NEWPARK RESOURCES INC - 10-Q Quarterly Report

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 September 30, 2004		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 þ No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes þ No o

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: 83,957,581 shares at November 1, 2004.

Newpark Resources Inc.

Consolidated Balance Sheets

(Unaudited)


	September 30,			December 31,
(In thousands, except share data)	2004			2003
ASSETS					Note 1
Current assets:
Cash and cash equivalents	$	4,331		$	4,692
Restricted cash		—			8,029
Trade accounts receivable, net		107,923			99,948
Notes and other receivables		5,250			5,428
Inventories		71,529			74,846
Deferred tax asset		7,597			8,698
Prepaid expenses and other current assets		11,745			8,510

Total current assets		208,375			210,151
Property, plant and equipment, at cost, net of accumulated depreciation		205,682			206,238
Goodwill		116,067			115,869
Deferred tax asset		7,617			8,778
Other intangible assets, net		15,767			14,947
Other assets		21,261			19,517

	$	574,769		$	575,500

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Foreign bank lines of credit	$	6,637		$	10,610
Current maturities of long-term debt		5,146			3,259
Accounts payable		36,016			40,479
Accrued liabilities		26,858			21,894

Total current liabilities		74,657			76,242
Long-term debt, less current portion		179,246			183,600
Other non-current liabilities		2,975			1,697
Stockholders’ equity:
Preferred Stock, $.01 par value, 1,000,000 shares authorized, 80,000 and 120,000 shares issued and outstanding at September 30, 2004 and December 31, 2003, respectively		20,000			30,000
Common Stock, $.01 par value, 100,000,000 shares authorized, 83,938,247 and 81,073,222 shares issued and outstanding at September 30, 2004 and December 31, 2003, respectively		839			811
Paid-in capital		401,737			390,788
Unearned restricted stock compensation		(555	)		(803	)
Accumulated other comprehensive income		4,245			5,033
Retained deficit		(108,375	)		(111,868	)

Total stockholders’ equity		317,891			313,961

	$	574,769		$	575,500

See Accompanying Notes to Unaudited Consolidated Financial Statements

Newpark Resources, Inc.

Consolidated Statements of Operations

For the Three and Nine Month Periods Ended September 30,
(Unaudited)


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(In thousands, except per share data)	2004			2003			2004			2003
Revenues	$	110,790		$	95,593		$	319,733		$	278,553
Cost of revenues		103,401			89,454			296,110			257,400

Gross profit		7,389			6,139			23,623			21,153
General and administrative expenses		2,122			979			6,993			3,245

Operating income		5,267			5,160			16,630			17,908
Foreign currency (gain) loss		76			16			217			(758	)
Interest income		(118	)		(138	)		(1,255	)		(570	)
Interest expense		3,760			3,719			10,885			11,413

Income before income taxes		1,549			1,563			6,783			7,823
Provision for income taxes		589			779			2,578			3,133

Net income		960			784			4,205			4,690
Less:
Preferred stock dividends and accretion		225			338			713			1,246

Net income applicable to common and common equivalent shares	$	735		$	446		$	3,492		$	3,444

Basic and diluted income per common and common equivalent shares	$	0.01		$	0.01		$	0.04		$	0.04

See Accompanying Notes to Unaudited Consolidated Financial Statements

Newpark Resources, Inc.

Consolidated Statements of Cash Flows

For the Nine Month Periods Ended September 30,
(Unaudited)


(In thousands )	2004			2003
Cash flows from operating activities:
Net income	$	4,205		$	4,690
Adjustments to reconcile net income to net cash provided by operations:
Depreciation and amortization		15,340			16,050
Provision for deferred income taxes		2,008			2,826
Gain (loss) on sale of assets		(15	)		94
Change in assets and liabilities:
Decrease in restricted cash		8,029			—
Decrease (increase) in accounts receivable		(11,881	)		3,662
Increase in inventories		(110	)		(20,080	)
Decrease (increase) in other assets		(5,385	)		912
Increase (decrease) in accounts payable		(4,156	)		2,733
Increase in accrued liabilities and other		1,040			9,335

Net cash provided by operating activities		9,075			20,222

Cash flows from investing activities:
Capital expenditures		(14,224	)		(18,374	)
Proceeds from sale of property, plant and equipment		336			125
Payments received on notes receivable		10,403			1,171

Net cash used in investing activities		(3,485	)		(17,078	)

Cash flows from financing activities:
Net borrowings (payments) on lines of credit		(19,345	)		504
Net borrowings (payments) on notes payable and long-term		13,213			(2,852	)
Proceeds from exercise of stock options and ESPP		631			176
Preferred stock dividends paid in cash		(450	)		—

Net cash used in financing activities		(5,951	)		(2,172	)

Net increase (decrease) in cash and cash equivalents		(361	)		972
Cash and cash equivalents at beginning of period		4,692			2,725

Cash and cash equivalents at end of period	$	4,331		$	3,697

See Accompanying Notes to Unaudited Consolidated Financial Statements

NEWPARK RESOURCES, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 — Interim Financial Statements

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine month periods ended September 30, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004.

The condensed consolidated balance sheet at December 31, 2003 was derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

For further information, please refer to the consolidated financial statements and footnotes thereto included in our annual report on Form 10-K for the year ended December 31, 2003.

Note 2 — Significant Accounting Policies

Our significant accounting policies, including our revenue recognition policies, have been previously disclosed in our Form 10-K for the period ending December 31, 2003. Following is a clarification of our revenue recognition policies.

For the E&P waste disposal segment, revenues are recognized when Newpark takes title to the waste, which is upon its receipt of the waste at our facility. All costs related to transporting and disposing of the waste received are accrued when that revenue is recognized.

For the mat and integrated services segment, revenues from sales of wooden or composite mats are recognized when title passes to the customer, which is upon shipment or delivery, depending upon the terms of the underlying sales contract.

Revenues in the mat and integrated services segment are generated from both fixed price and unit-priced contracts, which are short-term in duration. The activities provided for in these contracts include site preparation, pit design, construction and drilling waste management, and installation and use of our composite or wooden mat systems during an initial period. This initial period includes revenues and costs for site preparation, installation and the use of mat systems. Revenues from these contracts are recorded using

the percentage-of-completion method based on project milestones as specified in the contracts.

At the end of the initial period, the customer, at its option, may extend the use of the mat systems. Revenues related to the extension period are quoted either on a day-rate basis or at a fixed price and are recognized ratably over the agreed extension period. Revenues for services provided to customers at agreed upon hourly or daily rates are recognized when the services are performed. The services typically provided to our customers at agreed upon hourly or daily rates include site assessment and regulatory compliance.

All reimbursements by customers of shipping and handling costs are included in revenues. Shipping and handling costs are included in cost of services provided in the income statement.

Note 3 — Preferred Stock

In January 2004, the holder of Series B Preferred Stock exercised its right to convert a total of 40,000 shares of the Series B Preferred Stock into common stock. The converted shares of Series B Preferred Stock had a total stated value of $10.0 million. In this conversion, Newpark issued a total of 2.6 million shares of its common stock, valued at the conversion price of $3.804, and cancelled the 40,000 shares of Series B Preferred Stock.

Note 4 — 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 Financial Accounting Standards (“FAS”) 128 (in thousands, except per share amounts).


	Three Months Ended
	September 30,
	2004		2003
Income applicable to common and common equivalent shares	$	735	$	446

Weighted average number of common shares outstanding		83,921		80,892
Add:
Net effect of dilutive stock options and warrants		332		154

Adjusted weighted average number of common shares outstanding		84,253		81,046

Basic and diluted income applicable to common and common equivalent shares	$	.01	$	.01


	Nine Months Ended
	September 30,
	2004		2003
Income applicable to common and common equivalent shares	$	3,492	$	3,444

Weighted average number of common shares outstanding		83,549		79,379
Add:
Net effect of dilutive stock options and warrants		269		128

Adjusted weighted average number of common shares outstanding		83,818		79,507

Basic and diluted income applicable to common and common equivalent shares	$	.04	$	.04

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 September 30, 2004 and 2003, Newpark had dilutive stock options and warrants of approximately 3.0 million shares and 1.3 million shares, respectively, which were assumed to be exercised using the treasury stock method. For the nine months ended September 30, 2004 and 2003, Newpark had dilutive stock options and warrants of approximately 1.9 million shares and 687,000 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.

Options and warrants to purchase a total of approximately 7.2 million shares and 10.0 million shares of common stock were outstanding during the three months ended September 30, 2004 and 2003, respectively, but were not included in the computation of diluted income per share because they were anti-dilutive. Options and warrants to purchase a total of approximately 8.2 million shares and 10.4 million shares of common stock were outstanding during the nine months ended September 30, 2004 and 2003, 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 preferred stock through the date of repurchase or conversion has been excluded from the computation of diluted income per share for all periods presented because the effect would be anti-dilutive.

Note 5 — Stock-Based Compensation

At September 30, 2004, Newpark maintained six stock-based compensation plans, including four stock option plans, a deferred compensation plan and a long-term incentive plan. Newpark applies Accounting Principles Board Opinion 25 (“APB 25”) and related Interpretations in accounting for its stock-based compensation plans. In accordance with this guidance, no compensation cost has been recognized for Newpark’s stock option plans as the exercise price of all stock options granted thereunder is equal to the fair value at the date of grant. Compensation expense is recorded for Newpark’s deferred compensation plan and long-term incentive plan. Had compensation costs for all of Newpark’s stock-

based compensation plans been determined based on the fair value at the grant dates for awards under those plans consistent with the method of FAS 123, Newpark’s net income and net income per share would have been reduced to the pro forma amounts indicated below:


	Three Months Ended
	September 30,
(In thousands, except per share data)	2004			2003
Income applicable to common and common equivalent shares:
As reported	$	735		$	446
Add recorded stock compensation expense, net of related taxes		51			63
Deduct stock based employee compensation expense determined under fair value based method for all awards, net of related taxes		(485	)		(579	)

Pro forma	$	301		$	(70	)

Basic and diluted net income per share:
As reported	$	.01		$	.01

Proforma	$	.00		$	(.00	)


	Nine Months Ended
	September 30,
(In thousands, except per share data)	2004			2003
Income applicable to common and common equivalent shares:
As reported	$	3,492		$	3,444
Add recorded stock compensation expense, net of related taxes		154			149
Deduct stock based employee compensation expense determined under fair value based method for all awards, net of related taxes		(1,310	)		(1,687	)

Pro forma	$	2,336		$	1,906

Basic and diluted net income per share:
As reported	$	.04		$	.04

Proforma	$	.03		$	.02

On March 31, 2004, the Financial Accounting Standards Board (FASB) issued a proposed Statement, “Share-Based Payment,” that addresses the accounting for share-based payment transactions under which a company receives employee services in exchange for equity instruments of the company, such as stock options. The proposed Statement would eliminate the ability to account for share-based compensation transactions using APB 25 and generally would require instead that such transactions be accounted for using a fair value-based method. On October 13, 2004, the FASB concluded FAS 123R, “Share-Based Payment,” which will require companies to measure compensation cost for all share-based payments at fair value, to be effective for interim or annual periods beginning after June 15, 2005. The proposed Statement, if adopted, would require Newpark to begin accounting for stock options under this method beginning in the

quarter ended September 30, 2005. It is currently not known whether the implementation of FAS 123R would result in financial results materially different from those presented above or if Newpark will early adopt this Statement, as encouraged by the FASB.

Note 6 — Accounts Receivable

Included in accounts receivable at September 30, 2004 and December 31, 2003 are:


	September 30,			December 31,
(in thousands)	2004			2003
Trade receivables	$	94,954		$	89,801
Unbilled revenues		15,499			13,067

Gross trade receivables		110,453			102,868
Allowance for doubtful accounts		(2,530	)		(2,920	)

Net trade receivables	$	107,923		$	99,948

Note 7 — Inventory

Newpark’s inventory consisted of the following items at September 30, 2004 and December 31, 2003:


	September 30,		December 31,
(in thousands)	2004		2003
Finished goods:
Composite mats	$	13,136	$	21,307
Raw materials and components:
Drilling fluids raw material and components		50,749		47,856
Logs		6,283		3,982
Supplies		310		308
Other		1,051		1,393

Total raw materials and components		58,393		53,539

Total inventory	$	71,529	$	74,846

Note 8 — Long-Term Debt

As of September 30, 2004, 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 (see Note 11).

On February 25, 2004, Newpark’s bank credit facility was amended, restated and converted into an asset-based lending facility (the “Credit Facility”). The Credit Facility matures on February 25, 2007. Under the Credit Facility, Newpark can borrow up to $85 million in the form of $15 million in term debt and $70 million in revolving debt. At September 30, 2004, $12.6 million was outstanding under the term portion of the Credit Facility. Availability under the revolving portion of the Credit Facility is based on a

percentage of Newpark’s eligible consolidated accounts receivable and inventory as defined in the Credit Facility. At September 30, 2004, total availability under the revolving portion of the Credit Facility was $57.9 million. At September 30, 2004, $10.8 million in letters of credit were issued and outstanding and $18.7 million was outstanding under the revolving portion of the Credit Facility, leaving $28.4 million of availability under the revolving portion of the Credit Facility at that date. The Credit Facility bears interest at either a specified prime rate (4.75% at September 30, 2004), or the LIBOR rate (1.98% at September 30, 2004), in each case plus a spread determined quarterly based upon a fixed charge coverage ratio. The weighted average interest rates on the outstanding balance under the Credit Facility for the three months and nine months ended September 30, 2004 were 4.4% and 4.7%, respectively, as compared to 5.7% and 5.6%, respectively, for the comparable periods in 2003.

The Credit Facility is secured by substantially all domestic assets of Newpark and its domestic subsidiaries. The Credit Facility contains a fixed charge coverage ratio covenant and a tangible net worth covenant. Newpark was in compliance with all covenants as of September 30, 2004.

During the third quarter of 2004, Newpark closed a $15 million project financing of the recently completed barite mill, and $6.7 million in support of the new mat rental operation in Mexico. Proceeds from these transactions were applied to reduce advances under the Credit Facility.

Note 9 — New Accounting Standards

In January 2003, the FASB issued Financial Interpretation Number 46 (“FIN 46”) “Consolidation of Variable Interest Entities,” which clarifies the application of Accounting Research Bulletin 51, “Consolidated Financial Statements”, to certain entities (called variable interest entities) in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The disclosure requirements of FIN 46 were effective for all financial statements issued after January 31, 2003. The consolidation requirements apply to all variable interest entities created after January 31, 2003. In addition, public companies were required to apply the consolidation requirements to variable interest entities that existed prior to February 1, 2003 and remained in existence as of the beginning of annual or interim periods beginning after March 15, 2004.

Management has completed its assessment of the impact of FIN 46 on the reporting for Newpark’s three variable interest entities. These variable interest entities consist of a 90% interest in a Mexican joint venture for the sale and lease of DuraBase™ composite mats in the Mexican market (DuraBase de Mexico), a 49% interest in a joint venture with the leading producer of wooden mats (“MOCTX”) and a 49% interest in the Loma Company, LLC (“LOMA”), the producer of DuraBase™ composite mats. Based on management’s assessments, it was determined that Newpark is the primary beneficiary of DuraBase de Mexico, and has consolidated the financial statements of DuraBase de Mexico with Newpark. Based on management’s assessments, it was determined that Newpark is not the primary beneficiary of MOCTX and thus Newpark continues to account for this investment under the equity method. Newpark issued a guaranty for certain debt

obligations of MOCTX. The amount of this guaranty as of September 30, 2004 was $4.6 million.

Based on management’s assessments, it was determined that Newpark is the primary beneficiary of LOMA. However, Newpark continues to account for its 49% investment in LOMA under the equity method because LOMA’s financial position and results of operations are not material to Newpark’s consolidated financial statements. In addition, due to the ongoing dispute and pricing litigation discussed in Note 12, Newpark currently does not have access to and has been unable to obtain current and reliable financial information as of and for the period ended September 30, 2004. Based on the latest available financial information on LOMA, which is as of December 31, 2003, LOMA would have represented less than 2% of Newpark’s consolidated total assets as of December 31, 2003. Substantially all of the operating activity of LOMA is with Newpark or one of its wholly-owned subsidiaries and this activity would be eliminated in consolidation. Newpark’s investment in and advances to LOMA as of September 30, 2004 was $11.4 million, including $10.2 million in receivables recorded in connection with the recent judgment in our pricing dispute (see Note 12).

Newpark has also issued a guaranty of certain debt obligations of LOMA. This guaranty is backed by a letter of credit. The amount of this guaranty as of September 30, 2004 was $7.1 million. The LOMA plant suspended production in May 2003 and has not resumed operations. On August 11, 2004, LOMA initiated a Chapter 11 bankruptcy reorganization proceeding in the Bankruptcy Court for the Western District of Louisiana. Because of the recent bankruptcy filing by LOMA, Newpark’s guarantee may be called upon to fulfill LOMA’s debt obligation. Since Newpark’s guarantee is secured by a letter of credit, there would not be any impact on the availability under Newpark’s Credit Facility should performance under the guarantee be required.

Note 10 — Segment Data

Effective January 1, 2004, Newpark implemented a segment change in the financial reporting of its Canadian operations. As a result of this change, the operating results for the environmental services business unit in Canada are now included as a component of the E&P waste disposal segment, rather than within the fluids sales and engineering segment. In addition, a portion of the operating costs of the Canadian business unit are now reported as a component of G&A expenses. All segment information for the prior year has been restated to reflect these reporting changes. Summarized financial information concerning Newpark’s reportable segments is shown in the following table (dollars in millions):


	Three Months Ended
	September 30,					Increase/(Decrease)
	2004		2003			$			%
Revenues by segment:
Fluids sales & engineering	$	71,448	$	57,089		$	14,359			25	%
E&P waste disposal		15,363		18,634			(3,271	)		(18	)
Mat & integrated services		23,979		19,870			4,109			21

Total revenues	$	110,790	$	95,593		$	15,197			16	%

Operating income by segment:
Fluids sales & engineering	$	4,978	$	2,791		$	2,187			78	%
E&P waste disposal		1,243		3,908			(2,665	)		(68	)
Mat & integrated services		1,168		(560	)		1,728		NM

Total by segment		7,389		6,139			1,250			20
General and administrative expenses		2,122		979			1,143			117

Total operating income	$	5,267	$	5,160		$	107			2	%


	Nine Months Ended
	September 30,				Increase/(Decrease)
	2004		2003		$			%
Revenues by segment:
Fluids sales & engineering	$	196,042	$	158,590	$	37,452			24	%
E&P waste disposal		47,619		51,028		(3,409	)		(7	)
Mat & integrated services		76,072		68,935		7,137			10

Total revenues	$	319,733	$	278,553	$	41,180			15	%

Operating income by segment:
Fluids sales & engineering	$	13,778	$	8,667	$	5,111			59	%
E&P waste disposal		5,612		9,690		(4,078	)		(42	)
Mat & integrated services		4,232		2,796		1,436			51

Total by segment		23,622		21,153		2,469			12
General and administrative expenses		6,993		3,245		3,748			116

Total operating income	$	16,629	$	17,908	$	(1,279	)		(7	)%

NM — Not Meaningful

The figures above are shown net of intersegment transfers.

Note 11 — Condensed Consolidating Financial Information

The supplemental condensed consolidating financial information should be read in conjunction with the notes to these consolidated financial statements and have been prepared pursuant to the rules and regulations for condensed financial information and does not include all disclosures included in annual financial statements, although Newpark believes that the disclosures made are adequate to make the information presented not

misleading. Certain reclassifications were made to conform all of the financial information to the financial presentation on a consolidated basis. The principal eliminating entries eliminate investments in subsidiaries, intercompany balances and intercompany revenues and expenses. The allocation of the consolidated income tax provision was made using the with and without allocation method.

SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
AS OF SEPTEMBER 30, 2004
(in thousands)


	Parent						Non-
	Company			Guarantor			Guarantor
	Only			Subsidiaries			Subsidiaries			Eliminations			Consolidated
Current assets:
Cash and cash equivalents	$	1,884		$	(412	)	$	2,859		$	—		$	4,331
Accounts receivable, net		—			82,109			27,791			(1,977	)		107,923
Inventories		—			56,087			15,442			—			71,529
Other current assets		10,727			8,238			5,627			—			24,592

Total current assets		12,611			146,022			51,719			(1,977	)		208,375
Investment in subsidiaries		444,201			—			—			(444,201	)		—
Property and equipment, net		2,937			197,538			5,207			—			205,682
Goodwill		—			95,115			20,952			—			116,067
Identifiable intangibles, net		—			12,998			2,769			—			15,767
Other assets, net		32,413			13,455			702			(17,692	)		28,878

Total assets	$	492,162		$	465,128		$	81,349		$	(463,870	)	$	574,769

Current liabilities:
Foreign bank lines of credit	$	—		$	—		$	6,637		$	—		$	6,637
Current portion of long-term debt		1,250			3,877			19			—			5,146
Accounts payable		1,259			19,774			16,960			(1,977	)		36,016
Accrued liabilities		5,932			12,475			8,451			—			26,858

Total current liabilities		8,441			36,126			32,067			(1,977	)		74,657

Long-term debt		169,825			8,798			18,315			(17,692	)		179,246
Other liabilities		250			—			2,725			—			2,975
Preferred stock		20,000			—			—			—			20,000
Common stock		839			807			12,678			(13,485	)		839
Paid-in capital		401,737			421,696			12,155			(433,851	)		401,737
Unearned restricted stock		(555	)		—			—			—			(555	)
Cumulative translation adjustment		—			—			4,245			—			4,245
Retained deficit		(108,375	)		(2,299	)		(836	)		3,135			(108,375	)

Total stockholders’ equity		313,646			420,204			28,242			(444,201	)		317,891

Total liabilities and equity	$	492,162		$	465,128		$	81,349		$	(463,870	)	$	574,769

SUPPLEMENTAL CONDENSED CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 2003
(in thousands)


	Parent						Non-
	Company			Guarantor			Guarantor
	Only			Subsidiaries			Subsidiaries			Eliminations			Consolidated
Current assets:
Cash and cash equivalents	$	179		$	(485	)	$	4,998		$	—		$	4,692
Restricted cash		8,029			—			—			—			8,029
Accounts receivable, net		—			70,446			32,536			(3,034	)		99,948
Inventories		—			58,877			15,969			—			74,846
Other current assets		11,550			10,230			3,356			(2,500	)		22,636

Total current assets		19,758			139,068			56,859			(5,534	)		210,151
Investment in subsidiaries		425,449			—			—			(425,449	)		—
Property and equipment, net		5,583			193,054			7,601			—			206,238
Goodwill		—			95,114			20,755			—			115,869
Identifiable intangibles, net		—			12,320			2,627			—			14,947
Other assets, net		40,048			6,065			(450	)		(17,368	)		28,295

Total assets	$	490,838		$	445,621		$	87,392		$	(448,351	)	$	575,500

Current liabilities:
Foreign bank lines of credit	$	—		$	—		$	10,610		$	—		$	10,610
Current portion of long-term debt		—			3,259			—			—			3,259
Accounts payable		534			24,048			18,931			(3,034	)		40,479
Accrued liabilities		3,742			10,787			9,865			(2,500	)		21,894

Total current liabilities		4,276			38,094			39,406			(5,534	)		76,242

Long-term debt		177,500			1,018			16,841			(11,759	)		183,600
Other liabilities		134			(645	)		2,783			(575	)		1,697
Preferred stock		30,000			—			—			—			30,000
Common stock		811			2,613			12,670			(15,283	)		811
Paid-in capital		390,788			425,504			22,116			(447,620	)		390,788
Unearned restricted stock		(803	)		—			—			—			(803	)
Cumulative translation adjustment		—			—			5,033			—			5,033
Retained deficit		(111,868	)		(20,963	)		(11,457	)		32,420			(111,868	)

Total stockholders’ equity		308,928			407,154			28,362			(430,483	)		313,961

Total liabilities and equity	$	490,838		$	445,621		$	87,392		$	(448,351	)	$	575,500

SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2004
(in thousands)


	Parent						Non-
	Company			Guarantor			Guarantor
	Only			Subsidiaries			Subsidiaries			Eliminations			Consolidated
Revenues	$	—		$	93,884		$	16,906		$	—		$	110,790
Cost of revenues		—			86,251			17,150			—			103,401

Gross profit		—			7,633			(244	)		—			7,389
General and administrative expense		1,960			—			162			—			2,122

Operating income (loss)		(1,960	)		7,633			(406	)		—			5,267
Other (income) expense		—			(111	)		69			—			(42	)
Interest expense		3,319			142			299			—			3,760

Income (loss) before income taxes		(5,279	)		7,602			(774	)		—			1,549
Income taxes (benefit)		(2,005	)		2,943			(349	)		—			589
Equity in earnings of subsidiaries		4,232			—			—			(4,232	)		—

Net income	$	958		$	4,659		$	(425	)	$	(4,232	)	$	960

SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2003
(in thousands)


	Parent						Non-
	Company			Guarantor			Guarantor
	Only			Subsidiaries			Subsidiaries			Eliminations			Consolidated
Revenues	$	—		$	71,327		$	24,266		$	—		$	95,593
Cost of revenues		—			67,334			22,120			—			89,454

Gross profit		—			3,993			2,146			—			6,139
General and administrative expense		861			—			118			—			979

Operating income (loss)		(861	)		3,993			2,028			—			5,160
Other (income) expense		(33	)		(42	)		(47	)		—			(122	)
Interest expense		3,397			193			129			—			3,719

Income (loss) before income taxes		(4,225	)		3,842			1,946			—			1,563
Income taxes (benefit)		(1,651	)		1,551			879			—			779
Equity in earnings of subsidiaries		3,359			—			—			(3,359	)		—

Net income	$	785		$	2,291		$	1,067		$	(3,359	)	$	784

SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004
(in thousands)


	Parent						Non-
	Company			Guarantor			Guarantor
	Only			Subsidiaries			Subsidiaries		Eliminations			Consolidated
Revenues	$	—		$	263,041		$	56,692	$	—		$	319,733
Cost of revenues		—			241,470			54,640		—			296,110

Gross profit		—			21,571			2,052		—			23,623
General and administrative expense		6,548			—			445		—			6,993

Operating income (loss)		(6,548	)		21,571			1,607		—			16,630
Other (income) expense		(858	)		(344	)		164		—			(1,038	)
Interest expense		10,045			375			465		—			10,885

Income (loss) before income taxes		(15,735	)		21,540			978		—			6,783
Income taxes (benefit)		(5,980	)		8,117			441		—			2,578
Equity in earnings of subsidiaries		13,960			—			—		(13,960	)		—

Net income	$	4,205		$	13,423		$	537	$	(13,960	)	$	4,205

SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003


	Parent						Non-
	Company			Guarantor			Guarantor
	Only			Subsidiaries			Subsidiaries			Eliminations			Consolidated
Revenues	$	—		$	211,893		$	66,660		$	—		$	278,553
Cost of revenues		—			196,293			61,107			—			257,400

Gross profit		—			15,600			5,553			—			21,153
General and administrative expense		2,967			—			278			—			3,245

Operating income (loss)		(2,967	)		15,600			5,275			—			17,908
Other (income) expense		(206	)		(191	)		(931	)		—			(1,328	)
Interest expense		10,573			544			296			—			11,413

Income (loss) before income taxes		(13,334	)		15,247			5,910			—			7,823
Income taxes (benefit)		(5,067	)		5,540			2,660			—			3,133
Equity in earnings of subsidiaries		12,958			—			—			(12,958	)		—

Net income	$	4,691		$	9,707		$	3,250		$	(12,958	)	$	4,690

SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004
(in thousands)


	Parent						Non-
	Company			Guarantor			Guarantor
	Only			Subsidiaries			Subsidiaries			Eliminations		Consolidated
Net cash provided by (used in) operating activities	$	(14,048	)	$	19,377		$	3,746		$	—	$	9,075
Net cash provided by (used in) investing activities:
Capital expenditures, net of sales proceeds		(1,552	)		(11,446	)		(890	)		—		(13,888	)
Investments		16,967			(15,551	)		(1,416	)		—		—
Payments received on notes receivable		6,582			3,821			—			—		10,403

		21,997			(23,176	)		(2,306	)		—		(3,485	)

Net cash provided by (used in) financing activities:
Net borrowings (payments on) lines of credit, notes payable and long-term debt		(6,424	)		3,747			(3,455	)		—		(6,132	)
Other		181			—			—			—		181

		(6,243	)		3,747			(3,455	)		—		(5,951	)

Net increase (decrease) in cash and cash equivalents		1,706			(52	)		(2,015	)		—		(361	)
Cash and cash equivalents:
Beginning of period		178			(360	)		4,874			—		4,692

End of period	$	1,884		$	(412	)	$	2,859		$	—	$	4,331

SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003
(in thousands)


	Parent						Non-
	Company			Guarantor			Guarantor
	Only			Subsidiaries			Subsidiaries			Eliminations		Consolidated
Net cash provided by (used in) operating activities	$	(14,261	)	$	37,939		$	(3,456	)	$	—	$	20,222
Net cash provided by (used in) investing activities:
Capital expenditures, net of sales proceeds		(1,690	)		(14,292	)		(2,267	)		—		(18,249	)
Investments		15,191			(20,820	)		5,629			—		—
Payments received on notes receivable		333			838			—			—		1,171

		13,834			(34,274	)		3,362			—		(17,078	)

Net cash provided by (used in) financing activities:
Net borrowings (payments on) lines of credit, notes payable and long-term debt		—			(3,524	)		1,176			—		(2,348	)
Other		176			—			—			—		176

		176			(3,524	)		1,176			—		(2,172	)

Net increase (decrease) in cash and cash equivalents		(251	)		141			1,082			—		972
Cash and cash equivalents:
Beginning of period		472			242			2,011			—		2,725

End of period	$	221		$	383		$	3,093		$	—	$	3,697

Note 12 — Legal and Other Matters

In 2002, a Newpark subsidiary filed suit against LOMA asserting it had been overcharged for DuraBase™ composite mats purchased from Loma. On June 29, 2004, the Louisiana Fifteenth Judicial District Court granted judgment in favor of Newpark, affirming its interpretation of the pricing of the DuraBase™ composite mats and awarding Newpark $11.7 million in damages for overcharges through December 31, 2002. The state court judgment further denied LOMA’s and OLS Consulting Services, Inc.’s (“OLS”) claim to void Newpark’s exclusive license to use and sell the composite mats. Newpark’s judgment has been appealed by LOMA and OLS to the Louisiana Third Circuit Court of Appeal. Lacking adequate liquidity to obtain a bond to suspend execution of Newpark’s judgment pending appeal, LOMA filed for protection under Chapter 11 of the Bankruptcy Code on August 11, 2004. The bankruptcy court has ordered and confirmed the appointment of a trustee to assume control over LOMA’s affairs while in Chapter 11. The appointment of a trustee allows Newpark to file its own plan of reorganization, which it intends to do. At this juncture, it is impossible to predict when or if LOMA will be successfully reorganized or the exact details of any plan of reorganization.

In connection with the judgment of the pricing litigation with LOMA in the second quarter of 2004, Newpark recorded a receivable from LOMA, totaling $10.2 million, net of an allowance of approximately $6.8 million. This receivable is included in other long-term assets as of September 30, 2004. The recorded value of the receivable is net of any allowances for amounts deemed to be uncollectible from LOMA in the future. Net reductions to inventory and property, plant and equipment in the amount of $3.4 million and $5.2 million, respectively, were recorded in connection with the recording of this receivable. These reductions were made to reduce mat costs to the amounts determined as appropriate by the state court judgment, as opposed to the amounts originally invoiced by LOMA.

Also as previously reported in Newpark’s Annual Report on Form 10-K for the year ended December 31, 2003, in response to the filing of a lawsuit by Newpark Drilling Fluids, L.L.C., one of Newpark’s subsidiaries, certain of the individual defendants in the lawsuit filed stockholder derivative claims with respect to alleged misconduct as a cross-complaint to the lawsuit. A settlement of this litigation was reached through mediation on July 15, 2004. While the final settlement documents have not been executed as of the date of this report, management expects to recover its cumulative legal and other costs over the term of the settlement and will avoid related legal costs in future periods. Newpark’s total cost to date has been $3.6 million, of which $2.5 million was related to the original lawsuit and $1.1 million was related to defense of the stockholders derivative claims. Newpark has received acknowledgement from its insurance carrier that defense costs of the stockholder derivative claims is a covered item subject to a deductible of $100,000. Newpark has recorded a receivable in the amount of $1.0 million as of September 30, 2004 related to the amount recoverable from the insurance carrier. Included in General and Administrative expense for the three month and nine month periods ended September 30, 2004, are defense costs, net of anticipated recovery totaling $345,000 and $2.3 million, respectively.

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, 2003.

Operating Environment and Recent Developments

Our operating results depend in large measure on oil and gas drilling activity levels in the markets we serve, as well as on the depth of drilling, which governs the revenue potential of each well. These levels, in turn, depend on oil and gas commodities pricing, inventory levels and product demand. Rig count data is the most widely accepted indicator of drilling activity. Key average rig count data for the last seven quarters is listed in the following table:


	1Q03			2Q03			3Q03			4Q03			1Q04			2Q04			3Q04
U.S Rig Count		897			1,028			1,088			1,109			1,118			1,163			1,228
Gulf Coast market		218			225			228			222			217			222			233
Gulf Coast market to total		24.3	%		21.9	%		21.0	%		20.1	%		19.4	%		19.1	%		19.0	%
Canadian Rig Count		492			199			385			407			528			198			328

Source:

Baker Hughes Incorporated

While rig count in the Gulf Coast market during the third quarter of 2004 improved in both sequential quarter and year-over-year comparisons, operations of the industry were adversely affected by numerous suspensions of activity due to the number of tropical weather systems affecting the region during the period. This impact on operations in the Gulf Coast market negatively affected the operating results of our business segments during the third quarter of 2004.

Key Market Developments

Our primary Gulf Coast oilfield market 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. In addition to our primary Gulf Coast Market, we operate in several other key markets, including Canada, the U.S. central region (including the U.S. mid-continent and U.S. Rocky Mountain regions), West Texas and areas surrounding the Mediterranean Sea. Revenues by key markets are as follows (dollars in millions):


	Three months ended September 30,
	2004					2003					2004 vs. 2003
	$		%			$		%			$			%
Gulf Coast Oilfield	$	56.0		51	%	$	49.4		52	%	$	6.6			13	%
Canada		7.7		7			12.3		13			(4.6	)		(37	)
U.S. Central		29.6		26			17.5		18			12.1			69
Mediterranean		7.2		7			11.4		12			(4.2	)		(36	)
Other		10.3		9			5.0		5			5.3			104

Total	$	110.8		100	%	$	95.6		100	%	$	15.2			16	%


	Nine months ended September 30,
	2004					2003					2004 vs. 2003
	$		%			$		%			$			%
Gulf Coast Oilfield	$	159.8		50	%	$	150.1		54	%	$	9.7			6	%
Canada		28.5		9			37.9		14			(9.4	)		(25	)
U.S. Central		77.9		24			43.0		15			34.9			81
Mediterranean		25.6		8			27.9		10			(2.3	)		(8	)
Other		27.9		9			19.6		7			8.3			42

Total	$	319.7		100	%	$	278.5		100	%	$	41.2			15	%

Our primary Gulf Coast oilfield market accounted for approximately 51% of third quarter 2004 revenues, as compared to 52% of third quarter 2003 revenues. As recently as 1997, the Gulf Coast oilfield market accounted for 97% of total revenues. The decline in the percentage of Gulf Coast revenues is the result of growth in most other market revenues relative to flat Gulf Coast market activity in the comparable periods.

The Canadian market accounted for approximately 7% of third quarter 2004 revenues, as compared to 13% of third quarter 2003 revenues. This year over year decline is principally related to adverse weather conditions in our Canadian market. While we always anticipate and forecast a seasonal decline in the Canadian market during the second and third quarters, this year’s weather related decline was extreme. 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.

The U.S. Central region, composed of the U.S. Rocky Mountains, Oklahoma and West Texas, accounted for approximately 27% of third quarter 2004 revenues, as compared to 18% of third quarter 2003 revenues. Revenue growth in 2004 is primarily associated with the increase in rig activity and an increase in market share. The increase in market share is principally related to growing acceptance of our proprietary drilling fluids products.

Our Mediterranean operations accounted for approximately 7% of third quarter 2004 revenues, as compared to 12% of third quarter 2003 revenues. The year over year decline in quarterly revenue for the Mediterranean operations is principally related to the effect of a decline in the U.S. dollar on Euro denominated contracts and the completion of

several contracts. We are now focusing the management of these operations on improving margins rather than increasing revenues.

Other Market Trends

Current short-term industry forecasts suggest that we could see a slight increase in the number of rigs active in our primary Gulf Coast market, but this increase is expected to develop slowly as customers react to the changing risk profile of the market. In addition, any anticipated growth in rig counts is likely to be concentrated in the land market. The number of rigs active in the offshore and inland water Gulf Coast markets is not expected to increase due to a lack of available rigs, as many rigs have recently been mobilized to other markets. We anticipate continued revenue growth in the markets we serve, driven by increased market penetration of critical, deep water and geologically deeper wells. This market penetration is the result of our performance and continued success of new products, including our DeepDrill™ and FlexDrill™ families of products.

Current long-term industry forecasts anticipate difficulty in meeting growing demand for natural gas, predicated upon improving economic conditions. In addition, current gas reserves are being depleted at a rate faster than replacement through current drilling activities. Many shallow fields in the Gulf Coast market have been heavily exploited. Improved economics and technology have increased the interest of producers to drill at greater depths 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 to demand for product offerings in all of our segments.

Results of Operations

Effective January 1, 2004, we implemented a segment change in the financial reporting of our Canadian operations. As a result of this change, the operating results for the environmental services business unit in Canada are now included as a component of the E&P waste disposal segment, rather than within the fluids sales and engineering segment. In addition, a portion of the operating costs of the Canadian business unit are now reported as a component of G&A expenses. All segment information for the prior year has been restated to reflect these reporting changes. Summarized financial information concerning our reportable segments is shown in the following table (dollars in millions):


	Three Months Ended
	September 30,					Increase/(Decrease)
	2004		2003			$			%
Revenues by segment:
Fluids sales & engineering	$	71,448	$	57,089		$	14,359			25	%
E&P waste disposal		15,363		18,634			(3,271	)		(18	)
Mat & integrated services		23,979		19,870			4,109			21

Total revenues	$	110,790	$	95,593		$	15,197			16	%

Operating income by segment:
Fluids sales & engineering	$	4,978	$	2,791		$	2,187			78	%
E&P waste disposal		1,243		3,908			(2,665	)		(68	)
Mat & integrated services		1,168		(560	)		1,728		NM

Total by segment		7,389		6,139			1,250			20
General and administrative expenses		2,122		979			1,143			117

Total operating income	$	5,267	$	5,160		$	107			2	%


	Nine Months Ended
	September 30,				Increase/(Decrease)
	2004		2003		$			%
Revenues by segment:
Fluids sales & engineering	$	196,042	$	158,590	$	37,452			24	%
E&P waste disposal		47,619		51,028		(3,409	)		(7	)
Mat & integrated services		76,072		68,935		7,137			10

Total revenues	$	319,733	$	278,553	$	41,180			15	%

Operating income by segment:
Fluids sales & engineering	$	13,778	$	8,667	$	5,112			59	%
E&P waste disposal		5,612		9,690		(4,078	)		(42	)
Mat & integrated services		4,232		2,796		1,436			51

Total by segment		23,622		21,153		2,470			12
General and administrative expenses		6,993		3,245		3,748			116

Total operating income	$	16,629	$	17,908	$	(1,278	)		(7	)%

NM – Not Meaningful

The figures above are shown net of intersegment transfers.

Quarter Ended September 30, 2004 Compared to Quarter Ended September 30, 2003

Revenues

Fluids Sales and Engineering: Total revenue by region for this segment was as follows for the three months ended September 30, 2004 and 2003 (dollars in millions):


					2004 vs. 2003
	2004		2003		$			%
Gulf Coast	$	30.1	$	22.8	$	7.3			32	%
U.S. Central		28.4		16.4		12.0			73
Canada		3.3		4.9		(1.6	)		(32	)
Other		2.4		1.6		.8			50

Total North American		64.2		45.7		18.5			40
Mediterranean		7.2		11.4		(4.2	)		(37	)

Total	$	71.4	$	57.1	$	14.3			25	%

The average number of rigs we serviced in the North American market increased by 43%, from 133 in the third quarter of 2003 to 190 in the third quarter of 2004, as compared to a 6% increase in the North American rig count during the same periods. Average annual revenue per rig in the North American market remained relatively unchanged at approximately $1.3 million in the third quarter of 2004 and 2003.

Revenue in our primary Gulf Coast market for the third quarter of 2004 increased $7.3 million, or 32%, as compared to the third quarter of 2003 while the number of rigs active in this market increased only 2%. We have continued to improve our market position in key drilling fluid customer relationships in this market and believe that those customers will be increasingly active in the Gulf Coast market during the remainder of the year and into 2005, though the total number of active rigs is not expected to increase significantly. The growth experienced in the Gulf Coast market in the third quarter of 2004 was negatively impacted by the severity of tropical weather systems during the quarter, especially during the month of September. Several key Gulf of Mexico projects have recently started for our customers, and we expect to see progress in this market during the remainder of 2004.

Revenues in the U.S. Central region increased 73% in the third quarter of 2004, as compared to 2003. We serviced an average of 114 rigs in this region in the third quarter of 2004, as compared to 67 in the third quarter of 2003, an increase of 70%. The average number of rigs operating in this region increased 23%, from 400 rigs in the third quarter of 2003 to 493 in the third quarter of 2004. The difference between the increase in the number of rigs serviced in this region and the number of rigs active in the region reflects our market penetration.

Revenues in the Canadian market declined 32% during the quarter ended September 30, 2004, as compared to the third quarter of 2003, on a 15% decline in rig activity. The areas within Canada that we principally serviced experienced extreme weather-related declines as compared to the prior year and as compared to other areas in the Canadian market. We expect the normal seasonal recovery to occur in this market during the remainder of 2004.

Revenues in the Mediterranean market declined 37% during the quarter ended September 30, 2004, as compared to the third quarter of 2003. This year over year decline in quarterly revenue is principally related to the effect of a decline in the U.S. dollar on Euro denominated contracts and the completion of several contracts. We are now focusing the management of these operations on improving margins rather than increasing revenues..

E&P Waste Disposal: Total revenue for this segment consists of the following for the three months ended September 30, 2004 and 2003 (dollars in millions):


					2004 vs. 2003
	2004		2003		$			%
E&P Waste Gulf Coast	$	9.3	$	11.9	$	(2.6	)		(22	)%
E&P Waste Non-Gulf Coast		4.9		5.3		(.4	)		(8	)
NORM		1.0		.8		.2			25
Industrial		.2		.6		(.4	)		(67	)

Total	$	15.4	$	18.6	$	(3.2	)		(18	)%

E&P waste Gulf Coast revenues declined $2.6 million, or 22%, on a 26% decline in waste volumes received and a decline in the average revenue per barrel resulting from a change in mix of waste received. During the third quarter of 2004, we received 640,000 barrels of E&P waste in the Gulf Coast market, compared to 945,000 barrels in the comparable period in 2003. A majority of the decline in barrels received was in the offshore and inland water markets due principally to the effects of tropical weather during the recent quarter and lower average drilling activity in the offshore Gulf of Mexico. The average revenue per barrel in the Gulf Coast market declined 4%, to $11.97, as compared to an average of $12.41 in 2003. We believe that improvement in the Gulf Coast E&P waste market will likely trail other business segments because its results are more closely tied to Gulf Coast rig activity, which is not expected to increase significantly during the remainder of 2004.

Revenues within the western Canadian market and the operations serving Wyoming’s Jonah-Pinedale trend remained relatively stable in the third quarter of 2004 as compared to the third quarter of 2003. Near term growth for the E&P Waste Disposal segment is expected to continue to come from these newer markets.

Mat and Integrated Services: Total revenue for this segment consists of the following for the three months ended September 30, 2004 and 2003 (dollars in millions):


					2004 vs. 2003
	2004		2003		$			%
Installation	$	3.5	$	2.9	$	.6			20	%
Re-rental		1.5		2.3		(.8	)		(35	)

Total U.S. mat rental		5.0		5.2		(.2	)		(4	)
Integrated services and other		12.6		11.2		1.4			13
Canadian operations		.8		3.1		(2.3	)		(74	)
Composite mat sales		5.6		.4		5.2		NM

Total	$	24.0	$	19.9	$	4.1			21	%

NM – Not meaningful

Mat rental volume for the third quarter of 2004 totaled 3.4 million square feet at an average price of $1.04 per square foot. This compares to 3.9 million square feet at an average of $0.72 per square foot in the third quarter of 2003. We are currently focused on continuing to improve oil-field rental market pricing and expanding the non-oilfield rental market. The non-oilfield rental market is premium-priced and carries high incremental margins that should contribute to further improvement in average pricing and results for the mat segment in the fourth quarter.

Integrated services and other revenues, our lowest-margin business unit for this segment, includes a comprehensive range of environmental services necessary for our customers’ oil and gas exploration and production activities. These revenues also include the operations of our sawmill in Batson, Texas. The level of these revenues is often project driven.

During 2003, we transitioned our Canadian mat operations to a sales organization for wooden and composite mats. All of the Canadian revenue for the third quarter of 2004 was related to sales of wooden and composite mats, while revenue for the third quarter of 2003 included rental and sales revenues. Through this transition, the operating expenses of the Canadian mat operations have been significantly reduced.

During the third quarter of 2004, we recognized approximately $5.6 million in composite mat sales. During the quarter we sold approximately 3,000 DuraBase™ composite mats, resulting in $5.1 million in revenues, and we sold approximately 3,600 Bravo™ Mats, resulting in approximately $500,000 in revenues. Composite mat sales totaled approximately $400,000 in the third quarter of 2003.

Based on market data gathered in 2003 and 2004, we believe there is significant rental opportunity in support of expanding exploration and development activity in Mexico. As a result, we started a new business unit in that country in the first quarter. We are the majority owner of the business with the Mexican principals who are assisting us in development of the market holding a minority stake.

Operating Income

Fluids Sales and Engineering: Operating income for this segment increased $2.2 million in the third quarter of 2004 on a $14.4 million increase in revenues, as compared to the third quarter of 2003. The operating margin for this segment in the third quarter of 2004 was 7.0%, as compared to 4.9% in the third quarter of 2003. The increase in operating margin was primarily attributable to operating leverage, principally within the Gulf Coast and U.S. Central regions, which was partially offset by the decline in Canadian revenue related to severe weather conditions and the decline in Mediterranean revenues related to foreign currency and lower contract revenue.

Operating margins in 2004 for this segment have been impacted by increased pricing for barite, principally related to increased transportation costs for bulk shipments of barite from our suppliers. These raw material cost increases were not offset by price increases to our customers in the quarter. We are in the process of increasing our barite prices to customers and expect the effects of the raw material cost increase to be offset over the next several quarters. In addition to the increase in barite costs, margins for the Gulf Coast market were negatively impacted in the current quarter by the impact of the severe tropical weather in September.

We anticipate an increase in the number of rigs serviced in the Gulf of Mexico market during the remainder of 2004, as awarded projects begin. This market represents the premium-priced business for this segment. We expect to see margin improvement in our Gulf Coast operations throughout the remainder of 2004 as we continue to penetrate the offshore Gulf of Mexico market and gain wider customer acceptance of our higher-margin premium products such as our DeepDrill™ and FlexDrill™ family of products. In addition, we expect margins to improve in this segment for the remainder of 2004 due to the normal seasonal recovery of the Canadian market.

E&P Waste Disposal: Waste disposal operating income declined $2.7 million in the third quarter of 2004 on a $3.3 million decline in revenues, as compared to the third quarter of 2003. As noted above, the primary decline in revenues for the quarter was in the premium-priced Gulf Coast markets, which was principally related to the severe tropical weather systems in the quarter. In addition, fuel and transportation expenses increased significantly in the third quarter of 2004 as compared to the prior year. We are currently working to reduce our cost structure to improve profitability in the Gulf Coast market.

Mat and Integrated Services: Mat and integrated services operating income increased $1.7 million in the third quarter of 2004 on a $4.1 million increase in revenues, as compared to the third quarter of 2003. Most of the increase in operating income is attributable to the significant increase in composite mat sales in 2004. Consistent with our experience since the third quarter of 2003, we believe that rental pricing will continue to improve over the remainder of 2004 as a result of continued reductions in mat inventories servicing the oilfield market and continued growth in the premium-priced non-oilfield markets.

General and Administrative Expense

General and administrative expense increased $1.1 million to approximately $2.1 million in the third quarter of 2004, as compared to the same period in 2003. The increase is primarily related to increases in insurance costs of approximately $380,000, costs of approximately $345,000 related to the litigation which has recently been settled, and start up costs of approximately $247,000 related to our new joint venture in Mexico. In addition, general and administrative expenses have increased as a result of new corporate governance and compliance related expenses.

Interest Expense

Interest expense remained relatively unchanged at $3.8 million for the third quarter of 2004 as compared to $3.7 million for the third quarter of 2003. Average debt outstanding declined $6.5 million during the third quarter of 2004, as compared to the same period in 2003. This decline in average debt outstanding was offset by a slight increase in the average interest rate and a decline in capitalized interest.

Provision for Income Taxes

For the quarter ended September 30, 2004, we recorded an income tax provision of $589,000, reflecting an income tax rate of 38%. For the quarter ended September 30, 2003, we recorded an income tax provision of $779,000, reflecting an income tax rate of 49.8%. The effective tax rate in the prior year is higher than statutory rates due to adjustments made in the quarter to reflect increases in the projected annual effective tax rate as a result of changes in projected income. The prior year effective tax rate also reflected a higher mix of foreign income, which is taxed at higher rates than domestic income.

Nine Months Ended September 30, 2004 Compared to Nine Months Ended September 30, 2003

Revenues

Fluids Sales and Engineering: Total revenue by region for this segment was as follows for the nine months ended September 30, 2004 and 2003 (dollars in millions):


					2004 vs. 2003
	2004		2003		$			%
Gulf Coast	$	80.3	$	66.6	$	13.7			21	%
U.S. Central		74.1		40.8		33.3			82
Canada		13.1		20.2		(7.1	)		(35	)
Other		2.9		3.1		(.2	)		(6	)

Total North American		170.4		130.7		39.7			30
Mediterranean		25.6		27.9		(2.3	)		(8	)

Total	$	196.0	$	158.6	$	37.4			24	%

The average number of rigs we serviced in the North American market increased by 24%, from 137 in the first nine months of 2003 to 170 in the first nine months of 2004. Average annual revenue per rig in the North American market remained relatively unchanged at approximately $1.2 million for the first nine months of 2004 and 2003.

Revenue in our primary Gulf Coast market for the first nine months of 2004 increased $13.7 million, or 21%, as compared to the first nine months of 2003, as a result of increased market penetration, in spite of the stable number of rigs active in this market. Most of this increase occurred in the second quarter of 2004. As noted above, revenues in the Gulf Coast market were negatively impacted by severe tropical weather systems during the third quarter of 2004.

Revenues in the U.S. Central region increased 82% in the first nine months of 2004 as compared to 2003. We serviced an average of 98 rigs in this region in the first nine months of 2004, as compared to 60 in the first nine months of 2003, an increase of 63%. The average number of rigs operating in this region increased 28%, from 363 rigs in the first nine months of 2003 to 465 in the first nine months of 2004. The difference between the increase in the number of rigs serviced in this region and the number of rigs active in the region reflects our market penetration. The difference between the increase in revenues and the increase in the number of rigs serviced in these markets also reflects the expansion of our product offerings in this market.

Revenues in the Canadian market declined 35% during the first nine months of 2004, as compared to the first nine months of 2003, while rig activity in the Canadian market declined 2% period to period. The areas within Canada that we principally serviced experienced extreme weather-related declines as compared to the prior year and as compared to other areas in the Canadian market.

Revenues in the Mediterranean market declined 8% during the first nine months of 2004, as compared to the first nine months of 2003. This year over year decline in quarterly revenue is principally related to the effect of a decline in the U.S. dollar on Euro denominated contracts and the completion of several contracts. As noted above, beginning in 2004, we have focused the management of these operations on improving margins rather than increasing revenues.

E&P Waste Disposal: Total revenue for this segment consists of the following for the nine months ended September 30, 2004 and 2003 (dollars in millions):


					2004 vs. 2003
	2004		2003		$			%
E&P Waste Gulf Coast	$	29.2	$	35.8	$	(6.6	)		(18	)%
E&P Waste Non-Gulf Coast		14.3		12.1		2.2			18
NORM		2.1		1.5		.6			40
Industrial		2.0		1.6		.4			25

Total	$	47.6	$	51.0	$	(3.4	)		(7	)%

E&P waste Gulf Coast revenues declined $6.6 million, or 18%, on a 14% decline in waste volumes received and a decline in the average revenue per barrel resulting from a change in mix of waste received. During the first nine months of 2004, we received 2,354,000 barrels of E&P waste in the Gulf Coast market, compared to 2,740,000 barrels in the comparable period in 2003. A portion of the decline in barrels received is attributable to the effects of severe tropical weather in the third quarter of 2004. The average revenue per barrel in the Gulf Coast market declined 6%, to $11.90, as compared to an average of $12.63 in 2003.

The decline in Gulf Coast revenues was partially offset by increases in revenue within the western Canadian market and the start-up of operations serving Wyoming’s Jonah-Pinedale trend, which began operations in early 2003. Our NORM and industrial disposal revenue also contributed to the increase in segment revenue. The increase in industrial revenues was principally due to disposal of waste received in connection with a special project for one customer during the first quarter of 2004, which did not recur.

Mat and Integrated Services: Total revenue for this segment consists of the following for the nine months ended September 30, 2004 and 2003 (dollars in millions):


					2004 vs. 2003
	2004		2003		$			%
Installation	$	12.3	$	12.6	$	(.3	)		(2	)%
Re-rental		4.4		6.6		(2.2	)		(34	)

Total U.S. mat rental		16.7		19.2		(2.5	)		(13	)
Integrated services and other		36.6		34.3		2.3			7
Canadian operations		5.0		7.9		(2.9	)		(37	)
Composite mat sales		17.8		7.5		10.3			137

Total	$	76.1	$	68.9	$	7.2			10	%

Mat rental volume for the first nine months of 2004 totaled 12.7 million square feet at an average price of $0.97 per square foot. This compares to 12.6 million square feet at an average of $0.85 per square foot in the first nine months of 2003.

During 2003, we transitioned our Canadian mat operations to a sales organization for wooden and composite mats. All of the Canadian revenue for the first nine months of 2004 was related to sales of wooden and composite mats, while revenue for the first nine months of 2003 included rental and sales revenues.

During the first nine months of 2004, we recognized approximately $17.8 million in composite mat sales. During this period we sold approximately 10,700 DuraBase™ composite mats, resulting in $17.3 million in revenues, and we sold approximately 3,600 Bravo™ Mats, resulting in approximately $500,000 in revenues. During the first nine months of 2003, we recognized approximately $7.5 million in composite mat sales. During this period we sold approximately 3,800 DuraBase™ composite mats, resulting in $7.0 million in revenues, and we sold approximately 4,100 Bravo™ Mats, resulting in approximately $500,000 in revenues.

Operating Income

Fluids Sales and Engineering: Operating income for this segment increased $5.1 million in the first nine months of 2004 on a $37.5 million increase in revenues, as compared to the first nine months of 2003. The operating margin for this segment in the first nine months of 2004 was 7.0%, as compared to 5.5% in the first nine months of 2003. The increase in operating margin was primarily attributable to significant growth in the U.S. central region. Partially offsetting the impact of revenue growth in this region was the decline in Canadian revenue related to severe weather conditions in the second quarter of 2004.

As noted above, operating margins in 2004 for this segment have been impacted by increased pricing for barite, principally related to increased transportation costs for bulk shipments of barite from our suppliers. These raw material cost increases were not offset by price increases to our customers in the quarter. We are in the process of increasing our barite prices to customers and expect the effects of the raw material cost increase to be offset over the next several quarters. In addition to the increase in barite costs, margins for the Gulf Coast market were negatively impacted in the third quarter by the impact of the severe tropical weather.

E&P Waste Disposal: Waste disposal operating income declined $4.0 million in the first nine months of 2004 on a $3.4 million decline in revenues, as compared to the first nine months of 2003. Contribution increases from non-Gulf Coast markets did not fully offset the volume-related decline in the premium-priced Gulf Coast oilfield market, which was partially due to severe tropical weather in the third quarter of 2004. In addition, fuel and transportation expenses increased significantly beginning in the second quarter of 2004 as compared to the prior year.

Mat and Integrated Services: Mat and integrated services operating income increased $1.4 million in the first nine months of 2004 on a $7.1 million increase in revenues, as compared to the first nine months of 2003. Most of the increase in operating income is attributable to the significant increase in composite mat sales in 2004.

General and Administrative Expense

General and administrative expense increased $3.7 million to approximately $7.0 million in the first nine months of 2004, as compared to the same period in 2003. The majority of the increase is due to $2.3 million of litigation costs related to recently settled litigation. In addition, general and administrative expense increased approximately $490,000 as a result of new corporate governance and compliance related expenses and approximately $337,000 due to start up costs related to our new joint venture in Mexico. Increased insurance and personnel costs were the principal reasons for the remaining increase in general and administrative expense.

Foreign Currency Exchange Gains

Net foreign currency losses totaled $217,000 in the first nine months of 2004 as compared to net foreign currency gains of $758,000 in 2003. The principal components of foreign currency gains in the prior year were realized and unrealized gains on short-term intercompany payable balances of our Canadian operations due to the significant decline in the U.S. dollar against the Canadian dollar in 2003. These intercompany balances are denominated in U.S. dollars. In the first nine months of 2004, the net foreign currency losses were primarily associated with strengthening of the U.S. dollar against the Canadian dollar and the associated impact on these same intercompany balances.

Interest Income

Interest income totaled $1.3 million in the first nine months of 2004, as compared to $570,000 in the first nine months of 2003. During the first nine months of 2004 we collected the entire balance owed on a note receivable in connection with the 1996 sale of a

former shipyard operation. The payment included all interest accruable on the note receivable. We had ceased accrual on the note receivable in January 2003 due to the financial condition of the operator. Included in interest income for the nine months ended September 30, 2004 is $823,000 of previously unaccrued interest related to the note receivable.

Interest Expense

Interest expense of $10.9 million declined $528,000 from the prior year amount of $11.4 million. The decline is principally related to lower total cost of our revolving credit facility. During the first quarter of 2004, we completed the restructuring of our bank credit facility, which reduced the effective interest rate on our revolving facility by approximately one percent.

Provision for Income Taxes

For the nine months ended September 30, 2004, we recorded an income tax provision of $2.6 million, reflecting an income tax rate of 38%. For the nine months ended September 30, 2003, we recorded an income tax provision of $3.1 million, reflecting an income tax rate of 40%. The prior year effective tax rate reflected a higher mix of foreign income, which is taxed at higher rates than domestic income.

Liquidity and Capital Resources

Our working capital position was as follows at September 30, 2004 and December 31, 2003:


	September 30,		December 31,
	2004		2003
Working Capital (000’s)	$	133,718	$	133,909
Current Ratio		2.79		2.76

During the first nine months of 2004, our working capital position remained stable, in spite of the effect of an $8.0 million reduction in restricted cash which had been used to secure a letter of credit obligation at December 31, 2003. Net of the effect of the restricted cash item, working capital increased by $7.8 million, with most of this growth associated with an increase in accounts receivable related to the increase in annualized revenues at September 30, 2004 as compared to December 31, 2004.

As a result of a favorable judgment in our pricing dispute litigation with the manufacturer of our composite mats (“LOMA”), during the second quarter of 2004 we reduced the carrying value of our composite mat inventory by $3.4 million. LOMA is currently not producing mats due to low demand, and purchases of composite mats in 2004 were limited to LOMA’s remaining inventory of approximately 2,500 units. As of June 30, 2004, all of LOMA’s remaining inventory had been purchased. With this decline in purchases, along with anticipated composite mat sales in 2004, we expect to continue to reduce the level of composite mat inventory by the end of 2004. The decline in composite mat inventory was partially offset by an increase in drilling fluids raw materials and

components as a result of actual and anticipated increased revenues for this business segment and by the normal seasonal increase in logs at our sawmill in Batson, Texas.

Net trade accounts receivable increased $8.0 million during the first nine months of 2004 on a $16.2 million increase in revenues from the fourth quarter of 2003. During the first nine months of 2004, days sales in receivables declined by seven days to 91 days, from 98 days in the fourth quarter of 2003. We continue to monitor our accounts receivable positions and have made working capital management a primary focus for our management.

We anticipate that our working capital requirements for the remainder of 2004 and 2005 will increase as a result of the expected improvement in revenue. Some of this expected increase in working capital requirements should be offset by our continued focus on improving our collection cycle and anticipated reductions in composite mat inventory. However, we have the ability to supplement our operating cash flows with borrowings under our credit facility to fund the expected increase in working capital. We believe we have adequate capacity under our credit facility to meet these anticipated working capital needs.

Cash generated from operations during the first nine months of 2004 totaled $9.1 million. This cash, along with $10.4 million of collections on notes receivable, principally from the second quarter collection of a $6.3 million note receivable related to the 1996 sale of a former shipyard operation, was used to fund net capital expenditures of $13.9 million and net payments on debt obligations of $6.1 million. We anticipate that 2004 capital expenditures will be below 2004 depreciation and that we will fund capital expenditures for the remainder of 2004 with cash generated from operations. The majority of the remaining amounts of 2004 capital expenditures are expected to be used principally to expand drilling fluids and environmental service capacity in growing markets as and when needed and will be adjusted depending on market conditions, our operating cash flows and other available cash resources. We currently anticipate that capital expenditures in 2005 will again be lower than depreciation.

Our long term capitalization was as follows (in thousands):


	September 30,			December 31,
	2004			2003
Long-term debt:
Credit facility	$	31,283		$	52,500
Senior subordinated notes		125,000			125,000
Barite facilities financing		13,542			—
Mexico mat financing		5,493			—
Other		3,928			6,100

Total long-term debt		179,246			183,600
Stockholders’ equity		317,891			313,961

Total capitalization	$	497,137		$	497,561

Long-term debt to long-term capitalization		36.1	%		36.9	%

On February 25, 2004, our bank credit facility was amended, restated and converted into an asset-based lending facility (the “Credit Facility”). The Credit Facility matures on February 25, 2007. Under the Credit Facility, we can borrow up to $85 million in the form of $15 million in term debt and $70 million in revolving debt. At September 30, 2004, $12.6 million was outstanding under the term portion of the Credit Facility. Availability under the revolving portion of the Credit Facility is based on a percentage of our eligible consolidated accounts receivable and inventory as defined in the Credit Facility. At September 30, 2004, total availability under the revolving portion of the Credit Facility was $57.9 million. At September 30, 2004, $10.8 million in letters of credit were issued and outstanding and $18.7 million was outstanding under the revolving portion of the Credit Facility, leaving $28.4 million of availability under the revolving portion of the Credit Facility at that date. The Credit Facility bears interest at either a specified prime rate (4.75% at September 30, 2004), or the LIBOR rate (1.98% at September 30, 2004), in each case plus a spread determined quarterly based upon a fixed charge coverage ratio. The weighted average interest rates on the outstanding balances under the respective credit facilities for the three months ended September 30, 2004 and 2003 were 4.4% and 5.7%, respectively. The weighted average interest rates on the outstanding balances under the respective credit facilities for the nine months ended September 30, 2004 and 2003 were 4.7% and 5.6%, respectively.

During the third quarter of 2004, we closed a $15 million project financing of our recently completed barite mill, and $6.7 million in support of the new mat rental operation in Mexico. Proceeds from these transactions were applied to reduce advances under the Credit Facility.

Ava, S.p.A (“Ava”), our European drilling fluids subsidiary, maintains its own credit arrangements, consisting primarily of lines of credit with several banks, with the lines renewed on an annual basis. Advances under these credit arrangements are typically based on a percentage of Ava’s accounts receivable or firm contracts with certain

customers. As of September 30, 2004, Ava had a total of $6.6 million outstanding under these facilities. We do not provide a corporate guaranty of Ava’s debt.

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. We have issued a guaranty of certain debt obligations of the manufacturer of our composite mats (“LOMA”). This guaranty is backed by a letter of credit. The amount of this guaranty as of September 30, 2004 was $7.1 million.

The underlying debt obligation of LOMA matures in December 2008. The LOMA plant suspended production in May 2003 and has not resumed operations. As described in Note 12, on May 13, 2004, the Louisiana Fifteenth District Court judge awarded a judgment in the full amount of our complaint in a pricing dispute with LOMA. Lacking adequate liquidity from which to satisfy the judgment in cash, on August 11, 2004, Loma filed for protection under Chapter 11 of the Bankruptcy Code. The bankruptcy court has ordered and confirmed the appointment of a trustee to assume control over LOMA’s affairs while in Chapter 11. The appointment of a trustee allows us to file our own plan of reorganization, which we intend to do. At this juncture, it is impossible to predict when or if LOMA will be successfully reorganized or the exact details of any plan of reorganization. Because of the recent bankruptcy filing by LOMA, our guarantee may be called upon to fulfill LOMA’s debt obligation. Since our guarantee is secured by a letter of credit, there would not be any impact on the availability under our Credit Facility should performance under the guarantee be required.

We have also issued a guaranty for certain debt obligations of a joint venture (“MOCTX”), which supplies a portion of our wooden mats on a day rate leasing basis. The amount of this guaranty as of September 30, 2004 was $4.6 million.

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.

Critical Accounting Policies and Estimates.

Our consolidated financial statements are prepared in accordance with United States generally accepted accounting principles, which require us to make assumptions, estimates and judgments that affect the amounts reported. We periodically evaluate our estimates and judgments related to uncollectible accounts and notes receivable, inventory, customer returns, impairments of long-lived assets, including goodwill and other intangibles and our valuation allowance for deferred tax assets. 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.

For additional discussion of our critical accounting policies, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the year ended December 31, 2003. Following is a

clarification of our revenue recognition policies included in that report. Our critical accounting policies have not changed materially since December 31, 2003.

For the fluids sales and engineering segment, revenues, less allowances for product returns, are recognized for sales of drilling fluid materials upon shipment of the materials. Engineering and related services are provided to customers at agreed upon hourly or daily rates, and revenues are recognized when the services are performed. The reserve for estimated product returns is based on our historical experience of the percentage of returns, which in turn is based on the size and type of rig serviced and the nature of the products consumed by the customer. These percentages are periodically reviewed and updated and are applied to our drilling fluids product sales to determine the required reserve. Revisions to the return reserve are charged or credited to income in the period in which they occur.

For the E&P waste disposal segment, revenues are recognized when we take title to the waste, which is upon receipt of the waste at our facility. All costs related to transporting and disposing of the waste received are accrued when that revenue is recognized.

For the mat and integrated services segment, revenues for sales of wooden or composite mats are recognized when title passes to the customer, which is upon shipment or delivery, depending upon the terms of the underlying sales contract.

Revenues in the mat and integrated services segment are generated from both fixed price and unit-priced contracts, which are short-term in duration. The activities provided for in these contracts include site preparation, pit design, construction and drilling waste management, and installation and use of our composite or wooden mat systems during an initial period. This initial period includes revenues and costs for site preparation, installation and use of mat systems. Revenues from these contracts are recorded using the percentage-of-completion method based on project milestones as specified in the contracts.

New Accounting Standards.

On March 31, 2004, the Financial Accounting Standards Board (“FASB”) issued a proposed Statement, “Share-Based Payment,” that addresses the accounting for share-based payment transactions under which a company receives employee services in exchange for equity instruments of the company, such as stock options. The proposed Statement would eliminate the ability to account for share-based compensation transactions using Accounting Principles Board Opinion 25. (“APB 25”) and generally would require instead that such transactions be accounted for using a fair value-based method. We currently account for stock-based compensation using APB 25. On October 13, 2004, the FASB concluded Financial Accounting Standard 123R (“FAS 123R”), “Share-

Based Payment,” which will require companies to measure compensation cost for all share-based payments at fair value, to be effective for interim or annual periods beginning after June 15, 2005. The proposed Statement, if adopted, would require us to begin accounting for stock options under this method beginning in the quarter ended September 30, 2005. It is currently not known whether the implementation of FAS 123R would result in financial results materially different from those presented in Note 5 or if we will early adopt this Statement, as encouraged by the FASB.

We have completed our assessment of the impact of FIN 46 on the reporting for our three variable interest entities. These variable interest entities consist of a 90% interest in a Mexican joint venture for the sale and lease of DuraBase™ composite mats in the Mexican market (DuraBase de Mexico), a 49% interest in a joint venture with the leading producer of wooden mats (“MOCTX”) and a 49% interest in the Loma Company, LLC (“LOMA”), the producer of DuraBase™ composite mats. Based on our assessments, we determined that we are the primary beneficiary of DuraBase de Mexico, and have consolidated the financial statements of DuraBase de Mexico with our financial statements. Based on our assessments, we determined that we are not the primary beneficiary of MOCTX and we continue to account for this investment under the equity method. We issued a guaranty for certain debt obligations of MOCTX. The amount of this guaranty as of September 30, 2004 was $4.6 million.

Based on our assessments, we determined that we are the primary beneficiary of LOMA. However, we continue to account for our 49% investment in LOMA under the equity method because LOMA’s financial position and results of operations are not material to our consolidated financial statements. In addition, due to the ongoing dispute and pricing litigation discussed in Note 12, we currently do not have access to and have been unable to obtain current and reliable financial information as of and for the period ended September 30, 2004. Based on the latest available financial information on LOMA, which is as of December 31, 2003, LOMA would have represented less than 2% of our consolidated total assets as of December 31, 2003. Substantially all of the operating activity of LOMA is with us or one of our wholly-owned subsidiaries and this activity would be eliminated in consolidation. Our investment in LOMA as of September 30, 2004 was $11.4 million, including $10.2 million in receivables recorded in connection with the recent judgment in our pricing dispute (see Note 12).

We have issued a guaranty of certain debt obligations of LOMA. This guaranty is backed by a letter of credit. The amount of this guaranty as of September 30, 2004 was

$7.1 million. The LOMA plant suspended production in May 2003 and has not resumed operations. On August 11, 2004, The Loma Company initiated a Chapter 11 Reorganization Proceeding in the Federal Bankruptcy Court for the Western District of Louisiana.

ITEM 3. Quantitative and Qualitative Disclosures about Market Risk

We are exposed to market risk from changes in interest rates and changes in foreign currency rates. We do not believe that we have a material exposure to market risk. Historically, we have not entered into derivative financial instrument transactions to manage or reduce market risk or for speculative purposes. A discussion of our primary market risk exposure in financial instruments is presented below.

Interest Rate Risk

Our policy has historically been to manage exposure to interest rate fluctuations by using a combination of fixed and variable-rate debt. At September 30, 2004, we had total debt outstanding of $191.1 million, of which $125 million, or 65%, relates to our Senior Subordinated Notes (the “Notes”), which bear interest at a fixed rate of 8.625%. The remaining $66.1 million of debt outstanding at September 30, 2004 bears interest at a floating rate. At September 30, 2004, the weighted average interest rate under our floating-rate debt was approximately 5.2%. Assuming a 200 basis point increase in market interest rates during 2004, our annual interest expense would increase approximately $800,000, net of taxes, resulting in a $0.01 per diluted share reduction in annual earnings.

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.

Fair Value of Financial Instruments

The fair value of cash and cash equivalents, net accounts receivable, accounts payable and variable rate debt approximated book value at September 30, 2004. The fair value of the 8.625% Notes totaled $126.7 million at September 30, 2004. The fair value of the Notes has been estimated based on quotes from the lead broker.

Foreign Currency

Our principal foreign operations are conducted in Canada and in areas surrounding the Mediterranean Sea. We have foreign currency exchange risks associated with these operations, which are principally conducted 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 these transactions has not warranted our using hedging instruments.

During the three months and nine months ended September 30, 2004, we reported foreign currency losses of $76,000 and $217,000, respectively. During the three months and nine months ended September 30, 2003, we reported a foreign currency loss of $16,000

and a foreign currency gain of $758,000, respectively. These transactional gains and losses were primarily due to exchange rate fluctuations related to monetary asset balances denominated in currencies other than the functional currency, including intercompany advances which are deemed to be short-term in nature. We estimate that a hypothetical 10% movement of all applicable foreign currency exchange rates would affect annual earnings by approximately $500,000, due to the revaluing of these monetary assets and intercompany balances.

Assets and liabilities of our foreign subsidiaries are translated using the exchange rates in effect at the balance sheet date, resulting in translation adjustments that are reflected in accumulated other comprehensive loss in the stockholders’ equity section of our balance sheet. Included in comprehensive income are a translation loss of $788,000 and a translation gain of $5.1 million for the nine months ended September 30, 2004 and 2003, respectively. As of September 30, 2004, net assets of foreign subsidiaries included in our consolidated balance sheet totaled $28.2 million. We estimate that a hypothetical 10% movement of all applicable foreign currency exchange rates would affect other comprehensive income by approximately $2.8 million.

ITEM 4. Controls and Procedures

Our chief executive officer and chief financial officer, with the participation of management, have evaluated the effectiveness of our “disclosure controls and procedures” (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this quarterly report on Form 10-Q. Based on their evaluation, they have concluded that our disclosure controls and procedures (1) are effective in timely alerting them to material information relating to Newpark (including our consolidated subsidiaries) required to be disclosed in our periodic Securities and Exchange Commission filings and (2) are adequate to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Securities Exchange Act of 1934 is recorded, processed and summarized and reported within the time periods specified in the SEC’s rules and forms. It should be noted that in designing and evaluating the disclosure controls and procedures our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. We have designed our disclosure controls and procedures to reach a level of reasonable assurance of achieving the desired objectives and, based on the evaluation described above, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures as of the end of the period covered by this quarterly report on Form 10-Q were effective at reaching that level of reasonable assurance.

As directed by Section 404 of the Sarbanes-Oxley Act of 2002, the Securities and Exchange Commission has adopted rules which will require us to issue a report of management on the company’s internal control over financial reporting beginning with our annual report on Form 10-K for the period ended December 31, 2004. In preparing for this report and to further evaluate the effectiveness of our disclosure controls and procedures, we engaged third-party consultants during 2003 to perform extensive evaluations of our control environment. As a result of the work performed by these consultants, we have

identified some areas of weakness in our controls and procedures. These weaknesses include controls and procedures in the following areas:

• Reporting for foreign currency transactions and differences between U.S. and foreign generally accepted accounting principles in our Mediterranean operations; and

• Segregation of duties in several of our reporting units and in our corporate offices.

We will be making control changes during 2004 to reduce these weaknesses. These control changes, among other things, will include implementing new accounting software in our Mediterranean operations to improve management and financial reporting.

There were no significant changes in our internal controls over financial reporting or in other factors that could significantly affect these controls during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

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:

• A material decline in the level of oil and gas exploration and production and any reduction in the industry’s willingness to spend capital on environmental and oilfield services could adversely affect the demand for our services;

• Material changes in 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 could adversely affect the demand for our services;

• Changes in domestic and international political, military, regulatory and economic conditions may adversely affect the demand for oil and gas or production volumes;

• A rescission or relaxation of government regulations affecting E&P and NORM waste disposal could reduce the demand for our services and reduce our revenues and income.

• Changes in existing regulations could require us to change the way we do business, which may have a material adverse affect on our consolidated financial statements;

• 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 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;

• We face intense competition in our existing markets and expect to face tough competition in any markets into which we seek to expand, which 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;

• Our acquisitions may not achieve sales and profitability levels that justify our investment in them, which could result in these businesses placing downward pressure on our margins or our disposing of these businesses at a loss;

• The demand for our services may be adversely affected by shortages of critical supplies or equipment in the oil and gas industry and personnel trained to operate this equipment;

• We may not be able to successfully introduce our products and services, including our DeepDrill™ and FlexDrill™ technology and our new Dura-Base™ and Bravo™ mats, and we may not be successful in gaining acceptance or market share for these products and services;

• We may not be able to maintain the necessary permits to operate our non-hazardous waste disposal wells or we may not be able to successfully compete in this market;

• Adverse weather conditions could disrupt drilling operations and reduce the demand for our services;

• We may fail to comply with any of the numerous Federal, state and local laws, regulations and policies that govern environmental protection, zoning and other matters applicable to our business, or these regulations and policies may change, and we may face fines or other penalties if we fail to comply with these new regulations, or be forced to make significant capital expenditures or changes to our operations;

• 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 the costs to clean up and close contaminated sites;

• 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 affect on our financial condition;

• Our international operations are subject to uncertainties which could limit our ability to expand or reduce the revenues and profitability of these operations, 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, among other risks; and

• 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, would increase our cost of borrowing and have an adverse affect on our consolidated financial statements.

• We may not be able to retire or refinance our long-term debt at or before its maturity, whether due to conditions in financial markets or our own financial condition at that future time. We also can’t provide any assurances that we will be able to obtain any replacement long-term financing on terms as favorable to us as under our current financing.

For further information regarding these and other factors, risks and uncertainties affecting us, we refer you to the risk factors set forth in the Prospectus included in our Registration Statement on Form S-3 filed on May 8, 2002 (File No. 333-87840), and to the section entitled “Forward-Looking Statements” on page 17 of that Prospectus.

PART II

ITEM 1. Legal Proceedings.

In 2002, a Newpark subsidiary filed suit against LOMA asserting it had been overcharged for DuraBase™ composite mats purchased from LOMA. On June 29, 2004, the Louisiana Fifteenth Judicial District Court granted judgment in our favor affirming our interpretation of the pricing of the DuraBase™ composite mats and awarding us $11.7 million in damages for overcharges through December 31, 2002. The state court judgment further denied LOMA’s and OLS Consulting Services, Inc.’s (“OLS”) claim to void Newpark’s exclusive license to use and sell the composite mats. The judgment has been appealed by LOMA and OLS to the Louisiana Third Circuit Court of Appeal. Lacking adequate liquidity to obtain a bond to suspend execution of the judgment pending appeal, LOMA filed for protection under Chapter 11 of the Bankruptcy Code on August 11, 2004. The bankruptcy court has ordered and confirmed the appointment of a trustee to assume control over LOMA’s affairs while in Chapter 11. The appointment of a trustee allows us to file our own plan of reorganization, which we intend to do. At this juncture, it is impossible to predict when or if LOMA will be successfully reorganized or the exact details of any plan of reorganization.

In connection with the judgment of the pricing litigation with LOMA in the second quarter of 2004, we recorded a receivable from LOMA, totaling $10.2 million, net of an allowance of approximately $6.8 million. This receivable is included in other long-term assets as of September 30, 2004. The recorded value of the receivable is net of any allowances for amounts deemed to be uncollectible from Loma in the future. Net reductions to inventory and property, plant and equipment in the amount of $3.4 million and $5.2 million, respectively, were recorded in connection with the recording of this receivable. These reductions were made to reduce mat costs to the amounts determined as appropriate by the state court judgment, as opposed to the amounts originally invoiced by LOMA.

Also as previously reported in our Annual Report on Form 10-K for the year ended December 31, 2003, in response to the filing of a lawsuit by Newpark Drilling Fluids, L.L.C., one of our subsidiaries, certain of the individual defendants in the lawsuit filed stockholder derivative claims with respect to alleged misconduct as a cross-complaint to the lawsuit. A settlement of this litigation was reached through mediation on July 15, 2004. While the final settlement documents have not been executed as of the date of this report, we expect to recover our cumulative legal and other costs over the term of the settlement and will avoid related legal costs in future periods. Our cost to date has been $3.6 million, of which $2.5 million was related to the original lawsuit and $1.1 million was related to defense of the stockholder derivative claims. We have received acknowledgement from our insurance carrier that defense costs of the stockholder derivative claims is a covered item, subject to a deductible of $100,000. We have recorded a receivable in the amount of $1.0 million as of September 30, 2004 related to the amount recoverable from the insurance carrier. Included in General and Administrative expense for the three month and nine month periods ended September 30, 2004, are defense costs, net of anticipated recovery totaling $345,000 and $2.3 million, respectively.

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

Not applicable.

ITEM 3. Defaults Upon Senior Securities

Not applicable.

ITEM 4. Submission of Matters to a Vote of Security Holders

Not applicable.

ITEM 6. Exhibits

10.1 Loan agreement dated July 26, 2004 between Excalibar Minerals, Inc. and Excalibar Minerals of LA, L.L.C., as borrowers and RBS Lombard, Inc. as lender.

31.1 Certification of James D. Cole pursuant to Rule 13a-14 or 15d-14 of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2 Certification of Matthew W. Hardey pursuant to Rule 13a-14 or 15d-14 of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1 Certification of James D. Cole pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2 Certification of Matthew W. Hardey pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


(In thousands)	2004			2003
Net income	$	4,205		$	4,690
Other comprehensive income (loss):
Foreign currency translation adjustments		(788	)		5,104

Comprehensive income	$	3,417		$	9,794


		NEWPARK RESOURCES, INC.

		By:		/s/ James D. Cole

				James D. Cole, Chairman and Chief
				Executive Officer

		By:		/s/ Matthew W. Hardey

				Matthew W. Hardey, Vice President
				and Chief Financial Officer


Item Number	Description	Page Number
	PART I
1	Unaudited Consolidated Financial Statements:
	Balance Sheets as of September 30, 2004 and December 31, 2003		3
	Statements of Operations for the Three Month and Nine Month Periods Ended September 30, 2004 and 2003		4
	Statements of Comprehensive Income for the Nine Month Periods Ended September 30, 2004 and 2003		5
	Statements of Cash Flows for the Nine Month Periods Ended September 30, 2004 and 2003		6
	Notes to Unaudited Consolidated Financial Statements		7
2	Management’s Discussion and Analysis of Financial Condition and Results of Operations		21
3	Quantitative and Qualitative Disclosures about Market Risk		39
4	Controls and Procedures		40
	PART II
1	Legal Proceedings		44
2	Unregistered Shares of Equity Securities and Use of Proceeds		45
3	Defaults Upon Senior Securities		45
4	Submission of Matters to a Vote of Security Holders		45
6	Exhibits		45
	Signatures		46
Loan Agreement
Certification of James D. Cole pursuant to Section 302
Certification of Matthew W. Hardey pursuant to Section 302
Certification of James D. Cole pursuant to Section 906
Certification of Matthew W. Hardey pursuant to Section 906


ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations

•		Reporting for foreign currency transactions and differences between U.S. and foreign generally accepted accounting principles in our Mediterranean operations; and

•		Segregation of duties in several of our reporting units and in our corporate offices.

•		A material decline in the level of oil and gas exploration and production and any reduction in the industry’s willingness to spend capital on environmental and oilfield services could adversely affect the demand for our services;

•		Material changes in 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 could adversely affect the demand for our services;

•		Changes in domestic and international political, military, regulatory and economic conditions may adversely affect the demand for oil and gas or production volumes;

•		A rescission or relaxation of government regulations affecting E&P and NORM waste disposal could reduce the demand for our services and reduce our revenues and income.

•		Changes in existing regulations could require us to change the way we do business, which may have a material adverse affect on our consolidated financial statements;

•		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 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;

•		We face intense competition in our existing markets and expect to face tough competition in any markets into which we seek to expand, which 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;

•		Our acquisitions may not achieve sales and profitability levels that justify our investment in them, which could result in these businesses placing downward pressure on our margins or our disposing of these businesses at a loss;

•		The demand for our services may be adversely affected by shortages of critical supplies or equipment in the oil and gas industry and personnel trained to operate this equipment;

•		We may not be able to successfully introduce our products and services, including our DeepDrill™ and FlexDrill™ technology and our new Dura-Base™ and Bravo™ mats, and we may not be successful in gaining acceptance or market share for these products and services;

•		We may not be able to maintain the necessary permits to operate our non-hazardous waste disposal wells or we may not be able to successfully compete in this market;

•		Adverse weather conditions could disrupt drilling operations and reduce the demand for our services;

•		We may fail to comply with any of the numerous Federal, state and local laws, regulations and policies that govern environmental protection, zoning and other matters applicable to our business, or these regulations and policies may change, and we may face fines or other penalties if we fail to comply with these new regulations, or be forced to make significant capital expenditures or changes to our operations;

•		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 the costs to clean up and close contaminated sites;

•		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 affect on our financial condition;

•		Our international operations are subject to uncertainties which could limit our ability to expand or reduce the revenues and profitability of these operations, 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

•		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, would increase our cost of borrowing and have an adverse affect on our consolidated financial statements.

•		We may not be able to retire or refinance our long-term debt at or before its maturity, whether due to conditions in financial markets or our own financial condition at that future time. We also can’t provide any assurances that we will be able to obtain any replacement long-term financing on terms as favorable to us as under our current financing.

10.1		Loan agreement dated July 26, 2004 between Excalibar Minerals, Inc. and Excalibar Minerals of LA, L.L.C., as borrowers and RBS Lombard, Inc. as lender.

31.1		Certification of James D. Cole pursuant to Rule 13a-14 or 15d-14 of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Matthew W. Hardey pursuant to Rule 13a-14 or 15d-14 of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of James D. Cole pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of Matthew W. Hardey pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.