nr20131231_10k.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, 2013

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  √ 

 

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  √ 

 

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  √  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  √  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  √  

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 √_

 

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 28, 2013, was $936.8 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, 2014, a total of 86,358,856 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, 2013
 

 

PART I

 

3

     

ITEM 1.

Business

3

ITEM 1A.

Risk Factors

7

ITEM 1B.

Unresolved Staff Comments

12

ITEM 2.

Properties

12

ITEM 3.

Legal Proceedings

12

ITEM 4.

Mine Safety Disclosures

13

     

PART II

 

13

     

ITEM 5.

Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

13

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

30

ITEM 8.

Financial Statements and Supplementary Data

32

ITEM 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

63

ITEM 9A.

Controls and Procedures

63

ITEM 9B.

Other Information

66

     

PART III

 

66

     

ITEM 10.

Directors, Executive Officers and Corporate Governance

66

ITEM 11.

Executive Compensation

66

ITEM 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

66

ITEM 13.

Certain Relationships and Related Transactions, and Director Independence

66

ITEM 14.

Principal Accounting Fees and Services

66

     

PART IV

 

67

     

ITEM 15.

Exhibits and Financial Statement Schedules

67

 

Signatures

73

  

 
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 two reportable segments: Fluids Systems and Mats and Integrated Services. Our Fluids Systems 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. In February 2014, we entered into an agreement to sell our Environmental Services business, which was previously reported as a third operating segment. The sale is subject to regulatory approval and customary closing conditions. This business is now reported within discontinued operations, as the sale is expected to be completed in the first quarter of 2014. For a detailed discussion of this matter, see Note 2 Discontinued Operations to our Notes to Consolidated Financial Statements included in Item 8. Financial Statements and Supplementary Data.

 

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. Historically, drilling activity levels in the U.S. have been volatile, primarily driven by the price of natural gas. However, in recent years, activity levels have been more stable, due to expanding activity in areas directed toward the production of oil. The most widely accepted measure of activity for our North American operations is the Baker Hughes Rotary Rig Count. In 2013, the average North America rig count was 2,114, compared to 2,283 in 2012, and 2,298 in 2011. 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.

 

 
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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, during 2012, while the average total North America rig count decreased by only 1% from 2011, there was 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.

 

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 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 since improved, the near term outlook for operations in these areas remains uncertain.

 

Reportable Segments

 

Fluids Systems

 

Our Fluids Systems business, formerly referred to as Fluids Systems and Engineering, 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. 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. Our Fluids Systems business also historically included a completion services and equipment rental business, however, during the fourth quarter of 2013, we completed the sale of substantially all of the assets of this business.

 

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 past we have experienced periods of short-term scarcity of barite ore, which have resulted in significant cost increases. 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 was a significant increase in world-wide demand for barite ore, and as result, we experienced significant cost increases during this time. Although the price has since stabilized, our cost for barite remains elevated when compared to periods before 2011. In response to this development, we continue to identify other economical sources of barite ore and adjust 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 these 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 fluids systems, which we market as Evolution®, DeepDrill® and FlexDrill systems, which are 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.

 

 
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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.

 

Customers — Our customers are principally major integrated and independent oil and gas E&P companies operating in the markets that we serve. During 2013, approximately 54% of segment revenues were derived from the 20 largest segment customers, and 65% 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 13 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 to E&P customers in the Northeast U.S., onshore U.S. Gulf Coast, Rocky Mountain Region, and the United Kingdom. We also offer location construction and related well site services to E&P customers in the Gulf Coast Region. In addition, we sell mats direct to customers in areas around the world where infrastructure for mat rentals does not exist. Our mats provide environmental protection and ensure all-weather access to sites with unstable soil conditions.

 

We manufacture our DURA-BASE® Advanced Composite Mats for sales as well as for use in our domestic and international rental operations. During the fourth quarter of 2013, we announced plans to significantly expand our manufacturing facility in order to support our efforts to expand our markets globally. This project is expected to be completed in early 2015, and will nearly double our current manufacturing capacity. Historically, our marketing efforts for this product remained focused in principal oil and gas industry markets which include the U.S., U.K., 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 the design, manufacturing and several of the components of our DURA-BASE® 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 DURA-BASE® mats to many customers, both domestic and international. The mat sales component of our business is not as fragmented as the rental and services component with only a few competitors providing various alternatives to our DURA-BASE® 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.

 

 
5

 

  

Customers — Our customers are principally integrated and independent oil and gas E&P companies operating in the markets that we serve. During 2013, approximately 79% of our segment revenues were derived from the 20 largest segment customers, of which, the largest customer represented 18% 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 13 Segment and Related Information in Item 8. Financial Statements and Supplementary Data for additional information on financial and geographic data.

 

Pending Sale of Environmental Services Segment

 

In February 2014, we entered into an agreement to sell our Environmental Services segment. The transaction is subject to regulatory approval and customary closing conditions and is expected to be completed in the first quarter of 2014. See Note 2 Discontinued Operations in our Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary Data for further discussion of this transaction.

 

The Environmental Services business processes and disposes of waste generated by our oil and gas customers that is treated as exempt under the Resource Conservation and Recovery Act (“RCRA”). The Environmental Services business also processes E&P waste contaminated with naturally occurring radioactive material. In addition, the business receives and disposes of non hazardous industrial waste, principally from generators of such waste in the U.S. Gulf Coast market, that produce waste that is not regulated under RCRA.

 

Employees

 

At January 31, 2014, we employed 2,214 full and part-time personnel including 120 in discontinued operations, 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 (as defined under the RCRA). The non-hazardous wastes handled by our Environmental Services business are described below.

 

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 of oil and gas 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 well tubing, tank bottoms or at fluid 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.

 

 
6

 

  

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 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.

 

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. In December 2013, we acquired Terrafirma Roadways (“Terrafirma”), a provider of temporary roadway and worksite solutions headquartered in the United Kingdom. In addition, our 2014 capital expenditures are expected to be approximately $75 million to $100 million, including additional investments in our mat manufacturing and research and development facilities, expansion of our chemical blending capabilities and field service infrastructure, 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

 

■     delays in completion and cost overruns associated with the planned additions to our mat manufacturing facility

 

 
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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 (both onshore and offshore). 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 during the course of our service obligations. Damage to the customer’s property and any related spills of hazardous materials could be extensive if a major problem occurred. We purchase insurance which may provide coverage for incidents such as those described above, however, the policies may not provide coverage or a sufficient amount of coverage for all types of damage claims that could be asserted against us. 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 2013, these international operations generated approximately 31% 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

 

■     uncertainties in or 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

 

■     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, or have recently experienced, elevated economic uncertainties, which could negatively impact our operations and profitability.

 

 
8

 

  

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 the exporting countries, as well as the impact of weather and natural disasters.  During 2011 and early 2012, there was a significant increase in world-wide demand for barite ore, and as result, we experienced substantial cost increases in barite ore sourced from China, in particular. While the cost of barite did not increase markedly in 2013, it remains elevated, and we may not be able to increase or maintain our customer pricing to cover our costs, 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 market demand, which could ultimately result in a reduction in industry activity, or our inability to meet customer’s needs.

 

Our mats business is highly dependent on the availability of high-density polyethylene (“HDPE”), which is the primary raw material used in the manufacture of the DURA-BASE® mat. The cost of HDPE can vary significantly based on the energy costs of the producers of HDPE, demand for this material, and the capacity/operations of the plants used to make HDPE. Should our cost of HDPE increase, we may not be able to increase our customer pricing to cover our costs, which may result in a reduction in future profitability.

 

All of our businesses are 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 April 2010, the Deepwater Horizon drilling rig sank in the Gulf of Mexico after an explosion and fire, resulting in the discharge of significant volumes 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, drilling activity in the Gulf of Mexico has recovered. However, additional or renewed restrictions on exploration and production activities in the Gulf of Mexico and other offshore basins in the United States and globally in response to a similar event or perceptions of the risks of a similar event could have a significant impact on our business.

 

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 2013, approximately 50% 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

 

 
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■     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 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 fragmented, with many competitors providing various forms of mat products and services. More recently several competitors have begun marketing composite products to compete with our DURA-BASE® mat system. While we believe the design and manufacture of our mat products provide a differentiated value to our customers, many of our competitors seek to compete on pricing.

 

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.  

 

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.

 

 
10

 

 

The markets for our products and services are dependent on the continued exploration for and production of fossil fuels (predominantly oil and natural gas).  Climate change is receiving increased attention worldwide. Many scientists, legislators and others attribute climate change to increased levels of greenhouse gases, including carbon dioxide, which has led to significant legislative and regulatory efforts to limit greenhouse gas emissions. The Environmental Protection Agency (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. Although we do not provide hydraulic fracturing services and our drilling fluids products are not used in such services, regulations which have the effect of limiting the use or availability of hydraulic fracturing could have a significant negative impact on the drilling activity levels of our customers, and therefore, the demand for our products and services. During 2013, we began distributing “proppants”, which are used in hydraulic fracturing, following our acquisition of Alliance Drilling Fluids. While sales of proppants represent a very small percentage of our U.S. drilling fluids revenues (2%), restrictions on hydraulic fracturing would have a significant impact on this portion of our business.

 

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, 2013, our consolidated balance sheet includes $94.1 million in goodwill and $25.9 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 2013, 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.

 

 
11

 

  

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. 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 which could reduce the competitive advantages we may derive from our patents and other proprietary technology.

 

Risks Related to Severe Weather, Particularly in the U.S. Gulf Coast

 

Approximately 16% of our consolidated revenue from continuing operations in 2013 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. 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 in regions in which we operate.

 

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. In 2013, we completed the construction of our drilling fluids 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.  We own eight warehouse facilities and have 20 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 nine 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.

 

 
12

 

  

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 six 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 34 acres of land in Carencro, Louisiana, which houses manufacturing facilities for this segment. We also lease five sites, throughout Texas, Louisiana, Colorado, and Pennsylvania which serve as bases for our well site service activities. Additionally, we own six 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.

 

In February 2014, we entered into an agreement to sell our Environmental Services business. This business is now reported within discontinued operations, as the sale is expected to be completed in the first quarter of 2014, and these properties are included in “Assets of discontinued operations” in our Financial Statements.

 

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.”

 

 
13

 

 

 

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

 
                 

2013

               
                 

Fourth Quarter

  $ 13.64     $ 11.65  

Third Quarter

  $ 12.88     $ 10.94  

Second Quarter

  $ 11.78     $ 8.17  

First Quarter

  $ 9.69     $ 7.70  
                 

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  

 

As of February 1, 2014, we had 1,602 stockholders of record as determined by our transfer agent.

 

In April 2013, our Board of Directors approved a share repurchase program that authorizes the Company to purchase up to $50.0 million of its outstanding shares of common stock. The repurchase program has no specific term. During 2013, 562,341 shares were repurchased for an average price of approximately $11.94 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.

 

During 2013, 2012 and 2011 we repurchased $2.6 million, $0.6 million and $0.6 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 prohibit 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, 2013: 

 

Period

 

Total Number of

Shares Purchased

(1)  

Average Price

per Share

   

Total Number of

of Publicly Announced

Plans or Programs

   

Maximum Approximate Dollar

Value of Shares that May Yet

be Purchased Under

Plans or Programs

 

October 1 - 31, 2013

    2,018     $ 13.03       -       $47.8    

November 1 - 30, 2013

    -       -       -       $47.8    

December 1 - 31, 2013

    417,425     $ 12.05       372,805       $43.3    

Total

    419,443     $ 12.05       372,805            

 

 

 

(1)

During the three months ended December 31, 2013, we purchased an aggregate of 46,638 shares surrendered in lieu of taxes under vesting of restricted stock awards.

 

In February 2014, the Company’s Board of Directors authorized an amendment to the $50.0 million repurchase program to increase the amount authorized to $100.0 million, subject to completion of the Environmental Services divesture.  

 

 
14

 

 

Performance Graph

 

The following graph reflects a comparison of the cumulative total stockholder return of our common stock from January 1, 2009 through December 31, 2013, 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, 2009 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, 2013 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. Due to the pending sale of our Environmental Services business, the results of operations for that business have been reclassified and are presented in discontinued operations in all periods presented below.

  

Selected Financial Data

                                         
                                           
    As of and for the Year Ended December 31,  

(In thousands, except share data)

 

2013

   

2012

     

2011

   

2010

   

2009

 

Consolidated Statements of Operations:

                                         

Revenues

  $ 1,042,356     $ 983,953       $ 909,368     $ 667,192     $ 446,926  
                                           

Operating income (loss)

    94,445       92,275         120,855       64,557       (23,036 )
                                           

Interest expense, net

    11,279       9,727         9,226       10,233       9,340  
                                           

Income (loss) from continuing operations

  $ 52,622     $ 50,453       $ 71,233     $ 32,296     $ (27,023 )

Income from discontinued operations, net of tax

    12,701       9,579         8,784       9,330       6,450  
                                           

Net income (loss)

  $ 65,323     $ 60,032       $ 80,017     $ 41,626     $ (20,573 )
                                           

Net income (loss) from continuing operations per common share (basic):

                                         

Income (loss) from continuing operations

  $ 0.62     $ 0.58  

 

  $ 0.79     $ 0.36     $ (0.31 )

Net income (loss)

  $ 0.77     $ 0.69  

 

  $ 0.89     $ 0.47     $ (0.23 )
                                           

Net income (loss) from continuing operations per common share (diluted):

                                         

Income (loss) from continuing operations

  $ 0.56     $ 0.53       $ 0.71     $ 0.36     $ (0.30 )

Net income (loss)

  $ 0.69     $ 0.62       $ 0.80     $ 0.46     $ (0.23 )
                                           

Consolidated Balance Sheet Data:

                                         

Working capital

  $ 405,689     $ 444,460       $ 406,976     $ 329,371     $ 163,110  

Total assets

    968,417       994,541         886,837       737,342       592,630  

Foreign bank lines of credit

    12,809       2,546         2,174       1,458       6,901  

Current maturities of long-term debt

    58       53         58       148       10,319  

Long-term debt, less current portion

    172,786       256,832         189,876       172,987       105,810  

Stockholders' equity

    581,054       513,578         497,846       417,347       368,022  
                                           

Consolidated Cash Flow Data:

                                         

Net cash provided by (used in) operations

  $ 151,903     $ 110,245       $ (13,558 )   $ 31,476     $ 88,819  

Net cash used in investing activities

    (60,063 )     (96,167 )       (63,150 )     (10,549 )     (17,144 )

Net cash (used in) provided by financing activities

    (72,528 )     5,853         18,338       50,621       (66,265 )

 

 
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 two reportable segments: Fluids Systems and Mats and Integrated Services.

 

In May 2013, our Board of Directors approved commencement of a process to sell our Environmental Services business so that our focus can be on expanding into new markets and developing new technologies in our core Fluids Systems and Mats and Integrated Services segments. In February 2014, we entered into a definitive agreement to sell our Environmental Services business, which was previously reported as a third operating segment. Under the terms of the agreement, we will receive $100 million in cash, subject to adjustment based on final working capital conveyed at closing. While containing representations, warranties and indemnities which are customary for transactions of this nature, the agreement significantly limits our post-closing environmental obligations, including those related to the waste transfer and disposal facilities. The agreement provides for a $5 million reverse-termination fee which will be payable to Newpark if the agreement is terminated under certain circumstances. The sale is expected to close in the first quarter of 2014, subject to customary conditions, including regulatory approval. As a result, this business is now reported within discontinued operations. See Note 2 Discontinued Operations to our Notes to Consolidated Financial Statements included in Item 8. Financial Statements and Supplementary Data for additional information.

 

Our Fluids Systems segment, which generated 89% of consolidated continuing operations revenues in 2013, 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.

 

In December 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 $53.1 million, which was funded through borrowings on our revolving credit facility. 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.

 

In 2013, we announced several international contract awards, including two in the deepwater market.  In Brazil, we were awarded a two-year contract from a subsidiary of Total S.A., to provide drilling fluids and related services for a series of wells planned in the Campos Basin.  In our EMEA region, we were awarded a contract by another customer to provide drilling fluids and related services for a series of wells to be drilled in the Black Sea.  In addition, we were awarded two contracts to provide drilling fluids and related services for land operations, including a five year contract by the Kuwait Oil Company and a four year contract by another customer in India. Work under the Brazil contract is expected to begin in early 2014, while work under the other three contracts is expected to begin in the third quarter of 2014.

 

During 2013, we continued to experience declines in our completion services and equipment rental business, a unit within our Fluids Systems segment. Following these declines, we decided to exit this business, and sold substantially all assets of the business unit during the fourth quarter of 2013, generating total proceeds of $13.3 million and a gain on disposal of $2.7 million. For the full year 2013, this business generated $16.7 million of revenues and a $0.9 million operating income, including the gain on disposal.

 

 
17

 

  

We are continuing 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 completing the roll-out of the system into most major North American drilling basins in 2011 and 2012, we are seeking to further penetrate markets in North America, while expanding into key international markets. The system has now been used in our EMEA and Asia Pacific regions. Revenues from wells using the Evolution system were approximately $120 million in 2013, compared to $110 million in 2012 and $67 million in 2011.

 

Our Mats and Integrated Services segment, which generated 11% of consolidated revenues in 2013, 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.

 

In October 2013, we announced plans to expand our mat manufacturing facility, located in Carencro, Louisiana. The $40 million expansion project is expected to be completed in early 2015. Upon completion, the project will significantly increase our production capacity and support expansion into new markets, both domestically and internationally. The new facility will also include a research and development center, intended to drive continued new product development efforts.

 

In December 2013 we completed the acquisition of Terrafirma Roadways (“Terrafirma”), a provider of temporary roadways and worksites based in the United Kingdom, for total cash consideration of $6.8 million, net of cash acquired. Additional consideration up to $1.6 million may be payable based on earnings of business over the 18 month period following the acquisition. Prior to the acquisition, Terrafirma had been operating as a partner to the Company since 2008, developing a rental business with DURA-BASE® composite mats, primarily focused in the utility industry in the U.K.

 

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.

 

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,

   

2013 vs 2012

   

2012 vs 2011

 
   

2013

   

2012

   

2011

   

Count

   

%

   

Count

   

%

 
                                                         

U.S. Rig Count

    1,761       1,919       1,879       (158 )     (8 %)     40       2 %

Canadian Rig Count

    353       364       419       (11 )     (3 %)     (55 )     (13 %)

Total

    2,114       2,283       2,298       (169 )     (7 %)     (15 )     (1 %)

 

________________

Source: Baker Hughes Incorporated

 

During 2012, while the average total North America rig count decreased by only 1% from 2011, there was 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.

 

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.

 

 
18

 

 

Year Ended December 31, 2013 Compared to Year Ended December 31, 2012

 

Consolidated Results of Operations

 

Summarized results of operations for the year ended December 31, 2013 compared to the year ended December 31, 2012 are as follows:

 

 

   

Year Ended December 31,

   

2013 vs 2012

 

(In thousands)

 

2013

   

2012

       $    

%

 
                                 

Revenues

  $ 1,042,356     $ 983,953     $ 58,403       6 %
                                 

Cost of revenues

    858,467       811,048       47,419       6 %

Selling, general and administrative expenses

    93,657       81,500       12,157       15 %

Other operating income, net

    (4,213 )     (870 )     (3,343 )     384 %
                                 

Operating income

    94,445       92,275       2,170       2 %
                                 

Foreign currency exchange loss

    1,819       749       1,070       143 %

Interest expense, net

    11,279       9,727       1,552       16 %
                                 

Income from continuing operations before income taxes

    81,347       81,799       (452 )     (1% )

Provision for income taxes

    28,725       31,346       (2,621 )     (8% )

Income from continuing operations

    52,622       50,453       2,169       4 %

Income from discontinued operations, net of tax

    12,701       9,579       3,122       33 %
                                 

Net income

  $ 65,323     $ 60,032     $ 5,291       9

%

 

 

Revenues

 

Revenues increased 6% to $1,042.4 million in 2013, compared to $984.0 million in 2012. This $58.4 million increase includes a $32.7 million (5%) increase in revenues in North America, largely driven by the December 2012 acquisition of Alliance as described above. Revenues from our international operations increased by $25.7 million (10%), including gains in EMEA and Brazil. Additional information regarding the change in revenues is provided within the operating segment results below.

 

Cost of Revenues

 

Cost of revenues increased 6% to $858.5 million in 2013, compared to $811.0 million in 2012. The increase is primarily driven by the 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 $12.2 million to $93.7 million in 2013 from $81.5 million in 2012. The increase is primarily attributable to increases in personnel and administrative costs related to company growth as well as costs associated with strategic planning projects.

 

 
19

 

  

Other Operating Income, Net

 

Other operating income increased $3.3 million to $4.2 million in 2013, compared to $0.9 million in 2012. The increase is primarily due to the sale of the completion services and equipment rental business assets, which generated a $2.7 million gain in 2013.

 

Foreign Currency Exchange

 

Foreign currency exchange was a $1.8 million loss in 2013, compared to a $0.7 million loss in 2012, and primarily reflects the impact of currency translations on assets and liabilities held in our international 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”), totaled $11.3 million in 2013 compared to $9.7 million in 2012. The $1.6 million increase is primarily due to the impact of increased borrowings in our Brazil subsidiary along with increased borrowings under our revolving credit facility following the Alliance acquisition described above.

 

Provision for Income Taxes

 

The provision for income taxes in 2013 was $28.7 million, reflecting an effective tax rate of 35.3%, compared to $31.3 million in 2012, reflecting an effective tax rate of 38.3%. The 2012 provision included a charge associated with a tax assessment in a foreign subsidiary, resulting in a higher effective tax rate.

 

Discontinued Operations

 

Income from discontinued operations was $12.7 million in 2013 compared to $9.6 million in 2012. See Note 2 Discontinued Operations in our Notes to Consolidated Financial Statements included in Item 8. Financial Statements and Supplementary data for additional information regarding the Company’s discontinued operations.

 

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,

   

2013 vs 2012

 

(In thousands)

 

2013

   

2012

         

%

 
                                 

Revenues

                               

Fluids systems

  $ 926,392     $ 861,670     $ 64,722       8%  

Mats and integrated services

    115,964       122,283       (6,319 )     (5%)  

Total revenues

  $ 1,042,356     $ 983,953     $ 58,403       6%  
                                 

Operating income (loss)

                               

Fluids systems

  $ 72,604     $ 59,987     $ 12,617          

Mats and integrated services

    49,394       54,251       (4,857 )        

Corporate office

    (27,553 )     (21,963 )     (5,590 )        

Operating income

  $ 94,445     $ 92,275     $ 2,170          
                                 

Segment operating margin

                               

Fluids systems

    7.8 %     7.0 %                

Mats and integrated services

    42.6 %     44.4 %                

  

 
20

 

 

Fluids Systems

 

Revenues

 

Total revenues for this segment consisted of the following: 

 

   

Year ended December 31,

   

2013 vs 2012

 

(In thousands)

 

2013

   

2012

         

%

 
                                 

United States

  $ 606,261     $ 566,575     $ 39,686       7%  

Canada

    47,559       48,643       (1,084 )     (2%)  

Total North America

    653,820       615,218       38,602       6%  

EMEA

    137,044       117,360       19,684       17%  

Latin America

    99,116       87,173       11,943       14%  

Asia Pacific

    36,412       41,919       (5,507 )     (13%)  

Total

  $ 926,392     $ 861,670     $ 64,722       8%  

 

North American revenues increased 6% to $653.8 million in 2013, compared to $615.2 million in 2012. While the North American rig count declined 7% over this period, the increase is largely attributable to market share gains in West Texas, benefitting from our December 2012 acquisition of Alliance, along with improved drilling efficiency, which results in an increased number of customer wells drilled per rig.

 

Internationally, revenues were up 11% to $272.6 million in 2013, as compared to $246.5 million in 2012. This increase is primarily attributable to continued market expansion in our EMEA region, along with an increase in product sales to Petrobras in Brazil.

 

Operating Income

 

Operating income increased $12.6 million in 2013, as compared to 2012, primarily due to the $64.7 million increase in revenues, along with improvements in our North American operations. Profitability in the prior year was negatively impacted by several factors, including declines in our completion services and equipment rental business, along with the significant regional shift in U.S. customer drilling activity, moving from dry gas regions to oil and liquid-rich regions.  During this period of regional transition, operating expenses were elevated due to operating cost inefficiencies as we re-deployed personnel and assets among regions and modified our regional business unit infrastructures to meet the changing activity levels.  Following the period of transition, we have executed a series of cost reduction and other profit improvement initiatives, which have contributed to the operating income improvement in 2013. In addition, 2013 included a $2.7 million gain on the sale of assets from our completion services and equipment rental business, as described above. The improvements were partially offset by an $8.3 million increase in depreciation and amortization expense, following the acquisition of Alliance.

 

Our international operating income decreased $8.8 million in 2013 compared to 2012, predominately due to declines in Brazil, including $1.8 million of charges for restructuring and value-added tax assessments.

 

During the fourth quarter of 2013, we experienced revenue declines in the U.S., driven in part by changes in drilling activity by certain key customers. We expect these issues to continue impacting our results in early 2014, which will cause revenues and operating income to decline from the levels achieved in 2013. However, as described above, we have received several recent contract awards in our international Fluids Systems business units that are expected to start in the third quarter of 2014, which are anticipated to provide increased revenues and operating income in the second half of 2014. 

 

 
21

 

  

Mats and Integrated Services

 

Revenues

 

Total revenues for this segment consisted of the following:

 

   

Year ended December 31,

   

2013 vs 2012

 

(In thousands)

 

2013

   

2012

       $    

%

 
                                 

Mat rental and services

  $ 71,429     $ 59,779     $ 11,650       19%  

Mat sales

    44,535       62,504       (17,969 )     (29%)  

Total

  $ 115,964     $ 122,283     $ (6,319 )     (5%)  

 

Mat rental and services revenues increased $11.7 million as compared to 2012, primarily due to increasing demand for our composite mat products, particularly in the Northeast U.S. region. Revenues from mat sales declined $18.0 million from the prior year. During the first half of 2013, we allocated the majority of our composite mat production toward the expansion of our rental fleet, leaving fewer mats available for sale to customers.

 

Operating Income

 

Operating income decreased by $4.9 million on the $6.3 million decrease in revenues. The decrease in operating income is primarily attributable to the decrease in mat sales in 2013, partially offset by higher income from rental activities.

 

As noted above, we recently announced plans to expand our mat manufacturing facility, as our existing plant, which provide mats for our rental fleet as well as for third party sales, is operating near full capacity. Until the expansion project, which is expected to be completed in 2015, the levels of mats sales in a period will be 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 2014 from the levels achieved in 2013, 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 2013.

 

Corporate office

 

Corporate office expenses increased $5.6 million to $27.6 million in 2013, compared to $22.0 million in 2012.  The increase is primarily attributable to increases in personnel and administrative costs related to company growth, along with a $1.3 million increase in legal and professional expenses, largely associated with acquisitions, divestitures, and strategic planning projects.

 

 
22

 

  

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

  $ 983,953     $ 909,368     $ 74,585       8%  
                                 

Cost of revenues

    811,048       713,216       97,832       14%  
                                 

Selling, general and administrative expenses

    81,500       76,414       5,086       7%  

Other operating income, net

    (870 )     (1,117 )     247       (22%)  
                                 

Operating income

    92,275       120,855       (28,580 )     (24%)  
                                 

Foreign currency exchange loss

    749       522       227       43%  

Interest expense, net

    9,727       9,226       501       5%  
                                 

Income from continuing operations before income taxes

    81,799       111,107       (29,308 )     (26%)  

Provision for income taxes

    31,346       39,874       (8,528 )     (21%)  

Income from continuing operations

    50,453       71,233       (20,780 )     (29%)  

Income from discontinued operations, net of tax

    9,579       8,784       795       9%  
                                 

Net income

  $ 60,032     $ 80,017     $ (19,985 )     (25%)  

 

 

Revenues

 

Revenues increased 8% to $984.0 million in 2012, compared to $909.4 million in 2011. This $74.6 million improvement includes a $39.6 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 $811.0 million in 2012, compared to $713.2 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 $5.1 million to $81.5 million in 2012 from $76.4 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.

 

 
23

 

  

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 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 $31.3 million, reflecting an effective tax rate of 38.3%, compared to $39.9 million in 2011, reflecting an effective tax rate of 35.9%. 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.

 

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

  $ 861,670     $ 798,957     $ 62,713       8%  

Mats and integrated services

    122,283       110,411       11,872       11%  

Total revenues

  $ 983,953     $ 909,368     $ 74,585       8%  
                                 

Operating (loss) income

                               

Fluids systems

  $ 59,987     $ 90,683     $ (30,696 )        

Mats and integrated services

    54,251       52,678       1,573          

Corporate office

    (21,963 )     (22,506 )     543          

Operating income (loss)

  $ 92,275     $ 120,855     $ (28,580 )        
                                 

Segment operating margin

                               

Fluids systems

    7.0 %     11.4 %                

Mats and integrated services

    44.4 %     47.7 %                

 

 

 
24

 

 

Fluids Systems

 

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.

 

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.

 

 
25

 

  

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 DURA-BASE® composite mat products from non-E&P customers, including the utility industry and the U.S. military.

 

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.

 

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.

 

Liquidity and Capital Resources

 

Net cash provided by operating activities during 2013 totaled $151.9 million. Net income adjusted for non-cash items provided $106.7 million of cash during the period, while changes in operating assets and liabilities provided $45.2 million of cash.

 

Net cash used in investing activities during 2013 was $60.1 million, primarily consisting of expenditures associated with the construction of a new technology center in our Fluids Systems segment and expansion of our mat rental fleet in our mats and integrated services segment.

 

Net cash used in financing activities during 2013 was $72.5 million, including net payments under our lines of credit of $73.7 million and $9.3 million in repurchases of our outstanding common stock, which were partially offset by proceeds from employee stock plans.

 

As described above, in February 2014, we entered into a definitive agreement to sell our Environmental Services business for $100 million in cash, subject to adjustment based on actual working capital conveyed at closing. The sale is subject to regulatory approval and customary closing conditions. We expect net cash proceeds to be approximately $70 million, after taxes, which we intend to use for general corporate purposes, potential acquisitions and/or share repurchases under our repurchase program. We do not anticipate the absence of the future cash flows from the discontinued business, which are not separately stated in our Consolidated Statements of Cash Flows, to materially impact the Company’s ability to finance its continuing operations or its future liquidity or capital resources.

 

 
26

 

  

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, 2013. We expect total 2014 capital expenditures to range between $75 million to $100 million. As of December 31, 2013, our $65.8 million of cash on-hand resides primarily 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)

 

2013

   

2012

 
                 

Senior Notes

  $ 172,500     $ 172,500  

Revolving credit facility

    -       84,000  

Other

    13,153       2,931  

Total

    185,653       259,431  

Stockholder's equity

    581,054       513,578  
                 

Total capitalization

  $ 766,707     $ 773,009  
                 

Total debt to capitalization

    24.2 %     33.6 %

 

 

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. 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.

 

The Credit Agreement provides 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, 2013 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, 2013.

 

At December 31, 2013, we had letters of credit issued and outstanding under the Credit Agreement which totaled $25.7 million leaving $99.3 million of availability at December 31, 2013. Additionally, our foreign operations had $13.2 million outstanding under lines of credit and other borrowings, as well as $0.8 million outstanding in letters of credit.

 

 
27

 

  

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 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 14.11% and 2.81% on total outstanding balances of $13.2 million and $2.5 million at December 31, 2013 and 2012, 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 $4.0 million and $3.9 million at December 31, 2013 and 2012. We also had $9.9 million and $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, 2013 and 2012, of which $9.3 million and $7.0 million in obligations relate to operations that are classified as discontinued operations as of December 31, 2013 and 2012, respectively. The definitive agreement for the sale of our Environmental Services business requires the purchaser to replace these facility closure bonds and performance bonds following the closing of such sale.

 

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.

 

Contractual Obligations

 

A summary of our outstanding contractual and other obligations and commitments at December 31, 2013 is as follows: 

  

(In thousands)

 

2014

      2015-2016       2017-2018    

Thereafter

   

Total

 
                                         

Current maturities of long term debt

  $ 342     $ -     $ -     $ -     $ 342  

Long-term debt including capital leases

    -       286       172,500       -       172,786  

Interest on 4.0% Senior Notes

    6,900       13,800       5,233       -       25,933  

Foreign bank lines of credit

    12,525       -       -       -       12,525  

Operating leases (1)

    13,832       13,581       6,191       2,043       35,647  

Trade accounts payable and accrued liabilities

    134,927       -       -       -       134,927  

Purchase commitments, not accrued

    18,566       -       -       -       18,566  

Other long-term liabilities

    -       -       -       11,026       11,026  

Performance bond obligations (1)

    9,939       -       -       -       9,939  

Letter of credit commitments

    25,598       60       -       -       25,658  

Total contractual obligations

  $ 222,629     $ 27,727     $ 183,924     $ 13,069     $ 447,349  

 

 

(1)

Includes obligations and commitments on operations classified as discontinued operations.

 

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.

 

 
28

 

 

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. See Note 1 Summary of Significant Accounting Policies to our Notes to Consolidated Financial Statements included in Item 8. Financial Statements and Supplementary Data for a discussion of 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.

 

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 2013, 2012 and 2011, provisions for uncollectible accounts receivable for continuing operations were $0.3 million, $1.6 million and $2.4 million, respectively.

 

Allowance for Product Returns

 

We maintain reserves for estimated customer returns of unused materials in our Fluids Systems 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, 2013 evaluation, we determined that each reporting unit’s fair value was in excess of the net carrying value and therefore, no impairment was required.

 

 
29

 

  

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, 2013 and 2012, total insurance reserves were $3.7 million and $4.3 million, respectively.

 

Income Taxes

 

We have total deferred tax assets of $35.9 million at December 31, 2013. 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, 2013, a total valuation allowance of $15.0 million was recorded, which includes a valuation allowance on $14.1 million of net operating loss carryforwards for state and foreign 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 $5.2 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. 

 

New Accounting Standards

 

In February 2013, the Financial Accounting Standards Board issued additional guidance on disclosure requirements for items reclassified out of accumulated other comprehensive income which was effective for us beginning in the first quarter of 2013. This new guidance requires entities to present (either on the face of the income statement or in the notes) the effects on the line items of the income statement for amounts reclassified out of accumulated other comprehensive income. During the year-ended December 31, 2013, we had no reclassifications out of accumulated other comprehensive income, as the only changes relate to foreign currency translation adjustments.

 

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. 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.

 

 
30

 

  

Interest Rate Risk

 

At December 31, 2013, we had total debt outstanding of $185.7 million, including $172.5 million of borrowings under our Senior Notes, bearing interest at a fixed rate of 4.0%. Variable rate debt totaled $13.2 million which relates to our foreign operations under lines of credit and other borrowings. At the December 31, 2013 balance, a 200 basis point increase in market interest rates during 2013 would cause our annual interest expense to increase approximately $0.2 million.

 

Foreign Currency

 

Our principal foreign operations are conducted in certain areas of EMEA, Latin America, Asia Pacific, and Canada. 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, British pound 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 $112.6 million and $95.0 million at December 31, 2013 and 2012, 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 Shareholders 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, 2013 and 2012, 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, 2013. 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, 2013 and 2012, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2013, 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, 2013, based on the criteria established in Internal Control — Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 28, 2014 expressed an unqualified opinion on the Company's internal control over financial reporting.

 

 

/s/ DELOITTE & TOUCHE LLP

 

Houston, Texas

February 28, 2014 

 

 
32

 

 

Newpark Resources, Inc.

 

Consolidated Balance Sheets
December 31,

 

 

 

(In thousands, except share data)

 

2013

   

2012

 
                 

ASSETS

               

Cash and cash equivalents

  $ 65,840     $ 46,846  

Receivables, net

    268,529       312,292  

Inventories

    189,680       209,734  

Deferred tax asset

    11,272       11,251  

Prepaid expenses and other current assets

    11,016       11,860  

Assets of discontinued operations

    13,103       12,073  

Total current assets

    559,440       604,056  
                 

Property, plant and equipment, net

    217,010       190,402  

Goodwill

    94,064       87,388  

Other intangible assets, net

    25,900       37,661  

Other assets

    6,086       7,831  

Assets of discontinued operations

    65,917       67,203  

Total assets

  $ 968,417     $ 994,541  
                 

LIABILITIES AND STOCKHOLDERS’ EQUITY

               

Short-term debt

  $ 12,867     $ 2,599  

Accounts payable

    88,586       109,117  

Accrued liabilities

    46,341       42,133  

Liabilities of discontinued operations

    5,957       5,747  

Total current liabilities

    153,751       159,596  
                 

Long-term debt, less current portion

    172,786       256,832  

Deferred tax liability

    27,060       34,219  

Other noncurrent liabilities

    11,026       10,061  

Liabilities of discontinued operations

    22,740       20,255  

Total liabilities

    387,363       480,963  
                 

Commitments and contingencies (Note 15)

               
                 

Common stock, $0.01 par value, 200,000,000 shares authorized and 98,030,839 and 95,733,677 shares issued, respectively

    980       957  

Paid-in capital

    504,675       484,962  

Accumulated other comprehensive loss

    (9,484 )     (734 )

Retained earnings

    160,338       95,015  

Treasury stock, at cost; 10,832,845 and 10,115,951 shares, respectively

    (75,455 )     (66,622 )

Total stockholders’ equity

    581,054       513,578  

Total liabilities and stockholders' equity

  $ 968,417     $ 994,541  

 

 

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)

 

2013

   

2012

   

2011

 
                         

Revenues

  $ 1,042,356     $ 983,953     $ 909,368  
                         

Cost of revenues

    858,467       811,048       713,216  

Selling, general and administrative expenses

    93,657       81,500       76,414  

Other operating income, net

    (4,213 )     (870 )     (1,117 )
                         

Operating income

    94,445       92,275       120,855  
                         

Foreign currency exchange loss

    1,819       749       522  

Interest expense, net

    11,279       9,727       9,226  
                         

Income from continuing operations before income taxes

    81,347       81,799       111,107  

Provision for income taxes

    28,725       31,346       39,874  

Income from continuing operations

    52,622       50,453       71,233  

Income from discontinued operations, net of tax

    12,701       9,579       8,784  
                         

Net income

  $ 65,323     $ 60,032     $ 80,017  
                         
                         
                         

Income per common share -basic:

                       

Income from continuing operations

  $ 0.62     $ 0.58     $ 0.79  

Income from discontinued operations

    0.15       0.11       0.10  

Net income

  $ 0.77     $ 0.69     $ 0.89  
                         

Income per common share -diluted:

                       

Income from continuing operations

  $ 0.56     $ 0.53     $ 0.71  

Income from discontinued operations

    0.13       0.09       0.09  

Net income

  $ 0.69     $ 0.62     $ 0.80  

 

 

See Accompanying Notes to Consolidated Financial Statements

 

 
34

 

 

Newpark Resources, Inc.

 

Consolidated Statements of Comprehensive Income
Years Ended December 31,
 

 

 

(In thousands)

 

2013

   

2012

   

2011

 
                         

Net income

  $ 65,323     $ 60,032     $ 80,017  
                         

Foreign currency translation adjustments

    (8,750 )     (1,523 )     (7,792 )
                         

Comprehensive income

  $ 56,573     $ 58,509     $ 72,225  

 

 

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, 2011

  $ 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       -