Surface Technologies—designs and manufactures systems and provides services used by oil and gas companies involved in land and offshore exploration and production of crude oil and natural gas; designs, manufactures and supplies technologically advanced high pressure valves and fittings for oilfield service companies; and also provides flowback and well testing services for exploration companies in the oil and gas industry.
Total revenue by segment includes intersegment sales, which are made at prices approximating those that the selling entity is able to obtain on external sales. Segment operating profit is defined as total segment revenue less segment operating expenses. Income (loss) from equity method investments is included in computing segment operating profit. Refer to Note 8 for additional information. The following items have been excluded in computing segment operating profit: corporate staff expense, net interest income (expense) associated with corporate debt facilities, income taxes, and other revenue and other expense, net.
Segment revenue and segment operating profit were as follows:
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
(In millions) | 2017 | | 2016 | | 2017 | | 2016 |
Segment revenue | | | | | | | |
Subsea | $ | 1,478.2 |
| | $ | 1,560.3 |
| | $ | 4,585.2 |
| | $ | 4,624.7 |
|
Onshore/Offshore | 2,308.1 |
| | 815.4 |
| | 5,885.0 |
| | 2,527.2 |
|
Surface Technologies | 353.9 |
| | — |
| | 902.3 |
| | — |
|
Other revenue and intercompany eliminations | 0.7 |
| | — |
| | 1.4 |
| | — |
|
Total revenue | $ | 4,140.9 |
| | $ | 2,375.7 |
| | $ | 11,373.9 |
| | $ | 7,151.9 |
|
Income before income taxes: | | | | | | | |
Segment operating profit (loss): | | | | | | | |
Subsea | $ | 102.8 |
| | $ | 282.0 |
| | $ | 393.1 |
| | $ | 669.9 |
|
Onshore/Offshore | 206.4 |
| | 70.9 |
| | 553.7 |
| | 139.8 |
|
Surface Technologies | 49.0 |
| | — |
| | 29.4 |
| | — |
|
Total segment operating profit | 358.2 |
| | 352.9 |
| | 976.2 |
| | 809.7 |
|
Corporate items: | | | | | | | |
Corporate expense (1) | (42.3 | ) | | 51.7 |
| | (224.3 | ) | | (108.4 | ) |
Net interest expense | (86.3 | ) | | (0.4 | ) | | (240.5 | ) | | (21.4 | ) |
Total corporate items | (128.6 | ) | | 51.3 |
| | (464.8 | ) | | (129.8 | ) |
Income before income taxes (2) | $ | 229.6 |
| | $ | 404.2 |
| | $ | 511.4 |
| | $ | 679.9 |
|
_______________________
| |
(1)
| Corporate expense primarily includes corporate staff expenses, stock-based compensation expenses, other employee benefits, certain foreign exchange gains and losses, and merger-related transaction expenses. |
| |
(2)
| Includes amounts attributable to noncontrolling interests. |
Segment assets were as follows:
|
| | | | | | | |
(In millions) | September 30, 2017 | | December 31, 2016 |
Segment assets: | | | |
Subsea | $ | 13,757.6 |
| | $ | 7,823.1 |
|
Onshore/Offshore | 5,114.5 |
| | 3,229.3 |
|
Surface Technologies | 2,413.6 |
| | — |
|
Intercompany eliminations | (17.0 | ) | | — |
|
Total segment assets | 21,268.7 |
| | 11,052.4 |
|
Corporate (1) | 8,359.5 |
| | 7,637.3 |
|
Total assets | $ | 29,628.2 |
| | $ | 18,689.7 |
|
_______________________
| |
(1)
| Corporate includes cash, LIFO adjustments, deferred income tax balances, property, plant and equipment not associated with a specific segment, pension assets and the fair value of derivative financial instruments. |
NOTE 20. SUBSEQUENT EVENT
Dividends declared—On October 25, 2017, we announced that our Board of Directors had authorized and declared an initial quarterly cash dividend of $0.13 per ordinary share to be paid to shareholders of record as of November 21, 2017. The ex-dividend date will be November 20, 2017, and the payment date is expected to be on or shortly after December 1, 2017.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
BUSINESS OUTLOOK
Overall Outlook—Outlook – The priceglobal economy is forecast to grow in 2023. Increased lending rates by central banks aimed at slowing inflation and reduced availability of crude oil recoveredcredit related to regional banking concerns have increased the risk of a mild recession in 2016 when comparedsome economies. However, strength in Asia Pacific will likely offset weakness in other regions and lead global growth higher, driven in part by the easing of pandemic restrictions in China. Higher global gross domestic product (GDP) will in turn support growth in energy demand this year.
Oil prices continue to the prior year,be supported by regional geopolitical tensions and the industry’s more disciplined capital spend. This is evident for OPEC+ countries who are focused on realizing a price has remained stable throughout much of 2017. Nonetheless, the oilthat supports both economic growth and gas industry continues to experience the overall impacts of the steep decline in crude oil prices experienced in prior years and there are some lingering uncertainties in the crude oil price outlook. Despite OPEC’s implementation of a cap on crude oil production in 2017, uncertainty in the crude oil price outlook remainsenergy investment, as to the effectiveness and duration of both concurrent OPEC and non-OPECseen by planned production cuts announced in April. An extended period of underinvestment has contributed to a current supply deficit that ultimately will require increased upstream spending, lending support to a constructive view on the associated impact on worldwide production, and inventory levels. The sustainability oflonger-term outlook for oil prices.
With long-term energy demand forecast to increase, the crude oil price recovery and business activity levels is dependent onconflict in Ukraine has highlighted the need for greater energy security across the globe. As a number of variables, but many analysts continue to believeresult, the market corrections necessaryenergy industry has accelerated its efforts to address the oversupplyessential need for hydrocarbons today to ensure the continuity of crude oilaffordable energy while also playing an essential role in the energy transition.
We are in place and beginning to contribute to sustainable industry improvement. As long-term demand rises and production continues to naturally decline, wethe midst of a multi-year growth cycle for energy demand. We believe commodity prices should continue to demonstrate an ability for continued improvement, increasing both our cash flows and the confidence of our customers to increase their investmentsthat investment in new sources of oil production.
Subsea—The low crude oil price environmentand natural gas production will increase over the last two years ledintermediate-term, fueled by an expansion of activity in international markets – largely offshore and the Middle East. Investment in the Middle East occurs in both offshore and surface environments, with capital spending expected to accelerate in support of longer-term production targets. TechnipFMC has leading positions in many of these international markets and is uniquely positioned to take full advantage of this growth opportunity. We are confident that conventional resources will remain an important part of the energy mix for an extended period.
We are also committed to the energy transition, where we believe that offshore will play a meaningful role in the transition to renewable energy resources and reduction of carbon emissions. We are making real progress through our customers to reduce their capital spending plans or defer new deepwater projects. We began to reduce our workforcethree main pillars of greenhouse gas removal, offshore floating renewables and adjust manufacturing capacity to align our operations with the anticipated decreases in activity in 2016 due to delayed Subsea project inbound, and to mitigate the impact to operating margins. hydrogen.
We have benefited from these restructuring actions by attaining more cost-effective manufacturingbeen successful in building on our partnerships and we continuealliances to take additional actionsfurther position ourselves as business activity continuesthe leading offshore energy architect, with several notable developments in 2022.
•We signed the Option to slow. Subsea revenue will decrease in 2017Lease Agreement for the third consecutive year. However, evenScotWind N3 area through our partnership in offshore renewables, Magnora Offshore Wind. The proposed development project will install 33 floating wind turbines with lower Subsea revenue expectations, the operational improvements and cost reductions madetotal capacity of approximately 500 megawatts, which could power more than 600,000 homes in the prior year, combinedUnited Kingdom.
•We also signed an agreement with additional actions takenShell to explore synergies with a shared goal of enabling offshore renewable energy generation and reducing total CO2 emissions – another example of how our long-standing partnerships extend to all areas of our business.
•Orbital Marine Power, which is collaborating with TechnipFMC to accelerate the global commercialization of its tidal stream turbine, was awarded two contracts for difference in the current year, have protected operating marginsUK Allocation Round 4 multi-turbine projects in 2017, while still providing us with the capability to respondEday, Orkney. Capable of delivering 7.2 megawatts of predictable clean energy to the eventual market recovery. We also recognizegrid once completed, these Orbital tidal stream energy projects will support the needUnited Kingdom’s security of supply, energy transition and broader climate change objectives.
Subsea – Innovative approaches to continue to invest insubsea projects, like our people to ensure that we preserve the core competencies and capabilities that are delivering the strong results in 2017 and will be needed to respond to the market recovery. Our customers are continuing to take aggressive actions to improve theiriEPCI solution, have improved project economics, and we are monitoring customer activity in the context of current oil prices. The risk of project sanctioning delays continues to be high in the current environment, however, project economics have improved considerably now, and consequently, many offshore discoveries couldcan be developed economically atwell below today’s crude oil prices. We continuebelieve deepwater development is likely to work closely with our customers and believe that with our unique business model we can further reduce their project break-even levels by offering cost-effective approaches to their project developments, including customer acceptance of integrated business models to help achieve the cost-reduction goals and accelerate achievement of first oil. In the long term, we continue to believe that deep-water development will remain a significant part of many of our customers’ portfolios. However, further delays
Offshore economics have materially improved, and subsea cycle-times have become significantly shorter. This has resulted in project sanctionsnew subsea investments coming much earlier in the near term would leadcycle and more in parallel with U.S. land markets.
We believe these changes are fundamental and sustainable as a result of new business models and technology pioneered by our company.
As the subsea industry continues to evolve, we are driving simplification, standardization, and industrialization to reduce cycle times. The industrialization of our project business through the introduction of configure-to-order (CTO) is another way we are driving real change in our industry that further improves the economics of our customers’ projects while driving greater efficiencies for TechnipFMC.
With CTO, we have designed an environment, a process, a culture and tools that are scalable and, more importantly, are transformational to the future of our company. Our customers require a product platform that provides them with choices that meet their unique and evolving needs, but also provides them with the significant speed, cost and efficiency benefits that come with product and process standardization. CTO has allowed us to take further actionsredefine our sourcing strategy and transform our manufacturing flow, resulting in up to ensure25 percent lower product cost and a shortened 12-month delivery time for subsea production equipment – savings that are both real and sustainable. This has paved the way for other products to adopt a similar operating model, enabling an enterprise-wide way of working.
We continue to experience increased operator confidence in advancing subsea activity in response to both improved project economics and concerns regarding the security of energy supply. Brent crude oil averaged just under $100 per barrel in 2022. Crude is currently priced above $80 per barrel and is projected to stay at or above this level in the intermediate term, supported in part by the recently announced OPEC+ production cuts. The opportunity set of large subsea projects to be sanctioned over the next 24 months remains robust. The average project size has also risen due to an increasing number of large, greenfield opportunities in Brazil, Guyana and Africa. We also expect increased tie-back activity, with growth from these smaller projects to come primarily from the North Sea, Gulf of Mexico and West Africa – all regions in which we have a strong presence and are well-positioned due to our cost baseextensive installed base.
There is aligned withalso exploration activity occurring in new offshore frontiers. Recent oil and gas discoveries have been announced by operators in basins near countries such as Suriname, Namibia and Colombia, and we believe additional countries will become producers of deepwater resources during this decade. These examples demonstrate the market outlook.
Onshore/Offshore—The Offshore market faces manystrength of the same constraints ascurrent investment cycle and support our view that investment in conventional energy resources will continue.
Our Subsea inbound orders grew to $6.7 billion in 2022, an increase of 36 percent versus the prior year. Order momentum continued in the first quarter, with $2.5 billion of inbound providing further confidence for Subsea businessorders to exceed $8 billion for the full year. Growth in the current year is expected to be driven by a significant increase in iEPCI awards, which represented more than 50% of Subsea inbound orders in the quarter. We also anticipate growth in Subsea Services revenue to $1.3 billion, supported by the continued expansion in our installed base. When taken together, we expect direct awards, iEPCI and Subsea Services to represent more than 70 percent of inbound orders in 2023.
Surface Technologies – Our performance typically is driven by variations in global drilling activity, creating a dynamic environment. Operating results can be further impacted by stimulation activity and the completions intensity of shale applications in North America.
Activity in North America increased in 2022 due to industry challengeshigher drilling and completion activity and an improved pricing environment. In the first quarter, we benefited from higher completion-related activity as well as improved profitability. We continue to improve project economics. Meanwhile, Onshore market activity continuesprogress well on our E-Mission solution for onshore production facilities. The digital offering uses proprietary process automation to provide a tangible setthe industry’s only real-time monitoring and control system that both reduces methane flaring by up to 50 percent and maximizes oil production.
International markets represented approximately 55% of opportunities,total segment revenue in 2022. Our significant backlog provides us with visibility for international growth in 2023. TechnipFMC’s unique capabilities in these markets, which demand higher specification equipment, global services and in particular for natural gas projects as natural gas continues to takelocal content, provide a larger share of global energy demand. Activity in LNG is fueled by the potential for sustained modest natural gas prices, representing an important opportunity set for our business. We remain confident that the industry will make further LNG investments in the near to intermediate term. We also see opportunities for refining and petrochemical projects - areas that we know well. As Onshore market activity levels remain stable, it provides our business with the opportunity to remain actively engaged in and pursuing front-end engineering studies which provide the platform for early engagement with clients,us to extend our leadership positions.
Drilling activity in international markets is less cyclical than in North America as most activities are undertaken by national oil companies which can significantly de-risk project execution. Market opportunities for downstream front-end engineering studies and full engineering, procurement and construction projects are most prevalenttend to maintain a longer-term view that exhibits less variability in capital spend. We continue to benefit from our exposure to the Middle East, Africathe North Sea and Asia marketsPacific.
We continue to execute on our 10-year framework agreement with Abu Dhabi National Oil Company to provide wellheads, trees and associated services. We have also added new manufacturing capabilities in LNG, refiningSaudi Arabia, where the country is expected to increase its sustainable oil capacity and petrochemicals.
Surface Technologies—While North America rig count and operating activity have steadily improvedsignificantly expand its natural gas production over the last year,next decade. Our new facility also supports our commitment to develop a diverse and capable workforce as part of Aramco’s In-Kingdom Total Value Add Program and Saudi Vision 2030. The Middle East remains one of our largest market opportunities in the recovery has been constrainedcurrent decade.
CONSOLIDATED RESULTS OF OPERATIONS OF TECHNIPFMC PLC
THREE MONTHS ENDED MARCH 31, 2023 AND 2022
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | |
| March 31, | | Change |
(In millions, except %) | 2023 | | 2022 | | $ | | % |
Revenue | $ | 1,717.4 | | | $ | 1,555.8 | | | $ | 161.6 | | | 10.4 | |
| | | | | | | |
Costs and expenses | | | | | | | |
Cost of sales | 1,496.5 | | | 1,370.2 | | | 126.3 | | | 9.2 | |
Selling, general and administrative expense | 153.9 | | | 159.6 | | | (5.7) | | | (3.6) | |
Research and development expense | 15.4 | | | 14.6 | | | 0.8 | | | 5.5 | |
Impairment, restructuring and other expenses | 0.6 | | | 1.0 | | | (0.4) | | | (40.0) | |
| | | | | | | |
| | | | | | | |
Total costs and expenses | 1,666.4 | | | 1,545.4 | | | 121.0 | | | 7.8 | |
| | | | | | | |
Other income (expense), net | (1.3) | | | 40.8 | | | (42.1) | | | (103.2) | |
Income from equity affiliates | 14.2 | | | 5.4 | | | 8.8 | | | 163.0 | |
Loss from investment in Technip Energies | — | | | (28.5) | | | 28.5 | | | 100.0 | |
| | | | | | | |
Net interest expense | (18.7) | | | (33.9) | | | 15.2 | | | 44.8 | |
Income (loss) before income taxes | 45.2 | | | (5.8) | | | 51.0 | | | 879.3 | |
Provision for income taxes | 37.4 | | | 28.5 | | | 8.9 | | | 31.2 | |
Income (loss) from continuing operations | 7.8 | | | (34.3) | | | 42.1 | | | 122.7 | |
Net (income) from continuing operations attributable to non-controlling interests | (7.4) | | | (8.0) | | | 0.6 | | | 7.5 | |
Income (loss) from continuing operations attributable to TechnipFMC plc | 0.4 | | | (42.3) | | | 42.7 | | | 100.9 | |
Loss from discontinued operations | — | | | (19.4) | | | 19.4 | | | 100.0 | |
| | | | | | | |
Net income (loss) attributable to TechnipFMC plc | $ | 0.4 | | | $ | (61.7) | | | $ | 62.1 | | | 100.6 | |
Revenue
Revenue increased by $161.6 million during the three months ended March 31, 2023, compared to certain oil and gas producing basins that have the ability to generate acceptable returns. The market recovery begansame period in late 20162022. Subsea revenue increased year-over-year, primarily as a result of higher project activity. Surface Technologies revenue increased, largely as a result of the increase in operator activity in North America and has continued through the first nine months of 2017. To our benefit, we have experienced stronger demand for pressure control equipment driven by this increased activity. The pace of
improvement is likely to slow with expectations of more moderate rig count growth. However, our restructuring actions taken in 2016 have reduced costs, and accordingly, we are presently capturing the economic benefits of the higher activity levels. Activity in our international surface business has been strong but continues to experience competitive pricing pressure. Pricing has stabilized but we have not seen significant recovery. We expect this competitive pricing environment to continue and to have some negative impact on operating margins into the first half of 2018.
Pro Forma Results of Operations
Unaudited supplemental pro forma results of operations for the three months and nine months ended September 30, 2016 present consolidated information as if (i) the Merger and (ii) the consolidation of legal onshore/offshore contract entities which own and account for the design, engineering and construction of the Yamal LNG plant (“Yamal”) had been completed as of January 1, 2016. The pro forma results do not include any potential synergies, cost savings or other expected benefits of these transactions. Accordingly, the pro forma results should not be considered indicative of the results that would have occurred if the transactions had been consummated as of January 1, 2016, nor are they indicative of future results. In order to provide comparability to the prior year pro forma results, the impact of purchase price accounting adjustments have been reflected on an equal basis.
Refer to Note 2 for further information related to the Merger and refer to Note 11 for further information related to Yamal.
Due to the size of the aforementioned transactions relative to the size of historical results of operations and for purposes of comparability, management’s discussion of the consolidated and segment results of operations are provided on the basis of comparing actual results of operations for the three and nine months ended September 30, 2017 to pro forma results of operations for the three and nine months ended September 30, 2016.
CONSOLIDATED RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016
|
| | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Change (2017 vs. 2016 Pro Forma) |
(In millions, except %) | 2017 | | 2016 Pro Forma** | | 2016 | | $ | | % |
Revenue | $ | 4,140.9 |
| | $ | 5,038.2 |
| | $ | 2,375.7 |
| | (897.3 | ) | | (17.8 | ) |
Costs and expenses: | | | | | | | | | |
Cost of sales | 3,468.2 |
| | 4,294.7 |
| | 1,931.0 |
| | (826.5 | ) | | (19.2 | ) |
Selling, general and administrative expense | 284.4 |
| | 282.8 |
| | 143.0 |
| | 1.6 |
| | 0.6 |
|
Research and development expense | 51.1 |
| | 45.3 |
| | 22.0 |
| | 5.8 |
| | 12.8 |
|
Impairment, restructuring and other expense | 59.4 |
| | 34.0 |
| | 10.2 |
| | 25.4 |
| | 74.7 |
|
Merger transaction and integration costs | 9.2 |
| | 44.6 |
| | 14.0 |
| | (35.4 | ) | | (79.4 | ) |
Total costs and expenses | 3,872.3 |
| | 4,701.4 |
| | 2,120.2 |
| | (829.1 | ) | | (17.6 | ) |
Other income (expense), net | 30.0 |
| | 81.0 |
| | 81.7 |
| | (51.0 | ) | | (63.0 | ) |
Net interest expense | (86.3 | ) | | (13.9 | ) | | (0.4 | ) | | (72.4 | ) | | * |
|
Income from equity affiliates | 17.3 |
| | 46.5 |
| | 67.4 |
| | (29.2 | ) | | (62.8 | ) |
Income before income taxes | 229.6 |
| | 450.4 |
| | 404.2 |
| | (220.8 | ) | | (49.0 | ) |
Provision for income taxes | 111.7 |
| | 110.4 |
| | 102.5 |
| | 1.3 |
| | 1.2 |
|
Income from continuing operations | 117.9 |
| | 340.0 |
| | 301.7 |
| | (222.1 | ) | | (65.3 | ) |
Loss from discontinued operations, net of income taxes | — |
| | (14.0 | ) | | — |
| | 14.0 |
| | * |
|
Net income | 117.9 |
| | 326.0 |
| | 301.7 |
| | (208.1 | ) | | (63.8 | ) |
Net loss attributable to noncontrolling interests | 3.1 |
| | 1.0 |
| | 0.7 |
| | 2.1 |
| | * |
|
Net income attributable to TechnipFMC plc | $ | 121.0 |
| | $ | 327.0 |
| | $ | 302.4 |
| | (206.0 | ) | | (63.0 | ) |
_______________________
|
| |
* | Not meaningful |
** | Refer to “Pro Forma Results of Operations” above for further information related to the presentation of and transactions included in pro forma results for the three months ended September 30, 2016. |
Revenue
Revenue decreased $897.3 million in the third quarter of 2017 compared to the prior-year quarter on a pro forma basis, primarily resulting from a sharp decline in Subsea activities in the Europe and Africa region due to lower order activity during 2015 and 2016, leading to a lower backlog of business coming into the current year. Revenue also modestly decreased for Onshore/Offshore businesses year-over-year on a pro forma basis, due to the completion of several projects since the prior year period, partially offset by increased activity in the Middle East, and Africa regions. Partially offsetting the net decreasesdriven by an increase in Subsea and Onshore/Offshore were the benefits of increased Surface well completion activities in North America.U.S. rig count year-over-year.
Gross profitProfit
Gross profit (revenue less cost of sales) increased, as a percentage of salesrevenue, increased to 16.2% in12.9% during the third quarter of 2017, from 14.8%three months ended March 31, 2023, compared to 11.9% in the prior-year quarter on a pro forma basis. The improvement inperiod. Subsea gross profit as a percentage of sales was primarily due to the reduction of cost of salesincreased year-over-year, on a pro forma basis as a result of the realizationimproved margins in backlog and an increase in installation and services activity. Surface Technologies gross profit increased year-over-year, primarily due to an increase in volume of cost reduction opportunities on certain projectsactivities and a more favorable cost structure, the successful progression of several major projects with good margin performance, and improved product mix related to fluid control sales.increases in pricing in North America.
Selling, generalGeneral and administrative expenseAdministrative Expense
Selling, general and administrative expense increased $1.6decreased by $5.7 million year-over-year, ondriven by a pro forma basis, resulting from higher expensesdecrease in costs associated with long-term incentive plans and new grants, partially offset by the benefit of lower headcount across all reporting segments and decreased sales commissions.our support functions.
Impairment, restructuring and other expense
Impairment, restructuring and other expense increased by $25.4 million year-over-year on a pro forma basis. Impairment, restructuring and other expense for the third quarter of 2017 included $8.2 million of impairment expense. In recent years, we have implemented restructuring plans across our businesses to reduce costs and better align our workforce with anticipated activity levels. In the current period we have also incurred expenses of $10.9 million due to lost productivity associated with the impacts of Hurricane Harvey.
Merger transaction and integration costs
Merger transaction and integration costs of $9.2 million were incurred in the third quarter of 2017 due to integration expenses associated with the Merger. A significant portion of the expenses recorded in the period are related to facility lease termination charges, with a substantially lower portion related to integration activities pertaining to combining the two legacy companies. Refer to Note 2 to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.Other Income (Expense), Net
Other income (expense), net
Other income (expense), net, primarily reflects foreign currency gains and losses,expenses, including gains and losses associated with the remeasurement of net cash positions. Inpositions, gains and losses on sales of property, plant and equipment and non-operating gains and losses. The foreign currency impact was a net gain of $2.1 million and $28.4 million for the third quarterthree months ended March 31, 2023 and 2022, respectively, due to various factors, including exposure to certain currencies with limited derivative hedging markets.
Income from Equity Affiliates
For the three months ended March 31, 2023 and 2022, we recorded an income of 2017,$14.2 million and $5.4 million, respectively, from equity method affiliates. Income generated by our equity method investments during the period increased year-over-year, driven by an increase in operational activity of our equity method investments.
Loss from Investment in Technip Energies
During the three months ended March 31, 2022, we recorded a loss of $28.5 million as a result of our investment in Technip Energies. The amount recognized $19.3 millionprimarily represents fair value revaluation gains (losses) of net foreign exchange gains, compared with $83.5 million of foreign exchange gains in the prior year period.our investment. See Note 9 for further details.
Net Interest Expense
Net interest expense
The increase of $18.7 million decreased by $15.2 million in interest expense wasthe three months ended March 31, 2023, compared to the same period in 2022, largely due to the changesreduction in the fair value of the financial liability. Duringoutstanding debt.
Provision for Income Taxes
Our provision for income taxes for the three month periodmonths ended September 30, 2017, we revalued the liability to reflect current expectations about the obligationMarch 31, 2023 and recognized a loss of $73.3 million. Refer to Note 11 for further information regarding our other liabilities. Refer to Note 18 for further information regarding the fair value measurement assumptions of the mandatorily redeemable financial liability and related changes in its fair value.
Provision (benefit) for income taxes
Our income tax provision for the third quarter of 2017 and the third quarter of 2016 on a historical basis2022 reflected effective tax rates of 48.6%82.7% and 25.4%(491.4)%, respectively. The year-over-year increase in the effective tax rate was primarilylargely due to an unfavorablethe change in the forecastedgeographical profit mix year over year.
Our effective tax rate can fluctuate depending on our country mix of earnings, and increases insince our valuation allowance dueforeign earnings are generally subject to additional losses generated during the year for which nohigher tax benefit is expected to be realized. In addition, individual tax items, combined with lower profitabilityrates than in the current period, had a greater impact onUnited Kingdom.
Discontinued Operations
Loss from discontinued operations, net of income taxes, was $19.4 million for the effective rate in the three months ended September 30, 2017 as compared to the same period in 2016.March 31, 2022. See Note 17 for further details.
CONSOLIDATEDSEGMENT RESULTS OF OPERATIONS OF TECHNIPFMC PLC
NINETHREE MONTHS ENDED SEPTEMBER 30, 2017MARCH 31, 2023 AND 20162022
Subsea
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | |
| March 31, | | Favorable/(Unfavorable) |
(In millions, except %) | 2023 | | 2022 | | $ | | % |
Revenue | $ | 1,387.6 | | | $ | 1,289.1 | | | 98.5 | | | 7.6 | |
Operating profit | $ | 66.8 | | | $ | 54.0 | | | 12.8 | | | 23.7 | |
| | | | | | | |
Operating profit as a percentage of revenue | 4.8 | % | | 4.2 | % | | | | 0.6 pts. |
|
| | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, | | Change (2017 vs. 2016 Pro Forma) |
(In millions, except %) | 2017 | | 2016 Pro Forma** | | 2016 | | $ | | % |
Revenue | $ | 11,373.9 |
| | $ | 14,689.1 |
| | $ | 7,151.9 |
| | $ | (3,315.2 | ) | | (22.6 | ) |
Costs and expenses: | | | | | | | | | |
Cost of sales | 9,610.5 |
| | 12,648.4 |
| | 5,863.7 |
| | (3,037.9 | ) | | (24.0 | ) |
Selling, general and administrative expense | 806.5 |
| | 934.9 |
| | 434.0 |
| | (128.4 | ) | | (13.7 | ) |
Research and development expense | 143.6 |
| | 157.3 |
| | 67.8 |
| | (13.7 | ) | | (8.7 | ) |
Impairment, restructuring and other expense | 56.8 |
| | 185.1 |
| | 109.7 |
| | (128.3 | ) | | (69.3 | ) |
Merger transaction and integration costs | 87.2 |
| | 61.3 |
| | 30.7 |
| | 25.9 |
| | 42.3 |
|
Total costs and expenses | 10,704.6 |
| | 13,987.0 |
| | 6,505.9 |
| | (3,282.4 | ) | | (23.5 | ) |
Other income (expense), net | 43.2 |
| | (28.8 | ) | | (17.5 | ) | | 72.0 |
| | * |
|
Net interest expense | (240.5 | ) | | (14.5 | ) | | (21.4 | ) | | (226.0 | ) | | * |
|
Income from equity affiliates | 39.4 |
| | 28.9 |
| | 72.8 |
| | 10.5 |
| | 36.3 |
|
Income from continuing operations before income taxes | 511.4 |
| | 687.7 |
| | 679.9 |
| | (176.3 | ) | | (25.6 | ) |
Provision for income taxes | 249.7 |
| | 196.3 |
| | 153.8 |
| | 53.4 |
| | 27.2 |
|
Income from continuing operations | 261.7 |
| | 491.4 |
| | 526.1 |
| | (229.7 | ) | | (46.7 | ) |
Loss from discontinued operations, net of income taxes | — |
| | (14.0 | ) | | — |
| | 14.0 |
| | * |
|
Net income | 261.7 |
| | 477.4 |
| | 526.1 |
| | (215.7 | ) | | (45.2 | ) |
Net loss attributable to noncontrolling interests | 5.5 |
| | 1.4 |
| | 1.0 |
| | 4.1 |
| | * |
|
Net income attributable to TechnipFMC plc | $ | 267.2 |
| | $ | 478.8 |
| | $ | 527.1 |
| | $ | (211.6 | ) | | (44.2 | ) |
_______________________
|
| |
* | Not meaningful |
** | Refer to “Pro Forma Results of Operations” above for further information related to the presentation of and transactions included in pro forma results for the nine months ended September 30, 2016. |
Revenue
Revenue decreased $3,315.2Subsea revenue increased by $98.5 million, or 7.6%, driven by higher project activity in the first nine monthsGulf of 2017 compared to the prior-year period on a pro forma basis, primarily resulting from a sharp decline in Subsea activities in the EuropeMexico and Africa region due to lower order activity during 2015 and 2016, leading to a lower backlog of business coming into the current year. The decrease was also attributable to the completion of several projects and lower vessel utilization. Revenue also decreased across all Onshore/Offshore businesses year-over-year on a pro forma basis, primarily driven by lower levels of project backlog coming into the year impacting our Middle East, North America and South America businesses.
Gross profit
Gross profit (revenue less cost of sales) increased as a percentage of sales to 15.5% in the first nine months of 2017, from 13.9% in the prior-year on a pro forma basis. The improvement in gross profit as a percentage of sales was primarily due to the reduction of cost of sales year-over-year on a pro forma basisBrazil as a result of the realization of cost reduction opportunities on certain projects and a lower overall cost structure, the successful progression of several major projects with good gross margin performance and the benefit of a better product mix.
Selling, general and administrative expense
Selling, general and administrative expense decreased $128.4 million year-over-year on a pro forma basis, resulting from lower headcount across all reporting segments and decreased sales commissions.
Impairment, restructuring and other expense
Impairment, restructuring and other expense decreased by $128.3 million year-over-year on a pro forma basis. Impairment, restructuring and other expense for the first nine months of 2017 included $9.0 million of impairment expense.
In recent years, we have implemented restructuring plans across our businesses to reduce costs and better align our workforce with anticipated activity levels. Thus, we previously incurred significant restructuring expenseshigher inbound in 2016. In the current period we have also incurred expenses of $10.9 million due to lost productivity associated with the impacts of Hurricane Harvey. In recent years, we have implemented restructuring plans across our businesses to reduce costs and better align our workforce with anticipated activity levels. Thus, we previously incurred significant restructuring expenses in 2016.
Merger transaction and integration costs
We incurred merger transaction and integration costs of $87.2 million during the first nine months of 2017 due to the Merger. A significant portion of the expenses recorded in the period are related to transaction and leased facility termination fees, with a lower portion related to integration activities pertaining to combining the two legacy companies. Refer to Note 2 to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Other income (expense), net
Other income (expense), net, primarily reflects foreign currency gains and losses, including gains and losses associated with the remeasurement of net cash positions. In the first nine months of 2017, we recognized $0.3 million of net foreign exchange gains, compared with $13.6 million of foreign exchange losses in the prior year period.
Net interest expense
The increase in interest expense2022, which was due to the changes in the fair value of the financial liability. During the nine month period ended September 30, 2017 we revalued the liability to reflect current expectations about the obligation and recognized a loss of $202.9 million. Refer to Note 11 for further information regarding our other liabilities. Refer to Note 18 for further information regarding the fair value measurement assumptions of the mandatorily redeemable financial liability and related changes in its fair value.
Provision for income taxes
Our income tax provisions for the first nine months of 2017 and 2016 reflected effective tax rates of 48.8% and 22.6%, respectively. The year-over-year increase in the effective tax rate was primarily due to an unfavorable change in the forecasted country mix of earnings and increases in our valuation allowance due to additional losses generated during the year for which no tax benefit is expected to be realized. In addition, individual tax items, combined with lower profitability in the current period, had a greater impact on the effective rate in the nine months ended September 30, 2017 as compared to the same period in 2016.
SEGMENT RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016
Segment operating profit is defined as total segment revenue less segment operating expenses. Certain items have been excluded in computing segment operating profit and are included in corporate items. Refer to Note 19 to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for further information.
Subsea
|
| | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Favorable/(Unfavorable) (2017 vs. 2016 Pro Forma) |
(In millions, except %) | 2017 | | 2016 Pro Forma | | 2016 | | $ | | % |
Revenue | $ | 1,478.2 |
| | $ | 2,346.6 |
| | $ | 1,560.3 |
| | (868.4 | ) | | (37.0 | ) |
Operating profit | $ | 102.8 |
| | $ | 357.7 |
| | $ | 282.0 |
| | (254.9 | ) | | (71.3 | ) |
| | | | | | | | | |
Operating profit as a percentage of revenue | 7.0 | % | | 15.2 | % | | 18.1 | % | | | | (8.2 | ) pts. |
Subsea revenue decreased $868.4 million year-over-year on a pro forma basis, primarily due to lower project activity in the Europe and Africa region and lower activity in our Europe, Africa and North America Subsea services businesses. The lower project activity was substantially due to the reduced backlog levels at the beginning of the period as a result of slower project awards in 2015 and 2016. Additionally, the decrease in revenue was attributable to the completion of several projects during the third quarter of 2017.
Subsea operating profit as a percent of revenue decreased year-over-year on a pro forma basis and was driven primarily by lower project and subsea service activity levels, reduced vessel utilization, and a $18.2 million increase on a pro forma basis in impairment, restructuring and other severance charges.
Operating profit in the third quarter of 2017 included $22.8 million of impairment, restructuring and other severance charges compared to $4.6 million in the third quarter of 2016 on a pro forma basis.
Onshore/Offshore
|
| | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Favorable/(Unfavorable) (2017 vs. 2016 Pro Forma) |
(In millions, except %) | 2017 | | 2016 Pro Forma | | 2016 | | $ | | % |
Revenue | $ | 2,308.1 |
| | $ | 2,398.8 |
| | $ | 815.4 |
| | (90.7 | ) | | (3.8 | ) |
Operating profit | $ | 206.4 |
| | $ | 118.6 |
| | $ | 70.9 |
| | 87.8 |
| | 74.0 |
|
| | | | | | | | | |
Operating profit as a percentage of revenue | 8.9 | % | | 4.9 | % | | 8.7 | % | | | | 4.0 | pts. |
Onshore/Offshore revenue decreased $90.7 million year-over-year on a pro forma basis. In December 2016, we increased our stake in the Yamal joint venture and became the controlling shareholder, resulting in full consolidation of the joint venture into the consolidated financial statements. Revenues declined due to lower activity in North America due to the delivery of several projects in 2016 and early 2017, partially offset by increased activity in the Middle East and Asia Pacific.
Onshore/Offshore operating profit as a percentage of revenue increased year-over-year on a pro forma basis, primarily due to the successful progression of several major projects, including Yamal and Prelude FLNG.
Operating profit in the third quarter of 2017 included $28.9 million of impairment, restructuring and other severance charges compared to $5.2 million in the third quarter of 2016 on a pro forma basis.
Surface Technologies
|
| | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Favorable/(Unfavorable) (2017 vs. 2016 Pro Forma) |
(In millions, except %) | 2017 | | 2016 Pro Forma | | 2016 | | $ | | % |
Revenue | $ | 353.9 |
| | $ | 295.2 |
| | $ | — |
| | 58.7 |
| | 19.9 |
Operating profit (loss) | $ | 49.0 |
| | $ | (17.4 | ) | | $ | — |
| | 66.4 |
| | * |
| | | | | | | | | |
Operating profit (loss) as a percentage of revenue | 13.8 | % | | (5.9 | )% | |
| |
|
| | 19.7 |
_______________________
Surface Technologies revenue increased $58.7 million year-over-year on a pro forma basis. Revenue increased in our surface international and surface Americas businesses year-over-year on a pro forma basis, partially offset by a decrease in revenue in our loading systems and measurement solutions businesses. The increase was driven primarily by higher activity in North America due to improved rig count and completion intensity, partially offset by the flow-through to revenue of more competitively priced backlognegative impact in international markets and lower activity in our measurement solutions and loading systems businesses
Surface Technologies operating profitAsia Pacific as a percent of revenue increased year-over-year on a pro forma basis and was driven primarily by increased volume in flowline and well service pump products in our surface Americas business, and a $7.4 million decrease in impairment, restructuring and other severance charges.
Operating profitprojects conclude in the third quarter of 2017 included $7.8 million of impairment, restructuring and other severance charges compared to $15.2 million in 2016 on a pro forma basis.region.
Corporate Items
|
| | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Favorable/(Unfavorable) (2017 vs. 2016 Pro Forma) |
(In millions, except %) | 2017 | | 2016 Pro Forma | | 2016 | | $ | | % |
Corporate expense | $ | (42.3 | ) | | $ | 5.4 |
| | $ | 51.7 |
| | (47.7 | ) | | * |
_______________________
Corporate expense increased year-over-year on a proforma basis. Corporate expense in the third quarter of 2017 included $13.2 million of business combination transaction and integration costs related to the Merger and $19.3 million of foreign currency exchange gains.
SEGMENT RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016
Segment operating profit is defined as total segment revenue less segment operating expenses. Certain items have been excluded in computing segment operating profit and are included in corporate items. Refer to Note 19 to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for further information.
Subsea
|
| | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, | | Favorable/(Unfavorable) (2017 vs. 2016 Pro Forma) |
(In millions, except %) | 2017 (1) | | 2016 Pro Forma | | 2016 | | $ | | % |
Revenue | $ | 4,585.2 |
| | $ | 7,126.4 |
| | $ | 4,624.7 |
| | (2,541.2 | ) | | (35.7 | ) |
Operating profit | $ | 393.1 |
| | $ | 836.3 |
| | $ | 669.9 |
| | (443.2 | ) | | (53.0 | ) |
| | | | | | | | | |
Operating profit as a percent of revenue | 8.6 | % | | 11.7 | % | | 14.5 | % | | | | (3.1 | ) pts. |
_______________________
| |
(1)
| Due to the Merger, there were 8.5 months included in the first nine months of 2017 for legacy FMC Technologies, compared with nine months in 2016. Refer to Note 2 to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. |
Subsea revenue decreased $2,541.2 million year-over-year on a pro forma basis primarily due to lower project activity in the Europe and Africa region and lower activity in our Europe, Africa and North America Subsea services businesses. The lower project activity was substantially due to the reduced backlog levels at the beginning of the period as a result of slower project awards in 2015 and 2016. Additionally, the decrease in revenue was attributable to the completion of several projects during the first nine months of 2017, lower subsea service activity, and lower vessel utilization year-over-year on a pro forma basis primarily due to high vessel campaigns in Africa and Asia in the prior year.
Subsea operating profit as a percent of revenue decreased year-over-year on a pro forma basis due to lower revenue in our Subsea projects business across most Subsea regions. Excluding impairment, restructuring and other severance charges, on a comparable basis, operating profit as a percentage of revenue improved slightly year-over-year on a pro forma basis due to a better project mix and execution.
Subsea operating profit for the first ninethree months of 2017 included $35.5 million in restructuring, impairment and other severance charges compared to $29.6 million inended March 31, 2023, increased versus the prior year, on a pro forma basis.
Onshore/Offshore
|
| | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, | | Favorable/(Unfavorable) (2017 vs. 2016 Pro Forma) |
(In millions, except %) | 2017 | | 2016 Pro Forma | | 2016 | | $ | | % |
Revenue | $ | 5,885.0 |
| | $ | 6,629.1 |
| | $ | 2,527.2 |
| | (744.1 | ) | | (11.2 | ) |
Operating profit | $ | 553.7 |
| | $ | 239.5 |
| | $ | 139.8 |
| | 314.2 |
| | 131.2 |
|
| | | | | | | | | |
Operating profit as a percent of revenue | 9.4 | % | | 3.6 | % | | 5.5 | % | | | | 5.8 | pts. |
Onshore/Offshore revenue decreased $744.1 million year-over-year. In December 2016, we increased our stake in the Yamal joint venture and became the controlling shareholder, resulting in full consolidation of the joint venture into the consolidated financial statements. Revenues were lower due to reduced project activity across all geographical regions. Additionally, the decreaseimproved margins in backlog and an increased contribution of services activities.
Surface Technologies
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | |
| March 31, | | Favorable/(Unfavorable) |
(In millions, except %) | 2023 | | 2022 | | $ | | % |
Revenue | $ | 329.8 | | | $ | 266.7 | | | 63.1 | | | 23.7 | |
Operating profit | $ | 22.4 | | | $ | 3.7 | | | 18.7 | | | 505.4 | |
| | | | | | | |
Operating profit as a percentage of revenue | 6.8 | % | | 1.4 | % | | | | 5.4 pts. |
Surface Technologies revenue was attributable to lowerincreased by $63.1 million, or 23.7%, primarily driven by an increase in activity in North America and Souththe Middle East. Approximately 56% of total segment revenue was generated outside of North America due toduring the delivery of several projects in 2016three months ended March 31, 2023 and early 2017.
Onshore/Offshore operating profit as a percentage of revenue increased year-over-year on a pro forma basis due to a favorable mix of project margins, successful progression of several major projects including Yamal and Prelude FLNG, and the successful resolution of contract disputes.
Operating profit in the first nine months of 2017 compared to the first nine months of 2016 on a pro forma basis was favorably impacted by a decrease of $68.9 million related to impairment, restructuring and other severance charges in the prior year.
Surface Technologies
|
| | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, | | Favorable/(Unfavorable) (2017 vs. 2016 Pro Forma) |
(In millions, except %) | 2017 | | 2016 Pro Forma | | 2016 | | $ | | % |
Revenue | $ | 902.3 |
| | $ | 948.6 |
| | $ | — |
| | (46.3 | ) | | (4.9 | ) |
Operating profit (loss) | $ | 29.4 |
| | $ | (116.7 | ) | | $ | — |
| | 146.1 |
| | * |
|
| | | | | | | | | |
Operating profit (loss) as a percent of revenue | 3.3 | % | | (12.3 | )% | | | | | | 15.6 | pts. |
_______________________
Surface Technologies revenue decreased $46.3 million year-over-year on a pro forma basis. Revenue decreased in our surface international, measurement solutions and loading systems businesses year-over-year on a pro forma basis, partially offset by an increase in revenue in our surface Americas businesses. The decrease was driven primarily by the flow-through to revenue of more competitively priced backlog in international markets and lower activity in our measurement solutions and loading systems businesses.2022.
Surface Technologies operating profit as a percent of revenue increased year-over-year, on a pro forma basisdriven by an increase in volume of activities in North America and was driven primarily by increased volumethe Middle East and increase in flowline and well service pump productspricing in our surface Americas business and a $48.9 million decrease in impairment, restructuring and other severance charges.North America.
Operating profit in the first nine months of 2017 included $12.0 million of impairment, restructuring and other severance charges compared to $60.9 million in 2016 on a pro forma basis.
Corporate ItemsExpense
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | |
| March 31, | | Favorable/(Unfavorable) |
(In millions, except %) | 2023 | | 2022 | | $ | | % |
Corporate expense | $ | (27.4) | | | $ | (29.5) | | | 2.1 | | | 7.1 | |
|
| | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, | | Favorable/(Unfavorable) (2017 vs. 2016 Pro Forma) |
(In millions, except %) | 2017 | | 2016 Pro Forma | | 2016 | | $ | | % |
Corporate expense | $ | (224.3 | ) | | $ | (256.9 | ) | | $ | (108.4 | ) | | 32.6 |
| | * |
_______________________
Corporate expense decreased by $2.1 million, or 7.1%, year-over-year, on a proforma basis. Corporate expense indriven by the first nine months of 2017 primarily reflected $8.4 million of impairment, restructuring and other severance charges and $87.2 million of business combination transaction and integrationdecreased costs related to the Merger.associated with our support functions.
INBOUND ORDERS AND ORDER BACKLOG
Inbound orders—orders - Inbound orders represent the estimated sales value of confirmed customer orders received during the reporting period.
| | | | | | | | | | | | | | | | | |
| | | | Inbound Orders |
| | | Three Months Ended March 31, |
(In millions) | | | | | 2023 | | 2022 |
Subsea | | | | | $ | 2,536.5 | | | $ | 1,893.6 | |
Surface Technologies | | | | | 322.4 | | | 291.3 | |
Total inbound orders | | | | | $ | 2,858.9 | | | $ | 2,184.9 | |
|
| | | | | | | | | | | | | | | |
| Inbound Orders |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
(In millions) | 2017 | | 2016 | | 2017 | | 2016 |
Subsea | $ | 979.8 |
| | $ | 550.8 |
| | $ | 3,418.8 |
| | $ | 1,881.3 |
|
Onshore/Offshore | 1,153.0 |
| | 1,155.6 |
| | 2,938.7 |
| | 2,497.6 |
|
Surface Technologies | 329.1 |
| | — |
| | 846.9 |
| | — |
|
Total inbound orders | $ | 2,461.9 |
| | $ | 1,706.4 |
| | $ | 7,204.4 |
| | $ | 4,378.9 |
|
Order backlog—backlog - Order backlog is calculated as the estimated sales value of unfilled, confirmed customer orders at the reporting date. Backlog reflects the current expectations for the timing of project execution. See Note 3 for further details. | | | | | | | | | | | |
| Order Backlog |
(In millions) | March 31, 2023 | | December 31, 2022 |
Subsea | $ | 9,395.3 | | | $ | 8,131.5 | |
Surface Technologies | 1,212.1 | | | 1,221.5 | |
Total order backlog | $ | 10,607.4 | | | $ | 9,353.0 | |
|
| | | | | | | | | | | |
| Order Backlog |
(In millions) | September 30, 2017 | | December 31, 2016 | | September 30, 2016 |
Subsea | $ | 5,948.9 |
| | $ | 4,909.0 |
| | $ | 5,662.9 |
|
Onshore/Offshore | 7,559.3 |
| | 11,834.9 |
| | 8,035.9 |
|
Surface Technologies | 394.2 |
| | — |
| | — |
|
Total order backlog | $ | 13,902.4 |
| | $ | 16,743.9 |
| | $ | 13,698.8 |
|
Subsea.OrderSubsea - Subsea backlog for Subsea at September 30, 2017,of $9,395.3 million as of March 31, 2023 increased by $1,039.9 million$1.3 billion compared to December 31, 2016.2022. Subsea backlog of $5.9 billion at September 30, 2017, was composed of various subsea projects, including Total’s Kaombo; Petrobras’ pipelay support vesselPetrobras Buzios 6, Mero I, Mero II and pre-salt tree awards; Mellitah’s Bahr Essalam; Shell’s Appomattox; Eni’s Coral; Woodside’s Greater Enfield; Statoil’s Peregrino Phase II;Marlim; Total Energies Mozambique LNG, Lapa North East and BP’s Shah Deniz.Clov 3; ExxonMobil Yellowtail and Uaru; AkerBP Utsira; Azule Energy Agogo; Shell Jackdaw; Husky West White Rose; Equinor Halten East; Irpa, Verdande, Kristin South and various others; Tullow Jubilee South East; Wintershall Maria and Dvalin; and Harbour Talbot.
Onshore/Offshore.Onshore/Offshore order
Surface Technologies - Order backlog at September 30, 2017,for Surface Technologies as of March 31, 2023 decreased by $4.3 billion$9.4 million compared to December 31, 2016. Onshore/Offshore backlog of $7.6 billion was composed of various projects, including Yamal LNG; Enoc’s Jebel Ali refinery expansion; Sibur’s Zapsib-2; Total’s Martin Linge; Adma Opco’s Umm Lulu Phase 2; Shell’s Prelude FLNG; and Eni’s Ghana onshore receiving gas terminal.2022.
LIQUIDITY AND CAPITAL RESOURCES
Most of our cash is held in the treasury centralizing companies ofmanaged centrally and flows through centralized bank accounts controlled and maintained by TechnipFMC globally and in foreignmany operating jurisdictions to best meet the liquidity needs of our global operations. Cash held by subsidiaries of our U.S. domiciled companies could be repatriated to the United States, but under current law, any such repatriation would be subject to U.S. federal income tax, as adjusted for applicable foreign tax credits. We have provided for U.S. federal income taxes on earnings not distributed to the U.S. parent companies where we have determined that such earnings are not indefinitely reinvested.
We expect to meet the continuing funding requirements of our global operations with cash generated by such operations, cash from earnings of operations that are not indefinitely reinvested in the jurisdictions where generated and our existing revolving credit facility. We would make a provision for additional U.S. tax due to repatriated cash required to fund U.S. operations not previously provided, which may be material to our cash flows and results of operations.
Net (Debt) Cash—Debt - Net (debt) cash,debt, is a non-GAAP financial measure reflecting total debt, net of cash and cash equivalents, net of debt.equivalents. Management uses this non-GAAP financial measure to evaluate our capital structure and financial leverage. We believe net debt or net cash, is a meaningful financial measure that may assist investors in understanding our financial condition and recognizing underlying trends in our capital structure. Net (debt) cashdebt should not be considered an alternative to, or more meaningful than, cash and cash equivalentsour total debt as determined in accordance with GAAP or as an indicator of our operating performance or liquidity.
The following table provides a reconciliation of our
cash and cash equivalentstotal debt to net
(debt) cash,debt, utilizing details of classifications from our condensed consolidated balance
sheets.sheets: |
| | | | | | | |
(In millions) | September 30, 2017 | | December 31, 2016 |
Cash and cash equivalents | $ | 6,896.1 |
| | $ | 6,269.3 |
|
Less: Short-term debt and current portion of long-term debt | 473.2 |
| | 683.6 |
|
Less: Long-term debt, less current portion | 3,167.4 |
| | 1,869.3 |
|
Net (debt) cash | $ | 3,255.5 |
| | $ | 3,716.4 |
|
| | | | | | | | | | | |
(In millions) | March 31, 2023 | | December 31, 2022 |
Cash and cash equivalents | $ | 522.3 | | | $ | 1,057.1 | |
Short-term debt and current portion of long-term debt | (385.0) | | | (367.3) | |
Long-term debt, less current portion | (1,005.7) | | | (999.3) | |
Net debt | $ | (868.4) | | | $ | (309.5) | |
Cash Flows
Operating cash flows from continuing operations -We used $386.2 million and $329.4 million of cash in operating activities from continuing operations during the three months ended March 31, 2023 and 2022. The gross changeincrease of $56.8 million in the debt and cash components of our net (debt) cash positionused by operating activities from continuing operations was primarily due to timing differences on project milestones, vendor payments for inventory, and fluctuations in derivative assets and liabilities.
Investing cash flows from continuing operations - We used $52.8 million of cash in investing activities from continuing operations during the Merger. Referthree months ended March 31, 2023 as compared to Note 2 to our condensed consolidated financial statements included$203.7 million cash generated in Part I, Item 1investing cash flows from continuing operations during the same period in 2022. The decrease of this Quarterly Report on Form 10-Q.
Cash Flows
We generated $279.0 million and $268.4$256.5 million in cash from investing activities was primarily due to $238.5 million proceeds received from sales of our investment in Technip Energies during 2022 and an increase in capital expenditures during the three months ended March 31, 2023.
Financing cash flows from operatingcontinuing operations - Financing activities from continuing operations used $87.5 million and $13.1 million of cash during the ninethree months ended September 30, 2017March 31, 2023 and 2016, respectively. The slight increase in cash provided by operating activities was due to the change in trade receivables, costs in excess of billings, advance payments and billings in excess of costs. Our working capital balances can vary significantly depending on the payment and delivery terms on key contracts in our portfolio of projects.
Investing activities provided $1,334.4 million and used $187.3 million in cash flows during the nine months ended September 30, 2017 and 2016,2022, respectively. The increase in cash providedused by investing activities was due to the Merger. Refer to Note 2 to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Financing activities used $1,056.1 million and $583.5 million in cash flows during the nine months ended September 30, 2017 and 2016, respectively. The decrease in cash flows from financing activities was primarily due to the payments related to taxes withheld on stock-based compensation and a decrease in our commercial paper position$50.0 million share repurchases during the ninethree months ended September 30, 2017.
March 31, 2023.
Debt and Liquidity
Availability of borrowings under the Revolving Credit Facility—The following is a summaryreduced by the outstanding letters of our revolving credit facility at September 30, 2017:
|
| | | | | | | | | | | | | | | | | | | | | |
(In millions) Description | Amount | | Debt Outstanding | | Commercial Paper Outstanding (a) | | Letters of Credit | | Unused Capacity | | Maturity |
Five-year revolving credit facility | $ | 2,500.0 |
| | $ | — |
| | $ | 839.8 |
| | $ | — |
| | $ | 1,660.2 |
| | January 2022 |
_______________________
| |
(a)
| Under our commercial paper program, we have the ability to access up to $1.5 billion and €1.0 billion of financing through our commercial paper dealers. Our available capacity under our revolving credit facility is reduced by any outstanding commercial paper. |
Committed credit available under our revolving credit facility providesissued against the ability to issue our commercial paper obligations on a long-term basis. We had $839.8 million of commercial paper issued under our facility at September 30, 2017. As we had both the ability and intent to refinance these obligations on a long-term basis, our commercial paper borrowings were classified as long-term debt in the accompanying condensed consolidated balance sheets at September 30, 2017.
facility. As of September 30, 2017, weMarch 31, 2023, there were in compliance$45.4 million letters of credit outstanding, and our availability under the Revolving Credit Facility was $954.6 million.
Credit Ratings - Our credit ratings with all restrictive covenants underStandard and Poor’s (“S&P”) are BB+ for our revolvinglong-term unsecured, guaranteed debt (2021 Notes) and BB for our long-term unsecured debt (the Private Placement notes). Our credit facility.
Credit Risk Analysis
For the purposes of mitigating the effect of the changes in exchange rates, we hold derivative financial instruments. Valuations of derivative assets and liabilities reflect the fair value of the instruments, including the values associated with counterparty risk. These values must also take into account our credit standing, thus including in the valuation of the derivative instrument and the value of the net credit differential between the counterparties to the derivative contract. Our methodology includes the impact of both counterparty and our own credit standing. Adjustments to our derivative assets and liabilities related to credit risk were not material for any period presented.
Additional information about creditThe income approach was used as the valuation technique to measure the fair value of foreign currency derivative instruments on a recurring basis. This approach calculates the present value of the future cash flow by measuring the change from the derivative contract rate and the published market indicative currency rate, multiplied by the contract notional values. Credit risk is then incorporated herein by reference to reducing the derivative’s fair value in asset positions by the result of multiplying the present value of the portfolio by the counterparty’s published credit spread. Portfolios in a liability position are adjusted by the same calculation; however, a spread representing our credit spread is used.
At this Quarterly Report on Form 10-Q.
Outlook
Historically,time, we have generatedno credit-risk-related contingent features in our liquidity and capital resources primarily through operations and, when needed, through our credit facility. agreements with the financial institutions that would require us to post collateral for derivative positions in a liability position.
Financial Position Outlook
We have $1,660.2 million of capacity available under our revolving credit facility that we expectare committed to utilize if working capital needs temporarily increase. The volatility in credit, equity and commodity markets creates some uncertainty for our businesses. However, management believes, based on our current financial condition, existing backlog levels and current expectations for future market conditions, that we willa strong balance sheet. We continue to meet our short-maintain sufficient liquidity to support the needs of the business through growth, cyclicality and long-term liquidity needs with a combination of cash on hand, cash generated from operationsunforeseen events. We continue to maintain and drive sustainable leverage to preserve access to capital markets. While we will continue to reach payment milestones on our projects, we expect our consolidated operating cash flow in 2017 to decrease as a result ofthroughout the negative impact the decline in commodity prices and the corresponding impact the industry downturn is having on our overall business in terms of the number of new projects awarded and the payment terms and conditions of such project awards. Given the protracted downturn in the oilfield services industry, some key customers have requested the possibility of deferred payments. Additionally, our primary customer in Brazil has requested some re-scheduling of backlog deliveries in order to better match equipment deliveries with their operating schedule requirements and to better align cash flow capabilities. Consequently, any payment deferrals, discounts on pricing, or material product delivery delays that may ultimately be mutually agreed to with our key customers may adversely affect our results of operations and cash flows.
We project spending approximately $250 million in 2017 forcycle. Our capital expenditures largely towards maintenance expenditures incan be adjusted and managed to match market demand and activity levels. Based on current market conditions and our subsea service business. However, projectedfuture expectations, our capital expenditures for 20172023 are estimated to be approximately $250 million. Projected capital expenditures do not include any contingent capital that may be needed to respond to a contract award.
Our board of directors has authorized $500 million for repurchase of sharesawards. In maintaining our commitment to be executed over the remainder of 2017sustainable leverage and 2018. Also, on October 25, 2017, it was announced that our Board of Directors has authorized and declared an initial quarterly cash dividend of $0.13 per ordinary share. We implemented a court-approved reduction of our capital, which completed on June 29, 2017, in order to create distributable profits to support the payment of possible future dividends or future share repurchases.
During the remainder of 2017,liquidity, we expect to make contributions of approximately $2.9 millionbe able to our international pension plans. Actual contribution amounts are dependent upon plancontinue to generate free cash flow available for investment returns, changes in pension obligations, regulatory environmentsgrowth and other economic factors. We update our pension estimates annually duringdistribution to shareholders through the fourth quarter or more frequently upon the occurrence of significant events. Additionally, we expect to make payments of approximately $1.6 million to our U.S. Non-Qualified Defined Benefit Pension Plan during the remainder of 2017.business cycle.
CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make certain estimates, judgments and assumptions about future events that affect the reported amounts of assets and liabilities at the date of the financial statements, the reported amounts of revenue and expenses during the periods presented and the related disclosures in the accompanying notes to the financial statements. Management has reviewed these critical accounting estimates with the Audit Committee of our Board of Directors. We believe the following critical accounting estimates used in preparing our financial statements address all important accounting areas where the nature of the estimates or assumptions is material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change. See Note 1Refer to our consolidated financial statements included in Part I, Item I of this QuarterlyAnnual Report on Form 10-Q10-K for the year ended December 31, 2022 for a descriptiondiscussion of our significantcritical accounting policies.
Percentage of Completion Method of Accounting
We recognize revenue on construction-type manufacturing projects usingestimates. During the percentage of completion method of accounting whereby revenue is recognized as work progresses on each contract. There are several acceptable methods under GAAP of measuring progress toward completion. Most frequently, we use the ratio of costs incurred to date to total estimated contract costs at completion to measure progress toward completion.
We execute contracts with our customers that clearly describe the equipment, systems and/or services that we will provide and the amount of consideration we will receive. After analyzing the drawings and specifications of the contract requirements, our project engineers estimate total contract costs based on their experience with similar projects and then adjust these estimates for specific risks associated with each project, such as technical risks associated with a new design. Costs associated with specific risks are estimated by assessing the probability that conditions arising from these specific risks will affect our total cost to complete the project. After work on a project begins, assumptions that form the basis for our calculation of total project cost are examined on a regular basis and our estimates are updated to reflect the most current information and management’s best judgment.
A significant portion of our total revenue recognized under the percentage of completion method of accounting relatesthree months ended March 31, 2023, there were no changes to our Onshore/Offshore and Subsea segments, primarily for the entire range of onshore facilities, fixed and floating offshore oil and gas facilities and subsea exploration and production equipment projects that involve the design, engineering, manufacturing, construction, and assembly of complex, customer-specific systems.
Total estimated contract cost affects both the revenue recognized in a period as well as the reported profit or loss on a project. The determination of profit or loss on a contract requires consideration of contract revenue, change orders and claims, less costs incurred to date and estimated costs to complete. Profits are recognized based on the estimated project profit multiplied by the percentage complete. Adjustments to estimates of contract revenue, total contract cost, or extent of progress toward completion are often required as work progresses under the contract and as experience is gained, even though the scope of work required under the contract may not change. The nature of accounting for contracts under the percentage of completion method of accounting is such that refinements of the estimating process for changing conditions and new developments are continuous and characteristic of the process. Consequently, the amount of revenue recognized using the percentage of completion method of accounting is sensitive to changes in our estimates of total contract costs.
The total estimated contract cost in the percentage of completion method of accounting is aidentified critical accounting estimate because it can materially affect revenue and profit and requires us to make judgments about matters that are uncertain. There are many factors, including, but not limited to, the ability to properly execute the engineering and design phases consistent with our customers’ expectations, the availability and costs of labor and material resources, productivity and weather, that can affect the accuracy of our cost estimates, and ultimately, our future profitability.estimates.
Accounting for Income Taxes
Our income tax expense, deferred tax assets and liabilities, and reserves for uncertain tax positions reflect management’s best assessment of estimated future taxes to be paid. We are subject to income taxes in the United Kingdom and numerous foreign jurisdictions. Significant judgments and estimates are required in determining our consolidated income tax expense.
In determining our current income tax provision, we assess temporary differences resulting from differing treatments of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are recorded in our consolidated balance sheets. When we maintain deferred tax assets, we must assess the likelihood that these assets will be recovered through adjustments to future taxable income. To the extent we believe recovery is not likely, we establish a valuation allowance. We record an allowance reducing the asset to a value we believe will be recoverable based on our
expectation of future taxable income. We believe the accounting estimate related to the valuation allowance is a critical accounting estimate because it is highly susceptible to change from period to period, requires management to make assumptions about our future income over the lives of the deferred tax assets, and finally, the impact of increasing or decreasing the valuation allowance is potentially material to our results of operations.
Forecasting future income requires us to use a significant amount of judgment. In estimating future income, we use our internal operating budgets and long-range planning projections. We develop our budgets and long-range projections based on recent results, trends, economic and industry forecasts influencing our segments’ performance, our backlog, planned timing of new product launches and customer sales commitments. Significant changes in the expected realizability of a deferred tax asset would require that we adjust the valuation allowance applied against the gross value of our total deferred tax assets, resulting in a change to net income.
As of September 30, 2017, we believe that it is not more likely than not that we will generate future taxable income in certain jurisdictions in which we have cumulative net operating losses and, therefore, we have provided a valuation allowance against the related deferred tax assets. As of September 30, 2017, we believe that it is more likely than not that we will have future taxable income in the United States to utilize our deferred tax assets. Therefore, we have not provided a valuation allowance against the cumulative net operating loss.
The calculation of our income tax expense involves dealing with uncertainties in the application of complex tax laws and regulations in numerous jurisdictions in which we operate. We recognize tax benefits related to uncertain tax positions when, in our judgment, it is more likely than not that such positions will be sustained on examination, including resolutions of any related appeals or litigation, based on the technical merits. We adjust our liabilities for uncertain tax positions when our judgment changes as a result of new information previously unavailable. Due to the complexity of some of these uncertainties, their ultimate resolution may result in payments that are materially different from our current estimates. Any such differences will be reflected as adjustments to income tax expense in the periods in which they are determined.
Accounting for Pension and Other Post-retirement Benefit Plans
Our pension and other post-retirement (health care and life insurance) obligations are described in Note 15 to our consolidated financial statements included in Part I, Item I of this Quarterly Report on Form 10-Q.
The determination of the projected benefit obligations of our pension and other post-retirement benefit plans are important to the recorded amounts of such obligations on our consolidated balance sheet and to the amount of pension expense in our consolidated statements of income. In order to measure the obligations and expense associated with our pension benefits, management must make a variety of estimates, including discount rates used to value certain liabilities, expected return on plan assets set aside to fund these costs, rate of compensation increase, employee turnover rates, retirement rates, mortality rates and other factors. We update these estimates on an annual basis or more frequently upon the occurrence of significant events. These accounting estimates bear the risk of change due to the uncertainty and difficulty in estimating these measures. Different estimates used by management could result in our recognition of different amounts of expense over different periods of time.
Due to the specialized and statistical nature of these calculations which attempt to anticipate future events, we engage third-party specialists to assist management in evaluating our assumptions as well as appropriately measuring the costs and obligations associated with these pension benefits. The discount rate and expected long-term rate of return on plan assets are primarily based on investment yields available and the historical performance of our plan assets, respectively. These measures are critical accounting estimates because they are subject to management’s judgment and can materially affect net income.
The discount rate affects the interest cost component of net periodic pension cost and the calculation of the projected benefit obligation. The discount rate is based on rates at which the pension benefit obligation could be effectively settled on a present value basis. Discount rates are derived by identifying a theoretical settlement portfolio of long-term, high quality (“AA” rated) corporate bonds at our determination date that is sufficient to provide for the projected pension benefit payments. A single discount rate is determined that results in a discounted value of the pension benefit payments that equate to the market value of the selected bonds. The resulting discount rate is reflective of both the current interest rate environment and the pension’s distinct liability characteristics. Significant changes in the discount rate, such as those caused by changes in the yield curve, the mix of bonds available in the market, the duration of selected bonds and the timing of expected benefit payments, may result in volatility in our pension expense and pension liabilities.
The expected long-term rate of return on plan assets is a component of net periodic pension cost. Our estimate of the expected long-term rate of return on plan assets is primarily based on the historical performance of plan assets, current market conditions, our asset allocation and long-term growth expectations. The difference between the expected return and the actual return on
plan assets is amortized over the expected remaining service life of employees, resulting in a lag time between the market’s performance and its impact on plan results.
Holding other assumptions constant, the following table illustrates the sensitivity of changes in the discount rate and expected long-term return on plan assets on pension expense and the projected benefit obligation:
|
| | | | | | | |
(In millions, except basis points) | Increase (Decrease) in 2016 Pension Expense Before Income Taxes | | Increase (Decrease) in Projected Benefit Obligation at December 31, 2016 |
50 basis point decrease in discount rate | $ | 0.3 |
| | $ | 29.4 |
|
50 basis point increase in discount rate | $ | (0.2 | ) | | $ | (27.0 | ) |
50 basis point decrease in expected long-term rate of return on plan assets | $ | — |
| | — |
|
50 basis point increase in expected long-term rate of return on plan assets | $ | — |
| | — |
|
The actuarial assumptions and estimates made by management in determining our pension benefit obligations may materially differ from actual results as a result of changing market and economic conditions and changes in plan participant assumptions. While we believe the assumptions and estimates used are appropriate, differences in actual experience or changes in plan participant assumptions may materially affect our financial position or results of operations.
Impairment of Goodwill
Goodwill is not subject to amortization but is tested for impairment on an annual basis, or more frequently if impairment indicators arise. We have established October 31 as the date of our annual test for impairment of goodwill. Reporting units with goodwill are tested for impairment using a quantitative impairment test.
When using the quantitative impairment test, determining the fair value of a reporting unit is judgmental in nature and involves the use of significant estimates and assumptions. We estimate the fair value of our reporting units using a discounted future cash flow model. The majority of the estimates and assumptions used in a discounted future cash flow model involve unobservable inputs reflecting management’s own assumptions about the assumptions market participants would use in estimating the fair value of a business. These estimates and assumptions include revenue growth rates and operating margins used to calculate projected future cash flows, discount rates and future economic and market conditions. Our estimates are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and do not reflect unanticipated events and circumstances that may occur.
A lower fair value estimate in the future for any of our reporting units could result in goodwill impairments. Factors that could trigger a lower fair value estimate include sustained price declines of the reporting unit’s products and services, cost increases, regulatory or political environment changes, changes in customer demand, and other changes in market conditions, which may affect certain market participant assumptions used in the discounted future cash flow model.
Determination of Fair Value in Business Combinations
Accounting for the acquisition of a business requires the allocation of the purchase price to the various assets acquired and liabilities assumed at their respective fair values. The determination of fair value requires the use of significant estimates and assumptions, and in making these determinations, management uses all available information. If necessary, we have up to one year after the acquisition closing date to finalize these fair value determinations. For tangible and identifiable intangible assets acquired in a business combination, the determination of fair value utilizes several valuation methodologies including discounted cash flows which has assumptions with respect to the timing and amount of future revenue and expenses associated with an asset. The assumptions made in performing these valuations include, but are not limited to, discount rates, future revenues and operating costs, projections of capital costs, and other assumptions believed to be consistent with those used by principal market participants. Due to the specialized nature of these calculations, we engage third-party specialists to assist management in evaluating our assumptions as well as appropriately measuring the fair value of assets acquired and liabilities assumed. Any significant change in key assumptions may cause the acquisition accounting to be revised. Business combinations are described in Note 2 to our consolidated financial statements included in Part I, Item I of this Quarterly Report on Form 10-Q.
OFF-BALANCE SHEET ARRANGEMENTS
Information related to guarantees is incorporated herein by reference from Note 12 to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
OTHER MATTERS
On March 28, 2016, FMC Technologies received an inquiry from the U.S. Department of Justice (“DOJ”) related to the DOJ’sDOJ's investigation of whether certain services Unaoil S.A.M. provided to its clients, including FMC Technologies, violated the U.S. Foreign Corrupt Practices Act (“FCPA”). We are cooperating with the DOJ’s and U.S. Securities and Exchange Commission’s inquiries. On March 29, 2016, Technip S.A. also received an inquiry from the DOJ related to Unaoil. We are cooperatingcooperated with the DOJ’s inquiry.DOJ's investigations and, with regard to FMC Technologies, a related investigation by the SEC.
In late 2016, Technip S.A. was contacted by the DOJ regarding its investigation of offshore platform projects awarded between 2003 and 2007, performed in Brazil by a joint venture company in which Technip S.A. was a minority participant.participant, and also raised with the DOJ certain other projects performed by Technip S.A. subsidiaries in Brazil between 2002 and 2013. The DOJ has also inquired about projects in Ghana and Equatorial Guinea that were awarded to Technip S.A. subsidiaries in 2008 and 2009, respectively. We are cooperatingcooperated with the DOJ in its inquiryinvestigation into potential violations of the FCPA in connection with these projects. We contacted and cooperated with the Brazilian authorities (Federal Prosecution Service (“MPF”), the Comptroller General of Brazil (“CGU”) and the Attorney General of Brazil (“AGU”)) with their investigation concerning the projects in Brazil and have also contacted and are cooperating with French authorities (the Parquet National Financier (“PNF”)) with their investigation about these existing matters.
On June 25, 2019, we announced a global resolution to pay a total of $301.3 million to the DOJ, the SEC, the MPF and the CGU/AGU to resolve these anti-corruption investigations. We were not required to have a monitor and, instead, provided reports on our anti-corruption program to the Brazilian and U.S. authorities for two and three years, respectively. RECENTLY ISSUED ACCOUNTING STANDARDSAs part of this resolution, we entered into a three-year Deferred Prosecution Agreement (“DPA”) with the DOJ related to charges of conspiracy to violate the FCPA related to conduct in Brazil and with Unaoil. In addition, Technip USA, Inc., a U.S. subsidiary, pled guilty to one count of conspiracy to violate the FCPA related to conduct in Brazil. We also provided the DOJ reports on our anti-corruption program during the term of the DPA.
ReferIn Brazil, on June 25, 2019 our subsidiaries Technip Brasil - Engenharia, Instalações E Apoio Marítimo Ltda. and Flexibrás Tubos Flexíveis Ltda. entered into leniency agreements with both the MPF and the CGU/AGU. We made, as part of those agreements, certain enhancements to Note 3the compliance programs in Brazil during the two-year self-reporting period, which aligned with our commitment to cooperation and transparency with the compliance community in Brazil and globally.
In September 2019, the SEC approved our condensed consolidated financial statementspreviously disclosed agreement in principle with the SEC Staff and issued an Administrative Order, pursuant to which we paid the SEC $5.1 million, which was included in Part I, Item 1the global resolution of $301.3 million.
On December 8, 2022, the Company received notice of the official release from all obligations and charges by CGU, having successfully completed all of the self-reporting requirements in the leniency agreements and the case was closed. On December 27, 2022, the DOJ filed a Motion to Dismiss the charges against TechnipFMC related to conspiracy to violate the FCPA, noting to the Court that the Company had fully met and completed all of its obligations under the DPA. The Dismissal Order was signed by the Court on January 4, 2023, thereby closing the case. All obligations to regulatory authorities related to the enforcement matters in the United States and Brazil have been completed and the Company has been unconditionally released by both jurisdictions.
To date, the investigation by the PNF related to historical projects in Equatorial Guinea and Ghana has not reached a resolution. We remain committed to finding a resolution with the PNF and will maintain a $70.0 million provision related to this Quarterly Reportinvestigation. Additionally, the PNF informed us that it is reviewing other historical projects in Angola. We are not aware of any evidence that would support a finding of liability with respect to these projects, or whether the PNF would seek to impose any additional penalty. As we continue our discussions with PNF towards a potential resolution of all of these matters, the amount of a settlement could exceed this provision.
There is no certainty that a settlement with PNF will be reached or that the settlement will not exceed current accruals. The PNF has a broad range of potential sanctions under anti-corruption laws and regulations that it may seek to impose in appropriate circumstances including, but not limited to, fines, penalties, confiscations and modifications to business practices and compliance programs. Any of these measures, if applicable to us, as well as potential customer reaction to such measures, could have a material adverse impact on Form 10-Q.our business, results of operations and financial condition. If we cannot reach a resolution with the PNF, we could be subject to criminal proceedings in France, the outcome of which cannot be predicted.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are subject to financialFor quantitative and qualitative disclosures about market risks, including fluctuationsrisk affecting the Company, see Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” in foreign currency exchange rates and interest rates. In order to manage and mitigate our Annual Report on Form 10-K for the year ended December 31, 2022. Our exposure to these risks, we may use derivative financial instruments in accordance with established policies and procedures. We domarket risk has not use derivative financial instruments where the objective is to generate profits solely from trading activities. At September 30, 2017 andchanged materially since December 31, 2016, substantially all of our derivative holdings consisted of foreign currency forward contracts and foreign currency instruments embedded in purchase and sale contracts.2022.
These forward-looking disclosures only address potential impacts from market risks as they affect our financial instruments and do not include other potential effects that could impact our business as a result of changes in foreign currency exchange rates, interest rates, commodity prices or equity prices.
Foreign Currency Exchange Rate Risk
We conduct operations around the world in a number of different currencies. Many of our significant foreign subsidiaries have designated the local currency as their functional currency. Our earnings are therefore subject to change due to fluctuations in foreign currency exchange rates when the earnings in foreign currencies are translated into U.S. dollars. We do not hedge this translation impact on earnings. A 10% increase or decrease in the average exchange rates of all foreign currencies at September 30, 2017, would have changed our revenue and income before income taxes attributable to TechnipFMC by approximately 5% and 8%, respectively.
When transactions are denominated in currencies other than our subsidiaries’ respective functional currencies, we manage these exposures through the use of derivative instruments. We primarily use foreign currency forward contracts to hedge the foreign currency fluctuation associated with firmly committed and forecasted foreign currency denominated payments and receipts. The derivative instruments associated with these anticipated transactions are usually designated and qualify as cash flow hedges, and as such the gains and losses associated with these instruments are recorded in other comprehensive income until such time that the underlying transactions are recognized. Unless these cash flow contracts are deemed to be ineffective or are not designated as cash flow hedges at inception, changes in the derivative fair value will not have an immediate impact on our results of operations since the gains and losses associated with these instruments are recorded in other comprehensive income. When the anticipated transactions occur, these changes in value of derivative instrument positions will be offset against changes in the value of the underlying transaction. When an anticipated transaction in a currency other than the functional currency of an entity is recognized as an asset or liability on the balance sheet, we also hedge the foreign currency fluctuation of these assets and liabilities with derivative instruments after netting our exposures worldwide. These derivative instruments do not qualify as cash flow hedges.
Occasionally, we enter into contracts or other arrangements containing terms and conditions that qualify as embedded derivative instruments and are subject to fluctuations in foreign exchange rates. In those situations, we enter into derivative foreign exchange contracts that hedge the price or cost fluctuations due to movements in the foreign exchange rates. These derivative instruments are not designated as cash flow hedges.
Interest Rate Risk
We assess effectiveness of forward foreign currency contracts designated as cash flow hedges based on changes in fair value attributable to changes in spot rates. We exclude the impact attributable to changes in the difference between the spot rate and the forward rate for the assessment of hedge effectiveness and recognize the change in fair value of this component immediately in earnings. Considering that the difference between the spot rate and the forward rate is proportional to the differences in the interest rates of the countries of the currencies being traded, we have exposure in the unrealized valuation of our forward foreign currency contracts to relative changes in interest rates between countries in our results of operations. Based on our portfolio as of September 30, 2017, we have material positions with exposure to interest rates in the United States, Canada, Australia, Brazil, the United Kingdom, Singapore, the European Community and Norway.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of September 30, 2017, andMarch 31, 2023, under the direction of our Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures, as defined in RulesRule 13a-15(e) and 15d-15(e) under the Exchange Act. Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded as of September 30, 2017, that our disclosure controls and procedures were not effective because of the material weakness in our internal control over financial reporting described below.
As previously reported, we did not maintain effective controls relating to the calculation of temporary gains and losses from natural hedges on certain of its projects and related foreign exchange adjustments, and this control deficiency resulted in the restatement of our interim Condensed Consolidated Financial Statements as of, and for, the three month period ended March 31, 2017. Management determined that this control deficiency constituted a material weakness in our internal control over financial reporting and, as a result, has concluded that our internal control over financial reporting was not effective as of September 30, 2017. Additionally, this control deficiency could result in misstatements of the consolidated financial statements that would result in a material misstatement that would not be prevented or detected.
Management has taken corrective actions to address the material weakness, including the implementation of controls to ensure the accurate remeasurement of gains and losses due to foreign currency impact for the purpose of external reporting. Management has also revised the internal system for recording and tracking foreign currency gains and losses and for recording asset/liability project positions to ensure that proper remeasurement procedures are performed. With successful operation of these modifications, we expect to test these modifications to determine timing of full remediation in subsequent quarters.
Other than the changes in our internal control over financial reporting implemented after March 31, 2017 to address the material weakness noted above, there2023.
Changes in Internal Controls over Financial Reporting
There were no changes in our internal control over financial reporting during the three months ended September 30, 2017March 31, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II—II — OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are involved in various pending or potential legal actions or disputes in the ordinary course of our business. These actions and disputes can involve our agents, suppliers, clients and joint venture partners and can include claims related to payment of fees, service quality and ownership arrangements, including certain put or call options. Management is unable to predict the ultimate outcome of these actions because of their inherent uncertainty. However, management believes that the most probable, ultimate resolution of these matters will not have a material adverse effect on our consolidated financial position, results of operations or cash flows.
ITEM 1A. RISK FACTORS
The Company has identified a material weakness in its disclosure controls and procedures and internal control over financial reporting. If our remedial measures are insufficient to address the material weakness, or if one or more additional material weaknesses or significant deficiencies in our disclosure controls and procedures or internal control over financial reporting are discovered or occur in the future, our consolidated financial statements may contain material misstatements and we could be required to further restate our financial results, which could have a material adverse effect on our financial condition, results of operations and cash flows.
Management identified a material weakness in the Company’s disclosure controls and procedures and internal control over financial reporting as of March 31, 2017 relating to the rates used in calculations of foreign currency effects on certainAs of the Company’s engineering and construction projects and related ownership interests. We did not have sufficient controls in place to provide reasonable assurance that a material error would be prevented or detected related to the rates used in calculations of foreign currency effects on certain of the Company’s engineering and construction projects and related foreign exchange adjustments. This deficiency in the design of our controls resulted in a material error in our financial statements.
A material weakness is a deficiency, or combination of deficiencies in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. As a resultdate of this material weakness, our chief executive officer and chief financial officer have concluded that, as of September 30, 2017, our disclosure controls and procedures were not effective at a reasonable assurance level. As a result of the material weakness, management has concluded that our internal control over financial reporting was not effective as of September 30, 2017.
The Company has reviewed the process to calculate the foreign currency remeasurement effect and has implemented revisions and additional controls designed to ensure that similar computational errors will not recur. To remediate the material weakness in our internal control over financial reporting, the Company will establish policies and procedures for the review, approval and application of GAAP to, and disclosure with respect to, calculations of foreign currency effects.
If our remedial measures are insufficient to address the material weakness, or if one or more additional material weaknesses or significant deficiencies in our disclosure controls and procedures or internal control over financial reporting are discovered or occur in the future, our consolidated financial statements may contain material misstatements and we could be required to further restate our financial results, which could have a material adverse effect on our financial condition, results of operations and cash flows, restrict our ability to access the capital markets, require significant resources to correct the weaknesses or deficiencies, subject us to fines, penalties or judgments, harm the our reputation or otherwise cause a decline in investor confidence and cause a decline in the market price of our stock.
We cannot provide absolute assurance that additional material weaknesses or significant deficiencies in our disclosure controls and procedures or internal control over financial reporting will not be identified in the future. Any failure to maintain or implement required new or improved controls, or any difficulties we encounter in their implementation, could result in additional significant deficiencies or material weaknesses, cause us to fail to meet our periodic reporting obligations or result in material misstatements in our financial statements. Any such failure could also adversely affect the results of periodic management evaluations and annual auditor attestation reports regarding the effectiveness of our internal control over financial reporting required under Section 404 of the Sarbanes-Oxley Act of 2002 and the rules promulgated under Section 404. The existence of a material weakness could result in errors in our financial statements that could result in a restatement of financial statements, cause us to fail to meet our reporting obligations and cause investors to lose confidence in our reported financial information, leading to a decline in our stock price.
Unanticipated changes relating to competitive factors in our industry, including ongoing industry consolidation, may impact our results of operations.
Our industry, including our customers and competitors, has experienced unanticipated changes in recent years. Moreover, the industry is undergoing consolidation, which may affect demand for our products and services as a result of price concessions or decreased customer capital spending. This consolidation activity could have a significant negative impact on our results of operations, financial condition or cash flows. We are unable to predict what effect consolidations and other competitive factors in the industry may have on prices, capital spending by our customers, our selling strategies, our competitive position, our ability to retain customers or our ability to negotiate favorable agreements with our customers.
Demand for our products and services depends on oil and gas industry activity and expenditure levels, which are directly affected by trends in the demand for and price of crude oil and natural gas.
We are substantially dependent on conditions in the oil and gas industry, including (i) the level of exploration, development and production activity, (ii) capital spending, and (iii) the processing of oil and natural gas in refining units, petrochemical sites and natural gas liquefaction plants by energy companies. Any substantial or extended decline in these expenditures may result in the reduced pace of discovery and development of new reserves of oil and gas and the reduced exploration of existing wells, which could adversely affect demand for our products and services and, in certain instances, result in the cancellation, modification, or re-scheduling of existing orders in our backlog. These factors could have an adverse effect on our revenue and profitability. The level of exploration, development and production activity is directly affected by trends in oil and natural gas prices, which historicallyfiling, there have been volatile.
Factors affecting the prices of oil and natural gas include, but are not limited to, the following:
demand for hydrocarbons, which is affected by worldwide population growth, economic growth rates and general economic and business conditions;
costs of exploring for, producing and delivering oil and natural gas;
political and economic uncertainty and socio-political unrest;
available excess production capacity within the Organization of Petroleum Exporting Countries (“OPEC”) and the level of oil production by non-OPEC countries;
oil refining capacity and shifts in end-customer preferences toward fuel efficiency and the use of natural gas;
technological advances affecting energy consumption;
potential acceleration of the development of alternative fuels;
access to capital and credit markets, which may affect our customers’ activity levels and spending for our products and services; and
natural disasters.
The oil and gas industry has historically experienced periodic downturns, which have been characterized by diminished demand for oilfield services and downward pressure on the prices we charge. The current downturn in the oil and gas industry has resulted in a reduction in demand for oilfield services and could further adversely affect our financial condition, results of operationsno material changes or cash flows.
Our success depends on our ability to implement new technologies and services.
Our success depends on the ongoing development and implementation of new product designs, including the processes used by us to produce or market our products, and on our ability to protect and maintain critical intellectual property assets related to these developments. If we are not able to obtain patent or other protection of our intellectual property rights, we may not be able to continue to develop our services, products and related technologies to meet evolving industry requirements, and if so, at prices acceptableupdates to our customers.
The industries in which we operate or have operated expose us to potential liabilities, including the installation or use of our products.
We are subject to potential liabilities arising from equipment malfunctions, equipment misuse, personal injuries and natural disasters, the occurrence of which may result in uncontrollable flows of gas or well fluids, fires and explosions. Although we have obtained insurance against many of these risks, our insurance may not be adequate to cover our liabilities. Further, the insurance may not generally be available in the future or, if available, premiums may not be commercially justifiable. If we
incur substantial liability and the damages are not covered by insurance or are in excess of policy limits, or if we were to incur liability at a time when we are not able to obtain liability insurance, such potential liabilities could have a material adverse effect on our business, results of operations, financial condition or cash flows.
We may lose money on fixed-price contracts.
As customary for the types of businesses which we operate, we often agree to provide products and services under fixed-price contracts. We are subject to material risks in connection with such fixed-price contracts. Actual expenses incurred in executing a fixed-price contract can vary substantially from those originally anticipated for several reasons including, but not limited to, the following:
unforeseen additional costs related to the purchase of substantial equipment necessary for contract fulfillment;
mechanical failure of our production equipment and machinery;
delays caused by local weather conditions and/or natural disasters (including earthquakes and floods); and
a failure of suppliers or subcontractors to perform their contractual obligations.
The realization of any material risks and unforeseen circumstances could also lead to delays in the execution schedule of a project. We may be held liable to a customer should we fail to meet project milestones or deadlines or to comply with other contractual provisions. Additionally, delays in certain projects could lead to delays in subsequent projects for which production equipment and machinery currently being utilized on a project were intended.
Pursuant to the terms of fixed-price contracts, we are not always able to increase the price of the contract to reflectrisk factors that were unforeseen at the time its bid was submitted. As a result, it is not possible to estimate with complete certainty the final cost or margin of a project at the time of bidding or during the early phases of its execution. Depending on the size of a project, variations from estimated contract performance could have a significant impact on our financial condition, results of operations or cash flows.
New capital asset construction projects for vessels and plants are subject to risks, including delays and cost overruns, which could have a material adverse effect on our financial condition or results of operations.
We seek to continuously upgrade and develop our asset base. Such projects are subject to risks of delay and cost overruns which are inherent to any large construction project and which are the result of numerous factors including, but not limited to, the following:
shortages of key equipment, materials or skilled labor;
unscheduled delayspreviously disclosed in the delivery or ordered materials and equipment;
issues regarding the design and engineering; and
shipyard delays and performance issues.
Failure to complete construction in time, or the inability to complete construction in accordance with its design specifications, may result in loss of revenue. Additionally, capital expenditures for construction projects could materially exceed the initially planned investments or can result in delays in putting such assets into operation.
Disruptions in the timely deliveryPart I, Item 1A of our backlog could affect our future sales, profitability, and our relationships with our customers.
Many of the contracts we enter into with our customers require long manufacturing lead times due to complex technical and logistical requirements. These contracts may contain clauses related to liquidated damages or financial incentives regarding on-time delivery, and a failure by us to deliver in accordance with customer expectations could subject us to liquidated damages or loss of financial incentives, reduce our marginsAnnual Report on these contracts or result in damage to existing customer relationships. The ability to meet customer delivery schedules for this backlog is dependent on a number of factors, including, but not limited to, access to the raw materials required for production, an adequately trained and capable workforce, subcontractor performance, project engineering expertise and execution, sufficient manufacturing plant capacity and appropriate planning and scheduling of manufacturing resources. Failure to deliver backlog in accordance with expectations could negatively impact our financial performance, particularly in light of the current industry environment where customers may seek to improve their returns or cash flows.
We face risks relating to subcontractors, suppliers and our joint venture partners.
We generally rely on subcontractors, suppliers and our joint venture partnersForm 10-K for the performance of our contracts. Although we are not dependent upon any single supplier, certain geographic areas of our business or a project or group of projects may heavily depend on certain suppliers for raw materials or semi-finished goods. Any difficulty faced by us in hiring suitable subcontractors or acquiring equipment and materials could compromise our ability to generate a significant margin on a project or to complete such project within the allocated timeframe.year ended December 31, 2022.
Any delay on the part of subcontractors, suppliers or joint venture partners in the completion of work, any failure on the part of a subcontractor, supplier or joint venture partner to meet its obligations, or any other event attributable to a subcontractor, supplier or joint venture partner that is beyond our control or not foreseeable by us could lead to delays in the overall progress of the project and/or generate significant extra costs. We are exposed to risks presented by the activities of our subcontractors, suppliers and joint venture partners in connection with the performance of their obligations for a project. If subcontractors, suppliers or joint venture partners refuse to adhere to their contractual obligations with us or are unable to do so due to a deterioration of their financial condition, we may be unable to find a suitable replacement at a comparable price, or at all.
Based on these potential issues, we could be required to compensate our customers. Moreover, the failure of one of our joint venture partners to perform their obligations in a timely and satisfactory manner could lead to additional obligations and costs being imposed on us as we would be potentially obligated to assume our defaulting partner’s obligations, Even if we were entitled to make a claim for these extra costs against the defaulting supplier, subcontractor or joint venture partner, we could be unable to recover the entirety of these costs and this could materially adversely affect our business, financial condition or results of operations.
Our businesses are dependent on the continuing services of certain of our key managers and employees.
We depend on key personnel. The loss of any key personnel could adversely impact our business if we are unable to implement key strategies or transactions in their absence. The loss of qualified employees or an inability to retain and motivate additional highly-skilled employees required for the operation and expansion of our business could hinder our ability to successfully conduct research activities and develop marketable products and services.
Pirates endanger our maritime employees and assets.
We face material piracy risks in the Gulf of Guinea, the Somali Basin and the Gulf of Aden, and, to a lesser extent, in Southeast Asia, Malacca and the Singapore Straits. Piracy represents a risk for both our projects and our vessels which operate and transmit through sensitive maritime areas. Such risks have the potential to significant harm crews and to negatively impact the execution schedule for our projects. If our maritime employees or assets are endangered, additional time may be required to find an alternative solution, which may delay project realization and negatively impact our business, financial condition or results of operations.
Due to the types of contracts we enter into and the markets in which we operate, the cumulative loss of several major contracts, customers or alliances may have an adverse effect on our results of operations.
We often enter into large, long-term contracts that, collectively, represent a significant portion of our revenue. These agreements, if terminated or breached, may have a larger impact on our operating results or our financial condition than shorter-term contracts due to the value at risk. Moreover, the global market for the production, transportation and transformation of hydrocarbons and by-products, as well as the other industrial markets in which we operate, is dominated by a small number of companies. As a result, our business relies on a limited number of customers. If we were to lose several key contracts, customers or alliances over a relatively short period of time, we could experience a significant adverse impact on our financial condition, results of operations or cash flows.
Our operations require us to comply with numerous regulations, violations of which could have a material adverse effect on our financial condition, results of operations or cash flows.
Our operations and manufacturing activities are governed by international, regional transnational and national laws and regulations in every place where we operate relating to matters such as environmental, health and safety, labor and employment, import/export control, currency exchange, bribery and corruption and taxation. These laws and regulations are complex, frequently change and have tended to become more stringent over time. In the event the scope of these laws and regulations expand in the future, the incremental cost of compliance could adversely impact our financial condition, results of operations or cash flows.
Our international operations are subject to anti-corruption laws and regulations, such as the FCPA, the U.K. Bribery Act of 2010 (the “Bribery Act”), the Brazilian Anti-Bribery Act (also known as the Brazilian Clean Company Act) and economic and
trade sanctions, including those administered by the United Nations, the European Union, the Office of Foreign Assets Control of the U.S. Department of the Treasury (“U.S. Treasury”) and the U.S. Department of State. The FCPA prohibits providing anything of value to foreign officials for the purposes of obtaining or retaining business or securing any improper business advantage. We may deal with both governments and state-owned business enterprises, the employees of which are considered foreign officials for purposes of the FCPA. The provisions of the Bribery Act extend beyond bribery of foreign public officials and are more onerous than the FCPA in a number of other respects, including jurisdiction, non-exemption of facilitation payments and penalties. Economic and trade sanctions restrict our transactions or dealings with certain sanctioned countries, territories and designated persons.
As a result of doing business in foreign countries, including through partners and agents, we will be exposed to a risk of violating anti-corruption laws and sanctions regulations. Some of the international locations in which we will operate have developing legal systems and may have higher levels of corruption than more developed nations. Our continued expansion and worldwide operations, including in developing countries, our development of joint venture relationships worldwide and the employment of local agents in the countries in which we operate increases the risk of violations of anti-corruption laws and economic and trade sanctions. Violations of anti-corruption laws and economic and trade sanctions are punishable by civil penalties, including fines, denial of export privileges, injunctions, asset seizures, debarment from government contracts (and termination of existing contracts) and revocations or restrictions of licenses, as well as criminal fines and imprisonment. In addition, any major violations could have a significant impact on our reputation and consequently on our ability to win future business.
While we believe we have a strong compliance program, including procedures to minimize and detect fraud in a timely manner, and continue efforts to improve our systems of internal controls, we can provide no assurance that the policies and procedures will be followed at all times or will effectively detect and prevent violations of the applicable laws by one or more of our employees, consultants, agents or partners, and, as a result, we could be subject to penalties and material adverse consequences on our business, financial condition or results of operations.
Compliance with environmental laws and regulations may adversely affect our business and results of operations.
Environmental laws and regulations in various countries affect the equipment, systems and services we design, market and sell, as well as the facilities where we manufacture our equipment and systems. We are required to invest financial and managerial resources to comply with environmental laws and regulations and believe that we will continue to be required to do so in the future. Failure to comply with these laws and regulations may result in the assessment of administrative, civil and criminal penalties, the imposition of remedial obligations, or the issuance of orders enjoining our operations. These laws and regulations, as well as the adoption of new legal requirements or other laws and regulations affecting exploration and development of drilling for crude oil and natural gas, could adversely affect our business and operating results by increasing our costs, limiting the demand for our products and services or restricting our operations.
Disruptions in the political, regulatory, economic and social conditions of the countries in which we conduct business could adversely affect our business or results of operations.
We operate in various countries across the world. Instability and unforeseen changes in any of the markets in which we conduct business, including economically and politically volatile areas such as North Africa, West Africa, the Middle East, and the Commonwealth of Independent States, could have an adverse effect on the demand for our services and products, our financial condition or our results of operations. These factors include, but are not limited to, the following:
nationalization and expropriation;
potentially burdensome taxation;
inflationary and recessionary markets, including capital and equity markets;
civil unrest, labor issues, political instability, terrorist attacks, cyber-terrorism, military activity and wars;
supply disruptions in key oil producing countries;
the ability of OPEC to set and maintain production levels and pricing;
trade restrictions, trade protection measures or price controls;
foreign ownership restrictions;
import or export licensing requirements;
restrictions on operations, trade practices, trade partners and investment decisions resulting from domestic and foreign laws and regulations;
changes in, and the administration of, laws and regulations;
inability to repatriate income or capital;
reductions in the availability of qualified personnel;
foreign currency fluctuations or currency restrictions; and
fluctuations in the interest rate component of forward foreign currency rates.
DTC and Euroclear Paris may cease to act as depository and clearing agencies for our shares.
Our shares were issued into the facilities of The Depository Trust Company (“DTC”) with respect to shares listed on the New York Stock Exchange (“NYSE”) and Euroclear with respect to shares listed on Euronext Paris (DTC and Euroclear being referred to as the “Clearance Services”). The Clearance Services are widely used mechanisms that allow for rapid electronic transfers of securities between the participants in their respective systems, which include many large banks and brokerage firms. The Clearance Services have general discretion to cease to act as a depository and clearing agencies for our shares. If either of the Clearance Services determine at any time that our shares are not eligible for continued deposit and clearance within its facilities, then we believe that our shares would not be eligible for continued listing on the NYSE or Euronext Paris, as applicable, and trading in our shares would be disrupted. While we would pursue alternative arrangements to preserve the listing and maintain trading, any such disruption could have a material adverse effect on the trading price of our shares.
The results of the United Kingdom’s referendum on withdrawal from the European Union may have a negative effect on global economic conditions, financial markets and our business.
We are based in the United Kingdom and have operational headquarters in Paris, France; Houston, Texas, USA; and in London, United Kingdom, with worldwide operations, including material business operations in Europe. In June 2016, a majority of voters in the United Kingdom elected to withdraw from the European Union in a national referendum (“Brexit”). The referendum was advisory, and the terms of any withdrawal are subject to a negotiation period that could last at least two years after the government of the United Kingdom formally initiated its withdrawal process in the first quarter of 2017. Nevertheless, Brexit has created significant uncertainty about the future relationship between the United Kingdom and the European Union and has given rise to calls for certain regions within the United Kingdom to preserve their place in the European Union by separating from the United Kingdom as well as for the governments of other E.U. member states to consider withdrawal.
These developments, or the perception that any of them could occur, could have a material adverse effect on global economic conditions and the stability of the global financial markets and could significantly reduce global market liquidity and restrict the ability of key market participants to operate in certain financial markets. Asset valuations, currency exchange rates and credit ratings may be especially subject to increased market volatility. Lack of clarity about applicable future laws, regulations or treaties as the United Kingdom negotiates the terms of a withdrawal, as well as the operation of any such rules pursuant to any withdrawal terms, including financial laws and regulations, tax and free trade agreements, intellectual property rights, supply chain logistics, environmental, health and safety laws and regulations, immigration laws, employment laws and other rules that would apply to us and our subsidiaries, could increase our costs, restrict our access to capital within the United Kingdom and the European Union, depress economic activity and decrease foreign direct investment in the United Kingdom. For example, withdrawal from the European Union could, depending on the negotiated terms of withdrawal, eliminate the benefit of certain tax-related E.U. directives currently applicable to U.K. companies such as us, including the Parent-Subsidiary Directive and the Interest and Royalties Directive, which could, subject to any relief under an available tax treaty, raise our tax costs.
If the United Kingdom and the European Union are unable to negotiate acceptable withdrawal terms or if other E.U. member states pursue withdrawal, barrier-free access between the United Kingdom and other E.U. member states or among the European Economic Area overall could be diminished or eliminated. Any of these factors could have a material adverse effect on our business, financial condition and results of operations.
As an English public limited company, we must meet certain additional financial requirements before we may declare dividends or repurchase shares and certain capital structure decisions may require stockholder approval which may limit our flexibility to manage our capital structure.
Under English law, we will only be able to declare dividends, make distributions or repurchase shares (other than out of the proceeds of a new issuance of shares for that purpose) out of “distributable profits.” Distributable profits are a company’s accumulated, realized profits, to the extent that they have not been previously utilized by distribution or capitalization, less its accumulated, realized losses, to the extent that they have not been previously written off in a reduction or reorganization of capital duly made. In addition, as a public limited company organized under the laws of England and Wales, we may only make a distribution if the amount of our net assets is not less than the aggregate of our called-up share capital and non-distributable reserves and if, to the extent that, the distribution does not reduce the amount of those assets to less that that aggregate.
Following the merger, we capitalized our reserves arising out of the merger by the allotment and issuance by TechnipFMC of a bonus share, which was paid up using such reserves, such that the amount of such reserves so applied, less the nominal value of the bonus share, applied as share premium and accrued to our share premium account. We implemented a court-approved reduction of our capital by way of a cancellation of the bonus share and share premium account in the amount of $10,177,554,182, which completed on June 29, 2017, in order to create distributable profits to support the payment of possible future dividends or future share repurchases. Our articles of association permit us by ordinary resolution of the stockholders to declare dividends, provided that the directors have made a recommendation as to its amount. The dividend shall not exceed the amount recommended by the directors. The directors may also decide to pay interim dividends if it appears to them that the profits available for distribution justify the payment. When recommending or declaring payment of a dividend, the directors are required under English law to comply with their duties, including considering our future financial requirements.
We may not be able to pay dividends or repurchase shares of our ordinary shares in accordance with our announced intent or at all.
The Board of Directors’ determinations regarding dividends and share repurchases will depend on a variety of factors, including our net income, cash flow generated from operations or other sources, liquidity position and potential alternative uses of cash, such as acquisitions, as well as economic conditions and expected future financial results. Our ability to declare future dividends and make future share repurchases will depend on our future financial performance, which in turn depends on the successful implementation of our strategy and on financial, competitive, regulatory, technical and other factors, general economic conditions, demand and selling prices for our products and services and other factors specific to our industry or specific projects, many of which are beyond our control. Therefore, our ability to generate cash depends on the performance of our operations and could be limited by decreases in our profitability or increases in costs, regulatory changes, capital expenditures or debt servicing requirements.
Any failure to pay dividends or repurchase shares of our ordinary shares could negatively impact our reputation, harm investor confidence in us, and cause the market price of our ordinary shares to decline.
Our existing and future debt may limit cash flow available to invest in the ongoing needs of our business and could prevent us from fulfilling our obligations under our outstanding debt.
We have substantial existing debt. As of September 30, 2017, after giving effect to the Merger, our total debt would have been $3.6 billion. We also have the capacity under our $2.5 billion credit facility and bilateral facilities to incur substantial additional debt. Our level of debt could have important consequences. For example, it could:
make it more difficult for us to make payments on our debt;
require us to dedicate a substantial portion of our cash flow from operations to the payment of debt service, reducing the availability of our cash flow to fund working capital, capital expenditures, acquisitions, distributions and other general partnership purposes;
increase our vulnerability to adverse economic or industry conditions;
limit our ability to obtain additional financing to enable us to react to changes in our business; or
place us at a competitive disadvantage compared to businesses in our industry that have less debt.
Additionally, any failure to meet required payments on our debt, or failure to comply with any covenants in the instruments governing our debt, could result in an event of default under the terms of those instruments. In the event of such default, the holders of such debt could elect to declare all the amounts outstanding under such instruments to be due and payable.
A downgrade in our debt rating could restrict our ability to access the capital markets.
The terms of our financing are, in part, dependent on the credit ratings assigned to our debt by independent credit rating agencies. We cannot provide assurance that any of our current credit ratings will remain in effect for any given period of time or that a rating will not be lowered or withdrawn entirely by a rating agency. Factors that may impact our credit ratings include debt levels, capital structure, planned asset purchases or sales, near- and long-term production growth opportunities, market position, liquidity, asset quality, cost structure, product mix, customer and geographic diversification and commodity price levels. A downgrade in our credit ratings, particularly to non-investment grade levels, could limit our ability to access the debt capital markets, refinance our existing debt or cause us to refinance or issue debt with less favorable terms and conditions. Moreover, our revolving credit agreement includes an increase in interest rates if the ratings for our debt are downgraded, which could have an adverse effect on our results of operations. An increase in the level of our indebtedness and related interest costs may increase our vulnerability to adverse general economic and industry conditions and may affect our ability to obtain additional financing.
Uninsured claims and litigation against us, including intellectual property litigation, could adversely impact our financial condition, results of operations or cash flows.
We could be impacted by the outcome of pending litigation, as well as unexpected litigation or proceedings. We have insurance coverage against operating hazards, including product liability claims and personal injury claims related to our products or operating environments in which our employees operate, to the extent deemed prudent by our management and to the extent insurance is available. However, no assurance can be given that the nature and amount of that insurance will be sufficient to fully indemnify us against liabilities arising out of pending and future claims and litigation. Additionally, in individual circumstances, certain proceedings or cases may also lead to our formal or informal exclusion from tenders or the revocation or loss of business licenses or permits. Our financial condition, results of operations or cash flows could be adversely affected by unexpected claims not covered by insurance.
In addition, the tools, techniques, methodologies, programs and components we use to provide our services may infringe upon the intellectual property rights of others. Infringement claims generally result in significant legal and other costs. Royalty payments under licenses from third parties, if available, would increase our costs. If a license were not available, we might not be able to continue providing a particular service or product, which could adversely affect our financial condition, results of operations or cash flows. Additionally, developing non-infringing technologies would increase our costs.
Currency exchange rate fluctuations could adversely affect our financial condition, results of operations or cash flows.
We conduct operations around the world in a number of different currencies. Because a significant portion of our revenue is denominated in currencies other than our reporting currency, the U.S. dollar, changes in exchange rates will produce fluctuations in our revenue, costs and earnings and may also affect the book value of our assets and liabilities and related equity. We do not hedge translation impacts on earnings, and our efforts to engage in hedging transactions to minimize our current exchange rate exposure for transaction impacts may not be successful. Moreover, certain currencies, specifically currencies in countries such as Angola and Nigeria, do not actively trade in the global foreign exchange markets and may subject us to increased foreign currency exposures. As a result, fluctuations in foreign currency exchange rates may adversely affect our financial condition, results of operations or cash flows.
We may not realize the cost savings, synergies and other benefits expected from the merger of FMC Technologies and Technip.
The combination of two independent companies is a complex, costly and time-consuming process. As a result, we will be required to devote significant management attention and resources to integrating the business practices and operations of Technip and FMC Technologies. The integration process may disrupt our businesses and, if ineffectively implemented, could preclude realization of the full benefits expected from the merger. Our failure to meet the challenges involved in successfully integrating the operations of Technip and FMC Technologies or otherwise to realize the anticipated benefits of the merger could cause an interruption of our operations and could seriously harm our results of operations. In addition, the overall integration of Technip and FMC Technologies may result in material unanticipated problems, expenses, liabilities, competitive responses, loss of client relationships and diversion of management’s attention, and may cause our stock prices to decline. The difficulties of combining the operations of Technip and FMC Technologies include, but is not limited to, the following:
managing a significantly larger company;
coordinating geographically separate organizations;
the potential diversion of management focus and resources from other strategic opportunities and from operational matters;
aligning and executing our strategy;
retaining existing customers and attracting new customers;
maintaining employee morale and retaining key management and other employees;
integrating two unique business cultures, which may prove to be incompatible;
the possibility of faulty assumptions underlying expectations regarding the integration process;
consolidating corporate and administrative infrastructures and eliminating duplicative operations;
coordinating distribution and marketing efforts;
integrating IT, communications and other systems;
changes in applicable laws and regulations;
managing tax costs or inefficiencies associated with integrating our operations;
unforeseen expenses or delays associated with the merger; and
taking actions that may be required in connection with obtaining regulatory approvals.
Many of these factors will be outside our control and any one of them could result in increased costs, decreased revenue and diversion of management’s time and energy, which could materially impact our business, financial condition and results of operations. In addition, even if the operations of Technip and FMC Technologies are successfully integrated, we may not realize the full benefits of the merger, including the synergies, cost savings or sales or growth opportunities that we expect. These benefits may not be achieved within the anticipated time frame, or at all. As a result, we cannot assure that the combination of Technip and FMC Technologies will result in the realization of the full benefits expected from the merger.
We may incur significant merger-related costs.
We have incurred and expect to incur a number of non-recurring direct and indirect costs associated with the merger. In addition to the cost and expenses associated with the consummation of the merger, there are also processes, policies, procedures, operations, technologies and systems that must be integrated in connection with the merger and the integration of Technip and FMC Technologies. While both Technip and FMC Technologies have assumed that a certain level of expenses would be incurred in connection with the merger and continue to assess the magnitude of these costs, there are many factors beyond our control that could affect the total amount or the timing of the integration and implementation expenses. There may also be significant additional unanticipated costs in connection with the merger that we may not recoup. These costs and expenses could reduce the realization of efficiencies and strategic benefits we expect to achieve from the merger. Although we expect that these benefits will offset the transaction expenses and implementation costs over time, this net benefit may not be achieved in the near term or at all.
A failure of our IT infrastructure could adversely impact our business and results of operations.
The efficient operation of our business is dependent on our IT systems. Accordingly, we rely upon the capacity, reliability and security of our IT hardware and software infrastructure and our ability to expand and update this infrastructure in response to changing needs. Despite our implementation of security measures, our systems are vulnerable to damages from computer viruses, natural disasters, incursions by intruders or hackers, failures in hardware or software, power fluctuations, cyber terrorists and other similar disruptions. Additionally, we rely on third parties to support the operation of our IT hardware and software infrastructure, and in certain instances, utilize web-based applications. Although no such material incidents have occurred to date, the failure of our IT systems or those of our vendors to perform as anticipated for any reason or any significant breach of security could disrupt our business and result in numerous adverse consequences, including reduced effectiveness and efficiency of operations, inappropriate disclosure of confidential and proprietary information, reputational harm, increased overhead costs and loss of important information, which could have a material adverse effect on our business and results of operations. In addition, we may be required to incur significant costs to protect against damage caused by these disruptions or security breaches in the future.
The IRS may not agree that we should be treated as a foreign corporation for U.S. federal tax purposes and may seek to impose an excise tax on gains recognized by certain individuals.
Although we are incorporated in the United Kingdom, the U.S. Internal revenue Service (the “IRS”) may assert that we should be treated as a U.S. “domestic” corporation (and, therefore, a U.S. tax resident) for U.S. federal income tax purposes pursuant to Section 7874 of the U.S. Internal Revenue Code of 1986, as amended (the “Code”). For U.S. federal income tax purposes, a corporation is generally considered a U.S. “domestic” corporation (or U.S. tax resident) if it is organized in the United States, and a corporation is generally considered a “foreign” corporation (or non-U.S. tax resident) if it is not a U.S. domestic corporation. Because we are an entity incorporated in England and Wales, we would generally be classified as a foreign corporation (or non-U.S. tax resident) under these rules. Section 7874 provides an exception under which a foreign incorporated entity may, in certain circumstances, be treated as a U.S. domestic corporation for U.S. federal income tax purposes.
Unless we have satisfied the substantial business activities exception, as defined in Section 7874 and described in more detail below (the “Substantial Business Activities Exception”), we will be treated as a U.S. domestic corporation (that is, as a U.S. tax resident) for U.S. federal income tax purposes under Section 7874 if the percentage (by vote or value) of our shares considered to be held by former holders of FMCTI Shares after the merger by reason of holding FMCTI Shares for purposes of Section 7874 (the “Section 7874 Percentage”) is (i) 60% or more (if, as expected, the Third Country Rule (defined below) applies) or (ii) 80% or more (if the Third Country Rule does not apply). In order for us to satisfy the Substantial Business Exception, at least 25% of the employees (by headcount and compensation), real and tangible assets and gross income of our expanded affiliated group must be based, located and derived, respectively, in the United Kingdom. The Substantial Business Activities Exception is not expected to be satisfied. In addition, the IRS and the U.S. Department of the Treasury have issued a rule that generally provides that if (i) there is an acquisition of a domestic company by a foreign company in which the Section 7874 Percentage is at least 60%, and (ii) in a related acquisition, such foreign acquiring company acquires another foreign
corporation and the foreign acquiring company is not subject to tax as a resident in the foreign country in which the acquired foreign corporation was subject to tax as a resident prior to the transactions, then the foreign acquiring company will be treated as a U.S. domestic company for U.S. federal income tax purposes (the “Third Country Rule”). Because we are a tax resident in the United Kingdom and not a tax resident in France as Technip was, we expect that we would be treated as a U.S. domestic corporation for U.S. federal income tax purposes under the Third Country Rule if the Section 7874 Percentage were at least 60%.
In addition, if the Section 7874 Percentage is calculated to be at least 60%, Section 7874 and the rules related thereto may impose an excise tax under Section 4985 of the Code (the “Section 4985 Excise Tax”) on the gain recognized by certain “disqualified individuals” (including officers and directors of a U.S. company) on certain stock-based compensation held thereby at a rate equal to 15%, even if the Third Country Rule were to apply such that we were treated as a U.S. domestic corporation for U.S. federal income tax purposes. We may, if we determine that it is appropriate, provide disqualified individuals with a payment with respect to the excise tax, so that, on a net after-tax basis, they would be in the same position as if no such excise tax had been applied.
We believe that the Section 7874 Percentage was less than 60% such that the Third Country Rule is not expected to apply to us and the Section 4985 Excise Tax is not expected to apply to any such “disqualified individuals.” However, the calculation of the Section 7874 Percentage is complex and is subject to detailed U.S. Treasury regulations (the application of which is uncertain in various respects and would be impacted by changes in such U.S. Treasury regulations). In addition, there can be no assurance that there will not be a change in law, including with retroactive effect, which might cause us to be treated as a U.S. domestic corporation for U.S. federal income tax purposes. Accordingly, we cannot assure you that the IRS will agree with our position and/or would not successfully challenge our status as a foreign corporation.
U.S. tax laws and/or IRS guidance could affect our ability to engage in certain acquisition strategies and certain internal restructurings.
Even if we are treated as a foreign corporation for U.S. federal income tax purposes, Section 7874 and U.S. Treasury regulations promulgated thereunder may adversely affect our ability to engage in certain future acquisitions of U.S. businesses in exchange for our equity or to otherwise restructure the non-U.S. members of our group, which may affect the tax efficiencies that otherwise might be achieved in such potential future transactions or restructurings.
In addition, the IRS and the U.S. Treasury have issued final and temporary regulations providing that, even if we are treated as a foreign corporation for U.S. federal income tax purposes, certain intercompany debt instruments issued on or after April 4, 2016 will be treated as equity for U.S. federal income tax purposes, therefore limiting U.S. tax benefits and resulting in possible U.S. withholding taxes. These regulations may adversely affect our future effective tax rate and could also impact our ability to engage in future restructurings if such transactions cause an existing intercompany debt instrument to be treated as reissued for U.S. federal income tax purposes.
We are subject to tax laws of numerous jurisdictions, and challenges to the interpretations of, or future changes to, such laws could adversely affect us.
We and our subsidiaries are subject to tax laws and regulations in the United Kingdom, the United States, France and numerous other jurisdictions in which we and our subsidiaries operate. These laws and regulations are inherently complex, and we are and will continue to be obligated to make judgments and interpretations about the application of these laws and regulations to our operations and businesses. The interpretation and application of these laws and regulations could be challenged by the relevant governmental authorities, which could result in administrative or judicial procedures, actions or sanctions, which could be material.
In addition, the U.S. Congress, the U.K. Government, the Organization for Economic Co-operation and Development, and other government agencies in jurisdictions where we and our affiliates do business have had an extended focus on issues related to the taxation of multinational corporations. One example is in the area of “base erosion and profit shifting” where payments are made between affiliates from a jurisdiction with high tax rates to a jurisdiction with lower tax rates. Additionally, recent legislative proposals would treat us as a U.S. domestic corporation if our management and control of TechnipFMC and its affiliates were determined to be located primarily in the United States and/or would reduce the Section 7874 Percentage threshold at or above which we would be treated as a U.S. domestic corporation. Thus, the tax laws in the United States, the United Kingdom and other countries in which we and our affiliates do business could change on a retroactive basis and any such changes could adversely affect us. Furthermore, the interpretation and application of domestic or international tax laws made by us and by our subsidiaries could differ from that of the relevant governmental authority, which could result in administrative or judicial procedures, actions or sanctions, which could be material.
We may not qualify for benefits under the tax treaties entered into between the United Kingdom and other countries.
We operate in a manner such that we believe we are eligible for benefits under the tax treaties between the United Kingdom and other countries, notably the United States. However, our ability to qualify for such benefits will depend on whether we are treated as a U.K. tax resident and upon the requirements contained in each treaty and the applicable domestic laws, as the case may be, on the facts and circumstances surrounding our operations and management, and on the relevant interpretation of the tax authorities and courts. The failure by us or our subsidiaries to qualify for benefits under the tax treaties entered into between the United Kingdom and other countries could result in adverse tax consequences to us and could result in certain tax consequences of owning and disposing of our shares.
We intend to operate so as to be treated exclusively as a resident of the United Kingdom for tax purposes, but French or other tax authorities may seek to treat us as a tax resident of another jurisdiction.
We are incorporated in England and Wales. English law currently provides that we will be regarded as being a U.K. resident for tax purposes from incorporation and shall remain so unless (i) we are concurrently a resident in another jurisdiction (applying the tax residence rules of that jurisdiction) that has a double tax treaty with the United Kingdom and (ii) there is a tiebreaker provision in that tax treaty which allocates exclusive residence to that other jurisdiction.
In this regard, we have a permanent establishment in France to satisfy certain French tax requirements imposed by the French Tax Code with respect to the Technip Merger. Although it is intended that we will be treated as having our exclusive place of tax residence in the United Kingdom, the French tax authorities may claim that we are a tax resident of France if we were to fail to maintain our “place of effective management” in the United Kingdom due to the French tax authorities having deemed that certain strategic decisions of TechnipFMC have been taken at the level of our French permanent establishment rather than in the United Kingdom. Any such claim would need to be settled between the French and the U.K. tax authorities pursuant to the mutual assistance procedure provided for by the tax treaty dated June 19, 2008 concluded between France and the United Kingdom, and there is no assurance that these authorities would reach an agreement that we will remain exclusively a U.K. tax resident, which could materially and adversely affect our business, financial condition, results of operations and future prospects. A failure to maintain exclusive tax residency in the United Kingdom could result in adverse tax consequences to us and our subsidiaries and could result in different tax consequences of owning and disposing of our shares.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
We had no unregistered sales of equity securities during the three months ended September 30, 2017.March 31, 2023.
The following table summarizes repurchases of our ordinary shares during the three months ended September 30, 2017.March 31, 2023:
ISSUER PURCHASES OF EQUITY SECURITIES
| | | | | | | | | | | | | | | | | | | | | | | |
Period | Total Number of Shares Purchased (a) | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Maximum Number of Shares That May Yet Be Purchased Under the Plans or Programs |
January 1, 2023—January 31, 2023 | — | | | $ | — | | | — | | | — | |
February 1, 2023—February 28, 2023 | 450,000 | | | $ | 15.59 | | | 450,000 | | | 19,148,123 | |
March 1, 2023—March 31, 2023 | 2,905,002 | | | $ | 14.80 | | | 2,905,002 | | | 18,296,991 | |
Total | 3,355,002 | | | $ | 14.90 | | | 3,355,002 | | | 18,296,991 | |
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(a)In July 2022, we announced a repurchase plan approved by our Board of Directors authorizing up to $400.0 million to repurchase shares of our issued and outstanding ordinary shares through open market purchases. For the three months ended March 31, 2023, we repurchased 3,355,002 shares for a total cost of $50.0 million at an average price of $14.90 per share.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
ITEM 5. OTHER INFORMATION