| NEWPARK RESOURCES INC ITEM 1A Risk Factors We derive a significant portion of our revenues from companies in the oil and gas exploration and production (“E&P”) industry, a historically cyclical industry with levels of activity that are significantly affected by the levels and volatility of oil and gas prices |
| Prices for oil and natural gas are volatile, and this volatility affects the demand for our services |
| A material decline in oil or natural gas prices or activities could materially affect the demand for our services and, therefore, our results of operations and financial condition |
| We may be impacted by changes in oil and gas supply and demand, which are generally affected by the following factors: • oil and gas prices; • 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; and • government regulations regarding, among other things, environmental protection, taxation, price controls and product allocation |
| 15 _________________________________________________________________ [74]Table of Contents The potential fluctuations in the level of future oil and gas industry activity or demand for our services and products are difficult, if not impossible, to predict |
| There may be times when oil and gas industry activity or demand for our services may be less than expected |
| Our operating results have fluctuated during recent years, and these fluctuations may continue, which may have an adverse effect on the market price of our common stock |
| We have experienced in the past, and may continue to experience in the future, fluctuations in our yearly and quarterly operating results |
| It is possible that we will not realize expected earnings growth and that earnings in any particular year or quarter will fall short of either a prior fiscal year or quarter or investors’ expectations |
| If this were to occur, the market price of our common stock would likely be adversely affected |
| The following factors, in addition to others not listed, may affect our operating results in the future: • fluctuations in the oil and gas industry; • competition; • the ability to manage and control our operating costs; • the rate and extent of acceptance of our new drilling fluids products and our new composite mats; • our ability to efficiently integrate and operate businesses that we have recently acquired; and • the ability to identify strategic acquisitions at reasonable prices |
| We employ borrow funds as an integral part of our long-term capital structure |
| In an adverse industry cycle, we may not have sufficient cash flow from operations to meet our debt service requirements |
| As of December 31, 2005, we had approximately dlra185dtta9 million of long-term debt, and the current portion of our long-term debt was dlra12dtta7 million |
| There is a risk that we may be unable to obtain sufficient cash flow from operations or obtain other financing in the future to repay this debt |
| For the year ended December 31, 2005, we had total interest expense of approximately dlra16dtta2 million |
| Our ability to meet our debt service requirements and comply with the covenants in our various debt agreements, including the indenture governing our senior subordinated notes, will depend on our future performance |
| This, in turn, is subject to the volatile nature of the oil and gas industry, and to competitive, economic, financial and other factors that are beyond our control |
| If we are unable to obtain sufficient cash flow from operations or obtain other financing in the future to service our debt, we may be required to sell assets, reduce capital expenditures or refinance all or a portion of our existing debt in order to continue to operate |
| We may not be able to obtain any additional debt or equity financing if and when needed, and the terms we may be required to offer for this additional debt or equity financing may not be as favorable as the terms we have been able to obtain in the past |
| Substantially all of our assets are encumbered to secure our credit facility, and the indenture governing our senior subordinated notes restricts our ability to incur additional debt |
| In particular, we may not incur additional debt unless the ratio of our net income before income taxes, interest expense and certain non-cash charges for the four preceding fiscal quarters, to our interest expense for the same four quarters, would be at least 2:1 |
| In calculating this ratio, the additional debt is treated as if it had been incurred on the first day of the four quarter period, and several other adjustments required by the indenture are made |
| The principal exceptions to this restriction include our ability to: • refinance existing debt without increasing the amount of that debt; • incur up to dlra100cmam000cmam000 of debt under our credit facility or a replacement or refinancing of our credit facility; • issue bonds, letters of credit and similar items in the ordinary course of our business; • incur capitalized leases and obligations for the purchase of property not exceeding a total of dlra20cmam000cmam000; and • have outstanding at any time up to dlra25cmam000cmam000 of additional debt |
| As of December 31, 2005, not including amounts available under our credit facility, the refinance of existing debt and the issuance of bonds, letters of credit and similar items in the ordinary course of business, we could incur over dlra200 million of additional debt within the indenture restrictions |
| 16 _________________________________________________________________ [75]Table of Contents We may not be able to comply with all of the restrictions imposed by the terms of our indebtedness and could be placed in default by our lenders |
| Both the indenture governing the terms of our senior subordinated notes and our credit facility contain restrictive covenants with which we may not be able to comply |
| Our credit facility also requires us to satisfy certain financial tests |
| If we were to breach these covenants or fail to satisfy these financial tests, all amounts owing, including accrued interest, under both our senior subordinated notes and our credit facility could be declared immediately due and payable |
| The lenders under the credit facility also could terminate all commitments under the credit facility and enforce their rights to their security interests on substantially all of our assets |
| In addition, a default under our credit facility could constitute a cross-default under the indenture, and a default under the indenture could constitute a cross-default under our credit facility |
| Our ability to comply with these restrictive covenants and satisfy these financial tests may be affected by events beyond our control |
| These events include changes in oil and gas E&P levels and industry conditions that affect our financing and capital needs |
| The indenture includes covenants limiting our ability to: • incur additional debt; • pay dividends and redeem capital stock; • make certain investments; • issue any capital stock of our subsidiaries; • create any liens or other restrictions affecting our subsidiaries; • issue any guarantees; • enter into transactions with any of our affiliates; and • sell assets, merge or consolidate |
| We have high levels of fixed costs that may not be covered if there are any downturns in our business |
| Our business has high fixed costs, and downtime or low productivity due to reduced demand, weather interruptions, equipment failures or other causes can result in significant operating losses |
| We have high levels of goodwill in relation to our total assets and stockholders’ equity as a result of acquisitions |
| This could have a significant impact on our results of operations and financial condition |
| As of December 31, 2005, we had approximately dlra116dtta8 million in costs in excess of net assets of businesses we acquired and identifiable intangible assets of dlra18dtta2 million |
| Our estimates of the values of these assets could be reduced in the future as a result of various factors beyond our control |
| Any reduction in the value of these assets would reduce our reported income and reduce our total assets and stockholders’ equity in the year in which the reduction is recognized |
| The dlra116dtta8 million balance of goodwill represents 17dtta8prca of our total assets and 33dtta3prca of our total stockholders’ equity as of December 31, 2005 |
| We may not be able to keep pace with the continual and rapid technological developments that characterize the market for our products and services, and our failure to do so may result in our loss of market share |
| The market for our products and services is characterized by continual and rapid technological developments that have resulted in, and will likely continue to result in, substantial improvements in product functions and performance |
| If we are not successful in developing and marketing, on a timely and cost-effective basis, product enhancements or new products that respond to technological developments that are accepted in the marketplace or that comply with industry 17 _________________________________________________________________ [76]Table of Contents standards, we could lose market share |
| In addition, current competitors or new market entrants may develop new technologies, products or standards that could render some of our products or services obsolete, which could have a material adverse effect on our consolidated financial statements |
| Our future success and profitability are dependent upon our ability to: • improve our existing product lines; • address the increasingly sophisticated needs of our customers; • maintain a reputation for technological leadership; • maintain market acceptance of our products and services; and • anticipate changes in technology and industry standards and respond to technological developments on a timely basis, either internally or through strategic alliances |
| Demand for our services may be adversely affected by shortages of critical equipment and personnel trained to operate this equipment in the oil and gas industry |
| Shortages of critical equipment and qualified personnel necessary to explore for, produce or deliver oil and gas have on occasion limited the amount of drilling activity in our primary markets |
| Shortages in these areas could limit the amount of drilling activity and, accordingly, the demand for our services |
| Such shortages also could limit our ability to expand our services or geographic presence |
| If we lose key personnel or are unable to hire additional qualified personnel, we may not be successful |
| Our future success depends on our ability to retain our highly-skilled engineers and technical sales and service personnel |
| The market for these employees is very competitive, and if we cannot continue to attract and retain quality personnel, our ability to compete effectively and to grow our business will be severely limited |
| Our industry typically requires attractive compensation packages to attract and retain qualified personnel |
| A significant increase in the wages paid by competing employers could result in a reduction in our skilled labor force, increases in the rates of wages we must pay, or both |
| Our success also depends upon the continuing contributions of our key executive officers |
| None of our executive officers is covered by a long-term employment contract, and we do not know how long they will remain with our organization |
| We do not have key man life insurance policies on any of our personnel |
| A rescission or relaxation of government regulations could reduce the demand for our services and reduce our revenues and income |
| Changes in existing regulations also could require us to change the way we do business, which could have a material adverse effect on our results of operations and financial condition |
| We believe that the demand for our principal environmental services is directly related to regulation of E&P waste |
| If these regulations were rescinded or relaxed, or governmental authorities failed to enforce these regulations, we could see a decrease in the demand for our services |
| This decrease in demand could materially affect our results of operations and financial condition |
| We may also be affected adversely by new regulations or changes in other applicable regulations |
| E&P waste that is not contaminated with NORM is currently exempt from the principal federal statute governing the handling of hazardous waste |
| In recent years, proposals have been made to rescind this exemption |
| If the exemption covering this type of E&P waste is repealed or modified, we could be required to alter significantly our method of doing business |
| We also could be required to change the way we do business if the regulations interpreting the rules regarding the treatment or disposal of E&P waste or NORM waste were changed |
| If we are required to change the way we do business, it could have a material adverse effect on our results of operations and financial condition |
| 18 _________________________________________________________________ [77]Table of Contents Our patents or other proprietary technology may not prevent our competitors from developing substantially similar technology, which would reduce any competitive advantages we may have from these patents and proprietary technology |
| We also hold US patents on certain aspects of our system to process and dispose of E&P waste, including E&P waste that is contaminated with NORM However, these patents are not a guarantee that we will have a meaningful advantage over our competitors, and there is a risk that others may develop systems that are substantially equivalent to those covered by our patents |
| If that were to happen, we would face increased competition from both a service and a pricing standpoint |
| In addition, costly and time-consuming litigation could be necessary to enforce and determine the scope of our patents and proprietary rights |
| Our business could be negatively impacted by future technological change and innovation |
| It is possible that future innovation could change the way companies drill for oil and gas, reduce the amount of waste that is generated from drilling activities or create new methods of disposal or new types of drilling fluids |
| This could reduce the competitive advantages we may derive from our patents and other proprietary technology |
| We depend on the continued participation and cooperation of the Mexican group that controls the patented and proprietary water treatment technology |
| We are currently working with the Mexican Group under a Memorandum of Understanding that contemplates that they will enter into an exclusive license agreement with us for the application of this technology to the treatment of waste water in the United States and Canada |
| To date, although we continue to work and negotiate with the Mexican Group, a license agreement has not been entered into |
| If we are unable to reach a final agreement for exclusive use of this technology or a satisfactory alternative arrangement, we could lose the ability to use the technology, which could have a material adverse effect on our results of operations and our water treatment business |
| Through December 31, 2005, we had invested dlra13dtta8 million in property, plant and equipment and other assets related to this business |
| We face intense competition in our existing markets and expect to face tough competition in any markets into which we seek to expand |
| This will put pressure on our ability to maintain our current market share and may limit our ability to expand our market share or enter into new markets |
| We expect that competition in the E&P waste market will increase as the industry continues to develop, which could put downward pressure on our margins or make it more difficult for us to maintain or expand our market share |
| In the meantime, we would expect to encounter significant competition if we try to expand into new geographic areas or if we introduce new services |
| Barriers to entry by competitors in the environmental and oilfield services industries are low |
| Therefore, competitive products and services have been and may be developed and marketed successfully by others |
| We also face competition from efforts by oil and gas producing customers to improve their own methods of disposal |
| By doing so, they can reduce or eliminate the need to use third party E&P waste disposal companies like us |
| Our ability to expand our business or increase prices will also be affected by future technological change and innovation, which could affect our customers’ decisions to use their own methods of disposal |
| We also face competition in the drilling fluids market, where there are several companies larger than us that may have both lower capital costs and greater geographic coverage |
| Numerous smaller companies also compete against us in the drilling fluids market |
| These companies may have a lower total cost structure |
| 19 _________________________________________________________________ [78]Table of Contents We must comply with numerous federal, state and local laws, regulations and policies that govern environmental protection, zoning and other matters applicable to our business |
| If we fail to comply or these regulations and policies change, we may face fines or other penalties or be forced to make significant capital expenditures or changes to our operations |
| Laws and regulations have changed frequently in the past, and it is reasonable to expect additional changes in the future |
| If regulatory requirements change, we may be required to make significant unanticipated capital and operating expenditures to remain compliant |
| If our operations do not comply with future laws and regulations, governmental authorities may seek to impose fines and penalties on us or to revoke or deny the issuance or renewal of operating permits for failure to comply with applicable laws and regulations |
| Under these circumstances, we might be required to reduce or cease operations or conduct site remediation or other corrective action |
| Any of these results could have a material adverse effect on our results of operations and financial condition |
| Our business exposes us to potential environmental or regulatory liability, and we could be required to pay substantial amounts with respect to these liabilities, including costs to clean up and close contaminated sites |
| Our business exposes us to the risk that harmful substances may escape into the environment, which could result in: • personal injury or loss of life; • severe damage to or destruction of property; and • environmental damage and suspension of operations |
| Our current and past activities, as well as the activities of our former divisions and subsidiaries, could result in our facing substantial environmental, regulatory and other liabilities |
| This could include the costs of cleanup of contaminated sites and site closure obligations |
| These liabilities could also be imposed on the basis of one or more of the following theories: • negligence; • strict liability; • breach of contract with customers; and • our contractual agreements to indemnify our customers in the normal course of our business |
| We may not have adequate insurance for potential liabilities, and any significant liability not covered by insurance or in excess of our coverage limits could have a material adverse effect on our financial condition |
| While we maintain liability insurance, this insurance is subject to coverage limits |
| In addition, certain policies do not provide coverage for damages resulting from environmental contamination |
| We face the following risks with respect to our insurance coverage: • we may not be able to continue to obtain insurance on commercially reasonable terms or at all; • we may be faced with types of liabilities that will not be covered by our insurance; • our insurance carriers may not be able to meet their obligations under the policies; and • the dollar amount of any liabilities may exceed our policy limits |
| Even a partially uninsured claim, if successful and of significant size, could have a material adverse effect on our consolidated financial statements |
| 20 _________________________________________________________________ [79]Table of Contents We are subject to risks associated with our international operations which could limit our ability to expand internationally or reduce the revenues and profitability of these operations |
| We have significant operations in Canada and areas of Europe and North Africa surrounding the Mediterranean Sea |
| In addition, we may seek to expand to other areas outside the United States in the future |
| International operations are subject to a number of risks and uncertainties, including: • difficulties and cost associated with complying with a wide variety of complex foreign laws, treaties and regulations; • unexpected changes in regulatory environments; • inadequate protection of intellectual property in foreign countries; • 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; • tax rates in foreign countries that may exceed those of the United States and foreign earnings that may be subject to withholding requirements, tariffs or other restrictions; • exchange controls or other limitations on international currency movements; • fluctuations in foreign currency exchange rates; and • political and economic instability |
| Our success will depend, in part, on our ability to anticipate and effectively manage these and other risks |
| Any of these factors could impair our ability to expand into international markets and could prevent us from increasing our revenue and our profitability and meeting our growth objectives |
| The market price of our common stock is subject to fluctuation, and investors may not be able to predict the timing or extent of these fluctuations |
| The market price of our common stock may fluctuate depending on a number of factors |
| These include the general economy, stock market conditions, general trends in the oilfield service 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 |
| Our internal controls may not be sufficient to achieve all stated goals and objectives |
| Our internal controls and procedures were developed through a process in which our management applied its judgment in assessing the cost-benefit relationship of possible controls and procedures, which, by their nature, can provide only reasonable assurance regarding control objectives |
| You should note that the design of any system of internal controls and procedures is based in part upon various assumptions about the likelihood of future events, and we cannot assure you that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote |