taxes
The provision for income taxes for the third quarter of 2011 was $13.2 million, reflecting an effective tax rate of 36.5%, compared to $6.8 million in the third quarter of 2010, reflecting an effective tax rate of 45.4%. The high effective tax rate in the third quarter of 2010 was due to losses generated in Brazil for which the recording of a tax benefit was not permitted.

 

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Operating Segment Results
Summarized financial information for our reportable segments is shown in the following table (net of inter-segment transfers):
                                 
    Third Quarter     2011 vs 2010  
(In thousands)   2011     2010     $     %  
 
                               
Revenues
                               
Fluids systems and engineering
  $ 216,160     $ 148,140     $ 68,020       46 %
Mats and integrated services
    30,179       18,186       11,993       66 %
Environmental services
    14,854       12,952       1,902       15 %
 
                       
Total revenues
  $ 261,193     $ 179,278     $ 81,915       46 %
 
                       
 
                               
Operating income (loss)
                               
Fluids systems and engineering
  $ 25,648     $ 11,845     $ 13,803          
Mats and integrated services
    14,509       8,592       5,917          
Environmental services
    4,958       3,944       1,014          
Corporate office
    (5,936 )     (4,849 )     (1,087 )        
 
                         
Operating income
  $ 39,179     $ 19,532     $ 19,647          
 
                         
 
                               
Segment operating margin
                               
Fluids systems and engineering
    11.9 %     8.0 %                
Mats and integrated services
    48.1 %     47.2 %                
Environmental services
    33.4 %     30.5 %                
Fluids Systems and Engineering
Revenues
Total revenues for this segment consisted of the following:
                                 
    Third Quarter     2011 vs 2010  
(In thousands)   2011     2010     $     %  
 
United States
  $ 143,873     $ 104,064     $ 39,809       38 %
Canada
    13,515       5,106       8,409       165 %
 
                       
Total North America
    157,388       109,170       48,218       44 %
Mediterranean
    30,436       28,600       1,836       6 %
Brazil
    19,795       10,370       9,425       91 %
Asia Pacific
    8,541             8,541        
 
                       
Total
  $ 216,160     $ 148,140     $ 68,020       46 %
 
                       
North America revenues increased 44% to $157.4 million for the third quarter of 2011, as compared to $109.2 million for the third quarter of 2010, largely attributable to the 21% increase in the North America rig count along with market share improvements in several regions.
Internationally, revenues were up 51% to $58.8 million for the third quarter of 2011, as compared to $39.0 million for the third quarter of 2010. This increase includes a $9.4 million increase in Brazil, primarily attributable to the continued ramp-up of activity under our long-term contract with Petrobras, along with $8.5 million of revenues from our Asia Pacific region following the April 2011 acquisition described above. Mediterranean revenues increased $1.8 million, as a $3.3 million increase in Algeria and a $3.0 million increase in our Eastern European markets were partially offset by a $2.6 million decline in Libya, due to the social and political unrest in that country.

 

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Operating Income
Operating income for this segment was $25.6 million, reflecting an operating margin of 11.9% in the third quarter of 2011, compared to $11.8 million, and an 8.0% operating margin in the third quarter of 2010. Of this $13.8 million improvement, our North American operating income increased $10.6 million on a $48.2 million increase in revenues, reflecting a 22% incremental margin.
Our international operations generated a $3.2 million increase in operating income on a $19.8 million increase in revenues, reflecting a 16% incremental margin. The lower incremental margin is due partially to the acquisition of our Asia Pacific business unit in 2011, which generated $0.6 million of operating income in the third quarter. In addition, the third quarter of 2011 was negatively impacted by a $0.8 million provision for an allowance of a customer receivable in North Africa.
Mats and Integrated Services
Revenues
Total revenues for this segment consisted of the following:
                                 
    Third Quarter     2011 vs 2010  
(In thousands)   2011     2010     $     %  
 
                               
Mat rental and integrated services
  $ 16,139     $ 12,413     $ 3,726       30 %
Mat sales
    14,040       5,773       8,267       143 %
 
                       
Total
  $ 30,179     $ 18,186     $ 11,993       66 %
 
                       
Mat rental and integrated services revenues increased $3.7 million, including a $1.4 million increase in the Rockies region, a $1.1 million increase in the Gulf Coast and a $0.9 million increase in the Northeast U.S. Mat sales increased $8.3 million, due to increasing demand for our composite mat products from international E&P customers and other industries.
In July 2011, our largest customer in the Northeast U.S. region informed us that they intend to reduce the number of rental mats utilized on their drilling sites by approximately 70% and have since returned these mats over the course of the third quarter. As a result of this development, our revenues in this region declined by $3.7 million in the third quarter of 2011 from the second quarter of 2011. While we anticipate revenues in this region to decline further in the fourth quarter of 2011 as a result of the returned mats being utilized by the customer for a portion of the third quarter, the returned mats are being re-deployed to other regions and we expect increases in rental revenues from other regions to largely offset the anticipated revenue reduction in the Northeast.
Operating Income
Segment operating income increased by $5.9 million on the $12.0 million increase in revenues, reflecting an incremental margin of 49%. The low incremental margin, relative to recent historical experience, is primarily attributable to the higher mat sales activity as margins on mat sales are lower than margins on mat rentals, due to the fixed nature of rental activity operating expenses, including depreciation expense on our rental mat fleet.

 

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Environmental Services
Revenues
Total revenues for this segment consisted of the following:
                                 
    Third Quarter     2011 vs 2010  
(In thousands)   2011     2010     $     %  
 
                               
E&P waste
  $ 11,529     $ 10,579     $ 950       9 %
NORM and industrial waste
    3,325       2,373       952       40 %
 
                       
Total
  $ 14,854     $ 12,952     $ 1,902       15 %
 
                       
Environmental services revenues increased 15% to $14.9 million in the third quarter of 2011, as compared to the third quarter of 2010. The third quarter of 2010 included $5.4 million of revenues from disposals associated with the April 2010 Deepwater Horizon oil spill. The loss of this revenue in the third quarter of 2011 was more than offset by market share gains and increased activity in oilfield waste disposals from state water and inland locations.
Operating Income
Operating income for this segment increased by $1.0 million in the third quarter of 2011, compared to the third quarter of 2010, on a $1.9 million increase in revenues, reflecting an incremental margin of 53%. The high incremental impact to operating income from the higher revenues is due to the fixed nature of the majority of our operating expenses in this segment, including operating costs and depreciation expense.
Corporate office
Corporate office expenses increased $1.1 million to $5.9 million in the third quarter of 2011, compared to $4.8 million in the third quarter of 2010. The increase includes a $1.0 million increase in employee compensation, primarily attributable to an increase in performance-based employee incentives and share-based compensation.

 

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First Nine Months of 2011 Compared to First Nine Months of 2010
Results of Operations
Summarized results of operations for the first nine months of 2011 compared to the first nine months of 2010 are as follows:
                                 
    First Nine Months     2011 vs 2010  
(In thousands)   2011     2010     $     %  
 
                               
Revenues
  $ 694,666     $ 521,428     $ 173,238       33 %
 
                               
Cost of revenues
    539,185       424,041       115,144       27 %
Selling, general and administrative expenses
    57,770       47,435       10,335       22 %
Other operating income, net
    (1,012 )     (3,185 )     2,173       (68 %)
 
                       
 
                               
Operating income
    98,723       53,137       45,586       86 %
 
                               
Foreign currency exchange loss (gain)
    340       (640 )     980       (153 %)
Interest expense, net
    6,821       7,654       (833 )     (11 %)
 
                       
 
                               
Income from operations before income taxes
    91,562       46,123       45,439       99 %
Provision for income taxes
    33,431       19,267       14,164       74 %
 
                       
 
                               
Net income
  $ 58,131     $ 26,856     $ 31,275       116 %
 
                       
Revenues
Revenues increased 33% to $694.7 million in the first nine months of 2011, compared to $521.4 million in the first nine months of 2010. This $173.2 million improvement includes a $143.3 million (36%) increase in revenues in North America, largely driven by the 24% improvement in the North America rig count. Revenues from our international operations increased by $30.0 million (25%) reflecting continued growth in Brazil, along with the contribution of the Asia Pacific region, following our April 2011 acquisition. Additional information regarding the change in revenues is provided within the operating segment results below.
Cost of revenues
Cost of revenues increased 27% to $539.2 million in the first nine months of 2011, as compared to $424.0 million in the first nine months of 2010. The increase is primarily driven by the 33% increase in revenues. Additional information regarding the change in cost of revenues is provided within the operating segment results below.
Selling, general and administrative expenses
Selling, general and administrative expenses increased $10.3 million to $57.8 million in the first nine months of 2011 from $47.4 million for the first nine months of 2010. The increase includes a $2.2 million increase in performance-based employee incentive compensation. In addition, the first nine months of 2011 includes $1.7 million of costs associated with strategic planning projects, $1.0 million of transaction-related expenses associated with the April 2011 acquisition described above, and $2.0 million of expenses associated with the acquired Asia Pacific business.
Other operating income, net
Other operating income was $1.0 million in the first nine months of 2011, compared to $3.2 million for the first nine months of 2010. The first nine months of 2010 included a $3.1 million gain, reflecting net proceeds from the settlement of a lawsuit and proceeds from the insurance claims in our Mats and Integrated Services segment.

 

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Foreign currency exchange
Foreign currency exchange primarily reflects the impact of currency translations on assets and liabilities held in our foreign operations that are denominated in currencies other than functional currencies. Our foreign operations have a portion of their cash and accounts receivable that are denominated in U.S. dollars. During the first nine months of 2010, our foreign currency exchange transactions were favorably impacted by the weakening U.S. dollar as compared to other currencies in our foreign operations, while the first nine months of 2011 was negatively impacted by the strengthening U.S. dollar.
Provision for income taxes
The provision for income taxes for the first nine months of 2011 was $33.4 million of expense, reflecting an effective tax rate of 36.5%, compared to $19.3 million in the first nine months of 2010, reflecting an effective tax rate of 41.8%. The high effective tax rate in the first nine months of 2010 was due to losses generated in Brazil for which the recording of a tax benefit was not permitted.
Operating Segment Results
Summarized financial information for our reportable segments is shown in the following table (net of inter-segment transfers):
                                 
    First Nine Months     2011 vs 2010  
(In thousands)   2011     2010     $     %  
 
                               
Revenues
                               
Fluids systems and engineering
  $ 577,832     $ 434,984     $ 142,848       33 %
Mats and integrated services
    81,035       48,787       32,248       66 %
Environmental services
    35,799       37,657       (1,858 )     (5 %)
 
                       
Total revenues
  $ 694,666     $ 521,428     $ 173,238       33 %
 
                       
 
                               
Operating income (loss)
                               
Fluids systems and engineering
  $ 65,639     $ 39,423     $ 26,216          
Mats and integrated services
    41,023       16,342       24,681          
Environmental services
    9,558       10,847       (1,289 )        
Corporate office
    (17,497 )     (13,475 )     (4,022 )        
 
                         
Operating income
  $ 98,723     $ 53,137     $ 45,586          
 
                         
 
                               
Segment operating margin
                               
Fluids systems and engineering
    11.4 %     9.1 %                
Mats and integrated services
    50.6 %     33.5 %                
Environmental services
    26.7 %     28.8 %                

 

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Fluids Systems and Engineering
Revenues
Total revenues for this segment consisted of the following:
                                 
    First Nine Months     2011 vs 2010  
(In thousands)   2011     2010     $     %  
 
                               
United States
  $ 393,741     $ 301,041     $ 92,700       31 %
Canada
    27,972       16,202       11,770       73 %
 
                       
Total North America
    421,713       317,243       104,470       33 %
Mediterranean
    83,706       81,037       2,669       3 %
Brazil
    57,278       36,704       20,574       56 %
Asia Pacific
    15,135             15,135        
 
                       
Total
  $ 577,832     $ 434,984     $ 142,848       33 %
 
                       
North America revenues increased 33% to $421.7 million for the first nine months of 2011, as compared to $317.2 million for the first nine months of 2010, largely attributable to the 24% increase in the North American rig count, along with market share improvements in several regions.
Internationally, revenues were up 33% to $156.1 million for the first nine months of 2011, as compared to $117.7 million for the first nine months of 2010. This increase includes a $20.6 million increase in Brazil, primarily attributable to the continued ramp-up of activity under our long-term contract with Petrobras, along with $15.1 million of revenues from our Asia Pacific region following the April 2011 acquisition described above. Mediterranean revenues increased $2.7 million, as a $13.0 million increase in Eastern Europe and $2.8 million increase in Algeria was largely offset by declines in other markets, including a $5.1 million decline in Tunisia attributable to a reduction in customer activity, and an $8.9 million decline in Libya due to the political and social unrest in that country.
Operating Income
Operating income for this segment was $65.6 million reflecting an operating margin of 11.4%, in the first nine months of 2011, compared to $39.4 million, and a 9.1% operating margin in the first nine months of 2010. Of this $26.2 million improvement, our North American operating income increased $18.6 million on a $104.5 million increase in revenues, reflecting an 18% incremental margin. Compared to historical experience, the low incremental margin is the result of a greater mix of low margin products in the first nine months of 2011, as compared to the first nine months of 2010. Our product mix typically fluctuates from period to period based on the specific customer activities and needs in the period.
Our international operations generated a $7.6 million increase in operating income on a $38.4 million increase in revenues, reflecting a 20% incremental margin. The low incremental margin is partially due to the acquisition of our Asia Pacific business unit in the second quarter of 2011, which generated $1.5 million of operating income in the first nine months of 2011. In addition, operating income of our international operations was negatively impacted for the first nine months of 2011 by a $1.5 million provision for an allowance of a customer receivable in North Africa.

 

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Mats and Integrated Services
Revenues
Total revenues for this segment consisted of the following:
                                 
    First Nine Months     2011 vs 2010  
(In thousands)   2011     2010     $     %  
 
                               
Mat rental and integrated services
  $ 50,385     $ 30,755     $ 19,630       64 %
Mat sales
    30,650       18,032       12,618       70 %
 
                       
Total
  $ 81,035     $ 48,787     $ 32,248       66 %
 
                       
Mat rental and integrated services revenues increased $19.6 million, including a $17.3 million increase in the Northeast U.S. region. Mat sales also increased $12.6 million, due to increasing demand for our composite mat products from international E&P customers and other industries.
In July 2011, our largest customer in the Northeast U.S. region informed us that they intend to reduce the number of rental mats utilized on their drilling sites by approximately 70% and have since returned these mats over the course of the third quarter. As a result of this development, our revenues in this region declined by $3.7 million in the third quarter of 2011 from the second quarter of 2011. While we anticipate revenues in this region to decline further in the fourth quarter of 2011 as a result of the returned mats being utilized by the customer for a portion of the third quarter, the returned mats are being re-deployed to other regions and we expect increases in rental revenues from other regions to largely offset the anticipated revenue reduction in the Northeast.
Operating Income
Segment operating income increased by $24.7 million on the $32.2 million increase in revenues, reflecting an incremental margin of 77%. The high incremental margin, relative to recent historical experience, is primarily attributable to the higher percentage of mat rental activity relative to mat sales. Incremental margins on mat rentals are stronger than mat sales or service activities, due to the fixed nature of operating expenses, including depreciation expense on our rental mat fleet.
Environmental Services
Revenues
Total revenues for this segment consisted of the following:
                                 
    First Nine Months     2011 vs 2011  
(In thousands)   2011     2010     $     %  
 
                               
E&P waste
  $ 27,276     $ 30,509     $ (3,233 )     (11 %)
NORM and industrial waste
    8,523       7,148       1,375       19 %
 
                       
Total
  $ 35,799     $ 37,657     $ (1,858 )     (5 %)
 
                       
Environmental services revenues declined 5% to $35.8 million in the first nine months of 2011, as compared to the first nine months of 2010. The first nine months of 2010 included $7.4 million of revenues from disposals associated with the April 2010 Deepwater Horizon oil spill. The loss of this revenue in 2011 was partially offset by market share gains and increased activity in oilfield waste disposals from state water and inland locations.

 

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Operating Income
Operating income for this segment decreased by $1.3 million in the first nine months of 2011, compared to the first nine months of 2010, on a $1.9 million decline in revenues, reflecting an incremental margin of 68%. The high incremental impact to operating income from the decline in revenues is due to the fixed nature of the majority of our operating expenses in this segment, including operating costs and depreciation expense.
Corporate office
Corporate office expenses increased $4.0 million to $17.5 million in the first nine months of 2011, compared to $13.5 million in the first nine months of 2010. The increase includes a $2.3 million increase in employee compensation, primarily attributable to a $1.5 million increase in performance-based employee incentives, along with $1.0 million of transaction-related expenses associated with the April 2011 acquisition described above.
Liquidity and Capital Resources
Net cash provided by operating activities during the first nine months of 2011 totaled $34.7 million. Net income adjusted for non-cash items provided $100.2 million of cash during the period, while changes in operating assets and liabilities used $65.5 million of cash, including tax payments of $20.8 million. The changes in operating assets and liabilities during the period reflect the impact of the increased revenues, including $57.6 million from increases in receivables and $27.9 million in increases in inventories, partially offset by a $28.9 million increase in accounts payable.
Net cash used in investing activities during the first nine months of 2011 was $54.5 million, which included $26.8 million for the acquisition of the drilling fluids and engineering services business from Rheochecm PLC. In addition, capital expenditures were $28.1 million, including $9.5 million on the implementation of an Oracle ERP system, $7.8 million in the U.S. operations of the fluids systems and engineering segment, primarily related to replacement of field equipment, and $6.5 million in the mats and integrated services segment, primarily related to the expansion of the rental mat fleet. Net cash used in financing activities during the first nine months of 2011 was $0.9 million.
We anticipate that our working capital requirements for our operations will fluctuate with our revenue activity in the near term. Further, we expect total 2011 capital expenditures to range between $35 million to $40 million in addition to the investment for the Rheochem acquisition. The Rheochem acquisition also contains a one-year earn-out provision, under which we are obligated to pay additional consideration in the first quarter of 2012, up to a maximum of AUD$19.3 million (approximately $18.8 million at the current exchange rate), in addition to amounts already paid. We expect our $62.9 million of cash on-hand at September 30, 2011, along with cash generated by operations and availability under our existing credit agreement to be adequate to fund our anticipated capital needs during the next 12 months.
Our capitalization is as follows:
                 
    September 30,     December 31,  
(In thousands)   2011     2010  
 
               
Senior Notes
  $ 172,500     $ 172,500  
Other
    2,043       2,093  
 
           
Total debt
    174,543       174,593  
Stockholder’s equity
    475,654       417,347  
 
           
 
               
Total capitalization
  $ 650,197     $ 591,940  
 
           
 
               
Total debt to capitalization
    26.8 %     29.5 %
 
           

 

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In addition to the borrowings noted above, we have a $150.0 million revolving credit facility (“Facility”) which expires in December 2012 under which there were no borrowings outstanding as of September 30, 2011. Under the terms of the Facility, we can elect to borrow at an interest rate either based on LIBOR plus a margin based on our consolidated leverage ratio, ranging from 400 to 750 basis points, or at an interest rate based on the greatest of: (a) prime rate, (b) the federal funds rate in effect plus 50 basis points, or (c) the Eurodollar rate for a Eurodollar Loan with a one-month interest period plus 100 basis points, in each case plus a margin ranging from 300 to 650 basis points. The applicable margin on LIBOR borrowings at September 30, 2011 was 400 basis points. In addition, we are required to pay a commitment fee on the unused portion of the Facility of 50 basis points. As of September 30, 2011, we had $18.9 million of letters of credit issued under this Facility, leaving $131.1 million available for borrowing. The Facility contains certain financial covenants including a minimum fixed charge coverage ratio, a maximum consolidated leverage ratio, and a maximum funded debt-to-capitalization ratio. We were in compliance with these covenants as of September 30, 2011, and expect to remain in compliance through September 30, 2012.
The Facility is a senior secured obligation, secured by first liens on all of our U.S. tangible and intangible assets, including our accounts receivable and inventory. Additionally, a portion of the capital stock of our non-U.S. subsidiaries has also been pledged as collateral.
Critical Accounting Estimates
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America, 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 “Management’s 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, 2010. Our critical accounting policies have not changed materially since December 31, 2010.
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
At September 30, 2011, we had total debt outstanding of $174.5 million, including $172.5 million of borrowings under our Senior Notes, bearing interest at a fixed rate of 4.0% and $2.0 million of other borrowings, which bear interest at variable rates. Due to the limited borrowing currently outstanding under variable rate agreements, interest rate risk is minimal.
Foreign Currency
In addition to the April 2011 acquisition in Australia, our principal foreign operations are conducted in certain areas of Europe and North Africa, Brazil, Canada, and U.K. 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 which include European euros, Australian dollars, Canadian dollars and Brazilian reais. 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.

 

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ITEM 4.  
Controls and Procedures
      Evaluation of disclosure controls and procedures
Based on their evaluation of our disclosure controls and procedures as of the end of the period covered by this report, our Chief Executive Officer and Chief Financial Officer have concluded that the disclosure controls and procedures were effective as of September 30, 2011, the end of the period covered by this quarterly report.
      Changes in internal control over financial reporting
There has been no change in internal control over financial reporting during the quarter ended September 30, 2011 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II OTHER INFORMATION
ITEM 1.  
Legal Proceedings
The information set forth in the legal proceedings section of “Note 7, Commitments and Contingencies,” to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q is incorporated by reference into this Item 1.
ITEM 1A.  
Risk Factors
Information regarding risk factors appears in Item 1A to our Annual Report on Form 10-K for the year ended December 31, 2010. The risk factor described below updates, and should be read in conjunction with, the risk factors identified in our Annual Report on Form 10-K for the period ended December 31, 2010.
Risks Related to the Availability of Raw Materials
Our ability to provide products to our customers is dependent upon our ability to obtain the raw materials necessary to operate our business.
Barite is a naturally occurring mineral that constitutes a significant portion of our drilling fluids systems. We currently secure the majority of our barite ore from foreign sources, primarily China and India. The availability and cost of barite ore is dependent on factors beyond our control including power shortages, political priorities and government imposed export fees in China as well as natural disasters such as the 2008 earthquake in Sichuan Province, China. During 2011, there has been a significant increase in world-wide demand for barite ore, and as result, we have experienced significant cost increases in barite ore sourced from China. In response to this development, we continue our efforts to maintain our profitability by identifying other economical sources of barite ore and adjusting our customer pricing to offset the inflationary cost increases that we are currently experiencing. Our operating costs in future periods may continue to increase as a result of the increased demand in barite ore and we may be unable to offset these cost increases with customer pricing, which may result in a reduction in future profitability. Further, the future supply of barite ore from existing sources could be inadequate to meet the current market demand, which could ultimately result in a reduction in industry activity, or our inability to meet our customer’s needs.

 

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ITEM 2.  
Unregistered Sales of Equity Securities and Use of Proceeds
(a)  
Not applicable
 
(b)  
Not applicable
 
(c)  
The following table details our repurchases of shares of our common stock, for the three months ended September 30, 2011:
                                 
                    Total Number of     Maximum Approximate Dollar  
                    Shares Purchased as Part     Value of Shares that May Yet  
    Total Number of     Average Price     of Publicly Announced     be Purchased Under  
Period   Shares Purchased     per Share     Plans or Programs     the Plans or Programs  
July 1 – 31, 2011
    176     $ 9.13           $9.9 million
August 1 – 31, 2011
                    $9.9 million
September 1 – 30, 2011
                        $9.9 million
 
                       
Total
    176     $                
     
(1)  
The shares purchased represent shares surrendered in lieu of taxes under vesting of restricted stock awards.
ITEM 3.  
Defaults Upon Senior Securities
Not applicable.
ITEM 4.  
[Removed and Reserved]
ITEM 5.  
Other Information
Under the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), each operator of a coal or other mine is required to include certain mine safety results in its periodic reports filed with the Securities and Exchange Commission. We do not believe that certain operations of our subsidiary, Excalibar Minerals LLC (“Excalibar”), are subject to the jurisdiction of the Mine Safety and Health Administration (“MSHA”) and we previously filed an action with MSHA requesting a transfer of regulatory jurisdiction for the operations of Excalibar to the Occupational Safety and Health Administration (“OSHA”). Our request to transfer regulatory jurisdiction for these operations from MSHA to OSHA has been denied. As a result, the four specialized barite and calcium carbonate grinding facilities operated by Excalibar and a gravel excavation facility formerly operated by the Mats and Integrated Services business were subject to the regulation by MSHA under the Federal Mine Safety and Health Act of 1977 (the “Mine Act”). As required by the reporting requirements regarding mine safety included in the Dodd-Frank Act, Exhibit 99.1 includes the information for the three months ended September 30, 2011 for each of the specialized facilities operated by our subsidiaries.

 

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ITEM 6.  
Exhibits
         
  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.
       
 
  99.1    
Reporting requirements under the Mine Safety and Health Administration.
       
 
  101*    
The following materials from Newpark Resources, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2011, are formatted in XBRL (Extensible Business Reporting Language) : (i) Condensed Consolidated Balance Sheets at September 30, 2011 and December 31, 2010, (ii) Condensed Consolidated Statements of Operations for the three months and nine months ended September 30, 2011 and 2010, (iii) Condensed Consolidated Statements of Comprehensive Income for the three months and nine months ended September 30, 2011 and 2010, (iv) Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2011 and 2010 and (v) Notes to Unaudited Condensed Consolidates Financial Statements, tagged as a block of text.
 
     
*  
Furnished and not “filed” herewith for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

 

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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: October 28, 2011
 
  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, Senior Vice President and   
    Chief Financial Officer
(Principal Financial Officer) 
 
 
     
  By:   /s/ Gregg S. Piontek    
    Gregg S. Piontek, Vice President, Controller and   
    Chief Accounting Officer
(Principal Accounting Officer) 
 

 

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EXHIBIT INDEX
         
  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.
       
 
  99.1    
Reporting requirements under the Mine Safety and Health Administration.
       
 
  101*    
The following materials from Newpark Resources, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2011, are formatted in XBRL (Extensible Business Reporting Language) : (i) Condensed Consolidated Balance Sheets at September 30, 2011 and December 31, 2010, (ii) Condensed Consolidated Statements of Operations for the three months and nine months ended September 30, 2011 and 2010, (iii) Condensed Consolidated Statements of Comprehensive Income for the three months and nine months ended September 30, 2011 and 2010, (iv) Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2011 and 2010 and (v) Notes to Unaudited Condensed Consolidates Financial Statements, tagged as a block of text.
 
     
*  
Furnished and not “filed” herewith for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

 

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