NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited condensed consolidated financial statements of TechnipFMC plc and its consolidated subsidiaries (“TechnipFMC,” the “Company,” “we,” “us,” or “our”) have been prepared in accordance with United States generally accepted accounting principles (“GAAP”) and the rules and regulations of the Securities and Exchange Commission (“SEC”) pertaining to interim financial information. As permitted under those rules, certain footnotes or other financial information that are normally required by GAAP have been condensed or omitted. These unaudited condensed consolidated financial statements should be read together with our audited consolidated financial statements contained in our Annual Report on Form 10-K (“Form 10-K”) for the year ended December 31, 2021.
Our accounting policies are in accordance with GAAP. The preparation of financial statements in conformity with these accounting principles requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Ultimate results could differ from our estimates.
In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments necessary for a fair statement of our financial condition and operating results as of and for the periods presented. Revenue, expenses, assets and liabilities can vary during each quarter of the year. Therefore, the results and trends in these financial statements may not be representative of the results that may be expected for the year ending December 31, 2022. Certain prior-year amounts have been reclassified to conform to the current year’s presentation.
NOTE 2. DISCONTINUED OPERATIONS
The Spin-off
On February 16, 2021, we completed our separation of the Technip Energies business segment. The transaction was structured as a spin-off (the “Spin-off”), which occurred by way of a pro rata dividend (the “Distribution”) to our shareholders of 50.1% 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 of TechnipFMC held at 5:00 p.m., Eastern Standard 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 the Euronext Paris Stock Exchange.
In connection with the Spin-off, TechnipFMC and Technip Energies entered into a separation and distribution agreement, as well as various other agreements, including, among others, a tax matters agreement, an employee matters agreement, a transition services agreement and certain agreements relating to intellectual property. These agreements provide for the allocation between TechnipFMC and Technip Energies of assets, employees, taxes, liabilities and obligations attributable to periods prior to, at and after the Spin-off.
Discontinued Operations
The Spin-off represented a strategic shift that had a major impact to our operations and consolidated financial statements. Accordingly, historical results of Technip Energies prior to the Distribution on February 16, 2021 have been presented as discontinued operations in our condensed consolidated statements of income and condensed consolidated statements of cash flows for the three and nine months ended September 30, 2021. Our condensed consolidated statements of income and condensed consolidated statements of cash flows and notes to the condensed consolidated financial statements have been updated to reflect continuing operations only.
The following table summarizes the components of income (loss) from discontinued operations, net of income taxes:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
(In millions) | 2022 | | 2021 | | 2022 | | 2021 |
Revenue | $ | — | | | $ | — | | | $ | — | | | $ | 906.0 | |
Costs and expenses | (15.8) | | | — | | | (15.8) | | | (889.3) | |
Other expense, net | — | | | — | | | — | | | (18.6) | |
Loss from discontinued operations before income taxes | $ | (15.8) | | | $ | — | | | $ | (15.8) | | | $ | (1.9) | |
Income tax expense (benefit) | (0.5) | | | (8.4) | | | 18.9 | | | 42.2 | |
Income (loss) from discontinued operations, net of income taxes | $ | (15.3) | | | $ | 8.4 | | | $ | (34.7) | | | $ | (44.1) | |
For both the three and nine months ended September 30, 2022, we recorded $15.8 million in expense from discontinued operations due to a change in estimate of liabilities recognized in connection with the Spin-off. Also, for the three and nine months ended September 30, 2022, we recorded $(0.5) million and $18.9 million, respectively, in income tax (benefit) expense from discontinued operations related to a change in estimate in our French tax group.
NOTE 3. NEW ACCOUNTING STANDARDS
Recently Adopted Accounting Standards under GAAP
In August 2020, the FASB issued ASU No. 2020-06, “Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815 – 40).” This update simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts in an entity’s own equity. The amendments to this update are effective for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years, with early adoption permitted no earlier than fiscal years beginning after December 15, 2020. We adopted this amendment as of January 1, 2022, which did not have a material impact on our condensed consolidated financial statements.
Recently Issued Accounting Standards under GAAP
In March 2020, the FASB issued ASU No. 2020-04, “Facilitation of the Effects of Reference Rate Reform on Financial Reporting (Topic 848).” In addition, in January 2021, FASB issued ASU No. 2021-01, “Reference Rate Reform (Topic 848)” which clarifies the scope of Topic 848. The amendments in these updates apply only to contracts, hedging relationships, and other transactions that reference the London interbank offered rate (“LIBOR”) or another reference rate expected to be discontinued because of reference rate reform. The expedients and exceptions provided by the amendments do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022, that an entity has elected certain optional expedients for and that are retained through the end of the hedging relationship. The amendments in this update were issued as of March 12, 2020, effective through December 31, 2022. We are currently evaluating the impact of this ASU on our condensed consolidated financial statements.
We consider the applicability and impact of all ASUs. We assessed ASUs not listed above and determined that they either were not applicable or were not expected to have a material impact on our financial statements.
NOTE 4. REVENUE
The majority of our revenue is from long-term contracts associated with designing and manufacturing products and systems and providing services to customers involved in exploration and production of crude oil and natural gas.
Disaggregation of Revenue
Revenues are disaggregated by geographic location and contract types.
The following tables present total revenue by geography for each reportable segment for the three and nine months ended September 30, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | |
| Reportable Segments |
| Three Months Ended |
| September 30, 2022 | | September 30, 2021 |
(In millions) | Subsea | | Surface Technologies | | Subsea | | Surface Technologies |
Latin America | $ | 411.7 | | | $ | 30.1 | | | $ | 211.5 | | | $ | 22.7 | |
Europe and Central Asia | 395.0 | | | 42.1 | | | 423.2 | | | 46.3 | |
Africa | 216.5 | | | 7.6 | | | 257.8 | | | 8.5 | |
North America | 205.1 | | | 146.2 | | | 174.7 | | | 99.3 | |
Asia Pacific | 162.7 | | | 26.4 | | | 244.9 | | | 20.9 | |
Middle East | 24.0 | | | 65.6 | | | — | | | 69.6 | |
Total revenue | $ | 1,415.0 | | | $ | 318.0 | | | $ | 1,312.1 | | | $ | 267.3 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended |
| September 30, 2022 | | September 30, 2021 |
(In millions) | Subsea | | Surface Technologies | | Subsea | | Surface Technologies |
Europe and Central Asia | $ | 1,154.6 | | | $ | 121.6 | | | $ | 1,102.9 | | | $ | 145.2 | |
Latin America | 1,069.0 | | | 78.9 | | | 809.7 | | | 57.8 | |
Africa | 653.3 | | | 25.7 | | | 822.6 | | | 31.2 | |
Asia Pacific | 586.3 | | | 70.6 | | | 736.8 | | | 72.2 | |
North America | 582.3 | | | 406.9 | | | 594.4 | | | 266.6 | |
Middle East | 73.2 | | | 183.6 | | | 26.5 | | | 214.3 | |
Total revenue | $ | 4,118.7 | | | $ | 887.3 | | | $ | 4,092.9 | | | $ | 787.3 | |
The following tables present total revenue by contract type for each reportable segment for the three and nine months ended September 30, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | |
| Reportable Segments |
| Three Months Ended |
| September 30, 2022 | | September 30, 2021 |
(In millions) | Subsea | | Surface Technologies | | Subsea | | Surface Technologies |
Services | $ | 845.0 | | | $ | 57.0 | | | $ | 861.7 | | | $ | 39.3 | |
Products | 556.0 | | | 222.6 | | | 441.6 | | | 198.4 | |
Lease | 14.0 | | | 38.4 | | | 8.8 | | | 29.6 | |
Total revenue | $ | 1,415.0 | | | $ | 318.0 | | | $ | 1,312.1 | | | $ | 267.3 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended |
| September 30, 2022 | | September 30, 2021 |
(In millions) | Subsea | | Surface Technologies | | Subsea | | Surface Technologies |
Services | $ | 2,611.0 | | | $ | 162.6 | | | $ | 2,530.2 | | | $ | 110.4 | |
Products | 1,463.4 | | | 611.5 | | | 1,526.5 | | | 595.3 | |
Lease | 44.3 | | | 113.2 | | | 36.2 | | | 81.6 | |
Total revenue | $ | 4,118.7 | | | $ | 887.3 | | | $ | 4,092.9 | | | $ | 787.3 | |
Contract Balances
The timing of revenue recognition, billings and cash collections results in billed accounts receivable, costs and estimated earnings in excess of billings on uncompleted contracts (contract assets), and billings in excess of costs and estimated earnings on uncompleted contracts (contract liabilities) on the condensed consolidated balance sheets. Any expected contract losses are recorded in the period in which they become probable.
Contract Assets - Contract assets include unbilled amounts typically resulting from sales under long-term contracts when revenue is recognized over time and revenue recognized exceeds the amount billed to the customer, and right to payment is not just subject to the passage of time. Amounts may not exceed their net realizable value. Costs and estimated earnings in excess of billings on uncompleted contracts are generally classified as current.
Contract Liabilities - We sometimes receive advances or deposits from our customers, before revenue is recognized, resulting in contract liabilities.
The following table provides information about net contract assets (liabilities) as of September 30, 2022 and December 31, 2021:
| | | | | | | | | | | | | | | | | | | | | | | |
(In millions) | September 30, 2022 | | December 31, 2021 | | $ change | | % change |
Contract assets | $ | 1,023.9 | | | $ | 966.0 | | | $ | 57.9 | | | 6.0 | |
Contract liabilities | (711.1) | | | (1,012.9) | | | 301.8 | | | 29.8 | |
Net contract assets (liabilities) | $ | 312.8 | | | $ | (46.9) | | | $ | 359.7 | | | 767.0 | |
The increase in our contract assets from December 31, 2021 to September 30, 2022 was primarily due to the timing of project milestones.
The decrease in our contract liabilities was primarily due to progress relative to performance obligations and completion of performance obligations for contracts, for which consideration was received in advance of the work performed during the period.
In order to determine revenue recognized in the period from contract liabilities, we first allocate revenue to the individual contract liability balance outstanding at the beginning of the period until the revenue exceeds that balance. Any subsequent revenue we recognize increases the contract asset balance. Revenue recognized for the three months ended September 30, 2022 and 2021 that was included in the contract liabilities balance as of December 31, 2021 and 2020 was $256.0 million and $53.4 million, respectively, and $471.7 million and $250.5 million for the nine months ended September 30, 2022 and 2021, respectively.
In addition, net revenue recognized from our performance obligations satisfied in prior periods had favorable impacts of $97.2 million and $4.3 million for the three months ended September 30, 2022 and 2021, respectively, and $119.2 million and $6.9 million, for the nine months ended September 30, 2022 and 2021, respectively, from changes in the estimate of the stage of completion that impacted revenue.
Transaction Price Allocated to the Remaining Unsatisfied Performance Obligations
Remaining unsatisfied performance obligations (“RUPO” or “order backlog”) represents the transaction price for products and services for which we have a material right but work has not been performed. Transaction price of the order backlog includes the base transaction price, variable consideration and changes in transaction price. The order backlog table does not include contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed. The transaction price of order backlog related to unfilled, confirmed customer orders is estimated at each reporting date. As of September 30, 2022, the aggregate amount of the transaction price allocated to order backlog was $8,841.0 million. TechnipFMC expects to recognize revenue on approximately 14.2% of the order backlog through 2022 and 85.8% thereafter.
The following table details the order backlog for each business segment as of September 30, 2022:
| | | | | | | | | | | | | | | | | |
(In millions) | 2022 | | 2023 | | Thereafter |
Subsea | $ | 996.1 | | | $ | 3,747.3 | | | $ | 2,859.8 | |
Surface Technologies | 256.2 | | | 286.1 | | | 695.5 | |
Total order backlog | $ | 1,252.3 | | | $ | 4,033.4 | | | $ | 3,555.3 | |
NOTE 5. BUSINESS SEGMENTS
Management’s determination of our reporting segments was made on the basis of our strategic priorities within each segment and the differences in the products and services we provide, which corresponds to the manner in which our Chair and Chief Executive Officer, as our chief operating decision maker, reviews and evaluates operating performance to make decisions about resources to be allocated to the segment. We operate under two reporting segments, Subsea and Surface Technologies:
•Subsea - designs and manufactures products and systems, performs engineering, procurement and project management, and provides services used by oil and gas companies involved in offshore exploration and production of crude oil and natural gas.
•Surface Technologies - designs and manufactures products and systems and provides services used by oil and gas companies involved in land and shallow water exploration and production of crude oil and natural gas; designs, manufactures and supplies technologically advanced high-pressure valves and fittings for oilfield service companies; and also provides flowback and well testing services.
Segment operating profit is defined as total segment revenue less segment operating expenses. Income (loss) from equity method investments is included in computing segment operating profit. The following items have been excluded in computing segment operating profit: corporate staff expense, foreign exchange gains (losses), income (loss) from investment in Technip Energies, net interest income (expense) associated with corporate debt facilities and income taxes.
Segment revenue and segment operating profit were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
(In millions) | 2022 | | 2021 | | 2022 | | 2021 |
Segment revenue | | | | | | | |
Subsea | $ | 1,415.0 | | | $ | 1,312.1 | | | $ | 4,118.7 | | | $ | 4,092.9 | |
Surface Technologies | 318.0 | | | 267.3 | | | 887.3 | | | 787.3 | |
Total segment revenue | $ | 1,733.0 | | | $ | 1,579.4 | | | $ | 5,006.0 | | | $ | 4,880.2 | |
| | | | | | | |
Segment operating profit | | | | | | | |
Subsea | $ | 105.0 | | | $ | 23.5 | | | $ | 256.1 | | | $ | 132.9 | |
Surface Technologies | 19.0 | | | 12.1 | | | 32.7 | | | 33.2 | |
Total segment operating profit | $ | 124.0 | | | $ | 35.6 | | | $ | 288.8 | | | $ | 166.1 | |
| | | | | | | |
Corporate items | | | | | | | |
Corporate expense(a) | (25.2) | | | (29.3) | | | (76.7) | | | (88.4) | |
Net interest expense | (30.9) | | | (39.3) | | | (92.5) | | | (109.0) | |
Loss on early extinguishment of debt | — | | | (16.0) | | | (29.8) | | | (39.5) | |
Income (loss) from investment in Technip Energies | — | | | 28.5 | | | (27.7) | | | 351.8 | |
Foreign exchange gains (losses) | (14.5) | | | (6.2) | | | 13.1 | | | 11.2 | |
Total corporate items | (70.6) | | | (62.3) | | | (213.6) | | | 126.1 | |
Income (loss) before income taxes(b) | $ | 53.4 | | | $ | (26.7) | | | $ | 75.2 | | | $ | 292.2 | |
(a)Corporate expense primarily includes corporate staff expenses, share-based compensation expenses, and other employee benefits.
(b)Includes amounts attributable to non-controlling interests.
NOTE 6. EARNINGS (LOSS) PER SHARE
A reconciliation of the number of shares used for the basic and diluted earnings (loss) per share calculation was as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
(In millions, except per share data) | 2022 | | 2021 | | 2022 | | 2021 |
Income (loss) from continuing operations attributable to TechnipFMC plc | $ | 5.0 | | | $ | (40.6) | | | $ | (35.2) | | | $ | 215.0 | |
Income (loss) from discontinued operations attributable to TechnipFMC plc | (15.3) | | | 8.4 | | | (34.7) | | | (46.0) | |
Net income (loss) attributable to TechnipFMC plc | $ | (10.3) | | | $ | (32.2) | | | $ | (69.9) | | | $ | 169.0 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Weighted average number of shares outstanding | 450.1 | | | 450.7 | | | 451.1 | | | 450.4 | |
Dilutive effect of restricted stock units | 5.4 | | | — | | | — | | | 3.9 | |
| | | | | | | |
Dilutive effect of performance shares | 2.6 | | | — | | | — | | | 0.4 | |
| | | | | | | |
Total shares and dilutive securities | 458.1 | | | 450.7 | | | 451.1 | | | 454.7 | |
| | | | | | | |
Basic and diluted earnings (loss) per share attributable to TechnipFMC plc: | | | | | | | |
Earnings (loss) per share from continuing operations attributable to TechnipFMC plc | | | | | | | |
Basic | $ | 0.01 | | | $ | (0.09) | | | $ | (0.08) | | | $ | 0.48 | |
Diluted | $ | 0.01 | | | $ | (0.09) | | | $ | (0.08) | | | $ | 0.47 | |
| | | | | | | |
Earnings (loss) per share from discontinued operations attributable to TechnipFMC plc | | | | | | | |
Basic and diluted | $ | (0.03) | | | $ | 0.02 | | | $ | (0.08) | | | $ | (0.10) | |
| | | | | | | |
Total earnings (loss) per share attributable to TechnipFMC plc | | | | | | | |
Basic | $ | (0.02) | | | $ | (0.07) | | | $ | (0.16) | | | $ | 0.38 | |
Diluted | $ | (0.02) | | | $ | (0.07) | | | $ | (0.16) | | | $ | 0.37 | |
For the three months ended September 30, 2021, we incurred a loss from continuing operations; therefore, the impact of 4.3 million shares was anti-dilutive. For the nine months ended September 30, 2022, we incurred a loss from continuing operations; therefore, the impact of 6.6 million shares was anti-dilutive.
Weighted average shares of the following share-based compensation awards were excluded from the calculation of diluted weighted average number of shares, where the assumed proceeds exceed the average market price from the calculation of diluted weighted average number of shares, because their effect would be anti-dilutive:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
(millions of shares) | 2022 | | 2021 | | 2022 | | 2021 |
Share option awards | 1.6 | | | 1.7 | | | 1.6 | | | 1.6 | |
Restricted share units | — | | | 0.1 | | | — | | | 0.3 | |
| | | | | | | |
Total | 1.6 | | | 1.8 | | | 1.6 | | | 1.9 | |
NOTE 7. RECEIVABLES
We manage our trade and loans receivables portfolios using published default risk as a key credit quality indicator. Our loans receivable and security deposits were related to sales of long-lived assets or businesses, loans to related parties for capital expenditure purposes, or security deposits for lease arrangements.
We manage our held-to-maturity debt securities using published credit ratings as a key credit quality indicator as our held-to-maturity debt securities consist of government bonds.
The table below summarizes the amortized cost basis of financial assets by years of origination and credit quality.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
(In millions) | Credit rating | | Year of origination | | Balance | | Credit rating | | Year of origination | | Balance |
Loans receivables and other | Moody’s rating A3 - Ba2 | | 2020-2022 | | $ | 53.9 | | | Moody’s rating Ba2 | | 2019-2020 | | $ | 50.9 | |
Debt securities at amortized cost | Moody’s rating Caa1 | | 2021 | | 16.1 | | | Moody’s rating B3 | | 2019-2021 | | 24.0 | |
Total financial assets | | | | | $ | 70.0 | | | | | | | $ | 74.9 | |
Credit Losses
For contract assets, trade receivables, loans receivables, and other, we have elected to calculate an expected credit loss based on loss rates from historical data. We develop loss-rate statistics on the basis of the amount written-off over the life of the financial assets and contract assets and adjust these historical credit loss trends for forward-looking factors specific to the debtors and the economic environment to determine lifetime expected losses.
For held-to-maturity debt securities at amortized cost, we evaluate whether the debt securities are considered to have low credit risk at the reporting date using available and supportable information.
The table below shows the roll-forward of allowance for credit losses as of September 30, 2022 and 2021, respectively.
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance as of September 30, 2022 |
(In millions) | Trade receivables | | Contract assets | | Loans receivable and other | | | | Held-to-maturity debt securities |
Allowance for credit losses at December 31, 2021 | $ | 38.1 | | | $ | 1.1 | | | $ | 0.6 | | | | | $ | 2.7 | |
Current period provision (release) for expected credit losses | — | | | 0.1 | | | (0.1) | | | | | (1.5) | |
| | | | | | | | | |
Recoveries | (2.2) | | | — | | | — | | | | | — | |
Allowance for credit losses at September 30, 2022 | $ | 35.9 | | | $ | 1.2 | | | $ | 0.5 | | | | | $ | 1.2 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance as of September 30, 2021 |
(In millions) | Trade receivables | | Contract assets | | Loans receivable and other | | | | Held-to-maturity debt securities |
Allowance for credit losses at December 31, 2020 | $ | 40.2 | | | $ | 2.4 | | | $ | 7.9 | | | | | $ | 0.5 | |
Current period provision (release) for expected credit losses | (0.7) | | | (0.5) | | | (0.2) | | | | | 2.2 | |
| | | | | | | | | |
Recoveries | (1.2) | | | (0.7) | | | — | | | | | — | |
Allowance for credit losses at September 30, 2021 | $ | 38.3 | | | $ | 1.2 | | | $ | 7.7 | | | | | $ | 2.7 | |
Certain trade receivables are due in one year or less. We do not have any financial assets that are past due or are on non-accrual status.
NOTE 8. INVENTORIES
Inventories consisted of the following:
| | | | | | | | | | | |
(In millions) | September 30, 2022 | | December 31, 2021 |
Raw materials | $ | 299.8 | | | $ | 250.1 | |
Work in process | 158.2 | | | 178.7 | |
Finished goods | 573.6 | | | 603.1 | |
| | | |
| | | |
Inventories, net | $ | 1,031.6 | | | $ | 1,031.9 | |
NOTE 9. OTHER CURRENT ASSETS & OTHER CURRENT LIABILITIES
Other current assets consisted of the following:
| | | | | | | | | | | |
(In millions) | September 30, 2022 | | December 31, 2021 |
Value-added tax receivables | $ | 212.5 | | | $ | 222.4 | |
Withholding tax and other receivables | 137.8 | | | 176.7 | |
Prepaid expenses | 80.8 | | | 50.7 | |
| | | |
| | | |
Assets held for sale | 18.3 | | | 5.0 | |
Held-to-maturity investments | 13.8 | | | 8.8 | |
Current financial assets at amortized cost | 12.9 | | | 21.9 | |
Other | 29.8 | | | 26.8 | |
Total other current assets | $ | 505.9 | | | $ | 512.3 | |
Other current liabilities consisted of the following:
| | | | | | | | | | | |
(In millions) | September 30, 2022 | | December 31, 2021 |
Legal provisions | $ | 106.8 | | | $ | 121.7 | |
Warranty accruals and project contingencies | 103.4 | | | 119.5 | |
Value-added tax and other taxes payable | 63.6 | | | 71.0 | |
Social security liability | 50.8 | | | 70.4 | |
Compensation accrual | 47.1 | | | 85.7 | |
Provisions | 11.3 | | | 23.6 | |
Current portion of accrued pension and other post-retirement benefits | 3.3 | | | 5.2 | |
Other accrued liabilities | 147.8 | | | 163.3 | |
Total other current liabilities | $ | 534.1 | | | $ | 660.4 | |
NOTE 10. INVESTMENTS
Our income from equity affiliates is included in our Subsea segment. During the three and nine months ended September 30, 2022, our income from equity affiliates was $13.8 million and $23.5 million, respectively. Our loss from equity affiliates during the three and nine months ended September 30, 2021 was $30.0 million and $9.5 million, respectively.
During the first quarter of 2022, we entered into Magnora Offshore Wind AS, a partnership with Magnora ASA, in order to develop floating offshore wind projects. As of September 30, 2022, the equity method investment balance was $2.7 million and represented approximately 20% ownership.
Investment in Technip Energies
There was no gain or loss recognized for the three months ended September 30, 2022 as we fully divested our remaining ownership in Technip Energies prior to June 30, 2022. For the nine months ended September 30, 2022, we recognized a $27.7 million loss related to our investment in Technip Energies. The amount recognized includes purchase price discounts on the sales of shares and fair value revaluation gains (losses) of our investment.
For the three and nine months ended September 30, 2021, we recognized $28.5 million and $351.8 million of income, respectively, related to our investment in Technip Energies. The amounts recognized include purchase price discounts on the sales of shares and fair value revaluation gains (losses) of our investment.
NOTE 11. RELATED PARTY TRANSACTIONS
Receivables, payables, revenues and expenses, which are included in our condensed consolidated financial statements for all transactions with related parties, defined as entities related to our directors and main shareholders as well as the partners of our consolidated joint ventures, were as follows.
Accounts receivable consisted of receivables due from the following related parties:
| | | | | | | | | | | |
(In millions) | September 30, 2022 | | December 31, 2021 |
Dofcon Navegacao | $ | 10.4 | | | $ | 22.7 | |
Techdof Brasil AS | 5.3 | | | 4.5 | |
| | | |
Others | 0.7 | | | 2.5 | |
Total accounts receivable | $ | 16.4 | | | $ | 29.7 | |
Dofcon Navegacao and Techdof Brasil AS are our equity method investments. Additionally, we have a note receivable of $0 and $12.6 million with Dofcon Brasil AS as of September 30, 2022 and December 31, 2021, respectively. These are included in other assets in our condensed consolidated balance sheets.
As of September 30, 2022 and December 31, 2021, we did not have significant accounts payable outstanding with our related parties.
Revenue consisted of amounts from following related parties:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
(In millions) | 2022 | | 2021 | | 2022 | | 2021 |
Dofcon Navegacao | $ | 1.6 | | | $ | 0.1 | | | $ | 7.0 | | | $ | 1.3 | |
| | | | | | | |
| | | | | | | |
Techdof Brasil AS | 1.8 | | | 3.6 | | | 1.8 | | | 12.5 | |
Others | 1.8 | | | 3.5 | | | 4.8 | | | 7.8 | |
Total revenue | $ | 5.2 | | | $ | 7.2 | | | $ | 13.6 | | | $ | 21.6 | |
Expenses consisted of amounts to the following related parties:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
(In millions) | 2022 | | 2021 | | 2022 | | 2021 |
Dofcon Navegacao | $ | 6.3 | | | $ | 8.3 | | | $ | 12.4 | | | $ | 21.3 | |
Jumbo Shipping | 3.5 | | | — | | | 11.8 | | | — | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Others | 4.4 | | | 24.2 | | | 14.2 | | | 39.3 | |
Total expenses | $ | 14.2 | | | $ | 32.5 | | | $ | 38.4 | | | $ | 60.6 | |
A member of our Board of Directors serves on the Board of Directors for Jumbo Shipping.
NOTE 12. DEBT
Overview
Long-term debt consisted of the following:
| | | | | | | | | | | |
(In millions) | September 30, 2022 | | December 31, 2021 |
Revolving credit facility | $ | 150.0 | | | $ | — | |
3.40% 2012 Private placement notes due 2022 | — | | | 169.9 | |
3.15% 2013 Private placement notes due 2023 | 248.5 | | | 288.8 | |
5.75% 2020 Private placement notes due 2025 | 194.9 | | | 226.5 | |
6.50% Senior notes due 2026 | 202.9 | | | 633.1 | |
4.00% 2012 Private placement notes due 2027 | 73.1 | | | 84.9 | |
4.00% 2012 Private placement notes due 2032 | 97.5 | | | 113.3 | |
3.75% 2013 Private placement notes due 2033 | 97.5 | | | 113.3 | |
Bank borrowings and other | 312.8 | | | 397.4 | |
| | | |
Unamortized debt issuance costs and discounts | (10.4) | | | (22.3) | |
Total debt | 1,366.8 | | | 2,004.9 | |
Less: current borrowings | 231.9 | | | 277.6 | |
Long-term debt | $ | 1,134.9 | | | $ | 1,727.3 | |
Credit Facilities and Debt
Revolving Credit Facility - On February 16, 2021, we entered into a credit agreement, which provides for a $1.0 billion three-year senior secured multi-currency Revolving Credit Facility, including a $450.0 million letter of credit sub-facility. We incurred $34.8 million of debt issuance costs in connection with the Revolving Credit Facility. These debt issuance costs are deferred and are included in other assets in our condensed consolidated balance sheets. The deferred debt issuance costs are amortized to interest expense over the term of the Revolving Credit Facility.
Availability of borrowings under the Revolving Credit Facility is reduced by the outstanding letters of credit issued against the facility. As of September 30, 2022, there were $150.0 million of borrowings and $45.4 million of letters of credit outstanding, and our availability under the Revolving Credit Facility was $804.6 million.
Borrowings under the Revolving Credit Facility bear interest at the following rates, plus an applicable margin, depending on currency:
•U.S. dollar-denominated loans bear interest, at the Company’s option, at a base rate or an adjusted rate linked to the London interbank offered rate; and
•Euro-denominated loans bear interest on an adjusted rate linked to the Euro interbank offered rate.
The applicable margin for borrowings under the Revolving Credit Facility ranges from 2.50% to 3.50% for Eurocurrency loans and 1.50% to 2.50% for base rate loans, depending on a total leverage ratio. The Revolving Credit Facility is subject to customary representations and warranties, covenants, events of default, mandatory repayment provisions and financial covenants.
2021 Notes - On January 29, 2021, we issued $1.0 billion of 6.50% senior notes due 2026 (the “2021 Notes”). The interest on the 2021 Notes is paid semi-annually on February 1 and August 1 of each year, beginning on August 1, 2021. The 2021 Notes are senior unsecured obligations and are guaranteed on a senior unsecured basis by substantially all of our wholly owned U.S. subsidiaries and non-U.S. subsidiaries in Brazil, the Netherlands, Norway, Singapore and the United Kingdom. We incurred $25.7 million of debt issuance costs in connection with issuance of the 2021 Notes. These debt issuance costs are deferred and are included in long-term debt in our condensed consolidated balance sheets. The deferred debt issuance costs are amortized to interest expense over the term of the 2021 Notes, which approximates the effective interest method.
During the nine months ended September 30, 2022, 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.
As of September 30, 2022, we were in compliance with all debt covenants.
Bank borrowings - Include term loans issued in connection with financing for certain of our vessels and amounts outstanding under our foreign committed credit lines.
Foreign committed credit - We have committed credit lines at many of our international subsidiaries for immaterial amounts. We utilize these facilities for asset financing and to provide a more efficient daily source of liquidity. The effective interest rates depend upon the local national market.
NOTE 13. STOCKHOLDERS’ EQUITY
In July 2022, the Board of Directors authorized the repurchase of up to $400.0 million of our outstanding ordinary shares under our share repurchase program. Pursuant to this share repurchase program, we repurchased $50.1 million of ordinary shares during the three months ended September 30, 2022. Based upon the remaining repurchase authority of $349.9 million and the closing stock price as of September 30, 2022, approximately 41.4 million ordinary shares could be subject to repurchase. All share repurchases were immediately cancelled.
Accumulated other comprehensive income (loss) consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In millions) | Foreign Currency Translation | | Hedging | | Defined Pension and Other Post-Retirement Benefits | | Accumulated Other Comprehensive Loss Attributable to TechnipFMC plc | | Accumulated Other Comprehensive Loss Attributable to Non-Controlling Interest |
June 30, 2022 | $ | (1,158.3) | | | $ | (64.1) | | | $ | (124.6) | | | $ | (1,347.0) | | | $ | (10.1) | |
Other comprehensive income (loss) before reclassifications, net of tax | (97.2) | | | (33.4) | | | (1.5) | | | (132.1) | | | (2.8) | |
Reclassification adjustment for net losses included in net income, net of tax | — | | | 6.7 | | | 3.0 | | | 9.7 | | | — | |
Other comprehensive income (loss), net of tax | (97.2) | | | (26.7) | | | 1.5 | | | (122.4) | | | (2.8) | |
September 30, 2022 | $ | (1,255.5) | | | $ | (90.8) | | | $ | (123.1) | | | $ | (1,469.4) | | | $ | (12.9) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In millions) | Foreign Currency Translation | | Hedging | | Defined Pension and Other Post-Retirement Benefits | | Accumulated Other Comprehensive Loss Attributable to TechnipFMC plc | | Accumulated Other Comprehensive Loss Attributable to Non-Controlling Interest |
December 31, 2021 | $ | (1,158.4) | | | $ | (17.3) | | | $ | (129.3) | | | $ | (1,305.0) | | | $ | (5.7) | |
Other comprehensive loss before reclassifications, net of tax | (97.1) | | | (92.0) | | | (3.0) | | | (192.1) | | | (7.2) | |
Reclassification adjustment for net losses included in net income (loss), net of tax | — | | | 18.5 | | | 9.2 | | | 27.7 | | | — | |
Other comprehensive income (loss), net of tax | (97.1) | | | (73.5) | | | 6.2 | | | (164.4) | | | (7.2) | |
September 30, 2022 | $ | (1,255.5) | | | $ | (90.8) | | | $ | (123.1) | | | $ | (1,469.4) | | | $ | (12.9) | |
Reclassifications out of accumulated other comprehensive income (loss) consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended | | |
| September 30, | | September 30, | | |
(In millions) | 2022 | | 2021 | | 2022 | | 2021 | | |
Details about Accumulated Other Comprehensive Income (loss) Components | Amount Reclassified out of Accumulated Other Comprehensive Loss | | Affected Line Item in the Condensed Consolidated Statements of Income |
Gains (losses) on hedging instruments | | | | | | | | | |
Foreign exchange contracts | $ | (1.4) | | | $ | (1.6) | | | $ | (1.9) | | | $ | (27.6) | | | Revenue |
| (5.6) | | | 0.7 | | | (12.6) | | | 12.2 | | | Cost of sales |
| — | | | (0.1) | | | (0.3) | | | 0.1 | | | Selling, general and administrative expense |
| (2.2) | | | (0.7) | | | (11.1) | | | 6.2 | | | Other income (expense), net |
| (9.2) | | | (1.7) | | | (25.9) | | | (9.1) | | | Income (loss) before income taxes |
| (2.5) | | | (0.4) | | | (7.4) | | | (5.8) | | | Provision for income taxes |
| $ | (6.7) | | | $ | (1.3) | | | $ | (18.5) | | | $ | (3.3) | | | Net income (loss) |
Pension and other post-retirement benefits | | | | | | | | | |
Amortization of prior service credit (cost) | $ | (0.1) | | | $ | (0.1) | | | $ | (0.3) | | | $ | (0.4) | | | Other income (expense), net (a) |
Amortization of net actuarial loss | (5.8) | | | (6.8) | | | (14.9) | | | (19.8) | | | Other income (expense), net (a) |
| (5.9) | | | (6.9) | | | (15.2) | | | (20.2) | | | Income (loss) before income taxes |
| (2.9) | | | (2.1) | | | (6.0) | | | (5.5) | | | Provision for income taxes |
| $ | (3.0) | | | $ | (4.8) | | | $ | (9.2) | | | $ | (14.7) | | | Net income (loss) |
(a)These accumulated other comprehensive income components are included in the computation of net periodic pension cost.
NOTE 14. SHARE-BASED COMPENSATION
Under the Amended and Restated TechnipFMC plc Incentive Award Plan (the “2017 Plan”), we were able to grant certain incentives and awards to our officers, employees, non-employee directors and consultants of the Company and its subsidiaries. Awards included share options, share appreciation rights, performance stock units, restricted stock units, restricted shares or other awards authorized under the 2017 Plan. On April 28, 2022, we adopted the TechnipFMC plc 2022 Incentive Award Plan (the “Plan”), which replaces the 2017 Plan. Under the Plan, 8.9 million ordinary shares were authorized for awards, and the remaining available shares from the 2017 Plan were added to the authorized amount under the Plan.
We recognize compensation expense and the corresponding tax benefits for awards under incentive award plans. Share-based compensation expense for non-vested share options, performance-based shares and restricted stock units was $9.9 million and $7.7 million for the three months ended September 30, 2022 and 2021, respectively, and $28.9 million and $18.4 million for the nine months ended September 30, 2022 and 2021, respectively.
NOTE 15. IMPAIRMENT, RESTRUCTURING AND OTHER EXPENSES
Impairment, restructuring and other expenses were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
(In millions) | 2022 | | 2021 | | 2022 | | 2021 |
Subsea | $ | 3.3 | | | $ | 6.9 | | | $ | 2.5 | | | 27.6 | |
Surface Technologies | 3.6 | | | — | | | 9.6 | | | 3.8 | |
Corporate and other | — | | | 0.4 | | | 3.0 | | | 3.4 | |
Total impairment, restructuring and other expenses | $ | 6.9 | | | $ | 7.3 | | | $ | 15.1 | | | $ | 34.8 | |
During the nine months ended September 30, 2022, we recorded $15.1 million of impairment and restructuring expenses, primarily related to exiting our operations in Russia and Canada. During the nine months ended September 30, 2021, we recorded $19.6 million of impairment expenses, primarily relating to our operating lease right-of-use assets as a result of certain real estate rationalization actions.
Restructuring and Other Expenses
Restructuring and other charges primarily consisted of severance, facilities restructuring and other employee related costs across all segments and were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
(In millions) | 2022 | | 2021 | | 2022 | | 2021 |
Subsea | $ | 1.4 | | | $ | 5.6 | | | $ | 0.6 | | | 10.0 | |
Surface Technologies | 1.9 | | | — | | | 6.8 | | | 3.5 | |
Corporate and other | — | | | 0.4 | | | 3.0 | | | 0.4 | |
Total restructuring and other expenses | $ | 3.3 | | | $ | 6.0 | | | $ | 10.4 | | | $ | 13.9 | |
NOTE 16. COMMITMENTS AND CONTINGENT LIABILITIES
Contingent liabilities associated with guarantees - In the ordinary course of business, we enter into standby letters of credit, performance bonds, surety bonds and other guarantees with financial institutions for the benefit of our customers, vendors and other parties. The majority of these financial instruments expire within five years. Management does not expect any of these financial instruments to result in losses that, if incurred, would have a material adverse effect on our condensed consolidated financial position, results of operations or cash flows.
Guarantees consisted of the following:
| | | | | | | | | | | |
(In millions) | September 30, 2022 | | December 31, 2021 |
Financial guarantees (a) | $ | 203.4 | | | $ | 177.4 | |
Performance guarantees (b) | 1,423.1 | | | 1,069.0 | |
Maximum potential undiscounted payments | $ | 1,626.5 | | | $ | 1,246.4 | |
(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.
(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 non-financial obligating agreement. Events that trigger payment are performance-related, such as failure to ship a product or provide a service.
We believe the ultimate resolution of our known contingencies will not materially adversely affect our consolidated financial position, results of operations, or cash flows.
Contingent liabilities associated with legal and tax matters - We are involved in various pending or potential legal and tax actions or disputes in the ordinary course of our business. These actions and disputes can involve our agents, suppliers, clients and venture partners, and can include claims related to payment of fees, service quality and ownership arrangements. We are unable to predict the ultimate outcome of these actions because of their inherent uncertainty. However, we believe that the most probable, ultimate resolution of these matters will not have a material adverse effect on our consolidated financial position, results of operations or cash flows.
On March 28, 2016, FMC Technologies received an inquiry from the U.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 U.S. Foreign Corrupt Practices Act (“FCPA”). On March 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 the SEC.
In late 2016, Technip S.A. was contacted by the DOJ regarding its investigation of offshore platform projects awarded between 2003 and 2007, performed in Brazil by a joint venture company in which Technip S.A. was a minority participant, and we have also raised with the DOJ certain other projects performed by Technip S.A. subsidiaries in Brazil between 2002 and 2013. The DOJ has also inquired about projects in Ghana and Equatorial Guinea that were awarded to Technip 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 of Brazil (“CGU”) and the Attorney General of Brazil (“AGU”)) with their investigation concerning the projects in Brazil and have also contacted and are cooperating with French authorities (the Parquet National Financier (“PNF”)) with their investigation about these existing matters.
On June 25, 2019, we announced a global resolution to pay a total of $301.3 million to the DOJ, the SEC, 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 and U.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 in Brazil and with Unaoil. In addition, Technip USA, Inc., a U.S. subsidiary, pled guilty to one count of conspiracy to violate the FCPA related to conduct in Brazil. We will also provide the DOJ reports on our anti-corruption program during the term of the DPA.
In Brazil, 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 in Brazil during a two-year self-reporting period, which aligns with our commitment to cooperation and transparency with the compliance community in Brazil and globally.
In September 2019, the SEC approved our previously disclosed agreement in principle with the SEC Staff and issued an Administrative Order, pursuant to which we paid the SEC $5.1 million, which was included in the global resolution of $301.3 million.
To date, the investigation by PNF related to historical projects in Equatorial Guinea and Ghana has not reached a 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 recently informed us that it is reviewing historical projects in Angola. 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 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 in France, the outcome of which cannot be predicted.
Contingent liabilities associated with liquidated damages - Some of our contracts contain provisions that require us to pay liquidated damages if we are responsible for the failure to meet specified contractual milestone dates and the applicable customer asserts a conforming claim under these provisions. These contracts define the conditions under which our customers may make claims against us for liquidated damages. Based upon the evaluation of our performance and other commercial and legal analysis, management believes we have appropriately recognized probable liquidated damages at September 30, 2022 and December 31, 2021, and that the ultimate resolution of such matters will not materially affect our consolidated financial position, results of operations or cash flows.
NOTE 17. INCOME TAXES
Our provision for income taxes for the three months ended September 30, 2022 and 2021 reflected effective tax rates of 80.0% and (46.1)%, respectively. The year-over-year increase in the effective tax rate was primarily due to the change in geographical profit mix year over year.
Our provision for income taxes for the nine months ended September 30, 2022 and 2021 reflected effective tax rates of 121.0% and 24.5%, respectively. The year-over-year increase in the effective tax rate was primarily due to the change in geographical profit mix year over year.
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 the United Kingdom.
NOTE 18. DERIVATIVE FINANCIAL INSTRUMENTS
For purposes of mitigating the effect of changes in exchange rates, we hold derivative financial instruments to hedge the risks of certain identifiable and anticipated transactions and recorded assets and liabilities in our condensed consolidated balance sheets. The types of risks hedged are those relating to the variability of future earnings and cash flows caused by movements in foreign currency exchange rates. Our policy is to hold derivatives only for the purpose of hedging risks associated with anticipated foreign currency purchases and sales created in the normal course of business, and not for speculative purposes.
Generally, we enter into hedging relationships such that changes in the fair values or cash flows of the transactions being hedged are expected to be offset by corresponding changes in the fair value of the derivatives. For derivative instruments that qualify as a cash flow hedge, the effective portion of the gain or loss of the derivative, which does not include the time value component of a forward currency rate, is reported as a component of other comprehensive income (“OCI”) and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. For derivative instruments not designated as hedging instruments, any change in the fair value of those instruments is reflected in earnings in the period such change occurs.
We hold the following types of derivative instruments:
Foreign exchange rate forward contracts - The purpose of these instruments is to hedge the risk of changes in future cash flows of anticipated purchase or sale commitments denominated in foreign currencies and recorded assets and liabilities in our condensed consolidated balance sheets. As of September 30, 2022, we held the following material net positions:
| | | | | | | | | | | |
| Net Notional Amount Bought (Sold) |
(In millions) | | | USD Equivalent |
Euro | 1,128.0 | | | 1,099.3 | |
Norwegian krone | 3,239.9 | | | 299.3 | |
Australian dollar | 284.1 | | | 183.7 | |
Singapore dollar | 80.3 | | | 55.9 | |
Indonesian rupiah | 711,216.8 | | | 46.7 | |
Canadian dollar | 25.9 | | | 18.8 | |
Indian rupee | 1,312.9 | | | 16.1 | |
British pound | (187.8) | | | (207.4) | |
Kuwaiti dinar | (4.1) | | | (13.1) | |
Malaysian ringgit | (452.6) | | | (97.6) | |
Brazilian real | (773.9) | | | (143.2) | |
U.S. dollar | (1,522.5) | | | (1,522.5) | |
| | | |
| | | |
| | | |
Foreign exchange rate instruments embedded in purchase and sale contracts - The purpose of these instruments is to match offsetting currency payments and receipts for particular projects or comply with government restrictions on the currency used to purchase goods in certain countries. As of September 30, 2022, our portfolio of these instruments included the following material net positions:
| | | | | | | | | | | |
| Net Notional Amount Bought (Sold) |
(In millions) | | | USD Equivalent |
Brazilian real | 115.0 | | | 21.3 | |
Norwegian krone | (11.4) | | | (1.1) | |
Euro | (2.6) | | | (2.5) | |
U.S. dollar | (16.5) | | | (16.5) | |
Fair value amounts for all outstanding derivative instruments have been determined using available market information and commonly accepted valuation methodologies. See Note 19 for further details. Accordingly, the estimates presented may not be indicative of the amounts we would realize in a current market exchange and may not be indicative of the gains or losses we may ultimately incur when these contracts are settled. The following table presents the location and fair value amounts of derivative instruments reported in the condensed consolidated balance sheets:
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
(In millions) | Assets | | Liabilities | | Assets | | Liabilities |
Derivatives designated as hedging instruments | | | | | | | |
Foreign exchange contracts | | | | | | | |
Current - Derivative financial instruments | $ | 289.2 | | | $ | 436.4 | | | $ | 106.4 | | | $ | 139.5 | |
Long-term - Derivative financial instruments | 13.9 | | | 39.5 | | | 10.5 | | | 15.5 | |
Total derivatives designated as hedging instruments | 303.1 | | | 475.9 | | | 116.9 | | | 155.0 | |
Derivatives not designated as hedging instruments | | | | | | | |
Foreign exchange contracts | | | | | | | |
Current - Derivative financial instruments | 16.9 | | | 87.5 | | | 3.9 | | | 21.5 | |
Long-term - Derivative financial instruments | — | | | 6.4 | | | — | | | — | |
Total derivatives not designated as hedging instruments | 16.9 | | | 93.9 | | | 3.9 | | | 21.5 | |
Total derivatives | $ | 320.0 | | | $ | 569.8 | | | $ | 120.8 | | | $ | 176.5 | |
Cash flow hedges of forecasted transactions, net of tax, which qualify for hedge accounting, resulted in accumulated other comprehensive losses of $92.2 million and $18.7 million as of September 30, 2022 and December 31, 2021, respectively. We expect to transfer an approximate $59.5 million loss from accumulated OCI to earnings during the next 12 months when the anticipated transactions actually occur. All anticipated transactions currently being hedged are expected to occur by the first half of 2025.
The following table presents the gains (losses) recognized in other comprehensive income related to derivative instruments designated as cash flow hedges:
| | | | | | | | | | | | | | | | | | | | | | | |
| Gain (Loss) Recognized in OCI |
| Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, |
(In millions) | 2022 | | 2021 | | 2022 | | 2021 |
Foreign exchange contracts | $ | (43.9) | | | $ | (20.8) | | | $ | (107.6) | | | $ | (41.2) | |
The following tables represent the effect of cash flow hedge accounting in the condensed consolidated statements of income for the three and nine months ended September 30, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In millions) | Three Months Ended September 30, 2022 | | Three Months Ended September 30, 2021 |
Total amount of income (expense) presented in the consolidated statements of income associated with hedges and derivatives | Revenue | | Cost of sales | | Selling, general and administrative expense | | Other income (expense), net | | Revenue | | Cost of sales | | Selling, general and administrative expense | | Other income (expense), net |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Amounts reclassified from accumulated OCI to income | $ | (1.4) | | | $ | (5.6) | | | $ | — | | | $ | (2.2) | | | $ | (1.6) | | | $ | 0.7 | | | $ | (0.1) | | | $ | (0.7) | |
Amounts excluded from effectiveness testing | 5.2 | | | (4.8) | | | (0.1) | | | (11.7) | | | (1.0) | | | (0.3) | | | — | | | (1.2) | |
Total cash flow hedge gain (loss) recognized in income | 3.8 | | | (10.4) | | | (0.1) | | | (13.9) | | | (2.6) | | | 0.4 | | | (0.1) | | | (1.9) | |
Total hedge gain (loss) recognized in income | $ | 3.8 | | | $ | (10.4) | | | $ | (0.1) | | | $ | (13.9) | | | $ | (2.6) | | | $ | 0.4 | | | $ | (0.1) | | | $ | (1.9) | |
| | | | | | | | | | | | | | | |
Gain (loss) recognized in income on derivatives not designated as hedging instruments | 0.1 | | | 0.6 | | | — | | | (22.0) | | | — | | | (0.1) | | | — | | | (25.2) | |
Total | $ | 3.9 | | | $ | (9.8) | | | $ | (0.1) | | | $ | (35.9) | | | $ | (2.6) | | | $ | 0.3 | | | $ | (0.1) | | | $ | (27.1) | |
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(In millions) | Nine Months Ended September 30, 2022 | | Nine Months Ended September 30, 2021 |
Total amount of income (expense) presented in the consolidated statements of income associated with hedges and derivatives | Revenue | | Cost of sales | | Selling, general and administrative expense | | Other income (expense), net | | Revenue | | Cost of sales | | Selling, general and administrative expense | | Other income (expense), net |
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| | | | | | | | | | | | | | | |
Amounts reclassified from accumulated OCI to income (loss) | $ | (1.9) | | | $ | (12.6) | | | $ | (0.3) | | | $ | (11.1) | | | $ | (27.6) | | | $ | 12.2 | | | $ | 0.1 | | | $ | 6.2 | |
Amounts excluded from effectiveness testing | 8.2 | | | (8.6) | | | 0.4 | | | (31.3) | | | (0.8) | | | (3.0) | | | — | | | (3.2) | |
Total cash flow hedge gain (loss) recognized in income | 6.3 | | | (21.2) | | | 0.1 | | | (42.4) | | | (28.4) | | | 9.2 | | | 0.1 | | | 3.0 | |
Total hedge gain (loss) recognized in income | 6.3 | | | (21.2) | | | 0.1 | | | (42.4) | | | (28.4) | | | 9.2 | | | 0.1 | | | 3.0 | |
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Gain (loss) recognized in income on derivatives not designated as hedging instruments | — | | | (0.8) | | | — | | | (8.0) | | | 1.4 | | | 0.5 | | | — | | | 8.2 | |
Total | $ | 6.3 | | | $ | (22.0) | | | $ | 0.1 | | | $ | (50.4) | | | $ | (27.0) | | | $ | 9.7 | | | $ | 0.1 | | | $ | 11.2 | |
Balance Sheet Offsetting - We execute derivative contracts with counterparties that consent to a master netting agreement, which permits net settlement of the gross derivative assets against gross derivative liabilities. Each instrument is accounted for individually and assets and liabilities are not offset. As of September 30, 2022 and December 31, 2021, we had no collateralized derivative contracts. The following tables present both gross information and net information of recognized derivative instruments:
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| September 30, 2022 | | December 31, 2021 |
(In millions) | Gross Amount Recognized | | Gross Amounts Not Offset, Permitted Under Master Netting Agreements | | Net Amount | | Gross Amount Recognized | | Gross Amounts Not Offset, Permitted Under Master Netting Agreements | | Net Amount |
Derivative assets | $ | 320.0 | | | $ | (200.2) | | | $ | 119.8 | | | $ | 120.8 | | | $ | (78.6) | | | $ | 42.2 | |
Derivative liabilities | $ | 569.8 | | | $ | (200.2) | | | $ | 369.6 | | | $ | 176.5 | | | $ | (78.6) | | | $ | 97.9 | |
NOTE 19. FAIR VALUE MEASUREMENTS
Assets and liabilities measured at fair value on a recurring basis were as follows:
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| September 30, 2022 | | December 31, 2021 |
(In millions) | Total | | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 |
Assets | | | | | | | | | | | | | | | |
Investments | | | | | | | | | | | | | | | |
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Investment in Technip Energies | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 317.3 | | | $ | 317.3 | | | $ | — | | | $ | — | |
Equity securities | 18.7 | | | 18.7 | | | — | | | — | | | 25.0 | | | 25.0 | | | — | | | — | |
Money market and stable value funds | 1.7 | | | — | | | 1.5 | | | — | | | 2.7 | | | — | | | 2.4 | | | — | |
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Held-to-maturity debt securities | 15.0 | | | — | | | 15.0 | | | — | | | 24.0 | | | — | | | 24.0 | | | — | |
Derivative financial instruments | | | | | | | | | | | | | | | |
Foreign exchange contracts | 320.0 | | | — | | | 320.0 | | | — | | | 120.8 | | | — | | | 120.8 | | | — | |
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Total assets | $ | 355.4 | | | $ | 18.7 | | | $ | 336.5 | | | $ | — | | | $ | 489.8 | | | $ | 342.3 | | | $ | 147.2 | | | $ | — | |
Liabilities | | | | | | | | | | | | | | | |
Derivative financial instruments | | | | | | | | | | | | | | | |
Foreign exchange contracts | 569.8 | | | — | | | 569.8 | | | — | | | 176.5 | | | — | | | 176.5 | | | — | |
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Total liabilities | $ | 569.8 | | | $ | — | | | $ | 569.8 | | | $ | — | | | $ | 176.5 | | | $ | — | | | $ | 176.5 | | | $ | — | |
Investment in Technip Energies - The fair value of our investment in Technip Energies was based on quoted prices that we had the ability to access in public markets. As of September 30, 2022, we fully divested our remaining ownership in Technip Energies. See Note 10 for further details. Equity securities - The fair value measurement of our traded securities is based on quoted prices that we have the ability to access in public markets.
Money market and stable value funds - These funds are valued at the net asset value of the shares held at the end of the quarter, which is based on the fair value of the underlying investments using information reported by our investment advisor at quarter-end. These funds include fixed income and other investments measured at fair value. Certain investments that are measured at fair value using net asset value per share (or its equivalent) have not been classified in the fair value hierarchy.
Held-to-maturity debt securities - Held-to-maturity debt securities consist of government bonds. These investments are stated at amortized cost, which approximates fair value.
Derivative financial instruments - We use the income approach 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 by using the spread of similar companies in the same industry, of similar size and with the same credit rating.
We currently 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. See Note 18 for further details. Nonrecurring Fair Value Measurements
Fair value of long-lived, non-financial assets - Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that carrying amounts of such assets may not be recoverable.
The following summarizes impairments of our long-lived assets and related post-impairment fair value for the nine months ended September 30, 2021:
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| | | Nine Months Ended September 30, 2021 |
(In millions) | | | | | Impairment | | Fair Value |
Long-lived assets(a) | | | | | $ | 20.9 | | | $ | 31.6 | |
(a)Measuring these asset groups for recoverability required the use of unobservable inputs that require significant judgment. Such judgments include expected future asset utilization in response to market conditions.
Other fair value disclosures
The carrying amounts of cash and cash equivalents, trade receivables, accounts payable, short-term debt, debt associated with our bank borrowings, credit facilities, as well as amounts included in other current assets and other current liabilities that meet the definition of financial instruments, approximate fair value.
Fair value of debt - We use a market approach to determine the fair value of our fixed-rate debt using observable market data, which results in a Level 2 fair value measurement. The estimated fair value of our private placement notes, revolving credit facility and senior notes was $1,019.8 million and $1,706.1 million as of September 30, 2022 and December 31, 2021, respectively.
Credit risk - By their nature, financial instruments involve risk, including credit risk, for non-performance by counterparties. Financial instruments that potentially subject us to credit risk primarily consist of trade receivables and derivative contracts. We manage the credit risk on financial instruments by transacting only with what management believes are financially secure counterparties, requiring credit approvals and credit limits and monitoring counterparties’ financial condition. Our maximum exposure to credit loss in the event of non-performance by the counterparty is limited to the amount drawn and outstanding on the financial instrument. Allowances for losses on trade receivables are established based on collectability assessments. We mitigate credit risk on derivative contracts by executing contracts only with counterparties that consent to a master netting agreement, which permits the net settlement of gross derivative assets against gross derivative liabilities.