NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF MAJOR ACCOUNTING POLICIES
Basis of Presentation. Oceaneering International, Inc. ("Oceaneering," "we" or "us") has prepared these unaudited consolidated financial statements pursuant to instructions for quarterly reports on Form 10-Q, which we are required to file with the United States Securities and Exchange Commission (the "SEC"). These financial statements do not include all information and footnotes normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States ("U.S. GAAP"). These financial statements reflect all adjustments that we believe are necessary to present fairly our financial position as of September 30, 2020 and our results of operations and cash flows for the periods presented. Except as otherwise disclosed herein, all such adjustments are of a normal and recurring nature. These financial statements should be read in conjunction with the consolidated financial statements and related notes included in our annual report on Form 10-K for the year ended December 31, 2019. The results for interim periods are not necessarily indicative of annual results.
Principles of Consolidation. The consolidated financial statements include the accounts of Oceaneering and our 50% or more owned and controlled subsidiaries. We also consolidate entities that are determined to be variable interest entities if we determine that we are the primary beneficiary; otherwise, we account for those entities using the equity method of accounting. We use the equity method to account for our investments in unconsolidated affiliated companies of which we own an equity interest of between 20% and 50% and as to which we have significant influence, but not control, over operations. We use the cost method for all other long-term investments. Investments in entities that we do not consolidate are reflected on our balance sheet in other noncurrent assets. All significant intercompany accounts and transactions have been eliminated.
Use of Estimates. The preparation of financial statements in conformity with U.S. GAAP requires that our management make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expense during the reporting period. Actual results could differ from those estimates.
Recasting of Certain Prior Period Information. In the third quarter of 2020, we changed our organizational structure as part of the transformation to realign our businesses to achieve greater cost efficiencies. As a result, information that our chief operating decision maker regularly reviews changed. Therefore, for the three- and nine-month periods ended September 30, 2020, we are reporting our financial results consistent with our newly realigned operating segments and have recast certain prior period amounts to conform to the way we now manage our businesses and monitor segment performance as described in Note 3–"Revenue" and Note 10–"Business Segment Information." We also changed our reporting units to realign with the changes in our segments and reassessed impairments for long-lived assets and goodwill as described in Note 4–"Impairments."
Cash and Cash Equivalents. Cash and cash equivalents include demand deposits and highly liquid investments with original maturities of three months or less from the date of investment.
Allowances for Credit Loss—Financial Assets Measured at Amortized Costs. On January 1, 2020, we adopted Accounting Standard Update ("ASU") No. 2016-13, "Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments," as amended ("ASC 326"), which introduces a new credit reserving methodology known as the Current Expected Credit Loss ("CECL") model. The CECL model applies to financial assets measured at amortized costs, including accounts receivable, contract assets and held-to-maturity loan receivables. Under the CECL model, we identify allowances for credit loss based on future expected losses when accounts receivable, contract assets or held-to-maturity loan receivables are created rather than when losses are probable.
We use the loss-rate method in developing the allowance for credit losses, which involves identifying pools of assets with similar risk characteristics, reviewing historical losses within the last five years and consideration of reasonable supportable forecasts of economic indicators. Changes in estimates, developing trends and other new information could have material effects on future evaluations.
We monitor the credit quality of our accounts receivable and other financing receivable amounts by frequent customer interaction, following economic and industry trends and reviewing specific customer data. Our other receivable amounts include contract assets and held-to-maturity loans receivable, which we consider to have a low risk of loss.
We are monitoring the impacts from the coronavirus (COVID-19) outbreak and volatility in the oil and natural gas markets on our customers and various counterparties. We have considered the current and expected economic and market conditions, as a result of COVID-19, in determining credit loss expense for the three- and nine-month periods ended September 30, 2020.
As a result of the adoption of ASC 326, we recorded a cumulative-effect adjustment of $2.3 million as of January 1, 2020, which decreased retained earnings and increased the allowance for credit losses. We adopted ASC 326 using the modified retrospective method. Prior periods were not restated. We had an allowance for doubtful accounts of $7.5 million as of December 31, 2019, which we determined using the specific identification method, in accordance with previously applicable U.S. GAAP. As of September 30, 2020, our allowance for credit losses was $9.2 million for accounts receivable and $0.6 million for other receivables.
Financial assets are written off when deemed uncollectible and there is no reasonable expectation of recovering the contractual cash flows. During the three- and nine-month periods ended September 30, 2020, we wrote off accounts receivable of $5.3 million that previously had been reserved.
We have elected to apply the practical expedient available under ASC 326 to exclude the accrued interest receivable balance that is included in our held-to-maturity loans receivable. The amount excluded as of September 30, 2020 was $1.6 million.
Accounts receivable are considered to be past-due after the end of the contractual terms agreed to with the customer. There were no material past-due amounts that we consider uncollectible for our financial assets as of September 30, 2020. We generally do not require collateral from our customers.
See Note 2—"Accounting Standards Update"—for more information on our adoption of our adoption of ASC 326.
Inventory. Inventory is valued at the lower of cost or net realizable value. We determine cost using the weighted-average method.
Property and Equipment, Long-Lived Intangible Assets and Right-of-Use Operating Lease Assets. We provide for depreciation of assets included in property and equipment on the straight-line method over their estimated useful lives. We charge the costs of repair and maintenance of property and equipment to operations as incurred, while we capitalize the costs of improvements that extend asset lives or functionality. Upon the disposition of property and equipment, the related cost and accumulated depreciation accounts are relieved, and any resulting gain or loss is included as an adjustment to cost of services and products.
Long-lived intangible assets, primarily acquired in connection with business combinations, include trade names, intellectual property and customer relationships and are being amortized over their respective estimated useful lives.
Right-of-use operating lease assets are recognized, in each case, based on the present value of the future minimum lease payments over the lease term at commencement or modification date. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate, based on the information available at commencement or modification date in determining the present value of future payments. In determining the incremental borrowing rate, we considered our external credit ratings, bond yields for us and peer companies, the risk-free rate in geographic regions where we operate, and the impact associated with providing collateral over a similar term as the lease for an amount equal to the future lease payments. Our right-of-use operating lease assets also include any lease prepayments made and exclude lease incentives and initial direct costs incurred. Our lease terms may include options to extend or terminate the lease. These options are included in the lease term when it is reasonably certain that we will exercise that option. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.
We capitalize interest on assets where the construction period is anticipated to be more than three months. We capitalized no interest in the three- and nine-month periods ended September 30, 2020 and $1.4 million and $3.4 million of interest in the three- and nine-month periods ended September 30, 2019, respectively. We do not allocate general administrative costs to capital projects.
Our management periodically, and upon the occurrence of a triggering event, reviews the realizability of our property and equipment, long-lived intangible assets and right-of-use operating lease assets to determine whether any events or changes in circumstances indicate that the carrying amounts of the assets may not be recoverable. For long-lived assets to be held and used, we base our evaluation on impairment indicators such as the nature of
the assets, the future economic benefits of the assets, any historical or future profitability measurements and other external market conditions or factors that may be present. If such impairment indicators are present or other factors exist that indicate that the carrying amount of an asset may not be recoverable, we determine whether an impairment has occurred by utilization of an undiscounted cash flows analysis of the asset at the lowest level for which identifiable cash flows exist. If an impairment has occurred, we recognize a loss for the difference between the carrying amount and the fair value of the asset. For additional information regarding write-downs and write-offs of property and equipment, long-lived intangible assets and right-of-use operating lease assets in the three months ended March 31, 2020, see Note 4—"Impairments" and Note 10—"Business Segment Information."
For assets held for sale or disposal, the fair value of the asset is measured using fair market value less estimated costs to sell. Assets are classified as held for sale when we have a plan for disposal of certain assets and those assets meet the held for sale criteria.
Goodwill. Our goodwill is evaluated for impairment annually and whenever we identify certain triggering events or circumstances that would more likely than not reduce the fair value of a reporting unit below its carrying amount.
In our evaluation of goodwill, we perform a qualitative or quantitative impairment test. Under the qualitative approach, if we determine that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, we are required to perform the quantitative analysis to determine the fair value for the reporting unit. We then compare the fair value of the reporting unit with its carrying amount and recognize an impairment loss for the amount by which the carrying amount exceeds the fair value of the reporting unit. The loss recognized should not exceed the total amount of goodwill allocated to the reporting unit. We also consider income tax effects from any tax-deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. For additional information regarding impairments of goodwill in the three months ended March 31, 2020 and September 30, 2020, see Note 4—"Impairments" and Note 10—"Business Segment Information."
Foreign Currency Translation. The functional currency for several of our foreign subsidiaries is the applicable local currency. Results of operations for foreign subsidiaries with functional currencies other than the U.S. dollar are translated into U.S. dollars using average exchange rates during the period. Assets and liabilities of these foreign subsidiaries are translated into U.S. dollars using the exchange rates in effect as of the balance sheet date, and the resulting translation adjustments are recognized, net of tax, in accumulated other comprehensive income (loss) as a component of shareholders' equity. All foreign currency transaction gains and losses are recognized currently in the Consolidated Statements of Operations.
Revenue Recognition. All our revenue is realized through contracts with customers. We recognize our revenue according to the contract type. On a daily basis, we recognize service revenue over time for contracts that provide for specific time, material and equipment charges, which we bill periodically, ranging from weekly to monthly. We use the input method to faithfully depict revenue recognition, because each day of service provided represents value to the customer. The performance obligations in these contracts are satisfied, and revenue is recognized, as the work is performed. We have used the expedient available to recognize revenue when the billing corresponds to the value realized by the customer where appropriate.
We account for significant fixed-price contracts, mainly relating to our Manufactured Products segment, and to a lesser extent in our Offshore Projects Group and Aerospace and Defense Technologies segments, by recognizing revenue over time using an input, cost-to-cost measurement percentage-of-completion method. We use the input cost-to-cost method to faithfully depict revenue recognition. This commonly used method allows appropriate calculation of progress on our contracts. A performance obligation is satisfied as we create a product on behalf of the customer over the life of the contract. The remainder of our revenue is recognized at the point in time when control transfers to the customer, thus satisfying the performance obligation.
We have elected to recognize the cost for freight and shipping as an expense when incurred. Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, and that are collected by us from customers, are excluded from revenue.
In our service-based business lines, we principally charge on a dayrate basis for services provided. In our product-based business lines, predominantly in our Manufactured Products segment, we recognize revenue and profit using the percentage-of-completion method and exclude uninstalled materials and significant inefficiencies from the measure of progress.
We apply judgment in the determination and allocation of transaction price to performance obligations, and the subsequent recognition of revenue, based on the facts and circumstances of each contract. We routinely review
estimates related to our contracts and, when required, reflect revisions to profitability in earnings immediately. If an element of variable consideration has the potential for a significant future reversal of revenue, we will constrain that variable consideration to a level intended to remove the potential future reversal. If a current estimate of total contract cost indicates an ultimate loss on a contract, we recognize the projected loss in full when we determine it. In prior years, we have recorded adjustments to earnings as a result of revisions to contract estimates; however, we did not have any material adjustments during the nine months ended September 30, 2020 and 2019. There could be significant adjustments to overall contract costs in the future, due to changes in facts and circumstances.
In general, our payment terms consist of those services billed regularly as provided and those products delivered at a point in time, which are invoiced after the performance obligation is satisfied. Our product and service contracts with milestone payments due at agreed progress points during the contract are invoiced when those milestones are reached, which may differ from the timing of revenue recognition. Our payment terms generally do not provide financing of contracts to customers, nor do we receive financing from customers as a result of these terms.
See Note 3—"Revenue" for more information on our revenue from contracts with customers.
Leases. Effective as of January 1, 2019, we adopted ASU 2016-02, "Leases (Topic 842") ("ASC 842"), which requires lessees to recognize right-of-use assets ("ROU assets") and lease liabilities for virtually all leases and updates previous accounting standards for lessors to align certain requirements of the new leases standard and the revenue recognition accounting standard. We elected to apply the transition method that allowed us to apply this update at the adoption date and adopted the practical expedients that permitted us to retain the identification and classification of leases made under the previously applicable accounting standards. The adoption of this ASU as of January 1, 2019 resulted in a cumulative effect adjustment of $5.9 million recorded to retained earnings, with corresponding adjustments to increase ROU assets and lease liabilities by $185 million and $191 million, respectively. The adoption of this ASU did not materially affect our net earnings and had no impact on cash flows. Comparative information with respect to prior periods has not been retrospectively restated and continues to be reported under the accounting standards in effect for those periods.
We determine whether a contract is or contains a lease at inception, whether as a lessee or a lessor. We take into consideration the elements of an identified asset, right to control and the receipt of economic benefit in making those determinations.
As a lessor, we lease certain types of equipment along with the provision of services and utilize the expedient allowing us to combine the lease and non-lease components into a combined component that is accounted for (1) under ASC 842, when the lease component is predominant, and (2) under the accounting standard "Revenue from Contracts with Customers" ("ASC 606"), when the service component is predominant. In general, when we have a service component, it is typically the predominant element and leads to accounting under ASC 606.
As a lessor, we lease certain types of equipment, often providing services at the same time. These leases can be priced on a dayrate or lump-sum basis for periods ranging from a few days to multi-year contracts. These leases are negotiated on commercial terms at market rates and many carry standard options to extend or terminate at our customer's discretion. These leases generally do not contain options to purchase, material restrictions or covenants that impact our accounting for leases.
As a lessee, we lease land, buildings, vessels and equipment for the operation of our business and to support some of our service line revenue streams. These generally carry lease terms that range from days for operational and support equipment to 15 years for land and buildings. These leases are negotiated on commercial terms at market rates and many carry standard options to extend or terminate at our discretion. When the exercise of those options is reasonably certain, we include them in the lease assessment. Our leases do not contain material restrictions or covenants that impact our accounting for them, nor do we provide residual value guarantees.
As a lessee, we utilize the practical expedients to not recognize leases with an initial lease term of 12 months or less on the balance sheet and to combine lease and non-lease components together and account for the combined component as a lease for all asset classes, except real estate.
Right-of-use operating lease assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement or modification date. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate, based on the information available at commencement or modification date in determining the present value of future payments. In determining the incremental borrowing rate, we considered our external credit ratings, bond yields for us and our identified peers, the risk-free rate in geographic regions where we operate, and the impact associated with providing collateral over a similar term as the lease for an amount equal to the future lease payments. Our right-of-use operating lease assets
also include any lease prepayments made and exclude lease incentives and initial direct costs incurred. Our lease terms may include options to extend or terminate the lease. These options are included in the lease term when it is reasonably certain that we will exercise that option. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.
See Note 4—"Impairments" for more information on determination of impairment indicators for our right-of-use assets.
2. ACCOUNTING STANDARDS UPDATE
Recently Adopted Accounting Standards. On January 1, 2020, we adopted ASC 326, which introduces a new credit reserving model known as the CECL model. The adoption of ASC 326 did not materially affect our net earnings and had no impact on our cash flows. Comparative information with respect to prior periods has not been retrospectively restated and continues to be reported under the accounting standards in effect for those periods.
In August 2018, the Financial Accounting Standards Board (the "FASB") issued ASU 2018-13, “Changes to the Disclosure Requirements for Fair Value Measurement” ("ASU 2018-13"). This standard eliminated the prior requirement to disclose the amount or reason for transfers between level 1 and level 2 of the fair value hierarchy and the requirement to disclose the valuation methodology for level 3 fair value measurements. The standard added disclosure requirements for level 3 fair value measurements, including the requirement to disclose the changes in unrealized gains and losses in other comprehensive income during the period and the disclosure of other relevant quantitative information for certain unobservable inputs. The adoption of ASU 2018-13 on January 1, 2020, did not have a material impact on our disclosures.
Recently Issued Accounting Standards. In December 2019, the FASB issued ASU No. 2019-12, "Simplifying the Accounting for Income Taxes" (“ASU 2019-12”), which simplifies the accounting for income taxes, eliminates certain exceptions within ASC 740, "Income Taxes," and clarifies certain aspects of the current guidance to promote consistency among reporting entities. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020. Most amendments within the standard are required to be applied on a prospective basis, while certain amendments must be applied on a retrospective or modified retrospective basis. We are evaluating the impact and do not expect this ASU to have a material impact on our consolidated financial statements.
In March 2020, the FASB issued ASU No. 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting," which provides temporary optional expedients and exceptions to existing guidance on applying contract modifications and hedge accounting to facilitate the market transition from existing reference rates, such as the London Interbank Offered Rate (“LIBOR”), which is scheduled to be phased out in 2021, to alternate rates such as the Secured Overnight Financing Rate ("SOFR"). Entities may elect to apply the provisions of this new standard as early as March 12, 2020 until December 31, 2022, when the reference rate replacement activity is expected to be complete. We have not yet elected an adoption date. We continue to evaluate the impact and do not expect this ASU to have a material impact on our consolidated financial statements.
3. REVENUE
Revenue by Category
We recognized revenue, disaggregated by business segment, geographical region, and timing of transfer of goods or services, as follows:
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Three Months Ended
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Nine Months Ended
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(in thousands)
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Sep 30, 2020
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Sep 30, 2019 *
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Jun 30, 2020 *
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Sep 30, 2020
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Sep 30, 2019 *
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Business Segment:
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Energy Services and Products
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Subsea Robotics
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$
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119,617
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$
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151,492
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$
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119,234
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$
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378,621
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$
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432,548
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Manufactured Products
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110,416
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114,487
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100,570
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377,520
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334,488
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Offshore Projects Group
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73,212
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89,115
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73,840
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221,306
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289,193
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Integrity Management & Digital Solutions
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53,933
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65,332
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53,969
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172,631
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198,057
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Total Energy Services and Products
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357,178
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420,426
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347,613
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1,150,078
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1,254,286
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Aerospace and Defense Technologies
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82,565
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77,221
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79,603
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253,549
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233,028
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Total
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$
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439,743
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$
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497,647
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$
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427,216
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$
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1,403,627
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$
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1,487,314
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*
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Recast to reflect segment changes.
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Three Months Ended
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Nine Months Ended
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(in thousands)
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Sep 30, 2020
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Sep 30, 2019
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Jun 30, 2020
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Sep 30, 2020
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Sep 30, 2019
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Geographic Operating Areas:
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Foreign:
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Africa
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$
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43,077
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$
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73,901
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$
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51,649
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$
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158,143
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$
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222,397
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United Kingdom
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68,568
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61,914
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62,426
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191,781
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180,270
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Norway
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57,138
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59,875
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45,423
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154,745
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162,593
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Asia and Australia
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30,715
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42,662
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37,122
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113,517
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127,211
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Brazil
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19,296
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25,404
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19,117
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64,902
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66,825
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Other
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22,071
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14,178
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22,625
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69,355
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63,734
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Total Foreign
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240,865
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277,934
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238,362
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752,443
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823,030
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United States
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198,878
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219,713
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188,854
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651,184
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664,284
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Total
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$
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439,743
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$
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497,647
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$
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427,216
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$
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1,403,627
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$
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1,487,314
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Timing of Transfer of Goods or Services:
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Revenue recognized over time
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$
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411,809
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$
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460,029
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$
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396,773
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$
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1,306,889
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$
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1,377,211
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Revenue recognized at a point in time
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27,934
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37,618
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30,443
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96,738
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110,103
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Total
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$
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439,743
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$
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497,647
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$
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427,216
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$
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1,403,627
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$
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1,487,314
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Contract Balances
Our contracts with milestone payments have, in the aggregate, a significant impact on the contract asset and the contract liability balances. Milestones are contractually agreed with customers and relate to significant events across the contract lives. Some milestones are achieved before revenue is recognized, resulting in a contract liability, while other milestones are achieved after revenue is recognized, resulting in a contract asset.
The following table provides information about contract assets and contract liabilities from contracts with customers:
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(in thousands)
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Sep 30, 2020
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Dec 31, 2019
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Contract assets
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$
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220,760
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$
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221,288
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Contract liabilities
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45,566
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117,342
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Our payment terms consist of those services billed regularly as provided and those products delivered at a point in time, which are invoiced after the performance obligation is satisfied. Our product and service contracts with milestone payments due at agreed progress points during the contract are invoiced when those milestones are reached, which may differ from the timing of revenue recognition.
During the nine months ended September 30, 2020, contract assets decreased by $0.5 million from the balance at December 31, 2019, due to the timing of billings of approximately $1.272 billion exceeding revenue earned of $1.271 billion. Contract liabilities decreased $72 million from the balance at December 31, 2019, due to revenue recognition of $118 million in excess of deferrals of milestone payments that totaled $46 million. There were no cancellations, impairments or other significant impacts in the period that relate to other categories of explanation.
Performance Obligations
As of September 30, 2020, the aggregate amount of the transaction price allocated to remaining performance obligations was $226 million. In arriving at this value, we have used two practical expedients available to us and are not disclosing amounts in relation to performance obligations: (1) that are part of contracts with an original expected duration of one year or less; or (2) on contracts where we recognize revenue in line with the billing. Of this amount, we expect to recognize revenue of $177 million over the next 12 months, and we expect to recognize substantially all of the remaining balance of $48 million within the next 24 months.
Due to the nature of our service contracts in our Subsea Robotics, Offshore Projects Group, Integrity Management & Digital Solutions ("IMDS") and Aerospace and Defense Technologies ("ADTech") segments, the majority of our contracts either have initial contract terms of one year or less or have customer option cancellation clauses that lead us to consider the original expected duration of one year or less.
In our Manufactured Products and ADTech segments, we have long-term contracts that extend beyond one year, and these make up the majority of the performance obligations balance reported as of September 30, 2020. We also have shorter-term product contracts with an expected original duration of one year or less that have been excluded.
Where appropriate, we have made estimates within the transaction price of elements of variable consideration within the contracts and constrained those amounts to a level where we consider it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. The amount of revenue recognized in the three months ended September 30, 2020 that was associated with performance obligations completed or partially completed in prior periods was not significant.
As of September 30, 2020, there were no significant outstanding liability balances for refunds or returns due to the nature of our contracts and the services and products we provide. Our warranties are limited to assurance warranties that are of a standard length and are not considered to be material rights. The majority of our contracts consist of a single performance obligation. When there are multiple obligations, we look for observable evidence of stand-alone selling prices on which to base the allocation. This involves judgment as to the appropriateness of the observable evidence relating to the facts and circumstances of the contract. If we do not have observable evidence, we estimate stand-alone selling prices by taking a cost-plus-margin approach, using typical margins from the type of product or service, customer and regional geography involved.
Costs to Obtain or Fulfill a Contract
In line with the available practical expedient, we capitalize costs to obtain a contract when those amounts are significant and the contract is expected at inception to exceed one year in duration. Otherwise, the costs are expensed in the period when incurred. Costs to obtain a contract primarily consist of bid and proposal costs, which are incremental to our fixed costs. There were no balances or amortization of costs to obtain a contract in the current reporting periods.
Costs to fulfill a contract primarily consist of certain mobilization costs incurred to provide services or products to our customers. These costs are deferred and amortized over the period of contract performance. The closing balance of costs to fulfill a contract was $9.6 million and $15 million as of September 30, 2020 and December 31, 2019, respectively. For the three- and nine-month periods ended September 30, 2020, we recorded amortization expense of $1.5 million and $5.3 million, respectively. For the three- and nine-month periods ended September 30, 2019, we recorded amortization expense of $1.9 million and $6.2 million, respectively. No impairment costs were recognized.
4. IMPAIRMENTS
In the third quarter of 2020, we changed our organizational structure as part of the transformation to realign our businesses to achieve greater cost efficiencies. This resulted in changes in our operating segments and reporting units. Beginning with the three months ended September 30, 2020, we are reporting our financial results consistent with our newly realigned operating segments and have recast certain prior period amounts presented to reflect these changes. For information regarding our new business segments, see Note 10–"Business Segment Information."
Goodwill
After reallocation of our goodwill to our new segments in the third quarter of 2020, we determined that impairment indicators were present and performed quantitative analyses for our Subsea Robotics and Manufactured Products reporting units. Based on these quantitative analyses, the fair value was determined to be less than the carrying value for our Manufactured Products unit, but not for our Subsea Robotics reporting unit. As a result, for our Manufactured Products unit, we recorded a pre-tax goodwill impairment loss of $41 million.
During the first quarter of 2020, due to the protracted energy downturn compounded by demand destruction resulting from the adverse impacts of the COVID-19 pandemic and insufficient control of crude oil supply levels during the quarter, as well as our customers' continued focus on cost discipline, we determined that impairment indicators were present and we were required to perform a quantitative analysis for our Subsea Products–Service, Technology and Rentals ("ST&R"), Subsea Products–Manufactured Products, Subsea Projects, Asset Integrity and Advanced Technologies–Commercial reporting units. Based on these quantitative analyses, the fair value was determined to be less than the carrying value for each of those reporting units, with the exception of Subsea Products–Manufactured Products. As a result, for our Subsea Products–ST&R, Subsea Projects, Asset Integrity and Advanced Technologies–Commercial reporting units, we recorded pre-tax goodwill impairment losses of $51 million, $130 million, $111 million and $11 million, respectively. For our Remotely Operated Vehicles ("ROV") and Advanced Technologies–Government reporting units, qualitative assessments were performed; and we concluded that it was more likely than not the fair value of the reporting units were more than the carrying values of the respective reporting units and, therefore, no impairments were recorded for those reporting units.
Our estimates of fair values for our reporting units determined in the first and third quarters of 2020 required us to use significant unobservable inputs, classified as Level 3 fair value measurements, including assumptions related to future performance, risk-adjusted discount rates, future commodity prices and demand for our services and estimates of expected realizable values. For our cash flow projections in each of those periods, we utilized a weighted-average cost of capital ranging from 11% to 15% and a terminal value based on the Gordon Growth Model, assuming an expected long-term growth rate of 2%.
Our third quarter 2020 change in our operating segments resulted in one reporting unit for each of our new segments. The following table reflects goodwill impairments as recorded in the three-month period ended March 31, 2020, and allocated, based on historical cost, in the third quarter of 2020 to the reporting segments in our new organizational structure:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2020
|
|
(in thousands)
|
|
As originally recorded
|
|
As recast to reflect segment changes
|
|
Segment/Reporting Unit
|
|
Goodwill Impairment
|
|
Subsea Robotics
|
|
Manufactured Products
|
|
Offshore Projects Group
|
|
IMDS
|
|
Total
|
|
Subsea Products/ST&R
|
|
$
|
51,302
|
|
|
$
|
17,457
|
|
|
$
|
—
|
|
|
$
|
33,845
|
|
|
$
|
—
|
|
|
$
|
51,302
|
|
|
Subsea Projects/Subsea Projects
|
|
129,562
|
|
|
84,661
|
|
|
—
|
|
|
32,440
|
|
|
12,461
|
|
|
129,562
|
|
|
Asset Integrity/Asset Integrity
|
|
110,753
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
110,753
|
|
|
110,753
|
|
|
Advanced Technologies/Commercial
|
|
11,388
|
|
|
—
|
|
|
11,388
|
|
|
—
|
|
|
—
|
|
|
11,388
|
|
|
|
Total goodwill impairment
|
|
$
|
303,005
|
|
|
$
|
102,118
|
|
|
$
|
11,388
|
|
|
$
|
66,285
|
|
|
$
|
123,214
|
|
|
$
|
303,005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We did not identify any triggering events in the three- and nine-month periods ended September 30, 2019 and no impairments of goodwill were recorded in those periods.
Aside from the goodwill impairments discussed above, the changes in our reporting units' goodwill balances during the periods presented are from currency exchange rate changes.
For further information regarding goodwill by business segment, see Note 10–"Business Segment Information."
Property and Equipment and Intangible Assets
After reallocation of our long-lived assets to our new segments in the third quarter of 2020, we determined that impairment indicators were present and performed a quantitative assessment for our Manufactured Products asset groups. Based on that assessment, we concluded that it was more likely than not that the fair value of the asset groups within Manufactured Products was more than the carrying value of each asset group and, therefore, no impairment was required. We did not identify any triggering events for our asset groups other than those included in Manufactured Products during the third quarter of 2020.
During the first quarter of 2020, due to the protracted energy downturn compounded by demand destruction resulting from the adverse impacts of the COVID-19 pandemic and insufficient control of crude oil supply levels during the quarter, as well as our customers' continued focus on cost discipline, we determined that impairment indicators were present within certain of our asset groups. To measure market value for these asset groups, we used the following approaches:
•Subsea Distribution Solutions U.K. - We utilized the cost approach and considered economic obsolescence under the income approach to determine fair value of the property and equipment.
•Subsea Distribution Solutions Brazil and Angola - We utilized a combination of market and cost approaches to measure fair values.
•Shallow Water vessels - We utilized the cost approach and considered historical, current and anticipated dayrates and utilization to measure market value.
•Renewables and Special Projects - We utilized a combination of market and cost approaches to measure fair values.
•Oceaneering Entertainment Systems and Oceaneering AGV Systems - We utilized a combination of market and cost approaches to measure fair value.
Our estimates of fair values for these asset groups required us to use significant unobservable inputs, classified as Level 3 fair value measurements, including assumptions related to future performance, risk-adjusted discount rates, future commodity prices and demand for our services and estimates of expected realizable value. In the first quarter of 2020, our cash flow projections utilized a weighted-average cost of capital ranging from 12% to 15% and a terminal value based on the Gordon Growth Model, assuming an expected long-term growth rate of 2%.
Our third quarter 2020 change in operating segments did not result in any changes in our asset groups. Our reporting units with long-lived asset impairments in the three-month period ended March 31, 2020, were realigned into our new reporting segments as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2020
|
|
(in thousands)
|
|
As originally recorded
|
|
As recast to reflect segment changes
|
|
Segment/Reporting Unit
|
|
Long-lived Asset Impairments
|
|
Manufactured Products
|
|
Offshore Projects Group
|
|
IMDS
|
|
Total
|
|
Subsea Products
|
|
|
|
|
|
|
|
|
|
|
|
|
Subsea Distribution Solutions U.K.
|
|
$
|
6,543
|
|
|
$
|
6,543
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,543
|
|
|
|
Subsea Distribution Solutions Brazil
|
|
9,834
|
|
|
9,834
|
|
|
|
|
|
|
9,834
|
|
|
|
Subsea Distribution Solutions Angola
|
|
38,482
|
|
|
38,482
|
|
|
|
|
|
|
38,482
|
|
|
Subsea Projects
|
|
|
|
|
|
|
|
|
|
|
|
|
Shallow Water Vessels
|
|
3,894
|
|
|
|
|
3,894
|
|
|
|
|
3,894
|
|
|
|
Renewables and Special Projects Group
|
|
3,628
|
|
|
|
|
3,628
|
|
|
|
|
3,628
|
|
|
|
Global Data Solutions
|
|
167
|
|
|
|
|
|
|
167
|
|
|
167
|
|
|
Advanced Technologies
|
|
|
|
|
|
|
|
|
|
|
|
|
Oceaneering Entertainment Systems
|
|
5,065
|
|
|
5,065
|
|
|
|
|
|
|
5,065
|
|
|
|
Oceaneering AGV Systems
|
|
1,150
|
|
|
1,150
|
|
|
|
|
|
|
1,150
|
|
|
|
Total long-lived asset impairments
|
|
$
|
68,763
|
|
|
$
|
61,074
|
|
|
$
|
7,522
|
|
|
$
|
167
|
|
|
$
|
68,763
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We did not identify any triggering events in the three- and nine-month periods ended September 30, 2019, and no impairments of long-lived assets were recorded in those periods.
5. INCOME TAXES
Due to the economic uncertainty presented by COVID-19 and the current volatility in the oil and natural gas markets, we believe using a discrete tax provision method for the nine-month period ended September 30, 2020, based on actual earnings for the period, is a more reliable method for providing for income taxes because our annual effective tax rate as calculated under ASC 740-270 is highly sensitive to changes in estimates of total ordinary income (loss). Therefore, we do not believe a discussion of the annual effective tax rate is meaningful. The tax provision is based on (1) our earnings for the period and other factors affecting the tax provision and (2) the operations of foreign branches and subsidiaries that are subject to local income and withholding taxes. Factors that affect our tax rate include our profitability levels in general and the geographic mix in the sources of our results. The effective tax rate for the nine-month periods ended September 30, 2020 and 2019 was different than the federal statutory rate of 21%, primarily due to the 2020 enactment of the U.S. Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"), the geographic mix of operating revenue and results, and changes in uncertain tax positions and other discrete items. We continue to make an assertion to indefinitely reinvest the unrepatriated earnings of any foreign subsidiary that would incur incremental tax consequences upon the distribution of such earnings.
In the nine-month period ended September 30, 2020, we recognized a discrete tax benefit of $42 million, primarily related to a cash tax benefit of $33 million and a non-cash tax benefit of $9.9 million related to the CARES Act. These benefits are classified as an income tax receivable and a reduction in long-term liabilities, respectively. To secure these benefits, we filed a 2014 refund claim to carryback our U.S. net operating loss generated in 2019 and amended 2012 and 2013 income tax returns impacted by the net operating loss carryback. Prior to enactment of the CARES Act, such net operating losses could only be carried forward. In the nine-month period ended September 30, 2019, we recognized discrete tax expense of $5.1 million, primarily related to share-based compensation and valuation allowances.
We conduct our international operations in jurisdictions that have varying laws and regulations regarding income and other taxes, some of which are subject to interpretation. We recognize the expense or benefit for a tax position if it is more likely than not to be sustainable upon audit by the applicable taxing authority. If this threshold is met, the tax expense or benefit is then measured and recognized at the largest amount that we believe is greater than 50% likely of being realized upon ultimate settlement. We will continue to monitor this legislation as subsequent actions could postpone, modify or suspend these changes.
Our tax expense for the quarter ending September 30, 2020, was impacted by changes in the corporate income tax and withholding tax laws in Angola enacted during the quarter. The Angola Corporate Income Tax (CIT) Code was amended by Law No. 26/2020, on July 20, 2020 with enforcement beginning on August 20, 2020. Among other
changes, the new law decreased the corporate income tax rate from 30% to 25% and increased the withholding tax rate on certain payments made to entities not resident to Angola from 6.5% to 15%.
We have accrued a net total of $12 million and $21 million in other long-term liabilities on our balance sheet for worldwide unrecognized tax liabilities as of September 30, 2020 and December 31, 2019, respectively. We account for any applicable interest and penalties related to uncertain tax positions as a component of our provision for income taxes on our financial statements. Changes in management's judgment related to those liabilities would affect our effective income tax rate in the periods of change.
Our tax returns are subject to audit by taxing authorities in multiple jurisdictions. These audits often take years to complete and settle. The following table lists the earliest tax years open to examination by tax authorities where we have significant operations:
|
|
|
|
|
|
|
|
|
|
|
Jurisdiction
|
|
Periods
|
|
United States
|
|
2014
|
|
United Kingdom
|
|
2018
|
|
Norway
|
|
2015
|
|
Angola
|
|
2013
|
|
Brazil
|
|
2015
|
|
|
|
|
We have ongoing tax audits in various jurisdictions. The outcome of these audits may have an impact on uncertain tax positions for income tax returns subsequently filed in those jurisdictions.
6. SELECTED BALANCE SHEET INFORMATION
The following is information regarding selected balance sheet accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Sep 30, 2020
|
|
Dec 31, 2019
|
|
Inventory:
|
|
|
|
|
|
|
Remotely operated vehicle parts and components
|
|
$
|
68,957
|
|
|
$
|
76,120
|
|
|
|
Other inventory, primarily raw materials
|
|
79,570
|
|
|
98,624
|
|
|
|
Total
|
|
$
|
148,527
|
|
|
$
|
174,744
|
|
|
|
|
|
|
|
|
|
Other current assets:
|
|
|
|
|
|
|
Prepaid expenses
|
|
$
|
55,960
|
|
|
$
|
43,210
|
|
|
|
Angolan bonds
|
|
10,179
|
|
|
10,179
|
|
|
|
Total
|
|
$
|
66,139
|
|
|
$
|
53,389
|
|
|
|
|
|
|
|
|
|
Accrued liabilities:
|
|
|
|
|
|
|
Payroll and related costs
|
|
$
|
120,117
|
|
|
$
|
137,001
|
|
|
|
Accrued job costs
|
|
40,662
|
|
|
54,387
|
|
|
|
Income taxes payable
|
|
33,986
|
|
|
36,996
|
|
|
|
Current operating lease liability
|
|
20,481
|
|
|
19,863
|
|
|
|
Other
|
|
73,882
|
|
|
89,434
|
|
|
|
Total
|
|
$
|
289,128
|
|
|
$
|
337,681
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7. DEBT
Long-term debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Sep 30, 2020
|
|
Dec 31, 2019
|
|
4.650% Senior Notes due 2024
|
|
$
|
500,000
|
|
|
$
|
500,000
|
|
|
6.000% Senior Notes due 2028
|
|
300,000
|
|
|
300,000
|
|
|
Fair value of interest rate swaps on $200 million of principal
|
|
—
|
|
|
3,235
|
|
|
Interest rate swap settlements
|
|
11,525
|
|
|
—
|
|
|
Unamortized debt issuance costs
|
|
(5,894)
|
|
|
(6,719)
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
805,631
|
|
|
$
|
796,516
|
|
In November 2014, we completed the public offering of $500 million aggregate principal amount of 4.650% Senior Notes due 2024 (the "2024 Senior Notes"). We pay interest on the 2024 Senior Notes on May 15 and November 15 of each year. The 2024 Senior Notes are scheduled to mature on November 15, 2024.
In February 2018, we completed the public offering of $300 million aggregate principal amount of 6.000% Senior Notes due 2028 (the "2028 Senior Notes"). We pay interest on the 2028 Senior Notes on February 1 and August 1 of each year. The 2028 Senior Notes are scheduled to mature on February 1, 2028.
We may redeem some or all of the 2024 Senior Notes and the 2028 Senior Notes (collectively, the "Senior Notes") at specified redemption prices.
In October 2014, we entered into a credit agreement (as amended, the "Credit Agreement") with a group of banks. The Credit Agreement initially provided for a $500 million five-year revolving credit facility (the "Revolving Credit Facility"). Subject to certain conditions, the aggregate commitments under the Revolving Credit Facility may be increased by up to $300 million at any time upon agreement between us and existing or additional lenders. Borrowings under the Revolving Credit Facility may be used for general corporate purposes. The Credit Agreement also provided for a $300 million term loan, which we repaid in full in February 2018, using net proceeds from the issuance of our 2028 Senior Notes referred to above, and cash on hand.
In February 2018, we entered into Agreement and Amendment No. 4 to the Credit Agreement ("Amendment No. 4"). Amendment No. 4 amended the Credit Agreement to, among other things, extend the maturity of the Revolving Credit Facility to January 25, 2023 with the extending lenders, which represent 90% of the existing commitments of the lenders, such that the total commitments for the Revolving Credit Facility will be $500 million until October 25, 2021, and thereafter $450 million until January 25, 2023. As of September 30, 2020, we had no borrowings outstanding under the Revolving Credit Facility.
Borrowings under the Revolving Credit Facility bear interest at an Adjusted Base Rate or the Eurodollar Rate (both as defined in the Credit Agreement), at our option, plus an applicable margin based on our Leverage Ratio (as defined in the Credit Agreement) and, at our election, based on the ratings of our senior unsecured debt by designated ratings services, thereafter to be based on such debt ratings. The applicable margin varies: (1) in the case of advances bearing interest at the Adjusted Base Rate, from 0.125% to 0.750%; and (2) in the case of advances bearing interest at the Eurodollar Rate, from 1.125% to 1.750%. The Adjusted Base Rate is the highest of (1) the per annum rate established by the administrative agent as its prime rate, (2) the federal funds rate plus 0.50% and (3) the daily one-month LIBOR plus 1%. We pay a commitment fee ranging from 0.125% to 0.300% on the unused portion of the Revolving Credit Facility, depending on our Leverage Ratio. The commitment fees are included as interest expense in our consolidated financial statements.
The Credit Agreement contains various covenants that we believe are customary for agreements of this nature, including, but not limited to, restrictions on our ability and the ability of each of our subsidiaries to incur debt, grant liens, make certain investments, make distributions, merge or consolidate, sell assets and enter into certain restrictive agreements. We are also subject to a maximum adjusted total Capitalization Ratio (as defined in the Credit Agreement) of 55%. The Credit Agreement includes customary events of default and associated remedies. As of September 30, 2020, we were in compliance with all the covenants set forth in the Credit Agreement.
We had two interest rate swaps in place relating to a total of $200 million of the 2024 Senior Notes for the period to November 2024. The agreements swapped the fixed interest rate of 4.65% on $100 million of the 2024 Senior Notes to the floating rate of one-month LIBOR plus 2.426% and on another $100 million to one-month LIBOR plus 2.823%. In March 2020, we settled both interest rate swaps with the counterparty for cash proceeds of $13 million. The settlement resulted in a $13 million adjustment to increase our long-term debt balance that will be amortized to
interest expense prospectively through the maturity date for the 2024 Senior Notes using the effective interest method. As a result, we amortized $0.6 million and $1.3 million to interest expense for the three- and nine-month periods ended September 30, 2020, respectively.
We incurred $6.9 million and $4.2 million of issuance costs related to the 2024 Senior Notes and the 2028 Senior Notes, respectively, and $3.0 million of loan costs, including costs of the amendments prior to Amendment No. 4, related to the Credit Agreement. The costs, net of accumulated amortization, are included as a reduction of long-term debt on our Consolidated Balance Sheets, as they pertain to the Senior Notes, and in other noncurrent assets, as they pertain to the Credit Agreement. We are amortizing these costs to interest expense through the respective maturity dates for the Senior Notes and to January 2023 for the Credit Agreement.
8. COMMITMENTS AND CONTINGENCIES
Litigation. In the ordinary course of business, we are, from time to time, involved in litigation or subject to disputes, governmental investigations or claims related to our business activities, including, among other things:
•performance- or warranty-related matters under our customer and supplier contracts and other business arrangements; and
•workers’ compensation claims, Jones Act claims, occupational hazard claims, premises liability claims and other claims.
Although we cannot predict the ultimate outcome of these matters, we believe that our ultimate liability, if any, that may result from these other actions and claims will not have a material adverse effect on our consolidated financial condition, results of operations or cash flows. However, because of the inherent uncertainty of litigation and other dispute resolution proceedings and, in some cases, the availability and amount of potentially available insurance, we can provide no assurance that the resolution of any particular claim or proceeding to which we are a party will not have a material effect on our consolidated financial condition, results of operations or cash flows for the fiscal period in which that resolution occurs.
Financial Instruments and Risk Concentration. In the normal course of business, we manage risks associated with foreign exchange rates and interest rates through a variety of strategies, including the use of hedging transactions. As a matter of policy, we do not use derivative instruments unless we have an underlying exposure. Other financial instruments that potentially subject us to concentrations of credit risk are principally cash and cash equivalents and accounts receivable.
The carrying values of cash and cash equivalents approximate their fair values due to the short-term maturity of the underlying instruments. Accounts receivable are generated from a broad group of customers, primarily from within the energy industry, which is our major source of revenue. Due to their short-term nature, carrying values of our accounts receivable and accounts payable approximate fair market values.
We estimated the aggregate fair market value of the Senior Notes to be $571 million as of September 30, 2020, based on quoted prices. Since the market for the Senior Notes is not an active market, the fair value of the Senior Notes is classified within Level 2 in the fair value hierarchy under U.S. GAAP (inputs other than quoted prices in active markets for similar assets and liabilities that are observable or can be corroborated by observable market data for substantially the full terms for the assets or liabilities).
As our functional currency in Angola and Brazil is the U.S. dollar, we recorded foreign currency transaction losses related to the Angolan kwanza and Brazilian real as a component of other income (expense), net in our Consolidated Statements of Operations. Foreign currency losses related to the Angolan kwanza of less than $0.1 million and $2.0 million in the three-month periods ended September 30, 2020 and 2019, respectively, and $2.2 million and $2.6 million in the nine-month periods ended September 30, 2020 and 2019, respectively, were primarily due to the remeasurement of our Angolan kwanza cash balances to U.S. dollars. Foreign currency losses related to the Brazilian real of $0.7 million and $1.3 million in the three-month periods ended September 30, 2020 and 2019, respectively, and $8.4 million and $1.0 million in the nine-month periods ended September 30, 2020 and 2019, respectively, were primarily due to the remeasurement of our Brazilian real liability balances to U.S. dollars.
Any conversion of cash balances from kwanza to U.S. dollars is controlled by the central bank in Angola. As of September 30, 2020 and December 31, 2019, we had the equivalent of approximately $9.4 million and $6.2 million, respectively, of kwanza cash balances in Angola reflected on our Consolidated Balance Sheets.
To mitigate our currency exposure risk in Angola, we have used kwanza to purchase equivalent Angolan central bank (Banco Nacional de Angola) bonds. The bonds are denominated as U.S. dollar equivalents, so that, upon payment of semi-annual interest and principal upon maturity, payment is made in kwanza, equivalent to the respective U.S. dollars at the then-current exchange rate. As of September 30, 2020 and December 31, 2019, we had $10 million of Angolan bonds on our Consolidated Balance Sheets. Because we intend to sell the bonds if we are able to repatriate the proceeds, we have classified these bonds as available-for-sale securities, and they are recorded in other current assets on our Consolidated Balance Sheets.
We estimated the fair market value of the Angolan bonds to be $10 million as of September 30, 2020 and December 31, 2019 using quoted market prices. Since the market for the Angolan bonds is not an active market, the fair value of the Angolan bonds is classified within Level 2 in the fair value hierarchy under U.S. GAAP.
9. EARNINGS (LOSS) PER SHARE, SHARE-BASED COMPENSATION AND SHARE REPURCHASE PLAN
Earnings (Loss) per Share. For each period presented, the only difference between our calculated weighted-average basic and diluted number of shares outstanding is the effect of outstanding restricted stock units. In periods where we have a net loss, the effect of our outstanding restricted stock units is anti-dilutive, and therefore does not increase our diluted shares outstanding.
For each period presented, our net income (loss) allocable to both common shareholders and diluted common shareholders is the same as our net income (loss) in our consolidated statements of operations.
Share-Based Compensation. We have no outstanding stock options and, therefore, no share-based compensation to be recognized pursuant to stock option grants.
During 2018, 2019 and through September 30, 2020, we granted restricted units of our common stock to certain of our key executives and employees. During 2018, 2019 and 2020, our Board of Directors granted restricted common stock to our nonemployee directors. The restricted stock units granted to our key executives and key employees generally vest in full on the third anniversary of the award date, conditional on continued employment. The restricted stock unit grants can vest pro rata over three years, provided the individual meets certain age and years-of-service requirements. The shares of restricted stock we grant to our nonemployee directors vest in full on the first anniversary of the award date, conditional on continued service as a director. Each grantee of shares of restricted stock is deemed to be the record owner of those shares during the restriction period, with the right to vote and receive any dividends on those shares. The restricted stock units outstanding have no voting or dividend rights.
For each of the restricted stock units granted in 2018 through September 30, 2020, at the earlier of three years after grant or at termination of employment or service, the grantee will be issued one share of our common stock for each unit vested. As of September 30, 2020 and December 31, 2019, respective totals of 1,987,964 and 1,741,335 shares of restricted stock and restricted stock units were outstanding.
We estimate that share-based compensation cost not yet recognized related to shares of restricted stock or restricted stock units, based on their grant-date fair values, was $11 million as of September 30, 2020. This expense is being recognized on a graded-vesting basis over three years for awards attributable to individuals meeting certain age and years-of-service requirements, and on a straight-line basis over the applicable vesting period of one or three years for the other awards.
Share Repurchase Plan. In December 2014, our Board of Directors approved a plan to repurchase up to 10 million shares of our common stock. Under this plan, in 2015, we repurchased 2.0 million shares. We have not repurchased any shares under this plan since 2015. We account for the shares we hold in treasury under the cost method, at average cost.
10. BUSINESS SEGMENT INFORMATION
We are a global provider of engineered services and products, primarily to the offshore energy industry. Through the use of our applied technology expertise, we also serve the defense, aerospace and commercial theme park industries.
In the third quarter of 2020, we changed our organizational structure as part of the transformation to realign our businesses to achieve greater cost efficiencies. As a result, information that our chief operating decision maker
regularly reviews changed. Therefore, beginning with results for the three months ended September 30, 2020, we are reporting our financial results consistent with our newly realigned operating segments and have recast certain prior period amounts to conform to the way we internally manage our businesses and monitor segment performance. Our new structure aligns our company around five reportable segments: (1) Subsea Robotics; (2) Manufactured Products; (3) Offshore Projects Group; (4) Integrity Management & Digital Solutions; and (5) Aerospace and Defense Technologies.
Our Energy Services and Products business leverages our asset base and capabilities for providing services and products for offshore energy operations, inclusive of the offshore renewable energy market. Our Energy Services and Products segments are:
•Subsea Robotics—Our Subsea Robotics segment consists of our prior ROV segment, plus ROV tooling (previously in our Subsea Products segment) and survey services (previously in our Subsea Projects segment). Our Subsea Robotics segment provides the following:
◦ROVs for drilling support and vessel-based services, including subsea hardware installation, construction, pipeline inspection, survey and facilities inspection, maintenance and repair;
◦ROV tooling; and
◦survey services, including hydrographic survey and positioning services and autonomous underwater vehicles for geoscience.
•Manufactured Products—Our Manufactured Products segment consists of our prior Manufactured Products Business unit (previously in our Subsea Products segment) plus commercial theme park entertainment systems and automated guided vehicle technology (previously in our Advanced Technologies segment). Our Manufactured Products segment provides the following:
◦distribution and connection systems including production control umbilicals and field development hardware and pipeline connection and repair systems to the energy industry; and
◦automated guided vehicle technology and entertainment systems to a variety of industries.
•Offshore Projects Group—Our Offshore Projects Group segment consists of our prior Subsea Projects segment less survey services, maritime shipping and global data solutions (“GDS”) plus our Service and Rental business unit (previously in our Subsea Products segment). Our Offshore Projects Group segment provides the following:
◦project management, subsea installation and intervention, inspection, maintenance and repair services, principally in the U.S. Gulf of Mexico and offshore Angola, utilizing owned and charter vessels;
◦riserless light well intervention services;
◦installation and workover control systems; and
◦seabed preparation, route clearance and trenching services for submarine cables for the renewable energy markets.
•Integrity Management & Digital Solutions ("IMDS")—Our IMDS segment consists of our prior Asset Integrity segment plus maritime shipping and GDS (previously in our Subsea Projects segment). Our IMDS segment provides the following:
◦asset integrity management services;
◦software and analytical solutions for the bulk cargo maritime industry; and
◦software, digital and connectivity solutions for the energy industry.
Our Aerospace and Defense Technologies ("ADTech") segment consists of our prior Government business unit (previously in our Advanced Technologies segment). Our ADTech segment provides services and products include engineering and related manufacturing in defense and space exploration activities, principally to U.S. Government agencies and their prime contractors.
Unallocated Expenses are those not associated with a specific business segment. These consist of expenses related to our incentive and deferred compensation plans, including restricted stock and bonuses, as well as other general expenses, including corporate administrative expenses.
The following table presents revenue, income (loss) from operations and depreciation and amortization expense by business segment for each of the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
(in thousands)
|
|
Sep 30, 2020
|
|
Sep 30, 2019 *
|
|
Jun 30, 2020 *
|
|
Sep 30, 2020
|
|
Sep 30, 2019 *
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
Energy Services and Products
|
|
|
|
|
|
|
|
|
|
|
|
Subsea Robotics
|
|
$
|
119,617
|
|
|
$
|
151,492
|
|
|
$
|
119,234
|
|
|
$
|
378,621
|
|
|
$
|
432,548
|
|
|
Manufactured Products
|
|
110,416
|
|
|
114,487
|
|
|
100,570
|
|
|
377,520
|
|
|
334,488
|
|
|
Offshore Projects Group
|
|
73,212
|
|
|
89,115
|
|
|
73,840
|
|
|
221,306
|
|
|
289,193
|
|
|
Integrity Management & Digital Solutions
|
|
53,933
|
|
|
65,332
|
|
|
53,969
|
|
|
172,631
|
|
|
198,057
|
|
|
Total Energy Services and Products
|
|
357,178
|
|
|
420,426
|
|
|
347,613
|
|
|
1,150,078
|
|
|
1,254,286
|
|
|
Aerospace and Defense Technologies
|
|
82,565
|
|
|
77,221
|
|
|
79,603
|
|
|
253,549
|
|
|
233,028
|
|
|
Total
|
|
$
|
439,743
|
|
|
$
|
497,647
|
|
|
$
|
427,216
|
|
|
$
|
1,403,627
|
|
|
$
|
1,487,314
|
|
|
Income (Loss) from Operations
|
|
|
|
|
|
|
|
|
|
|
|
Energy Services and Products
|
|
|
|
|
|
|
|
|
|
|
|
Subsea Robotics
|
|
$
|
2,127
|
|
|
$
|
15,457
|
|
|
$
|
11,662
|
|
|
$
|
(80,294)
|
|
|
$
|
33,277
|
|
|
Manufactured Products
|
|
(38,198)
|
|
|
(2,158)
|
|
|
3,865
|
|
|
(100,471)
|
|
|
1,070
|
|
|
Offshore Projects Group
|
|
(12,282)
|
|
|
(34)
|
|
|
(4,135)
|
|
|
(95,740)
|
|
|
(2,792)
|
|
|
Integrity Management & Digital Solutions
|
|
793
|
|
|
(1,721)
|
|
|
(1,825)
|
|
|
(122,567)
|
|
|
(3,669)
|
|
|
Total Energy Services and Products
|
|
(47,560)
|
|
|
11,544
|
|
|
9,567
|
|
|
(399,072)
|
|
|
27,886
|
|
|
Aerospace and Defense Technologies
|
|
13,097
|
|
|
11,709
|
|
|
13,430
|
|
|
39,498
|
|
|
30,214
|
|
|
Unallocated Expenses
|
|
(26,157)
|
|
|
(28,447)
|
|
|
(28,179)
|
|
|
(86,985)
|
|
|
(94,643)
|
|
|
Total
|
|
$
|
(60,620)
|
|
|
$
|
(5,194)
|
|
|
$
|
(5,182)
|
|
|
$
|
(446,559)
|
|
|
$
|
(36,543)
|
|
|
Depreciation and Amortization, including Goodwill Impairment
|
|
|
|
|
|
|
|
|
|
|
|
Energy Services and Products
|
|
|
|
|
|
|
|
|
|
|
|
Subsea Robotics
|
|
$
|
25,144
|
|
|
$
|
31,090
|
|
|
$
|
25,080
|
|
|
$
|
189,411
|
|
|
$
|
95,917
|
|
|
Manufactured Products
|
|
44,028
|
|
|
4,920
|
|
|
3,587
|
|
|
63,579
|
|
|
14,953
|
|
|
Offshore Projects Group
|
|
15,147
|
|
|
10,610
|
|
|
8,255
|
|
|
98,309
|
|
|
30,758
|
|
|
Integrity Management & Digital Solutions
|
|
866
|
|
|
2,087
|
|
|
757
|
|
|
125,966
|
|
|
6,170
|
|
|
Total Energy Services and Products
|
|
85,185
|
|
|
48,707
|
|
|
37,679
|
|
|
477,265
|
|
|
147,798
|
|
|
Aerospace and Defense Technologies
|
|
654
|
|
|
640
|
|
|
658
|
|
|
1,999
|
|
|
1,998
|
|
|
Unallocated Expenses
|
|
1,712
|
|
|
1,220
|
|
|
361
|
|
|
3,181
|
|
|
3,561
|
|
|
Total
|
|
$
|
87,551
|
|
|
$
|
50,567
|
|
|
$
|
38,698
|
|
|
$
|
482,445
|
|
|
$
|
153,357
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* Recast to reflect segment changes.
|
|
|
|
|
|
|
|
|
|
|
We determine Income (Loss) from Operations for each business segment before interest income or expense, other income (expense) and provision for income taxes. We do not consider an allocation of these items to be practical.
Income (Loss) from Operations
Three Months Ended September 30, 2020—During the three-month period ended September 30, 2020, we recorded adjustments attributable to each of our reporting segments as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended September 30, 2020
|
|
(in thousands)
|
|
Subsea Robotics
|
|
Manufactured Products
|
|
Offshore Projects Group
|
|
IMDS
|
|
ADTech
|
|
Unallocated Expenses
|
|
Total
|
|
Adjustments for the effects of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-lived assets write-offs
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
7,243
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
7,243
|
|
|
|
Inventory write-downs
|
|
7,038
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
7,038
|
|
|
|
Goodwill impairment
|
|
—
|
|
|
40,875
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
40,875
|
|
|
|
Other
|
|
2,535
|
|
|
2,559
|
|
|
5,326
|
|
|
83
|
|
|
545
|
|
|
—
|
|
|
11,048
|
|
|
|
|
Total of adjustments
|
|
$
|
9,573
|
|
|
$
|
43,434
|
|
|
$
|
12,569
|
|
|
$
|
83
|
|
|
$
|
545
|
|
|
$
|
—
|
|
|
$
|
66,204
|
|
Nine Months Ended September 30, 2020—During the nine-month period ended September 30, 2020, we recorded adjustments attributable to each of our reporting segments as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended September 30, 2020
|
|
(in thousands)
|
|
Subsea Robotics
|
|
Manufactured Products
|
|
Offshore Projects Group
|
|
IMDS
|
|
ADTech
|
|
Unallocated Expenses
|
|
Total
|
|
Adjustments for the effects of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-lived assets impairments
|
|
$
|
—
|
|
|
$
|
61,074
|
|
|
$
|
7,522
|
|
|
$
|
167
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
68,763
|
|
|
|
Long-lived assets write-offs
|
|
7,328
|
|
|
—
|
|
|
7,243
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
14,571
|
|
|
|
Inventory write-downs
|
|
7,038
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
7,038
|
|
|
|
Goodwill impairment
|
|
102,118
|
|
|
52,263
|
|
|
66,285
|
|
|
123,214
|
|
|
—
|
|
|
—
|
|
|
343,880
|
|
|
|
Other
|
|
4,834
|
|
|
5,755
|
|
|
7,947
|
|
|
3,850
|
|
|
545
|
|
|
455
|
|
|
23,386
|
|
|
|
|
Total of adjustments
|
|
$
|
121,318
|
|
|
$
|
119,092
|
|
|
$
|
88,997
|
|
|
$
|
127,231
|
|
|
$
|
545
|
|
|
$
|
455
|
|
|
$
|
457,638
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and Amortization, including Goodwill Impairment
Depreciation expense on property and equipment, reflected in Depreciation and Amortization, including Goodwill Impairment in the table above, was $36 million, $47 million and $38 million in the three-month periods ended September 30, 2020 and 2019 and June 30, 2020, respectively, and $117 million and $145 million in the nine-month periods ended September 30, 2020 and 2019, respectively.
Amortization expense on long-lived intangible assets, reflected in Depreciation and Amortization, including Goodwill Impairment in the table above, was $3.5 million, $3.2 million and $0.8 million in the three-month periods ended September 30, 2020 and 2019 and June 30, 2020, respectively, and $6.9 million and $8.8 million in the nine-month periods ended September 30, 2020 and 2019, respectively.
Goodwill impairment expense, reflected in Depreciation and Amortization, including Goodwill Impairment in the table above, was $41 million and $344 million, in the three-month and nine-month periods ended September 30, 2020, respectively. For further information regarding goodwill impairment expense, see Note 4–"Impairments."
Long-lived assets write-offs, reflected in Depreciation and Amortization, including Goodwill Impairment in the table above, was $7.2 million and $15 million, in the three-month and nine-month periods ended September 30, 2020, respectively. For further information regarding our long-lived assets write-offs, see Note 4–"Impairments."
Assets, Property and Equipment, Net and Goodwill
The following table presents Assets, Property and Equipment, Net and Goodwill by business segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Sep 30, 2020
|
|
Dec 31, 2019 *
|
|
Assets
|
|
|
|
|
|
Energy Services and Products
|
|
|
|
|
|
Subsea Robotics
|
|
$
|
513,048
|
|
|
$
|
765,015
|
|
|
Manufactured Products
|
|
450,201
|
|
|
607,674
|
|
|
Offshore Projects Group
|
|
363,366
|
|
|
504,139
|
|
|
Integrity Management & Digital Solutions
|
|
84,716
|
|
|
236,137
|
|
|
Total Energy Services and Products
|
|
1,411,331
|
|
|
2,112,965
|
|
|
Aerospace and Defense Technologies
|
|
119,153
|
|
|
138,772
|
|
|
Corporate and Other
|
|
507,216
|
|
|
488,926
|
|
|
Total
|
|
$
|
2,037,700
|
|
|
$
|
2,740,663
|
|
|
Property and Equipment, Net
|
|
|
|
|
|
Energy Services and Products
|
|
|
|
|
|
Subsea Robotics
|
|
$
|
262,747
|
|
|
$
|
336,038
|
|
|
Manufactured Products
|
|
95,157
|
|
|
151,259
|
|
|
Offshore Projects Group
|
|
218,900
|
|
|
255,425
|
|
|
Integrity Management & Digital Solutions
|
|
11,917
|
|
|
13,403
|
|
|
Total Energy Services and Products
|
|
588,721
|
|
|
756,125
|
|
|
Aerospace and Defense Technologies
|
|
8,083
|
|
|
9,574
|
|
|
Corporate and Other
|
|
12,622
|
|
|
10,833
|
|
|
Total
|
|
$
|
609,426
|
|
|
$
|
776,532
|
|
|
Goodwill
|
|
|
|
|
|
Energy Services and Products
|
|
|
|
|
|
Subsea Robotics
|
|
$
|
24,105
|
|
|
$
|
129,402
|
|
|
Manufactured Products
|
|
—
|
|
|
52,828
|
|
|
Offshore Projects Group
|
|
—
|
|
|
73,352
|
|
|
Integrity Management & Digital Solutions
|
|
—
|
|
|
139,043
|
|
|
Total Energy Services and Products
|
|
24,105
|
|
|
394,625
|
|
|
Aerospace and Defense Technologies
|
|
10,454
|
|
|
10,454
|
|
|
Total
|
|
$
|
34,559
|
|
|
$
|
405,079
|
|
|
|
|
|
|
|
|
* Recast to reflect segment changes.
|
|
|
|
|