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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002 Commission File No. 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.)
3850 N. CAUSEWAY, SUITE 1770
METAIRIE, LOUISIANA 70002
(Address of principal executive offices) (Zip Code)
(504) 838-8222
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------- -------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
Common stock, $0.01 par value: 70,797,796 shares at May 1, 2002.
Page 1 of 24
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NEWPARK RESOURCES, INC.
INDEX TO FORM 10-Q
FOR THE THREE MONTH PERIOD ENDED
March 31, 2002
<Table>
<Caption>
Item Page
Number Description Number
- ------ ----------- ------
PART I
1 Unaudited Consolidated Financial Statements:
Balance Sheets as of March 31, 2002 and
December 31, 2001 ............................................................3
Statements of Income for the Three Month Periods
Ended March 31, 2002 and 2001.................................................4
Statements of Comprehensive Income for the Three Month
Periods Ended March 31, 2002 and 2001.........................................5
Statements of Cash Flows for the Three Month Periods
Ended March 31, 2002 and 2001.................................................6
Notes to Unaudited Consolidated Financial Statements ..............................7
2 Management's Discussion and Analysis of Financial
Condition and Results of Operations...............................................12
3 Quantitative and Qualitative Disclosures about Market Risk............................20
PART II
6 Exhibits and Reports on Form 8-K......................................................23
Signatures............................................................................24
</Table>
2
Newpark Resources, Inc.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<Table>
<Caption>
March 31, December 31,
(In thousands, except share data) 2002 2001
- --------------------------------- --------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 5,496 $ 7,504
Trade accounts receivable, less allowance
of $2,177 in 2002 and $2,159 in 2001 75,428 86,702
Notes and other receivables 3,778 2,567
Inventories 44,541 44,144
Deferred tax asset 4,272 4,272
Other current assets 10,293 9,131
--------- ---------
TOTAL CURRENT ASSETS 143,808 154,320
Property, plant and equipment, at cost, net of
accumulated depreciation 205,984 208,476
Goodwill, net of accumulated amortization 105,746 105,767
Deferred tax asset 18,768 19,609
Other intangible assets, net of accumulated amortization 12,214 12,437
Other assets 21,362 21,879
--------- ---------
$ 507,882 $ 522,488
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 3,189 $ 3,355
Accounts payable 22,972 26,588
Accrued liabilities 22,695 21,018
--------- ---------
TOTAL CURRENT LIABILITIES 48,856 50,961
Long-term debt 162,015 176,954
Other non-current liabilities 551 619
Commitments and contingencies -- --
STOCKHOLDERS' EQUITY:
Preferred Stock, $.01 par value, 1,000,000 shares
authorized, 390,000 shares outstanding 74,082 73,970
Common Stock, $.01 par value, 100,000,000 shares
authorized, 70,691,019 shares outstanding in 2002
and 70,332,017 in 2001 707 703
Paid-in capital 336,813 335,117
Unearned restricted stock compensation (786) (940)
Accumulated other comprehensive income (2,013) (2,032)
Retained deficit (112,343) (112,864)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 296,460 293,954
--------- ---------
$ 507,882 $ 522,488
========= =========
</Table>
See Accompanying Notes to Consolidated Financial Statements
3
Newpark Resources, Inc.
CONSOLIDATED STATEMENTS OF INCOME
For the Three Month Periods Ended March 31,
(Unaudited)
<Table>
<Caption>
(In thousands, except per share data) 2002 2001
- ------------------------------------- -------- --------
Revenues $ 75,110 $ 99,397
Operating costs and expenses:
Cost of services provided 48,646 61,030
Operating costs 19,654 19,106
-------- --------
68,300 80,136
General and administrative expenses 1,517 1,070
Goodwill amortization -- 1,234
-------- --------
Operating income 5,293 16,957
Foreign currency exchange loss 4 491
Interest income (171) (233)
Interest expense 3,122 4,215
-------- --------
Income before income taxes 2,338 12,484
Provision for income taxes 842 4,495
-------- --------
Net income 1,496 7,989
Less:
Preferred stock dividends 863 863
Accretion of discount on preferred stock 112 112
-------- --------
Net income applicable to common and common
equivalent shares $ 521 $ 7,014
======== ========
Basic and diluted net income per common and
common equivalent share $ 0.01 $ 0.10
======== ========
</Table>
See Accompanying Notes to Consolidated Financial Statements
4
Newpark Resources, Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Three Month Periods Ended March 31,
(Unaudited)
<Table>
<Caption>
(In thousands) 2002 2001
- -------------- ------- -------
Net income $ 1,496 $ 7,989
Other comprehensive income (loss):
Foreign currency translation adjustments 19 (1,304)
------- -------
Comprehensive income $ 1,515 $ 6,685
======= =======
</Table>
See Accompanying Notes to Consolidated Financial Statements
5
Newpark Resources, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Month Periods Ended March 31,
(Unaudited)
<Table>
<Caption>
(In thousands) 2002 2001
- -------------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,496 $ 7,989
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 6,076 6,413
Provision for deferred income taxes 842 4,495
Other (956) (113)
Change in assets and liabilities:
Decrease (increase) in accounts and notes receivable 10,020 (21,318)
Decrease (increase) in inventories (397) 140
Increase in other assets (1,640) (7,807)
Increase (decrease) in accounts payable (3,820) 5,131
Increase in accrued liabilities and other 1,606 4,149
-------- --------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 13,227 (921)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (3,089) (7,612)
Proceeds from disposal of property, plant and equipment 1,446 1,049
Payments received on notes receivable 674 27
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (969) (6,536)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments on lines of credit (14,199) (21,357)
Principal payments on notes payable and long-term debt (906) (96)
Proceeds from exercise of stock options 839 239
-------- --------
NET CASH USED IN FINANCING ACTIVITIES (14,266) (21,214)
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (2,008) (28,671)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 7,504 31,245
-------- --------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD $ 5,496 $ 2,574
======== ========
</Table>
See Accompanying Notes to Consolidated Financial Statements
6
NEWPARK RESOURCES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - INTERIM FINANCIAL STATEMENTS
In the opinion of management, the accompanying unaudited consolidated
financial statements reflect all adjustments necessary to present fairly the
financial position of Newpark Resources, Inc. ("Newpark") as of March 31, 2002,
and the results of its operations and its cash flows for the three month periods
ended March 31, 2002 and 2001. All such adjustments are of a normal recurring
nature. These interim financial statements should be read in conjunction with
the December 31, 2001 audited financial statements and related notes filed on
Form 10-K. The results of operations for the three month period ended March 31,
2002 are not necessarily indicative of the results to be expected for the entire
year.
NOTE 2 - EARNINGS PER SHARE
The following table presents the reconciliation of the numerator and
denominator for calculating income per share in accordance with the disclosure
requirements of SFAS 128 (in thousands, except per share amounts).
<Table>
<Caption>
Three Months Ended
March 31,
------------------
2002 2001
-------- -------
Income applicable to common and common equivalent shares $ 521 $ 7,014
Add:
Series B and C Preferred Stock dividends -- 675
------- -------
Adjusted income applicable to common and common
equivalent shares $ 521 $ 7,689
======= =======
Weighted average number of common shares outstanding 70,490 69,674
Add:
Net effect of dilutive stock options and warrants 451 792
Shares assumed issued upon conversion of Series B
and C Preferred Stock -- 7,758
------- -------
Adjusted weighted average number of common shares
outstanding 70,941 78,224
======= =======
Basic and diluted income applicable to common and
common equivalent shares $ .01 $ .10
======= =======
</Table>
Basic net income per share was calculated by dividing net income by the
weighted-average number of common shares outstanding during the period. For the
three months ended March 31, 2002 and 2001, Newpark had dilutive stock options
and warrants of approximately 2.3 million shares and 4.0 million shares,
respectively, which were assumed exercised using the treasury stock method. The
resulting net effects of stock options and warrants were used in calculating
diluted income per share for these periods.
7
Options and warrants to purchase a total of approximately 8.3 million
shares and 5.9 million shares of common stock were outstanding during the three
months ended March 31, 2002 and 2001, respectively, but were not included in the
computation of diluted income per share because they were anti-dilutive.
The net effect of the assumed conversion of the Series A Preferred
Stock has been excluded from the computation of diluted income per share for all
periods presented because the effect would be anti-dilutive. The net effects of
the assumed conversion of the Series B and Series C Preferred Stock has been
excluded from the computation of diluted income per share for the quarter ended
March 31, 2002 because the effects would be anti-dilutive.
NOTE 3 - ACCOUNTS AND NOTES RECEIVABLE
Included in trade accounts receivable at March 31, 2002 and
December 31, 2001 are (in thousands):
<Table>
<Caption>
March 31, December 31,
2002 2001
--------- ------------
Trade receivables $ 73,357 $ 86,765
Unbilled revenues 4,248 2,096
-------- --------
Gross trade receivables 77,605 88,861
Allowance for doubtful accounts (2,177) (2,159)
-------- --------
Net trade receivables $ 75,428 $ 86,702
======== ========
</Table>
NOTE 4 - INVENTORIES
Newpark's inventories consisted of the following items at March 31,
2002 and December 31, 2001:
<Table>
<Caption>
March 31, December 31,
2002 2001
--------- ------------
Composite mats $11,417 $10,854
Drilling fluids raw material and components 28,269 27,243
Logs 3,689 5,081
Supplies 306 311
Other 860 655
------- -------
Total $44,541 $44,144
======= =======
</Table>
NOTE 5 - LONG-TERM DEBT
As of March 31, 2002, Newpark had outstanding $125 million of unsecured
senior subordinated notes (the "Notes") which mature on December 15, 2007.
Interest on the Notes accrues at the rate of 8-5/8% per annum and is payable
semi-annually on June 15 and December 15.
8
In November 2001, Newpark entered into an interest-rate swap
instrument, effectively converting the Notes to a floating rate for a two year
period. The swap arrangement expires in December 2003. Under the terms of the
swap instrument, Newpark is to receive cash inflows equivalent to the
semi-annual fixed rate interest payments due under the Notes in exchange for the
obligation to pay semi-annual variable-rate interest payments. The variable rate
payments are based on the Libor rate in effect on the payment date, plus a
spread of 4.67%. The variable rate payments are payable semi-annually to match
the payment dates of the fixed rate interest obligations under the Notes. The
effective rate on the variable rate payments as of March 31, 2002, based on the
expected Libor rate in effect on the next payment date, was 7.17%.
Newpark has designated this instrument as an ineffective fair value
hedge. Accordingly, changes in the instrument's fair value are to be recognized
currently in earnings. As of March 31, 2002, Newpark recorded the fair value of
the interest-rate swap instrument on the balance sheet as a component of accrued
liabilities in the amount of $262,000. This is an increase of $207,000 from the
liability recorded as of December 31, 2001. This increase in the recorded
liability was recognized as a component of interest expense for the quarter
ended March 31, 2001.
As of March 31, 2002, Newpark also maintained a $100.0 million bank
credit facility, including up to $25.0 million in standby letters of credit, in
the form of a revolving line of credit commitment, which expires February 27,
2005. At March 31, 2002, $13.1 million in letters of credit were issued and
outstanding under the facility and $25.5 million was outstanding under the
revolving facility, leaving $61.4 million of availability under this facility at
March 31, 2002. The facility bears interest at either a specified prime rate
(4.75% at March 31, 2002) or the LIBOR rate (2.05% at March 31, 2002), in each
case plus a spread determined quarterly based on the ratio of Newpark's funded
debt to cash flow. The weighted average interest rates on the outstanding
balance under the credit facility for the first three months of 2002 and 2001
were 4.25% and 9.69%, respectively.
The credit facility contains certain financial covenants. As of March
31, 2002, Newpark was in compliance with the covenants contained in the Credit
Facility, as amended and restated.
NOTE 6 - NEW ACCOUNTING STANDARDS
On January 1, 2002, Newpark adopted Statement of Financial Accounting
Standards No. 141 and 142. These Standards, among other requirements, (i)
prohibit the use of pooling-of-interests method of accounting for business
combinations, (ii) require that goodwill not be amortized in any circumstance,
and (iii) require that goodwill be tested for impairment annually or when events
or circumstances occur between annual tests indicating that goodwill for a
reporting unit might be impaired. The Standards established a new method for
testing goodwill for impairment based on a fair value concept. Newpark completed
its fair value testing of goodwill balances during the quarter ended March 31,
2002 and determined that its existing goodwill balances were not impaired under
the new standards. Upon adoption of the Standards on January 1, 2002, Newpark
ceased to amortize its remaining goodwill balance. Goodwill amortization was
approximately $1.2 million for the quarter ended March 31, 2001.
9
The table below reconciles Newpark's net income and earnings per share
as reported to the amounts that would have been reported had these Standards
been adopted as of January 1, 2001 (in thousands, except per share amounts):
<Table>
<Caption>
March 31, March 31,
2002 2001
--------- ---------
Net income:
As reported $1,496 $7,989
Goodwill amortization, net of tax -- 977
------ ------
As adjusted $1,496 $8,966
====== ======
Net income applicable to common and common equivalent shares:
As reported $ 521 $7,014
Goodwill amortization, net of tax -- 977
------ ------
As adjusted $ 521 $7,991
====== ======
Basic and diluted earnings per share:
As reported $ .01 $ .10
Goodwill amortization, net of tax -- .01
------ ------
As adjusted $ .01 $ .11
====== ======
</Table>
NOTE 7 - SEGMENT DATA
Summarized financial information concerning Newpark's reportable
segments is shown in the following table (dollars in thousands):
<Table>
<Caption>
Three Months Ended
March 31, Increase/(Decrease)
2002 2001 $ %
-------- -------- -------- --------
Revenues by segment:
E&P waste disposal $ 11,064 $ 14,672 $ (3,608) (25)%
Fluids sales & engineering 42,079 50,401 (8,322) (17)
Mat & integrated services 21,967 34,324 (12,357) (36)
-------- -------- --------
Total revenues $ 75,110 $ 99,397 $(24,287) (24)%
======== ======== ========
Operating income by segment:
E&P waste disposal $ 554 $ 4,228 $ (3,674) (87)%
Fluids sales & engineering 4,004 6,025 (2,021) (34)
Mat & integrated services 2,252 9,008 (6,756) (75)
-------- -------- --------
Total by segment $ 6,810 $ 19,261 $(12,451) (65)
General and administrative expenses 1,517 1,070 447 42
Goodwill amortization -- 1,234 (1,234) (100)
-------- -------- --------
Total operating income $ 5,293 $ 16,957 $(11,664) (69)%
======== ======== ========
</Table>
The amounts above are shown net of intersegment transfers.
10
NOTE 8 - COMMITMENTS AND CONTINGENCIES
Under a Settlement Agreement with U.S. Liquids (USL), Newpark had the
right, but not the obligation, to deliver specified volumes of E&P Waste to
USL's facilities until June 30, 2001. Subject to certain conditions, Newpark
could extend this arrangement for two additional one-year terms at an annual
cost of $8 million, subject to adjustment based on increases in the Consumer
Price Index. Newpark had extended the agreement to June 30, 2002, but has
informed USL that it will not exercise its right to extend this arrangement
beyond the current expiration date. Accordingly, effective July 1, 2002, Newpark
will be relieved of any future obligation to pay USL under the terms of the
Settlement Agreement.
NOTE 9 - SUBSEQUENT EVENTS
Newpark has signed a letter of intent with the holder of all of the
outstanding shares of Series A Preferred Stock (Series A Stock) to purchase all
of the outstanding shares of Series A Stock. The contemplated purchase price is
$15 million plus an amount equal to the accrued but unpaid dividends on the
Series A Stock through the date of purchase. Upon execution of a definitive
agreement allowing for this purchase, Newpark plans to file a registration
statement on Form S-3 to sell only the number of shares of common stock that
will be required to pay the purchase price and the expenses of the offering.
Newpark believes this purchase and offering will have substantially the same
effect as if the Series A Stock had been converted into common stock. Upon
completion of the purchase the unamortized balance of the original discount
received by the purchaser of the Series A Stock will be charged as a reduction
to income available to common stockholders. The unamortized balance of this
discount as of March 31, 2002 was $918,000.
Under the original terms of the Series A Stock, effective April 15,
2002, the dividend rate on this issuance is subject to adjustment from 5% to a
rate equal to the current yield to maturity on the Notes plus 2.5%. Under the
terms of the letter of intent, the holder of the Series A Stock has agreed to
defer the adjustment through May 31, 2002, provided that Newpark completes the
purchase by that date.
On April 15, 2002, Newpark and the holder of the 120,000 outstanding
shares of Series C Preferred Stock (Series C Stock) entered into an agreement
under which the holder elected to convert the Series C Stock into common stock
as of April 15, 2002, at the variable conversion price then in effect under the
governing documents of the Series C Stock, if certain additional agreements are
entered into by May 15, 2002. The holder has the right to waive this condition.
If this condition is not timely met or waived, the election to convert is
automatically rescinded. If the condition is met or waived and the conversion
occurs, the applicable conversion price would be $6.30, resulting in the
issuance of 4,785,589 shares of common stock including 27,360 shares issuable
with respect to accrued but unpaid dividends through April 15, 2002.
Upon the purchase of the Series A Stock and conversion of the Series C
Stock, Newpark will cease to accrue dividends at the rate of 5%, or $750,000 per
year and 4.5%, or $1,350,000 per year, respectively. This reduction in dividends
will significantly offset any dilution to common stockholders that would occur
as a result of the purchase and conversion.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of our financial condition, results of
operations, liquidity and capital resources should be read together with our
"Unaudited Consolidated Financial Statements" and "Notes to Unaudited
Consolidated Financial Statements" as well as our annual report on Form 10-K for
the year ended December 31, 2001.
OPERATING ENVIRONMENT AND RECENT DEVELOPMENTS
Our operating results depend primarily on the level of oil and gas
drilling activity in the markets we serve. These levels in turn depend, to a
great extent, on oil and gas commodities pricing, inventory levels and product
demand. Key average rig count data for the last five quarters is listed in the
following table:
<Table>
<Caption>
1Q01 2Q01 3Q01 4Q01 1Q02
-------- -------- ------- ------- --------
U.S. Rig Count 1,137 1,239 1,242 1,004 814
Gulf Coast market 301 321 299 258 224
Gulf Coast market to total 26.5% 25.9% 24.1% 25.7% 27.5%
Canadian Rig Count 553 251 322 278 377
</Table>
- ---------
Source: Baker Hughes Incorporated
Our primary Gulf Coast market, which accounted for approximately 68% of
first quarter 2002 revenues, includes: (1) South Louisiana Land; (2) Texas
Railroad Commission Districts 2 and 3; (3) Louisiana and Texas Inland Waters;
and (4) Offshore Gulf of Mexico. The Canadian market accounted for approximately
12% of 2002 first quarter revenues. Much of the terrain throughout the oil and
gas-producing region of Canada presents soil stability and access problems
similar to those encountered in the marsh areas of the U.S. Gulf Coast region.
Much of the drilling activity in Canada has historically been conducted when
winter temperatures freeze the soil and stabilize it, allowing safe access.
Quarterly fluctuations in the Canadian rig count generally reflect the seasonal
nature of drilling activity related to these access issues.
Natural gas production accounts for the majority of activity in the
markets that we serve. Gas storage levels and demand for natural gas have a
significant impact on gas pricing, which, in turn, affects drilling activity, as
gas suppliers need to maintain adequate storage for peak demand levels and
insure adequate supplies for anticipated future demand.
Rising commodity prices moderated the demand for natural gas beginning
in the second half of 2000, as some commercial users switched to less costly
alternate fuel sources when possible. This moderating demand, due to both high
gas prices and declining economic activity, resulted in record high levels of
gas storage during 2001 and contributed to a decline in commodity prices and
exploration activity. Significant declines in exploration activity began in the
fourth quarter of 2001 and continued into the first quarter of 2002. The average
U.S. rig count declined 34% to 814 in the first quarter of 2002, as compared to
the peak of 1,242 for the third quarter of 2001, and declined 28% as compared
12
to the first quarter of 2001. According to Baker Hughes Incorporated, as of the
week ended April 26, 2002, the U.S. rig count was 766, with 201 rigs, or 26.2%,
within our primary Gulf Coast market.
The present weakness in commodity prices has also affected activity in
the other markets that we serve. Canadian rig activity in the first quarter of
2002 was 32% below the comparable period in 2001. The traditional surge in
Canadian activity during the winter season has not been as significant as in
recent years. As of the week ended April 26, 2002, the Canadian rig count was
down to 84, the lowest level in three years.
We have begun to penetrate non-oilfield markets with our new
Dura-Base(TM) composite mat system. The continued development of new markets for
this product could also help mitigate expected declines in 2002 for our
traditional oilfield mat and integrated services market, especially in Canada.
During the first quarter of 2002, 2,300 of the 3,800 composite mats sold were to
non-oilfield customers.
The Environmental Protection Agency recently published final
regulations imposing new limitations on the discharge into the Gulf of Mexico of
cuttings from wells drilled using synthetic oil-based fluid systems. These
regulations became effective February 19, 2002, with compliance phased in over a
period of six months thereafter. We believe that the new regulations could
result in an increase in waste disposal volume in this market and increase the
demand for our DeepDrill(TM) family of drilling fluids products.
OTHER MARKET TRENDS
Current short-term industry forecasts suggest that the average number
of rigs active in our primary Gulf Coast market is likely to continue to decline
through the second quarter of 2002, but begin an upward trend thereafter. While
the average number of rigs is expected to decline in the second quarter, we
anticipate continued market penetration of critical, deep water and geologically
deeper wells with our DeepDrill(TM) family of products, which should help to
lessen the effects of these expected declines. We believe that Canadian drilling
activity will continue to be weak throughout 2002 as compared to 2001.
Current long-term industry forecasts reflect a stable to growing demand
for natural gas, predicated upon improving economic conditions. In addition,
current productive gas reserves are being depleted at a rate faster than current
replacement through drilling activities. Because many shallow fields in the Gulf
Coast market have been heavily or fully exploited, and because of improved
economics, producers are increasing drilling depth to reach the larger gas
reserves. We expect gas-drilling activity to be increasingly associated with
deeper, more costly wells. We view this trend as favorable with respect to
demand for product offerings in all of our segments.
RESULTS OF OPERATIONS
Summarized financial information concerning Newpark's reportable
segments is shown in the following table (dollars in thousands):
13
<Table>
<Caption>
Three Months Ended
March 31, Increase/(Decrease)
2002 2001 $ %
---------- ---------- ---------- ----------
Revenues by segment:
E&P waste disposal $ 11,064 $ 14,672 $ (3,608) (25)%
Fluids sales & engineering 42,079 50,401 (8,322) (17)
Mat & integrated services 21,967 34,324 (12,357) (36)
---------- ---------- ----------
Total revenues $ 75,110 $ 99,397 $ (24,287) (24)%
========== ========== ==========
Operating income by segment:
E&P waste disposal $ 554 $ 4,228 $ (3,674) (87)%
Fluids sales & engineering 4,004 6,025 (2,021) (34)
Mat & integrated services 2,252 9,008 (6,756) (75)
---------- ---------- ----------
Total by segment $ 6,810 $ 19,261 $ (12,451) (65)
General and administrative expenses 1,517 1,070 447 42
Goodwill amortization -- 1,234 (1,234) (100)
---------- ---------- ----------
Total operating income $ 5,293 $ 16,957 $ (11,664) (69)%
========== ========== ==========
</Table>
The amounts above are shown net of intersegment transfers.
On January 1, 2002, Newpark adopted Statement of Financial Accounting
Standards No. 141 and 142. These Standards, among other requirements, (i)
prohibit the use of pooling-of-interests method of accounting for business
combinations, (ii) require that goodwill not be amortized in any circumstance,
and (iii) require that goodwill be tested for impairment annually or when events
or circumstances occur between annual tests indicating that goodwill for a
reporting unit might be impaired. The Standards established a new method for
testing goodwill for impairment based on a fair value concept. Newpark completed
its fair value testing of goodwill balances during the quarter ended March 31,
2002 and determined that its existing goodwill balances were not impaired under
the new standards. Upon adoption of the Standards on January 1, 2002, Newpark
ceased to amortize its remaining goodwill balance. Goodwill amortization was
approximately $1.2 million, or $977,000 net of tax, for the quarter ended March
31, 2001.
The table below reconciles Newpark's net income and earnings per share
as reported to the amounts that would have been reported had these Standards
been adopted as of January 1, 2001 (in thousands, except per share amounts):
14
<Table>
<Caption>
March 31, March 31,
2002 2001
---------- ----------
Net income:
As reported $ 1,496 $ 7,989
Goodwill amortization, net of tax -- 977
---------- ----------
As adjusted $ 1,496 $ 8,966
========== ==========
Net income applicable to common and common equivalent shares:
As reported $ 521 $ 7,014
Goodwill amortization, net of tax -- 977
---------- ----------
As adjusted $ 521 $ 7,991
========== ==========
Basic and diluted earnings per share:
As reported $ .01 $ .10
Goodwill amortization, net of tax -- .01
---------- ----------
As adjusted $ .01 $ .11
========== ==========
</Table>
Revenues
E&P Waste Disposal: Waste disposal revenue declined $3.6 million, or
25%, on a 32% decline in waste volumes received. During the first quarter of
2002, we received 730,000 barrels of E&P waste, compared to 1,078,000 barrels in
the comparable quarter of 2001. This decline in waste volumes received is due
primarily to the 28% decline in active rigs and the entrance of several new
competitors into our market during the last cycle. The average revenue per
barrel increased 11% to $12.94, as compared to an average of $11.70 for the
first quarter of 2001, as a result of favorable changes in the mix of waste
streams received.
Regulations limiting offshore discharges of synthetic fluids and drill
cuttings containing synthetic fluids were finalized and became effective
February 19, 2002, with a six month phase in period allowed. These regulations
prohibit the discharge of synthetic fluids and reduce the allowable percentage
of synthetic fluids contained in drill cuttings to 6.9% of total discharges by
volume. We expect to experience some increase in waste volumes as a result of
these new regulations once they are phased in.
Fluids Sales and Engineering: Revenues for this segment declined $8.3
million, or 17%, to $42.1 million during the first quarter of 2002, as compared
to the first quarter of 2001. The average number of rigs we serviced declined by
34%, from 196 in 2001 to 130 in 2002. The revenue decline was significantly less
than the decline in the number of rigs serviced as we continued to benefit from
our focus on deeper drilling projects in key markets. As a result, the average
annual revenue per rig increased 26% to approximately $1.3 million in the first
quarter of 2002, as compared to approximately $1.0 million for the comparable
period in 2001.
Beginning in March 2002, we experienced an increase in programming
requests for new drilling fluids projects, which are beginning to turn into
revenue opportunities in the second quarter of 2002 and could result in revenue
growth for the second half of 2002. We
15
anticipate that drilling fluids revenue will lead our revenue growth over the
remainder of the year, with expected improvement in drilling activity.
The new synthetic based fluid regulations could also impact favorably
the acceptance of our DeepDrill(TM) family of products, since the discharge of
these products would be exempt from these new regulations, thus reducing the
disposal costs of our customers. These new regulations have helped us recently
to open discussions about our drilling fluids products, services, and
capabilities with many operators who are not currently drilling fluids customers
Mat and Integrated Services: Mat rental revenue for the quarter was
$22.0 million, as compared to $34.3 million in the comparable prior year
quarter, representing a decline of 36%. Both pricing and volume of mats rented
in the core Gulf Coast market declined substantially compared to a year ago due
to reduced land drilling activity and the absence of activity in the marsh and
transition zone market during the first quarter of 2002. Average rental pricing
declined to $.61 from $1.39 per square foot, and the volume of mats installed
declined 35% to 3.2 million square feet. In addition to the decline in new
installation volume and pricing, the volume of re-rentals (i.e. revenues which
extend beyond the initial contractual period), the most profitable revenues for
this segment, declined by more than 50% in the first quarter of 2002 as compared
to 2001. Highly competitive pricing in the Gulf Coast mat rental market is
expected to persist until land and marsh drilling activity improves, which is
expected to occur later in 2002.
During the first quarter of 2002, we sold 3,800 composite mats,
generating revenue of $5.9 million, as compared to $8.9 million of revenue on
5,700 mats sold in the comparable period of 2001. The sales in 2002 were outside
our historic oilfield markets and included the first shipment of composite mats
to Alaska. We continue to develop leads on several large projects outside of our
primary North American oil service market, and expect that these new markets
will be the source of increasing composite mat revenue for the remainder of
2002. Sales to these new markets are also expected to help offset the declines
we have experienced in composite mat sales to the Canadian market in 2002. With
improvement in commodity pricing, we anticipate that Canadian composite mat
sales will increase again in 2003.
Operating Income
E&P Waste Disposal: Waste disposal operating income declined $3.7
million on a $3.6 million decline in revenues. Operating costs remained
unchanged for this segment during the first quarter of 2002, as compared to the
first quarter of 2001. Operating costs declined by $1.3 million as compared to
the fourth quarter of 2001. Of this amount, $400,000 results from lower variable
process costs due to reduced volume handled in the quarter. The remaining
$900,000 reduction reflects fixed cost reduction efforts. We expect to fully
implement our cost reduction measures by July 1, 2001, at which time our
obligations under a settlement agreement with U.S. Liquids (USL) will be
eliminated as further discussed below.
In December 2000, we exercised our option to extend our right to
dispose of specified volumes of E&P waste at some of USL's disposal facilities
for one year from July 1, 2001, under the terms of a settlement agreement. As
part of this extension, we doubled the amount of waste volume that we could
dispose of at these facilities and extended USL's agreement not to compete with
us in the E&P disposal business until June 30, 2002. We exercised this option in
anticipation of increased volumes of waste streams resulting from
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the recently enacted discharge regulations for synthetic fluids. In
consideration of the extension of the agreement, including extension of the
non-competition agreement, our costs of disposal under this contract increased
by approximately $2 per barrel beginning July 1, 2001.
Due to the decline in waste volumes resulting from the decrease in rig
activity, and in an effort to improve the variable nature of our waste disposal
cost structure, we have not exercised our option to extend our right to dispose
of wastes under the settlement agreement beyond the current expiration date of
June 30, 2002. Accordingly, as of that date we will be relieved of any future
obligation to pay USL under the terms of the settlement agreement and USL will
be relieved of any non-competition provisions. The annual commitment under the
previously extended settlement agreement was approximately $8.2 million.
Fluids Sales and Engineering: The $2.0 million decline in fluids sales
and engineering operating income is due primarily to the decline in revenue of
$8.3 million and represents an incremental margin of 24% (defined as the change
in operating income divided by the change in revenues). Operating margins for
this segment declined from 12.0% for the quarter ended March 31, 2001 to 9.5%
for the quarter ended March 31, 2002, primarily due to lower revenues which
resulted in less coverage of fixed operating costs. The operating margin of this
segment is affected by the mix of products sold. There is a significant
difference in the gross margins recognized on commodity products and those
recognized for specialty products. We expect to recognize the benefits of our
proprietary products such as DeepDrill(TM) as these products gain wider customer
acceptance. In addition, we expect to see margin improvement as we continue to
penetrate the offshore Gulf of Mexico market, as sales in this market typically
earn higher margins.
Mat and Integrated Services: Mat and integrated services operating
income declined $6.8 million on a $12.4 million decline in revenues,
representing an incremental margin of 55%. The high incremental margin is
primarily attributable to the significant reduction in re-rental income, this
segment's most profitable revenue, and the decline in pricing due to competitive
factors. In addition, this decline in incremental margin reflects the impact of
lower composite mat sales, which typically generate a gross margin of
approximately 45%.
Foreign Currency Gain/Loss
During the first quarter of 2001, we recognized foreign currency losses
of $490,000, primarily associated with composite mat sales in Canada, which
typically originate in the U.S. and are denominated in Canadian dollars. Foreign
currency losses were insignificant in the first quarter of 2002, primarily as a
result of the decline in composite mat sales to Canada.
Interest Income/Expense
Net interest expense was $3.0 million for the first quarter of 2002, a
decrease of $1 million, or 25%, as compared to $4.0 million for the first
quarter of 2001. The decrease in net interest cost is due to a decrease of $11.1
million in average outstanding borrowings and a decline in the average effective
interest rate from 9.7% in 2001 to 7.4% in 2002. The decrease in the effective
interest rate resulted from prime rate and Libor rate reductions
17
experienced during 2001 and the effects of our interest rate swap arrangement
entered into in November 2001. The swap arrangement resulted in a decrease in
interest expense of $331,000 in 2002 as compared to 2001, after consideration of
changes in the valuation of the swap arrangement.
Provision for Income Taxes
For the quarter ended March 31, 2002 we recorded an income tax
provision of $842,000, reflecting an income tax rate of 36%. For the quarter
ended March 31, 2001, we recorded an income tax provision of $4.5 million,
reflecting an income tax rate of 36%.
LIQUIDITY AND CAPITAL RESOURCES
Cash generated from operations for the first quarter totaled $13.2
million and was used principally to fund net capital expenditures of $1.6
million and to repay $15.1 million of debt. With the reduction in planned
capital expenditures for 2002 noted below, we plan some further reductions in
the outstanding balance of our credit facility in 2002 from operations, in spite
of the current weakness in rig activity. Key working capital data is provided
below:
<Table>
<Caption>
March 31, December 31,
------------ ------------
Working Capital (000's) $ 94,952 $ 103,359
Current Ratio 2.94 3.03
</Table>
During the first quarter of 2002, we generated approximately $6.4
million of additional cash by reducing non-cash working capital. This reduction
in working capital needs was primarily related to a reduction in accounts
receivable due to revenue declines and our efforts to reduce total days
outstanding. The reduction in accounts receivable in the first quarter was
partially offset by decreases in accounts payable. With the likelihood of
reduced composite mat sales in 2002, especially in the first half of the year,
we have reduced our planned orders of composite mats for delivery in 2002 to
15,000 mats. This reduced number of mat receipts, along with expected 2002
sales, should result in a reduction in our composite mat inventory by the end of
2002.
We anticipate that our working capital requirements for the first half
of 2002 will be minimal as a result of the current weakness in rig activity. If
market conditions improve in the second half of 2002 as anticipated, we will
likely have to supplement our operating cash flows with borrowings under our
credit facility to fund the resulting increase in working capital. Our concerted
effort to reduce the outstanding balance of our credit facility has provided us
with access to readily available capital resources for the next anticipated
upward cycle in activity.
18
Our long term capitalization was as follows (in thousands):
<Table>
<Caption>
March 31, December 31,
2002 2001
------------ ------------
Long-term debt:
Credit facility $ 25,516 $ 39,715
Subordinated debt 125,000 125,000
Other 11,499 12,239
------------ ------------
Total long-term debt 162,015 176,954
Stockholders' equity 296,460 293,954
------------ ------------
Total capitalization $ 458,475 $ 470,908
============ ============
Debt to total capitalization 35.3% 37.6%
============ ============
</Table>
Effective January 31, 2002, we completed the resyndication of our $100
million bank credit facility, expanding the participants to six banks from four,
and extending the term through February 2005. The compliance ratios were
simplified, and minor technical changes were implemented to simplify the
documentation. At March 31, 2002, $13.1 million in letters of credit were issued
and outstanding under the facility and $25.5 million was outstanding under the
revolving facility, leaving $61.4 million of availability under this facility at
March 31, 2002. We plan to limit capital expenditures in 2002 to approximately
$12 million, half of which is associated with maintenance capital requirements.
We anticipate that cash flow from operations will provide the majority of our
cash needs and that the availability under our credit facility will be
sufficient to meet our working capital funding needs in any cyclical recovery.
The credit facility bears interest at either a specified prime rate
(4.75% at March 31, 2002) or the LIBOR rate (2.05% at March 31, 2002), in each
case plus a spread determined quarterly based on the ratio of Newpark's funded
debt to cash flow. The weighted average interest rates on the outstanding
balance under the credit facility for the first three months of 2002 and 2001
were 4.25% and 9.69%, respectively.
The credit facility contains certain financial covenants. As of March
31, 2002, Newpark was in compliance with the covenants contained in the Credit
Facility, as amended and restated. Our Senior Subordinated Notes do not contain
any financial covenants. However, if we do not meet the financial covenants of
the bank credit facility and are unable to obtain an amendment from the banks,
we would be in default of the credit facility which would cause the Notes to be
in default and immediately due. The Notes, the bank credit facility and the
certificates of designation relating to our preferred stock also contain
covenants that significantly limit the payment of dividends on our Common Stock.
With respect to off balance sheet liabilities, we lease most of our
office and warehouse space, rolling stock, and certain pieces of operating
equipment under operating leases. In addition, as discussed below, during 2001
we entered into a limited duration interest rate swap arrangement. Furthermore,
we have issued a guaranty of certain debt obligations of the manufacturer of our
composite mats. This guaranty is backed by letters of credit. The underlying
debt obligation of the manufacturer matures in approximately six
19
years and current sales of composite mats are generating sufficient cash flows
to support this debt, which is amortizing on schedule. The details of these
various arrangements are more fully disclosed in the "Notes to the Financial
Statements" included in Form 10-K for the year ended December 31, 2001.
Except as described in the preceding paragraphs, we are not aware of
any material expenditures, significant balloon payments or other payments on
long term obligations or any other demands or commitments, including off-balance
sheet items to be incurred within the next 12 months. Inflation has not
materially impacted our revenues or income.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to certain market risks that are inherent in our
financial instruments arising from transactions that are entered into in the
normal course of business. Historically, we have not entered into derivative
financial instrument transactions to manage or reduce market risk or for
speculative purposes. However, in November 2001, we did enter into an
interest-rate swap arrangement. A discussion of our primary market risk exposure
in financial instruments is presented below.
Long-term Debt
We are subject to interest rate risk on our long-term fixed interest
rate senior subordinated notes. The bank credit facility has a variable interest
rate and, accordingly, is not subject to interest rate risk. All other things
being equal, the fair market value of debt with a fixed interest rate will
increase as interest rates fall. Conversely, the fair market value of this debt
will decrease as interest rates rise. Our policy has historically been to manage
exposure to interest rate fluctuations by using a combination of fixed and
variable-rate debt.
In November 2001, we entered into an interest-rate swap arrangement,
effectively converting our $125 million fixed-rate senior subordinated notes to
a floating rate for a two year period. The swap arrangement expires in December
2003. We are accounting for this instrument under the provisions of SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities" which
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. We have designated this instrument as an "ineffective fair value
hedge". Accordingly, changes in the instrument's fair value are to be recognized
currently in earnings. As of March 31, 2002, we recorded the fair value of the
interest-rate swap instrument on the balance sheet as a component of accrued
liabilities in the amount of $262,000. This is an increase of $207,000 from the
liability recorded as of December 31, 2001. This increase in the recorded
liability was recognized as a component of interest expense for the quarter
ended March 31, 2001.
Under the terms of the swap instrument, we are to receive cash inflows
equivalent to the semi-annual fixed rate interest payments due under the Notes
(which accrue at a fixed rate of 8.625%) in exchange for the obligation to pay
semi-annual variable-rate interest payments. The variable rate payments are
based on the Libor rate in effect on the payment date, plus a spread of 4.67%.
The variable rate payments are payable semi-annually to match the payment dates
of the fixed rate interest obligations under the Notes. The effective rate on
the variable rate payments as of March 31, 2002, based on the expected Libor
rate in effect on the next payment date, was 7.2%.
20
The Notes mature on December 15, 2007. There are no scheduled principal
payments under the Notes prior to the maturity date. However, all or some of the
Notes may be redeemed at a premium after December 15, 2002. We have no current
plans to repay the Notes ahead of their scheduled maturity.
During the three months ended March 31, 2002, we reduced our total
long-term variable-rate debt by $14.2 million.
Foreign Currency
Our principal foreign operations are conducted in Canada. There is
exposure to future earnings due to changes in foreign currency exchange rates
when transactions are denominated in currencies other than our functional
currencies. We primarily conduct our business in the functional currency of the
jurisdictions in which we operate. Historically, we have not used off-balance
sheet financial hedging instruments to manage foreign currency risks when we
enter into a transaction denominated in a currency other than our local
currencies because the dollar amount of such transactions has not warranted the
use of hedging instruments.
FORWARD-LOOKING STATEMENTS
The foregoing discussion contains "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. The words "anticipates", "believes",
"estimates", "expects", "plans", "intends" and similar expressions are intended
to identify these forward-looking statements but are not the exclusive means of
identifying them. These forward-looking statements reflect the current views of
our management; however, various risks, uncertainties and contingencies,
including the risks identified below, could cause our actual results,
performance or achievements to differ materially from those expressed in, or
implied by, these statements, including the success or failure of our efforts to
implement our business strategy.
We assume no obligation to update publicly any forward-looking
statements, whether as a result of new information, future events or otherwise.
In light of these risks, uncertainties and assumptions, the forward-looking
events discussed in this report might not occur.
Among the risks and uncertainties that could cause future events and
results to differ materially from those anticipated by us in the forward-looking
statements included in this report are the following:
o oil and gas exploration and production levels and the
industry's willingness to spend capital on environmental and
oilfield services;
o oil and gas prices, expectations about future prices, the cost
of exploring for, producing and delivering oil and gas, the
discovery rate of new oil and gas reserves and the ability of
oil and gas companies to raise capital;
o domestic and international political, military, regulatory and
economic conditions;
o other risks and uncertainties generally applicable to the oil
and gas exploration and production industry;
21
o existing regulations affecting E&P and NORM waste disposal
being rescinded or relaxed, governmental authorities failing
to enforce these regulations or industry participants being
able to avoid or delay compliance with these regulations;
o future technological change and innovation, which could result
in a reduction in the amount of waste being generated or
alternative methods of disposal being developed;
o increased competition in our product lines;
o our success in integrating acquisitions;
o our success in replacing our wooden mat fleet with our new
composite mats;
o our ability to maintain the necessary permits to operate our
non-hazardous waste disposal wells and our ability to
successfully compete in this market;
o our ability to successfully compete in the drilling fluids
markets in the Canadian provinces of Alberta and Saskatchewan,
the Permian Basin of West Texas and New Mexico and the
Anadarko Basin in Western Oklahoma, where we have only
recently entered the market;
o adverse weather conditions, which could disrupt drilling
operations;
o our ability to successfully introduce our new products and
services and the market acceptability of these products and
services;
o any delays in implementing the new synthetic fluids disposal
regulations or the failure of these regulations to materially
impact waste disposal volumes or drilling fluids revenues; and
o any increases in interest rates under our credit facility
either as a result of increases in the prime or LIBOR rates or
as a result of changes in our funded debt to cash flow ratio.
22
PART II
ITEM 6. EXHIBIT AND REPORTS ON FORM 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
None.
23
NEWPARK RESOURCES, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: May 3, 2002
NEWPARK RESOURCES, INC.
By: /s/ Matthew W. Hardey
-----------------------------------
Matthew W. Hardey, Vice President
and Chief Financial Officer
24