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 operate our business through two reportable segments: Industrial Solutions, which serves various markets including power transmission, oil and natural gas exploration and production (“E&P”), pipeline, renewable energy, petrochemical, construction and other industries, and Fluids Systems, which primarily serves E&P customers.
Industrial Solutions - Our Industrial Solutions segment, which generated 32% of consolidated revenues and $40 million of operating income for 2021, provides temporary worksite access solutions, including the rental of our manufactured 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 sell our manufactured recyclable composite mats to customers around the world, with power transmission being the primary end-market.
Our Industrial Solutions segment has been a primary source of operating income and cash generation for us in recent years. The expansion of our Industrial Solutions segment into 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 growth opportunity in these markets, including the potential positive impact from the energy transition. In 2021, approximately 80% of our total capital expenditures were directed to the Industrial Solutions segment in support of this growth strategy.
During 2020, our business was impacted by the COVID-19 pandemic, as customers delayed purchases and planned projects citing COVID-related market uncertainty, permitting delays, and logistical restrictions. In addition, our rental and service business has been impacted by the downturn in the U.S. oil and natural gas industry, as further discussed below. As compared to 2019, segment revenues from E&P customers decreased by $53 million (59%) to $37 million in 2021. During this same period, segment revenues from power transmission and other industrial markets increased by $47 million (43%) to $157 million in 2021. 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.
In 2020, we began leveraging our chemical blending capacity and technical expertise into industrial blending operations, and in response to the increasing market demand for cleaning products resulting from the COVID-19 pandemic, began producing disinfectants and industrial cleaning products in 2020. The scale-up of production was completed by the end of the third quarter of 2020, which effectively repositioned our chemical blending operation located in Conroe, Texas to support industrial end-markets. Beginning prospectively in the fourth quarter of 2020, the assets and operating results associated with these industrial blending operations are included in the Industrial Solutions segment, while the historical results from earlier in 2020, which were immaterial, are included in the Fluids Systems segment. Despite our initial success, a key blue-chip customer experienced a significant decline in product demand and cancelled all orders of disinfectants and cleaning products in the third quarter of 2021. In February 2022, in consideration of broader strategic priorities and the timeline and efforts required to further develop the industrial blending business, our management recommended and our Board of Directors approved a plan to exit our Industrial Blending operations. As part of the exit plan, we expect to complete the wind down of the Industrial Blending business by the end of the second quarter 2022 and pursue the sale of the industrial blending and warehouse facility located in Conroe, Texas, as well as the sale or other disposal of the blending and packaging equipment and other related assets currently used in these operations. The Industrial Blending business contributed $9 million of revenues in 2021 and incurred an operating loss of $2 million. As of December 31, 2021, the carrying value of the long-lived assets associated with the Industrial Blending business was $20 million. As a result of the plan to exit and dispose of the assets used in the Industrial Blending business, we may incur pre-tax charges in the range of approximately $4 million to $8 million primarily related to the non-cash impairment of long-lived assets, which we expect to recognize in the first quarter of 2022.
Fluids Systems - Our Fluids Systems segment, which generated 68% of consolidated revenues and incurred a $19 million operating loss for 2021, 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 (including the depth and whether the wells are drilled vertically or horizontally), which governs the revenue potential of each well. Drilling activity levels, in turn, depend on a variety of factors, including oil and natural gas commodity pricing, inventory
levels, product demand, and regulatory restrictions. Oil and natural gas prices and activity are cyclical and volatile, and this market volatility has a significant impact on our operating results.
While our Fluids Systems revenue potential is driven by a number of factors including those described above, rig count data remains the most widely accepted indicator of drilling activity. Average North American rig count data for the last three years is as follows:
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| | Year Ended December 31, | | 2021 vs 2020 | | 2020 vs 2019 |
| | 2021 | | 2020 | | 2019 | | Count | | % | | Count | | % |
U.S. Rig Count | | 475 | | | 433 | | | 943 | | | 42 | | | 10 | % | | (510) | | | (54) | % |
Canada Rig Count | | 131 | | | 89 | | | 134 | | | 42 | | | 47 | % | | (45) | | | (34) | % |
North America Rig Count | | 606 | | | 522 | | | 1,077 | | | 84 | | | 16 | % | | (555) | | | (52) | % |
_______________________________________________________
Source: Baker Hughes Company
During 2019, U.S. rig count steadily declined, exiting the year at 805 active rigs, a 26% decline from the end of 2018. The decline in market activity contributed to a significant decline in segment revenues and operating income. 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 the year at 586 rigs, 38% lower than the 2019 average. We anticipate that market activity will continue to improve in 2022, although U.S. activity is expected to remain well below 2019 levels as many of our customers remain focused on cost-saving measures and generating sufficient cash flows. Further, the ongoing impacts of the COVID-19 variants, 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 the timing and pace of recovery 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 have gradually recovered in 2021, with revenues for the fourth quarter 2021 approaching pre-COVID levels. Although the impacts of COVID-19 on our international operations has significantly declined in recent months, we expect some level of operational disruption and project delays will continue to impact international activity levels in the near-term, with the impact from the duration and magnitude of the pandemic and related government responses very difficult to predict.
In response to the 2020 market changes 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 during 2020 and continuing into 2021 aimed at conserving cash and protecting our liquidity, including:
•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 a 15% cut to the salaries paid to executive officers and the annual cash retainers paid to all non-employee members of the Board of Directors (compensation and matching contributions to the U.S. defined contribution plan were restored by the third quarter of 2021);
•The initiation of additional actions to further reduce the operational footprint of the Fluids Systems business in the U.S., to better align our cost structure with the lower market activity levels; and
•The elimination of all non-critical capital investments.
As part of the cost reduction programs, we reduced our global employee base by approximately 650 (30%) in 2020.
In 2020, we recognized $29.2 million of total charges, including $28.6 million in Fluids Systems 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.
In 2021, we recognized $5.5 million of total 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. We have continued to take cost actions throughout 2021 to further reduce the operational footprint of the Fluids Systems business in the U.S., to better align our cost structure with the lower market activity levels.
Additionally, with ongoing support from outside financial and other advisors, we have continuously reviewed our portfolio during the oil and natural gas cycle of the last couple of years. 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, as well as placing investment emphasis in markets where we generate strong returns and where we see greater long-term viability and stability. While we have taken certain actions to reduce our workforce and cost structure, our business contains high levels of fixed costs, including significant facility and personnel expense. In February 2022, our Board of Directors approved management’s plan to explore strategic options for our U.S. mineral grinding business, which contributed total third-party revenues of $36 million in 2021 yielding approximately break-even operating income and ended the year with $47 million of net capital employed, including approximately $25 million of net working capital. We continue to evaluate other under-performing areas of our business, particularly within the U.S. and Gulf of Mexico oil and natural gas markets, which necessitates consideration of broader structural changes to transform this business for the new market realities. In the absence of a longer-term increase in activity levels, we may incur future charges related to these efforts or potential asset impairments, which may negatively impact our future results.
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 $49.4 million increase in the Industrial Solutions segment and a $48.5 million increase in the Fluids Systems 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. 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.
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.
Other operating income, 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 includes $3.7 million and $5.2 million, respectively, in noncash 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 | 193,992 | | | 138,017 | | | 55,975 | | | 41 | % |
Total revenues | $ | 614,781 | | | $ | 492,625 | | | $ | 122,156 | | | 25 | % |
| | | | | | | |
Operating income (loss) | | | | | | | |
Fluids Systems | $ | (19,012) | | | $ | (66,403) | | | $ | 47,391 | | | |
Industrial Solutions | 39,733 | | | 13,459 | | | 26,274 | | | |
Corporate office | (29,546) | | | (25,690) | | | (3,856) | | | |
Total operating loss | $ | (8,825) | | | $ | (78,634) | | | $ | 69,809 | | | |
| | | | | | | |
Segment operating margin | | | | | | | |
Fluids Systems | (4.5) | % | | (18.7) | % | | | | |
Industrial Solutions | 20.5 | % | | 9.8 | % | | | | |
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 include $201.9 million from land markets and $25.4 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 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 | % |
Industrial blending revenues | 8,821 | | | 7,548 | | | 1,273 | | | 17 | % |
Total Industrial Solutions revenues | $ | 193,992 | | | $ | 138,017 | | | $ | 55,975 | | | 41 | % |
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 $39.7 million for 2021 compared to $13.5 million for 2020, the increase being primarily attributable to the changes in revenues as described above.
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.
Year Ended December 31, 2020 Compared to Year Ended December 31, 2019
Consolidated Results of Operations
Summarized results of operations for 2020 compared to 2019 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | 2020 vs 2019 |
(In thousands) | 2020 | | 2019 | | $ | | % |
Revenues | $ | 492,625 | | | $ | 820,119 | | | $ | (327,494) | | | (40) | % |
Cost of revenues | 473,258 | | | 684,738 | | | (211,480) | | | (31) | % |
Selling, general and administrative expenses | 86,604 | | | 113,394 | | | (26,790) | | | (24) | % |
Other operating (income) loss, net | (3,330) | | | 170 | | | (3,500) | | | NM |
Impairments and other charges | 14,727 | | | 11,422 | | | 3,305 | | | NM |
Operating income (loss) | (78,634) | | | 10,395 | | | (89,029) | | | NM |
| | | | | | | |
Foreign currency exchange (gain) loss | 3,378 | | | (816) | | | 4,194 | | | NM |
Interest expense, net | 10,986 | | | 14,369 | | | (3,383) | | | (24) | % |
Gain on extinguishment of debt | (419) | | | — | | | (419) | | | NM |
Income (loss) before income taxes | (92,579) | | | (3,158) | | | (89,421) | | | NM |
| | | | | | | |
Provision (benefit) for income taxes | (11,883) | | | 9,788 | | | (21,671) | | | NM |
Net loss | $ | (80,696) | | | $ | (12,946) | | | $ | (67,750) | | | NM |
Revenues
Revenues decreased 40% to $492.6 million for 2020, compared to $820.1 million for 2019. This $327.5 million decrease includes a $263.8 million (43%) decrease in revenues in North America, comprised of a $200.4 million decrease in the Fluids Systems segment and a $63.4 million decrease in the Industrial Solutions segment. Revenues from our North America operations decreased primarily due to the 52% reduction in North American rig count. Revenues from our international operations decreased by $63.7 million (31%), primarily driven by activity disruptions and project delays resulting from the COVID-19 pandemic as well as lower oil prices. Additional information regarding the change in revenues is provided within the operating segment results below.
Cost of revenues
Cost of revenues decreased 31% to $473.3 million for 2020, compared to $684.7 million for 2019. This $211.5 million decrease was primarily driven by the 40% decrease in revenues described above. Fluids Systems segment cost of revenues for 2020 and 2019 includes $14.1 million and $6.8 million, respectively, of total charges related to inventory write-downs, severance costs, and facility exit costs.
Selling, general and administrative expenses
Selling, general and administrative expenses decreased $26.8 million to $86.6 million for 2020, compared to $113.4 million for 2019. The 2019 expenses included a $4.0 million charge for stock-based compensation expense associated with the February 2019 retirement policy modification and $3.9 million in professional fees related to our long-term strategic planning project and the Cleansorb acquisition. The remaining decrease of $18.9 million was primarily driven by reduced personnel costs and lower spending related to legal matters in 2020. Selling, general and administrative expenses as a percentage of revenues was 17.6% for 2020 compared to 13.8% for 2019.
Other operating (income) loss, net
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 includes 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. Fluids Systems segment for 2019 includes an $11.4 million non-cash impairment charge to write-off the goodwill related to this business.
Foreign currency exchange
Foreign currency exchange was a $3.4 million loss for 2020 compared to a $0.8 million gain for 2019 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 $11.0 million for 2020 compared to $14.4 million for 2019. Interest expense for 2020 and 2019 includes $5.2 million and $6.2 million, respectively, in noncash amortization of original issue discount and debt issuance costs. The decrease in interest expense is primarily due to lower debt balances as well as a decrease in interest rates on the ABL Facility.
Gain on extinguishment of debt
The $0.4 million gain for 2020 reflects the difference in the amount paid and the net carrying value of the extinguished debt, including original issue discount and debt issuance costs, related to the repurchase of $33.1 million of our Convertible Notes in the open market for $29.1 million.
Provision (benefit) for income taxes
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. For 2019, the provision for income taxes was $9.8 million despite reporting a small pretax loss for the year. This result reflects the impact of the $11.4 million non-deductible goodwill impairment and other nondeductible expenses, as well as the impact of the geographic composition of our pretax loss, where tax expense related to earnings from our international operations is only partially offset by the tax benefit from losses in the U.S.
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, | | 2020 vs 2019 |
(In thousands) | 2020 | | 2019 | | $ | | % |
Revenues | | | | | | | |
Fluids Systems | $ | 354,608 | | | $ | 620,317 | | | $ | (265,709) | | | (43) | % |
Industrial Solutions | 138,017 | | | 199,802 | | | (61,785) | | | (31) | % |
Total revenues | $ | 492,625 | | | $ | 820,119 | | | $ | (327,494) | | | (40) | % |
| | | | | | | |
Operating income (loss) | | | | | | | |
Fluids Systems | $ | (66,403) | | | $ | 3,814 | | | $ | (70,217) | | | |
Industrial Solutions | 13,459 | | | 47,466 | | | (34,007) | | | |
Corporate office | (25,690) | | | (40,885) | | | 15,195 | | | |
Total operating income (loss) | $ | (78,634) | | | $ | 10,395 | | | $ | (89,029) | | | |
| | | | | | | |
Segment operating margin | | | | | | | |
Fluids Systems | (18.7) | % | | 0.6 | % | | | | |
Industrial Solutions | 9.8 | % | | 23.8 | % | | | | |
Fluids Systems
Revenues
Total revenues for this segment consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | 2020 vs 2019 |
(In thousands) | 2020 | | 2019 | | $ | | % |
United States | $ | 202,052 | | | $ | 395,618 | | | $ | (193,566) | | | (49) | % |
Canada | 24,762 | | | 31,635 | | | (6,873) | | | (22) | % |
Total North America | 226,814 | | | 427,253 | | | (200,439) | | | (47) | % |
| | | | | | | |
EMEA | 115,891 | | | 172,263 | | | (56,372) | | | (33) | % |
Other | 11,903 | | | 20,801 | | | (8,898) | | | (43) | % |
Total International | 127,794 | | | 193,064 | | | (65,270) | | | (34) | % |
| | | | | | | |
Total Fluids Systems revenues | $ | 354,608 | | | $ | 620,317 | | | $ | (265,709) | | | (43) | % |
North America revenues decreased 47% to $226.8 million for 2020, compared to $427.3 million for 2019. This decrease was primarily attributable to a $200.3 million decrease from U.S. land markets driven by the 54% decline in U.S. rig count, partially offset by a $4.0 million increase from offshore Gulf of Mexico, which benefited from our completion fluids product line extension. For 2020, U.S. revenues included $150.2 million from land markets and $48.5 million from offshore Gulf of Mexico.
Internationally, revenues decreased 34% to $127.8 million for 2020, compared to $193.1 million for 2019. The decrease in EMEA was driven by lower activity primarily attributable to COVID-19 disruptions and the impact of lower oil prices in Algeria, Romania, and various other countries, partially offset by the October 2019 acquisition of Cleansorb. The decrease in other international was primarily attributable to lower activity in Australia, including the completion of the Baker Hughes Greater Enfield project in the third quarter of 2019.
Operating income (loss)
The Fluids Systems segment incurred an operating loss of $66.4 million for 2020, reflecting a $70.2 million change from the $3.8 million of operating income generated for 2019. The decrease in operating income includes a $41.6 million decline from North American operations and a $18.8 million decline from international operations, which are primarily attributable to the changes in revenues described above, partially offset by the benefit of cost reduction programs implemented
in 2020. The Fluids Systems operating loss for 2020 also includes $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 Fluids Systems operating loss for 2019 included $18.8 million of charges, consisting of an $11.4 million non-cash impairment of goodwill and $7.4 million of total charges associated with facility closures and related exit costs, inventory write-downs, and severance costs, as well as the modification of the Company’s retirement policy.
Industrial Solutions
Revenues
Total revenues for this segment consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | 2020 vs 2019 |
(In thousands) | 2020 | | 2019 | | $ | | % |
Product sales revenues | $ | 29,170 | | | $ | 56,465 | | | $ | (27,295) | | | (48) | % |
Rental and service revenues | 101,299 | | | 143,337 | | | (42,038) | | | (29) | % |
Industrial blending revenues | 7,548 | | | — | | | 7,548 | | | NM |
Total Industrial Solutions revenues | $ | 138,017 | | | $ | 199,802 | | | $ | (61,785) | | | (31) | % |
The COVID-19 pandemic resulted in delays to planned projects across customer industries in 2020. Rental and service revenues decreased 29% to $101.3 million for 2020, which includes a $43.6 million decrease from E&P customers, primarily resulting from lower U.S. activity caused by the decline in oil and natural gas prices. This decline was partially offset by a $1.6 million increase from our continued expansion into non-E&P markets, including a 9% increase in revenues from the electrical utility sector, which benefited from increased demand to support repairs of hurricane-damaged utility infrastructure along the U.S. Gulf Coast region. Revenues from product sales, which typically fluctuate based on the timing of mat orders from customers, was negatively impacted in 2020 as certain customers delayed orders due to the uncertainty related to the COVID-19 pandemic.
Operating income
The Industrial Solutions segment generated operating income of $13.5 million for 2020 compared to $47.5 million for 2019, the decrease being primarily attributable to the change in revenues as described above.
Corporate Office
Corporate office expenses decreased $15.2 million to $25.7 million for 2020 compared to $40.9 million for 2019. The 2019 expenses included a $3.4 million charge for stock-based compensation expense associated with the February 2019 retirement policy modification and $3.9 million in professional fees related to our long-term strategic planning project and the Cleansorb acquisition. The remaining decrease of $7.9 million is primarily driven by reduced personnel costs and lower spending related to legal matters in 2020.
Liquidity and Capital Resources
Net cash used in operating activities was $3.0 million for 2021 compared to $55.8 million of net cash provided by operating activities for 2020. Net loss adjusted for non-cash items provided cash of $20.8 million for 2021, reflecting a $43.7 million improvement from 2020 which was more than offset by a net increase in working capital. In 2020, changes in working capital provided cash of $78.7 million, including $71.0 million associated with a decrease in receivables attributable to the decline in revenues. In 2021, changes in working capital used cash of $23.8 million, including a $61.3 million increase in receivables, attributable to the increase in revenues.
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. The majority of the proceeds from the sale of assets reflect used mats from our rental fleet, which are a part of the commercial offering of our Site and Access Solutions business. 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, replacing mats sold from the fleet and supporting our strategic growth in the power transmission sector. Net cash used in investing activities was $3.4 million for 2020, including capital expenditures of $15.8 million, partially offset by $12.4 million in proceeds from the sale of assets. Capital expenditures during 2020 included $7.8 million for the Industrial Solutions segment, including investments in the mat rental fleet as well as new products, and $6.2 million for the Fluids Systems segment.
Net cash provided by financing activities was $21.4 million for 2021, which primarily includes $77.6 million of net borrowings on our ABL Facility and foreign lines of credit, $8.1 million of net proceeds from a U.K. term loan facility, and $7.9 million of net proceeds from sale-leaseback transactions accounted for as financing arrangements, partially offset by $66.7 million used for repurchases and repayment of our Convertible Notes. We repaid the Convertible Notes at maturity in December 2021 with borrowings under the ABL Facility.
Substantially all our $24.1 million of cash on hand at December 31, 2021 resides in our international subsidiaries. Subject to maintaining sufficient cash requirements to support the strategic objectives of these international subsidiaries and complying with applicable exchange or cash controls, we expect to continue to repatriate available cash from these international subsidiaries. We anticipate that future working capital requirements for our operations will generally fluctuate directionally with revenues. We expect capital expenditures will remain heavily focused on industrial end-market opportunities, primarily reflecting expansion of our mat rental fleet to further support our growth in the utilities market.
Availability under our ABL Facility also provides additional liquidity as discussed further below. Total availability under the ABL Facility will fluctuate directionally based on the level of eligible U.S. accounts receivable, inventory, and, subject to satisfaction of certain financial covenants as described below, composite mats included in the rental fleet. We expect our available cash on-hand, cash generated by operations, and the expected availability under our ABL Facility and other existing financing arrangements to be adequate to fund our current operations during the next 12 months.
In February 2022, we initiated a plan to wind down our Industrial Blending operations and pursue the sale of the industrial blending and warehouse facility and related equipment, and also made the decision to explore strategic options for our U.S. mineral grinding business. Although the timing of any such transactions is not determinable, we expect to use any proceeds for general corporate purposes in support of our strategic initiatives. We also continue to evaluate additional sources of liquidity to support our longer-term needs.
Our capitalization is as follows:
| | | | | | | | | | | |
(In thousands) | December 31, 2021 | | December 31, 2020 |
Convertible Notes | $ | — | | | $ | 66,912 | |
ABL Facility | 86,500 | | | 19,100 | |
Other debt | 28,491 | | | 5,371 | |
Unamortized discount and debt issuance costs | (188) | | | (4,221) | |
Total debt | $ | 114,803 | | | $ | 87,162 | |
| | | |
Stockholders’ equity | 462,386 | | | 488,032 | |
Total capitalization | $ | 577,189 | | | $ | 575,194 | |
| | | |
Total debt to capitalization | 19.9 | % | | 15.2 | % |
Asset-Based Loan Facility. In May 2016, we entered into an asset-based revolving credit agreement, which was amended in October 2017 and in March 2019 (as amended, the “ABL Facility”). The ABL Facility provides financing of up to $200.0 million available for borrowings (inclusive of letters of credit) and can be increased up to a maximum capacity of $275.0 million, subject to certain conditions. The ABL Facility terminates in March 2024.
As of December 31, 2021, our total availability under the ABL Facility was $116.3 million, of which $86.5 million was drawn and $1.1 million was used for outstanding letters of credit, resulting in remaining availability of $28.7 million. As of February 24, 2022, our total availability under the ABL Facility was $124.7 million, of which $83.7 million was drawn and $1.1 million was used for outstanding letters of credit, resulting in remaining availability of $39.9 million.
Borrowing availability under the ABL Facility is calculated based on eligible U.S. accounts receivable, inventory, and, subject to satisfaction of certain financial covenants as described below, composite mats included in the rental fleet, net of reserves and limits on such assets included in the borrowing base calculation. To the extent pledged by us, the borrowing base calculation also includes the amount of eligible pledged cash. The lender may establish such reserves, in part based on appraisals of the asset base, and other limits at its discretion which could reduce the amounts otherwise available under the ABL Facility. Availability associated with eligible rental mats will also be subject to maintaining a minimum consolidated fixed charge coverage ratio of 1.5 to 1.0 and at least $1.0 million of operating income for the Site and Access Solutions business, each calculated based on a trailing twelve-month period.
Under the terms of the ABL Facility, we may elect to borrow at a variable interest rate based on either, (1) LIBOR subject to a floor of zero or (2) a base rate equal to the highest of: (a) the federal funds rate plus 50 basis points, (b) the prime rate of Bank of America, N.A. and (c) LIBOR, subject to a floor of zero, plus 100 basis points, plus, in each case, an applicable margin per annum. The applicable margin ranges from 150 to 200 basis points for LIBOR borrowings, and 50 to 100 basis points for base rate borrowings, based on the consolidated fixed charge coverage ratio as defined in the ABL Facility. As of December 31, 2021, the applicable margin for borrowings under our ABL Facility was 150 basis points with respect to LIBOR borrowings and 50 basis points with respect to base rate borrowings. The weighted average interest rate for outstanding borrowings under the ABL Facility was 1.6% at December 31, 2021. In addition, we are required to pay a commitment fee on the unused portion of the ABL Facility ranging from 25 to 37.5 basis points, based on the level of outstanding borrowings, as defined in the ABL Facility. As of December 31, 2021, the applicable commitment fee was 37.5 basis points.
The ABL Facility is a senior secured obligation, secured by first liens on substantially all of our U.S. tangible and intangible assets, and a portion of the capital stock of our non-U.S. subsidiaries has also been pledged as collateral. The ABL Facility contains customary operating covenants and certain restrictions including, among other things, those relating to the incurrence of additional debt, liens, dividends, asset sales, investments, mergers, acquisitions, affiliate transactions, stock repurchases and other restricted payments. The ABL Facility also requires a minimum consolidated fixed charge coverage ratio of 1.0 to 1.0 calculated based on a trailing twelve-month period if availability under the ABL Facility falls below $22.5 million. In addition, the ABL Facility contains customary events of default, including, without limitation, a failure to make payments under the facility, acceleration of more than $25.0 million of other indebtedness, certain bankruptcy events, and certain change of control events.
Other Debt. 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 $6.7 million in financing obligations outstanding under these arrangements at December 31, 2021.
In February 2021, a U.K. subsidiary entered a £6.0 million (approximately $8.3 million) term loan facility that matures in February 2024. The term loan bears interest at a rate of LIBOR plus a margin of 3.4% per year, payable in quarterly installments of £375,000 plus interest beginning March 2021 and a £1.5 million payment due at maturity. Effective January 1, 2022, the term loan bears interest at a rate of SONIA plus a margin of 3.5% per year. We had $6.1 million outstanding under this arrangement at December 31, 2021.
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 $11.8 million and $3.5 million outstanding under these arrangements at December 31, 2021 and 2020, respectively.
Off-Balance Sheet Arrangements
We do not have any special purpose entities. At December 31, 2021, we had $45.3 million in outstanding letters of credit, performance bonds, and other guarantees for which certain of the letters of credit are collateralized by $5.4 million in restricted cash. We also enter into normal short-term operating leases for office and warehouse space, as well as rolling stock and other pieces of 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, 2021 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In thousands) | 2022 | | 2023 | | 2024 | | 2025 | | 2026 | | Thereafter | | Total |
ABL Facility | $ | — | | | $ | — | | | $ | 86,500 | | | $ | — | | | $ | — | | | $ | — | | | $ | 86,500 | |
Other debt | 15,334 | | | 2,031 | | | 2,715 | | | — | | | — | | | — | | | 20,080 | |
Financing obligation (1) | 3,436 | | | 2,359 | | | 1,090 | | | 169 | | | — | | | — | | | 7,054 | |
Finance lease liabilities (1) | 722 | | | 587 | | | 325 | | | 156 | | | 2 | | | — | | | 1,792 | |
Operating lease liabilities (1) | 7,678 | | | 5,066 | | | 3,629 | | | 2,999 | | | 2,951 | | | 11,763 | | | 34,086 | |
Trade accounts payable and accrued liabilities (2) | 124,688 | | | — | | | — | | | — | | | — | | | — | | | 124,688 | |
Other long-term liabilities (3) | — | | | 1,680 | | | 1,651 | | | — | | | — | | | 7,013 | | | 10,344 | |
Performance bond obligations | 9,356 | | | 7,754 | | | 16,941 | | | 566 | | | — | | | 1,727 | | | 36,344 | |
Letter of credit commitments | 7,060 | | | 91 | | | 157 | | | 1,383 | | | — | | | 235 | | | 8,926 | |
Total contractual obligations | $ | 168,274 | | | $ | 19,568 | | | $ | 113,008 | | | $ | 5,273 | | | $ | 2,953 | | | $ | 20,738 | | | $ | 329,814 | |
(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 available cash on-hand, cash generated by operations, and estimated availability under our ABL Facility and other existing financing arrangements, 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, 2021, our consolidated balance sheet includes $260.3 million of property, plant and equipment and $24.4 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.
We began our Industrial Blending operations in the third quarter of 2020. Although we had initial success in leveraging our chemical blending capabilities into the disinfectant and cleaning products market, a key customer experienced a significant decline in product demand and cancelled all orders of products in the third quarter of 2021. While we continued to work to further develop the industrial blending business throughout the remainder of 2021 and into 2022, management began a process late in the fourth quarter of 2021 to evaluate the strategic value of this business. As a result of the above factors, we reviewed these long-lived assets for impairment in December 2021, considering the various strategic alternatives being evaluated at such time, and determined that the probability-weighted estimated undiscounted cash flows exceeded the $19.5 million carrying value, and therefore, no impairment was required.
In addition, in the fourth quarter of 2021, as part of management and the Board of Directors ongoing review of underperforming areas of our business, we evaluated certain strategic options related to our U.S. fluids systems business. As such, we reviewed the long-lived assets related to this business for impairment in December 2021 and determined that the estimated undiscounted cash flows from the ongoing operations exceeded the $78.7 million carrying value, and therefore, no impairment was required.
Estimating future net cash flows requires us to make judgments regarding the likelihood of possible outcomes and long-term forecasts of future revenues and costs related to the assets subject to review. These forecasts are uncertain in that they require assumptions about demand for our products and services, future market conditions, and technological developments. If changes in these assumptions occur, our expectations regarding future net cash flows may change and a material impairment could result.
In February 2022, in consideration of broader strategic priorities and the timeline and efforts required to further develop the industrial blending business, our management recommended and our Board of Directors approved a plan to exit our Industrial Blending operations. As part of the exit plan, we expect to complete the wind down of the Industrial Blending business by the end of the second quarter 2022 and pursue the sale of the industrial blending and warehouse facility located in Conroe, Texas, as well as the sale or other disposal of the blending and packaging equipment and other related assets currently used in these operations. As a result of the plan to exit and dispose of the assets used in the Industrial Blending business, we may incur pre-tax charges in the range of approximately $4 million to $8 million primarily related to the non-cash impairment of long-lived assets, which we expect to recognize in the first quarter of 2022.
In February 2022, our Board of Directors also approved management’s plan to explore strategic options for our U.S. mineral grinding business. We continue to evaluate other under-performing areas of our business, particularly within the U.S. and Gulf of Mexico oil and natural gas markets, which necessitates consideration of broader structural changes to transform this business for the new market realities. In the absence of a longer-term increase in activity levels, we may incur future charges related to these efforts or potential asset impairments, which may negatively impact our future results.
As of December 31, 2021, our consolidated balance sheet includes $47.3 million of goodwill, all of which relates to the Site and Access Solutions reporting unit in 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 exists. 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 2021, we applied the qualitative assessment and determined that the fair value of the Site and Access Solutions reporting unit was in excess of the net carrying value, and therefore, no impairment was required.
Income Taxes
We had total deferred tax assets of $70.2 million and $56.4 million at December 31, 2021 and 2020, respectively, with the increase primarily related to U.S. federal net operating loss carryforwards. 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, 2021, we had a total valuation allowance of $38.4 million, which includes a valuation allowance on $22.9 million of net operating loss carryforwards for certain U.S. federal, state and foreign jurisdictions, including Australia, as well as a valuation allowance of $5.2 million for certain foreign tax credits recognized related to the accounting for the impact of the 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 2014 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, 2021 and 2020, 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, 2021, 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, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, 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, 2021, 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 25, 2022, 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 US 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) related 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.
Evaluation of Long-Lived Asset Impairment – Industrial Blending Asset Group – Refer to Notes 1 and 16 of the financial statements
Critical Audit Matter Description
The Company reviews 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. Recoverability is based upon expected undiscounted future net cash flows. Due to changes in operating environment and strategic evaluation impacting the Industrial Blending asset group, management reviewed the related assets for impairment during 2021 and determined that the estimated undiscounted cash flows exceeded the carrying value, and therefore, no impairment was required.
Estimating future net cash flows requires management to make judgments regarding long-term forecasts of future revenues and the related costs associated with the asset group subject to review. If changes in these assumptions occur, expectations regarding future net cash flows may change and an impairment may result.
We identified the estimation of the undiscounted future net cash flows of the Industrial Blending asset group as a critical audit matter due to the materiality of the property, plant and equipment balance, high degree of auditor judgment and an increased level of effort when performing audit procedures to evaluate the reasonableness of management’s assumptions in determining the undiscounted future net cash flows, including those related to revenue forecasts, and the weighted-probability approach utilized to determine the estimated future cash flows under various business development plans.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the evaluation of the impairment model used to estimate the undiscounted future net cash flows of the Industrial Blending asset group included the following, among others:
•Evaluating the reasonableness of the identified triggering events to validate the timing of the asset impairment calculation.
•Testing the reasonableness of key assumptions used by management including revenue growth rates and EBITDA margins in the undiscounted future net cash flows determination.
•Performing sensitivity analyses of the key assumptions of revenue growth rates and costs as well as the weighted probabilities to evaluate the change in the undiscounted future net cash flows estimate that would result from changes in the assumptions.
•Testing the effectiveness of controls over the review of triggering events and management’s long-lived asset impairment evaluation.
/s/ DELOITTE & TOUCHE LLP
Houston, Texas
February 25, 2022
We have served as the Company’s auditor since 2008.
Newpark Resources, Inc.
Consolidated Balance Sheets
December 31,
| | | | | | | | | | | |
(In thousands, except share data) | 2021 | | 2020 |
ASSETS | | | |
Cash and cash equivalents | $ | 24,088 | | | $ | 24,197 | |
Receivables, net | 194,296 | | | 141,045 | |
Inventories | 155,341 | | | 147,857 | |
Prepaid expenses and other current assets | 14,787 | | | 15,081 | |
Total current assets | 388,512 | | | 328,180 | |
| | | |
Property, plant and equipment, net | 260,256 | | | 277,696 | |
Operating lease assets | 27,569 | | | 30,969 | |
Goodwill | 47,283 | | | 42,444 | |
Other intangible assets, net | 24,959 | | | 25,428 | |
Deferred tax assets | 2,316 | | | 1,706 | |
Other assets | 1,991 | | | 2,769 | |
Total assets | $ | 752,886 | | | $ | 709,192 | |
| | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
Current debt | $ | 19,210 | | | $ | 67,472 | |
Accounts payable | 84,585 | | | 49,252 | |
Accrued liabilities | 46,597 | | | 36,934 | |
Total current liabilities | 150,392 | | | 153,658 | |
| | | |
Long-term debt, less current portion | 95,593 | | | 19,690 | |
Noncurrent operating lease liabilities | 22,352 | | | 25,068 | |
Deferred tax liabilities | 11,819 | | | 13,368 | |
Other noncurrent liabilities | 10,344 | | | 9,376 | |
Total liabilities | 290,500 | | | 221,160 | |
| | | |
Commitments and contingencies (Note 15) | | | |
| | | |
Common stock, $0.01 par value (200,000,000 shares authorized and 109,330,733 and 107,587,786 shares issued, respectively) | 1,093 | | | 1,076 | |
Paid-in capital | 634,929 | | | 627,031 | |
Accumulated other comprehensive loss | (61,480) | | | (54,172) | |
Retained earnings | 24,345 | | | 50,937 | |
Treasury stock, at cost (16,981,147 and 16,781,150 shares, respectively) | (136,501) | | | (136,840) | |
Total stockholders’ equity | 462,386 | | | 488,032 | |
Total liabilities and stockholders’ equity | $ | 752,886 | | | $ | 709,192 | |
See Accompanying Notes to Consolidated Financial Statements
Newpark Resources, Inc.
Consolidated Statements of Operations
Years Ended December 31,
| | | | | | | | | | | | | | | | | |
(In thousands, except per share data) | 2021 | | 2020 | | 2019 |
Revenues | | | | | |
Product sales revenues | $ | 484,300 | | | $ | 378,813 | | | $ | 654,006 | |
Rental and service revenues | 130,481 | | | 113,812 | | | 166,113 | |
Total revenues | 614,781 | | | 492,625 | | | 820,119 | |
Cost of revenues | | | | | |
Cost of product sales revenues | 434,405 | | | 384,519 | | | 568,388 | |
Cost of rental and service revenues | 95,147 | | | 88,739 | | | 116,350 | |
Total cost of revenues | 529,552 | | | 473,258 | | | 684,738 | |
Selling, general and administrative expenses | 94,445 | | | 86,604 | | | 113,394 | |
Other operating (income) loss, net | (391) | | | (3,330) | | | 170 | |
Impairments and other charges | — | | | 14,727 | | | 11,422 | |
Operating income (loss) | (8,825) | | | (78,634) | | | 10,395 | |
| | | | | |
Foreign currency exchange (gain) loss | (397) | | | 3,378 | | | (816) | |
Interest expense, net | 8,805 | | | 10,986 | | | 14,369 | |
(Gain) loss on extinguishment of debt | 1,000 | | | (419) | | | — | |
Loss before income taxes | (18,233) | | | (92,579) | | | (3,158) | |
| | | | | |
Provision (benefit) for income taxes | 7,293 | | | (11,883) | | | 9,788 | |
Net loss | $ | (25,526) | | | $ | (80,696) | | | $ | (12,946) | |
| | | | | |
Net loss per common share - basic | $ | (0.28) | | | $ | (0.89) | | | $ | (0.14) | |
Net loss per common share - diluted | $ | (0.28) | | | $ | (0.89) | | | $ | (0.14) | |
See Accompanying Notes to Consolidated Financial Statements
Newpark Resources, Inc.
Consolidated Statements of Comprehensive Income (Loss)
Years Ended December 31,
| | | | | | | | | | | | | | | | | |
(In thousands) | 2021 | | 2020 | | 2019 |
| | | | | |
Net loss | $ | (25,526) | | | $ | (80,696) | | | $ | (12,946) | |
Foreign currency translation adjustments (net of tax benefit of $639, $293, $373) | (7,308) | | | 2,086 | | | (274) | |
Recognition of Brazil cumulative foreign currency translation losses | — | | | 11,689 | | | — | |
Comprehensive loss | $ | (32,834) | | | $ | (66,921) | | | $ | (13,220) | |
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 January 1, 2019 | $ | 1,064 | | | $ | 617,276 | | | $ | (67,673) | | | $ | 148,802 | | | $ | (129,788) | | | $ | 569,681 | |
Net loss | — | | | — | | | — | | | (12,946) | | | — | | | (12,946) | |
Employee stock options, restricted stock and employee stock purchase plan | 3 | | | (8,290) | | | — | | | (1,737) | | | 9,599 | | | (425) | |
Stock-based compensation expense | — | | | 11,640 | | | — | | | — | | | — | | | 11,640 | |
Treasury shares purchased at cost | — | | | — | | | — | | | — | | | (19,031) | | | (19,031) | |
Foreign currency translation, net of tax | — | | | — | | | (274) | | | — | | | — | | | (274) | |
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 | |
See Accompanying Notes to Consolidated Financial Statements
Newpark Resources, Inc.
Consolidated Statements of Cash Flows
Years Ended December 31,
| | | | | | | | | | | | | | | | | |
(In thousands) | 2021 | | 2020 | | 2019 |
Cash flows from operating activities: | | | | | |
Net loss | $ | (25,526) | | | $ | (80,696) | | | $ | (12,946) | |
Adjustments to reconcile net loss to net cash provided by (used in) operations: | | | | | |
Impairments and other non-cash charges | — | | | 25,072 | | | 11,422 | |
Depreciation and amortization | 42,225 | | | 45,314 | | | 47,144 | |
Stock-based compensation expense | 7,926 | | | 6,578 | | | 11,640 | |
Provision for deferred income taxes | (1,209) | | | (18,850) | | | (4,250) | |
Credit loss expense | 664 | | | 1,427 | | | 1,792 | |
Gain on sale of assets | (7,182) | | | (6,531) | | | (10,801) | |
Gain on insurance recovery | (849) | | | — | | | — | |
(Gain) loss on extinguishment of debt | 1,000 | | | (419) | | | — | |
Amortization of original issue discount and debt issuance costs | 3,707 | | | 5,152 | | | 6,188 | |
Change in assets and liabilities: | | | | | |
(Increase) decrease in receivables | (61,283) | | | 70,994 | | | 40,182 | |
(Increase) decrease in inventories | (10,336) | | | 39,889 | | | 699 | |
Increase in other assets | (726) | | | (686) | | | (1,032) | |
Increase (decrease) in accounts payable | 36,341 | | | (29,457) | | | (8,318) | |
Increase (decrease) in accrued liabilities and other | 12,235 | | | (1,996) | | | (9,434) | |
Net cash provided by (used in) operating activities | (3,013) | | | 55,791 | | | 72,286 | |
| | | | | |
Cash flows from investing activities: | | | | | |
Capital expenditures | (21,793) | | | (15,794) | | | (44,806) | |
Business acquisitions, net of cash acquired | (13,434) | | | — | | | (18,692) | |
Proceeds from sale of property, plant and equipment | 15,999 | | | 12,399 | | | 13,734 | |
Proceeds from insurance property claim | 1,753 | | | — | | | — | |
Net cash used in investing activities | (17,475) | | | (3,395) | | | (49,764) | |
| | | | | |
Cash flows from financing activities: | | | | | |
Borrowings on lines of credit | 286,154 | | | 173,794 | | | 327,983 | |
Payments on lines of credit | (208,575) | | | (221,781) | | | (335,613) | |
Purchases of Convertible Notes | (28,137) | | | (29,124) | | | — | |
Payment on Convertible Notes | (38,567) | | | — | | | — | |
Proceeds from term loan | 8,258 | | | — | | | — | |
Proceeds from financing obligation | 8,004 | | | — | | | — | |
Debt issuance costs | (295) | | | — | | | (1,214) | |
Proceeds from employee stock plans | — | | | — | | | 1,314 | |
Purchases of treasury stock | (1,448) | | | (333) | | | (21,737) | |
Other financing activities | (3,986) | | | (497) | | | (259) | |
Net cash provided by (used in) financing activities | 21,408 | | | (77,941) | | | (29,526) | |
| | | | | |
Effect of exchange rate changes on cash | (1,779) | | | (970) | | | (399) | |
| | | | | |
Net decrease in cash, cash equivalents, and restricted cash | (859) | | | (26,515) | | | (7,403) | |
Cash, cash equivalents, and restricted cash at beginning of year | 30,348 | | | 56,863 | | | 64,266 | |
Cash, cash equivalents, and restricted cash at end of year | $ | 29,489 | | | $ | 30,348 | | | $ | 56,863 | |
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 (“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 operate our business through two reportable segments: Fluids Systems and Industrial Solutions. 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 includes our Site and Access Solutions business, along with our Industrial Blending operations. Site and Access Solutions provides temporary worksite access, including the rental of our manufactured 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 sell our manufactured recyclable composite mats to customers around the world, with power transmission being the primary end-market.
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. In 2016, the Financial Accounting Standards Board (“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. See "New Accounting Pronouncements" below for details about the amended guidance and about our adoption. Results for reporting periods beginning after December 31, 2019 are presented under the new guidance, while prior period amounts were not adjusted and continue to be reported in accordance with previous guidance.
The new guidance requires an entity to estimate its lifetime “expected credit loss” for such assets at inception, which will generally result in the earlier recognition of allowances for losses. Under previous guidance, reserves for uncollectible accounts receivable were determined on a specific identification basis when we believed that the required payment of specific amounts owed to us was not probable. Under the new guidance, 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 | | 3-10 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 an indication of impairment exists. 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, fluids and spill containment, 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 both 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, 2021 and 2020, accumulated other comprehensive loss related to foreign subsidiaries reflected in stockholders’ equity was $61.5 million and $54.2 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 December 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. The new guidance requires an entity to estimate its lifetime “expected credit loss” for such assets at inception, which will generally result in the earlier recognition of allowances for losses. 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. Results for reporting periods beginning after December 31, 2019 are presented under the new guidance, while prior period amounts were not adjusted and continue to be reported in accordance with previous guidance. See Note 7 for additional required disclosures.
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 — Business Combinations
In December 2021, we acquired certain assets and assumed certain liabilities of Lentzcaping, Inc. and Lentzcaping, LLC (together, "Lentzcaping"). Lentzcaping has been a valued partner for Newpark in recent years, primarily serving utility transmission customers in the Northeast U.S. and providing a variety of complementary services, including worksite planning and preparation, temporary access, and worksite restoration. The purchase price for this acquisition was $13.5 million, net of cash acquired, and was funded with borrowings under the ABL Facility. The results of operations of Lentzcaping are reported within the Industrial Solutions segment for the period subsequent to the date of the acquisition.
The Lentzcaping transaction has been recorded using the acquisition method of accounting and accordingly, assets acquired and liabilities assumed were recorded at their estimated fair values as of the acquisition date. The acquisition resulted in the recognition of $3.3 million in other intangible assets, consisting primarily of customer relationships and tradename. The customer relationships and tradename are finite-lived intangible assets that are expected to be amortized over periods of 15 years and 2 years, respectively. In addition, the acquisition resulted in the recognition of a $2.1 million intangible liability that will be amortized to operating expense over the 7-year contract term. The excess of the total consideration was recorded as goodwill, which is deductible for tax purposes. The fair values of the identifiable assets acquired and liabilities assumed were based on our estimates and assumptions using various market, income, and cost valuation approaches, which are classified within level 3 of the fair value hierarchy.
The following table summarizes the preliminary amounts recognized for the assets acquired and liabilities assumed as of the December 17, 2021 acquisition date.
| | | | | |
(In thousands) | |
Receivables | $ | 2,807 | |
Intangible assets | 3,330 | |
Property, plant and equipment | 4,765 | |
Other assets | 346 | |
Total assets acquired | 11,248 | |
| |
Intangible liability | 2,065 | |
Other liabilities | 604 | |
Total liabilities assumed | 2,669 | |
| |
Net assets purchased | 8,579 | |
Goodwill | 4,871 | |
Total purchase consideration | 13,450 | |
| |
Net cash conveyed at closing | 13,434 | |
Due to seller | 16 | |
Total purchase consideration | $ | 13,450 | |
In October 2019, we completed the acquisition of Cleansorb Limited (“Cleansorb”), a U.K. based provider of specialty chemicals for the oil and natural gas industry, which further expanded our completion fluids technology portfolio and capabilities. The purchase price for this acquisition was $18.7 million, net of cash acquired, and was funded with borrowings under the ABL Facility. The results of operations of Cleansorb are reported within the Fluids Systems segment for the period subsequent to the date of the acquisition.
Results of operations and pro-forma combined results of operations for these acquired businesses have not been presented as the effect of these acquisitions are not material to our consolidated financial statements.
NEWPARK RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Note 3 — Inventories
Inventories consisted of the following at December 31:
| | | | | | | | | | | |
(In thousands) | 2021 | | 2020 |
Raw materials: | | | |
Fluids Systems | $ | 119,242 | | | $ | 98,974 | |
Industrial Solutions | 4,939 | | | 6,315 | |
Total raw materials | 124,181 | | | 105,289 | |
Blended fluids systems components | 27,793 | | | 31,744 | |
Finished goods — mats | 3,367 | | | 10,824 | |
Total inventories | $ | 155,341 | | | $ | 147,857 | |
Raw materials for the Fluids Systems segment consist primarily of barite, 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 and cleaning products, as well as materials that are consumed in providing spill containment and other services to our customers. Our blended fluids systems components consist of base 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.
Fluids Systems segment cost of revenues for 2020 includes $10.3 million of total charges for inventory write-downs, primarily attributable to the reduction in carrying values of certain inventory to their net realizable value.
Note 4 — Property, Plant and Equipment
Property, plant and equipment consisted of the following at December 31:
| | | | | | | | | | | |
(In thousands) | 2021 | | 2020 |
Land | $ | 11,820 | | | $ | 11,901 | |
Buildings and improvements | 118,395 | | | 122,961 | |
Machinery and equipment | 282,258 | | | 285,678 | |
Computer hardware and software | 48,389 | | | 46,801 | |
Furniture and fixtures | 5,879 | | | 5,955 | |
Construction in progress | 8,194 | | | 6,958 | |
| 474,935 | | | 480,254 | |
Less accumulated depreciation | (287,046) | | | (268,862) | |
| 187,889 | | | 211,392 | |
| | | |
Composite mats (rental fleet) | 135,975 | | | 126,617 | |
Less accumulated depreciation - composite mats | (63,608) | | | (60,313) | |
| 72,367 | | | 66,304 | |
| | | |
Property, plant and equipment, net | $ | 260,256 | | | $ | 277,696 | |
Depreciation expense was $38.5 million, $40.9 million, and $42.8 million in 2021, 2020 and 2019, respectively. Fluids Systems segment includes a $3.0 million impairment charge for 2020, attributable to the abandonment of certain property, plant and equipment.
NEWPARK RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Note 5 — Goodwill and Other Intangible Assets
Changes in the carrying amount of goodwill by reportable segment are as follows:
| | | | | | | | | | | | | | | | | |
(In thousands) | Fluids Systems | | Industrial Solutions | | Total |
Balance at December 31, 2019 | $ | — | | | $ | 42,332 | | | $ | 42,332 | |
Effects of foreign currency | — | | | 112 | | | 112 | |
Balance at December 31, 2020 | — | | | 42,444 | | | 42,444 | |
Acquisition | — | | | 4,871 | | | 4,871 | |
Effects of foreign currency | — | | | (32) | | | (32) | |
Balance at December 31, 2021 | $ | — | | | $ | 47,283 | | | $ | 47,283 | |
We completed the annual evaluation of the carrying value of our goodwill and other indefinite-lived intangible assets as of November 1, 2021 and determined that the fair value was in excess of the net carrying value, and therefore, no impairment was required.
In March 2020, primarily as a result of the collapse in oil prices and the expected declines in the U.S. land E&P markets, along with a significant decline in the quoted market prices of our common stock, we considered these developments to be a potential indicator of impairment that required us to complete an interim goodwill impairment evaluation. As such, in March 2020, we estimated the fair value of our Site and Access Solutions reporting unit based on our current forecasts and expectations for market conditions and determined that even though the estimated fair value had decreased from our 2019 annual evaluation, the fair value remained substantially in excess of its net carrying value, and therefore, no impairment was required. During the second quarter and third quarter of 2020, we determined that there were no further indicators of events or changes in circumstances that would more likely than not reduce the fair value below its carrying amount. We completed the annual evaluation of the carrying value of our goodwill and other indefinite-lived intangible assets as of November 1, 2020 and determined that the fair value was in excess of the net carrying value, and therefore, no impairment was required.
In 2019, as a result of the decline in drilling activities and the projection of continued softness in the U.S. land market, as well as the decline in the quoted market prices of our common stock, we determined that it was more likely than not that the carrying value of our Fluids Systems reporting unit exceeded its estimated fair value such that goodwill was potentially impaired. As a result, we completed the evaluation to measure the amount of goodwill impairment determining a full impairment of goodwill related to the Fluids Systems reporting unit was required. As such, in the fourth quarter of 2019, we recognized an $11.4 million non-cash impairment charge to write-off all the goodwill related to the Fluids Systems reporting unit.
Our impairment test 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. Significant assumptions inherent in the evaluation include the estimated growth rates for future revenues and the discount rate. Our assumptions are based on historical data supplemented by current and anticipated market conditions.
Other intangible assets consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 | | December 31, 2020 |
(In thousands) | Gross Carrying Amount | | Accumulated Amortization | | Other Intangible Assets, Net | | Gross Carrying Amount | | Accumulated Amortization | | Other Intangible Assets, Net |
Technology related | $ | 20,315 | | | $ | (9,201) | | | $ | 11,114 | | | $ | 20,398 | | | $ | (7,958) | | | $ | 12,440 | |
Customer related | 37,176 | | | (23,843) | | | 13,333 | | | 33,891 | | | (21,458) | | | 12,433 | |
Total amortizing intangible assets | 57,491 | | | (33,044) | | | 24,447 | | | 54,289 | | | (29,416) | | | 24,873 | |
| | | | | | | | | | | |
Permits and licenses | 512 | | | — | | | 512 | | | 555 | | | — | | | 555 | |
Total indefinite-lived intangible assets | 512 | | | — | | | 512 | | | 555 | | | — | | | 555 | |
Total intangible assets | $ | 58,003 | | | $ | (33,044) | | | $ | 24,959 | | | $ | 54,844 | | | $ | (29,416) | | | $ | 25,428 | |
Total amortization expense related to other intangible assets was $3.7 million, $4.5 million and $4.4 million in 2021, 2020 and 2019, respectively.
NEWPARK RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
In December 2021, we completed the acquisition of Lentzcaping, which resulted in additions to amortizable intangible assets of $3.3 million. See Note 2 for additional information.
Estimated future amortization expense for the years ended December 31 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In thousands) | 2022 | | 2023 | | 2024 | | 2025 | | 2026 | | Thereafter | | Total |
Technology related | $ | 1,245 | | | $ | 1,073 | | | $ | 1,051 | | | $ | 1,049 | | | $ | 1,049 | | | $ | 5,647 | | | $ | 11,114 | |
Customer related | 2,785 | | | 2,260 | | | 1,843 | | | 1,533 | | | 1,268 | | | 3,644 | | | 13,333 | |
Total future amortization expense | $ | 4,030 | | | $ | 3,333 | | | $ | 2,894 | | | $ | 2,582 | | | $ | 2,317 | | | $ | 9,291 | | | $ | 24,447 | |
The weighted average amortization period for technology related and customer related intangible assets is 14 years and 13 years, respectively.
Note 6 — Financing Arrangements
Financing arrangements consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 | | December 31, 2020 |
(In thousands) | Principal Amount | | Unamortized Discount and Debt Issuance Costs | | Total Debt | | Principal Amount | | Unamortized Discount and Debt Issuance Costs | | Total Debt |
Convertible Notes | $ | — | | | $ | — | | | $ | — | | | $ | 66,912 | | | $ | (4,221) | | | $ | 62,691 | |
ABL Facility | 86,500 | | | — | | | 86,500 | | | 19,100 | | | — | | | 19,100 | |
Term loan | 6,094 | | | (110) | | | 5,984 | | | — | | | — | | | — | |
Financing obligation | 6,688 | | | (78) | | | 6,610 | | | — | | | — | | | — | |
Other debt | 15,709 | | | — | | | 15,709 | | | 5,371 | | | — | | | 5,371 | |
Total debt | 114,991 | | | (188) | | | 114,803 | | | 91,383 | | | (4,221) | | | 87,162 | |
Less: current portion | (19,210) | | | — | | | (19,210) | | | (71,693) | | | 4,221 | | | (67,472) | |
Long-term debt | $ | 95,781 | | | $ | (188) | | | $ | 95,593 | | | $ | 19,690 | | | $ | — | | | $ | 19,690 | |
Convertible Notes. In December 2016, we issued $100.0 million of unsecured convertible senior notes (“Convertible Notes”) that matured on December 1, 2021. The notes bore interest at a rate of 4.0% per year, payable semiannually in arrears on June 1 and December 1 of each year. The conversion rate was 107.1381 shares of our common stock per $1,000 principal amount of notes (equivalent to an initial conversion price of $9.33 per share of common stock), subject to adjustment in certain circumstances.
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. 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. The remaining $38.6 million of our Convertible Notes were repaid at maturity in December 2021.
Asset-Based Loan Facility. In May 2016, we entered into an asset-based revolving credit agreement, which was amended in October 2017 and in March 2019 (as amended, the “ABL Facility”). The ABL Facility provides financing of up to $200.0 million available for borrowings (inclusive of letters of credit) and can be increased up to a maximum capacity of $275.0 million, subject to certain conditions. The ABL Facility terminates in March 2024.
As of December 31, 2021, our total availability under the ABL Facility was $116.3 million, of which $86.5 million was drawn and $1.1 million was used for outstanding letters of credit, resulting in remaining availability of $28.7 million. As of February 24, 2022, our total availability under the ABL Facility was $124.7 million, of which $83.7 million was drawn and $1.1 million was used for outstanding letters of credit, resulting in remaining availability of $39.9 million.
Borrowing availability under the ABL Facility is calculated based on eligible U.S. accounts receivable, inventory, and, subject to satisfaction of certain financial covenants as described below, composite mats included in the rental fleet, net of reserves and limits on such assets included in the borrowing base calculation. To the extent pledged by us, the borrowing base
NEWPARK RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
calculation also includes the amount of eligible pledged cash. The lender may establish such reserves, in part based on appraisals of the asset base, and other limits at its discretion which could reduce the amounts otherwise available under the ABL Facility. Availability associated with eligible rental mats will also be subject to maintaining a minimum consolidated fixed charge coverage ratio of 1.5 to 1.0 and at least $1.0 million of operating income for the Site and Access Solutions business, each calculated based on a trailing twelve-month period.
Under the terms of the ABL Facility, we may elect to borrow at a variable interest rate based on either, (1) LIBOR subject to a floor of zero or (2) a base rate equal to the highest of: (a) the federal funds rate plus 50 basis points, (b) the prime rate of Bank of America, N.A. and (c) LIBOR, subject to a floor of zero, plus 100 basis points, plus, in each case, an applicable margin per annum. The applicable margin ranges from 150 to 200 basis points for LIBOR borrowings, and 50 to 100 basis points for base rate borrowings, based on the consolidated fixed charge coverage ratio as defined in the ABL Facility. As of December 31, 2021, the applicable margin for borrowings under our ABL Facility was 150 basis points with respect to LIBOR borrowings and 50 basis points with respect to base rate borrowings. The weighted average interest rate for outstanding borrowings under the ABL Facility was 1.6% at December 31, 2021. In addition, we are required to pay a commitment fee on the unused portion of the ABL Facility ranging from 25 to 37.5 basis points, based on the level of outstanding borrowings, as defined in the ABL Facility. As of December 31, 2021, the applicable commitment fee was 37.5 basis points.
The ABL Facility is a senior secured obligation, secured by first liens on substantially all of our U.S. tangible and intangible assets, and a portion of the capital stock of our non-U.S. subsidiaries has also been pledged as collateral. The ABL Facility contains customary operating covenants and certain restrictions including, among other things, those relating to the incurrence of additional debt, liens, dividends, asset sales, investments, mergers, acquisitions, affiliate transactions, stock repurchases and other restricted payments. The ABL Facility also requires a minimum consolidated fixed charge coverage ratio of 1.0 to 1.0 calculated based on a trailing twelve-month period if availability under the ABL Facility falls below $22.5 million. In addition, the ABL Facility contains customary events of default, including, without limitation, a failure to make payments under the facility, acceleration of more than $25.0 million of other indebtedness, certain bankruptcy events, and certain change of control events.
Other Debt. 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 $6.7 million in financing obligations outstanding under these arrangements at December 31, 2021.
In February 2021, a U.K. subsidiary entered a £6.0 million (approximately $8.3 million) term loan facility that matures in February 2024. The term loan bears interest at a rate of LIBOR plus a margin of 3.4% per year, payable in quarterly installments of £375,000 plus interest beginning March 2021 and a £1.5 million payment due at maturity. Effective January 1, 2022, the term loan bears interest at a rate of SONIA plus a margin of 3.5% per year. We had $6.1 million outstanding under this arrangement at December 31, 2021.
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 $11.8 million and $3.5 million outstanding under these arrangements at December 31, 2021 and 2020, respectively.
We incurred net interest expense of $8.8 million, $11.0 million and $14.4 million for the years ended December 31, 2021, 2020 and 2019, respectively. There was no capitalized interest for the years ended December 31, 2021, 2020 or 2019. As of December 31, 2021, we had scheduled repayments for financing arrangements of approximately $19 million in 2022, $5 million in 2023, and $91 million in 2024.
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, with the exception of our Convertible Notes at December 31, 2020, approximated their fair values at December 31, 2021 and 2020. The estimated fair value of our Convertible Notes was $61.1 million at December 31, 2020, based on quoted market prices at such date.
NEWPARK RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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, 2021, 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. A majority of the cash was held in accounts that maintain deposit ratings of P-1 by Moody’s, A-1 by Standard & Poor’s, and F1 by Fitch. 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 2021, 2020 and 2019, revenues from our 20 largest customers represented approximately 39%, 49% and 42%, respectively, of our consolidated revenues. For 2021, 2020 and 2019, no single customer accounted for more than 10% of our consolidated revenues.
Receivables
Receivables consisted of the following at December 31:
| | | | | | | | | | | |
(In thousands) | 2021 | | 2020 |
Trade receivables: | | | |
Gross trade receivables | $ | 185,065 | | | $ | 133,717 | |
Allowance for credit losses | (4,587) | | | (5,024) | |
Net trade receivables | 180,478 | | | 128,693 | |
Income tax receivables | 4,167 | | | 6,545 | |
Other receivables | 9,651 | | | 5,807 | |
Total receivables, net | $ | 194,296 | | | $ | 141,045 | |
Other receivables include $5.7 million and $4.4 million for value added, goods and service taxes related to foreign jurisdictions as of December 31, 2021 and 2020, respectively. Other receivables at December 31, 2021 also includes $1.9 million for an insurance claim.
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.
Changes in our allowance for credit losses were as follows:
| | | | | | | | | | | | | | | | | |
(In thousands) | 2021 | | 2020 | | 2019 |
Balance at beginning of year | $ | 5,024 | | | $ | 6,007 | | | $ | 10,034 | |
Cumulative effect of accounting change | — | | | 959 | | | — | |
Credit loss expense | 664 | | | 1,427 | | | 1,792 | |
Write-offs, net of recoveries | (1,101) | | | (3,369) | | | (5,819) | |
Balance at end of year | $ | 4,587 | | | $ | 5,024 | | | $ | 6,007 | |
NEWPARK RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Note 8 — Leases
We lease certain office space, manufacturing facilities, warehouses, land, and equipment. Our leases have remaining terms ranging from 1 to 10 years with various extension and termination options. We consider these options in determining the lease term used to establish our operating lease assets and liabilities. Lease agreements with lease and non-lease components are accounted for as a single lease component. Leases with an initial term of 12 months or less are not recorded in the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term.
Leases consisted of the following at December 31:
| | | | | | | | | | | | | | |
(In thousands) | Balance Sheet Classification | 2021 | | 2020 |
Assets: | | | | |
Operating | Operating lease assets | $ | 27,569 | | | $ | 30,969 | |
Finance | Property, plant and equipment, net | 1,709 | | | 942 | |
Total lease assets | | $ | 29,278 | | | $ | 31,911 | |
Liabilities: | | | | |
Current: | | | | |
Operating | Accrued liabilities | $ | 6,494 | | | $ | 6,888 | |
Finance | Current debt | 682 | | | 353 | |
Noncurrent: | | | | |
Operating | Noncurrent operating lease liabilities | $ | 22,352 | | | $ | 25,068 | |
Finance | Long-term debt, less current portion | 1,041 | | | 590 | |
Total lease liabilities | | $ | 30,569 | | | $ | 32,899 | |
Total operating lease expenses were $24.4 million for 2021, of which $14.2 million related to short-term leases and $10.2 million related to leases recognized in the balance sheet. Total operating lease expenses were $25.8 million and $30.1 million for 2020 and 2019, 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, 2021 is as follows:
| | | | | | | | | | | | | | | | | |
(In thousands) | Operating Leases | | Finance Leases | | Total |
2022 | $ | 7,678 | | | $ | 722 | | | $ | 8,400 | |
2023 | 5,066 | | | 587 | | | 5,653 | |
2024 | 3,629 | | | 325 | | | 3,954 | |
2025 | 2,999 | | | 156 | | | 3,155 | |
2026 | 2,951 | | | 2 | | | 2,953 | |
Thereafter | 11,763 | | | — | | | 11,763 | |
Total lease payments | 34,086 | | | 1,792 | | | 35,878 | |
Less: Interest | 5,240 | | | 69 | | | 5,309 | |
Present value of lease liabilities | $ | 28,846 | | | $ | 1,723 | | | $ | 30,569 | |
During 2021, we entered into $6.5 million and $1.2 million of new operating lease liabilities and finance lease liabilities, respectively, in exchange for leased assets.
| | | | | |
Lease Term and Discount Rate | December 31, 2021 |
Weighted-average remaining lease term (years) | |
Operating leases | 7.1 |
Finance leases | 2.8 |
Weighted-average discount rate | |
Operating leases | 4.8 | % |
Finance leases | 4.1 | % |
Note 9 — Income Taxes
The provision (benefit) for income taxes was as follows:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
(In thousands) | 2021 | | 2020 | | 2019 |
Current: | | | | | |
U.S. Federal | $ | 773 | | | $ | 1,591 | | | $ | 1,892 | |
State | 525 | | | 365 | | | 706 | |
Foreign | 7,204 | | | 5,011 | | | 11,440 | |
Total current | 8,502 | | | 6,967 | | | 14,038 | |
Deferred: | | | | | |
U.S. Federal | 547 | | | (16,309) | | | (2,926) | |
State | (545) | | | 598 | | | 1,181 | |
Foreign | (1,211) | | | (3,139) | | | (2,505) | |
Total deferred | (1,209) | | | (18,850) | | | (4,250) | |
Total provision (benefit) for income taxes | $ | 7,293 | | | $ | (11,883) | | | $ | 9,788 | |
NEWPARK RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Income (loss) before income taxes was as follows:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
(In thousands) | 2021 | | 2020 | | 2019 |
U.S. | $ | (36,250) | | | $ | (92,838) | | | $ | (15,270) | |
Foreign | 18,017 | | | 259 | | | 12,112 | |
Loss before income taxes | $ | (18,233) | | | $ | (92,579) | | | $ | (3,158) | |
The effective income tax rate is reconciled to the statutory federal income tax rate as follows:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
(In thousands) | 2021 | | 2020 | | 2019 |
Income tax expense (benefit) at federal statutory rate | $ | (3,829) | | | $ | (19,442) | | | $ | (663) | |
Recognition of Brazil cumulative foreign currency translation losses | — | | | 2,456 | | | — | |
Nondeductible goodwill impairment | — | | | — | | | 2,401 | |
Nondeductible executive compensation | 999 | | | 170 | | | 756 | |
Other nondeductible expenses | 557 | | | 616 | | | 1,506 | |
Stock-based compensation | 880 | | | 1,602 | | | (248) | |
Different rates on earnings of foreign operations | (115) | | | 274 | | | 463 | |
Dividend taxes on unremitted earnings | 980 | | | 322 | | | 1,609 | |
U.S. tax on foreign earnings | — | | | — | | | 1,215 | |
Change in valuation allowance | 10,416 | | | 2,226 | | | 1,272 | |
State tax expense (benefit), net | (1,302) | | | 196 | | | 430 | |
Other items, net | (1,293) | | | (303) | | | 1,047 | |
Total provision (benefit) for income taxes | $ | 7,293 | | | $ | (11,883) | | | $ | 9,788 | |
The provision for income taxes was $7.3 million for 2021, despite reporting a pretax loss for the year, 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. The provision for income taxes was $9.8 million for 2019 despite reporting a small pretax loss for the year. This result reflects the impact of the $11.4 million nondeductible goodwill impairment and other nondeductible expenses, as well as the impact of the geographic composition of our pretax loss, where tax expense related to earnings from our international operations is only partially offset by the tax benefit from losses in the U.S.
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 carryback 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 permits 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 is due in two equal installments on December 31, 2021 and December 31, 2022. We paid the first installment in December 2021, and the remaining deferred amount of applicable payroll taxes was $1.6 million at December 31, 2021.
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) | 2021 | | 2020 |
Deferred tax assets: | | | |
Net operating losses | $ | 38,746 | | | $ | 25,990 | |
Foreign tax credits | 8,330 | | | 6,690 | |
Accruals not currently deductible | 4,393 | | | 5,121 | |
Unrealized foreign exchange losses, net | 4,590 | | | 3,750 | |
Stock-based compensation | 1,856 | | | 2,238 | |
Capitalized inventory costs | 1,706 | | | 3,111 | |
Other | 10,534 | | | 9,456 | |
Total deferred tax assets | 70,155 | | | 56,356 | |
Valuation allowance | (38,406) | | | (26,250) | |
Total deferred tax assets, net of allowances | 31,749 | | | 30,106 | |
Deferred tax liabilities: | | | |
Accelerated depreciation and amortization | (31,816) | | | (29,587) | |
Tax on unremitted earnings | (8,214) | | | (9,765) | |
Original issue discount on Convertible Notes | — | | | (804) | |
Other | (1,222) | | | (1,612) | |
Total deferred tax liabilities | (41,252) | | | (41,768) | |
Total net deferred tax liabilities | $ | (9,503) | | | $ | (11,662) | |
| | | |
Noncurrent deferred tax assets | $ | 2,316 | | | $ | 1,706 | |
Noncurrent deferred tax liabilities | (11,819) | | | (13,368) | |
Net deferred tax liabilities | $ | (9,503) | | | $ | (11,662) | |
We have U.S. federal income tax net operating loss carryforwards (“NOLs”) of approximately $100.9 million available to reduce future U.S. taxable income, which do not expire. We also have state NOLs of approximately $208.0 million available to reduce future state taxable income, including approximately $147.8 million which do not expire and approximately $60.2 million which expire in varying amounts beginning in 2022 through 2041. Foreign NOLs of approximately $21.5 million are available to reduce future taxable income, some of which expire beginning in 2022.
The realization of our net deferred tax assets is dependent on our ability to generate taxable income in future periods. At December 31, 2021 and 2020, we have recorded a valuation allowance in the amount of $38.4 million and $26.3 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 2017 U.S. Tax Cuts and Jobs Act (“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 2014 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) | 2021 | | 2020 | | 2019 |
Balance at January 1 | $ | 213 | | | $ | 291 | | | $ | 223 | |
Additions (reductions) for tax positions of prior years | (6) | | | (6) | | | 68 | |
Additions (reductions) for tax positions of current year | 306 | | | — | | | — | |
Reductions for settlements with tax authorities | — | | | — | | | — | |
Reductions for lapse of statute of limitations | (28) | | | (72) | | | — | |
Balance at December 31 | $ | 485 | | | $ | 213 | | | $ | 291 | |
Approximately $0.5 million of unrecognized tax benefits at December 31, 2021, 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) | 2021 | | 2020 | | 2019 |
Outstanding, beginning of year | 107,588 | | | 106,697 | | | 106,363 | |
Shares issued for exercise of options | — | | | — | | | 281 | |
Shares issued for time vested restricted stock (net of forfeitures) | 1,368 | | | 740 | | | 53 | |
Shares issued for employee stock purchase plan | 375 | | | 151 | | | — | |
Outstanding, end of year | 109,331 | | | 107,588 | | | 106,697 | |
Outstanding shares of common stock include shares held as treasury stock totaling 16,981,147, 16,781,150 and 16,958,418 as of December 31, 2021, 2020 and 2019, 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, 2021, 2020 or 2019.
Treasury Stock
During 2021, 2020 and 2019, we repurchased 419,114, 153,151 and 381,041 shares, respectively, for an aggregate price of $1.4 million, $0.3 million and $2.7 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 2021, 2020 and 2019, we reissued 219,117, 330,419 and 1,491,408 shares of treasury stock pursuant to various stock plans.
Repurchase Program
In November 2018, our Board of Directors authorized changes to our securities repurchase program. These changes increased the authorized amount under the repurchase program to $100.0 million, available for repurchases of any combination of our common stock and our Convertible Notes.
Our repurchase program authorizes us to purchase outstanding shares of our common stock or Convertible Notes in the open market or as otherwise determined by management, subject to certain limitations under the ABL Facility and other factors. The repurchase program has no specific term. Repurchases are expected to be funded from operating cash flows, available cash on hand, and borrowings under our ABL Facility. As part of the share repurchase program, our management has been authorized to establish trading plans under Rule 10b5-1 of the Securities Exchange Act of 1934. As of December 31, 2021, we had $23.8 million remaining under the program.
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. There were no Convertible Notes repurchased under the program during 2019.
There were no shares of common stock repurchased under the repurchase program during 2021 or 2020. During 2019, we repurchased an aggregate of 2,537,833 shares of our common stock under our repurchase program for a total cost of $19.0 million.
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 income (loss) per share:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
(In thousands, except per share data) | 2021 | | 2020 | | 2019 |
Numerator | | | | | |
Net loss - basic and diluted | $ | (25,526) | | | $ | (80,696) | | | $ | (12,946) | |
| | | | | |
Denominator | | | | | |
Weighted average common shares outstanding - basic | 91,460 | | | 90,198 | | | 89,782 | |
Dilutive effect of stock options and restricted stock awards | — | | | — | | | — | |
Dilutive effect of Convertible Notes | — | | | — | | | — | |
Weighted average common shares outstanding - diluted | 91,460 | | | 90,198 | | | 89,782 | |
| | | | | |
Net loss per common share | | | | | |
Basic | $ | (0.28) | | | $ | (0.89) | | | $ | (0.14) | |
Diluted | $ | (0.28) | | | $ | (0.89) | | | $ | (0.14) | |
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) | 2021 | | 2020 | | 2019 |
Stock options and restricted stock awards | 5,754 | | | 5,238 | | | 5,312 | |
For 2021, 2020 and 2019, we excluded all potentially dilutive stock options and restricted stock awards in calculating diluted earnings per share as the effect was anti-dilutive due to the net loss incurred for these periods. The Convertible Notes, which matured in December 2021, only impacted the calculation of diluted net income per share in periods that the average price of our common stock, as calculated in accordance with the terms of the indenture governing the Convertible Notes, exceeded the conversion price of $9.33 per share.
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 2021, our stockholders approved an amendment to the 2014 Director Plan to increase the number of shares authorized for issuance under the 2014 Director Plan from 1,000,000 to 1,200,000 shares. At December 31, 2021, 146,527 shares remained available for grant under the 2014 Director Plan. During 2021, non-employee directors received 210,367 shares of restricted stock at a weighted average grant-date fair value of $3.28 per share and cash-based awards of $0.2 million.
NEWPARK RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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 2021, our stockholders approved an amendment to the 2015 Plan to increase the number of shares authorized for issuance under the 2015 Plan from 12,300,000 to 14,300,000 shares. At December 31, 2021, 1,673,140 shares remained available for grant 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 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.
During 2019, the Compensation Committee modified our retirement policy applicable to cash and equity awards granted to include our Chief Executive Officer and those officers who report to our Chief Executive Officer, who were previously excluded from the retirement policy. In addition, the Compensation Committee also modified the retirement policy for certain vested stock options that remained outstanding to extend the exercise period available following the qualifying retirement of eligible employees. As a result of these modifications, we recognized a charge of $4.0 million in the first quarter of 2019. This charge primarily reflects the acceleration of expense, as well as the incremental value associated with modifications to extend the exercise period of outstanding options, for previously-granted awards for retirement eligible executive officers.
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, 2021:
| | | | | | | | | | | | | | | | | | | | | | | |
Stock Options | Shares | | Weighted- Average Exercise Price | | Weighted- Average Remaining Contractual Life (Years) | | Aggregate Intrinsic Value (In thousands) |
Outstanding at beginning of period | 2,297,702 | | | $ | 7.34 | | | | | |
Granted | — | | | — | | | | | |
Exercised | — | | | — | | | | | |
Expired or canceled | (500,826) | | | 8.29 | | | | | |
Outstanding at end of period | 1,796,876 | | | $ | 7.08 | | | 2.94 | | $ | — | |
| | | | | | | |
Vested or expected to vest at end of period | 1,796,876 | | | $ | 7.08 | | | 2.94 | | $ | — | |
Options exercisable at end of period | 1,796,876 | | | $ | 7.08 | | | 2.94 | | $ | — | |
There were no options exercised during the years ended December 31, 2021 and 2020. For the year ended December 31, 2019, the total intrinsic value of options exercised was $1.6 million, while cash from option exercises totaled $1.3 million. There was no compensation cost recognized for stock options for the years ended December 31, 2021 and 2020. For the year ended December 31, 2019, total compensation cost recognized for stock options was $1.3 million. For the year ended December 31, 2019, we recognized tax benefits resulting from the exercise of stock options totaling $0.3 million.
Performance-Based Restricted Stock Units
In 2016, performance-based restricted stock units were awarded to executive officers and were to be settled in shares of common stock based on the relative ranking of our total shareholder return (“TSR”) as compared to the TSR of our designated peer group over a three-year period. The ending TSR price is equal to the average closing price of our shares over the last 30-calendar days of the performance period. There have been no performance-based restricted stock units granted since
NEWPARK RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
2016 or outstanding since 2019. There was no compensation cost recognized for performance-based restricted stock units for the years ended December 31, 2021 and 2020. For the year ended December 31, 2019, total compensation cost recognized for performance-based restricted stock units was $0.1 million.
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.
The following tables summarize the activity for our outstanding time-vested restricted stock awards and restricted stock units for the year ended December 31, 2021:
| | | | | | | | | | | |
Nonvested Restricted Stock Awards (Time-Vesting) | Shares | | Weighted-Average Grant Date Fair Value |
Nonvested at January 1, 2021 | 181,886 | | | $ | 3.12 | |
Granted | 210,367 | | | 3.28 | |
Vested | (156,886) | | | 2.06 | |
Forfeited | — | | | — | |
Nonvested at December 31, 2021 | 235,367 | | | $ | 3.97 | |
| | | | | | | | | | | |
Nonvested Restricted Stock Units (Time-Vesting) | Shares | | Weighted-Average Grant Date Fair Value |
Nonvested at January 1, 2021 | 3,530,366 | | | $ | 4.01 | |
Granted | 2,859,177 | | | 3.20 | |
Vested | (1,377,181) | | | 4.80 | |
Forfeited | (373,101) | | | 3.87 | |
Nonvested at December 31, 2021 | 4,639,261 | | | $ | 3.29 | |
Total compensation cost recognized for restricted stock awards and restricted stock units was $7.7 million, $6.3 million and $9.8 million for the years ended December 31, 2021, 2020 and 2019, respectively. Total unrecognized compensation cost at December 31, 2021 related to restricted stock awards and restricted stock units was approximately $8.7 million which is expected to be recognized over the next 2.0 years. During the years ended December 31, 2021, 2020 and 2019, the total fair value of shares vested was $5.3 million, $1.9 million and $7.2 million, respectively. For the years ended December 31, 2021, 2020 and 2019, we recognized tax benefits resulting from the vesting of restricted stock awards and units of $1.1 million, $0.4 million and $1.9 million, respectively.
Cash-Based Awards
The Compensation Committee also approved the issuance of cash-based awards to certain executive officers during 2021, 2020 and 2019. 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 and 2019 awards included a target amount of $2.6 million and $2.3 million, respectively, 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 May 2, 2021 and ends May 31, 2024 for the 2021 awards, began May 2, 2020 and ends May 31, 2023 for the 2020 awards, and began May 2, 2019 and ends May 31, 2022 for the 2019 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
NEWPARK RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
valuation model with changes in fair value recognized in the consolidated statement of operations. As of December 31, 2021 and 2020, the total liability for cash-based awards was $5.7 million and $4.0 million, respectively.
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. 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 $2.2 million, $1.2 million and $4.3 million for 2021, 2020 and 2019, respectively.
Note 13 — Segment and Related Information
We operate our business through two reportable segments: Fluids Systems and Industrial Solutions. All intercompany revenues and related profits have been eliminated.
Fluids Systems — Our Fluids Systems segment provides drilling, completion, and stimulation products and related technical services to customers primarily in North America and EMEA, as well as certain countries in Asia Pacific and Latin America. We offer customized solutions for complex subsurface conditions such as horizontal, directional, geologically deep, or drilling in deep water. These projects require high levels of monitoring and technical support of the fluids system during the drilling process.
We also have industrial mineral grinding operations for barite, a critical raw material in fluids systems, which serve to support our activities in certain regions of the U.S. fluids market. We use the resulting products in our fluids systems and also sell the products to third party users, including other fluids companies. In addition, we sell a variety of other minerals, principally to third party industrial (non-oil and natural gas) markets.
Industrial Solutions — Our Industrial Solutions segment provides temporary worksite access, including the rental of our manufactured 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 sell our manufactured recyclable composite mats to customers around the world, with power transmission being the primary end-market.
NEWPARK RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Summarized financial information concerning our reportable segments is shown in the following tables:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
(In thousands) | 2021 | | 2020 | | 2019 |
| | | | | |
Revenues | | | | | |
Fluids Systems | $ | 420,789 | | | $ | 354,608 | | | $ | 620,317 | |
Industrial Solutions | 193,992 | | | 138,017 | | | 199,802 | |
Total revenues | $ | 614,781 | | | $ | 492,625 | | | $ | 820,119 | |
| | | | | |
Depreciation and amortization | | | | | |
Fluids Systems | $ | 17,877 | | | $ | 20,555 | | | $ | 21,202 | |
Industrial Solutions | 20,399 | | | 20,427 | | | 21,763 | |
Corporate office | 3,949 | | | 4,332 | | | 4,179 | |
Total depreciation and amortization | $ | 42,225 | | | $ | 45,314 | | | $ | 47,144 | |
| | | | | |
Operating income (loss) | | | | | |
Fluids Systems | $ | (19,012) | | | $ | (66,403) | | | $ | 3,814 | |
Industrial Solutions | 39,733 | | | 13,459 | | | 47,466 | |
Corporate office | (29,546) | | | (25,690) | | | (40,885) | |
Total operating income (loss) | $ | (8,825) | | | $ | (78,634) | | | $ | 10,395 | |
| | | | | |
Segment assets | | | | | |
Fluids Systems | $ | 458,179 | | | $ | 419,381 | | | $ | 593,758 | |
Industrial Solutions | 267,670 | | | 259,918 | | | 265,786 | |
Corporate office | 27,037 | | | 29,893 | | | 40,535 | |
Total segment assets | $ | 752,886 | | | $ | 709,192 | | | $ | 900,079 | |
| | | | | |
Capital expenditures | | | | | |
Fluids Systems | $ | 3,644 | | | $ | 6,237 | | | $ | 18,416 | |
Industrial Solutions | 17,402 | | | 7,831 | | | 23,535 | |
Corporate office | 747 | | | 1,726 | | | 2,855 | |
Total capital expenditures | $ | 21,793 | | | $ | 15,794 | | | $ | 44,806 | |
In August 2021, Hurricane Ida negatively impacted our Gulf of Mexico operations, including damage to certain inventory, equipment and warehouse facilities, at 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. During 2021, our Fluids Systems segment incurred hurricane-related costs of $5.5 million, which includes $2.5 million for inventory and property, plant and equipment, and $3.0 in property-related repairs, clean-up and other costs. Based on the provisions of our insurance policies and initial insurance claims filed, we estimated $2.9 million in expected recoveries and recognized a charge of $2.6 million for 2021 in other operating (income) loss, net, substantially all of which is our self-insured retention under our property insurance policy. The insurance receivable balance included in other receivables was $1.9 million as of December 31, 2021. As of December 31, 2021, the claims related to the hurricane under our property and business interruption insurance programs have not been finalized. Fluids Systems operating results for 2021 also includes $3.7 million of charges related to facility exit, severance, and other costs, as well as a $0.8 million gain related to the final insurance settlement associated with the July 2018 fire at our Kenedy, Texas drilling fluids facility.
In March 2020, oil prices collapsed due to geopolitical events along with the worldwide effects of the COVID-19 pandemic, which led to a rapid decline in customer activity in the E&P industry. In response to these market changes, we initiated workforce reductions and other cost reduction programs in the first quarter of 2020 and continued these actions throughout 2020 and into 2021.
As part of the cost reduction programs, we reduced our global employee base by approximately 650 (30%) in 2020. As a result of these workforce reductions, our operating results for 2020 included $4.3 million of total severance costs
NEWPARK RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
($3.7 million in Fluids Systems and $0.6 million in the Corporate office), with $2.7 million in cost of revenues and $1.6 million in selling, general and administrative expenses. These costs were substantially paid as of December 31, 2020.
For 2020, we recognized $29.2 million of total charges primarily related to our exit from Brazil, inventory write-downs, severance costs, and fixed asset impairments, with $28.6 million in the Fluids Systems segment and $0.6 million in the Corporate office. For 2019, we recognized $23.2 million of total charges primarily related to a non-cash impairment of goodwill and charges associated with facility closures and related exit costs, inventory write-downs, and severance costs, as well as the modification of our retirement policy, with $18.8 million in the Fluids Systems segment and $4.4 million in the Corporate office.
See below for details of charges in the Fluids Systems segment.
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
(In thousands) | 2021 | | 2020 | | 2019 |
Fourchon, Louisiana hurricane-related costs | $ | 2,596 | | | $ | — | | | $ | — | |
Facility exit costs and other | 2,399 | | | (201) | | | 2,631 | |
Severance costs | 1,329 | | | 3,729 | | | 2,264 | |
Kenedy, Texas facility fire (insurance recovery) | (849) | | | — | | | — | |
Brazil exit - Recognition of cumulative foreign currency translation losses | — | | | 11,689 | | | — | |
Inventory write-downs | — | | | 10,345 | | | 1,881 | |
Property, plant and equipment impairment | — | | | 3,038 | | | — | |
Goodwill impairment | — | | | — | | | 11,422 | |
Modification of retirement policy | — | | | — | | | 605 | |
Total Fluids Systems impairments and other charges | $ | 5,475 | | | $ | 28,600 | | | $ | 18,803 | |
The following table presents further disaggregated revenues for the Fluids Systems segment:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
(In thousands) | 2021 | | 2020 | | 2019 |
United States | $ | 227,261 | | | $ | 202,052 | | | $ | 395,618 | |
Canada | 48,007 | | | 24,762 | | | 31,635 | |
Total North America | 275,268 | | | 226,814 | | | 427,253 | |
| | | | | |
EMEA | 132,221 | | | 115,891 | | | 172,263 | |
Other | 13,300 | | | 11,903 | | | 20,801 | |
Total International | 145,521 | | | 127,794 | | | 193,064 | |
| | | | | |
Total Fluids Systems revenues | $ | 420,789 | | | $ | 354,608 | | | $ | 620,317 | |
The following table presents further disaggregated revenues for the Industrial Solutions segment:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
(In thousands) | 2021 | | 2020 | | 2019 |
Product sales revenues | $ | 66,796 | | | $ | 29,170 | | | $ | 56,465 | |
Rental revenues | 68,455 | | | 47,341 | | | 70,207 | |
Service revenues | 49,920 | | | 53,958 | | | 73,130 | |
Industrial blending revenues (1) | 8,821 | | | 7,548 | | | — | |
Total Industrial Solutions revenues | $ | 193,992 | | | $ | 138,017 | | | $ | 199,802 | |
(1) Industrial blending operations began in the second quarter of 2020 and ramped up in the third quarter of 2020. Results for the industrial blending component are presented in Industrial Solutions beginning October 2020. Results for the second quarter and third quarter of 2020 were reported in Fluids Systems and not adjusted as they were not material.
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) | 2021 | | 2020 | | 2019 |
Revenues | | | | | |
United States | $ | 402,246 | | | $ | 327,598 | | | $ | 578,698 | |
Canada | 48,007 | | | 24,762 | | | 37,496 | |
EMEA | 151,228 | | | 128,362 | | | 183,124 | |
Asia Pacific | 7,629 | | | 6,561 | | | 15,273 | |
Latin America | 5,671 | | | 5,342 | | | 5,528 | |
Total revenues | $ | 614,781 | | | $ | 492,625 | | | $ | 820,119 | |
| | | | | |
Long-lived assets | | | | | |
United States | $ | 318,839 | | | $ | 329,719 | | | $ | 365,185 | |
Canada | 1,209 | | | 1,503 | | | 2,129 | |
EMEA | 38,923 | | | 44,577 | | | 46,447 | |
Asia Pacific | 2,712 | | | 3,007 | | | 2,862 | |
Latin America | 375 | | | 500 | | | 1,047 | |
Total long-lived assets | $ | 362,058 | | | $ | 379,306 | | | $ | 417,670 | |
For 2021, 2020 and 2019, 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) | 2021 | | 2020 | | 2019 |
Cash paid (received) for: | | | | | |
Income taxes (net of refunds) | $ | 6,912 | | | $ | 6,350 | | | $ | 12,165 | |
Interest | $ | 5,339 | | | $ | 6,054 | | | $ | 8,718 | |
Cash, cash equivalents, and restricted cash in the consolidated statements of cash flows consisted of the following:
| | | | | | | | | | | | | | | | | |
(in thousands) | 2021 | | 2020 | | 2019 |
Cash and cash equivalents | $ | 24,088 | | | $ | 24,197 | | | $ | 48,672 | |
Restricted cash (included in other current assets) | 5,401 | | | 6,151 | | | 8,191 | |
Cash, cash equivalents, and restricted cash | $ | 29,489 | | | $ | 30,348 | | | $ | 56,863 | |
Accounts payable and accrued liabilities at December 31, 2021, 2020, and 2019, included accruals for capital expenditures of $0.7 million, $0.5 million, and $1.8 million, respectively.
Accrued liabilities at December 31, 2021 and 2020 included accruals for employee incentives and other compensation related expenses of $23.1 million and $16.4 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, 2021, we had $45.3 million in outstanding letters of credit, performance bonds, and other guarantees for which certain of the letters of credit are collateralized by $5.4 million in restricted cash. We also enter into normal short-term operating leases for office and warehouse space, as well as rolling stock and other pieces of 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, 2021 and 2020. 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 $2.5 million and $2.8 million for the uninsured portion of claims at December 31, 2021 and 2020, 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 $1.1 million and $1.2 million at December 31, 2021 and 2020, respectively.
Note 16 — Subsequent Events
International Subsidiary Restructuring
In January 2022, we completed the restructuring of certain subsidiary legal entities within Europe. As a result of the restructuring, we expect to recognize an income tax benefit of approximately $3 million in the first quarter of 2022 as the undistributed earnings for an international subsidiary will no longer be subject to certain taxes upon future distribution.
Strategic Review Actions
With ongoing support from outside financial and other advisors, we have continuously reviewed our portfolio during the oil and natural gas cycle of the last couple of years. 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, as well as placing investment emphasis in markets where we generate strong returns and where we see greater long-term viability and stability. As part of our ongoing review of our portfolio, our management recommended and our Board of Directors approved two actions in February 2022 intended to enhance liquidity available for investment in higher returning businesses.
First, in consideration of broader strategic priorities and the timeline and efforts required to further develop the industrial blending business, our management recommended and our Board of Directors approved a plan to exit our Industrial Blending operations. As part of the exit plan, we expect to complete the wind down of the Industrial Blending business by the end of the second quarter 2022 and pursue the sale of the industrial blending and warehouse facility and related equipment located in Conroe, Texas. The Industrial Blending business contributed $9 million of revenues in 2021 and incurred an operating loss of $2 million. As of December 31, 2021, the carrying value of the long-lived assets associated with the Industrial Blending business was $20 million. As a result of the plan to exit and dispose of the assets used in the Industrial Blending business, we may incur pre-tax charges in the range of approximately $4 million to $8 million primarily related to the non-cash impairment of long-lived assets, which we expect to recognize in the first quarter of 2022.
Second, our Board of Directors also approved management’s plan to explore strategic options for our U.S. mineral grinding business, which contributed total third-party revenues of $36 million in 2021 yielding approximately break-even operating income and ended the year with $47 million of net capital employed, including approximately $25 million of net working capital.