Newpark Resources, Inc. — FY 2017 Form 10-K
Reporting period: Year ended December 31, 2017; filed February 23, 2018. The supplied filing is for Newpark Resources, Inc., not a company identified as NPK International Inc.
Business context
Newpark supplies drilling-fluid products and technical services, composite mat rentals and sales, and site construction services. Its reportable segments are Fluids Systems and Mats and Integrated Services. Results are exposed to oil and gas activity, commodity prices, customer spending and the utilization of assets with significant fixed costs. The North American average rig count rose 69% in 2017, to 1,083 from 639 in 2016.
Key financial results
| Metric | 2017 | 2016 |
|---|---|---|
| Revenue | $747.8 million | $471.5 million |
| Operating income (loss) | $31.4 million | $(57.2) million |
| Operating margin | 4.2% | (12.1)% |
| Income (loss) from continuing operations | $11.2 million | $(40.7) million |
| Net income (loss) | $(6.1) million | $(40.7) million |
| Net cash provided by operations | $38.4 million | $11.1 million |
| Capital expenditures | $31.4 million | $38.4 million |
| Cash and cash equivalents at year-end | $56.4 million | $87.9 million |
| Working capital | $346.6 million | $283.1 million |
| Total debt, carrying value | $160.5 million | $156.3 million |
Revenue increased 59%. Fluids Systems revenue rose 56% to $615.8 million, while segment operating income improved to $27.6 million from a $43.6 million loss. Mats and Integrated Services revenue increased 74% to $132.0 million, and operating income grew to $40.5 million from $14.7 million. Consolidated gross margin, calculated from reported revenue and cost of revenue, was approximately 18.7%, up from 7.1% in 2016.
Net loss includes a $17.4 million after-tax loss from settling claims related to the 2014 sale of the Environmental Services business. Excluding that disposal charge, the company reported $11.2 million of income from continuing operations. Operating cash flow improved, but working-capital investment—particularly higher receivables—absorbed cash; the company also received a $37.2 million tax refund during 2017.
Material changes and notable items
- Recovery in North American drilling activity drove most of the revenue rebound; North American Fluids Systems revenue more than doubled.
- In November 2017, Newpark acquired Well Service Group and Utility Access Solutions for approximately $77.9 million, including $44.8 million cash and $32.4 million in Newpark shares. The acquired business contributed about $9 million in 2017 revenue after closing.
- The company repaid $83.3 million of 2017 Convertible Notes at maturity, funded largely by borrowings under its amended asset-based revolver. Year-end ABL borrowings were $81.6 million, with $54.6 million remaining availability against a $136.2 million borrowing base.
- The $100 million 2021 Convertible Notes remain outstanding at 4% stated interest. The notes’ carrying value is reduced by unamortized discount and issuance costs; scheduled principal maturity is December 2021.
- The 2017 tax provision includes a provisional $3.4 million net benefit from the Tax Act. The reported effective tax rate was 30.4%; management expected the Act to reduce the effective tax rate in 2018, but said the final impact depended on earnings mix and completion of its analysis.
Outlook, risks and contingencies
Management expected 2018 capital expenditures of $20 million to $25 million and stated that cash, operating cash generation and remaining ABL availability should fund operations for the next 12 months. It expected WSG to shift Mats and Integrated Services toward more service revenue; management anticipated positive operating-income contribution but lower segment margin than 2017’s 30.7%, partly due to mix and acquisition-related depreciation and amortization. Several international contracts, including Sonatrach and Petrobras contracts, were scheduled to conclude in 2018, with renewals and awards subject to competitive processes. The filing provides no specific consolidated revenue or earnings guidance.
Principal risks include oil and gas price and activity volatility, fixed-cost operating leverage, customer and U.S. market concentration, international political and currency risks, barite and HDPE supply and pricing, competition and patent expirations, environmental and operating hazards, insurance limitations, and impairment risk. Algeria represented 12% of consolidated revenue and 28% of cash at year-end; restrictions on repatriating funds are a stated risk. The ABL facility has borrowing-base and covenant conditions, and its maturity may spring forward to September 2021 if the 2021 notes are not addressed as specified. The company also faces an IRS dispute over an approximately $3.9 million tax assessment for 2015 and foreign tax examinations.
The Ecoserv settlement requires $22 million cash, effectively reducing proceeds from the former business sale; $8 million was covered by escrow and the remaining $14 million was expected to be funded in the first quarter of 2018 from cash and ABL borrowings. Deloitte issued unqualified opinions on the financial statements and internal control over financial reporting.
Most important facts for investors to verify
- Whether North American drilling activity and customer pricing continue to support the 2017 recovery and improve Fluids Systems profitability.
- Performance, integration costs and margins of the WSG acquisition, including the preliminary purchase-price allocation and goodwill/intangible asset assumptions.
- Actual 2018 capital spending, operating cash flow, receivables collection and available ABL borrowing capacity after settlement funding.
- Plans and funding for the $100 million 2021 notes, including the ABL springing-maturity provision and covenant headroom.
- Final Tax Act accounting and outcome of the IRS appeal and other tax examinations.
- Renewal or replacement of international contracts due to conclude in 2018, and the exposure of cash and revenue to Algeria and other jurisdictions.