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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☑
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
September 30, 2022
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 1-10945
____________________________________________
OCEANEERING INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Delaware
95-2628227
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer Identification No.)
5875 North Sam Houston Parkway, West, Suite 400
Houston,
Texas
77086
(Address of principal executive offices)
(Zip Code)
(713) 329-4500
(Registrant's telephone number, including area code)
11911 FM 529, Houston,TX77041
(Former name, former address and former fiscal year, if changed from last report)
____________________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common stock, par value $0.25 per share
OII
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þYes¨ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). þYes¨ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
þ
Accelerated filer
¨
Non-accelerated filer
¨
Smaller reporting company
¨
Emerging growth company
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
☐Yesþ No
Number of shares of Common Stock outstanding as of October 21, 2022: 100,259,525
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(unaudited)
Three Months Ended September 30,
Nine Months Ended September 30,
(in thousands)
2022
2021
2022
2021
Net income (loss)
$
18,303
$
(7,370)
$
2,813
$
(10,494)
Other Comprehensive Income (Loss):
Foreign currency translation adjustments
(20,889)
(8,988)
(42,044)
(5,376)
Change in unrealized gains for available-for-sale debt securities (1)
595
(249)
(46)
436
Total other comprehensive income (loss)
(20,294)
(9,237)
(42,090)
(4,940)
Comprehensive income (loss)
$
(1,991)
$
(16,607)
$
(39,277)
$
(15,434)
(1)
There is no income tax expense or benefit associated with the three and nine months ended September 30, 2022 and 2021 due to an offsetting valuation allowance.
The accompanying Notes are an integral part of these Consolidated Financial Statements.
Basis of Presentation. Oceaneering International, Inc. (“Oceaneering,” “we” “our” or “us”) has prepared these unaudited consolidated financial statements pursuant to instructions for quarterly reports on Form 10-Q, which we are required to file with the United States Securities and Exchange Commission (the “SEC”). These financial statements do not include all information and footnotes normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). These financial statements reflect all adjustments that we believe are necessary to present fairly our financial position as of September 30, 2022 and our results of operations and cash flows for the periods presented. Except as otherwise disclosed herein, all such adjustments are of a normal and recurring nature. These financial statements should be read in conjunction with the consolidated financial statements and related notes included in our annual report on Form 10-K for the year ended December 31, 2021. The results for interim periods are not necessarily indicative of annual results.
Principles of Consolidation. The consolidated financial statements include the accounts of Oceaneering and our 50% or more owned and controlled subsidiaries. We also consolidate entities that are determined to be variable interest entities if we determine that we are the primary beneficiary; otherwise, we account for those entities using the equity method of accounting. We use the equity method to account for our investments in unconsolidated affiliated companies of which we own an equity interest of between 20% and 50% and as to which we have significant influence, but not control, over operations. We use the cost method for all other long-term investments. Investments in entities that we do not consolidate are reflected on our balance sheet in other noncurrent assets. We eliminate intercompany transactions and accounts in consolidation.
Use of Estimates.The preparation of financial statements in conformity with U.S. GAAP requires that our management make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expense during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents. Cash and cash equivalents include demand deposits and highly liquid investments with original maturities of three months or less from the date of investment.
Allowances for Credit Loss—Financial Assets Measured at Amortized Costs. We identify allowances for credit loss based on future expected losses when accounts receivable, contract assets or held-to-maturity loan receivables are created rather than when losses are probable.
We use the loss-rate method in developing the allowance for credit losses, which involves identifying pools of assets with similar risk characteristics, reviewing historical losses within the last three years and consideration of reasonable supportable forecasts of economic indicators. Changes in estimates, developing trends and other new information could have material effects on future evaluations.
We monitor the credit quality of our accounts receivable and other financing receivable amounts by frequent customer interaction, following economic and industry trends and reviewing specific customer data. Our other receivable amounts include contract assets and held-to-maturity loans receivable, which we consider to have a low risk of loss.
We are monitoring the impacts from the coronavirus (“COVID-19”) pandemic and new variants thereof, the Russia-Ukraine conflict and volatility in the oil and natural gas markets and the effects thereof on our customers and various counterparties. We have considered the current and expected economic and market conditions, as a result of COVID-19 and the Russia-Ukraine conflict, in calculating credit loss expense for the three- and nine-month periods ended September 30, 2022 and 2021 and determined the impacts are de minimis.
As of September 30, 2022, our allowance for credit losses was $1.6 million for accounts receivable and $0.5 million for other receivables.
Financial assets are written off when deemed uncollectible and there is no reasonable expectation of recovering the contractual cash flows. During the three- and nine-month periods ended September 30, 2022, we did not write off any financial assets.
We have elected to apply the practical expedient available under Accounting Standards Codification (“ASC”) Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” as amended (“ASC 326”), to exclude the accrued interest receivable balance that is included in our held-to-maturity loans receivable. The amounts excluded as of September 30, 2022 and December 31, 2021 were $0.9 million and $1.2 million, respectively.
Accounts receivable are considered to be past due after the end of the contractual terms agreed to with the customer. There were no material past due amounts that we consider uncollectible for our financial assets as of September 30, 2022. We generally do not require collateral from our customers.
Inventory. Inventory is valued at the lower of cost or net realizable value. We determine cost using the weighted-average method. We periodically review the value of items in inventory and record write-downs or write-offs of inventory based on our assessment of market conditions. Write-downs and write-offs are charged to cost of services and products. We did not record any write-downs or write-offs of inventory in the three- and nine-month periods ended September 30, 2022 and 2021.
Property and Equipment, Long-Lived Intangible Assets and Right-of-Use Operating Lease Assets. We provide for depreciation of property and equipment on the straight-line method over estimated useful lives. We charge the costs of repair and maintenance of property and equipment to operations as incurred, and we capitalize the costs of improvements that extend asset lives or functionality. Upon the disposition of property and equipment, the related cost and accumulated depreciation accounts are relieved, and any resulting gain or loss is included as an adjustment to cost of services and products.
We capitalize interest on assets where the construction period is anticipated to be more than three months. We did not capitalize interest in the three- and nine-month periods ended September 30, 2022 and 2021. We do not allocate general administrative costs to capital projects.
Long-lived intangible assets, primarily acquired in connection with business combinations, include trade names, intellectual property and customer relationships and are being amortized over their respective estimated useful lives.
Our management periodically, and upon the occurrence of a triggering event, reviews the realizability of our property and equipment, long-lived intangible assets and right-of-use operating lease assets to determine whether any events or changes in circumstances indicate that the carrying amounts of the assets may not be recoverable. For long-lived assets to be held and used, we base our evaluation on impairment indicators such as the nature of the assets, the future economic benefits of the assets, any historical or future profitability measurements and other external market conditions or factors that may be present. If such impairment indicators are present or other factors exist that indicate that the carrying amount of an asset may not be recoverable, we determine whether an impairment has occurred through the use of an undiscounted cash flows analysis of the asset at the lowest level for which identifiable cash flows exist. If an impairment has occurred, we recognize a loss for the difference between the carrying amount and the fair value of the asset. We did not identify indicators of impairment for property and equipment, long-lived intangible assets or right-of-use operating lease assets for the three- and nine-month periods ended September 30, 2022 and 2021.
For assets held for sale or disposal, the fair value of the asset is measured using fair market value less estimated costs to sell. Assets are classified as held for sale when we have a plan for disposal of certain assets and those assets meet the held for sale criteria.
For additional information regarding right-of-use operating lease assets, see “Leases” below.
Goodwill. Our goodwill is evaluated for impairment annually and whenever we identify certain triggering events or circumstances that would more likely than not reduce the fair value of a reporting unit below its carrying amount.
In our annual evaluation of goodwill, we perform a qualitative or quantitative impairment test. Under the qualitative approach, if we determine that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, we are required to perform the quantitative analysis to determine the fair value for the reporting unit. We then compare the fair value of the reporting unit with its carrying amount and recognize an impairment loss for the amount by which the carrying amount exceeds the fair value of the reporting unit. The loss recognized should not exceed the total amount of goodwill allocated to the reporting unit. We also consider income tax effects from any tax-deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if
applicable. We did not identify indicators of impairment for goodwill for the three- and nine-month periods ended September 30, 2022 and 2021.
Foreign Currency Translation. The functional currency for most of our foreign subsidiaries is the applicable local currency. Results of operations for foreign subsidiaries with functional currencies other than the U.S. dollar are translated into U.S. dollars using average exchange rates during the period. Assets and liabilities of these foreign subsidiaries are translated into U.S. dollars using the exchange rates in effect as of the balance sheet date, and the resulting translation adjustments are recognized, net of tax, in accumulated other comprehensive income (loss) as a component of shareholders' equity. All foreign currency transaction gains and losses are recognized currently in the Consolidated Statements of Operations. We recorded $(1.1) million and $0.2 million of foreign currency transaction gains (losses) in the three- and nine-month periods ended September 30, 2022, respectively. We recorded $(0.3) million and $(4.0) million of foreign currency transaction gains (losses) in the three- and nine-month periods ended September 30, 2021, respectively. Those amounts are included as a component of other income (expense), net in our Consolidated Statement of Operations.
Revenue Recognition. All our revenue is realized through contracts with customers. We recognize our revenue according to the contract type. On a daily basis, we recognize service revenue over time for contracts that provide for specific time, material and equipment charges, which we bill periodically, ranging from weekly to monthly. We use an input method to recognize revenue, because each day of service provided represents value to the customer. The performance obligations in these contracts are satisfied, and revenue is recognized, as the work is performed. When appropriate, we apply the practical expedient to recognize revenue for the amount invoiced when the invoice corresponds directly to the value of our performance to date.
We account for significant fixed-price contracts, mainly relating to our Manufactured Products segment, and to a lesser extent in our Offshore Projects Group (“OPG”) and Aerospace and Defense Technologies (“ADTech”) segments, by recognizing revenue over time using an input, cost-to-cost measurement percentage-of-completion method. This commonly used method allows appropriate calculation of progress on our contracts. A performance obligation is satisfied as we create a product on behalf of the customer over the life of the contract. The remainder of our revenue is recognized at the point in time when control transfers to the customer, thus satisfying the performance obligation.
We have elected to recognize the cost for freight and shipping as an expense when incurred. Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, and that are collected by us from customers, are excluded from revenue.
In our service-based business lines, we principally charge on a dayrate basis for services provided. In our product-based business lines, predominantly in our Manufactured Products segment, we recognize revenue and profit using the percentage-of-completion method and exclude uninstalled materials and significant inefficiencies from the measure of progress.
We apply judgment in the determination and allocation of transaction price to performance obligations, and the subsequent recognition of revenue, based on the facts and circumstances of each contract. We routinely review estimates related to our contracts and, when required, reflect revisions to profitability in earnings immediately. If an element of variable consideration has the potential for a significant future reversal of revenue, we will constrain that variable consideration to a level intended to remove the potential future reversal. If a current estimate of total contract cost indicates an ultimate loss on a contract, we recognize the projected loss in full when we determine it. During the three- and nine-month periods ended September 30, 2022, we recognized projected losses of $1.5 million and $4.0 million, respectively, for contracts in our Manufactured Products segment. During the three- and nine-month periods ended September 30, 2021, we recognized a projected loss of $2.1 million for a contract in our Subsea Robotics segment. There could be significant adjustments to overall contract costs in the future, due to changes in facts and circumstances.
In general, our payment terms consist of those services billed regularly as provided and those products delivered at a point in time, which are invoiced after the performance obligation is satisfied. Our product and service contracts with milestone payments due at agreed progress points during the contract are invoiced when those milestones are reached, which may differ from the timing of revenue recognition. Our payment terms generally do not provide financing of contracts to customers, nor do we receive financing from customers as a result of these terms.
See Note 3—“Revenue” for more information on our revenue from contracts with customers.
Leases. We determine whether a contract is or contains a lease at inception, whether as a lessee or a lessor. We take into consideration the elements of an identified asset, right to control and the receipt of economic benefit in making those determinations.
As a lessor, we lease certain types of equipment along with the provision of services and utilize the expedient allowing us to combine the lease and non-lease components into a combined component that is accounted for (1) under “Leases” (“ASC 842”), when the lease component is predominant, and (2) under the accounting standard “Revenue from Contracts with Customers” (“ASC 606”), when the service component is predominant. In general, when we have a service component, it is typically the predominant element and leads to accounting under ASC 606.
As a lessor, we lease certain types of equipment, often providing services at the same time. These leases can be priced on a dayrate or lump-sum basis for periods ranging from a few days to multi-year contracts. These leases are negotiated on commercial terms at market rates and many carry standard options to extend or terminate at our customer's discretion. These leases generally do not contain options to purchase, material restrictions or covenants that impact our accounting for leases.
As a lessee, we lease land, buildings, vessels and equipment for the operation of our business and to support some of our service line revenue streams. These generally carry lease terms that range from days for operational and support equipment to 15 years for land and buildings. These leases are negotiated on commercial terms at market rates and many carry standard options to extend or terminate at our discretion. When the exercise of those options is reasonably certain, we include them in the lease assessment. Our leases do not contain material restrictions or covenants that impact our accounting for them, nor do we provide residual value guarantees.
As a lessee, we utilize the practical expedients to not recognize leases with an initial lease term of 12 months or less on the balance sheet and to combine lease and non-lease components together and account for the combined component as a lease for all asset classes, except real estate.
Right-of-use operating lease assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement or modification date. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate, based on the information available at commencement or modification date in determining the present value of future payments. In determining the incremental borrowing rate, we considered our external credit ratings, bond yields for us and our identified peers, the risk-free rate in geographic regions where we operate, and the impact associated with providing collateral over a similar term as the lease for an amount equal to the future lease payments. Our right-of-use operating lease assets also include any lease prepayments made and exclude lease incentives and initial direct costs incurred. Our lease terms may include options to extend or terminate the lease. These options are included in the lease term when it is reasonably certain that we will exercise that option. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.
2. ACCOUNTING STANDARDS UPDATE
Recently Issued Accounting Standards. In March 2020, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) No. 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting,” which provides temporary optional expedients and exceptions to existing guidance on applying contract modifications and hedge accounting to facilitate the market transition from existing reference rates, such as the London Interbank Offered Rate (“LIBOR”), which is scheduled to be phased out in June 2023, to alternate rates such as the Secured Overnight Financing Rate (“SOFR”). This ASU was effective upon issuance and can be applied prospectively through December 31, 2022. Our prior five-year revolving credit facility, which has been replaced, referenced LIBOR-based rates. We applied this guidance in connection with our entry into a new senior secured revolving credit agreement in April 2022, which referenced SOFR rates. See Note 6—“Debt” for information on the retirement of our prior revolving credit facility and entry into our senior secured revolving credit agreement in April 2022. We do not expect this ASU to have a material impact on our consolidated financial statements, but will continue to monitor potential impacts until the transition to this standard is complete.
The following tables present revenue disaggregated by business segment, geographical region, and timing of transfer of goods or services.
Three Months Ended
Nine Months Ended
(in thousands)
Sep 30, 2022
Sep 30, 2021
Sep 30, 2022
Sep 30, 2021
Business Segment:
Energy Services and Products
Subsea Robotics
$
169,422
$
143,710
$
454,534
$
404,200
Manufactured Products
94,039
75,359
282,187
241,311
Offshore Projects Group
152,987
95,580
366,841
292,765
Integrity Management & Digital Solutions
58,465
62,806
174,473
180,924
Total Energy Services and Products
474,913
377,455
1,278,035
1,119,200
Aerospace and Defense Technologies
84,758
89,359
251,826
283,366
Total
$
559,671
$
466,814
$
1,529,861
$
1,402,566
Geographic Operating Areas:
Foreign:
Africa
$
78,955
$
78,890
$
210,274
$
213,087
Asia and Australia
62,097
43,919
161,202
123,616
Norway
41,784
51,269
134,972
160,923
United Kingdom
45,234
46,254
130,122
135,401
Brazil
36,638
30,238
104,940
78,411
Other
25,085
22,912
69,253
69,183
Total Foreign
289,793
273,482
810,763
780,621
United States
269,878
193,332
719,098
621,945
Total
$
559,671
$
466,814
$
1,529,861
$
1,402,566
Timing of Transfer of Goods or Services:
Revenue recognized over time
$
525,967
$
437,086
$
1,427,692
$
1,316,733
Revenue recognized at a point in time
33,704
29,728
102,169
85,833
Total
$
559,671
$
466,814
$
1,529,861
$
1,402,566
Contract Balances
Our contracts with milestone payments have, in the aggregate, a significant impact on the contract asset and the contract liability balances. Milestones are contractually agreed with customers and relate to significant events across the contract lives. Some milestones are achieved before revenue is recognized, resulting in a contract liability, while other milestones are achieved after revenue is recognized, resulting in a contract asset.
The following table provides information about contract assets and contract liabilities from contracts with customers.
Nine Months Ended
(in thousands)
Sep 30, 2022
Sep 30, 2021
Total contract assets, beginning of period
$
164,847
$
221,997
Revenue accrued
1,456,244
1,355,567
Amounts billed
(1,448,147)
(1,322,892)
Total contract assets, end of period
$
172,944
$
254,672
Total contract liabilities, beginning of period
$
88,175
$
50,046
Deferrals of milestone payments
65,075
47,246
Recognition of revenue for goods and services
(73,066)
(46,538)
Total contract liabilities, end of period
$
80,184
$
50,754
Performance Obligations
As of September 30, 2022, the aggregate amount of the transaction price allocated to remaining performance obligations that were unsatisfied (or partially unsatisfied) was $203 million. In arriving at this value, we have used two expedients available to us and are not disclosing amounts in relation to performance obligations: (1) that are part of contracts with an original expected duration of one year or less; or (2) on contracts where we recognize revenue in line with the billing. Of this amount, we expect to recognize revenue of $156 million over the next 12 months, and we expect to recognize substantially all of the remaining balance of $47 million within the next 24 months.
Due to the nature of our service contracts in our Subsea Robotics, OPG, Integrity Management & Digital Solutions (“IMDS”) and ADTech segments, the majority of our contracts either have initial contract terms of one year or less or have customer option cancellation clauses that lead us to consider the original expected duration of one year or less.
In our Manufactured Products and ADTech segments, we have long-term contracts that extend beyond one year, and these make up the majority of the performance obligations balance reported as of September 30, 2022. We also have shorter-term product contracts with an expected original duration of one year or less that have been excluded.
Where appropriate, we have made estimates within the transaction price of elements of variable consideration within the contracts and constrained those amounts to a level where we consider it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. The amount of revenue recognized in the three- and nine-month periods ended September 30, 2022 and 2021 that was associated with performance obligations completed or partially completed in prior periods was not significant.
As of September 30, 2022, there were no significant outstanding liability balances for refunds or returns due to the nature of our contracts and the services and products we provide. Our warranties are limited to assurance warranties that are of a standard length and are not considered to be material rights. The majority of our contracts consist of a single performance obligation. When there are multiple obligations, we look for observable evidence of stand-alone selling prices on which to base the allocation. This involves judgment as to the appropriateness of the observable evidence relating to the facts and circumstances of the contract. If we do not have observable evidence, we estimate stand-alone selling prices by taking a cost-plus-margin approach, using typical margins from the type of product or service, customer and regional geography involved.
Costs to Obtain or Fulfill a Contract
In line with the available practical expedient, we capitalize incremental costs to obtain a contract that would not have been incurred if the contract had not been obtained when those amounts are significant and the contract is expected at inception to exceed one year in duration. Our costs to obtain a contract primarily consist of bid and proposal costs, which are generally expensed in the period when incurred. There were no balances or amortization of costs to obtain a contract in the current reporting periods.
Costs to fulfill a contract primarily consist of certain mobilization costs incurred to provide services or products to our customers. These costs are deferred and amortized over the period of contract performance. The closing balance of costs to fulfill a contract was $9.5 million and $7.8 million as of September 30, 2022 and December 31, 2021, respectively. For the three- and nine-month periods ended September 30, 2022, we recorded amortization expense of $1.2 million and $4.2 million, respectively. For the three- and nine-month periods ended September 30, 2021, we recorded amortization expense of $1.2 million and $3.4 million, respectively. No impairment costs were recognized.
4. INCOME TAXES
Our tax provision is based on (1) our earnings for the period and other factors affecting the tax provision and (2) the operations of foreign branches and subsidiaries that are subject to local income and withholding taxes. Factors that affect our tax rate include our profitability levels in general and the geographical mix of our results. The effective tax rate for the three- and nine-month periods ended September 30, 2022 and 2021 was different than the U.S. federal statutory rate of 21%, primarily due to the geographical mix of revenue and earnings, changes in valuation allowances and uncertain tax positions, and other discrete items; therefore, we do not believe a discussion of the effective tax rate is meaningful. We continue to make an assertion to indefinitely reinvest the unrepatriated earnings of any foreign subsidiary that would incur incremental tax consequences upon the distribution of such earnings.
On March 27, 2020, the U.S. Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into law in the United States. In accordance with the rules and procedures under the CARES Act, we filed certain refund claims to carry back a portion of our U.S. net operating loss. Prior to enactment of the CARES Act, such net operating losses could only be carried forward. As a result, we expected to receive combined refunds of approximately $33 million, of which we have previously received $10 million. During the third quarter of 2022, we reached an agreement in principle to settle our 2014 U.S. tax return audit, which reduces the outstanding refunds by approximately $3.0 million. The remaining refunds of approximately $20 million are classified as accounts receivable, net, in our consolidated balance sheet as of September 30, 2022. While the exact timing for the receipt of these refunds remains uncertain, we do not anticipate receiving any portion of these refunds in 2022.
We conduct our international operations in jurisdictions that have varying laws and regulations regarding income and other taxes, some of which are subject to interpretation. We recognize the expense or benefit for an uncertain tax position if it is more likely than not to be sustainable upon audit by the applicable taxing authority. If this threshold is met, the uncertain tax position is then measured and recognized at the largest amount that we believe is greater than 50% likely of being realized upon ultimate settlement.
We have accrued a net total of $11 million and $15 million in other long-term liabilities on our balance sheet for worldwide unrecognized tax liabilities as of September 30, 2022 and December 31, 2021, respectively. We account for any applicable interest and penalties related to uncertain tax positions as a component of our provision for income taxes in our consolidated financial statements. Changes in our management's judgment related to those liabilities would affect our effective income tax rate in the periods of change.
Our tax returns are subject to audit by taxing authorities in multiple jurisdictions. These audits often take years to complete and settle. The following table lists the earliest tax years open to examination by tax authorities where we have significant operations:
Jurisdiction
Periods
United States
2014
United Kingdom
2019
Norway
2017
Angola
2013
Brazil
2017
Australia
2018
We have ongoing tax audits and judicial tax appeals in various jurisdictions. The outcome of these tax audits and judicial tax appeals may have an impact on uncertain tax positions for income tax returns subsequently filed in those jurisdictions.
The following is information regarding selected balance sheet accounts:
(in thousands)
Sep 30, 2022
Dec 31, 2021
Inventory:
Remotely operated vehicle parts and components
$
73,159
$
72,572
Other inventory, primarily raw materials
94,603
81,110
Total
$
167,762
$
153,682
Other current assets:
Prepaid expenses
$
60,274
$
61,984
Angolan bonds
6,369
6,416
Total
$
66,643
$
68,400
Accrued liabilities:
Payroll and related costs
$
122,826
$
134,538
Accrued job costs
60,965
49,032
Income taxes payable
42,157
35,826
Current operating lease liability
18,311
18,781
Other
55,400
52,482
Total
$
299,659
$
290,659
6. DEBT
Long-term debt consisted of the following:
(in thousands)
Sep 30, 2022
Dec 31, 2021
4.650% Senior Notes due 2024
$
400,000
$
400,000
6.000% Senior Notes due 2028
300,000
300,000
Interest rate swap settlements
4,933
6,572
Unamortized debt issuance costs
(3,675)
(4,505)
Long-term debt
$
701,258
$
702,067
In November 2014, we completed the public offering of $500 million aggregate principal amount of 4.650% Senior Notes due 2024 (the “2024 Senior Notes”). We pay interest on the 2024 Senior Notes on May 15 and November 15 of each year. The 2024 Senior Notes are scheduled to mature on November 15, 2024.
In February 2018, we completed the public offering of $300 million aggregate principal amount of 6.000% Senior Notes due 2028 (the “2028 Senior Notes”). We pay interest on the 2028 Senior Notes on February 1 and August 1 of each year. The 2028 Senior Notes are scheduled to mature on February 1, 2028. We used the net proceeds from the 2028 Senior Notes to repay our term loan indebtedness described further below.
We may redeem some or all of the 2024 Senior Notes and 2028 Senior Notes (collectively, the “Senior Notes”) at specified redemption prices. In the year ended December 31, 2021, we repurchased $100 million in aggregate principal amount of the 2024 Senior Notes in open-market transactions. The aggregate purchase price in the year ended December 31, 2021 included accrued and unpaid interest to the repurchase date of $0.7 million, and we recorded loss on extinguishment of debt of $1.1 million (including premiums and fees associated with the repurchases).
In October 2014, we entered into a credit agreement (as amended, the “Prior Credit Agreement”) with a group of banks. The Prior Credit Agreement initially provided for a $500 million five-year revolving credit facility (the “Prior Revolving Credit Facility”). The Prior Credit Agreement also provided for a $300 million term loan, which we repaid in full in February 2018, using net proceeds from the issuance of our 2028 Senior Notes referred to above, and cash
on hand. In February 2018, we entered into Agreement and Amendment No. 4 to the Prior Credit Agreement to, among other things, extend the maturity of the Prior Revolving Credit Facility to January 25, 2023.
On April 8, 2022, we entered into a new senior secured revolving credit agreement with a group of banks (the “Revolving Credit Agreement”) that will mature in April 2026. In connection with entering into the Revolving Credit Agreement, we terminated our Prior Revolving Credit Facility. No borrowings were outstanding under the Prior Revolving Credit Facility. We repaid all accrued fees and expenses in connection with the termination of the Prior Revolving Credit Facility and all commitments thereunder were terminated. No early termination penalties were incurred in connection with the termination of the Prior Revolving Credit Facility.
The Revolving Credit Agreement includes a $215 million revolving credit facility (the “Revolving Credit Facility”) with a $100 million sublimit for the issuance of letters of credit. Our obligations under the Revolving Credit Agreement are guaranteed by certain of our wholly owned subsidiaries and are secured by first priority liens on certain of our assets and those of the guarantors, including, among other things, intellectual property, inventory, accounts receivable, equipment and equity interests in subsidiaries. As of September 30, 2022, we had no borrowings outstanding under the Revolving Credit Facility and no letters of credit outstanding under the Revolving Credit Agreement.
We may borrow under the Revolving Credit Facility at either (1) a base rate, determined as the greatest of (A) the prime rate of Wells Fargo Bank, National Association, (B) the federal funds effective rate plus 1⁄2 of 1% and (C) Adjusted Term SOFR (as defined in the Revolving Credit Agreement for a one-month tenor plus 1%, in each case plus the applicable margin, which varies from 1.25% to 2.25% depending on our Consolidated Net Leverage Ratio (as defined in the Revolving Credit Agreement), or (2) Adjusted Term SOFR plus the applicable margin, which varies from 2.25% to 3.25% depending on our Consolidated Net Leverage Ratio. We will also pay a facility fee based on the amount of the underlying commitment that is being utilized, which fee varies from 0.300% to 0.375%, with the higher rate owed when we use the Revolving Credit Facility less.
The Revolving Credit Agreement includes financial covenants that are tested on a quarterly basis, based on the rolling four-quarter period that ends on the last day of each fiscal quarter. The maximum permitted Consolidated Net Leverage Ratio is initially 4.00 to 1.00 and decreases to 3.25 to 1.00 during the term of the Revolving Credit Facility. The minimum Consolidated Interest Coverage Ratio (as defined in the Revolving Credit Agreement) is 3.00 to 1.00 throughout the term of the Revolving Credit Facility. In addition, the Revolving Credit Agreement contains various covenants that we believe are customary for agreements of this nature, including, but not limited to, restrictions on our ability and the ability of each of our subsidiaries to incur debt, grant liens, make certain investments, make distributions, merge or consolidate, sell assets and enter into certain restrictive agreements. As of September 30, 2022, we were in compliance with all the covenants set forth in the Revolving Credit Agreement.
We had two interest rate swaps in place relating to a total of $200 million of the 2024 Senior Notes for the period to November 2024. In March 2020, we settled both interest rate swaps with the counterparty for cash proceeds of $13 million. The settlement resulted in a $13 million increase to our long-term debt balance that will be amortized to interest expense prospectively through the maturity date for the 2024 Senior Notes using the effective interest method. As a result, we amortized $0.5 million and $1.6 million to interest expense for the three- and nine-month periods ended September 30, 2022, respectively. In the three- and nine-month periods ended September 30, 2021, we amortized $1.2 million and $3.1 million, respectively, to interest expense, including $0.6 million and $1.2 million, respectively, for the pro-rata write-off of interest rate swap settlement gains associated with the 2024 Senior Notes repurchases discussed above.
We incurred $6.9 million and $4.2 million of issuance costs related to the 2024 Senior Notes and the 2028 Senior Notes, respectively, and $4.0 million of new loan costs related to the Revolving Credit Agreement. These costs, net of accumulated amortization, are included as a reduction of long-term debt on our Consolidated Balance Sheets, as they pertain to the Senior Notes, and in other noncurrent assets, as they pertain to the Revolving Credit Agreement. We are amortizing these costs to interest expense through the respective maturity dates for the Senior Notes and the Revolving Credit Agreement using the straight-line method, which approximates the effective interest rate method. As a result, we amortized $0.6 million and $1.6 million to interest expense for the three- and nine-month periods ended September 30, 2022, respectively, and $0.3 million and $1.0 million to interest expense for the three- and nine-month periods ended September 30, 2021, respectively.
Litigation. In the ordinary course of business, we are, from time to time, involved in litigation or subject to disputes, governmental investigations or claims related to our business activities, including, among other things:
•performance- or warranty-related matters under our customer and supplier contracts and other business arrangements; and
•workers’ compensation claims, Jones Act claims, occupational hazard claims, premises liability claims and other claims.
Although we cannot predict the ultimate outcome of these matters, we believe that our ultimate liability, if any, that may result from these other actions and claims will not have a material adverse effect on our consolidated financial condition, results of operations or cash flows. However, because of the inherent uncertainty of litigation and other dispute resolution proceedings and, in some cases, the availability and amount of potentially available insurance, we can provide no assurance that the resolution of any particular claim or proceeding to which we are a party will not have a material effect on our consolidated financial condition, results of operations or cash flows for the fiscal period in which that resolution occurs.
Financial Instruments and Risk Concentration. In the normal course of business, we manage risks associated with foreign exchange rates and interest rates through a variety of strategies, including the use of hedging transactions. As a matter of policy, we do not use derivative instruments unless we have an underlying exposure. Other financial instruments that potentially subject us to concentrations of credit risk are principally cash and cash equivalents and accounts receivable.
The carrying values of cash and cash equivalents approximate their fair values due to the short-term maturity of the underlying instruments. Accounts receivable are generated from a broad group of customers within the energy industry and the U.S. government, which are major sources of our revenue. Due to their short-term nature, carrying values of our accounts receivable and accounts payable approximate fair market values.
We estimated the aggregate fair market value of the Senior Notes to be $604 million as of September 30, 2022, based on quoted prices. Since the market for the Senior Notes is not an active market, the fair value of the Senior Notes is classified within Level 2 in the fair value hierarchy under U.S. GAAP (inputs other than quoted prices in active markets for similar assets and liabilities that are observable or can be corroborated by observable market data for substantially the full terms for the assets or liabilities).
Foreign currency gains (losses) related to the Angolan kwanza of $(1.4) million and $0.9 million in the three-month periods ended September 30, 2022 and 2021, respectively, and $0.7 million and $(1.0) million in the nine-month periods ended September 30, 2022 and 2021, respectively, were primarily related to increasing (declining) exchange rates for the Angolan kwanza relative to the U.S. dollar. We recorded foreign currency transaction gains (losses) related to the Angolan kwanza as a component of other income (expense), net in our Consolidated Statements of Operations.
Any conversion of cash balances from kwanza to U.S. dollars is controlled by the central bank in Angola. As of September 30, 2022 and December 31, 2021, we had the equivalent of approximately $2.7 million and $1.0 million, respectively, of kwanza cash balances in Angola reflected on our Consolidated Balance Sheets. To mitigate our currency exposure risk in Angola, we have used kwanza to purchase equivalent Angolan central bank (Banco Nacional de Angola) bonds. The bonds are denominated as U.S. dollar equivalents, so that, upon payment of semi-annual interest and principal upon maturity, payment is made in kwanza, equivalent to the respective U.S. dollars at the then-current exchange rate. As of September 30, 2022 and December 31, 2021, we had $6.2 million, respectively, of U.S. dollar equivalent Angolan bonds. Because we intend to sell the bonds if we are able to repatriate the proceeds, we have classified these bonds as available-for-sale securities, and they are recorded at fair market value in other current assets in our Consolidated Balance Sheets. We did not sell any of our remaining Angolan bonds in the three- and nine-month periods ended September 30, 2022, however, during the nine-month period ended September 30, 2021, we sold a portion of these bonds for $4.5 million, and recognized a gain of $0.5 million as a component of other income (expense), net in our Consolidated Statement of Operations.
We estimated the fair market value of the Angolan bonds to be $6.4 million as of September 30, 2022 and December 31, 2021, respectively, using quoted market prices. Since the market for the Angolan bonds is not an
active market, the fair value of the Angolan bonds is classified within Level 2 in the fair value hierarchy under U.S. GAAP. As of September 30, 2022 and December 31, 2021, we have $0.2 million, in unrealized loss, net of tax, in unrealized gain, net of tax, respectively, related to these bonds as a component of accumulated other comprehensive loss in our Consolidated Balance Sheets.
In the three-month period ended June 30, 2021, we were notified by a customer in our Manufactured Products segment that it was suspending a contract that was substantially complete. Specific to this contract, we billed and received $18 million of accounts receivable during the first nine months of 2022. As of September 30, 2022, we had outstanding contract assets of approximately $18 million for the contract and $5.8 million contract liabilities. As of December 31, 2021, we had outstanding contract assets of approximately $33 million for the contract and contract liabilities of $11 million prepaid for storage of components. We are in discussions with the customer concerning the timing of remaining payments. We continue to believe that we will realize these contract assets at their book values, although we can provide no assurance as to the timing of receipt of the remaining payments.
8. EARNINGS (LOSS) PER SHARE, SHARE-BASED COMPENSATION AND SHARE REPURCHASE PLAN
Earnings (Loss) per Share. For each period presented, the only difference between our calculated weighted-average basic and diluted number of shares outstanding is the effect of outstanding restricted stock units. In periods where we have a net loss, the effect of our outstanding restricted stock units is anti-dilutive, and therefore does not increase our diluted shares outstanding.
For each period presented, our net income (loss) allocable to both common shareholders and diluted common shareholders is the same as our net income (loss) in our consolidated statements of operations.
Share-Based Compensation. Annually, the Compensation Committee granted restricted units of our common stock to certain of our key executives and employees and restricted common stock to our nonemployee directors. The restricted stock units granted to our key executives and key employees generally vest in full on the third anniversary of the award date, conditional on continued employment through such vesting date. The restricted stock unit grants can vest pro rata over three years, provided the individual meets certain age and years-of-service requirements. The grants of restricted stock to our nonemployee directors were scheduled to vest in full on the first anniversary of the award date, conditional upon continued service as a director, except for the 2021 grant to one director who retired from our board of directors as of the date of our annual meeting of shareholders in May 2021, which vested on that date. Each grantee of shares of restricted stock is deemed to be the record owner of those shares during the restriction period, with the right to vote and receive any dividends on those shares. The restricted stock units outstanding have no voting or dividend rights.
For each of the restricted stock units granted in 2020 through September 30, 2022, at the earlier of three years after grant or at termination of employment or service, the grantee will be issued one share of our common stock for each unit vested. As of September 30, 2022 and December 31, 2021, respective totals of 2,542,533 and 2,447,259 shares of restricted stock and restricted stock units were outstanding.
We estimate that share-based compensation cost not yet recognized related to shares of restricted stock or restricted stock units, based on their grant-date fair values, was $13 million as of September 30, 2022. This expense is being recognized on a graded-vesting basis over three years for awards attributable to individuals meeting certain age and years-of-service requirements, and on a straight-line basis over the applicable vesting period of one or three years for the other awards.
Share Repurchase Plan. In December 2014, our Board of Directors approved a share repurchase program under which we may repurchase up to 10 million shares of our common stock on a discretionary basis. Under the program, which has no expiration date, we had repurchased 2.0 million shares for $100 million through December 31, 2015. We have not repurchased any shares under this plan since 2015, and are not obligated to make any future repurchases. We account for the shares we hold in treasury under the cost method, at average cost.
9. BUSINESS SEGMENT INFORMATION
We are a global technology company delivering engineered services and products and robotic solutions to the offshore energy, defense, aerospace, manufacturing and entertainment industries.
Our Energy Services and Products business leverages our asset base and capabilities for providing services and products for offshore energy operations, inclusive of the offshore renewable energy market. Our Energy Services and Products segments are:
•Subsea Robotics—Our Subsea Robotics segment provides the following:
◦Remotely Operated Vehicles (“ROVs”) for drill support and vessel-based services, including subsea hardware installation, construction, pipeline inspection, survey and facilities inspection, maintenance and repair;
◦ROV tooling; and
◦survey services, including hydrographic survey and positioning services and autonomous underwater vehicles for geoscience.
•Manufactured Products—Our Manufactured Products segment provides the following:
◦distribution and connection systems including production control umbilicals and field development hardware and pipeline connection and repair systems to the energy industry; and
◦autonomous mobile robot technology and entertainment systems to a variety of industries.
•Offshore Projects Group—Our OPG segment provides the following:
◦subsea installation and intervention, including riserless light well intervention services, inspection, maintenance and repair (“IMR”) services, principally in the U.S. Gulf of Mexico and offshore Angola, utilizing owned and chartered vessels;
◦installation and workover control systems and ROV workover control systems;
◦project management and engineering; and
◦drill pipe riser services and systems and wellhead load relief solutions.
•Integrity Management & Digital Solutions—Our IMDS segment provides the following:
◦asset integrity management services;
◦software and analytical solutions for the bulk cargo maritime industry; and
◦software, digital and connectivity solutions for the energy industry.
Our Aerospace and Defense Technologies segment provides services and products, including engineering and related manufacturing in defense and space exploration activities, principally to U.S. Government agencies and their prime contractors.
Unallocated Expenses are those not associated with a specific business segment. These consist of expenses related to our incentive and deferred compensation plans, including restricted stock and bonuses, as well as other general expenses, including corporate administrative expenses.
There are no differences in the basis of segmentation or in the basis of measurement of segment profit or loss from
those used in our consolidated financial statements for the year ended December 31, 2021.
The table that follows presents revenue, income (loss) from operations and depreciation and amortization expense, by business segment:
Three Months Ended
Nine Months Ended
(in thousands)
Sep 30, 2022
Sep 30, 2021
Jun 30, 2022
Sep 30, 2022
Sep 30, 2021
Revenue
Energy Services and Products
Subsea Robotics
$
169,422
$
143,710
$
157,123
$
454,534
$
404,200
Manufactured Products
94,039
75,359
105,456
282,187
241,311
Offshore Projects Group
152,987
95,580
116,457
366,841
292,765
Integrity Management & Digital Solutions
58,465
62,806
59,438
174,473
180,924
Total Energy Services and Products
474,913
377,455
438,474
1,278,035
1,119,200
Aerospace and Defense Technologies
84,758
89,359
85,557
251,826
283,366
Total
$
559,671
$
466,814
$
524,031
$
1,529,861
$
1,402,566
Income (Loss) from Operations
Energy Services and Products
Subsea Robotics
$
37,069
$
19,533
$
25,938
$
74,559
$
55,862
Manufactured Products
4,282
809
(1,365)
5,560
4,352
Offshore Projects Group
20,310
7,634
17,535
38,511
24,443
Integrity Management & Digital Solutions
3,091
5,362
3,436
10,035
12,557
Total Energy Services and Products
64,752
33,338
45,544
128,665
97,214
Aerospace and Defense Technologies
13,043
14,251
8,961
33,848
50,430
Unallocated Expenses
(30,920)
(31,820)
(31,655)
(93,827)
(95,273)
Total
$
46,875
$
15,769
$
22,850
$
68,686
$
52,371
Depreciation and Amortization
Energy Services and Products
Subsea Robotics
$
16,013
$
21,483
$
17,531
$
52,545
$
66,871
Manufactured Products
2,939
3,202
3,020
9,031
9,677
Offshore Projects Group
7,132
6,781
7,107
21,536
20,768
Integrity Management & Digital Solutions
1,695
1,114
1,034
3,759
3,329
Total Energy Services and Products
27,779
32,580
28,692
86,871
100,645
Aerospace and Defense Technologies
671
1,427
821
2,148
4,107
Unallocated Expenses
1,799
234
1,347
4,109
1,185
Total
$
30,249
$
34,241
$
30,860
$
93,128
$
105,937
We determine Income (Loss) from Operations for each business segment before interest income or expense, other income (expense) and provision for income taxes. We do not consider an allocation of these items to be practical.
During the nine-month period ended September 30, 2021, we recorded adjustments attributable to each of our reporting segments as follows:
For the Nine Months Ended September 30, 2021
(in thousands)
Subsea Robotics
Manufactured Products
OPG
IMDS
ADTech
Unallocated Expenses
Total
Adjustments for the effects of:
Loss on sale of asset
$
—
$
—
$
—
$
—
$
—
$
1,415
$
1,415
Other
395
537
149
217
10
—
1,308
Total of adjustments
$
395
$
537
$
149
$
217
$
10
$
1,415
$
2,723
There were no adjustments of a similar nature during the three- and nine-month periods ended September 30, 2022.
Depreciation and Amortization
Depreciation expense on property and equipment, reflected in Depreciation and Amortization, was $28 million, $33 million and $29 million in the three-month periods ended September 30, 2022 and 2021 and June 30, 2022, respectively, and $87 million and $103 million in the nine-month periods ended September 30, 2022 and 2021, respectively.
Amortization expense on long-lived intangible assets, reflected in Depreciation and Amortization, was $2.3 million, $0.8 million and $1.9 million in the three-month periods ended September 30, 2022 and 2021 and June 30, 2022, respectively, and $5.8 million and $2.9 million in the nine-month periods ended September 30, 2022 and 2021, respectively.
Item 2.Management's Discussion and Analysis of Financial Condition and Results of Operations
Certain statements we make in this quarterly report on Form 10-Q are forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements include, without limitation, statements regarding our expectations about:
•the impacts of the coronavirus (“COVID-19”) pandemic and new variants thereof and the Russia-Ukraine conflict on the United States and the global economy, as well as on our business;
•the impact of ongoing supply chain constraints and workforce availability;
•tax refunds under the U.S. Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and other tax refunds;
•our cash tax payments and projected capital expenditures for 2022;
•increased costs to operate our business, including the availability and market for our chartered vessels;
•future demand, order intake and business activity levels;
•the collectability of accounts receivable and realizability of contract assets at the amounts reflected on our most-recent balance sheet;
•the backlog of our Manufactured Products segment, to the extent backlog may be an indicator of future revenue or productivity;
•the adequacy of our liquidity, cash flows and capital resources;
•the condition of the debt markets and our possible future debt repurchases;
•shares that may be repurchased under our share repurchase plan;
•the implementation of new accounting standards and related policies, procedures and controls;
•our expectations about growth in the area of energy transition;
•seasonality; and
•industry conditions.
These forward-looking statements are subject to various risks, uncertainties and assumptions, including those we have referred to under the headings “Risk Factors” and “Cautionary Statement Concerning Forward-Looking Statements” in Part I of our annual report on Form 10-K for the year ended December 31, 2021. Although we believe that the expectations reflected in such forward-looking statements are reasonable, because of the inherent limitations in the forecasting process, as well as the relatively volatile nature of the industries in which we operate, we can give no assurance that those expectations will prove to have been correct. Accordingly, evaluation of our future prospects must be made with caution when relying on forward-looking information.
The following discussion should be read in conjunction with “Management's Discussion and Analysis of Financial Condition and Results of Operations” included in our annual report on Form 10-K for the year ended December 31, 2021.
Overview of our Results
Our diluted earnings (loss) per share for the three- and nine-month periods ended September 30, 2022 were $0.18 and $0.03, respectively, as compared to $0.04 in the immediately preceding quarter and $(0.07) and $(0.11), respectively, for the corresponding periods of the prior year. Our third quarter 2022 results improved as compared to the second quarter of 2022, led by improved offshore activity and pricing, particularly in the Gulf of Mexico. Although the Gulf of Mexico stood out, our energy segments also saw broad-based activity increases in a number of international markets, including Asia, Africa and Australia. Offshore activity drove significant operating improvements in our energy businesses, which were led by our Subsea Robotics and Offshore Projects Group (“OPG”) segments. In addition, increased manufacturing throughput led to improved operating margins in our Manufactured Products segment. We also saw a meaningful recovery in our government-focused businesses, after experiencing negative timing effects during the second quarter of 2022.
During the first nine months of 2022, our cash decreased by $111 million. We utilized $39 million of cash in operating activities, primarily due to an increase in accounts receivable resulting from our customers extending payment terms. In addition, $55 million of cash was used for maintenance and growth capital expenditures.
We operate in five business segments. Our segments are contained within two businesses—services and products provided primarily to the oil and gas industry, and to a lesser extent, the offshore renewables industry (“Energy Services and Products”), and services and products provided to non-energy industries (Aerospace and Defense Technologies (“ADTech”)). Our four business segments within the Energy Services and Products business are Subsea Robotics, Manufactured Products, OPG and Integrity Management & Digital Solutions (“IMDS”). We report our ADTech business as one segment. Our Unallocated Expenses are those not associated with a specific business segment.
Consolidated revenue and profitability information are as follows:
Three Months Ended
Nine Months Ended
(dollars in thousands)
Sep 30, 2022
Sep 30, 2021
Jun 30, 2022
Sep 30, 2022
Sep 30, 2021
Revenue
$
559,671
$
466,814
$
524,031
$
1,529,861
$
1,402,566
Gross Margin
95,754
59,848
76,041
217,275
184,902
Gross Margin %
17
%
13
%
15
%
14
%
13
%
Operating Income (Loss)
46,875
15,769
22,850
68,686
52,371
Operating Income (Loss) %
8
%
3
%
4
%
4
%
4
%
We generate a material amount of our consolidated revenue from contracts for services in the U.S. Gulf of Mexico in our OPG segment, which is usually more active in the second and third quarters, as compared to the rest of the year. The European operations of our IMDS segment are traditionally also seasonally more active in the second and third quarters. Revenue in our Subsea Robotics segment is subject to seasonal variations in demand, with our first quarter generally being the low quarter of the year. The level of our Subsea Robotics seasonality depends on the number of Remotely Operated Vehicles (“ROVs”) we have engaged in vessel-based subsea infrastructure inspection, maintenance, repair and installation, which is more seasonal than drilling support. Revenue in each of our Manufactured Products and ADTech segments generally has not been seasonal.
We had operating income in the three- and nine-month periods ended September 30, 2022 of $47 million and $69 million, respectively, and $16 million and $52 million, respectively, in the corresponding periods of the prior year. Included in our operating income (losses) for the nine-month period ended September 30, 2021 were charges of $2.7 million for loss on sale of an asset and other costs we recognized as we adapted our geographic footprint and staffing levels to the conditions of the markets we serve. There were no such charges of a similar nature during the three- and nine-month periods ended September 30, 2022 or the three-month period ended September 30, 2021.
Charges included in the nine-month period ended September 30, 2021 are summarized as follows:
For the nine months ended September 30, 2021
(in thousands)
Subsea Robotics
Manufactured Products
Offshore Projects Group
Integrity Management & Digital Solutions
Aerospace and Defense Technologies
Unallocated Expenses
Total
Charges for the effects of:
Loss on sale of asset
$
—
$
—
$
—
$
—
$
—
$
1,415
$
1,415
Other
395
537
149
217
10
—
1,308
Total charges
$
395
$
537
$
149
$
217
$
10
$
1,415
$
2,723
Energy Services and Products
The primary focus of our Energy Services and Products business over the last several years has been toward instituting operational efficiency programs that leverage our asset base and capabilities for providing services and products predominantly for offshore energy operations and subsea completions, inclusive of our customers’ capital and operating budgets. Increasingly, our efforts in our Energy Services business have focused on assisting our customers to reduce their carbon emissions in exploring for, developing and producing oil and natural gas and in addressing the ongoing energy transition. We are also focused on opportunities to develop and deploy our
capabilities to grow business in offshore wind installations (both fixed and floating) and tidal energy solutions and to utilize our core competencies to provide engineered solutions to the wind, hydrogen and carbon-capture-and-sequestration (“CCS”) markets, as well as expanding our asset integrity management and digital solutions for those markets.
The table that follows sets out revenue and profitability for the business segments within our Energy Services and Products business. In the Subsea Robotics section of the table that follows, “ROV days available” includes all days from the first day that an ROV is placed into service until the ROV is retired. All days in this period are considered available days, including periods when an ROV is undergoing maintenance or repairs. Our ROVs do not have scheduled maintenance or repair that requires significant time when the ROVs are not available for utilization.
Three Months Ended
Nine Months Ended
(dollars in thousands)
Sep 30, 2022
Sep 30, 2021
Jun 30, 2022
Sep 30, 2022
Sep 30, 2021
Subsea Robotics
Revenue
$
169,422
$
143,710
$
157,123
$
454,534
$
404,200
Gross Margin
47,552
28,918
37,004
106,514
84,763
Operating Income (Loss)
37,069
19,533
25,938
74,559
55,862
Operating Income (Loss) %
22
%
14
%
17
%
16
%
14
%
ROV Days Available
23,000
23,002
22,750
68,250
68,221
ROV Days Utilized
15,408
14,474
14,631
41,881
40,366
ROV Utilization
67
%
63
%
64
%
61
%
59
%
Manufactured Products
Revenue
94,039
75,359
105,456
282,187
241,311
Gross Margin
12,170
8,544
7,918
31,090
26,939
Operating Income (Loss)
4,282
809
(1,365)
5,560
4,352
Operating Income (Loss) %
5
%
1
%
(1)
%
2
%
2
%
Backlog at End of Period
365,000
334,000
335,000
365,000
334,000
Offshore Projects Group
Revenue
152,987
95,580
116,457
366,841
292,765
Gross Margin
27,647
13,815
25,441
60,825
43,492
Operating Income (Loss)
20,310
7,634
17,535
38,511
24,443
Operating Income (Loss) %
13
%
8
%
15
%
10
%
8
%
Integrity Management & Digital Solutions
Revenue
58,465
62,806
59,438
174,473
180,924
Gross Margin
8,371
11,330
9,222
26,792
30,001
Operating Income (Loss)
3,091
5,362
3,436
10,035
12,557
Operating Income (Loss) %
5
%
9
%
6
%
6
%
7
%
Total Energy Services and Products
Revenue
$
474,913
$
377,455
$
438,474
$
1,278,035
$
1,119,200
Gross Margin
95,740
62,607
79,585
225,221
185,195
Operating Income (Loss)
64,752
33,338
45,544
128,665
97,214
Operating Income (Loss) %
14
%
9
%
10
%
10
%
9
%
Subsea Robotics. We believe we are the world's largest provider of work-class ROV services and, generally, this business segment has been the largest contributor to our Energy Services and Products business operating income. Our Subsea Robotics segment revenue reflects the utilization percentages, fleet sizes and average pricing
in the respective periods. Our survey services business provides survey and positioning, and geoscience services. The following table presents revenue from ROV as a percentage of total Subsea Robotics revenue:
Three Months Ended
Nine Months Ended
Sep 30, 2022
Sep 30, 2021
Jun 30, 2022
Sep 30, 2022
Sep 30, 2021
ROV
77
%
79
%
77
%
77
%
79
%
Other
23
%
21
%
23
%
23
%
21
%
During the third quarter of 2022, Subsea Robotics operating income and revenue both increased as compared to the immediately preceding quarter, primarily due to higher levels of activity for ROV, survey and tooling services, along with positive impacts of new contract pricing and utilization efficiencies. Subsea Robotics operating income for the third quarter of 2022 increased on higher revenue as compared to the corresponding period of the prior year, as a result of higher levels of activity and higher average revenue per day on hire due to positive impacts of new contract pricing. Subsea Robotics operating income for the nine-month period ended September 30, 2022 increased as compared to the corresponding period of the prior year on higher revenue, as a result of higher levels of activity for ROV and tooling, along with the positive impact of new contract pricing and utilization efficiencies in the first nine months of 2022.
For the three-month period ended September 30, 2022, days on hire increased modestly when compared to the immediately preceding quarter, with drill support days higher and vessel-based services days essentially flat.Fleet utilization was 67% in the three-month period ended September 30, 2022 as compared to 63% for the corresponding period of the prior year and 64% for the immediately preceding quarter. Fleet utilization increased to 61% from 59% for the nine-month periods ended September 30, 2022 and 2021, respectively. We retired seven of our conventional work-class ROV systems and replaced them with five upgraded conventional work-class ROV systems and two IsurusTM work-class ROV systems during the nine months ended September 30, 2022, resulting in a total of 250 ROVs in our ROV fleet as of both September 30, 2022 and September 30, 2021.
Manufactured Products. Our Manufactured Products segment provides distribution systems such as production control umbilicals and connection systems made up of specialty subsea hardware, and provides turnkey solutions that include program management, engineering design, fabrication/assembly and installation of autonomous mobile robot technology to the commercial theme park industry and a variety of other industries.
For the three-month period ended September 30, 2022, our Manufactured Products operating results improved measurably on lower revenue as compared to the immediately preceding quarter, primarily due to increased manufacturing throughput in our subsea hardware businesses. Manufactured Products operating results and revenue for the three-month period ended September 30, 2022, as compared to the corresponding period of the prior year, were higher primarily due to increased manufacturing throughput in our subsea umbilical facilities and our connection systems businesses. Manufactured Products operating results and revenue for the nine-month period ended September 30, 2022, increased as compared to the corresponding period of the prior year. The revenue increase was primarily due to receipt of certain umbilical materials in the first nine months of 2022 that did not contribute to manufacturing activity or profitability in the same period. Operating results increased on additional umbilical storage income and higher activity in our connection systems business. The aforementioned revenue and operating result increases were partially offset by lower revenue and operating results in our theme park and mobile robotics businesses.
Our Manufactured Products backlog was $365 million as of September 30, 2022 compared to $318 million as of December 31, 2021. Our book-to-bill ratio was 1.08 for the trailing 12 months, as compared with a book-to-bill ratio of 1.1 for the year ended December 31, 2021.
Offshore Projects Group. Our OPG segment provides a broad portfolio of integrated subsea project capabilities and solutions as follows:
•subsea installation and mechanical and hydraulic intervention, including riserless light well intervention
(“RLWI”) services and inspection, maintenance and repair (“IMR”) services, utilizing owned and chartered vessels;
•installation and workover control systems (“IWOCS”) and ROV workover control systems (“RWOCS”);
•drill pipe riser services and systems and wellhead load relief solutions.
Our OPG segment saw strong seasonal activity during the three months ended September 30, 2022, which resulted in higher operating results on increased revenue, as compared to the immediately preceding quarter. Our improved operating results in the third quarter of 2022, as compared to the prior quarter, were driven by increased intervention and installation work, primarily in the Gulf of Mexico. Our OPG operating results were significantly higher in the three months ended September 30, 2022 compared to the corresponding period of the prior year, primarily due to increased intervention and diving work in the Gulf of Mexico. Our OPG operating results improved in the nine months ended September 30, 2022 as compared to the corresponding period of the prior year, primarily due to increased intervention, installation and controls work in the Gulf of Mexico.
Integrity Management & Digital Solutions. Through our IMDS segment, we provide asset integrity management, corrosion management, inspection and nondestructive testing services, principally to customers in the oil and gas, power generation and petrochemical industries. We perform these services on both onshore and offshore facilities, both topside and subsea. We also provide software, digital and connectivity solutions for the energy industry and software and analytical solutions for the bulk cargo maritime industry.
Our IMDS operating results for the third quarter of 2022 declined slightly on lower revenue, as compared to the immediately preceding quarter. Revenue in the third quarter of 2022 declined, as compared to the immediately preceding quarter, as customers, particularly in Europe, delayed inspection programs and kept facilities running to support energy security priorities. Operating results in the third quarter of 2022 declined, as compared to the immediately preceding quarter, primarily due to the continuing impact of employee wage inflation. IMDS operating results for the three- and nine-month periods ended September 30, 2022 as compared to the corresponding periods of the prior year, were lower primarily on lower activity levels.
Aerospace and Defense Technologies. Our ADTech segment provides government services and products, including engineering and related manufacturing in defense and space exploration activities, principally to U.S. government agencies and their prime contractors.
Revenue, gross margin and operating income (loss) information for our ADTech segment are as follows:
Three Months Ended
Nine Months Ended
(dollars in thousands)
Sep 30, 2022
Sep 30, 2021
Jun 30, 2022
Sep 30, 2022
Sep 30, 2021
Revenue
$
84,758
$
89,359
$
85,557
$
251,826
$
283,366
Gross Margin
19,431
20,019
15,744
52,045
66,732
Operating Income (Loss)
13,043
14,251
8,961
33,848
50,430
Operating Income (Loss) %
15
%
16
%
10
%
13
%
18
%
Our ADTech segment operating results for the third quarter of 2022 increased significantly as compared to the immediately preceding quarter, on essentially flat revenue, reflecting recovery of second quarter of 2022 pre-contract costs and a favorable project mix which resulted in higher margins. ADTech operating results for the three-month period ended September 30, 2022 were lower, when compared to the corresponding period of the prior year, on decreased revenue due to decreased activity in defense subsea technologies. Our ADTech operating results for the nine-month period ended September 30, 2022 decreased significantly on lower levels of revenue, when compared to the corresponding period of the prior year, due to reduced activity in both defense subsea technologies and space systems.
Unallocated Expenses
Our Unallocated Expenses (i.e., those not associated with a specific business segment) within gross margin consist of expenses related to our incentive and deferred compensation plans, including restricted stock units, performance units and bonuses, as well as other general expenses. Our Unallocated Expenses within operating expense consist of those expenses within gross margin plus general and administrative expenses related to corporate functions.
The following table sets forth our Unallocated Expenses for the periods indicated:
Three Months Ended
Nine Months Ended
(dollars in thousands)
Sep 30, 2022
Sep 30, 2021
Jun 30, 2022
Sep 30, 2022
Sep 30, 2021
Gross margin expenses
$
(19,417)
$
(22,778)
(19,288)
$
(59,991)
$
(67,025)
% of revenue
3
%
5
%
4
%
4
%
5
%
Operating expenses
(30,920)
(31,820)
(31,655)
(93,827)
(95,273)
Operating expenses % of revenue
6
%
7
%
6
%
6
%
7
%
Our unallocated operating expenses for the third quarter of 2022 decreased slightly as compared to the immediately preceding quarter and the corresponding period of the prior year.Our Unallocated operating expenses for the nine-month period ended September 30, 2022 decreased as compared to the corresponding period of the prior year primarily due to lower accruals in 2022 for incentive-based compensation, partially offset by increased information technology costs.
Other
The following table sets forth our significant financial statement items below the income (loss) from operations line.
Three Months Ended
Nine Months Ended
(in thousands)
Sep 30, 2022
Sep 30, 2021
Jun 30, 2022
Sep 30, 2022
Sep 30, 2021
Interest income
$
1,396
$
662
$
767
$
2,959
$
1,864
Interest expense
(9,552)
(9,616)
(9,619)
(28,614)
(29,752)
Equity in income (losses) of unconsolidated affiliates
496
189
318
1,108
1,101
Other income (expense), net
(1,222)
(814)
583
(195)
(4,222)
Provision (benefit) for income taxes
19,690
13,560
11,179
41,131
31,856
In addition to interest on borrowings, interest expense, net of amounts capitalized, includes amortization of loan costs and interest rate swap gains, fees for lender commitments under our senior secured revolving credit agreement and fees for standby letters of credit and bank guarantees that banks issue on our behalf for performance bonds, bid bonds and self-insurance requirements.
Foreign currency transaction gains and losses are the principal component of other income (expense), net. In the three-month periods ended September 30, 2022 and 2021, we incurred foreign currency transaction gains (losses) of $(1.1) million and $(0.3) million, respectively. In the nine-month periods ended September 30, 2022 and 2021, we incurred foreign currency transaction gains (losses) of $0.2 million and $(4.0) million, respectively. The currency gains (losses) in the 2022 and 2021 periods were primarily related to increasing (declining) exchange rates for the Angolan kwanza relative to the U.S. dollar. We could incur further foreign currency transaction gains (losses) due to foreign currency exchange fluctuations in Angola, and other countries.
Our tax provision is based on (1) our earnings for the period and other factors affecting the tax provision and (2) the operations of foreign branches and subsidiaries that are subject to local income and withholding taxes. Factors that affect our tax rate include our profitability levels in general and the geographical mix of our results. The effective tax rate for the three- and nine-month periods ended September 30, 2022 and 2021 was different than the federal statutory rate of 21%, primarily due to the geographical mix of revenue and earnings, changes in valuation allowances and uncertain tax positions, and other discrete items; therefore, we do not believe a discussion of the effective tax rate is meaningful. We continue to make an assertion to indefinitely reinvest the unrepatriated earnings of any foreign subsidiary that would incur incremental tax consequences upon the distribution of such earnings.
On March 27, 2020, the CARES Act was signed into law in the United States. In accordance with the rules and procedures under the CARES Act, we filed certain refund claims to carry back a portion of our U.S. net operating loss. Prior to enactment of the CARES Act, such net operating losses could only be carried forward. As a result, we expected to receive combined refunds of approximately $33 million, of which we have previously received $10 million. During the third quarter of 2022, we reached an agreement in principle to settle our 2014 U.S. tax return audit, which reduces the outstanding refunds by approximately $3.0 million. The remaining refunds of approximately $20 million are classified as accounts receivable, net, in our consolidated balance sheet as of September 30, 2022.
While the exact timing for the receipt of these refunds remains uncertain, we do not anticipate receiving any portion of these refunds in 2022.
Our income tax payments for the full year of 2022 are estimated to be in the range of $40 million to $45 million, which includes taxes incurred in countries that impose tax on the basis of in-country revenue, without regard to the profitability of such operations.
Liquidity and Capital Resources
We consider our liquidity and capital resources adequate to support our operations, capital commitments and growth initiatives. As of September 30, 2022, we had working capital of $704 million, including cash and cash equivalents of $428 million. Additionally, as of September 30, 2022, we had $215 million of unused commitments through our senior secured revolving credit agreement (the “Revolving Credit Agreement”) that we entered into in April 2022. We remain committed to maintaining strong liquidity and believe that our cash position, undrawn Revolving Credit Agreement, and debt maturity profile should provide us ample resources and time to address potential opportunities to improve our returns.
Our nearest maturity of indebtedness is our $400 million of 2024 Notes (as defined below) due in November 2024. In 2021, we repurchased $100 million in aggregate principal amount of the 2024 Senior Notes in open-market transactions. We may, from time to time, complete additional limited repurchases of the 2024 Notes, via open-market or privately negotiated repurchase transactions or otherwise, prior to their maturity date. We can provide no assurances as to the timing of any such additional repurchases or whether we will complete any such repurchases at all. We do not intend to disclose further information regarding any such repurchase transactions, except to the extent required in our subsequent periodic filings on Forms 10-K or 10-Q, or unless otherwise required by applicable law.
Changes impacting our cash and cash equivalents in the nine months ended September 30, 2022 and 2021 are summarized as follows:
Nine Months Ended
(in thousands)
Sep 30, 2022
Sep 30, 2021
Changes in Cash:
Net Cash Provided by (Used in) Operating Activities
$
(38,583)
$
85,319
Net Cash Used in Investing Activities
(51,132)
(22,936)
Net Cash Used in Financing Activities
(1,862)
(64,737)
Effect of exchange rates on cash
(19,030)
(1,937)
Net Increase (Decrease) in Cash and Cash Equivalents
$
(110,607)
$
(4,291)
Operating activities
Our primary sources and uses of cash from operating activities for the nine months ended September 30, 2022 and 2021 are as follows:
Nine Months Ended
(in thousands)
Sep 30, 2022
Sep 30, 2021
Cash Flows from Operating Activities:
Net income (loss)
$
2,813
$
(10,494)
Non-cash items, net
98,679
109,919
Accounts receivable and contract assets
(130,023)
(29,587)
Inventory
(14,079)
12,371
Current liabilities
14,562
14,130
Other changes
(10,535)
(11,020)
Net Cash Provided by (Used in) Operating Activities
The decrease in cash used in operating activities in the nine months ended September 30, 2022 was primarily due to the increases in accounts receivable and contract assets reflecting the timing of project milestones and customer payments. The decrease in cash related to inventory in the nine months ended September 30, 2022 corresponds with an increase in our backlog. The increase in cash related to current liabilities in the nine months ended September 30, 2022 reflects the timing of vendor payments partially offset by decreased accruals for the annual employee incentive payments related to attainment of specific performance goals.
Investing activities
Our capital expenditures of $55 million were higher during the first nine months of 2022, as compared to $36 million in the first nine months of 2021, primarily due to increased spending in our Subsea Robotics segment to upgrade five of our conventional work-class ROV systems placed into service in the first nine months of 2022 along with three placed into service in October 2022 and to add two IsurusTM work-class ROV systems. We also had increased capital expenditures in the first nine months of 2022 for information technology systems.
For 2022, we continue to expect our organic capital expenditures to be in the range of $70 million to $80 million. This includes approximately $40 million to $45 million of maintenance capital expenditures and $30 million to $35 million of growth capital expenditures.
We have several deepwater vessels under a mix of short-term charters where we can see firm workload and spot charters as market opportunities arise, along with three long-term charters that began in the first and second quarters of 2022. With the current market conditions, we anticipate we may add additional chartered vessels throughout the year to align with our strategy that balances vessel cost, availability and capability to capture work. We expect to do this through the continued utilization of a mix of short-term, spot and long-term charters.
Financing activities
In the nine months ended September 30, 2022, we used $1.9 million of cash in financing activities. In the nine months ended September 30, 2021, we used $65 million of cash in financing activities primarily due to repurchases of approximately $63 million in aggregate principal amount of the 2024 Senior Notes (as defined below) at approximately par in open market transactions.
As of September 30, 2022, we had long-term debt in the principal amount of $700 million outstanding and $215 million of unused commitments under our Revolving Credit Agreement. As of September 30, 2022, we were in compliance with all the covenants set forth in the credit agreement governing the Revolving Credit Agreement.
In November 2014, we completed the public offering of $500 million aggregate principal amount of 4.650% Senior Notes due 2024 (the “2024 Senior Notes”). We pay interest on the 2024 Senior Notes on May 15 and November 15 of each year. The 2024 Senior Notes are scheduled to mature on November 15, 2024.
In February 2018, we completed the public offering of $300 million aggregate principal amount of 6.000% Senior Notes due 2028 (the “2028 Senior Notes”). We pay interest on the 2028 Senior Notes on February 1 and August 1 of each year. The 2028 Senior Notes are scheduled to mature on February 1, 2028.
We may redeem some or all of the 2024 Senior Notes and 2028 Senior Notes at specified redemption prices. In 2021, we repurchased $100 million in aggregate principal amount of the 2024 Senior Notes in open-market transactions.
In December 2014, our Board of Directors approved a plan to repurchase up to 10 million shares of our common stock. In 2015, we repurchased 2.0 million shares under this plan. We have not repurchased any shares under this plan since December 2015. We account for the shares we hold in treasury under the cost method, at average cost. The timing and amount of any future repurchases will be determined by our management. We expect that any additional shares repurchased under the plan will be held as treasury stock for possible future use. The plan does not obligate us to repurchase any particular number of shares.
We have not guaranteed any debt not reflected on our Consolidated Balance Sheets as of September 30, 2022, and we do not have any off-balance sheet arrangements, as defined by Securities and Exchange Commission's rules.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in conformity with accounting principles generally accepted in the United States. These principles require us to make various estimates, judgments and assumptions that affect the reported amounts in our financial statements and accompanying notes. We disclose our significant accounting policies in Notes to Consolidated Financial Statements—Note 1—“Summary of Major Accounting Policies” in this quarterly report and in our annual report on Form 10-K for the year ended December 31, 2021, in Part II. Item 7. “Financial Statements and Supplementary Data—Note 1—Summary of Major Accounting Policies.”
For information about our critical accounting policies and estimates, see Part II. Item 7. “Management's Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates” in our annual report on Form 10-K for the year ended December 31, 2021. As of September 30, 2022, there have been no material changes to the judgments, assumptions and estimates upon which our critical accounting policies and estimates are based.
Item 3.Quantitative and Qualitative Disclosures About Market Risk
We are exposed to certain market risks arising from transactions we have entered into in the normal course of business. These risks relate to interest rate changes and fluctuations in foreign exchange rates. Except for our exposure in Angola, we do not believe these risks are material. We have not entered into any market-risk-sensitive instruments for speculative or trading purposes. When we have a significant amount of borrowings, we may manage our exposure to interest rate changes through the use of a combination of fixed- and floating-rate debt. See Note 6—“Debt” in the Notes to Consolidated Financial Statements in this quarterly report for a description of our revolving credit agreement and interest rates on our borrowings. We believe significant interest rate changes would not have a material near-term impact on our future earnings or cash flows.
Because we operate in various regions in the world, we conduct a portion of our business in currencies other than the U.S. dollar. The functional currency for most of our international operations is the applicable local currency. A stronger U.S. dollar against the United Kingdom pound sterling, the Norwegian kroner and the Brazilian real could result in lower operating income. We manage our exposure to changes in foreign exchange rates by primarily denominating our contracts and providing for collections from our customers in U.S. dollars or freely convertible currency, and endeavoring to match our contract costs with the denominated contractual currency. We use the exchange rates in effect as of the balance sheet date to translate assets and liabilities when the functional currency is the local currency, resulting in translation adjustments that we reflect as accumulated other comprehensive income or loss in the equity section of our Consolidated Balance Sheets. We recorded net adjustments to our equity accounts of $(21) million and $(9.0) million in the three-month periods ended September 30, 2022 and September 30, 2021, respectively, and $(42) million and $(5.4) million in the nine-month periods ended September 30, 2022 and 2021, respectively. Negative adjustments reflect the net impact of the strengthening of the U.S. dollar against various foreign currencies for locations where the functional currency is not the U.S. dollar. Conversely, positive adjustments reflect the effect of a weakening U.S. dollar.
We recorded foreign currency transaction gains (losses) of $(1.1) million and $(0.3) million in the three-month periods ended September 30, 2022 and 2021, respectively, and $0.2 million and $(4.0) million in the nine-month periods ended September 30, 2022 and 2021, respectively. We recorded foreign currency transaction gains (losses) related to the Angolan kwanza as a component of other income (expense), net in our Consolidated Statements of Operations in those respective periods. Foreign currency transaction gains (losses) related to the Angolan kwanza of $(1.4) million and $0.9 million in three-month periods ended September 30, 2022 and 2021, respectively, and $0.7 million and $(0.9) million in the nine-month periods ended September 30, 2022 and 2021, respectively, were primarily due to the remeasurement of our Angolan kwanza cash balances to U.S. dollars. Any conversion of cash balances from kwanza to U.S. dollars is controlled by the central bank in Angola. During 2021, we were able to repatriate $4.5 million of cash from Angola.
As of September 30, 2022 and December 31, 2021, we had the equivalent of approximately $2.7 million and $1.0 million, respectively, of kwanza cash balances in Angola reflected on our Consolidated Balance Sheets.
To mitigate our currency exposure risk in Angola, we have used kwanza to purchase equivalent Angolan central bank (Banco Nacional de Angola) bonds. The bonds are denominated as U.S. dollar equivalents, so that, upon payment of semi-annual interest and principal upon maturity, payment is made in kwanza, equivalent to the respective U.S. dollars at the then-current exchange rate. As of September 30, 2022 and December 31, 2021, we had $6.2 million, respectively, of U.S. dollar equivalent Angolan bonds. During the nine-month period ended September 30, 2021, we sold a portion of these bonds for $4.5 million, and recognized a gain of $0.5 million, respectively, as a component of other income (expense), net in our Consolidated Statement of Operations. We did not sell any of our remaining Angolan bonds in the three- and nine-month periods ended September 30, 2022.
We estimated the fair market value of the Angolan bonds to be $6.4 million as of September 30, 2022 and December 31, 2021, respectively, using quoted market prices. Since the market for the Angolan bonds is not an active market, the fair value of the Angolan bonds is classified within Level 2 in the fair value hierarchy under U.S. GAAP. As of September 30, 2022 and December 31, 2021, we have $0.2 million in unrealized loss, net of tax, respectively, in unrealized losses, net of tax, related to these bonds as a component of accumulated other comprehensive loss on our Consolidated Balance Sheets.
In accordance with Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), we carried out an evaluation, under the supervision and with the participation of management, including our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of September 30, 2022 to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms.
There has been no change in our internal control over financial reporting that occurred during the three months ended September 30, 2022 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
For information regarding legal proceedings, see the discussion under the caption “Litigation” in Note 7—“Commitments and Contingencies” in the Notes to Consolidated Financial Statements included in this report, which discussion we incorporate by reference into this Item.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
