10-K 1 nr20150227_10k.htm FORM 10-K nr20141231_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, 2014

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.)

 

 

 9320 Lakeside Blvd., 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 30, 2014, was $1,019.1 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 19, 2015, a total of 84,069,387 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, 2014

 

 PART I

 

 3

 

 

 

 ITEM 1.  

Business 

 3

 ITEM 1A

Risk Factors 

 6

 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

 15

 ITEM 7.  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 16

 ITEM 7A. 

Quantitative and Qualitative Disclosures about Market Risk  

31

 ITEM 8. 

Financial Statements and Supplementary Data

 32

 ITEM 9.  

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 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. In addition, mat rental activity is expanding into applications in other industries, including petrochemicals, utilities, and pipeline. 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 March 2014, we completed the sale of our Environmental Services business, which was historically reported as a third operating segment. 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 9320 Lakeside Blvd., 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 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 oil and natural gas. The most widely accepted measure of activity for our North American operations is the Baker Hughes Rotary Rig Count. The average North America rig count was 2,241 in 2014, compared to 2,114 in 2013, and 2,283 in 2012. 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.

 

 
3

 

 

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. During the fourth quarter of 2014 and early 2015, the price for oil declined dramatically from the price levels in recent years. Following this decline, North American drilling activity has declined significantly, and activity levels are expected to remain below prior year levels for the foreseeable future. As of February 20, 2015 the North American rig count was at 1,670. The lower activity levels will reduce the demand for our services and negatively impact customer pricing in our North American operations in 2015. During these periods of rapid decline, the lower customer demand and elevated costs associated with workforce reductions negatively impact our profitability. Further, due to the fact that our business contains high levels of fixed costs, including significant facility and personnel expenses, North American operating margins in both operating segments are negatively impacted by the lower customer demand.

 

Internationally, we have seen continued growth in drilling activity, although certain international markets in which we operate, including Tunisia and Libya, have experienced political unrest in recent years and at various times our operations in these countries have been interrupted or suspended. Despite these interruptions, our international activities have continued to grow in recent years, driven by geographical expansion into new markets.

 

Reportable Segments

 

Fluids Systems

 

Our Fluids Systems business, offers customized solutions, including highly technical drilling projects involving complex subsurface conditions such as horizontal, directional, geologically deep or deep water drilling. These projects require increased monitoring and critical engineering support of the fluids system during the drilling process. We provide drilling fluids products and technical services to markets in North America, EMEA, Latin America, and the Asia Pacific regions. We also 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, 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. 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.

 

Competition — We face competition from larger companies, including Schlumberger, Halliburton and Baker Hughes, which compete vigorously on fluids performance and/or price. In addition, these companies have broad product and service offerings in addition to their drilling fluids. We also have smaller regional competitors competing with us mainly on price and local relationships. We believe that the principal competitive factors in our businesses include a combination of price, reputation, technical proficiency, reliability, quality, breadth of services offered and experience. We believe that our competitive position is enhanced by our proprietary products and services.

 

 
4

 

 

Customers — Our customers are principally major integrated and independent oil and gas E&P companies operating in the markets that we serve. During 2014, approximately 44% of segment revenues were derived from the 20 largest segment customers, and 63% of segment revenues were generated domestically. Typically, we perform services either under short-term standard contracts or under “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 manufacture our DURA-BASE® Advanced Composite Mats for use in our rental operations as well as for third party sales. Our mats provide environmental protection and ensure all-weather access to sites with unstable soil conditions. We sell composite mats direct to customers in areas around the world where we do not maintain an infrastructure for our mat rental activities. In addition, we provide mat rentals to E&P customers in the Northeast U.S., onshore U.S. Gulf Coast, and Rocky Mountain Regions, and to non-E&P customers in the U.S., Canada and the United Kingdom. We also offer location construction and related well site services to E&P customers in the Gulf Coast Region.

 

Historically, our marketing efforts for the sale of composite mats remained focused in principal oil and gas industry markets outside the U.S., including the Asia Pacific, Latin America and EMEA regions, 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 pipelines and electric utility transmission lines, and as temporary roads for movement of oversized or unusually heavy loads. In late 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 substantially completed in March 2015, and will nearly double our current manufacturing capacity.

 

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 oilfield services segment 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 2014, approximately 60% 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.

 

Sale of Environmental Services Segment

 

In March 2014, we completed the sale of our Environmental Services business, which was historically reported as a third operating segment. For a detailed discussion of this matter, see “Note 2- Discontinued Operations” in our Notes to Consolidated Financial Statements included in Item 8. Financial Statements and Supplementary Data.

 

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

 

Employees

 

At January 31, 2015, we employed 2,478 full and part-time personnel none of which are represented by unions. We consider our relations with our employees to be satisfactory.

 

Environmental Regulation  

 

We seek to comply with all applicable legal requirements concerning environmental matters. Our business is affected by governmental regulations relating to the oil and gas industry in general, as well as environmental, health and safety regulations that have specific application to our business. Our activities are impacted by various federal and state regulatory agencies, and provincial pollution control, health and safety programs that are administered and enforced by regulatory agencies.

 

Additionally, our business exposes us to environmental risks. 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.

 

 
6

 

 

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 2014, approximately 40% of our consolidated revenues were derived from our 20 largest customers, although no single customer accounted for more than 10% of our consolidated revenues.

 

The E&P industry is historically cyclical, with levels of activity generally affected by the following factors:

 

                ■     current oil and natural gas prices and expectations about future prices

 

■     the cost to explore for, produce and deliver oil and gas

 

■     the discovery rate for new oil and gas reserves

 

■     the ability of oil and gas companies to raise capital

 

■     domestic and international political, military, regulatory and economic conditions

 

■     government regulations regarding environmental protection, taxation, price controls and product allocation

 

Any of the factors above could have an adverse effect on our business, financial condition or results of operations. Specifically, during the fourth quarter of 2014 and early 2015, the price for oil has declined dramatically from the price levels in recent years and there are no assurances that the price for oil will not continue to decline. Following this decline, U.S. drilling activity has decreased, which will reduce the demand for our services and negatively impact customer pricing in our North American operations in 2015. Due to these expected changes, our quarterly and annual operating results may fluctuate in future periods. Because our business has high fixed costs, including significant facility and personnel expenses, downtime or low productivity due to reduced demand can have a significant adverse impact on our profitability.

 

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 and it is possible that such incidents can interrupt our ongoing operations and the ability to provide our services. 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 2014, these international operations generated approximately 33% 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

 

 
7

 

 

■     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 that 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 North African markets in which we operate, including Tunisia, Egypt, Libya, and Algeria experienced social and political unrest in recent years, which negatively impacted our operating results, including the temporary suspension of our operations. More recently in Brazil, a significant number of senior executives at Petrobras resigned their positions in connection with a widely-publicized corruption investigation. We expect these developments to further disrupt Petrobras’ operations in the near term.

 

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. In addition, changes in commodity prices, such as the recent declines in the price of oil, may have an adverse effect on the availability of borrowed funds or the cost of borrowings to us and our customers. As many of our customers 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.

 

 
8

 

 

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 2015, our capital expenditures are expected to be approximately $70 million to $90 million, including additional investments to complete our mat manufacturing expansion project and research and development facilities, the 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 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

 

■     delays in completion and cost overruns associated with large construction projects, including those mentioned above

 

Any of the factors above could have an adverse effect on our business, financial condition or results of 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.   The future supply of barite ore from existing sources could be inadequate to meet the market demand, particularly during periods of increasing world-wide 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

 

Following the Deepwater Horizon event in 2010, 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.

 

 
9

 

 

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 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.

 

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 adopted 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, others have adopted moratoriums on the use of fracturing, and the State of New York has banned the practice altogether. 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. 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.

 

 
10

 

 

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, 2014, our consolidated balance sheet includes $91.9 million in goodwill and $15.7 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 2014, we determined that no reporting unit had a fair value below its net carrying value, and therefore, no impairment was required. As a result of the significant declines in oil prices and decreases in U.S. drilling activities subsequent to our November 1, 2014 evaluation date, we updated our fair value estimates based on our current forecasts and market conditions and determined that each reporting unit’s fair value remains in excess of its net carrying value. However, if the financial performance or future projections for our operating segments deteriorate significantly from current levels, a future impairment of goodwill or indefinite-lived intangible assets may be required, which would negatively impact our financial results, in the period of impairment.

 

Risks Related to Technological Developments in our Industry

 

The market for our products and services is characterized by continual technological developments that generate substantial improvements in product functions and performance. If we are not successful in continuing to develop product enhancements or new products that are accepted in the marketplace or that comply with industry standards, we could lose market share to competitors, which would negatively impact our results of operations and financial condition.

 

We hold U.S. and foreign patents for certain of our drilling fluids components and our mat systems. 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 19% of our consolidated revenue from continuing operations in 2014 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.

 

 
11

 

 

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. 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 a facility containing approximately 102,685 square feet of office space on approximately 11 acres of land in Katy, Texas, which houses the divisional headquarters and technology center for this segment. Additionally, we own eight warehouse facilities and have 22 leased warehouses and 11 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 20 warehouses and own one warehouse in the EMEA region, lease five warehouses in Brazil, and own one warehouse and lease ten warehouses in the Asia Pacific region to support our international operations. 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 buildings providing office space in Oklahoma City, Oklahoma and office/warehouse space in Henderson, Australia. Some of these warehouses include blending facilities as well.

 

We operate four specialty product grinding facilities in the U.S. These facilities are located in Houston, Texas on approximately 18 acres of owned land, in New Iberia, Louisiana on 15.7 acres of leased land, in Corpus Christi, Texas on 6 acres of leased land, and in Dyersburg, Tennessee on 13.2 acres of owned land.

 

Mats and Integrated Services.  We own a facility containing approximately 41,000 square feet of office and industrial space on approximately 34 acres of land in Carencro, Louisiana, which houses manufacturing facilities and divisional headquarters 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 two facilities which are located in Louisiana and Texas to support field operations.

 

ITEM 3.     Legal Proceedings

 

Davida v. Newpark Drilling Fluids LLC. On June 18, 2014, Jesse Davida, a former employee of Newpark Drilling Fluids LLC filed a purported class action lawsuit in the U.S. District Court for the Western District of Texas, San Antonio Division, alleging violations of the Fair Labor Standards Act (“FLSA”). The plaintiff seeks damages and penalties for the Company’s alleged failure to: properly classify its field service employees as “non-exempt” under the FLSA; and, pay them on an hourly basis (including overtime). The plaintiff seeks recovery on his own behalf, and seeks certification of a class of similarly situated employees. In the interim since the filing of the litigation, 18 additional former employees of the Company have joined the case. On January 6, 2015, the Court granted the plaintiff’s motion to “conditionally” certify the class of fluid service technicians that have worked for Newpark Drilling Fluids over the past three years (approximately 675 individuals), and on February 17, 2015, the Court approved the form of the notice to be sent to the class members. In order to participate in the litigation, these employees and former employees must “opt-in” to the case within sixty days of notification. Notwithstanding, the conditional certification of the class, we have a number of defenses we can assert against these claims; including a request to decertify the class and that these employee’s are properly classified as exempt employees. Until the number of plaintiffs joining the case has been determined and their individual work histories assessed, a determination of our potential liability exposure cannot be determined. We have retained counsel with experience in cases of this nature, and intend to vigorously defend this litigation.

 

 
12

 

 

Christiansen v. Newpark Drilling Fluids LLC. On November 11, 2014, Christiansen filed a purported class action lawsuit in the U.S. District Court for the Southern District of Texas, Houston Division, alleging violations of the Fair Labor Standards Act (“FLSA”). The plaintiff seeks damages and penalties for the Company’s alleged failure to: properly classify him as an employee rather than an independent contractor; properly classify its field service employees as “non-exempt” under the FLSA; and, pay them on an hourly basis (including overtime) and seeks damages and penalties for the Company’s alleged failure to pay him and the others in the proposed class on an hourly basis (including overtime). Since the filing of this lawsuit, five additional plaintiffs have joined the proceedings. The plaintiff seeks recovery on his own behalf, and seeks certification of a class of similarly situated individuals and on February 2, 2015, filed a motion to conditionally certify such a class. We have retained counsel with experience in cases of this nature, and intend to vigorously defend this litigation.

 

ITEM 4.

Mine Safety Disclosures

 

The information concerning mine safety violations and other regulatory matters required by section 1503 (a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K is included in Exhibit 95.1 of this Annual Report on Form 10-K, which is incorporated by reference.

 

PART II

 

ITEM 5.

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

 

Our common stock is traded on the New York Stock Exchange under the symbol “NR.”

 

The following table sets forth the range of the high and low sales prices for our common stock for the periods indicated:

 

 

Period

 

High

   

Low

 
                 

2014

               

Fourth Quarter

  $ 12.65     $ 8.23  

Third Quarter

  $ 13.60     $ 11.50  

Second Quarter

  $ 12.65     $ 10.90  

First Quarter

  $ 12.56     $ 10.43  
                 

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  

 

 

As of February 2, 2015, we had 1,470 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. This authorization was subsequently increased to $100.0 million in February 2014. These purchases are funded with a combination of cash generated from operations, proceeds from the March 2014 sale of the Environmental Services business and borrowings under the Company’s revolving credit facility. The repurchase program has no specific term. The Company may repurchase shares in the open market or as otherwise determined by management, subject to market conditions, business opportunities and other factors. As part of the share repurchase program, the Company’s management has been authorized to establish trading plans under Rule 10b5-1 of the Securities Exchange Act of 1934.

 

 
13

 

 

During 2014, 4,317,278 shares were repurchased under the share repurchase program for an average price of approximately $11.72 per share, including commissions, leaving $42.7 million remaining under the program. During 2014, we also repurchased $2.5 million of shares surrendered in lieu of taxes under vesting of restricted stock awards. All of the shares repurchased are held as treasury stock.

 

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, 2014: 

 

Period  

Total Number of

Shares Purchased

   

Average Price

per Share

 

 

Total Number of

Shares Purchased as Part of  Publicly Announced Plans or Programs

   

Maximum Approximate Dollar

Value of Shares that May Yet 

be Purchased Under Plans or Programs

October 1 - 31, 2014

  10,210    $ 10.64      $ 42.7

November 1 - 30, 2014

    $     $ 42.7

December 1 - 31, 2014

  13,470      9.56      $ 42.7

Total

  23,680    $ 10.03         

 

(1)      

During the three months ended December 31, 2014, we purchased an aggregate of 23,680 shares surrendered in lieu of taxes under vesting of restricted stock awards.

          

Performance Graph

 

The following graph reflects a comparison of the cumulative total stockholder return of our common stock from January 1, 2010 through December 31, 2014, 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, 2010 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.

 

 

 
14

 

 

ITEM 6.     Selected Financial Data

 

The selected consolidated historical financial data presented below for the five years ended December 31, 2014 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. In March of 2014, we completed the sale of our Environmental Services business. All assets, liabilities and results of operations for this business have been reclassified to discontinued operations for all periods presented below.

 

   

As of and for the Year Ended December 31,

 

(In thousands, except share data)

 

2014

   

2013

     

2012

   

2011

   

2010

 

Consolidated Statements of Operations:

                                         

Revenues

  $ 1,118,416     $ 1,042,356       $ 983,953     $ 909,368     $ 667,192  
                                           

Operating income

    130,596       94,445         92,275       120,855       64,557  
                                           

Interest expense, net

    10,431       11,279         9,727       9,226       10,233  
                                           

Income from continuing operations

  $ 79,009     $ 52,622       $ 50,453     $ 71,233     $ 32,296  

Income from discontinued operations, net of tax

    1,152       12,701         9,579       8,784       9,330  

Gain from disposal of discontinued operations, net of tax

    22,117       -         -       -       -  
                                           

Net income

  $ 102,278     $ 65,323       $ 60,032     $ 80,017     $ 41,626  
                                           

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

                                         

Income from continuing operations

  $ 0.95     $ 0.62  

 

  $ 0.58     $ 0.79     $ 0.36  

Net income per common share

  $ 1.23     $ 0.77  

 

  $ 0.69     $ 0.89     $ 0.47  
                                           

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

                                         

Income from continuing operations

  $ 0.84     $ 0.56       $ 0.53     $ 0.71     $ 0.36  

Net income per common share

  $ 1.07     $ 0.69       $ 0.62     $ 0.80     $ 0.46  
                                           

Consolidated Balance Sheet Data:

                                         

Working capital

  $ 450,604     $ 405,689       $ 444,460     $ 406,976     $ 329,371  

Total assets

    1,020,122       968,417         994,541       886,837       737,342  

Foreign bank lines of credit

    11,395       12,809         2,546       2,174       1,458  

Current maturities of long-term debt

    253       58         53       58       148  

Long-term debt, less current portion

    172,498       172,786         256,832       189,876       172,987  

Stockholders' equity

    625,458       581,054         513,578       497,846       417,347  
                                           

Consolidated Cash Flow Data:

                                         

Net cash provided by (used in) operations

  $ 89,173     $ 151,903       $ 110,245     $ (13,558 )   $ 31,476  

Net cash used in investing activities

    (14,002 )     (60,063 )       (96,167 )     (63,150 )     (10,549 )

Net cash (used in) provided by financing activities

    (49,158 )     (72,528 )       5,853       18,338       50,621  

  

 

 
15

 

 

 

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 March 2014, we completed the sale of our Environmental Services business, which was historically reported as a third operating segment, for $100 million in cash. The proceeds were used for general corporate purposes, including investments in our core drilling fluids and mats segments, along with share purchases under our share repurchase program. See “Note 2- Discontinued Operations” in our Notes to Consolidated Financial Statements included in Item 8. Financial Statements and Supplementary Data for additional information.

 

Our Fluids Systems segment, which generated 86% of consolidated revenues in 2014, 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. In the fourth quarter of 2013, we sold substantially all assets of the completion services and equipment rental business, 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.

 

International expansion is a key element of our corporate strategy. In 2014, we began work on several international contract awards within the EMEA region. We were awarded a contract to provide drilling fluids and related services for a series of wells to be drilled in the deepwater Black Sea. In addition, we were awarded two contracts to provide drilling fluids and related services for land operations, including a five year contract with the Kuwait Oil Company (“Kuwait”) and a four year contract with Cairn Energy in India. Total revenue generated under these contracts was approximately $23 million during 2014. In addition, we received two contract awards that are expected to begin in 2015. We were awarded a contract by ENI S.p.A. to provide drilling fluids and related services for a series of wells in offshore Libya with the work expected to begin in the first half of 2015. We were also awarded Lot 1 and Lot 3 of a restricted tender by Sonatrach to provide drilling fluids and related services in Algeria. The award remains subject to final approval by Sonatrach and the execution of contract documents. The maximum value of the two lots of the Sonatrach tender is approximately $350 million, covering a term of three years. Work under this contract is expected to ramp-up beginning in the second half of 2015. On an annualized basis, the maximum value of the award represents an increase of approximately 165% over our 2014 revenue level with Sonatrach, although we do not expect to reach this rate in 2015.

 

We are continuing to focus on the development and commercialization of new drilling fluids technologies, including Evolution®, our family of high performance water-based drilling fluid systems, which we believe provide superior performance and environmental benefits to our customers, as compared to traditional fluid systems used in the industry. Total revenues from wells using Evolution systems were approximately $251 million in 2014, including $32 million from international markets, compared to total revenues of $120 million in 2013.

 

 
16

 

 

We recently announced two capital investment projects within the Fluids Systems segment. We are investing approximately $30 million to significantly expand existing capacity and upgrade the drilling fluids blending, storage and transfer capabilities in Fourchon, Louisiana, which serves the Gulf of Mexico deepwater market. This project is expected to be completed in early 2016. In addition, we are investing approximately $20 million in a new fluid blending facility and distribution center located in Conroe, Texas, which will support the increasing demand for our proprietary fluid technologies, including our Evolution systems. This project is expected to be completed by the end of 2015.

 

Our Mats and Integrated Services segment, which generated 14% of consolidated revenues in 2014, provides composite mat rentals, well site construction and related site services primarily to oil and gas customers. In addition, mat rentals activity is expanding into applications in other industries, including petrochemicals, utilities, and pipeline. We also manufacture and sell composite mats to E&P customers outside of the U.S., and to domestic customers outside of the oil and gas industry.

 

Over the past two years, revenues from mat sales have been constrained by our manufacturing capacity limitations, along with our efforts to meet growing demand for mat rentals. During 2014, we allocated the majority of our composite mat production toward the expansion of our rental fleet, leaving fewer mats available for sale to customers. In order to address the manufacturing capacity limitations, we initiated a project in late 2013 to expand our mat manufacturing facility, located in Carencro, Louisiana, which is expected to be substantially complete in March of 2015, with production ramping up throughout 2015. Upon completion, the project will nearly double our production capacity and support expansion into new markets, both domestically and internationally. The expanded facility will also include a research and development center that is expected to be completed in the second half of 2015, intended to drive continued new product development efforts. Capital expenditures related to this project totaled $28.8 million in 2014 and $4.9 million in 2013.

 

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. 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,

   

2014 vs 2013

   

2013 vs 2012

 
   

2014

   

2013

   

2012

   

Count

   

%

   

Count

   

%

 
                                                         

U.S. Rig Count

    1,862       1,761       1,919       101       6 %     (158 )     (8% )

Canadian Rig Count

    379       353       364       26       7 %     (11 )     (3% )

Total

    2,241       2,114       2,283       127       6 %     (169 )     (7% )

 

________________

Source: Baker Hughes Incorporated

 

The average North America rig count was 2,241 in 2014, compared to 2,114 in 2013, and 2,283 in 2012. During the fourth quarter of 2014 and early 2015, the price for oil declined dramatically from the price levels in recent years. Following this decline, North American drilling activity has decreased to 1,670 rigs as of February 20, 2015, and activity levels are expected to remain below prior year levels for the foreseeable future. The lower activity levels will reduce the demand for our services and negatively impact customer pricing in our North American operations in 2015. As a result of the lower customer demand, along with costs associated with anticipated workforce reductions, we expect profitability in our North America operations to be lower in 2015. Further, due to the fact that our business contains high levels of fixed costs, including significant facility and personnel expenses, we expect North American operating margins in both operating segments to be negatively impacted by the lower customer demand.

 

 
17

 

 

Drilling activity is generally more stable outside of 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. Further, we expect our EMEA region of Fluid Systems to benefit from new contract awards that are scheduled to begin in 2015.

 

Year Ended December 31, 2014 Compared to Year Ended December 31, 2013

 

Consolidated Results of Operations

 

Summarized results of operations for the year ended December 31, 2014 compared to the year ended December 31, 2013 are as follows:

 

   

Year Ended December 31,

   

2014 vs 2013

 

(In thousands)

 

2014

   

2013

         

%

 
                                 

Revenues

  $ 1,118,416     $ 1,042,356     $ 76,060       7 %
                                 

Cost of revenues

    876,999       858,467       18,532       2 %

Selling, general and administrative expenses

    112,648       93,657       18,991       20 %

Other operating income, net

    (1,827 )     (4,213 )     2,386       (57 %)
                                 

Operating income

    130,596       94,445       36,151       38 %
                                 

Foreign currency exchange loss

    108       1,819       (1,711 )     (94 %)

Interest expense, net

    10,431       11,279       (848 )     (8 %)
                                 

Income from continuing operations before income taxes

    120,057       81,347       38,710       48 %

Provision for income taxes

    41,048       28,725       12,323       43 %

Income from continuing operations

    79,009       52,622       26,387       50 %

Income from discontinued operations, net of tax

    1,152       12,701       (11,549 )     (91 %)

Gain from disposal of discontinued operations, net of tax

    22,117       -       22,117       -  
                                 

Net income

  $ 102,278     $ 65,323     $ 36,955       57 %

 

 

Revenues

 

Revenues increased 7% to $1,118.4 million in 2014, compared to $1,042.4 million in 2013. This $76.1 million increase includes a $63.5 million (8%) increase in revenues in North America, including a $33.1 million increase in our Fluids Systems segment and a $30.4 million increase in our Mats and Integrated Services segment. Revenues from our international operations increased by $12.5 million (5%), primarily attributable to increases in the Fluids Systems EMEA region, partially offset by declines in the Asia Pacific and Latin America regions. International revenues in 2014 also include a $6.8 million increase resulting from the December 2013 acquisition of Terrafirma. Additional information regarding the change in revenues is provided within the operating segment results below.

 

Cost of Revenues

 

Cost of revenues increased 2% to $877.0 million in 2014, compared to $858.5 million in 2013. Despite a 7% increase in revenues, cost of revenues only increased 2% in 2014, benefitting from an improved sales mix, including continued growth in our higher margin family of Evolution drilling fluid systems and higher growth in the Mats and Integrated Services segment, which provides a stronger margin relative to the Fluids Systems segment. Additional information regarding the change in cost of revenues is provided within the operating segment results below.

 

 
18

 

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses increased $19.0 million to $112.6 million in 2014 from $93.7 million in 2013. The increase is primarily attributable to increases in personnel and administrative costs associated with company growth, a $5.1 million increase in performance-based incentive compensation, a $3.1 million increase in stock-based compensation, and a $3.8 million increase in spending related to strategic planning projects, including the development of our deepwater market penetration strategy and other growth initiatives, offset partially by a $1.1 million decrease in spending related to acquisition and divesture activity.

 

Other Operating Income, net

 

Other operating income was $1.8 million in 2014 compared to $4.2 million in 2013. The 2014 fiscal year includes $1.2 million of gains recognized on the sale of two properties, while 2013 included the sale of the completion services and equipment rental business assets, which generated a gain of $2.7 million.

 

Foreign Currency Exchange

 

Foreign currency exchange was a $0.1 million loss in 2014, compared to a $1.8 million loss in 2013, and primarily reflects the impact of the fluctuating U.S. dollar on currency translations on assets and liabilities (including intercompany balances) held in our international operations that are denominated in currencies other than our 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 $10.4 million for 2014 compared to $11.3 million in 2013. The decrease in 2014 was primarily attributable to $0.8 million of interest capitalization associated with the mat manufacturing facility expansion project. The remaining decrease was attributable to lower average borrowings under our U.S. revolving credit facility, partially offset by higher average borrowings in our international subsidiaries.

 

Provision for income taxes

 

The provision for income taxes for 2014 was $41.0 million, reflecting an effective tax rate of 34.2%, compared to $28.7 million in 2013, reflecting an effective tax rate of 35.3%. The decrease in the effective tax rate is primarily related to increased tax credits and other benefits identified with the completion of U.S. and foreign tax filings, along with a reduced impact of nondeductible expenses partially offset by an increase in the provision for uncertain tax positions.

 

Discontinued operations

 

Income from our discontinued Environmental Services operations that was sold in March 2014 was $1.2 million in 2014 compared to $12.7 million in 2013.  In addition, 2014 includes a $22.1 million gain from the March 2014 sale of the business as described above.  See “Note 2- Discontinued Operations” in our Notes to Consolidated Financial Statements included in Item 8. Financial Statements and Supplementary Data for additional information.

 

 
19

 

 

Operating Segment Results

 

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

 

 

 

Year ended December 31,

   

2014 vs 2013

 

(In thousands)

 

2014

   

2013

       $    

%

 
                                 

Revenues

                               

Fluids systems

  $ 965,049     $ 926,392     $ 38,657       4 %

Mats and integrated services

    153,367       115,964       37,403       32 %

Total revenues

  $ 1,118,416     $ 1,042,356     $ 76,060       7 %
                                 

Operating income (loss)

                               

Fluids systems

  $ 95,600     $ 72,604     $ 22,996          

Mats and integrated services

    70,526       49,394       21,132          

Corporate office

    (35,530 )     (27,553 )     (7,977 )        

Operating income

  $ 130,596     $ 94,445     $ 36,151          
                                 

Segment operating margin

                               

Fluids systems

    9.9 %     7.8 %                

Mats and integrated services

    46.0 %     42.6 %                

 

 

Fluids Systems

 

Revenues

 

Total revenues for this segment consisted of the following: 

 

   

Year ended December 31,

   

2014 vs 2013

 

(In thousands)

 

2014

   

2013

       $    

%

 
                                 

United States

  $ 607,411     $ 606,261     $ 1,150       -  

Canada

    79,516       47,559       31,957       67 %

Total North America

    686,927       653,820       33,107       5 %

EMEA

    166,000       137,044       28,956       21 %

Latin America

    84,555       99,116       (14,561 )     (15 %)

Asia Pacific

    27,567       36,412       (8,845 )     (24 %)

Total

  $ 965,049     $ 926,392     $ 38,657       4 %

 

 

North American revenues increased 5% to $686.9 million in 2014, compared to $653.8 million in 2013. While the North American rig count improved by 6% over this period, the benefits of market share gains in Canada, strong demand for wholesale barite and increases in U.S. drilling activity were partially offset by market share losses in South Texas and reduced drilling activity of a key customer in the U.S. In addition, our U.S. completion services and equipment rental business, which was sold in December of 2013, contributed $16.7 million of revenue to 2013.

 

Internationally, revenues increased 2% to $278.1 million in 2014, as compared to $272.6 million in 2013 as increases in the EMEA region were partially offset by decreases in the Latin America and Asia Pacific regions. In 2014, international revenues were negatively impacted by approximately $11 million from the impact of currency exchange, primarily in Latin America and Asia Pacific. The increase in the EMEA region is primarily attributable to approximately $23 million in revenues from the new contracts described above, including in the Black Sea, India and Kuwait. The decline in the Asia Pacific region is primarily attributable to lower customer drilling activities under an offshore contract in Australia and lower land drilling revenues. The decrease in the Latin America region is primarily attributable to declines in Petrobras drilling activity and the impact of currency exchange.

 

 
20

 

 

Operating Income

 

Operating income increased $23.0 million in 2014, as compared to 2013, and included a $15.0 million increase from North American operations. While North American revenues increased 5% as described above, operating income in North America increased $15.0 million primarily attributable to improved sales mix, including approximately $109 million increase in revenues from our proprietary Evolution drilling fluid systems, which generate higher margins relative to our traditional product offering. North American operating income in 2014 also benefitted from the increased revenues in Canada and from the strong demand for wholesale barite.

 

Our international operating income increased by $8.0 million, primarily reflecting the benefit from the increased revenues in the EMEA region described above.

 

In recent years, the business environment in Brazil has become increasingly challenging, particularly as Petrobras, our primary customer in the region, has focused more efforts on well completions and less on drilling activities. Also, the lack of timely payment of Petrobras-related invoicing has caused periodic increases in invested working capital associated with participation in this market. More recently, a significant number of senior executives at Petrobras resigned their positions in connection with a widely-publicized corruption investigation. We expect these developments to further disrupt Petrobras’ operations in the near term. In response to these changes in the business environment, we have taken certain actions to reduce the cost structure of this operation and are continuing to evaluate further actions. While the Brazilian deepwater drilling market remains an important component of our long-term strategy, the profitability of our business in Brazil remains highly dependent on increasing levels of drilling activity by Petrobras and other E&P customers. In the absence of a longer-term increase in drilling activity, we may incur additional charges, including potential asset impairments, as we seek to reduce our cost structure in country, which may negatively impact our future operating results.

 

As described above, following the recent declines in oil prices, we expect drilling activity levels to remain below 2014 levels throughout 2015, reducing the demand for our services and negatively impacting customer pricing primarily in our North American operations. Further, while there are on-going actions being taken to reduce our workforce and cost structure, our business contains high levels of fixed costs, including significant facility and personnel expenses. Therefore, we expect profitability in our North American operations to be negatively impacted by the lower revenues, along with costs associated with workforce reductions. Also, during the second half of 2014 and early 2015, the U.S. Dollar strengthened against the functional currency of most of our foreign operations which will have a negative impact on our revenues and operating income in 2015 as compared to 2014. As a result of the above, segment revenue and operating income are expected to decline from the levels achieved in 2014.

 

 
21

 

 

Mats and Integrated Services

 

Revenues

 

Total revenues for this segment consisted of the following:

 

 

   

Year ended December 31,

   

2014 vs 2013

 

(In thousands)

 

2014

   

2013

         

%

 
                                 

Mat rental and services

  $ 125,861     $ 71,429     $ 54,432       76 %

Mat sales

    27,506       44,535       (17,029 )     (38 %)

Total

  $ 153,367     $ 115,964     $ 37,403       32 %

 

Mat rental and services revenues increased $54.4 million in 2014, compared to 2013, largely due to increasing demand for our composite mat products in the Northeast U.S. region, a large site preparation project in the Gulf Coast region and our ongoing expansion into the utility and pipeline markets. In addition, 2014 benefitted from a $6.8 million increase from the U.K. rental operation, following the December 2013 acquisition of Terrafirma described above. Mat sales decreased by $17.0 million in 2014, as we allocated the majority of our 2014 composite mat production toward the expansion of our rental fleet, leaving fewer mats available for sale to customers.

 

Operating Income

 

Segment operating income in 2014 increased by $21.1 million, as compared to 2013, attributable to the $37.4 million increase in revenues described above. The segment operating margin remains strong, driven by high utilization of mats in our rental fleet, and high utilization of our production facility, which continues to run at maximum production capacity levels.

 

As noted above, we expect the expansion of our mat manufacturing facility to be completed in March of 2015, significantly increasing our production capacity. While the expansion project is expected to relieve production capacity limitations that have negatively impacted our revenues from mat sales in 2014, the recent decline in oil prices is expected to result in lower drilling activity for our E&P customers, which in turn will reduce the demand for our services and negatively impact customer pricing in our North American operations in 2015. As a result of the lower customer demand and more competitive pricing environment, we expect profitability in our North American operations to be lower in 2015. Further, due to the fact that our business contains high levels of fixed costs, including significant facility and personnel expenses, we expect North American operating margins to be negatively impacted by the lower customer demand.

 

Corporate office

 

Corporate office expenses increased $8.0 million to $35.5 million in 2014, compared to $27.6 million in 2013.  The increase is attributable to increases in personnel and administrative costs related to company growth, higher performance-based incentive compensation, higher stock-based compensation, and a $3.5 million increase in spending related to strategic planning projects, including the development of our deepwater market penetration strategy, international tax planning projects, and other growth initiatives, offset partially by a $1.1 million decrease in spending related to acquisition and divestiture activity. Corporate office expenses for 2014 also include $1.0 million in incremental costs associated with our corporate office relocation and employee separation costs.

 

 
22

 

 

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 were 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. The $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. 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 was 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 was primarily attributable to increases in personnel and administrative costs related to company growth as well as costs associated with strategic planning projects, including acquisition and divestiture activity.

 

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 was primarily due to the sale of the completion services and equipment rental business assets, which generated a $2.7 million gain in 2013.

 

 
23

 

 

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 reflected the impact of the fluctuating U.S. dollar on currency translations on assets and liabilities (including intercompany balances) held in our international operations that are denominated in currencies other than our functional currencies.

 

Interest Expense, Net

 

Interest expense, which primarily reflects the 4% interest associated with our $172.5 million in Senior Notes, totaled $11.3 million in 2013 compared to $9.7 million in 2012. The $1.6 million increase was primarily due to the impact of increased borrowings in our Brazil subsidiary along with increased borrowings under our revolving credit facility following the December 2012 Alliance acquisition.

 

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 as 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.

 

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 %                

 

 
24

 

 

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 was largely attributable to market share gains in West Texas, benefitting from our December 2012 acquisition of Alliance, along with improved drilling efficiency, which resulted 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 was 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 2012 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 this period of transition, we executed a series of cost reduction and other profit improvement initiatives, which 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. These 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.

 

 
25

 

 

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 increased 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 was primarily attributable to the decrease in mat sales in 2013, partially offset by higher income from rental activities.

 

Corporate office

 

Corporate office expenses increased $5.6 million to $27.6 million in 2013, compared to $22.0 million in 2012.  The increase was 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.

 

Liquidity and Capital Resources

 

Net cash provided by operating activities during 2014 totaled $89.2 million compared to $151.9 million during 2013. This $62.7 million decrease in operating cash flow is primarily attributable to the increase in working capital to support revenue growth and the increase in tax payments, including taxes associated with the March 2014 sale of the Environmental Services business. Net income adjusted for non-cash items provided $118.9 million of cash in 2014, while changes in operating assets used $29.7 million of cash. Uses of cash included increases in accounts receivable of $53.5 million, primarily attributable to the higher revenue levels, and increases in inventories of $14.1 million, largely associated with the timing of receipts of barite ore purchased from China. These uses of cash were partially offset by a combined $38.4 million increase in accounts payable and accrued liabilities.

 

Net cash used in investing activities during 2014 was $14.0 million, consisting of $107.0 in capital expenditures, largely offset by $89.8 million of proceeds from the sale of the Environmental Services business. Capital expenditures for 2014 included $64.1 million in the Mats and Integrated Services segment, including $30.2 million related to the deployment of produced mats into the rental fleet and $28.8 million related to the manufacturing plant expansion project at our Carencro, Louisiana facility.

 

Net cash used in financing activities during 2014 was $49.2 million, primarily reflecting $53.1 million used for repurchases of our outstanding common stock.

 

 
26

 

 

We anticipate that our future working capital requirements for our operations will fluctuate directionally with revenues. In the first half of 2015, we anticipate that our working capital requirements will decrease as a result of anticipated declines in revenues following the recent drop in the price of oil. We expect total 2015 capital expenditures to range between $70 million to $90 million, with the majority of the investments focused on key strategic projects, including the completion of the expansion project at our mats manufacturing facility and infrastructure investments in our Fluids Systems segment described above, including the facility upgrade and expansion in Fourchon, Louisiana, and the investment in a new fluid blending facility and distribution center located in Conroe, Texas. As of December 31, 2014, we had cash on-hand of $85.1 million of which $58.8 million resides within our foreign subsidiaries that we intend to leave permanently reinvested abroad. We expect our subsidiary cash on-hand, as well as cash generated by operations and anticipated decreases in working capital levels, along with 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)

 

2014

   

2013

 
                 

Senior Notes

  $ 172,498     $ 172,500  

Revolving credit facility

    -       -  

Other

    11,648       13,153  

Total

    184,146       185,653  

Stockholder's equity

    625,458       581,054  
                 

Total capitalization

  $ 809,604     $ 766,707  
                 

Total debt to capitalization

    22.7 %     24.2 %

 

 

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, 2014 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, and also prohibits the payment of dividends on our common stock. We were in compliance with these covenants as of December 31, 2014.

 

At December 31, 2014, we had no outstanding borrowings and $22.5 million of letters of credit issued and outstanding under the Credit Agreement, leaving $102.5 million of availability at December 31, 2014. Additionally, our foreign operations had $11.6 million outstanding under lines of credit and other borrowings, as well as $0.1 million outstanding in letters of credit.

 

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.

 

 
27

 

 

Our foreign subsidiaries, primarily those in Italy, Brazil and India, 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 15.1% and 14.1% on total outstanding balances of $11.4 million and $13.2 million at December 31, 2014 and 2013, respectively.

 

Off-Balance Sheet Arrangements

 

In conjunction with our insurance programs, we had established letters of credit in favor of certain insurance companies in the amount of $3.5 million and $4.0 million at December 31, 2014 and 2013, respectively. We also had $0.4 million and $9.9 million in guarantee obligations in connection with facility closure bonds and other performance bonds issued by insurance companies outstanding as of December 31, 2014 and 2013. The December 31, 2013 balance included $9.3 million in obligations related to our Environmental Services business that was sold in March 2014.

 

Other than normal operating leases for office and warehouse space, 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, 2014 is as follows:

 

 

(In thousands)

 

2015

      2016-2017       2018-2019    

Thereafter

   

Total

 
                                         

Current maturities of long term debt

  $ 307     $ -     $ -     $ -     $ 307  

Long-term debt including capital leases

    -       172,498       -       -       172,498  

Interest on 4.0% Senior Notes

    6,900       12,133       -       -       19,033  

Foreign bank lines of credit

    11,341       -       -       -       11,341  

Operating leases

    8,441       11,034       6,597       10,499       36,571  

Trade accounts payable and accrued liabilities (1)

    159,859       -       -       -       159,859  

Purchase commitments, not accrued

    28,465       -       -       -       28,465  

Other long-term liabilities (2)

    -       -       -       11,240       11,240  

Performance bond obligations

    354       -       -       -       354  

Letter of credit commitments

    22,296       160       -       -       22,456  

Total contractual obligations

  $ 237,963     $ 195,825     $ 6,597     $ 21,739     $ 462,124  

 

 

(1)

Excludes accrued interest on the Senior Notes

 

 

(2)

Table does not allocate by year expected tax payments and uncertain tax positions due to the inability to make reasonably reliable estimates of the timing of future cash settlements with the respective taxing authorities. For additional discussion on uncertain tax positions, see “Note 9 - Income Taxes” in our Notes to Consolidated Financial Statements included in Item 8. Financial Statements and Supplementary Data in this report.

 

We anticipate that the obligations and commitments listed above that are due in less than one year will be paid from operating cash flows, available cash on-hand, and availability under our existing Credit Agreement. The specific timing of settlement for certain long-term obligations cannot be reasonably estimated.

 

 
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” in 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 2014, 2013 and 2012, provisions for uncollectible accounts receivable were $1.2 million, $0.3 million and $1.6 million, respectively.

 

Allowance for Product Returns

 

We maintain reserves for estimated customer returns of unused products 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.

 

 
29

 

 

In completing our November 1, 2014 evaluation, we determined that each reporting unit’s fair value was in excess of its net carrying value and therefore, no impairment was required. As a result of the significant declines in oil prices and decreases in U.S. drilling activities subsequent to our November 1, 2014 evaluation date, we updated our fair value estimates based on our current forecasts and market conditions and determined that even though the estimated fair values have decreased, each reporting unit’s fair value remains in excess of its net carrying value. Based on this updated fair value estimate, the fair value for our Drilling Fluids reporting unit remains approximately 15% above the reporting unit’s carrying value. For our mats and integrated services reporting unit, our updated fair value estimate remains substantially in excess of that reporting unit’s carrying value. There are significant inherent uncertainties and management judgment in estimating the fair value of each reporting unit. While we believe we have made reasonable estimates and assumptions to estimate the fair value of our reporting units, it is possible that a material change could occur. If actual results are not consistent with our current estimates and assumptions, or if changes in macroeconomic conditions outside the control of management change such that it results in a significant negative impact on our estimated fair values, the fair value of a reporting unit may decrease below its net carrying value, which could result in a material impairment of our goodwill.

 

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. Estimating future net cash flows requires us to make judgments regarding long-term forecasts of future revenue and costs related to the assets subject to review. These forecasts are uncertain in that they require assumptions about demand for our products and services, future market conditions and technological developments. If changes in these assumptions occur, our expectations regarding future net cash flows may change such that a material impairment could result.

 

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 experience under these programs, including estimated development of known claims 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, 2014 and 2013, total insurance reserves were $4.2 million and $3.7 million, respectively.

 

Income Taxes

 

We had total deferred tax assets of $39.4 million and $35.9 million at December 31, 2014 and 2013, respectively. 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, 2014, a total valuation allowance of $15.4 million was recorded, which includes a valuation allowance on $13.3 million of net operating loss carryforwards for state and foreign tax purposes, including 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 $4.8 million valuation allowance recorded on the net operating loss carryforward in Brazil which could be reversed in the future, depending on our ability to generate taxable income.

 

We file income tax returns in the United States and several non-U.S. jurisdictions and are subject to examination in the various jurisdictions in which we file. We are no longer subject to income tax examinations for U.S. federal and substantially all state jurisdictions for years prior to 2010 and for substantially all foreign jurisdictions for years prior to 2007. We are under examination by various United States federal and state tax authorities and tax authorities in other countries. We fully cooperate with all audits, but defend existing positions vigorously. These audits are in various stages of completion and certain foreign jurisdictions have challenged the amount of taxes due for certain tax periods. We evaluate the potential exposure associated with various filing positions and record a liability for tax contingencies as circumstances warrant. Although we believe all tax positions are reasonable and properly reported in accordance with applicable tax laws and regulations in effect during the periods involved, the final determination of tax audits and any related litigation could be materially different than that which is reflected in historical income tax provisions and tax contingency accruals.

 

 
30

 

 

New Accounting Standards

 

In April 2014, the Financial Accounting Standards Board (“FASB”) issued updated guidance that changes the criteria for reporting discontinued operations including enhanced disclosure requirements. Under the new guidance, only disposals representing a strategic shift in operations should be presented as discontinued operations. Those strategic shifts should have a major effect on the organization´s operations and financial results. The new guidance is effective for us in the first quarter of 2015; however, we do not expect the adoption to have a material effect on our consolidated financial statements.

 

In May 2014, the FASB amended the existing accounting standards for revenue recognition. The amendments are based on the principle that revenue should be recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new guidance is effective for us in the first quarter of 2017. Early adoption is not permitted. The amendments may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of initial application. We are currently evaluating the impact of these amendments and the transition alternatives on our consolidated financial statements.

 

ITEM 7A.

Quantitative and Qualitative Disclosures about Market Risk

 

We are exposed to market risk from changes in interest rates and changes in foreign currency rates. A discussion of our primary market risk exposure in financial instruments is presented below.

 

Interest Rate Risk

 

At December 31, 2014, we had total debt outstanding of $184.1 million, including $172.5 million of borrowings under our Senior Notes, bearing interest at a fixed rate of 4.0%. Variable rate debt totaled $11.6 million which relates to our foreign operations under lines of credit and other borrowings. At the December 31, 2014 balance, a 200 basis point increase in market interest rates during 2014 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 including European euros, Algerian dinar, Romanian new leu, Canadian dollars, Australian 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.

 

Unremitted foreign earnings permanently reinvested abroad upon which deferred income taxes have not been provided aggregated approximately $133.3 million and $112.6 million at December 31, 2014 and 2013, respectively. It is not practicable to determine the amount of federal income taxes, if any, that might become due if such earnings are repatriated. We have the ability and intent to leave these foreign earnings permanently reinvested abroad.

 

 
31

 

 

ITEM 8.

Financial Statements and Supplementary Data

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Stockholders of

Newpark Resources, Inc.

The Woodlands, Texas

 

 

We have audited the accompanying consolidated balance sheets of Newpark Resources, Inc. and subsidiaries (the “Company”) as of December 31, 2014 and 2013, and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2014. 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, 2014 and 2013, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2014, 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, 2014, based on the criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 27, 2015 expressed an unqualified opinion on the Company’s internal control over financial reporting.

 

 

/s/ DELOITTE & TOUCHE LLP

 

Houston, Texas

February 27, 2015

 

 
32

 

 

Newpark Resources, Inc.

 

Consolidated Balance Sheets
December 31,

 

(In thousands, except share data)

 

2014

   

2013

 
                 

ASSETS

               

Cash and cash equivalents

  $ 85,052     $ 65,840  

Receivables, net

    318,600       268,529  

Inventories

    196,556       189,680  

Deferred tax assets

    11,013       11,272  

Prepaid expenses and other current assets

    12,615       11,016  

Assets of discontinued operations

    -       13,103  

Total current assets

    623,836       559,440  
                 

Property, plant and equipment, net

    283,361       217,010  

Goodwill

    91,893       94,064  

Other intangible assets, net

    15,666       25,900  

Other assets

    5,366       6,086  

Assets of discontinued operations

    -       65,917  

Total assets

  $ 1,020,122     $ 968,417  
                 

LIABILITIES AND STOCKHOLDERS’ EQUITY

               

Short-term debt

  $ 11,648     $ 12,867  

Accounts payable

    108,242       88,586  

Accrued liabilities

    53,342       46,341  

Liabilities of discontinued operations

    -       5,957  

Total current liabilities

    173,232       153,751  
                 

Long-term debt, less current portion

    172,498       172,786  

Deferred tax liabilities

    37,694       27,060  

Other noncurrent liabilities

    11,240       11,026  

Liabilities of discontinued operations

    -       22,740  

Total liabilities

    394,664       387,363  
                 

Commitments and contingencies (Note 15)

               
                 

Common stock, $0.01 par value, 200,000,000 shares authorized and 99,204,318 and 98,030,839 shares issued, respectively

    992       980  

Paid-in capital

    521,228       504,675  

Accumulated other comprehensive loss

    (31,992 )     (9,484 )

Retained earnings

    262,616       160,338  

Treasury stock, at cost; 15,210,233 and 10,832,845 shares, respectively

    (127,386 )     (75,455 )

Total stockholders’ equity

    625,458       581,054  

Total liabilities and stockholders' equity

  $ 1,020,122     $ 968,417  

 

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)

 

2014

   

2013

   

2012

 
                         

Revenues

  $ 1,118,416     $ 1,042,356     $ 983,953  
                         

Cost of revenues

    876,999       858,467       811,048  

Selling, general and administrative expenses

    112,648       93,657       81,500  

Other operating income, net

    (1,827 )     (4,213 )     (870 )
                         

Operating income

    130,596       94,445       92,275  
                         

Foreign currency exchange loss

    108       1,819       749  

Interest expense, net

    10,431       11,279       9,727  
                         

Income from continuing operations before income taxes

    120,057       81,347       81,799  

Provision for income taxes

    41,048       28,725       31,346  

Income from continuing operations

    79,009       52,622       50,453  

Income from discontinued operations, net of tax

    1,152       12,701       9,579  

Gain from disposal of discontinued operations, net of tax

    22,117       -       -  

Net income

  $ 102,278     $ 65,323     $ 60,032  
                         
                         
                         

Income per common share -basic:

                       

Income from continuing operations

  $ 0.95     $ 0.62     $ 0.58  

Income from discontinued operations

    0.28       0.15       0.11  

Net income

  $ 1.23     $ 0.77     $ 0.69  
                         

Income per common share -diluted:

                       

Income from continuing operations

  $ 0.84     $ 0.56     $ 0.53  

Income from discontinued operations

    0.23       0.13       0.09  

Net income

  $ 1.07     $ 0.69     $ 0.62  

  

See Accompanying Notes to Consolidated Financial Statements

 

 
34

 

 

Newpark Resources, Inc.

 

Consolidated Statements of Comprehensive Income 
Years Ended December 31,

 

(In thousands)

 

2014

   

2013

   

2012

 
                         

Net income

  $ 102,278     $ 65,323     $ 60,032  
                         

Foreign currency translation adjustments

    (22,508 )     (8,750 )     (1,523 )
                         

Comprehensive income

  $ 79,770     $ 56,573     $ 58,509  

  

See Accompanying Notes to Consolidated Financial Statements

 

 
35

 

 

Newpark Resources, Inc.

 

Consolidated Statements of Stockholders’ Equity 

 

                   

Accumulated

                         
                   

Other

                         
                   

Compre-

                         
                   

hensive

                         
   

Common

   

Paid-In

   

Income

   

Retained

   

Treasury

         

(In thousands)

 

Stock

   

Capital

   

(Loss)

   

Earnings

   

Stock

   

Total

 
                                                 

Balance at January 1, 2012

  $ 945     $ 477,204     $ 789     $ 34,983     $ (16,075 )   $ 497,846  

Net income

    -       -       -       60,032       -       60,032  

Employee stock options, restricted stock and employee stock purchase plan

    12       1,088       -       -       (402 )     698  

Stock-based compensation expense

    -       7,103       -       -       -       7,103  

Income tax effect, net, of employee stock related activity

    -       (433 )     -       -       -       (433 )

Treasury shares purchased at cost

    -       -        -       -       (50,145 )     (50,145 )

Foreign currency translation

    -       -       (1,523 )     -       -       (1,523 )

Balance at December 31, 2012

    957       484,962       (734 )     95,015       (66,622 )     513,578  

Net income

    -       -       -       65,323       -       65,323  

Employee stock options, restricted stock and employee stock purchase plan

    23       8,284       -       -       (2,120 )     6,187  

Stock-based compensation expense

    -       9,699       -