UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934
Newpark Resources, Inc.
(504) 838-8222(Registrant’s telephone number)
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 x No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.
Common stock, $0.01 par value: 84,195,454 shares at April 29, 2005.
NEWPARK RESOURCES, INC.INDEX TO FORM 10-QFOR THE THREE MONTH PERIOD ENDEDMarch 31, 2005
Forward-Looking Statements
The following discussion contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. 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 below, 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.
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We assume no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this report might not occur.
Among the risks and uncertainties that could cause future events and results to differ materially from those anticipated by us in the forward-looking statements included in this report are the following:
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For further information regarding these and other factors, risks and uncertainties affecting us, we refer you to the risk factors set forth in the Prospectus included in our Registration Statement on Form S-3 filed on May 8, 2002 (File No. 333-87840), and to the section entitled “Forward-Looking Statements” on page 17 of that Prospectus and to our periodic reports filed with the Securities and Exchange Commission.
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Newpark Resources, Inc.Consolidated Balance Sheets
See Accompanying Notes to Unaudited Consolidated Financial Statements
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Newpark Resources, Inc.Consolidated Statements of IncomeFor the Three Month Periods Ended March 31,(Unaudited)
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Newpark Resources, Inc.Consolidated Statements of Comprehensive IncomeFor the Three Month Periods Ended March 31,(Unaudited)
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Newpark Resources, Inc.Consolidated Statements of Cash FlowsFor the Three Month Periods Ended March 31,(Unaudited)
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NEWPARK RESOURCES, INC.NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 — Interim Financial Statements
In the opinion of management, the accompanying unaudited consolidated financial statements reflect all adjustments necessary to present fairly the financial position of Newpark Resources, Inc. (“Newpark”) as of March 31, 2005, and the results of its operations and its cash flows for the three month periods ended March 31, 2005 and 2004. All such adjustments are of a normal recurring nature. These interim financial statements should be read in conjunction with the December 31, 2004 audited financial statements and related notes filed in Newpark’s Annual Report on Form 10-K. The results of operations for the three month period ended March 31, 2005 are not necessarily indicative of the results to be expected for the entire year. We have reclassified certain amounts previously reported to conform with the presentation at March 31, 2005.
Note 2 — Earnings Per Share
The following table presents the reconciliation of the numerator and denominator for calculating income per share in accordance with the disclosure requirements of Statement of Financial Accounting Standards (“FAS”) 128:
Basic net income per share was calculated by dividing net income by the weighted-average number of common shares outstanding during the period. For the three months ended March 31, 2005 and 2004, Newpark had dilutive stock options and warrants of approximately 2.6 million shares and 1.3 million shares, respectively, which were assumed exercised using the treasury stock method. The resulting net effects of stock options and warrants were used in calculating diluted income per share for these periods.
Options and warrants to purchase a total of approximately 7.0 million additional shares and 8.8 million additional shares of common stock were outstanding during the three months ended March 31, 2005 and 2004, respectively, but were not included in the computation of diluted income per share because they were anti-dilutive.
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The net effects of the assumed conversion of preferred stock have been excluded from the computation of diluted income per share for all periods presented because the effects would be anti-dilutive.
Note 3 — Stock-Based Compensation
At March 31, 2005, Newpark maintained six stock-based compensation plans, including four stock option plans and two long-term incentive plans. Newpark applies Accounting Principles Board Opinion 25 (“APB 25”) and related Interpretations in accounting for its stock-based compensation plans. In accordance with this guidance, no compensation cost has been recognized for Newpark’s stock option plans as the exercise price of all stock options granted thereunder is equal to the fair value at the date of grant. Compensation expense is recorded for Newpark’s long-term incentive plans. Had compensation costs for all of Newpark’s stock-based compensation plans been determined based on the fair value at the grant dates for awards under those plans consistent with the method of FAS 123, “Accounting for Stock-Based Compensation,” Newpark’s net income and net income per share would have been the pro forma amounts shown below:
During the year ended December 31, 2004, Newpark modified the terms of non-director and non-executive officer stock options to accelerate the vesting of out-of-the-money options. This resulted in a decrease of approximately $300,000 in the pro forma after-tax expense that otherwise would have been reported for the three months ended March 31, 2005 presented above.
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Note 4 — Accounts Receivable
Included in trade accounts receivable at March 31, 2005 and December 31, 2004 are:
The reduction in the allowance for doubtful accounts during the quarter ended March 31, 2005 is principally due to the write-off of accounts deemed to be uncollectible.
Note 5 — Inventory
Newpark’s inventory consisted of the following items at March 31, 2005 and December 31, 2004:
Note 6 — New Accounting Standards
In December 2004, the Financial Accounting Standards Board (“FASB”) issued FAS 123 (revised 2004), “Share-Based Payment,” (“FAS 123(R)”) which is a revision of FAS 123, “Accounting for Stock-Based Compensation.” FAS 123(R) supersedes Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and amends FAS 95, “Statement of Cash Flows.” Generally, the approach in FAS 123(R) is similar to the approach described in FAS 123. However, FAS 123(R) requires that all share-based payments to employees, including grants of employee stock options, be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. FAS 123(R) permits adoption of its requirements using one of two methods:(1)
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a “modified prospective” method in which compensation cost is recognized beginning with the effective date of FAS 123(R) (a) based on the requirement of FAS 123(R) for all share-based payments granted after that effective date and (b) based on the requirements of FAS 123 for all awards granted prior to the effective date of FAS 123(R) that remain unvested on the effective date; and (2) a “modified retrospective” method which includes the requirements of the modified prospective method previously described, but also permits restatement of prior periods based on the amounts previously reported in pro forma disclosures under FAS 123. Newpark currently plans to adopt FAS 123(R) using the modified prospective method. On April 14, 2005, the Securities and Exchange Commission announced amended compliance dates for SFAS 123(R). The Commission previously required companies to adopt this standard no later than July 1, 2005, but the new rules now require Newpark to adopt FAS 123(R) starting with its first quarter of its fiscal year beginning January 1, 2006.
As permitted by FAS 123, Newpark currently accounts for stock-based compensation using APB 25’s intrinsic value method and, as such, generally recognizes no compensation cost for employee stock options. Accordingly, the adoption of FAS 123(R) will likely have a material impact on Newpark’s results of operations. However, the ultimate impact of adoption of FAS 123(R) cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. If Newpark had adopted FAS 123(R) in prior periods, the impact for the three months ended March 31, 2005 and March 31, 2004, would have approximated the impact of FAS 123 as described in the disclosure of pro forma net income and earnings per share in Note 3.
In November 2004, the FASB issued FAS 151, “Inventory Costs-an amendment of ARB No. 43, Chapter 4,” to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material (spoilage). It requires that these items be recognized as current-period charges regardless of whether they meet a criterion of “so abnormal.” It also requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. FAS 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. Management cannot currently determine the impact that adoption of FAS 151 will have on Newpark’s financial results.
Note 7 — Segment Data
Summarized financial information concerning Newpark’s reportable segments is shown in the following table:
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The figures above are shown net of intersegment transfers.
Note 8 — Condensed Consolidating Financial Information
The supplemental condensed consolidating financial information should be read in conjunction with the notes to these consolidated financial statements and has been prepared pursuant to the rules and regulations for condensed financial information. The supplemental condensed consolidated financial information does not include all disclosures included in annual financial statements; nevertheless, Newpark believes that the disclosures made are adequate to make the information presented not misleading. Certain reclassifications were made to conform all of the financial information to the financial presentation on a consolidated basis. The principal eliminating entries eliminate investments in subsidiaries, intercompany balances and intercompany revenues and expenses. The allocation of the consolidated income tax provision was made using the with and without allocation method.
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SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEETAS OF MARCH 31, 2005(In thousands)
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SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEETAS OF DECEMBER 31, 2004(In thousands)
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SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOMEFOR THE THREE MONTHS ENDED MARCH 31, 2005(In thousands)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOMEFOR THE THREE MONTHS ENDED MARCH 31, 2004(In thousands)
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SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWSFOR THE THREE MONTHS ENDED MARCH 31, 2005(In thousands)
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWSFOR THE THREE MONTHS ENDED MARCH 31, 2004(In thousands)
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Note 9 — Legal Matters
Newpark, through a consolidated subsidiary, purchased composite mats from The Loma Company, LLC (“LOMA”), which manufactured the mats under an exclusive license granted by OLS Consulting Services, Inc. (“OLS”). Newpark, through a separate consolidated subsidiary, owned 49% of LOMA and OLS held the remaining 51% interest. OLS had granted Newpark an exclusive license to use and sell these composite mats. On April 18, 2005, Newpark acquired OLS in exchange for a cash payment of $1.3 million. The principal assets of OLS included the patents licensed to LOMA for use in the manufacture of the mats, a note receivable from LOMA and its 51% membership interest in LOMA. As a result of the acquisition of OLS, Newpark, through two of its subsidiaries, owns all of the outstanding equity interests in LOMA and the parties and their affiliates mutually dismissed all previously pending litigation, which has been previously described in our Annual Report on Form 10-K for the year ended December 31, 2004. A motion to dismiss the LOMA bankruptcy proceedings was heard on April 19, 2005 and such proceedings were dismissed.
In addition, Newpark and its subsidiaries are involved in litigation and other claims or assessments on matters arising in the normal course of business. In the opinion of management, any recovery or liability in these matters should not have a material effect on Newpark’s consolidated financial position, results of operations or cash flows.
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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 Consolidated Financial Statements” and “Notes to Unaudited Consolidated Financial Statements” as well as our Annual Report on Form 10-K for the year ended December 31, 2004.
Operating Environment and Recent Developments
Our operating results depend in large measure on oil and gas drilling activity levels in the markets we serve, as well as on the depth of drilling, which governs the revenue potential of each well. These levels, in turn, depend on oil and gas commodities pricing, inventory levels and product demand. Rig count data is the most widely accepted indicator of drilling activity. Key average rig count data for the last five quarters is listed in the following table:
Our primary Gulf Coast market includes: (1) South Louisiana Land; (2) Texas Railroad Commission Districts 2 and 3; (3) Louisiana and Texas Inland Waters; and (4) Offshore Gulf of Mexico. In addition to our primary Gulf Coast Market, we operate in several other key markets, including Canada, the U.S. central region (including the U.S. Rocky Mountain region, Oklahoma and West Texas) and areas surrounding the Mediterranean Sea.
Key Developments
Our primary Gulf Coast oilfield market accounted for approximately 48% of first quarter 2005 revenues, as compared to 46% of first quarter 2004 revenues. As recently as 1997, the Gulf Coast oilfield market accounted for 97% of total revenues. The overall decline in the percentage of Gulf Coast revenues over the last several years is the result of relatively flat Gulf Coast market activity as compared to growth in most other markets. While we have recently experienced an increase in Gulf Coast oilfield market activity, we believe that the majority of our growth will come from other markets and new product offerings in the markets we serve.
Over the last several years we have developed several new products and product enhancements in each of our business segments. We have invested a significant amount of financial and human resources in developing these new products. A large portion of these investments in product developments and enhancements has been made during an
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extended period of market stagnation or decline, primarily in the Gulf Coast market. We believe that these investments will be a key driver in our anticipated growth in 2005.
Fluids Sales and Engineering. We continue to develop a position in the drilling fluids market by expanding our customer base, drawing upon increasing acceptance of our proprietary DeepDrill™ technology. We have recently expanded on this technology by introducing the FlexDrill™ system that draws from the technology introduced in the DeepDrill™ system several years ago. FlexDrill™ allows the key components of the system to be added to the fluid as the well progresses, thereby reducing total system cost and simplifying the fluid management process. This product line extension has been well received, and we anticipate that, as our Gulf Coast customers increase their activity levels, FlexDrill™ will become a significant part of our revenue mix in that market.
We are presently exploring several contract opportunities offered to us to provide our high-performance water based fluid systems in a number of foreign countries, which should increase our revenues in the future.
We have introduced the New-100 oil-based drilling fluid system in the western Canadian market. This fluid system incorporates a principal component from the DeepDrill™ family to replace salt, which solves some of the environmental problems associated with oil-based fluids while improving drilling performance. This fluid has demonstrated up to 30% increased penetration rates on deep wells and is rapidly gaining market acceptance.
We believe that these new products will make it easier for our customers to comply with increasingly strict environmental regulations affecting their drilling operations and improve the economics of the drilling process.
During 2004 we experienced increases in our product costs across most of the U.S. markets that we serve. Specifically, in the second half of 2004, we experienced significant increases in the ocean freight shipping cost of barite from our foreign suppliers. These cost increases were only partially offset by price increases to our customers in the first quarter of 2005 due to market conditions and existing contractual arrangements. We are presently in the process of increasing prices to our customers as contracts are renewed. The cost increases appear to have stabilized and the impact of these cost increases should be fully offset through price increases to our customers by the end of 2005.
Mat and Integrated Services. During the current quarter we experienced continued improvement in pricing in the Gulf Coast oilfield market. This is the direct result of improved activity in this market and the industry-wide decline in mat inventories servicing this market. We believe that pricing will continue to improve throughout the remainder of 2005.
Beginning in late 2004, we implemented cost reduction measures in this segment. These cost reduction measures principally related to resizing our rental fleet, reducing infrastructure, outsourcing transportation and other services and reducing payroll. In addition to these cost reduction measures, we anticipate reductions in our depreciation costs, primarily in the second half of 2005, due to the completion of depreciation on portions of our wooden mat fleet that we do not intend to fully replace with new wooden mats.
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We continue to rent wooden mats in the Gulf Coast oilfield market and to sell them in the western Canadian oilfield market. These wooden mats are becoming more difficult to obtain due to dwindling supplies of suitable hardwoods. We believe that our access to hardwoods through our Batson Mill operation gives us a competitive advantage.
We also continue to develop the worldwide market for our Dura-Base® composite mat system. Our marketing efforts for this product continue to be focused in nine key markets, including Canada, Alaska and the Arctic, Russia, the Middle East, South America, Mexico, Indonesia, the U.S. military and the U.S. utilities markets. We now have completed sales in all of these key markets.
Over the past several years of marketing this product and evaluating customer acceptance, we have gained valuable information and have modified our marketing and product development strategies accordingly. These strategies include the development of several markets outside of our traditional oilfield market. These new markets include infrastructure construction applications, particularly for maintenance and upgrades of electric utility transmission lines in response to increasing demand for electricity in many parts of the country, and for other infrastructure construction applications and temporary roads for movement of oversized or unusually heavy loads. Approximately one-third of our composite mat sales to date have been to customers in markets outside of our oilfield market.
We recently completed the acquisition of the third-party ownership in our Dura-Base® mat manufacturing facility and are now in a position to implement several improvements to that product family based on our experience with rental and sales of this product.
We have recently begun marketing the first production run of our new lightweight Bravo Mat™ system and believe that it will substantially broaden the opportunities in mat sales in 2005. This new mat system has been designed specifically for personnel applications by the U.S. military, including walkways and tent flooring, but is likely to have many other applications.
E&P Waste Disposal. In the first quarter of 2005, changes we made in our recycling processes in the Gulf Coast temporarily reduced our capacity in this market, resulting in a decline in waste volume received in the quarter. With the process changes in place, we are now back to full capacity and expect to see an increase in waste volumes received in this market, consistent with the recent improvement in activity.
We continue to enter new markets for our environmental services as opportunities arise. During the third quarter of 2003 we opened a disposal facility serving Wyoming’s Jonah-Pinedale trend, and we have already committed to an expansion of that facility. Each geographic area has its unique challenges with respect to environmental matters, and we continue to meet these challenges by developing and applying new and innovative technologies.
We have recently announced the formation of Newpark Environmental Water Solutions, LLC (“NEWS”), through which we intend to commercialize the ARMEL Activator technology, a proprietary and patented water treatment technology. The new technology employs principles of sonochemistry to remove dissolved solids from the wastewater. If
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necessary, it can then be introduced into conventional treatment processes, rendering those processes much more effective and economical. During the first quarter of 2005, NEWS took delivery of the first water treatment plant, which is being installed at our Boulder Wyoming plant, and will service customers in the Jonah-Pinedale field. We expect first revenues for NEWS in the second quarter of 2005.
NEWS was also awarded its first contract for processing produced water from coal bed methane production near Gillette, Wyoming, and we expect a plant at that location to be on line in June 2005. Field tests in the western Canadian oil sands market are also scheduled to begin in June 2005.
Other Market Trends
Current short-term industry forecasts suggest that we could see a slight increase in the number of rigs active in our primary Gulf Coast market, but this increase is expected to develop slowly as customers react to the changing risk profile of the market. The number of rigs active in the offshore and inland water Gulf Coast markets is expected to increase slowly due to a lack of rigs of adequate capability. We anticipate continued revenue growth in the markets we serve, driven by increased market penetration of critical, deep water and geologically deeper wells. This market penetration is the result of our performance and continued success of new products, including our DeepDrill™ and FlexDrill™ families of products.
Current long-term industry analyses forecast difficulty in meeting anticipated growing demand for natural gas. In addition, current gas reserves are being depleted at a rate faster than replacement through current drilling activities. Many shallow fields in the Gulf Coast market have been heavily exploited. Improved economics and technology have increased the interest of producers to drill at greater depths to reach the larger gas reserves. We expect gas drilling activity to be increasingly associated with deeper, more costly wells. We view this trend as favorable to demand for product offerings in all of our segments.
Results of Operations — Quarter Ended March 31, 2005 Compared to Quarter Ended March 31, 2004
Summarized financial information concerning Newpark’s reportable segments is shown in the following table (dollars in millions):
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The figures above are shown net of intersegment transfers.NM — Not meaningful
Fluids Sales and Engineering:
Revenues
Total revenue by region for this segment was as follows for the three months ended March 31, 2005 and 2004 (dollars in millions):
The average number of rigs we serviced in the North American market increased by 31%, from 164 in the first quarter of 2004 to 215 in the first quarter of 2005. Average annual revenue per rig in the North American market decreased by 8%, from $1.3 million in the first quarter of 2004 to $1.2 million in the first quarter of 2005.
Revenues in our primary Gulf Coast market for the first quarter of 2005 were 55% higher as compared to the prior year. In the Gulf Coast market we serviced an average of 76 rigs in the first quarter of 2005, as compared to 47 in the first quarter of 2004, an increase of 62%. We have significantly improved our key drilling fluid customer relationships in this market and believe that those customers will be increasingly active in
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the Gulf Coast market during the remainder of the year, though the total number of active rigs is not expected to increase. While revenues for the Gulf Coast market increased substantially in the first quarter of 2005, as compared to the first quarter of 2004, revenues from deepwater rigs declined. These deepwater rigs generate much higher revenues and margins than land rigs. As a result, this change in mix had a negative impact on operating margins for this segment. We anticipate that deepwater projects will increase by mid-year 2005.
In the U.S. Central region we serviced an average of 110 rigs in the first quarter of 2005, as compared to 84 in the first quarter of 2004, an increase of 31%. The average number of rigs operating in this region increased 14%, from 435 rigs in the first quarter of 2004 to 494 in the first quarter of 2005. The difference between the increase in the number of rigs serviced in this region and the number of rigs active in the region reflects our market penetration.
Revenues in the Canadian market declined 20% during the quarter ended March 31, 2005, as compared to the first quarter of 2004 while rig activity in the Canadian market was relatively flat period to period. The decline in revenues is principally due to an early break-up in the Canadian markets we service.
Revenues in the Mediterranean market declined 22% during the quarter ended March 31, 2005, as compared to the first quarter of 2004. During 2004, we focused the management of these operations on improving margins rather than increasing revenues. In addition, the decrease in Mediterranean revenues reflects the impact of 5% lower exchange rates on Euro based revenues in the first quarter of 2005, as compared to the first quarter of 2004, resulting from the decline of the U.S. dollar to the Euro.
Operating Income
Operating income for this segment increased $0.5 million in the first quarter of 2005 on a $15.5 million increase in revenues, as compared to the first quarter of 2004. The operating margin for this segment in the first quarter of 2005 was 8.3%, as compared to 9.5% in the first quarter of 2004. The decrease in operating margin was attributable to several factors. First, barite costs increased 28% in the first quarter of 2005, as compared to the first quarter of 2004, resulting in an increase in cost of sales of $1.2 million. This cost increase was only partially offset by price increases to customers. Second, unfavorable changes in the mix of work, principally in the Gulf Coast market, negatively impacted margins. Third, for the last several years we have continued to invest in personnel and other infrastructure to meet the needs of our expanding business opportunities for this segment. Expenses associated with this investment in infrastructure offset a significant portion of the increase in operating income resulting from the revenue increase. Finally, the unanticipated early breakup in Canada and costs related to the roll out of our New-100 oil-based fluid system in that market negatively impacted operating income.
Recent contracts have helped to stabilize barite costs, and increases in pricing are anticipated to recapture these costs in the second half of 2005. We anticipate an increase in the number of deepwater rigs serviced in the Gulf of Mexico market during the remainder of 2005 which should improve margins in our Gulf Coast operations. In addition, we anticipate margin improvements for our New-100 fluid system sold in Canada as this product gains market acceptance.
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E&P Waste Disposal:
Total revenue for this segment consists of the following for the three months ended March 31, 2005 and 2004 (dollars in millions):
E&P waste Gulf Coast revenues increased $0.4 million, or 4%, on a 4% decline in waste volumes received. During the first quarter of 2005, we received 771,000 barrels of E&P waste in the Gulf Coast market, compared to 804,000 barrels in the comparable period in 2004. The average revenue per barrel in the Gulf Coast market increased 6%, to $12.88, as compared to an average of $12.11 in 2004. The decline in volumes received, in spite of the increase in Gulf Coast rig activity, is principally related to a temporary capacity reduction in the first quarter of 2005 related to changes in our recycling processes. With the process changes in place, we are now back to full capacity and expect to see an increase in waste volumes received in this market, consistent with the recent improvement in activity.
The slight increase in Gulf Coast revenues was more than offset by a decrease in revenues within the western Canadian market, which was principally due to the early break-up in that market.
Waste disposal operating income declined $1.4 million in the first quarter of 2005 on a $1.8 million decrease in revenues, as compared to the first quarter of 2004. The decline in operating income reflects the combined effect of the revenue decline in Canada, the impact of temporary capacity reductions in the Gulf Coast market and the start-up costs associated with the new water treatment operations in Wyoming.
Mat and Integrated Services:
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Oilfield mat rental volume for the first quarter of 2005 totaled 4.4 million square feet at an average price of $1.12 per square foot. This compares to 4.4 million square feet at an average price of $0.85 per square foot in the first quarter of 2004. Our oilfield mat rental pricing has continued to improve as a result of increased utilization of our mat inventory related to reductions in available mat inventory and improvements in market activity.
Revenues from non-oilfield mat rentals, a premium margin market composed principally of utility and infrastructure construction markets, increased nearly seven-fold to $3.4 million in the first quarter of 2005, compared to $500,000 in the year ago period. We continue to believe that this market has growth opportunities due to the aging of our nation’s electrical power delivery infrastructure and increased demand for electricity.
Integrated services and other revenues, our lowest-margin business unit for this segment, includes a comprehensive range of environmental services necessary for our customers’ E&P activities. These revenues also include the operations of our sawmill in Batson, Texas.
During 2003 we transitioned our Canadian mat operations to principally a sales organization for wooden and composite mats. All of the Canadian revenues for the first quarters of 2005 and 2004 were related to sales of wooden mats. The increase in wooden mat sales is principally due to the unusually early break-up in Western Canada and continued acceptance of matting systems in this market as a means to improve the operating efficiency for our customers.
During the first quarter of 2005, we sold approximately 3,900 composite mats, resulting in $6.4 million in revenues, as compared to $2.9 million of revenue on approximately 2,200 mats sold in the first quarter of 2004. The significant 2005 sales were completed in support of several E&P operations in Canada and for use in Sakhalin Island, Russia.
Mat and integrated services operating income improved $6.2 million in the first quarter of 2005 on an $11.1 million increase in revenues, as compared to the first quarter of 2004. The significant increase in operating income reflects the leverage of this operating unit, which has been enhanced as a result of cost reductions which began in 2004, and the impact of continued improvement in pricing for our mat rental markets.
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General and Administrative Expense
General and administrative expense decreased $377,000 to approximately $2.1 million in the first quarter of 2005, as compared to the same period in 2004. The decrease is principally associated with a reduction in legal costs due to the settlement of certain litigation in the second half of 2004.
Foreign Currency Exchange Gains
Net foreign currency gains totaled $274,000 in the first quarter of 2005 as compared to net foreign currency losses of $108,000 in the first quarter of 2004. In the first quarter of 2005, the net foreign currency gains were primarily associated with our Mediterranean operations. In the first quarter of 2004, the net foreign currency losses were primarily associated with strengthening of the U.S. dollar against the Canadian dollar and the associated impact on short-term intercompany payable balances of our Canadian operations.
Interest Income/Expense
Net interest expense increased approximately $561,000 for the first quarter of 2005 compared to the first quarter of 2004. This increase was principally due to an increase in average outstanding debt of approximately $13.3 million, caused by an increase in capital expenditures and funding of working capital requirements, and a 32 basis point increase in average interest rates due to the continued increase in variable rates during 2004 and early 2005.
Provision for Income Taxes
For the quarter ended March 31, 2005, we recorded an income tax provision of $3.0 million, reflecting an income tax rate of 37.2%. For the quarter ended March 31, 2004, we recorded an income tax provision of $1.0 million, reflecting an income tax rate of 37.5%.
Liquidity and Capital Resources
Our working capital position was as follows:
During the first quarter of 2005, our working capital position increased by $2.2 million. Net trade accounts receivable increased $14.1 million during the first quarter of 2005 on a $15.4 million increase in revenues from the fourth quarter of 2004. During the first quarter of 2005, days’ sales in receivables were approximately 81 days, which is the same as the fourth quarter of 2004. We continue to monitor our accounts receivable positions and we have made working capital management a primary focus for our management. Partially offsetting the increase in accounts receivable was the $6.9 million
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reduction in inventories, primarily related to composite mat sales and the seasonal decline in log inventory.
We anticipate that our working capital requirements for 2005 will increase as a result of the expected improvement in revenue. Some of this expected increase in working capital requirements should be offset by our continued focus on improving our collection cycle. However, we have the ability to supplement our operating cash flows with borrowings under our credit facility to fund the expected increase in working capital. We believe we have adequate capacity under our credit facility to meet these anticipated working capital needs.
Cash generated from operations during the first quarter of 2005 totaled $6.9 million. This cash, along with increased borrowings on lines of credit of $6.4 million, was used principally to fund net capital expenditures of $10.4 million. Capital expenditures within our established business segments totaled $6.5 million, compared to $6.2 million in depreciation. We also invested $3.9 million in the first quarter for acquisition of the first two water treatment systems. We anticipate that 2005 capital expenditures will approximate 2005 depreciation and that we will fund capital expenditures with cash generated from operations.
Our long term capitalization was as follows:
The Senior Subordinated Notes accrue interest at the rate of 8 5/8%, require semi-annual interest payments and mature on December 15, 2007.
On February 25, 2004, our bank credit facility was converted into an asset-based lending facility (the “Credit Facility”). The Credit Facility matures on February 25, 2007. Under the Credit Facility, we can borrow up to $15 million in term debt and $70 million in revolving debt, for a total of $85 million. At March 31, 2005, $11.1 million was outstanding under the term portion of the Credit Facility. Eligibility under the revolving portion of the Credit Facility is based on a percentage of our eligible consolidated accounts receivable and inventory, as defined in the Credit Facility. At March 31, 2005, the maximum amount we could borrow under the revolving portion of the Credit Facility was $63.7 million. At
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March 31, 2005, $15.0 million in letters of credit were issued and outstanding and $33.0 million was outstanding under the revolving portion of the Credit Facility, leaving $15.7 million of availability at that date. The Credit Facility bears interest at either a specified prime rate (5.75% at March 31, 2005), or the LIBOR rate (3.10% at March 31, 2005), in each case plus a spread determined quarterly based upon a fixed charge coverage ratio. The weighted average interest rates on the outstanding balances under the credit facilities for the three months ended March 31, 2005 and March 31, 2004 were 6.2% and 5.1%, respectively.
The Credit Facility is secured by substantially all of our domestic assets and the assets of our domestic subsidiaries. The Credit Facility contains a fixed charge coverage ratio covenant and a tangible net worth covenant. As of March 31, 2005, we were in compliance with the covenants contained in the Credit Facility, as amended. The Notes do not contain any financial covenants; however, if we do not meet the financial covenants of the Credit Facility and are unable to obtain an amendment from the banks, we would be in default of the Credit Facility which would cause the Notes to be in default and immediately due. The Notes, the Credit Facility and the certificate of designation relating to our preferred stock also contain covenants that significantly limit the payment of dividends on our common stock.
The Barite Facilities Financing is a $15 million term loan facility that bears interest at one-month LIBOR plus 3.75% (6.34% at March 31, 2005) payable monthly, and matures August 1, 2009. Principal payments are required monthly based on an amortization period of 12 years, with a balloon payment at the maturity date. The Barite Facilities Financing is collateralized by our four barite facilities and requires compliance with various financial and nonfinancial covenants. The financial covenants require us to maintain a minimum fixed charge coverage ratio and a minimum tangible net worth. We were in compliance with these covenants at March 31, 2005. At March 31, 2005, $14.2 million was outstanding under this agreement.
The Mexico Mat Financing consists of two term loan facilities totaling $6.8 million, bears interest at 7% payable monthly and matures August 1, 2007. Principal payments are required monthly based on an amortization period of 5 years, with a balloon payment at the maturity date. The Mexico Mat Financing is collateralized by the composite mats of our Mexican operation. At March 31, 2005, $6.1 million was outstanding under these arrangements.
Ava, S.p.A (“Ava”), our European drilling fluids subsidiary, maintains its own credit arrangements, consisting primarily of lines of credit with several banks, with the lines renewed on an annual basis. Advances under these credit arrangements are typically based on a percentage of Ava’s accounts receivable or firm contracts with certain customers. As of March 31, 2005, Ava had a total of $10.0 million outstanding under these facilities. We do not provide a corporate guarantee of Ava’s debt.
At December 31, 2004, we had issued a guarantee for certain lease obligations of a joint venture which supplied a portion of our wooden mats on a day rate leasing basis (“MOCTX”). The amount of this guarantee as of December 31, 2004 was $4.2 million. In January 2005, MOCTX was dissolved and we took possession of the underlying assets and assumed the obligations under the leases. We recorded these leases as capital leases in accordance with FAS 13. At March 31, 2005, $3.6 million was outstanding under these
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capital leases.
At March 31, 2005, we had issued a guarantee of certain debt obligations of the manufacturer of our composite mats, The Loma Company, LLC (“LOMA”). This guarantee was backed by a letter of credit. The amount of this guarantee as of March 31, 2005 was $6.2 million. The underlying debt obligation of LOMA matures in December 2008. As a result of LOMA’s insufficient cash, beginning in September 2004, we made debt service payments on behalf of LOMA in connection with our guarantee. Debt service payments made on behalf of LOMA totaled $984,000 through March 31, 2005. This amount has been recorded as a receivable from LOMA and is included in other long term assets as of March 31, 2005. Since our guarantee was secured by a letter of credit, there has been no impact on the availability under our Credit Facility as a result of the debt service payments made to date on behalf of LOMA or any future debt service payments that could be made as a result of the guarantee.
On April 18, 2005, we acquired OLS Consulting Services, Inc. (“OLS”) in exchange for a cash payment of $1.3 million. The principal assets of OLS included the patents licensed to LOMA for use in the manufacture of the mats, a note receivable from LOMA and OLS’ 51% membership interest in LOMA. As a result of the acquisition of OLS, through two of our subsidiaries, we own 100% of LOMA and the parties and their affiliates mutually dismissed all previously pending litigation. As a result of this acquisition, we now own all of the outstanding equity interests in LOMA. As a result, in the second quarter of 2005 we will consolidate the balance sheet and results of operations for LOMA with our financial statements, including the current debt balances of LOMA. We are presently working with the Credit Facility lenders to refinance LOMA’s obligations on a long-term basis and expect this refinancing to be completed by the end of the second quarter of 2005.
With respect to additional off-balance sheet liabilities, we lease most of our office and warehouse space, rolling stock and certain pieces of operating equipment under operating leases.
Except as described in the preceding paragraphs, we are not aware of any material expenditures, significant balloon payments or other payments on long-term obligations or any other demands or commitments, including off-balance sheet items to be incurred within the next 12 months. Inflation has not materially impacted our revenues or income.
Critical Accounting Policies.
Our consolidated financial statements are prepared in accordance with United States generally accepted accounting principles, which requires us to make assumptions, estimates and judgments that affect the amounts reported. We periodically evaluate our estimates and judgments related to uncollectible accounts and notes receivable, inventory, customer returns, 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.
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For additional discussion of our critical accounting 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, 2004. Our critical accounting policies have not changed materially since December 31, 2004.
New Accounting Standards.
In December 2004, the Financial Accounting Standards Board (“FASB”) issued FAS 123 (revised 2004), “Share-Based Payment,” (“FAS 123(R)”) which is a revision of FAS 123, “Accounting for Stock-Based Compensation.” FAS 123(R) supersedes Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and amends FAS 95, “Statement of Cash Flows.” Generally, the approach in FAS 123(R) is similar to the approach described in FAS 123. However, FAS 123(R) requires that all share-based payments to employees, including grants of employee stock options, be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. FAS 123(R) permits adoption of its requirements using one of two methods: (1) a “modified prospective” method in which compensation cost is recognized beginning with the effective date of FAS 123(R) (a) based on the requirement of FAS 123(R) for all share-based payments granted after the effective date and (b) based on the requirements of FAS 123 for all awards granted prior to the effective date of FAS 123(R) that remain unvested on the effective date; and (2) a “modified retrospective” method which includes the requirements of the modified prospective method previously described, but also permits restatement of prior periods based on the amounts previously reported in pro forma disclosures under FAS 123. We currently plan to adopt FAS 123(R) using the modified prospective method. On April 14, 2005, the Securities and Exchange Commission announced amended compliance dates for SFAS 123(R). The Commission previously required companies to adopt this standard no later than July 1, 2005, but the new rules now require that we adopt FAS 123(R) starting with our first quarter of our fiscal year beginning January 1, 2006.
As permitted by FAS 123, we currently account for stock-based compensation using Accounting Principles Board (“APB”) 25’s intrinsic value method and, as such, generally recognize no compensation cost for employee stock options. Accordingly, the adoption of FAS 123(R) will likely have a material impact on our results of operations. However, we cannot predict the ultimate impact of adoption of FAS 123(R) at this time because the impact will depend on levels of share-based payments granted in the future. However, had we adopted FAS 123(R) in prior periods, the impact for the three months ended March 31, 2005 and March 31, 2004, would have approximated the impact of FAS 123 as described in the disclosure of pro forma net income and earnings per share in Note 3 to our consolidated financial statements.
In November 2004, the FASB issued FAS 151, “Inventory Costs-an amendment of ARB No. 43, Chapter 4,” to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material (spoilage). FAS 151 requires that these items be recognized as current-period charges regardless of whether they meet a criterion of “so abnormal.” FAS 151 also requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. FAS 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. We cannot currently determine the impact that adoption of FAS 151 will have on Newpark’s financial results.
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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. We do not believe that we have a material exposure to market risk. Historically, we have not entered into derivative financial instrument transactions to manage or reduce market risk or for speculative purposes. However, during the quarter ended March 31, 2005, we did enter into a foreign currency forward contract arrangement. A discussion of our primary market risk exposure in financial instruments as well as the foreign currency forward contract is presented below.
Interest Rate Risk
Our policy has historically been to manage exposure to interest rate fluctuations by using a combination of fixed and variable-rate debt. At March 31, 2005, we had total debt outstanding of $208.5 million, of which $125 million, or 60%, relates to our Senior Subordinated Notes (the “Notes”) that bear interest at a fixed rate of 8.625%. The remaining $83.5 million of debt outstanding at March 31, 2005 bears interest at a floating rate. At March 31, 2005, the weighted average interest rate under our floating-rate debt was approximately 6.0%. Assuming a 200 basis point increase in market interest rates during 2005, our annual interest expense would increase approximately $1.0 million, net of taxes, resulting in a $0.01 per diluted share reduction in annual earnings.
The Notes mature on December 15, 2007. There are no scheduled principal payments under the Notes prior to the maturity date. However, all or some of the Notes may be redeemed at a premium after December 15, 2002. We have no current plans to repay the Notes ahead of their scheduled maturity.
Foreign Currency
Our principal foreign operations are conducted in Canada and in areas surrounding the Mediterranean Sea. We have foreign currency exchange risks associated with these operations, which are principally conducted in the functional currency of the jurisdictions in which we operate. Historically, we have not used off-balance sheet financial hedging instruments to manage foreign currency risks when we enter into a transaction denominated in a currency other than our local currencies because the dollar amount of these transactions has not warranted our using hedging instruments. However, during the quarter ended March 31, 2005, our Canadian subsidiary committed to purchase approximately $2.0 million of barite from one of our U.S. subsidiaries and we entered into a foreign currency forward contract arrangement to reduce the exposure to foreign currency fluctuations related to this commitment. The forward contract requires that the Canadian subsidiary purchase approximately $2.0 million U.S. dollars at a contracted exchange rate of 1.2496 over a two year period. At March 31, 2005, the fair value of this forward contract represents a loss of approximately $69,000.
During the three months ended March 31, 2005 and 2004, we reported foreign currency (gains) losses of $(274,000) and $108,000, respectively. These transactional gains and losses were primarily due to exchange rate fluctuations related to monetary asset balances denominated in currencies other than the functional currency, including intercompany advances which are deemed to be short-term in nature. We estimate that a
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hypothetical 10% movement of all applicable foreign currency exchange rates would affect annual earnings by approximately $500,000, due to the revaluing of these monetary assets and intercompany balances.
Assets and liabilities of our foreign subsidiaries are translated using the exchange rates in effect at the balance sheet date, resulting in translation adjustments that are reflected in accumulated other comprehensive loss in the stockholders’ equity section of our balance sheet. Included in comprehensive income are translation losses of $625,000 and $767,000 for the quarters ended March 31, 2005 and 2004, respectively. As of March 31, 2005, net assets of foreign subsidiaries included in our consolidated balance sheet totaled $37.5 million. We estimate that a hypothetical 10% movement of all applicable foreign currency exchange rates would affect other comprehensive income by approximately $3.8 million.
Fair Value of Financial Instruments
The fair value of cash and cash equivalents, net accounts receivable, accounts payable and variable rate debt approximated book value at March 31, 2005. The fair value of the 8.625% Notes totaled $123.4 million at March 31, 2005. The fair value of the Notes has been estimated based on quotes from the lead broker.
ITEM 4. Controls and Procedures
Our chief executive officer and chief financial officer, with the participation of management, have evaluated the effectiveness of our “disclosure controls and procedures” (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on their evaluation, they have concluded that our disclosure controls and procedures (1) are effective in timely alerting them to material information relating to Newpark (including our consolidated subsidiaries) required to be disclosed in our periodic filings with the Securities and Exchange Commission and (2) are adequate to ensure that information required to be disclosed by us in the reports filed or furnished by us under the Securities Exchange Act of 1934, as amended, is recorded, processed and summarized and reported within the time periods specified in the rules and forms of the Security and Exchange Commission. It should be noted that in designing and evaluating the disclosure controls and procedures, our management recognized that any control or procedure, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. We have designed our disclosure controls and procedures to reach a level of reasonable assurance of achieving the desired objectives and, based on the evaluation described above, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q were effective at reaching that level of reasonable assurance.
There were no significant changes in our internal controls over financial reporting or in other factors that could significantly affect these controls during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
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PART II
ITEM 1. Legal Proceedings
The information set forth in Note 9, Legal Matters, to our consolidated financial statements included in this report is incorporated by reference into this Item 1.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
ITEM 3. Defaults Upon Senior Securities
ITEM 4. Submission of Matters to a Vote of Security Holders
Not applicable.
ITEM 5. Other Information
ITEM 6. Exhibits
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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: May 2, 2005
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EXHIBIT INDEX