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 two segments:Subsea 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 summarized description of our products and services and annual financial data for each segment can be found in Note 6 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.
Our
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 debt, are therefore, key performance indicators of cash flows. In both of our segments, we serve customers from around the world. During 2022, approximately 80 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. 42 --------------------------------------------------------------------------------
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 are traded under the ticker symbol "TE" on theEuronext Paris stock exchange . As ofDecember 31, 2022 , we fully divested our remaining ownership interest in Technip Energies. Beginning in the first quarter of 2021, Technip Energies' historical financial results for periods prior to the Distribution are reflected in our consolidated financial statements as discontinued operations. For the year endedDecember 31, 2022 , we recorded expense from discontinued operations due to a change in estimate of liabilities recognized in connection with the Spin-off and an income tax expense related to a change in estimate in the French tax group.
BUSINESS OUTLOOK
Overall Outlook - The global economy is forecast to grow in 2023. The pace of growth expected to be slower than the prior year, and rate hikes by central banks aimed at slowing high inflation will increase the risk of a mild recession in some economies. However, strength inAsia Pacific will likely offset any regional weakness and lead global growth higher, driven in part by the easing of pandemic restrictions inChina . Higher global gross domestic product (GDP) will in turn support growth in energy demand. Oil prices continue to be supported by regional geopolitical tensions and the industry's more disciplined capital spend, particularly for OPEC+ countries focused on realizing a price that supports both economic growth and energy investment. An extended period of underinvestment has contributed to a current supply deficit that will ultimately require increased upstream spending, lending support to a constructive view on the longer-term outlook for oil prices. With long-term energy demand forecast to increase, the conflict inUkraine has highlighted the need for greater energy security across the globe. As a result, the energy industry has accelerated its efforts to address the essential need for hydrocarbons today to ensure the continuity of affordable energy while also playing an essential role in the energy transition. We are in the midst of a multi-year growth cycle for energy demand. We believe that investment in new sources of oil and natural gas production will increase over the intermediate-term, fueled by an expansion of activity in international markets - largely offshore and theMiddle East . Investment in theMiddle East occurs in both offshore and surface environments, with capital spending expected to accelerate in support of longer-term production targets.TechnipFMC has leading positions in many of these international markets and is uniquely positioned to take full advantage of this growth opportunity. We are confident that conventional resources will remain an important part of the energy mix for an extended period. We are also committed to the energy transition, where we believe that offshore will play a meaningful role in the transition to renewable energy resources and reduction of carbon emissions. We are making real progress through our three main pillars of greenhouse gas removal, offshore floating renewables and hydrogen.
We have been successful in building on our partnerships and alliances to further position ourselves as the leading offshore energy architect, with several notable developments in 2022.
•We signed the Option to Lease Agreement for the ScotWind N3 area through our partnership in offshore renewables, Magnora Offshore Wind. The proposed development project will install 33 floating wind turbines with total capacity of approximately 500 megawatts - which could power more than 600,000 homes in theUnited Kingdom . •We also signed an agreement with Shell to explore synergies with a shared goal of enabling offshore renewable energy generation and reducing total CO2 emissions - another example of how our long-standing partnerships extend to all areas of our business. 43 -------------------------------------------------------------------------------- •OrbitalMarine Power , which is collaborating withTechnipFMC to accelerate the global commercialization of its tidal stream turbine, was awarded two contracts for difference in theUK Allocation Round 4 multi-turbine projects in Eday,Orkney . Capable of delivering 7.2 megawatts of predictable clean energy to the grid once completed, these Orbital tidal stream energy projects will support theUnited Kingdom's security of supply, energy transition and broader climate change objectives.Subsea - Innovative approaches to subsea projects, like our iEPCI solution, have improved project economics, and many offshore discoveries can be developed economically well below today's crude oil prices. We believe deepwater development is likely to remain a significant part of many of our customers' portfolios. Over the last several years, offshore economics have materially improved, and subsea cycle-times have become significantly shorter. This has resulted in new subsea investments coming much earlier in the cycle and more in parallel withU.S. land markets. We believe these changes are fundamental and sustainable as a result of new business models and technology pioneered by our company.
As the subsea industry continues to evolve, we are driving simplification,
standardization, and industrialization to reduce cycle times. The
industrialization of our project business through the introduction of
configure-to-order (CTO) is another way in which we are driving real change in
our industry that further improves the economics of our customer's projects
while driving greater efficiencies for
With CTO, we have designed an environment, process, culture and tools which are scalable and, more importantly, are transformational to the future of our company. Our customers require a product platform that provides them with choices which meet their unique and evolving needs, but also provides them with the significant speed, cost and efficiency benefits that come with product and process standardization. CTO has allowed us to redefine our sourcing strategy and transform our manufacturing flow, resulting in up to 25 percent lower product cost and a shortened 12-month delivery time for subsea production equipment - savings that are both real and sustainable. This has paved the way for other products to adopt a similar operating model, enabling an enterprise-wide way of working. We continue to experience increased operator confidence in advancing subsea activity in response to both improved project economics and concerns regarding the security of energy supply. Brent crude oil averaged just under$100 per barrel in 2022. While closer to$80 per barrel at the start of the new year, prices are projected to stay elevated in the intermediate-term. The opportunity set of large subsea projects to be sanctioned over the next 24 months remains robust. The average project size has also risen due to an increasing number of large, greenfield opportunities inBrazil ,Guyana , andAfrica . We also expect increased tie-back activity, with growth from these smaller projects to come primarily from theNorth Sea ,Gulf of Mexico andWest Africa - all regions in which we have a strong presence and are well-positioned due to our extensive installed base. There is also exploration activity occurring in new offshore frontiers. Recent oil and gas discoveries have been announced by operators in basins near countries such as Suriname,Namibia andColombia , and we believe additional countries will become producers of deepwater resources during this decade. These examples demonstrate the strength of the current investment cycle and support our view that investment in conventional energy resources will continue. OurSubsea inbound orders grew to$6.7 billion in 2022, an increase of 36 percent versus the prior year. We see further growth in the year ahead, with inbound orders expected to exceed$8 billion . Growth in the current year is expected to include a significant increase in the value of integrated project awards. We also anticipate growth in Subsea Services revenue to$1.3 billion given the continued expansion in our installed base. When taken together, we expect direct awards, iEPCI and Subsea Services to represent more than 70 percent of inbound orders in 2023. Surface Technologies - Our performance 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 inNorth America . Activity inNorth America increased in 2022 due to higher drilling and completion activity and an improved pricing environment. We continue to progress well on our E-Mission solution for onshore production facilities. The digital offering uses proprietary process automation to provide the industry's only real-time monitoring and control system that both reduces methane flaring by up to 50 percent and maximizes oil production. 44 -------------------------------------------------------------------------------- International markets continued to represent a significant portion of total segment revenue in 2022, totaling 55 percent. Our growing backlog also provides us with greater visibility for growth in 2023.TechnipFMC's unique capabilities in these markets, which demand higher specification equipment, global services and local content, provide a platform for us to extend our leadership positions. Drilling activity in international markets is less cyclical thanNorth America as most activities are undertaken 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 theNorth Sea ,Asia Pacific and theMiddle East . We have commenced work on a 10-year framework agreement awarded byAbu Dhabi National Oil Company in 2021 to provide wellheads, trees and associated services. We have also added new manufacturing capabilities inSaudi Arabia , where the country is expected to increase its sustainable oil capacity and significantly expand its natural gas production over the next decade. Our new facility also supports our commitment to develop a diverse and capable workforce as part ofAramco's In-Kingdom Total Value Add Program and Saudi Vision 2030. TheMiddle East remains one of our largest market opportunities in the current decade. 45 --------------------------------------------------------------------------------
CONSOLIDATED RESULTS OF OPERATIONS
This section of this Annual Report on Form 10-K generally discusses 2022 and 2021 items and year-to-year comparisons between 2022 and 2021. Discussions of 2020 items and year-to-year comparisons between 2021 and 2020 that are not included in this Annual Report on 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, 2021 . 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. Year Ended December 31, Change (In millions, except percentages) 2022 2021 2020 2022 vs. 2021 2021 vs. 2020 Revenue$ 6,700.4 $ 6,403.5 $ 6,530.6 $ 296.9 4.6 %$ (127.1) (1.9) % Costs and expenses Cost of sales 5,804.1 5,579.6 5,835.8 224.5 4.0 % (256.2) (4.4) % Selling, general and administrative expense 616.8 644.9 724.1 (28.1) (4.4) % (79.2) (10.9) % Research and development expense 67.0 78.4 75.3 (11.4) (14.5) % 3.1 4.1 % Impairment, restructuring and other expense 15.2 66.7 3,402.0 (51.5) (77.2) % (3,335.3) (98.0) % Total costs and expenses 6,503.1 6,369.6 10,037.2 133.5 2.1 % (3,667.6) (36.5) % Other income, net 5.4 46.6 25.1 (41.2) (88.4) % 21.5 85.7 % Income from equity affiliates 44.6 0.6 64.6 44.0 7,333.3 % (64.0) (99.1) % Income (loss) from investment in Technip Energies (27.7) 322.2 - (349.9) (108.6) % 322.2 - % Loss on early extinguishment of debt (29.8) (61.9) - 32.1 51.9 % (61.9) - % Net interest expense (120.9) (143.3) (81.8) 22.4 15.6 % (61.5) (75.2) % Income (loss) before income taxes 68.9 198.1 (3,498.7) (129.2) (65.2) % 3,696.8 105.7 % Provision for income taxes 105.4 111.1 19.4 (5.7) (5.1) % 91.7 472.7 % Income (loss) from continuing operations (36.5) 87.0 (3,518.1) (123.5) (142.0) % 3,605.1 102.5 % (Income) loss from continuing operations attributable to non-controlling interests (25.4) 0.8 (34.5) (26.2) (3,275.0) % 35.3 102.3 % Income (loss) from continuing operations attributable to TechnipFMC plc (61.9) 87.8 (3,552.6) (149.7) (170.5) % 3,640.4 102.5 % Loss from discontinued operations (45.3) (72.6) 280.2 27.3 37.6 % (352.8) (125.9) % Income from discontinued operations attributable to non-controlling interests - (1.9) (15.2) 1.9 100.0 % 13.3 87.5 % Net income (loss) attributable to TechnipFMC plc$ (107.2) $ 13.3 $ (3,287.6) $ (120.5) (906.0) %$ 3,300.9 100.4 %
Results of Operations in 2022 Compared to 2021
Revenue
Revenue increased by$296.9 million in 2022, compared to 2021.Subsea revenue increased year-over-year, as a result of higher project and services activity. Surface Technologies revenue increased, as a result of the increase in operator activity inNorth America , driven by an increase inU.S. rig count year-over-year. 46
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Gross Profit
Gross profit (revenue less cost of sales) as a percentage of sales increased to 13.4% in 2022 compared to 12.9% in 2021.Subsea gross profit increased year over year due to improved margins in backlog and an increase in installation and services activity. Surface Technologies gross profit increased year-over-year, mostly due to an increase in volume of activities and increases in pricing inNorth America .
Selling, General and Administrative Expense
Selling, general and administrative expense decreased by
Impairment, Restructuring and Other Expense
We incurred$15.2 million of restructuring, impairment and other expenses in 2022, compared to$66.7 million in 2021, largely related to exiting our operations inRussia andCanada . Impairment, restructuring and other charges incurred in 2021 included$49.1 million of impairment charges relating to our operating lease right-of-use assets and property, plant and equipment. See
Note 19 to our consolidated financial statements for further details.
Other Income, Net
Other income, 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 non-operating gains and losses. Other income decreased by$41.2 million year-over-year, due to impact of foreign currency, which was a net loss of$23.9 million in 2022 and a net gain of$15.8 million in 2021. The change in foreign exchange gains and losses is due to various factors, including exposure to certain currencies with limited derivative hedging markets.
Income from Equity Affiliates
For the years endedDecember 31, 2022 and 2021, we recorded an income of$44.6 million and$0.6 million , respectively, from equity method affiliates. Income generated by our equity method investments during 2022 increased year-over-year, driven by an increase in operational activity of our equity method investments. Income generated by our equity method investments during 2021 was offset by a$36.7 million impairment of our Magma Global equity method investment. See
Note 3 to our consolidated financial statements for further details.
Income (Loss) from Investment in Technip Energies
For the years endedDecember 31, 2022 and 2021, we recorded a$27.7 million loss and$322.2 million of income, respectively, as a result of our investment in Technip Energies. The amounts recognized represent fair value revaluation gains (losses) of our investment. See Note 12 to our consolidated financial statements for further details.
Loss on Early Extinguishment of Debt
We recognized$29.8 million of loss on early extinguishment of debt during the year endedDecember 31, 2022 , which related to premium paid and write-off of debt issuance costs in connection with the repurchase of the 2021 Notes. We recognized$61.9 million of loss on early extinguishment of debt for the year endedDecember 31, 2021 , which related to premium paid and write-off of debt issuance costs in connection with the repurchase of the 2021 Notes and the repayment of our 3.45% Senior Notes due 2022. See Note 16 to our consolidated financial statements for further details.
Net Interest Expense
Net interest expense decreased by
Provision for Income Taxes
Our provision for income taxes for 2022 and 2021 reflected effective tax rates of 153.0% and 56.1%, respectively. The year-over-year increase in the effective tax rate was largely due to the change in geographical profit mix year over year. 47 -------------------------------------------------------------------------------- Our effective tax rate can fluctuate depending on our country mix of earnings, since our foreign earnings are generally subject to higher tax rates than in theUnited Kingdom . Discontinued Operations
Loss from discontinued operations, net of income taxes, was
Note 25 to our consolidated financial statements for further details.
OPERATING RESULTS OF BUSINESS SEGMENTS
Segment operating profit is defined as total segment revenue less segment operating expenses. Certain items have been excluded in computing segment operating profit and are included in corporate items. See Note 6 to our consolidated financial statements for further details.
Subsea Year Ended December 31, Favorable/(Unfavorable) (In millions, except %) 2022 2021 2020 2022 vs. 2021 2021 vs. 2020 Revenue$ 5,461.2 $ 5,329.1 $ 5,471.4 $ 132.1 2.5 %$ (142.3) (2.6) % Operating profit (loss)$ 317.6 $ 141.4 $ (2,815.5) $ 176.2 124.6 %$ 2,956.9 105.0 % Operating profit (loss) as a percentage of revenue 5.8 % 2.7 % (51.5) % 3.1 pts. 54.2 pts.Subsea revenue increased by$132.1 million , due to higher project installation activity inBrazil and theUnited Kingdom , which was partially offset by the negative impact of foreign exchange.Subsea operating profit for the year endedDecember 31, 2022 , increased versus the prior year, due to the improved margins in backlog and an increased mix of installation and service activities. Surface Technologies Year Ended December 31, Favorable/(Unfavorable) (In millions, except %) 2022 2021 2020 2022 vs. 2021 2021 vs. 2020 Revenue$ 1,239.2 $ 1,074.4 $ 1,059.2 $ 164.8 15.3 %$ 15.2 1.4 % Operating profit (loss)$ 58.3 $ 42.0 $ (429.3) $ 16.3 38.8 %$ 471.3 109.8 % Operating profit (loss) as a percentage of revenue 4.7 % 3.9 % (40.5) % 0.8 pts. 44.4 pts. Surface Technologies revenue increased by$164.8 million , or 15.3% year-over-year, driven by an increase inNorth America activity. Approximately 55% of total segment revenue was generated outside ofNorth America for the year endedDecember 31, 2022 .
Surface Technologies operating profit increased versus the prior year, due to an
increase in volume of activities and increase in pricing in
Corporate Items Year Ended December 31, Favorable/(Unfavorable) (In millions, except %) 2022 2021 2020 2022 vs. 2021 2021 vs. 2020 Corporate expense$ (104.7) $ (118.1) $ (131.9) $ 13.4 11.3 %$ 13.8 10.5 %
Corporate expense decreased by
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INBOUND ORDERS AND ORDER BACKLOG
Inbound orders - Inbound orders represent the estimated sales value of confirmed customer orders received during the reporting period.
Inbound Orders Year Ended December 31, (In millions) 2022 2021 Subsea$ 6,738.3 $ 4,960.9 Surface Technologies 1,340.8 1,793.3 Total inbound orders$ 8,079.1 $ 6,754.2 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. See Note 5 to our consolidated financial statements for further details. Order Backlog December 31, (In millions) 2022 2021 Subsea$ 8,131.5 $ 6,533.0 Surface Technologies 1,221.5 1,124.7 Total order backlog$ 9,353.0 $ 7,657.7 Subsea - Order backlog forSubsea as ofDecember 31, 2022 , increased by$1.6 billion fromDecember 31, 2021 .Subsea backlog of$8.1 billion as ofDecember 31, 2022 , was composed of various subsea projects, including Petrobras Buzios 6, Mero I, Mero II and Marlim; Total Energies Mozambique LNG, Lapa North East and Clov 3; ExxonMobil Yellowtail and Payara; Shell Jackdaw and Gumusut; Husky West White Rose; Equinor Halten East; Tullow Jubilee South East; Wintershall Maria and Dvalin; and Harbour Talbot.
Surface Technologies - Order backlog for Surface Technologies as of
LIQUIDITY AND CAPITAL RESOURCES
Most of our cash is managed centrally and flows through bank accounts controlled and maintained byTechnipFMC globally in various jurisdictions to best meet the liquidity needs of our global operations. Net Debt - Net debt, is a non-GAAP financial measure reflecting cash and cash equivalents, net of debt. Management uses this non-GAAP financial measure to evaluate our capital structure and financial leverage. We believe net debt is a meaningful financial measure that may assist investors in understanding our financial condition and recognizing underlying trends in our capital structure. Net debt should not be considered an alternative to, or more meaningful than, cash and cash equivalents as determined in accordance with GAAP or as an indicator of our operating performance or liquidity. The following table provides a reconciliation of our cash and cash equivalents to net debt, utilizing details of classifications from our consolidated balance sheets. Year Ended December 31, (In millions) 2022 2021 Cash and cash equivalents$ 1,057.1 $ 1,327.4 Short-term debt and current portion of long-term debt (367.3) (277.6) Long-term debt, less current portion (999.3) (1,727.3) Net debt$ (309.5) $ (677.5) 49
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Cash Flows
Cash flows for the years endedDecember 31, 2022 , 2021 and 2020 were as follows: Year Ended December 31, (In millions) 2022 2021 2020
Cash provided by operating activities from continuing operations
$ 352.1
162.2 821.8 (120.8)
Cash required by financing activities from continuing operations
(796.7) (1,447.3) (651.9) Net cash attributable to discontinued operations - (3,555.9) (605.6) Effect of exchange rate changes on cash and cash equivalents 12.1 (14.0) 223.5 Decrease in cash and cash equivalents$ (270.3)
(Increase) decrease in working capital from continuing operations
$ (81.1)
Free cash flow from continuing operations$ 194.2
Operating cash flows from continuing operations - During 2022 and 2021, we generated$352.1 million and$715.0 million , respectively, in operating cash flows from continuing operations. The decrease of$362.9 million in cash generated by operating activities from continuing operations in 2022, as compared to 2021, was due to timing differences on project milestones, vendor payments for inventory, and timing of income tax refund. Investing cash flows from continuing operations - Investing activities from continuing operations provided$162.2 million in 2022 and$821.8 million of cash in 2021. The decrease of$659.6 million in cash provided by investing activities was due to a$612.4 million decrease in proceeds received from sales of our investment in Technip Energies and a decrease in proceeds from sales of assets, partially offset by a decrease in capital expenditures during 2022. Financing cash flows from continuing operations - Financing activities from continuing operations used$796.7 million and$1,447.3 million in 2022 and 2021, respectively. The decrease of$650.6 million in cash used for financing activities was due to the decreased debt pay down and issuance activity of$742.9 million , partially offset by$100.2 million of share repurchases during 2022.
The change in working capital represents total changes in operating current assets and liabilities.
Free cash flow from continuing operations is defined as operating cash flows from continuing operations less capital expenditures. The following table reconciles cash provided by operating activities from continuing operations, which is the most directly comparable financial measure determined in accordance with GAAP, to free cash flow (non-GAAP measure). Year Ended December 31, (In millions) 2022 2021 2020
Cash provided by operating activities from continuing operations
$ 352.1 $ 715.0 $ 772.4 Capital expenditures (157.9) (191.7) (256.1) Free cash flow from continuing operations$ 194.2 $ 523.3 $ 516.3 Debt and Liquidity We are committed to maintaining a capital structure that provides sufficient cash resources to support future operating and investment plans. During 2022, we reduced our total debt position as follows: •We repaid$161.0 million of our 3.40% 2012 Private placement notes; and •We completed a tender offer and purchased for cash$430.2 million of the outstanding 2021 Notes. We paid a cash premium of$21.5 million to the tendering note holders and wrote-off$8.3 million of debt issuance costs. Concurrent with the tender offer, the Company obtained consents of holders with respect to the 2021 Notes to certain proposed amendments ("Proposed Amendments") to the indenture governing these notes. The Proposed Amendments, among other things, eliminated substantially all of the restrictive covenants and certain event of default triggers in the indenture. 50 -------------------------------------------------------------------------------- Availability of borrowings under the Revolving Credit Facility is reduced by the outstanding letters of credit issued against the facility. As ofDecember 31, 2022 there were$45.4 million letters of credit outstanding and availability of borrowings under the Revolving Credit Facility was$954.6 million .
As of
Credit Ratings - Our credit ratings with Standard and Poor's ("S&P") are BB+ for our long-term unsecured, guaranteed debt (2021 Notes) and BB for our long-term unsecured debt (the Private Placement notes). Our credit rating with Moody's is Ba1 for our long-term unsecured, guaranteed debt. See Note 16 for further details regarding our 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 23
and
24 to our consolidated financial statements for further details.
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.
Contractual and Other Obligations
The Company's principal contractual commitments include purchase obligations, repayments of long-term debt and related interest, and payments under operating leases. As ofDecember 31, 2022 , we had$1.2 billion of purchase obligations, more than 90 percent of which is short-term. Substantially all of these commitments are associated with purchases made to fulfill our customer's orders, the costs associated with these agreements will ultimately be reflected in cost of sales in our consolidated statement of income. Refer to respective notes to the consolidated financial statements for further information about our share repurchase program ( Note 18 ), long-term debt obligations ( Note 16 ), guarantees (Notes 12 and 20) and lease payments obligations ( Note 4 ).
Financial Position Outlook
We are committed to a strong balance sheet. We continue to maintain sufficient liquidity to support the needs of the business through growth, cyclicality and unforeseen events. We continue to maintain and drive sustainable leverage to preserve access to capital throughout the cycle. 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 2023 are estimated to be approximately$250 million . Projected capital expenditures do not include any contingent capital that may be needed to respond to contract awards. In maintaining our commitment to sustainable leverage and liquidity, we expect to be able to continue to generate free cash flow available for investment in growth and distribution to shareholders through the business cycle. 51
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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 ourSubsea segment, for the subsea exploration and production equipment projects that involve the design, engineering, manufacturing, construction, and assembly of complex 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 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. 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. 52 -------------------------------------------------------------------------------- Our operating income for the year endedDecember 31, 2022 was positively impacted by approximately$104.9 million , as a result of changes in contract estimates related to projects that were in progress as ofDecember 31, 2021 . During the year endedDecember 31, 2022 , we recognized changes in our estimates that had an impact on our margin in the amounts of$104.6 million and$0.3 million in ourSubsea and Surface Technologies segments, respectively. The changes in contract estimates are attributed to improved 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 theUnited 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
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
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 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 53 --------------------------------------------------------------------------------
matches 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 2022 Pension Obligation as of Expense Before December 31, (In millions, except basis points) Income Taxes 2022 25 basis point decrease in discount rate$ 1.4 $ - 25 basis point increase in discount rate$ (1.4) $ -
25 basis point decrease in expected long-term rate of return on plan assets
$ 2.8 N/A 25 basis point increase in expected long-term rate of return on plan assets$ (2.8) N/A
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.
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 also raised with the DOJ certain other projects performed byTechnip S.A. subsidiaries inBrazil between 2002 and 2013. The DOJ 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 contacted and are cooperating with French authorities (the Parquet National Financier ("PNF")) with their investigation about these existing matters. 54 --------------------------------------------------------------------------------
On
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 also provided the DOJ reports on our anti-corruption program during the term of the DPA. InBrazil , onJune 25, 2019 our subsidiaries Technip Brasil - Engenharia, Instalações E Apoio Marítimo Ltda. and Flexibrás Tubos Flexíveis Ltda. entered into leniency agreements with both the MPF and the CGU/AGU. We made, as part of those agreements, certain enhancements to the compliance programs inBrazil during the two-year self-reporting period, which aligned 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 . OnDecember 8, 2022 , the Company received notice of the official release from all obligations and charges by CGU, having successfully completed all of the self-reporting requirements in the leniency agreements and the case was closed. OnDecember 27, 2022 , the DOJ filed a Motion to Dismiss the charges againstTechnipFMC related to conspiracy to violate the FCPA, noting to the Court that the Company had fully met and completed all of its obligations under the DPA. The Dismissal Order was signed by the Court onJanuary 4, 2023 , thereby closing the case. All obligations to regulatory authorities related to the enforcement matters inthe United States andBrazil have been completed and the Company has been unconditionally released by both jurisdictions. To date, the investigation by the 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. Additionally, the PNF informed us that it is reviewing other historical projects inAngola . We are not aware of any evidence that would support a finding of liability with respect to these projects, or whether the PNF would seek to impose any additional penalty. As we continue our discussions with PNF towards a potential resolution of all of these matters, the amount of a settlement could exceed this provision. There is no certainty that a settlement with PNF will be reached or that the settlement will not exceed current accruals. The PNF has a broad range of potential sanctions under anti-corruption laws and regulations that it may seek to impose in appropriate circumstances including, but not limited to, fines, penalties, confiscations and modifications to business practices and compliance programs. Any of these measures, if applicable to us, as well as potential customer reaction to such measures, could have a material adverse impact on 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 2 to our consolidated financial statements for further details.
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