ITEM 7. 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 consolidated financial statements and notes thereto included in Item 8 “Financial Statements and Supplementary Data.”
Overview
We are a geographically diversified supplier providing environmentally-sensitive products, as well as rentals and services to customers across multiple industries. We currently operate our business through two reportable segments: Industrial Solutions and Fluids Systems, as described further below. In addition, we had a third reportable segment, Industrial Blending, which was exited in 2022. Prior to 2022, we aggregated our now exited Industrial Blending business and reported it within Industrial Solutions. We have reflected these three reportable segments for all periods presented in this Annual Report on Form 10-K.
While the Fluids Systems segment has historically been the primary driver of revenues, the Industrial Solutions segment has for several years been the primary driver of operating income, cash flows, and financial returns. The relative contribution of revenues and operating income (loss) for the Industrial Solutions and Fluids Systems segments for 2022 is as follows (amounts in millions):
* Fluids Systems segment operating loss for 2022 includes $29.4 million of total non-cash impairment charges.
Industrial Solutions – Our Industrial Solutions segment, which generated 24% of consolidated revenues and $43.9 million of operating income for 2022, provides temporary worksite access solutions, including the rental of our recyclable composite matting systems, along with related site construction and services to customers in various markets including power transmission, oil and natural gas exploration and production (“E&P”), pipeline, renewable energy, petrochemical, construction and other industries, primarily in the United States and Europe. We also manufacture and sell our recyclable composite mats to customers around the world, with power transmission being the primary end-market.
Our Industrial Solutions segment has been the primary source of operating income and cash generation for us in recent years, as illustrated above, and has also been the primary focus for growth investments, reflecting approximately 83% of our 2022 capital expenditures. The growth of this business in the power transmission and other industrial markets remains a strategic priority for us due to such markets’ relative stability compared to E&P, as well as the magnitude of the market growth opportunity, including the potential positive impact from the energy transition and future legislation and regulations related to greenhouse gas emissions and climate change. We expect customer activity, particularly in the power transmission sector, will remain robust in the coming years, driven in part by the impacts of the energy transition and the increasing investment in grid reliance initiatives.
Fluids Systems – Our Fluids Systems segment, which generated 76% of consolidated revenues and incurred a $15.6 million operating loss for 2022 (including $29.4 million of total non-cash impairment charges), provides drilling, completion, and stimulation fluids products and related technical services to customers for oil, natural gas, and geothermal projects primarily in North America and Europe, the Middle East and Africa (“EMEA”), as well as certain countries in Asia Pacific and Latin America. Our Fluids Systems operating results remain dependent on oil and natural gas drilling activity levels in the markets we serve and the nature of the drilling operations, which governs the revenue potential of each well. Drilling activity levels depend on a variety of factors, including oil and natural gas commodity pricing, inventory levels, product demand, and regulatory restrictions.
Rig count data remains the most widely accepted indicator of drilling activity. Average North American rig count data for the last three years is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | 2022 vs 2021 | | 2021 vs 2020 |
| | 2022 | | 2021 | | 2020 | | Count | | % | | Count | | % |
U.S. Rig Count | | 723 | | | 475 | | | 433 | | | 248 | | | 52 | % | | 42 | | | 10 | % |
Canada Rig Count | | 175 | | | 131 | | | 89 | | | 44 | | | 34 | % | | 42 | | | 47 | % |
North America Rig Count | | 898 | | | 606 | | | 522 | | | 292 | | | 48 | % | | 84 | | | 16 | % |
_______________________________________________________
Source: Baker Hughes Company
Oil and natural gas prices and activity are cyclical and volatile, and this market volatility has a significant impact on our operating results. During March 2020, oil prices collapsed due to geopolitical events along with the worldwide effects of the COVID-19 pandemic. As a result, U.S. rig count declined significantly beginning in March 2020 before reaching a low of 244 in August 2020. During 2021, oil prices rebounded, and the average U.S. rig count gradually increased, ending 2021 at 586 rigs. During 2022, oil prices significantly increased due in part to geopolitical events, and the average U.S. rig count continued to increase, ending 2022 at 779 rigs. We anticipate that market activity in the U.S. will remain fairly stable in the near-term, but remain well below 2019 levels as many of our customers maintain stronger capital discipline and prioritize cash flow generation over growth. Further, in the wake of the COVID-19 pandemic, an uncertain economic environment, including widespread supply chain disruptions, as well as enacted and proposed legislative changes in the U.S. impacting the oil and natural gas industry, make market activity levels difficult to predict.
Outside of North America land markets, drilling activity is generally more stable as this drilling activity is based on longer-term economic projections and multi-year drilling programs, which typically reduces the impact of short-term changes in commodity prices on overall drilling activity. However, operations in several countries in the EMEA region experienced activity disruptions and project delays beginning in early 2020 and continuing through 2021, driven by government-imposed restrictions on movements of personnel, quarantines of staffing, and logistical limitations as a result of the COVID-19 pandemic. Revenues and profitability from our international Fluids Systems business gradually recovered in 2021 and 2022, with revenues for 2022 exceeding 2019 levels. The combination of increasing activity levels combined with the impacts of global supply chain disruptions have caused significant cost inflation to many hydrocarbon-based products and chemicals used in our fluids systems. While we have and continue to work with customers to mitigate the inflationary impact, in some cases, we are unable to adjust, or there may be delays in being able to adjust, our customer pricing on certain international contracts due to the long-term contracts in place. Consequently, the inflationary impacts negatively impacted the profitability of our international operations in 2022. Although we expect this situation to improve in the near-term, the impact of cost inflation is very difficult to predict.
Looking ahead, the combination of recent geopolitical events and elevated oil and natural gas prices are causing several markets to increase drilling activity levels, to help ensure reliable energy supply in the coming years, while reducing their dependency on Russia-sourced oil and natural gas. Consequently, the outlook for several markets within the EMEA region continues to strengthen, with growth in activity expected over the next few years.
Industrial Blending – Our Industrial Blending segment began operations in 2020 and supported industrial end-markets, including the production of disinfectants and industrial cleaning products. In the first quarter of 2022, we completed the wind down of the Industrial Blending business, and in November 2022 we completed the sale of the industrial blending and warehouse facility and related equipment located in Conroe, Texas. Our Industrial Blending segment generated no revenue and incurred an $8.0 million operating loss for 2022, which includes a $7.9 million non-cash impairment charge partially offset by a $2.6 million gain on the eventual sale of the related assets.
2020-2022 Market Events and Strategic Actions
Following the 2020 market collapse and reduced demand for our products and services as a result of the decline in oil prices and the COVID-19 pandemic, we took a number of actions aimed at conserving cash and protecting our liquidity, which included the implementation of cost reduction programs, including workforce reductions, employee furloughs, the suspension of the Company’s matching contributions to its U.S. defined contribution plan, and temporary salary reductions effective April 1, 2020 for a significant portion of U.S. employees, including salaries paid to executive officers and the annual cash retainers paid to all non-employee members of the Board of Directors. We restored compensation and matching contributions for our U.S. defined contribution plan during the second and third quarters of 2021.
In 2022, we recognized $29.4 million of non-cash impairment charges in the Fluids Systems segment related to the long-lived assets and inventory associated with the exit of our Gulf of Mexico operations, as described further below. In 2021, we recognized $5.5 million of total charges in the Fluids Systems segment, primarily related to self-insured costs associated with Hurricane Ida damage to our Fourchon, Louisiana Fluids Systems operating base, facility exit, and severance costs. In 2020, we recognized total charges of $28.6 million in the Fluids Systems segment consisting of $11.7 million for the recognition of cumulative foreign currency translation losses related to our exit from Brazil, $10.3 million for inventory write-downs, $3.5 million for severance and other costs, and $3.0 million in fixed asset impairments.
Additionally, throughout the oil and natural gas cycle of the last couple of years, we continuously reviewed our portfolio. These reviews have focused on evaluating changes in the outlook for our served markets and customer priorities, while identifying opportunities for value-creating options in our portfolio, placing investment emphasis in markets where we generate strong returns and where we see greater long-term viability and stability. As part of this review, our Board of Directors approved the following actions in 2022.
Exit of Industrial Blending Segment and Sale of Conroe, Texas Blending Facility
In the first quarter of 2022, in consideration of broader strategic priorities and the timeline and efforts required to further develop the industrial blending business, we exited our Industrial Blending operations. In November 2022, we completed the sale of the industrial blending and warehouse facility and related equipment located in Conroe, Texas to a global chemical provider, and received cash proceeds of approximately $14 million. In connection with this divestiture, we recognized a $7.9 million impairment charge related to these long-lived assets in the second quarter of 2022, and subsequently recognized a gain of $2.6 million upon the eventual sale in the fourth quarter of 2022.
Sale of Excalibar U.S. Mineral Grinding Business
In the second quarter of 2022, we initiated a formal sale process for our Excalibar U.S. mineral grinding business (“Excalibar”), which is reported within our Fluids Systems segment. On November 30, 2022, we completed the sale of substantially all the long-lived assets, inventory, and operations of Excalibar to Cimbar Resources, INC. (“Cimbar”), received cash proceeds (after purchase price adjustments) of approximately $51 million, and recognized a gain of $1.0 million. The Company retained certain assets and liabilities, including accounts receivable and accounts payable. Such working capital provided approximately $10 million of cash generation in the fourth quarter of 2022 and is expected to provide approximately $5 million of additional cash generation in early 2023. In connection with the sale, the Company and Cimbar have entered into a long-term barite supply agreement for certain regions of our U.S. drilling fluids business, with an initial term of four years following the closing of the transaction.
Exit of Gulf of Mexico Operations
In the third quarter of 2022, our Board of Directors approved management’s plan to exit our Fluids Systems Gulf of Mexico operations, including the potential sale of related assets. In December 2022, we completed the sale of substantially all assets associated with our Gulf of Mexico completion fluids operations. Separately, we entered into a seven-year arrangement to sublease our Fourchon, LA drilling fluids shorebase and blending facility to a leading global energy services provider. As part of this arrangement, substantially all of our Gulf of Mexico drilling fluids inventory will be sold as consumed by the lessee or no later than nine months from the closing of the transaction. The sale of the completion fluids operations provided approximately $6 million of cash generation in the fourth quarter of 2022, and the exit of the drilling fluids operations is expected to provide approximately $25 million of additional cash generation, primarily in early 2023.
As a result of the plan to exit the Gulf of Mexico operations as described above, we considered the third quarter developments to be a potential indicator of impairment that required us to complete an impairment evaluation. Accordingly, we estimated the fair value for our Gulf of Mexico assets as of September 30, 2022 based on the expected cash flows to be generated from the anticipated transactions and determined that a $21.5 million impairment charge was required related to the long-lived assets. We also recognized an $8.0 million charge to reduce the carrying value of inventory to their net realizable value primarily based on the anticipated transactions. The total charges of $29.4 million were recorded to impairments and other charges in the third quarter of 2022.
Total impairments and other charges consisted of the following:
| | | | | |
| Year Ended December 31, |
(In thousands) | 2022 |
Industrial Blending - Long-lived assets impairment | $ | 7,905 | |
Gulf of Mexico - Long-lived assets impairment | 21,461 | |
Gulf of Mexico - Inventory write-downs | 7,956 | |
Total impairments and other charges | $ | 37,322 | |
Summarized operating results of the business units exited in 2022 (including impairments and other charges described above) are shown in the following table:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
(In thousands) | 2022 | | 2021 | | 2020 |
Revenues | | | | | |
Industrial Blending | $ | — | | | $ | 8,821 | | | $ | 7,548 | |
Excalibar | 55,990 | | | 36,396 | | | 28,214 | |
Gulf of Mexico | 26,708 | | | 25,366 | | | 46,524 | |
| | | | | |
Operating income (loss) | | | | | |
Industrial Blending | (8,002) | | | (2,384) | | | 429 | |
Excalibar | 3,665 | | | (277) | | | (1,999) | |
Gulf of Mexico | (43,215) | | | (6,753) | | | (3,450) | |
Summarized net assets of the business units exited in 2022 are shown in the following table:
| | | | | | | | | | | |
(In thousands) | December 31, 2022 | | December 31, 2021 |
Receivables, net | $ | 27,798 | | | $ | 12,140 | |
Inventories | 5,805 | | | 42,421 | |
Property, plant and equipment, net | 4,508 | | | 74,318 | |
Accounts payable | (2,060) | | | (5,136) | |
Accrued liabilities | (311) | | | (1,976) | |
Total net assets | $ | 35,740 | | | $ | 121,767 | |
As described above, the change in net assets related to these divested business units includes the impact of the $37.3 million of impairments and other charges, the impact from the divestiture transactions, as well as the wind-down of retained working capital. The net assets remaining as of December 31, 2022 include the remaining Gulf of Mexico net assets and retained working capital from the Excalibar sale. As noted above, we expect to generate approximately $31 million of cash primarily in the first half of 2023 from the realization of the remaining working capital related to these divestitures.
We continue to evaluate other under-performing areas of our business, including certain international oil and natural gas markets, and anticipate additional actions may be necessary to optimize our operational footprint and invested capital in the Fluids Systems segment to transform this business for the evolving market conditions and outlook. As a result, we may incur future charges related to these efforts or potential asset impairments, which may negatively impact our future results.
Year Ended December 31, 2022 Compared to Year Ended December 31, 2021
Consolidated Results of Operations
Summarized results of operations for 2022 compared to 2021 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | 2022 vs 2021 |
(In thousands) | 2022 | | 2021 | | $ | | % |
Revenues | $ | 815,594 | | | $ | 614,781 | | | $ | 200,813 | | | 33 | % |
Cost of revenues | 694,058 | | | 529,552 | | | 164,506 | | | 31 | % |
Selling, general and administrative expenses | 97,618 | | | 94,445 | | | 3,173 | | | 3 | % |
Other operating income, net | (4,370) | | | (391) | | | (3,979) | | | NM |
Impairments and other charges | 37,322 | | | — | | | 37,322 | | | NM |
Operating loss | (9,034) | | | (8,825) | | | (209) | | | (2) | % |
| | | | | | | |
Foreign currency exchange (gain) loss | 389 | | | (397) | | | 786 | | | NM |
Interest expense, net | 7,040 | | | 8,805 | | | (1,765) | | | (20) | % |
Loss on extinguishment of debt | — | | | 1,000 | | | (1,000) | | | NM |
Loss before income taxes | (16,463) | | | (18,233) | | | 1,770 | | | 10 | % |
| | | | | | | |
Provision for income taxes | 4,371 | | | 7,293 | | | (2,922) | | | NM |
Net loss | $ | (20,834) | | | $ | (25,526) | | | $ | 4,692 | | | 18 | % |
Revenues
Revenues increased 33% to $815.6 million for 2022, compared to $614.8 million for 2021. This $200.8 million increase includes a $146.2 million (32%) increase in revenues in North America, comprised of a $141.2 million increase in the Fluids Systems segment and a $13.7 million increase in the Industrial Solutions segment, partially offset by a $8.8 million decrease in the Industrial Blending segment, which we exited in 2022. Revenues from our North America operations increased primarily due to the improvement in North America rig count, which favorably impacted our Fluids Systems segment, and an increase in rental and service revenues in our Industrial Solutions segment. Revenues from our international operations increased by $54.7 million (33%), as the prior year was unfavorably impacted by activity disruptions and project delays resulting from the COVID-19 pandemic, partially offset by a $20.8 million decrease in revenues from currency exchange rate changes resulting from the strengthening U.S. dollar. Consolidated revenues included $82.7 million of revenues from divested business units for 2022, compared to $70.6 million for 2021. Additional information regarding the change in revenues is provided within the Operating Segment Results below.
Cost of revenues
Cost of revenues increased 31% to $694.1 million for 2022, compared to $529.6 million for 2021. This $164.5 million increase was primarily driven by the 33% increase in revenues described above. Consolidated cost of revenues included $90.7 million of cost of revenues from divested business units for 2022, compared to $73.1 million for 2021.
Selling, general and administrative expenses
Selling, general and administrative expenses increased $3.2 million to $97.6 million for 2022, compared to $94.4 million for 2021. This increase was primarily driven by higher personnel expense, as well as higher legal and professional expenses. Selling, general and administrative expenses as a percentage of revenues was 12.0% for 2022 compared to 15.4% for 2021. Consolidated selling, general and administrative expenses included $1.8 million of costs related to divested business units for 2022, compared to $2.1 million for 2021.
Other operating income, net
Other operating income, net for 2022 includes $3.6 million of total gains on divestitures, including $2.6 million in the Industrial Blending segment for the sale of the Conroe, Texas blending facility and $1.0 million in the Fluids Systems segment for the Excalibar sale. See Note 2 for additional details. Other operating income, net for 2021 included gains associated with sales of assets, along with insurance and a legal settlement in the Industrial Solutions segment, largely offset by a $2.6 million charge associated with Hurricane Ida in August 2021 that caused damage to our Fourchon, Louisiana Fluids Systems operating base.
Impairments and other charges
As described above, 2022 includes $29.4 million of total non-cash impairment charges related to the long-lived assets and inventory associated with the exit of our Fluids Systems Gulf of Mexico operations, as well as a $7.9 million non-cash impairment charge related to the exit of our Industrial Blending operations.
Foreign currency exchange
Foreign currency exchange was a $0.4 million loss for 2022 compared to a $0.4 million gain for 2021 and primarily reflects the impact of currency translation for assets and liabilities (including intercompany balances) that are denominated in currencies other than functional currencies.
Interest expense, net
Interest expense was $7.0 million for 2022 compared to $8.8 million for 2021. Interest expense for 2022 and 2021 includes $0.9 million and $3.7 million, respectively, in non-cash amortization of original issue discount and debt issuance costs. The decrease in interest expense is primarily due to the 2021 repayment of our Convertible Notes using borrowings under the ABL Facility, partially offset by the increase in benchmark borrowing rates as well as an increase in average debt outstanding during 2022, in support of the higher working capital associated with the 33% revenue growth.
Loss on extinguishment of debt
In 2021, we repurchased $28.3 million, respectively, of our Convertible Notes in the open market for $28.1 million. The $1.0 million loss for 2021 reflects the difference in the amount paid and the net carrying value of the extinguished debt, including original issue discount and debt issuance costs.
Provision for income taxes
The provision for income taxes was $4.4 million for 2022, which includes an income tax benefit of $3.1 million related to the restructuring of certain subsidiary legal entities within Europe, as the undistributed earnings for an international subsidiary are no longer subject to certain taxes upon future distribution. The provision for income taxes in 2022 was unfavorably impacted as we are unable to recognize a tax benefit related to the $37.3 million in total impairment charges. The provision for income taxes was $7.3 million for 2021 despite reporting a pretax loss for the period. In both years, income tax expense primarily reflects earnings from our international operations since we are unable to recognize the tax benefit from our U.S. losses as they may not be realized.
Operating Segment Results
Summarized financial information for our reportable segments is shown in the following table (net of inter-segment transfers):
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | 2022 vs 2021 |
(In thousands) | 2022 | | 2021 | | $ | | % |
Revenues | | | | | | | |
Fluids Systems | $ | 622,601 | | | $ | 420,789 | | | $ | 201,812 | | | 48 | % |
Industrial Solutions | 192,993 | | | 185,171 | | | 7,822 | | | 4 | % |
Industrial Blending | — | | | 8,821 | | | (8,821) | | | (100) | % |
Total revenues | $ | 815,594 | | | $ | 614,781 | | | $ | 200,813 | | | 33 | % |
| | | | | | | |
Operating income (loss) | | | | | | | |
Fluids Systems | $ | (15,566) | | | $ | (19,012) | | | $ | 3,446 | | | |
Industrial Solutions | 43,899 | | | 42,117 | | | 1,782 | | | |
Industrial Blending | (8,002) | | | (2,384) | | | (5,618) | | | |
Corporate office | (29,365) | | | (29,546) | | | 181 | | | |
Total operating loss | $ | (9,034) | | | $ | (8,825) | | | $ | (209) | | | |
| | | | | | | |
Segment operating margin | | | | | | | |
Fluids Systems | (2.5) | % | | (4.5) | % | | | | |
Industrial Solutions | 22.7 | % | | 22.7 | % | | | | |
Industrial Blending | NM | | (27.0) | % | | | | |
Fluids Systems
Revenues
Total revenues for this segment consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | 2022 vs 2021 |
(In thousands) | 2022 | | 2021 | | $ | | % |
United States | $ | 355,435 | | | $ | 227,261 | | | $ | 128,174 | | | 56 | % |
Canada | 61,069 | | | 48,007 | | | 13,062 | | | 27 | % |
Total North America | 416,504 | | | 275,268 | | | 141,236 | | | 51 | % |
| | | | | | | |
EMEA | 185,298 | | | 132,221 | | | 53,077 | | | 40 | % |
Other | 20,799 | | | 13,300 | | | 7,499 | | | 56 | % |
Total International | 206,097 | | | 145,521 | | | 60,576 | | | 42 | % |
| | | | | | | |
Total Fluids Systems revenues | $ | 622,601 | | | $ | 420,789 | | | $ | 201,812 | | | 48 | % |
North America revenues increased 51% to $416.5 million for 2022, compared to $275.3 million for 2021. The increase includes a $126.7 million increase from U.S. land markets driven primarily by the 52% increase in U.S. rig count, partially offset by lower market share, while offshore Gulf of Mexico increased $1.3 million. In addition, Canada revenues increased $13.1 million driven primarily by the 34% increase in Canada rig count. For 2022, U.S. revenues included $328.4 million from land markets, including $56.0 million from the Excalibar business, and $26.7 million from offshore Gulf of Mexico. For 2021, U.S. revenues included $201.9 million from land markets, including $36.4 million from the Excalibar business, and $25.4 million from offshore Gulf of Mexico.
Internationally, revenues increased 42% to $206.1 million for 2022, compared to $145.5 million for 2021. The increase was primarily driven by higher activity in Europe, Africa, and the Asia Pacific region following a significant impact in 2021 from the COVID-19 pandemic, as described above, partially offset by a $19.3 million decrease in revenues from currency exchange rate changes.
Operating loss
The Fluids Systems segment incurred an operating loss of $15.6 million for 2022, which includes $29.4 million of total non-cash impairment charges, compared to a $19.0 million operating loss incurred in 2021. The Fluids Systems segment operating loss for 2022 includes $1.4 million of charges primarily related to facility exit and severance costs, and the operating loss for 2021 included $5.5 million of charges primarily related to self-insured costs associated with Hurricane Ida damage to our Fourchon, Louisiana Fluids Systems operating base, facility exit, and severance costs. The change in operating loss includes a $33.3 million improvement from North America land markets (reflecting an incremental margin of 24%) along with a $6.9 million improvement from international operations (reflecting an incremental margin of 11%), driven primarily by the revenue improvement described above, partially offset by a $36.5 million decline for the Gulf of Mexico (including impairments). The international operating results reflect the impact of inflationary cost pressures from certain international contracts in which customer pricing is fixed.
Industrial Solutions
Revenues
Total revenues for this segment consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | 2022 vs 2021 |
(In thousands) | 2022 | | 2021 | | $ | | % |
Product sales revenues | $ | 58,692 | | | $ | 66,796 | | | $ | (8,104) | | | (12) | % |
Rental and service revenues | 134,301 | | | 118,375 | | | 15,926 | | | 13 | % |
Total Industrial Solutions revenues | $ | 192,993 | | | $ | 185,171 | | | $ | 7,822 | | | 4 | % |
Revenues from product sales decreased by $8.1 million from 2021, as 2021 was favorably impacted by pent-up customer demand following the delays in purchases and project execution associated with the COVID-19 pandemic. Rental and service revenues increased by 13% from 2021, as continued market penetration of the power transmission sector in the U.S. was partially offset by lower activity in the U.K.
Operating income
The Industrial Solutions segment generated operating income of $43.9 million for 2022 compared to $42.1 million for 2021. The 2021 operating results included a $1.0 million gain associated with a legal settlement. The remaining $2.8 million increase is primarily attributable to the growth in revenues described above, partially offset by the effects of lower average pricing associated with large scale rental projects.
Industrial Blending
We completed the wind down of the Industrial Blending business and the sale of the associated warehouse facility and related equipment in 2022, as described above. The operating loss for 2022 includes a $7.9 million non-cash charge for the impairment of the long-lived assets as well as exit and other costs related to the process to sell these assets, partially offset by a $2.6 million gain subsequently recognized upon the eventual sale in the fourth quarter of 2022.
Corporate Office
Corporate office expenses decreased slightly to $29.4 million for 2022, compared to $29.5 million for 2021. This decrease was primarily driven by lower stock-based compensation expense partially offset by higher performance-based incentives and personnel expense.
Year Ended December 31, 2021 Compared to Year Ended December 31, 2020
Consolidated Results of Operations
Summarized results of operations for 2021 compared to 2020 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | 2021 vs 2020 |
(In thousands) | 2021 | | 2020 | | $ | | % |
Revenues | $ | 614,781 | | | $ | 492,625 | | | $ | 122,156 | | | 25 | % |
Cost of revenues | 529,552 | | | 473,258 | | | 56,294 | | | 12 | % |
Selling, general and administrative expenses | 94,445 | | | 86,604 | | | 7,841 | | | 9 | % |
Other operating income, net | (391) | | | (3,330) | | | 2,939 | | | NM |
Impairments and other charges | — | | | 14,727 | | | (14,727) | | | NM |
Operating loss | (8,825) | | | (78,634) | | | 69,809 | | | 89 | % |
| | | | | | | |
Foreign currency exchange (gain) loss | (397) | | | 3,378 | | | (3,775) | | | NM |
Interest expense, net | 8,805 | | | 10,986 | | | (2,181) | | | (20) | % |
(Gain) loss on extinguishment of debt | 1,000 | | | (419) | | | 1,419 | | | NM |
Loss before income taxes | (18,233) | | | (92,579) | | | 74,346 | | | 80 | % |
| | | | | | | |
Provision (benefit) for income taxes | 7,293 | | | (11,883) | | | 19,176 | | | NM |
Net loss | $ | (25,526) | | | $ | (80,696) | | | $ | 55,170 | | | 68 | % |
Revenues
Revenues increased 25% to $614.8 million for 2021, compared to $492.6 million for 2020. This $122.2 million increase includes a $97.9 million (28%) increase in revenues in North America, comprised of a $48.5 million increase in the Fluids Systems segment and a $48.2 million increase in the Industrial Solutions segment. Revenues from our North America operations increased primarily due to the significant growth in power transmission and other industrial markets, which impacts our Industrial Solutions segment, as well as the improvement in North America rig count, which favorably impacted our Fluids Systems segment. Revenues from our international operations increased by $24.3 million (17%) but continued to be unfavorably impacted by activity disruptions and project delays resulting from the COVID-19 pandemic. Consolidated revenues included $70.6 million of revenues from divested business units for 2021, compared to $82.3 million for 2020. Additional information regarding the change in revenues is provided within the Operating Segment Results below.
Cost of revenues
Cost of revenues increased 12% to $529.6 million for 2021, compared to $473.3 million for 2020. Fluids Systems segment cost of revenues for 2021 includes $3.0 million of charges primarily related to facility exit and severance costs, and 2020 included a total of $14.1 million of charges related to inventory write-downs, severance costs, and facility exit costs. The remaining increase was primarily driven by the 25% increase in revenues described above, partially offset by the benefit of cost reduction programs implemented in 2020 and 2021. Consolidated cost of revenues included $73.1 million of cost of revenues from divested business units for 2021, compared to $78.5 million for 2020.
Selling, general and administrative expenses
Selling, general and administrative expenses increased $7.8 million to $94.4 million for 2021, compared to $86.6 million for 2020. This increase was primarily driven by higher performance-based incentive and stock-based compensation expense, as well as higher personnel costs in 2021, partially offset by the benefit of cost reduction programs implemented in 2020 and 2021, and lower severance charges. Selling, general and administrative expenses as a percentage of revenues was 15.4% for 2021 compared to 17.6% for 2020. Consolidated selling, general and administrative expenses included $2.1 million of costs related to divested business units for 2021, compared to $1.4 million for 2020.
Other operating (income) loss, net
In August 2021, Hurricane Ida caused damage to our Fourchon, Louisiana Fluids Systems operating base. While this event is covered by our property and business interruption insurance programs, these programs contain self-insured retentions, which remain our financial obligations, resulting in $2.6 million of charges for 2021. In addition, 2021 includes a $0.8 million gain related to the final insurance settlement associated with the July 2018 fire at our Kenedy, Texas drilling fluids facility, and a $1.0 million gain related to a legal settlement in the Industrial Solutions segment, as well as gains on sales of assets. Other operating income for 2020 primarily relates to gains on sales of assets, including a $1.3 million gain related to our exit from Brazil.
Impairments and other charges
Fluids Systems segment included non-cash charges for 2020 consisting of $11.7 million for the recognition of cumulative foreign currency translation losses related to the substantial liquidation of our subsidiary in Brazil, as well as $3.0 million attributable to the abandonment of certain property, plant and equipment.
Foreign currency exchange
Foreign currency exchange was a $0.4 million gain for 2021 compared to a $3.4 million loss for 2020 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 $8.8 million for 2021 compared to $11.0 million for 2020. Interest expense for 2021 and 2020 included $3.7 million and $5.2 million, respectively, in non-cash amortization of original issue discount and debt issuance costs. The decrease in cash interest expense is primarily due to lower debt balances.
(Gain) loss on extinguishment of debt
In 2021 and 2020, we repurchased $28.3 million and $33.1 million, respectively, of our Convertible Notes in the open market for $28.1 million and $29.1 million, respectively. The $1.0 million loss and $0.4 million gain for 2021 and 2020, respectively, reflects the difference in the amount paid and the net carrying value of the extinguished debt, including original issue discount and debt issuance costs.
Provision (benefit) for income taxes
The provision for income taxes was $7.3 million for 2021, despite reporting a pretax loss for the period, primarily reflecting the impact of the geographic composition of our pretax loss. The tax expense primarily relates to earnings from our international operations since we are currently unable to recognize the tax benefit from our U.S. losses as they may not be realized. The benefit for income taxes was $11.9 million for 2020, reflecting an effective tax benefit rate of 13%. This result primarily reflects the impact of the $11.7 million non-cash recognition of cumulative foreign currency translation losses related to the substantial liquidation of our subsidiary in Brazil and other nondeductible expenses, as well as the impact of the geographic composition of our pretax loss, where the tax benefit from losses in the U.S was partially offset by the tax expense related to earnings from our international operations.
Operating Segment Results
Summarized financial information for our reportable segments is shown in the following table (net of inter-segment transfers):
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | 2021 vs 2020 |
(In thousands) | 2021 | | 2020 | | $ | | % |
Revenues | | | | | | | |
Fluids Systems | $ | 420,789 | | | $ | 354,608 | | | $ | 66,181 | | | 19 | % |
Industrial Solutions | 185,171 | | | 130,469 | | | 54,702 | | | 42 | % |
Industrial Blending | 8,821 | | | 7,548 | | | 1,273 | | | 17 | % |
Total revenues | $ | 614,781 | | | $ | 492,625 | | | $ | 122,156 | | | 25 | % |
| | | | | | | |
Operating income (loss) | | | | | | | |
Fluids Systems | $ | (19,012) | | | $ | (66,403) | | | $ | 47,391 | | | |
Industrial Solutions | 42,117 | | | 13,030 | | | 29,087 | | | |
Industrial Blending | (2,384) | | | 429 | | | (2,813) | | | |
Corporate office | (29,546) | | | (25,690) | | | (3,856) | | | |
Total operating income (loss) | $ | (8,825) | | | $ | (78,634) | | | $ | 69,809 | | | |
| | | | | | | |
Segment operating margin | | | | | | | |
Fluids Systems | (4.5) | % | | (18.7) | % | | | | |
Industrial Solutions | 22.7 | % | | 10.0 | % | | | | |
Industrial Blending | (27.0) | % | | 5.7 | % | | | | |
Fluids Systems
Revenues
Total revenues for this segment consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | 2021 vs 2020 |
(In thousands) | 2021 | | 2020 | | $ | | % |
United States | $ | 227,261 | | | $ | 202,052 | | | $ | 25,209 | | | 12 | % |
Canada | 48,007 | | | 24,762 | | | 23,245 | | | 94 | % |
Total North America | 275,268 | | | 226,814 | | | 48,454 | | | 21 | % |
| | | | | | | |
EMEA | 132,221 | | | 115,891 | | | 16,330 | | | 14 | % |
Other | 13,300 | | | 11,903 | | | 1,397 | | | 12 | % |
Total International | 145,521 | | | 127,794 | | | 17,727 | | | 14 | % |
| | | | | | | |
Total Fluids Systems revenues | $ | 420,789 | | | $ | 354,608 | | | $ | 66,181 | | | 19 | % |
North America revenues increased 21% to $275.3 million for 2021, compared to $226.8 million for 2020. This increase was primarily attributable to a $51.7 million increase from U.S. land markets driven primarily by the 10% increase in U.S. rig count and an increase in market share, partially offset by a $23.2 million decrease from offshore Gulf of Mexico driven primarily by changes in customer drilling and completion activity levels. In addition, Canada increased $23.2 million driven primarily by the 47% increase in Canada rig count and an increase in market share. For 2021, U.S. revenues included $201.9 million from land markets, including $36.4 million from the Excalibar business, and $25.4 million from offshore Gulf of Mexico. For 2020, U.S. revenues included $155.6 million from land markets, including $28.2 million from the Excalibar business, and $46.5 million from offshore Gulf of Mexico.
Internationally, revenues increased 14% to $145.5 million for 2021, compared to $127.8 million for 2020. The increase was primarily driven by higher activity in Europe and Asia Pacific regions following significant impact of the COVID-19 pandemic, as described above.
Operating income (loss)
The Fluids Systems segment incurred an operating loss of $19.0 million for 2021, reflecting a $47.4 million improvement from the $66.4 million operating loss incurred in 2020. The Fluids Systems segment operating loss for 2021 includes $5.5 million of charges primarily related to self-insured costs associated with Hurricane Ida damage to our Fourchon, Louisiana Fluids Systems operating base, facility exit, and severance costs, and the operating loss for 2020 included $28.6 million of charges, consisting of $11.7 million for the recognition of cumulative foreign currency translation losses related to the substantial liquidation of our subsidiary in Brazil and $16.9 million of total charges associated with inventory write-downs, severance costs, fixed asset impairments, and facility exit costs. The remaining improvement in the operating loss includes a $20.1 million benefit from North America operations and a $4.2 million benefit from international operations, reflecting the impact of the revenue improvement described above along with the benefit of cost reduction programs implemented in 2020 and 2021.
Industrial Solutions
Revenues
Total revenues for this segment consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | 2021 vs 2020 |
(In thousands) | 2021 | | 2020 | | $ | | % |
Product sales revenues | $ | 66,796 | | | $ | 29,170 | | | $ | 37,626 | | | 129 | % |
Rental and service revenues | 118,375 | | | 101,299 | | | 17,076 | | | 17 | % |
Total Industrial Solutions revenues | $ | 185,171 | | | $ | 130,469 | | | $ | 54,702 | | | 42 | % |
In 2020, customer activity across most end-markets was unfavorably impacted by the COVID-19 pandemic and the related operational restrictions and market uncertainty, causing delays in purchases and project execution. As a result, revenues from product sales, which typically fluctuate based on the timing of mat orders from customers, increased by $37.6 million in 2021, including a favorable impact from pent-up demand following the COVID-19 pandemic as well as our expanding power transmission customer base.
Rental and service revenues increased by $17.1 million in 2021, as delayed purchases and projects resumed, including a $16.4 million increase from power transmission and other industrial markets. The increase from industrial customers reflects our continued expansion into these markets, both in the U.S. and U.K., including an approximately 22% increase in revenues from the power transmission sector.
Operating income
The Industrial Solutions segment generated operating income of $42.1 million for 2021 compared to $13.0 million for 2020, the increase being primarily attributable to the change in revenues as described above.
Industrial Blending
The Industrial Blending business was operational from the fourth quarter of 2020 until the first quarter of 2022, as described above. The operating loss generated in 2021 was primarily attributable to the ramp-up of operating costs to support the operations.
Corporate Office
Corporate office expenses increased $3.9 million to $29.5 million for 2021 compared to $25.7 million for 2020. This increase was primarily driven by higher performance-based incentive and stock-based compensation expense, as well as the restoration of certain U.S. salary and retirement benefits, and higher mergers and acquisitions and other legal and professional costs, partially offset by the benefit of cost reduction programs implemented in 2020 and 2021.
Liquidity and Capital Resources
Net cash used in operating activities was $25.0 million for 2022 compared to $3.0 million for 2021. During 2022, net loss adjusted for non-cash items provided cash of $54.1 million, while changes in working capital used cash of $79.1 million, including nearly $20 million to fund working capital growth within the Excalibar business and Gulf of Mexico operations prior to their respective fourth quarter divestitures. The use of cash for working capital in 2022 is primarily related to an increase in inventories and receivables associated with higher activity levels, along with raw materials cost inflation.
Net cash provided by investing activities was $46.2 million for 2022, including $71.3 million in proceeds from divestitures (see Note 2 for additional information) as well as $3.2 million in proceeds from the sale of assets, which includes the sale of used mats from our Industrial Solutions rental fleet, partially offset by capital expenditures of $28.3 million. Our capital expenditures during 2022 were primarily directed to supporting our Industrial Solutions segment, including $21.2 million of investments to expand the mat rental fleet, supporting our strategic growth in the power transmission sector and replacing mats sold from the fleet. Net cash used in investing activities was $17.5 million for 2021, including capital expenditures of $21.8 million and $13.4 million associated with the Lentzcaping acquisition (see Note 2 for additional information), partially offset by $16.0 million in proceeds from the sale of assets. Nearly all of our capital expenditures during 2021 were directed to supporting our Industrial Solutions segment, including $14.3 million of investments in the mat rental fleet.
Net cash used in financing activities was $24.9 million for 2022, which includes $17.6 million in share purchases under our repurchase program. Net cash provided by financing activities was $21.4 million for 2021, which primarily included $89.9 million of net borrowings on our ABL Facility and other financing arrangements, partially offset by $66.7 million used for repurchases and repayment of our Convertible Notes which matured in December 2021.
Substantially all our $23.2 million of cash on hand at December 31, 2022 resides in our international subsidiaries. We primarily manage our liquidity utilizing availability under our Amended ABL Facility and other existing financing arrangements. Under our Amended ABL Facility, we manage daily cash requirements by utilizing borrowings or repayments under this revolving credit facility, while maintaining minimal cash on hand in the U.S. As of February 23, 2023, our total borrowing availability under the Amended ABL Facility was $167.9 million, of which $58.0 million was drawn and $3.3 million was used for outstanding letters of credit, resulting in remaining availability of $106.6 million.
We expect total availability under the Amended ABL Facility to fluctuate directionally based on the level of eligible U.S. accounts receivable, inventory, and composite mats included in the rental fleet. We expect the projected availability under our Amended ABL Facility and other existing financing arrangements, cash generated by operations, and available cash on-hand in our international subsidiaries to be adequate to fund our current operations during the next 12 months.
We anticipate that future working capital requirements for our operations will generally fluctuate directionally with revenues, though 2023 is expected to benefit from the wind down of approximately $30 million of working capital associated with the fourth quarter 2022 divestiture transactions. We expect capital expenditures in 2023 will remain fairly in line with 2022 levels, with spending heavily focused on the expansion of our mat rental fleet to further support the utilities market penetration. We also expect to return value to our shareholders, utilizing excess cash generation to fund additional share repurchases.
Our capitalization is as follows:
| | | | | | | | | | | |
(In thousands) | December 31, 2022 | | December 31, 2021 |
Amended ABL Facility | $ | 80,300 | | | $ | 86,500 | |
Other debt | 33,949 | | | 28,491 | |
Unamortized discount and debt issuance costs | (134) | | | (188) | |
Total debt | $ | 114,115 | | | $ | 114,803 | |
| | | |
Stockholders’ equity | 423,028 | | | 462,386 | |
Total capitalization | $ | 537,143 | | | $ | 577,189 | |
| | | |
Total debt to capitalization | 21.2 | % | | 19.9 | % |
Asset-Based Loan Facility. In October 2017, we entered into a U.S. asset-based revolving credit agreement, which was amended in March 2019 (the “ABL Facility”). In May 2022, we amended and restated the ABL Facility (the “Amended ABL Facility”). The Amended ABL Facility provides financing of up to $175.0 million available for borrowings (inclusive of
letters of credit), which can be increased up to $250.0 million, subject to certain conditions. The Amended ABL Facility has a five-year term expiring May 2027, expands available borrowing capacity associated with the Industrial Solutions rental mat fleet, replaces the LIBOR-based pricing grid with a Bloomberg Short-Term Bank Yield Index (“BSBY”) pricing grid, and includes a mechanism to incorporate a sustainability-linked pricing framework with the consent of the required lenders (as defined in the Amended ABL Facility).
As of December 31, 2022, our total borrowing availability under the Amended ABL Facility was $167.6 million, of which $80.3 million was drawn and $3.3 million was used for outstanding letters of credit, resulting in remaining availability of $84.0 million.
Borrowing availability under the Amended ABL Facility is calculated based on eligible U.S. accounts receivable, inventory and composite mats included in the rental fleet, net of reserves and subject to limits on certain of the assets included in the borrowing base calculation. To the extent pledged by the borrowers, the borrowing base calculation also includes the amount of eligible pledged cash. The administrative agent may establish reserves in accordance with the Amended ABL Facility, in part based on appraisals of the asset base, and other limits in its discretion, which could reduce the amounts otherwise available under the Amended ABL Facility.
Under the terms of the Amended ABL Facility, we may elect to borrow at a variable interest rate based on either, (1) the BSBY rate (subject to a floor of zero) or (2) the base rate (subject to a floor of zero), equal to the highest of (a) the federal funds rate plus 0.50%, (b) the prime rate of Bank of America, N.A., and (c) BSBY for a one-month interest period plus 1.00%, plus, in each case, an applicable margin per annum. The applicable margin ranges from 1.50% to 2.00% per annum for BSBY borrowings, and 0.50% to 1.00% per annum for base rate borrowings, based on the consolidated leverage ratio (as defined in the Amended ABL Facility) as of the last day of the most recent fiscal quarter. We are also required to pay a commitment fee equal to (i) 0.375% per annum at any time the average daily unused portion of the commitments is greater than 50% and (ii) 0.25% per annum at any time the average daily unused portion of the commitments is less than 50%.
As of December 31, 2022, the applicable margin for borrowings under the Amended ABL Facility was 1.75% with respect to BSBY borrowings and 0.75% with respect to base rate borrowings. As of December 31, 2022, the weighted average interest rate for the Amended ABL Facility was 5.9% and the applicable commitment fee on the unused portion of the Amended ABL Facility was 0.375% per annum.
The Amended ABL Facility is a senior secured obligation of the Company and certain of our U.S. subsidiaries constituting borrowers thereunder, secured by a first priority lien on substantially all of the personal property and certain real property of the borrowers, including a first priority lien on certain equity interests of direct or indirect domestic subsidiaries of the borrowers and certain equity interests issued by certain foreign subsidiaries of the borrowers.
The Amended ABL Facility contains customary representations, warranties and covenants that, among other things, and subject to certain specified circumstances and exceptions, restrict or limit the ability of the borrowers and certain of their subsidiaries to incur indebtedness (including guarantees), grant liens, make investments, pay dividends or distributions with respect to capital stock and make other restricted payments, make prepayments on certain indebtedness, engage in mergers or other fundamental changes, dispose of property, and change the nature of their business.
The Amended ABL Facility requires compliance with the following financial covenants: (i) a minimum fixed charge coverage ratio of 1.00 to 1.00 for the most recently completed four fiscal quarters and (ii) while a leverage covenant trigger period (as defined in the Amended ABL Facility) is in effect, a maximum consolidated leverage ratio of 4.00 to 1.00 as of the last day of the most recently completed fiscal quarter.
The Amended ABL Facility includes customary events of default including non-payment of principal, interest or fees, violation of covenants, inaccuracy of representations or warranties, cross-default to other material indebtedness, bankruptcy and insolvency events, invalidity or impairment of security interests or invalidity of loan documents, certain ERISA events, unsatisfied or unstayed judgments and change of control.
Other Debt. In February 2021, a U.K. subsidiary entered a £6.0 million term loan facility that was scheduled to mature in February 2024. In April 2022, this facility was amended to increase the term loan to £7.0 million and establish a £2.0 million revolving credit facility. Both the amended term loan and revolving credit facility mature in April 2025 and bear interest at a rate of Sterling Overnight Index Average (“SONIA”) plus a margin of 3.25% per year. As of December 31, 2022, the interest rate for the U.K. facilities was 6.7%. The term loan is payable in quarterly installments of £350,000 plus interest beginning June 2022 and a £2.8 million payment due at maturity. We had $8.5 million outstanding under these arrangements at December 31, 2022.
In August 2021, we completed sale-leaseback transactions related to certain vehicles and other equipment for net proceeds of approximately $7.9 million. The transactions have been accounted for as financing arrangements as they did not qualify for sale accounting. As a result, the vehicles and other equipment continue to be reflected on our balance sheet in
property, plant and equipment, net. The financing arrangements have a weighted average annual interest rate of 5.4% and are payable in monthly installments with varying maturities through October 2025. We had $3.4 million in financing obligations outstanding under these arrangements at December 31, 2022.
Certain of our foreign subsidiaries maintain local credit arrangements consisting primarily of lines of credit or overdraft facilities which are generally 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 $14.3 million and $11.8 million outstanding under these arrangements at December 31, 2022 and 2021, respectively.
Off-Balance Sheet Arrangements
We do not have any special purpose entities. At December 31, 2022, we had $42.3 million in outstanding letters of credit, performance bonds, and other guarantees for which certain of the letters of credit are collateralized by $1.9 million in restricted cash. We also enter into normal short-term operating leases for office and warehouse space, as well as certain operating equipment. None of these off-balance sheet arrangements either has, or is expected to have, a material effect on our financial statements.
Contractual Obligations
A summary of our outstanding contractual and other obligations and commitments at December 31, 2022 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In thousands) | 2023 | | 2024 | | 2025 | | 2026 | | 2027 | | Thereafter | | Total |
Amended ABL Facility | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 80,300 | | | $ | — | | | $ | 80,300 | |
Other debt | 18,675 | | | 1,694 | | | 5,144 | | | — | | | — | | | — | | | 25,513 | |
Financing obligation (1) | 2,311 | | | 1,068 | | | 166 | | | — | | | — | | | — | | | 3,545 | |
Finance lease liabilities (1) | 1,803 | | | 1,567 | | | 1,307 | | | 903 | | | 61 | | | — | | | 5,641 | |
Operating lease liabilities (1) | 6,619 | | | 4,501 | | | 3,422 | | | 3,245 | | | 3,042 | | | 9,042 | | | 29,871 | |
Trade accounts payable and accrued liabilities (2) | 134,917 | | | — | | | — | | | — | | | — | | | — | | | 134,917 | |
Other long-term liabilities (3) | — | | | 2,566 | | | 410 | | | — | | | — | | | 6,315 | | | 9,291 | |
Performance bond obligations | 12,644 | | | 21,498 | | | 543 | | | — | | | 1,966 | | | — | | | 36,651 | |
Letter of credit commitments | 3,888 | | | 155 | | | 1,383 | | | — | | | — | | | 238 | | | 5,664 | |
Total contractual obligations | $ | 180,857 | | | $ | 33,049 | | | $ | 12,375 | | | $ | 4,148 | | | $ | 85,369 | | | $ | 15,595 | | | $ | 331,393 | |
(1)Financing obligations, finance lease liabilities, and operating lease liabilities represent the undiscounted future payments.
(2)Excludes the current portion of operating lease liabilities.
(3)Table does not allocate by year expected tax payments, asset retirement obligations, and uncertain tax positions due to the inability to make reasonably reliable estimates of the timing of future cash settlements.
We anticipate that the obligations and commitments listed above that are due in less than one year will be paid from the projected availability under our Amended ABL Facility and other existing financing arrangements, cash generated by operations, and available cash on-hand in our international subsidiaries, subject to covenant compliance and certain restrictions as further discussed above. The specific timing of settlement for certain long-term obligations cannot be reasonably estimated.
Critical Accounting Policies
Critical Accounting Estimates
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”), which requires management to make estimates and assumptions that affect the reported amounts and disclosures. Significant estimates used in preparing our consolidated financial statements include estimated cash flows and fair values used for impairments of long-lived assets, including goodwill and other intangibles, and valuation allowances for deferred tax assets. See Note 1 for a discussion of the accounting policies for each of these matters. 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.
We believe the critical accounting policies described below affect our more significant judgments and estimates used in preparing the consolidated financial statements.
Impairment of Long-lived Assets
As of December 31, 2022, our consolidated balance sheet includes $193.1 million of property, plant and equipment and $19.7 million of finite-lived intangible assets. We review property, plant and equipment, finite-lived intangible assets and certain other assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. We assess recoverability based on the undiscounted future net cash flows expected from the use and eventual disposition of such asset. Should the review indicate that the carrying value is not fully recoverable, the amount of impairment loss is determined by comparing the carrying value to the estimated fair value.
Conroe, Texas Blending Facility
In connection with the 2022 wind down of the Industrial Blending business and sales process associated with the industrial blending and warehouse facility and related equipment as described above, we recognized a $7.9 million impairment charge to impairments and other charges related to these long-lived assets in the second quarter of 2022, and subsequently recognized a gain of $2.6 million upon the eventual sale in the fourth quarter of 2022.
Gulf of Mexico Operations
As a result of the plan to exit the Gulf of Mexico operations as described above, we considered the third quarter of 2022 developments to be a potential indicator of impairment that required us to complete an impairment evaluation. Accordingly, we estimated the fair value for our Gulf of Mexico assets as of September 30, 2022 based on the expected cash flows to be generated from the anticipated transactions and determined that a $21.5 million impairment charge for the third quarter of 2022 was required related to the long-lived assets. While there are inherent uncertainties and management judgment in estimating the fair value of long-lived assets including the discount rate, the estimated future cash flows for these assets primarily relate to the rental income from the agreement for a seven-year sublease of our Fourchon, Louisiana drilling fluids shorebase and blending facility net of the lease payments for our existing lease of such shorebase facility.
As of December 31, 2022, our consolidated balance sheet includes $47.1 million of goodwill, all of which relates to the Industrial Solutions segment. Goodwill and other indefinite-lived intangible assets are tested for impairment annually as of November 1, or more frequently, if indicators of impairment exist. As part of our annual goodwill review, we first perform a qualitative assessment based on company performance and future business outlook to determine if indicators of impairment exist. When there are qualitative indicators of impairment, we use an impairment test which includes a comparison of the carrying value of net assets of our reporting units, including goodwill, with their estimated fair values, which we estimate using a combination of a market multiple and discounted cash flow approach (classified within Level 3 of the fair value hierarchy). In completing the annual evaluation during the fourth quarter of 2022, we determined that the fair value of the Industrial Solutions reporting unit was significantly more than the net carrying value, and therefore, no impairment was required.
Income Taxes
We had total deferred tax assets of $71.9 million and $70.2 million at December 31, 2022 and 2021, respectively. A valuation allowance must be established to offset a deferred tax asset if, based on available evidence, it is more likely than not that some or all of the deferred tax asset will not be realized. We have considered future taxable income and tax planning strategies in assessing the need for our valuation allowance. At December 31, 2022, we had a total valuation allowance of $47.3 million, which includes a valuation allowance on $28.9 million of net operating loss carryforwards for certain U.S. federal, state and foreign jurisdictions, including Australia, as well as a valuation allowance of $4.7 million for certain foreign tax credits recognized related to the accounting for the impact of the 2017 U.S. Tax Cuts and Jobs Act (“Tax Act”). Changes in the expected future generation of qualifying taxable income within these jurisdictions or in the realizability of other tax assets
may result in an adjustment to the valuation allowance, which would be charged or credited to income in the period this determination was made.
We file income tax returns in the U.S. and several non-U.S. jurisdictions and are subject to examination in the various jurisdictions in which we file. We are no longer subject to income tax examinations for U.S. federal and substantially all state jurisdictions for years prior to 2018 and for substantially all foreign jurisdictions for years prior to 2008.
We are under examination by various tax authorities in countries where we operate, 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.
New Accounting Pronouncements
See Note 1 in Item 8. “Financial Statements and Supplementary Data” for a discussion of new accounting pronouncements.
ITEM 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the stockholders and the Board of Directors of Newpark Resources, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Newpark Resources, Inc. and subsidiaries (the “Company”) as of December 31, 2022 and 2021, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows, for each of the three years in the period ended December 31, 2022, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 24, 2023, expressed an unqualified opinion on the Company’s internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Long-lived Assets / Inventory Impairment and other charges – Exit of Gulf of Mexico Operations — Refer to Notes 2, 3 and 4 to the financial statements
Critical Audit Matter Description
In the third quarter of 2022, the Company’s Board of Directors approved management’s plan to exit its Gulf of Mexico operations, including the potential sale of related assets. As a result of the plan to exit the Gulf of Mexico operations, the Company considered developments in the third quarter to be a potential indicator of impairment that required an impairment evaluation. Accordingly, the Company estimated the fair value for Gulf of Mexico assets as of September 30, 2022, based on the expected cash flows to be generated from anticipated transactions and determined that a $21.5 million impairment charge was required related to long-lived assets. The Company also recognized an $8.0 million charge to reduce the carrying value of inventory to net realizable value primarily based on the anticipated transactions. The total charges of $29.4 million were recorded to impairments and other charges in the year ended December 31, 2022.
We identified impairment and other charges taken for the Gulf of Mexico operations as a critical audit matter due to the materiality of the long-lived assets and inventory balances within the Gulf of Mexico operations, high degree of auditor judgment, an increased level of effort when performing audit procedures to evaluate the reasonableness of management’s assumptions in determining the future net cash flows, and an increased extent of effort, including the need to involve fair value specialists.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the evaluation of the Company’s impairment analysis for long-lived assets within the Gulf of Mexico asset group included the following, among others:
•Made inquiries of business unit managers as well as executives and operations personnel about the expected plans for sale of related assets.
•Evaluated management’s impairment analysis by reviewing agreements, indicators of interest and letters of intent involving external parties to determine potential impairment indicators and the analysis of whether the carrying amounts of the Gulf of Mexico assets were no longer recoverable.
•Evaluated the completeness and accuracy of the long-lived assets identified for impairment by comparing the listing of assets evaluated by management in the fair value analysis to the listing of assets recorded in the Gulf of Mexico asset group.
•Evaluated the reasonableness of key assumptions used by management in determining the undiscounted future net cash flows by comparing the undiscounted net future cash flows to source information such as agreements under negotiation for precedent transactions involving external parties and assessing the remaining useful life and end of life/salvage value of the assets and testing the mathematical accuracy of the analysis.
•With the assistance of our fair value specialists, we evaluated the valuation methodology, assessed the reasonableness of the valuation assumptions and confirmed the mathematical accuracy of the discount rate used in the fair value analysis.
Our audit procedures related to the net realizable value of inventory included the following, among others:
•Made inquiries of business unit managers as well as executives, sales, and operations personnel about the expected sales prices and plans for usage of products.
•Tested the forecasted net realizable value by comparing to internal and external information (agreements under negotiation for precedent transactions involving external parties, contracts, historical usage, communications with customers) and actual results occurring after the net realizable value analysis was completed.
•Considered the existence of contradictory evidence based on reading of internal communications to management and the board of directors and Company press releases, as well as our observations and inquiries as to changes within the business.
Our audit procedures also included testing the effectiveness of controls over the review of impairment indicators and management’s long-lived asset impairment and net realizable value evaluation.
/s/ DELOITTE & TOUCHE LLP
Houston, Texas
February 24, 2023
We have served as the Company’s auditor since 2008.
Newpark Resources, Inc.
Consolidated Balance Sheets
December 31,
| | | | | | | | | | | |
(In thousands, except share data) | 2022 | | 2021 |
ASSETS | | | |
Cash and cash equivalents | $ | 23,182 | | | $ | 24,088 | |
Receivables, net of allowance of $4,817 and $4,587, respectively | 242,247 | | | 194,296 | |
Inventories | 149,571 | | | 155,341 | |
Prepaid expenses and other current assets | 10,966 | | | 14,787 | |
Total current assets | 425,966 | | | 388,512 | |
| | | |
Property, plant and equipment, net | 193,099 | | | 260,256 | |
Operating lease assets | 23,769 | | | 27,569 | |
Goodwill | 47,110 | | | 47,283 | |
Other intangible assets, net | 20,215 | | | 24,959 | |
Deferred tax assets | 2,275 | | | 2,316 | |
Other assets | 2,441 | | | 1,991 | |
Total assets | $ | 714,875 | | | $ | 752,886 | |
| | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
Current debt | $ | 22,438 | | | $ | 19,210 | |
Accounts payable | 93,633 | | | 84,585 | |
Accrued liabilities | 46,871 | | | 46,597 | |
Total current liabilities | 162,942 | | | 150,392 | |
| | | |
Long-term debt, less current portion | 91,677 | | | 95,593 | |
Noncurrent operating lease liabilities | 19,816 | | | 22,352 | |
Deferred tax liabilities | 8,121 | | | 11,819 | |
Other noncurrent liabilities | 9,291 | | | 10,344 | |
Total liabilities | 291,847 | | | 290,500 | |
| | | |
Commitments and contingencies (Note 15) | | | |
| | | |
Common stock, $0.01 par value (200,000,000 shares authorized and 111,451,999 and 109,330,733 shares issued, respectively) | 1,115 | | | 1,093 | |
Paid-in capital | 641,266 | | | 634,929 | |
Accumulated other comprehensive loss | (67,186) | | | (61,480) | |
Retained earnings | 2,489 | | | 24,345 | |
Treasury stock, at cost (21,751,232 and 16,981,147 shares, respectively) | (154,656) | | | (136,501) | |
Total stockholders’ equity | 423,028 | | | 462,386 | |
Total liabilities and stockholders’ equity | $ | 714,875 | | | $ | 752,886 | |
See Accompanying Notes to Consolidated Financial Statements
Newpark Resources, Inc.
Consolidated Statements of Operations
Years Ended December 31,
| | | | | | | | | | | | | | | | | |
(In thousands, except per share data) | 2022 | | 2021 | | 2020 |
Revenues | | | | | |
Product sales revenues | $ | 665,318 | | | $ | 484,300 | | | $ | 378,813 | |
Rental and service revenues | 150,276 | | | 130,481 | | | 113,812 | |
Total revenues | 815,594 | | | 614,781 | | | 492,625 | |
Cost of revenues | | | | | |
Cost of product sales revenues | 588,234 | | | 434,405 | | | 384,519 | |
Cost of rental and service revenues | 105,824 | | | 95,147 | | | 88,739 | |
Total cost of revenues | 694,058 | | | 529,552 | | | 473,258 | |
Selling, general and administrative expenses | 97,618 | | | 94,445 | | | 86,604 | |
Other operating (income) loss, net | (4,370) | | | (391) | | | (3,330) | |
Impairments and other charges | 37,322 | | | — | | | 14,727 | |
Operating loss | (9,034) | | | (8,825) | | | (78,634) | |
| | | | | |
Foreign currency exchange (gain) loss | 389 | | | (397) | | | 3,378 | |
Interest expense, net | 7,040 | | | 8,805 | | | 10,986 | |
(Gain) loss on extinguishment of debt | — | | | 1,000 | | | (419) | |
Loss before income taxes | (16,463) | | | (18,233) | | | (92,579) | |
| | | | | |
Provision (benefit) for income taxes | 4,371 | | | 7,293 | | | (11,883) | |
Net loss | $ | (20,834) | | | $ | (25,526) | | | $ | (80,696) | |
| | | | | |
Net loss per common share - basic | $ | (0.22) | | | $ | (0.28) | | | $ | (0.89) | |
Net loss per common share - diluted | $ | (0.22) | | | $ | (0.28) | | | $ | (0.89) | |
See Accompanying Notes to Consolidated Financial Statements
Newpark Resources, Inc.
Consolidated Statements of Comprehensive Income (Loss)
Years Ended December 31,
| | | | | | | | | | | | | | | | | |
(In thousands) | 2022 | | 2021 | | 2020 |
| | | | | |
Net loss | $ | (20,834) | | | $ | (25,526) | | | $ | (80,696) | |
Foreign currency translation adjustments (net of tax benefit of $1, $639, $293) | (5,706) | | | (7,308) | | | 2,086 | |
Recognition of Brazil cumulative foreign currency translation losses | — | | | — | | | 11,689 | |
Comprehensive loss | $ | (26,540) | | | $ | (32,834) | | | $ | (66,921) | |
See Accompanying Notes to Consolidated Financial Statements
Newpark Resources, Inc.
Consolidated Statements of Stockholders’ Equity
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In thousands) | Common Stock | | Paid-In Capital | | Accumulated Other Comprehensive Loss | | Retained Earnings | | Treasury Stock | | Total |
Balance at December 31, 2019 | $ | 1,067 | | | $ | 620,626 | | | $ | (67,947) | | | $ | 134,119 | | | $ | (139,220) | | | $ | 548,645 | |
Cumulative effect of accounting change | — | | | — | | | — | | | (735) | | | — | | | (735) | |
Net loss | — | | | — | | | — | | | (80,696) | | | — | | | (80,696) | |
Employee stock options, restricted stock and employee stock purchase plan | 9 | | | (173) | | | — | | | (1,751) | | | 2,380 | | | 465 | |
Stock-based compensation expense | — | | | 6,578 | | | — | | | — | | | — | | | 6,578 | |
Foreign currency translation, net of tax | — | | | — | | | 2,086 | | | — | | | — | | | 2,086 | |
Recognition of Brazil cumulative foreign currency translation losses | — | | | — | | | 11,689 | | | — | | | — | | | 11,689 | |
Balance at December 31, 2020 | 1,076 | | | 627,031 | | | (54,172) | | | 50,937 | | | (136,840) | | | 488,032 | |
Net loss | — | | | — | | | — | | | (25,526) | | | — | | | (25,526) | |
Employee stock options, restricted stock and employee stock purchase plan | 17 | | | (28) | | | — | | | (1,066) | | | 339 | | | (738) | |
Stock-based compensation expense | — | | | 7,926 | | | — | | | — | | | — | | | 7,926 | |
Foreign currency translation, net of tax | — | | | — | | | (7,308) | | | — | | | — | | | (7,308) | |
Balance at December 31, 2021 | 1,093 | | | 634,929 | | | (61,480) | | | 24,345 | | | (136,501) | | | 462,386 | |
Net loss | — | | | — | | | — | | | (20,834) | | | — | | | (20,834) | |
Employee stock options, restricted stock and employee stock purchase plan | 22 | | | (524) | | | — | | | (1,022) | | | (537) | | | (2,061) | |
Stock-based compensation expense | — | | | 6,861 | | | — | | | — | | | — | | | 6,861 | |
Treasury shares purchased at cost | — | | | — | | | — | | | — | | | (17,618) | | | (17,618) | |
Foreign currency translation, net of tax | — | | | — | | | (5,706) | | | — | | | — | | | (5,706) | |
Balance at December 31, 2022 | $ | 1,115 | | | $ | 641,266 | | | $ | (67,186) | | | $ | 2,489 | | | $ | (154,656) | | | $ | 423,028 | |
See Accompanying Notes to Consolidated Financial Statements
Newpark Resources, Inc.
Consolidated Statements of Cash Flows
Years Ended December 31,
| | | | | | | | | | | | | | | | | |
(In thousands) | 2022 | | 2021 | | 2020 |
Cash flows from operating activities: | | | | | |
Net loss | $ | (20,834) | | | $ | (25,526) | | | $ | (80,696) | |
Adjustments to reconcile net loss to net cash provided by (used in) operations: | | | | | |
Impairments and other non-cash charges | 37,322 | | | — | | | 25,072 | |
Depreciation and amortization | 38,610 | | | 42,225 | | | 45,314 | |
Stock-based compensation expense | 6,861 | | | 7,926 | | | 6,578 | |
Provision for deferred income taxes | (3,384) | | | (1,209) | | | (18,850) | |
Credit loss expense | 1,039 | | | 664 | | | 1,427 | |
Gain on divestitures | (3,596) | | | — | | | — | |
Gain on sale of assets | (2,809) | | | (7,182) | | | (6,531) | |
Gain on insurance recovery | — | | | (849) | | | — | |
(Gain) loss on extinguishment of debt | — | | | 1,000 | | | (419) | |
Amortization of original issue discount and debt issuance costs | 871 | | | 3,707 | | | 5,152 | |
Change in assets and liabilities: | | | | | |
(Increase) decrease in receivables | (42,452) | | | (61,283) | | | 70,994 | |
(Increase) decrease in inventories | (46,909) | | | (10,336) | | | 39,889 | |
Increase in other assets | (855) | | | (726) | | | (686) | |
Increase (decrease) in accounts payable | 10,781 | | | 36,341 | | | (29,457) | |
Increase (decrease) in accrued liabilities and other | 334 | | | 12,235 | | | (1,996) | |
Net cash provided by (used in) operating activities | (25,021) | | | (3,013) | | | 55,791 | |
| | | | | |
Cash flows from investing activities: | | | | | |
Capital expenditures | (28,273) | | | (21,793) | | | (15,794) | |
Proceeds from divestitures | 71,286 | | | — | | | — | |
Business acquisitions, net of cash acquired | — | | | (13,434) | | | — | |
Proceeds from sale of property, plant and equipment | 3,217 | | | 15,999 | | | 12,399 | |
Proceeds from insurance property claim | — | | | 1,753 | | | — | |
Net cash provided by (used in) investing activities | 46,230 | | | (17,475) | | | (3,395) | |
| | | | | |
Cash flows from financing activities: | | | | | |
Borrowings on lines of credit | 287,276 | | | 286,154 | | | 173,794 | |
Payments on lines of credit | (290,886) | | | (208,575) | | | (221,781) | |
Purchases of Convertible Notes | — | | | (28,137) | | | (29,124) | |
Payment on Convertible Notes | — | | | (38,567) | | | — | |
Proceeds from term loan | 3,754 | | | 8,258 | | | — | |
Proceeds from financing obligation | — | | | 8,004 | | | — | |
Debt issuance costs | (1,499) | | | (295) | | | — | |
Purchases of treasury stock | (20,248) | | | (1,448) | | | (333) | |
Other financing activities | (3,327) | | | (3,986) | | | (497) | |
Net cash provided by (used in) financing activities | (24,930) | | | 21,408 | | | (77,941) | |
| | | | | |
Effect of exchange rate changes on cash | (707) | | | (1,779) | | | (970) | |
| | | | | |
Net decrease in cash, cash equivalents, and restricted cash | (4,428) | | | (859) | | | (26,515) | |
Cash, cash equivalents, and restricted cash at beginning of year | 29,489 | | | 30,348 | | | 56,863 | |
Cash, cash equivalents, and restricted cash at end of year | $ | 25,061 | | | $ | 29,489 | | | $ | 30,348 | |
See Accompanying Notes to Consolidated Financial Statements
NEWPARK RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 — Summary of Significant Accounting Policies
Organization and Principles of Consolidation. Newpark Resources, Inc. was organized in 1932 as a Nevada corporation. In 1991, we changed our state of incorporation to Delaware. The consolidated financial statements include our company and our wholly-owned subsidiaries (the “Company,” “we,” “our,” or “us”). All intercompany transactions are eliminated in consolidation.
We are a geographically diversified supplier providing environmentally-sensitive products, as well as rentals and services to customers across multiple industries. We currently operate our business through two reportable segments: Fluids Systems and Industrial Solutions. In addition, we had a third reportable segment, Industrial Blending, which was exited in 2022. Prior to 2022, we aggregated our now exited Industrial Blending business and reported it within Industrial Solutions. We have reflected these three reportable segments for all periods presented in this Annual Report on Form 10-K.
•Our Fluids Systems segment provides customized drilling, completion, and stimulation fluids products and related technical services to oil and natural gas exploration and production (“E&P”) customers primarily in North America and Europe, the Middle East and Africa (“EMEA”), as well as certain countries in Asia Pacific and Latin America.
•Our Industrial Solutions segment provides temporary worksite access solutions, including the rental of our recyclable composite matting systems, along with related site construction and services to customers in various markets including power transmission, E&P, pipeline, renewable energy, petrochemical, construction and other industries, primarily in the United States and Europe. We also manufacture and sell our recyclable composite mats to customers around the world, with power transmission being the primary end-market.
•Our Industrial Blending segment began operations in 2020 and supported industrial end-markets, including the production of disinfectants and industrial cleaning products. We completed the wind down of the Industrial Blending business in the first quarter of 2022, and we completed the sale of the industrial blending and warehouse facility and related equipment located in Conroe, Texas in the fourth quarter of 2022.
Use of Estimates and Market Risks. The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“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. Significant estimates used in preparing our consolidated financial statements include, but are not limited to, the following: estimated cash flows and fair values used for impairments of long-lived assets, including goodwill and other intangibles, and valuation allowances for deferred tax assets.
Our Fluids Systems operating results remain dependent on oil and natural gas drilling activity levels in the markets we serve and 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.
Cash Equivalents. All highly liquid investments with a remaining maturity of three months or less at the date of acquisition are classified as cash equivalents.
Restricted Cash. Cash that is restricted as to withdrawal or usage is recognized as restricted cash and is included in other current assets in the consolidated balance sheets.
Allowance for Credit Losses. Trade receivables are presented at the net amount expected to be collected. We estimate the lifetime “expected credit loss” for such assets at inception, which generally results in the earlier recognition of allowances for losses. Our allowance for credit losses reflects losses that are expected over the contractual life of the asset, and takes into account historical loss experience, current and future economic conditions, and reasonable and supportable forecasts.
Inventories. Inventories are stated at the lower of cost (principally average cost) or net realizable value. Certain conversion costs associated with the acquisition, production, blending, and storage of inventory in our Fluids Systems segment as well as the manufacturing operations in the Industrial Solutions segment are capitalized as a component of the carrying value of the inventory and expensed as a component of cost of revenues as the products are sold. Reserves for inventory obsolescence are determined based on the net realizable value of the inventory using factors such as our historical usage of inventory on-hand, future expectations related to our customers’ needs, market conditions, and the development of new products.
NEWPARK RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Property, Plant and Equipment. Property, plant and equipment are recorded at cost. Additions and improvements that extend the useful life of an asset are capitalized. We capitalize interest costs on significant capital projects. Maintenance and repairs are expensed as incurred. Sales and disposals of property, plant and equipment are removed at carrying cost less accumulated depreciation with any resulting gain or loss reflected in earnings.
Depreciation is provided on property, plant and equipment, including finance lease assets, primarily utilizing the straight-line method over the following estimated useful service lives or lease term:
| | | | | | | | |
Computer hardware and office equipment | | 3-5 years |
Computer software | | 3-5 years |
Autos and light trucks | | 5-7 years |
Furniture, fixtures, and trailers | | 7-10 years |
Composite mats (rental fleet) | | 7-12 years |
Machinery and heavy equipment | | 10-15 years |
Owned buildings | | 20-39 years |
Leasehold improvements | Lease term, including reasonably assured renewal periods |
Goodwill and Other Intangible Assets. Goodwill represents the excess of the purchase price of acquisitions over the fair value of the net identifiable assets acquired in business combinations. Goodwill and other intangible assets with indefinite lives are not amortized. Intangible assets with finite useful lives are amortized either on a straight-line basis over the asset’s estimated useful life or on a basis that reflects the pattern in which the economic benefits of the asset are realized. Any period costs of maintaining intangible assets are expensed as incurred.
Impairment of Long-Lived Assets. Goodwill and other indefinite-lived intangible assets are tested for impairment annually as of November 1, or more frequently, if indicators of impairment exist. As part of our annual goodwill review, we first perform a qualitative assessment based on company performance and future business outlook to determine if indicators of impairment exist. When there are qualitative indicators of impairment, we use an impairment test which includes a comparison of the carrying value of net assets of our reporting units, including goodwill, with their estimated fair values, which we estimate using a combination of a market multiple and discounted cash flow approach (classified within level 3 of the fair value hierarchy). If the carrying value exceeds the estimated fair value, an impairment charge is recorded in the period in which such review is performed. We identify our reporting units based on our analysis of several factors, including our operating segment structure, evaluation of the economic characteristics of our geographic regions within each of our operating segments, and the extent to which our business units share assets and other resources.
We review property, plant and equipment, finite-lived intangible assets and certain other assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. We assess recoverability based on the undiscounted future net cash flows expected from the use and eventual disposition of such asset. Should the review indicate that the carrying value is not fully recoverable, the amount of impairment loss is determined by comparing the carrying value to the estimated fair value.
Insurance. We maintain reserves for estimated future payments associated with our self-insured employee healthcare programs, as well as the self-insured retention exposures under our general liability, auto liability, and workers compensation insurance policies. Our reserves are determined based on historical experience under these programs, including estimated development of known claims and estimated incurred-but-not-reported claims.
Treasury Stock. Treasury stock is carried at cost, which includes the entire cost of the acquired stock.
Revenue Recognition. The following provides a summary of our significant accounting policies for revenue recognition.
Fluids Systems. Revenues for fluid system additive products and engineering services, when provided to customers in the delivery of an integrated fluid system, are recognized as product sales revenues when utilized by the customer. Revenues for formulated liquid systems are recognized as product sales revenues when utilized or lost downhole while drilling. Revenues for equipment rentals and other services provided to customers that are ancillary to the fluid system product delivery are recognized in rental and service revenues when the services are performed. For direct sales of fluid system products, revenues are recognized when control passes to the customer, which is generally upon shipment of materials.
Industrial Solutions. Revenues for rentals and services are generated from both fixed-price and unit-priced contracts, which are generally short-term in duration. The activities under these contracts include the installation and rental of matting
NEWPARK RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
systems for a period of time and services such as access road construction, site planning and preparation, environmental protection, erosion control, and site restoration services. Rental revenues are recognized over the rental term and service revenues are recognized when the specified services are performed. Revenues from any subsequent extensions to the rental agreements are recognized over the extension period. Revenues from the direct sale of products are recognized when control passes to the customer, which is upon shipment or delivery, depending on the terms of the underlying sales contract.
For all segments, the amount of revenue we recognize for products sold and services performed reflects the consideration to which we expect to be entitled in exchange for such goods or services, which generally reflects the amount we have the right to invoice based on agreed upon unit rates. While billing requirements vary, many of our customer contracts require that billings occur periodically or at the completion of specified activities, even though our performance and right to consideration occurs throughout the contract. As such, we recognize revenue as performance is completed in the amount to which we have the right to invoice. We do not disclose the value of our unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which we recognize revenue for the amount to which we have the right to invoice for products sold and services performed.
Shipping and handling costs are reflected in cost of revenues, and all reimbursements by customers of shipping and handling costs are included in revenues.
Income Taxes. We provide for deferred taxes using an asset and liability approach by measuring deferred tax assets and liabilities due to temporary differences existing at year end using currently enacted tax rates and laws that will be in effect when the differences are expected to reverse. We reduce deferred tax assets by a valuation allowance when, based on our estimates, it is more likely than not that a portion of those assets will not be realized in a future period. The estimates utilized in recognition of deferred tax assets are subject to revision, either up or down, in future periods based on new facts or circumstances. We present deferred tax assets and liabilities as noncurrent in the balance sheet based on an analysis of each taxpaying component within a jurisdiction. We evaluate uncertain tax positions and record a liability as circumstances warrant.
Share-Based Compensation. Share-based compensation cost is measured at the grant date based on the fair value of the award, net of an estimated forfeiture rate. We recognize these costs in the statement of operations using the straight-line method over the vesting term.
Foreign Currency Translation. The functional currency for substantially all international subsidiaries is their respective local currency. Financial statements for these international subsidiaries are translated into U.S. dollars using the exchange rate at each balance sheet date for assets and liabilities and the average exchange rates in effect during the respective period for revenues and expenses. Exchange rate adjustments resulting from translation of foreign currency financial statements of our international subsidiaries are reflected in accumulated other comprehensive loss in stockholders’ equity until such time that the international subsidiary is sold or liquidation is substantially complete, at which time the related accumulated adjustments would be reclassified into income. Exchange rate adjustments resulting from foreign currency denominated transactions are recorded in income. At December 31, 2022 and 2021, accumulated other comprehensive loss related to foreign subsidiaries reflected in stockholders’ equity was $67.2 million and $61.5 million, respectively.
During the fourth quarter of 2019, we made the decision to wind down our Brazil operations, and during the fourth quarter of 2020, we completed the substantial liquidation of our Brazil subsidiary and recognized an $11.7 million non-cash charge to "impairments and other charges" for the reclassification of cumulative foreign currency translation losses related to our subsidiary in Brazil.
Fair Value Measurement. Fair value is measured as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at a measurement date. We apply the following fair value hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:
•Level 1: The use of quoted prices in active markets for identical financial instruments.
•Level 2: The use of quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active or other inputs that are observable in the market or can be corroborated by observable market data.
•Level 3: The use of significantly unobservable inputs that typically require the use of management’s estimates of assumptions that market participants would use in pricing.
NEWPARK RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
New Accounting Pronouncements
Standards Adopted in 2021
Income Taxes: Simplifying the Accounting for Income Taxes. In 2019, the FASB issued new guidance intended to simplify various aspects related to accounting for income taxes. We adopted this new guidance as of January 1, 2021. The adoption of this new guidance had no material impact on our financial statements or related disclosures.
Standards Adopted in 2020
Credit Losses: In 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. We adopted this new guidance as of January 1, 2020 using the modified retrospective transition method, and recorded a net reduction of $0.7 million to opening retained earnings to reflect the cumulative effect of adoption. The cumulative effect of the changes made to our consolidated balance sheet for the adoption of the new accounting guidance for credit losses were as follows:
| | | | | | | | | | | | | | | | | |
(In thousands) | Balance at December 31, 2019 | | Impact of Adoption of New Credit Losses Guidance | | Balance at January 1, 2020 |
Receivables, net | $ | 216,714 | | | $ | (959) | | | $ | 215,755 | |
Deferred tax assets | 3,600 | | | 59 | | | 3,659 | |
Deferred tax liabilities | 34,247 | | | (165) | | | 34,082 | |
Retained earnings | 134,119 | | | (735) | | | 133,384 | |
NEWPARK RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Note 2 — Divestitures and Business Combinations
Divestitures
Throughout the oil and natural gas cycle of the last couple of years, we continuously reviewed our portfolio. These reviews have focused on evaluating changes in the outlook for our served markets and customer priorities, while identifying opportunities for value-creating options in our portfolio, placing investment emphasis in markets where we generate strong returns and where we see greater long-term viability and stability. As part of this review, our Board of Directors approved the following actions in 2022.
Exit of Industrial Blending Segment and Sale of Conroe, Texas Blending Facility
In the first quarter of 2022, in consideration of broader strategic priorities and the timeline and efforts required to further develop the industrial blending business, we exited our Industrial Blending operations. In November 2022, we completed the sale of the industrial blending and warehouse facility and related equipment located in Conroe, Texas to a global chemical provider, and received cash proceeds of approximately $14 million. In connection with this divestiture, we recognized a $7.9 million impairment charge related to these long-lived assets in the second quarter of 2022, and subsequently recognized a gain of $2.6 million upon the eventual sale in the fourth quarter of 2022.
Sale of Excalibar U.S. Mineral Grinding Business
In the second quarter of 2022, we initiated a formal sale process for our Excalibar U.S. mineral grinding business (“Excalibar”), which is reported within our Fluids Systems segment. On November 30, 2022, we completed the sale of substantially all the long-lived assets, inventory, and operations of Excalibar to Cimbar Resources, INC. (“Cimbar”), received cash proceeds (after purchase price adjustments) of approximately $51 million, and recognized a gain of $1.0 million. The Company retained certain assets and liabilities, including accounts receivable and accounts payable. Such working capital provided approximately $10 million of cash generation in the fourth quarter of 2022 and is expected to provide approximately $5 million of additional cash generation in early 2023. In connection with the sale, the Company and Cimbar have entered into a long-term barite supply agreement for certain regions of our U.S. drilling fluids business, with an initial term of four years following the closing of the transaction.
Exit of Gulf of Mexico Operations
In the third quarter of 2022, our Board of Directors approved management’s plan to exit our Fluids Systems Gulf of Mexico operations, including the potential sale of related assets. In December 2022, we completed the sale of substantially all assets associated with our Gulf of Mexico completion fluids operations. Separately, we also entered a seven-year arrangement to sublease our Fourchon, Louisiana drilling fluids shorebase and blending facility to a leading global energy services provider. As part of this arrangement, substantially all of our Gulf of Mexico drilling fluids inventory will be sold as consumed by the lessee or no later than nine months from the closing of the transaction. The sale of the completion fluids operations provided approximately $6 million of cash generation in the fourth quarter of 2022, and the exit of the drilling fluids operations is expected to provide approximately $25 million of additional cash generation, primarily in early 2023.
As a result of the plan to exit the Gulf of Mexico operations as described above, we considered the third quarter developments to be a potential indicator of impairment that required us to complete an impairment evaluation. Accordingly, we estimated the fair value for our Gulf of Mexico assets as of September 30, 2022 based on the expected cash flows to be generated from the anticipated transactions and determined that a $21.5 million impairment charge was required related to the long-lived assets. We also recognized an $8.0 million charge to reduce the carrying value of inventory to their net realizable value primarily based on the anticipated transactions. The total charges of $29.4 million were recorded to impairments and other charges in the third quarter of 2022.
NEWPARK RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Total impairments and other charges consisted of the following:
| | | | | |
| Year Ended December 31, |
(In thousands) | 2022 |
Industrial Blending - Long-lived assets impairment | $ | 7,905 | |
Gulf of Mexico - Long-lived assets impairment | 21,461 | |
Gulf of Mexico - Inventory write-downs | 7,956 | |
Total impairments and other charges | $ | 37,322 | |
Summarized operating results of the business units exited in 2022 (including impairments and other charges described above) are shown in the following table:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
(In thousands) | 2022 | | 2021 | | 2020 |
Revenues | | | | | |
Industrial Blending | $ | — | | | $ | 8,821 | | | $ | 7,548 | |
Excalibar | 55,990 | | | 36,396 | | | 28,214 | |
Gulf of Mexico | 26,708 | | | 25,366 | | | 46,524 | |
| | | | | |
Operating income (loss) | | | | | |
Industrial Blending | (8,002) | | | (2,384) | | | 429 | |
Excalibar | 3,665 | | | (277) | | | (1,999) | |
Gulf of Mexico | (43,215) | | | (6,753) | | | (3,450) | |
Summarized net assets of the business units exited in 2022 are shown in the following table:
| | | | | | | | | | | |
(In thousands) | December 31, 2022 | | December 31, 2021 |
Receivables, net | $ | 27,798 | | | $ | 12,140 | |
Inventories | 5,805 | | | 42,421 | |
Property, plant and equipment, net | 4,508 | | | 74,318 | |
Accounts payable | (2,060) | | | (5,136) | |
Accrued liabilities | (311) | | | (1,976) | |
Total net assets | $ | 35,740 | | | $ | 121,767 | |
As described above, the change in net assets related to these divested business units includes the impact of the $37.3 million of impairments and other charges, the impact from the divestiture transactions, as well as the wind-down of retained working capital. The net assets remaining as of December 31, 2022 relate to the remaining Gulf of Mexico net assets and retained working capital from the Excalibar sale. As noted above, we expect to generate approximately $31 million of cash primarily in the first half of 2023 from the realization of the remaining working capital related to these divestitures.
NEWPARK RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Business Combinations
In December 2021, we acquired certain assets and assumed certain liabilities of Lentzcaping, Inc. and Lentzcaping, LLC (together, "Lentzcaping"). The purchase price for this acquisition was $13.5 million, net of cash acquired, and was funded with borrowings under the ABL Facility (as defined in Note 6). The results of operations of Lentzcaping are reported within the Industrial Solutions segment for the periods subsequent to the date of the acquisition. Results of operations and pro-forma combined results of operations for the acquired business have not been presented as the effect of this acquisition is not material to our consolidated financial statements.
Note 3 — Inventories
Inventories consisted of the following at December 31:
| | | | | | | | | | | |
(In thousands) | 2022 | | 2021 |
Raw materials: | | | |
Fluids Systems | $ | 110,623 | | | $ | 119,242 | |
Industrial Solutions | 3,966 | | | 4,939 | |
Total raw materials | 114,589 | | | 124,181 | |
Blended fluids systems components | 29,244 | | | 27,793 | |
Finished goods — mats | 5,738 | | | 3,367 | |
Total inventories | $ | 149,571 | | | $ | 155,341 | |
Raw materials for the Fluids Systems segment consist primarily of chemicals and other additives that are consumed in the production of our fluids systems. Raw materials for the Industrial Solutions segment consist primarily of resins, chemicals, and other materials used to manufacture composite mats, as well as materials that are consumed in providing ground protection and other services to our customers. Our blended fluids systems components consist of base fluids systems that have been either mixed internally at our blending facilities or purchased from third-party vendors. These base fluids systems require raw materials to be added, as needed to meet specified customer requirements.
The decrease in inventories in 2022 was primarily attributable to a $36.6 million decrease related to our divestitures described in Note 2, including the impact of related inventory impairments, partially offset by activity-driven increases and raw materials cost inflation in the Fluids Systems segment.
The Fluids Systems segment operating results for 2022 includes $8.0 million of total charges for inventory write-downs included in impairments and other charges, primarily attributable to the reduction in carrying values of certain inventory related to the exit of our Gulf of Mexico operations to their net realizable value.
Note 4 — Property, Plant and Equipment
Property, plant and equipment consisted of the following at December 31:
| | | | | | | | | | | |
(In thousands) | 2022 | | 2021 |
Land | $ | 7,804 | | | $ | 11,820 | |
Buildings and improvements | 63,333 | | | 118,395 | |
Machinery and equipment | 229,080 | | | 282,258 | |
Computer hardware and software | 47,743 | | | 48,389 | |
Furniture and fixtures | 5,733 | | | 5,879 | |
Construction in progress | 5,447 | | | 8,194 | |
| 359,140 | | | 474,935 | |
Less accumulated depreciation | (248,844) | | | (287,046) | |
| 110,296 | | | 187,889 | |
| | | |
Composite mats (rental fleet) | 147,764 | | | 135,975 | |
Less accumulated depreciation - composite mats | (64,961) | | | (63,608) | |
| 82,803 | | | 72,367 | |
| | | |
Property, plant and equipment, net | $ | 193,099 | | | $ | 260,256 | |
NEWPARK RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Depreciation expense was $35.0 million, $38.5 million, and $40.9 million in 2022, 2021 and 2020, respectively. The decrease in property, plant and equipment in 2022 primarily reflects a $69.8 million reduction related to our divestitures and associated impairments described in Note 2, partially offset by investments to expand our mat rental fleet.
Note 5 — Goodwill and Other Intangible Assets
Changes in the carrying amount of goodwill, which all relates to the Industrial Solutions segment, are as follows:
| | | | | | | | | | | |
(In thousands) | | Industrial Solutions | |
Balance at December 31, 2020 | | $ | 42,444 | | |
Acquisition | | 4,871 | | |
Effects of foreign currency | | (32) | | |
Balance at December 31, 2021 | | 47,283 | | |
Effects of foreign currency | | (173) | | |
Balance at December 31, 2022 | | $ | 47,110 | | |
We completed the annual evaluation of the carrying value of our goodwill and other indefinite-lived intangible assets as of November 1, 2022 and determined that the fair value was significantly more than the net carrying value, and therefore, no impairment was required.
In December 2021, we completed the acquisition of Lentzcaping, which resulted in additions to goodwill of $4.9 million.
Other intangible assets consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
(In thousands) | Gross Carrying Amount | | Accumulated Amortization | | Other Intangible Assets, Net | | Gross Carrying Amount | | Accumulated Amortization | | Other Intangible Assets, Net |
Technology related | $ | 17,806 | | | $ | (8,204) | | | $ | 9,602 | | | $ | 20,315 | | | $ | (9,201) | | | $ | 11,114 | |
Customer related | 35,253 | | | (25,122) | | | 10,131 | | | 37,176 | | | (23,843) | | | 13,333 | |
Total amortizing intangible assets | 53,059 | | | (33,326) | | | 19,733 | | | 57,491 | | | (33,044) | | | 24,447 | |
| | | | | | | | | | | |
Permits and licenses | 482 | | | — | | | 482 | | | 512 | | | — | | | 512 | |
Total indefinite-lived intangible assets | 482 | | | — | | | 482 | | | 512 | | | — | | | 512 | |
Total intangible assets | $ | 53,541 | | | $ | (33,326) | | | $ | 20,215 | | | $ | 58,003 | | | $ | (33,044) | | | $ | 24,959 | |
Total amortization expense related to other intangible assets was $3.6 million, $3.7 million and $4.5 million in 2022, 2021 and 2020, respectively.
In December 2021, we completed the acquisition of Lentzcaping, which resulted in additions to amortizable intangible assets of $3.3 million.
Estimated future amortization expense for the years ended December 31 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In thousands) | 2023 | | 2024 | | 2025 | | 2026 | | 2027 | | Thereafter | | Total |
Technology related | $ | 1,047 | | | $ | 1,025 | | | $ | 1,023 | | | $ | 1,023 | | | $ | 1,008 | | | $ | 4,476 | | | $ | 9,602 | |
Customer related | 2,117 | | | 1,775 | | | 1,515 | | | 1,252 | | | 996 | | | 2,476 | | | 10,131 | |
Total future amortization expense | $ | 3,164 | | | $ | 2,800 | | | $ | 2,538 | | | $ | 2,275 | | | $ | 2,004 | | | $ | 6,952 | | | $ | 19,733 | |
The weighted average amortization period for technology related and customer related intangible assets is 15 years and 13 years, respectively.
NEWPARK RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Note 6 — Financing Arrangements
Financing arrangements consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
(In thousands) | Principal Amount | | Unamortized Discount and Debt Issuance Costs | | Total Debt | | Principal Amount | | Unamortized Discount and Debt Issuance Costs | | Total Debt |
Amended ABL Facility | $ | 80,300 | | | $ | — | | | $ | 80,300 | | | $ | 86,500 | | | $ | — | | | $ | 86,500 | |
U.K. term loan | 7,201 | | | (99) | | | 7,102 | | | 6,094 | | | (110) | | | 5,984 | |
Financing obligation | 3,437 | | | (35) | | | 3,402 | | | 6,688 | | | (78) | | | 6,610 | |
Other debt | 23,311 | | | — | | | 23,311 | | | 15,709 | | | — | | | 15,709 | |
Total debt | 114,249 | | | (134) | | | 114,115 | | | 114,991 | | | (188) | | | 114,803 | |
Less: current portion | (22,438) | | | — | | | (22,438) | | | (19,210) | | | — | | | (19,210) | |
Long-term debt | $ | 91,811 | | | $ | (134) | | | $ | 91,677 | | | $ | 95,781 | | | $ | (188) | | | $ | 95,593 | |
Asset-Based Loan Facility. In October 2017, we entered into a U.S. asset-based revolving credit agreement, which was amended in March 2019 (the “ABL Facility”). In May 2022, we amended and restated the ABL Facility (the “Amended ABL Facility”). The Amended ABL Facility provides financing of up to $175.0 million available for borrowings (inclusive of letters of credit), which can be increased up to $250.0 million, subject to certain conditions. The Amended ABL Facility has a five-year term expiring May 2027, expands available borrowing capacity associated with the Industrial Solutions rental mat fleet, replaces the LIBOR-based pricing grid with a Bloomberg Short-Term Bank Yield Index (“BSBY”) pricing grid, and includes a mechanism to incorporate a sustainability-linked pricing framework with the consent of the required lenders (as defined in the Amended ABL Facility).
As of December 31, 2022, our total borrowing availability under the Amended ABL Facility was $167.6 million, of which $80.3 million was drawn and $3.3 million was used for outstanding letters of credit, resulting in remaining availability of $84.0 million.
Borrowing availability under the Amended ABL Facility is calculated based on eligible U.S. accounts receivable, inventory and composite mats included in the rental fleet, net of reserves and subject to limits on certain of the assets included in the borrowing base calculation. To the extent pledged by the borrowers, the borrowing base calculation also includes the amount of eligible pledged cash. The administrative agent may establish reserves in accordance with the Amended ABL Facility, in part based on appraisals of the asset base, and other limits in its discretion, which could reduce the amounts otherwise available under the Amended ABL Facility.
Under the terms of the Amended ABL Facility, we may elect to borrow at a variable interest rate based on either, (1) the BSBY rate (subject to a floor of zero) or (2) the base rate (subject to a floor of zero), equal to the highest of (a) the federal funds rate plus 0.50%, (b) the prime rate of Bank of America, N.A., and (c) BSBY for a one-month interest period plus 1.00%, plus, in each case, an applicable margin per annum. The applicable margin ranges from 1.50% to 2.00% per annum for BSBY borrowings, and 0.50% to 1.00% per annum for base rate borrowings, based on the consolidated leverage ratio (as defined in the Amended ABL Facility) as of the last day of the most recent fiscal quarter. We are also required to pay a commitment fee equal to (i) 0.375% per annum at any time the average daily unused portion of the commitments is greater than 50% and (ii) 0.25% per annum at any time the average daily unused portion of the commitments is less than 50%.
As of December 31, 2022, the applicable margin for borrowings under the Amended ABL Facility was 1.75% with respect to BSBY borrowings and 0.75% with respect to base rate borrowings. As of December 31, 2022, the weighted average interest rate for the Amended ABL Facility was 5.9% and the applicable commitment fee on the unused portion of the Amended ABL Facility was 0.375% per annum.
The Amended ABL Facility is a senior secured obligation of the Company and certain of our U.S. subsidiaries constituting borrowers thereunder, secured by a first priority lien on substantially all of the personal property and certain real property of the borrowers, including a first priority lien on certain equity interests of direct or indirect domestic subsidiaries of the borrowers and certain equity interests issued by certain foreign subsidiaries of the borrowers.
The Amended ABL Facility contains customary representations, warranties and covenants that, among other things, and subject to certain specified circumstances and exceptions, restrict or limit the ability of the borrowers and certain of their
NEWPARK RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
subsidiaries to incur indebtedness (including guarantees), grant liens, make investments, pay dividends or distributions with respect to capital stock and make other restricted payments, make prepayments on certain indebtedness, engage in mergers or other fundamental changes, dispose of property, and change the nature of their business.
The Amended ABL Facility requires compliance with the following financial covenants: (i) a minimum fixed charge coverage ratio of 1.00 to 1.00 for the most recently completed four fiscal quarters and (ii) while a leverage covenant trigger period (as defined in the Amended ABL Facility) is in effect, a maximum consolidated leverage ratio of 4.00 to 1.00 as of the last day of the most recently completed fiscal quarter.
The Amended ABL Facility includes customary events of default including non-payment of principal, interest or fees, violation of covenants, inaccuracy of representations or warranties, cross-default to other material indebtedness, bankruptcy and insolvency events, invalidity or impairment of security interests or invalidity of loan documents, certain ERISA events, unsatisfied or unstayed judgments and change of control.
Convertible Notes. In December 2016, we issued $100.0 million of unsecured convertible senior notes (“Convertible Notes”) which bore interest at a rate of 4.0% per year and matured in December 2021. A total of $38.6 million of our Convertible Notes were repaid at maturity. During 2021, we repurchased $28.3 million of our Convertible Notes in the open market for a total cost of $28.1 million and recognized a net loss of $1.0 million reflecting the difference in the amount paid and the net carrying value of the extinguished debt, including original issue discount and debt issuance costs. During 2020, we repurchased $33.1 million of our Convertible Notes in the open market for a total cost of $29.1 million and recognized a net gain of $0.4 million reflecting the difference in the amount paid and the net carrying value of the extinguished debt, including original issue discount and debt issuance costs.
Other Debt. In February 2021, a U.K. subsidiary entered a £6.0 million term loan facility that was scheduled to mature in February 2024. In April 2022, this facility was amended to increase the term loan to £7.0 million and establish a £2.0 million revolving credit facility. Both the amended term loan and revolving credit facility mature in April 2025 and bear interest at a rate of Sterling Overnight Index Average (“SONIA”) plus a margin of 3.25% per year. As of December 31, 2022, the interest rate for the U.K. facilities was 6.7%. The term loan is payable in quarterly installments of £350,000 plus interest beginning June 2022 and a £2.8 million payment due at maturity. We had $8.5 million outstanding under these arrangements at December 31, 2022.
In August 2021, we completed sale-leaseback transactions related to certain vehicles and other equipment for net proceeds of approximately $7.9 million. The transactions have been accounted for as financing arrangements as they did not qualify for sale accounting. As a result, the vehicles and other equipment continue to be reflected on our balance sheet in property, plant and equipment, net. The financing arrangements have a weighted average annual interest rate of 5.4% and are payable in monthly installments with varying maturities through October 2025. We had $3.4 million in financing obligations outstanding under these arrangements at December 31, 2022.
Certain of our foreign subsidiaries maintain local credit arrangements consisting primarily of lines of credit or overdraft facilities which are generally 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 $14.3 million and $11.8 million outstanding under these arrangements at December 31, 2022 and 2021, respectively.
We incurred net interest expense of $7.0 million, $8.8 million and $11.0 million for the years ended December 31, 2022, 2021 and 2020, respectively. There was no capitalized interest for the years ended December 31, 2022, 2021 or 2020. As of December 31, 2022, we had scheduled repayments for financing arrangements of approximately $23 million in 2023, $4 million in 2024, $7 million in 2025, and $80 million in 2027.
NEWPARK RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Note 7 — Fair Value of Financial Instruments and Concentrations of Credit Risk
Fair Value of Financial Instruments
Our financial instruments include cash and cash equivalents, receivables, payables, and debt. We believe the carrying values of these instruments approximated their fair values at December 31, 2022 and 2021.
Concentrations of Credit Risk
Financial instruments that potentially subject us to significant concentrations of credit risk primarily consist of cash and trade accounts receivable. At December 31, 2022, substantially all of our cash deposits were held by our international subsidiaries in accounts at numerous financial institutions across the various regions in which we operate. As part of our investment strategy, we perform periodic evaluations of the relative credit standing of these financial institutions.
Customer Revenue Concentration
We derive a significant portion of our revenues and profitability from companies in the energy industry, and more specifically, customers in the E&P and utility sectors. Our E&P customer base consists primarily of mid-sized and international oil companies as well as government-owned or government-controlled oil companies operating in the markets that we serve. Our utility customer base consists primarily of large regulated electrical utility providers, as well as power transmission service providers. For 2022, 2021 and 2020, revenues from our 20 largest customers represented approximately 38%, 39% and 49%, respectively, of our consolidated revenues. For 2022, 2021 and 2020, no single customer accounted for more than 10% of our consolidated revenues.
Receivables
Receivables consisted of the following at December 31:
| | | | | | | | | | | |
(In thousands) | 2022 | | 2021 |
Trade receivables: | | | |
Gross trade receivables | $ | 227,762 | | | $ | 185,065 | |
Allowance for credit losses | (4,817) | | | (4,587) | |
Net trade receivables | 222,945 | | | 180,478 | |
Income tax receivables | 2,697 | | | 4,167 | |
Other receivables | 16,605 | | | 9,651 | |
Total receivables, net | $ | 242,247 | | | $ | 194,296 | |
The increase in trade receivables in 2022 was primarily attributable to the increase in revenues in the fourth quarter of 2022 compared to the fourth quarter of 2021, including trade amounts outstanding of $17.0 million at December 31, 2022 related to our divestitures described in Note 2.
Other receivables included $3.5 million and $5.7 million for value added, goods and service taxes related to foreign jurisdictions as of December 31, 2022 and 2021, respectively. Other receivables also included $10.8 million at December 31, 2022 related to our divestitures described in Note 2.
We adopted the new accounting guidance for credit losses as of January 1, 2020 (see Note 1 for additional information). To measure expected credit losses, we evaluate our receivables on a collective basis for assets that share similar risk characteristics. Our allowance for credit losses reflects losses that are expected over the contractual life of the asset, and takes into account historical loss experience, current and future economic conditions, and reasonable and supportable forecasts.
NEWPARK RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Changes in our allowance for credit losses were as follows:
| | | | | | | | | | | | | | | | | |
(In thousands) | 2022 | | 2021 | | 2020 |
Balance at beginning of year | $ | 4,587 | | | $ | 5,024 | | | $ | 6,007 | |
Cumulative effect of accounting change | — | | | — | | | 959 | |
Credit loss expense | 1,039 | | | 664 | | | 1,427 | |
Write-offs, net of recoveries | (809) | | | (1,101) | | | (3,369) | |
Balance at end of year | $ | 4,817 | | | $ | 4,587 | | | $ | 5,024 | |
Note 8 — Leases
We lease certain office space, warehouses, land, equipment, and an industrial facility. Our leases have remaining terms ranging from 1 to 9 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 at December 31:
| | | | | | | | | | | | | | |
(In thousands) | Balance Sheet Classification | 2022 | | 2021 |
Assets: | | | | |
Operating | Operating lease assets | $ | 23,769 | | | $ | 27,569 | |
Finance | Property, plant and equipment, net | 4,462 | | | 1,709 | |
Total lease assets | | $ | 28,231 | | | $ | 29,278 | |
Liabilities: | | | | |
Current: | | | | |
Operating | Accrued liabilities | $ | 5,587 | | | $ | 6,494 | |
Finance | Current debt | 1,537 | | | 682 | |
Noncurrent: | | | | |
Operating | Noncurrent operating lease liabilities | $ | 19,816 | | | $ | 22,352 | |
Finance | Long-term debt, less current portion | 3,462 | | | 1,041 | |
Total lease liabilities | | $ | 30,402 | | | $ | 30,569 | |
Total operating lease expenses were $27.3 million for 2022, of which $19.1 million related to short-term leases and $8.3 million related to leases recognized in the balance sheet. Total operating lease expenses were $24.4 million and $25.8 million for 2021 and 2020, respectively. 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.
NEWPARK RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The maturity of lease liabilities as of December 31, 2022 is as follows:
| | | | | | | | | | | | | | | | | |
(In thousands) | Operating Leases | | Finance Leases | | Total |
2023 | $ | 6,619 | | | $ | 1,803 | | | $ | 8,422 | |
2024 | 4,501 | | | 1,567 | | | 6,068 | |
2025 | 3,422 | | | 1,307 | | | 4,729 | |
2026 | 3,245 | | | 903 | | | 4,148 | |
2027 | 3,042 | | | 61 | | | 3,103 | |
Thereafter | 9,042 | | | — | | | 9,042 | |
Total lease payments | 29,871 | | | 5,641 | | | 35,512 | |
Less: Interest | 4,468 | | | 642 | | | 5,110 | |
Present value of lease liabilities | $ | 25,403 | | | $ | 4,999 | | | $ | 30,402 | |
During 2022, we entered into $4.8 million and $4.4 million of new operating lease liabilities and finance lease liabilities, respectively, in exchange for leased assets.
| | | | | |
Lease Term and Discount Rate | December 31, 2022 |
Weighted-average remaining lease term (years) | |
Operating leases | 6.6 |
Finance leases | 3.5 |
Weighted-average discount rate | |
Operating leases | 4.6 | % |
Finance leases | 6.6 | % |
Note 9 — Income Taxes
The provision (benefit) for income taxes was as follows:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
(In thousands) | 2022 | | 2021 | | 2020 |
Current: | | | | | |
U.S. Federal | $ | 318 | | | $ | 773 | | | $ | 1,591 | |
State | 338 | | | 525 | | | 365 | |
Foreign | 7,099 | | | 7,204 | | | 5,011 | |
Total current | 7,755 | | | 8,502 | | | 6,967 | |
Deferred: | | | | | |
U.S. Federal | (3,204) | | | 547 | | | (16,309) | |
State | (142) | | | (545) | | | 598 | |
Foreign | (38) | | | (1,211) | | | (3,139) | |
Total deferred | (3,384) | | | (1,209) | | | (18,850) | |
Total provision (benefit) for income taxes | $ | 4,371 | | | $ | 7,293 | | | $ | (11,883) | |
NEWPARK RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Income (loss) before income taxes was as follows:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
(In thousands) | 2022 | | 2021 | | 2020 |
U.S. | $ | (38,001) | | | $ | (36,250) | | | $ | (92,838) | |
Foreign | 21,538 | | | 18,017 | | | 259 | |
Loss before income taxes | $ | (16,463) | | | $ | (18,233) | | | $ | (92,579) | |
The effective income tax rate is reconciled to the statutory federal income tax rate as follows:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
(In thousands) | 2022 | | 2021 | | 2020 |
Income tax expense (benefit) at federal statutory rate | $ | (3,457) | | | $ | (3,829) | | | $ | (19,442) | |
Tax benefit on restructuring of certain subsidiary legal entities | (3,111) | | | — | | | — | |
Recognition of Brazil cumulative foreign currency translation losses | — | | | — | | | 2,456 | |
Nondeductible executive compensation | 958 | | | 999 | | | 170 | |
Other nondeductible expenses | 684 | | | 557 | | | 616 | |
Stock-based compensation | 5 | | | 880 | | | 1,602 | |
Different rates on earnings of foreign operations | 63 | | | (115) | | | 274 | |
Dividend taxes on unremitted earnings | 874 | | | 980 | | | 322 | |
U.S. tax on foreign earnings | 378 | | | — | | | — | |
Research and development credits | (649) | | | (1,093) | | | (521) | |
Change in valuation allowance | 8,156 | | | 10,416 | | | 2,226 | |
State tax expense (benefit), net | 55 | | | (1,302) | | | 196 | |
Other items, net | 415 | | | (200) | | | 218 | |
Total provision (benefit) for income taxes | $ | 4,371 | | | $ | 7,293 | | | $ | (11,883) | |
The provision for income taxes was $4.4 million for 2022, which includes an income tax benefit of $3.1 million related to the restructuring of certain subsidiary legal entities within Europe, as the undistributed earnings for an international subsidiary are no longer subject to certain taxes upon future distribution. The provision for income taxes in 2022 was unfavorably impacted as we are unable to recognize a tax benefit related to the $37.3 million of impairment charges. The provision for income taxes was $7.3 million for 2021, despite reporting a pretax loss for the period. In both years, income tax expense primarily reflects earnings from our international operations since we are unable to recognize the tax benefit from our U.S. losses as they may not be realized. The benefit for income taxes was $11.9 million for 2020 reflecting an effective tax benefit rate of 13%. This result primarily reflects the impact of the $11.7 million non-cash recognition of cumulative foreign currency translation losses related to the substantial liquidation of our subsidiary in Brazil and other nondeductible expenses, as well as the impact of the geographic composition of our pretax loss, where the tax benefit from losses in the U.S was partially offset by the tax expense related to earnings from our international operations.
The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted in March 2020 in the United States. The CARES Act contains several tax provisions, including additional carry back opportunities for net operating losses, temporary increases in the interest deductibility threshold, and the acceleration of refunds for any remaining alternative minimum tax (“AMT”) carryforwards. There was no material impact from the CARES Act in our provision for income taxes for 2020. In addition, we filed an amendment to our 2018 U.S. federal income tax return in the second quarter of 2020 and received a refund of $0.7 million for AMT carryforwards in July 2020.
The CARES Act also permitted most companies to defer paying their portion of certain applicable payroll taxes from the date the CARES Act was signed into law through December 31, 2020. The deferred amount was due and paid in two equal installments in December 2021 and 2022.
NEWPARK RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Temporary differences and carryforwards which give rise to deferred tax assets and liabilities consisted of the following at December 31:
| | | | | | | | | | | |
(In thousands) | 2022 | | 2021 |
Deferred tax assets: | | | |
Net operating losses | $ | 35,430 | | | $ | 38,746 | |
Foreign tax credits | 8,836 | | | 8,330 | |
Accruals not currently deductible | 2,989 | | | 4,393 | |
Unrealized foreign exchange losses, net | 5,353 | | | 4,590 | |
Research and development credits | 5,181 | | | 4,695 | |
Stock-based compensation | 1,359 | | | 1,856 | |
Capitalized inventory costs | 1,821 | | | 1,706 | |
Capitalized research and development expenditures | 4,342 | | | — | |
Other | 6,551 | | | 5,839 | |
Total deferred tax assets | 71,862 | | | 70,155 | |
Valuation allowance | (47,280) | | | (38,406) | |
Total deferred tax assets, net of allowances | 24,582 | | | 31,749 | |
Deferred tax liabilities: | | | |
Accelerated depreciation and amortization | (24,099) | | | (31,816) | |
Tax on unremitted earnings | (5,656) | | | (8,214) | |
Other | (673) | | | (1,222) | |
Total deferred tax liabilities | (30,428) | | | (41,252) | |
Total net deferred tax liabilities | $ | (5,846) | | | $ | (9,503) | |
| | | |
Noncurrent deferred tax assets | $ | 2,275 | | | $ | 2,316 | |
Noncurrent deferred tax liabilities | (8,121) | | | (11,819) | |
Net deferred tax liabilities | $ | (5,846) | | | $ | (9,503) | |
We have U.S. federal income tax net operating loss carryforwards (“NOLs”) of approximately $83.7 million available to reduce future U.S. taxable income, which do not expire. We also have state NOLs of approximately $217.8 million available to reduce future state taxable income, including approximately $158.3 million which do not expire and approximately $59.5 million which expire in varying amounts beginning in 2023 through 2042. Foreign NOLs of approximately $22.8 million are available to reduce future taxable income, some of which expire beginning in 2023. Effective January 1, 2022, certain research and development expenditures are now required under regulations enacted as part of the 2017 U.S. Tax Cuts and Jobs Act (“Tax Act”) to be capitalized and amortized over five years, resulting in a $4.3 million deferred tax asset at December 31, 2022.
The realization of our net deferred tax assets is dependent on our ability to generate taxable income in future periods. At December 31, 2022 and 2021, we have recorded a valuation allowance in the amount of $47.3 million and $38.4 million, respectively, primarily related to certain U.S. federal, state, and foreign NOL carryforwards, including Australia, as well as for certain foreign tax credits recognized related to the accounting for the impact of the Tax Act, which may not be realized.
We file income tax returns in the U.S. and several non-U.S. jurisdictions and are subject to examination in the various jurisdictions in which we file. We are no longer subject to income tax examinations for U.S. federal and substantially all state jurisdictions for years prior to 2018 and for substantially all foreign jurisdictions for years prior to 2008.
We are under examination by various tax authorities in countries where we operate, 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.
NEWPARK RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
A reconciliation of the beginning and ending provision for uncertain tax positions is as follows:
| | | | | | | | | | | | | | | | | |
(In thousands) | 2022 | | 2021 | | 2020 |
Balance at January 1 | $ | 485 | | | $ | 213 | | | $ | 291 | |
Additions (reductions) for tax positions of prior years | (8) | | | (6) | | | (6) | |
Additions (reductions) for tax positions of current year | — | | | 306 | | | — | |
Reductions for settlements with tax authorities | (93) | | | — | | | — | |
Reductions for lapse of statute of limitations | (66) | | | (28) | | | (72) | |
Balance at December 31 | $ | 318 | | | $ | 485 | | | $ | 213 | |
Approximately $0.3 million of unrecognized tax benefits at December 31, 2022, if recognized, would favorably impact the effective tax rate.
We recognize accrued interest and penalties related to uncertain tax positions in operating expenses. The amount of interest and penalties was immaterial for all periods presented.
NEWPARK RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Note 10 — Capital Stock
Common Stock
Changes in outstanding common stock were as follows:
| | | | | | | | | | | | | | | | | |
(In thousands of shares) | 2022 | | 2021 | | 2020 |
Outstanding, beginning of year | 109,331 | | | 107,588 | | | 106,697 | |
Shares issued for exercise of options | — | | | — | | | — | |
Shares issued for time vested restricted stock (net of forfeitures) | 1,918 | | | 1,368 | | | 740 | |
Shares issued for employee stock purchase plan | 203 | | | 375 | | | 151 | |
Outstanding, end of year | 111,452 | | | 109,331 | | | 107,588 | |
Outstanding shares of common stock include shares held as treasury stock totaling 21,751,232, 16,981,147 and 16,781,150 as of December 31, 2022, 2021 and 2020, respectively.
Preferred Stock
We are authorized to issue up to 1,000,000 shares of preferred stock, $0.01 par value. There were no outstanding shares of preferred stock as of December 31, 2022, 2021 or 2020.
Treasury Stock
During 2022, we repurchased an aggregate of 4,437,885 shares of our common stock under our repurchase program for a total cost of $17.5 million. In addition, during 2022, 2021 and 2020, we repurchased 592,539, 419,114 and 153,151 shares, respectively, for an aggregate cost of $2.7 million, $1.4 million and $0.3 million, respectively, representing employee shares surrendered in lieu of taxes under vesting of restricted stock awards. All of the shares repurchased are held as treasury stock.
During 2022, 2021 and 2020, we reissued 260,339, 219,117 and 330,419 shares of treasury stock pursuant to various stock plans.
Repurchase Program
Our Board of Directors authorized a $100.0 million securities repurchase program in November 2018, available for repurchases of any combination of our common stock and our Convertible Notes that matured in 2021. During 2022, we repurchased an aggregate of 4,437,885 shares of our common stock under our repurchase program for a total cost of $17.5 million. Our Convertible Notes matured in 2021. During 2021, we repurchased $28.3 million of our Convertible Notes in the open market under the repurchase program for a total cost of $28.1 million. During 2020, we repurchased $33.1 million of our Convertible Notes in the open market under the repurchase program for a total cost of $29.1 million. As of December 31, 2022, we had $6.2 million remaining under the program.
In February 2023, our Board of Directors approved certain changes to this program and increased the authorization to $50.0 million. Our repurchase program authorizes us to purchase outstanding shares of our common stock or Convertible Notes that matured in 2021 in the open market or as otherwise determined by management, subject to certain limitations under the Amended ABL Facility and other factors. The repurchase program has no specific term. Repurchases are expected to be funded from borrowings under our Amended ABL Facility, operating cash flows, and available cash on hand. 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.
NEWPARK RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Note 11 — Earnings Per Share
The following table presents the reconciliation of the numerator and denominator for calculating net loss per share:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
(In thousands, except per share data) | 2022 | | 2021 | | 2020 |
Numerator | | | | | |
Net loss - basic and diluted | $ | (20,834) | | | $ | (25,526) | | | $ | (80,696) | |
| | | | | |
Denominator | | | | | |
Weighted average common shares outstanding - basic | 92,712 | | | 91,460 | | | 90,198 | |
Dilutive effect of stock options and restricted stock awards | — | | | — | | | — | |
Weighted average common shares outstanding - diluted | 92,712 | | | 91,460 | | | 90,198 | |
| | | | | |
Net loss per common share | | | | | |
Basic | $ | (0.22) | | | $ | (0.28) | | | $ | (0.89) | |
Diluted | $ | (0.22) | | | $ | (0.28) | | | $ | (0.89) | |
We excluded the following weighted-average potential shares from the calculations of diluted net loss per share during the applicable periods because their inclusion would have been anti-dilutive:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
(In thousands) | 2022 | | 2021 | | 2020 |
Stock options and restricted stock awards | 5,545 | | | 5,754 | | | 5,238 | |
For 2022, 2021 and 2020, 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 these periods. For 2021 and 2020, the Convertible Notes, which matured in December 2021, did not impact the calculation of diluted earnings per share due to the net loss incurred for those periods.
Note 12 — Stock-Based Compensation and Other Benefit Plans
The following describes stockholder approved plans utilized by us for the issuance of stock-based awards.
2014 Non-Employee Directors’ Restricted Stock Plan
In May 2014, our stockholders approved the 2014 Non-Employee Directors’ Restricted Stock Plan (“2014 Director Plan”) which authorizes grants of restricted stock to non-employee directors. Each restricted share granted to a non-employee director vests 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. In May 2022, our stockholders approved an amendment to the 2014 Director Plan, increasing the number of shares authorized for issuance from 1,200,000 to 1,400,000 shares. At December 31, 2022, 86,188 shares remained available for award under the 2014 Director Plan. During 2022, non-employee directors received 260,339 shares of restricted stock at a weighted average grant-date fair value of $4.11 per share.
2015 Employee Equity Incentive Plan
In May 2015, our stockholders approved the 2015 Employee Equity Incentive Plan (“2015 Plan”) pursuant to which the Compensation Committee of our Board of Directors (“Compensation Committee”) may grant to key employees, including executive officers and other corporate and divisional employees, a variety of forms of equity-based compensation, including options to purchase shares of common stock, shares of restricted common stock, restricted stock units, stock appreciation rights, other stock-based awards, and performance-based awards. In May 2022, our stockholders approved an amendment to the 2015 Plan, increasing the number of shares authorized for issuance from 14,300,000 to 15,300,000 shares. At December 31, 2022, 1,767,893 shares remained available for award under the 2015 Plan.
In June 2017, our Board of Directors approved the Long-Term Cash Incentive Plan (“Cash Plan”), a sub-plan to the 2015 Plan, pursuant to which the Compensation Committee may grant time-based cash awards or performance-based cash awards to key employees, including executive officers and other corporate and divisional employees, to provide an opportunity
NEWPARK RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
for employees to receive a cash payment upon either completion of a service period or achievement of predetermined performance criteria at the end of a performance period.
Activity under each of these programs is described below.
Stock Options
Stock options granted by the Compensation Committee are granted with a three-year vesting period and a term of ten years. There have been no options granted since 2016.
The following table summarizes activity for our outstanding stock options for the year ended December 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | |
Stock Options | Shares | | Weighted- Average Exercise Price | | Weighted- Average Remaining Contractual Life (Years) | | Aggregate Intrinsic Value (In thousands) |
Outstanding at beginning of period | 1,796,876 | | | $ | 7.08 | | | | | |
Granted | — | | | — | | | | | |
Exercised | — | | | — | | | | | |
Expired or canceled | (364,138) | | | 5.71 | | | | | |
Outstanding at end of period | 1,432,738 | | | $ | 7.39 | | | 2.40 | | $ | — | |
| | | | | | | |
Vested or expected to vest at end of period | 1,432,738 | | | $ | 7.39 | | | 2.40 | | $ | — | |
Options exercisable at end of period | 1,432,738 | | | $ | 7.39 | | | 2.40 | | $ | — | |
There were no stock options exercised and no compensation cost recognized for stock options during the years ended December 31, 2022, 2021, or 2020.
Restricted Stock Awards and Units
Time-vested restricted stock awards and restricted stock units are periodically granted to key employees, including grants for employment inducements, as well as to members of our Board of Directors. Employee awards provide for vesting periods ranging from three to four years. Non-employee director grants 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. Upon vesting of these grants, shares are issued to award recipients.
NEWPARK RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following tables summarize the activity for our outstanding time-vested restricted stock awards and restricted stock units for the year ended December 31, 2022:
| | | | | | | | | | | |
Nonvested Restricted Stock Awards (Time-Vesting) | Shares | | Weighted-Average Grant Date Fair Value |
Nonvested at January 1, 2022 | 235,367 | | | $ | 3.97 | |
Granted | 260,339 | | | 4.11 | |
Vested | (235,367) | | | 3.97 | |
Forfeited | — | | | — | |
Nonvested at December 31, 2022 | 260,339 | | | $ | 4.11 | |
| | | | | | | | | | | |
Nonvested Restricted Stock Units (Time-Vesting) | Shares | | Weighted-Average Grant Date Fair Value |
Nonvested at January 1, 2022 | 4,639,261 | | | $ | 3.29 | |
Granted | 1,977,096 | | | 4.11 | |
Vested | (1,924,067) | | | 3.67 | |
Forfeited | (313,013) | | | 3.18 | |
Nonvested at December 31, 2022 | 4,379,277 | | | $ | 3.50 | |
Total compensation cost recognized for restricted stock awards and restricted stock units was $6.7 million, $7.7 million and $6.3 million for the years ended December 31, 2022, 2021 and 2020, respectively. Total unrecognized compensation cost at December 31, 2022 related to restricted stock awards and restricted stock units was approximately $10.0 million which is expected to be recognized over the next 1.8 years. During the years ended December 31, 2022, 2021 and 2020, the total fair value of shares vested was $9.4 million, $5.3 million and $1.9 million, respectively. For the years ended December 31, 2022, 2021 and 2020, we recognized tax benefits resulting from the vesting of restricted stock awards and units of $1.8 million, $1.1 million and $0.4 million, respectively.
Cash-Based Awards
The Compensation Committee also approved the issuance of cash-based awards to certain executive officers during 2022, 2021 and 2020. The 2022 awards included a target amount of $2.8 million of performance-based cash awards. The 2021 awards included $1.4 million of time-based cash awards and a target amount of $3.0 million of performance-based cash awards. The 2020 awards included a target amount of $2.6 million of performance-based cash awards.
The performance-based cash awards are settled based on the relative ranking of our TSR as compared to the TSR of our designated peer group over a three-year period. The performance period began June 1, 2022 and ends May 31, 2025 for the 2022 awards, began May 2, 2021 and ends May 31, 2024 for the 2021 awards, and began May 2, 2020 and ends May 31, 2023 for the 2020 awards. The ending TSR price is equal to the average closing price of our shares over the last 30-calendar days of the performance period, and provide for a cash payout ranging from 0% to 200% of target for each eligible executive.
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 statement of operations. As of December 31, 2022 and 2021, the total liability for cash-based awards was $6.5 million and $5.7 million, respectively.
NEWPARK RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Defined Contribution Plan
Substantially all of our U.S. employees are covered by a defined contribution plan (“401(k) Plan”). Employees may voluntarily contribute up to 50% of compensation, as defined in the 401(k) Plan. Participants’ contributions, up to 3% of compensation, are matched 100% by us, and the participants’ contributions, from 3% to 6% of compensation, are matched 50% by us. Effective January 1, 2023, Participant’s contributions up to 4% are matched 100% by us with contributions from 4% to 6% being matched 50%. In connection with the cost reduction programs implemented in early 2020, we temporarily eliminated our 401(k) matching contribution beginning in April 2020. Beginning in the second quarter of 2021, we reinstituted the matching contribution for our U.S. defined contribution plan. Under the 401(k) Plan, our cash contributions were $2.5 million, $2.2 million and $1.2 million for 2022, 2021 and 2020, respectively.
Note 13 — Segment and Related Information
We currently operate our business through two reportable segments: Fluids Systems and Industrial Solutions. In addition, we had a third reportable segment, Industrial Blending, which was exited in 2022. Prior to 2022, we aggregated our now exited Industrial Blending business and reported it within Industrial Solutions. We have reflected these three reportable segments for all periods presented in this Annual Report on Form 10-K. All intercompany revenues and related profits have been eliminated.
•Fluids Systems — Our Fluids Systems segment provides customized drilling, completion, and stimulation fluids products and related technical services to customers for oil, natural gas, and geothermal projects primarily in North America and EMEA, as well as certain countries in Asia Pacific and Latin America. In the fourth quarter of 2022, we exited two of our Fluids Systems business units, including our U.S.-based mineral grinding business as well as our Gulf of Mexico fluids operations (see Note 2 for additional information).
•Industrial Solutions — Our Industrial Solutions segment provides temporary worksite access solutions, including the rental of our recyclable composite matting systems, along with related site construction and services to customers in various markets including power transmission, E&P, pipeline, renewable energy, petrochemical, construction and other industries, primarily in the United States and Europe. We also manufacture and sell our recyclable composite mats to customers around the world, with power transmission being the primary end-market.
•Industrial Blending — Our Industrial Blending segment began operations in 2020 and supported industrial end-markets, including the production of disinfectants and industrial cleaning products. We completed the wind down of the Industrial Blending business in the first quarter of 2022, and we completed the sale of the industrial blending and warehouse facility and related equipment located in Conroe, Texas in the fourth quarter of 2022 (see Note 2 for additional information).
NEWPARK RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Summarized financial information for our reportable segments is shown in the following tables:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
(In thousands) | 2022 | | 2021 | | 2020 |
| | | | | |
Revenues | | | | | |
Fluids Systems | $ | 622,601 | | | $ | 420,789 | | | $ | 354,608 | |
Industrial Solutions | 192,993 | | | 185,171 | | | 130,469 | |
Industrial Blending | — | | | 8,821 | | | 7,548 | |
Total revenues | $ | 815,594 | | | $ | 614,781 | | | $ | 492,625 | |
| | | | | |
Depreciation and amortization | | | | | |
Fluids Systems | $ | 13,875 | | | $ | 17,877 | | | $ | 20,555 | |
Industrial Solutions | 21,653 | | | 19,304 | | | 20,127 | |
Industrial Blending | 678 | | | 1,095 | | | 300 | |
Corporate office | 2,404 | | | 3,949 | | | 4,332 | |
Total depreciation and amortization | $ | 38,610 | | | $ | 42,225 | | | $ | 45,314 | |
| | | | | |
Operating income (loss) | | | | | |
Fluids Systems | $ | (15,566) | | | $ | (19,012) | | | $ | (66,403) | |
Industrial Solutions | 43,899 | | | 42,117 | | | 13,030 | |
Industrial Blending | (8,002) | | | (2,384) | | | 429 | |
Corporate office | (29,365) | | | (29,546) | | | (25,690) | |
Total operating income (loss) | $ | (9,034) | | | $ | (8,825) | | | $ | (78,634) | |
| | | | | |
Segment assets | | | | | |
Fluids Systems | $ | 420,039 | | | $ | 458,179 | | | $ | 419,381 | |
Industrial Solutions | 247,611 | | | 247,531 | | | 238,376 | |
Industrial Blending | — | | | 20,139 | | | 21,542 | |
Corporate office | 47,225 | | | 27,037 | | | 29,893 | |
Total segment assets | $ | 714,875 | | | $ | 752,886 | | | $ | 709,192 | |
| | | | | |
Capital expenditures | | | | | |
Fluids Systems | $ | 3,906 | | | $ | 3,644 | | | $ | 6,237 | |
Industrial Solutions | 23,569 | | | 15,311 | | | 7,831 | |
Industrial Blending | 230 | | | 2,091 | | | — | |
Corporate office | 568 | | | 747 | | | 1,726 | |
Total capital expenditures | $ | 28,273 | | | $ | 21,793 | | | $ | 15,794 | |
The increase in Corporate office segment assets primarily relates to the transition in 2022 of our Katy, Texas technology center from the Fluids Systems segment to a multi-purpose facility housing both business headquarters and support personnel, as well as administrative offices for two third-party lessees. The decrease in Fluids Systems segment assets includes the impact of the Excalibar divestiture (see Note 2) and the transfer of the Katy technology center to the Corporate office, as described above, partially offset by an increase in working capital.
NEWPARK RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Operating results for the Fluids Systems segment include the following charges. See Note 2 for additional information regarding the 2022 charges.
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
(In thousands) | 2022 | | 2021 | | 2020 |
Impairments and other charges | $ | 29,417 | | | $ | — | | | $ | — | |
Gain on divestitures | (971) | | | — | | | — | |
Fourchon, Louisiana hurricane-related costs | — | | | 2,596 | | | — | |
Facility exit costs and other | 1,000 | | | 2,399 | | | (201) | |
Severance costs | 398 | | | 1,329 | | | 3,729 | |
Kenedy, Texas facility fire (insurance recovery) | — | | | (849) | | | — | |
Brazil exit - Recognition of cumulative foreign currency translation losses | — | | | — | | | 11,689 | |
Inventory write-downs | — | | | — | | | 10,345 | |
Property, plant and equipment impairment | — | | | — | | | 3,038 | |
Total Fluids Systems impairments and other charges | $ | 29,844 | | | $ | 5,475 | | | $ | 28,600 | |
Industrial Blending operating results for 2022 includes a $7.9 million non-cash impairment charge related to the long-lived assets previously used in the now exited Industrial Blending business, as described in Note 2.
The following table presents further disaggregated revenues for the Fluids Systems segment:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
(In thousands) | 2022 | | 2021 | | 2020 |
United States | $ | 355,435 | | | $ | 227,261 | | | $ | 202,052 | |
Canada | 61,069 | | | 48,007 | | | 24,762 | |
Total North America | 416,504 | | | 275,268 | | | 226,814 | |
| | | | | |
EMEA | 185,298 | | | 132,221 | | | 115,891 | |
Other | 20,799 | | | 13,300 | | | 11,903 | |
Total International | 206,097 | | | 145,521 | | | 127,794 | |
| | | | | |
Total Fluids Systems revenues | $ | 622,601 | | | $ | 420,789 | | | $ | 354,608 | |
The following table presents further disaggregated revenues for the Industrial Solutions segment:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
(In thousands) | 2022 | | 2021 | | 2020 |
Product sales revenues | $ | 58,692 | | | $ | 66,796 | | | $ | 29,170 | |
Rental revenues | 75,616 | | | 68,455 | | | 47,341 | |
Service revenues | 58,685 | | | 49,920 | | | 53,958 | |
Total Industrial Solutions revenues | $ | 192,993 | | | $ | 185,171 | | | $ | 130,469 | |
NEWPARK RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following table sets forth geographic information for all of our operations. Revenues by geographic location are determined based on the operating location from which services are rendered or products are sold. Long-lived assets include property, plant and equipment and other long-term assets based on the country in which the assets are located.
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
(In thousands) | 2022 | | 2021 | | 2020 |
Revenues | | | | | |
United States | $ | 535,335 | | | $ | 402,246 | | | $ | 327,598 | |
Canada | 61,069 | | | 48,007 | | | 24,762 | |
EMEA | 198,391 | | | 151,228 | | | 128,362 | |
Asia Pacific | 15,722 | | | 7,629 | | | 6,561 | |
Latin America | 5,077 | | | 5,671 | | | 5,342 | |
Total revenues | $ | 815,594 | | | $ | 614,781 | | | $ | 492,625 | |
| | | | | |
Long-lived assets | | | | | |
United States | $ | 250,196 | | | $ | 318,839 | | | $ | 329,719 | |
Canada | 1,215 | | | 1,209 | | | 1,503 | |
EMEA | 32,487 | | | 38,923 | | | 44,577 | |
Asia Pacific | 2,392 | | | 2,712 | | | 3,007 | |
Latin America | 344 | | | 375 | | | 500 | |
Total long-lived assets | $ | 286,634 | | | $ | 362,058 | | | $ | 379,306 | |
For 2022, 2021 and 2020, no single customer accounted for more than 10% of our consolidated revenues.
Note 14 — Supplemental Cash Flow and Other Information
Supplemental disclosures to the statements of cash flows are presented below:
| | | | | | | | | | | | | | | | | |
(in thousands) | 2022 | | 2021 | | 2020 |
Cash paid (received) for: | | | | | |
Income taxes (net of refunds) | $ | 9,058 | | | $ | 6,912 | | | $ | 6,350 | |
Interest | $ | 5,945 | | | $ | 5,339 | | | $ | 6,054 | |
Cash, cash equivalents, and restricted cash in the consolidated statements of cash flows consisted of the following:
| | | | | | | | | | | | | | | | | |
(in thousands) | 2022 | | 2021 | | 2020 |
Cash and cash equivalents | $ | 23,182 | | | $ | 24,088 | | | $ | 24,197 | |
Restricted cash (included in other current assets) | 1,879 | | | 5,401 | | | 6,151 | |
Cash, cash equivalents, and restricted cash | $ | 25,061 | | | $ | 29,489 | | | $ | 30,348 | |
Accounts payable and accrued liabilities at December 31, 2022, 2021, and 2020, included accruals for capital expenditures of $1.1 million, $0.7 million, and $0.5 million, respectively.
Accrued liabilities at December 31, 2022 and 2021 included accruals for employee incentives and other compensation related expenses of $25.2 million and $23.1 million, respectively.
Note 15 — 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 expect that any loss resulting from such litigation or other proceedings, in excess of any amounts accrued or covered by insurance, will have a material adverse impact on our consolidated financial statements.
Other
We do not have any special purpose entities. At December 31, 2022, we had $42.3 million in outstanding letters of credit, performance bonds, and other guarantees for which certain of the letters of credit are collateralized by $1.9 million in restricted cash. We also enter into normal short-term operating leases for office and warehouse space, as well as certain operating equipment. None of these off-balance sheet arrangements either had, or is expected to have, a material effect on our financial statements.
We are self-insured for health claims, subject to certain “stop loss” insurance policies. Claims in excess of $250,000 per incident are insured by third-party insurers. Based on historical experience, we had accrued liabilities of $0.7 million for unpaid claims incurred at both December 31, 2022 and 2021. Substantially all of these estimated claims are expected to be paid within six months of their occurrence. In addition, we are self-insured for certain workers’ compensation, auto, and general liability claims up to a certain policy limit. Claims in excess of $750,000 are insured by third-party reinsurers. Based on historical experience, we had accrued liabilities of $3.1 million and $2.5 million for the uninsured portion of claims at December 31, 2022 and 2021, respectively.
We also maintain accrued liabilities for asset retirement obligations, which represent obligations associated with the retirement of tangible long-lived assets that result from the normal operation of the long-lived asset. Our asset retirement obligations primarily relate to required expenditures associated with owned and leased facilities. Upon settlement of the liability, a gain or loss for any difference between the settlement amount and the liability recorded is recognized. We had accrued asset retirement obligations of $1.2 million and $1.1 million at December 31, 2022 and 2021, respectively.