Newpark Resources, Inc. — Form 10-Q Summary
Filing identity: The supplied filing is for Newpark Resources, Inc., not NPK International Inc. It covers the quarter and nine months ended September 30, 2015; financial statements are unaudited. Dollar amounts below are in millions unless noted.
Business context and reporting period
Newpark supplies products and services to the oil and gas industry through Fluids Systems and Mats and Integrated Services. Its former Environmental Services business was sold in March 2014 and is reported as discontinued operations. Results were pressured by sharply lower oil prices and drilling activity, especially in North America.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $154.2 | $297.0 | $526.3 | $812.3 |
| Operating income (loss) | $(9.3) | $39.4 | $(4.8) | $92.0 |
| Continuing-operations income (loss) | $(4.5) | $23.5 | $(7.7) | $55.6 |
| Net income (loss) | $(4.5) | $23.5 | $(7.7) | $78.8 |
| Basic EPS | $(0.05) | $0.29 | $(0.09) | $0.95 |
- Q3 revenue fell 48%; nine-month revenue fell 35%. North American rig counts declined 54% year over year in Q3 and 43% for the nine-month period.
- Q3 Fluids Systems revenue declined 45% and Mats and Integrated Services revenue declined 66%. Both segments recorded operating losses in Q3. For the first nine months, Fluids Systems had a $3.2 million operating loss; Mats and Integrated Services earned $22.1 million, down from $47.6 million.
- Gross profit was approximately $15.9 million in Q3 versus $68.3 million a year earlier, and $69.2 million for nine months versus $172.3 million. Implied gross margins were about 10.3% and 23.0% in Q3, and 13.1% and 21.2% for the respective nine-month periods.
- Nine-month operating cash flow was $107.2 million, compared with $22.9 million in 2014. The filing attributes the improvement primarily to working-capital releases as revenue declined: changes in operating assets and liabilities provided $83.7 million.
- Cash and cash equivalents were $113.9 million at September 30, 2015, including $57.1 million held by foreign subsidiaries that the company intended to keep invested abroad. Current assets were $501.8 million and current liabilities $114.0 million.
- Total debt was $178.4 million: $172.5 million of 4% convertible senior notes and $5.9 million of foreign borrowings. No revolver borrowings were outstanding; reported availability was $166.6 million. Debt-to-capitalization was 22.8%.
Material changes and unusual items
- Q3 North American revenue fell $132.0 million; international revenue also declined, in part because of currency effects and reduced activity in Brazil. A stronger U.S. dollar contributed to a $3.2 million Q3 foreign-exchange loss and a $4.4 million nine-month loss.
- The nine-month 2014 comparison includes $1.2 million of discontinued-operations income and a $22.1 million after-tax gain from the Environmental Services sale. These items help explain why 2014 net income materially exceeded continuing-operations income.
- 2015 tax benefits included a $2.2 million release of U.S. tax reserves and approximately $3.3 million related to forgiveness of certain Brazilian intercompany balances. A $1.1 million valuation allowance was recorded against Australian deferred tax assets.
- The company reduced its North American employee base by 369, approximately 28%, since year-end 2014, and eliminated most contract positions. Termination costs were $5.9 million for nine months; another $1.5 million of voluntary-retirement costs was expected to be recognized over the following year.
- Operating cash flow should be viewed in light of working-capital liquidation; it was not a measure of improved operating profitability. Capital expenditures were $51.4 million for nine months, and investing cash flow also included $15.5 million placed in restricted cash to collateralize letters of credit.
Outlook, risks and contingencies
- Management expected North American drilling activity to remain below 2014 levels for the rest of 2015 and into 2016, with lower demand, pricing pressure, and fixed-cost exposure weighing on operating income and margins. Management expected North American operating results to be significantly below 2014 levels in 2015 and 2016.
- Management forecast 2015 capital expenditures of $65 million to $75 million. Strategic projects included the Conroe fluids facility, Fourchon shore-base upgrades, and the expanded Carencro mat manufacturing facility.
- The company was compliant with debt covenants at September 30, but anticipated breaching its consolidated leverage covenant by year-end 2015 and expected difficulty complying into 2016 if drilling activity remained weak. It was discussing possible relief with its lead bank; a waiver or amendment was not assured and could increase costs or restrict activities. An uncured default could trigger acceleration and a cross-default under the senior notes.
- The $200 million revolving facility expires in March 2020 but has a springing maturity in June 2017 if the senior notes are not addressed or fully funded for repayment by their October 2017 maturity.
- Goodwill testing in Q3 found no impairment, but management estimated the Drilling Fluids reporting unit’s fair value was only about 10% above carrying value and cautioned that changed assumptions or market conditions could result in impairment.
- Contingencies include wage-and-hour litigation, including the Davida case with 91 opt-in plaintiffs and a trial scheduled for September 2016; nine separate independent-contractor cases; and a dispute with the buyer of Environmental Services over an $8 million escrow, including fraud allegations. The company disputed the claims and could not estimate a possible loss for the wage cases.
- International contracts supported growth opportunities, including Algeria, Kuwait, the Black Sea, and a Republic of Congo contract expected to begin in Q4 2015. A Uruguay project was expected to start in Q2 2016 and generate approximately $10 million over four to five months. These awards did not offset the broad market downturn in reported results.
Key facts for investors to verify
- Whether the company obtained a covenant waiver or amendment, and its subsequent leverage and liquidity position.
- Whether operating cash flow remains positive after the working-capital release subsides, and whether the capital-spending forecast was met.
- Trends in North American rig activity, customer pricing, segment margins, and international currency exposure.
- Developments and potential financial effects of the wage litigation and the $8 million escrow dispute.
- Whether continued weakness in oil and gas markets leads to goodwill or other asset impairments.