Newpark Resources, Inc. — Form 10-Q Summary
Period: Three and six months ended June 30, 2013. The supplied filing identifies the registrant as Newpark Resources, Inc., not NPK International Inc.; verify the company and filing match. Amounts below are in U.S. dollars.
Business context and reporting period
Newpark supplies products and services primarily to the oil and gas exploration and production industry through Fluids Systems and Engineering, Mats and Integrated Services, and Environmental Services. Fluids Systems and Engineering produced 86% of first-half revenue. Financial statements are unaudited interim statements; management cautions that interim results are not necessarily indicative of full-year results.
Financial performance and liquidity
- Second quarter: Revenue was $276.6 million, up 13% year over year; operating income was $26.9 million, up 9%; net income was $15.7 million, up 8%. Basic and diluted EPS were $0.19 and $0.17, versus $0.16 and $0.15.
- First half: Revenue was $559.1 million, up 10%; operating income was $55.3 million, up 9%; net income was $33.0 million, up 10%. Basic and diluted EPS were $0.39 and $0.35, versus $0.34 and $0.31.
- Margins: Gross margin was approximately 18.6% in Q2 versus 18.0% a year earlier, and 18.5% for the first half versus 18.0%. Operating margin was approximately 9.7% in Q2 versus 10.1%, and 9.9% for the first half versus 10.0%.
- Cash flow: First-half operating cash flow was $43.9 million, compared with $15.8 million in 2012. Investing used $36.8 million, principally for a fluids technology center and mat rental fleet expansion; capital expenditures were $37.4 million. Cash increased $11.2 million to $58.0 million.
- Balance sheet and debt: At June 30, cash was $58.0 million, current assets $618.4 million, current liabilities $158.1 million, and total assets $1.02 billion. Total debt was $260.1 million, versus $259.4 million at year-end; debt to capitalization was 32.2%, down from 33.6%. Cash was largely held in foreign subsidiaries and intended to remain permanently reinvested abroad.
- Credit availability: The $125 million revolver had $78.0 million drawn and $14.2 million of letters of credit outstanding, leaving $32.8 million available; facility capacity may be increased to $200 million. The company reported compliance with credit covenants. The $172.5 million convertible notes bear 4% interest and mature in October 2017.
- Segment trends: Q2 Fluids Systems and Engineering revenue rose 16% and operating income rose to $17.7 million; Mats and Integrated Services revenue fell 15% and operating income fell to $10.3 million; Environmental Services revenue rose 30% and operating income rose to $5.3 million.
Material changes versus prior comparable periods
- Revenue growth reflected international expansion and the Alliance Drilling Fluids acquisition completed in December 2012. First-half international revenue increased 29%; North American Fluids revenue rose 9%, partly offset by lower Canadian activity.
- Fluids Systems and Engineering operating income improved, which management attributed to North American cost and profit-improvement initiatives, increased activity, and Alliance. International results included an approximately $1.8 million Brazil charge for an adjustment to estimated margins on unbilled Petrobras sales in Q2.
- Mats sales fell 54% in the first half as production was directed mainly to expanding the rental fleet in preparation for a spill-containment system launch; segment revenue declined 24% and operating income declined $8.6 million.
- First-half SG&A rose 18% to $48.8 million, primarily from personnel, administrative, and strategic-planning costs. Interest expense increased 8% to $5.3 million, mainly due to borrowings associated with the Alliance acquisition.
- Foreign currency translation reduced comprehensive income: first-half translation adjustments were a negative $10.3 million, compared with a negative $3.9 million in 2012.
Outlook, commentary, risks and unusual items
- Management forecast 2013 capital expenditures of $55 million to $65 million and expected cash, operating cash flow, and credit availability to cover anticipated needs over the next 12 months. It anticipated near-term working-capital needs would decline through efforts to reduce receivables and inventory.
- Three international drilling-fluid contract awards—in Brazil, the Black Sea, and Kuwait—were expected to begin in late 2013 or early 2014. The company expected to introduce its Evolution water-based fluids system in Asia Pacific in the second half of 2013; related first-half revenue was approximately $54 million versus $50 million in 2012.
- In May, the board authorized commencement of a process to sell Environmental Services. The company had contacted potential interested parties but gave no assurance that the process would continue or result in a sale.
- North American rig counts were down 11% year over year in both Q2 and the first half. Other cited exposures include foreign currency movements and variable-rate debt; management estimated a 200-basis-point rate increase would add approximately $1.1 million to annual interest expense.
- Management said ordinary-course litigation and claims were not expected to have a material financial statement effect. It reported no material change in risk factors and that disclosure controls were effective.
- An April authorization permitted up to $50 million in share repurchases; no purchases under that program had been made by June 30. Separately, 175,537 shares were acquired in June through employee share surrenders for taxes, not under the public program.
Important facts for investors to verify
- Confirm the filing belongs to the intended company: the document names Newpark Resources, Inc., while the request metadata names NPK International Inc.
- Track execution and profitability of the three new international awards and the expected Evolution expansion.
- Assess whether mat-rental fleet investment and the spill-containment launch offset lower mat sales, and monitor the proposed Environmental Services sale.
- Review receivables, collections, inventory, and the extent to which foreign-held cash is available to fund U.S. needs.
- Monitor revolving-credit availability, covenant compliance, variable-rate exposure, and the potential dilution or settlement implications of convertible notes and equity awards.