NPK International - 10-Q quarterly report FY

 

 

(Exact name of registrant as specified in its charter)

(281) 362-6800
(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

 

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995, as amended. We also may provide oral or written forward-looking statements in other materials we release to the public. The words “anticipates,” “believes,” “estimates,” “expects,” “plans,” “intends,” and similar expressions are intended to identify these forward-looking statements but are not the exclusive means of identifying them. These forward-looking statements reflect the current views of our management; however, various risks, uncertainties and contingencies, including the risks identified in Item 1A, “Risk Factors,” in Part I of our Annual Report on Form 10-K for the year ended December 31, 2007, and those set forth from time to time in our filings with the Securities and Exchange Commission, could cause our actual results, performance or achievements to differ materially from those expressed in, or implied by, these statements, including the success or failure of our efforts to implement our business strategy.

We assume no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by securities laws. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this Quarterly Report on Form 10-Q might not occur.

For further information regarding these and other factors, risks and uncertainties affecting us, we refer you to the risk factors set forth in Part I of our Annual Report on Form 10-K for the year ended December 31, 2007.

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

(Unaudited)

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

(Unaudited)

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

(Unaudited)

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

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 and do not include all information and footnotes required by generally accepted accounting principles 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, 2007. The results of operations for the three and nine months ended September 30, 2008 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 September 30, 2008, the results of our operations for the three and nine months ended September 30, 2008 and 2007, and our cash flows for the nine months ended September 30, 2008 and 2007. All adjustments are of a normal recurring nature. Our balance sheet at December 31, 2007 has been derived from the audited financial statements at that date.

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. For further information, see Note 1 in our Annual Report on Form 10-K for the year ended December 31, 2007.

In March 2008, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133” (“SFAS 161”). SFAS 161 changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about (1) how and why an entity uses derivative instruments, (2) how derivative instruments and related hedged items are accounted for under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”), and its related interpretations, and (3) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. SFAS 161 is effective for fiscal years beginning after November 15, 2008.

In September 2006, the FASB issued SFAS No. 157 “Fair Value Measurements” (“SFAS 157”). This standard defines fair value, establishes a framework for measuring fair value in accounting principles generally accepted in the United States of America and expands disclosure about fair value measurements. SFAS 157 introduces a fair value hierarchy (levels 1 through 3) to prioritize inputs to fair value and classifies the measurements for disclosure purposes. This pronouncement applies whenever other accounting standards require or permit assets or liabilities to be measured at fair value. Accordingly, this statement does not require any new fair value measurements. SFAS 157 was effective for our 2008 fiscal year and interim periods within the 2008 fiscal year. The adoption of SFAS 157 did not have a material effect on our consolidated financial position or results of operations.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB Statement No. 115” (“SFAS 159”). This statement provides companies with an option to measure, at specified election dates, many financial instruments and certain other items at fair value that are not currently measured at fair value. A company will report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. This Statement also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. SFAS 159 was effective for our 2008 fiscal year and interim periods within the 2008 fiscal year. The adoption of SFAS 159 did not have a material effect on our consolidated financial position or results of operations as we elected not to adopt fair value accounting on applicable financial assets and liabilities.

In December 2007, the FASB issued SFAS No. 141(R) (revised 2007), “Business Combinations”, (“SFAS 141(R)”) which provides revised guidance on the accounting for acquisitions of businesses. This standard changes the current guidance, requiring that all acquired assets, liabilities, minority interest and certain contingencies be measured at fair value, and certain other acquisition-related costs be expensed rather than capitalized. SFAS 141(R) will apply to acquisitions that are effective after December 31, 2008, and application of the standard to acquisitions prior to that date is not permitted.

Following a comprehensive review of all of our businesses in 2007, we decided to explore strategic alternatives with regards to our Environmental Services business, which was historically reported as a third reportable segment. We initiated a sale process for this business and entered into an agreement in October 2007 to sell the U.S. Environmental Services business to Trinity TLM Acquisitions, LLC (“Trinity”) for $81.5 million in cash and potentially an additional $8 million which could be earned under a five-year earn out provision. In April 2008, this agreement was terminated as a result of Trinity’s inability to secure acceptable financing to complete the transaction and we entered into a new agreement with CCS Inc. to sell the U.S. Environmental Services business for $85 million in cash, subject to adjustment as provided in the agreement. The termination agreement with Trinity includes provisions for the payment of a $2.5 million transaction fee to Trinity in certain circumstances. On October 23, 2008, the Federal Trade Commission (“FTC”) filed suit in the United States District Court for the Southern District of Texas seeking a Temporary Restraining Order and Preliminary Injunction to prevent us and CCS from concluding the previously announced sale of our environmental services business. The FTC alleges that the proposed combination of CCS and our environmental services business would have an anti-competitive impact on the alleged markets. We disagree with the FTC’s position at this time and intend to oppose the FTC’s request to obtain a preliminary injunction preventing consummation of the proposed transaction. Simultaneous with the filing of the lawsuit in the Southern District of Texas, the FTC also filed an Administrative Complaint and has scheduled hearings before an Administrative Law Judge for January of 2009. If a preliminary injunction preventing consummation is granted and not overturned on appeal, we would expect to terminate the agreement with CCS for the sale of our environmental business and not go forward with the administrative hearings. If a preliminary injunction is finally denied, the Commission has the opportunity to withdraw its administrative complaint.

Discontinued operations includes all of the assets, liabilities and results of operations of the former Environmental Services segment, including the U.S. business described above, along with the Canadian operations, which were exited in the third quarter of 2007. Also, discontinued operations includes the results of a sawmill facility sold in August 2007 and the continued shut-down costs associated with the Newpark Environmental Water Solutions business (“NEWS”), which was exited in 2006.

Summarized results of operations from discontinued operations are as follows:

Assets and liabilities of discontinued operations are as follows:

In the third quarter of 2008, $1.7 million in property, plant and equipment previously classified as discontinued operations was reclassified to continuing operations as we have implemented a plan to utilize these assets in on-going operations.

In August 2007, we completed the acquisition of substantially all of the assets and operations of SEM Construction Company, headquartered in Grand Junction, Colorado (the “Colorado business”). The Colorado business is a full-service well site construction business engaged in construction, reclamation, maintenance, and general rig work for the oil and gas industry at drilling locations throughout Western Colorado. The financial results of this business are reported within the Mats and Integrated Services segment.

Total cash consideration paid was $21.3 million which was funded by borrowing on our revolving credit facility. The following table summarizes the estimated fair value of the assets acquired at the date of acquisition:

The Colorado business recorded revenues of $4.3 million and $10.2 million, and an operating income (loss) of $0.4 million and ($0.3) million during the three and nine months ended September 30, 2008, respectively, which included depreciation and amortization expense attributable to acquired assets of $0.6 million and $2.1 million during these respective periods.

We review goodwill and other intangible assets annually or as events or circumstances indicate that the carrying amount may not be recoverable. Should the review indicate that the carrying value is not fully recoverable, the amount of impairment loss is determined by comparing the carrying value to the fair value, which is estimated based on a combination of market multiple and discounted cash flow analysis.

The following table presents the reconciliation of the numerator and denominator for calculating income per share:

For the three and nine months ended September 30, 2008, we had dilutive stock options and restricted stock of approximately 1.6 million shares and 1.4 million shares, respectively. For the three and nine months ended September 30, 2007, we had dilutive stock options and restricted stock of approximately 0.9 million shares and 1.2 million shares, respectively. The resulting net effects of stock options and restricted stock were used in calculating diluted income per share for these periods.

Options and warrants to purchase a total of approximately 4.0 million shares and 4.1 million shares, of common stock were outstanding during the three and nine months ended September 30, 2008, respectively, but were not included in the computation of diluted income per share because they were anti-dilutive. Options and warrants to purchase a total of approximately 4.7 million shares and 3.9 million shares, of common stock were outstanding during the three and nine months ended September 30, 2007, respectively, but were not included in the computation of diluted income per share because they were anti-dilutive.

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 warrants by 2.5%, for each year we are not in compliance with the registration requirements and extend the term of the warrant. As of September 30, 2008, the Series B Warrant, as adjusted for certain anti-dilution provisions, remains outstanding and provides for the right to purchase up to 2,094,235 shares of our common stock at an exercise price of $9.14. We are currently not in compliance with the registration provisions and expect to establish an effective registration of this warrant by the end of 2008. Upon completion of the registration, the remaining life of the warrant will be approximately 28 months.

In February 2008, our Board of Directors approved a plan authorizing the repurchase of up to $25.0 million of our outstanding shares of common stock. As of September 30, 2008, we had repurchased 2,618,195 shares for an aggregate price of approximately $15.1 million. Of these repurchases, 732,195 were repurchased in the third quarter of 2008 for an aggregate price of $5.1 million. All of the shares repurchased are held as treasury stock. We record treasury stock purchases under the cost method whereby the entire cost of the acquired stock is recorded as treasury stock.

Receivables consisted of the following:

Inventory consisted of the following:

In the third quarter of 2008, $4.2 million of raw materials inventory which serves as a permanent sub-surface for our barite ore, was reclassified to property, plant and equipment.

In connection with our announcement regarding an internal investigation commissioned by our Audit Committee in April 2006, and subsequent announcements, we were served with a number of shareholder class action and derivative lawsuits. These suits asserted claims against us and certain of our former officers and current and former directors alleging damages resulting from the loss of value in our common stock and, derivatively, for damages we allegedly suffered.

In April 2007, we announced that we reached a settlement of our pending derivative and class action litigation. The settlement received final approval from the U.S. District Court for the Eastern District of Louisiana on October 9, 2007. Under the terms of the settlement, we paid $1.6 million which was accrued in the first quarter of 2007, and our directors and officers’ liability insurance carrier paid $8.3 million. A portion of these amounts were used to pay administration costs and legal fees. This settlement resolved all pending shareholder class and derivative litigation against us, our former and current directors, and former officers. As part of the settlement, however, we preserved certain claims against our former Chief Executive Officer and Chief Financial Officer for matters arising from invoicing irregularities at Soloco Texas, LP and the backdating of stock options.

By letter dated April 25, 2007, counsel for James D. Cole, our former Chief Executive Officer and former director, notified us that Mr. Cole is pursuing claims against us for breach of his employment agreement and other causes of action. Mr. Cole seeks recovery of approximately $3.1 million purportedly due under his employment agreement and reimbursement of certain defense costs incurred in connection with the shareholder litigation and our internal investigation. Mr. Cole also claims that he is entitled to the sum of $640,000 pursuant to the non-compete provision of his employment agreement. Pursuant to the terms of his employment agreement, this matter has been submitted to arbitration. We have deposited $320,000 representing the first installment due under the employment agreement in a trust account, subject to further order from the arbitrator. We have also submitted to the same arbitration proceedings the claims preserved against Mr. Cole arising from the derivative litigation referenced above.

On November 2, 2007, we were served with a lawsuit filed on behalf of Matthew Hardey, our former Chief Financial Officer, against Newpark Resources and Paul L. Howes, our current Chief Executive Officer. The lawsuit was filed on October 9, 2007, in the 24th Judicial District Court in Jefferson Parish, Louisiana. We have removed this case to Federal Court (United States District Court for the Eastern District of Louisiana). The lawsuit includes a variety of allegations arising from our internal investigation and Mr. Hardey’s termination, including breach of contract, unfair trade practices, defamation, and negligence. The lawsuit does not specify the amount of damages being sought by Mr. Hardey. We dispute the allegations in the lawsuit and intend to vigorously defend our position.

The outcomes of the Cole and Hardey proceedings are not certain; however it is the opinion of management that any liability in these matters should not have a material effect on our consolidated financial statements.

On March 12, 2007, we were advised that the Securities and Exchange Commission (“SEC”) has opened a formal investigation into the matters disclosed in Amendment No. 2 to our Annual Report on Form 10-K/A filed on October 10, 2006. On September 30, 2008, Newpark’s former auditors, Ernst and Young, were served with a subpoena by the SEC requesting documents in its possession relating to Newpark. We are cooperating with the SEC in their investigation.

In addition, we and our subsidiaries are involved in litigation and other claims or assessments on matters arising in the normal course of business. In the opinion of management, any recovery or liability in these matters should not have a material effect on our consolidated financial statements.

In the ordinary course of conducting our business, we become involved in judicial and administrative proceedings involving governmental authorities at the federal, state and local levels, as well as private party actions. We believe that none of these matters involves material exposure. We cannot assure you, however, that this exposure does not exist or will not arise in other matters relating to our past or present operations.

Recourse against our insurers under general liability insurance policies for reimbursement in the actions described above is uncertain as a result of conflicting court decisions in similar cases. In addition, certain insurance policies under which coverage may be afforded contain self-insurance levels that may exceed our ultimate liability.

We believe that any liability incurred in the environmental matters described above will not have a material adverse effect on our consolidated financial statements.

As of September 30, 2008 and December 31, 2007, we had outstanding guarantee obligations totaling $8.5 million, in connection with facility closure bonds and other performance bonds issued by insurance companies.

The segment data has been reclassified to exclude the results of discontinued operations, as described in Note 2. Summarized financial information concerning our reportable segments is shown in the following table (net of inter-segment transfers):

The following discussion of our financial condition, results of operations, liquidity and capital resources should be read together with our consolidated financial statements and notes to consolidated financial statements contained in this report as well as our Annual Report on Form 10-K for the year ended December 31, 2007.

We are a diversified oil and gas industry supplier, and we currently have two reportable segments: Fluids Systems and Engineering, and Mats and Integrated Services. We provide these products and services principally to the E&P industry in the U.S. Gulf Coast, West Texas, U.S. mid-continent, U.S. Rocky Mountains, Canada, Mexico, Brazil, United Kingdom (“U.K.”) and areas of Europe and North Africa surrounding the Mediterranean Sea. Further, we are expanding our presence outside the E&P sector through our Mats and Integrated Services segment, where we are marketing to utilities, municipalities, and government sectors.

As previously reported, following a comprehensive review of all of our businesses in 2007, we decided to explore strategic alternatives with regards to our Environmental Services business, which was historically reported as a third reportable segment. We initiated a sale process for this business and entered into an agreement in October 2007 to sell the U.S. Environmental Services business to Trinity TLM Acquisitions, LLC (“Trinity”) for $81.5 million in cash and potentially an additional $8 million which could be earned under a five-year earn out provision. In April 2008, this agreement was terminated as a result of Trinity’s inability to secure acceptable financing to complete the transaction due to the difficult credit markets and we entered into a new agreement with CCS Inc. (“CCS”) to sell the U.S. Environmental Services business for $85 million in cash, subject to adjustment as provided in the agreement. The termination agreement with Trinity includes provisions for the payment of a $2.5 million transaction fee to Trinity in certain circumstances. On October 23, 2008, the Federal Trade Commission (“FTC”) filed suit in the United States District Court for the Southern District of Texas seeking a Temporary Restraining Order and Preliminary Injunction to prevent us and CCS from concluding the previously announced sale of our environmental services business. The FTC alleges that the proposed combination of CCS and our environmental services business would have an anti-competitive impact on the alleged markets. We disagree with the FTC’s position at this time and intend to oppose the FTC’s request to obtain a preliminary injunction preventing consummation of the proposed transaction. If a preliminary injunction preventing consummation is granted and not overturned on appeal, we would expect to terminate the agreement with CCS for the sale of our environmental business.

Another key element of our previously communicated strategic plan is to leverage our existing platform of international operations to drive further expansion into high-growth international markets. During the first nine months of 2008, we have made significant progress in expanding our presence in the Brazilian market. As announced earlier this year, we were awarded a significant deepwater offshore project, and have since completed the construction of a $4.6 million fluids plant to serve this market. During the nine months ended September 30, 2008, we have generated $8.6 million of revenue in this growing market. Also, we expect to sign the Lot B contract with Petroleo Brasileiro S.A. (“Petrobras”) in November 2008, to provide drilling fluids and related services for both onshore and offshore locations beginning in 2009. This contract is valued by Petrobras at approximately 350 million Brazilian Reals (approximately $165 million USD at current exchange rates) and is expected to have a term of 5 years.

In February 2008, our Board of Directors approved a plan authorizing the repurchase of up to $25.0 million of our outstanding shares of common stock. As of September 30, 2008, we had repurchased 2,618,195 shares for an aggregate price of approximately $15.1 million. Of these repurchases, 732,195 were repurchased in the third quarter of 2008 for an aggregate price of $5.1 million.

The recent volatility in credit markets and commodity prices has created an uncertain outlook for drilling activity. This volatility is expected to result in some decline in E&P spending during the fourth quarter of 2008 and early 2009 from the levels experienced in recent quarters.

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 commodity pricing, inventory levels and product demand. Rig count data is the most widely accepted indicator of drilling activity. Key average rig count data for 2008 and 2007 are as follows:

Summarized financial information for our reportable segments is shown in the following table (net of inter-segment transfers):

Total revenues for this segment consisted of the following:

North American drilling fluid and engineering revenues increased 43% to $111.0 million for the quarter ended September 30, 2008, as compared to $77.5 million for the quarter ended September 30, 2007. This increase in revenues is largely attributable to an increase in market activity as well as an increase in our market share. As noted above, North American rig activity increased 13% during this period. During this same period, the number of rigs serviced by this business segment increased 38% reflecting our continued market share growth within the markets that we service.

In the quarter ended September 30, 2008, our Mediterranean and South American revenues increased 46% over the same period in 2007. This revenue increase was driven largely by the increased rig activity and continued market penetration into the North African and Eastern European markets, a $2.1 million increase due to the euro to US dollar translation rate, along with a $4.7 million increase in revenues generated in Brazil in the 2008 period.

Revenues in our completion fluids and services business increased 44% for the quarter ended September 30, 2008, as compared to the same period in 2007, due to strong demand for rental equipment and transportation services for well completion activities in the Mid-continent region served by this business.

Revenues in our industrial materials business increased 64% for the quarter ended September 30, 2008, as compared to the same period in 2007, resulting from a 22% increase in sales volume, along with significant pricing increases to help offset higher barite transportation costs.

Operating income for this segment increased $10.1 million for the quarter ended September 30, 2008 on a $59.0 million increase in revenues, compared to the same period in 2007, reflecting an increase in operating margin from 11.9% to 13.5%. The increase in operating profit includes an $8.6 million increase in operating profits on the $47.3 million increase in revenues from the North American operations (including completion fluids and services and industrial materials). During this same period, operating profits from the international operations increased $1.6 million on an $11.7 million increase in revenues, which included a $2.1 million revenue increase attributable to the strengthening euro exchange rate. Incremental profits associated with the international revenue increase is partially offset by higher operating expenses in our Brazil operations, as this business continues to ramp-up and prepare for future contracts.

Total revenues for this segment consisted of the following:

Total mat rental and integrated services revenues increased by $0.4 million in the quarter ended September 30, 2008, compared to the same period in 2007 as a $3.1 million increase in revenues generated by the Colorado business acquired in August 2007 was offset by a $2.7 million decline in rental and related service volume in other regions, primarily the Gulf Coast.

Mat sales primarily consist of export sales of composite mats to various international markets. Mat sales volume decreased by $1.6 million in the third quarter of 2008 from the comparable period of 2007, as mats sales volumes typically fluctuate significantly based on the specific timing of large order deliveries.

Mats and integrated services operating income decreased by $3.4 million for the quarter ended September 30, 2008 on a $1.2 million decrease in revenues compared to the same period in 2007, reflecting a decrease in operating margins to 5.0% from 19.1%. The decrease in operating margin is primarily attributable to the change in sales mix, along with certain charges incurred in the third quarter of 2008. The Colorado business acquired in August of 2007 generated a $3.1 million increase in revenues and a $0.2 million increase in operating profits in the third quarter of 2008 compared to the third quarter of 2007. The remainder of the business, which primarily consists of the Gulf Coast service business and mat sales, experienced a $4.3 million decrease in revenues and a $3.6 million decrease in operating profits. The third quarter of 2008 included a $0.9 million charge for the transportation of rental mats to the United Kingdom for re-deployment in a rental agreement, under which the mats are being rented to customers within the U.K. utility industry. The remaining $2.7 million decrease in operating profits is attributable to the lower revenues, as reductions in operating expenses only partially offset the impact of the lower revenues.

General and administrative expense increased $2.2 million to $6.8 million for the quarter ended September 30, 2008 from the comparable period of 2007. The increase in expenses in the third quarter of 2008 includes a $0.8 million increase in charges for performance-based employee incentive programs, along with a $1.3 million increase in legal and related fees, including expenses associated with arbitration with our former Chief Executive Officer, strategic planning, and merger and acquisition projects.

Interest expense, net totaled $2.5 million for the quarter ended September 30, 2008 compared to $4.0 million for the quarter ended September 30, 2007. The decrease in interest expense is primarily attributable to lower interest rates in 2008 under the new credit facilities established in December 2007. As of September 30, 2008, the weighted average borrowing rate under the new credit facilities was 5.60% compared to a weighted average borrowing rate of 7.11% at September 30, 2007 under the former credit facilities.

The provision for income taxes for the quarter ended September 30, 2008 was $5.7 million, reflecting an income tax rate of 32.9%, compared to $4.0 million for the prior year period, reflecting an income tax rate of 34.2%. The lower effective rate in the 2008 period resulted from favorable adjustments identified in the completion of 2007 tax returns during the third quarter of 2008. The full year income tax rate for 2008 is projected to be between 33% and 34%.

Discontinued operations includes all of the assets, liabilities and results of operations associated with the former Environmental Services segment, including the U.S. business described above, along with the Canadian operations, which were exited in the third quarter of 2007. Also, discontinued operations includes the results of a sawmill facility sold in August 2007 and the on-going shut-down costs associated with the Newpark Environmental Water Solutions business (“NEWS”), which was exited in 2006.

During the quarter ended September 30, 2008, discontinued operations generated a pre-tax operating loss of $2.0 million, which includes $3.5 million of legal and selling costs associated with the pending sale of the Environmental Services business, including costs associated with our response to the second request from the Federal Trade Commission as part of the Hart-Scott-Rodino Act review. Also, the on-going U.S. environmental services business was negatively impacted by a temporary shut-down and property damage at most facilities following Hurricane Ike. This business generated an operating loss of $1.7 million in the period. Discontinued operations also included $0.3 million of shut-down expenses associated with the other exited businesses. The provision for income taxes was $0.8 million, reflecting an effective rate of 38.0%, resulting in a net loss from discontinued operations of $1.2 million.

During the quarter ended September 30, 2007, discontinued operations generated a pre-tax operating loss of $0.4 million, including a $1.9 million operating profit from the U.S. environmental services business, offset by a $1.1 million charge following the decision to exit the Canadian environmental business operations and a $0.9 million operating loss from the sawmill facility prior to its August 2007 sale. The provision for income taxes was $0.2 million, reflecting an effective rate of 46.9%, resulting in a net loss from discontinued operations of $0.2 million.

North American drilling fluid and engineering revenues increased 24% to $296.8 million for the nine months ended September 30, 2008, as compared to $239.5 million for the nine months ended September 30, 2007. While North American rig activity increased 7% during this period, the number of rigs serviced by this business segment increased 23% reflecting continued market share growth within the markets that we service.

In the nine months ended September 30, 2008, our Mediterranean and South American revenues increased 65% over the same period in 2007. This revenue increase was driven largely by the increased rig activity and continued market penetration into the North African and Eastern European markets, an $8.0 million increase due to euro to US dollar translation rate, along with an $8.6 million increase in revenues generated in Brazil in the 2008 period.

Revenues in our completion fluids and services business increased 27% for the nine months ended September 30, 2008, as compared to the same period in 2007, due to strong demand for rental equipment and services for well completion activities in the Mid-continent region served by this business.

Revenues in our industrial materials businesses increased 55% for the nine months ended September 30, 2008, as compared to the same period in 2007, resulting from a 16% increase in sales volume, along with significant pricing increases to help offset higher barite transportation costs.

Operating income for this segment increased $16.4 million for the nine months ended September 30, 2008 on a $128.9 million increase in revenues, compared to the same period in 2007, reflecting an increase in operating margin from 12.5% to 12.6%. This change includes a $13.8 million increase in operating profits on an $89.5 million increase in revenues from the North American operations. Operating profits from the international operations for the nine months ended September 30, 2008 increased $2.6 million on the $39.4 million increase in revenues, which included an $8.0 million revenue increase attributable to the strengthening euro exchange rate. Incremental profits associated with higher revenues were somewhat offset by higher operating expenses attributable to personnel, higher transportation and logistics costs due to the location of projects, and start-up costs associated with new contracts.

Total mat rental and integrated services revenues decreased by $2.2 million in the nine months ended September 30, 2008, compared to the same period in 2007 as a $9.0 million increase in 2008 revenues generated by the Colorado business acquired in August 2007 was more than offset by an $11.2 million decline in rental and related service volume in the Gulf Coast region, driven largely by weakness in the South Louisiana land rig count in 2008 compared to 2007.

Mat sales primarily consist of export sales of composite mats to various international markets. Mat sales volume increased by $4.3 million in the first nine month of 2008 from the comparable period of 2007, as mats sales volumes typically fluctuate significantly based on the specific timing of large order deliveries.

Mats and integrated services operating income decreased by $7.8 million to $3.6 million for the nine months ended September 30, 2008 on a $2.2 million increase in revenues compared to the same period in 2007, reflecting a decrease in operating margins to 5.2% from 17.2%. The decrease in operating margin is primarily attributable to the change in sales mix. The Colorado business acquired in August 2007 generated an increase in revenues of $9.0 million in the nine months ended September 30, 2008; however, operating profits from this business declined by $0.5 million over this period, partially due to a $1.9 million increase in depreciation and amortization related to acquired assets. Operating profits for the remaining operations, which primarily service the Gulf Coast area, declined by $7.3 million on a $6.8 million decline in revenue. As noted above, this $6.8 million decline in revenue included a $11.2 million decrease in rental and integrated services revenue, offset by a $4.3 million increase in mat sales. The high rate of flow-through of the revenues decline to operating profits is primarily due to the mix shift from rental and integrated service activities, which have a relatively fixed cost structure, as well as additional pricing pressure resulting from the significantly lower rig counts in the region. Also, the business recorded $3.2 million of pre-tax charges in the first nine months of 2008 related primarily to inventory and receivable write-downs, transportation costs for the re-deployment of rental mats, as well as severance and related costs associated with restructuring activities in this segment.

General and administrative expense decreased $1.2 million to $16.6 million for the nine months ended September 30, 2008 from the comparable period of 2007. The decrease is attributable to a $2.1 million decrease in legal expenses, including lower costs associated with the 2007 settlement of the shareholder class action and derivative litigation, along with a $0.6 million decline in costs related to corporate strategic planning projects. These decreases were partially offset by an increase in charges for performance-based employee incentive programs.

Interest expense, net totaled $8.4 million for the nine months ended September 30, 2008 compared to $12.2 million for the nine months ended September 30, 2007. The decrease in interest expense is primarily attributable to lower interest rates in 2008 under the new credit facilities established in December 2007. As of September 30, 2008, the weighted average borrowing rate under the new credit facilities was 5.60%, compared to a weighted average borrowing rate of 7.11% at September 30, 2007 under the former credit facilities.

The provision for income taxes for the nine months ended September 30, 2008 was $14.3 million, reflecting an income tax rate of 33.0%, compared to $10.6 million for the prior year period, reflecting an income tax rate of 35.2%.

During the nine months ended September 30, 2008, discontinued operations generated a pre-tax operating profit of $4.3 million, which includes an operating profit of $5.1 million from the on-going U.S. Environmental Services business, including $3.5 million of legal costs primarily associated with our response to the second request from the Federal Trade Commission as part of the Hart-Scott-Rodino Act review, and $0.7 million of shut-down expenses associated with the other exited businesses. The provision for income taxes was $1.6 million, reflecting an effective rate of 36.3%, resulting in a net income from discontinued operations of $2.8 million.

During the nine months ended September 30, 2007, discontinued operations generated a pre-tax operating profit of $0.7 million, including a $8.0 million operating profit from the U.S. Environmental Services business, offset by a $4.1 million loss from disposal, a $0.9 million charge related to the impairment of assets and settlement of outstanding claims in the NEWS business, a $1.1 million charge following the decision to exit the Canadian environmental business operations, along with a combined $1.9 million operating loss from these discontinued operations. The provision for income taxes was $0.3 million, resulting in net income from discontinued operations of $0.4 million.

Net cash provided by operating activities during the nine months ended September 30, 2008 totaled $37.2 million. Net income adjusted for non-cash items generated $62.8 million of cash during the period, while increases in working capital used $39.5 million of cash. The increase in working capital during the period includes a $49.2 million increase in receivables, resulting from the higher revenues generated in the period. Cash provided by operating activities of discontinued operations was $13.9 million.

Net cash used in investing activities during the nine months ended September 30, 2008 was $16.7 million, consisting primarily of capital expenditures. Net cash used in financing activities during the nine months ended September 30, 2008 totaled $17.0 million which included $15.1 million to repurchase outstanding shares under our stock repurchase program.

We anticipate that our working capital requirements for continuing operations will remain consistent with the changes in revenue in the near term. As described previously, our Board of Directors approved a plan authorizing the repurchase of up to $25.0 million of our outstanding shares of common stock, of which $15.1 million of common stock has been repurchased through September 30, 2008. We also anticipate capital expenditures in 2008 to be approximately $22.0 million. Cash generated by operations, availability under existing long-term credit agreements, and our continued focus on improving our collection cycle are expected to be adequate to fund our anticipated capital needs.

Our long term capitalization was as follows as of:

In December 2007, we entered into a $225.0 million Amended and Restated Credit Agreement (“Credit Agreement”) with a five-year term, expiring in December 2012. The Credit Agreement consists of a $175.0 million revolving credit facility along with a $50.0 million term loan (“Term Loan”), which is to be repaid through annual principal repayments of $10.0 million beginning in December 2008. There are no prepayment penalties should we decide to repay the Term Loan in part or in full prior to the scheduled maturity dates.

We can elect to borrow under the Credit Agreement at an interest rate either based on the prime rate plus a margin ranging from 0 to 100 basis points or at LIBOR plus a margin ranging from 150 to 250 basis points, both of which margins vary depending on our leverage. As of September 30, 2008, $150.0 million of the outstanding principal is bearing interest at LIBOR plus 200 basis points, or 5.61%, while the remaining $13.0 million in outstanding principal is bearing interest at Prime Rate plus 50 basis points, or 5.5%. 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 totals $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% plus the applicable LIBOR margin, which was 200 basis points at September 30, 2008, over the term of the loan. The weighted average interest rates on the outstanding balances under the credit facilities as of September 30, 2008 and December 31, 2007 were 5.60% and 6.95%, 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 September 30, 2008, $17.0 million in letters of credit were issued and outstanding and $113.0 million was outstanding under our revolving credit facility, leaving $45.0 million of availability at that date.

The Credit Agreement contains covenants normal and customary for lending facilities of this nature. The financial covenants include requirements to maintain certain thresholds for a fixed- charge coverage ratio, a consolidated leverage ratio, and a funded debt-to-capitalization ratio. As of September 30, 2008, we were in compliance with these financial covenants. The Credit Agreement also contains covenants that allow for, but limit, our ability to pay dividends, repurchase our common stock, and incur additional indebtedness.

Our consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles, which requires us to make assumptions, estimates and judgments that affect the amounts reported. We periodically evaluate our estimates and judgments related to uncollectible accounts and notes receivable, customer returns, reserves for obsolete and slow moving inventory, impairments of long-lived assets, including goodwill and other intangibles and our valuation allowance for deferred tax assets. Our estimates are based on historical experience and on our future expectations that we believe to be reasonable. The combination of these factors forms the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from our current estimates and those differences may be material.

For additional discussion of our critical accounting estimates and policies, see “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, 2007. Our critical accounting policies have not changed materially since December 31, 2007.

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.

Our policy historically has been to manage exposure to interest rate fluctuations by using a combination of fixed and variable-rate debt. At September 30, 2008, we had total debt outstanding of $173.3 million, all of which is subject to variable rate terms. As described above, we entered into interest rate swap agreements in January 2008 to effectively fix the underlying LIBOR rate on our borrowings under the Term Loan. Through these swap arrangements, we have effectively fixed the interest rate on $50.0 million, or 29%, of our total debt outstanding as of September 30, 2008. The fair value of the interest rate swap arrangements was a $0.1 million liability, net of tax as of September 30, 2008. The counterparties to the interest rate swap agreements are major financial institutions. The credit ratings and concentration of risks of these financial institutions are monitored on a continuing basis. In the unlikely event that the counterparties fail to meet the terms of the agreement, our exposure is limited to the LIBOR differential.

The remaining $123.3 million of debt outstanding at September 30, 2008 bears interest at a floating rate. At September 30, 2008, the weighted average interest rate under our floating-rate debt was approximately 5.55%. A 200 basis point increase in market interest rates during 2008 would cause our annual interest expense to increase approximately $1.7 million, net of taxes, resulting in $0.02 per diluted share reduction in annual earnings.

Our principal foreign operations are conducted in areas surrounding the Mediterranean Sea, Canada, Brazil and the United Kingdom. We have foreign currency exchange risks associated with these operations, which are conducted principally in the foreign currency of the jurisdictions in which we operate. Historically, we have not used financial hedging instruments to manage foreign currency risks when our businesses enter into a transaction denominated in a currency other than their functional currencies because the dollar amount of these transactions has not warranted our using hedging instruments.

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 are effective.

There has been no change in internal control over financial reporting during the quarter ended September 30, 2008 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

The information set forth in the legal proceedings section of Note 9, “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.

Information regarding risk factors appears in Item 1A to our Annual Report on Form 10-K for the year ended December 31, 2007. 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, 2007.

We currently secure the majority of our barite ore, which is a principal component of many drilling fluid systems, from foreign sources, primarily China and India. We rely upon the ability of our suppliers to mine the crude ore, provide the quality control function required to produce ore meeting market specifications and to manage the internal transportation and storage required to move the crude ore to designated ports for loading onto ocean vessels contracted by us. The internal logistics and supply chain infrastructure in China has struggled in keeping pace with the rapid expansion of China’s economy, resulting in periodic constraints in the supply of all raw materials. In addition, the supply of our barite ore is also vulnerable to other factors beyond our control including power shortages, political priorities (for example, the Olympic Games), and pending government imposed export fees in China as well as natural disasters such as the recent earthquake in Sichuan Province, China. Depending upon the extent of the damage and disruption caused by this earthquake to our suppliers and the transportation infrastructure, as well as the other factors listed above, our fluids systems and engineering segment as well as our operating results may be adversely affected.

Our business strategy has included, and will continue to include, growth both organically and through acquisitions. To the extent we do not generate sufficient cash from operations, we may need to incur additional indebtedness to finance our plans for growth. Recent turmoil in the credit markets and the potential impact on the liquidity of major financial institutions may have an adverse effect on our customer's and our ability to fund our business strategy through borrowings, under either existing or newly created instruments in the public or private markets on terms we believe to be reasonable.

(a) Not applicable

(b) Not applicable

(c) The following table details our repurchases of shares of our common stock, for the three months ended September 30, 2008:

In February 2008, our Board of Directors approved a stock repurchase plan authorizing the repurchase of up to $25 million of our outstanding shares of common stock. These purchases may be funded with borrowings under our revolving credit facility.

Not applicable.

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: October 31, 2008