NPK International Inc. (NPKI) FY 2023 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
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. We have reflected these three reportable segments for all periods presented in this Annual Report on Form 10-K.
Over much of the past decade, while the Fluids Systems segment has been the primary driver of revenues, the Industrial Solutions segment has been the primary driver of operating income, cash flows, and financial returns. Consequently, our growth investments in recent years have been heavily concentrated in the Industrial Solutions segment. For 2023, the relative revenues, operating income, and capital expenditures for the Industrial Solutions and Fluids Systems segments for 2023 are as follows (amounts in millions):
* Fluids Systems segment operating income for 2023 includes $12.7 million in total charges for certain impairments, facility exit, severance costs, and transaction related expenses for the ongoing Fluids Systems segment sale process as described further below.
In June 2023, we announced that we initiated a review of strategic alternatives for the long-term positioning of the Fluids Systems division. We have retained Lazard to serve as our exclusive financial advisor in connection with the strategic review. In September 2023, we launched a formal sale process for substantially all the Fluids Systems business as part of this strategic review. While the sale process is ongoing, we anticipate substantially completing the process in mid-2024, although it is not certain that any such transaction will be consummated on that timeline or at all. As part of the strategic review, we will continue to evaluate under-performing areas within our business and anticipate additional actions may be necessary to optimize our operational footprint and invested capital within the Fluids Systems segment. If we successfully complete the process to substantially exit the Fluids Systems segment, our remaining operations will primarily reflect a specialty rental and service business, serving the utilities sector and other critical infrastructure markets. See further information below.
2023 Priorities
The following summarizes our performance against key priorities established for 2023:
•Accelerate Industrial Solutions Growth – We continued to prioritize investment capital in the growth of our Industrial Solutions business, where over the past several years, we have seen the strong market adoption of our specialty rental products and differentiated service offering. For 2023, 90% of our capital expenditures were directed to the Industrial Solutions segment. Industrial Solutions segment revenues were $207.6 million in 2023, reflecting an 8% increase from 2022, including a 12% increase in rental and services, with higher revenues seen broadly across all major industries served.
•Operational Excellence – We increased our focus on efficiency improvements and operating cost optimization across every aspect of our global footprint. With our simplified business model and enhanced focus on balance sheet optimization, we seek to improve returns and consistency in cash flow generation. During 2023, we generated $100.0 million of operating cash flow, which was partially driven by the effects of the 2022 divestitures and ongoing efforts to restructure or reduce the level of invested capital in underperforming business activities within the Fluids Systems segment. In addition, we have continually evaluated and executed actions intended to streamline the organization and our cost structure, driving reductions in overhead costs and improvements in profitability.
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•Prioritize Return of Capital – We are committed to maintaining a strong balance sheet, using excess cash generation to reduce our debt and return value to our shareholders. During 2023, we utilized $47 million of cash generation for debt repayments and another $32 million to repurchase 6.5 million (7%) of our outstanding shares under our repurchase program.
Segment Overview
Industrial Solutions – Our Industrial Solutions segment, which generated 28% of our consolidated revenues and $53.0 million of operating income for 2023, 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 United Kingdom. We also sell our manufactured recyclable composite mats to customers around the world, with power transmission being the primary end-market. For the Industrial Solutions segment, approximately 75% of 2023 revenues were derived from power transmission and other industrial markets.
Our Industrial Solutions segment has been our primary source of operating income and cash generation in recent years, and has also been the primary focus for growth investments. The growth of our business in the power transmission and other industrial markets remains a strategic priority for us due to the relative stability of such markets compared to E&P, as well as the magnitude of growth opportunity in these markets, 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 U.S. energy transition and the increasing investment in grid reliance initiatives.
Fluids Systems – Our Fluids Systems segment, which generated 72% of our consolidated revenues and $11.9 million of operating income for 2023 (including $12.7 million in total charges for certain impairments, facility exit, severance costs, and transaction related expenses for the ongoing Fluids Systems segment sale process), provides drilling and completion fluids products and related technical services to customers for oil, natural gas, and geothermal projects primarily in North America and EMEA, as well as certain countries in Asia Pacific. Over the past few years, our primary focus within Fluids Systems has been the transformation into a more agile and simplified business focused on key markets, while monetizing assets in underperforming or sub-scale markets and reducing our invested capital to drive improvements in segment profitability and returns. As of December 31, 2023, the net working capital of the Fluids Systems segment was $171 million, which reflects a $69 million reduction from December 31, 2022.
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. Oil and natural gas prices and activity are cyclical and volatile, and this market volatility has a significant impact on our Fluids Systems operating results.
Rig count data remains the most widely accepted indicator of drilling activity. Average North American rig count data for the last three years is as follows:
| Year Ended December 31, | 2023 vs 2022 | 2022 vs 2021 | |||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | 2021 | Count | % | Count | % | |||||||||||||||
| U.S. Rig Count | 687 | 723 | 475 | (36) | (5) | % | 248 | 52 | % | ||||||||||||
| Canada Rig Count | 177 | 175 | 131 | 2 | 1 | % | 44 | 34 | % | ||||||||||||
| North America Rig Count | 864 | 898 | 606 | (34) | (4) | % | 292 | 48 | % |
_______________________________________________________
Source: Baker Hughes
During 2021, oil prices and the average U.S. rig count steadily improved in the wake of COVID-19, and during 2022, oil prices and rig counts further increased due in part to global economic recovery and geopolitical events. In 2023, market activity in the U.S. steadily declined, ending the year at 622 active rigs, down 20% from the end of 2022. With recent instability in oil prices, the 2024 outlook for U.S. market activity generally remains below the 2023 average level, as many of our customers maintain strong capital discipline and prioritize cash flow generation over growth.
Outside of North America, 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. Further, geopolitical events in recent years 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 remains strong, with growth in activity expected over the next few years.
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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 assets.
2023 Strategic Actions
The following strategic actions were taken in 2023.
Review of Strategic Alternatives for Fluids Systems Business
As described above, we initiated a review of strategic alternatives for the long-term positioning of the Fluids Systems division in June 2023, and in September 2023, we launched a formal sale process for substantially all the Fluids Systems business as part of this strategic review. While the sale process is ongoing, we anticipate substantially completing the process in mid-2024, although it is not certain that any such transaction will be consummated on that timeline or at all. As part of this review, in the fourth quarter of 2023 we recognized a $2.5 million impairment charge (included in impairments and other charges) related to certain long-lived assets utilized in our U.S. operations. We also incurred $1.2 million and $0.6 million of transaction related costs in 2023 included in Corporate Office expenses and Fluids Systems segment operating income, respectively. As of December 31, 2023, the Fluids Systems business had approximately $227 million of net assets, including $38 million in cash, $13 million of debt, and $171 million of net working capital.
As we continue to evaluate strategic alternatives for our Fluids Systems portfolio, we may incur future charges related to these efforts or potential asset impairments, which may negatively impact our future results.
Exit of Stimulation Chemicals Product Line
In 2023, we made the decision to exit the stimulation chemicals product line. The Fluids Systems segment operating results for 2023 includes $1.6 million of total charges (included in impairments and other charges) for inventory write-downs to reduce the carrying values of certain inventory related to the exit of our stimulation chemicals product line to their net realizable value. As of December 31, 2023, we had $2.1 million of inventory remaining related to the stimulation chemicals product line.
Exit of Offshore Australia Operations
In 2023, we made the decision to exit our offshore Australia operations. The Fluids Systems segment operating results for 2023 includes $1.5 million of total charges (included in impairments and other charges) for inventory write-downs to reduce the carrying values of certain inventory related to the exit of our offshore Australia operations to their net realizable value as well as impairments related to the long-lived assets previously used in the now exited business. We expect to incur certain exit related costs of approximately $1 million from the exit of our offshore Australia operations in 2024.
Exit of Chile Operations
In 2023, we completed our customer contract in Chile, and during the fourth quarter of 2023, we completed the substantial liquidation of our Chile subsidiary and recognized an $0.8 million non-cash charge (included in impairments and other charges) for the reclassification of cumulative foreign currency translation losses related to our subsidiary in Chile.
2022 Strategic Actions
The following strategic actions were taken in 2022.
Exit of Industrial Blending Segment and Sale of Conroe, Texas Blending Facility
In the first quarter of 2022, we exited our Industrial Blending operations. In November 2022, we completed the sale of the industrial blending assets for 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 (included in impairments and other charges), 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 November 2022, we completed the sale of substantially all the long-lived assets, inventory, and operations of our Excalibar U.S. mineral grinding business (“Excalibar”), which was reported within our Fluids Systems segment, to Cimbar Resources, INC. (“Cimbar”), for 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, the wind down of which was substantially completed in the first quarter of 2023. Such working capital provided approximately $10 million of cash generation in the fourth quarter of 2022 and approximately $6 million of additional cash generation in the
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first quarter of 2023. In connection with the sale, the Company and Cimbar 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 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 has been sold to the lessee as consumed. These transactions provided cash generation of approximately $6 million in the fourth quarter of 2022 and approximately $28 million in 2023. Fluids Systems segment operating income for 2023 includes $4.8 million in charges related to the exit of our Gulf of Mexico operations, which was substantially completed during the second quarter of 2023.
As a result of the plan to exit the Gulf of Mexico operations as described above, we considered the third quarter 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 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 are shown in the following table:
| Year Ended December 31, | ||||||
|---|---|---|---|---|---|---|
| (In thousands) | 2023 | 2022 | ||||
| Fluids U.S. Land - Long-lived assets impairment | 2,485 | — | ||||
| Stimulation chemicals product line - Inventory write-downs | 1,576 | — | ||||
| Australia - Inventory write-downs | 1,058 | — | ||||
| Australia - Long-lived assets impairment | 439 | — | ||||
| Chile exit - Recognition of cumulative foreign currency translation losses | 798 | — | ||||
| Industrial Blending - Long-lived assets impairment | — | 7,905 | ||||
| Gulf of Mexico - Long-lived assets impairment | — | 21,461 | ||||
| Gulf of Mexico - Inventory write-downs | — | 7,956 | ||||
| Total impairments and other charges | $ | 6,356 | $ | 37,322 |
Summarized operating results of the business units exited in 2022 (including impairments and other charges described above) are shown in the following table:
| Year Ended December 31, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| (In thousands) | 2023 | 2022 | 2021 | |||||||
| Revenues | ||||||||||
| Industrial Blending | $ | — | $ | — | $ | 8,821 | ||||
| Excalibar | — | 55,990 | 36,396 | |||||||
| Gulf of Mexico | — | 26,708 | 25,366 | |||||||
| Total revenues | $ | — | $ | 82,698 | $ | 70,583 | ||||
| Operating income (loss) | ||||||||||
| Industrial Blending | $ | — | $ | (8,002) | $ | (2,384) | ||||
| Excalibar | — | 3,665 | (277) | |||||||
| Gulf of Mexico | (4,776) | (43,215) | (6,753) | |||||||
| Total Operating income (loss) | $ | (4,776) | $ | (47,552) | $ | (9,414) |
Summarized net assets related to the business units exited in 2022 are shown in the following table:
| (In thousands) | December 31, 2022 | |
|---|---|---|
| Receivables, net | $ | 27,798 |
| Inventories | 5,805 | |
| Accounts payable | (2,060) | |
| Accrued liabilities | (311) | |
| Total net assets | $ | 31,232 |
The net assets remaining as of December 31, 2022 related to the retained working capital from the Excalibar sale and the remaining Gulf of Mexico net assets. During 2023, we substantially settled the above net assets related to the now exited Excalibar business and Gulf of Mexico operations.
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Year Ended December 31, 2023 Compared to Year Ended December 31, 2022
Consolidated Results of Operations
Summarized results of operations for 2023 compared to 2022 are as follows:
| Year Ended December 31, | 2023 vs 2022 | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (In thousands) | 2023 | 2022 | $ | % | ||||||||||
| Revenues | $ | 749,600 | $ | 815,594 | $ | (65,994) | (8) | % | ||||||
| Cost of revenues | 611,061 | 694,058 | (82,997) | (12) | % | |||||||||
| Selling, general and administrative expenses | 101,136 | 97,618 | 3,518 | 4 | % | |||||||||
| Other operating income, net | (2,583) | (4,370) | 1,787 | NM | ||||||||||
| Impairments and other charges | 6,356 | 37,322 | (30,966) | NM | ||||||||||
| Operating income (loss) | 33,630 | (9,034) | 42,664 | NM | ||||||||||
| Foreign currency exchange loss | 267 | 389 | (122) | NM | ||||||||||
| Interest expense, net | 8,181 | 7,040 | 1,141 | 16 | % | |||||||||
| Income (loss) before income taxes | 25,182 | (16,463) | 41,645 | NM | ||||||||||
| Provision for income taxes | 10,666 | 4,371 | 6,295 | NM | ||||||||||
| Net income (loss) | $ | 14,516 | $ | (20,834) | $ | 35,350 | 170 | % |
Revenues
Revenues decreased 8% to $749.6 million for 2023, compared to $815.6 million for 2022. This $66.0 million decrease includes a $118.8 million (20%) decrease in North America, comprised of a $133.0 million decrease in the Fluids Systems segment partially offset by a $14.2 million increase in the Industrial Solutions segment. In our Fluids Systems segment, revenues from North America operations decreased primarily due to a $82.7 million impact from the divested business units, as well as the effect of lower market share and reduced U.S. market activity. In our Industrial Solutions segment, revenues from North America operations increased primarily due to an increase in rental and services revenues. Revenues from our international operations increased by $52.8 million (24%), driven primarily by higher activity in Europe and Africa. Additional information regarding the change in revenues is provided within the operating segment results below.
Cost of revenues
Cost of revenues decreased 12% to $611.1 million for 2023, compared to $694.1 million for 2022 which included $90.7 million of cost of revenues from divested business units. This $83.0 million decrease in cost of revenues was primarily driven by the 8% decrease in revenues described above, as well as the impact of segment revenue mix, with Industrial Solutions representing a higher proportion of revenues for 2023, as compared to the prior year.
Selling, general and administrative expenses
Selling, general and administrative expenses increased $3.5 million to $101.1 million for 2023, compared to $97.6 million for 2022. This increase was primarily driven by a $1.9 million increase in severance costs and a $1.4 million increase in expenses related to strategic planning projects. Selling, general and administrative expenses as a percentage of revenues was 13.5% for 2023 compared to 12.0% for 2022. Selling, general and administrative expenses in 2022 included $1.8 million of costs within divested business units.
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Other operating income, net
Other operating income, net for 2023 primarily reflects gains and losses associated with the sale of assets, including assets previously used in divested businesses, as well as lease income on office space from third-party lessees. 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.
Impairments and other charges
For 2023, the Fluids Systems segment includes $5.6 million of non-cash charges for long-lived asset impairments and inventory write-downs, as well as an $0.8 million non-cash charge for the reclassification of cumulative foreign currency translation losses related to the substantial liquidation of our subsidiary in Chile.
For 2022, the Fluids Systems segment included $29.4 million of total non-cash impairment charges related to the long-lived assets and inventory associated with the exit of our Gulf of Mexico operations. In addition, the Industrial Blending segment included a $7.9 million non-cash impairment charge related to the process to sell the assets previously used in this now exited business.
Foreign currency exchange
Foreign currency exchange was a $0.3 million loss for 2023 compared to a $0.4 million loss for 2022, and 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 $8.2 million for 2023 compared to $7.0 million for 2022. The increase in interest expense is primarily due to an increase in benchmark borrowing rates partially offset by a decrease in average debt outstanding.
Provision for income taxes
The provision for income taxes was $10.7 million for 2023, reflecting an effective tax rate of 42%. The 2023 provision primarily reflects income taxes associated with our international operations, including the impact from the geographic composition of our earnings, and was unfavorably impacted by losses in certain international jurisdictions in which we are unable to recognize a related tax benefit, partially offset by the benefit associated with a partial valuation allowance release to recognize a portion of previously unbenefited U.S. net operating losses. The provision for income taxes was $4.4 million for 2022, which included 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 2022 provision for income taxes primarily reflects the impact from the geographic composition of our earnings and was unfavorably impacted as we are unable to recognize a tax benefit related to the $37.3 million in total impairment charges.
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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):
| Year Ended December 31, | 2023 vs 2022 | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (In thousands) | 2023 | 2022 | $ | % | ||||||||||
| Revenues | ||||||||||||||
| Fluids Systems | $ | 541,952 | $ | 622,601 | $ | (80,649) | (13) | % | ||||||
| Industrial Solutions | 207,648 | 192,993 | 14,655 | 8 | % | |||||||||
| Industrial Blending | — | — | — | — | % | |||||||||
| Total revenues | $ | 749,600 | $ | 815,594 | $ | (65,994) | (8) | % | ||||||
| Operating income (loss) | ||||||||||||||
| Fluids Systems | $ | 11,857 | $ | (15,566) | $ | 27,423 | ||||||||
| Industrial Solutions | 53,008 | 43,899 | 9,109 | |||||||||||
| Industrial Blending | — | (8,002) | 8,002 | |||||||||||
| Corporate office | (31,235) | (29,365) | (1,870) | |||||||||||
| Total operating income (loss) | $ | 33,630 | $ | (9,034) | $ | 42,664 | ||||||||
| Segment operating margin | ||||||||||||||
| Fluids Systems | 2.2 | % | (2.5) | % | ||||||||||
| Industrial Solutions | 25.5 | % | 22.7 | % |
Fluids Systems
Revenues
Total revenues for this segment consisted of the following:
| Year Ended December 31, | 2023 vs 2022 | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (In thousands) | 2023 | 2022 | $ | % | ||||||||||
| United States | $ | 215,410 | $ | 355,435 | $ | (140,025) | (39) | % | ||||||
| Canada | 68,143 | 61,069 | 7,074 | 12 | % | |||||||||
| Total North America | 283,553 | 416,504 | (132,951) | (32) | % | |||||||||
| EMEA | 238,479 | 185,298 | 53,181 | 29 | % | |||||||||
| Other | 19,920 | 20,799 | (879) | (4) | % | |||||||||
| Total International | 258,399 | 206,097 | 52,302 | 25 | % | |||||||||
| Total Fluids Systems revenues | $ | 541,952 | $ | 622,601 | $ | (80,649) | (13) | % |
North America revenues decreased 32% to $283.6 million for 2023, compared to $416.5 million for 2022, primarily related to the divested business units as well as a decline in U.S. land activity. For 2022, U.S. revenues included $56.0 million from the U.S. mineral grinding business and $26.7 million from offshore Gulf of Mexico, which were exited in 2022. Revenues from U.S. land decreased $57.3 million, primarily as a result of lower market share and reduced market activity. In addition, Canada revenues increased $7.1 million driven primarily by elevated product consumption per rig partially offset by a slight decline in market share, which typically fluctuates based on customer mix and timing of projects.
International revenues increased 25% to $258.4 million for 2023, compared to $206.1 million for 2022. The increase was primarily driven by higher customer activity and elevated product consumption per rig in Europe and Africa.
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Operating income (loss)
The Fluids Systems segment generated operating income of $11.9 million for 2023 compared to an operating loss of $15.6 million incurred for 2022. The Fluids Systems segment operating income for 2023 includes $12.7 million in total charges for certain impairments, facility exit, severance costs, and transaction related expenses for the ongoing Fluids Systems segment sale process. The Fluids Systems segment operating loss for 2022 included $29.4 million of total non-cash impairment charges, as well as operating losses of $10.1 million related to the divested business units. Excluding these items, the $0.7 million improvement in operating income primarily reflects the impact of the increase in revenues in EMEA and benefits of strategic actions and cost reduction efforts in the U.S., substantially offset by the decrease in U.S. revenues.
Industrial Solutions
Revenues
Total revenues for this segment consisted of the following:
| Year Ended December 31, | 2023 vs 2022 | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (In thousands) | 2023 | 2022 | $ | % | ||||||||||
| Rental and service revenues | $ | 149,954 | $ | 134,301 | $ | 15,653 | 12 | % | ||||||
| Product sales revenues | 57,694 | 58,692 | (998) | (2) | % | |||||||||
| Total Industrial Solutions revenues | $ | 207,648 | $ | 192,993 | $ | 14,655 | 8 | % |
Rental and service revenues increased by 12% for 2023, primarily reflecting increases in rental volume and service revenues, and was driven by our continued market penetration across all major industries served in the U.S. Product sales revenues decreased slightly for 2023, with continued strong demand across sectors, including utilities. Product sales typically fluctuate based on the timing of customer projects and orders.
Operating income
The Industrial Solutions segment generated operating income of $53.0 million for 2023 compared to $43.9 million for 2022, the increase being primarily attributable to incremental profitability associated with revenue growth, including the effects of improved operating cost leverage from increased manufacturing, rental, and service activity.
Industrial Blending
As described above, the Industrial Blending operating loss for 2022 included 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 increased to $31.2 million for 2023, compared to $29.4 million for 2022. Corporate office expenses for 2023 includes approximately $2.9 million of expenses related to strategic planning projects, including $1.2 million of transaction related expenses for the ongoing Fluids Systems segment sale process, as well as $1.2 million of severance costs, while 2022 included $1.1 million associated with shareholder matters and acquisition and divestiture efforts.
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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:
| Year Ended December 31, | 2022 vs 2021 | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (In thousands) | 2022 | 2021 | $ | % | ||||||||||
| Revenues | $ | 815,594 | $ | 614,781 | $ | 200,813 | 33 | % | ||||||
| Cost of revenues | 694,058 | 529,552 | 164,506 | 31 | % | |||||||||
| Selling, general and administrative expenses | 97,618 | 94,445 | 3,173 | 3 | % | |||||||||
| Other operating income, net | (4,370) | (391) | (3,979) | NM | ||||||||||
| Impairments and other charges | 37,322 | — | 37,322 | NM | ||||||||||
| Operating loss | (9,034) | (8,825) | (209) | (2) | % | |||||||||
| Foreign currency exchange (gain) loss | 389 | (397) | 786 | NM | ||||||||||
| Interest expense, net | 7,040 | 8,805 | (1,765) | (20) | % | |||||||||
| Loss on extinguishment of debt | — | 1,000 | (1,000) | NM | ||||||||||
| Loss before income taxes | (16,463) | (18,233) | 1,770 | 10 | % | |||||||||
| Provision for income taxes | 4,371 | 7,293 | (2,922) | NM | ||||||||||
| Net loss | $ | (20,834) | $ | (25,526) | $ | 4,692 | 18 | % |
Revenues
Revenues increased 33% to $815.6 million for 2022, compared to $614.8 million for 2021. This $200.8 million increase includes a $146.2 million (32%) increase in revenues in North America, comprised of a $141.2 million increase in the Fluids Systems segment and a $13.7 million increase in the Industrial Solutions segment, partially offset by a $8.8 million decrease in the Industrial Blending segment, which we exited in 2022. Revenues from our North America operations increased primarily due to the improvement in North America rig count, which favorably impacted our Fluids Systems segment, and an increase in rental and service revenues in our Industrial Solutions segment. Revenues from our international operations increased by $54.7 million (33%), as the prior year was unfavorably impacted by activity disruptions and project delays resulting from the COVID-19 pandemic, partially offset by a $20.8 million decrease in revenues from currency exchange rate changes resulting from the strengthening U.S. dollar. Consolidated revenues included $82.7 million of revenues from divested business units for 2022, compared to $70.6 million for 2021. Additional information regarding the change in revenues is provided within the Operating Segment Results below.
Cost of revenues
Cost of revenues increased 31% to $694.1 million for 2022, compared to $529.6 million for 2021. This $164.5 million increase was primarily driven by the 33% increase in revenues described above. Consolidated cost of revenues included $90.7 million of cost of revenues from divested business units for 2022, compared to $73.1 million for 2021.
Selling, general and administrative expenses
Selling, general and administrative expenses increased $3.2 million to $97.6 million for 2022, compared to $94.4 million for 2021. This increase was primarily driven by higher personnel expense, as well as higher legal and professional expenses. Selling, general and administrative expenses as a percentage of revenues was 12.0% for 2022 compared to 15.4% for 2021. Consolidated selling, general and administrative expenses included $1.8 million of costs related to divested business units for 2022, compared to $2.1 million for 2021.
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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 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 included $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):
| Year Ended December 31, | 2022 vs 2021 | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (In thousands) | 2022 | 2021 | $ | % | ||||||||||
| Revenues | ||||||||||||||
| Fluids Systems | $ | 622,601 | $ | 420,789 | $ | 201,812 | 48 | % | ||||||
| Industrial Solutions | 192,993 | 185,171 | 7,822 | 4 | % | |||||||||
| Industrial Blending | — | 8,821 | (8,821) | (100) | % | |||||||||
| Total revenues | $ | 815,594 | $ | 614,781 | $ | 200,813 | 33 | % | ||||||
| Operating income (loss) | ||||||||||||||
| Fluids Systems | $ | (15,566) | $ | (19,012) | $ | 3,446 | ||||||||
| Industrial Solutions | 43,899 | 42,117 | 1,782 | |||||||||||
| Industrial Blending | (8,002) | (2,384) | (5,618) | |||||||||||
| Corporate office | (29,365) | (29,546) | 181 | |||||||||||
| Total operating loss | $ | (9,034) | $ | (8,825) | $ | (209) | ||||||||
| Segment operating margin | ||||||||||||||
| Fluids Systems | (2.5) | % | (4.5) | % | ||||||||||
| Industrial Solutions | 22.7 | % | 22.7 | % | ||||||||||
| Industrial Blending | NM | (27.0) | % |
Fluids Systems
Revenues
Total revenues for this segment consisted of the following:
| Year Ended December 31, | 2022 vs 2021 | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (In thousands) | 2022 | 2021 | $ | % | ||||||||||
| United States | $ | 355,435 | $ | 227,261 | $ | 128,174 | 56 | % | ||||||
| Canada | 61,069 | 48,007 | 13,062 | 27 | % | |||||||||
| Total North America | 416,504 | 275,268 | 141,236 | 51 | % | |||||||||
| EMEA | 185,298 | 132,221 | 53,077 | 40 | % | |||||||||
| Other | 20,799 | 13,300 | 7,499 | 56 | % | |||||||||
| Total International | 206,097 | 145,521 | 60,576 | 42 | % | |||||||||
| Total Fluids Systems revenues | $ | 622,601 | $ | 420,789 | $ | 201,812 | 48 | % |
North America revenues increased 51% to $416.5 million for 2022, compared to $275.3 million for 2021. The increase includes a $126.7 million increase from U.S. land markets driven primarily by the 52% increase in U.S. rig count, partially offset by lower market share, while offshore Gulf of Mexico increased $1.3 million. In addition, Canada revenues increased $13.1 million driven primarily by the 34% increase in Canada rig count. For 2022, U.S. revenues included $328.4 million from land markets, including $56.0 million from the Excalibar business, and $26.7 million from offshore Gulf of Mexico. For 2021, U.S. revenues included $201.9 million from land markets, including $36.4 million from the Excalibar business, and $25.4 million from offshore Gulf of Mexico.
Internationally, revenues increased 42% to $206.1 million for 2022, compared to $145.5 million for 2021. The increase was primarily driven by higher activity in Europe, Africa, and the Asia Pacific region following a significant impact in 2021 from the COVID-19 pandemic, as described above, partially offset by a $19.3 million decrease in revenues from currency exchange rate changes.
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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:
| Year Ended December 31, | 2022 vs 2021 | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (In thousands) | 2022 | 2021 | $ | % | ||||||||||
| Product sales revenues | $ | 58,692 | $ | 66,796 | $ | (8,104) | (12) | % | ||||||
| Rental and service revenues | 134,301 | 118,375 | 15,926 | 13 | % | |||||||||
| Total Industrial Solutions revenues | $ | 192,993 | $ | 185,171 | $ | 7,822 | 4 | % |
Revenues from product sales decreased by $8.1 million from 2021, as 2021 was favorably impacted by pent-up customer demand following the delays in purchases and project execution associated with the COVID-19 pandemic. Rental and service revenues increased by 13% from 2021, as continued market penetration of the power transmission sector in the U.S. was partially offset by lower activity in the U.K.
Operating income
The Industrial Solutions segment generated operating income of $43.9 million for 2022 compared to $42.1 million for 2021. The 2021 operating results included a $1.0 million gain associated with a legal settlement. The remaining $2.8 million increase is primarily attributable to the growth in revenues described above, partially offset by the effects of lower average pricing associated with large scale rental projects.
Industrial Blending
We completed the wind down of the Industrial Blending business and the sale of the associated warehouse facility and related equipment in 2022, as described above. The operating loss for 2022 includes a $7.9 million non-cash charge for the impairment of the long-lived assets as well as exit and other costs related to the process to sell these assets, partially offset by a $2.6 million gain subsequently recognized upon the eventual sale in the fourth quarter of 2022.
Corporate Office
Corporate office expenses decreased slightly to $29.4 million for 2022 compared to $29.5 million for 2021. This decrease was primarily driven by lower stock-based compensation expense partially offset by higher performance-based incentives and personnel expense.
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Liquidity and Capital Resources
Net cash provided by operating activities was $100.0 million for 2023 compared to net cash used in operating activities of $25.0 million for 2022. During 2023, net income adjusted for non-cash items provided cash of $57.2 million and changes in working capital provided cash of $42.8 million. The cash provided by reductions in work working capital was primarily driven by Fluids Systems segment reductions in U.S. land, along with the wind down of retained working capital associated with the fourth quarter 2022 divestiture transactions.
Net cash used in investing activities was $5.7 million for 2023, including $29.2 million in capital expenditures partially offset by $19.8 million in proceeds received related to our fourth quarter of 2022 divestitures (see Note 2 for additional information), as well as $3.7 million in proceeds from the sale of assets, which includes the sale of used mats from our Industrial Solutions rental fleet. The substantial majority of our capital expenditures were directed to expanding our Industrial Solutions segment rental fleet. Net cash provided by investing activities was $46.2 million for 2022, which included $71.3 million in proceeds from 2022 divestitures as well as $3.2 million in proceeds from the sale of assets, partially offset by capital expenditures of $28.3 million.
Net cash used in financing activities was $81.0 million for 2023, which includes $47.4 million in net repayments on our Amended ABL Facility and other financing arrangements and $32.0 million in share purchases under our repurchase program. Net cash used in financing activities was $24.9 million for 2022, which included $17.6 million in share purchases under our repurchase program.
Substantially all our $38.6 million of cash on hand at December 31, 2023 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 22, 2024, our total borrowing availability under the Amended ABL Facility was $116.8 million, of which $45.6 million was drawn and $4.0 million was used for outstanding letters of credit, resulting in remaining availability of $67.2 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 our near-term working capital requirements for our operations will generally fluctuate directionally with revenues. We expect capital expenditures in 2024 will remain fairly in line with 2023 levels, with spending heavily focused on the expansion of our mat rental fleet. We also expect to return value to our shareholders, utilizing excess cash generation to fund additional share repurchases. In addition, if we are successful in completing the process to substantially exit the Fluids Systems business, we anticipate the proceeds to be used to repay a substantial portion of our existing outstanding debt and increase our cash on-hand, providing additional liquidity to fund our long-term strategic initiatives.
Our capitalization is as follows:
| (In thousands) | December 31, 2023 | December 31, 2022 | ||||
|---|---|---|---|---|---|---|
| Amended ABL Facility | $ | 45,000 | $ | 80,300 | ||
| Other debt | 30,093 | 33,949 | ||||
| Unamortized discount and debt issuance costs | (60) | (134) | ||||
| Total debt | $ | 75,033 | $ | 114,115 | ||
| Stockholders’ equity | 415,364 | 423,028 | ||||
| Total capitalization | $ | 490,397 | $ | 537,143 | ||
| Total debt to capitalization | 15.3 | % | 21.2 | % |
Asset-Based Loan Facility. In October 2017, we entered into a U.S. asset-based revolving credit agreement, which was amended in March 2019 and amended and restated in May 2022 (the “Amended ABL Facility”). The Amended ABL Facility provides financing of up to $175.0 million available for borrowings (inclusive of letters of credit), which can be increased up to $250.0 million, subject to certain conditions. The Amended ABL Facility has a five-year term expiring May 2027, is based on 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).
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As of December 31, 2023, our total availability under the Amended ABL Facility was $109.2 million, of which $45.0 million was drawn and $4.0 million was used for outstanding letters of credit, resulting in remaining availability of $60.2 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, 2023, the applicable margin for borrowings under the Amended ABL Facility was 1.50% with respect to BSBY borrowings and 0.50% with respect to base rate borrowings. As of December 31, 2023, the weighted average interest rate for the Amended ABL Facility was 6.9% 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.
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Other Financing Arrangements. 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. In addition, in April 2022, a U.K. subsidiary entered a £7.0 million term loan and a £2.0 million revolving credit facility. Both the term loan and revolving credit facility mature in April 2025 and bear interest at a rate of Sterling Overnight Index Average plus a margin of 3.25% per year. As of December 31, 2023, the interest rate for the U.K. facilities was 8.7%. 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 also maintain finance leases primarily related to transportation equipment.
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.
Off-Balance Sheet Arrangements
We do not have any special purpose entities. At December 31, 2023, we had $39.8 million in outstanding letters of credit, performance bonds, and other guarantees for which certain of the letters of credit are collateralized by $0.3 million in restricted cash. We also enter into normal short-term operating leases for office and warehouse space, as well as certain operating equipment. None of these off-balance sheet arrangements either has, or is expected to have, a material effect on our financial statements.
Contractual Obligations
A summary of our outstanding contractual and other obligations and commitments at December 31, 2023 is as follows:
| (In thousands) | 2024 | 2025 | 2026 | 2027 | 2028 | Thereafter | Total | |||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Amended ABL Facility | $ | — | $ | — | $ | — | $ | 45,000 | $ | — | $ | — | $ | 45,000 | ||||||||||||
| Other debt | 13,078 | 4,010 | — | — | — | — | 17,088 | |||||||||||||||||||
| Financing obligation (1) | 932 | 157 | — | — | — | — | 1,089 | |||||||||||||||||||
| Finance lease liabilities (1) | 3,389 | 3,097 | 2,656 | 1,134 | 261 | 100 | 10,637 | |||||||||||||||||||
| Operating lease liabilities (1) | 5,639 | 4,051 | 3,628 | 3,236 | 2,819 | 6,278 | 25,651 | |||||||||||||||||||
| Trade accounts payable and accrued liabilities (2) | 114,609 | — | — | — | — | — | 114,609 | |||||||||||||||||||
| Other long-term liabilities (3) | — | 1,689 | 558 | — | — | 4,613 | 6,860 | |||||||||||||||||||
| Performance bond obligations | 24,481 | 4,160 | — | — | 557 | — | 29,198 | |||||||||||||||||||
| Letter of credit commitments | 8,748 | — | — | 1,729 | — | 123 | 10,600 | |||||||||||||||||||
| Total contractual obligations | $ | 170,876 | $ | 17,164 | $ | 6,842 | $ | 51,099 | $ | 3,637 | $ | 11,114 | $ | 260,732 |
(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 in Item 8. “Financial Statements and Supplementary Data” 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, 2023, our consolidated balance sheet includes $195.3 million of property, plant and equipment and $17.1 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.
Fluids Systems Operations
In June 2023, we announced that we engaged Lazard to assist us in a review of strategic alternatives for our Fluids Systems division, and in September 2023, we launched a formal sale process for substantially all the Fluids Systems business as part of this strategic review. As of December 31, 2023, the Fluids Systems business had approximately $227 million of net assets, including $171 million of net working capital and $44 million of long-lived assets, as well as $38 million in cash and $13 million of debt. While the sale process is ongoing, we considered fourth quarter 2023 developments in the sale process to be a potential indicator of impairment that required us to complete an impairment evaluation. The ongoing Fluids sale process did not meet the held for sale accounting criteria as of December 31, 2023, and as such, continued to be accounted for as held for use. Accordingly, we completed the impairment evaluation for the geographic asset groups of the Fluids Systems business and determined that the carrying value exceeded the estimated undiscounted future net cash flows for only the U.S. Land asset group.
We estimated the fair value for the U.S. Land asset group as of December 31, 2023 based on the expected cash flows to be generated from the anticipated use and eventual disposition of such asset group. We estimated the fair value of the long-lived assets of the U.S. Land asset group, requiring us to recognize a $2.5 million impairment charge in the fourth quarter of 2023. As of December 31, 2023, the U.S. Land asset group had approximately $62 million of net assets, including $58 million of net working capital and $11 million of long-lived assets, as well as $3 million of debt.
Estimating future net cash flows of the geographic asset groups of our Fluids Systems business, as well as the fair value of the U.S. Land asset group and the long-lived assets within such group, required us to make judgments regarding the likelihood of possible outcomes and cash flows of the ongoing sale process, future revenue and costs related to the assets subject to review, and the use and eventual disposition of such assets. These judgments are uncertain in that they require assumptions about the potential outcomes for the eventual disposition of the assets from the ongoing Fluids Systems sale process, as well as forecasts for the demand for our products and services, future market conditions, and technological development. Depending on the actual outcome of the Fluids Systems sale process, or changes in these assumptions, our expectations regarding future net cash flows may change and a material impairment could result.
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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
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. 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, 2023, our consolidated balance sheet includes $47.3 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 2023, 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 $77.3 million and $71.9 million at December 31, 2023 and 2022, 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, 2023, we had a total valuation allowance of $49.2 million, which includes a valuation allowance on $29.3 million of net operating loss carryforwards for certain U.S. federal, state and foreign jurisdictions, as well as a valuation allowance of $13.0 million for foreign tax credits and research and development credits. 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 2019 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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