Filing Summary
Issuer identification: The supplied filing is Newpark Resources, Inc.’s Form 10-Q, not a filing identified as NPK International Inc. It covers the quarter and nine months ended September 30, 2019; amounts are U.S. dollars unless stated otherwise.
Business Context and Reporting Period
Newpark supplies products, rentals and services primarily to the oil and gas exploration and production industry through Fluids Systems and Mats and Integrated Services. Its results are sensitive to drilling activity, commodity prices and customer contract transitions. The statements are unaudited.
Financial Performance and Position
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $202.8m | $235.3m | $630.6m | $698.9m |
| Operating income | $6.3m | $10.1m | $22.9m | $43.0m |
| Net income (loss) | ($1.4m) | $3.6m | $4.1m | $21.7m |
| Diluted earnings (loss) per share | ($0.02) | $0.04 | $0.05 | $0.23 |
Q3 gross margin was approximately 16.4% versus 17.3% a year earlier; operating margin was 3.1% versus 4.3%. For the first nine months, gross margin was approximately 17.2% versus 18.5%, and operating margin 3.6% versus 6.2%. Nine-month net margin was approximately 0.7% versus 3.1%.
- Cash flow: Nine-month operating cash flow was $53.2m, compared with $20.1m in 2018. Investing used $28.7m, including $35.8m of capital expenditures; financing used $25.5m. Cash, cash equivalents and restricted cash ended at $61.7m, down from $64.3m at year-end 2018.
- Liquidity: September 30 cash and cash equivalents were $53.7m, including restricted cash of $8.1m reported separately. ABL availability was $100.8m after $70.2m drawn. Management said cash, operating cash generation and remaining ABL availability should fund operations for the next 12 months.
- Debt: Total debt carrying value was $162.4m, including $100.0m principal of 4% convertible notes due December 2021 and $70.2m drawn under the ABL. Total principal debt was $176.1m. Debt-to-capitalization was 22.5%. The ABL’s weighted-average rate was 3.8%; the convertible notes’ effective interest rate, including discount and issuance costs, was approximately 11.3%.
- Balance sheet: Total assets were $912.6m and stockholders’ equity $559.6m at September 30, 2019. The company adopted lease accounting in 2019, recognizing $29.7m of operating lease assets and $24.3m of noncurrent operating lease liabilities.
Material Changes Versus Prior Comparable Period
- Q3 revenue fell 14% year over year and nine-month revenue fell 10%. Nine-month operating income declined 47% and net income declined 81%.
- Fluids Systems revenue declined 16% in Q3 and 10% year to date; Mats and Integrated Services revenue declined 8% and 10%, respectively. Lower North American drilling activity and international contract transitions contributed to the declines.
- International Fluids Systems revenue for the first nine months fell 23%, including lower activity in Brazil, Algeria and Kuwait. U.S. Fluids revenue increased year to date, supported by Gulf of Mexico market-share gains and improved drilling efficiency.
- Non-E&P Mats rental and service revenue increased approximately 10% in the first nine months, partly offsetting an approximately 20% decline in E&P rental and service revenue.
- Operating cash flow improved substantially, helped by working-capital movements and noncash adjustments. The company repurchased $19.0m of shares in the first nine months, versus none under the program in the comparable 2018 period.
Outlook, Commentary, Risks and Unusual Items
- Management expected 2019 capital expenditures of approximately $40m–$45m. It noted the business has significant fixed costs and may incur additional restructuring charges or asset impairments if activity does not improve.
- New international awards include contracts expected to start in the first half of 2020 and generate a combined $15m–$20m of annual revenue. Management also expected revenue under new Kuwait awards to increase and eventually exceed prior contract levels; Sonatrach’s new award implies lower annual revenue than the prior activity level.
- In October 2019, after quarter-end, Newpark acquired U.K.-based Cleansorb for $18.7m net of cash acquired, funded with ABL borrowings. It also repatriated approximately $15m from foreign subsidiaries and used the funds to repay ABL borrowings.
- Q3 tax expense included a $2.0m charge reflecting lower anticipated U.S. full-year earnings and a higher projected tax rate. The nine-month effective tax rate was 63%, compared with 32% in 2018.
- A Mexican tax assessment of approximately $3.3m remains in an appeals process. A court confirmed nullification of the assessment, but the tax authority appealed and may begin a new audit. A $6.0m performance bond relates to this matter.
- Claims from 38 plaintiffs related to the 2018 Kenedy, Texas facility fire total approximately $1.5m; the company reports insurance coverage, subject to self-insured retentions, and claims were not finalized at quarter-end.
- The ABL facility has a springing maturity provision that could accelerate maturity to September 1, 2021 if the 2021 convertible notes are not otherwise satisfied or adequately funded. A 100-basis-point rate increase would raise annual pretax interest expense by an estimated $0.7m.
- The filing reports no material change in risk factors and no material change in internal control over financial reporting. Management concluded disclosure controls were effective.
Important Facts for Investors to Verify
- Confirm issuer identity: the filing is for Newpark Resources, Inc., despite the request metadata naming NPK International Inc.
- Track drilling activity, contract transitions and whether new international awards replace declining legacy revenue.
- Monitor ABL availability, borrowing-base and covenant requirements, and plans for the 2021 convertible notes’ maturity and springing-maturity trigger.
- Assess the outcome and potential financial exposure of the Mexican tax dispute and the Kenedy fire claims, including insurance recoveries and self-insured costs.
- Review Cleansorb’s post-acquisition contribution, integration costs and the effect of acquisition borrowing on leverage and liquidity.