newpark_10k-123112.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2012
OR
[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From      to
Commission File Number 1-2960

Newpark Resources, Inc.
(Exact name of registrant as specified in its charter)

Delaware
72-1123385
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)
   
2700 Research Forest Drive, Suite 100
 
The Woodlands, Texas
77381
(Address of principal executive offices)
(Zip Code)
   
Registrant’s telephone number, including area code (281) 362-6800
   
Securities registered pursuant to Section 12(b) of the Act:
    Name of each exchange
Title of each class
on which registered
Common Stock, $0.01 par value
New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:  None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
 
Yes     No  Ö_
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
 
Yes     No  Ö_
 
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  Ö   No _ _
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes _Ö    No___
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulations S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K      
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See definitions of “large accelerated filer”, “accelerated filer” and “small reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer    Ö                                                                                                Accelerated filer    
 
Non-accelerated filer   _   (Do not check if a smaller reporting company) Smaller Reporting Company     _
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.
 
Yes    No  Ö_
 
 
 

 
 
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant, computed by reference to the price at which the common equity was last sold as of June 30, 2012, was $514.9 million.  The aggregate market value has been computed by reference to the closing sales price on such date, as reported by The New York Stock Exchange.
 
As of February 13, 2013, a total of 85,652,284 shares of Common Stock, $0.01 par value per share, were outstanding.
 
Documents Incorporated by Reference

Pursuant to General Instruction G(3) to this Form 10-K, the information required by Items 10, 11, 12, 13 and 14 of Part III hereof is incorporated by reference from the registrant’s definitive Proxy Statement for its 2013 Annual Meeting of Stockholders.
 
 
 

 
 
NEWPARK RESOURCES, INC.
 
INDEX TO ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2012
 
 
PART I  3
       
  ITEM 1. Business  3
  ITEM 1A. Risk Factors 7
  ITEM 1B. Unresolved Staff Comments 13
  ITEM 2. Properties 13
  ITEM 3. Legal Proceedings 14
  ITEM 4. Mine Safety Disclosures 14
       
 PART II 14
       
 
ITEM 5.
Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
14
 
ITEM 6.
Selected Financial Data
16
 
ITEM 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
17
 
ITEM 7A.
Quantitative and Qualitative Disclosures about Market Risk
31
 
ITEM 8.
Financial Statements and Supplementary Data
32
 
ITEM 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
61
 
ITEM 9A.
Controls and Procedures 
61
 
ITEM 9B.
Other Information
65
     
 PART III 65
       
 
ITEM 10.
Directors, Executive Officers and Corporate Governance
65
 
ITEM 11.
Executive Compensation
65
 
ITEM 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
65
 
ITEM 13.
Certain Relationships and Related Transactions, and Director Independence
65
 
ITEM 14.
Principal Accounting Fees and Services
65
     
 PART IV 66
     
 
ITEM 15.
Exhibits and Financial Statement Schedules 66
   
Signatures
 72
 
 
1

 
 
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
 
This Annual Report on Form 10-K 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 information in other materials we release to the public.  Words such as “will”, “may”, “could”, “would”, “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, contingencies and other factors, some of which are beyond our control, are difficult to predict and 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, amend or clarify 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 Annual Report might not occur.
 
 
For further information regarding these and other factors, risks and uncertainties affecting us, we refer you to the risk factors set forth in Item 1A of this Annual Report on Form 10-K.
 
 
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PART I
 
ITEM 1.
Business
 
General
 
Newpark Resources, Inc. was organized in 1932 as a Nevada corporation. In 1991, we changed our state of incorporation to Delaware. We are a diversified oil and gas industry supplier providing products and services primarily to the oil and gas exploration (“E&P”) industry. We operate our business through three reportable segments: Fluids Systems and Engineering, Mats and Integrated Services, and Environmental Services.  Our Fluids Systems and Engineering segment provides customized drilling fluids solutions to E&P customers globally, operating through four geographic regions:  North America, Europe, the Middle East and Africa (“EMEA”), Latin America, and Asia Pacific.  Our Mats and Integrated Services segment provides composite mat rentals, well site construction and related site services to oil and gas customers at well, production, transportation and refinery locations in the U.S.  We also sell composite mats to E&P customers outside of the U.S., and to domestic customers outside of the oil and gas industry.  Our Environmental Services segment processes and disposes of waste generated by E&P and industrial activity, primarily along the U.S. Gulf Coast.
 
Our principal executive offices are located at 2700 Research Forest Drive, Suite 100, The Woodlands, Texas 77381. Our telephone number is (281) 362-6800. You can find more information about us at our website located at www.newpark.com. Our Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q, our Current Reports on Form 8-K and any amendments to those reports are available free of charge on or through our website. These reports are available as soon as reasonably practicable after we electronically file these materials with, or furnish them to, the Securities and Exchange Commission (“SEC”). Our Code of Ethics, our Corporate Governance Guidelines, our Audit Committee Charter, our Compensation Committee Charter and our Nominating and Corporate Governance Committee Charter are also posted to the corporate governance section of our website. We make our website content available for informational purposes only. It should not be relied upon for investment purposes, nor is it incorporated by reference in this Form 10-K. Information filed with the SEC may be read or copied at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C., 20549. Information on operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The SEC also maintains a website at www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, including us.
 
When referring to “Newpark” and using phrases such as “we”, “us” and “our”, our intent is to refer to Newpark Resources, Inc. and its subsidiaries as a whole or on a segment basis, depending on the context in which the statements are made.
 
Industry Fundamentals
 
Historically, several factors have driven demand for our products and services, including the supply, demand and pricing of oil and gas commodities, which drive E&P drilling and development activity.  Demand for most of our products and services is related to the level, type, depth and complexity of oil and gas drilling. The most widely accepted measure of activity for our North American operations is the Baker Hughes Rotary Rig Count.  In 2012, the average North America rig count was 2,283, compared to 2,298 in 2011, and 1,894 in 2010.  Outside of North America, drilling activity is generally more stable, as drilling activity in many countries is based upon longer term economic projections and multiple year drilling programs, which tend to minimize the impact of short term changes in commodity prices on overall drilling activity.
 
In our core North American markets, we have seen significant growth in drilling activity in deep shales and other hard rock formations with limited permeability in recent years.  These formations are being exploited with advanced fracture stimulation technology, which facilitates production of oil and natural gas from these formations and drives higher drilling activities.  In addition, while the average total North America rig count has decreased by only 1% from 2011 to 2012, there has been a significant regional shift in U.S. activity over this period.  This shift from dry gas drilling to oil and liquid-rich drilling resulted in a significant decline in several key dry gas basins, including the Haynesville shale (East Texas), Barnett (East Texas) and areas in the Rockies, largely offset by increases in oil and liquid-rich basins, including the Bakken (North Dakota), Eagle Ford (South Texas), Mississippian Lime (mid-continent) and Permian Basin (West Texas).  During periods of rapid transition such as 2012, operating expenses within our U.S. business units were elevated, as we re-deployed personnel and assets among regions and modified our regional business unit infrastructures to meet the changing activity levels.
 
 
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Internationally, we have seen continued growth in drilling activity, which is more heavily focused on oil, rather than natural gas exploration. The elevation of oil prices in recent years and the expectation of continued increases in world-wide demand have supported continued expansion of the international E&P activity.  In recent years, several international markets in which we operate, including Tunisia, Libya and Algeria experienced political unrest and at various times our operations in these countries have been interrupted or suspended.  While conditions in Libya have improved in recent months, the near term outlook for operations in these areas remains uncertain.
 
Reportable Segments
 
Fluids Systems and Engineering
 
Our Fluids Systems and Engineering business offers customized solutions, including highly technical drilling projects involving complex subsurface conditions such as horizontal, directional, geologically deep or deep water drilling. These projects require increased monitoring and critical engineering support of the fluids system during the drilling process.  We provide drilling fluids products and technical services to markets in North America, EMEA, Latin America, and the Asia Pacific region. Additionally, following our December 2012 acquisition of Alliance Drilling Fluids, LLC we distribute stimulation products (proppants), to customers in Texas. We also provide completion services and equipment rental to customers in Oklahoma and Texas.
 
We have industrial mineral grinding operations for barite, a critical raw material in drilling fluids products, which serve to support our activity in the drilling fluids market. We grind barite and other industrial minerals at facilities in Houston and Corpus Christi, Texas, New Iberia, Louisiana and Dyersburg, Tennessee. We use the resulting products in our drilling fluids business, and also sell them to third party users, including other drilling fluids companies. We also sell a variety of other minerals, principally to third party industrial (non oil and gas) markets, from our main plant in Houston, Texas and from the plant in Dyersburg, Tennessee.
 
Raw Materials — We believe that our sources of supply for materials and equipment used in our drilling fluids business are adequate for our needs, however, in the last two years, we experienced significant cost increases on barite ore. Our specialty milling operation is our primary supplier of barite used in our drilling fluids business. Our mills obtain raw barite ore under supply agreements from foreign sources, primarily China and India.  During 2011 and 2012, there has been a significant increase in world-wide demand for barite ore, and as result, we experienced significant cost increases in barite ore sourced from China.  In response to this development, we attempt to maintain our profitability by identifying other economical sources of barite ore and adjusting our customer pricing to offset the inflationary cost increases that we experienced.  We obtain other materials used in the drilling fluids business from various third party suppliers. We have encountered no serious shortages or delays in obtaining raw materials.
 
Technology — We seek patents and licenses on new developments whenever we believe it creates a competitive advantage in the marketplace. We own the patent rights to a family of high-performance water-based products, which we market as DeepDrill® and FlexDrill systems.  In addition, in 2010 we introduced Evolution®, a new water-based system which was designed to enhance drilling performance and provide environmental benefits.  Proprietary technology and systems is an important aspect of our business strategy. We also rely on a variety of unpatented proprietary technologies and know-how in many of our applications. We believe that our reputation in the industry, the range of services we offer, ongoing technical development and know-how, responsiveness to customers and understanding of regulatory requirements are of equal or greater competitive significance than our existing proprietary rights.
 
Competition — We face competition from larger companies, including Schlumberger, Halliburton and Baker Hughes, which compete vigorously on fluids performance and/or price.  In addition, these companies have broad product and service offerings in addition to their drilling fluids.  We also have smaller regional competitors competing with us mainly on price and local relationships. We believe that the principal competitive factors in our businesses include a combination of price, reputation, technical proficiency, reliability, quality, breadth of services offered and experience. We believe that our competitive position is enhanced by our proprietary products and services.
 
 
4

 
 
Customers — Our customers are principally major integrated and independent oil and gas E&P companies operating in the markets that we serve. During 2012, approximately 47% of segment revenues were derived from the 20 largest segment customers, and 66% of segment revenues were generated domestically. Typically, we perform services either under short-term standard contracts or under longer term “master” service agreements. As most agreements with our customers can be terminated upon short notice, our backlog is not significant. We do not derive a significant portion of our revenues from government contracts.  See Note 12 Segment and Related Information in Item 8. Financial Statements and Supplementary Data for additional information on financial and geographic data.
 
Mats and Integrated Services
 
We provide mat rentals, location construction and related well site services to E&P customers in the Northeast U.S., onshore U.S. Gulf Coast, and Rocky Mountain regions, and mat rentals to the petrochemical industry in the U.S. and the utility industry in the U.K. These mats provide environmental protection and ensure all-weather access to sites with unstable soil conditions.
 
We manufacture our DuraBase® Advanced Composite Mats for sales as well as for use in our domestic and international rental operations. Our marketing efforts for this product remain focused in principal oil and gas industry markets which include the Asia Pacific, Latin America, EMEA, as well as markets outside the E&P sector in the U.S. and Europe. We believe these mats have worldwide applications outside our traditional oilfield market, primarily in infrastructure construction, maintenance and upgrades of electric utility transmission lines, military logistics and as temporary roads for movement of oversized or unusually heavy loads.
 
Raw Materials — We believe that our sources of supply for materials and equipment used in our business are adequate for our needs. We are not dependent upon any one supplier and we have encountered no serious shortages or delays in obtaining any raw materials. The resins, chemicals and other materials used to manufacture composite mats are widely available. Resin is the largest raw material component in the manufacturing of our composite mat products.
 
Technology — We have obtained patents related to several of the components utilized in our DuraBase mats as well as the design and manufacture of our composite mats.  Using proprietary technology and systems is an important aspect of our business strategy. We believe that these products provide us with a distinct advantage over our competition. We believe that our reputation in the industry, the range of services we offer, ongoing technical development and know-how, responsiveness to customers and understanding of regulatory requirements also have competitive significance in the markets we serve.
 
Competition — Our market is fragmented and competitive, with many competitors providing various forms of site preparation products and services. We provide DuraBase mats to many customers, both domestic and international. The mat sales component of our business is not as fragmented as the oilfield services segment with only a few competitors providing various alternatives to our DuraBase mat products. This is due to many factors, including large capital start-up costs and proprietary technology associated with this product.  We believe that the principal competitive factors in our businesses include product capabilities, price, reputation, and reliability. We also believe that our competitive position is enhanced by our proprietary products, services and experience.
 
Customers — Our customers are principally integrated and independent oil and gas E&P companies operating in the markets that we serve. During 2012, approximately 76% of our segment revenues were derived from the 20 largest segment customers, of which, the largest customer represented 16% of our segment revenues.  Typically, we perform services either under short-term contracts or rental service agreements. As most agreements with our customers are cancelable upon short notice, our backlog is not significant. We do not derive a significant portion of our revenues from government contracts. See Note 12 Segment and Related Information in Item 8. Financial Statements and Supplementary Data for additional information on financial and geographic data.
 
 
5

 
 
 
Environmental Services
 
We process and dispose of waste generated by our oil and gas customers that is treated as exempt under the Resource Conservation and Recovery Act (“RCRA”). Primary revenue sources include onshore and offshore Gulf of Mexico drilling waste management as well as reclamation services. Additionally, we provide disposal services in the West Texas market. We operate six receiving and transfer facilities located along the U.S. Gulf Coast.  E&P waste is collected at the transfer facilities from drilling and production operations located offshore, onshore and within inland waters. Waste is accumulated at the transfer facilities and moved by barge through the Gulf Intracoastal Waterway to our processing and transfer facility at Port Arthur, Texas, and, if not recycled, is trucked to injection disposal facilities. Any remaining material is injected, after further processing, into environmentally secure geologic formations.
 
Under permits from Texas state regulatory agencies, we currently operate waste disposal facilities in Jefferson County, Texas (Fannett and “Big Hill”).  The Fannett site was placed in service in September 1995 and is our primary facility for disposing of E&P waste.  Utilizing this same technology, we also receive and dispose of non-hazardous industrial waste at the Big Hill facility, principally from generators in the U.S. Gulf Coast market, including refiners, manufacturers, service companies and industrial municipalities that produce waste that is not regulated under RCRA.  These non-hazardous waste streams are injected into a separate well utilizing the same low-pressure injection technology.
 
We are also licensed to process E&P waste contaminated with naturally occurring radioactive material (“NORM”) at the Big Hill facility, using the same waste disposal methods described above.  For more information on NORM, please refer to the discussion under Environmental Regulation below.  We also dispose of non-hazardous industrial waste.
 
Technology — We use proprietary technology to dispose of E&P waste by low-pressure injection into unique geologic structures deep underground.  We have patents covering our waste processing and injection operations which expire in 2014.  We do not expect these expirations to have an impact on our operations.  Our injection technology is distinguished from conventional methods in that it utilizes very low pressure to move the waste into the injection zone.
 
Competition — Our largest competitor in the markets we serve is Waste Connections, although we also compete with several smaller companies which utilize a variety of disposal methods and generally serve specific geographic markets. In addition, we face competition with our major customers, who continually re-evaluate their decision to use internal disposal methods, or a third-party disposal company, such as ours. We believe that the principal competitive factors in our businesses include price, reputation, location in relation to customer activity and reliability. We believe that we compete effectively on the basis of these factors.
 
Customers — Our customers are principally integrated and independent oil and gas E&P companies operating in the markets that we serve. During 2012, approximately 63% of our segment revenues were derived from the 20 largest segment customers, of which, the largest customer represented 16% of our segment revenues. All of our segment revenues are generated domestically. Typically, we perform services either under short-term standard contracts or under longer term service agreements. As most agreements with our customers are cancelable upon short notice, our backlog is not significant.  We do not derive a significant portion of our revenues from government contracts. See Note 12 Segment and Related Information in Item 8. Financial Statements and Supplementary Data for additional information on financial and geographic data.
 
 
6

 
 
Employees
 
At January 31, 2013, we employed 2,248 full and part-time personnel, none of which are represented by unions. We consider our relations with our employees to be satisfactory.
 
Environmental Regulation
 
We seek to comply with all applicable legal requirements concerning environmental matters. Our environmental services business processes and disposes of several types of non-hazardous waste. The non-hazardous wastes handled by our environmental services business are generally described as follows:
 
E&P Waste.  E&P waste typically contains levels of oil and grease, salts, dissolved solids and heavy metals within limits defined by state regulations. E&P waste may also include soils that have become contaminated by these materials.
 
NORM.  NORM is present throughout the earth’s crust at very low levels. Radium can co-precipitate with scale in the production stream as it is drawn to the surface and encounters a pressure or temperature change in the well tubing or production equipment. This scale contains radioactive elements that can become concentrated on tank bottoms or at water discharge points at production facilities.
 
Non-hazardous Industrial Waste.  This category of waste is generated by industries not associated with the exploration or production of oil and gas. This includes refineries and petrochemical plants.
 
Our business is affected by governmental regulations relating to the oil and gas industry in general, as well as environmental, health and safety regulations that have specific application to our business. Our activities are impacted by various federal and state regulatory agencies, and provincial pollution control, health and safety programs that are administered and enforced by regulatory agencies.
 
Additionally, our business exposes us to environmental risks. For example, our environmental services business routinely handles, stores and disposes of non-hazardous regulated materials and waste. We could be held liable for improper cleanup and disposal based upon statute, negligence, strict liability, contract or otherwise. As is common in the oil and gas industry, we often are required contractually to indemnify our customers or other third-parties against certain risks related to the services we perform, including damages stemming from environmental contamination.
 
We have implemented various procedures designed to ensure compliance with applicable regulations and reduce the risk of damage or loss. These include specified handling procedures and guidelines for regulated waste, ongoing employee training and monitoring and maintaining insurance coverage.
 
We also employ a corporate-wide web-based health, safety and environmental management system (“HSEMS”), which is ISO 14001:2004 compliant. The HSEMS is designed to capture information related to the planning, decision-making, and general operations of environmental regulatory activities within our operations. We also use the HSEMS to capture the information generated by regularly scheduled independent audits that are done to validate the findings of our internal monitoring and auditing procedures.
 
ITEM 1A.                      Risk Factors
 
The following summarizes the most significant risk factors to our business.  Our success will depend, in part, on our ability to anticipate and effectively manage these and other risks. Any of these risk factors, either individually or in combination, could have significant adverse impacts to our results of operations and financial condition, or prevent us from meeting our profitability or growth objectives.
 
 
7

 
 
Risks Related to Business Acquisitions and Capital Investments
 
Our ability to successfully execute our business strategy will depend, among other things, on our ability to make capital investments and acquisitions which provide us with financial benefits.  On December 31, 2012, we acquired substantially all assets and operations of Alliance Drilling Fluids, LLC (“Alliance”), a provider of drilling fluids, proppants, and related services headquartered in Midland, Texas.  In addition, our 2013 capital expenditures are expected to be approximately $50-$60 million, including additional investments in our manufacturing and research and development facilities, additions to our composite mat rental fleet, as well as expansion of our field equipment.  These completed and anticipated investments, along with any future investments, are subject to a number of risks and uncertainties, including:
 
§  
incorrect assumptions regarding the future benefits or results from our capital investments, acquired operations or assets
 
§  
failure to complete a planned acquisition transaction or to successfully integrate the operations or management of any acquired businesses or assets in a timely manner
 
§  
diversion of management's attention from existing operations or other priorities
 
§  
unanticipated disruptions to our business associated with the implementation of our enterprise-wide operational and financial system
 
§  
failure of new enterprise-wide operational and financial system to function as intended
 
Any of the factors above could have an adverse effect on our business, financial condition or results of operations.
 
Risks Related to Operating Hazards Present in the Oil and Natural Gas Industry
 
Our operations are subject to hazards present in the oil and natural gas industry, such as fire, explosion, blowouts, oil spills and leaks or spills of hazardous materials.  These incidents as well as accidents or problems in normal operations can cause personal injury or death and damage to property or the environment.  The customer’s operations can also be interrupted.  From time to time, customers seek recovery for damage to their equipment or property that occurred while we are performing services.  Damage to the customer’s property could be extensive if a major problem occurred.  We purchase insurance which may provide coverage for incidents such as those described above.  See the section entitled “Risks Related to the Inherent Limitations of Insurance Coverage” for additional information.
 
Risks Related to International Operations
 
We have significant operations outside of the United States, including certain areas of Canada, EMEA, Latin America, and Asia Pacific. In 2012, these international operations generated approximately 29% of our consolidated revenues.  In addition, we may seek to expand to other areas outside the United States in the future. International operations are subject to a number of risks and uncertainties, including:
 
§  
difficulties and cost associated with complying with a wide variety of complex foreign laws, treaties and regulations
 
§  
unexpected changes in regulatory environments or tax laws
 
§  
legal uncertainties, timing delays and expenses associated with tariffs, export licenses and other trade barriers
 
§  
difficulties enforcing agreements and collecting receivables through foreign legal systems
 
 
8

 
 
§  
risks associated with the Foreign Corrupt Practices Act, export laws, and other similar U.S. laws applicable to our operations in international markets
 
§  
exchange controls or other limitations on international currency movements
 
§  
sanctions imposed by the U.S. government to prevent us from engaging in business in certain countries
 
§  
inability to obtain or preserve certain intellectual property rights in the foreign countries in which we operate
 
§  
our inexperience in new international markets
 
§  
fluctuations in foreign currency exchange rates
 
§  
political and economic instability
 
§  
acts of terrorism
 
In addition, several of the European Union markets in which we operate, including Italy, Romania, and Hungary are currently experiencing elevated economic uncertainties, which could negatively impact our operations and profitability.
 
Several North African markets in which we operate, including Tunisia, Egypt, Libya, and Algeria experienced social and political unrest, which negatively impacted our operating results, including the temporary suspension of our operations.
 
Risks Related to the Availability of Raw Materials and Skilled Personnel
 
Our ability to provide products and services to our customers is dependent upon our ability to obtain the raw materials and qualified personnel necessary to operate our business.
 
Barite is a naturally occurring mineral that constitutes a significant portion of our drilling fluids systems. We currently secure the majority of our barite ore from foreign sources, primarily China and India. The availability and cost of barite ore is dependent on factors beyond our control including transportation, political priorities and government imposed export fees in China as well as the impact of weather and natural disasters.  During 2011 and early 2012, there has been a significant increase in world-wide demand for barite ore, and as result, we have experienced substantial cost increases in barite ore sourced from China.  Our operating costs in future periods may continue to increase as a result of the increased demand in barite ore and we may be unable to offset these cost increases with customer pricing, which may result in a reduction in future profitability.  Further, the future supply of barite ore from existing sources could be inadequate to meet the current market demand, which could ultimately result in a reduction in industry activity, or our inability to meet our customer’s needs.
 
Our business is also highly dependent on our ability to attract and retain highly-skilled engineers, technical sales and service personnel. The market for these employees is very competitive, and if we cannot attract and retain quality personnel, our ability to compete effectively and to grow our business will be severely limited. Also, a significant increase in the wages paid by competing employers could result in a reduction in our skilled labor force or an increase in our operating costs.
 
Risks Related to the Impact of Restrictions on Offshore Drilling Activity in the Gulf of Mexico
 
In April 2010, the Deepwater Horizon drilling rig sank in the Gulf of Mexico after an explosion and fire, resulting in the discharge of oil from the well.  Following the Deepwater Horizon oil spill, the Department of Interior of the U.S. government took several actions aimed at restricting and temporarily prohibiting certain drilling activity in the Gulf of Mexico.  Following the adoption of a number of new regulations impacting offshore drilling activities by a variety of regulatory authorities, the U.S. Department of Interior has resumed issuing permits.  However, drilling activity in the Gulf of Mexico remains lower than the levels prior to the Deepwater Horizon accident.  We cannot predict the impact of these new regulations or any additional restrictions on exploration and production activities in the Gulf of Mexico.
 
 
9

 
 
Risks Related to our Customer Concentration and Cyclical Nature of the E&P Industry
 
We derive a significant portion of our revenues from companies in the E&P industry, and our customer base is concentrated in major integrated and independent oil and gas E&P companies operating in the markets that we serve. In 2012, approximately 40% of our consolidated revenues were derived from our 20 largest customers, although no single customer accounted for more than 10% of our consolidated revenues. The E&P industry is historically cyclical, with levels of activity generally affected by the following factors:
 
§  
current oil and natural gas prices and expectations about future prices
 
§  
the cost to explore for, produce and deliver oil and gas
 
§  
the discovery rate for new oil and gas reserves
 
§  
the ability of oil and gas companies to raise capital
 
§  
domestic and international political, military, regulatory and economic conditions
 
§  
government regulations regarding environmental protection, taxation, price controls and product allocation
 
 
Because of the cyclical nature of our industry and our customer concentration, our quarterly and annual operating results have fluctuated significantly in recent years and may continue to fluctuate in future periods. A prolonged decline in industry drilling rig activity or the loss of any of our large customers could materially affect the demand for our services. Because our business has high fixed costs, including significant facility and personnel expenses, downtime or low productivity due to reduced demand can have significant adverse impact on our profitability.
 
Risk Related to our Market Competition
 
We face competition in the Fluids Systems and Engineering business from larger companies, which compete vigorously on fluids performance and/or price.  In addition, these companies have broad product and service offerings in addition to their drilling fluids.  At times, these larger companies attempt to compete by offering discounts to customers to use multiple products and services from our competitor, some of which we do not offer.  We also have smaller regional competitors competing with us mainly on price and local relationships.  Our competition in the Mats and Integrated Services business is very fragmented, with many competitors providing various forms of mat products and services.  Competition in the Environmental Services market could increase as the result of new entrants into the market, which could put downward pressure on our margins.  We also face competition from efforts by oil and gas producing customers to improve their own methods of disposal and waste minimization.
 
Risks Related to the Cost and Continued Availability of Borrowed Funds
 
We employ borrowed funds as an integral part of our long-term capital structure and our future success is dependent upon continued access to borrowed funds to support our operations. The availability of borrowed funds on reasonable terms is dependent on the condition of credit markets and financial institutions from which these funds are obtained.  Adverse events in the financial markets may significantly reduce the availability of funds, which may have an adverse effect on our cost of borrowings and our ability to fund our business strategy.  Adverse events in the financial markets may also negatively impact our customers, as many of them finance their drilling and production operations through borrowed funds. The reduced availability and increased cost of borrowing could cause our customers to reduce their spending on drilling programs, thereby reducing demand and potentially pricing for our products and services.
 
 
10

 
 
Our ability to meet our debt service requirements and the continued availability of funds under our existing or future credit agreements is dependent upon our ability to continue generating operating income and remain in compliance with the covenants in our credit agreements. This, in turn, is subject to the volatile nature of the E&P industry, and to competitive, economic, financial and other factors that are beyond our control.
 
Risks Related to Legal and Regulatory Matters, Including Environmental Regulations
 
We are responsible for complying with numerous federal, state and local laws, regulations and policies that govern environmental protection, zoning and other matters applicable to our current and past business activities, including the activities of our former subsidiaries.  Failure to remain compliant with these laws and regulations may result in fines, penalties, costs of cleanup of contaminated sites and site closure obligations, or other expenditures.  Further, any changes in the current legal and regulatory environment could impact industry activity and the demands for our products and services, the scope of products and services that we provide, or our cost structure required to provide our products and services, or the costs incurred by our customers.
 
We believe that the demand for our services in the Environmental Services business is directly related to regulation of E&P waste. In particular, E&P waste is currently exempt from the principal federal statute governing the handling of hazardous waste.  In recent years, proposals have been made to rescind this exemption. If the exemption covering this type of E&P waste is repealed or modified, or if the regulations interpreting the rules regarding the treatment or disposal of E&P waste or NORM waste were changed, it could have a material adverse effect on this business.
 
The markets for our products and services are dependent on the continued exploration for and production of fossil fuels (predominantly oil and natural gas).  In December 2009, the U.S. Environmental Protection Agency (“EPA”) published findings that the emissions of carbon dioxide, methane and other greenhouse gases are contributing to the warming of the Earth’s atmosphere and other climatic changes, presenting an endangerment to human health and the environment.  Further, federal legislation to reduce emissions of greenhouse gases has been considered and many states have taken measures to reduce greenhouse gas emissions.  The EPA has adopted regulations that potentially limit greenhouse gas emissions and impose reporting obligations on large greenhouse gas emission sources.  In addition, the EPA has proposed rules that could require the reduction of certain air emissions during exploration and production of oil and gas.   To the extent that laws and regulations enacted as part of climate change legislation increase the costs of drilling for or producing such fossil fuels, or reduce the demand for fossil fuels, such legislation could have a material adverse impact on our operations and profitability.
 
Hydraulic fracturing is an increasingly common practice used by E&P operators to stimulate production of hydrocarbons, particularly from shale oil and gas formations in the United States.  The process of hydraulic fracturing, which involves the injection of sand (or other forms of proppants) laden fluids into oil and gas bearing zones, has come under increasing scrutiny from a variety of regulatory agencies, including the EPA and various state authorities.  Several states have adopted regulations requiring operators to identify the chemicals used in fracturing operations, and others have adopted moratoriums on the use of fracturing.  The EPA has commenced a study of the potential impact of hydraulic fracturing on drinking water including the disposal of waste fluid by underground injection. The results are expected to be published in 2014.  Further, the EPA has announced plans to develop effluent limitations associated with wastewater generated by hydraulic fracturing.  To the extent that any of these ongoing studies or initiatives lead to regulations which have the effect of limiting the use or availability of hydraulic fracturing, such developments could have a significant negative impact on the drilling activity levels of our customers.  In addition, though we believe we are in material compliance with all the applicable underground injection control requirements, new requirements could be adopted at the state or federal level as a result of the study. Such regulatory changes could have a material adverse effect on our business, results of operations or financial condition.
 
 
11

 
 
Risks Related to the Inherent Limitations of Insurance Coverage
 
While we maintain liability insurance, this insurance is subject to coverage limitations.  Specific risks and limitations of our insurance coverage include the following:
 
 
§  
self-insured retention limits on each claim, which are our responsibility
 
 
§  
exclusions for certain types of liabilities and limitations on coverage for damages resulting from pollution
 
 
§  
coverage limits of the policies, and the risk that claims will exceed policy limits
 
 
§  
the financial strength and ability of our insurance carriers to meet their obligations under the policies
 
In addition, our ability to continue to obtain insurance coverage on commercially reasonable terms is dependent upon a variety of factors impacting the insurance industry in general, which are outside our control.
 
Any of the issues noted above, including insurance cost increases, uninsured or underinsured claims, or the inability of an insurance carrier to meet their financial obligations could have a material adverse effect on our profitability.
 
Risks Related to Potential Impairments of Long-lived Intangible Assets
 
As of December 31, 2012, our consolidated balance sheet includes $87.4 million in goodwill and $41.0 million of intangible assets, net.  Goodwill and indefinite-lived intangible assets are tested for impairment annually, or more frequently as the circumstances require, using a combination of market multiple and discounted cash flow approaches.  In completing this annual evaluation during the fourth quarter of 2012, we determined that no reporting unit has a fair value below its net carrying value, and therefore, no impairment is required.  However, if the financial performance or future projections for our operating segments deteriorate from current levels, a future impairment of goodwill or indefinite-lived intangible assets may be required, which would negatively impact our financial results, in the period of impairment.
 
Risks Related to Technological Developments in our Industry
 
The market for our products and services is characterized by continual technological developments that generate substantial improvements in product functions and performance. If we are not successful in continuing to develop product enhancements or new products that are accepted in the marketplace or that comply with industry standards, we could lose market share to competitors, which would negatively impact our results of operations and financial condition.
 
We hold U.S. and foreign patents for certain of our drilling fluids components and our mat systems. In our Environmental Services business, we also hold U.S. patents on certain aspects of our system to process and dispose of E&P waste, including E&P waste that is contaminated with NORM.  However, these patents are not a guarantee that we will have a meaningful advantage over our competitors, and there is a risk that others may develop systems that are substantially equivalent to those covered by our patents. If that were to happen, we would face increased competition from both a service and a pricing standpoint. In addition, costly and time-consuming litigation could be necessary to enforce and determine the scope of our patents and proprietary rights. It is possible that future innovation could change the way companies drill for oil and gas, reduce the amount of waste that is generated from drilling activities or create new methods of disposal or new types of drilling fluids. This could reduce the competitive advantages we may derive from our patents and other proprietary technology.
 
 
12

 
 
Risks Related to Severe Weather, Particularly in the U.S. Gulf Coast
 
Approximately 20% of our consolidated revenue in 2012 was generated in market areas in the U.S. Gulf of Mexico and related near-shore areas, which are susceptible to hurricanes and other adverse weather events, such as those which occurred in 2005 and 2008. These weather events can disrupt our operations and result in damage to our properties, as well as negatively impact the activity and financial condition of our customers.  Our business may be adversely affected by these and other negative effects of future hurricanes or other adverse weather events.
 
Risks Related to Fluctuations in the Market Value of our Common Stock
 
The market price of our common stock may fluctuate due to a number of factors, including the general economy, stock market conditions, general trends in the E&P industry, announcements made by us or our competitors, and variations in our operating results. Investors may not be able to predict the timing or extent of these fluctuations.
 
ITEM 1B.       Unresolved Staff Comments
 
None
 
ITEM 2.          Properties
 
 
We lease office space to support our operating segments as well as our corporate offices.  This leased space is located in several cities throughout Texas and Louisiana, Denver Colorado, Calgary, Alberta, Rome, Italy and Rio de Janeiro, Brazil.  We also own office space in Oklahoma City, Oklahoma and Henderson, Australia and currently constructing a technology center on property we own in Katy, Texas.  All material domestic owned properties are subject to liens and security interests under our Second Amended and Restated Credit Agreement (“Credit Amendment”).
 
Fluids Systems & Engineering.   We own eight warehouse facilities and have 22 leased warehouses and 10 contract warehouses to support our customers and operations in the U.S.  We own two warehouse facilities in Western Canada to support our Canadian operations.  Additionally, we lease 18 warehouses and own one warehouse in the EMEA region, lease eight warehouses in Brazil, and own one warehouse and lease nine warehouses in the Asia Pacific region to support our international operations. Some of these warehouses include blending facilities as well.
 
We operate four specialty product grinding facilities in the U.S. These facilities are located in Houston, Texas on approximately 18 acres of owned land, in New Iberia, Louisiana on 15.7 acres of leased land, in Corpus Christi, Texas on 6 acres of leased land, and in Dyersburg, Tennessee on 13.2 acres of owned land.
 
Mats & Integrated Services.  We own approximately 41,000 square feet of office and industrial space on 18 acres of land in Carencro, Louisiana, which houses manufacturing facilities for this segment.  We also lease four sites, throughout Texas, Louisiana, Colorado, and Pennsylvania which serve as bases for our well site service activities.  Additionally, we own five facilities which are located in Louisiana, Texas, and Colorado to support field operations.
 
Environmental Services.  We lease a 4.6 acre E&P waste processing and transfer facility in Port Arthur, Texas.  We own three injection disposal sites located in Jefferson County, Texas with two of those properties immediately adjacent to each other, one 47 acre site for NORM disposal with five caprock injection wells and a 130 acre site for our industrial injection operation with two caprock injection wells. The remaining site consists of our nonhazardous oilfield waste processing and injection operations.  This site is on 275+ acres and has 11 caprock injection wells and a disposal cavern. In addition, we own three facilities in West Texas on a total of approximately 80 acres of land.  Additionally, we have six leased receiving facilities to support our injection and waste disposal services.
 
 
13

 
 
ITEM 3.          Legal Proceedings
 
In the ordinary course of conducting our business, we become involved in litigation and other claims from private party actions, as well as judicial and administrative proceedings involving governmental authorities at the federal, state and local levels.  In the opinion of management, any liability in these matters should not have a material effect on our consolidated financial statements.
 
ITEM 4.         Mine Safety Disclosures
 
The information concerning mine safety violations and other regulatory matters required by section 1503 (a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K is included in Exhibit 95.1 of this Annual Report on Form 10-K, which is incorporated by reference.
 
PART II
 
ITEM 5.         Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
Our common stock is traded on the New York Stock Exchange under the symbol “NR.”
 
The following table sets forth the range of the high and low sales prices for our common stock for the periods indicated:
 
Period
   
High
     
Low
 
                 
2012
               
                 
Fourth Quarter
  $ 8.10     $ 6.29  
Third Quarter
  $ 8.31     $ 5.70  
Second Quarter
  $ 8.31     $ 5.19  
First Quarter
  $ 10.62     $ 7.40  
                 
2011
               
                 
Fourth Quarter
  $ 9.87     $ 5.19  
Third Quarter
  $ 10.09     $ 6.07  
Second Quarter
  $ 10.00     $ 6.60  
First Quarter
  $ 7.99     $ 5.52  
 
As of February 1, 2013, we had 1,650 stockholders of record as determined by our transfer agent.
 
In February 2012, our Board of Directors approved a share repurchase program that authorized the repurchase of up to $50.0 million of our outstanding shares of common stock.  During 2012, we executed the full $50.0 million authorized, purchasing 7,241,693 shares for an average price of approximately $6.92 per share, including commissions. 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.
 
 
14

 
 
During 2012, 2011 and 2010 we repurchased $0.6 million, $0.6 million and $0.2 million of shares surrendered in lieu of taxes under vesting of restricted stock awards, respectively. We have not paid any dividends during the two recent fiscal years or any subsequent interim period, and we do not intend to pay any cash dividends in the foreseeable future. In addition, our credit facilities contain covenants which limit the payment of dividends on our common stock.
 
 
The following table details our repurchases of shares of our common stock for the three months ended December 31, 2012:
 
Period
 
Total Number of
Shares Purchased
(1)  
Average Price
per Share
   
Total Number of
Shares Purchased as Part
of Publicly Announced
Plans or Programs
   
Maximum Approximate
DollarValue of Shares that May Yet
be Purchased Under
Plans or Programs (2)
 
October 1 -
31, 2012
    1,324,152     $ 6.99       1,314,027    
$5.7 million
 
November 1 -
30, 2012
    262,718     $ 7.39       262,718    
$3.7 million
 
December 1 -
31, 2012
    493,981       7.82       493,981     -  
Total
    2,080,851     $ 7.24       2,070,726        
 
 
(1)  
During the three months ended December 31, 2012, we purchased an aggregate of 10,125 shares surrendered in lieu of taxes under vesting of restricted stock awards.
 
(2)  
The share repurchase program authorized in February 2012 was completed in December 2012 and no further repurchases will be made under that program.
 
Performance Graph
 
The following graph reflects a comparison of the cumulative total stockholder return of our common stock from January 1, 2008 through December 31, 2012, with the New York Stock Exchange Market Value Index, a broad equity market index, and the Morningstar Oil & Gas Equipment & Services Index, an industry group index.  The graph assumes the investment of $100 on January 1, 2008 in our common stock and each index and the reinvestment of all dividends, if any.  This information shall be deemed furnished not filed, in this Form 10-K, and shall not be deemed incorporated by reference into any filing under the Securities Exchange Act of 1933, or the Securities Act of 1934, except to the extent we specifically incorporate it by reference.
 
 
 
15

 
 
ITEM 6.
Selected Financial Data
 
The selected consolidated historical financial data presented below for the five years ended December 31, 2012 is derived from our consolidated financial statements and is not necessarily indicative of results to be expected in the future.
 
The following data should be read in conjunction with the consolidated financial statements and notes thereto and with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Items 7 and 8 below.
 
   
As of and for the Year Ended December 31,
 
(In thousands, except share data)
 
2012
   
2011
   
2010
   
2009
   
2008
 
                                         
Consolidated Statements of Operations:
                                       
Revenues
  $ 1,038,019     $ 958,180     $ 715,954     $ 490,275     $ 858,350  
                                         
Operating income (loss)
    105,897       132,764       78,004       (15,325 )     71,496  
                                         
Interest expense, net
    9,740       9,226       10,267       9,334       10,881  
                                         
Income (loss) from continuing operations
  $ 60,032     $ 80,017     $ 41,626     $ (20,573 )   $ 39,300  
Loss from discontinued operations, net of tax
    -       -       -       -       (842 )
                                         
Net income (loss)
  $ 60,032     $ 80,017     $ 41,626     $ (20,573 )   $ 38,458  
                                         
Net income (loss) per common share (basic):
                                       
Income (loss) from continuing operations
  $ 0.69     $ 0.89     $ 0.47     $ (0.23 )   $ 0.44  
Net income (loss) per common share
  $ 0.69     $ 0.89     $ 0.47     $ (0.23 )   $ 0.43  
                                         
Net income (loss) per common share (diluted):
                                       
Income (loss) from continuing operations
  $ 0.62     $ 0.80     $ 0.46     $ (0.23 )   $ 0.44  
Net income (loss) per common share
  $ 0.62     $ 0.80     $ 0.46     $ (0.23 )   $ 0.43  
                                         
Consolidated Balance Sheet Data:
                                       
Working capital
  $ 444,460     $ 406,976     $ 329,371     $ 163,110     $ 253,136  
Total assets
    994,541       886,837       737,342       585,114       713,679  
Foreign bank lines of credit
    2,546       2,174       1,458       6,901       11,302  
Current maturities of long-term debt
    53       58       148       10,319       10,391  
Long-term debt, less current portion
    256,832       189,876       172,987       105,810       166,461  
Stockholders' equity
    513,578       497,846       417,347       368,022       377,882  
                                         
Consolidated Cash Flow Data:
                                       
Net cash provided by (used in) operations
  $ 110,245     $ (13,558 )   $ 31,476     $ 88,819     $ 28,687  
Net cash used in investing activities
    (96,167 )     (63,150 )     (10,549 )     (17,144 )     (23,168 )
Net cash provided by (used in) financing activities
    5,853       18,338       50,621       (66,265 )     (2,062 )
 
 
16

 
 
ITEM 7.
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 Consolidated Financial Statements and Notes to Consolidated Financial Statements included in Item 8 of this Annual Report.
 
Overview
 
We are a diversified oil and gas industry supplier providing products and services primarily to the oil and gas exploration and production (“E&P”) industry.  We operate our business through three reportable segments: Fluids Systems and Engineering, Mats and Integrated Services, and Environmental Services.  Our Fluids Systems and Engineering segment, which generated 83% of consolidated revenues in 2012, provides customized drilling fluids solutions to E&P customers globally, operating through four geographic regions:  North America, Europe, the Middle East and Africa (“EMEA”), Latin America, and Asia Pacific.
 
Our Mats and Integrated Services segment, which generated 12% of consolidated revenues in 2012, provides composite mat rentals, well site construction and related site services to oil and gas customers and mat rentals to the petrochemicals industry in the U.S. and the utility industry in the U.K.  We also sell composite mats to E&P customers outside of the U.S., and to domestic customers outside of the oil and gas industry.  Our Environmental Services segment, which generated 5% of consolidated revenues in 2012, processes and disposes of waste primarily generated by E&P customers along the U.S. Gulf Coast.
 
During 2012, we have continued the roll-out of Evolution®, our high performance water-based drilling fluid system launched in 2010, which we believe provides superior performance and environmental benefits to our customers, as compared to traditional fluids systems used in the industry.  After the initial introduction into the Haynesville shale in 2010, the system is now being used by customers in most major North American drilling basins.  In addition, the first Evolution well in the EMEA region was drilled in the fourth quarter of 2012.  Revenues from wells using the Evolution system were approximately $110 million in 2012, up from $67 million in 2011.
 
On December 31, 2012, we completed the acquisition of substantially all assets and operations of Alliance Drilling Fluids, LLC (“Alliance”), a provider of drilling fluids, proppant distribution, and related services headquartered in Midland, Texas.  Total cash consideration at closing was approximately $53 million, which was funded through borrowings on our revolving credit facility.  The purchase price is subject to further adjustments, based upon actual working capital conveyed.  Additional consideration up to $4.3 million may be payable based on the profitability of the proppant distribution business over the two year period following the acquisition.  Alliance recorded revenues of $89 million and operating income of $14 million for the year ended December 31, 2011, of which approximately 50% of revenue and 40% of operating income was attributable to the proppant business.
 
In April 2011, we completed the acquisition of the drilling fluids and engineering services business from Rheochem PLC, a publicly-traded Australian-based oil and gas company.  The acquired business provides drilling fluids and related engineering services with operations in Australia, New Zealand and India.  Total cash paid in 2011 was AUD$27.2 million ($28.8 million).  During 2012, the final payment was made which totaled AUD$11.9 million ($11.9 million) reflecting additional consideration required based on financial results of the acquired business over a one year earn-out period ending February 2012.  In 2012, this business generated $41.9 million of revenues, or 4% of our consolidated revenues.
 
Our operating results depend, to a large extent, on oil and gas drilling activity levels in the markets we serve, as well as the nature of the drilling operations (including the depth and whether the wells are drilled vertically or horizontally), which governs the revenue potential of each well.  The drilling activity in turn, depends on oil and gas commodity pricing, inventory levels and demand, and regulatory actions, such as those affecting operations in the Gulf of Mexico in recent years.
 
 
17

 
 
Rig count data is the most widely accepted indicator of drilling activity. Average North American rig count data for the last three years ended December 31 is as follows:
 
   
Year ended December 31,
         
2012 vs 2011
   
2011 vs 2010
 
   
2012
   
2011
   
2010
   
Count
   
 
%  
Count
   
 
%
                                                         
U.S. Rig Count
    1,919       1,879       1,546       40       2 %     333       22 %
Canadian Rig Count
    364       419       348       (55 )     (13 %)     71       20 %
Total
    2,283       2,298       1,894       (15 )     (1 %)     404       21 %
 

Source: Baker Hughes Incorporated
 
While the average total North America rig count has decreased by only 1% from 2011 to 2012, there has been a significant regional shift in U.S. activity over this period.  This shift from dry gas drilling to oil and liquid-rich drilling resulted in a significant decline in several key dry gas basins, including the Haynesville shale (East Texas), Barnett (East Texas), Marcellus Shale (Pennsylvania) and areas in the Rockies, largely offset by increases in oil and liquid-rich basins, including the Bakken (North Dakota), Eagle Ford (South Texas), Mississippian Lime (mid-continent) and Permian Basin (West Texas).  During periods of rapid transition such as 2012, operating expenses within our U.S. business units were elevated, as we re-deployed personnel and assets among regions and modified our regional business unit infrastructures to meet the changing activity levels.
 
Outside of North America, drilling activity is generally more stable than North America, as drilling activity in many countries is based upon longer term economic projections and multiple year drilling programs, which tend to minimize the impact of short term changes of commodity prices on overall drilling activity.
 
Year Ended December 31, 2012 Compared to Year Ended December 31, 2011
 
Consolidated Results of Operations
 
Summarized results of operations for the year ended December 31, 2012 compared to the year ended December 31, 2011 are as follows:
 
   
Year Ended December 31,
   
2012 vs 2011
 
(In thousands)
 
2012
   
2011
     $         %
                                 
Revenues
  $ 1,038,019     $ 958,180     $ 79,839       8 %
                                 
Cost of revenues
    846,529       744,176       102,353       14 %
Selling, general and administrative expenses
    86,352       81,672       4,680       6 %
Other operating income, net
    (759 )     (432 )     (327 )     76 %
                                 
Operating income
    105,897       132,764       (26,867 )     (20 %)
                                 
Foreign currency exchange loss
    749       522       227       43 %
Interest expense, net
    9,740       9,226       514       6 %
                                 
Income from operations before income taxes
    95,408       123,016       (27,608 )     (22 %)
Provision for income taxes
    35,376       42,999       (7,623 )     (18 %)
                                 
Net income
  $ 60,032     $ 80,017     $ (19,985 )     (25 %)
 
 
18

 
 
Revenues
 
Revenues increased 8% to $1.038 billion in 2012, compared to $958.2 million in 2011.  This $79.8 million improvement includes a $44.9 million (6%) increase in revenues in North America, largely driven by improved drilling efficiency, which results in an increased number of customer wells drilled per rig, along with strong demand for the purchase of our composite mat products from customers outside of the E&P industry.  Revenues from our international operations increased $35.0 million including a $17.3 million increase from our Asia Pacific business unit, which was acquired in April of 2011.  Additional information regarding the change in revenues is provided within the operating segment results below.
 
Cost of Revenues
 
Cost of revenues increased 14% to $846.5 million in 2012, compared to $744.2 million in 2011.  The increase is primarily driven by the 8% increase in revenues along with elevated operating expenses in 2012 driven by the shift in activity from dry gas to liquid rich regions in the U.S.  Additional information regarding the change in cost of revenues is provided within the operating segment results below.
 
Selling, General and Administrative Expenses
 
Selling, general and administrative expenses increased $4.7 million to $86.4 million in 2012 from $81.7 million in 2011.  The 2012 increase in spending is largely attributable to costs associated with our fourth quarter 2011 enterprise resource planning (“ERP”) system conversion in the U.S. operations.
 
Foreign Currency Exchange
 
Foreign currency exchange was a $0.7 million loss in 2012, compared to a $0.5 million loss in 2011, and primarily reflects the impact of currency translations on assets and liabilities held in our foreign operations that are denominated in currencies other than functional currencies.
 
Interest Expense, Net
 
Interest expense, which primarily reflects the 4% interest associated with our $172.5 million in unsecured convertible notes (“Senior Notes”), was $9.7 million in 2012, compared to $9.2 in 2011.  The increased interest expense in 2012 is primarily due to the impact of increased borrowings under our revolving credit facility in the U.S.
 
Provision for Income Taxes
 
The provision for income taxes in 2012 was $35.4 million, reflecting an effective tax rate of 37.1%, compared to $43.0 million in 2011, reflecting an effective tax rate of 35.0%.  The increase in the effective tax rate includes a $3.9 million charge in 2012 associated with a tax assessment and related increase in tax rate for the period of 2006 through 2012 in a foreign subsidiary, which was partially offset by additional U.S. tax deductions that became available after our U.S. Federal Net Operating Loss carryforwards were exhausted in 2011.
 
 
19

 
 
 
Operating Segment Results
 
 
Summarized financial information for our reportable segments is shown in the following table (net of inter-segment transfers):
 
   
Year ended December 31,
   
2012 vs 2011
 
(In thousands)
 
2012
   
2011
     $         %
                                 
Revenues                                
Fluids systems and engineering
  $ 861,670     $ 798,957     $ 62,713       8 %
Mats and integrated services
    122,283       110,411       11,872       11 %
Environmental services
    54,066       48,812       5,254       11 %
Total revenues
  $ 1,038,019     $ 958,180     $ 79,839       8 %
                                 
Operating income (loss)
                               
Fluids systems and engineering
  $ 59,987     $ 90,683     $ (30,696 )        
Mats and integrated services
    54,251       52,678       1,573          
Environmental services
    13,622       11,909       1,713          
Corporate office
    (21,963 )     (22,506 )     543          
Operating income
  $ 105,897     $ 132,764     $ (26,867 )        
                                 
Segment operating margin
                               
Fluids systems and engineering
    7.0 %     11.4 %                
Mats and integrated services
    44.4 %     47.7 %                
Environmental services
    25.2 %     24.4 %                
 
Fluids Systems and Engineering
 
Revenues
 
Total revenues for this segment consisted of the following:
 
     
Year ended December 31,
   
2012 vs 2011
 
(In thousands)
   
2012
   
2011
    $     %  
                                 
United States
    $ 566,575     $ 533,629     $ 32,946     6 %
Canada
      48,643       51,712       (3,069 )   (6 %)
Total North America
      615,218       585,341       29,877     5 %
EMEA
      117,360       113,386       3,974     4 %
Latin America
      87,173       75,642       11,531     15 %
Asia Pacific
      41,919       24,588       17,331     70 %
Total
    $ 861,670     $ 798,957     $ 62,713     8 %
 
North American revenues increased 5% to $615.2 million in 2012, compared to $585.3 million in 2011, although North America rig count was down 1% over this period.  This increase in revenues is largely attributable to improved drilling efficiency achieved by our customers, which is reflected in an increased number of wells drilled per rig.  The growth in several North American basins was partially offset by a $28.6 million decline in our completion services and equipment rental revenues in the mid-continent region, which was primarily attributable to increased competition.
 
 
20

 
 
Internationally, revenues were up 15% to $246.5 million in 2012, compared to $213.6 million in 2011.  This increase includes a $17.3 million increase in revenues from our Asia Pacific region following the April 2011 acquisition described above, along with an $11.5 million increase in Brazil, driven by increased activities with Petrobras and international oil company customers.
 
Operating Income
 
Operating income for this segment was $60.0 million, reflecting an operating margin of 7.0% in 2012, compared to $90.7 million and an 11.4% operating margin in 2011.  Substantially all of this $30.7 million operating income decline is attributable to our North America operations, despite a $29.9 million increase in revenues.  The decline in operating income includes a $15.7 million decrease in the completion services and equipment rental business associated with the $28.6 million revenue decline in that business as described above.  Due to the relatively fixed nature of operating expenses in this service and equipment rental business unit, the incremental operating income impact from the decline in these revenues is higher than what is typically experienced in this segment.  In addition, 2012 includes elevated costs associated with  an ERP system conversion in the U.S. operations (which began in the fourth quarter of 2011) and operating cost increases associated with our customer transition away from dry gas regions into oil and liquid-rich regions, as described above.
 
Operating income from our international operations increased $2.0 million on a $32.8 million increase in revenues.  Increases from our Asia Pacific and Latin America regions were partially offset by a decline in the EMEA region, as the EMEA region was negatively impacted by increased personnel and operating costs in North Africa, partially associated with the 2012 transition to new contracts in Algeria.
 
Mats and Integrated Services
 
Revenues
 
Total revenues for this segment consisted of the following:
 
     
Year ended December 31,
   
2012 vs 2011
 
(In thousands)
   
2012
   
2011
    $       %  
                                   
Mat rental and services
    $ 59,779     $ 68,579     $ (8,800 )     (13 %)
Mat sales
      62,504       41,832       20,672       49 %
Total
    $ 122,283     $ 110,411     $ 11,872       11 %
 
Mat rental and services revenues decreased $8.8 million in 2012 compared to the prior year, as a $17.2 million decline in the Northeast U.S. was partially offset by a $4.0 million increase in the U.S. Gulf Coast, a $2.1 million increase in the Rocky Mountain region, and a $2.1 million increase in our international rental business.  Mat sales increased by $20.7 million, primarily due to higher demand for our DuraBase composite mat products from non-E&P customers, including the utility industry and the U.S. military.
 
 
21

 
 
Operating Income
 
Segment operating income increased by $1.6 million on the $11.9 million increase in revenues, reflecting an incremental margin of 13.4%.  The low incremental margin is primarily attributable to the higher mix of mat sales relative to rental activity.  Due to the fixed nature of operating expenses in the rental business, including depreciation expense on our rental mat fleet, the decremental margin associated with the decline in rental and service revenues is much higher than the incremental margin associated with the increase in mat sales.
 
As noted above, mat sales increased in 2012 as a result of continued strong demand for our mats from both E&P and non-E&P customers, including the utility industry and the U.S. military.  The levels of mats sales in a period are determined by several factors, including customer demand, as well as our allocation of mat production between sales and deployment into our rental fleet.  The allocation of our production between additions to our rental fleet and sales in any given period is driven by a number of factors including commitments to meeting customer schedules, ability of our customers to take delivery of mats, timing of large mat rental projects/events, and plant capacity/efficiencies.  We expect mat sales to decline in early 2013 from the levels achieved in 2012, partially due to our decision to deploy additional mats into our rental fleet.  As a result, segment revenue and operating income are expected to decline from the levels achieved in 2012.
 
Environmental Services
 
Revenues
 
Total revenues for this segment consisted of the following:
 
     
Year ended December 31,
   
2012 vs 2011
 
(In thousands)
   
2012
   
2011
    $         %
                                   
E&P waste
    $ 42,894     $ 36,957     $ 5,937       16 %
NORM and industrial waste
      11,172       11,855       (683 )     (6 %)
Total
    $ 54,066     $ 48,812     $ 5,254       11 %
 
Environmental services revenues increased 11% to $54.1 million in 2012, compared to $48.8 million in 2011.  E&P waste revenues increased by $5.9 million, primarily due to the increased offshore drilling activity along the U.S. Gulf Coast.  NORM and industrial waste revenues declined by $0.7 million, primarily due to the impact of large disposal projects in 2011, which did not recur in 2012.
 
Operating Income
 
Operating income for this segment increased by $1.7 million from 2011 to 2012, on a $5.3 million increase in revenues, reflecting an incremental margin of 32%.
 
Corporate office
 
Corporate office expenses decreased $0.5 million to $22.0 million in 2012, compared to $22.5 million in 2011.  The decrease is primarily driven by a $2.3 million decline in performance-based employee incentive costs partially offset by increased costs following our fourth quarter 2011 ERP system conversion in our U.S. operations.
 
 
22

 
 
Year Ended December 31, 2011 Compared to Year Ended December 31, 2010
 
Consolidated Results of Operations
 
Summarized results of operations for the year ended December 31, 2011 compared to the year ended December 31, 2010 are as follows:
 
   
Year Ended December 31,
   
2011 vs 2010
 
(In thousands)
 
2011
   
2010
    $         %
                                 
Revenues
  $ 958,180     $ 715,954     $ 242,226       34 %
                                 
Cost of revenues
    744,176       576,920       167,256       29 %
                                 
Selling, general and administrative expenses
    81,672       64,157       17,515       27 %
Other operating income, net
    (432 )     (3,127 )     2,695       (86 %)
                                 
Operating income
    132,764       78,004       54,760       70 %
                                 
Foreign currency exchange loss (gain)
    522       (1,134 )     1,656       (146 %)
Interest expense, net
    9,226       10,267       (1,041 )     (10 %)
                                 
Income from operations before income taxes
    123,016       68,871       54,145       79 %
Provision for income taxes
    42,999       27,245       15,754       58 %
                                 
Net income
  $ 80,017     $ 41,626     $ 38,391       92 %
 
Revenues
 
Revenues increased 34% to $958.2 million in 2011, compared to $716.0 million in 2010.  This $242.2 million improvement includes a $201.3 million (37%) increase in revenues in North America, largely driven by the 21% improvement in the North America rig count.  Revenues from our international operations increased by $40.9 million (23%) reflecting the contribution of the Asia Pacific region, following our April 2011 acquisition, along with continued growth in Brazil.  Additional information regarding the change in revenues is provided within the operating segment results below.
 
Cost of Revenues
 
Cost of revenues increased 29% to $744.2 million in 2011, as compared to $576.9 million in 2010. The increase is primarily driven by the 34% increase in revenues. Additional information regarding the change in cost of revenues is provided within the operating segment results below.
 
Selling, General and Administrative Expenses
 
Selling, general and administrative expenses increased $17.5 million to $81.7 million in 2011 from $64.2 million in 2010.  The increase includes a $3.6 million increase in performance-based employee incentive compensation expense.  In addition, 2011 includes $3.2 million of expenses incurred within the acquired Asia Pacific business, $1.0 million of transaction-related expenditures for this acquisition, $2.5 million of costs associated with strategic planning projects, and $2.3 million of implementation expenses associated with an operational and financial system conversion in the U.S. operations.  The remainder of the increase is primarily attributable to additional costs required to support the increase in revenues.
 
Other Operating Income, Net
 
Other operating income was $0.4 million in 2011, compared to $3.1 million in 2010.  The 2010 results included a $3.1 million gain, reflecting net proceeds from the settlement of a lawsuit and proceeds from the insurance claims in our Mats and Integrated Services segment.
 
 
23

 
 
Foreign Currency Exchange
 
Foreign currency exchange was a $0.5 million loss in 2011, compared to a $1.1 million gain in 2010, and primarily reflects the impact of currency translations on assets and liabilities held in our foreign operations that are denominated in currencies other than functional currencies.  Our foreign operations have a portion of their cash and accounts receivable that are denominated in U.S. dollars.  During 2010, our foreign currency exchange transactions were favorably impacted by the weakening U.S. dollar as compared to other currencies in our foreign operations, while 2011 was negatively impacted by the strengthening U.S. dollar.
 
Interest Expense
 
Interest expense decreased to $9.2 million in 2011, compared to $10.3 million in 2010.  The 2010 fiscal year included a $1.2 million charge for the termination of our interest rate swap agreements.
 
Provision for Income Taxes
 
The provision for income taxes for 2011 was $43.0 million, reflecting an effective tax rate of 35.0%, compared to $27.2 million in 2010, reflecting an effective tax rate of 39.6%.  The high effective tax rate in 2010 was due to losses generated in Brazil for which the recording of a tax benefit was not permitted.
 
Operating Segment Results
 
Summarized financial information for our reportable segments is shown in the following table (net of inter-segment transfers):
 
   
Year ended December 31,
   
2011 vs 2010
 
(In thousands)
 
2011
   
2010
    $         %
                                 
Revenues                                
Fluids systems and engineering
  $ 798,957     $ 597,795     $ 201,162       34 %
Mats and integrated services
    110,411       69,397       41,014       59 %
Environmental services
    48,812       48,762       50       0 %
Total revenues
  $ 958,180     $ 715,954     $ 242,226       34 %
                                 
Operating (loss) income
                               
Fluids systems and engineering
  $ 90,683     $ 56,234       34,449          
Mats and integrated services
    52,678       26,684       25,994          
Environmental services
    11,909       13,447       (1,538 )        
Corporate office
    (22,506 )     (18,361 )     (4,145 )        
Operating income (loss)
  $ 132,764     $ 78,004     $ 54,760          
                                 
Segment operating margin
                               
Fluids systems and engineering
    11.4 %     9.4 %                
Mats and integrated services
    47.7 %     38.5 %                
Environmental services
    24.4 %     27.6 %                
 
 
24

 
 
Fluids Systems and Engineering
 
Revenues
 
Total revenues for this segment consisted of the following:
 
     
Year ended December 31,
   
2011 vs 2010
 
(In thousands)
   
2011
   
2010
    $         %
                                   
United States
    $ 533,629     $ 402,106     $ 131,523       33 %
Canada
      51,712       23,021       28,691       125 %
Total North America
      585,341       425,127       160,214       38 %
EMEA
      113,386       111,416       1,970       2 %
Latin America
      75,642       61,252       14,390       23 %
Asia Pacific
      24,588       -       24,588       -  
Total
    $ 798,957     $ 597,795     $ 201,162       34 %
 
North American revenues increased 38% to $585.3 million in 2011, as compared to $425.1 million in 2010, largely attributable to the 22% increase in the U.S. rig count, a 20% increase in the Canadian rig count, along with market share improvements in Canada and several U.S. regions.
 
Internationally, revenues were up 24% to $213.6 million in 2011, as compared to $172.7 million in 2010. This increase includes $24.6 million of revenues from our Asia Pacific region following the April 2011 acquisition described above and a $14.4 million increase in Brazil, primarily attributable to the continued ramp-up of activity under our long-term contract with Petrobras.  EMEA revenues increased $2.0 million, as a $13.4 million increase in Eastern Europe and a $5.9 million increase in Algeria was largely offset by declines in other markets, including a $5.9 million decline in Tunisia attributable to a reduction in customer activity, and a $10.0 million decline in Libya due to the political and social unrest in that country.
 
Operating Income
 
Operating income for this segment was $90.7 million reflecting an operating margin of 11.4% in 2011, compared to $56.2 million and a 9.4% operating margin in 2010. Of this $34.4 million improvement, our North American operating income increased $28.0 million on a $160.2 million increase in revenues, reflecting an 18% incremental margin.
 
Our international operations generated a $6.5 million increase in operating income on a $40.9 million increase in revenues, reflecting a 16% incremental margin.  The low incremental margin is partially due to the acquisition of our Asia Pacific business unit in the second quarter of 2011, which generated $2.3 million of operating income in 2011.  In addition, operating income of our international operations was negatively impacted in 2011 by a $2.3 million provision for an allowance of a customer receivable in North Africa.
 
 
25

 
 
Mats and Integrated Services
 
Revenues
 
Total revenues for this segment consisted of the following:
 
     
Year ended December 31,
   
2011 vs 2010
 
(In thousands)
   
2011
   
2010
    $       %
                                   
Mat rental and services
    $ 68,579     $ 45,945     $ 22,634       49 %
Mat sales
      41,832       23,452       18,380       78 %
Total
    $ 110,411     $ 69,397     $ 41,014       59 %
 
Mat rental and services revenues increased $22.6 million, including a $12.1 million increase in the Northeast U.S., a $5.8 million increase in the Gulf Coast and $4.8 million increase in the Rocky Mountain region.  The increase is primarily driven by higher demand for our DuraBase composite mats, which provide environmental protection and soil stability at the drilling sites.
 
Mat sales also increased $18.4 million, due to increasing demand for our DuraBase composite mat products from international E&P customers and other industries.
 
Operating Income
 
Segment operating income increased by $26.0 million on the $41.0 million increase in revenues, reflecting an incremental margin of 63%.  The high incremental margin, relative to recent historical experience, is primarily attributable to the significant increase in mat rental revenues.  Incremental margins on mat rentals are stronger than mat sales or service activities, due to the fixed nature of operating expenses, including depreciation expense on our rental mat fleet.
 
Environmental Services
 
Revenues
 
Total revenues for this segment consisted of the following:
 
     
Year ended December 31,
   
2011 vs 2010
 
(In thousands)
   
2011
   
2010
    $         %
                                   
E&P waste
    $ 36,957     $ 39,169     $ (2,212 )     (6 %)
NORM and industrial waste
      11,855       9,593       2,262       24 %
Total
    $ 48,812     $ 48,762     $ 50       0 %
 
Environmental services revenues were $48.8 million in both 2011 and 2010.  Revenues in 2010 included $10.5 million generated from disposals associated with the April 2010 Deepwater Horizon oil spill.  The loss of this revenue in 2011 was offset by market share gains and increased activity in oilfield waste disposals from state water and inland locations, along with a $2.3 million increase in NORM and industrial waste disposals.
 
 
26

 
 
Operating Income
 
Operating income for this segment decreased by $1.5 million from 2010 to 2011, primarily due to a $0.5 million increase in transportation costs, due to a higher mix of inland waste disposals in 2011, and a $0.7 million non-cash charge in 2011 for the abandonment of a disposal well.
 
Corporate office
 
Corporate office expenses increased $4.1 million to $22.5 million in 2011, compared to $18.4 million in 2010.  The increase includes a $2.3 million increase in employee compensation, primarily attributable to a $1.6 million increase in employee incentives, along with $1.0 million of transaction-related expenses associated with the April 2011 acquisition described above.
 
Liquidity and Capital Resources
 
Net cash provided by operating activities during 2012 totaled $110.2 million. Net income adjusted for non-cash items provided $104.2 million of cash during the period, while changes in operating assets and liabilities provided $6.1 million of cash.
 
Net cash used in investing activities during 2012 was $96.2 million, which included $53.1 million for the Alliance acquisition described above.  Capital expenditures were $44.0 million in 2012, consisting primarily of $27.9 million in expenditures in our fluids systems and engineering segment, including $11.3 million associated with the construction of a new technology center and $13.4 million associated with purchases of equipment at our operating locations.  In addition, $8.2 million was used in the mats and integrated services segment for expansion of the mat rental fleet and capacity expansion at our mat manufacturing facility.
 
Net cash provided by financing activities during 2012 was $5.9 million, including net borrowings under our lines of credit of $67.5 million, largely offset by $50.8 million in repurchases of our outstanding common stock and a payment associated with the one-year earn-out obligation of $11.9 million following the April 2011 acquisition.
 
We anticipate that our working capital requirements for our operations will decline in the near term due to continued efforts to reduce accounts receivable and inventory from the levels at December 31, 2012.  We expect total 2013 capital expenditures to range between $50 million to $60 million.  As of December 31, 2012, substantially all of our $46.8 million of cash on-hand resides within our foreign subsidiaries which we intend to leave permanently reinvested abroad.  We expect our subsidiary cash on-hand, along with cash generated by operations and availability under our existing credit agreement to be adequate to fund our anticipated capital needs during the next 12 months.
 
Our capitalization was as follows as of December 31:
 
(In thousands)
   
2012
   
2011
 
                   
Senior Notes
    $ 172,500     $ 172,500  
Revolving credit facility
      84,000       17,000  
Other
        2,931       2,608  
 
Total
      259,431       192,108  
Stockholder's equity
      513,578       497,846  
                     
Total capitalization
    $ 773,009     $ 689,954  
                     
Total debt to capitalization
      33.6 %     27.8 %
 
 
27

 
 
Our financing arrangements include $172.5 million of Senior Notes and a $125.0 million revolving credit facility. The Senior Notes bear interest at a rate of 4.0% per year, payable semi-annually in arrears on April 1 and October 1 of each year, beginning April 1, 2011.  Holders may convert the Senior Notes at their option at any time prior to the close of business on the business day immediately preceding the October 1, 2017 maturity date.  The conversion rate is initially 90.8893 shares of our common stock per $1,000 principal amount of Senior Notes (equivalent to an initial conversion price of $11.00 per share of common stock), subject to adjustment in certain circumstances. Upon conversion, the Senior Notes will be settled in shares of our common stock.  We may not redeem the Senior Notes prior to their maturity date.
 
In November 2011, we entered into a Second Amended and Restated Credit Agreement (the "Credit Agreement") which provides for a $125 million revolving loan facility available for borrowings and letters of credit and expires in November 2016. Under the terms of the Credit Agreement, we can elect to borrow at an interest rate either based on LIBOR plus a margin based on our consolidated leverage ratio, ranging from 175 to 300 basis points, or at an interest rate based on the greatest of: (a) prime rate, (b) the federal funds rate in effect plus 50 basis points, or (c) the Eurodollar rate for a Eurodollar Loan with a one-month interest period plus 100 basis points, in each case plus a margin ranging from 75 to 200 basis points. The applicable margin on LIBOR borrowings on December 31, 2012 was 200 basis points. In addition, we are required to pay a commitment fee on the unused portion of the Credit Agreement of 37.5 basis points. The Credit Agreement contains customary financial and operating covenants, including a consolidated leverage ratio, a senior secured leverage ratio and an interest coverage ratio. We were in compliance with these covenants as of December 31, 2012.
 
At December 31, 2012, $84.0 million was outstanding under the Credit Agreement, and $6.9 million in letters of credit were issued and outstanding under the Credit Agreement leaving $34.1 million of availability at December 31, 2012.  Additionally, we had $0.2 million in letters of credit outstanding relating to foreign operations.
 
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.
 
Our foreign Fluid Systems and Engineering subsidiaries in Italy and Brazil maintain local credit arrangements consisting primarily of lines of credit with several banks, which are renewed on an annual basis.  We utilize local financing arrangements in our foreign operations in order to provide short-term local liquidity needs, as well as to reduce the net investment in foreign operations subject to foreign currency risk. Advances under these short-term credit arrangements are typically based on a percentage of the subsidiary’s accounts receivable or firm contracts with certain customers.  The weighted average interest rate under these arrangements was 2.81% and 3.54% on total outstanding balances of $2.5 million and $2.2 million at December 31, 2012 and 2011, respectively.
 
Off-Balance Sheet Arrangements
 
In conjunction with our insurance programs, we had established letters of credit in favor of certain insurance companies in the amount of $3.9 million and $3.6 million at December 31, 2012 and 2011.  We also had $8.6 million in guarantee obligations in connection with facility closure bonds and other performance bonds issued by insurance companies outstanding as of December 31, 2012 and 2011.
 
Other than normal operating leases for office and warehouse space, barges, rolling stock and other pieces of operating equipment, we do not have any off-balance sheet financing arrangements or special purpose entities. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such financing arrangements.
 
 
28

 
 
Contractual Obligations
 
A summary of our outstanding contractual and other obligations and commitments at December 31, 2012 is as follows:
                                     
(In thousands)
   
2013
      2014-2015       2016-2017    
Thereafter
   
Total
 
                                           
Current maturities of long term debt
    $ 53     $ -     $ -     $ -     $ 53  
Long-term debt including capital leases
      -       332       84,000       172,500       256,832  
Interest on 4.0% Senior Notes
      6,900       13,800       12,133       -       32,833  
Foreign bank lines of credit
      2,546       -       -       -       2,546  
Operating leases
      15,510       13,803       5,800       229       35,342  
Trade accounts payable and accrued liabilities
      156,997       -       -       -       156,997  
Purchase commitments, not accrued
      3,498       -       -       -       3,498  
Other long-term liabilities
      -       -       -       18,187       18,187  
Performance bond obligations
      6,237       2,371       -       -       8,608  
Letter of credit commitments
      6,928       -       -       -       6,928  
Total contractual obligations
    $ 198,669     $ 30,306     $ 101,933     $ 190,916     $ 521,824  
 
The above table does not reflect expected tax payments and uncertain tax positions due to the inability to make a reasonably reliable estimate of the timing and amount to be paid. For additional discussion on uncertain tax positions, see “Note 8 - Income Taxes” to our Notes to Consolidated Financial Statements included in Part II Item 8 in this report.
 
We anticipate that the obligations and commitments listed above that are due in less than one year will be paid from operating cash flows, available cash on-hand, and availability under our existing Credit Agreement. The specific timing of settlement for certain long-term obligations cannot be reasonably estimated.
 
Critical Accounting Policies
 
Critical Accounting Estimates
 
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted within the United States (“U.S. GAAP”), which requires us to make assumptions, estimates and judgments that affect the amounts and disclosures reported.  Significant estimates used in preparing our consolidated financial statements include the following:  allowances for product returns, allowances for doubtful accounts, reserves for self-insured retentions under insurance programs, estimated performance and values associated with employee incentive programs, fair values used for goodwill impairment testing, undiscounted cash flows used for impairment testing of long-lived assets and valuation allowances for deferred tax assets.  Note 1 to the consolidated financial statements contains the accounting policies governing each of these matters. Our estimates are based on historical experience and on our future expectations that are believed 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.
 
We believe the critical accounting policies described below affect our more significant judgments and estimates used in preparing our consolidated financial statements.
 
 
29

 
 
Allowance for Doubtful Accounts
 
Reserves for uncollectible accounts receivable are determined on a specific identification basis when we believe that the required payment of specific amounts owed to us is not probable.  The majority of our revenues are from mid-sized and international oil companies as well as government-owned or government-controlled oil companies, and we have receivables in several foreign jurisdictions. Changes in the financial condition of our customers or political changes in foreign jurisdictions could cause our customers to be unable to repay these receivables, resulting in additional allowances. For 2012, 2011 and 2010, provisions for uncollectible accounts receivable were $1.7 million, $2.4 million and $0.5 million, respectively.
 
Allowance for Product Returns
 
We maintain reserves for estimated customer returns of unused materials in our Fluids Systems and Engineering segment. The reserves are established based upon historical customer return levels and estimated gross profit levels attributable to product sales.  Future customer return levels may differ from the historical return rate.
 
Impairments of Long-lived Assets
 
Goodwill and other indefinite-lived intangible assets are tested for impairment annually as of November 1, or more frequently, if an indication of impairment exists. The impairment test includes a comparison of the carrying value of net assets of our reporting units, including goodwill, with their estimated fair values, which we determine using a combination of a market multiple and discounted cash flow approach. If the carrying value exceeds the estimated fair value, an impairment charge is recorded in the period in which such review is performed.  We identify our reporting units based on our analysis of several factors, including our operating segment structure, evaluation of the economic characteristics of our geographic regions within each of our operating segments, and the extent to which our business units share assets and other resources.
 
We determine the impairment of goodwill by comparing the carrying amounts of our reporting units with fair values, which we estimate using a combination of a market multiple and discounted cash flow approach.  In completing our November 1, 2012 evaluation, we determined that each reporting unit’s fair value was in excess of the net carrying value and therefore, no impairment was required.
 
We review property, plant and equipment, finite-lived intangible assets and certain other assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. We assess recoverability based on expected undiscounted future net cash flows. In estimating expected cash flows, we use a probability-weighted approach. 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 estimated fair value.
 
Insurance
 
We maintain reserves for estimated future payments associated with our self-insured employee healthcare programs, as well as the self-insured retention exposures under our general liability, auto liability and workers compensation insurance policies. Our reserves are determined based on historical cost experience under these programs, including estimated development of known claims under these programs and estimated incurred-but-not-reported claims. Required reserves could change significantly based upon changes in insurance coverage, loss experience or inflationary impacts. As of December 31, 2012 and 2011, total insurance reserves were $4.3 million and $4.4 million, respectively.
 
Income Taxes
 
We have total deferred tax assets of $34.5 million at December 31, 2012. A valuation allowance must be established to offset a deferred tax asset if, based on available evidence, it is more likely than not that some or all of the deferred tax asset will not be realized. We have considered future taxable income and tax planning strategies in assessing the need for our valuation allowance. At December 31, 2012, a total valuation allowance of $13.6 million was recorded, substantially all of which offsets $13.3 million of net operating loss carryforwards for state tax purposes, as well as Brazil.  Changes in the expected future generation of qualifying taxable income within these jurisdictions or in the realizability of other tax assets may result in an adjustment to the valuation allowance, which would be charged or credited to income in the period this determination was made.  Specifically, we have a $3.8 million valuation allowance recorded on the net operating loss carryforward in Brazil which could be reversed in the future, depending on our ability to generate taxable income. 
 
 
30

 
 
New Accounting Standards
 
In July 2012, the Financial Accounting Standards Board (“FASB”) issued an update to previous guidance regarding testing indefinite-lived intangible assets for impairment. The revised guidance permits an entity first to assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform the quantitative impairment test. The update is effective for impairment tests performed for fiscal years beginning after September 15, 2012. We do not expect the adoption of this additional guidance to have a material effect on our consolidated financial statements.
 
In September 2011, the FASB issued additional guidance regarding intangibles and goodwill impairment testing. The objective of the additional guidance is to simplify how entities test goodwill for impairment. Under the new requirements, we have the option to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If we determine it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, further quantitative testing is not required. The changes in this update were effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The adoption of this additional guidance did not have a material effect on our consolidated financial statements.
 
ITEM 7A.
Quantitative and Qualitative Disclosures about Market Risk
 
We are exposed to market risk from changes in interest rates and changes in foreign currency rates. A discussion of our primary market risk exposure in financial instruments is presented below.
 
Interest Rate Risk
 
At December 31, 2012, we had total debt outstanding of $259.4 million, including $172.5 million of borrowings under our Senior Notes, bearing interest at a fixed rate of 4.0%. Variable rate debt totaled $86.9 million which included $84.0 million outstanding under our revolving credit facility and $2.9 million of borrowings under foreign bank lines of credit.  At the December 31, 2012 balance, a 200 basis point increase in market interest rates during 2012 would cause our annual interest expense to increase approximately $1.7 million resulting in a $0.02 per diluted share reduction in annual net earnings.
 
Foreign Currency
 
Our principal foreign operations are conducted in certain areas of EMEA, Latin America, Asia Pacific, Canada, U.K. and Mexico.  We have foreign currency exchange risks associated with these operations, which are conducted principally in the foreign currency of the jurisdictions in which we operate which include European euros, Australian dollars, Canadian dollars and Brazilian reais.  Historically, we have not used off-balance sheet financial hedging instruments to manage foreign currency risks when we enter into a transaction denominated in a currency other than our local currencies because the dollar amount of these transactions has not warranted our using hedging instruments.
 
Unremitted foreign earnings permanently reinvested abroad upon which deferred income taxes have not been provided aggregated approximately $95.0 million and $84.7 million at December 31, 2012 and 2011, respectively. We have the ability and intent to leave these foreign earnings permanently reinvested abroad.
 
 
31

 
 
ITEM 8.
Financial Statements and Supplementary Data
 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
To the Board of Directors and Stockholders of
Newpark Resources, Inc.
The Woodlands, Texas
 
We have audited the accompanying consolidated balance sheets of Newpark Resources, Inc. and subsidiaries (the "Company") as of December 31, 2012 and 2011, and the related consolidated statements of operations, comprehensive income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2012. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements based on our audits.
 
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
 
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Newpark Resources, Inc. and subsidiaries as of December 31, 2012 and 2011, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2012, in conformity with accounting principles generally accepted in the United States of America.
 
 
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of December 31, 2012, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 28, 2013 expressed an unqualified opinion on the Company's internal control over financial reporting.
 
 
/s/   DELOITTE & TOUCHE LLP
 
Houston, Texas
February 28, 2013
 
 
32

 

Newpark Resources, Inc.
 
Consolidated Balance Sheets
December 31,
 
               
 
(In thousands, except share data)
   
2012
   
2011
 
                   
ASSETS                  
Cash and cash equivalents
    $ 46,846     $ 25,247  
Receivables, net
      323,439       328,590  
Inventories
      209,734       175,929  
Deferred tax asset
      11,596       13,224  
Prepaid expenses and other current assets
      12,441       10,828  
Total current assets
      604,056       553,818  
                   
Property, plant and equipment, net
      253,990       231,055  
Goodwill
      87,388       71,970  
Other intangible assets, net
      41,018       20,850  
Other assets
      8,089       9,144  
Total assets
    $ 994,541     $ 886,837  
                   
LIABILITIES AND STOCKHOLDERS’ EQUITY
                 
Short-term debt
    $ 2,599     $ 2,232  
Accounts payable
      114,377       97,168  
Accrued liabilities
      42,620       47,443  
Total current liabilities
      159,596       146,843  
                   
Long-term debt, less current portion
      256,832       189,876  
Deferred tax liability
      46,348       46,844  
Other noncurrent liabilities
      18,187       5,428  
Total liabilities
      480,963       388,991  
                   
Commitments and contingencies (Note 14)
                 
                   
                   
Common stock, $0.01 par value, 200,000,000 shares authorized and 95,733,677 and 94,497,526 shares issued, respectively
      957       945  
Paid-in capital
      484,962       477,204  
Accumulated other comprehensive (loss) income
      (734 )     789  
Retained earnings
      95,015       34,983  
Treasury stock, at cost; 10,115,951 and 2,803,987 shares, respectively
      (66,622 )     (16,075 )
Total stockholders’ equity
      513,578       497,846  
Total liabilities and stockholders' equity
    $ 994,541     $ 886,837  
 
See Accompanying Notes to Consolidated Financial Statements
 
 
33

 
 
Newpark Resources, Inc.
 
Consolidated Statements of Operations
Years Ended December 31,
 
                     
(In thousands, except per share data)
   
2012
   
2011
   
2010
 
                           
Revenues
    $ 1,038,019     $ 958,180     $ 715,954  
                           
Cost of revenues
      846,529       744,176       576,920  
                           
Selling, general and administrative expenses
      86,352       81,672       64,157  
Other operating income, net
      (759 )     (432 )     (3,127 )
                           
Operating income
      105,897       132,764       78,004  
                           
Foreign currency exchange loss (gain)
      749       522       (1,134 )
Interest expense, net
      9,740       9,226       10,267  
                           
Income from operations before income taxes
      95,408       123,016       68,871  
Provision for income taxes
      35,376       42,999       27,245  
                           
Net income
    $ 60,032     $ 80,017     $ 41,626  
                           
                           
                           
Income per common share -basic:
    $ 0.69     $ 0.89     $ 0.47  
Income per common share -diluted:
    $ 0.62     $ 0.80     $ 0.46  
 
See Accompanying Notes to Consolidated Financial Statements
 
 
34

 
 
Newpark Resources, Inc.
 
Consolidated Statements of Comprehensive Income
Years Ended December 31,
 
                   
(In thousands)
 
2012
   
2011
   
2010
 
                         
Net income
  $ 60,032     $ 80,017     $ 41,626  
                         
Settlement of interest rate swap, net of tax
    -       -       858  
Foreign currency translation adjustments
    (1,523 )     (7,792 )     (912 )
                         
Comprehensive income
  $ 58,509     $ 72,225     $ 41,572  

 
See Accompanying Notes to Consolidated Financial Statements
 
 
35

 
 
Newpark Resources, Inc.
 
Consolidated Statements of Stockholders’ Equity
 
(In thousands)
 
Common
Stock
   
Paid-In
Capital
   
Accumulated
Other
Compre-
hensive
Income
(Loss)
   
Retained
(Deficit)
Earnings
   
Treasury
Stock
   
Total
 
                                                 
Balance at January 1, 2010
  $ 917     $ 460,544     $ 8,635     $ (86,660 )   $ (15,414 )   $ 368,022  
Net income
    -       -       -       41,626       -       41,626  
Employee stock options, restricted stock and employee stock purchase plan
    14       3,838       -       -       (220 )     3,632  
Stock-based compensation expense
    -       3,876       -       -       -       3,876  
Income tax effect, net, of employee stock related activity
    -       245       -       -       -       245  
Settlement of interest rate swap, net of tax
    -       -       858       -       -       858  
Foreign currency translation
    -       -       (912 )     -       -       (912 )
Balance at December 31, 2010
    931       468,503       8,581       (45,034 )     (15,634 )     417,347  
Net income
    -       -       -       80,017       -       80,017  
Employee stock options, restricted stock and employee stock purchase plan
    14       3,574       -       -       (441 )     3,147  
Stock-based compensation expense
    -       4,535       -       -       -       4,535  
Income tax effect, net, of employee stock related activity
    -       592       -       -       -       592  
Foreign currency translation
    -       -       (7,792 )     -       -       (7,792 )
Balance at December 31, 2011
    945       477,204       789       34,983       (16,075 )     497,846  
Net income
    -       -       -       60,032       -       60,032  
Employee stock options, restricted stock and employee stock purchase plan
    12       1,088       -       -       (402 )     698  
Stock-based compensation expense
    -       7,103       -       -       -       7,103  
Income tax effect, net, of employee stock related activity
    -       (433 )     -       -       -       (433 )
   Treasury shares purchased at cost
    -       -       -       -       (50,145 )     (50,145 )
Foreign currency translation
    -       -       (1,523 )     -       -       (1,523 )
Balance at December 31, 2012
  $ 957     $ 484,962     $ (734 )   $ 95,015     $ (66,622 )   $ 513,578  

 

See Accompanying Notes to Consolidated Financial Statements
 
 
36

 
 
Newpark Resources, Inc.
 
Consolidated Statements of Cash Flows
Years Ended December 31,
 
                   
(In thousands)
 
2012
   
2011
   
2010
 
Cash flows from operating activities:
                       
Net income
  $ 60,032     $ 80,017     $ 41,626  
Adjustments to reconcile net income to net cash provided by operations:
                       
Impairment charges
    443       -       225  
Depreciation and amortization
    32,821       28,971       27,010  
Stock-based compensation expense
    7,103       4,535       3,876  
Provision for deferred income taxes
    1,358       26,623       18,030  
Net provision for doubtful accounts
    1,709       2,400       478  
 Loss (gain) on sale of assets
    724       630       (257 )
Change in assets and liabilities:
                       
Decrease (increase) in receivables
    23,565       (135,303 )     (75,829 )
Increase in inventories
    (28,758 )     (48,129 )     (8,085 )
(Increase) decrease in other assets
    (641 )     (434 )     1,898  
Increase in accounts payable
    13,702       30,425       2,810  
(Decrease) increase in accrued liabilities and other
    (1,813 )     (3,293 )     19,694  
Net cash provided by (used in) operating activities
    110,245       (13,558 )     31,476  
                         
Cash flows from investing activities:
                       
Capital expenditures
    (43,955 )     (36,897 )     (12,134 )
Proceeds from sale of property, plant and equipment
    863       522       1,585  
Business acquisitions, net of cash acquired
    (53,075 )     (26,775 )     -  
Net cash used in investing activities
    (96,167 )     (63,150 )     (10,549 )
                         
Cash flows from financing activities:
                       
Borrowings on lines of credit
    364,426       27,619       141,497  
Payments on lines of credit
    (296,944 )     (9,951 )     (231,613 )
Principal payments on notes payable and long-term debt
    (40 )     (219 )     (30,457 )
Proceeds from senior notes, net of offering costs
    -       -       167,756  
Proceeds from employee stock plans
    1,059       3,588       3,591  
Post-closing payment for business acquisition
    (11,892 )     (2,055 )     -  
Purchase of treasury stock
    (50,756 )     (644 )     (153 )
Net cash provided by financing activities
    5,853       18,338       50,621  
                         
Effect of exchange rate changes on cash
    1,668       607       (72 )
                         
Net increase (decrease) in cash and cash equivalents
    21,599       (57,763 )     71,476  
Cash and cash equivalents at beginning of year
    25,247       83,010       11,534  
                         
Cash and cash equivalents at end of year
  $ 46,846     $ 25,247     $ 83,010  
                         
Cash paid for:
                       
Income taxes (net of refunds)
  $ 24,508     $ 29,675     $ 7,395  
Interest
  $ 8,355     $ 7,794     $ 7,956  

See Accompanying Notes to Consolidated Financial Statements
 
 
37

 

NEWPARK RESOURCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
  Note 1 — Summary of Significant Accounting Policies
 
Organization and Principles of Consolidation.  Newpark Resources, Inc. was organized in 1932 as a Nevada corporation. In 1991, we changed our state of incorporation to Delaware. We are a diversified oil and gas industry supplier providing products and services primarily to the oil and gas exploration (“E&P”) industry serving customers in North America, Europe, the Middle East and Africa (“EMEA”), Latin America and Asia Pacific regions. The consolidated financial statements include our company and our wholly-owned subsidiaries (“we”, “our” or “us”). All intercompany transactions are eliminated in consolidation.
 
Use of Estimates and Market Risks.  The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“US GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Estimates used in preparing our consolidated financial statements include, but are not limited to the following: allowances for product returns, allowances for doubtful accounts, reserves for self-insured retentions under insurance programs, reserves for incentive compensation programs, fair values used for goodwill impairment testing, undiscounted future cash flows used for impairment testing of long-lived assets, depreciation using the unit-of-production method and valuation allowances for deferred tax assets.
 
Our operating results depend primarily on oil and gas drilling activity levels in the markets we serve. Drilling activity, in turn, depends on oil and gas commodities pricing, inventory levels and product demand. Oil and gas prices and activity are cyclical and volatile. This market volatility has a significant impact on our operating results.
 
Cash Equivalents.  All highly liquid investments with a remaining maturity of three months or less at the date of acquisition are classified as cash equivalents.
 
Allowance for Doubtful Accounts.  Reserves for uncollectible accounts receivable are determined on a specific identification basis when we believe that the required payment of specific amounts owed to us is not probable.
 
The majority of our revenues are from mid-sized and international oil companies and government-owned or government-controlled oil companies, and we have receivables in several foreign jurisdictions. Changes in the financial condition of our customers or political changes in foreign jurisdictions could cause our customers to be unable to repay these receivables, resulting in additional allowances.
 
Allowance for Product Returns.  We maintain reserves for estimated customer returns of unused materials in our Fluids Systems and Engineering segment. The reserves are established based upon historical customer return levels and estimated gross profit levels attributable to product sales.
 
Inventories.  Inventories are stated at the lower of cost (principally average cost) or market. Certain conversion costs associated with the acquisition, production, blending and storage of inventory in our Fluids Systems and Engineering segment as well as in the manufacturing operations in the Mats and Integrated Services segment are capitalized as a component of the carrying value of the inventory and expensed as a component of cost of revenues as the products are sold. Reserves for inventory obsolescence are determined based on the fair value of the inventory using factors such as our historical usage of inventory on-hand, future expectations related to our customers needs, market conditions and the development of new products.
 
Property, Plant and Equipment.  Property, plant and equipment are recorded at cost. Additions and improvements that extend the useful life of the assets are capitalized. Maintenance and repairs are charged to expense as incurred. The cost of property, plant and equipment sold or otherwise disposed of and the accumulated depreciation thereon are eliminated from the property and related accumulated depreciation accounts, and any gain or loss is credited or charged to income.
 
 
38

 
 
NEWPARK RESOURCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
 
For financial reporting purposes, except as described below, depreciation is provided on property, plant and equipment, including assets held under capital leases, by utilizing the straight-line method over the following estimated useful service lives or lease term:
 
  Years
Computer hardware and office equipment
3 -
5
Computer software
3 -
10
Autos & light trucks
5 -
7
Furniture, fixtures & trailers
7 -
10
Composite mats
7 -
12
Machinery and heavy equipment
5 -
15
Owned buildings
20 -
39
Leasehold improvements
              Lease term, including reasonably assured renewal periods
 
We compute the provision for depreciation on certain of our environmental disposal assets and our barite grinding mills using the unit-of-production method. In applying this method, we have considered certain factors which affect the expected production units (lives) of these assets. These factors include periods of non-use for normal maintenance and economic slowdowns.
 
Goodwill and Other Intangible Assets.  Goodwill represents the excess of the purchase price of acquisitions over the fair value of the net identifiable assets acquired. Goodwill and other intangible assets with indefinite lives are not amortized. Intangible assets with finite useful lives are amortized either on a straight-line basis over the asset’s estimated useful life or on a basis that reflects the pattern in which the economic benefits of the asset are realized. Any period costs of maintaining intangible assets are expensed as incurred.
 
Impairment of Long-Lived Assets.  Goodwill and other indefinite-lived intangible assets are tested for impairment annually as of November 1, or more frequently, if an indication of impairment exists. The impairment test includes a comparison of the carrying value of net assets of our reporting units, including goodwill, with their estimated fair values, which we determine using a combination of a market multiple and discounted cash flow approach. If the carrying value exceeds the estimated fair value, an impairment charge is recorded in the period in which such review is performed. We identify our reporting units based on our analysis of several factors, including our operating segment structure, evaluation of the economic characteristics of our geographic regions within each of our operating segments, and the extent to which our business units share assets and other resources.
 
We review property, plant and equipment, finite-lived intangible assets and certain other assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. We assess recoverability based on expected undiscounted future net cash flows. In estimating expected cash flows, we use a probability-weighted approach. 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 estimated fair value.
 
Insurance.  We maintain reserves for estimated future payments associated with our self-insured employee healthcare programs, as well as the self-insured retention exposures under our general liability, auto liability and workers compensation insurance policies. Our reserves are determined based on historical cost experience under these programs, including estimated development of known claims and estimated incurred-but-not-reported claims.
 
Revenue Recognition.  The Fluids Systems and Engineering segment recognizes sack and bulk material additive revenues upon shipment of materials and passage of title. Formulated liquid systems revenues are recognized when utilized or lost downhole while drilling. An allowance for product returns is maintained, reflecting estimated future customer product returns. Engineering and related services are provided to customers at agreed upon hourly or daily rates, and revenues are recognized when the services are performed.
 
 
39

 
 
NEWPARK RESOURCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
 
For the Mats and Integrated Services segment, revenues from the sale of mats are recognized when title passes to the customer, which is upon shipment or delivery, depending upon the terms of the underlying sales contract. Revenues for services and rentals provided by this segment are generated from both fixed-price and unit-priced contracts, which are short-term in duration. The activities under these contracts include site preparation, pit design, construction, drilling waste management, and the installation and rental of mat systems for a period of time generally not to exceed 60 days. Revenues from services provided under these contracts are recognized as the specified services are completed. Revenues from any subsequent extensions to the rental agreements are recognized over the extension period.
 
For our Environmental Services segment, revenues are recognized when we take title to the waste, which is upon receipt of the waste at one of our facilities. All costs related to the transporting and disposing of the waste received are accrued when that revenue is recognized.
 
Shipping and handling costs are reflected in cost of revenues, and all reimbursements by customers of shipping and handling costs are included in revenues.
 
Income Taxes.  We provide for deferred taxes using an asset and liability approach by measuring deferred tax assets and liabilities due to temporary differences existing at year end using currently enacted tax rates and laws that will be in effect when the differences are expected to reverse. We reduce deferred tax assets by a valuation allowance when, based on our estimates, it is more likely than not that a portion of those assets will not be realized in a future period. The estimates utilized in recognition of deferred tax assets are subject to revision, either up or down, in future periods based on new facts or circumstances.  We evaluate uncertain tax positions and record a liability as circumstances warrant. We have a $2.8 million and $1.2 million liability for uncertain tax positions recorded as of December 31, 2012 and 2011, respectively.
 
Stock-Based Compensation.  All share-based payments to employees, including grants of employee stock options, are recognized in the income statement based on their fair values. We use the Black-Scholes option-pricing model for measuring the fair value of stock options granted and recognize stock-based compensation based on the grant date fair value, net of an estimated forfeiture rate, for all share-based awards, on a straight-line basis over the vesting term.
 
Foreign Currency Transactions.  The majority of our transactions are in U.S. dollars; however, our foreign subsidiaries maintain their accounting records in the respective local currency. These currencies are converted to U.S. dollars with the effect of the foreign currency translation reflected in “accumulated other comprehensive income (loss),” a component of stockholders’ equity. Foreign currency transaction gains and losses, if any, are credited or charged to income. We recorded a net transaction loss (gain) totaling $0.7 million, $0.5 million and ($1.1) million in 2012, 2011 and 2010, respectively.  At December 31, 2012 and 2011, accumulated other comprehensive income (loss) related to foreign subsidiaries reflected in stockholders’ equity amounted to ($0.7) million and $0.9 million, respectively.
 
Derivative Financial Instruments.  We monitor our exposure to various business risks including interest rates and foreign currency exchange rates and occasionally use derivative financial instruments to manage the impact of certain of these risks. At the inception of a new derivative, we designate the derivative as a cash flow or fair value hedge or we determine the derivative to be undesignated as a hedging instrument based on the underlying facts. We do not enter into derivative instruments for trading purposes.
 
New Accounting Standards.  In July 2012, the Financial Accounting Standards Board (“FASB”) issued an update to previous guidance regarding testing indefinite-lived intangible assets for impairment. The revised guidance permits an entity first to assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform the quantitative impairment test. The update is effective for impairment tests performed for fiscal years beginning after September 15, 2012. We do not expect the adoption of this additional guidance to have a material effect on our consolidated financial statements.
 
 
40

 
 
NEWPARK RESOURCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
 
In September 2011, the FASB issued additional guidance regarding intangibles and goodwill impairment testing. The objective of the additional guidance is to simplify how entities test goodwill for impairment. Under the new requirements, we have the option to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If we determine it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, further quantitative testing is not required. The changes in this update were effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The adoption of this additional guidance did not have a material effect on our consolidated financial statements.
 
Note 2 — Inventories
 
Inventories consisted of the following items at December 31:
 
             
   
 
   
 
 
(In thousands)
 
2012
   
2011
 
                 
Raw materials and components:
               
Drilling fluids
  $ 208,580     $ 174,659  
Mats
    754       623  
Total raw materials and components
    209,334       175,282  
                 
Finished goods- mats
    400       647  
Total
  $ 209,734     $ 175,929  
 
The increase in inventory during 2012 includes a $20.8 million increase in U.S. barite ore inventory, a key raw material in our drilling fluids systems.
 
Note 3 — Property, Plant and Equipment
 
Our investment in property, plant and equipment consisted of the following at December 31:
 
             
(In thousands)
 
2012
   
2011
 
             
Land
  $ 14,517     $ 14,677  
Buildings and improvements
    148,726       134,628  
Machinery and equipment
    239,873       219,993  
Mats (rental fleet)
    44,811       40,597  
Construction in progress
    14,489       3,520  
      462,416       413,415  
Less accumulated depreciation
    (208,426 )     (182,360 )
Property, plant and equipment, net
  $ 253,990     $ 231,055  
 
Depreciation expense was $29.5 million, $25.6 million and $23.9 million in 2012, 2011 and 2010, respectively.
 
 
41

 
 
NEWPARK RESOURCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
 
Note 4 — Goodwill, Other Intangibles and Impairments of Long-Lived Assets
 
Changes in the carrying amount of goodwill by reportable segment are as follows:
 
             
(In thousands)
 
Fluids Systems
& Engineering
    Mats and
Integrated
Services
    Total  
                         
Balance at December 31, 2010
  $ 47,378     $ 14,929     $ 62,307  
Acquisition
    10,275       -       10,275  
Effects of foreign currency
    (612 )     -       (612 )
Balance at December 31, 2011
    57,041       14,929       71,970  
Acquisition
    15,060       -       15,060  
Effects of foreign currency
    358       -       358  
Balance at December 31, 2012
  $ 72,459     $ 14,929     $ 87,388  
 
 
We have evaluated the carrying values of our goodwill and other indefinite-lived intangible assets as of November 1, 2012.  We determine any impairment of goodwill by comparing the carrying amounts of our reporting units with fair values, which we estimate using a combination of a market multiple and discounted cash flow approach. In completing this evaluation, we determined that no reporting unit has a fair value below its net carrying value and therefore, no impairment was required.
 
 
Other intangible assets consist of the following:
 
   
December 31, 2012
   
December 31, 2011
 
(In thousands)
 
Gross Carrying Amount
   
Accumulated Amortization
   
Intangible assets, net
   
Gross
Carrying
Amount
   
Accumulated Amortization
   
Intangible
assets, net
 
                                                 
Technology related
  $ 5,421     $ (2,910 )   $ 2,511     $ 5,531     $ (2,607 )   $ 2,924  
Customer related
    42,540       (10,559 )     31,981       20,675       (7,854 )     12,821  
Employment related
    2,327       (593 )     1,734       2,679       (2,337 )     342  
Total amortizing intangible assets
    50,288       (14,062 )     36,226       28,885       (12,798 )     16,087  
                                                 
Permits and licenses
    3,941       -       3,941       3,929       -       3,929  
Trademarks
    851       -       851       834       -       834  
Total indefinite-lived intangible assets
    4,792       -       4,792       4,763       -       4,763  
                                                 
Total intangible assets
  $ 55,080     $ (14,062 )