OCEANEERING INTERNATIONAL, INC.
Certain statements in this annual report on Form 10-K, including, without
limitation, statements regarding the following matters, are forward-looking
statements made pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995:
•our business strategy;
•industry conditions;
•seasonality;
•the impacts of the coronavirus ("COVID-19") pandemic on the U.S. and global
economy, as well as on our business;
•our expectations about 2021 results of operations, items below the operating
income line and segment operating results, and the factors underlying those
expectations, including our expectations about demand and pricing for our energy
services and products as a result of the factors we specify in "Overview" and
"Results of Operations" below;
•the U.S. Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act")
and other tax refunds;
•our backlog;
•projections relating to floating rig demand and subsea tree installations;
•the adequacy of our liquidity, cash flows and capital resources to support our
operations and internally generated growth initiatives;
•our projected capital expenditures for 2021;
•our plans for future operations (including planned additions to and retirements
from our remotely operated vehicle ("ROV") fleet;
•our ability and intent to redeem Angolan bonds and repatriate cash;
•our expectations regarding shares that may be repurchased under our share
repurchase plan;
•our expectations regarding the implementation of new accounting standards and
related policies, procedures and controls;
•our expectations about our ROV fleet utilization in the future; and
•our expectations regarding the effect of inflation in the near future.
These forward-looking statements are subject to various risks, uncertainties and
assumptions, including those we refer to under the headings "Cautionary
Statement Concerning Forward-Looking Statements" and "Risk Factors" in Part I of
this report. 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.
Recent Developments Affecting Industry Conditions and Our Business
The ongoing COVID-19 outbreak, which the World Health Organization declared a
pandemic and the U.S. Government declared a national emergency in March 2020 ,
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. 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, our customers' 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
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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 and its
variants will continue to spread, the widespread availability and efficacy of
vaccines and the extent and duration of governmental and other measures
implemented to try to slow the spread, 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 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. 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 noted by the
International Energy Agency , global crude oil demand for the full year of 2020
fell by approximately 8.8 million barrels per day compared to 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.
Despite recent improvements in commodity prices, 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 December 31, 2020 , we had $452 million of cash and cash equivalents 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 loans
under any COVID-19-related program, and we do not expect to have to utilize any
such loans. We have experienced some increased absenteeism in our hourly
workforce, but, so far, we have not experienced any resulting problems that have
been unmanageable. We are continuing to address concerns to protect the health
and safety of our employees and those of our customers and other business
counterparties, which includes implementing changes as needed to comply with
health-related guidelines as they may be modified and supplemented from time to
time.
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, but not limited to, the ultimate
geographic spread of the virus, the efficacy of governmental and other measures
designed to prevent the spread of the virus, the ongoing development and
distribution of vaccines and therapeutic treatments, the duration of the
pandemic, actions taken by members of OPEC and other foreign oil-exporting
countries,
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governmental authorities, customers, suppliers and other thirds parties,
workforce availability, and the timing and extent to which normal economic and
operating conditions resume.
Overview of our Results and Guidance
The table that follows sets out our revenue and operating results for 2020, 2019
and 2018.
Year Ended December 31,
(dollars in thousands) 2020 2019 2018
Revenue $ 1,827,889 $ 2,048,124 $ 1,909,482
Gross Margin 163,941 98,244 129,226
Gross Margin % 9 % 5 % 7 %
Operating Income (Loss) (446,079) (290,713) (145,482)
Operating Income (Loss) % (24) % (14) % (8) %
Net Income (Loss) (496,751) (348,444) (212,327)
Our business segments are contained within two businesses - services and
products provided primarily to the oil and gas industry and, to a lesser extent,
the offshore renewables industry ("Energy Services and Products") and services
and products provided to non-energy industries ("Aerospace and Defense
Technologies"). Our four business segments within the Energy Services and
Products business are Subsea Robotics, Manufactured Products, Offshore Projects
Group ("OPG") and Integrity Management & Digital Solutions ("IMDS"). We report
our Aerospace and Defense Technologies ("ADTech") business as one segment.
Unallocated Expenses are expenses 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.
Our business primarily depends on the level of spending on offshore developments
and related operating activities by our customers in the energy industry. During
2020, we generated approximately 81% of our revenue from services and products
we provide to the energy industry. Our results for 2020 reflect the impact of
pre-tax charges of $467 million recognized during the year, most notably in the
first quarter. Activity levels and operating performance within our energy
segments were lower than expected. The COVID-19 pandemic negatively impacted
operator investments in oil and gas projects, due to a decline in crude oil
demand and pricing, and entertainment business spending, due to limited theme
park attendance. Activity levels and performance within our ADTech segment met
expectations for the year. Overall, our 2020 revenue decreased 11% to $1.8
billion , with revenue decreases in each of our four energy segments being
partially offset by a revenue increase in our ADTech segment.
In 2020, on a consolidated level, we had a net loss of $497 million , or diluted
loss of $5.01 per share, compared to net loss of $348 million , or diluted loss
of $3.52 per share, in 2019. The $148 million increase in net loss as compared
to 2019 was primarily attributable to pre-tax charges of $467 million recorded
in 2020 for impairments, write-downs and write-offs of certain equipment,
intangible assets, goodwill and inventory, and other expenses, most notably in
our Subsea Robotics, Manufactured Products, OPG and IMDS segments. This compares
to pre-tax charges recorded in 2019 of $252 million , for impairments,
write-downs and write-offs of certain equipment, intangible assets, goodwill and
inventory, and other expenses, most notably in our Subsea Robotics, OPG and IMDS
segments.
We had operating losses of $446 million and $291 million , including charges of
$467 million and $252 million in 2020 and 2019, respectively. More information
about these charges is described below. Due to lower profit contributions for
our Manufactured Products, Subsea Robotics and IMDS segments, partially offset
by increased profit contributions from our OPG and ADTech segments, operating
results decreased $155 million from 2019. The changes in operating results
occurred in our:
•Subsea Robotics segment, which had a $77 million decrease in operating results,
primarily as a result of charges of $122 million in 2020 as compared to charges
of $31 million in 2019. These charges were principally due to a goodwill
impairment in 2020 of $102 million , largely based on market conditions and lower
pricing levels. Both 2020 and 2019 charges included asset write-offs and
inventory write-downs, largely resulting from impairment and obsolescence.
•Manufactured Products segment, which had a $94 million decrease in operating
results, primarily as a result of charges of $116 million in 2020 as compared to
charges of $3.3 million in 2019. These charges in 2020 included impairments and
write-downs of certain equipment of $61 million and goodwill impairments of
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$52 million , both largely based on market conditions and lower pricing levels.
This compared with long-lived assets write-offs of $0.5 million and inventory
write-downs of $2.1 million in 2019.
•OPG segment, which had a $64 million increase in operating results, primarily
as a result of decrease in charges from $168 million in 2019 to $100 million in
2020. The long-lived asset impairment charges of $161 million in 2019 were
principally the result of several vessel impairments, as market conditions no
longer supported the prior valuations for these assets. This compared with a
goodwill impairment of $66 million and long-lived asset impairments and
write-offs of $25 million in 2020.
•IMDS segment, which had a $69 million decrease in operating results, primarily
as a result of charges of $128 million in 2020 as compared to charges of $49
million in 2019. These charges in 2020 included a goodwill impairment of $123
million , largely based on market conditions and lower pricing levels. This
compared with charges including impairments and write-offs of long-lived assets
and inventory write-downs of $32 million and a goodwill impairment of $15
million in 2019.
•ADTech segment, which had an $13 million increase in operating income on higher
levels of revenue in both defense subsea technologies and space systems.
In 2020, 2019 and 2018 we incurred charges of $467 million , $252 million and $84
million , respectively, primarily due to market conditions that no longer
supported the prior valuations. Additionally, we recognized other costs, as we
adapted our geographic footprint and staffing levels to the conditions of the
markets we serve, along with asset write-downs relating to the retirement of 30
ROVs from our fleet in 2019. Charges for 2020, 2019 and 2018 are summarized as
follows (in thousands):
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Year Ended December 31, 2020
Integrity
Offshore Management & Aerospace and
Subsea Manufactured Projects Digital Defense Unallocated
Robotics Products Group Solutions Technologies Expenses Total
Charges for the effects of:
Long-lived assets impairments $ - $ 61,074 $ 8,826 $ 545 $ - $ - $ 70,445
Long-lived assets write-offs 7,328 - 16,644 170 - - 24,142
Inventory write-downs 7,038 - - - - - 7,038
Goodwill impairment 102,118 52,263 66,285 123,214 - - 343,880
Other 5,055 2,266 8,590 4,272 572 455 21,210
Total charges $ 121,539 $ 115,603 $ 100,345 $ 128,201 $ 572 $ 455 $ 466,715
Year Ended December 31, 2019 *
Integrity
Offshore Management & Aerospace and
Subsea Manufactured Projects Digital Defense Unallocated
Robotics Products Group Solutions Technologies Expenses Total
Charges for the effects of:
Long-lived assets impairments $ - $ - $ 142,615 $ 16,738 $ - $ - $ 159,353
Long-lived assets write-offs 11,340 482 18,723 14,108 - - 44,653
Inventory write-downs 15,433 2,107 2,771 719 255 21,285
Goodwill impairment - - - 14,713 - - 14,713
Other 4,228 757 3,526 3,082 102 56 11,751
Total charges $ 31,001 $ 3,346 $ 167,635 $ 49,360 $ 357 $ 56 $ 251,755
Year Ended December 31, 2018 *
Integrity
Offshore Management & Aerospace and
Subsea Manufactured Projects Digital Defense Unallocated
Robotics Products Group Solutions Technologies Expenses Total
Charges for the effects of:
Long-lived assets write-offs $ 617 $ 1,531 $ 5,543 $ - $ - $ - $ 7,691
Goodwill impairment 51,168 - 17,750 7,531 - - 76,449
Total charges $ 51,785 $ 1,531 $ 23,293 $ 7,531 $ - $ - $ 84,140 * Recast to reflect segment changes.
We expect our 2021 operating results to approximate those of 2020. Based on our backlog as ofDecember 31, 2020 and anticipated order intake, we anticipate generally flat consolidated revenue, with higher revenue in ADTech and IMDS to offset substantially lower revenue from our Manufactured Products segment. We expect relatively flat revenue in our Subsea Robotics and OPG segments assuming no significant incremental COVID-19 impacts and generally stable oil and gas prices. We expect positive operating income contributions from each of our operating segments. Apart from seasonality, we generally view pricing and margins in the current energy markets to be stable. We anticipate improved annual operating results in our Subsea Robotics, OPG, IMDS and ADTech segments, and lower operating results in our Manufactured Products segments. We use our ROVs to provide drilling support, vessel-based inspection, maintenance and repair, subsea hardware installation, construction, and pipeline inspection services to customers in the energy industry. Most of our ROVs have historically been used to provide drill support services. Therefore, the contracted number of floating drilling rigs is a leading market indicator for this business. The following table shows average floating rigs under contract and our ROV utilization. 33
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2020 2019 2018
Average number of floating rigs under contract 139 154 148 ROV days on hire (in thousands)
54 58 52
ROV utilization 59% 58% 51%
Demand for floating rigs is the primary leading indicator of the strength of the
deepwater market. According to industry data published by IHS Petrodata,
excluding rigs under construction, at the end of 2020 there were 212 floating
drilling rigs in operation or available for work throughout the world, with 129
of those rigs under contract. The average contracted offshore floating rig count
in 2020 declined to approximately 139 rigs.
In addition to floating rig demand, the number of subsea tree orders and
installations is another leading indicator, and the primary demand driver for
our Manufactured Products lines. According to data published by Rystad Energy in
December 2020 , there are projected to be 277 subsea tree installations in 2021,
compared to 296 in 2020, 286 in 2019 and 280 in 2018.
In 2021, we expect interest expense, net of interest income, to be approximately
$40 million . We do not anticipate capitalizing interest on any long-lived assets
in 2021.
In 2021, our income tax payments, estimated to total between $35 million and $40
million , are expected to relate primarily to taxes incurred in countries that
impose tax on the basis of in-country revenue, without regard to the
profitability of such operations. These cash tax payments do not include the
impact of approximately $28 million of CARES Act tax refunds expected to be
received in 2021.
Results of Operations
Realignment of Reportable Segments. 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 and to bring together business units that
frequently work together and promote increased synergies in bidding, project
management and the use of offshore technicians. As a result, information that
our chief operating decision maker regularly reviews for purposes of allocating
resources and assessing performance changed. Therefore, for the year ended
December 31, 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. Additional information on our business segments is shown
in Note 11-"Operations by Business Segment and Geographic Area" in the Notes to
Consolidated Financial Statements included in this report.
Energy Services and Products. The table that follows sets out revenue and
profitability for the business segments within our Energy Services and Products
business. 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 in service
until the ROV is retired. All days in 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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Year ended December 31,
(dollars in thousands) 2020 2019 * 2018 *
Subsea Robotics
Revenue $ 493,332 $ 583,652 $ 513,701
Gross Margin 78,952 57,601 46,151
Gross Margin % 16 % 10 % 9 %
Operating Income (Loss) (65,817) 11,627 (46,572)
Operating Income (Loss)% (13) % 2 % (9) %
ROV Days Available 91,499 100,480 101,464
ROV Days Utilized 54,411 58,347 52,084
ROV Utilization % 59 % 58 % 51 %
Manufactured Products
Revenue 477,419 498,350 431,459
Gross Margin 62,962 48,865 53,937
Gross Margin % 13 % 10 % 13 %
Operating Income (Loss) (88,253) 5,730 14,028
Operating Income (Loss)% (18) % 1 % 3 %
Backlog at end of period 266,000 548,000 351,000
Offshore Projects Group
Revenue 289,127 380,966 413,598
Gross Margin 1,265 4,339 8,401
Gross Margin % - % 1 % 2 %
Operating Income (Loss) (105,680) (170,013) (36,909)
Operating Income (Loss)% (37) % (45) % (9) %Integrity Management & Digital Solutions
Revenue 226,938 266,086 273,575 Gross Margin 29,772 15,361 36,652 Gross Margin % 13 % 6 % 13 % Operating Income (Loss) (121,675) (52,527) 546 Operating Income (Loss)% (54) % (20) % - %
Total Energy Services and Products
Revenue$ 1,486,816 $
1,729,054
Gross Margin 172,951 126,166 145,141 Gross Margin % 12 % 7 % 9 % Operating Income (Loss) (381,425)
(205,183) (68,907)
Operating Income (Loss)% (26) % (12) % (4) %
* Recast to reflect segment changes.
Subsea Robotics. Historically, we built new ROVs to increase the size of our fleet in response to demand to support deepwater drilling and vessel-based IMR and installation work. These vehicles are designed for use around the world in water depths of 10,000 feet or more. In 2015, as a result of declining market conditions, we began building fewer ROVs, generally limiting additions to meet contractual commitments. We added three, 13 and six ROVs in 2020, 2019 and 2018, respectively, while retiring 51 units over the three-year period. Our ROV fleet size was 250 as ofDecember 31, 2020 and 2019, and 275 as ofDecember 31, 2018 . We have decreased our ROV fleet size since 2015 in response to lower market demand. 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 35 -------------------------------------------------------------------------------- Table of Contents services business provides survey and positioning, and geoscience services. The following table presents revenue from ROV services as a percentage of total Subsea Robotics revenue: Year Ended December 31, 2020 2019 * 2018 * ROV 81 % 77 % 77% Other 19 % 23 % 23% * Recast to reflect segment changes. For the year endedDecember 31, 2020 , our Subsea Robotics operating income decreased as compared to 2019, primarily due to charges of$122 million and$31 million for the years endedDecember 31, 2020 and 2019, respectively, for goodwill impairment, write-downs and write-offs of certain equipment, intangible assets and inventory, and other expenses. Exclusive of those charges,Subsea Robotics operating income for the year endedDecember 31, 2020 increased as compared to the corresponding period of the prior year on higher margins and improved cost controls. We had a 7% decrease in days on hire and year-over-year decreases in both drill support and vessel support days. Dayrates and costs per days on hire decreased on a slight increase in utilization. For the year endedDecember 31, 2019 , our Subsea Robotics operating income increased compared to 2018. We generated higher revenue, due to a 12% increase in days on hire and year-over-year increases in both drill support and vessel support days. Both dayrates and costs per days on hire increased slightly on increased utilization. The operational benefits of this increased activity were offset by$31 million of charges for write-downs and write-offs of certain equipment, intangible assets, inventory, and other expenses. 2018 operating results included$52 million of charges primarily for goodwill impairment. For our Subsea Robotics in 2021, we expect improved results based on essentially flat ROV days on hire with higher vessel-based service days balancing a decline in drill support days, minor shifts in geographic mix and generally stable pricing. Results for tooling-based services are expected to be flat, with activity levels generally following ROV days on hire. Survey operating results are expected to improve on higher geoscience activity. We project fewer installations and demobilizations in 2021, which should lower operating costs as compared to 2020. Our overall ROV fleet utilization is expected to be in the mid- to high-50% range for the full year of 2021, with higher seasonal activity during the second and third quarters. Subject to quarterly variances, we continue to expect our drill support market share to generally approximate 60%. Manufactured Products. For the year endedDecember 31, 2020 , our Manufactured Products operating results decreased, as compared to 2019, primarily due to charges in 2020 of$116 million for asset and goodwill impairments, and other expenses as compared to$3.3 million of charges in 2019 for write-offs of certain equipment, intangible assets and inventory, and other expenses. Exclusive of charges, Manufactured Products adjusted operating income for the year endedDecember 31, 2020 increased as compared to the corresponding period of the prior year. Our energy-related businesses year over year had increased volume and operating margins due to better execution and improved operating efficiencies. Our mobility solutions businesses had significantly less volume and lower operating margins as a result of declines in activity attributable to the COVID-19 pandemic. For the year endedDecember 31, 2019 , our Manufactured Products operating results decreased, on higher revenue as compared to 2018, as a result of an increase in subsea umbilical and hardware awards and related throughput, partially offset by lower revenue and operating results from our mobility solutions businesses. Operating results in 2019 and 2018 were partially offset by$3.3 million and$1.5 million , respectively, of charges for write-offs of certain equipment and inventory, and other expenses. We expect our Manufactured Products segment operating results in 2021 to decline, primarily as a result of the decreased order intake in our energy businesses during 2020. We continue to closely monitor the impact of the COVID-19 pandemic on our mobility solutions businesses, and currently expect to see marginally higher activity and contribution from these businesses in 2021. Our Manufactured Products backlog was$266 million as ofDecember 31, 2020 , a$282 million , or 51%, decrease overDecember 31, 2019 .Offshore Projects Group . Our OPG operating results for the year endedDecember 31, 2020 increased as compared to 2019 primarily due to decreased charges in 2020 of$100 million for vessel and other asset impairments and write-offs, goodwill impairment, and other charges as compared to 2019 charges of$168 million for vessel and intangible impairments, write-downs and write-offs of certain equipment and inventory, and other 36 -------------------------------------------------------------------------------- Table of Contents expenses. Exclusive of those charges, our OPG operating results were lower for the year endedDecember 31, 2020 , as compared to the prior year, on lower revenue due to reduced activity levels in the areas of IMR, decommissioning and intervention services. Our OPG operating results for the year endedDecember 31, 2019 decreased on lower revenue as compared to 2018 primarily due to 2019 charges of$168 million for vessel and intangible impairments, write-downs and write-offs of certain equipment and inventory, and other expenses. This segment's 2018 results included charges of$23 million related to goodwill impairment and write-offs of obsolete equipment and intangible assets associated with exiting the land survey business. In 2021, we expect operating results for our OPG segment to improve, on generally stable offshore activity and margins as compared to the last half of 2020. Operating results are expected to improve largely due to the efficiency and cost improvement measures implemented in 2020 and improved year-over-year contribution from ourAngola riserless light well intervention campaign. Vessel day rates remain competitive but stable, and we expect to see opportunities for pricing improvements during periods of higher activity. We also anticipate reduced charter obligations and increased flexibility on third-party vessels combined with an overall improvement in fleet utilization. Integrity Management & Digital Solutions. For the year endedDecember 31, 2020 , compared to 2019, our IMDS operating results were lower primarily due to 2020 charges of$128 million for goodwill impairment, asset impairment and write-offs, and other expenses as compared to 2019 charges of$49 million for goodwill and asset impairments, write-downs and write-offs of certain equipment, intangible assets and inventory, and other expenses. Exclusive of those charges, operating results for the year endedDecember 31, 2020 were higher, as compared to the prior year, due to improved operating efficiencies instituted in the fourth quarter of 2019 and in the first three quarters of 2020. For the year endedDecember 31, 2019 , compared to 2018, our IMDS operating results were lower, primarily due to 2019 charges of$49 million for goodwill and asset impairments, write-downs and write-offs of certain equipment, intangible assets and inventory, and other expenses. 2018 operating income included charges of$7.5 million for write-down of intangible assets. We anticipate our 2021 operating results for IMDS to improve on higher revenue, with operating income margins averaging in the high-single digit range for the year as compared to 2020. Good order intake at the end of 2020 is expected to begin benefiting the business in the second quarter of 2021. Aerospace and Defense Technologies. Revenue, gross margin and operating income information for our ADTech segment are as follows: Year ended December 31, (dollars in thousands) 2020 2019 * 2018 * Revenue$ 341,073 $ 319,070 $ 277,149 Gross Margin 71,794 60,462 51,045 Gross Margin % 21 % 19 % 18 % Operating Income 56,023 42,574 32,734 Operating Income % 16 % 13 % 12 % * Recast to reflect segment changes. For the year endedDecember 31, 2020 , compared to 2019, our ADTech segment operating results were higher on higher levels of revenue due to increased activity in both defense subsea technologies and space systems. For the year endedDecember 31, 2019 , compared to 2018, our ADTech segment operating results were higher on higher levels of revenue. We project our ADTech 2021 revenue to be higher, producing improved results with operating income margins consistent with those achieved in 2020. Growth in this segment is expected to be broad-based, with revenue growth in our government-focused businesses. 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 37 -------------------------------------------------------------------------------- Table of Contents restricted stock units, performance units and bonuses, as well as other general expenses. Our unallocated expenses within operating expenses 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: Year ended December 31, (dollars in thousands) 2020 2019 2018 Gross margin expenses$ (80,804) $ (88,384) $ (66,960) % of revenue 4 % 4 % 4 % Operating expenses (120,677) (128,104) (109,309) % of revenue 7 % 6 % 6 % Our unallocated expenses for the year endedDecember 31, 2020 decreased compared to 2019, primarily as a result of reduced accruals in 2020 for incentive-based compensation. Our unallocated expenses for the year endedDecember 31, 2019 increased compared to 2018, primarily due to higher 2019 expenses related to both short- and long-term performance based incentive compensation expense. We anticipate unallocated expenses in 2021 to average in the low- to mid-$30 million range per quarter, as we forecast higher accrual rates for projected short- and long-term performance-based incentive compensation expense, as compared to 2020. Other. The following table sets forth our significant financial statement items below the income (loss) from operations line: Year ended December 31, (dollars in thousands) 2020 2019 2018 Interest income$ 3,083 $ 7,893 $ 9,962 Interest expense, net of amounts capitalized (43,900)
(42,711) (37,742)
Equity earnings (loss) of unconsolidated affiliates 2,268
1,331 (3,783)
Other income (expense), net (14,269)
(6,621) (8,788)
Provision (benefit) for income taxes (2,146)
17,623 26,494
Interest income for the year endedDecember 31, 2020 decreased as compared to 2019, primarily due to lower interest rates. Interest income for the year endedDecember 31, 2019 decreased as compared to 2018, primarily due to lower amounts held in Angolan bonds in 2019. Interest expense increased for the year endedDecember 31, 2020 compared to 2019, and for the year endedDecember 31, 2019 compared to 2018, due to a decrease in our capitalized interest. We capitalized none,$3.4 million , and$7.3 million of interest in 2020, 2019 and 2018, respectively, associated with the new-build vessel, the Ocean Evolution, described under "Liquidity and Capital Resources" below. 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. In 2021, we expect interest expense, net of interest income, to be approximately$40 million . We do not anticipate capitalizing interest on any long-lived assets in 2021. Included in other income (expense), net are foreign currency transaction losses of$14 million ,$6.3 million , and$18 million for 2020, 2019 and 2018, respectively. The currency losses in 2020 primarily related to the Angolan kwanza and Brazilian real. Foreign currency losses in 2020 related to the Angolan kwanza were primarily due to declining exchange rates for the Angolan kwanza, which devalued its currency by 36%. Foreign currency losses in 2020 related to the Brazilian real were primarily due to the remeasurement of ourU.S. dollar denominated liability balances to the Brazilian real. The currency losses in 2019 and 2018 primarily related to declining exchange rates for the Angolan kwanza, which devalued its currency by 55% and 46% in 2019 and 2018, respectively. We could incur further foreign currency exchange losses in Angolan kwanza, the Brazilian real and other currencies, if currency devaluations occur. 38 -------------------------------------------------------------------------------- Table of Contents In 2018, other income (expense), net also included a pre-tax gain of$9.3 million resulting from the sale of our cost method investment inASV Global, LLC inSeptember 2018 . The total consideration from the sale was$15 million . Our 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 12-month periods endedDecember 31, 2020 and 2019 was different than theU.S. federal statutory rate of 21%, primarily due to the 2020 enactment of theU.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. Therefore, we do not believe a discussion of the annual effective tax rate is meaningful. 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. OnMarch 27, 2020 , the CARES Act was signed into law inthe United States . In accordance with the recently established rules and procedures under the CARES Act, we filed a 2014 refund claim to carry back ourU.S. net operating loss generated in 2019 and amended our 2012 and 2013 federal 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. As a result, we expect to receive combined refunds of approximately$33 million , of which we have received$5.6 million as ofDecember 31, 2020 . The remaining refunds are classified as accounts receivable, net, in our consolidated balance sheet as ofDecember 31, 2020 . We also realized a non-cash tax benefit of$8.4 million due to the carryback provision of the CARES Act recognized as a reduction in long-term liabilities. OnDecember 22, 2017 , the Tax Cuts and Jobs Act of 2017 (the "Tax Act") was enacted, most notably reducing theU.S. corporate income tax rate from 35% to 21% effectiveJanuary 1, 2018 , and creating a quasi-territorial tax system with a one-time mandatory transition tax on applicable previously-deferred earnings of foreign subsidiaries. In 2018, based on regulations issued by theU.S. Department of the Treasury and additional accounting analysis, we reflected the effects of the Tax Act in our financial statements to include the tax impact of$8.8 million related to the one-time mandatory transition tax. In 2019, we identified additional available business credits, which are reflected in our 2018 income tax return as filed, thereby reducing the effects of the Tax Act in our financial statements by$8.2 million , for a total liability of$0.6 million . We determined it was more likely than not that we would not be able to utilize our remaining unvalued deferred tax assets. In accordance with applicable accounting standards, we recorded an increase in income tax expense of$315 million and$74 million in 2020 and 2019, respectively, related to the establishment of a valuation allowance on those deferred tax assets. In 2021, our income tax payments, estimated to total between$35 million and$40 million , are expected to relate primarily to taxes incurred in countries that impose tax on the basis of in-country revenue, without regard to the profitability of such operations. These cash tax payments do not include the impact of approximately$28 million of CARES Act tax refunds expected to be received in 2021. 39 -------------------------------------------------------------------------------- Table of Contents Liquidity and Capital Resources We consider our liquidity and capital resources adequate to support our operations and growth initiatives. As ofDecember 31, 2020 , we had working capital of$733 million , including cash and cash equivalents of$452 million . Additionally, we had$500 million available through our revolving credit facility under a credit agreement further described below. Our nearest maturity of indebtedness is our$500 million of 2024 Notes (as defined below) due inNovember 2024 . Given that the 2024 Notes are currently trading at a 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. Cash flows for the years endedDecember 31, 2020 , 2019 and 2018 are summarized as follows: Year ended December 31, (in thousands) 2020 2019 2018 Changes in Cash:
Net Cash Provided by Operating Activities $ 136,647 $ 157,569 $ 36,567
Net Cash Used in Investing Activities (52,590) (134,787) (98,842)
Net Cash Used in Financing Activities (1,699) (2,299) (5,628)
Effect of exchange rates on cash (3,997) (1,087) (8,154)
Net Increase (Decrease) in Cash and Cash
Equivalents $ 78,361 $ 19,396 $ (76,057)
Operating activities
Our principal source of cash from operating activities is our net income (loss),
adjusted for noncash items. Our primary sources and uses of cash flows from
operating activities for the years ended December 31, 2020 , 2019 and 2018 are as
follows:
Year ended December 31,
(in thousands) 2020 2019 2018
Cash Flows from Operating Activities:
Net income (loss) Noncash adjustments:
Depreciation and amortization, including
goodwill impairment 528,895 263,427 293,590
Loss on impairment of long-lived assets 70,445 159,353 -
Deferred income tax provision (benefit) (4,158) (12,268) 11,912
Inventory write-downs 7,038 21,285 -
Other noncash 6,167 7,419 3,405
Total noncash adjustments 608,387 439,216 308,907
Accounts receivable and contract assets 125,541 (17,561) (86,724)
Inventory 26,466 (11,777) (12,485)
Current liabilities (138,932) 76,552 25,968
Other changes 11,936 19,583 13,228
Net Cash Provided by Operating Activities Net cash provided by operating activities for the years endedDecember 31, 2020 , 2019 and 2018 of$137 million ,$158 million and$37 million , respectively, was affected by the following: •Accounts receivable and contract assets - The increase in cash related to accounts receivable and contract assets in 2020 reflects the timing of project milestones and customer payments. The decrease in cash 40 -------------------------------------------------------------------------------- Table of Contents related to accounts receivable and contract assets in 2019 and 2018 reflects higher business activity in the fourth quarter of both years due to commencement of new projects, along with timing of project milestones and customer payments. •Inventory - The increase in cash related to inventory as ofDecember 31, 2020 corresponds with a decrease in our backlog. The decrease in cash related to inventory as ofDecember 31, 2019 and 2018 was primarily due to increases in Manufactured Products' inventory related to increases in backlog. •Current liabilities - The decrease in cash related to changes in current liabilities in 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. The increase in cash related to changes in current liabilities in 2019 reflected higher business activity in the fourth quarter and primarily the timing of vendor payments for related goods and services. The increase in cash in 2018 reflected timing of vendor payments. Investing activities In 2020, we used$53 million in net investing activities, primarily for capital expenditures of$61 million . Our 2020 capital expenditures included$34 million in ourOffshore Projects Group segment to add capabilities and maintain current operations and$15 million in our Subsea Robotics segment to upgrade our fleet of work-class ROVs. In 2019, we used$135 million in net investing activities, primarily for capital expenditures of$148 million . Our 2019 capital expenditures included$73 million in our Subsea Robotics segment to upgrade our fleet of work-class ROVs, adding 13 ROVs to our fleet,$18 million in our Manufactured Products segment to add capabilities and maintain current operations and$42 million in ourOffshore Projects Group segment, which included completion of the MSV Ocean Evolution, which was placed in service in the second quarter of 2019. In 2018, we used$99 million in net investing activities. We used$109 million for capital expenditures and$69 million for business acquisitions, totaling$178 million in investments. These investments included$51 million in our Subsea Robotics segment,$9 million in our Manufactured Products segment and$111 million in ourOffshore Projects Group segment, including the acquisition of Ecosse for approximately$68 million . Ecosse builds and operates seabed preparation, route clearance and trenching tools for submarine cables and pipelines on an integrated basis that includes vessels, ROVs and survey services. Enabling technologies acquired in the transaction include Ecosse's modular seabed system, capable of completing the entire trenching work scope (route preparation, boulder clearance, trenching and backfill), and its newly developed trenching system. These systems primarily serve the shallow water offshore renewables market. We also received$70 million of proceeds from maturities and redemptions of Angolan bonds and$15 million of proceeds from the sale of a cost method investment, partially offset by the use of$10 million for the purchase of Angolan central bank bonds indexed to theU.S. dollar. Our priority continues to be generating cash. In 2021, we expect our organic capital expenditures to total between$50 million and$70 million , exclusive of business acquisitions. This includes approximately$35 million to$40 million of maintenance capital expenditures and$15 million to$30 million of growth capital expenditures. We remain committed to maintaining strong liquidity and believe that our cash position, undrawn revolving credit facility, and debt maturity profile should provide us ample resources and time to address potential future opportunities to improve our returns. Our capital expenditures during 2020, 2019 and 2018 included$15 million ,$73 million and$51 million , respectively, in our Subsea Robotics segment, principally for upgrades to our ROV fleet and to replace certain units we retired. We currently plan to add new ROVs only to meet contractual commitments. We added three, 13 and six ROVs to our fleet and retired three, 38 and 10 units during 2020, 2019 and 2018, respectively, resulting in a total of 250 work-class systems in our fleet as ofDecember 31, 2020 . Over the past three years, we retired a greater number of ROVs than we have added due to market conditions and outlook. We previously had several deepwater vessels under long-term charter. The last of our long-term charters expired inMarch 2018 . With the current market conditions, our philosophy is to attempt to charter vessels for specific projects on a back-to-back basis or short-term time charter party arrangements with the vessel owners. This generally minimizes our contract exposure by closely matching our obligations with our revenue. We placed our new-build, Jones Act-compliant, MSV Ocean Evolution into service during the second quarter of 2019. The Ocean Evolution isU.S. -flagged and documented with a coastwise endorsement by theU.S. Coast Guard . The vessel has an overall length of 353 feet, a Class 2 dynamic positioning system, accommodations for 110 personnel, a helideck, a 250-ton active heave-compensated crane, a working moonpool, and two of our high 41 -------------------------------------------------------------------------------- Table of Contents specification 4,000 meter work-class ROVs. The vessel has five low-emissionEnvironmental Protection Agency ("EPA") Tier 4 diesel engines. The Tier 4 rating is theEPA's strictest emission requirements for non-road diesel engines. The vessel is also equipped with a satellite communications system capable of transmitting streaming video for real-time work observation by shore-based personnel. The vessel is being used to augment our ability to provide subsea intervention services in theU.S. Gulf of Mexico . These services are required to perform IMR projects and hardware installations. Due to market conditions that no longer support the prior valuation for this asset, in the fourth quarter of 2019, we determined that the carrying amount of the Ocean Evolution exceeded the fair value and recorded impairment expense of$101 million . In 2010, we acquired a vessel, which we renamed the Ocean Patriot, and converted it to a dynamically positioned saturation diving and ROV service vessel. We installed a 12-man saturation ("SAT") diving system and one work-class ROV on the vessel, and we placed the vessel into service inDecember 2011 . Due to market conditions that no longer support the prior valuation for this asset, in the fourth quarter of 2019 and the 1st quarter of 2020, we determined that the carrying amount of the Ocean Patriot exceeded the fair value and recorded impairment expense of$31 million and$3.9 million , respectively. Financing activities In 2020 and 2019, we used$1.7 million and$2.3 million , respectively, in financing activities. In 2018, we used$5.6 million in financing activities, with$300 million for a repayment of the term loan facility, substantially offset by$296 million of the proceeds received from the issuance of the 2028 Senior Notes, net of issuance costs. InNovember 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 onMay 15 andNovember 15 of each year. The 2024 Senior Notes are scheduled to mature onNovember 15, 2024 . InFebruary 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 onFebruary 1 andAugust 1 of each year. The 2028 Senior Notes are scheduled to mature onFebruary 1, 2028 . We used the net proceeds from the 2028 Senior Notes to repay our term loan indebtedness described further below. We may redeem some or all of the 2024 Senior Notes and 2028 Senior Notes (collectively, the "Senior Notes") at specified redemption prices. InOctober 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 inFebruary 2018 , using net proceeds from the issuance of our 2028 Senior Notes referred to above, and cash on hand. InFebruary 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 toJanuary 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 untilOctober 25, 2021 , and thereafter$450 million untilJanuary 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 42 -------------------------------------------------------------------------------- Table of Contents 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 ofDecember 31, 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 toNovember 2024 . The agreements swapped the fixed interest rate of 4.65% on$100 million of the 2024 Senior Notes to the floating rate of one-month LIBOR plus 2.426% and on another$100 million to one-month LIBOR plus 2.823%. InMarch 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$2.0 million to interest expense for the year endedDecember 31, 2020 . See Note 9-"Debt" in the Notes to Consolidated Financial Statements included in this report for a description of these interest rate swaps. We incurred$6.9 million and$4.2 million of issuance costs related to the 2024 Senior Notes and the 2028 Senior Notes, respectively, and$3.0 million of new loan costs, including costs of the amendments prior to Amendment No. 4, related to the Credit Agreement. These costs, net of accumulated amortization, are included as a reduction of long-term debt in our Consolidated Balance Sheet, as they pertain to the Senior Notes, and in other noncurrent assets as they pertain to the Credit Agreement. We are amortizing these costs to interest expense through the respective maturity dates for the Senior Notes and toJanuary 2023 for the Credit Agreement using the straight-line method, which approximates the effective interest rate method. Our maximum outstanding indebtedness during 2020 under the Credit Agreement and the Senior Notes was$800 million , and our total interest costs, including commitment fees, were$44 million . We have not guaranteed any debt not reflected on our Consolidated Balance Sheets as ofDecember 31, 2020 and 2019, and we do not have any off-balance-sheet arrangements, as defined bySEC rules. InDecember 2014 , our Board of Directors approved a share repurchase program under which we may repurchase up to 10 million shares of our common stock on a discretionary basis. The program calls for the repurchases to be made in the open market, or in privately negotiated transactions from time to time, in compliance with applicable laws, rules and regulations, including Rule 10b-18 under the Securities Exchange Act of 1934, as amended, subject to market and business conditions, levels of available liquidity, cash requirements for other purposes, applicable legal requirements and other relevant factors. The timing and amount of any future repurchases will be determined by management based on its evaluation of these factors. The program does not obligate us to repurchase any particular number of shares. Under this program, in 2015, we repurchased 2.0 million shares of our common stock for$100 million . We have not repurchased any shares under the program since 2015. As ofDecember 31, 2020 , we retained 11.5 million of the shares we had repurchased through this and a prior repurchase program. We expect to hold the shares repurchased as treasury stock for future use. We account for the shares we hold in treasury under the cost method, at average cost. Because of our significant foreign operations, we are exposed to currency fluctuations and exchange rate risks. We generally minimize these risks primarily through matching, to the extent possible, revenue and expense in the various currencies in which we operate. Cumulative translation adjustments as ofDecember 31, 2020 relate primarily to our net investments in, including long-term loans to, our foreign subsidiaries. A strongerU.S. dollar against theU.K. pound sterling, Norwegian kroner and Brazilian real could result in lower operating income. See Item 7A-"Quantitative and Qualitative Disclosures About Market Risk." Critical Accounting Policies and Estimates We have based the following discussion and analysis of our financial condition and results of operations on our consolidated financial statements, which we have prepared in conformity with accounting principles generally accepted inthe United States . These principles require us to make various estimates, judgments and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the periods we present. We base our estimates on historical experience, available information and other assumptions we believe to be reasonable under the circumstances. On an ongoing basis, we evaluate our estimates; however, our actual results may differ from these estimates under different assumptions or conditions. The following discussion summarizes the accounting policies we believe (1) require our 43 -------------------------------------------------------------------------------- Table of Contents management's most difficult, subjective or complex judgments and (2) are the most critical to our reporting of results of operations and financial position. Revenue Recognition. EffectiveJanuary 1, 2018 , we adopted Accounting Standard Update ("ASU") 2014-09, "Revenue from Contracts with Customers," which implemented Accounting Standards Codification Topic 606 ("ASC 606"). We applied the modified retrospective method to those contracts that were not completed as ofJanuary 1, 2018 , and utilized the practical expedient to reflect the effect on contract modifications in the aggregate. The adoption of this ASU resulted in an after-tax cumulative effect adjustment of$0.5 million recorded to retained earnings as ofJanuary 1, 2018 . The 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. All of our revenue is realized through contracts with customers. We recognize our revenue according to the contract type. On a daily basis, we recognize service revenue over time for contracts that provide for specific time, material and equipment charges, which we bill periodically, ranging from weekly to monthly. We use the input method to faithfully depict revenue recognition, because each day of service provided represents value to the customer. The performance obligations in these contracts are satisfied, and revenue is recognized, as the work is performed. We have used the expedient available to recognize revenue when the billing corresponds to the value realized by the customer where appropriate. We account for significant fixed-price contracts, mainly relating to our Manufactured Products segment, and to a lesser extent in ourOffshore Projects Group and Aerospace and Defense Technologies segments, by recognizing revenue over time using an input, cost-to-cost measurement percentage-of-completion method. We use the input cost-to-cost method to faithfully depict revenue recognition. This commonly used method allows appropriate calculation of progress on our contracts. A performance obligation is satisfied as we create a product on behalf of the customer over the life of the contract. The remainder of our revenue is recognized at the point in time when control transfers to the customer, thus satisfying the performance obligation. We have elected to recognize the cost for freight and shipping as an expense when incurred. Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, and that are collected by us from customers, are excluded from revenue. In our service-based business lines, which principally charge on a dayrate basis for services provided, there is no significant impact in the pattern of revenue and profit recognition as a result of implementation of ASC 606. In our product-based business lines, we have seen impacts on the pattern of our revenue and profit recognition in our contracts using the percentage-of-completion method, as a result of the requirement to exclude uninstalled materials and significant inefficiencies from the measure of progress. This occurs predominantly in our Manufactured Products segment. 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, where 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 12 months endedDecember 31, 2020 or 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.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. Events or circumstances that might indicate an interim evaluation is warranted include, among other things, unexpected adverse business conditions, macro and reporting unit specific economic factors (for example, interest rate and foreign exchange rate fluctuations, and loss of key personnel), supply costs, unanticipated competitive activities and acts by governments and courts. 44 -------------------------------------------------------------------------------- Table of Contents 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. Thereafter, we 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. Our estimates of fair values for our reporting units require us to use significant unobservable inputs, classified as Level 3 fair value measurement, including assumptions related to future performance, risk-adjusted discount rates, future commodity prices and demand for our services and estimates of expected realizable values. In the years endingDecember 31, 2020 , 2019 and 2018, as a result of our goodwill impairment testing, we recognized aggregate losses of$344 million ,$15 million and$76 million , respectively. See Note 5-"Impairments" and Note 11-"Operations by Business Segment and Geographic Area" in the Notes To Consolidated Financial Statements included in this report for further discussion of these impairments. Property and Equipment, Long-lived Intangible Assets and Right-of-Use Operating Lease Assets. We periodically and upon the occurrence of a triggering event review 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 amount of the asset 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 through the use 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. Our estimates of fair values for our asset groups require us to use significant unobservable inputs, classified as Level 3 fair value measurements, including assumptions related to future performance, risk-adjusted discount rates, future commodity prices and demand for our services and estimates of expected realizable value. In the years endingDecember 31, 2020 and 2019, we recognized long-lived asset impairment losses of$70 million and$159 million , respectively. See Note 5-"Impairments" and Note 11-"Operations by Business Segment and Geographic Area" in the Notes To Consolidated Financial Statements included in this report for further discussion of these impairments. For assets held for sale or disposal, the fair value of the asset is measured using fair market value less cost 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. 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. Income Taxes. Our tax provisions are based on our expected taxable income, statutory rates and tax-planning opportunities available to us in the various jurisdictions in which we operate. The determination of taxable income in any jurisdiction requires the interpretation of the related tax laws. We are at risk that a taxing authority's final determination of our tax liabilities may differ from our interpretation. We account for any applicable interest and penalties on uncertain tax positions as a component of our provision for income taxes on our financial statements. Current income tax expense represents either nonresident withholding taxes or the liabilities expected to be reflected on our income tax returns for the current year, while the net deferred income tax expense or benefit represents the change in the balance of deferred tax assets or liabilities as reported on our balance sheet. We establish valuation allowances to reduce deferred tax assets when it is more likely than not that some portion or all of the deferred tax assets will not be realized in the future. Provisions for valuation allowances impact our income tax provision in the period in which such adjustments are identified and recorded. For a summary of our major accounting policies and a discussion of recently adopted accounting standards, please 45 -------------------------------------------------------------------------------- Table of Contents see Note 1-"Summary of Major Accounting Policies" in the Notes to Consolidated Financial Statements included in this report. Off-Balance Sheet Arrangements We do not have any off-balance sheet arrangements, as defined bySEC rules. Contractual Obligations As ofDecember 31, 2020 , we had payments due under contractual obligations as follows: (dollars in thousands) Payments due by period Total 2021 2022-2023 2024-2025 After 2025 Long-term Debt$ 800,000 $ - $ -
Operating Lease Liabilities 239,101 28,892 49,082
38,534 122,593
Purchase Obligations 165,682 161,374 2,932 838 538
Other Long-term Obligations
reflected on our Balance Sheet
under U.S. GAAP 38,884 81 195 247 38,361 TOTAL$ 1,243,667 $ 190,347 $ 52,209 $ 539,619 $ 461,492 Pursuant to a service agreement we entered into with our Chairman of the Board of Directors, we are obligated to provide for medical coverage on an after-tax basis to him, his spouse and two adult children for their lives. Our total accrued liabilities, current and long-term, under this post-employment benefit were$1.8 million and$2.5 million as ofDecember 31, 2020 and 2019, respectively. Effects of Inflation and Changing Prices Our financial statements are prepared in accordance with generally accepted accounting principles inthe United States , using historicalU.S. dollar accounting, or historical cost. Statements based on historical cost, however, do not adequately reflect the cumulative effect of increasing costs and changes in the purchasing power of the dollar, especially during times of significant and continued inflation. In order to minimize the negative impact of inflation on our operations, we attempt to cover the increased cost of anticipated changes in labor, material and service costs, either through an estimate of those changes, which we reflect in the original price, or through price escalation clauses in our contracts. Our success in achieving price escalation clauses has become more challenging, due to the protracted downturn and over-capacity in the energy market in which we compete. Inflation has not had a material effect on our revenue or income from operations in the past three years, and no such effect is expected in the near future. 46
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