10-Q 1 c03979e10vq.htm FORM 10-Q Form 10-Q
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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 June 30, 2010
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
(State or other jurisdiction of
incorporation or organization) 		  72-1123385
(I.R.S. Employer
Identification No.)
     
2700 Research Forest Drive, Suite 100
The Woodlands, Texas
(Address of principal executive offices) 		  77381
(Zip Code)
(281) 362-6800
(Registrant’s 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 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 o       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 July 20, 2010, a total of 89,881,847 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 SIX MONTHS ENDED
JUNE 30, 2010
             
Item       Page  
Number   Description   Number  
   
 
        
           
   
 
        
1          
   
 
        
        3  
   
 
        
        4  
   
 
        
        5  
   
 
        
        6  
   
 
        
        7  
   
 
        
2       15  
   
 
        
3       26  
   
 
        
4       27  
   
 
        
           
   
 
        
1       27  
   
 
        
   1A       27  
   
 
        
2       28  
   
 
        
3       28  
   
 
        
4       28  
   
 
        
5       28  
   
 
        
6       28  
   
 
        
        29  
   
 
        
 Exhibit 31.1
 Exhibit 31.2
 Exhibit 32.1
 Exhibit 32.2
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, 2009, 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 Item 1A in Part II of this Quarterly Report and Part I of our Annual Report on Form 10-K for the year ended December 31, 2009.

 

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PART I FINANCIAL INFORMATION
ITEM 1. Financial Statements
Newpark Resources, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
                 
    June 30,     December 31,  
(In thousands, except share data)   2010     2009  
 
                
ASSETS
                
Cash and cash equivalents
   $ 12,213     $ 11,534  
Receivables, net
     172,475       122,386  
Inventories
     116,470       115,495  
Deferred tax asset
     35,315       7,457  
Prepaid expenses and other current assets
     12,060       11,740  
 
            
Total current assets
     348,533       268,612  
 
                
Property, plant and equipment, net
     215,336       224,625  
Goodwill
     60,873       62,276  
Other intangible assets, net
     14,350       16,037  
Other assets
     4,366       13,564  
 
            
Total assets
   $ 643,458     $ 585,114  
 
            
 
                
LIABILITIES AND STOCKHOLDERS’ EQUITY
                
Foreign bank lines of credit
   $ 5,286     $ 6,901  
Current maturities of long-term debt
     10,192       10,319  
Accounts payable
     76,183       62,992  
Accrued liabilities
     31,397       25,290  
 
            
Total current liabilities
     123,058       105,502  
 
                
Long-term debt, less current portion
     104,588       105,810  
Deferred tax liability
     30,378       2,083  
Other noncurrent liabilities
     4,224       3,697  
 
            
Total liabilities
     262,248       217,092  
 
                
Commitments and contingencies (Note 6)
                
 
                
Common stock, $0.01 par value, 200,000,000 shares authorized 92,599,210 and 91,672,871 shares issued, respectively
     926       917  
Paid-in capital
     463,366       460,544  
Accumulated other comprehensive income
     307       8,635  
Retained deficit
     (68,038 )     (86,660 )
Treasury stock, at cost; 2,717,363 and 2,727,765 shares, respectively
     (15,351 )     (15,414 )
 
            
Total stockholders’ equity
     381,210       368,022  
 
            
Total liabilities and stockholders’ equity
   $ 643,458     $ 585,114  
 
            
See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements

 

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Newpark Resources, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
                                 
    Three Months Ended June 30,     Six Months Ended June 30,  
(In thousands, except per share data)   2010     2009     2010     2009  
 
                                
Revenues
   $ 181,352     $ 109,599     $ 342,150     $ 236,537  
 
                                
Cost of revenues
     145,299       103,906       278,817       227,418  
Selling, general and administrative expenses
     16,360       15,652       30,773       31,882  
Other income, net
     (203 )     (37 )     (1,045 )     (62 )
 
                        
 
                                
Operating income (loss)
     19,896       (9,922 )     33,605       (22,701 )
 
                                
Foreign currency exchange gain
     (1,213 )     (590 )     (1,824 )     (561 )
Interest expense
     2,228       1,600       4,376       3,250  
 
                        
 
                                
Income (loss) from operations before income taxes
     18,881       (10,932 )     31,053       (25,390 )
Provision for income taxes
     8,041       (2,145 )     12,431       (4,599 )
 
                        
 
                                
Net income (loss)
   $ 10,840     $ (8,787 )   $ 18,622     $ (20,791 )
 
                        
 
                                
Basic weighted average common shares outstanding
     88,818       88,514       88,737       88,430  
Diluted weighted average common shares outstanding
     89,392       88,514       89,079       88,430  
 
                                
Income (loss) per common share — basic
   $ 0.12     $ (0.10 )   $ 0.21     $ (0.24 )
Income (loss) per common share — diluted
   $ 0.12     $ (0.10 )   $ 0.21     $ (0.24 )
See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements

 

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Newpark Resources, Inc.
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
                                 
    Three Months Ended June 30,     Six Months Ended June 30,  
(In thousands)   2010     2009     2010     2009  
 
                                
Net income (loss)
   $ 10,840     $ (8,787 )   $ 18,622     $ (20,791 )
 
                                
Changes in fair value of interest rate swap, net of tax
     49       255       39       327  
Foreign currency translation adjustments
     (5,985 )     6,074       (8,367 )     2,957  
 
                        
 
                                
Comprehensive income (loss)
   $ 4,904     $ (2,458 )   $ 10,294     $ (17,507 )
 
                        
See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements

 

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Newpark Resources, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
                 
    Six Months Ended June 30,  
(In thousands)   2010     2009  
Cash flows from operating activities:
                
Net income (loss)
   $ 18,622     $ (20,791 )
Adjustments to reconcile net income (loss) to net cash provided by operations:
                
Non-cash impairment charges
     150       941  
Depreciation and amortization
     13,298       14,093  
Stock-based compensation expense
     1,930       1,190  
Provision for deferred income taxes
     9,402       (6,256 )
Provision for doubtful accounts
     542       1,533  
Gain on sale of assets
     (189 )     (265 )
Change in assets and liabilities:
                
(Increase) decrease in receivables
     (54,167 )     111,652  
(Increase) decrease in inventories
     (4,132 )     12,658  
(Increase) decrease in other assets
     (558 )     427  
Increase (decrease) in accounts payable
     15,742       (45,083 )
Increase (decrease) in accrued liabilities and other
     7,162       (12,592 )
 
            
Net cash provided by operating activities
     7,802       57,507  
 
                
Cash flows from investing activities:
                
Capital expenditures
     (5,995 )     (14,139 )
Proceeds from sale of property, plant and equipment
     1,318       734  
 
            
Net cash used in investing activities
     (4,677 )     (13,405 )
 
                
Cash flows from financing activities:
                
Borrowings on lines of credit
     99,027       84,934  
Payments on lines of credit
     (100,782 )     (128,701 )
Principal payments on notes payable and long-term debt
     (305 )     (195 )
Proceeds from employee stock plans
     902       104  
Purchase of treasury stock
     (153 )     (212 )
 
            
Net cash used in financing activities
     (1,311 )     (44,070 )
 
                
Effect of exchange rate changes on cash
     (1,135 )     (1,573 )
 
            
 
                
Net increase in cash and cash equivalents
     679       (1,541 )
Cash and cash equivalents at beginning of period
     11,534       8,252  
 
            
 
                
Cash and cash equivalents at end of period
   $ 12,213     $ 6,711  
 
            
 
                
Cash paid for:
                
Income taxes (net of refunds)
   $ 4,249     $ 3,023  
Interest
   $ 4,474     $ 2,819  
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, 2009, as updated by our Current Report on Form 8-K, filed with the SEC on May 12, 2010 (“Form 8-K”). Our fiscal year end is December 31, our second quarter represents the three month period ending June 30 and our first half represents the six month period ending June 30. The results of operations for the second quarter and first half of 2010 are not necessarily indicative of the results to be expected for the entire year.
In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments necessary to present fairly our financial position as of June 30, 2010, the results of our operations for the second quarter and first half of 2010 and 2009, and our cash flows for the first half of 2010 and 2009. All adjustments are of a normal recurring nature. Our balance sheet at December 31, 2009 is derived from the audited 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, 2009, as updated by our Form 8-K, filed with the SEC on May 12, 2010.
New Accounting Standards
In October 2009, the Financial Accounting Standards Board (“FASB”) issued additional guidance on multiple-deliverable revenue arrangements. The guidance provides amendments to the criteria for separating consideration in multiple-deliverable arrangements. It replaces the term “fair value” in the revenue allocation guidance with “selling price” to clarify that the allocation of revenue is based on entity-specific assumptions rather than assumptions of a marketplace participant, and they establish a selling price hierarchy for determining the selling price of a deliverable. The amendments eliminate the residual method of allocation and require that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method, and they significantly expand the required disclosures related to multiple-deliverable revenue arrangements. The amendments will be effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning after June 15, 2010 and we do not expect the impact of this additional guidance to have a material impact on our financial statements.

 

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Note 2 — Earnings per Share
The following table presents the reconciliation of the numerator and denominator for calculating income per share:
                                 
    Second Quarter     First Half  
(In thousands, except per share data)   2010     2009     2010     2009  
Net income (loss)
   $ 10,840     $ (8,787 )   $ 18,622     $ (20,791 )
 
                        
 
                                
Weighted average number of common shares outstanding
     88,818       88,514       88,737       88,430  
Add: Net effect of dilutive stock options and restricted stock awards
     574       —       342       —  
 
                        
Adjusted weighted average number of common shares outstanding
     89,392       88,514       89,079       88,430  
 
                        
 
                                
Net income (loss) per common share:
                                
Basic
   $ 0.12     $ (0.10 )   $ 0.21     $ (0.24 )
Diluted
   $ 0.12     $ (0.10 )   $ 0.21     $ (0.24 )
 
                                
Stock options, restricted stock and warrants excluded from calculation of diluted earnings per share because they were anti-dilutive for the period
     3,952       5,827       4,641       5,659  
 
                        
For the second quarter and first half of 2010, we had dilutive stock options and restricted stock of approximately 3.2 million shares and 2.6 millions shares respectively, and zero dilutive stock options or restricted stock for the same periods in 2009. The resulting net effect of stock options and restricted stock were used in calculating diluted income per share for the period.
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 2006, 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 warrant by 2.5%, for each year we are not in compliance with the registration requirements, and extend the term of the warrant. Effective May 1, 2009, we became compliant with the registration requirements for the warrant. Previously, we were not in compliance with these requirements which resulted in adjustments to the exercise price and extended the term of the warrant. As of June 30, 2010, the Series B Warrant, as adjusted for certain 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 2010, 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 636,030 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 $5.61 per share.
Additionally, in June 2010, non-employee directors received shares of restricted stock totaling 100,970 shares, which will vest in full on the first anniversary of the grant date.

 

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Note 4 — Receivables and Inventories
Receivables — Receivables, net consist of the following:
                 
    June 30,     December 31,  
(In thousands)   2010     2009  
 
                
Gross trade receivables
   $ 172,862     $ 123,909  
Allowance for doubtful accounts
     (6,365 )     (5,969 )
 
            
Net trade receivables
     166,497       117,940  
 
                
Notes and other receivables
     5,978       4,446  
 
            
 
                
Total receivables, net
   $ 172,475     $ 122,386  
 
            
Inventories — Our inventories include $115.8 million and $113.3 million of raw materials and components for our drilling fluids systems at June 30, 2010 and December 31, 2009, respectively. The remaining balance consists primarily of composite mat finished goods.
Note 5 — Fair Value of Financial Instruments
Our derivative financial instruments consist of interest rate swap agreements entered into in January 2008, which effectively fix the underlying LIBOR rate on our borrowings under our term loan. The initial notional amount of the swap agreements totaled $50.0 million reducing by $10.0 million each December, matching the required principal payments under the term loan. As of June 30, 2010, $30.0 million remained outstanding on the term loan. As a result of the swap agreements, we will pay a fixed rate of 3.74% plus the applicable margin.
The swap agreements represent a cash flow hedge, entered into for the purpose of fixing a portion of our borrowing costs and thereby decreasing the volatility of future cash flows. These agreements are valued based upon “level 2” fair value criteria, where the fair value of these instruments is determined using observable inputs, including quoted prices for similar assets/liabilities and market corroborated inputs as well as quoted prices in inactive markets. The fair value of the interest rate swap arrangements was an obligation of $1.3 million as of June 30, 2010 and December 31, 2009, recorded within accrued liabilities, which was determined from broker quotes.
Our financial instruments include cash and cash equivalents, receivables, payables, debt, and certain derivative financial instruments. We believe the carrying values of these instruments approximated their fair values at June 30, 2010 and December 31, 2009.
At June 30, 2010 and December 31, 2009, the estimated fair value of total debt is equal to the carrying value of $120.1 million and $123.0 million, respectively.
Note 6 — 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.
SEC Investigation
On March 12, 2007, we were advised that the SEC 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 have and will continue to cooperate fully with the SEC’s investigation. On July 16, 2009, the SEC filed a civil lawsuit against our former Chief Financial Officer, the former Chief Financial Officer of our Soloco business unit and one former vendor in connection with the transactions that were described in the Amended Form 10-K/A. Subsequently, the SEC announced that it reached a settlement of its claims against the former vendor and the former CFO of our Soloco business. We have not been named as a defendant in this lawsuit.

 

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Note 7 — Segment Data
Summarized operating results for our reportable segments is shown in the following table (net of inter-segment transfers):
                                 
    Second Quarter     First Half  
(In thousands)   2010     2009     2010     2009  
Revenues
                                
Fluids systems and engineering
   $ 150,534     $ 89,642     $ 286,844     $ 196,230  
Mats and integrated services
     16,981       8,638       30,601       17,501  
Environmental services
     13,837       11,319       24,705       22,806  
 
                        
Total revenues
   $ 181,352     $ 109,599     $ 342,150     $ 236,537  
 
                        
 
                                
Operating income (loss)
                                
Fluids systems and engineering
   $ 15,164     $ (1,722 )(1)     27,578     $ (7,296 )(3)
Mats and integrated services
     5,036       (4,774 )(1)     7,750 (2)     (8,188 )(3)
Environmental services
     4,224       1,385       6,903       2,542  
Corporate office
     (4,528 )     (4,811 )(1)     (8,626 )     (9,759 )(3)
 
                        
Operating income (loss)
   $ 19,896     $ (9,922 )   $ 33,605     $ (22,701 )
 
                        
     
(1)  
Includes employee termination and related charges of $1.8 million, which includes $1.0 million in fluids systems and engineering, $0.6 million in mats and integrated services and $0.2 million in our corporate office.
 
(2)  
Includes $0.9 million of other income reflecting proceeds from insurance claims related to Hurricane Ike in 2008.
 
(3)  
Includes employee termination costs and related charges of $4.4 million, which includes $3.0 million in fluids systems and engineering, $1.0 million in mats and integrated services and $0.4 million in our corporate office.
Note 8 — Guarantor and Non-Guarantor Financials
In May 2010, we filed a “shelf” registration statement on Form S-3 (“Form S-3”) registering up to $200 million in securities that may be issued by the Company from time to time. The Form S-3 was declared effective by the SEC on May 19, 2010. We may in the future issue debt securities registered pursuant to the Form S-3 that are fully and unconditionally guaranteed by certain subsidiaries of the Company, as identified in the Form S-3 and primarily consisting of our U.S. subsidiaries. As a result, we are required to present consolidating financial information regarding the guarantors and non-guarantors of the securities in accordance with SEC Regulation S-X Rule 3-10. As specified in Rule 3-10, the unaudited condensed consolidating balance sheets, results of operations, and statements of cash flows presented on the following pages meet the requirements for financial statements of the issuer and each guarantor of the debt securities because the guarantors are all direct or indirect wholly-owned subsidiaries of Newpark Resources, Inc., and all of the guarantees are full and unconditional on a joint and several basis. The unaudited condensed consolidating balance sheet as of June 30, 2010 and December 31, 2009, the unaudited condensed consolidating statements of operations for the second quarter and first half of 2010 and 2009, and the unaudited condensed consolidated statements of cash flows for the first half of 2010 and 2009 are as follows:

 

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Condensed Consolidating Balance Sheets
                                         
    June 30, 2010  
(in thousands)           Guarantor     Non-guarantor     Consolidating        
(unaudited)   Parent     subsidiaries     subsidiaries     entries     Consolidated  
ASSETS
                                        
Cash and cash equivalents
   $ 238     $ —     $ 11,975     $ —     $ 12,213  
Receivables, net
     198       121,372       50,905       —       172,475  
Inventories
     —       77,903       38,567       —       116,470  
Deferred tax asset
     27,958       7,091       266       —       35,315  
Prepaid expenses and other current assets
     1,157       2,689       8,214       —       12,060  
 
                              
Total current assets
     29,551       209,055       109,927       —       348,533  
 
                                        
Property, plant and equipment, net
     4,064       187,005       24,267     $ —       215,336  
Goodwill
     —       38,236       22,637       —       60,873  
Other intangible assets, net
     —       12,053       2,297       —       14,350  
Other assets
     2,280       685       1,401       —       4,366  
Investment in subsidiaries
     126,111       26,165       —       (152,276 )     —  
 
                              
Total assets
   $ 162,006     $ 473,199     $ 160,529     $ (152,276 )   $ 643,458  
 
                              
 
                                        
LIABILITIES AND STOCKHOLDERS’ EQUITY
                                
Foreign bank lines of credit
   $ —     $ —     $ 5,286     $ —     $ 5,286  
Current maturities of long-term debt
     10,000       —       192       —       10,192  
Accounts payable
     (661 )     58,289       18,555       —       76,183  
Accrued liabilities
     10,579       10,365       10,453       —       31,397  
 
                              
Total current liabilities
     19,918       68,654       34,486       —       123,058  
 
                                        
Long-term debt, less current portion
     104,000       —       588       —       104,588  
Deferred tax liability
     1,832       27,436       1,110       —       30,378  
Other noncurrent liabilities
     2,283       10       1,931       —       4,224  
Net intercompany (receivable) payable
     (347,237 )     282,079       65,158       —       —  
 
                              
Total liabilities
     (219,204 )     378,179       103,273       —       262,248  
 
                                        
Common stock
     926       24,557       25,991       (50,548 )     926  
Paid-in capital
     463,366       56,417       3       (56,420 )     463,366  
Accumulated other comprehensive income
     307       —       9,209       (9,209 )     307  
Retained (deficit) earnings
     (68,038 )     14,046       22,053       (36,099 )     (68,038 )
Treasury stock, at cost
     (15,351 )     —       —       —       (15,351 )
 
                              
Total stockholders’ equity
     381,210       95,020       57,256       (152,276 )     381,210  
 
                              
Total liabilities and stockholders’ equity
   $ 162,006     $ 473,199     $ 160,529     $ (152,276 )   $ 643,458  
 
                              

 

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    December 31, 2009  
(in thousands)           Guarantor     Non-guarantor     Consolidating        
(unaudited)   Parent     subsidiaries     subsidiaries     Entries     Consolidated  
ASSETS
                                        
Cash and cash equivalents
   $ 162     $ —     $ 11,372     $ —     $ 11,534  
Receivables, net
     9       72,985       49,392       —       122,386  
Inventories
     —       72,197       43,298       —       115,495  
Deferred tax asset
     155       7,091       211       —       7,457  
Prepaid expenses and other current assets
     1,937       2,384       7,419       —       11,740  
 
                              
Total current assets
     2,263       154,657       111,692       —       268,612  
 
                                        
Property, plant and equipment, net
     3,766       194,902       25,957       —       224,625  
Goodwill
     —       38,237       24,039       —       62,276  
Other intangible assets, net
     —       13,249       2,788       —       16,037  
Deferred tax and other assets
     38,379       680       1,151       (26,646 )     13,564  
Investment in subsidiaries
     93,860       26,171       —       (120,031 )     —  
 
                              
Total assets
   $ 138,268     $ 427,896     $ 165,627     $ (146,677 )   $ 585,114  
 
                              
 
                                        
LIABILITIES AND STOCKHOLDERS’ EQUITY
                                
Foreign bank lines of credit
   $ —     $ —     $ 6,901     $ —     $ 6,901  
Current maturities of long-term debt
     10,000       107       212       —       10,319  
Accounts payable
     1,195       38,317       23,480       —       62,992  
Accrued liabilities
     7,940       7,945       9,405       —       25,290  
 
                              
Total current liabilities
     19,135       46,369       39,998       —       105,502  
 
                                        
Long-term debt, less current portion
     105,000       —       810       —       105,810  
Deferred tax liability
     —       27,437       1,292       (26,646 )     2,083  
Other noncurrent liabilities
     1,782       10       1,905       —       3,697  
Net intercompany (receivable) payable
     (356,257 )     295,408       60,849       —       —  
 
                              
Total liabilities
     (230,340 )     369,224       104,854       (26,646 )     217,092  
 
                                        
Common stock
     917       24,907       25,945       (50,852 )     917  
Paid-in capital
     460,544       56,423       3       (56,426 )     460,544  
Accumulated other comprehensive income
     5,230       —       17,241       (13,836 )     8,635  
Retained (deficit) earnings
     (82,669 )     (22,658 )     17,584       1,083       (86,660 )
Treasury stock, at cost
     (15,414 )     —       —       —       (15,414 )
 
                              
Total stockholders’ equity
     368,608       58,672       60,773       (120,031 )     368,022  
 
                              
Total liabilities and stockholders’ equity
   $ 138,268     $ 427,896     $ 165,627     $ (146,677 )   $ 585,114  
 
                              

 

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Condensed Consolidated Statements of Operations
Second Quarter 2010 and 2009
                                         
    Second Quarter 2010  
(in thousands)           Guarantor     Non-guarantor     Consolidating        
(unaudited)   Parent     subsidiaries     subsidiaries     entries     Consolidated  
 
                                        
Revenues
   $ —     $ 137,542     $ 43,810     $ —     $ 181,352  
 
                                        
Cost of revenues
     —       108,971       36,328       —       145,299  
Selling, general and administrative expenses
     4,528       7,562       4,270       —       16,360  
Other (income) expense, net
     —       (287 )     84       —       (203 )
 
                              
 
                                        
Operating (loss) income
     (4,528 )     21,296       3,128       —       19,896  
 
                                        
Foreign currency exchange loss (gain)
     —       55       (1,268 )     —       (1,213 )
Interest expense (income)
     2,104       (6 )     130       —       2,228  
Intercompany interest (income) expense
     —       (739 )     739       —       —  
 
                              
 
                                        
(Loss) income from operations before income taxes
     (6,632 )     21,986       3,527       —       18,881  
Provision for income taxes
     (2,240 )     7,775       2,506       —       8,041  
Equity in income of subsidiaries
     15,232       1,724       —       (16,956 )     —  
 
                              
Net income
   $ 10,840     $ 15,935     $ 1,021     $ (16,956 )   $ 10,840  
 
                              
                                         
 
                                        
    Second Quarter 2009  
(in thousands)           Guarantor     Non-guarantor     Consolidating        
(unaudited)   Parent     subsidiaries     subsidiaries     entries     Consolidated  
 
                                        
Revenues
   $ —     $ 75,570     $ 34,029     $ —     $ 109,599  
 
                                        
Cost of revenues
     —       74,273       29,633       —       103,906  
Selling, general and administrative expenses
     4,813       7,746       3,093       —       15,652  
Other (income) expense, net
     —       (256 )     219       —       (37 )
 
                              
 
                                        
Operating (loss) income
     (4,813 )     (6,193 )     1,084       —       (9,922 )
 
                                        
Foreign currency exchange gain
     —       (98 )     (492 )     —       (590 )
Interest expense (income)
     1,582       (4 )     22       —       1,600  
Intercompany interest (income) expense
     (369 )     (467 )     836       —       —  
 
                              
 
                                        
(Loss) income from operations before income taxes
     (6,026 )     (5,624 )     718       —       (10,932 )
Provision for income taxes
     (1,940 )     (1,886 )     1,681       —       (2,145 )
Equity in income (loss) of subsidiaries
     (4,701 )     1,097       —       3,604       —  
 
                              
Net (loss) income
   $ (8,787 )   $ (2,641 )   $ (963 )   $ 3,604     $ (8,787 )
 
                              

 

First Half 2010 and 2009
                                         
    First Half 2010  
(in thousands)           Guarantor     Non-guarantor     Consolidating        
(unaudited)   Parent     subsidiaries     subsidiaries     entries     Consolidated  
 
                                        
Revenues
   $ —     $ 251,245     $ 90,905     $ —     $ 342,150  
 
                                        
Cost of revenues
     —       203,433       75,384       —       278,817  
Selling, general and administrative expenses
     8,635       13,745       8,393       —       30,773  
Other (income) expense, net
     (11 )     (1,248 )     214       —       (1,045 )
 
                              
 
                                        
Operating (loss) income
     (8,624 )     35,315       6,914       —       33,605  
 
                                        
Foreign currency exchange loss (gain)
     —       74       (1,898 )     —       (1,824 )
Interest expense (income)
     4,183       (15 )     208       —       4,376  
Intercompany interest (income) expense
     —       (1,448 )     1,448       —       —  
 
                              
 
                                        
(Loss) income from operations before income taxes
     (12,807 )     36,704       7,156       —       31,053  
Provision for income taxes
     (4,975 )     14,257       3,149       —       12,431  
Equity in income of subsidiaries
     26,454       3,662       —       (30,116 )     —  
 
                              
Net income
   $ 18,622     $ 26,109     $ 4,007     $ (30,116 )   $ 18,622  
 
                              

 

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    First Half 2009  
(in thousands)           Guarantor     Non-guarantor     Consolidating        
(unaudited)   Parent     subsidiaries     subsidiaries     entries     Consolidated  
 
                                        
Revenues
   $ —     $ 170,091     $ 66,446     $ —     $ 236,537  
 
                                        
Cost of revenues
     —       170,007       57,411       —       227,418  
Selling, general and administrative expenses
     9,759       16,200       5,923       —       31,882  
Other (income) expense, net
     —       (92 )     30       —       (62 )
 
                              
 
                                        
Operating (loss) income
     (9,759 )     (16,024 )     3,082       —       (22,701 )
 
                                        
Foreign currency exchange gain
     —       (92 )     (469 )     —       (561 )
Interest expense (income)
     3,149       (6 )     107       —       3,250  
Intercompany interest (income) expense
     (710 )     (838 )     1,548       —       —  
 
                              
 
                                        
(Loss) income from operations before income taxes
     (12,198 )     (15,088 )     1,896       —       (25,390 )
Provision for income taxes
     (3,676 )     (4,548 )     3,625       —       (4,599 )
Equity in income (loss) of subsidiaries
     (12,269 )     2,201       —       10,068       —  
 
                              
Net (loss) income
   $ (20,791 )   $ (8,339 )   $ (1,729 )   $ 10,068     $ (20,791 )

Condensed Consolidated Statements of Cash Flows
                                 
    First Half 2010  
(in thousands)           Guarantor     Non-guarantor        
(unaudited)   Parent     subsidiaries     subsidiaries     Consolidated  
 
                                
Net cash (used in) provided by operating activitites
   $ (8,511 )   $ 14,657     $ 1,656     $ 7,802  
 
                        
 
                                
Net cash used in investing activities
     (60 )     (1,733 )     (2,884 )     (4,677 )
 
                        
 
                                
Borrowings on lines of credit
     75,000       —       24,027       99,027  
Payments on lines of credit
     (76,000 )     —       (24,782 )     (100,782 )
Inter-company borrowings (repayments)
     8,898       (12,817 )     3,919       —  
Other financing activities
     749       (107 )     (198 )     444  
 
                        
Net cash provided by (used in) financing activities
     8,647       (12,924 )     2,966       (1,311 )
 
                        
 
                                
Effect of exchange rate changes on cash
     —       —       (1,135 )     (1,135 )
 
                        
Net increase in cash
     76       —       603       679  
Cash at the beginning of the period
     162       —       11,372       11,534  
 
                        
Cash at the end of the period
   $ 238     $ —     $ 11,975     $ 12,213  
 
                        

                                 
    First Half 2009  
(in thousands)           Guarantor     Non-guarantor        
(unaudited)   Parent     subsidiaries     subsidiaries     Consolidated  
 
                                
Net cash (used in) provided by operating activitites
   $ (13,675 )   $ 67,909     $ 3,273     $ 57,507  
 
                        
 
                                
Net cash (used in) provided by investing activitites
     (253 )     (6,756 )     (6,396 )     (13,405 )
 
                        
 
                                
Borrowings on lines of credit
     68,000       —       16,934       84,934  
Payments on lines of credit
     (107,000 )     —       (21,701 )     (128,701 )
Inter-company borrowings (repayments)
     53,353       (60,992 )     7,639       —  
Other financing activities
     (108 )     (161 )     (34 )     (303 )
 
                        
Net cash provided by (used in) financing activitites
     14,245       (61,153 )     2,838       (44,070 )
 
                        
 
                                
Effect of exchange rate changes on cash
     —       —       (1,573 )     (1,573 )
 
                        
Net increase in cash
     317       —       (1,858 )     (1,541 )
Cash at the beginning of the period
     —       —       8,252       8,252  
 
                        
Cash at the end of the period
   $ 317     $ —     $ 6,394     $ 6,711  
 
                        
Note 9 — Subsequent Events
In July 2010, we reached a settlement in a lawsuit we filed in 2007 against a former raw materials vendor used in our Mats and Integrated Services segment. As a result of this settlement, we expect to record approximately $2.0 million of other income in the mats and integrated services segment during the third quarter of 2010.

 

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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, 2009, as updated by our Current Report on Form 8-K, filed with the SEC on May 12, 2010 (“Form 8-K”). Our second quarter represents the three month period ended June 30, and our first half represents the six month period ended June 30.
Overview
We are a diversified oil and gas industry supplier, and have 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 Canada, Brazil, United Kingdom (“U.K.”), Mexico and certain areas of Europe and North Africa. 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 77% of total reported revenues for the first half of 2010, and our consolidated revenues by segment are as follows:
                 
    First Half        
(In thousands)   2010 Revenues     %  
 
                
Fluids systems and engineering
   $ 286,844       84 %
Mats and integrated services
     30,601       9 %
Environmental services
     24,705       7 %
 
            
Total revenues
   $ 342,150       100 %
 
            
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.
Rig count data is the most widely accepted indicator of drilling activity. Average North American rig count data for the second quarter and first half of 2010, as compared to the comparable period of the prior year is as follows:
                                 
    Second Quarter     2010 vs 2009  
    2010     2009     Count     %  
 
                                
U.S. Rig Count
     1,506       934       572       61 %
Canadian Rig Count
     163       89       74       83 %
 
                        
North America
     1,669       1,023       646       63 %
 
                
                                 
    First Half     2010 vs 2009  
    2010     2009     Count     %  
 
                                
U.S. Rig Count
     1,419       1,139       280       25 %
Canadian Rig Count
     306       211       95       45 %
 
                        
North America
     1,725       1,350       375       28 %
 
     
Source: Baker Hughes Incorporated

 

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North American drilling activity declined dramatically during the first half of 2009, from the elevated levels experienced in 2008. In response to these declines, we executed cost reduction programs during 2009 including workforce reductions, reduced discretionary spending and salary reductions. As part of this cost reduction program, we reduced our North American workforce by 548 employees, in addition to eliminating substantially all contract employee positions. As a result of these workforce reductions, operating results for the first half of 2009 include $4.4 million of charges associated with employee termination and related costs, including $1.8 million in the second quarter of 2009.
In April 2010, the Deepwater Horizon drilling rig sank in the Gulf of Mexico after an explosion and fire, resulting in the ongoing discharge of oil from the well. During the second quarter of 2010, we generated $2.7 million of revenue related to the Deepwater Horizon oil spill, which includes the disposal of spill-related waste along with the sale of products and equipment rentals.
Following the Deepwater Horizon oil spill, the Department of Interior of the U.S. government has taken several actions aimed at restricting and temporarily prohibiting certain drilling activity in the Gulf of Mexico. In addition to the $2.7 million of revenue generated directly from the Deepwater Horizon oil spill in the second quarter of 2010, we estimate that approximately $23 million, or 7%, of total consolidated revenue in the first half of 2010 came from services provided in the areas of the Gulf of Mexico affected by the U.S. government restrictions. Of this, approximately $13 million was generated within our Environmental Services business, and the remaining $10 million was generated within our Fluids Systems and Engineering segment. As a result of these restrictions on Gulf of Mexico drilling activity, we expect revenues and operating income from this region to be lower in future periods, as compared to first half 2010 levels, for as long as the restrictions remain in effect. While we expect revenue declines resulting from these restrictions to be partially offset by revenues generated from continued oil spill disposals in the third quarter of 2010, we do not expect the spill activity to fully offset the lost revenues. As a result, we expect revenues from the affected areas to be approximately $7.0 million to $9.0 million lower and operating income to be $4.0 million to $5.0 million lower in the third quarter of 2010, as compared to the second quarter of 2010.
Second Quarter of 2010 Compared to Second Quarter of 2009
Results of Operations
Summarized results of operations for the second quarter of 2010 compared to the second quarter of 2009 are as follows:
                         
    Second Quarter     2010 vs 2009  
(In thousands)   2010     2009     $  
 
                        
Revenues
   $ 181,352     $ 109,599     $ 71,753  
 
                        
Cost of revenues
     145,299       103,906       41,393  
Selling, general and administrative expenses
     16,360       15,652       708  
Other income, net
     (203 )     (37 )     (166 )
 
                  
 
                        
Operating income (loss)
     19,896       (9,922 )     29,818  
 
                        
Foreign currency exchange gain
     (1,213 )     (590 )     (623 )
Interest expense
     2,228       1,600       628  
 
                  
 
                        
Income (loss) from operations before income taxes
     18,881       (10,932 )     29,813  
Provision for income taxes
     8,041       (2,145 )     10,186  
 
                  
 
                        
Income (loss) from operations
   $ 10,840     $ (8,787 )   $ 19,627  
 
                  

 

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Revenues
Revenues increased 65% to $181.4 million in the second quarter of 2010, compared to $109.6 million in the second quarter of 2009. This increase in revenues is primarily driven by the 63% improvement in the North American rig count, along with our expansion into new markets and market share gains, including increased revenues of $21.2 million from East Texas and North Louisiana, $9.4 million from the Northeast U.S. region and $7.7 million from Brazil. Additional information regarding these increases is provided within the operating segment results below.
Cost of revenues
Cost of revenues increased 40% to $145.3 million in the second quarter of 2010, as compared to $103.9 million in the second quarter of 2009. The increase is primarily driven by the 65% increase in revenues, partially offset by the benefits of the 2009 cost reduction programs, workforce reductions and non-recurring employee termination and related costs recorded in the second quarter of 2009. Additional information regarding these declines is provided within the operating segment results below.
Selling, general and administrative expenses
Selling, general and administrative expenses increased $0.7 million to $16.4 million in the second quarter of 2010 from $15.7 million for the second quarter of 2009. The increase is primarily attributable to a $1.8 million increase in performance-based employee incentive costs in the 2010 period, partially offset by the impact of cost reduction programs implemented during 2009.
Foreign currency exchange
Foreign currency exchange was a $1.2 million gain in the second quarter of 2010, reflecting the impact of non-functional currency fluctuations in our foreign operations. During the second quarter of 2010, foreign currency exchange was favorably impacted by the strengthening U.S. dollar as compared to other currencies in our foreign operations.
Interest expense
Interest expense totaled $2.2 million for the second quarter of 2010 compared to $1.6 million for the second quarter of 2009. The increase in interest expense is primarily attributable to higher interest rates following the First Amendment and Waiver to the Amended Credit Agreement (“First Amendment”), which was entered into in July 2009. Following the First Amendment, the weighted average borrowing rate under our credit facilities was 5.31% at June 30, 2010, compared to a weighted average borrowing rate of 3.64% at June 30, 2009. See additional discussion regarding the First Amendment in Liquidity and Capital Resources below.
Provision for income taxes
The provision for income taxes for the second quarter of 2010 was a $8.0 million expense, reflecting an effective tax rate of 42.6%, compared to a $2.1 million benefit for the second quarter of 2009, reflecting an effective tax rate of 19.6%. The high effective tax rate in the second quarter of 2010 is due to losses generated in Brazil for which the recording of a tax benefit is not permitted. The low effective tax benefit rate in the second quarter of 2009 is primarily due to the write off of a previously recognized net operating loss carryforward tax asset in Canada, along with losses generated in certain foreign countries for which the recording of a tax benefit is 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):
                                 
    Second Quarter     2010 vs 2009  
(In thousands)   2010     2009     $     %  
 
                                
Revenues
                                
Fluids systems and engineering
   $ 150,534     $ 89,642     $ 60,892       68 %
Mats and integrated services
     16,981       8,638       8,343       97 %
Environmental services
     13,837       11,319       2,518       22 %
 
                        
Total revenues
   $ 181,352     $ 109,599     $ 71,753       65 %
 
                        
 
                                
Operating income (loss)
                                
Fluids systems and engineering
   $ 15,164     $ (1,722 )   $ 16,886          
Mats and integrated services
     5,036       (4,774 )     9,810          
Environmental services
     4,224       1,385       2,839          
Corporate office
     (4,528 )     (4,811 )     283          
 
                          
Operating income (loss)
   $ 19,896     $ (9,922 )   $ 29,818          
 
                          
 
                                
Segment operating margin
                                
Fluids systems and engineering
     10.1 %     (1.9 %)                
Mats and integrated services
     29.7 %     (55.3 %)                
Environmental services
     30.5 %     12.2 %                
Fluids Systems and Engineering
Revenues
Total revenues for this segment consisted of the following:
                                 
    Second Quarter     2010 vs 2009  
(In thousands)   2010     2009     $     %  
 
                                
Drilling fluids and engineering
   $ 85,311     $ 41,700     $ 43,611       105 %
Completion fluids and services
     11,500       7,776       3,724       48 %
Industrial minerals
     12,367       7,218       5,149       71 %
 
                        
Total North America
     109,178       56,694       52,484       93 %
Mediterranean
     30,160       29,476       684       2 %
Brazil
     11,196       3,472       7,724       222 %
 
                        
Total
   $ 150,534     $ 89,642     $ 60,892       68 %
 
                        
North America revenues increased 93% to $109.2 million for the second quarter of 2010, as compared to $56.7 million for the second quarter of 2009. Of this $52.5 million increase, drilling fluids and engineering revenues increased $43.6 million, largely attributable to the 63% increase in the North American rig count, along with expansion in the Northeast U.S. region, and market share gains in East Texas and North Louisiana. Our completion fluids and services activity was up 48% and our wholesale industrial minerals revenues were up 71%, both driven by the increased activity levels.
Internationally, revenues were up 26% to $41.4 million for the second quarter of 2010, as compared to $32.9 million for the second quarter of 2009, primarily due to a $7.7 million increase from Brazil as activity under new contracts continues to ramp-up, while Mediterranean revenues increased 2% to $30.2 million.

 

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Operating Income
Operating income for this segment was $15.2 million in the second quarter of 2010, reflecting an improvement of $16.9 million from a $1.7 million operating loss for the same period in 2009. Substantially all of this improvement was provided by the North American operations, which generated a $16.0 million improvement in operating income. This increase is primarily attributable to the incremental profit from the $52.5 million increase in revenues described above, combined with operating expense reductions from programs implemented during 2009, and $1.0 million of second quarter 2009 charges associated with employee terminations. Operating income from international operations increased $0.7 million, resulting from the higher revenue levels. The low incremental margin is attributable to Brazil, which generated a $2.0 million operating loss in the second quarter of 2010, compared to a $2.5 million operating loss in the second quarter of 2009.
Mats and Integrated Services
Revenues
Total revenues for this segment consisted of the following:
                                 
    Second Quarter     2010 vs 2009  
(In thousands)   2010     2009     $     %  
 
                                
Mat rental and integrated services
   $ 10,612     $ 4,869     $ 5,743       118 %
Mat sales
     6,369       3,769       2,600       69 %
 
                        
Total
   $ 16,981     $ 8,638     $ 8,343       97 %
 
                        
The $8.3 million increase in revenues is primarily driven by revenues from mat rentals, including a $5.6 million increase in the Northeast U.S. region. Mat sales also increased $2.6 million, as demand for these products has improved from the E&P and other industries, following the economic downturn in 2009.
Operating Income
Segment operating income increased by $9.8 million to $5.0 million for the second quarter of 2010, as compared to a $4.8 million operating loss in the second quarter of 2009. This improvement in operating income is primarily attributable to the $8.3 million increase in revenues, along with $1.9 million in operating expense reductions associated with 2009 cost reduction programs, including $0.6 million of employee termination costs and $0.8 million non-cash write-downs of inventory recorded in the prior year. Operating income in the second quarter of 2010 benefited from a higher mix of mat rental activity. 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. As a result, we experienced significantly higher operating margins in the second quarter of 2010, as compared to the second quarter of 2009.
Environmental Services
Revenues
Total revenues for this segment consisted of the following:
                                 
    Second Quarter     2010 vs 2009  
(In thousands)   2010     2009     $     %  
 
                                
E&P waste — Gulf Coast
   $ 10,617     $ 7,805     $ 2,812       36 %
E&P waste — West Texas
     740       725       15       2 %
NORM and industrial waste
     2,480       2,789       (309 )     (11 %)
 
                        
Total
   $ 13,837     $ 11,319     $ 2,518       22 %
 
                        

 

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Environmental services revenues increased 22% to $13.8 million in the second quarter of 2010, as compared to the second quarter of 2009. The majority of this increase is attributable to the E&P waste in the Gulf Coast, which included $2.0 million of revenues from the Deepwater Horizon oil spill for the second quarter of 2010.
Operating Income
Environmental services operating income increased by $2.8 million in the second quarter of 2010, of which $1.8 million was attributable to higher revenue levels. In addition, operating expenses are down $1.0 million in the second quarter of 2010, including a $0.8 million reduction in equipment rental expenses, following the non-renewal of barge leases in 2009.
In addition to the $2.0 million of revenues generated directly from the Deepwater Horizon oil spill, approximately 55% of second quarter 2010 revenues for this segment were derived from areas of the Gulf of Mexico affected by the U.S. government restrictions. We expect revenues and operating income from this region to be lower in future periods, as compared to second quarter 2010 levels, for as long as the restrictions remain in effect. Due to the fixed nature of the majority of our operating expenses in this segment, we expect any reduction in segment revenues to have a high incremental impact on segment operating income.
First Half of 2010 Compared to First Half of 2009
Results of Operations
Summarized results of operations for the first half of 2010 compared to the first half of 2009 are as follows:
                         
    First Half     2010 vs 2009  
(In thousands)   2010     2009     $  
Revenues
   $ 342,150     $ 236,537     $ 105,613  
 
                        
Cost of revenues
     278,817       227,418       51,399  
Selling, general and administrative expenses
     30,773       31,882       (1,109 )
Other income, net
     (1,045 )     (62 )     (983 )
 
                  
 
                        
Operating (loss) income
     33,605       (22,701 )     56,306  
 
                        
Foreign currency exchange gain
     (1,824 )     (561 )     (1,263 )
Interest expense
     4,376       3,250       1,126  
 
                  
 
                        
Income (loss) from operations before income taxes
     31,053       (25,390 )     56,443  
Provision for income taxes
     12,431       (4,599 )     17,030  
 
                  
 
                        
Income (loss) from operations
   $ 18,622     $ (20,791 )   $ 39,413  
 
                  
Revenues
Revenues increased 45% to $342.2 million in the first half of 2010, compared to $236.5 million in the first half of 2009. This increase in revenues is primarily driven by the 28% improvement in the North American rig count, along with our expansion into new markets and market share gains, including increased revenues of $34.0 million from East Texas and North Louisiana, $14.9 million from the Northeast U.S. region and $20.1 million from Brazil. Additional information regarding these increases is provided within the operating segment results below.
Cost of revenues
Cost of revenues increased 23% to $278.8 million in the first half of 2010, as compared to $227.4 million in the first half of 2009. The increase is primarily driven by the 45% increase in revenues, partially offset by the benefits of the 2009 cost reduction programs, workforce reductions and non-recurring employee termination and related costs recorded in the first half of 2009. Additional information regarding these declines is provided within the operating segment results below.

 

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Selling, general and administrative expenses
Selling, general and administrative expenses declined $1.1 million to $30.8 million in the first half of 2010 from $31.9 million for the first half of 2009. The decrease is primarily attributable to the impact of cost reduction programs implemented during 2009, partially offset by $3.0 million of performance-based employee incentive costs in the 2010 period.
Other income, net
Other income, net was $1.0 million during the first half of 2010, reflecting $0.9 million of proceeds from insurance claims within our Mats and Integrated Services business, resulting from Hurricane Ike in 2008.
Foreign currency exchange
Foreign currency exchange was a $1.8 million gain in the first half of 2010, compared to a $0.6 million gain in the first half of 2009, reflecting the impact of non-functional currency fluctuations in our foreign operations. During the first half of 2010, foreign currency exchange was favorably impacted by the strengthening U.S. dollar as compared to other currencies in our foreign operations.
Interest expense
Interest expense increased 35% to $4.4 million in the first half of 2010 compared to $3.3 million for the first half of 2009. The increase in interest expense is primarily attributable to higher interest rates following the First Amendment, which was entered into in July 2009. Following the First Amendment, the weighted average borrowing rate under our credit facilities was 5.31% at June 30, 2010, compared to a weighted average borrowing rate of 3.64% at June 30, 2009. See additional discussion regarding the First Amendment in Liquidity and Capital Resources below.
Provision for income taxes
The provision for income taxes for the first half of 2010 was a $12.4 million expense, reflecting an effective tax rate of 40.0%, compared to a $4.6 million benefit for the second quarter of 2009, reflecting an effective tax rate of 18.1%. The high effective tax rate in the first half of 2010 is due to losses generated in Brazil for which the recording of a tax benefit is not permitted. The low effective tax benefit rate in the first half of 2009 is primarily due to the write off of a previously recognized net operating loss carryforward tax asset in Canada, along with losses generated in certain foreign countries for which the recording of a tax benefit is 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):
                                 
    First Half     2010 vs 2009  
(In thousands)   2010     2009     $     %  
 
                                
Revenues
                                
Fluids systems and engineering
   $ 286,844     $ 196,230     $ 90,614       46 %
Mats and integrated services
     30,601       17,501       13,100       75 %
Environmental services
     24,705       22,806       1,899       8 %
 
                        
Total revenues
   $ 342,150     $ 236,537     $ 105,613       45 %
 
                        
 
                                
Operating (loss) income
                                
Fluids systems and engineering
   $ 27,578     $ (7,296 )   $ 34,874          
Mats and integrated services
     7,750       (8,188 )     15,938          
Environmental services
     6,903       2,542       4,361          
Corporate office
     (8,626 )     (9,759 )     1,133          
 
                          
Operating (loss) income
   $ 33,605     $ (22,701 )   $ 56,306          
 
                          
 
                                
Segment operating margin
                                
Fluids systems and engineering
     9.61 %     (3.7 %)                
Mats and integrated services
     25.3 %     (46.8 %)                
Environmental services
     27.9 %     11.1 %                
Fluids Systems and Engineering
Revenues
Total revenues for this segment consisted of the following:
                                 
    First Half     2010 vs 2009  
(In thousands)   2010     2009     $     %  
 
                                
Drilling fluids and engineering
   $ 163,749     $ 102,636     $ 61,113       60 %
Completion fluids and services
     19,839       16,695       3,144       19 %
Industrial minerals
     24,485       16,103       8,382       52 %
 
                        
Total North America
     208,073       135,434       72,639       54 %
Mediterranean
     52,437       54,513       (2,076 )     (4 %)
Brazil
     26,334       6,283       20,051       319 %
 
                        
Total
   $ 286,844     $ 196,230     $ 90,614       46 %
 
                        
North America revenues increased 54% to $208.1 million for the first half of 2010, as compared to $135.4 million for the first half of 2009. Of this $72.6 million increase, drilling fluids and engineering revenues increased $61.1 million, largely attributable to the 28% increase in the North American rig count, along with expansion in the Northeast U.S. region and market share gains in East Texas and North Louisiana. Our completion fluids and services activity was up 19% and our wholesale industrial minerals revenues were up 52%, both driven by the increased activity levels.
Internationally, revenues were up 30% to $78.8 million for the first half of 2010, as compared to $60.8 million for the first half of 2009, primarily due to a $20.0 million increase from Brazil as activity under new contracts continues to ramp-up. Mediterranean revenue is down 4%, due to lower revenues in the first quarter of 2010 resulting from delays in customer projects and unusually cold weather in Eastern Europe.

 

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Operating Income
Operating income for this segment was $27.6 million in the first half of 2010, reflecting an improvement of $34.9 million from a $7.3 million operating loss for the same period in 2009. Substantially all of this improvement was provided by the North American operations, which generated a $33.9 million improvement in operating income. This improvement is primarily attributable to the incremental profit from the $72.6 million increase in revenues described above, combined with operating expense reductions from programs implemented during 2009, and $3.0 million of first half 2009 charges associated with employee terminations.
Operating income from international operations increased $0.8 million, including a $2.3 million increase in Brazil, resulting from the higher revenue levels. This increase was offset by a $1.5 decline in the Mediterranean operations, as revenues were down $2.1 million in this period.
Mats and Integrated Services
Revenues
Total revenues for this segment consisted of the following:
                                 
    First Half     2010 vs 2009  
(In thousands)   2010     2009     $     %  
 
                                
Mat rental and integrated services
   $ 18,342     $ 12,290     $ 6,052       49 %
Mat sales
     12,259       5,211       7,048       135 %
 
                        
Total
   $ 30,601     $ 17,501     $ 13,100       75 %
 
                        
The $13.1 million increase in revenues is primarily driven by a $7.9 million increase in mat rentals in the Northeast U.S. region, partially offset by a $2.7 million decline in Colorado rental and service revenues. Mat sales increased $7.0 million, as demand for these products has improved from the E&P and other industries, following the economic downturn in 2009.
Operating Income
Segment operating income increased by $15.9 million to $7.8 million for the first half of 2010. This improvement in operating income is primarily attributable to the $13.1 million increase in revenues, along with $4.5 million in operating expense reductions associated with 2009 cost reduction programs, including $1.0 million of employee termination costs and $1.0 million of non-cash write-downs of inventory recorded in the prior year. Operating income in the first half of 2010 benefited from a higher mix of mat rental activity. 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 the rental mat fleet. As a result, we experienced significantly higher operating margins in the first half of 2010, as compared to the first half of 2009. Additionally, the first quarter of 2010 included $0.9 million of other income reflecting proceeds for insurance claims related to Hurricane Ike in 2008.

 

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Environmental Services
Revenues
Total revenues for this segment consisted of the following:
                                 
    First Half     2010 vs 2009  
(In thousands)   2010     2009     $     %  
 
                                
E&P waste — Gulf Coast
   $ 18,545     $ 16,198     $ 2,347       14 %
E&P waste — West Texas
     1,385       1,788       (403 )     (23 %)
NORM and industrial waste
     4,775       4,820       (45 )     (1 %)
 
                        
Total
   $ 24,705     $ 22,806     $ 1,899       8 %
 
                        
Environmental services revenues increased 8% to $24.7 million in the first half of 2010, as compared to the first half of 2009. The majority of this increase is attributable to higher E&P waste in the Gulf Coast in the first half of 2010, which included $2.0 million of revenues related to the Deepwater Horizon oil spill.
Operating Income
Environmental services operating income increased by $4.4 million in the first half of 2010, partially driven by the $1.9 million increase in revenues compared to the first half of 2009. In addition, operating expenses are down $2.5 million in the first half of 2010, including a $1.7 million reduction in equipment rental expenses, following the non-renewal of barge leases in 2009.
In addition to the $2.0 million of revenues generated directly from the Deepwater Horizon oil spill, approximately 55% of first half 2010 revenues for this segment were derived from areas of the Gulf of Mexico affected by the U.S. government restrictions. We expect revenues and operating income from this region to be lower in future periods, as compared to first half 2010 levels, for as long as the restrictions remain in effect. Due to the fixed nature of the majority of our operating expenses in this segment, we expect any reduction in segment revenues to have a high incremental impact on segment operating income.
Liquidity and Capital Resources
Net cash provided by operating activities during the first half of 2010 totaled $7.8 million. Net income adjusted for non-cash items provided $43.8 million of cash during the period, while increases in changes in operating assets and liabilities used $36.0 million of cash. The increase in working capital during the period includes $54.2 million from increases in receivables reflecting the impact of increased revenue levels along with a $4.1 million increase in inventories, partially offset by a $15.7 million increase in accounts payable and $7.2 million in increases in accrued liabilities.
Net cash used in investing activities during the first half of 2010 was $4.7 million, consisting primarily of capital expenditures. Net cash used in financing activities during the first half of 2010 was $1.3 million, primarily reflecting net payments on our revolving credit facilities during the period.
We anticipate that our working capital requirements for our operations will fluctuate with our sales activity in the near term. Cash generated by operations along with availability under our existing credit agreement is expected to be adequate to fund our anticipated capital needs. Further, we may decide to access the public equity or debt markets for potential acquisitions, working capital or other liquidity needs, if such financings are available on acceptable terms. In May 2010, we filed a “shelf” registration statement on Form S-3 registering up to $200 million of common stock, preferred stock, debt securities and warrants, and such registration statement was declared effective on May 19, 2010.

 

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Our capitalization is as follows:
                 
    June 30,     December 31,  
(In thousands)   2010     2009  
 
                
Term loan
   $ 30,000     $ 30,000  
Revolving credit facility
     84,000       85,000  
Foreign bank lines of credit
     5,286       6,901  
Other
     780       1,129  
 
            
Total
     120,066       123,030  
Stockholder’s equity
     381,210       368,022  
 
            
 
                
Total capitalization
   $ 501,276     $ 491,052  
 
            
 
                
Total debt to capitalization
     24.0 %     25.1 %
 
            
In December 2007, we entered into a $225.0 million Amended and Restated Credit Agreement (“Credit Agreement”) which consisted of a $175.0 million revolving credit facility and a $50.0 million term loan. The Credit Agreement contained certain financial covenants including a minimum fixed charge coverage ratio, a maximum consolidated leverage ratio, and a maximum funded debt-to-capitalization ratio. At June 30, 2009, we were not in compliance with the fixed charge coverage ratio and consolidated leverage ratio covenants. However, in July 2009, we entered into the First Amendment, which provided a waiver of the financial covenant violations as of June 30, 2009 and modified certain covenant requirements.
We were in compliance with our covenants as of June 30, 2010, and expect to remain in compliance through June 30, 2011. The calculated performance for these covenants as of June 30, 2010 is as follows:
                 
    Covenant     Calculation as of  
    Requirement     June 30, 2010  
 
                
Fixed charge coverage ratio (1)
     1.10 minimum       2.60  
 
                
Consolidated leverage ratio
     3.00 maximum       1.63  
 
                
Funded debt-to-captalization ratio
     45.0% maximum     23.1 %
     
(1)  
Effective September 30, 2010, this coverage ratio goes to 1.20.
The First Amendment also reduced the revolving credit facility from $175.0 million to $150.0 million, and provided for adjustments in the interest rates and commitment fees under the credit facility. Under the Credit Agreement, as amended by the First Amendment, 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 First Amendment also increased the commitment fee rate payable under the credit facility, which is now fixed at 50 basis points. The applicable margin on LIBOR borrowings at June 30, 2010 was 400 basis points.

 

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As of June 30, 2010, $79.0 million of the outstanding principal of the revolving credit facility was bearing interest at LIBOR plus 400 basis points, or 4.33%, while the remaining $5.0 million in outstanding principal was bearing interest at Prime Rate plus 300 basis points, or 6.25%. In January 2008, we entered into interest rate swap agreements to effectively fix the underlying LIBOR rate on our borrowings under the Term Loan. The initial notional amount of the swap agreements totaled $50.0 million, reducing by $10.0 million each December, matching the required principal repayments under the Term Loan. As a result of the swap agreements, we will pay a fixed rate of 3.74% over the term of the loan plus the applicable margin to lenders, which was 400 basis points at June 30, 2010. The weighted average interest rate on the outstanding balances under our Credit Agreement including the interest rate swaps as of June 30, 2010 and December 31, 2009 was 5.31% and 5.55%, respectively.
The Credit Agreement 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.
At June 30, 2010, $3.9 million in letters of credit were issued and outstanding relating to our insurance programs. In addition, we had $84.0 million outstanding under our revolving credit facility at June 30, 2010, leaving $62.1 million of availability at that date. Additionally, we had $1.4 million in letters of credit outstanding relating to foreign operations.
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, 2009. Our critical accounting policies have not changed materially since December 31, 2009.
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 is to manage exposure to interest rate fluctuations by using a combination of fixed and variable-rate debt. At June 30, 2010, we had total debt outstanding of $120.1 million.
In January 2008, we entered into interest rate swap agreements to effectively fix the underlying LIBOR interest rate on our borrowings under the term loan portion of our credit facility. The initial notional amount of the swap agreements totaled $50.0 million, reducing by $10.0 million each December, matching the required principal repayments under the term loan. As of June 30, 2010, $30.0 million remained outstanding under this term loan. As a result of the swap agreements, we will pay a fixed rate of 3.74% plus the applicable margin, over the term of the loan.
At June 30, 2010, we had $86.8 million of variable rate debt, bearing interest at a weighted average of 4.40%. At the June 30, 2010 balance, a 200 basis point increase in market interest rates during 2010 would cause our annual interest expense to increase approximately $1.7 million, resulting in a $0.01 per diluted share reduction in annual net earnings.

 

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Foreign Currency
Our principal foreign operations are conducted in certain areas of Europe and North Africa, Brazil, Canada, U.K. and Mexico. 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, 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.
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 June 30, 2010, 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 June 30, 2010 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 6, “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, 2009. 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, 2009.
Our operations could be adversely impacted by restrictions on offshore drilling activity in the Gulf of Mexico.
In April 2010, the Deepwater Horizon drilling rig sank in the Gulf of Mexico after a blowout and fire, resulting in the ongoing discharge of oil from the well. Following the Deepwater Horizon oil spill, the Department of Interior of the U.S. government has taken several actions aimed at restricting and temporarily prohibiting certain drilling activity in the Gulf of Mexico. During the first half of 2010, we have generated approximately $26 million of revenues from the area impacted by the restrictions, including $2.7 million of revenue generated directly related to the Deepwater Horizon oil spill.
As a result of the restrictions imposed by the Department of Interior, our customers may possibly be forced to delay or cease operations in the areas impacted by the spill, resulting in less demand for our drilling fluids and waste disposal services. Further, our facilities on the coast of the Gulf of Mexico may be forced to suspend operations as a result of impacts from the restrictions, which could potentially result in a reduction in revenues or an increase in our costs. Depending on the scope of restrictions on Gulf of Mexico drilling activity, we expect revenues and operating income from this region to be lower in future periods, as compared to first half 2010 levels, for as long as the restrictions remain in effect.
In addition, we cannot predict whether changes in laws and regulations concerning operations in the Gulf of Mexico, or more generally throughout the U.S. will be enacted. Significant changes in regulations regarding future exploration and production activities in the Gulf of Mexico or other government or regulatory actions could reduce drilling and production activity, or increase the costs of our services, which could have a material adverse impact on our business.

 

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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 June 30, 2010:
                                 
                            Maximum Approximate  
                    Total Number of     Dollar Value of  
                    Shares Purchased     Shares that  
                    as Part of     May Yet be  
    Total Number of     Average Price     Publicly Announced     Purchased Under the  
Period   Shares Purchased     per Share     Plans or Programs     Plans or Programs  
April 1 - 30, 2010
     —       —       —     $9.9 million
May 1 - 31, 2010
     —       —       —     $9.9 million
June 1 - 30, 2010
     11,506 (1)   $ 5.93       —     $9.9 million
 
                          
Total
     11,506     $ 5.93       —          
     
(1)  
The shares purchased represent shares surrendered in lieu of taxes under vesting of restricted stock awards. These shares were not acquired as part of the stock repurchase plan.
ITEM 3. Defaults Upon Senior Securities
Not applicable.
ITEM 4. (Removed and Reserved)
ITEM 5. Other Information
Not applicable.
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.

 

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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: July 30, 2010
         
  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 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.

 

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