Newpark Resources, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. The filing is for Newpark Resources, Inc.; the supplied company metadata identifies NPK International Inc.
Business context
Newpark supplies products, rentals, and services primarily to the oil and gas industry through Fluids Systems and Mats and Integrated Services. Mats also serves non-E&P markets. The filing attributes improved activity partly to higher North American rig counts and market-share gains. The November 2017 WSG acquisition contributed materially to Mats and Integrated Services growth.
Financial performance
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Revenue | $236.3m | $183.0m | $463.6m | $341.7m |
| Operating income | $19.1m | $8.0m | $33.0m | $11.7m |
| Net income | $10.8m | $1.6m | $18.1m | $0.6m |
| Diluted EPS | $0.12 | $0.02 | $0.19 | $0.01 |
| Operating margin | 8.1% | 4.4% | 7.1% | 3.4% |
Second-quarter revenue increased 29%; first-half revenue increased 36%. Q2 Fluids Systems revenue rose 19% and segment operating margin improved to 7.4% from 3.9%. Mats and Integrated Services revenue increased 74%, including about $18m from WSG, while its operating margin declined to 26.3% from 35.2%. First-half segment margins were 6.7% for Fluids Systems and 25.3% for Mats and Integrated Services, versus 4.3% and 32.4%, respectively, a year earlier.
First-half operating cash flow was $20.7m, compared with $22.3m in 2017; the prior period included a $37.2m tax refund. Capital expenditures were $24.5m, and investing cash outflow was $37.8m, including the $14.0m payment related to the Environmental Services sale settlement. Financing provided $35.1m, including net ABL borrowings of about $32.3m.
Balance sheet and liquidity
At June 30, 2018, cash and cash equivalents were $71.7m; current assets were $533.9m and current liabilities $136.6m. Total debt carrying value was $197.2m, up from $160.5m at December 31, 2017; total principal debt was $217.5m. Total debt to capitalization increased to 26.2% from 22.7%. The ABL had $113.9m drawn and $36.1m remaining availability. The $100m convertible notes bear 4% stated interest, mature in December 2021, and have an approximately 11.3% effective interest rate including discount and issuance costs.
Outlook, risks, and unusual items
- Management expected 2018 capital expenditures of approximately $40m and believed cash, operating cash flow, and ABL availability would fund operations for the next 12 months.
- Several international contracts were scheduled to conclude in 2018. A provisional Sonatrach award was expected to generate about $125m over three years, roughly $25m less per year than recent activity; final approval and contract execution remained outstanding. The Petrobras contract was also due to conclude by year-end, with no assurance of renewal. The KOC contract was expected to end in 2018, with a tender underway.
- A July 2018 fire at the Kenedy, Texas fluids facility destroyed a warehouse, inventory, and equipment. The company expected $1m–$2m of third-quarter charges, primarily for insurance retentions; total costs were not yet estimable. Alternate facilities were being used to avoid customer disruption.
- The Ecoserv settlement resolved the Environmental Services sale litigation: Newpark paid $14m and released $8m held in escrow. The lawsuit was dismissed with prejudice in March 2018; the $22m charge had been recorded in discontinued operations in Q4 2017.
- Tax Act accounting remained provisional. The company was appealing a U.S. IRS assessment of about $3.9m and a Mexican tax assessment of about $3.3m, and said it intended to defend both positions.
- Revenue recognition guidance adopted January 1, 2018 changed recognition timing for certain U.S. drilling-fluid products to customer utilization; the filing reported no material impact on Q2 or first-half revenue.
Key facts for investors to verify
- Final Sonatrach tender approval, Petrobras and KOC renewals, and the effect of any contract transitions on international revenue and margins.
- The Kenedy fire’s final insured and uninsured costs, restoration timeline, and any effect on customer service.
- WSG’s contribution to results and whether service-mix and acquisition-related amortization continue to pressure Mats segment margins.
- ABL borrowing-base availability and covenant headroom, particularly given the facility’s springing maturity linked to the 2021 notes.
- Outcomes of the U.S. and Mexican tax disputes and any changes to provisional Tax Act accounting.
- Working-capital demands, capital spending against the $40m estimate, and the conversion of reported earnings into operating cash flow.