Business context and reporting period
Registrant discrepancy: The filing is Newpark Resources, Inc.’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2013; it does not identify NPK International Inc. as the registrant. Newpark supplies products and services to the oil and gas industry through Fluids Systems and Engineering, Mats and Integrated Services, and Environmental Services.
Financial results
Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions.
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $285.7m | $259.6m | $844.8m | $767.7m |
| Operating income | $30.3m | $28.8m | $85.6m | $79.6m |
| Net income | $18.8m | $18.7m | $51.8m | $48.8m |
| Diluted EPS | $0.20 | $0.20 | $0.54 | $0.50 |
| Operating cash flow | Not stated separately | Not stated separately | $95.7m | $80.7m |
Revenue rose 10% in both comparisons. Net income was nearly flat in Q3, despite higher revenue and operating income; for the nine months, net income increased 6%. Gross margin was approximately 19.4% in Q3 and 18.8% year to date, compared with 19.0% and 18.4%, respectively, in 2012. Operating margin was approximately 10.6% in Q3 and 10.1% year to date, versus 11.1% and 10.4%.
For the first nine months, capital expenditures were $52.6m, leaving operating cash flow less capital expenditures of approximately $43.1m. Cash increased to $69.4m from $46.8m at year-end 2012. Total debt was $232.0m, down from $259.4m; debt to total capitalization was 28.9%, versus 33.6%. Debt included $172.5m of 4% convertible notes and $47.0m drawn on the revolving facility, plus $12.5m of other borrowings. Revolver availability was $55.0m after outstanding letters of credit. Management said much of the cash was held by foreign subsidiaries and intended to remain permanently reinvested abroad.
Material changes and segment performance
- Fluids Systems and Engineering: Nine-month revenue rose 13% to $714.3m and operating income rose to $57.4m from $42.3m. Growth reflected the Alliance acquisition, North American market-share gains, and stronger EMEA and Latin American activity. Asia Pacific revenue declined in Q3, partly because the region’s largest customer temporarily shut down.
- Mats and Integrated Services: Nine-month revenue fell 15% to $81.1m and operating income declined to $34.2m from $43.4m. Mat sales fell 40% as production was allocated to rental fleet expansion; rental and services revenue increased 11%.
- Environmental Services: Nine-month revenue rose 25% to $49.4m and operating income increased to $13.5m from $10.2m, primarily on increased U.S. Gulf Coast offshore activity.
- North American rig count was down 9% for the first nine months versus 2012. Alliance, acquired in December 2012 for approximately $53m at closing, contributed to fluids growth and increased depreciation, interest expense, and SG&A.
Outlook, commentary and risks
- Management expected full-year 2013 capital expenditures of $65m–$75m and an approximately 33% full-year tax rate. It stated cash, operating cash generation, and credit availability should cover anticipated capital needs over the following 12 months.
- A $40m expansion of the Carencro, Louisiana mat facility was announced in October 2013, with completion expected in early 2015. Three international drilling-fluid contracts awarded in 2013 were expected to start in early 2014. Evolution-system revenue was $86m for the first nine months, compared with $79m in 2012.
- Newpark decided to exit its declining completion services and equipment rental business; it generated $13.4m of revenue and a $1.7m operating loss in the first nine months of 2013. The company also began a process to sell Environmental Services, but stated there was no assurance a sale would occur.
- Risks and uncertainties include reduced drilling activity, foreign-currency movements, interest-rate exposure, execution of growth projects and contracts, and the ability to complete the contemplated business sale. A 200-basis-point rate increase was estimated to raise annual interest expense by about $0.8m. Management reported compliance with credit covenants and no material change in reported risk factors.
- Ordinary-course litigation and claims were disclosed; management did not expect them to have a material effect on the consolidated financial statements. The filing also reported a $1.0m Q3 foreign-exchange loss. No clear quantified estimate of potential litigation exposure is provided.
Important facts for investors to verify
- Confirm the intended issuer: the supplied filing is for Newpark Resources, Inc., not NPK International Inc.
- Assess how much revenue and earnings growth is attributable to Alliance and whether North American market-share gains persist amid lower rig counts.
- Track the effect of reduced mat sales, rental-fleet expansion, and the planned manufacturing expansion on segment margins and cash needs.
- Monitor the completion-services exit, Environmental Services sale process, and the timing and economics of the announced international contracts.
- Review cash accessibility given the foreign-subsidiary balances, revolver availability and covenants, and the dilution and conversion terms of the senior notes.