TECHNIPFMC PLC EXECUTIVE OVERVIEW We are a global leader in energy projects, technologies, systems and services. We have manufacturing operations worldwide, strategically located to facilitate efficient delivery of these products, technologies, systems and services to our customers. We report our results of operations in the following segments:Subsea , Technip Energies and Surface Technologies. Management's determination of our reporting segments was made on the basis of our strategic priorities and corresponds to the manner in which our Chief Executive Officer reviews and evaluates operating performance to make decisions about resource allocations to each segment. A description of our products and services and annual financial data for each segment can be found in Part I, Item 1, "Business" and Note 7 to our consolidated financial statements. We focus on economic- and industry-specific drivers and key risk factors affecting our business segments as we formulate our strategic plans and make decisions related to allocating capital and human resources. The results of our segments are primarily driven by changes in capital spending by oil and gas companies, which largely depend upon current and anticipated future crude oil and natural gas demand, production volumes, and consequently, commodity prices. We use crude oil and natural gas prices as an indicator of demand. Additionally, we use both onshore and offshore rig count as an indicator of demand, which consequently influences the level of worldwide production activity and spending decisions. We also focus on key risk factors when determining our overall strategy and making decisions for capital allocation. These factors include risks associated with the global economic outlook, product obsolescence and the competitive environment. We address these risks in our business strategies, which incorporate continuing development of leading edge technologies and cultivating strong customer relationships. OurSubsea segment is affected by changes in commodity prices and trends in deepwater oil and natural gas production. Our Technip Energies segment is impacted by change in commodity prices, population growth and demand for natural gas, although the onshore market is typically more resilient to these changes impacting the segment. OurSubsea and Technip Energies segments both benefit from the current market fundamentals supporting the demand for new liquefied natural gas facilities. Technip Energies also benefits from the construction of petrochemical and fertilizer plants. Our Surface Technologies segment is primarily affected by changes in commodity prices and trends in land-based and shallow water oil and natural gas production. We have developed close working relationships with our customers. Our results reflect our ability to build long-term alliances with oil and natural gas companies and to provide solutions for their needs in a timely and cost-effective manner. We believe that by closely working with our customers, we enhance our competitive advantage, improve our operating results and strengthen our market positions. As we evaluate our operating results, we consider business segment performance indicators like segment revenue, operating profit and capital employed, in addition to the level of inbound orders and order backlog. A significant proportion of our revenue is recognized under the percentage of completion method of accounting. Cash receipts from such arrangements typically occur at milestones achieved under stated contract terms. Consequently, the timing of revenue recognition is not always correlated with the timing of customer payments. We aim to structure our contracts to receive advance payments that we typically use to fund engineering efforts and inventory purchases. Working capital (excluding cash) and net cash are therefore key performance indicators of cash flows. In each of our segments, we serve customers from around the world. During 2020, approximately 84 percent of our total sales were recognized outside ofthe United States . We evaluate international markets and pursue opportunities that fit our technological capabilities and strategies. The Spin-off OnFebruary 16, 2021 , we completed the separation of the Technip Energies business segment. The transaction was structured as a Spin-off, which occurred by way of a Distribution to our shareholders of 50.1 percent of the outstanding shares in Technip Energies N.V. Each of our shareholders received one ordinary share of Technip Energies N.V. for every five ordinary shares ofTechnipFMC held at5:00 p.m. ,New York City time on the record date,February 17, 2021 . Technip Energies N.V. is now an independent public company and its shares trade under the ticker symbol "TE" on theEuronext Paris stock exchange . 53 -------------------------------------------------------------------------------- In connection with the Spin-off, onJanuary 7, 2021 , BPI, which has been one of our substantial shareholders since 2009, entered into a Share Purchase Agreement with us pursuant to which BPI agreed to purchase a portion of our retained stake in Technip Energies N.V. for$200.0 million . OnFebruary 25, 2021 , BPI paid$200.0 million in connection with the Share Purchase Agreement. The Purchase Price is subject to adjustment, and BPI's ownership stake will be determined based upon a thirty day volume-weighted average price of Technip Energies N.V.' shares (with BPI's ownership collared between an 11.82 percentage floor and a 17.25 percentage cap), less a six percent discount.The BPI Investment is subject to customary conditions and regulatory approval. We intend to significantly reduce our shareholding in Technip Energies N.V. over the 18 months following the Spin-off, including in connection with the sale of shares to BPI pursuant to theBPI Investment .
Beginning in the first quarter of 2021, Technip Energies' historical financial results for periods prior to the Distribution will be reflected in our consolidated financial statements as discontinued operations.
BUSINESS OUTLOOK Overall outlook - While economic activity continues to be impacted by the COVID-19 pandemic, the short-term outlook for crude oil has improved as the OPEC+ countries better manage the oversupplied market. Long-term demand for energy is still forecast to rise, and we believe this outlook will ultimately provide our customers with the confidence to increase investments in new sources of oil and natural gas production. Subsequent to the Spin-off, we will operate under two reporting segments:Subsea and Surface Technologies, therefore the discussion below relates to these two reporting segments only.Subsea - The volatile, and generally low crude oil price environment of the last several years led many of our customers to reduce their capital spending plans and defer new deepwater projects. Order activity in 2020 was particularly impacted by the sharp decline in commodity prices, driven in part by the reduced economic activity, and the general uncertainty related to the pandemic. The reduction and deferral of new projects resulted in delayed subsea project inbound for the industry. The trajectory and pace of further recovery and expansion in the subsea market is subject to more stringent capital discipline and the allocation of capital our clients dedicate to developing offshore oil and gas fields amongst their entire portfolio of projects. The risk of project sanctioning delays still exists in the current environment; however, innovative approaches to subsea projects, like our iEPCI solution, have improved project economics, and many offshore discoveries can be developed economically at today's crude oil prices. In the long-term, deepwater development is expected to remain a significant part of many of our customers' portfolios. As the subsea industry continues to evolve, we have taken actions to further streamline our organization, achieve standardization, and reduce cycle times. The rationalization of our global footprint will also further leverage the benefits of our integrated offering. We aim to continuously align our operations with activity levels, while preserving our core capacity in order to deliver current projects in backlog and future order activity. We have experienced renewed operator confidence in advancing subsea activity as a result of the improved economic outlook, lower market volatility and higher oil price. With crude now trending back above$50 per barrel, the opportunity set of large subsea projects to be sanctioned over the next 24 months has expanded. FEED activity is also improving, with solid momentum experienced in the second half of 2020. FEED activity in the current year is expected to return to the more robust levels seen in 2019, which further supports our view of a sustainable recovery for deepwater. We expect at least 60% of the projects undergoing studies in 2021 to include an iEPCI solution, many of which could be directly awarded to our Company upon reaching final investment decision.TechnipFMC is increasingly less dependent on larger, publicly tendered projects. •We anticipate that an increasing share of our inbound orders will result from projects that will be direct awarded to our Company, many of which come from our alliance partners;
•We anticipate higher activity in subsea services, with the industry's largest installed base; and
54
--------------------------------------------------------------------------------•We expect a higher mix of iEPCI project awards, demonstrating strong geographic diversity and new adopters of our unique, integrated approach to subsea development.
For 2021, we believe thatSubsea inbound orders will meet or exceed the$4 billion achieved in 2020. We expectBrazil to be the most active region of the world for new project orders, driven by continued investment in the pre-salt field discoveries. We see additional market growth potential coming from theNorth Sea ,Asia Pacific andAfrica . The strong front end activity we are experiencing today should further support project award momentum into 2022.
Surface Technologies - Surface Technologies' performance is typically driven by
variations in global drilling activity, creating a dynamic environment.
Operating results can be further impacted by stimulation activity and the
completions intensity of shale applications in the
TheNorth America shale market is sensitive to oil price fluctuations. The average rig count declined by just over 50 percent in 2020, with drilling and completion spending estimated to have declined by a similar amount.North America activity improved over the second half of the year as the rig count increased following the rising oil price. The rig count exited 2020 below prior year-end levels but has experienced further improvement in the current year. In 2021, we expect our completions-related revenue to outperform the overall market, driven by increased market adoption of iComplete - our fully integrated, digitally-enabled pressure control system. iComplete has already achieved significant market penetration since its introduction in the third quarter of 2020, with 10 customers utilizing the new integrated system.
Despite the sequential improvement in market activity, full year revenue for
Drilling activity in international markets is less cyclical thanNorth America as most activity is driven by national oil companies, which tend to maintain a longer term view that exhibits less variability in capital spend. Additionally, we continue to benefit from our exposure to theMiddle East andAsia Pacific , both of which are being supported by strength in gas-related activity. The average rig count in these two regions declined by a more modest 17 percent in 2020 versus the prior year. International revenue has been gaining significance in our total segment revenue, representing over 60 percent in 2020. We expect a gradual and steady recovery in well count in 2021 to drive modest international market growth, with spending increases led by national oil companies, particularly in theMiddle East . Our unique capabilities in the international markets, which demand higher specification equipment, global services and local content, provide a platform for us to extend our leadership positions. We remain levered to these more resilient markets where we expect to source approximately 65% of our full year revenue in 2021. 55
-------------------------------------------------------------------------------- CONSOLIDATED RESULTS OF OPERATIONS This section of this Form 10-K generally discusses 2020 and 2019 items and year-to-year comparisons between 2020 and 2019. Discussions of 2018 items and year-to-year comparisons between 2019 and 2018 that are not included in this Form 10-K can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of our Annual Report on Form 10-K for the year endedDecember 31, 2019 . Year Ended December 31, Change (In millions, except percentages) 2020 2019 2018 2020 vs. 2019 2019 vs. 2018 Revenue$ 13,050.6 $ 13,409.1 $ 12,552.9 $ (358.5) (2.7) %$ 856.2 6.8 % Costs and expenses Cost of sales 11,209.4 10,950.7 10,273.0 258.7 2.4 % 677.7 6.6 % Selling, general and administrative expense 1,066.2 1,228.1 1,140.6 (161.9) (13.2) % 87.5 7.7 % Research and development expense 119.8 162.9 189.2 (43.1) (26.5) % (26.3) (13.9) % Impairment, restructuring and other expense 3,501.3 2,490.8 1,831.2 1,010.5 40.6 % 659.6 36.0 % Separation costs 39.5 72.1 - (32.6) (45.2) % 72.1 n/a Merger transaction and integration costs - 31.2 36.5 (31.2) (100.0) % (5.3) (14.5) % Total costs and expenses 15,936.2 14,935.8 13,470.5 1,000.4 6.7 % 1,465.3 10.9 % Other income (expense), net 31.1 (220.7) (323.9) 251.8 114.1 % 103.2 31.9 % Income from equity affiliates 63.0 62.9 114.3 0.1 0.2 % (51.4) (45.0) % Net interest expense (293.0) (451.3) (360.9) 158.3 35.1 % (90.4) (25.0) % Loss before income taxes (3,084.5) (2,135.8) (1,488.1) (948.7) (44.4) % (647.7) (43.5) % Provision for income taxes 153.4 276.3 422.7 (122.9) (44.5) % (146.4) (34.6) % Net loss (3,237.9) (2,412.1) (1,910.8) (825.8) (34.2) % (501.3) (26.2) % Net profit attributable to non-controlling interests (49.7) (3.1) (10.8) (46.6) (1,503.2) % 7.7 71.3 %
Net loss attributable to
$ (1,921.6) $ (872.4) (36.1) %$ (493.6) (25.7) % Results of Operations in 2020 Compared to 2019 Revenue Revenue decreased by$358.5 million in 2020 compared to 2019.Subsea revenue decreased year-over-year primarily due to decreased project activity in theGulf of Mexico and theNorth Sea . Increased revenue in Technip Energies was primarily driven by the continued ramp-up of Arctic LNG 2, increased activity on downstream projects and in the Process Technology business, which more than offset the decline in revenue fromYamal LNG . Technip Energies revenue was also favorably impacted by the result of a litigation settlement. Surface Technologies revenue decreased, primarily as a result of the significant decline in operator activity inNorth America , with partial positive impact from order intake timing in international markets. In addition, our consolidated revenues were negatively impacted by operational challenges associated with the COVID-19 related disruptions. Gross Profit Gross profit (revenue less cost of sales) as a percentage of sales decreased to 14.1% in 2020 compared to 18.3% in 2019.Subsea gross profit decreased due to a more competitively priced backlog and the negative operational impacts related to COVID-19. Gross profit declined in Technip Energies due in large part to a reduced contribution fromYamal LNG as the project reached physical completion last year and is progressing through the warranty phase. Surface Technologies gross profit was negatively impacted by the year-over-year decline in North American drilling and completions activity, which was partially offset by the lower costs from our accelerated cost reduction initiative implemented during 2020. 56 -------------------------------------------------------------------------------- Selling, General and Administrative Expense Selling, general and administrative expense decreased by$161.9 million year-over-year, primarily as a result of decreased corporate expenses. During the beginning of 2020, in response to the deteriorated market environment, driven in part by the COVID-19 pandemic, we implemented a series of cost reduction initiatives that resulted in significant savings and extended to all business segments and support functions. Impairment, Restructuring and Other Expenses We incurred$3,501.3 million of restructuring, impairment and other expenses in 2020. These charges primarily included$3,083.4 million of goodwill impairment,$204.0 million of long-lived assets impairment,$101.8 million of COVID-19 related expenses, and$112.1 million for restructuring and severance expenses. COVID-19 related expenses represent unplanned, one-off, incremental and non-recoverable costs incurred solely as a result of the COVID-19 pandemic situation, which would not have been incurred otherwise. COVID-19 related expenses primarily included (a) employee payroll and travel, operational disruptions associated with quarantining, personnel travel restrictions to job sites, and shutdown of manufacturing plants and sites; (b) supply chain and related expediting costs of accelerated shipments for previously ordered and undelivered products; (c) costs associated with implementing additional information technology to support remote working environments; and (d) facilities-related expenses to ensure safe working environments. COVID-19 related expenses exclude costs associated with project and/or operational inefficiencies, time delays in performance delivery, indirect costs increases and potentially reimbursable or recoverable expenses. During 2019, we incurred$2,490.8 million of restructuring, impairment and other expenses, which included$1,988.7 million and$495.4 million of goodwill and long-lived assets impairments, respectively. See Note 19 to our consolidated financial statements for further details. Separation costs During the year endedDecember 31, 2020 , we incurred$39.5 million of separation costs associated with the preparation of the separation transaction. During the first quarter of 2020, we incurred$27.1 million of separation costs associated with the separation transaction, which was postponed due to the COVID-19 pandemic, the significant decline in commodity prices, and the heightened volatility in global equity markets. During the fourth quarter of 2020, we incurred$12.4 million of separation costs associated with theJanuary 2021 announcement of the resumption of activities toward the separation of Technip Energies. During the year endedDecember 31, 2019 , we incurred$72.1 million of separation costs associated with the separation transaction. See Note 3 to our consolidated financial statements for further details. Merger Transaction and Integration Costs Prior to the initial announcement of the planned separation transaction inAugust 2019 , we incurred merger transaction and integration costs of$31.2 million during the first half of 2019 relating to the continuation of the integration activities following the Merger. No such costs were incurred subsequently in 2019 or in 2020. Other Income (Expense), Net Other income (expense), net, primarily reflects foreign currency gains and losses, including gains and losses associated with the remeasurement of net cash positions, gains and losses on sales of property, plant and equipment and other non-operating gains and losses. During 2020, we recognized$31.1 million of other income, which primarily included$23.1 million of gains on sales of property, plant and equipment and other assets. During 2019, we recognized$220.7 million of other expenses, which primarily included$146.9 million of net foreign exchange losses and$54.6 million of legal provision, net of settlements. The change in foreign exchange losses is primarily due to a reduction in foreign exchange losses from unhedged currencies, more favorable hedging costs, and the effects of a weakenedU.S. dollar on naturally hedged projects. Net Interest Expense Net interest expense decreased$158.3 million in 2020 compared to 2019, primarily due to the change in the fair value of the redeemable financial liability. We revalued the mandatorily redeemable financial liability to reflect current expectations about the obligation and recognized a charge of$202.0 million , as compared to$423.1 million recognized in 2019. See Note 24 to our consolidated financial statements for further details. Net interest expense, excluding the fair value measurement of the mandatorily redeemable financial liability and including interest income decreased by$62.8 million during 2020. 57 -------------------------------------------------------------------------------- Provision for Income Taxes Our provision for income taxes for 2020 and 2019 reflected effective tax rates of (5.0)% and (12.9)%, respectively. The year-over-year change in the effective tax rate was primarily due to the impact of nondeductible goodwill impairments, increase in adjustment on prior year taxes, offset in part by the amount of tax expense associated with movements in valuation allowances. Our effective tax rate can fluctuate depending on our country mix of earnings, which may change based on changes in the jurisdictions in which we operate. OPERATING RESULTS OF BUSINESS SEGMENTS Segment operating profit is defined as total segment revenue less segment operating expenses. Certain items have been excluded in computing segment operating profit and are included in corporate items. See Note 7 to our consolidated financial statements for further details. We report our results of operations inU.S. dollars; however, our earnings are generated in various currencies worldwide. In order to provide worldwide consolidated results, the earnings of subsidiaries functioning in their local currencies are translated intoU.S. dollars based upon the average exchange rate during the period. While theU.S. dollar results reported reflect the actual economics of the period reported upon, the variances from prior periods include the impact of translating earnings at different rates.Subsea Year Ended December 31, Favorable/(Unfavorable) (In millions, except %) 2020 2019 2018 2020 vs. 2019 2019 vs. 2018 Revenue$ 5,471.4 $ 5,523.0 $ 4,840.0 $ (51.6) (0.9) %$ 683.0 14.1 % Operating loss$ (2,815.5) $ (1,447.7) $ (1,529.5) $ (1,367.8) (94.5) %$ 81.8 5.3 % Operating loss as a percentage of revenue (51.5) % (26.2) % (31.6) % (25.3) pts. 5.4 pts.Subsea revenue decreased$51.6 million , or (0.9)% year-over-year, primarily due to operational challenges driven by the COVID-19 pandemic. However, despite these challenges and related disruptions, we continued to demonstrate strong execution of our backlog.Subsea operating loss is primarily due to significant impairment and other non-recurring charges. The operating loss included$2,957.5 million of goodwill and long-lived assets impairments, restructuring and other charges and COVID-19 related expenses compared to$1,752.2 million in 2019. Non-recurring charges incurred related to COVID-19 disruptions during 2020 were$50.1 million . See Note 19 to our consolidated financial statements for further details. Refer to 'Non-GAAP Measures' for more information regarding our segment operating results. Technip Energies Year Ended December 31, Favorable/(Unfavorable) (In millions, except %) 2020 2019 2018 2020 vs. 2019 2019 vs. 2018 Revenue$ 6,520.0 $ 6,268.8 $ 6,120.7 $ 251.2 4.0 %$ 148.1 2.4 % Operating profit$ 683.6 $ 959.6 $ 824.0 $ (276.0) (28.8) %$ 135.6 16.5 % Operating profit as a percentage of revenue 10.5 % 15.3 % 13.5 % (4.8) pts. 1.8 pts. Technip Energies revenue increased$251.2 million year-over-year. Revenue benefited from the continued ramp-up of Arctic LNG 2 and higher activity on downstream projects inAfrica ,North America andIndia , which more than offset the decline in revenue fromYamal LNG . COVID-19 related operational efficiencies and business disruption also impeded revenue growth during 2020. Revenue during the period benefited from a$113.2 million litigation settlement. 58 -------------------------------------------------------------------------------- Operating profit decreased year-over-year, primarily due to a reduced contribution fromYamal LNG and lower margin realization on early stage projects, including Arctic LNG 2. Project execution remained strong across the portfolio. Non-recurring charges incurred related to COVID-19 disruptions during the period were$44.0 million . Refer to 'Non-GAAP Measures' for more information regarding our segment operating results. Subsequent to the Spin-off, we operate under two reporting segments:Subsea and Surface Technologies, for further details see Note 3 to our consolidated financial statements. Surface Technologies Year Ended December 31, Favorable/(Unfavorable) (In millions, except %) 2020 2019 2018 2020 vs. 2019 2019 vs. 2018 Revenue$ 1,059.2 $ 1,617.3 $ 1,592.2 $ (558.1) (34.5)%$ 25.1 1.6 % Operating profit (loss)$ (429.3) $ (656.1) $ 172.8 $ 226.8 34.6%$ (828.9) (479.7) % Operating profit (loss) as a percentage of revenue (40.5) % (40.6) % 10.9 % 0.1 pts. (51.5) pts. Surface Technologies revenue decreased$558.1 million , or (34.5)% year-over-year, primarily driven by the significant reduction in operator activity inNorth America . Revenue outside ofNorth America displayed resilience, with a more modest decline due to reduced activity levels. Nearly 64% of total segment revenue was generated outside ofNorth America in the period. Surface Technologies operating loss was primarily due to impairment and other non-recurring charges. The operating loss included$440.2 million of goodwill and long-lived assets impairments, restructuring and other charges and COVID-19 related expenses compared to$704.2 million incurred in 2019. Operating loss was also negatively impacted by the reduced demand inNorth America driven by the significant decline in rig count and completions-related activity, which was partially offset by lower costs from our accelerated cost reduction actions initiated in the first quarter of 2020. Non-recurring charges incurred related to COVID-19 disruptions during the period were$7.7 million . See Note 19 to our consolidated financial statements for further details. Refer to 'Non-GAAP Measures' for more information regarding our segment operating results. Corporate Items Year Ended December 31, Favorable/(Unfavorable) (In millions, except %) 2020 2019 2018 2020 vs. 2019 2019 vs. 2018 Corporate expense$ (201.5) $ (393.4) $
(478.0)$ 191.9 49%$ 84.6 18% Corporate expenses decreased by$191.9 million during 2020. The reduction in corporate expenses is primarily due to$54.6 million decrease in legal provision, net of settlements;$38.6 million decrease due to lower activity and the impact of cost reductions implemented in 2020;$32.7 million decrease in separation costs;$31.2 million decrease in integration expenses and$16.6 million decrease in restructuring and impairment expenses. Refer to 'Non-GAAP Measures' for more information regarding our segment operating results. 59 -------------------------------------------------------------------------------- NON-GAAP MEASURES In addition to financial results determined in accordance withU.S. generally accepted accounting principles ("GAAP"), we provide non-GAAP financial measures (as defined in Item 10 of Regulation S-K of the Securities Exchange Act of 1934, as amended) below: -Net income (loss), excluding charges and credits, as well as measures derived from it (excluding charges and credits; -Income (loss) before net interest expense and income taxes, excluding charges and credits ("Adjusted Operating profit"); -Adjusted diluted earnings per share attributable toTechnipFMC plc ; -Depreciation and amortization, excluding charges and credits ("Adjusted Depreciation and amortization"); -Earnings before net interest expense, income taxes, depreciation and amortization, excluding charges and credits ("Adjusted EBITDA"); -Corporate expenses excluding charges and credits; -Net cash; and -Free cash flow. Management believes that the exclusion of charges and credits from these financial measures enables investors and management to more effectively evaluate our operations and consolidated results of operations period-over-period, and to identify operating trends that could otherwise be masked or misleading to both investors and management by the excluded items. These measures are also used by management as performance measures in determining certain incentive compensation. The foregoing non-GAAP financial measures should be considered in addition to, not as a substitute for or superior to, other measures of financial performance prepared in accordance with GAAP. The following is a reconciliation of the most comparable financial measures under GAAP to the non-GAAP financial measures. 60
--------------------------------------------------------------------------------
Year Ended
December 31, 2020
Income (loss) Earnings before
before net net interest
interest expense, income
Net income (loss) expense and taxes,
Net income (loss) attributable to income taxes depreciation and
attributable to non-controlling Provision for Net interest (Operating Depreciation and amortization
TechnipFMC plc interests income taxes expense profit)
amortization (EBITDA)
TechnipFMC plc, as reported $ (3,287.6) $ 49.7 $ 153.4 $ 293.0 $ (2,791.5) $ 447.2 $ (2,344.3)
Charges and (credits):
Impairment and other charges 3,271.0 - 16.4 - 3,287.4 - 3,287.4
Restructuring and other charges 96.1 - 16.0 - 112.1 - 112.1
Direct COVID-19 expenses 83.7 - 18.1 - 101.8 - 101.8
Litigation settlement (113.2) - - - (113.2) - (113.2)
Separation costs 36.3 - 3.2 - 39.5 - 39.5
Purchase price accounting adjustment 6.5 - 2.0 - 8.5 (8.5) -
Valuation allowance (3.5) - 3.5 - - - -
Adjusted financial measures $ 89.3 $ 49.7 $ 212.6 $ 293.0 $ 644.6 $ 438.7 $ 1,083.3
Diluted earnings (loss) per share
attributable to TechnipFMC plc , as
reported $ (7.33)
Adjusted diluted earnings per share
attributable to TechnipFMC plc $ 0.20
Year Ended
December 31, 2019
Income (loss) Earnings before
before net net interest
interest expense, income
Net income (loss) expense and taxes,
Net income (loss) attributable to income taxes depreciation and
attributable to non-controlling Provision for Net interest (Operating Depreciation and amortization
TechnipFMC plc interests income taxes expense profit) amortization (EBITDA)
Charges and (credits): Impairment and other charges 2,364.2 - 119.9 - 2,484.1 - 2,484.1 Restructuring and other charges 27.7 - 9.3 - 37.0 - 37.0 Business combination transaction and integration costs 23.1 - 8.1 - 31.2 - 31.2 Separation costs 54.2 - 17.9 - 72.1 - 72.1 Reorganization 17.2 - 8.1 - 25.3 - 25.3 Legal provision, net 46.3 - 8.3 - 54.6 - 54.6 Purchase price accounting adjustment 26.0 - 8.0 - 34.0 (34.0) - Valuation allowance 187.0 - (187.0) - - - - Adjusted financial measures $ 330.5 $ 3.1$ 268.9 $ 451.3 $ 1,053.8 $ 475.6$ 1,529.4 Diluted earnings per share attributable toTechnipFMC plc , as reported $ (5.39) Adjusted diluted earnings per share attributable to TechnipFMC plc $ 0.74 61 --------------------------------------------------------------------------------
Year Ended
December 31, 2020
Surface Corporate Foreign
Subsea Technip Energies Technologies Expense Exchange, net Total
Revenue $ 5,471.4 $ 6,520.0 $ 1,059.2 $ - $ - $ 13,050.6
Operating profit (loss), as
reported (pre-tax) $ (2,815.5) $ 683.6 $ (429.3) $ (201.5) $ (28.8) $ (2,791.5)
Charges and (credits):
Impairment and other charges 2,854.5 10.3 419.3 3.3 - 3,287.4
Restructuring and other charges* 52.9 39.3 13.2 6.7 - 112.1 Direct COVID-19 expenses 50.1 44.0 7.7 - - 101.8 Litigation settlement - (113.2) - - - (113.2) Separation costs - - - 39.5 - 39.5 Purchase price accounting adjustments 8.5 - - - - 8.5 Subtotal 2,966.0 (19.6) 440.2 49.5 - 3,436.1 Adjusted Operating profit (loss) 150.5 664.0 10.9 (152.0) (28.8) 644.6 Adjusted Depreciation and amortization 316.4 34.2 70.1 18.0 - 438.7 Adjusted EBITDA$ 466.9 $ 698.2$ 81.0 $ (134.0) $ (28.8) $ 1,083.3 Operating profit margin (51.5) % 10.5 % (40.5) % (21.4) % Adjusted Operating profit margin 2.8 % 10.2 % 1.0 % 4.9 % Adjusted EBITDA margin 8.5 % 10.7 % 7.6 % 8.3 %
*On
62
--------------------------------------------------------------------------------
Year Ended
December 31, 2019
Surface Corporate Foreign
Subsea Technip Energies Technologies Expense Exchange, net Total
Revenue $ 5,523.0 $ 6,268.8 $ 1,617.3 $ - $ - $ 13,409.1
Operating profit (loss), as reported
(pre-tax) $ (1,447.7) $ 959.6 $ (656.1) $ (393.4) $ (146.9) $ (1,684.5)
Charges and (credits):
Impairment and other charges* 1,798.6 - 685.5 - - 2,484.1
Restructuring and other charges* (46.4) 17.0 39.8 26.6 -
37.0
Business combination transaction and integration costs - - - 31.2 - 31.2 Separation costs - - - 72.1 - 72.1 Reorganization - 25.3 - - - 25.3 Legal provision, net - - - 54.6 - 54.6 Purchase price accounting adjustments 34.0 - - - - 34.0 Subtotal 1,786.2 42.3 725.3 184.5 - 2,738.3 Adjusted Operating profit (loss) 338.5 1,001.9 69.2 (208.9) (146.9) 1,053.8 Adjusted Depreciation and amortization 311.6 38.7 107.9 17.4 - 475.6 Adjusted EBITDA$ 650.1 $ 1,040.6 $ 177.1 $ (191.5) $ (146.9) $ 1,529.4 Operating profit margin (26.2) % 15.3 % (40.6) % (12.6) % Adjusted Operating profit margin 6.1 % 16.0 % 4.3 % 7.9 % Adjusted EBITDA margin 11.8 % 16.6 % 11.0 % 11.4 % *OnDecember 30, 2019 , we completed the acquisition of the remaining 50 percent of Technip Odebrecht PLSV CV, which resulted in a net loss of$0.9 million that was recorded in theSubsea segment. The net loss was comprised of an impairment charge of$84.2 million included within impairment and other charges and a gain on bargain purchase of$83.3 million included within restructuring and other charges. 63 -------------------------------------------------------------------------------- INBOUND ORDERS AND ORDER BACKLOG Inbound orders - Inbound orders represent the estimated sales value of confirmed customer orders received during the reporting period. The significant decline in commodity prices, due in part to the lower demand resulting from COVID-19 contributed to the decrease in the inbound orders during 2020. Inbound Orders Year Ended December 31, (In millions) 2020 2019 Subsea$ 4,003.0 $ 7,992.6 Technip Energies 5,001.3 13,080.5 Surface Technologies 1,061.2 1,619.9 Total inbound orders$ 10,065.5 $ 22,693.0 Order backlog - Order backlog is calculated as the estimated sales value of unfilled, confirmed customer orders at the reporting date. Backlog reflects the current expectations for the timing of project execution. The scheduling of some future work included in our order backlog has been impacted by COVID-19 related disruptions and remains subject to future adjustment. See Note 6 to our consolidated financial statements for further details. Order Backlog December 31, (In millions) 2020 2019 Subsea$ 6,876.0 $ 8,479.8 Technip Energies 14,098.7 15,298.1 Surface Technologies 413.5 473.2 Total order backlog$ 21,388.2 $ 24,251.1 Subsea - Order backlog forSubsea as ofDecember 31, 2020 , decreased by$1.6 billion fromDecember 31, 2019 .Subsea backlog of$6.9 billion as ofDecember 31, 2020 , was composed of various subsea projects, including Total Mozambique LNG;Eni Coral and Merakes; Petrobras Mero I and Mero II; Energean Karish; ExxonMobil Payara; Reliance MJ-1; Equinor Johan Sverdrup Phase 2; Husky West White Rose;BP Platina ; Chevron Gorgon Stage 2; and Woodside Pyxis andLambert Deep . Technip Energies - Technip Energies order backlog as ofDecember 31, 2020 , decreased by$1.2 billion compared toDecember 31, 2019 . Technip Energies backlog of$14.1 billion as ofDecember 31, 2020 was composed of various projects, including Arctic LNG 2,Yamal LNG ;Midor refinery expansion;BP Tortue FPSO ; Long Son Petrochemicals;ExxonMobil Beaumont refinery expansion; HURL fertilizer plants; Petronas Kasawari; Energean Karish; Neste bio-diesel expansion; andMotor Oil Hellas New Naphtha Complex . Subsequent to the Spin-off, we will operate under two reporting segments:Subsea and Surface Technologies, for further details see Note 3 to our consolidated financial statements. Surface Technologies - Order backlog for Surface Technologies as ofDecember 31, 2020 , decreased by$59.7 million compared toDecember 31, 2019 , mainly driven by the transfer of the Loading Systems business unit from Surface Technologies to Technip Energies. Given the short-cycle nature of the business, most orders are quickly converted into sales revenue; longer contracts are typically converted within twelve months. Non-consolidated backlog - Non-consolidated backlog reflects the proportional share of backlog related to joint ventures that is not consolidated due to our minority ownership position. Non-consolidated order backlog December 31, (In millions) 2020 Subsea $ 640.2 Technip Energies 1,890.3 Total order backlog $ 2,530.5 64
-------------------------------------------------------------------------------- LIQUIDITY AND CAPITAL RESOURCES Most of our cash is managed centrally and flows through centralized bank accounts controlled and maintained byTechnipFMC globally and in many operating jurisdictions to best meet the liquidity needs of our global operations.Net Cash - Net cash, is a non-GAAP financial measure reflecting cash and cash equivalents, net of debt. Management uses this non-GAAP financial measure to evaluate our capital structure and financial leverage. We believe net cash is a meaningful financial measure that may assist investors in understanding our financial condition and recognizing underlying trends in our capital structure. Net cash should not be considered an alternative to, or more meaningful than, cash and cash equivalents as determined in accordance with GAAP or as an indicator of our operating performance or liquidity. The following table provides a reconciliation of our cash and cash equivalents to net cash, utilizing details of classifications from our consolidated balance sheets. December 31, December 31, (In millions) 2020 2019 Cash and cash equivalents$ 4,807.8 $ 5,190.2 Short-term debt and current portion of long-term debt (636.2) (495.4) Long-term debt, less current portion (3,317.7) (3,980.0) Net cash$ 853.9 $ 714.8
Cash Flows
Cash flows for the years ended
Year Ended December 31,
(In millions) 2020 2019 2018
Cash provided (required) by operating activities
$ 848.5 $ (185.4) Cash required by investing activities (180.6) (419.8) (460.2) Cash required by financing activities (1,082.2) (784.4) (444.8) Effect of exchange rate changes on cash and cash equivalents 223.5 5.9 (107.0) Decrease in cash and cash equivalents$ (382.4) $ (349.8) $ (1,197.4) Working capital$ 54.0 $ (82.2) $ (759.0) Free cash flow$ 365.1 $ 394.1 $ (553.5) Operating cash flows - During 2020, we generated$656.9 million in cash flows from operating activities as compared to$848.5 million generated in 2019, resulting in a$191.6 million decrease compared to 2019. The decrease in operating cash flows is primarily driven by the decrease in cash generated by our operations during the year due to the overall decline in activity. Investing cash flows - Investing activities used$180.6 million and$419.8 million of cash in 2020 and 2019, respectively. The decrease in cash used by investing activities was due primarily to decreased capital expenditures, decreased payments to acquire debt securities and increased proceeds from sale of assets and debt securities during 2020. In 2019, we purchased a deepwater dive support vessel, Deep Discoverer for$116.8 million , that was subsequently funded through a sale-leaseback transaction. Financing cash flows - Financing activities used$1,082.2 million and$784.4 million in 2020 and 2019, respectively. The increase of$297.8 million in cash required for financing activities was due primarily to the increased debt pay down activity during 2020 of$883.6 million , partially offset by$338.6 million reduction in settlements of mandatorily redeemable financial liability and our efforts and commitment to preserve cash, which included reduction in cash dividends of$173.6 million and reduction in share repurchases of$92.7 million .
Working capital represents total changes in operating current assets and liabilities.
65
--------------------------------------------------------------------------------
Free cash flow is defined as operating cash flows less capital expenditures. The
following table reconciles cash provided by operating activities, which is
directly comparable financial measure determined in accordance with GAAP, to
free cash flow (non-GAAP measure).
Year Ended December 31,
(In millions) 2020 2019 2018
Cash provided (required) by operating activities
$ (185.4) Capital expenditures (291.8) (454.4) (368.1) Free cash flow$ 365.1 $ 394.1 $ (553.5) Debt and Liquidity
Significant Funding and Liquidity Activities - During 2020, we completed the following transactions in order to enhance our total liquidity position:
•Repaid$233.9 million of 5.00% 2010 private placement notes; •Repaid the remaining outstanding balance of$190.0 million of the term loan assumed in connection with the acquisition of the remaining 50% interest in TOP CV. •Issued €200 million aggregate principal amount of 4.500% Private Placement Notes dueJune 30, 2025 . Within three months of the effective date of the Spin-off of Technip Energies, if there is a downgrade by a nationally recognized rating agency of the corporate rating ofTechnipFMC from an investment grade to a non-investment grade rating or a withdrawal of any such rating, the interest rate applicable to the Private Placement Notes will be increased to 5.75%; •Entered into a new, six-month €500 million senior unsecured revolving credit facility agreement, which may be extended for two additional three-month periods (the "Euro Facility"); and •Entered into theBank of England's COVID Corporate Financing Facility program (the "CCFF Program"), which allows us to issue up to £600 million of unsecured commercial paper notes. Total borrowings as ofDecember 31, 2020 and 2019 were as follows: (In millions) December 31, 2020 2019 Commercial paper$ 1,525.9 $ 1,967.0 Synthetic bonds due 2021 551.2 492.9 3.45% Senior Notes due 2022 500.0 500.0 5.00% Notes due 2020 - 224.6 3.40% Notes due 2022 184.0 168.5 3.15% Notes due 2023 159.5 146.0 3.15% Notes due 2023 153.4 140.4 4.50% Notes due 2025 245.4 - 4.00% Notes due 2027 92.0 84.2 4.00% Notes due 2032 122.7 112.3 3.75% Notes due 2033 122.7 112.3 Bank borrowings and Other 309.9 536.3 Unamortized debt issuance costs and discounts (12.8) (9.1) Total borrowings$ 3,953.9 $ 4,475.4 66
-------------------------------------------------------------------------------- Credit Facilities - The following is a summary of our credit facilities as ofDecember 31, 2020 : Commercial Paper (In millions) Debt Outstanding Letters Unused Description Amount Outstanding (a) of Credit Capacity Maturity Revolving credit facility$ 2,500.0 $ -$ 708.0 $ -$ 1,792.0 January 2023 CCFF Program £ 600.0 £ - £ 600.0 £ - £ - March 2021 Euro Facility € 500.0 € - € - € - € 500.0 February 2021 Bilateral credit facility € 100.0 € - € - € - € 100.0
(a)Under our commercial paper program, we have the ability to access up to$1.5 billion and €1.0 billion of financing through our commercial paper dealers. Our available capacity under our revolving credit facility is reduced by any outstanding commercial paper. Committed credit available under our revolving credit facilities provides the ability to issue our commercial paper obligations on a long-term basis. We had$708.0 million of commercial paper issued under our facilities as ofDecember 31, 2020 . In addition, we had$817.9 million of Notes outstanding under the CCFF Program. When we have both the ability and intent to refinance certain obligations on a long-term basis, the obligations are classified as long-term, as such, the commercial paper borrowings were classified as long-term debt in our consolidated balance sheet as ofDecember 31, 2020 . OnJune 12, 2020 , we entered into Amendment No. 1 to the Facility Agreement and into an Amendment and Restatement Agreement to our Euro Facility. The amendments, which are effective through the respective expirations of the Facility Agreement and Euro Facility, permit us to include the gross book value of$3.2 billion of goodwill (fully impaired in the quarter endedMarch 31, 2020 ) in the calculation of consolidated net worth, which is used in the calculation of our quarterly compliance with the total capitalization ratio under the Facility Agreement and Euro Facility. The amended and restated Facility Agreement and Euro Facility contain usual and customary covenants, representations and warranties, and events of default for credit facilities of this type, including financial covenants requiring that our total capitalization ratio not exceed 60% at the end of any financial quarter. The Facility Agreement and Euro Facility also contain covenants restricting our ability and our subsidiaries' ability to incur additional liens and indebtedness, enter into asset sales, or make certain investments.
As of
Refer to Note 24 to our consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K for further information related to credit risk. Credit Ratings - As ofFebruary 25, 2021 , our credit ratings with Standard and Poor's (S&P) are BB+ for our long-term secured debt and B for commercial paper program. Our credit ratings with Moody's are Ba1 for our long-term secured debt. Credit Risk Analysis For the purposes of mitigating the effect of the changes in exchange rates, we hold derivative financial instruments. Valuations of derivative assets and liabilities reflect the fair value of the instruments, including the values associated with counterparty risk. These values must also take into account our credit standing, thus including the valuation of the derivative instrument and the value of the net credit differential between the counterparties to the derivative contract. Adjustments to our derivative assets and liabilities related to credit risk were not material for any period presented. The income approach was used as the valuation technique to measure the fair value of foreign currency derivative instruments on a recurring basis. This approach calculates the present value of the future cash flow by measuring the change from the derivative contract rate and the published market indicative currency rate, multiplied by the contract notional values. Credit risk is then incorporated by reducing the derivative's fair value in asset positions by the result of multiplying the present value of the portfolio by the counterparty's published credit spread. Portfolios in a liability position are adjusted by the same calculation; however, a spread representing our credit spread is used. Our credit spread, and the credit spread of other counterparties not publicly available, are approximated using the spread of similar companies in the same industry, of similar size, and with the same credit rating. See Notes 24 and 25 to our consolidated financial statements for further details. 67 --------------------------------------------------------------------------------
At this time, we have no credit-risk-related contingent features in our agreements with the financial institutions that would require us to post collateral for derivative positions in a liability position.
Financial Position Outlook Overview We are committed to a strong balance sheet and ample liquidity that that will enable us to avoid distress in cyclical troughs and access capital markets throughout the cycle. We believe our liquidity has and continues to exceed the level required to achieve this goal. Our objective in financing our business is to maintain sufficient liquidity, adequate financial resources and financial flexibility in order to fund the requirements of our business. Our capital expenditures can be adjusted and managed to match market demand and activity levels. Based on current market conditions and our future expectations, our capital expenditures for 2021 are estimated to be approximately$250.0 million . Projected capital expenditures do not include any contingent capital that may be needed to respond to a contract award. Spin-off
In connection with the Spin-off, we executed a series of refinancing transactions, in order to provide a capital structure with sufficient cash resources to support future operating and investment plans.
Debt Issuance
OnFebruary 16, 2021 , we entered into Revolving Credit Facility that provides for aggregate revolving capacity of up to$1.0 billion . Availability of borrowings under the Revolving Credit Facility is reduced by any outstanding letters of credit issued against the facility. AtFebruary 25, 2021 , there were no outstanding letters of credit and availability of borrowings under the Revolving Credit Facility was$800 million . OnJanuary 29, 2021 , we issued$1.0 billion of 6.5% senior notes due 2026 (the "2021 Notes"). The interest on the 2021 Notes is paid semi-annually onFebruary 1 andAugust 1 of each year, beginning onAugust 1, 2021 . The 2021 Notes are senior unsecured obligations and are guaranteed on a senior unsecured basis by substantially all of our wholly-ownedU.S. subsidiaries and non-U.S. subsidiaries inBrazil ,the Netherlands ,Norway ,Singapore and theUnited Kingdom .
Repayment of Debt
The proceeds from the debt issuance described above along with the available cash on hand were used to fund:
•The repayment of all$522.8 million of the outstanding Synthetic Convertible Bonds that matured inJanuary 2021 . •The repayment of all$500.0 million aggregate principal amount of outstanding 3.45% Senior Notes due 2022. •The termination of the$2.5 billion senior unsecured revolving credit facility we entered into onJanuary 17, 2017 ; the termination of the €500.0 million Euro Facility and the CCFF Program we entered into onMay 19, 2020 . In connection with the termination of these credit facilities, we repaid most of the outstanding commercial paper borrowings, which were$1,525.9 million as ofDecember 31, 2020 . We will continue to be strategically focused on cash and liquidity preservation. Subsequent to the completion of the Spin-off, we own 49.9% of the outstanding shares of Technip Energies. The ownership percentage will be further reduced by the sale of shares to BPI pursuant to the Share Purchase Agreement, for further details see section "The Spin-off" in "Item 1. Business." We intend to conduct an orderly sale of our stake in Technip Energies over time and will use the proceeds from future sales to further reduce our net leverage. 68 -------------------------------------------------------------------------------- CONTRACTUAL OBLIGATIONS The following is a summary of our contractual obligations as ofDecember 31, 2020 : Payments Due by Period Total Less than 1-3 3-5 After 5 (In millions) payments 1 year years years years Debt (a)$ 3,953.9 $ 636.2 $ 2,589.1 $ 294.0 $ 434.6
Interest on debt (a) 242.3 58.1 69.3 42.9 72.0 Operating leases (b) 1,128.0 131.2 328.6 196.8 471.4 Purchase obligations (c) 5,709.4 4,587.5 1,008.9 112.0 1.0 Pension and other post-retirement benefits (d) 19.0 19.0 - - - Unrecognized tax benefits (e) 56.1 4.2 4.2 47.6 0.1 Other contractual obligations (f) 246.6 141.9 104.7 - -
Total contractual obligations
(a)Our available debt is dependent upon our compliance with covenants, including negative covenants related to liens and our total capitalization ratio. Any violation of covenants or other events of default, which are not waived or cured, or changes in our credit rating could have a material impact on our ability to maintain our committed financing arrangements. Due to our intent and ability to refinance commercial paper obligations on a long-term basis under our revolving credit facility and the variable interest rates associated with these debt instruments, only interest on our Senior Notes is included in the table. During 2020, we paid$107.0 million for interest charges, net of interest capitalized. Subsequent to the Spin-off, we expect the total future principal payments on debt and total future interest payments to be approximately$2,376.8 million and$556.1 million , respectively. (b)We lease office space, manufacturing facilities and various types of manufacturing and data processing equipment. Leases of real estate generally provide for payment of property taxes, insurance and repairs by us. Substantially all of our leases are classified as operating leases. (c)In the normal course of business, we enter into agreements with our suppliers to purchase raw materials or services. These agreements include a requirement that our supplier provide products or services to our specifications and require us to make a firm purchase commitment to our supplier. As substantially all of these commitments are associated with purchases made to fulfill our customers' orders, the costs associated with these agreements will ultimately be reflected in cost of sales in our consolidated statements of income. Subsequent to the Spin-off, we expect the total remaining future purchase obligations to be approximately$1,094.1 million . (d)We expect to contribute approximately$20.7 million to our international pension plans during 2021. Required contributions for future years depend on factors that cannot be determined at this time. Additionally, we expect to pay directly to beneficiaries approximately$14.3 million for international unfunded pension plan and$4.7 million forU.S. Non-Qualified unfunded pension plan during 2021. Subsequent to the Spin-off, we expect to contribute approximately$18.9 million to our international pension plans during 2021. (e)It is reasonably possible that$4.2 million of liabilities for unrecognized tax benefits will be settled during 2021, and this amount is reflected in income taxes payable in our consolidated balance sheet as ofDecember 31, 2020 . Although unrecognized tax benefits are not contractual obligations, they are presented in this table because they represent demands on our liquidity. (f)Other contractual obligations represent our share of the mandatorily redeemable financial liability, which is recorded at its fair value. The mandatorily redeemable financial liability relates to our voting control interests in legal Technip Energies contract entities which own and account for the design, engineering and construction of theYamal LNG plant. During the year endedDecember 31, 2020 we revalued the liability to reflect current expectations about the obligation. See Note 24 to our consolidated financial statements for further details. OTHER OFF-BALANCE SHEET ARRANGEMENTS The following is a summary of other off-balance sheet arrangements for our consolidated subsidiaries as ofDecember 31, 2020 : Amount of
Commitment Expiration per Period
Total Less than 1-3 3-5 After 5
(In millions) amount 1 year years years years
Financial guarantees (a) $ 310.1 $ 204.1 $ 38.9 $ 24.7 $ 42.4
Performance guarantees (b) 4,659.6 1,968.0 2,011.4 565.7 114.5
Total other off-balance sheet
arrangements $ 4,969.7 $ 2,172.1 $ 2,050.3 $ 590.4 $ 156.9 (a)Financial guarantees represent contracts that contingently require a guarantor to make payments to a guaranteed party based on changes in an underlying agreement that is related to an asset, a liability or an equity security of the guaranteed party. These tend to be drawn down only if there is a failure to fulfill our financial obligations.
69
--------------------------------------------------------------------------------
(b)Performance guarantees represent contracts that contingently require a
guarantor to make payments to a guaranteed party based on another entity's
failure to perform under a nonfinancial obligating agreement. Events that
trigger payment are performance-related, such as failure to ship a product or
provide a service.
CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with GAAP requires
management to make certain estimates, judgments and assumptions about future
events that affect the reported amounts of assets and liabilities at the date of
the financial statements, the reported amounts of revenue and expenses during
the periods presented and the related disclosures in the accompanying notes to
the financial statements. Management has reviewed these critical accounting
estimates with the Audit Committee of our Board of Directors. We believe the
following critical accounting estimates used in preparing our financial
statements address all important accounting areas where the nature of the
estimates or assumptions is material due to the levels of subjectivity and
judgment necessary to account for highly uncertain matters or the susceptibility
of such matters to change. See Note 1 to our consolidated financial statements
for further details.
Revenue Recognition
The majority of our revenue is derived from long-term contracts that can span
several years. We account for revenue in accordance with Accounting Standard
Codification ("ASC") Topic 606, Revenues from Contracts with Customers. The unit
of account in ASC Topic 606 is a performance obligation. A contract's
transaction price is allocated to each distinct performance obligation and
recognized as revenue when, or as, the performance obligation is satisfied. Our
performance obligations are satisfied over time as work progresses or at a point
in time.
A significant portion of our total revenue recognized over time relates to our
Technip Energies and Subsea segments, primarily for the entire range of onshore
facilities, fixed and floating offshore oil and gas facilities, and subsea
exploration and production equipment projects that involve the design,
engineering, manufacturing, construction, and assembly of complex,
customer-specific systems. Because of control transferring over time, revenue is
recognized based on the extent of progress towards completion of the performance
obligation. The selection of the method to measure progress towards completion
requires judgment and is based on the nature of the products or services to be
provided. We generally use the cost-to-cost measure of progress for our
contracts because it best depicts the transfer of control to the customer that
occurs as we incur costs on our contracts. Under the cost-to-cost measure of
progress, the extent of progress towards completion is measured based on the
ratio of costs incurred to date to the total estimated costs at completion of
the performance obligation. Revenues, including estimated fees or profits, are
recorded proportionally as costs are incurred.
Due to the nature of the work required to be performed on many of our
performance obligations, the estimation of total revenue and cost at completion
is complex, subject to many variables, and requires significant judgment. It is
common for our long-term contracts to contain award fees, incentive fees, or
other provisions that can either increase or decrease the transaction price. We
include estimated amounts in the transaction price when we believe we have an
enforceable right to the modification, the amount can be estimated reliably, and
its realization is probable. The estimated amounts are included in the
transaction price to the extent it is probable that a significant reversal of
cumulative revenue recognized will not occur when the uncertainty associated
with the variable consideration is resolved.
We execute contracts with our customers that clearly describe the equipment,
systems, and/or services. After analyzing the drawings and specifications of the
contract requirements, our project engineers estimate total contract costs based
on their experience with similar projects and then adjust these estimates for
specific risks associated with each project, such as technical risks associated
with a new design. Costs associated with specific risks are estimated by
assessing the probability that conditions arising from these specific risks will
affect our total cost to complete the project. After work on a project begins,
assumptions that form the basis for our calculation of total project cost are
examined on a regular basis and our estimates are updated to reflect the most
current information and management's best judgment.
70
--------------------------------------------------------------------------------
Adjustments to estimates of contract revenue, total contract cost, or extent of
progress toward completion are often required as work progresses under the
contract and as experience is gained, even though the scope of work required
under the contract may not change. The nature of accounting for long-term
contracts is such that refinements of the estimating process for changing
conditions and new developments are continuous and characteristic of the
process. Consequently, the amount of revenue recognized over time is sensitive
to changes in our estimates of total contract costs. There are many factors,
including, but not limited to, the ability to properly execute the engineering
and design phases consistent with our customers' expectations, the availability
and costs of labor and material resources, productivity, and weather, all of
which can affect the accuracy of our cost estimates, and ultimately, our future
profitability.
Our operating loss for the year ended December 31, 2020 was positively impacted
by approximately $457.9 million , as a result of changes in contract estimates
related to projects that were in progress as of December 31, 2019 . During the
year ended December 31, 2020 , we recognized changes in our estimates that had an
impact on our margin in the amounts of $519.5 million , $(56.5) million and
$(5.1) million in our Technip Energies, Subsea and Surface Technologies
segments, respectively. The changes in contract estimates are attributed to
better, than expected performance throughout our execution of our projects.
Our operating loss for the year ended December 31, 2019 was positively impacted
by approximately $1,114.3 million , as a result of changes in contract estimates
related to projects that were in progress as of December 31, 2018 . During the
year ended December 31, 2019 , we recognized changes in our estimates that had an
impact on our margin in the amounts of $797.2 million , $324.7 million and $(7.6)
million in our Technip Energies, Subsea and Surface Technologies segments,
respectively. The changes in contract estimates are attributed to better, than
expected performance throughout our execution of our projects.
Our operating profit for the year ended December 31, 2018 was positively
impacted by approximately $553.4 million , as a result of changes in contract
estimates related to projects that were in progress as of December 31, 2017 .
During the year ended December 31, 2018 , we recognized changes in our estimates
that had an impact on our margin in the amounts of $379.2 million , $169.9
million and $4.3 million in our Technip Energies, Subsea and Surface
technologies segments, respectively. The changes in contract estimates are
attributed to better, than expected performance throughout our execution of our
projects.
Accounting for Income Taxes
Our income tax expense, deferred tax assets and liabilities, and reserves for
uncertain tax positions reflect management's best assessment of estimated future
taxes to be paid. We are subject to income taxes in the United Kingdom and
numerous foreign jurisdictions. Significant judgments and estimates are required
in determining our consolidated income tax expense.
In determining our current income tax provision, we assess temporary differences
resulting from differing treatments of items for tax and accounting purposes.
These differences result in deferred tax assets and liabilities, which are
recorded in our consolidated balance sheets. When we maintain deferred tax
assets, we must assess the likelihood that these assets will be recovered
through adjustments to future taxable income. To the extent, we believe recovery
is not likely, we establish a valuation allowance. We record a valuation
allowance to reduce the asset to a value we believe will be recoverable based on
our expectation of future taxable income. We believe the accounting estimate
related to the valuation allowance is a critical accounting estimate because it
is highly susceptible to change from period to period, requires management to
make assumptions about our future income over the lives of the deferred tax
assets, and finally, the impact of increasing or decreasing the valuation
allowance is potentially material to our results of operations.
Forecasting future income requires us to use a significant amount of judgment.
In estimating future income, we use our internal operating budgets and
long-range planning projections. We develop our budgets and long-range
projections based on recent results, trends, economic and industry forecasts
influencing our segments' performance, our backlog, planned timing of new
product launches and customer sales commitments. Significant changes in our
judgment related to the expected realizability of a deferred tax asset results
in an adjustment to the associated valuation allowance.
As of December 31, 2020 , we have provided a valuation allowance against the
related deferred tax assets where we believe it is not more likely than not that
we will generate future taxable income sufficient to realize such assets.
71
--------------------------------------------------------------------------------
The calculation of our income tax expense involves dealing with uncertainties in
the application of complex tax laws and regulations in numerous jurisdictions in
which we operate. We recognize tax benefits related to uncertain tax positions
when, in our judgment, it is more likely than not that such positions will be
sustained on examination, including resolutions of any related appeals or
litigation, based on the technical merits. We adjust our liabilities for
uncertain tax positions when our judgment changes as a result of new information
previously unavailable. Due to the complexity of some of these uncertainties,
their ultimate resolution may result in payments that are materially different
from our current estimates. Any such differences will be reflected as
adjustments to income tax expense in the periods in which they are determined.
Accounting for Pension and Other Post -retirement Benefit Plans
The determination of the projected benefit obligations of our pension and other
post-retirement benefit plans are important to the recorded amounts of such
obligations in our consolidated balance sheets and to the amount of pension
expense in our consolidated statements of income. In order to measure the
obligations and expense associated with our pension benefits, management must
make a variety of estimates, including discount rates used to value certain
liabilities, expected return on plan assets set aside to fund these costs, rate
of compensation increase, employee turnover rates, retirement rates, mortality
rates and other factors. We update these estimates on an annual basis or more
frequently upon the occurrence of significant events. These accounting estimates
bear the risk of change due to the uncertainty and difficulty in estimating
these measures. Different estimates used by management could result in our
recognition of different amounts of expense over different periods of time.
Due to the specialized and statistical nature of these calculations which
attempt to anticipate future events, we engage third-party specialists to assist
management in evaluating our assumptions as well as appropriately measuring the
costs and obligations associated with these pension benefits. The discount rate
and expected long-term rate of return on plan assets are primarily based on
investment yields available and the historical performance of our plan assets,
respectively. The timing and amount of cash outflows related to the bonds
included in the indices matches it estimated defined benefits payments. These
measures are critical accounting estimates because they are subject to
management's judgment and can materially affect net income.
The actuarial assumptions and estimates made by management in determining our
pension benefit obligations may materially differ from actual results as a
result of changing market and economic conditions and changes in plan
participant assumptions. While we believe the assumptions and estimates used are
appropriate, differences in actual experience or changes in plan participant
assumptions may materially affect our financial position or results of
operations.
The following table illustrates the sensitivity of changes in the discount rate
and expected long-term return on plan assets on pension expense and the
projected benefit obligation:
Increase
(Decrease) in
Increase Projected
(Decrease) in Benefit
2020 Pension Obligation as
Expense Before of December
(In millions, except basis points) Income Taxes 31, 2020
25 basis point decrease in discount rate $ 3.2 $ 66.8
25 basis point increase in discount rate $ (3.2) $ 3.7 N/A 25 basis point increase in expected long-term rate of return on plan assets$ (1.6) N/A 72
-------------------------------------------------------------------------------- Determination of Fair Value in Business Combinations Accounting for the acquisition of a business requires the allocation of the purchase price to the various assets acquired and liabilities assumed at their respective fair values. The determination of fair value requires the use of significant estimates and assumptions, and in making these determinations, management uses all available information. If necessary, we have up to one year after the acquisition closing date to finalize these fair value determinations. For tangible and identifiable intangible assets acquired in a business combination, the determination of fair value utilizes several valuation methodologies including discounted cash flows which has assumptions with respect to the timing and amount of future revenue and expenses associated with an asset. The assumptions made in performing these valuations include, but are not limited to, discount rates, future revenues and operating costs, projections of capital costs, and other assumptions believed to be consistent with those used by principal market participants. Due to the specialized nature of these calculations, we engage third-party specialists to assist management in evaluating our assumptions as well as appropriately measuring the fair value of assets acquired and liabilities assumed. See Note 2 to our consolidated financial statements for further details. Impairment of Long-Lived and Intangible Assets Long-lived assets, including vessels, property, plant and equipment, identifiable intangible assets being amortized and capitalized software costs are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of the long-lived asset may not be recoverable. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. If it is determined that an impairment loss has occurred, the loss is measured as the amount by which the carrying amount of the long-lived asset exceeds its fair value. The determination of future cash flows as well as the estimated fair value of long-lived assets involves significant estimates on the part of management. Because there usually is a lack of quoted market prices for long-lived assets, fair value of impaired assets is typically determined based on the present values of expected future cash flows using discount rates believed to be consistent with those used by principal market participants, or based on a multiple of operating cash flows validated with historical market transactions of similar assets where possible. The expected future cash flows used for impairment reviews and related fair value calculations are based on judgmental assessments of revenue, forecasted utilization, operating costs and capital decisions and all available information at the date of review. If future market conditions deteriorate beyond our current expectations and assumptions, impairments of long-lived assets may be identified if we conclude that the carrying amounts are no longer recoverable. Impairment ofGoodwill Goodwill represents the excess of cost over the fair market value of net assets acquired in business combinations.Goodwill is not subject to amortization but is tested for impairment at a reporting unit level on an annual basis, or more frequently if impairment indicators arise. We have establishedOctober 31 as the date of our annual test for impairment of goodwill. We identify a potential impairment by comparing the fair value of the applicable reporting unit to its net book value, including goodwill. If the net book value exceeds the fair value of the reporting unit, we measure the impairment by comparing the carrying value of the reporting unit to its fair value. Reporting units with goodwill are tested for impairment using a quantitative impairment test. When using the quantitative impairment test, determining the fair value of a reporting unit is judgmental in nature and involves the use of significant estimates and assumptions. We estimate the fair value of our reporting units using a discounted future cash flow model. The majority of the estimates and assumptions used in a discounted future cash flow model involve unobservable inputs reflecting management's own assumptions about the assumptions market participants would use in estimating the fair value of a business. These estimates and assumptions include revenue growth rates and operating margins used to calculate projected future cash flows, discount rates and future economic and market conditions. Our estimates are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and do not reflect unanticipated events and circumstances that may occur. 73 -------------------------------------------------------------------------------- The income approach estimates fair value by discounting each reporting unit's estimated future cash flows using a weighted-average cost of capital that reflects current market conditions and the risk profile of the reporting unit. To arrive at our future cash flows, we use estimates of economic and market assumptions, including growth rates in revenues, costs, estimates of future expected changes in operating margins, tax rates and cash expenditures. Future revenues are also adjusted to match changes in our business strategy. We believe this approach is an appropriate valuation method. Under the market multiple approach, we determine the estimated fair value of each of our reporting units by applying transaction multiples to each reporting unit's projected EBITDA and then averaging that estimate with similar historical calculations using either a one, two or three year average. Our reporting unit valuations were determined primarily by utilizing the income approach, with a lesser weighting attributed the market multiple approach. During the first quarter of 2020 a severe decline in the Company's market capitalization, significant decline in crude oil prices and the growing pandemic caused by COVID-19 triggered the need for an impairment test atMarch 31, 2020 . We utilized a market approach to measure the fair value of our reporting units as ofMarch 31, 2020 . In measuring a fair value of the Company we used the Company's market capitalization. An appropriate control premium was considered for each of the reporting units and applied to the output of the market approach. An interim impairment test during the first quarter of 2020 resulted in$2,747.5 million and$335.9 million of goodwill impairment charges recorded in ourSubsea and Surface Technologies segments, respectively. During our annual impairment test the following significant estimates were used by management in determining the fair values of our reporting units in order to test the remaining goodwill atOctober 31 : 2020 2019
2018
Year of cash flows before terminal value 4 4 5 Discount rates 0.15 12.5% to 15.0% 12.0% to 13.0% EBITDA multiples N/A 6.0 - 8.5x 7.0 - 8.5x During the year endedDecember 31, 2020 , the significant estimates used by management in determining the fair value described above relate to Technip Energies reporting unit only. Based on the impairment tests performed during the year endedDecember 31, 2020 we recorded$2,747.5 million and$335.9 million of goodwill impairment charges recorded in ourSubsea and Surface Technologies reporting units, respectively. No goodwill impairment charges were recorded in our Technip Energies reporting unit. The fair value over carrying amount for our Technip Energies segment was in excess of 300% of its carrying amount at our annual impairment test date that isOctober 31, 2020 . During the year endedDecember 31, 2019 , we recorded$1,321.9 million and$666.8 million of goodwill impairment charges in ourSubsea and Surface Technologies segments, respectively. During the year endedDecember 31, 2018 , we recorded$1,383.0 million of goodwill impairment charges in ourSubsea segment. See Notes 15 and 19 to our consolidated financial statements for further details. OTHER MATTERS OnMarch 28, 2016 , FMC Technologies received an inquiry from theU.S. Department of Justice ("DOJ") related to the DOJ's investigation of whether certain services Unaoil S.A.M. provided to its clients, including FMC Technologies, violated the FCPA. OnMarch 29, 2016 ,Technip S.A. also received an inquiry from the DOJ related to Unaoil. We cooperated with the DOJ's investigations and, with regard to FMC Technologies, a related investigation by theSEC . In late 2016,Technip S.A. was contacted by the DOJ regarding its investigation of offshore platform projects awarded between 2003 and 2007, performed inBrazil by a joint venture company in whichTechnip S.A. was a minority participant, and we have also raised with DOJ certain other projects performed byTechnip S.A. subsidiaries inBrazil between 2002 and 2013. The DOJ has also inquired about projects inGhana andEquatorial Guinea that were awarded toTechnip S.A. subsidiaries in 2008 and 2009, respectively. We cooperated with the DOJ in its investigation into potential violations of the FCPA in connection with these projects. We contacted and cooperated with the Brazilian authorities (Federal Prosecution Service ("MPF"), the Comptroller General ofBrazil ("CGU") and the Attorney General ofBrazil ("AGU")) with their investigation concerning the projects inBrazil and have also 74 -------------------------------------------------------------------------------- contacted and are cooperating with French authorities (the Parquet National Financier ("PNF")) about these existing matters. OnJune 25, 2019 , we announced a global resolution to pay a total of$301.3 million to the DOJ, theSEC , the MPF, and the CGU/AGU to resolve these anti-corruption investigations. We will not be required to have a monitor and will, instead, provide reports on our anti-corruption program to the Brazilian andU.S. authorities for two and three years, respectively. As part of this resolution, we entered into a three-year Deferred Prosecution Agreement ("DPA") with the DOJ related to charges of conspiracy to violate the FCPA related to conduct inBrazil and with Unaoil. In addition,Technip USA, Inc. , aU.S. subsidiary, pled guilty to one count of conspiracy to violate the FCPA related to conduct inBrazil . We will also provide the DOJ reports on our anti-corruption program during the term of the DPA. InBrazil , our subsidiaries Technip Brasil - Engenharia, Instalações E Apoio Marítimo Ltda. and Flexibrás Tubos Flexíveis Ltda. entered into leniency agreements with both the MPF and the CGU/AGU. We have committed, as part of those agreements, to make certain enhancements to their compliance programs inBrazil during a two-year self-reporting period, which aligns with our commitment to cooperation and transparency with the compliance community inBrazil and globally. InSeptember 2019 , theSEC approved our previously disclosed agreement in principle with theSEC Staff and issued an Administrative Order, pursuant to which we paid theSEC $5.1 million , which was included in the global resolution of$301.3 million . To date, the investigation by PNF related to historical projects inEquatorial Guinea andGhana has not reached resolution. We remain committed to finding a resolution with the PNF and will maintain a$70.0 million provision related to this investigation. As we continue to progress our discussions with PNF towards resolution, the amount of a settlement could exceed this provision. There is no certainty that a settlement with PNF will be reached or that the settlement will not exceed current accruals. The PNF has a broad range of potential sanctions under anti-corruption laws and regulations that it may seek to impose in appropriate circumstances including, but not limited to, fines, penalties, and modifications to business practices and compliance programs. Any of these measures, if applicable to us, as well as potential customer reaction to such measures, could have a material adverse impact on our business, results of operations, and financial condition. If we cannot reach a resolution with the PNF, we could be subject to criminal proceedings inFrance , the outcome of which cannot be predicted. RECENTLY ISSUED ACCOUNTING STANDARDS See Note 4 to our consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K. 75
--------------------------------------------------------------------------------
© Edgar Online, source
