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Text: I remain extremely proud of the resilience of our entire organization as we've navigated through the combination of the oil and gas industry dislocation, as well as the prolonged COVID-related headwinds that continue to impact our business.
Adding to these market headwinds, the third quarter is also impacted by the most active hurricane season in the last decade, causing repeated work stoppages in the Gulf of Mexico.
In the face of these challenging conditions, we remain focused on executing our strategic playbook by pulling the required levers to maintain positive free cash flow and paying down debt while adjusting our infrastructure to address the new market realities in our U.S. Fluids business.
Free cash flow generation and debt reduction remain our highest priorities and I am extremely pleased with our performance on this front.
During the third quarter, we generated $15 million of cash from operations and reduced our total debt balance by $34 million as we continue to harvest working capital and repatriate excess cash from our foreign subsidiaries.
Benefiting from the strong cash generation over the past two quarters, we reduced our total outstanding debt by $65 million since the start of the year.
Touching on the specifics of the segment results, Fluids Systems posted third quarter 2020 revenues of $68 million, reflecting a 9% sequential decline.
In contrast to a 35% reduction in U.S. rig count, revenues from U.S. land has steadily improved as we progressed through the quarter, increasing 8% sequentially to $30 million.
This improvement was driven by our expanding market share and a recovery in customer activity, specifically drilling more wells with fewer rigs.
As we touched on last quarter, our market share in U.S. land has meaningfully expanded in recent months and I'm pleased to highlight that our share has remained above [Phonetic] 20% mark, throughout the third quarter, achieving a record level for Newpark.
In the Gulf of Mexico, the quarter is impacted by the repeated weather-related disruptions which led to revenues declining by nearly 50% to $7 million.
Internationally, activities in key markets within the Middle East and North Africa were negatively impacted by greater travel and operational restrictions, imposed by local governments in response to a surge in COVID outbreaks in the third quarter.
This led to a 12% sequential reduction in our international Fluids revenues.
Also, as we announced previously, in response to the significant change in the U.S. oil and gas market, we've been working over the past two quarters to reposition our chemical blending facility located in Conroe, Texas to serve more stable markets.
As an update, I'm pleased to announce that we completed the installation of our first semi-automated packaging line late in the quarter, which allowed us to begin scaling up production of industrial cleaning products as we target leading cleaning product companies.
With a partial quarter of production, we generated nearly $3 million of revenue from the cleaning products in the third quarter.
We remain encouraged by our progress in this area, but more work is required to better understand the industrial cleaning products market, including our position in that value chain.
In the Mats segment, despite the continuing impact of COVID across the United States and the United Kingdom, revenues improved 5% sequentially in the third quarter to $29 million.
The improvement benefited from a late quarter surge in demand from the utility sector along the Gulf Coast where we are supporting electrical infrastructure, damaged by the recent hurricanes.
We anticipate that the hurricane-related demand will provide a positive impact to Q4 results as work continues repairing damaged utility infrastructure.
While the market conditions were extremely challenging in the third quarter, I'm pleased to note that we feel that both of our business segments had bottomed out and the worst is now behind us.
As we look forward to the fourth quarter, we are anticipating improvement in operating results across both segments.
And with that, I will hand the call over to Greg to discuss in more detail the financials for the third quarter.
I'll begin by covering the specifics of the segment and consolidated financial results for the quarter before providing an update on our near-term outlook.
In the Fluids Systems segment, as Paul touched on, revenues from U.S. land increased 8% sequentially to $30 million in third quarter despite the 35% reduction in average rig count, reflecting our expanding market share as well as a rebound in customer spending per rig.
The Northeast and Rockies reflected the most notable areas of sequential improvement.
Our Gulf of Mexico business had an extremely challenging quarter due to the repeated hurricane shutdowns leading to nearly 50% reduction in revenues to $7 million in the third quarter.
Industrial cleaning product revenues contributed nearly $3 million in the third quarter, more than tripling the prior quarter.
In Canada, revenues declined 36% to $2 million in the third quarter with the sequential comparison negatively impacted by the timing of customer projects.
Outside of North America, as Paul touched on, COVID continued to have a negative impact on customer activity, most notably in the EMEA region were ongoing restrictions on movement of personnel and products within a number of countries have resulted in significant activity disruptions and project delays.
Although the Middle East held up well in the second quarter, we've seen a more notable COVID impact during the third quarter.
Total international revenues declined 12% sequentially to $25 million with operations in the Middle East contributing the majority of the decline.
With the COVID-driven impacts, total revenues from the Middle East pulled back 27% to $9 million in the third quarter.
On a year-over-year basis, our Fluids Systems revenues declined 56% compared to Q3 of 2019.
North American land revenues declined by $64 million or 66%, modestly favorable to the 71% decline in rig count while Gulf of Mexico revenues declined $2 million or 25% year-over-year as our expanding market share was more than offset by the impact of the 2020 hurricane season.
International revenues also declined $21 million or 45% year-over-year with declines seen across substantially all markets.
Despite realizing a meaningful impact from our cost actions, the third quarter operating loss was impacted by the $7 million sequential decline in revenues, cost inefficiencies driven by the unplanned activity interruptions in the Gulf of Mexico and EMEA region, the start-up of cleaning products packaging as well as ongoing efforts to drawdown excess inventories.
Turning to the Mats business, total segment revenues increased 5% sequentially to $29 million in the third quarter, driven by improvement in rental and services as well as product sales.
As Paul mentioned, rental and service revenues increased 3% sequentially as the late third quarter surge in demand from the utility sector along the Gulf Coast, was largely offset by a $2 million reduction from E&P markets.
Product sales improved 14% to $6 million for the quarter.
Although we are seeing continued strengthening in quoting and customer planning activity in the utility and industrial market, several scheduled utility infrastructure projects in Q3 were delayed due to the prolonged COVID-related restrictions in many states.
Further, it's worth noting that as a result of the utility industry's mutual assistance program, the hurricane response caused many utility service providers to redirect their efforts to support the emergency Gulf Coast repairs, causing delays in projects that would have otherwise moved ahead.
From an end market perspective, $20 million of our third quarter revenues is derived from the energy infrastructure and industrial markets, representing roughly 70% of our total segment revenue.
Compared to the third quarter of last year, Mats segment revenues declined $22 million or 43%, largely reflecting a $12 million decline in E&P, rental and service and $9 million decline in direct sales.
Our UK operation has been a particular bright spot year-over-year, delivering more than 20% growth in revenues over 2019.
Mats segment operating income declined $1 million sequentially to essentially breakeven, generating EBITDA of $5 million in the third quarter.
The third quarter operating results were impacted by the mix of rental and service revenues along with elevated unabsorbed fixed cost in our manufacturing facility and cost to mobilize our assets and resources to respond to the hurricane work.
As noted in last quarter's call, we pulled back production within our manufacturing facility in the third quarter as part of our inventory and cash management strategy.
Total corporate office expenses were $6.6 million in the third quarter, relatively in line with the second quarter.
On a year-over-year basis, corporate office expenses declined $3 million, primarily driven by a $1.5 million reduction in personnel costs, as well as lower M&A and strategic planning costs.
SG&A costs were $21 million in the third quarter, down slightly from the second quarter.
On a year-over-year basis, SG&A costs declined $7 million, largely reflecting lower personnel expense, strategic planning costs, and legal and professional spending.
As Paul discussed, we made meaningful progress in our debt reduction efforts.
As a result of the reduced debt balance, interest expense declined 17% to $2.4 million in the third quarter, roughly half of which reflects non-cash amortization of facility fees and discounts.
As of the end of the third quarter, the weighted average cash borrowing rate on our outstanding debt was approximately 3%.
The third quarter benefit from income taxes was $4.8 million, which reflects a 17% effective rate for the third quarter and 15% rate for the first nine months of 2020.
This compares to a net loss of $0.29 per share in the second quarter, which included $0.09 of charges and a net loss of $0.02 per share in the third quarter of last year.
For the third quarter, cash provided by operating activities was $15 million which included a $29 million net reduction in working capital.
The continued monetization of working capital benefited from a strong reduction in both inventories and receivables, particularly in the U.S. Investing activities again had a minimal impact in the quarter, illustrating the flexibility of our capital-light business model.
It's worth noting that the majority of our capital expenditures support our industrial end market activities, including the deployment of mats into the rental fleet to support the increased demand from the utility sector.
Our cash balance declined $20 million in the third quarter, reflecting our ongoing efforts to repatriate excess cash from our foreign subsidiaries, which combined with our free cash flow generation was used to pay down our U.S. asset-based loan facility by $34 million in the quarter.
With the benefit of the debt repayments, our total debt balance declined to $102 million, while our cash balance ended the third quarter at $24 million, resulting in a total debt-to-capital ratio of 17% and a net debt-to-capital ratio of 14%.
Our primary debt components include the remaining $67 million of convertible notes due December of next year and $30 million outstanding on our U.S. asset-based bank facility, which runs through 2024.
Substantially, all of our $24 million of cash on hand resides in our international subsidiaries.
Now turning to our near-term outlook.
In Fluids, with hurricane season coming to an end and North American land markets continuing to gradually improve, we expect to see a meaningful improvement in fourth quarter operating results.
The largest change is anticipated within the Gulf of Mexico, where we expect Q4 revenues will return to roughly Q2 levels.
In U.S. land, we're seeing continuing improvement in customer activity with October revenues coming in roughly 5% ahead of the Q3 run rate.
We also expect Canada will rebound as the overall market activity levels improved in the seasonally stronger Q4.
In addition, we expect our cleaning products revenues will roughly double Q3 levels, benefiting from a full quarter of production.
Looking outside of North America, although a second wave of COVID is currently hitting parts of Europe, the Middle East and North Africa, we currently expect our Q4 revenues will return to roughly Q2 levels, benefiting from increased customer activity in North Africa, and Eastern Europe, as well as an increase in stimulation chemical sales into the Middle East.
From a margin perspective, we anticipate the impact of the stronger revenues combined with the ongoing cost rationalization efforts should drive the Fluids business close to EBITDA breakeven in the fourth quarter and a return to positive EBITDA generation in the first quarter of 2021.
In the Mats segment, with the benefit of the hurricane-driven demand in the U.S. utility sector to start the fourth quarter, ongoing strength from our UK business along with the pickup in customer bidding and planning activity, we expect Q4 rental and service revenues to improve by roughly 10% from Q3.
Further, although visibility to the timing of Mats sales is always a challenge to predict, it's worth noting that several US utility companies have continued to publicly reconfirm their commitment to their capital plans.
Consequently, we believe we will see an uptick in year-end demand for product sales, potentially doubling the Q3 results.
Combining the RS with the product sale expectation, this sets up for Q4 to be the strongest revenue quarter of the year for the Mats business.
From a margin perspective, the extent of the year-end product sale demand will likely determine whether the Mats business can return to double-digit operating margin in the fourth quarter.
Corporate office spending should remain near the Q3 level in [Technical Issues] and we expect the effective tax rate for the remainder of the year to remain relatively in line with the year-to-date 2020 rate.
With regards to cash flows, we have made solid progress in monetizing working capital over the past two quarters and see additional opportunities ahead with over $200 million of net working capital remaining on our books.
More specifically, international receivables and global inventories remain well above historical levels.
So we expect further reductions in excess working capital will continue to provide a tailwind to cash generation in the coming quarters.
Inventories will likely take several quarters to optimize depending on customer activity.
Meanwhile, reflective of our capital-light model, we expect limited net capital investments for the foreseeable future with capital deployment largely targeting industrial end market diversification efforts that provide a clear line of sight to cash flow and EBITDA generation.
As illustrated by our actions over the past two quarters, we are taking prudent steps to maintain positive cash flow with a particular focus on the remaining $67 million convertible note maturity at the end of next year.
We expect that our cash on hand, cash generated from operations and the available capacity under our U.S. asset-based loan facility will provide sufficient liquidity to support our ongoing operations and satisfy our convertible note maturity.
As we noted in the past, it remains our intention to fund the maturity without accessing public capital markets.
As part of our capital structure management, we are evaluating additional sources of liquidity available to further enhance our capital structure.
Specifically, we maintain meaningful U.S. real estate as well as assets within our European operation that can be used to create additional liquidity through secured financings or alternative arrangements.
It's also worth noting that with our 30-day average share price recently falling below the NYSE's $1 listing requirement, we expect to receive notification from the NYSE regarding this non-compliance.
While we intend to evaluate the various options that are available to regain compliance with the NYSE requirement, our primary focus remains on driving operational improvement and consistent free cash flow generation as we continue to reshape the Company.
2020 has certainly been a challenging year that I do not think any of us could have predicted.
The combination of a global pandemic, volatile oil and gas prices and the historic hurricane season, certainly challenged our businesses, but we are optimistic that the worst is now behind us.
We also recognize that more work is required to streamline fluid to the new market realities of the oil and gas industry, while at the same time positioning the Company to take advantage of [Technical Issues] opportunities in the energy infrastructure and industrial cleaning product markets.
So, I'd like to close by summarizing the actions taken as part of the strategic playbook we laid out earlier this year to navigate through these difficult times and position the Company for profitable growth and improved returns on invested capital.
First, our focus on employee safety, our most important core value has not wavered in these exceptionally challenging times.
We are pleased with our improved 2020 safety performance as well as the limited number of COVID cases within our global employee base.
Second, we are aggressively managing our balance sheet by harvesting cash from working capital while leveraging our capital-light business model.
Since the beginning of the year, we've generated $36 million in free cash flow and reduced our outstanding debt by $65 million, a reduction of nearly 40%.
Third, we have been successful on diversifying our revenue streams away from the volatile oil and gas markets, particularly U.S. land, which we believe will ultimately lead to improved stability and cash flows and higher returns on invested capital.
In our Mats business [Technical Issues] 70% of our revenues from energy infrastructure and other industrial markets, which we believe provide significant growth opportunities as the energy transition gains traction.
In Fluids, we also believe that continued expansion of our international business, predominantly in the Eastern Hemisphere will provide future stability as it has in prior cycles.
Over the last 12 months, we've secured several new contracts in the EMEA region that should add incremental revenue once the COVID headwinds ultimately subside.
And as I touched on earlier, we've now successfully repositioned our Conroe, Texas oilfield chemicals blending site to an industrial and consumer cleaning products facility, providing a path forward to further diversification outside of the oil and gas markets.
And fourth, we've taken aggressive actions to rightsize our Fluids business, particularly in the U.S. and as we touched on last quarter's call, we have now reduced our Fluids Systems EBITDA breakeven point to roughly $350 million of annualized revenue.
But more opportunity exists to further optimize our footprint, driving efficiencies in our operations, while also harvesting additional working capital from the balance sheet, most notably inventory.
These efforts will not be completed within a quarter or two.
Rather, it will be a continuing process as the market evolves over the coming year.
Furthermore, I'd like to note that as we reduce our net capital deployed in Fluids, we remain very selective in future investments in the U.S. oilfield sector.
This should enable the Fluids business to more efficiently navigate market volatility and deliver stronger cash flow generation and improved returns on invested capital through future industry cycles.
In closing, I'd like to take a moment to speak about ESG, something that's long been part of our DNA at Newpark and a subject that is becoming of increasing importance around the world.
Over the past decade, we've prided ourselves on offering products that help our customers across all industries, improve the sustainability of their operations.
For examples of this, you need to look no further than our flagship products, including our fully [Indecipherable] DURA-BASE matting system which has been in the market for over 20 years and competes primarily with old-growth timber mats or our evolution water-based drilling fluid system launched in 2010, which provides customers with a number of environmental benefits over traditional diesel fuel-based products.
Through these product offerings and our larger ESG program, we continue to reduce our environmental impact while helping our customers reach their environmental goal.
For more information regarding the benefits of our environmentally focused product offerings and other facets of our ESG program, we encourage you to visit our website and select sustainability from the landing page.

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reduces debt by $34 million in quarter.

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