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MarketScreener Homepage  >  Equities  >  Nyse  >  Oceaneering International, Inc.    OII

OCEANEERING INTERNATIONAL, INC.

(OII)
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OCEANEERING INTERNATIONAL : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

11/02/2020 | 04:53pm EST
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:
•the impacts of COVID-19 on the U.S. and the global economy, as well as on our
business;
•our fourth quarter 2020 operating results and the contributions from our
segments to those results, as well as the amount of Unallocated Expenses for the
fourth quarter;
•our expectation of CARES Act and other tax refunds;
•our cash tax payments and projected capital expenditures for 2020;
•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 timing for the commencement of work on the Angola light well intervention
project;
•the adequacy of our liquidity, cash flows and capital resources;
•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
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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.

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. OPEC and other foreign, oil-producing countries implemented
production cuts during the second quarter and, though somewhat eased in August,
extended the production cuts in the third quarter, in an effort to address the
supply/demand imbalance. As a result, crude oil prices improved somewhat.
However, as estimated by the International Energy Agency, global crude oil
demand for the full year of 2020 was approximately 8.4 million barrels per day
lower than for 2019. Recent increases in COVID-19 cases, or a so-called "second
wave," 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 September 30, 2020, we had $359 million of cash on our balance sheet and
our $500 million 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.

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 safe
and effective treatments and vaccines, 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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Realignment of Reportable Segments

As described in Note 10, "Business Segment Information," in the accompanying
consolidated financial statements, in the third quarter of 2020, we changed our
organizational structure as part of the transformation to realign our businesses
to achieve greater cost efficiencies. As a result, information that our chief
operating decision maker regularly reviews for purposes of allocating resources
and assessing performance changed. Therefore, for the three and nine months
ended September 30, 2020, we are reporting our financial results consistent with
our newly realigned operating segments and have recast certain prior period
amounts to conform to the way we internally manage our businesses and monitor
segment performance. Our new structure aligns our company around five reportable
segments: (1) Subsea Robotics; (2) Manufactured Products; (3) Offshore Projects
Group; (4) Integrity Management & Digital Solutions; and (5) Aerospace and
Defense Technologies.

Overview of our Results and Guidance


Our diluted earnings (loss) per share for the three- and nine-month periods
ended September 30, 2020 were $(0.80) and $(4.76), respectively, as compared to
$(0.26) and $(0.87) for the corresponding periods of the prior year. Considering
the uncertainties surrounding crude oil markets and the COVID-19 pandemic, we
were encouraged by 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.
Adjusted operating income improved as compared to the second quarter of 2020, as
efficiency gains from our cost-out efforts are meaningfully enhancing our
bottom-line results. Sequentially, the adjusted operating results for each of
our segments, except Subsea Robotics, improved as compared to the second quarter
of 2020. Each operating segment reported positive adjusted operating income. Our
cash position of $359 million as of September 30, 2020 increased by $25.3
million from June 30, 2020, largely driven by positive contributions from
operations and working capital, and ongoing capital conservation.

Looking forward, we believe our fourth quarter 2020 results will decline
sequentially with the onset of lower seasonal offshore activity and customer
budget exhaustion negatively affecting our energy businesses. Sequentially, we
are projecting lower operating results in each of our segments, except
Manufactured Products. That segment is expected to recognize higher revenue and
operating results as a result of percentage-of-completion revenue and operating
income recognition on certain projects. Unallocated Expenses are expected to
approximate $30 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
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 accounts receivable, net, in the
consolidated balance sheet as of September 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 affirm our guidance for cash tax payments for the full year of 2020 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 and other refunds to be
in the range of $16 million to $34 million.
We are narrowing our guidance range for capital expenditures to $50 million to
$60 million. We continue to expect to generate positive free cash flow for the
full year of 2020 and expect the fourth quarter of 2020 to benefit from the
aforementioned tax refunds and positive working capital changes.

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 ("Aerospace and Defense Technologies"). Our Unallocated
Expenses are those not associated with a specific business segment.
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Consolidated revenue and profitability information are as follows:

                                                   Three Months Ended                             Nine Months Ended
(dollars in thousands)             Sep 30, 2020       Sep 30, 2019       Jun 30, 2020       Sep 30, 2020      Sep 30, 2019
Revenue                           $    439,743$    497,647$    427,216$ 1,403,627$ 1,487,314
Gross Margin                            29,651             49,061             42,537           118,940           118,631
Gross Margin %                               7  %              10  %              10  %              8  %              8  %
Operating Income (Loss)                (60,620)            (5,194)            (5,182)         (446,559)          (36,543)
Operating Income (Loss) %                  (14) %              (1) %              (1) %            (32) %             (2) %



We generate a material amount of our consolidated revenue from contracts for
services in the U.S.Gulf of Mexico in our Offshore Projects Group 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 Integrity Management &
Digital Solutions segment are also seasonally more active in the second and
third quarters. Revenue in our Subsea Robotics segment is subject to seasonal
variations in demand, with our first quarter generally being the low quarter of
the year. The level of our Subsea Robotics seasonality depends on the number of
Remotely Operated Vehicles ("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 Manufactured Products and
Aerospace and Defense Technologies segments generally has not been seasonal.

We had operating losses of $60.6 million, $5.2 million and $5.2 million in the
three-month periods ended September 30, 2020, September 30, 2019 and June 30,
2020, respectively, and $447 million and $37 million in the nine-month periods
ended September 30, 2020 and September 30, 2019, respectively. Included in our
operating losses for the nine months ended September 30, 2020 were charges of
$458 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
included in the nine months ended September 30, 2020 are summarized as follows:
                                                                                                                    For the nine months ended September 30, 2020
                                                                                                                                   Integrity
                                                                                                              Offshore            Management &
                                                                   Subsea             Manufactured            Projects              Digital               Aerospace and             Unallocated
(in thousands)                                                    Robotics              Products                Group              Solutions           Defense Technologies           Expenses              Total

Charges for the effects of:

               Long-lived assets impairments                    $        -          $       61,074$    7,522          $         167          $               -          $           -          $  68,763
               Long-lived assets write-offs                          7,328                       -               7,243                      -                          -                      -             14,571
               Inventory write-downs                                 7,038                                                                  -                          -                      -              7,038
               Goodwill impairment                                 102,118                  52,263              66,285                123,214                          -                      -            343,880
               Other                                                 4,834                   5,755               7,947                  3,850                        545                    455             23,386
                                   Total charges                $  121,318$      119,092$   88,997$     127,231          $             545          $         455          $ 457,638



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, inclusive of 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 Subsea Robotics section of the table that follows, "ROV 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                                   Nine Months Ended
(dollars in thousands)                     Sep 30, 2020        Sep 30, 2019 *        Jun 30, 2020 *        Sep 30, 2020       Sep 30, 2019 *
Subsea Robotics
                  Revenue                 $    119,617$      151,492$      119,234$   378,621$      432,548
                  Gross Margin                  13,378                26,783                21,324             54,175                65,829
                  Operating Income
                  (Loss)                         2,127                15,457                11,662            (80,294)               33,277
                  Operating Income (Loss)
                  %                                  2  %                 10  %                 10  %             (21) %                  8  %
                  ROV Days Available            23,000                25,392                22,750             68,500                74,904
                  ROV Days Utilized             13,601                15,146                13,501             41,955                43,511
                  ROV Utilization                   59  %                 60  %                 59  %              61  %                 58  %

Manufactured Products

                  Revenue                      110,416               114,487               100,570            377,520               334,488
                  Gross Margin                  11,242                 9,145                13,679             42,870                32,076
                  Operating Income
                  (Loss)                       (38,198)               (2,158)                3,865           (100,471)                1,070
                  Operating Income (Loss)
                  %                                (35) %                 (2) %                  4  %             (27) %                  -  %
                  Backlog at End of
                  Period                       318,000               582,000               380,000            318,000               582,000

Offshore Projects Group

                  Revenue                       73,212                89,115                73,840            221,306               289,193
                  Gross Margin                  (1,633)                8,337                 3,170              3,632                20,163
                  Operating Income
                  (Loss)                       (12,282)                  (34)               (4,135)           (95,740)               (2,792)
                  Operating Income (Loss)
                  %                                (17) %                  -  %                 (6) %             (43) %                 (1) %

Integrity Management & Digital
Solutions
                  Revenue                       53,933                65,332                53,969            172,631               198,057
                  Gross Margin                   7,129                 6,612                 5,455             22,376                21,494
                  Operating Income
                  (Loss)                           793                (1,721)               (1,825)          (122,567)               (3,669)
                  Operating Income (Loss)
                  %                                  1  %                 (3) %                 (3) %             (71) %                 (2) %

Total Energy Services and Products

                  Revenue                 $    357,178$      420,426$      347,613$ 1,150,078$    1,254,286
                  Gross Margin                  30,116                50,877                43,628            123,053               139,562
                  Operating Income
                  (Loss)                       (47,560)               11,544                 9,567           (399,072)               27,886
                  Operating Income (Loss)
                  %                                (13) %                  3  %                  3  %             (35) %                  2  %

* Recast to reflect segment changes.




In general, our Energy Services and Products 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.

Subsea Robotics. Our Subsea Robotics segment consists of our ROV, survey services and tooling businesses, merging our underwater robotics and automation capabilities with our subsea delivery systems. Our Subsea

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Robotics segment consists of our prior ROV segment, and ROV tooling (previously
in our Subsea Products segment) and survey services (previously in our Subsea
Projects segment).
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 Subsea Robotics segment revenue
reflects the utilization percentages, fleet sizes and average pricing in the
respective periods. Our survey services business provides survey and
positioning, and geoscience services. The following table presents revenue from
ROV as a percentage of total Subsea Robotics revenue:

                                                                                 Three Months Ended                              Nine Months Ended
                                                                                    Sep 30, 2019       Jun 30, 2020                           Sep 30, 2019
(dollars in thousands)                                           Sep 30, 2020            *                  *             Sep 30, 2020             *
ROV                                                                     83  %              75  %              83  %               82  %              77  %

Other                                                                   17  %              25  %              17  %               18  %              23  %

* Recast to reflect segment changes.




During the third quarter of 2020, Subsea Robotics operating income decreased as
compared to the immediately preceding quarter, primarily due to charges of $9.6
million for write-downs of inventory and other expenses. Exclusive of those
charges, Subsea Robotics operating income decreased as compared to the
immediately preceding quarter, on flat revenue, primarily due to lower
contributions from our tooling and survey operations. Subsea Robotics operating
income for the third quarter of 2020 decreased as compared to the corresponding
period of the prior year, as a result of fewer ROV days on hire and lower
average revenue per day on hire, mostly offset by lower costs per day on hire,
as well as the $9.6 million of charges mentioned above. Subsea Robotics
operating income for the nine-month period ended September 30, 2020 decreased as
compared to the corresponding period of the prior year, primarily due to charges
of $121 million for goodwill impairment, write-downs and write-offs of certain
intangibles and inventory, and other expenses. Exclusive of those charges,
Subsea Robotics operating income for the nine-month period ended September 30,
2020 increased as compared to the corresponding period of the prior year due to
lower ROV costs per day and improved execution and results for survey services,
partially offset by fewer ROV days on hire and a lower average revenue per day
on hire.

Our ROV fleet utilization was 59% for the three months ended September 30, 2020
as compared to 60% for the corresponding period of the prior year. Fleet
utilization increased to 61% from 58% for the nine-month periods ended
September 30, 2020 and September 30, 2019, respectively. We added two new ROVs
to our fleet during the nine months ended September 30, 2020 and retired two,
resulting in a total of 250 ROVs in our ROV fleet as of September 30, 2020, as
compared to 276 ROVs in our ROV fleet as of September 30, 2019.

Manufactured Products. Our Manufactured Products segment consists of our manufactured products business (previously in our Subsea Products segment), and theme park entertainment systems and automated guided vehicles ("AGV") (previously in our Advanced Technologies segment).


Our Manufactured Products segment includes distribution systems such as
production control umbilicals and connection systems made up of specialty subsea
hardware, and provides turnkey solutions that include program management,
engineering design, fabrication/assembly and installation to the commercial
theme park industry and mobile robotics solutions, including AGV technology to a
variety of industries.

Our Manufactured Products operating results in the third quarter of 2020 were
lower than those of the immediately preceding quarter, due to charges of $43
million for goodwill impairment and other expenses. Exclusive of those charges,
Manufactured Products adjusted operating income during the third quarter 2020,
was up slightly as compared to the second quarter 2020 on a 10% increase in
revenue. Much of the revenue increase was attributed to percentage-of-completion
revenue recognition on certain lower-margin project components in our umbilical
manufacturing operations. During the third quarter, COVID-19 had limited impact
on the energy manufacturing operations, but continued to adversely affect
manufacturing timing in our non-energy entertainment operations. Manufactured
Products operating income for the third quarter of 2020 decreased, as compared
to the corresponding period of the prior year, as a result of the charges
mentioned above. Manufactured Products operating income for the nine-month
period ended September 30, 2020 decreased as compared to the corresponding
period of the prior year primarily due to charges of $119 million for asset and
goodwill impairments, and other expenses. Exclusive of charges, Manufactured
Products adjusted operating income for the nine-month
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period ended September 30, 2020 increased as compared to the corresponding
period of the prior year primarily due to an increase in volume and improved
profitability in our umbilical and hardware related operations.

Our Manufactured Products backlog was $318 million as of September 30, 2020
compared to $557 million as of December 31, 2019. The backlog decrease was
attributable to reduced levels of bookings in 2020 in both our energy-related
and non-energy related operations. Many of our energy-related Manufactured
Products customers have delayed investment decisions due to low oil demand and
pricing, while many of our non-energy related customers have delayed investment
decisions due to uncertainties regarding COVID-19 and the related potential
operating risks. The higher throughput and lower order intake resulted in a 44%
revenue replacement in the third quarter of 2020. Our book-to-bill ratio for the
trailing 12 months was 0.5.

Offshore Projects Group ("OPG"). Our OPG segment provides a broad portfolio of
integrated subsea project capabilities and solutions, including project
management, vessels, offshore services, route clearance and trenching, well
intervention, and installation workover control systems. Our OPG segment
consists of (1) our prior Subsea Projects segment, less survey services and
global data solutions, and (2) our service and rental business, less ROV tooling
(previously in our Subsea Products segment). This combination brings together
business units that frequently work together and promotes increased efficiency
in bidding, project management, and the use of offshore technicians.

Our OPG operating results were lower in the third quarter of 2020, as compared
to the immediately preceding quarter, due to charges of $13 million for asset
write-offs and other expenses. Exclusive of those charges, our OPG operating
results improved in the third quarter of 2020, as compared to the immediately
preceding quarter, on flat revenue. Call-out work during the third quarter was
relatively consistent with the second quarter of 2020, with the improved
operating results benefiting from the cost-outs and operating synergies
implemented in connection with our new operating model. The impacts of COVID-19
continue to delay the Angola light well intervention project, but we are
optimistic that this work will begin to move forward either late in the fourth
quarter 2020 or early in the first quarter 2021. Our OPG operating results were
lower in the three months ended September 30, 2020, compared to the
corresponding period of the prior year, due to charges mentioned above. Our OPG
operating results were lower in the nine-month period ended September 30, 2020,
as compared to the corresponding period of the prior year, on lower revenue
combined with charges in the first and third quarters of 2020 of $89 million for
asset impairments and write-offs, goodwill impairment, and other charges.
Exclusive of those charges, our OPG operating results were lower in the
nine-month period ended September 30, 2020, as compared to the corresponding
period of the prior year, due to reduced activity levels in the areas of
inspection, maintenance and repair and intervention services.

Integrity Management & Digital Solutions ("IMDS"). Our IMDS segment combines
asset inspection and integrity capabilities with the data services and products
from our global data solutions ("GDS") business and maritime shipping
businesses, which provides essential asset and transportation data required by
customers to make informed, value­adding decisions. Our IMDS segment consists of
our prior Asset Integrity segment plus maritime shipping and our GDS business
(previously in our Subsea Projects segment). The inclusion of GDS in this
segment facilitates optimized digital and software solutions to our integrity
management services.

Our IMDS operating results for the third quarter of 2020 improved, as compared
to the immediately preceding quarter, on flat revenue, improved execution, and
without the effect of non-recurring costs on certain completed projects that
negatively affected second quarter 2020 operating results. IMDS' operating
results for the three-month period ended September 30, 2020, as compared to the
corresponding period of the prior year, were higher on significantly lower
revenue, offset by cost reductions. IMDS operating results for the nine-month
period ended September 30, 2020, as compared to the corresponding period of the
prior year, were lower primarily due to charges in the first quarter of 2020 of
$127 million for goodwill impairment and other expenses. Exclusive of those
charges, operating results for the nine-month period ended September 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 three
quarters of 2020.

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Aerospace and Defense Technologies ("ADTech"). Our ADTech segment consists of
our government business (previously in our Advanced Technologies segment),
focused on defense subsea technologies, marine services, and space systems.

Revenue, gross margin and operating income (loss) information for our ADTech
segment are as follows:
                                                         Three Months Ended                                Nine Months Ended
(dollars in thousands)                  Sep 30, 2020       Sep 30, 2019 *  
   Jun 30, 2020 *      Sep 30, 2020       Sep 30, 2019 *
Revenue                                $     82,565$      77,221$      79,603$    253,549$      233,028
Gross Margin                                 16,668              15,960              17,313             51,466               43,234
Operating Income (Loss)                      13,097              11,709              13,430             39,498               30,214
Operating Income (Loss) %                        16  %               15  %               17  %              16  %                13  %

* Recast to reflect segment
changes.



Our ADTech segment operating results for the third quarter of 2020 were slightly
lower, as compared to the immediately preceding quarter, on slightly higher
revenue. ADTech operating results for the three-month period ended September 30,
2020 were higher, when compared to the corresponding period of the prior year,
as a result of improved margins. ADTech operating results for the nine-month
period ended September 30, 2020 were higher, when compared to the corresponding
period of the prior year, on higher levels of revenue due to increased activity
in both defense subsea technologies and space systems.

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                             Nine Months Ended
(dollars in thousands)                    Sep 30, 2020       Sep 30, 2019   

Jun 30, 2020Sep 30, 2020Sep 30, 2019 Gross margin expenses

                    $    (17,133)$    (17,776)

(18,404) $ (55,579)$ (64,165) % of revenue

                                        4  %               4  %              4  %               4  %               4  %
Operating expenses                            (26,157)           (28,447)          (28,179)           (86,985)           (94,643)
Operating expenses % of revenue                     6  %               6  %              7  %               6  %               6  %



Our Unallocated Expenses for the third quarter of 2020 were lower as compared to
the immediately preceding quarter and the corresponding period of the prior
year, due to reduced accruals for incentive-based compensation. Our Unallocated
Expenses for the nine-month period ended September 30, 2020 were lower, as
compared to the corresponding period of the prior year, also primarily as a
result of reduced accruals for incentive-based compensation.

Other

The following table sets forth our significant financial statement items below the income (loss) from operations line.

                                         Three Months Ended                             Nine Months Ended
 (in thousands)          Sep 30, 2020      Sep 30, 2019       Jun 30, 2020       Sep 30, 2020       Sep 30, 2019
 Interest income        $        414$       2,089      $         511      $       2,202$       6,541
 Interest expense,
 net of amounts
 capitalized                  (9,250)           (11,382)           (11,611)           (33,323)           (31,005)
 Equity in income
 (losses) of
 unconsolidated
 affiliates                      131                554                674              2,002                390
 Other income
 (expense), net               (2,836)            (3,660)            (3,660)           (13,624)            (2,934)
 Provision (benefit)
 for income taxes              7,204              7,930              5,520            (17,551)            21,981


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In addition to interest on borrowings, interest expense, net of amounts
capitalized, 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 nine-month periods ended
September 30, 2020, we incurred foreign currency transaction losses of $2.5
million and $13 million, respectively. In the three- and nine-month periods
ended September 30, 2019, we incurred foreign currency transaction losses of
$3.5 million and $2.8 million, respectively. The currency losses in 2020 and
2019 primarily related to declining exchange rates for the Angolan kwanza and
the Brazilian real relative to the U.S. dollar. We could incur further foreign
currency exchange losses in Angola and Brazil if further currency devaluations
occur.

Due to the economic uncertainty presented by COVID-19 and the current volatility
in the oil and natural gas markets, we believe using a discrete tax provision
method for the nine-month period ended September 30, 2020, based on actual
earnings for the period, is a more reliable method for providing for income
taxes because our annual effective tax rate as calculated under ASC 740-270 is
highly sensitive to changes in estimates of total ordinary income (loss).
Therefore, we do not believe a discussion of the annual effective tax rate is
meaningful. The tax provision is based on (1) our earnings for the period and
other factors affecting the tax provision and (2) the operations of foreign
branches and subsidiaries that are subject to local income and withholding
taxes. Factors that affect our tax rate include our profitability levels in
general and the geographic mix in the sources of our results. The effective tax
rate for the nine-month periods ended September 30, 2020 and 2019 was different
than the federal statutory rate of 21%, primarily due to the 2020 enactment of
the U.S. Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"),
the geographic mix of operating revenue and results, and changes in uncertain
tax positions and other discrete items. We continue to make an assertion to
indefinitely reinvest the unrepatriated earnings of any foreign subsidiary that
would incur incremental tax consequences upon the distribution of such earnings.

In the nine-month period ended September 30, 2020, we recognized a discrete tax
benefit of $42 million, primarily related to a cash tax benefit of $33 million
and a non-cash tax benefit of $9.9 million related to the CARES Act. These
benefits are classified as an income tax receivable and a reduction in long-term
liabilities, respectively. To secure these benefits, we filed a 2014 refund
claim to carryback our U.S. net operating loss generated in 2019 and amended
2012 and 2013 income tax returns impacted by the net operating loss carryback.
Prior to enactment of the CARES Act, such net operating losses could only be
carried forward. In the nine-month period ended September 30, 2019, we
recognized discrete tax expense of $5.1 million, primarily related to
share-based compensation and valuation allowance.
Liquidity and Capital Resources

As of September 30, 2020, we had working capital of $695 million, including $359
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. Our revolving credit facility provided under the
Credit Agreement was undrawn as of September 30, 2020, and remains undrawn as of
the date of this report, and our nearest maturity of indebtedness is our $500
million of 2024 Notes (as defined below) due in November 2024. Given that the
2024 Notes are currently trading at market discount to principal amount, we may,
from time to time, complete limited repurchases of the 2024 Notes, via
open-market or privately negotiated repurchase transactions or otherwise, prior
to their maturity date.  We can provide no
assurances as to the timing of any such repurchases or whether we will complete
any such repurchases at all. We do not intend to disclose further information
regarding any such repurchase transactions, except to the extent required in our
subsequent periodic filings on Forms 10-K or 10-Q, or unless otherwise required
by applicable law.

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.

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Cash flows for the nine months ended September 30, 2020 and 2019 are summarized
as follows:
                                                                                   Nine Months Ended
      (in thousands)                                                      Sep 30, 2020           Sep 30, 2019

Changes in Cash:

      Net Cash Provided by Operating Activities                         $      32,363$     112,167
      Net Cash Used in Investing Activities                                   (38,714)              (120,046)
      Net Cash Used in Financing Activities                                    (1,725)                (2,320)
      Effect of exchange rates on cash                                         (6,802)                (3,737)
      Net Increase (Decrease) in Cash and Cash Equivalents              $     (14,878)$     (13,936)



Operating activities

Our primary sources and uses of cash flows from operating activities for the nine months ended September 30, 2020 and 2019 are as follows:

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