Newpark Resources, Inc. — Form 10-Q Summary
Period: Three and nine months ended September 30, 2018. The filing is for Newpark Resources, Inc.; this differs from the “NPK International Inc.” company name in the request metadata.
Business context and financial performance
Newpark supplies drilling-fluid products and services and composite-mat rentals and related site services, primarily to the oil and gas industry. Its reportable segments are Fluids Systems and Mats and Integrated Services. Results are unaudited and in U.S. dollars.
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $235.3m | $201.7m | $698.9m | $543.4m |
| Operating income | $10.1m | $9.9m | $43.0m | $21.6m |
| Net income | $3.6m | $2.7m | $21.7m | $3.3m |
| Diluted EPS | $0.04 | $0.03 | $0.23 | $0.04 |
Q3 revenue increased 17% and nine-month revenue increased 29%. Q3 operating margin was approximately 4.3% versus 4.9%; nine-month operating margin was approximately 6.2% versus 4.0%. Cost of revenues grew 18% in Q3, slightly faster than revenue; for nine months both grew 29%. Nine-month effective tax rate was 32%, compared with 68% in 2017; Q3 rates were 44% and 57%, respectively.
- Segments: Q3 Fluids Systems revenue rose 9% to $181.0m and operating income was $8.3m; segment margin eased to 4.6% from 4.8%. Mats and Integrated Services revenue rose 56% to $54.4m and operating income reached $12.9m; segment margin fell to 23.8% from 31.3%. For nine months, segment revenues rose 19% and 79%, respectively; margins were 6.0% (up from 4.4%) and 24.8% (down from 32.0%).
- Cash flow: Nine-month operating cash flow was $20.1m, versus $15.8m; 2017 included a $37.2m tax refund. Capital expenditures were $32.8m, producing operating cash flow less capex of negative $12.7m. Investing cash use was $45.6m, including capex and a $14.0m payment related to the Environmental Services sale settlement. Financing cash provided $23.7m. Cash, cash equivalents and restricted cash were $59.9m at period end, including $52.2m unrestricted cash and $7.7m restricted cash.
- Debt and liquidity: Total debt carrying value was $188.4m ($207.4m principal), up from $160.5m at year-end 2017. The ABL had $100.2m drawn and $49.8m remaining availability. Total debt to capitalization was 25.2%, up from 22.7%. Management said cash, operating cash generation and ABL availability were expected to cover operations for the next 12 months.
- Balance sheet: Current assets were $537.0m and current liabilities $145.0m at September 30. Inventory increased to $202.7m from $165.3m at December 31, 2017.
Material changes, outlook, and notable items
- North American activity supported growth: average North American rig count increased 9% in Q3 and 14% for the first nine months year over year. The Mats segment’s growth also reflected the November 2017 WSG acquisition, which contributed about $55m of nine-month revenue.
- Management expected 2018 capital expenditures of approximately $40m. No consolidated earnings or revenue guidance was provided in the supplied filing text.
- International contract transitions create revenue risk. The new Sonatrach award is expected to generate about $125m over three years, roughly $25m less per year than recent activity levels, with the change beginning in Q4 2018. The Petrobras contract was scheduled to end in December 2018; a new three-year award was delayed and a six-month contract went to another supplier. Newpark recorded $1.1m of Brazil severance costs and warned of possible additional cost-reduction charges or asset impairments absent replacement work. The KOC contract was also expected to conclude by year-end, with a tender pending.
- A July fire at the Kenedy, Texas facility destroyed a warehouse, inventory and equipment. The company incurred $4.6m of costs, estimated $3.8m of insurance recoveries and recorded a net $0.8m charge. Insurance claims remained unsettled; 23 plaintiffs sought $1.5m for alleged injuries and property damage, with coverage subject to self-insured retentions.
- The Ecoserv dispute over the 2014 Environmental Services sale was settled for $22.0m, funded by a $14.0m cash payment and release of $8.0m escrow; the lawsuit was dismissed with prejudice in March 2018. The settlement charge was recorded in discontinued operations in 2017.
- Tax matters include an IRS dispute involving an approximately $3.9m assessment related to a 2015 deduction and a Mexican assessment of approximately $3.3m, for which the company filed an appeal and posted a bond. Outcomes were unresolved. Further Tax Act measurement-period adjustments could also be required.
- The 2021 convertible notes have $100m principal, a 4.0% coupon and a December 2021 maturity; their effective interest rate, including discount and issuance costs, was approximately 11.3%. The ABL has a springing maturity in September 2021 if specified arrangements to repay the notes are not made. A 100-basis-point increase in short-term rates would increase annual pretax interest expense by about $1.0m.
- Adoption of new revenue-recognition guidance reduced opening retained earnings by $2.3m and increased opening inventory by $5.5m; it had no material reported revenue impact in 2018. The company expected the new lease standard, effective in Q1 2019, to add balance-sheet assets and liabilities, but had not estimated the amount.
- Management reported effective disclosure controls at September 30, 2018 and no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether Newpark retained or replaced the Sonatrach, KOC and Petrobras work, and the revenue and cost effects of contract transitions.
- Realization and timing of the $3.8m Kenedy fire insurance recovery, remaining self-insured costs, and resolution of related claims.
- Cash conversion and working-capital needs, particularly the inventory build, alongside planned capex and ABL borrowing availability.
- Progress and outcomes of the IRS and Mexican tax disputes, and any additional Tax Act adjustments.
- ABL covenant headroom and the plan for the 2021 convertible-note maturity and related springing-maturity provisions.