NPK INTERNATIONAL INC.
10-Ks and 10-Qs
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
For the quarterly period ended September 30, 2019
or
For the transition period from __________ to __________
Commission File Number: 001-02960
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
(Address of principal executive offices) | (Zip Code) | |
(281 ) 362-6800
(Registrant’s telephone number, including area code)
Not Applicable |
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
☑ | Accelerated filer | ☐ | ||
Non-accelerated filer | ☐ | Smaller reporting company | ||
Emerging growth company | ||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☑
As of October 28, 2019, a total of 89,713,692 shares of common stock, $0.01 par value per share, were outstanding.
NEWPARK RESOURCES, INC.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2019
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995, as amended. We also may provide oral or written forward-looking statements in other materials we release to the public. Words such as “will,” “may,” “could,” “would,” “should,” “anticipates,” “believes,” “estimates,” “expects,” “plans,” “intends,” and similar expressions are intended to identify these forward-looking statements but are not the exclusive means of identifying them. These forward-looking statements reflect the current views of our management; however, various risks, uncertainties, contingencies, and other factors, some of which are beyond our control, are difficult to predict and could cause our actual results, performance, or achievements to differ materially from those expressed in, or implied by, these statements.
We assume no obligation to update, amend, or clarify publicly any forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by securities laws. In light of these risks, uncertainties, and assumptions, the forward-looking events discussed in this Quarterly Report on Form 10-Q might not occur.
For further information regarding these and other factors, risks, and uncertainties that could cause actual results to differ, we refer you to the risk factors set forth in Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018.
1
PART I | FINANCIAL INFORMATION |
ITEM 1. | Financial Statements |
Newpark Resources, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
(In thousands, except share data) | September 30, 2019 | December 31, 2018 | |||||
ASSETS | |||||||
Cash and cash equivalents | $ | $ | |||||
Receivables, net | |||||||
Inventories | |||||||
Prepaid expenses and other current assets | |||||||
Total current assets | |||||||
Property, plant and equipment, net | |||||||
Operating lease assets | — | ||||||
Goodwill | |||||||
Other intangible assets, net | |||||||
Deferred tax assets | |||||||
Other assets | |||||||
Total assets | $ | $ | |||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||
Current debt | $ | $ | |||||
Accounts payable | |||||||
Accrued liabilities | |||||||
Total current liabilities | |||||||
Long-term debt, less current portion | |||||||
Noncurrent operating lease liabilities | — | ||||||
Deferred tax liabilities | |||||||
Other noncurrent liabilities | |||||||
Total liabilities | |||||||
Commitments and contingencies (Note 10) | |||||||
Common stock, $0.01 par value (200,000,000 shares authorized and 106,696,719 and 106,362,991 shares issued, respectively) | |||||||
Paid-in capital | |||||||
Accumulated other comprehensive loss | ( | ) | ( | ) | |||
Retained earnings | |||||||
Treasury stock, at cost (17,003,058 and 15,530,952 shares, respectively) | ( | ) | ( | ) | |||
Total stockholders’ equity | |||||||
Total liabilities and stockholders’ equity | $ | $ | |||||
See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements
2
Newpark Resources, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
(In thousands, except per share data) | 2019 | 2018 | 2019 | 2018 | |||||||||||
Revenues | $ | $ | $ | $ | |||||||||||
Cost of revenues | |||||||||||||||
Selling, general and administrative expenses | |||||||||||||||
Other operating (income) loss, net | ( | ) | |||||||||||||
Operating income | |||||||||||||||
Foreign currency exchange (gain) loss | ( | ) | |||||||||||||
Interest expense, net | |||||||||||||||
Income before income taxes | |||||||||||||||
Provision for income taxes | |||||||||||||||
Net income (loss) | $ | ( | ) | $ | $ | $ | |||||||||
Net income (loss) per common share - basic: | $ | ( | ) | $ | $ | $ | |||||||||
Net income (loss) per common share - diluted: | $ | ( | ) | $ | $ | $ | |||||||||
See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements
3
Newpark Resources, Inc.
Condensed Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
(In thousands) | 2019 | 2018 | 2019 | 2018 | |||||||||||
Net income (loss) | $ | ( | ) | $ | $ | $ | |||||||||
Foreign currency translation adjustments (net of tax benefit of $713, $0, $604, $987) | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Comprehensive income (loss) | $ | ( | ) | $ | $ | $ | |||||||||
See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements
4
Newpark Resources, Inc.
Condensed Consolidated Statements of Stockholders’ Equity
(Unaudited)
(In thousands) | Common Stock | Paid-In Capital | Accumulated Other Comprehensive Loss | Retained Earnings | Treasury Stock | Total | |||||||||||||||||
Balance at June 30, 2019 | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | |||||||||||||
Net loss | — | — | — | ( | ) | — | ( | ) | |||||||||||||||
Employee stock options, restricted stock and employee stock purchase plan | — | ( | ) | — | ( | ) | ( | ) | |||||||||||||||
Stock-based compensation expense | — | — | — | — | |||||||||||||||||||
Treasury shares purchased at cost | — | — | — | — | ( | ) | ( | ) | |||||||||||||||
Foreign currency translation, net of tax | — | — | ( | ) | — | — | ( | ) | |||||||||||||||
Balance at September 30, 2019 | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | |||||||||||||
Balance at June 30, 2018 | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | |||||||||||||
Net income | — | — | — | — | |||||||||||||||||||
Employee stock options, restricted stock and employee stock purchase plan | — | — | ( | ) | ( | ) | |||||||||||||||||
Stock-based compensation expense | — | — | — | — | |||||||||||||||||||
Foreign currency translation, net of tax | — | — | ( | ) | — | — | ( | ) | |||||||||||||||
Balance at September 30, 2018 | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | |||||||||||||
Balance at December 31, 2018 | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | |||||||||||||
Net income | — | — | — | — | |||||||||||||||||||
Employee stock options, restricted stock and employee stock purchase plan | ( | ) | — | ( | ) | ( | ) | ||||||||||||||||
Stock-based compensation expense | — | — | — | — | |||||||||||||||||||
Treasury shares purchased at cost | — | — | — | — | ( | ) | ( | ) | |||||||||||||||
Foreign currency translation, net of tax | — | — | ( | ) | — | — | ( | ) | |||||||||||||||
Balance at September 30, 2019 | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | |||||||||||||
Balance at December 31, 2017 | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | |||||||||||||
Cumulative effect of accounting changes | — | — | — | ( | ) | — | ( | ) | |||||||||||||||
Net income | — | — | — | — | |||||||||||||||||||
Employee stock options, restricted stock and employee stock purchase plan | — | ( | ) | ( | ) | ||||||||||||||||||
Stock-based compensation expense | — | — | — | — | |||||||||||||||||||
Foreign currency translation, net of tax | — | — | ( | ) | — | — | ( | ) | |||||||||||||||
Balance at September 30, 2018 | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | |||||||||||||
See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements
5
Newpark Resources, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended September 30, | |||||||
(In thousands) | 2019 | 2018 | |||||
Cash flows from operating activities: | |||||||
Net income | $ | $ | |||||
Adjustments to reconcile net income to net cash provided by operations: | |||||||
Depreciation and amortization | |||||||
Stock-based compensation expense | |||||||
Provision for deferred income taxes | ( | ) | ( | ) | |||
Net provision for doubtful accounts | |||||||
Gain on sale of assets | ( | ) | ( | ) | |||
Amortization of original issue discount and debt issuance costs | |||||||
Change in assets and liabilities: | |||||||
(Increase) decrease in receivables | ( | ) | |||||
(Increase) decrease in inventories | ( | ) | |||||
Increase in other assets | ( | ) | ( | ) | |||
Increase (decrease) in accounts payable | ( | ) | |||||
Decrease in accrued liabilities and other | ( | ) | ( | ) | |||
Net cash provided by operating activities | |||||||
Cash flows from investing activities: | |||||||
Capital expenditures | ( | ) | ( | ) | |||
Proceeds from sale of property, plant and equipment | |||||||
Refund of proceeds from sale of a business | ( | ) | |||||
Business acquisitions, net of cash acquired | ( | ) | |||||
Net cash used in investing activities | ( | ) | ( | ) | |||
Cash flows from financing activities: | |||||||
Borrowings on lines of credit | |||||||
Payments on lines of credit | ( | ) | ( | ) | |||
Debt issuance costs | ( | ) | ( | ) | |||
Proceeds from employee stock plans | |||||||
Purchases of treasury stock | ( | ) | ( | ) | |||
Other financing activities | |||||||
Net cash provided by (used in) financing activities | ( | ) | |||||
Effect of exchange rate changes on cash | ( | ) | ( | ) | |||
Net decrease in cash, cash equivalents, and restricted cash | ( | ) | ( | ) | |||
Cash, cash equivalents, and restricted cash at beginning of period | |||||||
Cash, cash equivalents, and restricted cash at end of period | $ | $ | |||||
See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements
6
NEWPARK RESOURCES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 – Basis of Presentation and Significant Accounting Policies
The accompanying unaudited condensed consolidated financial statements of Newpark Resources, Inc. and our wholly-owned subsidiaries, which we collectively refer to as “we,” “our,” or “us,” have been prepared in accordance with Rule 10-01 of Regulation S-X for interim financial statements required to be filed with the Securities and Exchange Commission (“SEC”), and do not include all information and footnotes required by the accounting principles generally accepted in the United States (“U.S. GAAP”) for complete financial statements. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2018. Our fiscal year end is December 31, our third quarter represents the three-month period ended September 30, and our first nine months represents the nine-month period ended September 30. The results of operations for the third quarter and first nine months of 2019 are not necessarily indicative of the results to be expected for the entire year. Unless otherwise noted, all currency amounts are stated in U.S. dollars.
In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments necessary to present fairly our financial position as of September 30, 2019, our results of operations for the third quarter and first nine months of 2019 and 2018, and our cash flows for the first nine months of 2019 and 2018. All adjustments are of a normal recurring nature. Our balance sheet at December 31, 2018 is derived from the audited consolidated financial statements at that date.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. For further information, see Note 1 in our Annual Report on Form 10-K for the year ended December 31, 2018.
New Accounting Pronouncements
Standards Adopted in 2019
Leases. In February 2016, the Financial Accounting Standards Board (“FASB”) amended the guidance related to the accounting for leases. The new guidance provides principles for the recognition, measurement, presentation, and disclosure of leases and requires lessees to recognize both assets and liabilities arising from finance and operating leases. The classification as either a finance or operating lease will determine whether lease expense is recognized based on an effective interest method basis or on a straight-line basis over the term of the lease, respectively.
We adopted this new guidance as of January 1, 2019 using the modified retrospective transition method and recorded approximately $28 million of operating lease assets and liabilities as of January 1, 2019, with no cumulative effect adjustment to retained earnings. The new guidance had no impact on our consolidated statements of operations or cash flows. Results for reporting periods beginning after December 31, 2018 are presented under the new guidance, while prior period amounts were not adjusted and continue to be reported in accordance with previous guidance.
As permitted under the transition guidance within the new standard, we elected to carry forward the historical lease identification and classification for existing leases upon adoption. We have also made an accounting policy election to not recognize leases with an initial term of 12 months or less in the consolidated balance sheets. See Note 8 for additional required disclosures.
Standards Not Yet Adopted
Credit Losses. In June 2016, the FASB issued new guidance which requires financial assets measured at amortized cost basis, including trade receivables, to be presented at the net amount expected to be collected. The new guidance requires an entity to estimate its lifetime “expected credit loss” for such assets at inception which will generally result in the earlier recognition of allowances for losses. This guidance is effective for us in the first quarter of 2020 with early adoption permitted and will be applied using a modified retrospective transition method through a cumulative-effect adjustment, if any, to retained earnings as of the date of adoption. As part of our assessment work to date, we have formed an implementation work team and conducted a preliminary analysis of the new guidance. Based on our current financial assets measured at amortized cost basis, we anticipate the new guidance may require us to reflect additional credit loss expense; however, we have not yet completed an estimation of such amount and we are still evaluating the overall impact of the new guidance on our consolidated financial statements and related disclosures.
7
Note 2 – Earnings Per Share
The following table presents the reconciliation of the numerator and denominator for calculating net income (loss) per share:
Third Quarter | First Nine Months | ||||||||||||||
(In thousands, except per share data) | 2019 | 2018 | 2019 | 2018 | |||||||||||
Numerator | |||||||||||||||
Net income (loss) - basic and diluted | $ | ( | ) | $ | $ | $ | |||||||||
Denominator | |||||||||||||||
Weighted average common shares outstanding - basic | |||||||||||||||
Dilutive effect of stock options and restricted stock awards | |||||||||||||||
Dilutive effect of 2021 Convertible Notes | |||||||||||||||
Weighted average common shares outstanding - diluted | |||||||||||||||
Net income (loss) per common share | |||||||||||||||
Basic | $ | ( | ) | $ | $ | $ | |||||||||
Diluted | $ | ( | ) | $ | $ | $ | |||||||||
We excluded the following weighted-average potential shares from the calculations of diluted net income (loss) per share during the applicable periods because their inclusion would have been anti-dilutive:
Third Quarter | First Nine Months | ||||||||||
(In thousands) | 2019 | 2018 | 2019 | 2018 | |||||||
Stock options and restricted stock awards | |||||||||||
For the third quarter of 2019, we excluded all potentially dilutive stock options and restricted stock awards in calculating diluted earnings per share as the effect was anti-dilutive due to the net loss incurred for this period. The 2021 Convertible Notes (as defined in Note 7) only impact the calculation of diluted net income per share in periods that the average price of our common stock, as calculated in accordance with the terms of the indenture governing the 2021 Convertible Notes, exceeds the conversion price of $9.33 per share. We have the option to pay cash, issue shares of common stock, or any combination thereof for the aggregate amount due upon conversion of the 2021 Convertible Notes as further described in Note 7. If converted, we currently intend to settle the principal amount of the notes in cash and as a result, only the amounts payable in excess of the principal amount of the notes, if any, are assumed to be settled with shares of common stock for purposes of computing diluted net income per share.
8
Note 3 – Repurchase Program
In November 2018, our Board of Directors authorized changes to our existing securities repurchase program. The authorization increased the amount under the repurchase program to $100 million, available for repurchases of any combination of our common stock and our 2021 Convertible Notes. The repurchase program has no specific term. Repurchases are expected to be funded from operating cash flows, available cash on hand, and borrowings under our ABL Facility (as defined in Note 7). As part of the share repurchase program, our management has been authorized to establish trading plans under Rule 10b5-1 of the Securities Exchange Act of 1934.
During the first nine months of 2019, we repurchased an aggregate of 2,537,833 shares of our common stock under our Board authorized repurchase program for a total cost of $19.0 million. There were no shares repurchased under the program during the first nine months of 2018. As of September 30, 2019, we had $81.0 million remaining under the program.
Note 4 – Stock-Based and Other Long-Term Incentive Compensation
During the second quarter of 2019, our stockholders approved an amendment to the 2015 Employee Equity Incentive Plan (“2015 Plan”) to increase the number of shares authorized for issuance under the 2015 Plan from 9,800,000 to 12,300,000 shares and remove the fungible share counting provision.
During the second quarter of 2019, the Compensation Committee of our Board of Directors (“Compensation Committee”) approved equity-based compensation to executive officers and other key employees, consisting of 1,135,216 shares of restricted stock units which will primarily vest in equal installments over a three-year period. At September 30, 2019, 3,341,007 shares remained available for award under the 2015 Plan. In addition, non-employee directors received a grant of 104,900 shares of restricted stock awards which will vest in full on the earlier of the day prior to the next annual meeting of stockholders following the grant date or the first anniversary of the grant date. The weighted average grant-date fair value was $7.34 per share for both the restricted stock units and restricted stock awards.
Also during the second quarter of 2019, the Compensation Committee approved the issuance of cash-settled awards to certain executive officers, consisting of a target amount of $2.3 million of performance-based cash awards. The performance-based cash awards will be settled based on the relative ranking of our total shareholder return (“TSR”) as compared to the TSR of our designated peer group over a three-year period. The performance period began June 1, 2019 and ends May 31, 2022, with the ending TSR price being equal to the average closing price of our shares over the 30-calendar days ending May 31, 2022 and the cash payout for each executive ranging from 0 % to 200 % of target. The performance-based cash awards are accrued as a liability award over the performance period based on the estimated fair value. The fair value of the performance-based cash awards is remeasured each period using a Monte-Carlo valuation model with changes in fair value recognized in the consolidated statements of operations.
In February 2019, the Compensation Committee modified our retirement policy applicable to cash and equity awards granted to include our Chief Executive Officer and those officers who report to our Chief Executive Officer, whom were previously excluded from the retirement policy. In addition, the Compensation Committee also modified the retirement policy for certain vested stock options that remain outstanding to extend the exercise period available following the qualifying retirement of eligible employees. As a result of these modifications, we recognized a pretax charge of approximately $4.0 million in the first quarter of 2019. This charge primarily reflects the acceleration of expense, as well as the incremental value associated with modifications to extend the exercise period of outstanding options, for previously-granted awards for retirement eligible executive officers.
9
Note 5 – Receivables
Receivables consisted of the following:
(In thousands) | September 30, 2019 | December 31, 2018 | |||||
Trade receivables: | |||||||
Gross trade receivables | $ | $ | |||||
Allowance for doubtful accounts | ( | ) | ( | ) | |||
Net trade receivables | |||||||
Income tax receivables | |||||||
Other receivables | |||||||
Total receivables, net | $ | $ | |||||
Other receivables included $5.9 million and $6.3 million for value added, goods and service taxes related to foreign jurisdictions as of September 30, 2019 and December 31, 2018, respectively.
Note 6 – Inventories
Inventories consisted of the following:
(In thousands) | September 30, 2019 | December 31, 2018 | |||||
Raw materials: | |||||||
Fluids systems | $ | $ | |||||
Mats and integrated services | |||||||
Total raw materials | |||||||
Blended fluids systems components | |||||||
Finished goods - mats | |||||||
Total inventories | $ | $ | |||||
Raw materials for the Fluids Systems segment consists primarily of barite, chemicals, and other additives that are consumed in the production of our fluids systems. Raw materials for the Mats and Integrated Services segment consists primarily of resins, chemicals, and other materials used to manufacture composite mats, as well as materials that are consumed in providing spill containment and other services to our customers. Our blended fluids systems components consist of base fluid systems that have been either mixed internally at our blending facilities or purchased from third-party vendors. These base fluid systems require raw materials to be added, as needed to meet specified customer requirements.
Note 7 – Financing Arrangements and Fair Value of Financial Instruments
Financing arrangements consisted of the following:
September 30, 2019 | December 31, 2018 | ||||||||||||||||||||||
(In thousands) | Principal Amount | Unamortized Discount and Debt Issuance Costs | Total Debt | Principal Amount | Unamortized Discount and Debt Issuance Costs | Total Debt | |||||||||||||||||
2021 Convertible Notes | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | |||||||||||||
ABL Facility | — | — | |||||||||||||||||||||
Other debt | — | — | |||||||||||||||||||||
Total debt | ( | ) | ( | ) | |||||||||||||||||||
Less: Current portion | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||
Long-term debt | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | |||||||||||||
10
2021 Convertible Notes. In December 2016, we issued $100.0 million of unsecured convertible senior notes (“2021 Convertible Notes”) that mature on December 1, 2021, unless earlier converted by the holders pursuant to the terms of the notes. The notes bear interest at a rate of 4.0 % per year, payable semiannually in arrears on June 1 and December 1 of each year.
Holders may convert the notes at their option at any time prior to the close of business on the business day immediately preceding June 1, 2021, only under the following circumstances:
• | during any calendar quarter commencing after the calendar quarter ending on March 31, 2017 (and only during such calendar quarter), if the last reported sale price of our common stock for at least |
• | during the five business day period after any five consecutive trading day period in which the trading price per $ |
• | upon the occurrence of specified corporate events, as described in the indenture governing the notes, such as a consolidation, merger, or share exchange. |
On or after June 1, 2021 until the close of business on the business day immediately preceding the maturity date, holders may convert their notes at any time, regardless of whether any of the foregoing conditions have been satisfied. As of October 28, 2019, the notes were not convertible.
The notes are convertible into, at our election, cash, shares of common stock, or a combination of both, subject to satisfaction of specified conditions and during specified periods, as described above. If converted, we currently intend to pay cash for the principal amount of the notes converted. The conversion rate is 107.1381 shares of our common stock per $1,000 principal amount of notes (equivalent to an initial conversion price of $9.33 per share of common stock), subject to adjustment in certain circumstances. We may not redeem the notes prior to their maturity date.
In accordance with accounting guidance for convertible debt with a cash conversion option, we separately accounted for the debt and equity components of the notes in a manner that reflected our estimated nonconvertible debt borrowing rate. As of September 30, 2019, the carrying amount of the debt component was $86.3 million, which is net of the unamortized debt discount and issuance costs of $12.3 million and $1.4 million, respectively. Including the impact of the debt discount and related deferred debt issuance costs, the effective interest rate on the notes is approximately 11.3 %.
Asset-Based Loan Facility. In May 2016, we entered into an asset-based revolving credit agreement which replaced our previous credit agreement. In October 2017, we entered into an Amended and Restated Credit Agreement and in March 2019, we entered into a First Amendment to Amended and Restated Credit Agreement (as amended, the “ABL Facility”). The March 2019 amendment increased the amount available for borrowings, reduced applicable borrowing rates, and extended the term. The ABL Facility provides financing of up to $200.0 million available for borrowings (inclusive of letters of credit) and can be increased up to a maximum capacity of $275.0 million, subject to certain conditions. As of September 30, 2019, our total availability under the ABL Facility was $171.0 million, of which $70.2 million was drawn, resulting in remaining availability of $100.8 million.
The ABL Facility terminates in March 2024; however, the ABL Facility has a springing maturity date that will accelerate the maturity of the ABL Facility to September 1, 2021 if, prior to such date, the 2021 Convertible Notes have not been repurchased, redeemed, refinanced, exchanged or otherwise satisfied in full or we have not escrowed an amount of funds, that together with the amount that we establish as a reserve against our borrowing capacity, is sufficient for the future settlement of the 2021 Convertible Notes at their maturity. The ABL Facility requires compliance with a minimum fixed charge coverage ratio and minimum unused availability of $25.0 million to utilize borrowings or assignment of availability under the ABL Facility towards funding the repayment of the 2021 Convertible Notes.
Borrowing availability under the ABL Facility is calculated based on eligible accounts receivable, inventory, and, subject to satisfaction of certain financial covenants as described below, composite mats included in the rental fleet, net of reserves and limits on such assets included in the borrowing base calculation. To the extent pledged by us, the borrowing base calculation also includes the amount of eligible pledged cash. The lender may establish such reserves, in part based on appraisals of the asset base, and other limits at its discretion which could reduce the amounts otherwise available under the ABL Facility. Availability associated with eligible rental mats will also be subject to maintaining a minimum consolidated fixed charge coverage ratio and a minimum level of operating income for the Mats and Integrated Services segment.
Under the terms of the ABL Facility, we may elect to borrow at a variable interest rate plus an applicable margin based on either, (1) LIBOR subject to a floor of zero or (2) a base rate equal to the highest of: (a) the federal funds rate plus 50 basis points, (b) the prime rate of Bank of America, N.A. and (c) LIBOR, subject to a floor of zero, plus 100 basis points, plus, in each case, an applicable margin per annum. The applicable margin ranges from 150 to 200 basis points for LIBOR borrowings, and 50
11
to 100 basis points for base rate borrowings, based on the consolidated fixed charge coverage ratio as defined in the ABL Facility. As of September 30, 2019, the applicable margin for borrowings under our ABL Facility was 150 basis points with respect to LIBOR borrowings and 50 basis points with respect to base rate borrowings. The weighted average interest rate for the ABL Facility was 3.8 % at September 30, 2019. In addition, we are required to pay a commitment fee on the unused portion of the ABL Facility ranging from 25 to 37.5 basis points, based on the level of outstanding borrowings, as defined in the ABL Facility. As of September 30, 2019, the applicable commitment fee was 37.5 basis points.
The ABL Facility is a senior secured obligation, secured by first liens on all of our U.S. tangible and intangible assets, and a portion of the capital stock of our non-U.S. subsidiaries has also been pledged as collateral. The ABL Facility contains customary operating covenants and certain restrictions including, among other things, the incurrence of additional debt, liens, dividends, asset sales, investments, mergers, acquisitions, affiliate transactions, stock repurchases and other restricted payments. The ABL Facility also requires compliance with a fixed charge coverage ratio if availability under the ABL Facility falls below $22.5 million. In addition, the ABL Facility contains customary events of default, including, without limitation, a failure to make payments under the facility, acceleration of more than $25.0 million of other indebtedness, certain bankruptcy events, and certain change of control events.
Other Debt. Our foreign subsidiaries in Italy, India, and Canada maintain local credit arrangements consisting primarily of lines of credit which are renewed on an annual basis. We utilize local financing arrangements in our foreign operations in order to provide short-term local liquidity needs. We had $2.0 million and $1.1 million outstanding under these arrangements at September 30, 2019 and December 31, 2018, respectively.
At September 30, 2019, we had $13.1 million in outstanding letters of credit and performance bonds, for which the letters of credit are collateralized by $6.1 million in restricted cash. We also have a performance bond issued and outstanding of $6.0 million related to the appeals process for an ongoing income tax audit for our Mexico subsidiary. Additionally, our foreign operations had $33.0 million in outstanding letters of credit, performance bonds and other guarantees, primarily issued under a credit arrangement in Italy as well as certain letters of credit that are collateralized by $2.0 million in restricted cash.
Our financial instruments include cash and cash equivalents, receivables, payables, and debt. We believe the carrying values of these instruments, with the exception of our 2021 Convertible Notes, approximated their fair values at September 30, 2019 and December 31, 2018. The estimated fair value of our 2021 Convertible Notes was $106.2 million at September 30, 2019 and $120.9 million at December 31, 2018, based on quoted market prices at these respective dates.
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Note 8 – Leases
We lease certain office space, manufacturing facilities, warehouses, land, and equipment. Our leases have remaining terms ranging from 1 to 10 years with various extension and termination options. We consider these options in determining the lease term used to establish our operating lease assets and liabilities. Lease agreements with lease and non-lease components are accounted for as a single lease component. Leases with an initial term of 12 months or less are not recorded in the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term.
Leases consisted of the following:
(In thousands) | Balance Sheet Classification | September 30, 2019 | ||
Assets: | ||||
Operating | Operating lease assets | $ | ||
Finance | Property, plant and equipment, net | |||
Total lease assets | $ | |||
Liabilities: | ||||
Current: | ||||
Operating | Accrued liabilities | $ | ||
Finance | Current debt | |||
Noncurrent: | ||||
Operating | Noncurrent operating lease liabilities | $ | ||
Finance | Long-term debt, less current portion | |||
Total lease liabilities | $ | |||
Total operating lease expenses were $7.4 million for the third quarter of 2019, of which $4.9 million related to short-term leases and $2.5 million related to leases recognized in the balance sheet. Total operating lease expenses were $21.8 million for the first nine months of 2019, of which $14.3 million related to short-term leases and $7.5 million related to leases recognized in the balance sheet. Total operating lease expenses approximate cash paid during each period. Amortization and interest for finance leases are not material. Operating lease expenses and amortization of leased assets for finance leases are included in either cost of revenues or selling, general and administrative expenses. Interest for finance leases is included in interest expense, net.
The maturity of lease liabilities as of September 30, 2019 is as follows:
(In thousands) | Operating Leases | Finance Leases | Total | ||||||||
2019 (remainder of year) | $ | $ | $ | ||||||||
2020 | |||||||||||
2021 | |||||||||||
2022 | |||||||||||
2023 | |||||||||||
Thereafter | |||||||||||
Total lease payments | |||||||||||
Less: Interest | |||||||||||
Present value of lease liabilities | $ | $ | $ | ||||||||
During the third quarter and first nine months of 2019, we entered into $3.8 million and $6.7 million, respectively, of new operating lease liabilities in exchange for leased assets.
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Lease Term and Discount Rate | September 30, 2019 | |
Weighted-average remaining lease term (years) | ||
Operating leases | ||
Finance leases | ||
Weighted-average discount rate | ||
Operating leases | % | |
Finance leases | % | |
As previously disclosed in our 2018 Annual Report on Form 10-K and under the previous lease accounting guidance, future minimum payments under non-cancelable operating leases at December 31, 2018, with initial or remaining terms in excess of one year are included in the table below. Future minimum payments under capital leases were not significant.
(In thousands) | |||
2019 | $ | ||
2020 | |||
2021 | |||
2022 | |||
2023 | |||
Thereafter | |||
$ | |||
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Note 9 – Income Taxes
The provision for income taxes was $7.2 million for the first nine months of 2019, reflecting an effective tax rate of 63 %, compared to $10.1 million for the first nine months of 2018, reflecting an effective tax rate of 32 %. The effective tax rate for the first nine months of 2019 was negatively impacted by the decrease in U.S. earnings, as well as non-deductible expenses, relative to the amount of pre-tax income. The effective tax rate for the first nine months of 2018 also included a $1.7 million net benefit related to the U.S. Tax Cuts and Jobs Act ("Tax Act") as well as $0.8 million in excess tax benefits related to the vesting of certain stock-based compensation awards during the period. The provision for income taxes was $3.3 million for the third quarter of 2019. As a result of a decline in anticipated earnings in the U.S. for the full year 2019, the third quarter 2019 provision for income taxes includes a $2.0 million charge, primarily reflecting the impact of an increase in the projected full year 2019 tax rate.
We file income tax returns in the United States and several non-U.S. jurisdictions and are subject to examination in the various jurisdictions in which we file. Following an audit in 2015, the treasury authority in Mexico issued a tax assessment (inclusive of interest and penalties) in the amount of 60 million pesos (approximately $3.3 million) to our Mexico subsidiary, primarily in connection with the export of mats from Mexico in 2010. The mats that are the subject of this assessment were owned by a U.S. subsidiary and leased to our Mexico subsidiary for matting projects in the Mexican market. In 2010, we made the decision to move these mats out of Mexico to markets with higher demand. The Mexican treasury authority determined the export of the mats was the equivalent of a sale and assessed taxes on the gross declared value of the exported mats to our Mexico subsidiary. We retained outside legal counsel and filed administrative appeals with the treasury authority, but we were notified in April 2018 that the last administrative appeal had been rejected. In response, we filed an appeal in the Mexican Federal Tax Court in the second quarter of 2018, which required that we post a bond in the amount of the assessed taxes (plus additional interest). In the fourth quarter of 2018, the Mexican Federal Tax Court issued a favorable judgment nullifying in full the tax assessment which was subsequently appealed by the treasury authority in Mexico. Following a judgment by the Mexican Court of Appeals, the Mexican Federal Tax Court, in the third quarter of 2019, confirmed the full nullification of the tax assessment based on a due process violation and recognized the treasury authority's right to cure the due process violation by starting a new tax audit. The treasury authority in Mexico is appealing the latest judgment from the Mexican Federal Tax Court. Although the tax appeals process has not concluded, we believe our tax position is properly reported in accordance with applicable tax laws and regulations in Mexico and intend to vigorously defend our position through the tax appeals process.
We are also under examination by various tax authorities in other countries, and certain foreign jurisdictions have challenged the amounts of taxes due for certain tax periods. These audits are in various stages of completion. We fully cooperate with all audits, but defend existing positions vigorously. We evaluate the potential exposure associated with various filing positions and record a liability for uncertain tax positions as circumstances warrant. Although we believe all tax positions are reasonable and properly reported in accordance with applicable tax laws and regulations in effect during the periods involved, the final determination of tax audits and any related litigation could be materially different than that which is reflected in historical income tax provisions and accruals.
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Note 10 – Commitments and Contingencies
In the ordinary course of conducting our business, we become involved in litigation and other claims from private party actions, as well as judicial and administrative proceedings involving governmental authorities at the federal, state, and local levels. While the outcome of litigation or other proceedings against us cannot be predicted with certainty, management does not consider it reasonably possible that a loss resulting from such litigation or other proceedings, in excess of any amounts accrued or covered by insurance, has been incurred that is expected to have a material adverse impact on our consolidated financial statements.
Kenedy, Texas Drilling Fluids Facility Fire
In July 2018, a fire occurred at our Kenedy, Texas drilling fluids facility, destroying the distribution warehouse, including inventory and surrounding equipment. In addition, nearby residences and businesses were evacuated as part of the response to the fire. In order to avoid any customer service disruptions, we implemented contingency plans to supply products from alternate facilities in the area and region. During the third quarter of 2018 and subsequently, we have received petitions seeking payment for alleged bodily injuries, property damage, and punitive damages claimed to have been incurred as a result of the fire and the subsequent efforts we undertook to remediate any potential smoke damage. As of September 30, 2019, there are open claims with 38 plaintiffs seeking a total of approximately $1.5 million. While no trial date has been set for the matter at this time, we have been advised by our insurer that these claims are insured under our general liability insurance program. While this event and related claims are covered by our property, business interruption, and general liability insurance programs, these programs contain self-insured retentions, which remain our financial obligations.
During 2018, we incurred fire-related costs of $4.8 million, which included $1.9 million for inventory and property, plant and equipment, $2.1 million in property-related cleanup and other costs, and $0.8 million relating to our self-insured retention for third-party claims. Based on the provisions of our insurance policies and initial insurance claims filed, we estimated $4.0 million in expected insurance recoveries and recognized a charge of $0.8 million in other operating (income) loss, net, in the third quarter of 2018. The insurance receivable balance included in other receivables was $0.3 million as of September 30, 2019, and $0.6 million as of December 31, 2018. As of September 30, 2019, the claims related to the fire under our property, business interruption, and general liability insurance programs have not been finalized.
Note 11 – Supplemental Disclosures to the Statements of Cash Flows
Supplemental disclosures to the statements of cash flows are presented below:
First Nine Months | |||||||
(In thousands) | 2019 | 2018 | |||||
Cash paid for: | |||||||
Income taxes (net of refunds) | $ | $ | |||||
Interest | $ | $ | |||||
Cash, cash equivalents, and restricted cash in the consolidated statements of cash flows consisted of the following:
(In thousands) | September 30, 2019 | December 31, 2018 | |||||
Cash and cash equivalents | $ | $ | |||||
Restricted cash (included in other current assets) | |||||||
Cash, cash equivalents, and restricted cash | $ | $ | |||||
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Note 12 – Segment Data
Summarized operating results for our reportable segments are shown in the following table (net of inter-segment transfers):
Third Quarter | First Nine Months | ||||||||||||||
(In thousands) | 2019 | 2018 | 2019 | 2018 | |||||||||||
Revenues | |||||||||||||||
Fluids systems | $ | $ | $ | $ | |||||||||||
Mats and integrated services | |||||||||||||||
Total revenues | $ | $ | $ | $ | |||||||||||
Operating income (loss) | |||||||||||||||
Fluids systems | $ | $ | $ | $ | |||||||||||
Mats and integrated services | |||||||||||||||
Corporate office | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Total operating income | $ | $ | $ | $ | |||||||||||
The following table presents further disaggregated revenues for the Fluids Systems segment:
Third Quarter | First Nine Months | ||||||||||||||
(In thousands) | 2019 | 2018 | 2019 | 2018 | |||||||||||
United States | $ | $ | $ | $ | |||||||||||
Canada | |||||||||||||||
Total North America | |||||||||||||||
EMEA | |||||||||||||||
Asia Pacific | |||||||||||||||
Latin America | |||||||||||||||
Total International | |||||||||||||||
Total Fluids Systems revenues | $ | $ | $ | $ | |||||||||||
The following table presents further disaggregated revenues for the Mats and Integrated Services segment:
Third Quarter | First Nine Months | ||||||||||||||
(In thousands) | 2019 | 2018 | 2019 | 2018 | |||||||||||
Service revenues | $ | $ | $ | $ | |||||||||||
Rental revenues | |||||||||||||||
Product sales revenues | |||||||||||||||
Total Mats and Integrated Services revenues | $ | $ | $ | $ | |||||||||||
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Note 13 – Subsequent Event
In October 2019, we completed the acquisition of Cleansorb Limited (“Cleansorb”), a U.K. based provider of specialty chemicals for the oil and natural gas industry, which further expands our fluids technology portfolio and capabilities. The purchase price for this acquisition was $18.7 million, net of cash acquired, and was funded with borrowings under the ABL Facility.
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ITEM 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
The following discussion of our financial condition, results of operations, liquidity, and capital resources should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto included in this report as well as our Annual Report on Form 10-K for the year ended December 31, 2018. Our third quarter represents the three-month period ended September 30 and our first nine months represents the nine-month period ended September 30. Unless otherwise noted, all currency amounts are stated in U.S. dollars. The reference to a “Note” herein refers to the accompanying Notes to Unaudited Condensed Consolidated Financial Statements contained in Item 1 “Financial Statements.”
Overview
We are a geographically diversified supplier providing products, as well as rentals and services primarily to the oil and natural gas exploration and production (“E&P”) industry. We operate our business through two reportable segments: Fluids Systems and Mats and Integrated Services. In addition to the E&P industry, our Mats and Integrated Services segment serves a variety of industries, including the electrical transmission & distribution, pipeline, solar, petrochemical, and construction industries.
Our operating results depend, to a large extent, on oil and natural gas drilling activity levels in the markets we serve, and particularly for the Fluids Systems segment, the nature of the drilling operations (including the depth and whether the wells are drilled vertically or horizontally), which governs the revenue potential of each well. Drilling activity levels, in turn, depend on a variety of factors, including oil and natural gas commodity pricing, inventory levels, product demand, and regulatory restrictions. Oil and natural gas prices and activity are cyclical and volatile, and this market volatility has a significant impact on our operating results.
While our revenue potential is driven by a number of factors including those described above, rig count data remains the most widely accepted indicator of drilling activity. Average North American rig count data for the third quarter and first nine months of 2019 as compared to the same periods of 2018 is as follows:
Third Quarter | 2019 vs 2018 | ||||||||||
2019 | 2018 | Count | % | ||||||||
U.S. Rig Count | 920 | 1,051 | (131 | ) | (12 | )% | |||||
Canada Rig Count | 132 | 209 | (77 | ) | (37 | )% | |||||
North America Rig Count | 1,052 | 1,260 | (208 | ) | (17 | )% | |||||
First Nine Months | 2019 vs 2018 | ||||||||||
2019 | 2018 | Count | % | ||||||||
U.S. Rig Count | 984 | 1,019 | (35 | ) | (3 | )% | |||||
Canada Rig Count | 132 | 195 | (63 | ) | (32 | )% | |||||
North America Rig Count | 1,116 | 1,214 | (98 | ) | (8 | )% | |||||
_______________________________________________________
Source: Baker Hughes Company
The Canada rig count reflects the normal seasonality for this market, with the highest rig count levels generally observed in the first quarter of each year, prior to Spring break-up. Outside of North America, drilling activity is generally more stable as drilling activity in many countries is based on longer-term economic projections and multi-year drilling programs, which tends to reduce the impact of short-term changes in commodity prices on overall drilling activity.
Segment Overview
Our Fluids Systems segment, which generated 77% of consolidated revenues for the first nine months of 2019, provides customized fluids solutions to E&P customers globally, operating through four geographic regions: North America, Europe, the Middle East and Africa (“EMEA”), Asia Pacific, and Latin America. International expansion, including the penetration of international oil companies (“IOCs”) and national oil companies (“NOCs”), is a key element of our Fluids Systems strategy, which has historically helped to stabilize segment revenues as North American oil and natural gas exploration activities have fluctuated significantly. Revenues from IOC and NOC customers represent approximately one-third of Fluids Systems segment revenues for the first nine months of 2019 and 2018. Significant international contract awards with recent developments include:
• | In Kuwait, we provide drilling and completion fluids and related services for land operations under a multi-year contract with Kuwait Oil Company (“KOC”), which began in 2014. Following a tender process with KOC, we have received two new contract awards to provide drilling and completion fluids, along with related services, covering a five-year term which began in the first quarter of 2019. The initial revenue value of the combined awards is |
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approximately $165 million and expands our presence to include a second base of operations in Northern Kuwait. The transition to the new contracts resulted in recent fluctuations in revenues, with first nine months of 2019 revenues reflecting a $5 million decline from the first nine months of 2018. However, based on the customer plans currently in place, we expect the revenue levels of the new awards to increase and eventually surpass the levels achieved on the previous contract.
• | In Algeria, we provide drilling and completion fluids and related services to Sonatrach under a multi-year contract. Work under Lot 1 and Lot 3 of a three-year contract awarded in 2015 (“2015 Contract”) was completed in the fourth quarter of 2018. During 2018, Sonatrach initiated a new tender (“2018 Tender”), for a three-year term succeeding the 2015 Contract. For the 2018 Tender, Sonatrach adopted a change in its procurement process, limiting the number of Lots that could be awarded to major service providers, which consequently reduced the potential revenue of the 2018 Tender as compared to the 2015 Contract. Based upon the new contract awarded under the 2018 Tender, we expect that revenue from Sonatrach will be approximately $125 million over the three-year term, which would result in a reduction of approximately $25 million per year as compared to the prior activity levels. Consequently, with the transition to the new contract that began in late 2018, first nine months of 2019 revenues reflect a $17 million decline from the first nine months of 2018. |
• | In Australia, we provided drilling and completion fluids and related services under a contract with Baker Hughes Company, as part of its integrated service offering in support of the Greater Enfield project in offshore Western Australia. Work under this contract began in the first quarter of 2018 and was substantially completed in the third quarter of 2019. |
• | In Brazil, we provided drilling fluids and related services under a multi-year contract with Petrobras for both onshore and offshore locations. Work under this contract began in the first half of 2009 and concluded in December 2018. For the first nine months of 2018, our Brazilian subsidiary generated revenues of $19 million, substantially all of which related to the Petrobras contract. Despite the completion of the Petrobras contract, we are maintaining infrastructure in the Brazilian market to support our efforts to penetrate the offshore IOC market. |
Our Fluids Systems business was also successful in securing three international tender awards during the third quarter of 2019. These include a new three-year contract for combined drilling and completion fluids with ENI to support their offshore drilling campaign in Cyprus and a two-year contract with PTT Exploration and Production in Algeria. Both of these contracts are expected to begin in the first half of 2020 and combined, generate additional revenues of $15 million to $20 million per year. In addition, we were awarded a new five-year contract with OMV Petrom, which extends our on-going work providing drilling and completion fluids to this customer in Romania. While we expect the total revenue under the new OMV Petrom contract to be relatively in-line with the current contract, annual revenues may fluctuate with changes in the customer’s drilling program.
In addition to our international expansion efforts, we are also expanding our presence in North America, capitalizing on our capabilities, infrastructure, and strong market position in the North American land drilling fluids markets to expand our drilling fluids presence within the deepwater Gulf of Mexico, as well as our presence in adjacent product offerings, including completion fluids and stimulation chemicals. To support this effort, we have incurred start-up costs, including costs associated with additional personnel and facility-related expenses, and have made additional capital investments. Revenues from the deepwater Gulf of Mexico increased to $27 million for the first nine months of 2019 compared to $8 million for the first nine months of 2018.
In October 2019, we completed the acquisition of Cleansorb Limited (“Cleansorb”), a U.K. based provider of specialty chemicals for the oil and natural gas industry, which further expands our fluids technology portfolio and capabilities. The purchase price for this acquisition was $18.7 million, net of cash acquired.
Our Mats and Integrated Services segment, which generated 23% of consolidated revenues for the first nine months of 2019, provides composite mat rentals utilized for temporary worksite access, along with related site construction and services to customers in various markets including E&P, electrical transmission & distribution, pipeline, solar, petrochemical, and construction industries across North America and Europe. We also sell composite mats to customers around the world. The expansion of our rental and service activities into non-E&P markets represents a strategic priority for us due to the magnitude of this market growth opportunity, as well as the market’s relative stability compared to E&P. The Mats and Integrated Services segment rental and service revenues from non-E&P markets increased to approximately $50 million for the first nine months of 2019 compared to approximately $45 million for the first nine months of 2018. Product sales revenues largely reflect sales to non-E&P and international E&P markets, and typically fluctuate based on the timing of customer orders.
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Third Quarter of 2019 Compared to Third Quarter of 2018
Consolidated Results of Operations
Summarized results of operations for the third quarter of 2019 compared to the third quarter of 2018 are as follows:
Third Quarter | 2019 vs 2018 | |||||||||||||
(In thousands) | 2019 | 2018 | $ | % | ||||||||||
Revenues | $ | 202,763 | $ | 235,329 | $ | (32,566 | ) | (14 | )% | |||||
Cost of revenues | 169,429 | 194,730 | (25,301 | ) | (13 | )% | ||||||||
Selling, general and administrative expenses | 27,017 | 29,820 | (2,803 | ) | (9 | )% | ||||||||
Other operating loss, net | 29 | 725 | (696 | ) | (96 | )% | ||||||||
Operating income | 6,288 | 10,054 | (3,766 | ) | (37 | )% | ||||||||
Foreign currency exchange (gain) loss | 828 | (89 | ) | 917 | NM | |||||||||
Interest expense, net | 3,628 | 3,668 | (40 | ) | (1 | )% | ||||||||
Income before income taxes | 1,832 | 6,475 | (4,643 | ) | (72 | )% | ||||||||
Provision for income taxes | 3,273 | 2,831 | 442 | 16 | % | |||||||||
Net income (loss) | $ | (1,441 | ) | $ | 3,644 | $ | (5,085 | ) | NM | |||||
Revenues
Revenues decreased 14% to $202.8 million for the third quarter of 2019, compared to $235.3 million for the third quarter of 2018. This $32.6 million decrease includes a $20.8 million (12%) decrease in revenues in North America, comprised of a $17.8 million decrease in the Fluids Systems segment and $3.0 million decrease in the Mats and Integrated Services segment. Revenues from our international operations decreased by $11.8 million (19%), primarily driven by transitions in key contracts in our EMEA and Latin America regions, as described above. Additional information regarding the change in revenues is provided within the operating segment results below.
Cost of revenues
Cost of revenues decreased 13% to $169.4 million for the third quarter of 2019, compared to $194.7 million for the third quarter of 2018. This $25.3 million decrease was primarily driven by the 14% decrease in revenues described above.
Selling, general and administrative expenses
Selling, general and administrative expenses decreased $2.8 million to $27.0 million for the third quarter of 2019, compared to $29.8 million for the third quarter of 2018. The third quarter of 2018 included a corporate office charge of $1.8 million associated with the retirement and transition of our former Senior Vice President, General Counsel and Chief Administrative Officer. The remaining decrease was primarily driven by lower performance-based incentive compensation partially offset by higher professional fees primarily related to the Cleansorb acquisition and our long-term strategic planning project. Selling, general and administrative expenses as a percentage of revenues was 13.3% for the third quarter of 2019 compared to 12.7% for the third quarter of 2018.
Other operating loss, net
Other operating loss for the third quarter of 2018 primarily relates to the July 2018 fire at our Kenedy, Texas drilling fluids facility (see Note 10 for additional information).
Foreign currency exchange
Foreign currency exchange was a $0.8 million loss for the third quarter of 2019 compared to a $0.1 million gain for the third quarter of 2018, and reflects the impact of currency translation on assets and liabilities (including intercompany balances) that are denominated in currencies other than functional currencies.
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Interest expense, net
Interest expense was $3.6 million for the third quarter of 2019 compared to $3.7 million for the third quarter of 2018. Interest expense for the third quarter of 2019 and 2018 includes $1.6 million and $1.4 million, respectively, in noncash amortization of original issue discount and debt issuance costs.
Provision for income taxes
The provision for income taxes was $3.3 million for the third quarter of 2019 compared to $2.8 million for the third quarter of 2018. As a result of a decline in anticipated earnings in the U.S. for the full year 2019, the third quarter 2019 provision for income taxes includes a $2.0 million charge, primarily reflecting the impact of an increase in the projected full year 2019 tax rate. The provision for income taxes for the third quarter of 2018 included a $0.6 million net benefit primarily related to finalizing our 2017 income tax returns in the U.S. and certain foreign tax jurisdictions, including revisions associated with the U.S. Tax Cuts and Jobs Act ("Tax Act").
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Operating Segment Results
Summarized financial information for our reportable segments is shown in the following table (net of inter-segment transfers):
Third Quarter | 2019 vs 2018 | |||||||||||||
(In thousands) | 2019 | 2018 | $ | % | ||||||||||
Revenues | ||||||||||||||
Fluids systems | $ | 152,547 | $ | 180,970 | $ | (28,423 | ) | (16 | )% | |||||
Mats and integrated services | 50,216 | 54,359 | (4,143 | ) | (8 | )% | ||||||||
Total revenues | $ | 202,763 | $ | 235,329 | $ | (32,566 | ) | (14 | )% | |||||
Operating income (loss) | ||||||||||||||
Fluids systems | $ | 5,893 | $ | 8,288 | $ | (2,395 | ) | |||||||
Mats and integrated services | 10,049 | 12,925 | (2,876 | ) | ||||||||||
Corporate office | (9,654 | ) | (11,159 | ) | 1,505 | |||||||||
Total operating income | $ | 6,288 | $ | 10,054 | $ | (3,766 | ) | |||||||
Segment operating margin | ||||||||||||||
Fluids systems | 3.9 | % | 4.6 | % | ||||||||||
Mats and integrated services | 20.0 | % | 23.8 | % | ||||||||||
Fluids Systems
Revenues
Total revenues for this segment consisted of the following:
Third Quarter | 2019 vs 2018 | |||||||||||||
(In thousands) | 2019 | 2018 | $ | % | ||||||||||
United States | $ | 98,140 | $ | 106,992 | $ | (8,852 | ) | (8 | )% | |||||
Canada | 8,029 | 16,960 | (8,931 | ) | (53 | )% | ||||||||
Total North America | 106,169 | 123,952 | (17,783 | ) | (14 | )% | ||||||||
EMEA | 41,126 | 46,614 | (5,488 | ) | (12 | )% | ||||||||
Asia Pacific | 3,986 | 4,064 | (78 | ) | (2 | )% | ||||||||
Latin America | 1,266 | 6,340 | (5,074 | ) | (80 | )% | ||||||||
Total International | 46,378 | 57,018 | (10,640 | ) | (19 | )% | ||||||||
Total Fluids Systems revenues | $ | 152,547 | $ | 180,970 | $ | (28,423 | ) | (16 | )% | |||||
North America revenues decreased 14% to $106.2 million for the third quarter of 2019 compared to $124.0 million for the third quarter of 2018. This decrease was primarily attributable to lower customer drilling activity in North America land markets, as reflected by the 17% decline in average rig count. This decrease was partially offset by market share gains in the offshore Gulf of Mexico market, as well as an increase in footage drilled per rig due to improvements in customer drilling efficiency in the U.S. land markets.
Internationally, revenues decreased 19% to $46.4 million for the third quarter of 2019 compared to $57.0 million for the third quarter of 2018. This decrease was primarily attributable to declines related to the contract transitions described above in Algeria and Brazil.
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Operating income
The Fluids Systems segment generated operating income of $5.9 million for the third quarter of 2019 compared to operating income of $8.3 million for the third quarter of 2018. Operating expenses for the third quarter of 2018 included a total of $2.5 million of charges associated with severance costs related to workforce reductions in connection with the completion of the contract with Petrobras in Brazil, the Kenedy, Texas facility fire, and expenses related to the conversion of a drilling fluids facility into a completion fluids facility. Excluding these charges, the decrease in operating income includes a $3.3 million decline from North American operations and a $1.6 million decline from international operations. This decline in operating income is primarily attributable to the decreases in revenues described above.
While we have taken certain actions to reduce our workforce and cost structure as activity levels have declined, our business contains high levels of fixed costs, including significant facility and personnel expenses. We continue to evaluate under-performing areas as well as opportunities to further enable a more efficient and scalable cost structure. In the absence of a longer-term increase in activity levels, we may incur future charges related to further cost reduction efforts or potential asset impairments, which may negatively impact our future results.
Mats and Integrated Services
Revenues
Total revenues for this segment consisted of the following:
Third Quarter | 2019 vs 2018 | |||||||||||||
(In thousands) | 2019 | 2018 | $ | % | ||||||||||
Rental and service revenues | $ | 35,630 | $ | 42,900 | $ | (7,270 | ) | (17 | )% | |||||
Product sales revenues | 14,586 | 11,459 | 3,127 | 27 | % | |||||||||
Total Mats and Integrated Services revenues | $ | 50,216 | $ | 54,359 | $ | (4,143 | ) | (8 | )% | |||||
Rental and service revenues decreased $7.3 million to $35.6 million for the third quarter of 2019 compared to $42.9 million for the third quarter of 2018, primarily due to a decrease in revenues from E&P customers of approximately 35%, resulting from lower exploration activity and weakness in commodity prices. This decline was partially offset by an increase of approximately 22% in non-E&P rental and service revenues. Product sales revenues were $14.6 million for the third quarter of 2019 compared to $11.5 million for the third quarter of 2018. Revenues from product sales have typically fluctuated based on the timing of mat orders from customers.
Operating income
The Mats and Integrated Services segment generated operating income of $10.0 million for the third quarter of 2019 compared to $12.9 million for the third quarter of 2018, primarily attributable to the change in revenues as described above.
Corporate Office
Corporate office expenses decreased $1.5 million to $9.7 million for the third quarter of 2019 compared to $11.2 million for the third quarter of 2018. This decrease was primarily driven by a $1.8 million charge in the third quarter of 2018 associated with the retirement and transition of our former Senior Vice President, General Counsel and Chief Administrative Officer, as well as lower performance-based incentive compensation for the third quarter of 2019, partially offset by higher professional fees primarily related to the Cleansorb acquisition and our long-term strategic planning project.
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First Nine Months of 2019 Compared to First Nine Months of 2018
Consolidated Results of Operations
Summarized results of operations for the first nine months of 2019 compared to the first nine months of 2018 are as follows:
First Nine Months | 2019 vs 2018 | |||||||||||||
(In thousands) | 2019 | 2018 | $ | % | ||||||||||
Revenues | $ | 630,648 | $ | 698,884 | $ | (68,236 | ) | (10 | )% | |||||
Cost of revenues | 522,338 | 569,665 | (47,327 | ) | (8 | )% | ||||||||
Selling, general and administrative expenses | 85,796 | 85,482 | 314 | — | % | |||||||||
Other operating (income) loss, net | (367 | ) | 702 | (1,069 | ) | NM | ||||||||
Operating income | 22,881 | 43,035 | (20,154 | ) | (47 | )% | ||||||||
Foreign currency exchange loss | 756 | 594 | 162 | 27 | % | |||||||||
Interest expense, net | 10,807 | 10,659 | 148 | 1 | % | |||||||||
Income before income taxes | 11,318 | 31,782 | (20,464 | ) | (64 | )% | ||||||||
Provision for income taxes | 7,171 | 10,070 | (2,899 | ) | (29 | )% | ||||||||
Net income | $ | 4,147 | $ | 21,712 | $ | (17,565 | ) | (81 | )% | |||||
Revenues
Revenues decreased 10% to $630.6 million for the first nine months of 2019, compared to $698.9 million for the first nine months of 2018. This $68.2 million decrease includes a $23.1 million (5%) decrease in revenues in North America, comprised of a $12.6 million decrease in the Mats and Integrated Services segment and a $10.5 million decrease in the Fluids Systems segment. Revenues from our international operations decreased by $45.1 million (23%), primarily driven by transitions in key contracts in our EMEA and Latin America regions, as described above. Additional information regarding the change in revenues is provided within the operating segment results below.
Cost of revenues
Cost of revenues decreased 8% to $522.3 million for the first nine months of 2019, compared to $569.7 million for the first nine months of 2018. This $47.3 million decrease was primarily driven by the 10% decrease in revenues described above. In addition, the first nine months of 2018 included $1.1 million in severance costs in Brazil.
Selling, general and administrative expenses
Selling, general and administrative expenses increased $0.3 million to $85.8 million for the first nine months of 2019, compared to $85.5 million for the first nine months of 2018. This increase was primarily driven by $4.0 million in charges associated with the February 2019 retirement policy modification, as discussed in Note 4, a $3.1 million increase in professional fees primarily related to our long-term strategic planning project and the Cleansorb acquisition, as well as higher personnel costs, partially offset by lower performance-based incentive compensation. In addition, the first nine months of 2018 included a corporate office charge of $1.8 million associated with the retirement and transition of our former Senior Vice President, General Counsel and Chief Administrative Officer. Selling, general and administrative expenses as a percentage of revenues was 13.6% for the first nine months of 2019 compared to 12.2% for the first nine months of 2018.
Other operating (income) loss, net
Other operating loss for the first nine months of 2018 primarily relates to the July 2018 fire at our Kenedy, Texas drilling fluids facility (see Note 10 for additional information).
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Foreign currency exchange
Foreign currency exchange was a $0.8 million loss for the first nine months of 2019 compared to a $0.6 million loss for the first nine months of 2018, and reflects the impact of currency translation on assets and liabilities (including intercompany balances) that are denominated in currencies other than functional currencies.
Interest expense, net
Interest expense was $10.8 million for the first nine months of 2019 compared to $10.7 million for the first nine months of 2018. Interest expense for the first nine months of 2019 and 2018 includes $4.6 million and $4.1 million, respectively, in noncash amortization of original issue discount and debt issuance costs.
Provision for income taxes
The provision for income taxes was $7.2 million for the first nine months of 2019, reflecting an effective tax rate of 63%, compared to $10.1 million for the first nine months of 2018, reflecting an effective tax rate of 32%. The effective tax rate for the first nine months of 2019 was negatively impacted by the decrease in U.S. earnings, as well as non-deductible expenses, relative to the amount of pre-tax income. The effective tax rate for the first nine months of 2018 also included a $1.7 million net benefit related to the Tax Act as well as $0.8 million in excess tax benefits related to the vesting of certain stock-based compensation awards during the period.
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Operating Segment Results
Summarized financial information for our reportable segments is shown in the following table (net of inter-segment transfers):
First Nine Months | 2019 vs 2018 | |||||||||||||
(In thousands) | 2019 | 2018 | $ | % | ||||||||||
Revenues | ||||||||||||||
Fluids systems | $ | 485,744 | $ | 538,087 | $ | (52,343 | ) | (10 | )% | |||||
Mats and integrated services | 144,904 | 160,797 | (15,893 | ) | (10 | )% | ||||||||
Total revenues | $ | 630,648 | $ | 698,884 | $ | (68,236 | ) | (10 | )% | |||||
Operating income (loss) | ||||||||||||||
Fluids systems | $ | 21,951 | $ | 32,092 | $ | (10,141 | ) | |||||||
Mats and integrated services | 32,863 | 39,864 | (7,001 | ) | ||||||||||
Corporate office | (31,933 | ) | (28,921 | ) | (3,012 | ) | ||||||||
Total operating income | $ | 22,881 | $ | 43,035 | $ | (20,154 | ) | |||||||
Segment operating margin | ||||||||||||||
Fluids systems | 4.5 | % | 6.0 | % | ||||||||||
Mats and integrated services | 22.7 | % | 24.8 | % | ||||||||||
Fluids Systems
Revenues
Total revenues for this segment consisted of the following:
First Nine Months | 2019 vs 2018 | |||||||||||||
(In thousands) | 2019 | 2018 | $ | % | ||||||||||
United States | $ | 318,353 | $ | 303,794 | $ | 14,559 | 5 | % | ||||||
Canada | 26,283 | 51,317 | (25,034 | ) | (49 | )% | ||||||||
Total North America | 344,636 | 355,111 | (10,475 | ) | (3 | )% | ||||||||
EMEA | 123,346 | 147,595 | (24,249 | ) | (16 | )% | ||||||||
Asia Pacific | 13,649 | 12,224 | 1,425 | 12 | % | |||||||||
Latin America | 4,113 | 23,157 | (19,044 | ) | (82 | )% | ||||||||
Total International | 141,108 | 182,976 | (41,868 | ) | (23 | )% | ||||||||
Total Fluids Systems revenues | $ | 485,744 | $ | 538,087 | $ | (52,343 | ) | (10 | )% | |||||
North America revenues decreased 3% to $344.6 million for the first nine months of 2019 compared to $355.1 million for the first nine months of 2018. This decrease was primarily attributable to lower customer drilling activity in Canada, as reflected by the 32% decline in the average rig count. Despite the 3% decline in the United States average rig count, revenues increased in the U.S. primarily related to market share gains in the offshore Gulf of Mexico market, as well as an increase in footage drilled per rig due to improvements in customer drilling efficiency in the U.S. land markets.
Internationally, revenues decreased 23% to $141.1 million for the first nine months of 2019 compared to $183.0 million for the first nine months of 2018. This decrease was primarily attributable to declines related to the contract transitions described above in Brazil, Algeria, and Kuwait as well as lower drilling activity in Romania, largely attributable to lower commodity prices.
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Operating income
The Fluids Systems segment generated operating income of $22.0 million for the first nine months of 2019 compared to operating income of $32.1 million for the first nine months of 2018. Operating income for the first nine months of 2019 includes $1.7 million of charges related to severance costs and the February 2019 retirement policy modification. Operating expenses for the first nine months of 2018 included a total of $2.5 million of charges associated with severance costs related to workforce reductions in connection with the completion of the contract with Petrobras in Brazil, the Kenedy, Texas facility fire, and expenses related to the conversion of a drilling fluids facility into a completion fluids facility. Excluding these charges, the decrease in operating income includes a $9.5 million decline from international operations and a $1.4 million decline from North America operations, which includes a decline in Canada partially offset by an increase from U.S. operations. These changes in operating income are primarily attributable to the changes in revenues described above.
Mats and Integrated Services
Revenues
Total revenues for this segment consisted of the following:
First Nine Months | 2019 vs 2018 | |||||||||||||
(In thousands) | 2019 | 2018 | $ | % | ||||||||||
Rental and service revenues | $ | 115,944 | $ | 128,401 | $ | (12,457 | ) | (10 | )% | |||||
Product sales revenues | 28,960 | 32,396 | (3,436 | ) | (11 | )% | ||||||||
Total Mats and Integrated Services revenues | $ | 144,904 | $ | 160,797 | $ | (15,893 | ) | (10 | )% | |||||
Rental and service revenues decreased $12.5 million to $115.9 million for the first nine months of 2019 compared to $128.4 million for the first nine months of 2018, primarily due to a decrease in revenues from E&P customers of approximately 20%, resulting from lower exploration activity and weakness in commodity prices. This decline was partially offset by an increase of approximately 10% in non-E&P rental and service revenues. Product sales revenues were $29.0 million for the first nine months of 2019 compared to $32.4 million for the first nine months of 2018. Revenues from product sales have typically fluctuated based on the timing of mat orders from customers.
Operating income
The Mats and Integrated Services segment generated operating income of $32.9 million for the first nine months of 2019 compared to $39.9 million for the first nine months of 2018, primarily attributable to the change in revenues as described above.
Corporate Office
Corporate office expenses increased $3.0 million to $31.9 million for the first nine months of 2019 compared to $28.9 million for the first nine months of 2018. This increase was primarily driven by $3.4 million in charges associated with the February 2019 retirement policy modification, as discussed in Note 4. The remaining change primarily reflects a $3.1 million increase in professional fees primarily related to our long-term strategic planning project and the Cleansorb acquisition, partially offset by lower performance-based incentive compensation. In addition, the first nine months of 2018 included a $1.8 million charge associated with the retirement and transition of our former Senior Vice President, General Counsel and Chief Administrative Officer.
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Liquidity and Capital Resources
Net cash provided by operating activities was $53.2 million for the first nine months of 2019 compared to $20.1 million for the first nine months of 2018. During the first nine months of 2019, net income adjusted for non-cash items provided cash of $47.5 million, while changes in working capital provided cash of $5.7 million.
Net cash used in investing activities was $28.7 million for the first nine months of 2019, including capital expenditures of $35.8 million. Capital expenditures during the first nine months of 2019 included $20.1 million for the Mats and Integrated Services segment, including investments in the mat rental fleet as well as new products, and $13.0 million for the Fluids Systems segment.
Net cash used in financing activities was $25.5 million for the first nine months of 2019, which includes $19.0 million in share purchases under our repurchase program and a net payment of $6.1 million on our ABL Facility (as defined below).
As of September 30, 2019, we had cash on hand of $53.7 million, substantially all of which resides within our international subsidiaries. Following the enactment of the Tax Act in 2018, we began repatriating excess cash from certain of our international subsidiaries and we intend to continue repatriating excess cash from these international subsidiaries, subject to cash requirements to support the strategic objectives of these international subsidiaries. In October 2019, we repatriated approximately $15 million from our international subsidiaries, which was used to repay borrowings under the ABL Facility.
In October 2019, we completed the acquisition of Cleansorb, a U.K. based provider of specialty chemicals for the oil and natural gas industry, which further expands our fluids technology portfolio and capabilities. The purchase price for this acquisition was $18.7 million, net of cash acquired, and was funded with borrowings under the ABL Facility.
We anticipate that future working capital requirements for our operations will fluctuate directionally with revenues. In addition, we expect total 2019 capital expenditures to be approximately $40.0 million to $45.0 million. Availability under our ABL Facility also provides additional liquidity as discussed further below. Total availability under the ABL Facility will fluctuate directionally based on the level of eligible accounts receivable, inventory, and, subject to satisfaction of certain financial covenants as described below, composite mats included in the rental fleet. We expect our available cash on-hand, cash generated by operations, and remaining availability under our ABL Facility to be adequate to fund current operations during the next 12 months. In addition, we may continue to purchase our common stock under our existing repurchase program from time to time.
Our capitalization is as follows:
(In thousands) | September 30, 2019 | December 31, 2018 | |||||
2021 Convertible Notes | $ | 100,000 | $ | 100,000 | |||
ABL Facility | 70,200 | 76,300 | |||||
Other debt | 5,865 | 3,199 | |||||
Unamortized discount and debt issuance costs | (13,707 | ) | (17,752 | ) | |||
Total debt | $ | 162,358 | $ | 161,747 | |||
Stockholder's equity | 559,631 | 569,681 | |||||
Total capitalization | $ | 721,989 | $ | 731,428 | |||
Total debt to capitalization | 22.5 | % | 22.1 | % | |||
2021 Convertible Notes. In December 2016, we issued $100.0 million of unsecured convertible senior notes (“2021 Convertible Notes”) that mature on December 1, 2021, unless earlier converted by the holders pursuant to the terms of the notes. The notes bear interest at a rate of 4.0% per year, payable semiannually in arrears on June 1 and December 1 of each year.
Holders may convert the notes at their option at any time prior to the close of business on the business day immediately preceding June 1, 2021, only under the following circumstances:
• | during any calendar quarter commencing after the calendar quarter ending on March 31, 2017 (and only during such calendar quarter), if the last reported sale price of our common stock for at least 20 trading days (regardless of whether consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price of the notes in effect on each applicable trading day; |
• | during the five business day period after any five consecutive trading day period in which the trading price per $1,000 principal amount of notes for each trading day was less than 98% of the last reported sale price of our common stock on such date multiplied by the conversion rate on each such trading day; or |
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• | upon the occurrence of specified corporate events, as described in the indenture governing the notes, such as a consolidation, merger, or share exchange. |
On or after June 1, 2021 until the close of business on the business day immediately preceding the maturity date, holders may convert their notes at any time, regardless of whether any of the foregoing conditions have been satisfied. As of October 28, 2019, the notes were not convertible.
The notes are convertible into, at our election, cash, shares of common stock, or a combination of both, subject to satisfaction of specified conditions and during specified periods, as described above. If converted, we currently intend to pay cash for the principal amount of the notes converted. The conversion rate is 107.1381 shares of our common stock per $1,000 principal amount of notes (equivalent to an initial conversion price of $9.33 per share of common stock), subject to adjustment in certain circumstances. We may not redeem the notes prior to their maturity date.
Asset-Based Loan Facility. In May 2016, we entered into an asset-based revolving credit agreement which replaced our previous credit agreement. In October 2017, we entered into an Amended and Restated Credit Agreement and in March 2019, we entered into a First Amendment to Amended and Restated Credit Agreement (as amended, the “ABL Facility”). The March 2019 amendment increased the amount available for borrowings, reduced applicable borrowing rates, and extended the term. The ABL Facility provides financing of up to $200.0 million available for borrowings (inclusive of letters of credit) and can be increased up to a maximum capacity of $275.0 million, subject to certain conditions. As of September 30, 2019, our total availability under the ABL Facility was $171.0 million, of which $70.2 million was drawn, resulting in remaining availability of $100.8 million.
The ABL Facility terminates in March 2024; however, the ABL Facility has a springing maturity date that will accelerate the maturity of the ABL Facility to September 1, 2021 if, prior to such date, the 2021 Convertible Notes have not been repurchased, redeemed, refinanced, exchanged or otherwise satisfied in full or we have not escrowed an amount of funds, that together with the amount that we establish as a reserve against our borrowing capacity, is sufficient for the future settlement of the 2021 Convertible Notes at their maturity. The ABL Facility requires compliance with a minimum fixed charge coverage ratio and minimum unused availability of $25.0 million to utilize borrowings or assignment of availability under the ABL Facility towards funding the repayment of the 2021 Convertible Notes.
Borrowing availability under the ABL Facility is calculated based on eligible accounts receivable, inventory, and, subject to satisfaction of certain financial covenants as described below, composite mats included in the rental fleet, net of reserves and limits on such assets included in the borrowing base calculation. To the extent pledged by us, the borrowing base calculation also includes the amount of eligible pledged cash. The lender may establish such reserves, in part based on appraisals of the asset base, and other limits at its discretion which could reduce the amounts otherwise available under the ABL Facility. Availability associated with eligible rental mats will also be subject to maintaining a minimum consolidated fixed charge coverage ratio and a minimum level of operating income for the Mats and Integrated Services segment.
Under the terms of the ABL Facility, we may elect to borrow at a variable interest rate plus an applicable margin based on either, (1) LIBOR subject to a floor of zero or (2) a base rate equal to the highest of: (a) the federal funds rate plus 50 basis points, (b) the prime rate of Bank of America, N.A. and (c) LIBOR, subject to a floor of zero, plus 100 basis points, plus, in each case, an applicable margin per annum. The applicable margin ranges from 150 to 200 basis points for LIBOR borrowings, and 50 to 100 basis points for base rate borrowings, based on the consolidated fixed charge coverage ratio as defined in the ABL Facility. As of September 30, 2019, the applicable margin for borrowings under our ABL Facility was 150 basis points with respect to LIBOR borrowings and 50 basis points with respect to base rate borrowings. The weighted average interest rate for the ABL Facility was 3.8% at September 30, 2019. In addition, we are required to pay a commitment fee on the unused portion of the ABL Facility ranging from 25 to 37.5 basis points, based on the level of outstanding borrowings, as defined in the ABL Facility. As of September 30, 2019, the applicable commitment fee was 37.5 basis points.
The ABL Facility is a senior secured obligation, secured by first liens on all of our U.S. tangible and intangible assets, and a portion of the capital stock of our non-U.S. subsidiaries has also been pledged as collateral. The ABL Facility contains customary operating covenants and certain restrictions including, among other things, the incurrence of additional debt, liens, dividends, asset sales, investments, mergers, acquisitions, affiliate transactions, stock repurchases and other restricted payments. The ABL Facility also requires compliance with a fixed charge coverage ratio if availability under the ABL Facility falls below $22.5 million. In addition, the ABL Facility contains customary events of default, including, without limitation, a failure to make payments under the facility, acceleration of more than $25.0 million of other indebtedness, certain bankruptcy events, and certain change of control events.
Other Debt. Our foreign subsidiaries in Italy, India, and Canada maintain local credit arrangements consisting primarily of lines of credit which are renewed on an annual basis. We utilize local financing arrangements in our foreign operations in order to provide short-term local liquidity needs. We had $2.0 million and $1.1 million outstanding under these arrangements at September 30, 2019 and December 31, 2018, respectively.
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At September 30, 2019, we had $13.1 million in outstanding letters of credit and performance bonds, for which the letters of credit are collateralized by $6.1 million in restricted cash. We also have a performance bond issued and outstanding of $6.0 million related to the appeals process for an ongoing income tax audit for our Mexico subsidiary. Additionally, our foreign operations had $33.0 million in outstanding letters of credit, performance bonds and other guarantees, primarily issued under a credit arrangement in Italy as well as certain letters of credit that are collateralized by $2.0 million in restricted cash.
Critical Accounting Estimates and Policies
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America, which requires us to make estimates and assumptions that affect the reported amounts and disclosures. Significant estimates used in preparing our condensed consolidated financial statements include the following: allowances for doubtful accounts, reserves for self-insured retention under insurance programs, estimated performance and values associated with employee incentive programs, fair values used for impairments of long-lived assets, including goodwill and other intangibles, and valuation allowances for deferred tax assets. Our estimates are based on historical experience and on our future expectations that we believe to be reasonable. The combination of these factors forms the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from our current estimates and those differences may be material.
For additional discussion of our critical accounting estimates and policies, see “Management's Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the year ended December 31, 2018. Our critical accounting estimates and policies have not materially changed since December 31, 2018.
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ITEM 3. | Quantitative and Qualitative Disclosures About Market Risk |
We are exposed to market risk from changes in interest rates and changes in foreign currency exchange rates. A discussion of our primary market risk exposure in financial instruments is presented below.
Interest Rate Risk
At September 30, 2019, we had total principal amounts outstanding under financing arrangements of $176.1 million, including $100.0 million of borrowings under our 2021 Convertible Notes which bear interest at a fixed rate of 4.0% and $70.2 million of borrowings under our ABL Facility. Borrowings under our ABL Facility are subject to a variable interest rate as determined by the ABL Facility. The weighted average interest rate at September 30, 2019 for the ABL Facility was 3.8%. Based on the balance of variable rate debt at September 30, 2019, a 100 basis-point increase in short-term interest rates would have increased annual pre-tax interest expense by $0.7 million.
Foreign Currency Risk
Our principal foreign operations are conducted in certain areas of EMEA, Asia Pacific, Latin America, and Canada. We have foreign currency exchange risks associated with these operations, which are conducted principally in the foreign currency of the jurisdictions in which we operate including European euros, Algerian dinar, Romanian new leu, Canadian dollars, British pounds, Australian dollars, and Brazilian reais. Historically, we have not used off-balance sheet financial hedging instruments to manage foreign currency risks when we enter into a transaction denominated in a currency other than our local currencies.
ITEM 4. | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this quarterly report. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2019, the end of the period covered by this quarterly report.
Changes in Internal Control Over Financial Reporting
There were no changes in internal control over financial reporting during the quarter ended September 30, 2019 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II | OTHER INFORMATION |
ITEM 1. | Legal Proceedings |
None.
ITEM 1A. | Risk Factors |
There have been no material changes during the period ended September 30, 2019 in our “Risk Factors” as discussed in Item 1A of our Annual Report on Form 10‑K for the year ended December 31, 2018.
ITEM 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
a) | Not applicable |
b) | Not applicable |
c) | The following table details our repurchases of shares of our common stock for the three months ended September 30, 2019: |
Period | Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Approximate Dollar Value of Shares that May Yet be Purchased Under Plans or Programs ($ in Millions) | |||||||||
July 2019 | 114,376 | $ | 7.12 | — | $ | 84.5 | |||||||
August 2019 | 490,819 | $ | 7.10 | 490,819 | $ | 81.0 | |||||||
September 2019 | — | $ | — | — | $ | 81.0 | |||||||
Total | 605,195 | $ | 7.10 | 490,819 | |||||||||
During the three months ended September 30, 2019, we purchased an aggregate of 114,376 shares surrendered in lieu of taxes under vesting of restricted shares.
In November 2018, our Board of Directors authorized changes to our existing securities repurchase program. The authorization increased the authorized amount under the repurchase program to $100.0 million, available for repurchases of any combination of our common stock and our 2021 Convertible Notes.
Our repurchase program authorizes us to purchase our outstanding shares of common stock or 2021 Convertible Notes in the open market or as otherwise determined by management, subject to certain limitations under the ABL Facility and other factors. The repurchase program has no specific term. Repurchases are expected to be funded from operating cash flows, available cash on hand, and borrowings under our ABL Facility. As part of the repurchase program, our management has been authorized to establish trading plans under Rule 10b5-1 of the Securities Exchange Act of 1934. During the three months ended September 30, 2019, we repurchased an aggregate of 490,819 shares of our common stock under our Board authorized repurchase program for a total cost of $3.5 million.
ITEM 3. | Defaults Upon Senior Securities |
None.
ITEM 4. | Mine Safety Disclosures |
The information concerning mine safety violations and other regulatory matters required by section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K is included in Exhibit 95.1 of this Quarterly Report on Form 10-Q, which is incorporated by reference.
ITEM 5. | Other Information |
None.
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ITEM 6. | Exhibits |
The exhibits listed are filed as part of, or incorporated by reference into, this Quarterly Report on Form 10-Q.
†*10.1 | |
*31.1 | |
*31.2 | |
**32.1 | |
**32.2 | |
*95.1 | |
*101.INS | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document |
*101.SCH | Inline XBRL Schema Document |
*101.CAL | Inline XBRL Calculation Linkbase Document |
*101.DEF | Inline XBRL Definition Linkbase Document |
*101.LAB | Inline XBRL Label Linkbase Document |
*101.PRE | Inline XBRL Presentation Linkbase Document |
*104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
† Management compensation plan or agreement.
* Filed herewith.
** Furnished herewith.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: October 31, 2019
NEWPARK RESOURCES, INC. | |
(Registrant) | |
By: | /s/ Paul L. Howes |
Paul L. Howes President and Chief Executive Officer (Principal Executive Officer) | |
By: | /s/ Gregg S. Piontek |
Gregg S. Piontek Senior Vice President and Chief Financial Officer (Principal Financial Officer) | |
By: | /s/ Douglas L. White |
Douglas L. White Vice President, Corporate Controller and Chief Accounting Officer (Principal Accounting Officer) | |
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TABLE OF CONTENTS
Part IItem 1. Financial StatementsNote 1 Basis Of Presentation and Significant Accounting PoliciesNote 2 Earnings Per ShareNote 3 Repurchase ProgramNote 4 Stock-based and Other Long-term Incentive CompensationNote 5 ReceivablesNote 6 InventoriesNote 7 Financing Arrangements and Fair Value Of Financial InstrumentsNote 8 LeasesNote 9 Income TaxesNote 10 Commitments and ContingenciesNote 11 Supplemental Disclosures To The Statements Of Cash FlowsNote 12 Segment DataNote 13 Subsequent EventItem 2. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPart II Other InformationPart IIItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsItem 3. Defaults Upon Senior SecuritiesItem 4. Mine Safety DisclosuresItem 5. Other InformationItem 6. Exhibits