Newpark Resources, Inc. — Q1 2016 Form 10-Q
Entity and period: The filing is for Newpark Resources, Inc., not “NPK International Inc.” It reports unaudited results for the three months ended March 31, 2016; comparisons are with Q1 2015 unless stated otherwise. Newpark supplies products and services to the oil and gas industry through Fluids Systems and Mats and Integrated Services.
Financial performance and position
- Revenue: $114.5 million, down 45% from $208.5 million. North American revenue fell 58%; international revenue fell 13%.
- Profitability: Operating loss was $18.8 million versus operating income of $6.1 million. Net loss was $13.3 million, or $0.16 per diluted share, versus net income of $1.0 million, or $0.01 per share. Consolidated operating margin was approximately negative 16.4%, compared with positive 2.9% a year earlier.
- Segments: Fluids Systems revenue was $98.7 million, down 43%, and operating loss was $15.2 million. Mats and Integrated Services revenue was $15.9 million, down 57%; operating income was $3.7 million, with a 23.5% margin versus 42.8%. Corporate expense was $7.4 million.
- Cash flow: Operating activities used $2.9 million, compared with providing $31.6 million. Investing activities used $12.0 million, including $13.4 million of capital expenditures. Financing activities used $11.6 million, primarily reflecting cash paid to repurchase senior notes. Cash declined $24.6 million to $82.5 million.
- Liquidity and debt: Current assets were $453.4 million and current liabilities $93.2 million at quarter-end. Total debt was $165.8 million, down from $178.6 million at December 31, 2015; debt to capitalization was 24.4%. Debt included $161.3 million principal of 4% convertible senior notes due October 2017 and $5.5 million of other debt. The company had no borrowings under its revolving credit facility at quarter-end. Cash included $36.1 million held by foreign subsidiaries and intended to remain permanently reinvested abroad.
Material changes and notable items
- Revenue contraction reflected lower drilling activity and pricing amid a sharp oil-industry downturn. Average North American rig count fell 58% year over year; U.S. rig count was 415 on May 6, 2016, versus 551 on average in Q1 2016.
- In February, Newpark repurchased $11.2 million principal of senior notes for $9.2 million cash, recognizing a $1.9 million gain on extinguishment.
- A prospective change to estimated composite-mat useful lives and residual values reduced Q1 depreciation by about $1.6 million and increased after-tax income by about $1.0 million, or $0.01 per share. Management expected a similar quarterly effect going forward.
- Newpark reduced its North American workforce by 155 employees in Q1 and by 591 employees, approximately 46%, since December 31, 2014. Q1 termination costs were $3.4 million.
- Sonatrach, Newpark’s primary customer in Algeria, represented approximately 15% of consolidated Q1 revenue.
Outlook, liquidity, and risks
- Management expected drilling activity to remain below prior-year levels for the foreseeable future and anticipated lower operating results for the remainder of 2016. Fixed costs, weaker customer demand, and pricing pressure were cited as constraints; additional cost-reduction charges or asset impairments were possible.
- Management forecast 2016 capital expenditures of $30 million to $40 million. It expected to use about $6 million in Q2 and Q3 for severance and the wage-and-hour settlement. A roughly $27 million tax refund related to 2015 loss carrybacks was received in April 2016, after quarter-end.
- After failing to comply with leverage and interest-coverage covenants in its prior revolving credit agreement, the company terminated it effective May 12, 2016 and entered into a new asset-based revolving facility. The facility provides up to $90 million, potentially expandable to $150 million, but was not available to draw until specified closing and collateral conditions were completed. Those steps were expected by August 1; failure to meet the deadline or obtain an extension could terminate lender commitments. The facility has a springing maturity of June 30, 2017 if the 2017 senior notes are not addressed as specified in the agreement.
- Management stated that cash, operating cash generation, working-capital reductions and tax refunds were expected to fund operations and anticipated capital needs for the next 12 months. This outlook depends in part on completing ABL conditions and maintaining covenant compliance.
- Litigation: an April 2016 wage-and-hour settlement remained subject to court approval and other conditions; the company recorded a $5 million charge in Q4 2015 and expected installment payments in Q2 and Q3 2016. Separately, an $8 million escrow from the 2014 sale of its Environmental Services business remains disputed in litigation; Newpark is seeking release of the funds and disputes the buyer’s claims.
- Other risks include prolonged industry weakness, foreign-currency movements, customer concentration and collection delays in Brazil, and availability under the asset-based facility depending on eligible collateral and lender reserves. The filing reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Key facts for investors to verify
- Confirm the registrant identity: the source filing names Newpark Resources, Inc., despite the request metadata naming NPK International Inc.
- Track subsequent ABL facility availability, completion of lending conditions, borrowing base and covenant headroom, and the plan for the October 2017 senior-note maturity.
- Assess whether revenue and margins stabilize, particularly in North America, and whether non-oil-and-gas markets and international contracts offset declines.
- Evaluate the sustainability and cash impact of the composite-mat depreciation estimate change and the pace of planned capital spending.
- Monitor settlement approval and payments, the disputed $8 million escrow, and any additional severance, impairment or litigation charges.