Oceaneering International Inc 10-Q for FY2020 Q2
Oceaneering International Inc (OII)
10-Q
2020-08-03
For: 2020-06-30
View Original
Added on
April 07, 2026
About this 10-Q
Oceaneering International Inc filed this 10-Q on August 3, 2020, covering the quarter ended June 30, 2020 (FY2020 Q2).
Headline figures
Quarter ended June 30, 2020, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $427.22M
- down 13.8% from $495.78M a year earlier
- Net loss
- $24.79M
- Diluted EPS
- -$0.25
- compared with -$0.36 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||
For the quarterly period ended | June 30, 2020 | |
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the transition period from to | |
Commission File Number: 1-10945
____________________________________________
OCEANEERING INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
(Address of principal executive offices) | (Zip Code) | |
(713 ) 329-4500
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed from last report)
____________________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of exchange on which registered |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ Yes ¨ No
Indicate by check mark whether the registrant has submitted every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). þ Yes ¨ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
þ | Accelerated filer | ☐ | |
Non-accelerated filer | ¨ | Smaller reporting company | |
Emerging growth company | |||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Number of shares of Common Stock outstanding as of July 31, 2020: 99,286,613
Oceaneering International, Inc.
Form 10-Q
Table of Contents
Part I | |||
Item 1. | |||
Item 2. | |||
Item 3. | |||
Item 4. | |||
Part II | |||
Item 1. | |||
Item 1A. | |||
Item 6. | |||
1
PART I – FINANCIAL INFORMATION
Item 1. | Financial Statements |
OCEANEERING INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Jun 30, 2020 | Dec 31, 2019 | |||||||
(in thousands, except share data) | ||||||||
(unaudited) | ||||||||
ASSETS | ||||||||
Current Assets: | ||||||||
Cash and cash equivalents | $ | $ | ||||||
Accounts receivable, net | ||||||||
Contract assets, net | ||||||||
Inventory, net | ||||||||
Other current assets | ||||||||
Total Current Assets | ||||||||
Property and equipment, at cost | ||||||||
Less accumulated depreciation | ||||||||
Net property and equipment | ||||||||
Other Assets: | ||||||||
Goodwill | ||||||||
Other noncurrent assets | ||||||||
Right-of-use operating lease assets | ||||||||
Total other assets | ||||||||
Total Assets | $ | $ | ||||||
LIABILITIES AND EQUITY | ||||||||
Current Liabilities: | ||||||||
Accounts payable | $ | $ | ||||||
Accrued liabilities | ||||||||
Contract liabilities | ||||||||
Total current liabilities | ||||||||
Long-term debt | ||||||||
Long-term operating lease liabilities | ||||||||
Other long-term liabilities | ||||||||
Commitments and contingencies | ||||||||
Equity: | ||||||||
Common stock, par value $0.25 per share; 360,000,000 shares authorized; 110,834,088 shares issued | ||||||||
Additional paid-in capital | ||||||||
Treasury stock; 11,547,475 and 11,903,252 shares, at cost | ( | ) | ( | ) | ||||
Retained earnings | ||||||||
Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
Oceaneering shareholders' equity | ||||||||
Noncontrolling interest | ||||||||
Total equity | ||||||||
Total Liabilities and Equity | $ | $ | ||||||
The accompanying Notes are an integral part of these Consolidated Financial Statements.
2
OCEANEERING INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||
(in thousands, except per share data) | 2020 | 2019 | 2020 | 2019 | |||||||||||||
Revenue | $ | $ | $ | $ | |||||||||||||
Cost of services and products | |||||||||||||||||
Gross margin | |||||||||||||||||
Selling, general and administrative expense | |||||||||||||||||
Long-lived assets impairments | |||||||||||||||||
Goodwill impairment | |||||||||||||||||
Income (loss) from operations | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||
Interest income | |||||||||||||||||
Interest expense, net of amounts capitalized | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||
Equity in income (losses) of unconsolidated affiliates | ( | ) | |||||||||||||||
Other income (expense), net | ( | ) | ( | ) | |||||||||||||
Income (loss) before income taxes | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||
Provision (benefit) for income taxes | ( | ) | |||||||||||||||
Net Income (Loss) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||
Weighted-average shares outstanding | |||||||||||||||||
Basic | |||||||||||||||||
Diluted | |||||||||||||||||
Earnings (loss) per share | |||||||||||||||||
Basic | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||
Diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||
The accompanying Notes are an integral part of these Consolidated Financial Statements.
3
OCEANEERING INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(unaudited)
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||
(in thousands) | 2020 | 2019 | 2020 | 2019 | |||||||||||||
Net income (loss) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||
Other Comprehensive Income (Loss): | |||||||||||||||||
Foreign currency translation adjustments | ( | ) | |||||||||||||||
Total other comprehensive income (loss) | ( | ) | |||||||||||||||
Comprehensive income (loss) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||
The accompanying Notes are an integral part of these Consolidated Financial Statements.
4
OCEANEERING INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Six Months Ended June 30, | ||||||||
(in thousands) | 2019 | |||||||
Cash Flows from Operating Activities: | ||||||||
Net income (loss) | $ | (392,386 | ) | $ | (60,009 | ) | ||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||
Depreciation and amortization, including goodwill impairment | 394,894 | 102,790 | ||||||
Loss on impairment of long-lived assets | ||||||||
Deferred income tax provision (benefit) | ( | ) | ( | ) | ||||
Net loss (gain) on sales of property and equipment and cost method investment | ( | ) | ||||||
Noncash compensation | ||||||||
Noncash impact of lease accounting | ( | ) | ||||||
Excluding the effects of acquisitions, increase (decrease) in cash from: | ||||||||
Accounts receivable and contract assets | ||||||||
Inventory | ( | ) | ||||||
Proceeds from interest rate swaps | ||||||||
Other operating assets | ( | ) | ||||||
Currency translation effect on working capital, excluding cash | ( | ) | ||||||
Current liabilities | ( | ) | ( | ) | ||||
Other operating liabilities | ( | ) | ( | ) | ||||
Total adjustments to net income (loss) | ||||||||
Net Cash Provided by (Used in) Operating Activities | ||||||||
Cash Flows from Investing Activities: | ||||||||
Purchases of property and equipment | ( | ) | ( | ) | ||||
Distributions of capital from unconsolidated affiliates | ||||||||
Proceeds from sale of property and equipment | 1,337 | 1,679 | ||||||
Net Cash Provided by (Used in) Investing Activities | ( | ) | ( | ) | ||||
Cash Flows from Financing Activities: | ||||||||
Other financing activities | (1,947 | ) | ( | ) | ||||
Net Cash Provided by (Used in) Financing Activities | ( | ) | ( | ) | ||||
Effect of exchange rates on cash | ( | ) | ( | ) | ||||
Net Increase (Decrease) in Cash and Cash Equivalents | ( | ) | ||||||
Cash and Cash Equivalents—Beginning of Period | ||||||||
Cash and Cash Equivalents—End of Period | $ | $ | ||||||
The accompanying Notes are an integral part of these Consolidated Financial Statements.
5
OCEANEERING INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
(unaudited)
Common Stock | Additional Paid-in Capital | Treasury Stock | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Oceaneering Shareholders' Equity | Non-controlling Interest | Total Equity | |||||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||||||
Balance, December 31, 2019 | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | $ | ||||||||||||||||||||
Cumulative effect of ASC 326 adoption | — | — | — | ( | ) | — | ( | ) | — | ( | ) | |||||||||||||||||||||
Net income (loss) | — | — | — | ( | ) | — | ( | ) | — | ( | ) | |||||||||||||||||||||
Other comprehensive income (loss) currency translation adjustments | — | — | — | — | ( | ) | ( | ) | — | ( | ) | |||||||||||||||||||||
Restricted stock unit activity | — | ( | ) | — | — | — | ||||||||||||||||||||||||||
Restricted stock activity | — | ( | ) | — | — | — | ||||||||||||||||||||||||||
Balance, March 31, 2020 | ( | ) | ( | ) | ||||||||||||||||||||||||||||
Net income (loss) | — | — | — | ( | ) | — | ( | ) | — | ( | ) | |||||||||||||||||||||
Other comprehensive income (loss) currency translation adjustments | — | — | — | — | — | |||||||||||||||||||||||||||
Restricted stock unit activity | — | — | — | — | ||||||||||||||||||||||||||||
Balance, June 30, 2020 | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | $ | ||||||||||||||||||||
Common Stock | Additional Paid-in Capital | Treasury Stock | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Oceaneering Shareholders' Equity | Non-controlling Interest | Total Equity | |||||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||||||
Balance, December 31, 2018 | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | $ | ||||||||||||||||||||
Cumulative effect of ASC 842 adoption | — | — | — | ( | ) | — | ( | ) | — | ( | ) | |||||||||||||||||||||
Net income (loss) | — | — | — | ( | ) | — | ( | ) | — | ( | ) | |||||||||||||||||||||
Other comprehensive income (loss) currency translation adjustments | — | — | — | — | — | |||||||||||||||||||||||||||
Restricted stock unit activity | — | ( | ) | — | — | — | ||||||||||||||||||||||||||
Restricted stock activity | — | ( | ) | — | — | — | ||||||||||||||||||||||||||
Balance, March 31, 2019 | ( | ) | ( | ) | ||||||||||||||||||||||||||||
Net income (loss) | — | — | — | ( | ) | — | ( | ) | ( | ) | ||||||||||||||||||||||
Other comprehensive income (loss) currency translation adjustments | — | — | — | — | ||||||||||||||||||||||||||||
Restricted stock unit activity | — | — | — | |||||||||||||||||||||||||||||
Balance, June 30, 2019 | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | $ | ||||||||||||||||||||
The accompanying Notes are an integral part of these Consolidated Financial Statements.
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF MAJOR ACCOUNTING POLICIES
Basis of Presentation. Oceaneering International, Inc. ("Oceaneering," "we" or "us") has prepared these unaudited consolidated financial statements pursuant to instructions for quarterly reports on Form 10-Q, which we are required to file with the United States Securities and Exchange Commission (the "SEC"). These financial statements do not include all information and footnotes normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States ("U.S. GAAP"). These financial statements reflect all adjustments that we believe are necessary to present fairly our financial position as of June 30, 2020 and our results of operations and cash flows for the periods presented. Except as otherwise disclosed herein, all such adjustments are of a normal and recurring nature. These financial statements should be read in conjunction with the consolidated financial statements and related notes included in our annual report on Form 10-K for the year ended December 31, 2019. The results for interim periods are not necessarily indicative of annual results.
Use of Estimates. The preparation of financial statements in conformity with U.S. GAAP requires that our management make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expense during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents. Cash and cash equivalents include demand deposits and highly liquid investments with original maturities of three months or less from the date of investment.
Allowances for Credit Loss—Financial Assets Measured at Amortized Costs. On January 1, 2020, we adopted Accounting Standard Update ("ASU") No. 2016-13, "Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments," as amended ("ASC 326"), which introduces a new credit reserving methodology known as the Current Expected Credit Loss ("CECL") model. The CECL model applies to financial assets measured at amortized costs, including accounts receivable, contract assets and held-to-maturity loan receivables. Under the CECL model, we identify allowances for credit loss based on future expected losses when accounts receivable, contract assets or held-to-maturity loan receivables are created rather than when losses are probable.
We use the loss-rate method in developing the allowance for credit losses, which involves identifying pools of assets with similar risk characteristics, reviewing historical losses within the last five years and consideration of reasonable supportable forecasts of economic indicators. Changes in estimates, developing trends and other new information could have material effects on future evaluations.
We monitor the credit quality of our accounts receivable and other financing receivable amounts by frequent customer interaction, following economic and industry trends and reviewing specific customer data. Our other receivable amounts include contract assets and held-to-maturity loans receivable, which we consider to have a low risk of loss.
We are monitoring the impacts from the coronavirus (COVID-19) outbreak and volatility in the oil and natural gas markets on our customers and various counterparties. We have considered the current and expected economic and market conditions, as a result of COVID-19, in determining credit loss expense for the three- and six-month periods ended June 30, 2020.
As a result of the adoption of ASC 326, we recorded a cumulative-effect adjustment of $2.3 million as of January 1, 2020, which decreased retained earnings and increased the allowance for credit losses. As of June 30, 2020, our allowance for credit losses was $4.1 million for accounts receivable and $0.5 million for other receivables. We adopted ASC 326 using the modified retrospective method. Prior periods were not restated. We had an allowance
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for doubtful accounts of $7.5 million as of December 31, 2019, which we determined using the specific identification method, in accordance with previously applicable U.S. GAAP.
Financial assets are written off when deemed uncollectible and there is no reasonable expectation of recovering the contractual cash flows. During the three- and six-month periods ended June 30, 2020, we wrote-off accounts receivable of $5.3 million that previously had been reserved.
We have elected to apply the practical expedient available under ASC 326 to exclude the accrued interest receivable balance that is included in our held-to-maturity loans receivable. The amount excluded as of June 30, 2020 was $1.5 million.
Accounts receivable are considered to be past-due after the end of the contractual terms agreed to with the customer. There were no material past-due amounts that we consider uncollectible for our financial assets as of June 30, 2020. We generally do not require collateral from our customers.
See Note 2—"Accounting Standards Update"—for more information on our adoption of our adoption of ASC 326.
Inventory. Inventory is valued at the lower of cost or net realizable value. We determine cost using the weighted-average method.
Property and Equipment, Long-Lived Intangible Assets and Right-of-Use Operating Lease Assets. We provide for depreciation of assets included in property and equipment on the straight-line method over their estimated useful lives. We charge the costs of repair and maintenance of property and equipment to operations as incurred, while we capitalize the costs of improvements that extend asset lives or functionality. Upon the disposition of property and equipment, the related cost and accumulated depreciation accounts are relieved, and any resulting gain or loss is included as an adjustment to cost of services and products.
Long-lived intangible assets, primarily acquired in connection with business combinations, include trade names, intellectual property and customer relationships and are being amortized over their respective estimated useful lives.
Right-of-use operating lease assets are recognized, in each case, based on the present value of the future minimum lease payments over the lease term at commencement or modification date. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate, based on the information available at commencement or modification date in determining the present value of future payments. In determining the incremental borrowing rate, we considered our external credit ratings, bond yields for us and peer companies, the risk-free rate in geographic regions where we operate, and the impact associated with providing collateral over a similar term as the lease for an amount equal to the future lease payments. Our right-of-use operating lease assets also include any lease prepayments made and exclude lease incentives and initial direct costs incurred. Our lease terms may include options to extend or terminate the lease. These options are included in the lease term when it is reasonably certain that we will exercise that option. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.
We capitalize interest on assets where the construction period is anticipated to be more than three months. We capitalized no interest in the three- and six-month periods ended June 30, 2020 and $1.4 million and $3.4 million of interest in the three- and six-month periods ended June 30, 2019, respectively. We do not allocate general administrative costs to capital projects.
Our management periodically, and upon the occurrence of a triggering event, reviews the realizability of our property and equipment, long-lived intangible assets and right-of-use operating lease assets to determine whether any events or changes in circumstances indicate that the carrying amounts of the assets may not be recoverable. For long-lived assets to be held and used, we base our evaluation on impairment indicators such as the nature of the assets, the future economic benefits of the assets, any historical or future profitability measurements and other external market conditions or factors that may be present. If such impairment indicators are present or other factors exist that indicate that the carrying amount of an asset may not be recoverable, we determine whether an impairment has occurred by utilization of an undiscounted cash flows analysis of the asset at the lowest level for which identifiable cash flows exist. If an impairment has occurred, we recognize a loss for the difference between the carrying amount and the fair value of the asset.
During the first quarter of 2020, due to the protracted energy downturn compounded by demand destruction resulting from the adverse impacts of the COVID-19 pandemic and insufficient control of supply levels, as well as
8
our customers' continued focus on cost discipline, we determined that impairment indicators were present within certain of our asset groups in our Subsea Products, Subsea Projects and Advanced Technologies segments. For our Subsea Products segment, impairment indicators were present in our Subsea Distributions Solutions asset group. For our Subsea Projects segment, impairment indicators were present in our Shallow Water vessels, Renewables and Special Projects and Global Data Solutions asset groups. For our Advanced Technologies segment, impairment indicators were present in our Oceaneering Entertainment Systems and Oceaneering Automated Guided Vehicles ("AGV") Systems asset groups. To measure market value for our asset groups, we used the following approaches:
• | Subsea Distribution Solutions U.K. - We utilized the cost approach and considered economic obsolescence under the income approach to determine fair value of the property and equipment. |
• | Subsea Distribution Solutions Brazil and Angola - We utilized a combination of market and cost approaches to measure fair values. |
• | Shallow Water vessels - We utilized the cost approach and considered historical, current and anticipated dayrates and utilization to measure market value. |
• | Renewables and Special Projects - We utilized a combination of market and cost approaches to measure fair values. |
• | Oceaneering Entertainment Systems and Oceaneering AGV Systems - We utilized a combination of market and cost approaches to measure fair value. |
Our estimates of fair values for the asset groups in our Subsea Products, Subsea Projects and Advanced Technologies segments required us to use significant unobservable inputs, classified as Level 3 fair value measurements, including assumptions related to future performance, risk-adjusted discount rates, future commodity prices and demand for our services and estimates of expected realizable value. For our cash flow projections, we utilized a weighted-average cost of capital ranging between 12 % and 15 % and a terminal value based on the Gordon Growth Model assuming an expected long-term growth rate of 2 %.
We determined that the carrying values exceeded the estimated fair values and, as a result, recorded impairments in the three-month period ended March 31, 2020, as noted below:
Three Months Ended March 31, 2020 | |||||||||||||||||
(in thousands) | Property and Equipment, Net | Intangible Assets | Right-of-Use Operating Lease Assets | Total | |||||||||||||
Subsea Products | |||||||||||||||||
Subsea Distribution Solutions U.K. | $ | $ | — | $ | — | $ | |||||||||||
Subsea Distribution Solutions Brazil | — | — | |||||||||||||||
Subsea Distribution Solutions Angola | — | ||||||||||||||||
Subsea Projects | |||||||||||||||||
Shallow Water Vessels | |||||||||||||||||
Renewables and Special Projects Group | |||||||||||||||||
Global Data Solutions | — | — | |||||||||||||||
Advanced Technologies | |||||||||||||||||
Oceaneering Entertainment Systems | |||||||||||||||||
Oceaneering AGV Systems | |||||||||||||||||
Total long-lived asset impairments | $ | $ | $ | $ | |||||||||||||
For additional information regarding write-downs and write-offs of property and equipment, long-lived intangible assets and right-of-use operating lease assets in the three months ended March 31, 2020 and December 31, 2019, see Note 9—"Business Segment Information." We did not identify any triggering events in the three-month period ended June 30, 2020 and the three- and six-month periods ended June 30, 2019 and no impairments of long-lived assets were recorded.
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For assets held for sale or disposal, the fair value of the asset is measured using fair market value less estimated costs to sell. Assets are classified as held for sale when we have a plan for disposal of certain assets and those assets meet the held for sale criteria.
Goodwill. Our goodwill is evaluated for impairment annually and whenever we identify certain triggering events or circumstances that would more likely than not reduce the fair value of a reporting unit below its carrying amount.
In our evaluation of goodwill, we perform a qualitative or quantitative impairment test. Under the qualitative approach, if we determine that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, we are required to perform the quantitative analysis to determine the fair value for the reporting unit. We then compare the fair value of the reporting unit with its carrying amount and recognize an impairment loss for the amount by which the carrying amount exceeds the fair value of the reporting unit. The loss recognized should not exceed the total amount of goodwill allocated to the reporting unit. We also consider income tax effects from any tax-deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable.
During the first quarter of 2020, due to the protracted energy downturn compounded by demand destruction resulting from the adverse impacts of the COVID-19 pandemic and insufficient control of supply levels, as well as our customers' continued focus on cost discipline, we determined that impairment indicators were present and we were required to perform a quantitative analysis for our Subsea Products–Service, Technology and Rentals ("ST&R"), Subsea Products–Manufactured Products, Subsea Projects, Asset Integrity and Advanced Technologies–Commercial reporting units. Based on these quantitative analyses, the fair value was determined to be less than the carrying value for each of those reporting units, with the exception of Subsea Products–Manufactured Products. As a result, for our Subsea Products–ST&R, Subsea Projects, Asset Integrity and Advanced Technologies–Commercial reporting units, we recorded pre-tax goodwill impairment losses of $51 million, $130 million, $111 million and $11 million, respectively. For our ROV and Advanced Technologies–Government reporting units, qualitative assessments were performed; and we concluded that it was more likely than not the fair value of the reporting units were more than the carrying value of the reporting unit and, therefore, no impairment was required.
Our estimates of fair values for our reporting units required us to use significant unobservable inputs, classified as Level 3 fair value measurements, including assumptions related to future performance, risk-adjusted discount rates, future commodity prices and demand for our services and estimates of expected realizable value. For our cash flow projections for the three months ended March 31, 2020, we utilized a weighted-average cost of capital ranging between 12 % and 15 % and a terminal value based on the Gordon Growth Model assuming an expected long-term growth rate of 2 %.
In the fourth quarter of 2019, we were required to perform a quantitative analysis for our Subsea Projects and Asset Integrity reporting units. Based on these quantitative tests, we determined that the fair value for our Subsea Projects reporting unit exceeded the carrying amount and there was no impairment. For our Asset Integrity reporting unit, the fair value was less than the carrying value and, as a result, we recorded a pre-tax goodwill impairment loss of $15 million. For the remaining reporting units, qualitative assessments were performed; and we concluded that it was more likely than not the fair value of the reporting unit was more than the carrying value of the reporting unit and, therefore, no impairment was required.
Besides the goodwill impairments discussed above, the changes in our reporting units' goodwill balances during the periods presented are from currency exchange rate changes. For information regarding goodwill by business segment, see Note 9–"Operations by Business Segment and Geographic Area."
Revenue Recognition. All our revenue is realized through contracts with customers. We recognize our revenue according to the contract type. On a daily basis, we recognize service revenue over time for contracts that provide for specific time, material and equipment charges, which we bill periodically, ranging from weekly to monthly. We use the input method to faithfully depict revenue recognition, because each day of service provided represents
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value to the customer. The performance obligations in these contracts are satisfied, and revenue is recognized, as the work is performed. We have used the expedient available to recognize revenue when the billing corresponds to the value realized by the customer where appropriate.
We account for significant fixed-price contracts, mainly relating to our Subsea Products segment, and to a lesser extent in our Subsea Projects and Advanced Technologies segments, by recognizing revenue over time using an input, cost-to-cost measurement percentage-of-completion method. We use the input cost-to-cost method to faithfully depict revenue recognition. This commonly used method allows appropriate calculation of progress on our contracts. A performance obligation is satisfied as we create a product on behalf of the customer over the life of the contract. The remainder of our revenue is recognized at the point in time when control transfers to the customer, thus satisfying the performance obligation.
We have elected to recognize the cost for freight and shipping as an expense when incurred. Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, and that are collected by us from customers, are excluded from revenue.
In our service-based business lines, we principally charge on a dayrate basis for services provided. In our product-based business lines, predominantly in our Subsea Products segment, we recognize revenue and profit using the percentage-of-completion method and exclude uninstalled materials and significant inefficiencies from the measure of progress.
We apply judgment in the determination and allocation of transaction price to performance obligations, and the subsequent recognition of revenue, based on the facts and circumstances of each contract. We routinely review estimates related to our contracts and, when required, reflect revisions to profitability in earnings immediately. If an element of variable consideration has the potential for a significant future reversal of revenue, we will constrain that variable consideration to a level intended to remove the potential future reversal. If a current estimate of total contract cost indicates an ultimate loss on a contract, we recognize the projected loss in full when we determine it. In prior years, we have recorded adjustments to earnings as a result of revisions to contract estimates; however, we did not have any material adjustments during the six months ended June 30, 2020 and 2019. There could be significant adjustments to overall contract costs in the future, due to changes in facts and circumstances.
In general, our payment terms consist of those services billed regularly as provided and those products delivered at a point in time, which are invoiced after the performance obligation is satisfied. Our product and service contracts with milestone payments due at agreed progress points during the contract are invoiced when those milestones are reached, which may differ from the timing of revenue recognition. Our payment terms generally do not provide financing of contracts to customers, nor do we receive financing from customers as a result of these terms.
See Note 3—"Revenue" for more information on our revenue from contracts with customers.
Leases. Effective as of January 1, 2019, we adopted ASU 2016-02, "Leases (Topic 842") ("ASC 842"), which requires lessees to recognize right-of-use assets ("ROU assets") and lease liabilities for virtually all leases and updates previous accounting standards for lessors to align certain requirements of the new leases standard and the revenue recognition accounting standard. We elected to apply the transition method that allowed us to apply this update at the adoption date and adopted the practical expedients that permitted us to retain the identification and classification of leases made under the previously applicable accounting standards. The adoption of this ASU as of January 1, 2019 resulted in a cumulative effect adjustment of $5.9 million recorded to retained earnings, with corresponding adjustments to increase ROU assets and lease liabilities by $185 million and $191 million, respectively. The adoption of this ASU did not materially affect our net earnings and had no impact on cash flows. Comparative information with respect to prior periods has not been retrospectively restated and continues to be reported under the accounting standards in effect for those periods.
We determine whether a contract is or contains a lease at inception, whether as a lessee or a lessor. We take into consideration the elements of an identified asset, right to control and the receipt of economic benefit in making those determinations.
As a lessor, we lease certain types of equipment along with the provision of services and utilize the expedient allowing us to combine the lease and non-lease components into a combined component that is accounted for (1) under ASC 842, when the lease component is predominant, and (2) under the accounting standard "Revenue from
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Contracts with Customers" ("ASC 606"), when the service component is predominant. In general, when we have a service component, it is typically the predominant element and leads to accounting under ASC 606.
As a lessor, we lease certain types of equipment, often providing services at the same time. These leases can be priced on a dayrate or lump-sum basis for periods ranging from a few days to multi-year contracts. These leases are negotiated on commercial terms at market rates and many carry standard options to extend or terminate at our customer's discretion. These leases generally do not contain options to purchase, material restrictions or covenants that impact our accounting for leases.
As a lessee, we lease land, buildings, vessels and equipment for the operation of our business and to support some of our service line revenue streams. These generally carry lease terms that range from days for operational and support equipment to 15 years for land and buildings. These leases are negotiated on commercial terms at market rates and many carry standard options to extend or terminate at our discretion. When the exercise of those options is reasonably certain, we include them in the lease assessment. Our leases do not contain material restrictions or covenants that impact our accounting for them, nor do we provide residual value guarantees.
As a lessee, we utilize the practical expedients to not recognize leases with an initial lease term of 12 months or less on the balance sheet and to combine lease and non-lease components together and account for the combined component as a lease for all asset classes, except real estate.
Right-of-use operating lease assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement or modification date. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate, based on the information available at commencement or modification date in determining the present value of future payments. In determining the incremental borrowing rate, we considered our external credit ratings, bond yields for us and our identified peers, the risk-free rate in geographic regions where we operate, and the impact associated with providing collateral over a similar term as the lease for an amount equal to the future lease payments. Our right-of-use operating lease assets also include any lease prepayments made and exclude lease incentives and initial direct costs incurred. Our lease terms may include options to extend or terminate the lease. These options are included in the lease term when it is reasonably certain that we will exercise that option. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.
2. ACCOUNTING STANDARDS UPDATE
Recently Adopted Accounting Standards. On January 1, 2020, we adopted ASC 326, which introduces a new credit reserving model known as the CECL model. The adoption of ASC 326 did not materially affect our net earnings and had no impact on our cash flows. Comparative information with respect to prior periods has not been retrospectively restated and continues to be reported under the accounting standards in effect for those periods.
In August 2018, the Financial Accounting Standards Board (the "FASB") issued ASU 2018-13, “Changes to the Disclosure Requirements for Fair Value Measurement” ("ASU 2018-13"). This standard eliminated the prior requirement to disclose the amount or reason for transfers between level 1 and level 2 of the fair value hierarchy and the requirement to disclose the valuation methodology for level 3 fair value measurements. The standard added disclosure requirements for level 3 fair value measurements, including the requirement to disclose the changes in unrealized gains and losses in other comprehensive income during the period and the disclosure of other relevant quantitative information for certain unobservable inputs. The adoption of ASU 2018-13 on January 1, 2020, did not have a material impact on our disclosures.
Recently Issued Accounting Standards. In December 2019, the FASB issued ASU No. 2019-12, "Simplifying the Accounting for Income Taxes" (“ASU 2019-12”), which simplifies the accounting for income taxes, eliminates certain exceptions within ASC 740, "Income Taxes," and clarifies certain aspects of the current guidance to promote consistency among reporting entities. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020. Most amendments within the standard are required to be applied on a prospective basis, while certain amendments must be applied on a retrospective or modified retrospective basis. We are evaluating the impact and do not expect this ASU to have a material impact on our consolidated financial statements.
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In March 2020, the FASB issued ASU No. 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting," which provides temporary optional expedients and exceptions to existing guidance on applying contract modifications and hedge accounting to facilitate the market transition from existing reference rates, such as the London Interbank Offered Rate (“LIBOR”), which is scheduled to be phased out in 2021, to alternate rates such as the Secured Overnight Financing Rate ("SOFR"). Entities may elect to apply the provisions of this new standard as early as March 12, 2020 until December 31, 2022, when the reference rate replacement activity is expected to be complete. We have not yet elected an adoption date. We continue to evaluate the impact and do not expect this ASU to have a material impact on our consolidated financial statements.
3. REVENUE
Revenue by Category
We recognized revenue, disaggregated by business segment, geographical region, and timing of transfer of goods or services, as follows:
Three Months Ended | Six Months Ended | |||||||||||||||||||||
(in thousands) | Jun 30, 2020 | Jun 30, 2019 | Mar 31, 2020 | Jun 30, 2020 | Jun 30, 2019 | |||||||||||||||||
Business Segment: | ||||||||||||||||||||||
Energy Services and Products | ||||||||||||||||||||||
Remotely Operated Vehicles | $ | $ | $ | $ | $ | |||||||||||||||||
Subsea Products | ||||||||||||||||||||||
Subsea Projects | ||||||||||||||||||||||
Asset Integrity | ||||||||||||||||||||||
Total Energy Services and Products | ||||||||||||||||||||||
Advanced Technologies | ||||||||||||||||||||||
Total | $ | $ | $ | $ | $ | |||||||||||||||||
Three Months Ended | Six Months Ended | |||||||||||||||||||||
(in thousands) | Jun 30, 2020 | Jun 30, 2019 | Mar 31, 2020 | Jun 30, 2020 | Jun 30, 2019 | |||||||||||||||||
Geographic Operating Areas: | ||||||||||||||||||||||
Foreign: | ||||||||||||||||||||||
Africa | $ | $ | $ | $ | $ | |||||||||||||||||
United Kingdom | ||||||||||||||||||||||
Norway | ||||||||||||||||||||||
Asia and Australia | ||||||||||||||||||||||
Brazil | ||||||||||||||||||||||
Other | ||||||||||||||||||||||
Total Foreign | ||||||||||||||||||||||
United States | ||||||||||||||||||||||
Total | $ | $ | $ | $ | $ | |||||||||||||||||
Timing of Transfer of Goods or Services: | ||||||||||||||||||||||
Revenue recognized over time | $ | $ | $ | $ | $ | |||||||||||||||||
Revenue recognized at a point in time | ||||||||||||||||||||||
Total | $ | $ | $ | $ | $ | |||||||||||||||||
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Contract Balances
Our contracts with milestone payments have, in the aggregate, a significant impact on the contract asset and the contract liability balances. Milestones are contractually agreed with customers and relate to significant events across the contract lives. Some milestones are achieved before revenue is recognized, resulting in a contract liability, while other milestones are achieved after revenue is recognized, resulting in a contract asset.
The following table provides information about contract assets and contract liabilities from contracts with customers:
(in thousands) | Jun 30, 2020 | Dec 31, 2019 | ||||||
Contract assets | $ | $ | ||||||
Contract liabilities | ||||||||
Our payment terms consist of those services billed regularly as provided and those products delivered at a point in time, which are invoiced after the performance obligation is satisfied. Our product and service contracts with milestone payments due at agreed progress points during the contract are invoiced when those milestones are reached, which may differ from the timing of revenue recognition.
During the six months ended June 30, 2020, contract assets increased by $2.1 million from the balance at December 31, 2019, due to revenue earned of $868 million, which exceeded the timing of billings of approximately $866 million. Contract liabilities decreased $66 million from the balance at December 31, 2019, due to revenue recognition of $81 million in excess of deferrals of milestone payments that totaled $15 million. There were no cancellations, impairments or other significant impacts in the period that relate to other categories of explanation.
Performance Obligations
As of June 30, 2020, the aggregate amount of the transaction price allocated to remaining performance obligations was $314 million. In arriving at this value, we have used two practical expedients available to us and are not disclosing amounts in relation to performance obligations: (1) that are part of contracts with an original expected duration of one year or less; or (2) on contracts where we recognize revenue in line with the billing. Of this amount, we expect to recognize revenue of $251 million over the next 12 months, and we expect to recognize substantially all of the remaining balance of $63 million within the next 24 months.
Due to the nature of our service contracts in our Remotely Operated Vehicle, Subsea Projects, Asset Integrity and Advanced Technologies segments, the majority of our contracts either have initial contract terms of one year or less or have customer option cancellation clauses that lead us to consider the original expected duration of one year or less.
In our Subsea Products and Advanced Technologies segments, we have long-term contracts that extend beyond one year, and these make up the majority of the performance obligations balance reported as of June 30, 2020. We also have shorter-term product contracts with an expected original duration of one year or less that have been excluded.
Where appropriate, we have made estimates within the transaction price of elements of variable consideration within the contracts and constrained those amounts to a level where we consider it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. The amount of revenue recognized in the three months ended June 30, 2020 that was associated with performance obligations completed or partially completed in prior periods was not significant.
As of June 30, 2020, there were no significant outstanding liability balances for refunds or returns due to the nature of our contracts and the services and products we provide. Our warranties are limited to assurance warranties that are of a standard length and are not considered to be material rights. The majority of our contracts consist of a single performance obligation. When there are multiple obligations, we look for observable evidence of stand-alone selling prices on which to base the allocation. This involves judgment as to the appropriateness of the observable evidence relating to the facts and circumstances of the contract. If we do not have observable evidence, we estimate stand-alone selling prices by taking a cost-plus-margin approach, using typical margins from the type of product or service, customer and regional geography involved.
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Costs to Obtain or Fulfill a Contract
In line with the available practical expedient, we capitalize costs to obtain a contract when those amounts are significant and the contract is expected at inception to exceed one year in duration. Otherwise, the costs are expensed in the period when incurred. Costs to obtain a contract primarily consist of bid and proposal costs, which are incremental to our fixed costs. There were no balances or amortization of costs to obtain a contract in the current reporting periods.
4. SELECTED BALANCE SHEET INFORMATION
The following is information regarding selected balance sheet accounts:
(in thousands) | Jun 30, 2020 | Dec 31, 2019 | |||||||
Inventory: | |||||||||
Remotely operated vehicle parts and components | $ | $ | |||||||
Other inventory, primarily raw materials | |||||||||
Total | $ | $ | |||||||
Other current assets: | |||||||||
Prepaid expenses | $ | $ | |||||||
Angolan bonds | |||||||||
Total | $ | $ | |||||||
Accrued liabilities: | |||||||||
Payroll and related costs | $ | $ | |||||||
Accrued job costs | |||||||||
Income taxes payable | |||||||||
Current operating lease liability | |||||||||
Other | |||||||||
Total | $ | $ | |||||||
5. INCOME TAXES
Due to the economic uncertainty presented by COVID-19 and the current volatility in the oil and natural gas markets, we believe using a discrete tax provision method for the six-month period ended June 30, 2020, based on actual earnings for the period, is a more reliable method for providing for income taxes because our annual effective tax rate as calculated under ASC 740-270 is highly sensitive to changes in estimates of total ordinary income (loss). Therefore, we do not believe a discussion of the annual effective tax rate is meaningful. The tax provision is based on (1) our earnings for the period and other factors affecting the tax provision and (2) the operations of foreign branches and subsidiaries that are subject to local income and withholding taxes. Factors that affect our tax rate include our profitability levels in general and the geographic mix in the sources of our results. The effective tax rate for the six-month periods ended June 30, 2020 and 2019 was different than the federal statutory rate of 21%, primarily due to the 2020 enactment of the U.S. Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"), the geographic mix of operating revenue and results, and changes in uncertain tax positions and other
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discrete items. We continue to make an assertion to indefinitely reinvest the unrepatriated earnings of any foreign subsidiary that would incur incremental tax consequences upon the distribution of such earnings.
In the six-month period ended June 30, 2020, we recognized a discrete tax benefit of $42 million, primarily related to a cash tax benefit of $33 million and a non-cash tax benefit of $9.9 million related to the CARES Act. These
benefits are classified as an income tax receivable and a reduction in long-term liabilities, respectively. To secure these benefits, we filed a 2014 refund claim to carryback our U.S. net operating loss generated in 2019 and intend to file amended 2012 and 2013 income tax returns impacted by the net operating loss carryback. Prior to enactment of the CARES Act, such net operating losses could only be carried forward. In the six-month period ended June 30, 2019, we recognized discrete tax expense of $5.1 million, primarily related to share-based compensation and valuation allowances.
We conduct our international operations in jurisdictions that have varying laws and regulations regarding income and other taxes, some of which are subject to interpretation. We recognize the expense or benefit for a tax position if it is more likely than not to be sustainable upon audit by the applicable taxing authority. If this threshold is met, the tax expense or benefit is then measured and recognized at the largest amount that we believe is greater than 50 % likely of being realized upon ultimate settlement.
We have accrued a net total of $12 million and $21 million in other long-term liabilities on our balance sheet for worldwide unrecognized tax liabilities as of June 30, 2020 and December 31, 2019, respectively. We account for any applicable interest and penalties related to uncertain tax positions as a component of our provision for income taxes on our financial statements. Changes in management's judgment related to those liabilities would affect our effective income tax rate in the periods of change.
Our tax returns are subject to audit by taxing authorities in multiple jurisdictions. These audits often take years to complete and settle. The following table lists the earliest tax years open to examination by tax authorities where we have significant operations:
Jurisdiction | Periods | |
United States | ||
United Kingdom | ||
Norway | ||
Angola | ||
Brazil | ||
6. DEBT
Long-term debt consisted of the following:
(in thousands) | Jun 30, 2020 | Dec 31, 2019 | |||||||
4.650% Senior Notes due 2024 | $ | $ | |||||||
6.000% Senior Notes due 2028 | |||||||||
Fair value of interest rate swaps on $200 million of principal | |||||||||
Interest rate swap settlements | 12,175 | — | |||||||
Unamortized debt issuance costs | ( | ) | ( | ) | |||||
Long-term debt | $ | 806,006 | $ | 796,516 | |||||
In November 2014, we completed the public offering of $500 million aggregate principal amount of 4.650 % Senior Notes due 2024 (the "2024 Senior Notes"). We pay interest on the 2024 Senior Notes on May 15 and November 15 of each year. The 2024 Senior Notes are scheduled to mature on November 15, 2024.
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In February 2018, we completed the public offering of $300 million aggregate principal amount of 6.000 % Senior Notes due 2028 (the "2028 Senior Notes"). We pay interest on the 2028 Senior Notes on February 1 and August 1 of each year. The 2028 Senior Notes are scheduled to mature on February 1, 2028.
We may redeem some or all of the 2024 Senior Notes and the 2028 Senior Notes (collectively, the "Senior Notes") at specified redemption prices.
In October 2014, we entered into a credit agreement (as amended, the "Credit Agreement") with a group of banks. The Credit Agreement initially provided for a $500 million five-year revolving credit facility (the "Revolving Credit Facility"). Subject to certain conditions, the aggregate commitments under the Revolving Credit Facility may be increased by up to $300 million at any time upon agreement between us and existing or additional lenders. Borrowings under the Revolving Credit Facility may be used for general corporate purposes. The Credit Agreement also provided for a $300 million term loan, which we repaid in full in February 2018, using net proceeds from the issuance of our 2028 Senior Notes referred to above, and cash on hand.
In February 2018, we entered into Agreement and Amendment No. 4 to the Credit Agreement ("Amendment No. 4"). Amendment No. 4 amended the Credit Agreement to, among other things, extend the maturity of the Revolving Credit Facility to January 25, 2023 with the extending lenders, which represent 90 % of the existing commitments of the lenders, such that the total commitments for the Revolving Credit Facility will be $500 million until October 25, 2021, and thereafter $450 million until January 25, 2023. As of June 30, 2020, we had no borrowings outstanding under the Revolving Credit Facility.
Borrowings under the Revolving Credit Facility bear interest at an Adjusted Base Rate or the Eurodollar Rate (both as defined in the Credit Agreement), at our option, plus an applicable margin based on our Leverage Ratio (as defined in the Credit Agreement) and, at our election, based on the ratings of our senior unsecured debt by designated ratings services, thereafter to be based on such debt ratings. The applicable margin varies: (1) in the case of advances bearing interest at the Adjusted Base Rate, from 0.125 % to 0.750 %; and (2) in the case of advances bearing interest at the Eurodollar Rate, from 1.125 % to 1.750 %. The Adjusted Base Rate is the highest of (1) the per annum rate established by the administrative agent as its prime rate, (2) the federal funds rate plus 0.50 % and (3) the daily one-month LIBOR plus 1 %. We pay a commitment fee ranging from 0.125 % to 0.300 % on the unused portion of the Revolving Credit Facility, depending on our Leverage Ratio. The commitment fees are included as interest expense in our consolidated financial statements.
The Credit Agreement contains various covenants that we believe are customary for agreements of this nature, including, but not limited to, restrictions on our ability and the ability of each of our subsidiaries to incur debt, grant liens, make certain investments, make distributions, merge or consolidate, sell assets and enter into certain restrictive agreements. We are also subject to a maximum adjusted total Capitalization Ratio (as defined in the Credit Agreement) of 55 %. The Credit Agreement includes customary events of default and associated remedies. As of June 30, 2020, we were in compliance with all the covenants set forth in the Credit Agreement.
We had two interest rate swaps in place relating to a total of $200 million of the 2024 Senior Notes for the period to November 2024. The agreements swapped the fixed interest rate of 4.650 % on $100 million of the 2024 Senior Notes to the floating rate of one-month LIBOR plus 2.426 % and on another $100 million to one-month LIBOR plus 2.823 %. In March 2020, we settled both interest rate swaps with the counterparty for cash proceeds of $13 million. The settlement resulted in a $13 million adjustment to increase our long-term debt balance that will be amortized to interest expense prospectively through the maturity date for the 2024 Senior Notes using the effective interest method. As a result, we amortized $0.7 million to interest expense for the three- and six-month periods ended June 30, 2020.
7. COMMITMENTS AND CONTINGENCIES
Litigation. In the ordinary course of business, we are, from time to time, involved in litigation or subject to disputes, governmental investigations or claims related to our business activities, including, among other things:
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• | performance- or warranty-related matters under our customer and supplier contracts and other business arrangements; and |
• | workers’ compensation claims, Jones Act claims, occupational hazard claims, premises liability claims and other claims. |
Although we cannot predict the ultimate outcome of these matters, we believe that our ultimate liability, if any, that may result from these other actions and claims will not have a material adverse effect on our consolidated financial condition, results of operations or cash flows. However, because of the inherent uncertainty of litigation and other dispute resolution proceedings and, in some cases, the availability and amount of potentially available insurance, we can provide no assurance that the resolution of any particular claim or proceeding to which we are a party will not have a material effect on our consolidated financial condition, results of operations or cash flows for the fiscal period in which that resolution occurs.
Financial Instruments and Risk Concentration. In the normal course of business, we manage risks associated with foreign exchange rates and interest rates through a variety of strategies, including the use of hedging transactions. As a matter of policy, we do not use derivative instruments unless we have an underlying exposure. Other financial instruments that potentially subject us to concentrations of credit risk are principally cash and cash equivalents and accounts receivable.
The carrying values of cash and cash equivalents approximate their fair values due to the short-term maturity of the underlying instruments. Accounts receivable are generated from a broad group of customers, primarily from within the energy industry, which is our major source of revenue. Due to their short-term nature, carrying values of our accounts receivable and accounts payable approximate fair market values.
We estimated the aggregate fair market value of the Senior Notes to be $601 million as of June 30, 2020, based on quoted prices. Since the market for the Senior Notes is not an active market, the fair value of the Senior Notes is classified within Level 2 in the fair value hierarchy under U.S. GAAP (inputs other than quoted prices in active markets for similar assets and liabilities that are observable or can be corroborated by observable market data for substantially the full terms for the assets or liabilities).
As our functional currency in Angola is the U.S. dollar, we recorded foreign currency transaction gains (losses) related to the kwanza of $(0.2 ) million and $(0.6 ) million in the three-month periods ended June 30, 2020 and 2019, respectively, and $(2.2 ) million and $(0.6 ) million in the six-month periods ended June 30, 2020 and 2019, respectively, as a component of other income (expense), net in our Consolidated Statements of Operations. Our foreign currency transaction losses related primarily to the remeasurement of our Angolan kwanza cash balances to U.S. dollars. Any conversion of cash balances from kwanza to U.S. dollars is controlled by the central bank in Angola. As of June 30, 2020 and December 31, 2019, we had the equivalent of approximately $11 million and $6.2 million, respectively, of kwanza cash balances in Angola reflected on our Consolidated Balance Sheets.
To mitigate our currency exposure risk in Angola, we have used kwanza to purchase equivalent Angolan central bank (Banco Nacional de Angola) bonds. The bonds are denominated as U.S. dollar equivalents, so that, upon payment of semi-annual interest and principal upon maturity, payment is made in kwanza, equivalent to the respective U.S. dollars at the then-current exchange rate. As of June 30, 2020 and December 31, 2019, we had $10 million of Angolan bonds on our Consolidated Balance Sheets. Because we intend to sell the bonds if we are able to repatriate the proceeds, we have classified these bonds as available-for-sale securities, and they are recorded in other current assets on our Consolidated Balance Sheets.
We estimated the fair market value of the Angolan bonds to be $10 million as of June 30, 2020 and December 31, 2019 using quoted market prices. Since the market for the Angolan bonds is not an active market, the fair value of the Angolan bonds is classified within Level 2 in the fair value hierarchy under U.S. GAAP.
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8. EARNINGS (LOSS) PER SHARE, SHARE-BASED COMPENSATION AND SHARE REPURCHASE PLAN
Earnings (Loss) per Share. For each period presented, the only difference between our calculated weighted-average basic and diluted number of shares outstanding is the effect of outstanding restricted stock units. In periods where we have a net loss, the effect of our outstanding restricted stock units is anti-dilutive, and therefore does not increase our diluted shares outstanding.
For each period presented, our net income (loss) allocable to both common shareholders and diluted common shareholders is the same as our net income (loss) in our consolidated statements of operations.
Share-Based Compensation. We have no outstanding stock options and, therefore, no share-based compensation to be recognized pursuant to stock option grants.
During 2018, 2019 and through June 30, 2020, we granted restricted units of our common stock to certain of our key executives and employees. During 2018, 2019 and 2020, our Board of Directors granted restricted common stock to our nonemployee directors. The restricted stock units granted to our key executives and key employees generally vest in full on the third anniversary of the award date, conditional on continued employment. The restricted stock unit grants can vest pro rata over three years , provided the individual meets certain age and years-of-service requirements. The shares of restricted stock we grant to our nonemployee directors vest in full on the first anniversary of the award date, conditional on continued service as a director. Each grantee of shares of restricted stock is deemed to be the record owner of those shares during the restriction period, with the right to vote and receive any dividends on those shares. The restricted stock units outstanding have no voting or dividend rights.
For each of the restricted stock units granted in 2018 through June 30, 2020, at the earlier of three years after grant or at termination of employment or service, the grantee will be issued one share of our common stock for each unit vested. As of June 30, 2020 and December 31, 2019, respective totals of 2,024,150 and 1,741,335 shares of restricted stock and restricted stock units were outstanding.
We estimate that share-based compensation cost not yet recognized related to shares of restricted stock or restricted stock units, based on their grant-date fair values, was $15 million as of June 30, 2020. This expense is being recognized on a graded-vesting basis over three years for awards attributable to individuals meeting certain age and years-of-service requirements, and on a straight-line basis over the applicable vesting period of one or three years for the other awards.
Share Repurchase Plan. In December 2014, our Board of Directors approved a plan to repurchase up to 10 million shares of our common stock. Under this plan, in 2015, we repurchased 2.0 million shares. We have no t repurchased any shares under this plan since December 2015. We account for the shares we hold in treasury under the cost method, at average cost.
9. | BUSINESS SEGMENT INFORMATION |
We are a global provider of engineered services and products, primarily to the offshore energy industry. Through the use of our applied technology expertise, we also serve the defense, aerospace and commercial theme park industries. Our Energy Services and Products business consists of ROVs, Subsea Products, Subsea Projects and Asset Integrity. Our ROV segment provides submersible vehicles operated from the surface to support offshore energy exploration, development and production activities. Our Subsea Products segment supplies a variety of specialty subsea hardware and related services. Our Subsea Projects segment provides multiservice subsea support shallow and deepwater vessels and offshore diving and support vessel operations, primarily for inspection, maintenance and repair and installation activities. We also provide survey, autonomous underwater vehicle and satellite-positioning services. For the renewable energy markets, we provide seabed preparation, route clearance and trenching services for submarine cables. Our Asset Integrity segment provides asset integrity management and assessment services, nondestructive testing and inspection. Our Advanced Technologies business provides project management, engineering services and equipment for applications in non-energy industries. Unallocated Expenses are those not associated with a specific business segment. These consist of expenses related to our incentive and deferred compensation plans, including restricted stock and bonuses, as well as other general expenses, including corporate administrative expenses.
There are no differences in the basis of segmentation or in the basis of measurement of segment profit or loss from those used in our consolidated financial statements for the year ended December 31, 2019.
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The following table presents revenue, income (loss) from operations and depreciation and amortization expense by business segment for each of the periods indicated.
Three Months Ended | Six Months Ended | |||||||||||||||||||
(in thousands) | Jun 30, 2020 | Jun 30, 2019 | Mar 31, 2020 | Jun 30, 2020 | Jun 30, 2019 | |||||||||||||||
Revenue | ||||||||||||||||||||
Energy Services and Products | ||||||||||||||||||||
Remotely Operated Vehicles | $ | $ | $ | $ | $ | |||||||||||||||
Subsea Products | ||||||||||||||||||||
Subsea Projects | ||||||||||||||||||||
Asset Integrity | ||||||||||||||||||||
Total Energy Services and Products | ||||||||||||||||||||
Advanced Technologies | ||||||||||||||||||||
Total | $ | $ | $ | $ | $ | |||||||||||||||
Income (Loss) from Operations | ||||||||||||||||||||
Energy Services and Products | ||||||||||||||||||||
Remotely Operated Vehicles | $ | $ | $ | $ | $ | |||||||||||||||
Subsea Products | ( | ) | ( | ) | ||||||||||||||||
Subsea Projects | ( | ) | ( | ) | ||||||||||||||||
Asset Integrity | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||
Total Energy Services and Products | ( | ) | ( | ) | ||||||||||||||||
Advanced Technologies | ( | ) | ( | ) | ||||||||||||||||
Unallocated Expenses | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||
Total | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||
Depreciation and Amortization, including Goodwill Impairment | ||||||||||||||||||||
Energy Services and Products | ||||||||||||||||||||
Remotely Operated Vehicles | $ | $ | $ | $ | $ | |||||||||||||||
Subsea Products | ||||||||||||||||||||
Subsea Projects | ||||||||||||||||||||
Asset Integrity | ||||||||||||||||||||
Total Energy Services and Products | ||||||||||||||||||||
Advanced Technologies | ||||||||||||||||||||
Unallocated Expenses | ||||||||||||||||||||
Total | $ | $ | $ | $ | $ | |||||||||||||||
We determine Income (Loss) from Operations for each business segment before interest income or expense, other income (expense) and provision for income taxes. We do not consider an allocation of these items to be practical.
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Income (Loss) from Operations
Three Months Ended March 31, 2020 and Six Months Ended June 30, 2020—During the three-month period ended March 31, 2020 and the six-month period ended June 30, 2020, we recorded total adjustments of $386 million for:
• | loss on impairment of $ |
• | write-downs and write-offs of certain intangible assets as discussed below in "Depreciation and Amortization Expense" of $ |
• | pre-tax goodwill impairment of $ |
• | other expenses of $ |
These total adjustments of $386 million, attributable to each of our reporting segments, are summarized as follows:
• | Remotely Operated Vehicles - $ |
• | Subsea Products - $ |
• | Subsea Projects - $ |
• | Asset Integrity - $ |
• | Advanced Technologies - $ |
Depreciation and Amortization, including Goodwill Impairment
Depreciation expense on property and equipment, reflected in Depreciation and Amortization, including Goodwill Impairment in the table above, was $38 million, $49 million and $43 million in the three-month periods ended June 30, 2020 and 2019 and March 31, 2020, respectively, and $81 million and $97 million in the six-month periods ended June 30, 2020 and 2019, respectively.
Amortization expense on long-lived intangible assets, reflected in Depreciation and Amortization, including Goodwill Impairment in the table above, was $0.8 million, $1.8 million and $2.6 million in the three-month periods ended June 30, 2020 and 2019 and March 31, 2020, respectively, and $3.4 million and $5.6 million in the six-month periods ended June 30, 2020 and 2019, respectively.
Goodwill impairment expense, reflected in Depreciation and Amortization, including Goodwill Impairment in the table above, was $303 million, in the three-month period ended March 31, 2020 and the six-month period ended June 30, 2020, attributable to each reporting segment as follows:
• | Subsea Products - $ |
• | Subsea Projects - $ |
• | Asset Integrity - $ |
• | Advanced Technologies - $ |
In the three-month period ended March 31, 2020 and the six-month period ended June 30, 2020, we also recorded the write-downs and write-offs of certain intangible assets of $7.3 million in our Subsea Projects segment, which is included in Depreciation and Amortization, including Goodwill Impairment in the table above.
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Goodwill
The following table presents Goodwill by business segment:
(in thousands) | Jun 30, 2020 | Dec 31, 2019 | ||||||
Goodwill | ||||||||
Energy Services and Products | ||||||||
Remotely Operated Vehicles | $ | $ | ||||||
Subsea Products | ||||||||
Subsea Projects | — | |||||||
Asset Integrity | — | |||||||
Total Energy Services and Products | ||||||||
Advanced Technologies | ||||||||
Total | $ | $ | ||||||
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Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations |
Certain statements we make in this quarterly report on Form 10-Q are forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements include, without limitation, statements regarding our expectations about:
• | free cash flow, which we define as net cash provided by operating activities less cash paid for purchases of property and equipment, in 2020 and in future periods; |
• | future demand, order intake and business activity levels; |
• | the adequacy of our liquidity, cash flows and capital resources; |
• | the impacts of COVID-19 on the U.S. and the global economy, as well as on our business; |
• | our expectations regarding tax refunds under the CARES Act; |
• | our projected capital expenditures, unallocated expenses and cash tax payments for 2020; |
• | our expectations regarding shares to be repurchased under our share repurchase plan; |
• | the implementation of new accounting standards and related policies, procedures and controls; |
• | seasonality; and |
• | industry conditions. |
These forward-looking statements are subject to various risks, uncertainties and assumptions, including those we have referred to under the headings "Risk Factors" and "Cautionary Statement Concerning Forward-Looking Statements" in Part I of our annual report on Form 10-K for the year ended December 31, 2019. Although we believe that the expectations reflected in such forward-looking statements are reasonable, because of the inherent limitations in the forecasting process, as well as the relatively volatile nature of the industries in which we operate, we can give no assurance that those expectations will prove to have been correct. Accordingly, evaluation of our future prospects must be made with caution when relying on forward-looking information.
The following discussion should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our annual report on Form 10-K for the year ended December 31, 2019.
Recent Developments Affecting Industry Conditions and Our Business
The ongoing coronavirus (COVID-19) outbreak, which the World Health Organization declared a pandemic and the U.S. Government declared a national emergency in March 2020, has reached more than 200 countries and has continued to be a rapidly evolving situation. The pandemic has resulted in widespread adverse impacts on the global economy and financial markets, and on our employees, customers, suppliers and other parties with whom we have business relations. We have experienced some resulting disruptions to our business operations, as the pandemic has continued to spread through most of our markets. For example, since mid-March, we have had to restrict access to our administrative offices around the world and quarantine personnel and assets as required by various governmental authorities and our own safety protocols.
Our first priority in our response to this crisis has been the health and safety of our employees and those of our customers and other business counterparties. We have implemented preventative measures and developed corporate and regional response plans to minimize unnecessary risk of exposure and prevent infection, while supporting our customers’ global operations to the best of our ability in the circumstances. Our preventative measures and response plans were developed based on guidance received from the World Health Organization, Centers for Disease Control and Prevention, International SOS and our corporate medical advisor. We have modified certain business and workforce practices (including those related to employee travel, employee work locations, and cancellation of physical participation in meetings, events and conferences) and implemented new protocols to promote social distancing and enhance sanitary measures in our offices and facilities to conform to government restrictions and best practices encouraged by governmental and regulatory authorities.
There is considerable uncertainty regarding the extent to which COVID-19 will continue to spread and the extent and duration of governmental and other measures implemented to try to slow the spread of the virus, such as large-scale travel bans and restrictions, border closures, quarantines, shelter-in-place orders and business and government shutdowns. Restrictions of this nature have caused, and may continue to cause, us, our suppliers and other business counterparties to experience operational delays, delays in the delivery of materials and supplies that are sourced from around the globe, and have caused, and may continue to cause, milestones or deadlines relating to various projects to be missed.
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We have also received various notices from some of our suppliers and other business counterparties, and provided notices to several customers, regarding performance delays resulting from the pandemic. These actions may result in some disputes and could strain our relations with customers and others. If and to the extent these actions were to result in material modifications or cancellations of the underlying contracts, we could experience reductions in our currently reported backlog and in the anticipated conversion of backlog into revenue in future periods. In addition, worsening economic conditions could result in reductions in backlog over time, which would impact our future financial performance.
One of the impacts of the pandemic has been a significant reduction in global demand for oil and natural gas. For example, according to industry reports, global demand for oil dropped precipitously by approximately 14 million barrels per day during the first quarter of 2020. This significant decline in demand was met with a sharp decline in oil prices following the announcement of price reductions and production increases in March 2020 by members of the Organization of Petroleum Exporting Countries ("OPEC"), and other foreign, oil-exporting countries. The resulting supply/demand imbalance has had, and is continuing to have, disruptive impacts on the oil and natural gas exploration and production industry and on other industries that serve exploration and production companies. Although OPEC and other foreign, oil-producing countries implemented production cuts during the second quarter and, as a result, crude oil prices improved somewhat, global crude oil demand during the second quarter of 2020 was 16.4 million barrels per day lower than that of the second quarter of 2019. Recent increases in COVID-19 cases in various regions around the world and the resulting governmental and other restrictions imposed in response to those increases, have resulted in more volatility and less predictability in industry conditions. These conditions have led to significant global economic contraction generally and in our industry in particular.
We expect to see continued volatility in oil and natural gas prices for the foreseeable future, which could, over the long term, adversely impact our business. A significant decline in exploration and development activities and related spending by our customers, whether due to decreases in demand or prices for oil and natural gas or otherwise, would have a material adverse effect on our business, cash flows, liquidity, financial condition and results of operations.
As of the date of this report, our efforts to respond to the challenges presented by the conditions described above and minimize the impacts to our business have yielded results as we have largely been able to maintain operational continuity on a worldwide basis. Our manufacturing, services operations, and other operating facilities have remained operational and our vessels have continued to perform. We have moved quickly to reduce costs, increase operational efficiencies and lower our capital spending. In addition, as of June 30, 2020, we had $334 million of cash on our balance sheet and our revolving credit facility was undrawn and remains available to support our operations. We have not required any funding under any COVID-19-related, U.S. federal or other governmental programs to support our operations, and we do not expect to have to utilize any such funding. We have experienced some increased absenteeism in our hourly workforce, but, so far, we have not experienced any resulting problems that we have not been able to manage. We are continuing to address concerns to protect the health and safety of our employees and those of our customers and other business counterparties, and this includes changes to comply with health-related guidelines as they are modified and supplemented.
In our March 31, 2020 press release, we announced that we had withdrawn our 2020 financial guidance. We are not providing operating results or EBITDA guidance for the third quarter or second half of 2020, due to the continuing uncertainty impacting the majority of our businesses. Many of the markets we serve are being profoundly affected by the effects of and associated responses to COVID-19, as well as the significant reductions in customer spending as a result of the lower crude oil price environment.
We cannot predict the full impact that COVID-19 or the significant disruption and volatility currently being experienced in the oil and natural gas markets will have on our business, cash flows, liquidity, financial condition and results of operations at this time, due to numerous uncertainties. The ultimate impacts will depend on future developments beyond our control, which are highly uncertain and cannot be predicted, including, among others, the ultimate geographic spread of the virus, the consequences of governmental and other measures designed to prevent the spread of the virus, the development of effective treatments, the duration of the outbreak, actions taken by members of OPEC and other foreign oil-exporting countries, governmental authorities, customers, suppliers and other thirds parties, workforce availability, and the timing and extent to which normal economic and operating conditions resume.
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Executive Overview
Our diluted earnings (loss) per share for the three- and six-month periods ended June 30, 2020 were $(0.25) and $(3.96), respectively, as compared to $(0.36) and $(0.61) for the corresponding periods of the prior year. Considering the uncertainties surrounding crude oil markets and the COVID-19 pandemic, we were satisfied with our operating results adjusted for asset impairments, write-offs and other charges. These results were partially attributable to our actions to substantially reduce structural costs in light of an expected continuation of lower demand for our services and products.
As expected, compared to the first quarter of 2020, the adjusted results of our energy segments, as a whole, declined during the second quarter of 2020. However, this decrease was partially offset by improved performance in our non-energy segment, Advanced Technologies, and lower Unallocated Expenses. We did experience some operational disruptions and delays due to COVID-19 during the second quarter, but the safety protocols we and others in the industry put into place in response to this pandemic limited impacts to our employees and customers.
Although we are encouraged by our second quarter 2020 results, uncertainty remains for the rest of 2020. Many of the markets we serve will likely continue to be impacted by the effects of and associated responses to COVID-19, as well as potential reductions in customer spending as a consequence of the volatility in the macro drivers surrounding commodity prices. As a result, we are not providing segment financial guidance for the third quarter or second half of 2020. We affirm our guidance that Unallocated Expenses are forecast to be in the high-$20 million range per quarter for the remainder of 2020 and our annual capital expenditures to be in the range of $45 million to $65 million.
On March 27, 2020, the U.S. Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") was signed into law in the U.S. In accordance with the recently established rules and procedures under the CARES Act, we filed a 2014 refund claim to carryback our U.S. net operating loss generated in 2019 and intend to file amended 2012 and 2013 income tax returns impacted by the net operating loss carryback. As a result, we expect to receive combined refunds of approximately $33 million. These refunds are classified as income taxes receivable in the consolidated balance sheet as of June 30, 2020. We also realized a non-cash tax benefit of $9.9 million due to the carryback provision of the CARES Act recognized as a reduction in long-term liabilities. Prior to enactment of the CARES Act, such net operating losses could only be carried forward. As a result of these actions and other factors, any discussion of an estimated effective tax rate would not be meaningful.
We estimate our 2020 net income tax payments to be in the range of $30 million to $35 million, primarily due to taxes incurred in countries that impose tax on the basis of in-country revenue, without regard to the profitability of such operations, and our CARES Act refunds to be in the range of $16 million to $34 million.
Although we are not able to currently provide operating or EBITDA guidance, we continue to believe that we will generate positive free cash flow during 2020. This belief is based on the following: actions we have taken to achieve cost reductions; reduced capital spending levels; lower cash taxes; our expectation for CARES Act tax refunds; and cash expected to be generated from working capital for the remainder of the year.
Results of Operations
We operate in five business segments. The segments are contained within two businesses — services and products provided primarily to the offshore energy industry ("Energy Services and Products") and services and products provided to non-energy industries ("Advanced Technologies"). Our Unallocated Expenses are those not associated with a specific business segment.
Consolidated revenue and profitability information are as follows:
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Three Months Ended | Six Months Ended | ||||||||||||||||||||
(dollars in thousands) | Jun 30, 2020 | Jun 30, 2019 | Mar 31, 2020 | Jun 30, 2020 | Jun 30, 2019 | ||||||||||||||||
Revenue | $ | 427,216 | $ | 495,781 | $ | 536,668 | $ | 963,884 | $ | 989,667 | |||||||||||
Gross Margin | 42,537 | 41,983 | 46,752 | 89,289 | 69,570 | ||||||||||||||||
Gross Margin % | 10 | % | 8 | % | 9 | % | 9 | % | 7 | % | |||||||||||
Operating Income (Loss) | (5,182 | ) | (9,635 | ) | (380,757 | ) | (385,939 | ) | (31,349 | ) | |||||||||||
Operating Income (Loss) % | (1 | )% | (2 | )% | (71 | )% | (40 | )% | (3 | )% | |||||||||||
We generate a material amount of our consolidated revenue from contracts for services in the U.S. Gulf of Mexico in our Subsea Projects segment, which is usually more active in the second and third quarters, as compared to the rest of the year. The European operations of our Asset Integrity segment are also seasonally more active in the second and third quarters. Revenue in our ROV segment is subject to seasonal variations in demand, with our first quarter generally being the low quarter of the year. The level of our ROV seasonality depends on the number of ROVs we have engaged in vessel-based subsea infrastructure inspection, maintenance, repair and installation, which is more seasonal than drilling support. Revenue in each of our Subsea Products and Advanced Technologies segments generally has not been seasonal.
We had operating losses of $5.2 million, $9.6 million and $381 million in the three-month periods ended June 30, 2020, June 30, 2019 and March 31, 2020, respectively, and $386 million and $31 million in the six-month periods ended June 30, 2020 and June 30, 2019, respectively. Included in our operating losses for the three months ended March 31, 2020 and the six months ended June 30, 2020, were charges of $386 million, primarily due to market conditions requiring impairment of certain of our assets along with other costs we recognized as we adapted our geographic footprint and staffing levels to the conditions of the markets we serve. Charges for the three months ended March 31, 2020 and six months ended June 30, 2020 are summarized as follows:
For the three months ended March 31, 2020 and the six months ended June 30, 2020 | ||||||||||||||||||||||||||||||
(in thousands) | Remotely Operated Vehicles | Subsea Products | Subsea Projects | Asset Integrity | Advanced Tech. | Unallocated Expenses | Total | |||||||||||||||||||||||
Charges for the effects of: | ||||||||||||||||||||||||||||||
Long-lived assets impairments | $ | — | $ | 54,859 | $ | 7,689 | $ | — | $ | 6,215 | $ | — | $ | 68,763 | ||||||||||||||||
Long-lived assets write-offs | — | — | 7,328 | — | — | — | 7,328 | |||||||||||||||||||||||
Goodwill impairment | — | 51,302 | 129,562 | 110,753 | 11,388 | — | 303,005 | |||||||||||||||||||||||
Other | 713 | 1,668 | 1,480 | 1,694 | 795 | 280 | 6,630 | |||||||||||||||||||||||
Total charges | $ | 713 | $ | 107,829 | $ | 146,059 | $ | 112,447 | $ | 18,398 | $ | 280 | $ | 385,726 | ||||||||||||||||
Energy Services and Products
The primary focus of our Energy Services and Products business over the last several years has been toward leveraging our asset base and capabilities for providing services and products for offshore energy operations and subsea completions, inclusive of our customers' operating expenses and the offshore renewable energy market.
The following table sets forth the revenue, gross margin and operating income (loss) for our Energy Services and Products business segments for the periods indicated. In the ROV section of the table that follows, "Days available" includes all days from the first day that an ROV is placed into service until the ROV is retired. All days during this period are considered available days, including periods when an ROV is undergoing maintenance or repairs. Our ROVs do not have scheduled maintenance or repair that requires significant time when the ROVs are not available for utilization.
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Three Months Ended | Six Months Ended | ||||||||||||||||||||
(dollars in thousands) | Jun 30, 2020 | Jun 30, 2019 | Mar 31, 2020 | Jun 30, 2020 | Jun 30, 2019 | ||||||||||||||||
Remotely Operated Vehicles | |||||||||||||||||||||
Revenue | $ | 98,778 | $ | 120,363 | $ | 111,780 | $ | 210,558 | $ | 220,709 | |||||||||||
Gross Margin | 13,788 | 17,360 | 18,112 | 31,900 | 26,781 | ||||||||||||||||
Operating Income (Loss) | 5,975 | 8,688 | 9,066 | 15,041 | 10,106 | ||||||||||||||||
Operating Income (Loss) % | 6 | % | 7 | % | 8 | % | 7 | % | 5 | % | |||||||||||
Days Available | 22,750 | 25,006 | 22,750 | 45,500 | 49,512 | ||||||||||||||||
Days Utilized | 13,501 | 15,423 | 14,853 | 28,354 | 28,365 | ||||||||||||||||
Utilization | 59 | % | 62 | % | 65 | % | 62 | % | 57 | % | |||||||||||
Subsea Products | |||||||||||||||||||||
Revenue | 130,655 | 138,910 | 194,838 | 325,493 | 267,754 | ||||||||||||||||
Gross Margin | 21,578 | 21,029 | 28,639 | 50,217 | 33,344 | ||||||||||||||||
Operating Income (Loss) | 9,068 | 7,413 | (91,858 | ) | (82,790 | ) | 6,937 | ||||||||||||||
Operating Income (Loss) % | 7 | % | 5 | % | (47 | )% | (25 | )% | 3 | % | |||||||||||
Backlog at End of Period | 486,000 | 596,000 | 528,000 | 486,000 | 596,000 | ||||||||||||||||
Subsea Projects | |||||||||||||||||||||
Revenue | 56,326 | 75,104 | 61,455 | 117,781 | 164,832 | ||||||||||||||||
Gross Margin | 6,331 | 5,472 | (2,114 | ) | 4,217 | 14,505 | |||||||||||||||
Operating Income (Loss) | 845 | 87 | (145,290 | ) | (144,445 | ) | 2,979 | ||||||||||||||
Operating Income (Loss) % | 2 | % | — | % | (236 | )% | (123 | )% | 2 | % | |||||||||||
Asset Integrity | |||||||||||||||||||||
Revenue | 48,077 | 61,156 | 59,132 | 107,209 | 121,845 | ||||||||||||||||
Gross Margin | 4,155 | 6,423 | 8,729 | 12,884 | 12,695 | ||||||||||||||||
Operating Income (Loss) | (2,598 | ) | (1,302 | ) | (109,441 | ) | (112,039 | ) | (2,015 | ) | |||||||||||
Operating Income (Loss) % | (5 | )% | (2 | )% | (185 | )% | (105 | )% | (2 | )% | |||||||||||
Total Energy Services and Products | |||||||||||||||||||||
Revenue | $ | 333,836 | $ | 395,533 | $ | 427,205 | $ | 761,041 | $ | 775,140 | |||||||||||
Gross Margin | 45,852 | 50,284 | 53,366 | 99,218 | 87,325 | ||||||||||||||||
Operating Income (Loss) | 13,290 | 14,886 | (337,523 | ) | (324,233 | ) | 18,007 | ||||||||||||||
Operating Income (Loss) % | 4 | % | 4 | % | (79 | )% | (43 | )% | 2 | % | |||||||||||
In general, our energy-related business focuses on supplying services and products to the offshore energy industry. Since the downturn in oil prices in mid-2014, we have experienced lower activity levels and reduced pricing. In 2019, oil prices stabilized, resulting in increased demand and higher utilization for our energy-related businesses, with slightly improved pricing through the first quarter of 2020. The adverse impacts of COVID-19 and the resulting supply and demand imbalance along with lower crude oil prices are resulting in lower levels of activity and profitability. As we expect a recovery will take time to restore profitability and generate satisfactory returns, we have been reviewing our operating model’s cost structure and aggressively implementing cost reductions.
ROV. We believe we are the world's largest provider of ROV services and, generally, this business segment has been the largest contributor to our Energy Services and Products business operating income. Our ROV segment revenue reflects the utilization percentages, fleet sizes and average pricing in the respective periods.
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During the second quarter of 2020, ROV operating income decreased as compared to the immediately preceding quarter, primarily due to the lower number of working drilling rigs. This led to fewer days on hire for drill support services that were slightly offset by a marginal increase in days on hire for vessel-based services. ROV operating income for the second quarter of 2020 decreased, as compared to the corresponding period of the prior year, as a result of fewer days on hire and lower average revenue per day on hire, partially offset by lower costs per day on hire. ROV operating income for the six-month period ended June 30, 2020 increased as compared to the corresponding period of the prior year as a result of reduced costs per day, which were partially offset by lower average revenue per day. Days on hire, as compared to the corresponding period of the prior year, were relatively flat.
Fleet utilization was 59% for the three months ended June 30, 2020 as compared to 62% for the corresponding period of the prior year. Fleet utilization increased to 62% from 57% for the six-month periods ended June 30, 2020 and June 30, 2019, respectively. We added one new ROV to our fleet during the six months ended June 30, 2020 and retired one, resulting in a total of 250 ROVs in our ROV fleet as of June 30, 2020, as compared to 276 ROVs in our ROV fleet as of June 30, 2019.
Subsea Products. Our Subsea Products segment consists of two business units: (1) Manufactured Products; and (2) Service and Rental. Manufactured Products includes production control umbilicals and specialty subsea hardware, while Service and Rental includes tooling, subsea work systems and installation and workover control systems. The following table presents revenue from Manufactured Products and Service and Rental, as their respective percentages of total Subsea Products revenue:
Three Months Ended | Six Months Ended | |||||||||||||||
Jun 30, 2020 | Jun 30, 2019 | Mar 31, 2020 | Jun 30, 2020 | Jun 30, 2019 | ||||||||||||
Manufactured Products | 65 | % | 63 | % | 74 | % | 71 | % | 57 | % | ||||||
Service and Rental | 35 | % | 37 | % | 26 | % | 29 | % | 43 | % | ||||||
Our Subsea Products operating results in the second quarter of 2020 were higher than those of the immediately preceding quarter, as a result of charges for the impairment and write-offs of goodwill, certain equipment, intangibles and other expenses of $108 million in the first quarter of 2020. Exclusive of such charges, operating results declined during the second quarter of 2020, as compared to the immediately preceding quarter, due to significantly lower revenue. Revenue in our Manufactured Products business was impacted by the delayed receipt of materials, customer-driven project delays, and reduced working hours due to COVID-19. Revenue was also lower in our Service and Rental business due to overall lower activity levels. Our Subsea Products operating results increased in the second quarter of 2020, as compared to the corresponding period of the prior year, primarily as a result of increased earnings from our Manufactured Products business based on improved pricing and cost reduction initiatives. Subsea Products operating results were lower for the six-month period ended June 30, 2020, when compared to the corresponding period of the prior year, as a result of the charges in the first quarter of 2020. Exclusive of charges, operating results increased when compared to the corresponding six-month period of the prior year, primarily due to increased activity in subsea umbilical and hardware throughput, as well as improved margins in our Service and Rental business.
Our Subsea Products backlog was $486 million as of June 30, 2020, compared to $630 million as of December 31, 2019. The backlog decrease was attributable to low levels of bookings during the second quarter, as many of our customers delayed investment decisions due to the uncertainties regarding oil prices and potential COVID-19-related operating risks. The higher throughput and lower order intake resulted in a 67% revenue replacement in the second quarter of 2020. Our book-to-bill ratio for the trailing 12 months was 0.8.
Subsea Projects. Our Subsea Projects operating results were higher in the second quarter of 2020, as compared to the immediately preceding quarter, primarily as a result of charges in the first quarter of 2020 of $146 million for goodwill impairment, vessel and intangible impairments, and write-downs and write-offs of certain equipment. Exclusive of charges, operating results improved on lower revenue in the second quarter of 2020, as compared to the immediately preceding quarter, due to better project execution and ongoing cost reduction activity. Our Subsea Projects operating results increased slightly in the three months ended June 30, 2020, compared to the corresponding period of the prior year, on significantly lower revenue due to reduced amounts of Gulf of Mexico diving and international inspection, maintenance and repair ("IMR") work. Our Subsea Projects revenue and operating results were lower in the six-month period ended June 30, 2020, as compared to the corresponding
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period of the prior year, as a result of charges in the first quarter of 2020 along with reduced IMR work both in the Gulf of Mexico and internationally along with a significant decrease in Gulf of Mexico diving work.
Asset Integrity. Asset Integrity's operating results for the second quarter of 2020 were higher than the immediately preceding quarter, as a result of charges related to goodwill impairment, asset impairments, write-downs and write-offs of certain equipment and intangible assets, and other expenses of $112 million in the first quarter of 2020. Exclusive of charges, operating results declined in the second quarter of 2020, as compared to the immediately preceding quarter, on lower revenue and as a result of non-recurring costs on certain completed projects. Asset Integrity's operating results for the three-month period ended June 30, 2020, as compared to the corresponding period of the prior year, were lower due to significantly lower revenue, partially offset by cost reduction activities. Asset Integrity's operating results for the six-month period ended June 30, 2020, as compared to the corresponding period of the prior year, were lower due to charges in the first quarter of 2020. Exclusive of those charges, operating results for the six-month period ended June 30, 2020 were higher, as compared to the corresponding period of the prior year, due to cost reductions instituted in the fourth quarter of 2019 and in the first half of 2020.
Advanced Technologies
Our Advanced Technologies segment consists of two business units: (1) government; and (2) commercial. Government services and products include engineering and related manufacturing in defense and space exploration activities. Our commercial business unit offers turnkey solutions that include program management, engineering design, fabrication/assembly and installation to the commercial theme park industry and mobile robotics solutions, including automated guided vehicle technology to a variety of industries.
Revenue, gross margin and operating income (loss) information for our Advanced Technologies segment are as follows:
Three Months Ended | Six Months Ended | ||||||||||||||||||||
(dollars in thousands) | Jun 30, 2020 | Jun 30, 2019 | Mar 31, 2020 | Jun 30, 2020 | Jun 30, 2019 | ||||||||||||||||
Revenue | $ | 93,380 | $ | 100,248 | $ | 109,463 | $ | 202,843 | $ | 214,527 | |||||||||||
Gross Margin | 15,089 | 13,386 | 13,428 | 28,517 | 28,634 | ||||||||||||||||
Operating Income (Loss) | 9,707 | 7,241 | (10,585 | ) | (878 | ) | 16,840 | ||||||||||||||
Operating Income (Loss) % | 10 | % | 7 | % | (10 | )% | — | % | 8 | % | |||||||||||
Our Advanced Technologies segment operating results for the second quarter of 2020 were higher, as compared to the immediately preceding quarter, as a result of charges of $18 million for our commercial business unit in the first quarter of 2020 for goodwill impairment, asset impairments, write-downs of certain equipment and other expenses. Exclusive of charges, operating results were higher based on improved performance from our government business unit. Even though COVID-19 continues to adversely affect our commercial business unit, operating results exclusive of charges improved in the second quarter, as compared to the immediately preceding quarter, as a result of cost reduction measures implemented during the first quarter of 2020. Advanced Technologies operating results for the three-month period ended June 30, 2020 were higher, when compared to the corresponding period of the prior year, as a result of improved margins from our government business unit as well as improved execution with our AGV business. Advanced Technologies operating results for the six-month period ended June 30, 2020 were lower, when compared to the corresponding period of the prior year, primarily as a result of charges in the first quarter of 2020. Exclusive of charges, operating results increased slightly on lower levels of revenue in the first six months of 2020, when compared to the corresponding period of the prior year, due to increased activity for our government business unit mostly offset by customer operational project delays and the adverse impacts of COVID-19, combined with higher costs on certain projects within our entertainment business.
The following table presents revenue from government and commercial, as their respective percentages of total Advanced Technologies revenue:
Three Months Ended | Six Months Ended | |||||||||||||||
Jun 30, 2020 | Jun 30, 2019 | Mar 31, 2020 | Jun 30, 2020 | Jun 30, 2019 | ||||||||||||
Government | 85 | % | 75 | % | 83 | % | 84 | % | 73 | % | ||||||
Commercial | 15 | % | 25 | % | 17 | % | 16 | % | 27 | % | ||||||
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Unallocated Expenses
Our Unallocated Expenses, (i.e., those not associated with a specific business segment), within gross margin consist of expenses related to our incentive and deferred compensation plans, including restricted stock units, performance units and bonuses, as well as other general expenses. Our Unallocated Expenses within operating expense consist of those expenses within gross margin plus general and administrative expenses related to corporate functions.
The following table sets forth our Unallocated Expenses for the periods indicated:
Three Months Ended | Six Months Ended | |||||||||||||||||||
(dollars in thousands) | Jun 30, 2020 | Jun 30, 2019 | Mar 31, 2020 | Jun 30, 2020 | Jun 30, 2019 | |||||||||||||||
Gross margin expenses | $ | (18,404 | ) | $ | (21,687 | ) | (20,042 | ) | $ | (38,446 | ) | $ | (46,389 | ) | ||||||
% of revenue | 4 | % | 4 | % | 4 | % | 4 | % | 5 | % | ||||||||||
Operating expenses | (28,179 | ) | (31,762 | ) | (32,649 | ) | (60,828 | ) | (66,196 | ) | ||||||||||
Operating expenses % of revenue | 7 | % | 6 | % | 6 | % | 6 | % | 7 | % | ||||||||||
Our Unallocated Expenses for the second quarter of 2020 were lower, as compared to the immediately preceding quarter, as the return on market-based assets held in a trust for the benefit of certain post-retirement obligations improved, as compared to a first quarter 2020 loss. Additionally, we had reduced information technology costs during the second quarter of 2020. Our Unallocated Expenses for the three- and six-month periods ended June 30, 2020 were lower, as compared to the corresponding periods of the prior year, primarily as a result of lower accruals for incentive-based compensation, along with reduced information technology costs in the second quarter of 2020.
Other
The following table sets forth our significant financial statement items below the income (loss) from operations line.
Three Months Ended | Six Months Ended | ||||||||||||||||||||
(in thousands) | Jun 30, 2020 | Jun 30, 2019 | Mar 31, 2020 | Jun 30, 2020 | Jun 30, 2019 | ||||||||||||||||
Interest income | $ | 511 | $ | 1,848 | $ | 1,277 | $ | 1,788 | $ | 4,452 | |||||||||||
Interest expense, net of amounts capitalized | (11,611 | ) | (10,199 | ) | (12,462 | ) | (24,073 | ) | (19,623 | ) | |||||||||||
Equity in income (losses) of unconsolidated affiliates | 674 | — | 1,197 | 1,871 | (164 | ) | |||||||||||||||
Other income (expense), net | (3,660 | ) | 7 | (7,128 | ) | (10,788 | ) | 726 | |||||||||||||
Provision (benefit) for income taxes | 5,520 | 17,203 | (30,275 | ) | (24,755 | ) | 14,051 | ||||||||||||||
In addition to interest on borrowings, interest expense includes amortization of loan costs and hedge accounting adjustments, fees for lender commitments under our revolving credit agreement and fees for standby letters of credit and bank guarantees that banks issue on our behalf for performance bonds, bid bonds and self-insurance requirements.
Foreign currency transaction gains and losses are the principal component of other income (expense), net. In the three- and six-month periods ended June 30, 2020, we incurred foreign currency transaction gains (losses) of $(3.9) million and $(11) million, respectively. In the three- and six-month periods ended June 30, 2019, we incurred foreign currency transaction gains of less than $0.1 million and $0.7 million, respectively. The currency losses in 2020 primarily related to declining exchange rates for the Angolan kwanza and the Brazilian real relative to the U.S. dollar. We did not incur any significant currency transaction losses in any one currency in 2019. We could incur further foreign currency exchange losses in Angola and Brazil if further currency devaluations occur.
In the six-month period ended June 30, 2020, we provided for income taxes based on our earnings for the period using: (1) earnings and other factors that would affect the tax provision for the period; and (2) the operations of foreign branches and subsidiaries that are subject to local income and withholding taxes. Factors that affect our tax rate include our profitability levels in general and the geographic mix in the sources of our results. The effective tax rate for the six months ended June 30, 2020 was different than the federal statutory rate of 21%, primarily due to
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the enactment of the CARES Act, the geographic mix of operating revenue and results, and changes in uncertain tax positions and other discrete items. We continue to make an assertion to indefinitely reinvest the unrepatriated earnings of any foreign subsidiary that would incur incremental tax consequences upon the distribution of such earnings. Therefore, we do not believe a discussion of the effective tax rate is meaningful.
In the six-month period ended June 30, 2020, we recognized a tax benefit of $42 million from discrete items, primarily related to a $33 million benefit related to the CARES Act and $9.9 million of uncertain tax positions. In the six-month period ended June 30, 2019, we recognized additional tax expense of $5.1 million from discrete items, primarily related to uncertain tax positions, valuation allowances and share-based compensation.
We estimate our 2020 net income tax payments to be in the range of $30 million to $35 million, primarily due to taxes incurred in countries that impose tax on the basis of in-country revenue, without regard to the profitability of such operations, and our CARES Act refunds to be in the range of $16 million to $34 million.
Liquidity and Capital Resources
As of June 30, 2020, we had working capital of $679 million, including $334 million of cash and cash equivalents. Additionally, Amendment No. 4 to the Credit Agreement (as defined below) provides for a $500 million revolving credit facility until October 25, 2021 and thereafter $450 million until January 25, 2023 with a group of banks. We consider our liquidity, cash flows and capital resources to be adequate to support our existing operations and capital commitments. However, given the uncertainty in the rapidly changing market and economic conditions related to the COVID-19 outbreak, we will continue to evaluate the nature and extent of the impact to our business and financial position.
Cash flows for the six months ended June 30, 2020 and 2019 are summarized as follows:
Six Months Ended | |||||||||
(in thousands) | Jun 30, 2020 | Jun 30, 2019 | |||||||
Changes in Cash: | |||||||||
Net Cash Provided by Operating Activities | $ | 5,368 | $ | 72,709 | |||||
Net Cash Used in Investing Activities | (35,317 | ) | (68,119 | ) | |||||
Net Cash Used in Financing Activities | (1,947 | ) | (2,682 | ) | |||||
Effect of exchange rates on cash | (8,250 | ) | (329 | ) | |||||
Net Increase (Decrease) in Cash and Cash Equivalents | $ | (40,146 | ) | $ | 1,579 | ||||
Operating activities
Our primary sources and uses of cash flows from operating activities for the six months ended June 30, 2020 and 2019 are as follows:
Six Months Ended | ||||||||||
(in thousands) | Jun 30, 2020 | Jun 30, 2019 | ||||||||
Cash Flows from Operating Activities: | ||||||||||
Net income (loss) | $ | (392,386 | ) | $ | (60,009 | ) | ||||
Non-cash items, net | 459,072 | 103,347 | ||||||||
Accounts receivable and contract assets | 63,724 | 53,913 | ||||||||
Inventory | 14,297 | (18,687 | ) | |||||||
Current liabilities | (135,019 | ) | (18,669 | ) | ||||||
Other changes | (4,320 | ) | 12,814 | |||||||
Net Cash Provided by (Used in) Operating Activities | $ | 5,368 | $ | 72,709 | ||||||
The increase in cash related to accounts receivable and contract assets in the six months ended June 30, 2020 reflects the timing of project milestones and customer payments. The increase in cash related to inventory in the six
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months ended June 30, 2020 corresponds with a decrease in our backlog. The decrease in cash related to current liabilities in the six months ended June 30, 2020 reflects the timing of vendor payments, lower contract liabilities due to a decrease in deferred customer prepayments, and the annual employee incentive payments related to attainment of specific performance goals in prior periods.
Investing activities
Our capital expenditures of $38 million were lower during the first six months of 2020, as compared to $71 million in the first six months of 2019, as a result of actions we have taken in 2020 to reduce costs and preserve liquidity.
For 2020, we expect our capital expenditures to be in the range of $45 million to $65 million, exclusive of business acquisitions. This includes approximately $15 million to $25 million of maintenance capital expenditures and $30 million to $40 million of growth capital expenditures.
We previously had several deepwater vessels under long-term charter. The last of our long-term charters expired in March 2018. With the current vessel market conditions, we have entered into some minimum-day, short-term, time charter party agreements and, for specific projects, we continue to charter on a back-to-back basis with the vessel owners. This generally minimizes our contract exposure by closely matching our obligations with our revenue.
Financing activities
In the six months ended June 30, 2020, we used $1.9 million of cash in financing activities. In the six months ended June 30, 2019, we used $2.7 million in financing activities.
As of June 30, 2020, we had long-term debt in the principal amount of $800 million outstanding and $500 million available under our revolving credit facility provided under the Credit Agreement.
In October 2014, we entered into a credit agreement (as amended, the "Credit Agreement") with a group of banks. The Credit Agreement initially provided for a $500 million five-year revolving credit facility (the "Revolving Credit Facility"). Subject to certain conditions, the aggregate commitments under the Revolving Credit Facility may be increased by up to $300 million at any time upon agreement between us and existing or additional lenders. Borrowings under the Revolving Credit Facility may be used for general corporate purposes. The Credit Agreement also provided for a $300 million term loan, which we repaid in full in February 2018, using net proceeds from the issuance of our 2028 Senior Notes (as defined and discussed below), and cash on hand.
In February 2018, we entered into Agreement and Amendment No. 4 to the Credit Agreement ("Amendment No. 4"). Amendment No. 4 amended the Credit Agreement to, among other things, extend the maturity of the Revolving Credit Facility to January 25, 2023 with the extending lenders, which represent 90% of the existing commitments of the lenders, such that the total commitments for the Revolving Credit Facility will be $500 million until October 25, 2021, and thereafter $450 million until January 25, 2023.
Borrowings under the Revolving Credit Facility bear interest at an Adjusted Base Rate or the Eurodollar Rate (both as defined in the Credit Agreement), at our option, plus an applicable margin based on our Leverage Ratio (as defined in the Credit Agreement) and, at our election, based on the ratings of our senior unsecured debt by designated ratings services, thereafter to be based on such debt ratings. The applicable margin varies: (1) in the case of advances bearing interest at the Adjusted Base Rate, from 0.125% to 0.750%; and (2) in the case of advances bearing interest at the Eurodollar Rate, from 1.125% to 1.750%. The Adjusted Base Rate is the highest of (1) the per annum rate established by the administrative agent as its prime rate, (2) the federal funds rate plus 0.50% and (3) the daily one-month LIBOR plus 1%. We pay a commitment fee ranging from 0.125% to 0.300% on the unused portion of the Revolving Credit Facility, depending on our Leverage Ratio. The commitment fees are included as interest expense in our consolidated financial statements.
The Credit Agreement contains various covenants that we believe are customary for agreements of this nature, including, but not limited to, restrictions on our ability and the ability of each of our subsidiaries to incur debt, grant liens, make certain investments, make distributions, merge or consolidate, sell assets and enter into certain restrictive agreements. We are also subject to a maximum adjusted total Capitalization Ratio (as defined in the Credit Agreement which stipulates, that among other items, we exclude any impacts associated with current and prior period impairments) of 55%. The Credit Agreement includes customary events of default and associated remedies. As of June 30, 2020, we were in compliance with all the covenants set forth in the Credit Agreement. As
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of June 30, 2020, we had no borrowings outstanding under the Revolving Credit Facility and the option of utilizing the entire $500 million of available borrowing capacity under the Revolving Credit Facility while remaining in compliance with the maximum adjusted Capitalization Ratio.
In November 2014, we completed the public offering of $500 million aggregate principal amount of 4.650% Senior Notes due 2024 (the "2024 Senior Notes"). We pay interest on the 2024 Senior Notes on May 15 and November 15 of each year. The 2024 Senior Notes are scheduled to mature on November 15, 2024.
In February 2018, we completed the public offering of $300 million aggregate principal amount of 6.000% Senior Notes due 2028 (the "2028 Senior Notes"). We pay interest on the 2028 Senior Notes on February 1 and August 1 of each year. The 2028 Senior Notes are scheduled to mature on February 1, 2028.
We may redeem some or all of the 2024 Senior Notes and 2028 Senior Notes at specified redemption prices.
In December 2014, our Board of Directors approved a plan to repurchase up to 10 million shares of our common stock. In 2015, we repurchased 2.0 million shares under this plan. We have not repurchased any shares under this plan since December 2015. We account for the shares we hold in treasury under the cost method, at average cost. The timing and amount of any future repurchases will be determined by our management. We expect that any additional shares repurchased under the plan will be held as treasury stock for possible future use. The plan does not obligate us to repurchase any particular number of shares.
Off-Balance Sheet Arrangements
We have not guaranteed any debt not reflected on our Consolidated Balance Sheets as of June 30, 2020, and we do not have any off-balance sheet arrangements, as defined by SEC rules.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in conformity with accounting principles generally accepted in the United States. These principles require us to make various estimates, judgments and assumptions that affect the reported amounts in our financial statements and accompanying notes. We disclose our significant accounting policies in Notes to Consolidated Financial Statements—Note 1—"Summary of Major Accounting Policies" in this quarterly report and in our annual report on Form 10-K for the year ended December 31, 2019, in Part II. Item 7. "Financial Statements and Supplementary Data—Note 1—Summary of Major Accounting Policies."
For information about our critical accounting policies and estimates, see Part II. Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates" in our annual report on Form 10-K for the year ended December 31, 2019. As of June 30, 2020, there have been no material changes to the judgments, assumptions and estimates upon which our critical accounting policies and estimates are based.
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Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
We are currently exposed to certain market risks arising from transactions we have entered into in the normal course of business. These risks relate to interest rate changes and fluctuations in foreign exchange rates. Except for our exposure in Angola, we do not believe these risks are material. We have not entered into any market-risk-sensitive instruments for speculative or trading purposes. When we have a significant amount of borrowings, we typically manage our exposure to interest rate changes through the use of a combination of fixed- and floating-rate debt. See Note 6—"Debt" in the Notes to Consolidated Financial Statements in this quarterly report for a description of our revolving credit facility and interest rates on our borrowings. We had two interest rate swaps in place relating to a total of $200 million of the 2024 Senior Notes. These agreements swapped the fixed interest rate of 4.650% on $100 million of the 2024 Senior Notes to the floating rate of one-month LIBOR plus 2.426% and on another $100 million to one-month LIBOR plus 2.823%. In March 2020, we terminated these interest rate swaps. We believe significant interest rate changes would not have a material near-term impact on our future earnings or cash flows.
Because we operate in various regions in the world, we conduct a portion of our business in currencies other than the U.S. dollar. The functional currency for several of our international operations is the applicable local currency. A stronger U.S. dollar against the United Kingdom pound sterling, the Norwegian kroner and the Brazilian real may result in lower operating income. We manage our exposure to changes in foreign exchange rates principally through arranging compensation in U.S. dollars or freely convertible currency and, to the extent possible, by limiting compensation received in other currencies to amounts necessary to meet obligations denominated in those currencies. We use the exchange rates in effect as of the balance sheet date to translate assets and liabilities as to which the functional currency is the local currency, resulting in translation adjustments that we reflect as accumulated other comprehensive income or loss in the equity section of our Consolidated Balance Sheets. We recorded net adjustments to our equity accounts of $11 million and $0.2 million in the three-month periods ended June 30, 2020 and 2019, respectively, and $(60) million and $6.4 million in the six-month periods ended June 30, 2020 and 2019, respectively. Negative adjustments reflect the net impact of the strengthening of the U.S. dollar against various foreign currencies for locations where the functional currency is not the U.S. dollar. Conversely, positive adjustments reflect the effect of a weakening U.S. dollar.
We recorded foreign currency transaction gains (losses) of $(3.9) million and $(11) million in the three- and six-month periods ended June 30, 2020, and less than $0.1 million and $0.7 million in the three- and six-month periods ended June 30, 2019, respectively. Those gains (losses) are included in other income (expense), net in our Consolidated Statements of Operations in those respective periods. As our functional currency in Angola is the U.S. dollar, we recorded foreign currency transaction gains (losses) related to the kwanza of $(0.2) million and $(2.2) million in the three- and six-month periods ended June 30, 2020 and $(0.6) million and $(0.6) million in the three- and six-month periods ended June 30, 2019, respectively, as a component of other income (expense), net in our Consolidated Statements of Operations for those respective periods. Our foreign currency transaction losses related primarily to the remeasurement of our Angolan kwanza cash balances to U.S. dollars. Any conversion of cash balances from kwanza to U.S. dollars is controlled by the central bank in Angola. We were able to repatriate $6.7 million of cash out of Angola during the first six months of 2020 and $5.5 million in the 12 months ended December 31, 2019. As of June 30, 2020 and December 31, 2019, we had the equivalent of approximately $11 million and $6.2 million, respectively, of kwanza cash balances in Angola reflected on our Consolidated Balance Sheets.
To mitigate our currency exposure risk in Angola, we have used kwanza to purchase equivalent Angolan central bank (Banco Nacional de Angola) bonds. The bonds are denominated as U.S. dollar equivalents, so that, upon payment of semi-annual interest and principal upon maturity, payment is made in kwanza, equivalent to the respective U.S. dollars at the then-current exchange rate. Because we intend to sell the bonds if we are able to repatriate the proceeds, we classified these bonds as available-for-sale securities, and they are recorded in other current assets on our Consolidated Balance Sheets.
We estimated the fair market value of the Angolan bonds to be $10 million as of June 30, 2020 and December 31, 2019 using quoted market prices. Since the market for the Angolan bonds is not an active market, the fair value of the Angolan bonds is classified within Level 2 in the fair value hierarchy under U.S. GAAP. As of June 30, 2020 and December 31, 2019, the difference between the fair market value and the carrying amount of the Angolan bonds was immaterial.
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Item 4. Controls and Procedures
In accordance with Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), we carried out an evaluation, under the supervision and with the participation of management, including our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of June 30, 2020 to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms.
There has been no change in our internal control over financial reporting that occurred during the three months ended June 30, 2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II – OTHER INFORMATION
Item 1. | Legal Proceedings |
In the ordinary course of business, we are, from time to time, involved in litigation or subject to disputes, governmental investigations or claims related to our business activities, including, among other things:
• | performance- or warranty-related matters under our customer and supplier contracts and other business arrangements; and |
• | workers’ compensation claims, Jones Act claims, occupational hazard claims, premises liability claims and other claims. |
Although we cannot predict the ultimate outcome of these matters, we believe that our ultimate liability, if any, that may result from these other actions and claims will not have a material adverse effect on our consolidated financial condition, results of operations or cash flows. However, because of the inherent uncertainty of litigation and other dispute resolution proceedings and, in some cases, the availability and amount of potentially available insurance, we can provide no assurance that the resolution of any particular claim or proceeding to which we are a party will not have a material effect on our consolidated financial condition, results of operations or cash flows for the fiscal period in which that resolution occurs.
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Item 1A. | Risk Factors |
We are subject to various risks and uncertainties in the course of our business. A discussion of material risks and uncertainties may be found under Item 1A–Risk Factors in Part I of our annual report on Form 10-K for the year ended December 31, 2019. The update to those risk factors provided under Item 1A–Risk Factors in Part II of our quarterly report on Form 10-Q for the quarter ended March 31, 2020 is incorporated by reference into this item.
Item 6. Exhibits
Index to Exhibits | ||||||||||||
Registration or File Number | Form of Report | Report Date | Exhibit Number | |||||||||
* | 3.01 | 1-10945 | 10-K | Dec. 2000 | 3.01 | |||||||
* | 3.02 | 1-10945 | 8-K | May 2008 | 3.1 | |||||||
* | 3.03 | 1-10945 | 8-K | May 2014 | 3.1 | |||||||
* | 3.04 | 1-10945 | 8-K | Mar. 2020 | 3.01 | |||||||
* | 10.01+ | 333-238325 | S-8 | May 2020 | 4.06 | |||||||
31.01 | ||||||||||||
31.02 | ||||||||||||
32.01 | ||||||||||||
32.02 | ||||||||||||
101.INS | Inline XBRL Instance Document - The instance document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL document. | |||||||||||
101.SCH | XBRL Taxonomy Extension Schema Document | |||||||||||
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |||||||||||
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | |||||||||||
101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |||||||||||
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | |||||||||||
104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | |||||||||||
+ | Management contract or compensatory plan or arrangement. | |||||||||||
* | Exhibit previously filed with the Securities and Exchange Commission, as indicated, and incorporated herein by reference. | |||||||||||
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
August 3, 2020 | /S/ RODERICK A. LARSON | |
Date | Roderick A. Larson | |
President and Chief Executive Officer | ||
(Principal Executive Officer) | ||
August 3, 2020 | /S/ ALAN R. CURTIS | |
Date | Alan R. Curtis | |
Senior Vice President and Chief Financial Officer | ||
(Principal Financial Officer) | ||
August 3, 2020 | /S/ WITLAND J. LEBLANC, JR. | |
Date | Witland J. LeBlanc, Jr. | |
Vice President and Chief Accounting Officer | ||
(Principal Accounting Officer) | ||
38
Exhibit 31.01
CERTIFICATION
I, Roderick A. Larson, principal executive officer of Oceaneering International, Inc., certify that:
1. | I have reviewed this Quarterly Report on Form 10-Q of Oceaneering International, Inc. for the quarter ended June 30, 2020; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c) | Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d) | Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and |
5. | The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): |
a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and |
b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. |
August 3, 2020 | /S/ RODERICK A. LARSON | |
Date | Roderick A. Larson | |
President and Chief Executive Officer | ||
(Principal Executive Officer) | ||
Exhibit 31.02
CERTIFICATION
I, Alan R. Curtis, principal financial officer of Oceaneering International, Inc., certify that:
1. | I have reviewed this Quarterly Report on Form 10-Q of Oceaneering International, Inc. for the quarter ended June 30, 2020; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c) | Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d) | Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and |
5. | The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): |
a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and |
b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. |
August 3, 2020 | /S/ ALAN R. CURTIS | |
Date | Alan R. Curtis | |
Senior Vice President and Chief Financial Officer | ||
(Principal Financial Officer) | ||
Exhibit 32.01
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Oceaneering International, Inc. ("Oceaneering") on Form 10-Q for the quarter ended June 30, 2020 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Roderick A. Larson, principal executive officer, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
1. | The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
2. | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Oceaneering. |
August 3, 2020 | /S/ RODERICK A. LARSON | |
Date | Roderick A. Larson | |
President and Chief Executive Officer | ||
(Principal Executive Officer) | ||
Exhibit 32.02
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Oceaneering International, Inc. ("Oceaneering") on Form 10-Q for the quarter ended June 30, 2020 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Alan R. Curtis, principal financial officer, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
1. | The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
2. | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Oceaneering. |
August 3, 2020 | /S/ ALAN R. CURTIS | |
Date | Alan R. Curtis | |
Senior Vice President and Chief Financial Officer | ||
(Principal Financial Officer) | ||