NPK International Inc. (NPKI) FY 2022 MD&A

ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion of our financial condition, results of operations, liquidity, and capital resources should be read in conjunction with the consolidated financial statements and notes thereto included in Item 8 “Financial Statements and Supplementary Data.”

Overview

We are a geographically diversified supplier providing environmentally-sensitive products, as well as rentals and services to customers across multiple industries. We currently operate our business through two reportable segments: Industrial Solutions and Fluids Systems, as described further below. In addition, we had a third reportable segment, Industrial Blending, which was exited in 2022. Prior to 2022, we aggregated our now exited Industrial Blending business and reported it within Industrial Solutions. We have reflected these three reportable segments for all periods presented in this Annual Report on Form 10-K.

While the Fluids Systems segment has historically been the primary driver of revenues, the Industrial Solutions segment has for several years been the primary driver of operating income, cash flows, and financial returns. The relative contribution of revenues and operating income (loss) for the Industrial Solutions and Fluids Systems segments for 2022 is as follows (amounts in millions):

* Fluids Systems segment operating loss for 2022 includes $29.4 million of total non-cash impairment charges.

Industrial Solutions – Our Industrial Solutions segment, which generated 24% of consolidated revenues and $43.9 million of operating income for 2022, provides temporary worksite access solutions, including the rental of our recyclable composite matting systems, along with related site construction and services to customers in various markets including power transmission, oil and natural gas exploration and production (“E&P”), pipeline, renewable energy, petrochemical, construction and other industries, primarily in the United States and Europe. We also manufacture and sell our recyclable composite mats to customers around the world, with power transmission being the primary end-market.

Our Industrial Solutions segment has been the primary source of operating income and cash generation for us in recent years, as illustrated above, and has also been the primary focus for growth investments, reflecting approximately 83% of our 2022 capital expenditures. The growth of this business in the power transmission and other industrial markets remains a strategic priority for us due to such markets’ relative stability compared to E&P, as well as the magnitude of the market growth opportunity, including the potential positive impact from the energy transition and future legislation and regulations related to greenhouse gas emissions and climate change. We expect customer activity, particularly in the power transmission sector, will remain robust in the coming years, driven in part by the impacts of the energy transition and the increasing investment in grid reliance initiatives.

Fluids Systems – Our Fluids Systems segment, which generated 76% of consolidated revenues and incurred a $15.6 million operating loss for 2022 (including $29.4 million of total non-cash impairment charges), provides drilling, completion, and stimulation fluids products and related technical services to customers for oil, natural gas, and geothermal projects primarily in North America and Europe, the Middle East and Africa (“EMEA”), as well as certain countries in Asia Pacific and Latin America. Our Fluids Systems operating results remain dependent on oil and natural gas drilling activity levels in the markets we serve and the nature of the drilling operations, which governs the revenue potential of each well. Drilling activity levels depend on a variety of factors, including oil and natural gas commodity pricing, inventory levels, product demand, and regulatory restrictions.

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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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Source: Baker Hughes Company

Oil and natural gas prices and activity are cyclical and volatile, and this market volatility has a significant impact on our operating results. During March 2020, oil prices collapsed due to geopolitical events along with the worldwide effects of the COVID-19 pandemic. As a result, U.S. rig count declined significantly beginning in March 2020 before reaching a low of 244 in August 2020. During 2021, oil prices rebounded, and the average U.S. rig count gradually increased, ending 2021 at 586 rigs. During 2022, oil prices significantly increased due in part to geopolitical events, and the average U.S. rig count continued to increase, ending 2022 at 779 rigs. We anticipate that market activity in the U.S. will remain fairly stable in the near-term, but remain well below 2019 levels as many of our customers maintain stronger capital discipline and prioritize cash flow generation over growth. Further, in the wake of the COVID-19 pandemic, an uncertain economic environment, including widespread supply chain disruptions, as well as enacted and proposed legislative changes in the U.S. impacting the oil and natural gas industry, make market activity levels difficult to predict.

Outside of North America land markets, drilling activity is generally more stable as this drilling activity is based on longer-term economic projections and multi-year drilling programs, which typically reduces the impact of short-term changes in commodity prices on overall drilling activity. However, operations in several countries in the EMEA region experienced activity disruptions and project delays beginning in early 2020 and continuing through 2021, driven by government-imposed restrictions on movements of personnel, quarantines of staffing, and logistical limitations as a result of the COVID-19 pandemic. Revenues and profitability from our international Fluids Systems business gradually recovered in 2021 and 2022, with revenues for 2022 exceeding 2019 levels. The combination of increasing activity levels combined with the impacts of global supply chain disruptions have caused significant cost inflation to many hydrocarbon-based products and chemicals used in our fluids systems. While we have and continue to work with customers to mitigate the inflationary impact, in some cases, we are unable to adjust, or there may be delays in being able to adjust, our customer pricing on certain international contracts due to the long-term contracts in place. Consequently, the inflationary impacts negatively impacted the profitability of our international operations in 2022. Although we expect this situation to improve in the near-term, the impact of cost inflation is very difficult to predict.

Looking ahead, the combination of recent geopolitical events and elevated oil and natural gas prices are causing several markets to increase drilling activity levels, to help ensure reliable energy supply in the coming years, while reducing their dependency on Russia-sourced oil and natural gas. Consequently, the outlook for several markets within the EMEA region continues to strengthen, with growth in activity expected over the next few years.

Industrial Blending – Our Industrial Blending segment began operations in 2020 and supported industrial end-markets, including the production of disinfectants and industrial cleaning products. In the first quarter of 2022, we completed the wind down of the Industrial Blending business, and in November 2022 we completed the sale of the industrial blending and warehouse facility and related equipment located in Conroe, Texas. Our Industrial Blending segment generated no revenue and incurred an $8.0 million operating loss for 2022, which includes a $7.9 million non-cash impairment charge partially offset by a $2.6 million gain on the eventual sale of the related assets.

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2020-2022 Market Events and Strategic Actions

Following the 2020 market collapse and reduced demand for our products and services as a result of the decline in oil prices and the COVID-19 pandemic, we took a number of actions aimed at conserving cash and protecting our liquidity, which included the implementation of cost reduction programs, including workforce reductions, employee furloughs, the suspension of the Company’s matching contributions to its U.S. defined contribution plan, and temporary salary reductions effective April 1, 2020 for a significant portion of U.S. employees, including salaries paid to executive officers and the annual cash retainers paid to all non-employee members of the Board of Directors. We restored compensation and matching contributions for our U.S. defined contribution plan during the second and third quarters of 2021.

In 2022, we recognized $29.4 million of non-cash impairment charges in the Fluids Systems segment related to the long-lived assets and inventory associated with the exit of our Gulf of Mexico operations, as described further below. In 2021, we recognized $5.5 million of total charges in the Fluids Systems segment, primarily related to self-insured costs associated with Hurricane Ida damage to our Fourchon, Louisiana Fluids Systems operating base, facility exit, and severance costs. In 2020, we recognized total charges of $28.6 million in the Fluids Systems segment consisting of $11.7 million for the recognition of cumulative foreign currency translation losses related to our exit from Brazil, $10.3 million for inventory write-downs, $3.5 million for severance and other costs, and $3.0 million in fixed asset impairments.

Additionally, throughout the oil and natural gas cycle of the last couple of years, we continuously reviewed our portfolio. These reviews have focused on evaluating changes in the outlook for our served markets and customer priorities, while identifying opportunities for value-creating options in our portfolio, placing investment emphasis in markets where we generate strong returns and where we see greater long-term viability and stability. As part of this review, our Board of Directors approved the following actions in 2022.

Exit of Industrial Blending Segment and Sale of Conroe, Texas Blending Facility

In the first quarter of 2022, in consideration of broader strategic priorities and the timeline and efforts required to further develop the industrial blending business, we exited our Industrial Blending operations. In November 2022, we completed the sale of the industrial blending and warehouse facility and related equipment located in Conroe, Texas to a global chemical provider, and received cash proceeds of approximately $14 million. In connection with this divestiture, we recognized a $7.9 million impairment charge related to these long-lived assets in the second quarter of 2022, and subsequently recognized a gain of $2.6 million upon the eventual sale in the fourth quarter of 2022.

Sale of Excalibar U.S. Mineral Grinding Business

In the second quarter of 2022, we initiated a formal sale process for our Excalibar U.S. mineral grinding business (“Excalibar”), which is reported within our Fluids Systems segment. On November 30, 2022, we completed the sale of substantially all the long-lived assets, inventory, and operations of Excalibar to Cimbar Resources, INC. (“Cimbar”), received cash proceeds (after purchase price adjustments) of approximately $51 million, and recognized a gain of $1.0 million. The Company retained certain assets and liabilities, including accounts receivable and accounts payable. Such working capital provided approximately $10 million of cash generation in the fourth quarter of 2022 and is expected to provide approximately $5 million of additional cash generation in early 2023. In connection with the sale, the Company and Cimbar have entered into a long-term barite supply agreement for certain regions of our U.S. drilling fluids business, with an initial term of four years following the closing of the transaction.

Exit of Gulf of Mexico Operations

In the third quarter of 2022, our Board of Directors approved management’s plan to exit our Fluids Systems Gulf of Mexico operations, including the potential sale of related assets. In December 2022, we completed the sale of substantially all assets associated with our Gulf of Mexico completion fluids operations. Separately, we entered into a seven-year arrangement to sublease our Fourchon, LA drilling fluids shorebase and blending facility to a leading global energy services provider. As part of this arrangement, substantially all of our Gulf of Mexico drilling fluids inventory will be sold as consumed by the lessee or no later than nine months from the closing of the transaction. The sale of the completion fluids operations provided approximately $6 million of cash generation in the fourth quarter of 2022, and the exit of the drilling fluids operations is expected to provide approximately $25 million of additional cash generation, primarily in early 2023.

As a result of the plan to exit the Gulf of Mexico operations as described above, we considered the third quarter developments to be a potential indicator of impairment that required us to complete an impairment evaluation. Accordingly, we estimated the fair value for our Gulf of Mexico assets as of September 30, 2022 based on the expected cash flows to be generated from the anticipated transactions and determined that a $21.5 million impairment charge was required related to the long-lived assets. We also recognized an $8.0 million charge to reduce the carrying value of inventory to their net realizable value primarily based on the anticipated transactions. The total charges of $29.4 million were recorded to impairments and other charges in the third quarter of 2022.

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Total impairments and other charges consisted of the following:

Summarized operating results of the business units exited in 2022 (including impairments and other charges described above) are shown in the following table:

Summarized net assets of the business units exited in 2022 are shown in the following table:

As described above, the change in net assets related to these divested business units includes the impact of the $37.3 million of impairments and other charges, the impact from the divestiture transactions, as well as the wind-down of retained working capital. The net assets remaining as of December 31, 2022 include the remaining Gulf of Mexico net assets and retained working capital from the Excalibar sale. As noted above, we expect to generate approximately $31 million of cash primarily in the first half of 2023 from the realization of the remaining working capital related to these divestitures.

We continue to evaluate other under-performing areas of our business, including certain international oil and natural gas markets, and anticipate additional actions may be necessary to optimize our operational footprint and invested capital in the Fluids Systems segment to transform this business for the evolving market conditions and outlook. As a result, we may incur future charges related to these efforts or potential asset impairments, which may negatively impact our future results.

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Year Ended December 31, 2022 Compared to Year Ended December 31, 2021

Consolidated Results of Operations

Summarized results of operations for 2022 compared to 2021 are as follows:

Revenues

Revenues increased 33% to $815.6 million for 2022, compared to $614.8 million for 2021. This $200.8 million increase includes a $146.2 million (32%) increase in revenues in North America, comprised of a $141.2 million increase in the Fluids Systems segment and a $13.7 million increase in the Industrial Solutions segment, partially offset by a $8.8 million decrease in the Industrial Blending segment, which we exited in 2022. Revenues from our North America operations increased primarily due to the improvement in North America rig count, which favorably impacted our Fluids Systems segment, and an increase in rental and service revenues in our Industrial Solutions segment. Revenues from our international operations increased by $54.7 million (33%), as the prior year was unfavorably impacted by activity disruptions and project delays resulting from the COVID-19 pandemic, partially offset by a $20.8 million decrease in revenues from currency exchange rate changes resulting from the strengthening U.S. dollar. Consolidated revenues included $82.7 million of revenues from divested business units for 2022, compared to $70.6 million for 2021. Additional information regarding the change in revenues is provided within the Operating Segment Results below.

Cost of revenues

Cost of revenues increased 31% to $694.1 million for 2022, compared to $529.6 million for 2021. This $164.5 million increase was primarily driven by the 33% increase in revenues described above. Consolidated cost of revenues included $90.7 million of cost of revenues from divested business units for 2022, compared to $73.1 million for 2021.

Selling, general and administrative expenses

Selling, general and administrative expenses increased $3.2 million to $97.6 million for 2022, compared to $94.4 million for 2021. This increase was primarily driven by higher personnel expense, as well as higher legal and professional expenses. Selling, general and administrative expenses as a percentage of revenues was 12.0% for 2022 compared to 15.4% for 2021. Consolidated selling, general and administrative expenses included $1.8 million of costs related to divested business units for 2022, compared to $2.1 million for 2021.

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Other operating income, net

Other operating income, net for 2022 includes $3.6 million of total gains on divestitures, including $2.6 million in the Industrial Blending segment for the sale of the Conroe, Texas blending facility and $1.0 million in the Fluids Systems segment for the Excalibar sale. See Note 2 for additional details. Other operating income, net for 2021 included gains associated with sales of assets, along with insurance and a legal settlement in the Industrial Solutions segment, largely offset by a $2.6 million charge associated with Hurricane Ida in August 2021 that caused damage to our Fourchon, Louisiana Fluids Systems operating base.

Impairments and other charges

As described above, 2022 includes $29.4 million of total non-cash impairment charges related to the long-lived assets and inventory associated with the exit of our Fluids Systems Gulf of Mexico operations, as well as a $7.9 million non-cash impairment charge related to the exit of our Industrial Blending operations.

Foreign currency exchange

Foreign currency exchange was a $0.4 million loss for 2022 compared to a $0.4 million gain for 2021 and primarily reflects the impact of currency translation for assets and liabilities (including intercompany balances) that are denominated in currencies other than functional currencies.

Interest expense, net

Interest expense was $7.0 million for 2022 compared to $8.8 million for 2021. Interest expense for 2022 and 2021 includes $0.9 million and $3.7 million, respectively, in non-cash amortization of original issue discount and debt issuance costs. The decrease in interest expense is primarily due to the 2021 repayment of our Convertible Notes using borrowings under the ABL Facility, partially offset by the increase in benchmark borrowing rates as well as an increase in average debt outstanding during 2022, in support of the higher working capital associated with the 33% revenue growth.

Loss on extinguishment of debt

In 2021, we repurchased $28.3 million, respectively, of our Convertible Notes in the open market for $28.1 million. The $1.0 million loss for 2021 reflects the difference in the amount paid and the net carrying value of the extinguished debt, including original issue discount and debt issuance costs.

Provision for income taxes

The provision for income taxes was $4.4 million for 2022, which includes an income tax benefit of $3.1 million related to the restructuring of certain subsidiary legal entities within Europe, as the undistributed earnings for an international subsidiary are no longer subject to certain taxes upon future distribution. The provision for income taxes in 2022 was unfavorably impacted as we are unable to recognize a tax benefit related to the $37.3 million in total impairment charges. The provision for income taxes was $7.3 million for 2021 despite reporting a pretax loss for the period. In both years, income tax expense primarily reflects earnings from our international operations since we are unable to recognize the tax benefit from our U.S. losses as they may not be realized.

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Operating Segment Results

Summarized financial information for our reportable segments is shown in the following table (net of inter-segment transfers):

Fluids Systems

Revenues

Total revenues for this segment consisted of the following:

North America revenues increased 51% to $416.5 million for 2022, compared to $275.3 million for 2021. The increase includes a $126.7 million increase from U.S. land markets driven primarily by the 52% increase in U.S. rig count, partially offset by lower market share, while offshore Gulf of Mexico increased $1.3 million. In addition, Canada revenues increased $13.1 million driven primarily by the 34% increase in Canada rig count. For 2022, U.S. revenues included $328.4 million from land markets, including $56.0 million from the Excalibar business, and $26.7 million from offshore Gulf of Mexico. For 2021, U.S. revenues included $201.9 million from land markets, including $36.4 million from the Excalibar business, and $25.4 million from offshore Gulf of Mexico.

Internationally, revenues increased 42% to $206.1 million for 2022, compared to $145.5 million for 2021. The increase was primarily driven by higher activity in Europe, Africa, and the Asia Pacific region following a significant impact in 2021 from the COVID-19 pandemic, as described above, partially offset by a $19.3 million decrease in revenues from currency exchange rate changes.

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Operating loss

The Fluids Systems segment incurred an operating loss of $15.6 million for 2022, which includes $29.4 million of total non-cash impairment charges, compared to a $19.0 million operating loss incurred in 2021. The Fluids Systems segment operating loss for 2022 includes $1.4 million of charges primarily related to facility exit and severance costs, and the operating loss for 2021 included $5.5 million of charges primarily related to self-insured costs associated with Hurricane Ida damage to our Fourchon, Louisiana Fluids Systems operating base, facility exit, and severance costs. The change in operating loss includes a $33.3 million improvement from North America land markets (reflecting an incremental margin of 24%) along with a $6.9 million improvement from international operations (reflecting an incremental margin of 11%), driven primarily by the revenue improvement described above, partially offset by a $36.5 million decline for the Gulf of Mexico (including impairments). The international operating results reflect the impact of inflationary cost pressures from certain international contracts in which customer pricing is fixed.

Industrial Solutions

Revenues

Total revenues for this segment consisted of the following:

Revenues from product sales decreased by $8.1 million from 2021, as 2021 was favorably impacted by pent-up customer demand following the delays in purchases and project execution associated with the COVID-19 pandemic. Rental and service revenues increased by 13% from 2021, as continued market penetration of the power transmission sector in the U.S. was partially offset by lower activity in the U.K.

Operating income

The Industrial Solutions segment generated operating income of $43.9 million for 2022 compared to $42.1 million for 2021. The 2021 operating results included a $1.0 million gain associated with a legal settlement. The remaining $2.8 million increase is primarily attributable to the growth in revenues described above, partially offset by the effects of lower average pricing associated with large scale rental projects.

Industrial Blending

We completed the wind down of the Industrial Blending business and the sale of the associated warehouse facility and related equipment in 2022, as described above. The operating loss for 2022 includes a $7.9 million non-cash charge for the impairment of the long-lived assets as well as exit and other costs related to the process to sell these assets, partially offset by a $2.6 million gain subsequently recognized upon the eventual sale in the fourth quarter of 2022.

Corporate Office

Corporate office expenses decreased slightly to $29.4 million for 2022, compared to $29.5 million for 2021. This decrease was primarily driven by lower stock-based compensation expense partially offset by higher performance-based incentives and personnel expense.

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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:

Revenues

Revenues increased 25% to $614.8 million for 2021, compared to $492.6 million for 2020. This $122.2 million increase includes a $97.9 million (28%) increase in revenues in North America, comprised of a $48.5 million increase in the Fluids Systems segment and a $48.2 million increase in the Industrial Solutions segment. Revenues from our North America operations increased primarily due to the significant growth in power transmission and other industrial markets, which impacts our Industrial Solutions segment, as well as the improvement in North America rig count, which favorably impacted our Fluids Systems segment. Revenues from our international operations increased by $24.3 million (17%) but continued to be unfavorably impacted by activity disruptions and project delays resulting from the COVID-19 pandemic. Consolidated revenues included $70.6 million of revenues from divested business units for 2021, compared to $82.3 million for 2020. Additional information regarding the change in revenues is provided within the Operating Segment Results below.

Cost of revenues

Cost of revenues increased 12% to $529.6 million for 2021, compared to $473.3 million for 2020. Fluids Systems segment cost of revenues for 2021 includes $3.0 million of charges primarily related to facility exit and severance costs, and 2020 included a total of $14.1 million of charges related to inventory write-downs, severance costs, and facility exit costs. The remaining increase was primarily driven by the 25% increase in revenues described above, partially offset by the benefit of cost reduction programs implemented in 2020 and 2021. Consolidated cost of revenues included $73.1 million of cost of revenues from divested business units for 2021, compared to $78.5 million for 2020.

Selling, general and administrative expenses

Selling, general and administrative expenses increased $7.8 million to $94.4 million for 2021, compared to $86.6 million for 2020. This increase was primarily driven by higher performance-based incentive and stock-based compensation expense, as well as higher personnel costs in 2021, partially offset by the benefit of cost reduction programs implemented in 2020 and 2021, and lower severance charges. Selling, general and administrative expenses as a percentage of revenues was 15.4% for 2021 compared to 17.6% for 2020. Consolidated selling, general and administrative expenses included $2.1 million of costs related to divested business units for 2021, compared to $1.4 million for 2020.

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Other operating (income) loss, net

In August 2021, Hurricane Ida caused damage to our Fourchon, Louisiana Fluids Systems operating base. While this event is covered by our property and business interruption insurance programs, these programs contain self-insured retentions, which remain our financial obligations, resulting in $2.6 million of charges for 2021. In addition, 2021 includes a $0.8 million gain related to the final insurance settlement associated with the July 2018 fire at our Kenedy, Texas drilling fluids facility, and a $1.0 million gain related to a legal settlement in the Industrial Solutions segment, as well as gains on sales of assets. Other operating income for 2020 primarily relates to gains on sales of assets, including a $1.3 million gain related to our exit from Brazil.

Impairments and other charges

Fluids Systems segment included non-cash charges for 2020 consisting of $11.7 million for the recognition of cumulative foreign currency translation losses related to the substantial liquidation of our subsidiary in Brazil, as well as $3.0 million attributable to the abandonment of certain property, plant and equipment.

Foreign currency exchange

Foreign currency exchange was a $0.4 million gain for 2021 compared to a $3.4 million loss for 2020 and reflects the impact of currency translation on assets and liabilities (including intercompany balances) that are denominated in currencies other than functional currencies.

Interest expense, net

Interest expense was $8.8 million for 2021 compared to $11.0 million for 2020. Interest expense for 2021 and 2020 included $3.7 million and $5.2 million, respectively, in non-cash amortization of original issue discount and debt issuance costs. The decrease in cash interest expense is primarily due to lower debt balances.

(Gain) loss on extinguishment of debt

In 2021 and 2020, we repurchased $28.3 million and $33.1 million, respectively, of our Convertible Notes in the open market for $28.1 million and $29.1 million, respectively. The $1.0 million loss and $0.4 million gain for 2021 and 2020, respectively, reflects the difference in the amount paid and the net carrying value of the extinguished debt, including original issue discount and debt issuance costs.

Provision (benefit) for income taxes

The provision for income taxes was $7.3 million for 2021, despite reporting a pretax loss for the period, primarily reflecting the impact of the geographic composition of our pretax loss. The tax expense primarily relates to earnings from our international operations since we are currently unable to recognize the tax benefit from our U.S. losses as they may not be realized. The benefit for income taxes was $11.9 million for 2020, reflecting an effective tax benefit rate of 13%. This result primarily reflects the impact of the $11.7 million non-cash recognition of cumulative foreign currency translation losses related to the substantial liquidation of our subsidiary in Brazil and other nondeductible expenses, as well as the impact of the geographic composition of our pretax loss, where the tax benefit from losses in the U.S was partially offset by the tax expense related to earnings from our international operations.

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Operating Segment Results

Summarized financial information for our reportable segments is shown in the following table (net of inter-segment transfers):

Fluids Systems

Revenues

Total revenues for this segment consisted of the following:

North America revenues increased 21% to $275.3 million for 2021, compared to $226.8 million for 2020. This increase was primarily attributable to a $51.7 million increase from U.S. land markets driven primarily by the 10% increase in U.S. rig count and an increase in market share, partially offset by a $23.2 million decrease from offshore Gulf of Mexico driven primarily by changes in customer drilling and completion activity levels. In addition, Canada increased $23.2 million driven primarily by the 47% increase in Canada rig count and an increase in market share. For 2021, U.S. revenues included $201.9 million from land markets, including $36.4 million from the Excalibar business, and $25.4 million from offshore Gulf of Mexico. For 2020, U.S. revenues included $155.6 million from land markets, including $28.2 million from the Excalibar business, and $46.5 million from offshore Gulf of Mexico.

Internationally, revenues increased 14% to $145.5 million for 2021, compared to $127.8 million for 2020. The increase was primarily driven by higher activity in Europe and Asia Pacific regions following significant impact of the COVID-19 pandemic, as described above.

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Operating income (loss)

The Fluids Systems segment incurred an operating loss of $19.0 million for 2021, reflecting a $47.4 million improvement from the $66.4 million operating loss incurred in 2020. The Fluids Systems segment operating loss for 2021 includes $5.5 million of charges primarily related to self-insured costs associated with Hurricane Ida damage to our Fourchon, Louisiana Fluids Systems operating base, facility exit, and severance costs, and the operating loss for 2020 included $28.6 million of charges, consisting of $11.7 million for the recognition of cumulative foreign currency translation losses related to the substantial liquidation of our subsidiary in Brazil and $16.9 million of total charges associated with inventory write-downs, severance costs, fixed asset impairments, and facility exit costs. The remaining improvement in the operating loss includes a $20.1 million benefit from North America operations and a $4.2 million benefit from international operations, reflecting the impact of the revenue improvement described above along with the benefit of cost reduction programs implemented in 2020 and 2021.

Industrial Solutions

Revenues

Total revenues for this segment consisted of the following:

In 2020, customer activity across most end-markets was unfavorably impacted by the COVID-19 pandemic and the related operational restrictions and market uncertainty, causing delays in purchases and project execution. As a result, revenues from product sales, which typically fluctuate based on the timing of mat orders from customers, increased by $37.6 million in 2021, including a favorable impact from pent-up demand following the COVID-19 pandemic as well as our expanding power transmission customer base.

Rental and service revenues increased by $17.1 million in 2021, as delayed purchases and projects resumed, including a $16.4 million increase from power transmission and other industrial markets. The increase from industrial customers reflects our continued expansion into these markets, both in the U.S. and U.K., including an approximately 22% increase in revenues from the power transmission sector.

Operating income

The Industrial Solutions segment generated operating income of $42.1 million for 2021 compared to $13.0 million for 2020, the increase being primarily attributable to the change in revenues as described above.

Industrial Blending

The Industrial Blending business was operational from the fourth quarter of 2020 until the first quarter of 2022, as described above. The operating loss generated in 2021 was primarily attributable to the ramp-up of operating costs to support the operations.

Corporate Office

Corporate office expenses increased $3.9 million to $29.5 million for 2021 compared to $25.7 million for 2020. This increase was primarily driven by higher performance-based incentive and stock-based compensation expense, as well as the restoration of certain U.S. salary and retirement benefits, and higher mergers and acquisitions and other legal and professional costs, partially offset by the benefit of cost reduction programs implemented in 2020 and 2021.

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Liquidity and Capital Resources

Net cash used in operating activities was $25.0 million for 2022 compared to $3.0 million for 2021. During 2022, net loss adjusted for non-cash items provided cash of $54.1 million, while changes in working capital used cash of $79.1 million, including nearly $20 million to fund working capital growth within the Excalibar business and Gulf of Mexico operations prior to their respective fourth quarter divestitures. The use of cash for working capital in 2022 is primarily related to an increase in inventories and receivables associated with higher activity levels, along with raw materials cost inflation.

Net cash provided by investing activities was $46.2 million for 2022, including $71.3 million in proceeds from divestitures (see Note 2 for additional information) as well as $3.2 million in proceeds from the sale of assets, which includes the sale of used mats from our Industrial Solutions rental fleet, partially offset by capital expenditures of $28.3 million. Our capital expenditures during 2022 were primarily directed to supporting our Industrial Solutions segment, including $21.2 million of investments to expand the mat rental fleet, supporting our strategic growth in the power transmission sector and replacing mats sold from the fleet. Net cash used in investing activities was $17.5 million for 2021, including capital expenditures of $21.8 million and $13.4 million associated with the Lentzcaping acquisition (see Note 2 for additional information), partially offset by $16.0 million in proceeds from the sale of assets. Nearly all of our capital expenditures during 2021 were directed to supporting our Industrial Solutions segment, including $14.3 million of investments in the mat rental fleet.

Net cash used in financing activities was $24.9 million for 2022, which includes $17.6 million in share purchases under our repurchase program. Net cash provided by financing activities was $21.4 million for 2021, which primarily included $89.9 million of net borrowings on our ABL Facility and other financing arrangements, partially offset by $66.7 million used for repurchases and repayment of our Convertible Notes which matured in December 2021.

Substantially all our $23.2 million of cash on hand at December 31, 2022 resides in our international subsidiaries. We primarily manage our liquidity utilizing availability under our Amended ABL Facility and other existing financing arrangements. Under our Amended ABL Facility, we manage daily cash requirements by utilizing borrowings or repayments under this revolving credit facility, while maintaining minimal cash on hand in the U.S. As of February 23, 2023, our total borrowing availability under the Amended ABL Facility was $167.9 million, of which $58.0 million was drawn and $3.3 million was used for outstanding letters of credit, resulting in remaining availability of $106.6 million.

We expect total availability under the Amended ABL Facility to fluctuate directionally based on the level of eligible U.S. accounts receivable, inventory, and composite mats included in the rental fleet. We expect the projected availability under our Amended ABL Facility and other existing financing arrangements, cash generated by operations, and available cash on-hand in our international subsidiaries to be adequate to fund our current operations during the next 12 months.

We anticipate that future working capital requirements for our operations will generally fluctuate directionally with revenues, though 2023 is expected to benefit from the wind down of approximately $30 million of working capital associated with the fourth quarter 2022 divestiture transactions. We expect capital expenditures in 2023 will remain fairly in line with 2022 levels, with spending heavily focused on the expansion of our mat rental fleet to further support the utilities market penetration. We also expect to return value to our shareholders, utilizing excess cash generation to fund additional share repurchases.

Our capitalization is as follows:

Asset-Based Loan Facility. In October 2017, we entered into a U.S. asset-based revolving credit agreement, which was amended in March 2019 (the “ABL Facility”). In May 2022, we amended and restated the ABL Facility (the “Amended ABL Facility”). The Amended ABL Facility provides financing of up to $175.0 million available for borrowings (inclusive of

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letters of credit), which can be increased up to $250.0 million, subject to certain conditions. The Amended ABL Facility has a five-year term expiring May 2027, expands available borrowing capacity associated with the Industrial Solutions rental mat fleet, replaces the LIBOR-based pricing grid with a Bloomberg Short-Term Bank Yield Index (“BSBY”) pricing grid, and includes a mechanism to incorporate a sustainability-linked pricing framework with the consent of the required lenders (as defined in the Amended ABL Facility).

As of December 31, 2022, our total borrowing availability under the Amended ABL Facility was $167.6 million, of which $80.3 million was drawn and $3.3 million was used for outstanding letters of credit, resulting in remaining availability of $84.0 million.

Borrowing availability under the Amended ABL Facility is calculated based on eligible U.S. accounts receivable, inventory and composite mats included in the rental fleet, net of reserves and subject to limits on certain of the assets included in the borrowing base calculation. To the extent pledged by the borrowers, the borrowing base calculation also includes the amount of eligible pledged cash. The administrative agent may establish reserves in accordance with the Amended ABL Facility, in part based on appraisals of the asset base, and other limits in its discretion, which could reduce the amounts otherwise available under the Amended ABL Facility.

Under the terms of the Amended ABL Facility, we may elect to borrow at a variable interest rate based on either, (1) the BSBY rate (subject to a floor of zero) or (2) the base rate (subject to a floor of zero), equal to the highest of (a) the federal funds rate plus 0.50%, (b) the prime rate of Bank of America, N.A., and (c) BSBY for a one-month interest period plus 1.00%, plus, in each case, an applicable margin per annum. The applicable margin ranges from 1.50% to 2.00% per annum for BSBY borrowings, and 0.50% to 1.00% per annum for base rate borrowings, based on the consolidated leverage ratio (as defined in the Amended ABL Facility) as of the last day of the most recent fiscal quarter. We are also required to pay a commitment fee equal to (i) 0.375% per annum at any time the average daily unused portion of the commitments is greater than 50% and (ii) 0.25% per annum at any time the average daily unused portion of the commitments is less than 50%.

As of December 31, 2022, the applicable margin for borrowings under the Amended ABL Facility was 1.75% with respect to BSBY borrowings and 0.75% with respect to base rate borrowings. As of December 31, 2022, the weighted average interest rate for the Amended ABL Facility was 5.9% and the applicable commitment fee on the unused portion of the Amended ABL Facility was 0.375% per annum.

The Amended ABL Facility is a senior secured obligation of the Company and certain of our U.S. subsidiaries constituting borrowers thereunder, secured by a first priority lien on substantially all of the personal property and certain real property of the borrowers, including a first priority lien on certain equity interests of direct or indirect domestic subsidiaries of the borrowers and certain equity interests issued by certain foreign subsidiaries of the borrowers.

The Amended ABL Facility contains customary representations, warranties and covenants that, among other things, and subject to certain specified circumstances and exceptions, restrict or limit the ability of the borrowers and certain of their subsidiaries to incur indebtedness (including guarantees), grant liens, make investments, pay dividends or distributions with respect to capital stock and make other restricted payments, make prepayments on certain indebtedness, engage in mergers or other fundamental changes, dispose of property, and change the nature of their business.

The Amended ABL Facility requires compliance with the following financial covenants: (i) a minimum fixed charge coverage ratio of 1.00 to 1.00 for the most recently completed four fiscal quarters and (ii) while a leverage covenant trigger period (as defined in the Amended ABL Facility) is in effect, a maximum consolidated leverage ratio of 4.00 to 1.00 as of the last day of the most recently completed fiscal quarter.

The Amended ABL Facility includes customary events of default including non-payment of principal, interest or fees, violation of covenants, inaccuracy of representations or warranties, cross-default to other material indebtedness, bankruptcy and insolvency events, invalidity or impairment of security interests or invalidity of loan documents, certain ERISA events, unsatisfied or unstayed judgments and change of control.

Other Debt. In February 2021, a U.K. subsidiary entered a £6.0 million term loan facility that was scheduled to mature in February 2024. In April 2022, this facility was amended to increase the term loan to £7.0 million and establish a £2.0 million revolving credit facility. Both the amended term loan and revolving credit facility mature in April 2025 and bear interest at a rate of Sterling Overnight Index Average (“SONIA”) plus a margin of 3.25% per year. As of December 31, 2022, the interest rate for the U.K. facilities was 6.7%. The term loan is payable in quarterly installments of £350,000 plus interest beginning June 2022 and a £2.8 million payment due at maturity. We had $8.5 million outstanding under these arrangements at December 31, 2022.

In August 2021, we completed sale-leaseback transactions related to certain vehicles and other equipment for net proceeds of approximately $7.9 million. The transactions have been accounted for as financing arrangements as they did not qualify for sale accounting. As a result, the vehicles and other equipment continue to be reflected on our balance sheet in

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property, plant and equipment, net. The financing arrangements have a weighted average annual interest rate of 5.4% and are payable in monthly installments with varying maturities through October 2025. We had $3.4 million in financing obligations outstanding under these arrangements at December 31, 2022.

Certain of our foreign subsidiaries maintain local credit arrangements consisting primarily of lines of credit or overdraft facilities which are generally renewed on an annual basis. We utilize local financing arrangements in our foreign operations in order to provide short-term local liquidity needs. We had $14.3 million and $11.8 million outstanding under these arrangements at December 31, 2022 and 2021, respectively.

Off-Balance Sheet Arrangements

We do not have any special purpose entities. At December 31, 2022, we had $42.3 million in outstanding letters of credit, performance bonds, and other guarantees for which certain of the letters of credit are collateralized by $1.9 million in restricted cash. We also enter into normal short-term operating leases for office and warehouse space, as well as certain operating equipment. None of these off-balance sheet arrangements either has, or is expected to have, a material effect on our financial statements.

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Contractual Obligations

A summary of our outstanding contractual and other obligations and commitments at December 31, 2022 is as follows:

(1)Financing obligations, finance lease liabilities, and operating lease liabilities represent the undiscounted future payments.

(2)Excludes the current portion of operating lease liabilities.

(3)Table does not allocate by year expected tax payments, asset retirement obligations, and uncertain tax positions due to the inability to make reasonably reliable estimates of the timing of future cash settlements.

We anticipate that the obligations and commitments listed above that are due in less than one year will be paid from the projected availability under our Amended ABL Facility and other existing financing arrangements, cash generated by operations, and available cash on-hand in our international subsidiaries, subject to covenant compliance and certain restrictions as further discussed above. The specific timing of settlement for certain long-term obligations cannot be reasonably estimated.

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Critical Accounting Policies

Critical Accounting Estimates

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”), which requires management to make estimates and assumptions that affect the reported amounts and disclosures. Significant estimates used in preparing our consolidated financial statements include estimated cash flows and fair values used for impairments of long-lived assets, including goodwill and other intangibles, and valuation allowances for deferred tax assets. See Note 1 for a discussion of the accounting policies for each of these matters. Our estimates are based on historical experience and on our future expectations that we believe to be reasonable. The combination of these factors forms the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from our current estimates and those differences may be material.

We believe the critical accounting policies described below affect our more significant judgments and estimates used in preparing the consolidated financial statements.

Impairment of Long-lived Assets

As of December 31, 2022, our consolidated balance sheet includes $193.1 million of property, plant and equipment and $19.7 million of finite-lived intangible assets. We review property, plant and equipment, finite-lived intangible assets and certain other assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. We assess recoverability based on the undiscounted future net cash flows expected from the use and eventual disposition of such asset. Should the review indicate that the carrying value is not fully recoverable, the amount of impairment loss is determined by comparing the carrying value to the estimated fair value.

Conroe, Texas Blending Facility

In connection with the 2022 wind down of the Industrial Blending business and sales process associated with the industrial blending and warehouse facility and related equipment as described above, we recognized a $7.9 million impairment charge to impairments and other charges related to these long-lived assets in the second quarter of 2022, and subsequently recognized a gain of $2.6 million upon the eventual sale in the fourth quarter of 2022.

Gulf of Mexico Operations

As a result of the plan to exit the Gulf of Mexico operations as described above, we considered the third quarter of 2022 developments to be a potential indicator of impairment that required us to complete an impairment evaluation. Accordingly, we estimated the fair value for our Gulf of Mexico assets as of September 30, 2022 based on the expected cash flows to be generated from the anticipated transactions and determined that a $21.5 million impairment charge for the third quarter of 2022 was required related to the long-lived assets. While there are inherent uncertainties and management judgment in estimating the fair value of long-lived assets including the discount rate, the estimated future cash flows for these assets primarily relate to the rental income from the agreement for a seven-year sublease of our Fourchon, Louisiana drilling fluids shorebase and blending facility net of the lease payments for our existing lease of such shorebase facility.

As of December 31, 2022, our consolidated balance sheet includes $47.1 million of goodwill, all of which relates to the Industrial Solutions segment. Goodwill and other indefinite-lived intangible assets are tested for impairment annually as of November 1, or more frequently, if indicators of impairment exist. As part of our annual goodwill review, we first perform a qualitative assessment based on company performance and future business outlook to determine if indicators of impairment exist. When there are qualitative indicators of impairment, we use an impairment test which includes a comparison of the carrying value of net assets of our reporting units, including goodwill, with their estimated fair values, which we estimate using a combination of a market multiple and discounted cash flow approach (classified within Level 3 of the fair value hierarchy). In completing the annual evaluation during the fourth quarter of 2022, we determined that the fair value of the Industrial Solutions reporting unit was significantly more than the net carrying value, and therefore, no impairment was required.

Income Taxes

We had total deferred tax assets of $71.9 million and $70.2 million at December 31, 2022 and 2021, respectively. A valuation allowance must be established to offset a deferred tax asset if, based on available evidence, it is more likely than not that some or all of the deferred tax asset will not be realized. We have considered future taxable income and tax planning strategies in assessing the need for our valuation allowance. At December 31, 2022, we had a total valuation allowance of $47.3 million, which includes a valuation allowance on $28.9 million of net operating loss carryforwards for certain U.S. federal, state and foreign jurisdictions, including Australia, as well as a valuation allowance of $4.7 million for certain foreign tax credits recognized related to the accounting for the impact of the 2017 U.S. Tax Cuts and Jobs Act (“Tax Act”). Changes in the expected future generation of qualifying taxable income within these jurisdictions or in the realizability of other tax assets

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may result in an adjustment to the valuation allowance, which would be charged or credited to income in the period this determination was made.

We file income tax returns in the U.S. and several non-U.S. jurisdictions and are subject to examination in the various jurisdictions in which we file. We are no longer subject to income tax examinations for U.S. federal and substantially all state jurisdictions for years prior to 2018 and for substantially all foreign jurisdictions for years prior to 2008.

We are under examination by various tax authorities in countries where we operate, and certain foreign jurisdictions have challenged the amounts of taxes due for certain tax periods. These audits are in various stages of completion. We fully cooperate with all audits but defend existing positions vigorously. We evaluate the potential exposure associated with various filing positions and record a liability for uncertain tax positions as circumstances warrant. Although we believe all tax positions are reasonable and properly reported in accordance with applicable tax laws and regulations in effect during the periods involved, the final determination of tax audits and any related litigation could be materially different than that which is reflected in historical income tax provisions and accruals.

New Accounting Pronouncements

See Note 1 in Item 8. “Financial Statements and Supplementary Data” for a discussion of new accounting pronouncements.

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