Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and the related notes thereto included in Part II, Item 8, “Financial Statements and Supplementary Data” included in this Form 10-K.
This section contains forward-looking statements that are based on management’s current expectations, estimates and projections about our business and operations, and involve risks and uncertainties. Our actual results may differ materially from those currently anticipated and expressed in such forward-looking statements because of various factors, including those described in the sections titled “Cautionary Note Regarding Forward-Looking Statements,” Part I, Item 1A, “Risk Factors” and elsewhere in this Form 10-K.
This section of this Form 10-K generally discusses 2022 and 2021 items and year-to-year comparisons between 2022 and 2021. Discussions of 2020 items and year-to-year comparisons between 2021 and 2020 that are not included in this Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Company's Annual Report on Form 10-K for the year ended December 31, 2021.
Unless otherwise indicated, references to the terms “Frank’s” refers to Frank’s International N.V., the predecessor reporting entity prior to the Merger, references to “Legacy Expro” refer to Expro Group Holdings International Limited, the entity acquired by the Company, and references to “Expro,” the “Company,” “we,” “our,” and “us” refer to Expro Group Holdings N.V., following the consummation of the Merger and unless the context otherwise requires, Frank’s prior to the consummation of the Merger.
Overview of Business
Working for clients across the entire well life cycle, we are a leading provider of energy services, offering cost-effective, innovative solutions and what we consider to be best-in-class safety and service quality. The Company’s extensive portfolio of capabilities spans well construction, well flow management, subsea well access, and well intervention and integrity solutions.
With roots dating to 1938, we have approximately 7,600 employees and provide services and solutions to leading exploration and production companies in both onshore and offshore environments in approximately 60 countries.
Our broad portfolio of products and services are designed to enhance production and improve recovery across the well lifecycle from exploration through abandonment, including:
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• |
Our well construction products and services support customers’ new wellbore drilling, wellbore completion and recompletion, and wellbore plug and abandonment requirements. In particular, we offer advanced technology solutions in drilling, tubular running services, cementing and tubulars. With a focus on innovation, we are continuing to advance the way wells are constructed by optimizing process efficiency on the rig floor, developing new methods to handle and install tubulars and mitigating well integrity risks. |
|
Our well management offerings consist of well flow management, subsea well access and well intervention and integrity services: |
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• |
Well flow management: We gather valuable well and reservoir data, with a particular focus on well-site safety and environmental impact. We provide global, comprehensive well flow management systems for the safe production, measurement and sampling of hydrocarbons from a well during the exploration and appraisal phase of a new field; the flowback and clean-up of a new well prior to production; and in-line testing of a well during its production life. We also provide early production facilities to accelerate production; production enhancement packages to enhance reservoir recovery rates through the realization of production that was previously locked within the reservoir; and metering and other well surveillance technologies to monitor and measure flow and other characteristics of wells. |
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• |
Subsea well access: With over 35 years of experience providing a wide range of fit-for-purpose subsea well access solutions, our technology aims to ensure safe well access and optimized production throughout the lifecycle of the well. We provide what we believe to be the most reliable, efficient and cost-effective subsea well access systems for exploration and appraisal, development, intervention and abandonment, including an extensive portfolio of standard and bespoke Subsea Test Tree Assemblies, a rig-deployed Intervention Riser System and a vessel-deployed, wire through water Riserless Well Intervention System. We also provide systems integration and project management services. |
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• |
Well intervention and integrity: We provide well intervention solutions to acquire and interpret well data, ensure well bore integrity and improve production. In addition to our extensive fleet of mechanical and cased hole wireline units, we have recently introduced a number of cost-effective, innovative well intervention services, including CoilHose™, a lightweight, small-footprint solution for wellbore lifting, cleaning and chemical treatments; Octopoda™, for fluid treatments in wellbore annuli; and Galea™, an autonomous well intervention solution. We also possess several other distinct technical capabilities, including non-intrusive metering technologies and wireless telemetry systems for reservoir monitoring. |
We operate a global business and have a diverse and relatively stable customer base that is comprised of national oil companies (“NOC”), international oil companies (“IOC”), independent exploration and production companies (“Independents”) and service partners. We have strong relationships with a number of the world’s largest NOCs and IOCs, some of which have been our customers for decades. We are dedicated to safely and sustainably delivering maximum value to our customers.
We organize and manage our operations on a geographical basis. Our reporting structure and the key financial information used by our management team is organized around our four operating segments: (i) NLA, (ii) ESSA, (iii) MENA and (iv) APAC.
How We Generate Our Revenue
Our revenue is derived primarily from providing services in well construction, well flow management, subsea well access and well intervention and integrity to operators globally. Our revenue includes equipment service charges, personnel charges, run charges and consumables. Some of our contracts allow us to charge for additional deliverables, such as the costs of mobilization of people and equipment and customer specific engineering costs associated with a project. We also procure products and services on behalf of our customers that are provided by third parties for which we are reimbursed with a mark-up or in connection with an integrated services contract. We also design, manufacture and sell equipment, which is typically done in connection with a related operations and maintenance arrangement with a particular customer. In addition, we also generate revenue from the sale of certain well construction products.
For the year ended December 31, 2022, approximately 79% of our revenue was generated outside of the United States and approximately 70% of our revenue was generated by activities related to offshore oil and gas operations. Approximately 70% of our revenue was generated by services tied to drilling and completions-related activities, which are generally funded by customers’ capital expenditures, and approximately 30% of our revenue was generated by production optimization related activities, which are generally funded by customers’ operating expenditures rather than capital expenditures.
Market Conditions and Price of Oil and Gas
Fiscal year 2022 has seen positive signs of recovery in the market following the impact of the COVID-19 pandemic and the Russian war in Ukraine. There are a number of market factors that have had, and may continue to have, an effect on our business, including:
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• |
The market for energy services and our business are substantially dependent on the price of oil and, to a lesser extent, the regional price of gas, which are both driven by market supply and demand. Changes in oil and gas prices impact customers' willingness to spend on exploration and appraisal, development, production and abandonment activities. The extent of the impact of a change in oil and gas prices on these activities varies extensively between geographic regions, types of customers, types of activities and the financial returns of individual projects. In response to this uncertain industry outlook, we continue to evaluate additional cost saving opportunities in order to reduce service delivery costs, increase productivity and improve profitability; however, our commitment to safety, service quality and innovation remains steadfast. |
|
• |
Oil demand in 2022 exceeded 2021; in 2023 liquids demand is estimated to approximate 2019 levels. Brent prices remained volatile during the fourth quarter of 2022, with the average Brent oil price falling as a result of a slowdown in demand growth and tighter governmental monetary policies, offset by falling global oil inventories, uncertainty around the impact of the latest sanctions on Russia, and continued production restraint from OPEC+ members. In February 2023, Russia announced that it will cut production by 500,000 bbl/d in March, equivalent to 5% of its January output, following the enactment of the EU embargo and the $60 per barrel price cap for Russian oil. |
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• |
Following the multi-year underinvestment in new reserves, Expro and other energy service companies expect that operators will increase activity levels in exploration and development in 2023 and beyond, while maintaining fiscal discipline. |
|
• |
Activity related to gas production and associated asset development is continuing to accelerate in the North Sea, Sub-Saharan Africa and MENA as a result of Russian gas supply shortfalls and Europe’s effort to diversify its gas supply and reduce its reliance on Russian pipeline gas supplies over the long term. |
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• |
Growth is not expected to be uniform across geo-markets or type of activity; however, international and deepwater activity are expected to continue to improve in 2023 and beyond. We also expect that the demand for services related to brownfield and production enhancement and infield development programs will continue to show increased demand. In addition, we envisage an increase in demand for early production facilities, especially in support of gas and liquified natural gas (“LNG”) developments. |
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• |
The clean energy transition continues to gain momentum. Hydrocarbons, however, are expected to continue to play a vital role in the transition towards more sustainable energy resources, with natural gas in particular acting as a key transition fuel and potentially as a structural source of low carbon electricity generation. We also believe that the existing expertise and future innovation within the energy services sector, both to reduce emissions and enhance efficiency, will be critical. We are already active in the early-stage carbon capture and storage segment and have expertise and established operations within the geothermal and flare reduction segments. We continue to develop technologies to enhance the sustainability of our customers’ operations which, along with our digital transformation initiatives, are expected to enable us to continue to support our customers’ commercial and environmental initiatives. As the industry changes, we continue to evolve our approach to adapt and help our customers address the critical energy transition. |
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• |
Increased expectations of host countries in regard to local content is another multi-year trend that gained additional momentum in recent years. Our commitment to developing local capabilities and in-country personnel has reduced our dependence on international staff, enabling us to continue to service our customers in their ongoing operations and mitigate some of the operational challenges associated with pandemic-related travel restrictions. |
Outlook
Demand continues to improve despite volatile oil prices, with oil demand forecast to return to pre-pandemic levels in early 2023. The U.S. Energy Information Administration (“EIA”) estimates that global liquids consumption will increase from an average of 99.4 million barrels per day ("b/d") in 2022 to 100.5 million b/d in 2023 (approximating 2019 consumption levels) and rise further to 102.2 million b/d in 2024. The EIA expects continued OPEC+ production growth in 2023 and a further increase of 0.8 million b/d over 2022, to average 29.5 million b/d in 2024. The increase in OPEC+ production along with growth in U.S. oil production in 2023 (expected to rise to 12.4 million b/d in 2023 and 12.8 million b/d in 2024, greater than the highest annual average U.S. crude oil production on record) is expected to lead to an overall build in global oil inventories in 2023. As a result, the EIA has reduced its forecast for Brent crude oil spot prices from its third quarter prediction to an average $83 per barrel in 2023 and $78 per barrel in 2024, compared to an average $101 per barrel in 2022. The EIA’s third quarter forecast was an average $102 per barrel in 2022 and $95 per barrel in 2023, so the EIA is increasingly forecasting a stabilizing oil price with lower price peaks.
In addition to the improving oil market outlook, global natural gas prices remain elevated due to a combination of sustained economic activity and energy security concerns in Europe driving continued strong demand for LNG to replace Russian pipeline gas. The global demand for natural gas is set to decline from the highs of 2022 as domestic consumption from the electric power and industrial sectors is reduced and LNG exports remain relatively flat, limiting further upwards pricing pressures in 2023.
The EIA expects Henry Hub spot prices to decrease to an average of $4.90 per million British thermal unit (“MMBtu”) in 2023, down close to 25% from $6.42 MMBtu in 2022, then falling to $4.80/MMBtu in 2024 as natural gas production outpaces an increase in LNG exports resulting from rising LNG export capacity. Rystad forecasts the European and Asian LNG spot price to trade at approximately $32.0/MMBtu and $30.0/MMBtu respectively in 2023, a reduction from previous forecasts as record-strong LNG supplies have driven a storage build, suggesting a comparably softer market for 2023. The market does however remain tight for 2023 with upside risks due to further reduction in Russian gas and LNG exports, cold spells in the northern hemisphere, and a recovery in Chinese demand.
The outlook for 2023 indicates a continuing recovery in exploration and production expenditures, with investments expected to reach pre-pandemic levels with growth maintained in offshore shelf activity, driven by Latin America, shale / tight oil led by the U.S. land markets, and significant investments in incremental capacity in the Middle East, including Saudi Arabia, the United Arab Emirates and Qatar, in order to offset the decline in Russian gas supply.
As a result, we expect demand for our services and solutions to continue to trend positively through 2023. The following provides an outlook for 2023 by our reporting segments based on data from Spears and Associates, Inc.
NLA: In North America, activity is projected to increase in 2023 by approximately 12% to 810 active rigs and over 21,900 new well spuds, which will also support an increase of 6% in frac activity over 2022. Approximately 792 rigs are forecast to be active in onshore North America, and 18 rigs active offshore, a 20% increase over 2022 active offshore rig count. The rate of growth has decelerated recently, most likely due to increased oilfield inflation and fiscal discipline from operators looking to return excess cash to investors or use cash to reduce financial leverage. In Latin America, drilling activity is forecast to increase 19% in 2023 to 202 active rigs and approximately 2,700 new wells, driven by the continued recovery in Argentina and Mexico, two countries with the highest drilling activity in the region. Offshore drilling activity in Latin America is forecast to rise 13% to 44 active rigs and 280 wells, driven by Brazil and Mexico, but offshore activity in Guyana is also expected to remain buoyant.
ESSA: European drilling is projected to average 84 active rigs in 2023 (up 14%) accounting for approximately 775 new wells. Offshore drilling is projected to rise by 9% in 2023, averaging 35 rigs with 425 new wells. As a result of energy security concerns and a desire by European policy makers to reduce reliance on Russian oil and gas imports, there remains an increased focus on North Sea operations and production optimization from existing assets, core areas of Expro’s expertise. In Sub-Saharan Africa, drilling activity is forecast to jump by 12% in 2023 to average 129 active rigs, drilling over 1,000 new wells. Sub-Saharan Africa growth is driven by offshore activity with 16% growth forecast in 2023, with the progression of development programs for a number of large offshore projects. In addition, exploration campaigns in Namibia are also progressing. New gas and LNG projects are expected to boost Africa’s natural gas production to record levels over the next decade, driven by Europe’s demand for non-Russian imports and Africa’s own gas demand rising.
MENA: In the Middle East and North Africa, drilling activity is projected to rise substantially in 2023 (26%) to an average of 356 active rigs, drilling over 3,100 new wells as Saudi Arabia seeks to meet increased demand for its oil with several large oilfield expansion schemes. Abu Dhabi, Qatar and Iraq also plan to increase their production capacity. There also is increased focus on infield development and production optimization and enhancement projects to increase production rates (for example in Saudi Arabia, Iraq and Qatar), also adding to a positive future activity outlook.
APAC: In Asia-Pacific, drilling activity is forecast to increase by 11% with 189 active rigs drilling around 2,500 new wells in 2023. Offshore activity is forecast to grow 20% to an average of 49 rigs, with growth primarily in India, Indonesia, Malaysia and Thailand. In addition, carbon capture, utilization and storage project interest is growing, with opportunities being investigated in Thailand as well as in Indonesia, Australia and Malaysia. Production enhancement, well intervention and well abandonment activities are also gaining momentum.
How We Evaluate Our Operations
We use a number of financial and operational measures to routinely analyze and evaluate the performance of our business, including Revenue, Adjusted EBITDA, Adjusted Cash Flow from Operations and Cash Conversion.
Revenue: We analyze our performance by comparing actual monthly revenue by operating segments and areas of capabilities to our internal projections for each month. Our revenue is primarily derived from well construction, well flow management, subsea well access and well intervention and integrity solutions.
Adjusted EBITDA: We regularly evaluate our financial performance using Adjusted EBITDA. Our management believes Adjusted EBITDA is a useful financial performance measure as it excludes non-cash charges and other transactions not related to our core operating activities and allows more meaningful analysis of the trends and performance of our core operations.
Adjusted Cash Flow from Operations: We regularly evaluate our operating cash flow performance using Adjusted Cash Flow from Operations. Our management believes Adjusted Cash Flow from Operations is a useful tool to measure the operating cash performance of the Company as it excludes exceptional payments, interest payments and non-cash charges not related to our core operating activities and allows more meaningful analysis of the trends and performance of our core operations.
Cash Conversion: We regularly evaluate our efficiency of generating cash from operations using Cash Conversion which provides a useful tool to measure Adjusted Cash Flow from Operations as a percentage of Adjusted EBITDA.
Adjusted EBITDA, Adjusted Cash Flow from Operations and Cash Conversion are non-GAAP financial measures. Please refer to the section titled “Non-GAAP Financial Measures” for a reconciliation of Adjusted EBITDA to net loss, the most directly comparable financial performance measure calculated and presented in accordance with GAAP and a reconciliation of Adjusted Cash Flow from Operations to net cash provided by operating activities, the most directly comparable liquidity measure calculated and presented in accordance with GAAP.
Executive Overview
Year ended December 31, 2022 compared to year ended December 31, 2021
Certain highlights of our financial results and other key developments include:
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• |
Revenue for the year ended December 31, 2022 increased by $453.6 million, or 54.9%, to $1,279.4 million, compared to $825.8 million for the year ended December 31, 2021. Of the total increase, $385.7 million represents an increase in well construction revenue, reflecting a full-year impact of the Merger (versus only the last quarter of 2021 in the prior year). The remaining increase was driven by higher well management revenue due to higher customer activities. Activity and revenue across all our geography-based operating segments also increased during the year ended December 31, 2022. Revenue for our segments is discussed separately below under the heading “Operating Segment Results.” |
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We reported a net loss for the year ended December 31, 2022 of $20.1 million, compared to a net loss of $131.9 million for the year ended December 31, 2021. The overall decrease in net loss was primarily driven by increased revenue and Adjusted EBITDA due to a combination of the impact of the Merger, Merger-related synergies and higher activity during the year ended December 31, 2022, a reduction in stock-based compensation expense of $35.7 million and a reduction in merger and integration expense of $34.0 million. The above improvement was partially offset by higher start-up and commissioning costs of $27.7 million incurred on a large subsea project in the current year and an increase in tax expenses by $25.0 million during the year ended December 31, 2022. |
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Adjusted EBITDA for the year ended December 31, 2022 increased by $80.3 million, or 63.8%, to $206.2 million from $125.9 million for the year ended December 31, 2021. The overall increase in Adjusted EBITDA was due to the impact of the Merger, Merger-related synergies and higher activity during the year ended December 31, 2022, partially offset by start-up and commissioning costs incurred on a large subsea project during 2022. Adjusted EBITDA margin increased to 16.1% during the year ended December 31, 2022, as compared to 15.3% during the year ended December 31, 2021, due to a combination of favorable product mix and lower support costs as a result of merger-related synergies, partially offset by start-up and commissioning costs incurred on a large subsea project during the current period. Excluding $27.7 million of such start-up and commissioning costs during the year ended December 31, 2022, Adjusted EBITDA would have been $233.9 million and Adjusted EBITDA margin would have been 18.3%. |
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Net cash provided by operating activities was $80.2 million during the year ended December 31, 2022 as compared to $16.1 million during the year ended December 31, 2021. The increase of $64.1 million in net cash provided by operating activities for the year ended December 31, 2022 was primarily due to improvements in Adjusted EBITDA of $80.3 million (despite the start-up and commissioning costs referenced above), a decrease in payment of merger and integration expenses related to the Merger of $9.8 million, and a decrease in payment of severance and other expense of $4.1 million, partially offset by unfavorable movements in working capital of $15.9 million and an increase in tax payments of $13.0 million during the year ended 31 December 2022. Adjusted Cash Flow from Operations and Cash Conversion for the year ended December 31, 2022, were $115.3 million and 55.9%, respectively, compared to $65.3 million and 51.9%, respectively, for the year ended December 31, 2021. |
Selected Unaudited Financial Information for the Three Months Ended December 31, 2022 and September 30, 2022
Operating Segment Results
The following table shows revenue by segment and revenue as a percentage of total revenue by segment for the three months ended December 31, 2022 and September 30, 2022:
|
|
Three Months Ended |
|
|
Percentage |
|
(in thousands) |
|
December 31, 2022 |
|
|
September 30, 2022 |
|
|
December 31, 2022 |
|
|
September 30, 2022 |
|
NLA |
|
$ |
131,684 |
|
|
$ |
134,574 |
|
|
|
37.5 |
% |
|
|
40.2 |
% |
ESSA |
|
|
117,344 |
|
|
|
99,809 |
|
|
|
33.4 |
% |
|
|
29.9 |
% |
MENA |
|
|
55,387 |
|
|
|
50,030 |
|
|
|
15.8 |
% |
|
|
15.0 |
% |
APAC |
|
|
46,551 |
|
|
|
49,938 |
|
|
|
13.3 |
% |
|
|
14.9 |
% |
Total Revenue |
|
$ |
350,966 |
|
|
$ |
334,351 |
|
|
|
100.0 |
% |
|
|
100.0 |
% |
The following table shows the Segment EBITDA and Segment EBITDA as a percentage of total revenue by segment (“Segment EBITDA margin”) and a reconciliation to income (loss) before income taxes for the three months ended December 31, 2022 and September 30, 2022:
|
|
Three Months Ended |
|
|
Segment EBITDA Margin |
|
(in thousands) |
|
December 31, 2022 |
|
|
September 30, 2022 |
|
|
December 31, 2022 |
|
|
September 30, 2022 |
|
NLA |
|
$ |
35,153 |
|
|
$ |
39,743 |
|
|
|
26.7 |
% |
|
|
29.5 |
% |
ESSA |
|
|
30,179 |
|
|
|
17,760 |
|
|
|
25.7 |
% |
|
|
17.8 |
% |
MENA |
|
|
19,433 |
|
|
|
14,667 |
|
|
|
35.1 |
% |
|
|
29.3 |
% |
APAC |
|
|
3,673 |
|
|
|
(8,617 |
) |
|
|
7.9 |
% |
|
|
-17.3 |
% |
Total Segment EBITDA |
|
$ |
88,438 |
|
|
$ |
63,553 |
|
|
|
25.2 |
% |
|
|
19.0 |
% |
Corporate costs |
|
|
(23,954 |
) |
|
|
(18,849 |
) |
|
|
|
|
|
|
|
|
Equity in income of joint ventures |
|
|
5,590 |
|
|
|
3,510 |
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense |
|
|
(34,538 |
) |
|
|
(34,825 |
) |
|
|
|
|
|
|
|
|
Merger and integration expense |
|
|
(4,996 |
) |
|
|
(1,629 |
) |
|
|
|
|
|
|
|
|
Severance and other expense |
|
|
(2,411 |
) |
|
|
(3,242 |
) |
|
|
|
|
|
|
|
|
Stock-based compensation expense |
|
|
(3,554 |
) |
|
|
(4,684 |
) |
|
|
|
|
|
|
|
|
Foreign exchange gain (loss) |
|
|
2,044 |
|
|
|
(7,957 |
) |
|
|
|
|
|
|
|
|
Other income, net |
|
|
1,477 |
|
|
|
432 |
|
|
|
|
|
|
|
|
|
Interest and finance (expense) income, net |
|
|
(3,468 |
) |
|
|
1,502 |
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
$ |
24,628 |
|
|
$ |
(2,189 |
) |
|
|
|
|
|
|
|
|
Quarter ended December 31, 2022 compared to quarter ended September 30, 2022
NLA
Revenue for the NLA segment was $131.7 million for the three months ended December 31, 2022, a decrease of $2.9 million, or 2.1%, compared to $134.6 million for the three months ended September 30, 2022. The decrease was primarily due to lower well management services revenue in Mexico and the U.S., partially offset by higher well construction services revenue in the Gulf of Mexico driven by higher customer activities.
Segment EBITDA for the NLA segment was $35.2 million, or 26.7% of revenues, during the three months ended December 31, 2022, compared to $39.7 million, or 29.5% of revenues, during the three months ended September 30, 2022. The decrease of $4.5 million in Segment EBITDA was attributable to lower activity and the reduction in Segment EBITDA margin was attributable to a less favorable product mix during the three months ended December 31, 2022.
ESSA
Revenue for the ESSA segment was $117.3 million for the three months ended December 31, 2022, an increase of $17.5 million, or 17.6%, compared to $99.8 million for the three months ended September 30, 2022. The increase in revenues was primarily driven by higher well flow management revenue in Congo from a new contract and in the U.K. from increased customer activities.
Segment EBITDA for the ESSA segment was $30.2 million, or 25.7% of revenues, for the three months ended December 31, 2022, an increase of $12.4 million, or 69.9%, compared to $17.8 million, or 17.8% of revenues, for the three months ended September 30, 2022. The increase in Segment EBITDA and Segment EBITDA margin was primarily attributable to higher activity levels and a more favorable activity mix during the three months ended December 31, 2022.
MENA
Revenue for the MENA segment was $55.4 million for the three months ended December 31, 2022, an increase of $5.4 million, or 10.7%, compared to $50.0 million for the three months ended September 30, 2022. The increase in revenue was driven by higher well flow management services revenue in Algeria and the Kingdom of Saudi Arabia.
Segment EBITDA for the MENA segment was $19.4 million, or 35.1% of revenues, for the three months ended December 31, 2022, an increase of $4.7 million, or 32.5%, compared to $14.7 million, or 29.3% of revenues, for the three months ended September 30, 2022. The increase in Segment EBITDA and Segment EBITDA margin was primarily due to higher activity and a more favorable activity mix during the three months ended December 31, 2022.
APAC
Revenue for the APAC segment was $46.6 million for the three months ended December 31, 2022, a decrease of $3.3 million, or 6.8%, compared to $49.9 million for the three months ended September 30, 2022. The decrease in revenue was primarily due to lower subsea well access revenue in Australia and Malaysia.
Segment EBITDA for the APAC segment was $3.7 million, or 7.9% of revenues, for the three months ended December 31, 2022, an increase of $12.3 million compared to $(8.6) million, or (17.3)% of revenues, for the three months ended September 30, 2022. The increase in Segment EBITDA (despite the decrease in revenues) was primarily due to lower start-up and commissioning costs incurred on a large subsea project during the three months December 31, 2022, as compared to the three months ended September 30, 2022. Excluding $4.8 million and $16.8 million of start-up and commissioning costs during the three months ended December 31, 2022 and September 30, 2022, respectively, Segment EBITDA would have been $8.5 million and $8.1 million and Segment EBITDA margin would have been 18.2% and 16.3% respectively, for the three months ended December 31, 2022 and September 30, 2022.
Non-GAAP Financial Measures
We include in this Form 10-K the non-GAAP financial measures Adjusted EBITDA, Adjusted EBITDA margin, Adjusted Cash Flow from Operations and Cash Conversion. We provide reconciliations of net loss, the most directly comparable financial performance measure calculated and presented in accordance with GAAP, to Adjusted EBITDA. We also provide a reconciliation of Adjusted Cash Flow from Operations to net cash provided by operating activities, the most directly comparable liquidity measure calculated and presented in accordance with GAAP.
Adjusted EBITDA, Adjusted EBITDA margin, Adjusted Cash Flow from Operations and Cash Conversion are used as supplemental financial measures by our management and by external users of our financial statements, such as investors, commercial banks, research analysts and others. These non-GAAP financial measures allow our management and others to assess our financial and operating performance as compared to those of other companies in our industry, without regard to the effects of our capital structure, asset base, items outside the control of management and other charges outside the normal course of business.
We define Adjusted EBITDA as net loss adjusted for (a) income tax expense (benefit), (b) depreciation and amortization expense, (c) impairment expense, (d) severance and other expense, net, (e) stock-based compensation expense, (f) merger and integration expense, (g) gain on disposal of assets, (h) other income, net, (i) interest and finance income (expense), net and (j) foreign exchange losses. Adjusted EBITDA margin reflects our Adjusted EBITDA as a percentage of revenues.
We define Adjusted Cash Flow from Operations as net cash provided by operating activities adjusted for cash paid during the period for interest, net, severance and other expense and merger and integration expense. We define Cash Conversion as Adjusted Cash Flow from Operations divided by Adjusted EBITDA.
Adjusted EBITDA, Adjusted EBITDA margin, Adjusted Cash Flow from Operations and Cash Conversion have limitations as analytical tools and should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. As Adjusted EBITDA, Adjusted Cash Flow from Operations and Cash Conversion may be defined differently by other companies in our industry, our presentation of Adjusted EBITDA, Adjusted Cash Flow from Operations and Cash Conversion may not be comparable to similarly titled measures of other companies, thereby diminishing their utility.
The following table presents a reconciliation of net loss to Adjusted EBITDA for each of the periods presented (in thousands):
|
|
Year ended |
|
|
|
December 31, |
|
|
|
2022 |
|
|
2021 |
|
|
2020 |
|
Net loss |
|
$ |
(20,145 |
) |
|
$ |
(131,891 |
) |
|
$ |
(307,045 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit) |
|
|
41,247 |
|
|
|
16,267 |
|
|
|
(3,400 |
) |
Depreciation and amortization expense |
|
|
139,767 |
|
|
|
123,866 |
|
|
|
113,693 |
|
Impairment expense (1) |
|
|
- |
|
|
|
- |
|
|
|
287,454 |
|
Severance and other expense |
|
|
7,825 |
|
|
|
7,826 |
|
|
|
13,930 |
|
Merger and integration expense |
|
|
13,620 |
|
|
|
47,593 |
|
|
|
1,630 |
|
Gain on disposal of assets |
|
|
- |
|
|
|
(1,000 |
) |
|
|
(10,085 |
) |
Other income, net (2) |
|
|
(3,149 |
) |
|
|
(3,992 |
) |
|
|
(3,908 |
) |
Stock-based compensation expense |
|
|
18,486 |
|
|
|
54,162 |
|
|
|
- |
|
Foreign exchange losses |
|
|
8,341 |
|
|
|
4,314 |
|
|
|
2,261 |
|
Interest and finance expense, net |
|
|
241 |
|
|
|
8,795 |
|
|
|
5,656 |
|
Adjusted EBITDA (3) |
|
$ |
206,233 |
|
|
$ |
125,940 |
|
|
$ |
100,186 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA Margin |
|
|
16.1 |
% |
|
|
15.3 |
% |
|
|
14.8 |
% |
(1) |
Impairment expense represents impairments recorded on goodwill and other long-lived assets, including property, plant and equipment, intangible assets and operating lease right-of-use assets. |
(2) |
Other income, net, is comprised of immaterial, unusual or infrequently occurring transactions which, in management’s view, do not provide useful measures of the underlying operating performance of the business. |
(3) |
Excluding $27.7 million of start-up and commissioning costs on a large subsea project during the year ended December 31, 2022, Adjusted EBITDA would have been $233.9 million and Adjusted EBITDA margin would have been 18.3%. |
The following table provides a reconciliation of net cash provided by operating activities to Adjusted Cash Flow from Operations for each of the periods presented (in thousands):
|
|
Year Ended |
|
|
|
December 31, |
|
|
|
2022 |
|
|
2021 |
|
|
2020 |
|
Net cash provided by operating activities |
|
$ |
80,169 |
|
|
$ |
16,144 |
|
|
$ |
70,391 |
|
Cash paid during the year for interest, net |
|
|
3,851 |
|
|
|
4,192 |
|
|
|
2,630 |
|
Cash paid during the year for severance and other expense |
|
|
3,970 |
|
|
|
8,052 |
|
|
|
15,602 |
|
Cash paid during the year for merger and integration expense |
|
|
27,344 |
|
|
|
36,921 |
|
|
|
- |
|
Adjusted Cash Flow from Operations |
|
$ |
115,334 |
|
|
$ |
65,309 |
|
|
$ |
88,623 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA |
|
$ |
206,233 |
|
|
$ |
125,940 |
|
|
$ |
100,186 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Conversion |
|
|
55.9 |
% |
|
|
51.9 |
% |
|
|
88.5 |
% |
Results of Operations
Operating Segment Results
We evaluate our business segment operating performance using segment revenue and Segment EBITDA, as described in Note 5 “Business segment reporting” in our consolidated financial statements. We believe Segment EBITDA is a useful operating performance measure as it excludes non-cash charges and other transactions not related to our core operating activities and corporate costs, and Segment EBITDA allows management to more meaningfully analyze the trends and performance of our core operations by segment as well as to make decisions regarding the allocation of resources to our segments.
The following table shows revenue by segment and revenue as a percentage of total revenue by segment for the years ended December 31, 2022 and December 31, 2021:
|
|
Year Ended |
|
|
Percentage |
|
(in thousands) |
|
December 31, 2022 |
|
|
December 31, 2021 |
|
|
December 31, 2020 |
|
|
December 31, 2022 |
|
|
December 31, 2021 |
|
|
December 31, 2020 |
|
NLA |
|
$ |
499,813 |
|
|
$ |
193,156 |
|
|
$ |
115,738 |
|
|
|
39.1 |
% |
|
|
23.4 |
% |
|
|
17.2 |
% |
ESSA |
|
|
389,342 |
|
|
|
300,557 |
|
|
|
219,534 |
|
|
|
30.4 |
% |
|
|
36.4 |
% |
|
|
32.5 |
% |
MENA |
|
|
201,495 |
|
|
|
171,136 |
|
|
|
194,033 |
|
|
|
15.7 |
% |
|
|
20.7 |
% |
|
|
28.7 |
% |
APAC |
|
|
188,768 |
|
|
|
160,913 |
|
|
|
145,721 |
|
|
|
14.8 |
% |
|
|
19.5 |
% |
|
|
21.6 |
% |
Total Revenue |
|
$ |
1,279,418 |
|
|
$ |
825,762 |
|
|
$ |
675,026 |
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
The following table shows Segment EBITDA and Segment EBITDA margin by segment and a reconciliation to income (loss) before income taxes for the years ended December 31, 2022 and December 31, 2021:
|
|
Year Ended |
|
|
Segment EBITDA Margin |
|
(in thousands) |
|
December 31, 2022 |
|
|
December 31, 2021 |
|
|
December 31, 2020 |
|
|
December 31, 2022 |
|
|
December 31, 2021 |
|
|
December 31, 2020 |
|
NLA |
|
$ |
135,236 |
|
|
$ |
32,254 |
|
|
$ |
54 |
|
|
|
27.1 |
% |
|
|
16.7 |
% |
|
|
0.0 |
% |
ESSA |
|
|
74,681 |
|
|
|
53,336 |
|
|
|
35,393 |
|
|
|
19.2 |
% |
|
|
17.7 |
% |
|
|
16.1 |
% |
MENA |
|
|
63,315 |
|
|
|
56,312 |
|
|
|
77,296 |
|
|
|
31.4 |
% |
|
|
32.9 |
% |
|
|
39.8 |
% |
APAC (1) |
|
|
4,850 |
|
|
|
33,444 |
|
|
|
34,976 |
|
|
|
2.6 |
% |
|
|
20.8 |
% |
|
|
24.0 |
% |
Total Segment EBITDA |
|
|
278,082 |
|
|
|
175,346 |
|
|
|
147,719 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate costs (2) |
|
|
(87,580 |
) |
|
|
(66,153 |
) |
|
|
(61,122 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Equity in income of joint ventures |
|
|
15,731 |
|
|
|
16,747 |
|
|
|
13,589 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense |
|
|
(139,767 |
) |
|
|
(123,866 |
) |
|
|
(113,693 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Impairment expense |
|
|
- |
|
|
|
- |
|
|
|
(287,454 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Merger and integration expense |
|
|
(13,620 |
) |
|
|
(47,593 |
) |
|
|
(1,630 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Severance and other expense |
|
|
(7,825 |
) |
|
|
(7,826 |
) |
|
|
(13,930 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense |
|
|
(18,486 |
) |
|
|
(54,162 |
) |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange loss |
|
|
(8,341 |
) |
|
|
(4,314 |
) |
|
|
(2,261 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Other income, net |
|
|
3,149 |
|
|
|
3,992 |
|
|
|
3,908 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on disposal of assets |
|
|
- |
|
|
|
1,000 |
|
|
|
10,085 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and finance expense, net |
|
|
(241 |
) |
|
|
(8,795 |
) |
|
|
(5,656 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
$ |
21,102 |
|
|
$ |
(115,624 |
) |
|
$ |
(310,445 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Excluding $27.7 million of start-up and commissioning costs during the year ended December 31, 2022, Segment EBITDA would have been $32.6 million and Segment EBITDA margin would have been 17.3%. |
(2) |
Corporate costs include the costs of running our corporate head office and other central functions that support the operating segments, including research, engineering and development, logistics, sales and marketing and health and safety and are not attributable to a particular operating segment. |
Year ended December 31, 2022 compared to the year ended December 31, 2021
NLA
Revenue for the NLA segment was $499.8 million for the year ended December 31, 2022, an increase of 306.6 million, or 158.7%, compared to $193.2 million for the year ended December 31, 2021. Of the total increase, $257.8 million was attributable to higher well construction revenue, reflecting a full-year impact of the Merger (versus only the fourth quarter of 2021 in the prior year) and higher customer activities in Gulf of Mexico, the U.S. and Brazil during the year ended December 31, 2022. The remaining increase of $48.9 million was attributable to higher well flow management revenue in the U.S., Gulf of Mexico and Canada as well as higher well intervention and integrity revenue in Argentina and Brazil during the year ended December 31, 2022.
Segment EBITDA for the NLA segment was $135.2 million, or 27.1% of revenues, during the year ended December 31, 2022, compared to $32.3 million or 16.7% of revenues during the year ended December 31, 2021, an increase of $102.9 million. The increase was primarily attributable to a combination of the impact of the Merger and higher activities during the year ended December 31, 2022. Further, the increase in Segment EBITDA margin was due to a more favorable activity mix and lower support costs as a result of merger-related synergies, which together contributed to a higher fall-through from incremental revenue.
ESSA
Revenue for the ESSA segment was $389.3 million for the year ended December 31, 2022, an increase of $88.7 million, or 29.5%, compared to $300.6 million for the year ended December 31, 2021. The Merger contributed an increase of $85.6 million, reflecting well construction revenue during the year ended December 31, 2022. Additionally, well intervention and integrity services revenue was higher during the current period in the U.K. and Mozambique due to increased customer activities. We also benefited from higher well flow management revenue during the three months ended December 31, 2022, driven by a new long-term construction project in Congo. This increase was partially offset by lower well flow management business activity in Nigeria due to a large production equipment sale in 2021 that did not recur during the current period and lower well flow management services revenue in Norway from reduced customer activities.
Segment EBITDA for the ESSA segment was $74.7 million, or 19.2% of revenues, during the year ended December 31, 2022, compared to $53.3 million, or 17.7% of revenues, during the year ended December 31, 2021, an increase of $21.4 million, primarily due to the impact of the Merger and higher activities during the year ended December 31, 2022. The increase in Segment EBITDA margin was primarily due to a more favorable activity mix.
MENA
Revenue for the MENA segment was $201.5 million for the year ended December 31, 2022, an increase of $30.4 million, or 17.7%, compared to $171.1 million for the year ended December 31, 2021. Of the total increase, $15.9 million was attributable to the Merger reflecting the well construction revenue during the year, and the remaining increase was primarily driven by well flow management equipment sales in Saudi Arabia and higher well flow management revenue in Algeria and Egypt, partially offset by lower well intervention and integrity activities in Algeria.
Segment EBITDA for the MENA segment was $63.3 million, or 31.4% of revenues, during the year ended December 31, 2022, compared to $56.3 million, or 32.9% of revenues during the year ended December 31, 2021. The increase was primarily attributable to a combination of the impact of the Merger and higher activities during the year ended December 31, 2022. The reduction in Segment EBITDA margin was primarily due to lower activity on higher margin contracts and a less favorable activity mix.
APAC
Revenue for the APAC segment was $188.8 million for the year ended December 31, 2022, an increase of $27.9 million, or 17.3%, compared to $160.9 million for the year ended December 31, 2021. Of the total increase, $26.5 million was attributable to the Merger with the addition of well construction revenue during the period, and the remaining increase was primarily attributable to higher subsea well access and well intervention and integrity services revenue in Australia and Brunei, respectively, partially offset by lower well flow management and well intervention and integrity revenue in Thailand.
Segment EBITDA for the APAC segment was $4.9 million, or 2.6% of revenues, during the year ended December 31, 2022, compared to $33.4 million, or 20.8% of revenues, during the year ended December 31, 2021. The reduction in Segment EBITDA and Segment EBITDA margin was primarily due to $27.7 million in start-up and commissioning costs incurred on a large subsea project during the year ended December 31, 2022 that did not occur during the year ended December 31, 2021, lower activity on higher margin contracts and a resulting less favorable activity mix. Excluding the $27.7 million of such start-up and commissioning costs during the year ended December 31, 2022, Segment EBITDA would have been $32.6 million and Segment EBITDA margin would have been 17.3%.
Corporate Costs
Corporate costs for the year ended December 31, 2022 increased by $21.4 million, or 32.3%, to $87.6 million as compared to $66.2 million for the year ended December 31, 2021. The increase in the corporate costs is primarily driven by the impact of the Merger, whereby the statement of operations reflect the corporate costs of only Legacy Expro prior to the Merger and of the combined company (including activities of Frank’s) for all periods subsequent to the Merger, partially offset by lower support costs as a result of merger-related synergies.
Equity in income of joint ventures
Equity in income of joint ventures for the year ended December 31, 2022 decreased by $1.0 million, or 6.1%, to $15.7 million as compared to $16.7 million for the year ended December 31, 2021. The decrease reflects lower income from our joint venture in China compared to the previous year.
Depreciation and amortization expense
Depreciation and amortization expense for the year ended December 31, 2022 increased by $15.9 million, or 12.8%, to $139.8 million, as compared to $123.9 million for the year ended December 31, 2021. The increase in depreciation and amortization expense for the year ended December 31, 2022 is primarily related to the Merger.
Merger and integration expense
Merger and integration expense for the year ended December 31, 2022 decreased by $34.0 million, to $13.6 million as compared to $47.6 million for the year ended December 31, 2021. The decrease was primarily attributable to lower legal and other professional fees, and lower integration and other costs related to the Merger incurred during the year ended December 31, 2022 as compared to the year ended December 31, 2021.
Stock-based compensation expense
Stock-based compensation expense for the year ended December 31, 2022 was $18.5 million as compared to $54.2 million for the year ended December 31, 2021. The decrease is primarily attributable to the recognition of stock-based compensation expense for Legacy Expro’s Management Incentive Plan of $42.1 million as a result of the Merger during the previous year ended December 31, 2021 as the performance conditions within the stock-based compensation agreements were satisfied upon consummation of the Merger, as compared to $3.8 million of expenses incurred on the Legacy Expro’s Management Incentive Plan during the current year ended December 31, 2022.
Gain on disposal of assets
No gain on disposal of assets was recorded for the year ended December 31, 2022 as compared to $1.0 million for the year ended December 31, 2021. The gain during the previous year represented the earn-out consideration related to a sale of assets which occurred in 2020; the gain was recognized as the conditions upon which the consideration was contingent were met during the year ended December 31, 2021.
Interest and finance expense, net
Interest and finance expense, net, for the year ended December 31, 2022, was $0.2 million, a decrease of $8.6 million, or 97.7%, compared to $8.8 million for the year ended December 31, 2021. The decrease in interest and finance expense was primarily due to fees incurred with respect to the New Facility established following the Merger during the previous year.
Income tax (expense) benefit
Income tax expense for the year ended December 31, 2022 was $41.2 million, compared to an income tax expense of $16.3 million for the year ended December 31, 2021. Our statutory tax rate for the year ended December 31, 2022 was 25.8% as compared to 25.0% for the year ended December 31, 2021. The effective tax rate was 768.0% and (12.3%) for the years ended December 31, 2022 and 2021 respectively. Our effective tax rate was impacted by the Merger in 2021 and the geographic mix of profits and losses between deemed profit and taxable profit jurisdictions.
Our effective income tax rate fluctuates from the statutory tax rate based on, among other factors, changes in pretax income in jurisdictions with varying statutory tax rates along with jurisdictions utilizing a deemed profit taxation regime, the impact of valuation allowances, foreign inclusions and other permanent differences related to the recognition of income and expense.
Liquidity and Capital Resources
Liquidity
Our financial objectives include the maintenance of sufficient liquidity, adequate financial resources and financial flexibility to fund our business. At December 31, 2022, total available liquidity was $348.5 million, including cash and cash equivalents and restricted cash of $218.5 million and $130.0 million available for borrowings under our New Facility. Expro believes these amounts, along with cash generated by ongoing operations, will be sufficient to meet future business requirements for the next 12 months and beyond. Our primary sources of liquidity have been cash flows from operations. Our primary uses of capital have been for capital expenditures and acquisitions. We monitor potential capital sources, including equity and debt financing, in order to meet our investment and liquidity requirements.
Our total capital expenditures are estimated to range between $120.0 million and $130.0 million for 2023. Our total capital expenditures were $81.9 million for year ended December 31, 2022, out of which approximately 90% were used for the purchase and manufacture of equipment to directly support customer-related activities and approximately 10% for other property, plant and equipment, inclusive of software costs. The actual amount of capital expenditures for the purchase and manufacture of equipment may fluctuate based on market conditions. Our total capital expenditures (exclusive of the Merger) were $81.5 million for the year ended December 31, 2021, which were generally used for the purchase and manufacture of equipment to directly support customer-related activities. We continue to focus on preserving and protecting our strong balance sheet, optimizing utilization of our existing assets and, where practical, limiting new capital expenditures.
On June 16, 2022, the Board approved the Stock Repurchase Program. Under the Stock Repurchase Program, we may repurchase shares of our common stock in open market purchases, in privately negotiated transactions or otherwise. The Stock Repurchase Program is being utilized at management’s discretion and in accordance with U.S. federal securities laws. The timing and actual numbers of shares repurchased, if any, will depend on a variety of factors including price, corporate requirements, the constraints specified in the Stock Repurchase Program along with general business and market conditions. The Stock Repurchase Program does not obligate us to repurchase any particular amount of common stock, and it could be modified, suspended or discontinued at any time. During the year ended December 31, 2022, we repurchased 1.1 million shares at an average price of $11.81 per share, for a total cost of $13.0 million under this $50.0 million program.
Credit Facility
Revolving Credit Facility
On November 5, 2018, certain subsidiaries of Frank’s entered into an asset-based revolving credit facility (the “ABL Credit Facility”) with aggregate commitments of $100.0 million secured by certain assets of the subsidiary guarantors.
On December 20, 2018, subsidiaries of Legacy Expro entered into a revolving credit facility (the “2018 RCF”) with aggregate commitments of $150.0 million with up to $100.0 million available for drawdowns as loans and up to $50 million for bonds and guarantees. The 2018 RCF was secured by a fixed and floating charge on certain assets of some of our wholly owned subsidiaries. On October 1, 2021, following the closing of the Merger, the ABL Credit Facility and 2018 RCF were cancelled.
Concurrently with the cancelation of the ABL Credit Facility and the 2018 RCF, we entered into the New Facility with DNB Bank ASA, London Branch, as agent, with total commitments of $200.0 million, of which $130.0 million is available for drawdowns as loans and $70.0 million is available for letters of credit. Proceeds of the New Facility may be used for general corporate and working capital purposes. Please see Note 16 “Interest bearing loans” in the Notes to the Consolidated Financial Statements for additional information.
On July 21, 2022, the Company entered into an agreement to increase the facility available for letters of credit to $92.5 million, on the same terms as the current facility, increasing total facility commitments to $222.5 million.
Cash flow from operating, investing and financing activities
Cash flows provided by (used in) our operations, investing and financing activities are summarized below (in thousands):
|
|
Year Ended December 31, |
|
(in thousands) |
|
2022 |
|
|
2021 |
|
|
2020 |
|
Net cash provided by operating activities |
|
$ |
80,169 |
|
|
$ |
16,144 |
|
|
$ |
70,391 |
|
Net cash (used in) provided by investing activities |
|
|
(71,206 |
) |
|
|
112,046 |
|
|
|
(96,773 |
) |
Net cash used in financing activities |
|
|
(25,612 |
) |
|
|
(7,176 |
) |
|
|
(625 |
) |
Effect of exchange rate changes on cash activities |
|
|
(4,738 |
) |
|
|
(1,876 |
) |
|
|
631 |
|
Net (decrease) increase to cash and cash equivalents and restricted cash |
|
$ |
(21,387 |
) |
|
$ |
119,138 |
|
|
$ |
(26,376 |
) |
Analysis of cash flow changes between the years ended December 31, 2022 and 2021
Net cash provided by operating activities
Net cash provided by operating activities was $80.2 million during the year ended December 31, 2022 as compared to $16.1 million during the year ended December 31, 2021. The increase of $64.1 million in net cash provided by operating activities for the year ended December 31, 2022 was primarily due to improvements in Adjusted EBITDA of $80.3 million, a decrease in payment of merger and integration expenses related to the Merger by $9.8 million, and a decrease in payment of severance and other expense by $4.1 million partially offset by unfavorable movements in working capital of $15.9 million and an increase in income tax payments by $13.0 million during the year ended December 31, 2022.
Adjusted Cash Flow from Operations during the year ended December 31, 2022 was $115.3 million compared to $65.3 million during the year ended December 31, 2021. Our primary uses of net cash provided by operating activities were capital expenditures and funding obligations related to our financing arrangements.
Net cash (used in) provided by investing activities
Net cash used in investing activities was $71.2 million during the year ended December 31, 2022 as compared to net cash provided by investing activities of $112.0 million during the year ended December 31, 2021. Our principal recurring investing activity is our capital expenditures. The change in net cash used in investing activities was primarily due to cash of $189.7 million acquired as part of the Merger during the year ended December 31, 2021 and an acquisition of technology of $8.0 million during the year ended December 31, 2022, partially offset by proceeds from sale / maturity of investments of $11.3 million and an increase in proceeds from disposal of assets by $3.4 million during the year ended December 31, 2022. Capital expenditures during the years ended December 31, 2022 and December 31, 2021 both approximated $82 million.
Net cash used in financing activities
Net cash used in financing activities was $25.6 million during the year ended December 31, 2022 as compared to $7.2 million during the year ended December 31, 2021. The increase of $18.4 million in cash used in financing activities is primarily related to repurchase of common stock of $13.0 million, an increase in payment of financed insurance premium of $7.0 million, and an increase in payment of withholding taxes on stock-based compensation plans of $3.4 million, partially offset by lower payment of loan issuance and other transaction costs of $5.0 million during 2022.
Off-balance sheet arrangements
We have outstanding letters of credit/guarantees that relate to performance bonds, custom/excise tax guaranties and facility lease/rental obligations. These were entered into in the ordinary course of business and are customary practices in the various countries where we operate. It is not practicable to estimate the fair value of these financial instruments. None of the off-balance sheet arrangements either has, or is likely to have, a material effect on our consolidated financial statements. As of December 31, 2022, we had no material off-balance sheet financing arrangements other than those discussed above.
Critical accounting policies and estimates
The preparation of consolidated financial statements and related disclosures in conformity with U.S. GAAP requires Expro to make estimates and assumptions that affect the reported amounts of revenues and associated costs as well as reported amounts of assets and liabilities and related disclosures of contingent liabilities. Certain accounting policies involve judgments and uncertainties. We evaluate estimates and assumptions on a regular basis. We base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We consider the following policies to be the most critical to understanding the judgments that are involved and the uncertainties that could impact our results of operations, financial condition and cash flows.
Revenue recognition
Service revenue is recognized over a period of time as services are performed or rendered and the customer simultaneously consumes the benefit of the service while it is being rendered, and, therefore, reflects the amount of consideration to which we have a right to invoice. We generally perform services either under direct service purchase orders or master service agreements which are supplemented by individual call-out provisions. For customers contracted under such arrangements, an accrual is recorded in unbilled receivable for revenue earned but not yet invoiced. Revenue from the sale of goods is generally recognized at the point in time when the control has passed onto the customer which generally coincides with delivery and, where applicable, installation. We also regularly assess customer credit risk inherent in the carrying amounts of receivables, contract costs and estimated earnings, including the risk that contractual penalties may not be sufficient to offset our accumulated investment in the event of customer termination.
We also recognize revenue for “bill and hold” sales, once the following criteria have been met: (1) there is a substantive reason for the arrangement, (2) the product is identified as the customer’s asset, (3) the product is ready for delivery to the customer, and (4) we cannot use the product or direct it to another customer.
Where contractual arrangements contain multiple performance obligations, judgment is involved to analyze each performance obligation within the sales arrangement to determine whether they are distinct. The revenue for contracts involving multiple performance obligations is allocated to each distinct performance obligation based on relative selling prices and is recognized on satisfaction of each of the distinct performance obligations.
We recognize revenue for long-term construction-type contracts, involving significant design and engineering efforts in order to satisfy custom designs for customer-specific applications, on an over a period of time basis, using an input method, which represents the ratio of actual costs incurred to date on the project in relation to total estimated project costs. The estimate of total project costs has a significant impact on both the amount of revenue recognized as well as the related profit on a project. Revenue and profits on contracts can also be significantly affected by change orders and claims. Profits are recognized based on the estimated project profit multiplied by the percentage complete. Due to the nature of these projects, adjustments to estimates of contract revenue and total contract costs are often required as work progresses. Any expected losses on a project are recorded in full in the period in which they are identified.
We are required to determine the transaction price in respect of each of our contracts with customers. In making such judgment, we assess the impact of any variable consideration in the contract, due to discounts or penalties, the existence of any significant financing component and any non-cash consideration in the contract. In determining the impact of variable consideration, we use the “most-likely amount” method whereby the transaction price is determined by reference to the single most likely amount in a range of possible consideration amounts.
Business Combinations
We record business combinations using the acquisition method of accounting. All of the assets acquired and liabilities assumed are recorded at estimated fair value as of the acquisition date. The excess of the purchase price over the estimated fair values of the net tangible and intangible assets acquired is recorded as goodwill.
The application of the acquisition method of accounting for business combinations requires management to make significant estimates and assumptions in the determination of the fair value of assets acquired and liabilities assumed, in order to properly allocate purchase price consideration between assets that are depreciated and amortized from goodwill. The fair value assigned to tangible and intangible assets acquired and liabilities assumed are based on management’s estimates and assumptions, as well as other information compiled by management, including valuations that utilize customary valuation procedures and techniques. Significant assumptions and estimates include, but are not limited to, the cash flows that an asset is expected to generate in the future and what we believe to be an appropriate weighted-average cost of capital.
If the actual results differ from the estimates and judgments used in these estimates, the amounts recorded in the consolidated financial statements may be exposed to potential impairment of long-lived assets, including intangible assets and goodwill. The Merger of Frank’s with Legacy Expro pursuant to the Merger Agreement was completed on October 1, 2021. Refer to Note 3 “Business combinations and dispositions” of our consolidated financial statements for further details.
Goodwill and identified intangible assets
We record the excess of purchase price over the fair value of the tangible and identifiable intangible assets acquired and liabilities assumed as goodwill. Goodwill is not subject to amortization and is tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. A qualitative assessment is allowed to determine if goodwill is potentially impaired. We have the option to bypass the qualitative assessment for any reporting unit in any period and proceed directly to performing the quantitative goodwill impairment test. The qualitative assessment determines whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount. If it is more likely than not that the fair value of the reporting unit is less than the carrying amount, then a quantitative impairment test is performed. The quantitative goodwill impairment test is used to identify both the existence of impairment and the amount of impairment loss. The test compares the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit is less than its carrying value, an impairment loss is recorded based on that difference.
No impairment expense was recorded for goodwill during the year ended December 31, 2022 or December 31, 2021. During the year ended December 31, 2020, we recorded impairment expense of $191.9 million, relating to our goodwill. Refer to Note 4 “Fair value measurements” of our consolidated financial statements for details regarding the facts and circumstances that led to this impairment and other details. We used the income approach and the market approach to estimate the fair value of our reporting units. The income approach estimates the fair value by discounting the reporting unit’s estimated future cash flows using what we believe to be an appropriate risk-adjusted rate. The market approach includes the use of comparative multiples to corroborate the discounted cash flow results and involves significant judgment in the selection of the appropriate peer group companies and valuation multiples. The inputs used in the determination of fair value are generally level 3 inputs.
We review our identified intangible assets for impairment whenever events or changes in business circumstances arise that may indicate that the carrying amount of its intangible assets may not be recoverable. These events and changes can include significant current period operating losses or negative cash flows associated with the use of an intangible asset, or group of assets, combined with a history of such factors, significant changes in the manner of use of the assets, and current expectations that it is more likely than not that an intangible asset will be sold or otherwise disposed of significantly before the end of its previously estimated useful life. When impairment indicators are present, we compare undiscounted future cash flows, including the eventual disposition of the asset group at market value, to the asset group’s carrying value to determine if the asset group is recoverable. If the carrying values are in excess of undiscounted expected future cash flows, we measure any impairment by comparing the fair value of the asset or asset group to its carrying value. Estimating future cash flows requires significant judgment, and projections may vary from the cash flows eventually realized, which could impact our ability to accurately assess whether an asset has been impaired.
No impairment expense was recorded for identified intangible assets during the year ended December 31, 2022 or December 31, 2021. During the year ended December 31, 2020, we recorded impairment expense relating to our identified intangible assets of $60.4 million. Refer to Note 4 “Fair value measurements” of our consolidated financial statements for further details.
Defined benefit plans
Our post-retirement benefit obligations are described in detail in Note 19 “Post-retirement benefits” of our consolidated financial statements. Defined pension benefits are calculated using significant inputs to the actuarial models that measure pension benefit obligations and related effects on operations. Two assumptions, discount rate and expected return on assets, are important elements of plan asset/liability measurement and are updated on an annual basis, or more frequently if events or changes in circumstances so indicate.
We evaluate these critical assumptions at least annually on a plan and country specific basis. We periodically evaluate other assumptions involving demographic factors such as retirement age, mortality and turnover, and update them to reflect our experience and expectations for the future. Actual results in any given year will often differ from actuarial assumptions because of economic and other factors.
The discount rate that we use reflects the market rate of a portfolio of high-quality corporate bonds with maturities approximately matching the expected timing of payment of the related benefit obligations. The discount rates used to determine the benefit obligations for our principal pension plans were 4.7% in 2022, 1.8% in 2021 and 1.3% in 2020, reflecting market interest rates. As of December 31, 2022, we estimate that a 1% increase or decrease in the discount rate would result in an impact of approximately $18.5 million to our present value of defined benefit obligations at December 31, 2022.
The expected rate of return on plan assets represents the average rate of return expected to be earned on plan assets over the period that benefits included in the benefit obligation are expected to be paid, with consideration given to the distribution of investments by asset class and historical rates of return for each individual asset class. The weighted average expected rate of return on plan assets for the pension plans was 5.6% in 2022, 3.2% in 2021 and 2.7% in 2020. A change in the expected rate of return of 1% would impact our net periodic pension expense by $2.7 million.
Income Taxes
We use the asset and liability method to account for income taxes whereby we calculate the deferred tax asset or liability account balances using tax laws and rates in effect at that time. Under this method, the balances of deferred tax liabilities and assets at the end of each period are determined using the tax rate expected to be in effect when taxes are actually paid or recovered. Valuation allowances are recorded to reduce gross deferred tax assets when it is more likely than not that all or some portion of the gross deferred tax assets will not be realized. In determining the need for valuation allowances, we have made judgments and considered estimates regarding estimated future taxable income and available tax planning strategies. These estimates and judgments include some degree of uncertainty, therefore changes in these estimates and assumptions could require us to adjust the valuation allowances for our deferred tax assets accordingly. The ultimate realization of the deferred tax assets depends on the generation of sufficient taxable income in the applicable taxing jurisdictions.
We operate in approximately 60 countries. As a result, we are subject to numerous domestic and foreign taxing jurisdictions and tax agreements and treaties among various governments. Determination of taxable income in any jurisdiction requires the interpretation of the related tax laws and regulations and the use of estimates and assumptions regarding future events, including the amount, timing and character of income, deductions, and tax credits. Changes in tax laws, regulations or agreements in each taxing jurisdiction could have an impact on the amount of income taxes that we provide during any given year.
Our tax filings for various periods are subject to audit by the tax authorities in most jurisdictions in which we operate, and these assessments can result in additional taxes. Estimating the outcome of audits and assessments by the tax authorities involves uncertainty. We review the facts of each case and apply judgments and assumptions to determine the most likely outcome and provide for taxes, interest and penalties on this basis. In line with U.S. GAAP, we recognize the effects of a tax position in the consolidated financial statements when it is more likely than not that, based on the technical merits, some level of tax benefit related to a tax position will be sustained upon audit by tax authorities. Our experience has been that the estimates and assumptions used to provide for future tax assessments have proven to be appropriate. However, past experience is only a guide, and the potential exists that tax resulting from the resolution of current and potential future tax disputes may differ materially from the amount accrued. In such an event, we will record additional tax expense or tax benefit in the period in which such resolution occurs.
New accounting pronouncements
See Note 2 “Basis of presentation and significant accounting policies” in our consolidated financial statements under the heading “Recent accounting pronouncements.”
Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the stockholders and the Board of Directors of Expro Group Holdings N.V.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Expro Group Holdings N.V. and subsidiaries (the "Company") as of December 31, 2022 and 2021, the related consolidated statements of operations, comprehensive loss, stockholders’ equity, and cash flows, for each of the three years in the period ended December 31, 2022, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 23, 2023, expressed an unqualified opinion on the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Goodwill – ESSA and APAC Reporting Units — Refer to Notes 2, 3, 4 and 15 to the financial statements
Critical Audit Matter Description
The Company’s evaluation of goodwill for impairment involves the comparison of the fair value of each reporting unit to its carrying value. The Company determines the fair value of its reporting units using the discounted cash flow model and the market approach. The determination of the fair value using the discounted cash flow model requires management to make significant assumptions related to short-term and long-term forecasts of operating performance, including revenue growth rates and profitability margins, and discount rates. The determination of the fair value using the market approach requires management to make significant assumptions related to the selection of the appropriate peer companies and valuation multiples. Changes in these assumptions could have a significant impact on either the fair value, the amount of any goodwill impairment expense, or both. The goodwill balance was $221.0 million as of December 31, 2022, of which $80.1 million and $18.2 million was allocated to the ESSA and APAC reporting units, respectively.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The fair value of ESSA and APAC reporting units exceeded their carrying values as of the measurement date and, therefore, no impairment was recognized.
We identified goodwill for ESSA and APAC as a critical audit matter because of the significant judgments made by management when developing the fair value of its ESSA and APAC reporting units, the high degree of auditor judgment in performing procedures and evaluating audit evidence related to management’s anticipated future cash flows and significant assumptions related to short-term and long-term forecasts of operating performance, revenue growth rates, profitability margins and discount rates, and an increased extent of audit effort, including the need to involve professionals with specialized skill and knowledge.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the short-term and long-term forecasts of operating performance, including revenue growth rates and profitability margins, and the selection of discount rates for ESSA and APAC reporting units included the following, among others:
| ● | We tested the effectiveness of controls over management’s goodwill impairment evaluation, including those over the determination of the fair value of ESSA and APAC, such as controls related to management’s forecasts and selection of the discount rates. |
| ● | We evaluated management’s ability to accurately forecast future revenues and profitability margins by comparing actual results to management’s historical forecasts. |
| ● | We evaluated the reasonableness of management’s short-term and long-term forecasts by comparing the forecasts to (1) historical results, (2) internal communications to management and the Board of Directors, and (3) forecasted information included in Company press releases as well as in analyst and industry reports of the Company and companies in its peer group. |
| ● | We evaluated the impact of changes in management’s forecast from the October 31, 2022, annual measurement date to December 31, 2022. |
| ● | With the assistance of our fair value specialists, we evaluated the terminal revenue growth rates and discount rates and developed a range of independent estimates and compared those to the terminal revenue growth rates and discount rates selected by management. |
| ● | With the assistance of our fair value specialists, we evaluated the valuation multiples used in the market approach, including testing the underlying source information and mathematical accuracy of the calculations, and comparing the multiples selected by management to its guideline companies. |
/s/ Deloitte & Touche LLP
Houston, Texas
February 23, 2023
We have served as the Company's auditor since 2020.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the stockholders and the Board of Directors of Expro Group Holdings N.V.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Expro Group Holdings N.V. and subsidiaries (the “Company”) as of December 31, 2022, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2022 of the Company and our report dated February 23, 2023, expressed an unqualified opinion on those financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Controls, appearing under Part II, Item 9A. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Deloitte & Touche LLP
Houston, Texas
February 23, 2023
EXPRO GROUP HOLDINGS N.V.
Consolidated Statements of Operations
(in thousands)
|
|
Year Ended December 31, |
|
|
|
2022 |
|
|
2021 |
|
|
2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
1,279,418 |
|
|
$ |
825,762 |
|
|
$ |
675,026 |
|
Operating costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue, excluding depreciation and amortization |
|
|
(1,057,356 |
) |
|
|
(701,165 |
) |
|
|
(566,876 |
) |
General and administrative expense, excluding depreciation and amortization |
|
|
(58,387 |
) |
|
|
(73,880 |
) |
|
|
(23,814 |
) |
Depreciation and amortization expense |
|
|
(139,767 |
) |
|
|
(123,866 |
) |
|
|
(113,693 |
) |
Impairment expense |
|
|
- |
|
|
|
- |
|
|
|
(287,454 |
) |
Gain on disposal of assets |
|
|
- |
|
|
|
1,000 |
|
|
|
10,085 |
|
Merger and integration expense |
|
|
(13,620 |
) |
|
|
(47,593 |
) |
|
|
(1,630 |
) |
Severance and other expense |
|
|
(7,825 |
) |
|
|
(7,826 |
) |
|
|
(13,930 |
) |
Total operating cost and expenses |
|
|
(1,276,955 |
) |
|
|
(953,330 |
) |
|
|
(997,312 |
) |
Operating income (loss) |
|
|
2,463 |
|
|
|
(127,568 |
) |
|
|
(322,286 |
) |
Other income, net |
|
|
3,149 |
|
|
|
3,992 |
|
|
|
3,908 |
|
Interest and finance expense, net |
|
|
(241 |
) |
|
|
(8,795 |
) |
|
|
(5,656 |
) |
Income (loss) before taxes and equity in income of joint ventures |
|
|
5,371 |
|
|
|
(132,371 |
) |
|
|
(324,034 |
) |
Equity in income of joint ventures |
|
|
15,731 |
|
|
|
16,747 |
|
|
|
13,589 |
|
Income (loss) before income taxes |
|
|
21,102 |
|
|
|
(115,624 |
) |
|
|
(310,445 |
) |
Income tax (expense) benefit |
|
|
(41,247 |
) |
|
|
(16,267 |
) |
|
|
3,400 |
|
Net loss |
|
$ |
(20,145 |
) |
|
$ |
(131,891 |
) |
|
$ |
(307,045 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted |
|
$ |
(0.18 |
) |
|
$ |
(1.64 |
) |
|
$ |
(4.33 |
) |
Weighted average common shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted |
|
|
109,072,761 |
|
|
|
80,525,694 |
|
|
|
70,889,753 |
|
The accompanying notes are an integral part of these consolidated financial statements. |
EXPRO GROUP HOLDINGS N.V.
Consolidated Statements of Comprehensive Loss
(in thousands)
|
|
Year Ended December 31, |
|
|
|
2022 |
|
|
2021 |
|
|
2020 |
|
Net loss |
|
$ |
(20,145 |
) |
|
$ |
(131,891 |
) |
|
$ |
(307,045 |
) |
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
Actuarial gain (loss) on defined benefit plans |
|
|
7,440 |
|
|
|
22,345 |
|
|
|
(9,356 |
) |
Plan curtailment / amendment credit recognized |
|
|
- |
|
|
|
- |
|
|
|
5,510 |
|
Reclassified net remeasurement (loss) gains |
|
|
- |
|
|
|
(244 |
) |
|
|
104 |
|
Amortization of prior service credit |
|
|
(249 |
) |
|
|
(249 |
) |
|
|
- |
|
Income taxes on pension |
|
|
- |
|
|
|
- |
|
|
|
(926 |
) |
Other comprehensive income (loss) |
|
|
7,191 |
|
|
|
21,852 |
|
|
|
(4,668 |
) |
Comprehensive loss |
|
$ |
(12,954 |
) |
|
$ |
(110,039 |
) |
|
$ |
(311,713 |
) |
The accompanying notes are an integral part of these consolidated financial statements. |
EXPRO GROUP HOLDINGS N.V.
Consolidated Balance Sheets
(in thousands, except share data)
| | December 31, | |
| | 2022 | | | 2021 | |
Assets | | | | | | | | |
Current assets | | | | | | | | |
Cash and cash equivalents | | $ | 214,788 | | | $ | 235,390 | |
Restricted cash | | | 3,672 | | | | 4,457 | |
Accounts receivable, net | | | 419,237 | | | | 319,286 | |
Inventories | | | 153,718 | | | | 125,116 | |
Assets held for sale | | | 2,179 | | | | 6,386 | |
Income tax receivables | | | 26,938 | | | | 20,561 | |
Other current assets | | | 44,975 | | | | 52,938 | |
Total current assets | | | 865,507 | | | | 764,134 | |
| | | | | | | | |
Property, plant and equipment, net | | | 462,316 | | | | 478,580 | |
Investments in joint ventures | | | 66,038 | | | | 57,604 | |
Intangible assets, net | | | 229,504 | | | | 253,053 | |
Goodwill | | | 220,980 | | | | 179,903 | |
Operating lease right-of-use assets | | | 74,856 | | | | 83,372 | |
Non-current accounts receivable, net | | | 9,688 | | | | 11,531 | |
Other non-current assets | | | 8,263 | | | | 26,461 | |
Total assets | | $ | 1,937,152 | | | $ | 1,854,638 | |
| | | | | | | | |
Liabilities and stockholders’ equity | | | | | | | | |
Current liabilities | | | | | | | | |
Accounts payable and accrued liabilities | | $ | 272,704 | | | $ | 213,152 | |
Income tax liabilities | | | 37,151 | | | | 22,999 | |
Finance lease liabilities | | | 1,047 | | | | 1,147 | |
Operating lease liabilities | | | 19,057 | | | | 19,695 | |
Other current liabilities | | | 107,750 | | | | 74,213 | |
Total current liabilities | | | 437,709 | | | | 331,206 | |
| | | | | | | | |
Deferred tax liabilities, net | | | 30,419 | | | | 31,744 | |
Post-retirement benefits | | | 11,344 | | | | 29,120 | |
Non-current finance lease liabilities | | | 13,773 | | | | 15,772 | |
Non-current operating lease liabilities | | | 60,847 | | | | 73,688 | |
Other non-current liabilities | | | 97,165 | | | | 75,537 | |
Total liabilities | | | 651,257 | | | | 557,067 | |
| | | | | | | | |
Commitments and contingencies (Note 18) | | | | | | | | |
| | | | | | | | |
Stockholders’ equity: | | | | | | | | |
Common stock, €0.06 nominal value, 200,000,000 shares authorized, 110,710,188 and 109,697,040 shares issued and 108,743,761 and 109,142,925 shares outstanding | | | 7,911 | | | | 7,844 | |
Treasury stock (at cost), 1,966,427 and 554,115 shares | | | (40,870 | ) | | | (22,785 | ) |
Additional paid-in capital | | | 1,847,078 | | | | 1,827,782 | |
Accumulated other comprehensive income | | | 27,549 | | | | 20,358 | |
Accumulated deficit | | | (555,773 | ) | | | (535,628 | ) |
Total stockholders’ equity | | | 1,285,895 | | | | 1,297,571 | |
Total liabilities and stockholders’ equity | | $ | 1,937,152 | | | $ | 1,854,638 | |
The accompanying notes are an integral part of these consolidated financial statements. |
EXPRO GROUP HOLDINGS N.V.
Consolidated Statements of Cash Flows
(in thousands)
|
|
Year Ended December 31, |
|
Cash flows from operating activities: |
|
2022 |
|
|
2021 |
|
|
2020 |
|
Net loss |
|
$ |
(20,145 |
) |
|
$ |
(131,891 |
) |
|
$ |
(307,045 |
) |
Adjustments to reconcile net loss to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Impairment expense |
|
|
- |
|
|
|
- |
|
|
|
287,454 |
|
Depreciation and amortization expense |
|
|
139,767 |
|
|
|
123,866 |
|
|
|
113,693 |
|
Equity in income of joint ventures |
|
|
(15,731 |
) |
|
|
(16,747 |
) |
|
|
(13,589 |
) |
Stock-based compensation expense |
|
|
18,486 |
|
|
|
54,162 |
|
|
|
- |
|
Changes in fair value of investments |
|
|
1,199 |
|
|
|
(511 |
) |
|
|
- |
|
Elimination of unrealized profit on sales to joint ventures |
|
|
- |
|
|
|
174 |
|
|
|
2,085 |
|
Debt issuance expense |
|
|
- |
|
|
|
5,166 |
|
|
|
- |
|
Gain on disposal of assets |
|
|
- |
|
|
|
(1,000 |
) |
|
|
(10,085 |
) |
Deferred taxes |
|
|
(1,326 |
) |
|
|
(737 |
) |
|
|
(20,596 |
) |
Unrealized foreign exchange losses |
|
|
6,116 |
|
|
|
1,407 |
|
|
|
2,106 |
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net |
|
|
(97,758 |
) |
|
|
(20,256 |
) |
|
|
38,486 |
|
Inventories |
|
|
(26,037 |
) |
|
|
906 |
|
|
|
2,780 |
|
Other assets |
|
|
4,365 |
|
|
|
12,683 |
|
|
|
532 |
|
Accounts payable and accrued liabilities |
|
|
35,491 |
|
|
|
5,371 |
|
|
|
(25,161 |
) |
Other liabilities |
|
|
31,435 |
|
|
|
(5,981 |
) |
|
|
7,150 |
|
Income taxes, net |
|
|
10,209 |
|
|
|
(2,056 |
) |
|
|
(4,241 |
) |
Dividends received from joint ventures |
|
|
7,283 |
|
|
|
4,058 |
|
|
|
3,646 |
|
Other |
|
|
(13,185 |
) |
|
|
(12,470 |
) |
|
|
(6,824 |
) |
Net cash provided by operating activities |
|
|
80,169 |
|
|
|
16,144 |
|
|
|
70,391 |
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
(81,904 |
) |
|
|
(81,511 |
) |
|
|
(112,387 |
) |
Cash and cash equivalents and restricted cash acquired in the Merger |
|
|
- |
|
|
|
189,739 |
|
|
|
- |
|
Acquisition of technology |
|
|
(7,967 |
) |
|
|
- |
|
|
|
- |
|
Proceeds from disposal of assets |
|
|
7,279 |
|
|
|
3,818 |
|
|
|
15,614 |
|
Proceeds from sale / maturity of investments |
|
|
11,386 |
|
|
|
- |
|
|
|
- |
|
Net cash (used in) provided by investing activities |
|
|
(71,206 |
) |
|
|
112,046 |
|
|
|
(96,773 |
) |
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
(Cash pledged for) release of collateral deposits |
|
|
(70 |
) |
|
|
162 |
|
|
|
2,271 |
|
Repayment of financed insurance premium |
|
|
(7,245 |
) |
|
|
(227 |
) |
|
|
- |
|
Payments of loan issuance and other transaction costs |
|
|
(132 |
) |
|
|
(5,123 |
) |
|
|
(1,095 |
) |
Acquisition of Company common stock |
|
|
(12,996 |
) |
|
|
- |
|
|
|
- |
|
Payment of withholding taxes on stock-based compensation plans |
|
|
(4,168 |
) |
|
|
(818 |
) |
|
|
- |
|
Repayments of finance leases |
|
|
(1,001 |
) |
|
|
(1,170 |
) |
|
|
(1,801 |
) |
Net cash used in financing activities |
|
|
(25,612 |
) |
|
|
(7,176 |
) |
|
|
(625 |
) |
Effect of exchange rate changes on cash and cash equivalents |
|
|
(4,738 |
) |
|
|
(1,876 |
) |
|
|
631 |
|
Net (decrease) increase to cash and cash equivalents and restricted cash |
|
|
(21,387 |
) |
|
|
119,138 |
|
|
|
(26,376 |
) |
Cash and cash equivalents and restricted cash at beginning of year |
|
|
239,847 |
|
|
|
120,709 |
|
|
|
147,085 |
|
Cash and cash equivalents and restricted cash at end of year |
|
$ |
218,460 |
|
|
$ |
239,847 |
|
|
$ |
120,709 |
|
The accompanying notes are an integral part of these consolidated financial statements. |
EXPRO GROUP HOLDINGS N.V.
Consolidated Statements of Stockholders’ Equity
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
other |
|
|
|
|
|
|
Total |
|
|
|
Common stock |
|
|
Treasury |
|
|
|
|
|
|
paid-in |
|
|
comprehensive |
|
|
Accumulated |
|
|
Stockholders’ |
|
|
|
Shares |
|
|
Value |
|
|
Stock |
|
|
Warrants |
|
|
capital |
|
|
income (loss) |
|
|
deficit |
|
|
Equity |
|
Balance at January 1, 2020 |
|
|
70,890 |
|
|
$ |
585 |
|
|
$ |
- |
|
|
$ |
10,530 |
|
|
$ |
1,006,100 |
|
|
$ |
3,174 |
|
|
$ |
(95,839 |
) |
|
$ |
924,550 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adoption of ASU 2016-13, Financial Instruments - Credit Losses (“Topic 326”) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(853 |
) |
|
|
(853 |
) |
Net loss |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(307,045 |
) |
|
|
(307,045 |
) |
Other comprehensive loss |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(4,668 |
) |
|
|
- |
|
|
|
(4,668 |
) |
Balance at December 31, 2020 |
|
|
70,890 |
|
|
$ |
585 |
|
|
$ |
- |
|
|
$ |
10,530 |
|
|
$ |
1,006,100 |
|
|
$ |
(1,494 |
) |
|
$ |
(403,737 |
) |
|
$ |
611,984 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(131,891 |
) |
|
|
(131,891 |
) |
Other comprehensive income |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
21,852 |
|
|
|
- |
|
|
|
21,852 |
|
Stock-based compensation expense |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
54,162 |
|
|
|
- |
|
|
|
- |
|
|
|
54,162 |
|
Common shares issued upon vesting of share-based awards |
|
|
741 |
|
|
|
16 |
|
|
|
- |
|
|
|
- |
|
|
|
(16 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
Common shares issued for ESPP |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Treasury shares withheld |
|
|
(554 |
) |
|
|
- |
|
|
|
(818 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(818 |
) |
Cancellation of Legacy Expro common stock |
|
|
- |
|
|
|
(585 |
) |
|
|
- |
|
|
|
- |
|
|
|
585 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Cancellation of warrants |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(10,530 |
) |
|
|
10,530 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Merger |
|
|
38,066 |
|
|
|
7,828 |
|
|
|
(21,967 |
) |
|
|
- |
|
|
|
756,421 |
|
|
|
- |
|
|
|
- |
|
|
|
742,282 |
|
Balance at December 31, 2021 |
|
|
109,143 |
|
|
$ |
7,844 |
|
|
$ |
(22,785 |
) |
|
$ |
- |
|
|
$ |
1,827,782 |
|
|
$ |
20,358 |
|
|
$ |
(535,628 |
) |
|
$ |
1,297,571 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(20,145 |
) |
|
|
(20,145 |
) |
Other comprehensive income |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
7,191 |
|
|
|
- |
|
|
|
7,191 |
|
Stock-based compensation expense |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
18,486 |
|
|
|
- |
|
|
|
- |
|
|
|
18,486 |
|
Common shares issued upon vesting of share-based awards |
|
|
1,013 |
|
|
|
67 |
|
|
|
- |
|
|
|
- |
|
|
|
810 |
|
|
|
- |
|
|
|
- |
|
|
|
877 |
|
Acquisition of common stock |
|
|
(1,100 |
) |
|
|
- |
|
|
|
(12,995 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(12,995 |
) |
Common stock withheld |
|
|
(312 |
) |
|
|
- |
|
|
|
(5,090 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(5,090 |
) |
Balance at December 31, 2022 |
|
|
108,744 |
|
|
$ |
7,911 |
|
|
$ |
(40,870 |
) |
|
$ |
- |
|
|
$ |
1,847,078 |
|
|
$ |
27,549 |
|
|
$ |
(555,773 |
) |
|
$ |
1,285,895 |
|
The accompanying notes are an integral part of these consolidated financial statements. |
EXPRO GROUP HOLDINGS N.V.
Notes to the Consolidated Financial Statements
1. Business description
With roots dating to 1938, the Company is a global provider of energy services with operations in approximately 60 countries. The Company’s portfolio of capabilities includes products and services related to well construction, well flow management, subsea well access, and well intervention and integrity. The Company’s portfolio of products and services enhance production and improve recovery across the well lifecycle, from exploration through abandonment.
On March 10, 2021, Frank’s International N.V. (“Frank’s”) and New Eagle Holdings Limited, an exempted company limited by shares incorporated under the laws of the Cayman Islands and a direct wholly owned subsidiary of Frank’s (“Merger Sub”), entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Expro Group Holdings International Limited (“Legacy Expro”), an exempted company limited by shares incorporated under the laws of the Cayman Islands, providing for the merger of Legacy Expro with and into Merger Sub in an all-stock transaction, with Merger Sub surviving the merger as a direct, wholly owned subsidiary of Frank’s (the “Merger”). The Merger closed on October 1, 2021 (the “Closing Date”), and Frank’s was renamed to Expro Group Holdings N.V. (the “Company”). The Merger was accounted for using the acquisition method of accounting with Legacy Expro being identified as the accounting acquirer. The consolidated financial statements of the Company reflect the financial position, results of operations and cash flows of only Legacy Expro for all periods prior to the Merger and of the combined company (including activities of Frank’s) for all periods subsequent to the Merger.
Pursuant to the Merger Agreement, as of the effective time of the Merger (the “Effective Time”), each outstanding ordinary share of common stock, par value $0.01 per share, of Legacy Expro was converted into the right to receive 1.2120 shares of common stock, nominal value €0.06 per share, of the Company (“Company Common Stock”). The number of shares of Company Common Stock received by the Legacy Expro shareholders was equal to 7.2720 (the “Exchange Ratio” as provided in the Merger Agreement) multiplied by the 1-for-6 reverse stock split ratio. Further, pursuant to the Merger Agreement, at the Effective Time, the articles of association of the Company (the “Company Articles”) were amended to increase the total authorized capital stock of the Company from 798,096,000 shares of Company Common Stock to 1,200,000,000 shares of Company Common Stock (200,000,000 shares of Company Common Stock on a post-reverse split basis) and to effect certain other amendments to the Company Articles contemplated by the Merger Agreement. On October 4, 2021, the first trading day following the closing of the Merger, the Company Common Stock began trading on a post-reverse split basis on the New York Stock Exchange under the new name and new ticker symbol “XPRO.”
Further, the supervisory board of directors of Frank’s unanimously approved a 1-for-6 reverse stock split of Frank’s common stock, which was affected on October 1, 2021. All of the outstanding share numbers, nominal value, share prices and per share amounts in these consolidated financial statements have been retroactively adjusted to reflect the Exchange Ratio (as defined below) and the 1-for-6 reverse stock split for all periods presented, as applicable.
On June 16, 2022, the Company’s Board of Directors (the “Board”) approved a new stock repurchase program, under which the Company is authorized to acquire up to $50.0 million of its outstanding common stock through November 24, 2023. Under the Stock Repurchase Program, the Company may repurchase shares of the Company’s common stock in open market purchases, in privately negotiated transactions or otherwise. The Stock Repurchase Program is being utilized at management’s discretion and in accordance with federal securities laws. The timing and actual numbers of shares repurchased will depend on a variety of factors including price, corporate requirements, the constraints specified in the Stock Repurchase Program along with general business and market conditions. The Stock Repurchase Program does not obligate the Company to repurchase any particular amount of common stock, and it could be modified, suspended or discontinued at any time. The Company has repurchased a total of 1.1 million shares at an average price of $11.81 per share, for a total cost of $13.0 million as of December 31, 2022 under the Stock Repurchase Program.
2. Basis of presentation and significant accounting policies
Basis of presentation
The consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).
The consolidated financial statements have been prepared using the U.S. dollar (“$” or “USD”) as the reporting currency.
EXPRO GROUP HOLDINGS N.V.
Notes to the Consolidated Financial Statements
Basis of consolidation
The consolidated financial statements reflect the accounts of the Company and its subsidiaries. All intercompany balances and transactions, including unrealized profits arising from them, have been eliminated for purposes of preparing these consolidated financial statements. Investments in which we do not have a controlling interest, but over which we do exercise significant influence, are accounted for under the equity method of accounting.
Use of estimates
Preparation of the consolidated financial statements in accordance with U.S. GAAP requires us to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and the accompanying notes. Estimates and assumptions are used for, but are not limited to, determining the following: purchase price allocation on business combinations, valuation of intangible assets, expected credit losses, inventory valuation reserves, valuation of share warrants, impairment assessment of goodwill, income tax provisions, recovery of deferred taxes, actuarial assumptions to determine costs and liabilities related to employee benefit plans and revenue recognition. While we believe that the estimates and assumptions used in the preparation of the consolidated financial statements are appropriate, actual results could differ from these estimates.
Revenue recognition
We recognize revenue from rendering of services over a period of time as the customer simultaneously consumes the benefit of the service while it is being rendered reflecting the amount of consideration to which the Company has a right to invoice. As part of rendering of services, the Company also provides rental equipment and personnel. Using practical expedients under Accounting Standards Update (“ASU”) 2014-09, the Company has elected not to separate non-lease components from the associated lease components and account for the combined component in accordance with the ASU 2014-09 with recognition over a period of time.
Revenue from the sale of goods is generally recognized at the point in time when the control has passed onto the customer which generally coincides with delivery and installation, where applicable.
We also recognize revenue for “bill and hold” sales, associated with certain product sales, once the following criteria have been met: (1) there is a substantive reason for the arrangement, (2) the product is identified as the customer’s asset, (3) the product is ready for delivery to the customer, and (4) we cannot use the product or direct it to another customer.
Where contractual arrangements contain multiple performance obligations, we analyze each performance obligation within the sales arrangement to determine whether they are distinct. The revenue for contracts involving multiple performance obligations is allocated to each distinct performance obligation based on relative selling prices and is recognized on satisfaction of each distinct performance obligation. Further, a small number of our contracts contain penalty provisions for late delivery and installation of equipment, downtime or other equipment functionality. These penalties are typically percentage reductions in the total arrangement consideration, capped at a certain amount, or a reduction in the on-going service fee and are assessed as variable consideration in the contract.
Expro recognizes revenue for long-term construction-type contracts, involving significant design and engineering efforts in order to satisfy custom designs for customer-specific applications, on an over a period of time basis, using an input method, which represents the ratio of actual costs incurred to date on the project in relation to total estimated project costs. The estimate of total project costs has a significant impact on both the amount of revenue recognized as well as the related profit on a project. Revenue and profits on contracts can also be significantly affected by change orders and claims. Profits are recognized based on the estimated project profit multiplied by the percentage complete. Due to the nature of these projects, adjustments to estimates of contract revenue and total contract costs are often required as work progresses. Any expected losses on a project are recorded in full in the period in which they are identified.
Revenue is recognized to depict the transfer of promised services or goods to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those services or goods. We do not include tax amounts collected from customers in sales transactions as a component of revenue.
Foreign currency transactions
The functional currency of all our subsidiaries is the USD. Gains and losses resulting from remeasurement of foreign currency denominated monetary assets and liabilities are included in the consolidated statements of operations as incurred. Gains and losses resulting from transactions denominated in a foreign currency are also included in the consolidated statements of operations as incurred.
EXPRO GROUP HOLDINGS N.V.
Notes to the Consolidated Financial Statements
Interest and finance expense, net
Our interest and finance expense primarily consists of interest and other costs that we incur in connection with our revolving credit facility and finance lease liabilities. Costs incurred that are directly related to the raising of debt financing, together with any original issue discount or premium, are capitalized and recognized over the term of the loan or facility, using the effective interest method other than for those debt instruments that we elect to account for under the fair value option, in which case such costs are expensed in the period incurred. All other finance costs are expensed in the period they are incurred.
Income taxes
We use the asset and liability method to account for income taxes whereby we calculate the deferred tax asset or liability account balances using tax laws and rates in effect at that time. Under this method, the balances of deferred tax liabilities and assets at the end of each period are determined using the tax rate expected to be in effect when taxes are actually paid or recovered. Valuation allowances are recorded to reduce gross deferred tax assets when it is more likely than not that some portion or all of the gross deferred tax assets will not be realized. In determining the need for valuation allowances, we have made judgments and considered estimates regarding estimated future taxable income and ongoing achievable tax planning strategies. These estimates and judgments include some degree of uncertainty therefore changes in these estimates and assumptions could require us to adjust the valuation allowances for our deferred tax assets accordingly. The ultimate realization of the deferred tax assets depends on the generation of sufficient taxable income in the applicable taxing jurisdictions.
We operate in approximately 60 countries and are subject to domestic and numerous foreign taxing jurisdictions. Determination of taxable income in any jurisdiction requires the interpretation of the related tax laws and regulations and the use of estimates and assumptions regarding significant future events such as the amount, timing and character of income, deductions, and tax credits. Changes in tax laws, regulations or agreements in each taxing jurisdiction could have an impact on the amount of income taxes that we provide during any given year.
Our tax filings for various periods are subject to audit by the tax authorities in most jurisdictions in which we operate, and these assessments can result in additional taxes. Estimating the outcome of audits and assessments by the tax authorities involves uncertainty. We review the facts of each case and apply judgments and assumptions to determine the most likely outcome and we provide for taxes, interest and penalties on this basis.
In line with U.S. GAAP, we recognize the effects of a tax position in the consolidated financial statements when it is more likely than not that, based on the technical merits, some level of tax benefit related to a tax position will be sustained upon audit by tax authorities.
Cash, cash equivalents and restricted cash
We consider all highly liquid instruments with original maturities of three months or less at the time of purchase to be cash equivalents. Restricted cash primarily relates to bank deposits which have been pledged as cash collateral for certain guarantees issued by various banks or minimum cash balances which must be maintained in accordance with contractual arrangements.
Accounts receivable, net
Accounts receivable represents customer transactions that have been invoiced as of the balance sheet date and unbilled receivables relating to customer transactions that have not yet been invoiced as of the balance sheet date. The carrying value of our receivables, net of expected credit losses, represents the estimated net realizable value. We have an extensive global customer base comprised of a large number of international oil companies, national oil companies, independent exploration and production companies and service partners that operate in all major oil and gas locations around the world. We estimate reserves for expected credit losses using information about past events, current conditions and risk characteristics of customers, and reasonable and supportable forecasts relevant to assessing risk associated with the collectability of accounts and unbilled receivables. Past-due receivables are written off when our internal collection efforts have been unsuccessful.
EXPRO GROUP HOLDINGS N.V.
Notes to the Consolidated Financial Statements
Inventories
Inventories are stated at the lower of cost or net realizable value. Cost comprises direct materials and where applicable, direct labor costs and overheads that have been incurred in bringing the inventories to their current location and condition which are calculated using the average cost method.
We regularly evaluate the quantities and values of our inventories in light of current market conditions, market trends and other factors, and record inventory write-downs as appropriate. This evaluation considers historical usage, expected demand, product obsolescence and other factors. Market conditions are subject to change, and actual consumption of our inventory could differ from expected demand.
Impairment of long-lived assets
We assess long-lived assets, including our property, plant and equipment, for impairment whenever events or changes in business circumstances arise that may indicate that the carrying amount of our long-lived assets may not be recoverable. These events and changes can include significant current period operating losses or negative cash flows associated with the use of a long-lived asset, or group of assets, combined with a history of such factors, significant changes in the manner of use of the assets, and current expectations that it is more likely than not that a long-lived asset will be sold or otherwise disposed of significantly before the end of its previously estimated useful life. For purposes of recognition and measurement of an impairment loss, long-lived assets are grouped with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. When impairment indicators are present, we compare undiscounted future cash flows, including the eventual disposition of the asset group at market value, to the asset group’s carrying value to determine if the asset group is recoverable. If the carrying values are in excess of undiscounted expected future cash flows, we measure any impairment by comparing the fair value of the asset or asset group to its carrying value. Fair value is generally determined by considering (i) internally developed discounted projected cash flow analysis of the asset or asset group, (ii) third-party valuations, and/or (iii) information available regarding the current market for similar assets. If the fair value of an asset or asset group is determined to be less than the carrying amount of the asset or asset group, an impairment equal to the difference is recorded in the period that the impairment indicator occurs. Estimating future cash flows requires significant judgment, and projections may vary from the cash flows eventually realized, which could impact our ability to accurately assess whether an asset has been impaired.
We consider a long-lived asset to be abandoned after we have ceased use of such asset and we have no intent to use or re-purpose the asset in the future.
Property, plant and equipment
Property, plant and equipment are stated at cost less accumulated depreciation. Cost includes the price paid to acquire or construct the asset, required installation costs, interest capitalized during the construction period and any expenditure that substantially adds to the value of the asset, substantially upgrades the assets for an enhanced use or substantially extends the useful life of an existing asset. We expense costs related to the routine repair and maintenance of property, plant and equipment at the time we incur them. We capitalize interest as part of the cost of acquiring or constructing certain assets, to the extent incurred, during the period of time required to place the property, plant and equipment into service.
When properties or equipment are sold, retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the books and the resulting gain or loss is recognized on the consolidated statements of operations.
We begin depreciation for such assets, including any related capitalized interest, once an asset is placed into operational service. We consider an asset to be placed into operational service when the asset is both in the location and condition for its intended use. We compute depreciation expense, with the exception of land, using the straight-line method on a net cost basis over the estimated useful lives of the assets, as presented in the table below.
Land improvement | 12 years |
Buildings | Up to 40 years |
Leased property, including leasehold buildings | over the lesser of the remaining useful life or period of the lease |
Plant and equipment | 2 to 12 years |
Useful lives and residual values are reviewed annually and where adjustments are required these are made prospectively. For property, plant and equipment that has been placed into service, but is subsequently idled, we continue to record depreciation expense during the idle period. We adjust the estimated useful lives of the idled assets if the estimated useful lives have changed.
EXPRO GROUP HOLDINGS N.V.
Notes to the Consolidated Financial Statements
Goodwill
Goodwill is not subject to amortization and is tested for impairment annually, or more frequently if events or changes in circumstances indicate that the asset might be impaired. A qualitative assessment is allowed to determine if goodwill is potentially impaired. We have the option to bypass the qualitative assessment for any reporting unit in any period and proceed directly to performing the quantitative goodwill impairment test. The qualitative assessment determines whether it is more likely than not that a reporting unit’s fair value is less than it’s carrying amount. If it is more likely than not that the fair value of the reporting unit is less than the carrying amount, then a quantitative impairment test is performed. The quantitative goodwill impairment test is used to identify both the existence of impairment and the amount of impairment loss. The test compares the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit is less than its carrying value, an impairment loss is recorded based on that difference. We complete our assessment of goodwill impairment as of October 31 each year.
Intangible assets, net
Identifiable intangible assets are amortized using the straight-line method over the estimated useful lives of the assets, ranging from one year to fifteen years. We evaluate impairment of our intangible assets on an asset group basis whenever circumstances indicate that the carrying value may not be recoverable. Intangible assets deemed to be impaired are written down to their fair value using a discounted cash flow model and, if available, comparable market values. Our intangible assets are primarily associated with trademarks, customer relationships and contracts (“CR&C”), technology, and software.
Investments in joint ventures
We use the equity method of accounting for our equity investments where we hold more than 20% of the ownership interests of an investee that does not constitute a controlling interest or where we have the ability to significantly influence the operations or financial decision of the investee. Such equity investments are carried on the consolidated balance sheets at cost plus post-acquisition changes in our share of net income, less dividends received and less any impairments. Our consolidated statements of operations reflect our share of income from the joint ventures’ results after tax. Any goodwill arising on the acquisition of a joint venture, representing the excess of the cost of the investment compared to the Company’s share of the net fair value of the acquired identifiable net assets, is included in the carrying amount of the joint venture and is not amortized.
The Company evaluates its investments in joint ventures for potential impairment whenever events or changes in circumstances indicate that there may be a loss in the value of each investment that is other than temporary.
The results of the joint ventures are prepared for the same reporting period as the Company. Where necessary, adjustments are made to bring the accounting policies used in line with those of the Company, to take into account fair values assigned at the date of acquisition; and to reflect impairment losses where appropriate. Adjustments are also made in our consolidated financial statements to eliminate our share of unrealized gains and losses on transactions between us and our joint ventures.
Fair value measurements
We measure certain financial assets and liabilities at fair value at each balance sheet date and, for the purposes of impairment testing, use fair value to determine the recoverable amount of our non-financial assets.
Fair value is defined as the price that would be received from the sale of an asset or paid to transfer a liability (an exit price) on the measurement date in an orderly transaction between market participants in the principal or most advantageous market for the asset or liability. The principal or the most advantageous market must be accessible by us. Accounting standards include disclosure requirements around fair values used for certain financial instruments and establish a fair value hierarchy. The hierarchy prioritizes valuation inputs into three levels based on the extent to which inputs used in measuring fair value are observable in the market. Each fair value is reported in one of three levels:
EXPRO GROUP HOLDINGS N.V.
Notes to the Consolidated Financial Statements
Level 1 – Valuation techniques in which all significant inputs are unadjusted quoted market prices from active markets for identical assets or liabilities being measured;
Level 2 – Valuation techniques in which significant inputs include quoted prices from active markets for assets or liabilities that are similar to the assets or liabilities being measured and/or quoted prices for assets or liabilities that are identical or similar to the assets or liabilities being measured from markets that are not active. Also, model-derived valuations in which all significant inputs and significant value drivers are observable in active markets are Level 2 valuation techniques; and
Level 3 – Valuation techniques in which one or more significant inputs or significant value drivers are unobservable. Unobservable inputs are valuation technique inputs that reflect our own assumptions about the assumptions that market participants would use to price an asset or liability.
When available, we use quoted market prices to determine the fair value of an asset or liability. We determine the policies and procedures for both recurring fair value measurements and non-recurring fair value measurements, such as impairment tests.
At each reporting date, we analyze the movements in the values of assets and liabilities which are required to be remeasured or reassessed as per our accounting policies.
For the purpose of fair value disclosures, we have determined classes of assets and liabilities based on the nature, characteristics and risks of the asset or liability and the level of the fair value hierarchy as explained above.
Leases
We have operating and finance leases primarily related to real estate, transportation and equipment. We determine if an arrangement is a lease at inception. Upon commencement of a lease, we recognize an operating lease right-of-use asset (“ROU Asset”) and corresponding operating lease liability based on the then present value of all lease payments over the lease term. ROU Assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligations to make lease payments arising from the lease. The accounting for some of our leases may require significant judgments, which includes determining the incremental borrowing rates to utilize in our net present value calculation of lease payments for lease agreements which do not provide an implicit rate, and assessing the likelihood of renewal or termination options, which are considered as part of assessing the lease term if the extension or termination is deemed to be reasonably certain.
Leases which meet the criteria of a finance lease in accordance with Accounting Standards Codification (“ASC”) 842 Leases are capitalized and included in “Property, plant and equipment, net” and “Finance lease liabilities” on the consolidated balance sheets. Our lease contracts generally do not provide any guaranteed residual values. Payments related to finance leases are apportioned between the reduction of the lease liability and finance expense in the consolidated statement of operations so as to achieve a constant rate of interest on the remaining balance of the liability. Leases which do not meet the definition of a finance lease are classified as operating leases and are included in Operating lease right-of-use assets and operating lease liabilities on the consolidated balance sheets. Lease expense is recognized on a straight-line basis over the shorter of the estimated useful life of the underlying asset or the lease term.
We do not separate lease and non-lease components for all classes of leased assets. Also, leases with an initial term of one year or less are not recorded on the consolidated balance sheets.
EXPRO GROUP HOLDINGS N.V.
Notes to the Consolidated Financial Statements
Post-retirement benefits
Defined Benefit Plans
The cost of providing benefits under defined benefit plans are determined separately for each plan using the projected unit credit method, which attributes entitlement to benefits to the current and prior periods. Both current and past service costs are recognized in net income (loss) as they arise.
The interest element of the defined benefit cost represents the change in present value of plan obligations resulting from the passage of time and is determined by applying a discount rate to the opening present value of the benefit obligation, taking into account material changes in the obligation during the year. The expected return on plan assets is based on an assessment made at the beginning of the year of long-term market returns on plan assets, adjusted for the effect on the fair value of plan assets of contributions received and benefits paid during the year.
We initially recognize actuarial gains and losses as other comprehensive income in the year they arise. Where the net cumulative actuarial gains or losses for a plan exceeds 10 percent of that plan’s gross pension liability, or asset if higher, the amount of gains or losses above the 10 percent threshold are recognized in the consolidated statement of operations as a component of net pension costs (over the expected remaining working lives of the plan’s active participants or the remaining lives of plan members in the event the plan is no longer active), which is included in “Cost of revenue, excluding depreciation and amortization.”
The defined benefit pension asset or liability on the consolidated balance sheets comprise the total for each plan of the present value of the defined benefit obligation using a discount rate based on high quality corporate bonds less the fair value of plan assets out of which the obligations are to be settled directly. Fair value is based on market price information and in the case of quoted securities is the published bid price.
Defined Contribution Plans
The costs of providing benefits under a defined contribution plan are expensed at the time contributions become payable to the respective plan.
Stock-based compensation
Effective October 1, 2021, in connection with the consummation of the Merger, the Company amended its 2013 Long-Term Incentive Plan to the Expro Group Holdings N.V. Long-Term Incentive Plan, As Amended and Restated. Further, effective May 25, 2022, the Expro Group Holdings N.V. Long-Term Incentive Plan, As Amended and Restated was terminated and the Expro Group Holdings N.V. 2022 Long-Term Incentive Plan (the “2022 LTIP” plan) was adopted and established by the Board and approved by the Company’s stockholders. Pursuant to the 2022 LTIP, stock options, stock appreciation rights, restricted stock, restricted stock units, dividend equivalent rights and other types of equity and cash incentive awards may be granted to employees, non-employee directors and consultants.
Stock-based compensation expense is measured at the grant date of the share-based awards based on their fair value. Stock-based compensation expense is recognized on a straight-line basis over the vesting period and is included in cost of revenue and general and administrative expenses in the consolidated statements of operations. We do not estimate expected forfeitures, but recognize them as they occur.
The grant date fair value of the RSUs, which are not entitled to receive dividends until vested, is measured by reducing the share price at that date by the present value of the dividends expected to be paid during the requisite vesting period, discounted at the appropriate risk-free interest rate. The grant date fair value and compensation expense of PRSU grants is estimated based on a Monte Carlo simulation using the Company’s closing stock price as of the day before the grant date.
In October 2018, Legacy Expro established the Expro Group Holdings International Limited 2018 Management Incentive Plan (the “Management Incentive Plan”) which was comprised of the following stock-based compensation awards: (a) stock options to non-executive directors and key management personnel and (b) restricted stock units, each of which were assumed by the Company in connection with the Merger. Due to the Merger, the Company recorded stock-based compensation expense based on the fair value on the Closing Date to the extent each award was fully vested. Compensation expense associated with those awards that have a requisite service period remaining as of the Closing Date will be recognized on a straight-line basis over the remaining requisite service period based on the Closing Date fair value.
EXPRO GROUP HOLDINGS N.V.
Notes to the Consolidated Financial Statements
Research and development
Research and development costs are expensed as incurred and relate to spending for new product development and innovation and includes internal engineering, materials and third-party costs. We incurred $7.3 million, $6.7 million and $10.4 million of research and development costs for the years ended December 31, 2022, 2021 and 2020, respectively, which are included in “Cost of revenue, excluding depreciation and amortization” in the consolidated statements of operations.
Income (loss) per share
Basic income (loss) per share excludes dilution and is computed by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted income (loss) per share reflects the potential dilution that could occur if securities to issue common stock were exercised or converted to common stock.
Recent accounting pronouncements
Accounting guidance adopted
Changes to GAAP are established by the Financial Accounting Standards Board (“FASB”) in the form of ASUs to the FASB’s Accounting Standards Codification. We consider the applicability and impact of all accounting pronouncements; recently issued ASUs were either determined to be not applicable or expected to have immaterial impact on our consolidated financial position, results of operations and cash flows.
EXPRO GROUP HOLDINGS N.V.
Notes to the Consolidated Financial Statements
3. Business combinations and dispositions
Frank’s International N.V.
As discussed in Note 1, the Merger of Frank’s with Legacy Expro pursuant to the Merger Agreement was completed on October 1, 2021. U.S. GAAP requires the determination of the accounting acquirer, the acquisition date, the fair value of assets and liabilities of the acquired and the resulting measurement of goodwill. The Merger is accounted for as a reverse merger and Legacy Expro has been identified as the acquirer for accounting purposes. As a result, the Company has in accordance with ASC 805, Business Combinations, applied the acquisition method of accounting to account for Frank’s assets acquired and liabilities assumed. Applying the acquisition method of accounting includes recording the identifiable assets acquired and liabilities assumed at their fair values and recording goodwill for the excess of the consideration transferred over the net aggregate fair value of the identifiable assets acquired and liabilities assumed.
The merger consideration was based on Frank’s closing share price on the Closing Date. In a reverse merger involving only the exchange of equity, the fair value of the equity of the accounting acquiree may be used to measure consideration transferred if the value of the accounting acquiree’s equity interests are more reliably measurable than the value of the accounting acquirer’s equity interest. As Legacy Expro was a private company and Frank’s was a public company with a quoted and reliable market price, the fair value of Frank’s equity interests was deemed to be more reliable. Under the acquisition method of accounting, total consideration exchanged was as follows:
| | | | | | Per share | | | Amount | |
| | Shares issued | | | Price | | | (in thousands) | |
Issuance of common stock attributable to Frank’s stockholders | | | 38,066,216 | | | $ | 18.90 | | | $ | 719,452 | |
Replacement of Frank’s equity awards | | | | | | | | | | | 7,830 | |
Cash payment to Mosing Holdings LLC pursuant to the amended and restated tax receivable agreement | | | | | | | | | | | 15,000 | |
Total Merger Consideration Exchanged | | | | | | | | | | $ | 742,282 | |
EXPRO GROUP HOLDINGS N.V.
Notes to the Consolidated Financial Statements
The following table sets forth the allocation of the merger consideration exchanged to the fair value of identifiable tangible and intangible assets acquired and liabilities assumed as of the Closing Date, with the recording of goodwill for the excess of the consideration transferred over the net aggregate fair value of the identifiable assets acquired and liabilities assumed ($ in thousands):
| | Initial allocation of the consideration | | | Measurement period adjustments | | | Allocation of consideration as of December 31, 2022 | |
| | | | | | | | | | | | |
Cash and cash equivalents | | $ | 187,178 | | | $ | - | | | $ | 187,178 | |
Restricted cash | | | 2,561 | | | | - | | | | 2,561 | |
Accounts receivables, net | | | 112,234 | | | | (1,020 | ) | | | 111,214 | |
Inventories | | | 69,567 | | | | (109 | ) | | | 69,458 | |
Assets held for sale | | | 10,061 | | | | - | | | | 10,061 | |
Income tax receivables | | | 2,030 | | | | - | | | | 2,030 | |
Other current assets | | | 23,908 | | | | (862 | ) | | | 23,046 | |
Property, plant and equipment | | | 212,639 | | | | (2,479 | ) | | | 210,160 | |
Goodwill | | | 154,399 | | | | 41,077 | | | | 195,476 | |
Intangible assets | | | 104,791 | | | | - | | | | 104,791 | |
Operating lease right-of-use assets | | | 27,406 | | | | - | | | | 27,406 | |
Other assets | | | 20,494 | | | | (70 | ) | | | 20,424 | |
Total assets | | | 927,268 | | | | 36,537 | | | | 963,805 | |
Accounts payable and accrued liabilities | | | 81,959 | | | | 3,876 | | | | 85,835 | |
Operating lease liabilities | | | 8,344 | | | | - | | | | 8,344 | |
Current income tax liabilities | | | 8,932 | | | | 9,862 | | | | 18,794 | |
Other current liabilities | | | 19,918 | | | | 12,108 | | | | 32,026 | |
Deferred tax liabilities | | | 5,673 | | | | - | | | | 5,673 | |
Non-current operating lease liabilities | | | 19,607 | | | | - | | | | 19,607 | |
Other non-current liabilities | | | 40,553 | | | | 10,691 | | | | 51,244 | |
Total Liabilities | | | 184,986 | | | | 36,537 | | | | 221,523 | |
| | | | | | | | | | | | |
Total Merger Consideration Exchanged | | $ | 742,282 | | | $ | - | | | $ | 742,282 | |
The preliminary valuation of the assets acquired and liabilities assumed, including other current liabilities, in the Merger initially resulted in goodwill of $154.4 million. During the third quarter of 2022, the Company finalized the valuation and recorded measurement period adjustments to its preliminary estimates due to additional information received primarily related to accounts payable and accrued liabilities, other current liabilities (please see Note 18 “Commitments and contingencies” for additional information), other non-current liabilities and income taxes. The measurement period adjustments resulted in an increase in goodwill of $41.1 million, for final total goodwill associated with the Merger of $195.5 million. The fair values of identifiable intangible assets were prepared using an income valuation approach, which requires a forecast of expected future cash flows either through the use of the relief-from-royalty method or the multi-period excess earnings method, which are discounted to approximate their current value. The estimated useful lives are based on management’s historical experience and expectations as to the duration of time that benefits from these assets are expected to be realized.
The intangible assets will be amortized on a straight-line basis over an estimated 10- to 15-year life. We expect annual amortization to be approximately $7.7 million associated with these intangible assets.
Goodwill will not be amortized but rather subject to an annual impairment test, absent any indicators of impairment. Goodwill is attributable to planned synergies expected to be achieved from the combined operations of Legacy Expro and Frank’s. Goodwill recorded in the Merger is not expected to be deductible for tax purposes.
EXPRO GROUP HOLDINGS N.V.
Notes to the Consolidated Financial Statements
Results of Frank’s for the period October 1, 2021 through December 31, 2021
The Company’s operating results for the period October 1, 2021 through December 31, 2021 include $112.1 million of revenue and $32.9 million of net loss attributable to Frank’s.
Unaudited Pro Forma Financial Information
The following unaudited pro forma consolidated results of operations for the year ended December 31, 2021 and 2020 assume the Merger was completed as of January 1, 2020 (in thousands):
| | Year Ended December 31, | |
| | 2021 | | | 2020 | |
Unaudited pro forma revenues | | $ | 1,143,356 | | | $ | 1,065,384 | |
Unaudited pro forma net loss | | $ | (121,546 | ) | | $ | (491,091 | ) |
Estimated unaudited pro forma information is not necessarily indicative of the results that actually would have occurred had the Merger been completed on the date indicated or of future operating results.
Merger and integration expense
During the year ended December 31, 2022, 2021 and 2020, the Company incurred $13.6 million, $47.6 million and $1.6 million of merger and integration expense respectively, which consist primarily of legal fees, professional fees, integration, severance and other costs directly attributable to the Merger.
Below is a reconciliation of our liability balance associated with our severance plan initiated during 2021 related to the integration in connection with the Merger, which is included in “Other current liabilities” on the consolidated balance sheets (in thousands):
| | NLA | | | ESSA | | | MENA | | | APAC | | | Central | | | Total | |
Balance as of December 31, 2021 | | $ | 2,057 | | | $ | 2,502 | | | $ | 424 | | | $ | 617 | | | $ | 6,615 | | | $ | 12,215 | |
Expense (reversal) during the period | | $ | (256 | ) | | $ | (808 | ) | | $ | 34 | | | $ | 646 | | | $ | 1,707 | | | | 1,323 | |
Payments made during the year | | | (1,675 | ) | | | (1,634 | ) | | | (458 | ) | | | (1,176 | ) | | | (7,880 | ) | | | (12,823 | ) |
Balance as of December 31, 2022 | | $ | 126 | | | $ | 60 | | | $ | - | | | $ | 87 | | | $ | 442 | | | $ | 715 | |
Sale of assets
On November 13, 2020, Legacy Expro entered into an agreement to transfer, sell and assign all rights, title and interest in and to certain identified tangible and intangible assets and liabilities relating to its pressure-control chokes product line for total cash consideration of $15.5 million and an additional earn-out consideration of up to a maximum of $1.0 million, contingent upon certain criteria being met in the following year. No contingent consideration was recognized during the year ended December 31, 2020. Legacy Expro recognized a gain of $10.1 million for the year ended December 31, 2020 net of the carrying value of the assets transferred of $4.4 million and costs directly attributable to the sale of $1.0 million. As of December 31, 2021, the conditions upon which the earn-out consideration was contingent were met. As a result, the Company recognized a gain of $1.0 million for the year ended December 31, 2021.
EXPRO GROUP HOLDINGS N.V.
Notes to the Consolidated Financial Statements
4. Fair value measurements
Recurring Basis
A summary of financial assets and liabilities that are measured at fair value on a recurring basis, as of December 31, 2022 and 2021, were as follows (in thousands):
| | December 31, 2022 | |
| | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
Assets: | | | | | | | | | | | | | | | | |
Investments: | | | | | | | | | | | | | | | | |
Non-current accounts receivable, net | | $ | - | | | $ | 9,688 | | | | - | | | $ | 9,688 | |
Liabilities: | | | | | | | | | | | | | | | | |
Finance lease liabilities | | | - | | | | 14,820 | | | | - | | | | 14,820 | |
| | December 31, 2021 | |
| | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
Assets: | | | | | | | | | | | | | | | | |
Investments: | | | | | | | | | | | | | | | | |
Cash surrender value of life insurance policies- | | | | | | | | | | | | | | | | |
Deferred compensation plan | | $ | - | | | $ | 18,857 | | | $ | - | | | $ | 18,857 | |
Non-current accounts receivable, net | | | - | | | | 11,531 | | | | - | | | | 11,531 | |
Liabilities: | | | | | | | | | | | | | | | | |
Deferred compensation plan | | | - | | | | 9,339 | | | | - | | | | 9,339 | |
Finance lease liabilities | | | - | | | | 16,919 | | | | - | | | | 16,919 | |
Our investments associated with our deferred compensation plan at December 31, 2021 consist primarily of the cash surrender value of life insurance policies and is included in “other non-current assets” on the consolidated balance sheets. The liability associated with our deferred compensation plan at December 31, 2021 is included in “other non-current liabilities” on the consolidated balance sheets. During 2022, the Company terminated the executive deferred compensation benefit plan. Please see Note 19 “Post-retirement benefits” for additional information. Our investments changed as a result of contributions, payments, and fluctuations in the market. Assets and liabilities, measured using significant observable inputs, are reported at fair value based on third-party broker statements, which are derived from the fair value of the funds’ underlying investments. They are reported at fair value based on the price of the stock and are included in “Other non-current assets” on the consolidated balance sheets.
EXPRO GROUP HOLDINGS N.V.
Notes to the Consolidated Financial Statements
Non-recurring Basis
We apply the provisions of the fair value measurement standard to our non-recurring, non-financial measurements including business combinations and assets identified as held for sale, as well as impairment related to goodwill and other long-lived assets. For business combinations, the purchase price is allocated to the assets acquired and liabilities assumed based on a discounted cash flow model for most intangibles as well as market assumptions for the valuation of equipment and other fixed assets.
Goodwill is not subject to amortization and is tested for impairment annually, or more frequently if events or changes in circumstances indicate that the asset might be impaired. A qualitative assessment is allowed to determine if goodwill is potentially impaired. We have the option to bypass the qualitative assessment for any reporting unit in any period and proceed directly to performing the quantitative goodwill impairment test. The qualitative assessment determines whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount. If it is more likely than not that the fair value of the reporting unit is less than the carrying amount, then a quantitative impairment test is performed. The quantitative goodwill impairment test is used to identify both the existence of impairment and the amount of impairment loss. The test compares the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit is less than its carrying value, an impairment loss is recorded based on that difference.
When conducting an impairment test on long-lived assets, other than goodwill, we first compare estimated future undiscounted cash flows associated with the asset to the asset’s carrying amount. If the undiscounted cash flows are less than the asset’s carrying amount, we then determine the asset’s fair value by using a discounted cash flow analysis. These analyses are based on estimates such as management’s short-term and long-term forecast of operating performance, including revenue growth rates and expected profitability margins, estimates of the remaining useful life and service potential of the asset, and a discount rate based on our weighted average cost of capital. For assets that meet the criteria to be classified as held for sale, a market approach is used to determine fair value based on third-party appraisal reports.
The impairment assessments discussed above incorporate inherent uncertainties, including projected commodity pricing, supply and demand for our services and future market conditions, which are difficult to predict in volatile economic environments and could result in impairment expense in future periods if actual results materially differ from the estimated assumptions utilized in our forecasts. If crude oil prices decline significantly and remain at low levels for a sustained period of time, we could be required to record an impairment of the carrying value of our long-lived assets in the future which could have a material adverse impact on our operating results. Given the unobservable nature of the inputs, the discounted cash flow models are deemed to use Level 3 inputs.
No impairment expense was recognized during the year ended December 31, 2022 and 2021. The following table presents total amount of impairment expense recognized during the year ended December 31, 2020 (in thousands):
| | Year Ended December 31, | |
| | 2020 | |
Goodwill | | $ | 191,893 | |
Intangible assets, net | | | 60,394 | |
Property, plant and equipment, net | | | 19,993 | |
Operating lease right-of-use assets | | | 15,174 | |
Total | | $ | 287,454 | |
EXPRO GROUP HOLDINGS N.V.
Notes to the Consolidated Financial Statements
Goodwill
For the year ended December 31, 2022, we performed a quantitative goodwill impairment assessment as of our annual testing date and determined that the fair value was substantially in excess of the carrying value for each reporting unit. For the year ended December 31, 2021, we performed a qualitative goodwill impairment assessment of our goodwill as of our annual testing date and determined that there were no events or circumstances that indicated it is more likely than not that a reporting unit’s fair value is less than its carrying amount. Accordingly, no impairment expense related to goodwill was recorded during the years ended December 31, 2022 and December 31, 2021.
In March 2020, the Company observed a material increase in macro-economic uncertainty and a material decrease in oil and gas prices as a result of a combination of factors, including the substantial decline in global demand for oil caused by the COVID-19 pandemic and disagreements between the Organization of Petroleum Exporting Countries and other oil producing nations regarding limits on production. As a result, customers significantly decreased capital budgets and other spending, which significantly impacted our global outlook for the industry. We determined that these events constituted a triggering event that required us to perform a quantitative goodwill impairment assessment as of March 31, 2020 (“Testing Date”) and to review the recoverability of all our long-lived assets. Our interim quantitative goodwill impairment test in 2020 determined the carrying value of certain of our reporting units exceeded their estimated fair value as of the Testing date, which resulted in goodwill impairment expenses of $191.9 million. Our quantitative goodwill impairment test as of our annual testing date on 2020 determined no further impairment to goodwill was to be recorded. After recording of the impairment expense, the carrying value of our impaired reporting units equaled their fair value whereas the estimated fair values of other reporting units were more that their carrying values.
In performing our quantitative goodwill impairment assessments, we used the income approach and the market approach to estimate the fair value of our reporting units. The income approach estimates the fair value by discounting the reporting unit’s estimated future cash flows using an estimated discount rate, or expected return, that a marketplace participant would have required as of the valuation date. The market approach includes the use of comparative multiples to corroborate the discounted cash flow results and involves significant judgment in the selection of the appropriate peer group companies and valuation multiples. Under the income approach, we utilized third-party valuation advisors to assist us with these valuations. These analyses included significant judgment, including significant Level 3 assumptions related to management’s short-term and long-term forecast of operating performance, discount rates based on our estimated weighted average cost of capital, revenue growth rates, profitability margins and capital expenditures.
Long-lived Assets
The Company did not identify any indicators of impairment related to our long-lived assets during the years ended December 31, 2022 and December 31, 2021. In reviewing the recoverability of our long-lived assets during 2020, we identified certain of our long-lived assets which exceeded their respective fair values and certain of our long-lived assets which were deemed to be no longer useable. As a result, during 2020 we recorded impairment expense of $20.0 million, $60.4 million and $15.2 million relating to our property, plant and equipment, intangible assets and operating lease right-of-use assets, respectively.
Financial Instruments
The estimated fair values of the Company’s financial instruments have been determined at discrete points in time based on relevant market information. The Company’s financial instruments consist of cash and cash equivalents, restricted cash, accounts receivable, other current assets, accounts payable and accrued liabilities and interest-bearing loans. The carrying amounts of the Company’s financial instruments other than interest bearing loans approximate fair value due to the short-term nature of the items. The Company does not have any outstanding borrowings on its interest-bearing loans.
EXPRO GROUP HOLDINGS N.V.
Notes to the Consolidated Financial Statements
5. Business segment reporting
Operating segments are defined as components of an enterprise for which separate financial information is available that is regularly evaluated by the Company’s Chief Operating Decision Maker (“CODM”), which is our CEO, in deciding how to allocate resources and assess performance. Our operations are comprised of four operating segments which also represent our reporting segments and are aligned with our geographic regions as below:
| ● | North and Latin America (“NLA”), |
| ● | Europe and Sub-Saharan Africa (“ESSA”), |
| ● | Middle East and North Africa (“MENA”), and |
The following table presents our revenue disaggregated by our operating segments (in thousands):
| | Year Ended December 31, | |
| | 2022 | | | 2021 | | | 2020 | |
NLA | | $ | 499,813 | | | $ | 193,156 | | | $ | 115,738 | |
ESSA | | | 389,342 | | | | 300,557 | | | | 219,534 | |
MENA | | | 201,495 | | | | 171,136 | | | | 194,033 | |
APAC | | | 188,768 | | | | 160,913 | | | | 145,721 | |
Total | | $ | 1,279,418 | | | $ | 825,762 | | | $ | 675,026 | |
EXPRO GROUP HOLDINGS N.V.
Notes to the Consolidated Financial Statements
Segment EBITDA
Our CODM regularly evaluates the performance of our operating segments using Segment EBITDA, which we define as loss before income taxes adjusted for corporate costs, equity in income of joint ventures, depreciation and amortization expense, impairment expense, severance and other expense, gain on disposal of assets, foreign exchange losses, merger and integration expense, other income, net, interest and finance expense, net and stock-based compensation expense.
The following table presents our Segment EBITDA disaggregated by our operating segments and reconciliation to income (loss) before income taxes (in thousands):
| | Year Ended December 31, | |
| | 2022 | | | 2021 | | | 2020 | |
NLA | | $ | 135,236 | | | $ | 32,254 | | | $ | 54 | |
ESSA | | | 74,681 | | | | 53,336 | | | | 35,393 | |
MENA | | | 63,315 | | | | 56,312 | | | | 77,296 | |
APAC | | | 4,850 | | | | 33,444 | | | | 34,976 | |
Total Segment EBITDA | | | 278,082 | | | | 175,346 | | | | 147,719 | |
Corporate costs | | | (87,580 | ) | | | (66,153 | ) | | | (61,122 | ) |
Equity in income of joint ventures | | | 15,731 | | | | 16,747 | | | | 13,589 | |
Depreciation and amortization expense | | | (139,767 | ) | | | (123,866 | ) | | | (113,693 | ) |
Impairment expense | | | - | | | | - | | | | (287,454 | ) |
Severance and other expense | | | (7,825 | ) | | | (7,826 | ) | | | (13,930 | ) |
Stock-based compensation expense | | | (18,486 | ) | | | (54,162 | ) | | | - | |
Gain on disposal of assets | | | - | | | | 1,000 | | | | 10,085 | |
Foreign exchange losses | | | (8,341 | ) | | | (4,314 | ) | | | (2,261 | ) |
Merger and integration expense | | | (13,620 | ) | | | (47,593 | ) | | | (1,630 | ) |
Other income, net | | | 3,149 | | | | 3,992 | | | | 3,908 | |
Interest and finance expense, net | | | (241 | ) | | | (8,795 | ) | | | (5,656 | ) |
Income (loss) before income taxes | | $ | 21,102 | | | $ | (115,624 | ) | | $ | (310,445 | ) |
Corporate costs include the costs of running our corporate head office and other central functions that support the operating segments, including research, engineering and development, logistics, sales and marketing and health and safety and are not attributable to a particular operating segment.
We are a Netherlands based company and we derive our revenue from services and product sales to customers primarily in the oil and gas industry. No single customer accounted for more than 10% of our revenue for the years ended December 31, 2022 and 2021. One customer in our MENA operating segment accounted for 16% of our consolidated revenue for the year ended December 31, 2020. The revenue generated in the Netherlands was immaterial for the years ended December 31, 2022, 2021 and 2020. Other than the U.S. in 2022, Norway in 2021, and Algeria in 2020, no individual country represented more than 10% of our revenue for the years ended December 31, 2022, 2021 and 2020.
The following table presents total assets by geographic region and assets held centrally. Assets held centrally includes certain property plant and equipment, investments in joint ventures, collateral deposits, income tax related balances, corporate cash and cash equivalents, accounts receivable and other current and non-current assets, which are not included in the measure of segment assets reviewed by the CODM:
| | December 31, | |
| | 2022 | | | 2021 | |
NLA | | $ | 633,644 | | | $ | 561,482 | |
ESSA | | | 444,368 | | | | 370,638 | |
MENA | | | 294,742 | | | | 358,465 | |
APAC | | | 232,812 | | | | 231,087 | |
Assets held centrally | | | 331,586 | | | | 332,966 | |
Total | | $ | 1,937,152 | | | $ | 1,854,638 | |
EXPRO GROUP HOLDINGS N.V.
Notes to the Consolidated Financial Statements
The following table presents our capital expenditures disaggregated by our operating segments (in thousands):
| | Year Ended December 31, | |
| | 2022 | | | 2021 | |
NLA | | $ | 18,435 | | | $ | 6,426 | |
ESSA | | | 17,574 | | | | 11,151 | |
MENA | | | 27,354 | | | | 14,553 | |
APAC | | | 13,457 | | | | 19,958 | |
Assets held centrally | | | 5,084 | | | | 29,423 | |
Total | | $ | 81,904 | | | $ | 81,511 | |
6. Revenue
Disaggregation of revenue
We disaggregate our revenue from contracts with customers by geography, as disclosed in Note 5 above, as we believe this best depicts how the nature, amount, timing and uncertainty of our revenue and cash flows are affected by economic factors. Additionally, we disaggregate our revenue into areas of capability.
The following table sets forth the total amount of revenue by areas of capability as follows (in thousands):
| | Year Ended December 31, | |
| | 2022 | | | 2021 | | | 2020 | |
Well construction | | $ | 500,438 | | | $ | 112,126 | | | $ | - | |
Well management | | | 778,980 | | | | 713,636 | | | | 675,026 | |
Total | | $ | 1,279,418 | | | $ | 825,762 | | | $ | 675,026 | |
Contract balances
We perform our obligations under contracts with our customers by transferring services and products in exchange for consideration. The timing of our performance often differs from the timing of our customers’ payments, which results in the recognition of receivables and deferred revenue.
EXPRO GROUP HOLDINGS N.V.
Notes to the Consolidated Financial Statements
Unbilled receivables are initially recognized for revenue earned on completion of the performance obligation which are not yet invoiced to the customer. The amounts recognized as unbilled receivables are reclassified to trade receivable upon billing. Deferred revenue represents the Company’s obligations to transfer goods or services to customers for which the Company has received consideration, in full or part, from the customer.
Contract balances consisted of the following as of December 31, 2022 and December 31, 2021 (in thousands):
| | December 31, | |
| | 2022 | | | 2021 | |
Trade receivable, net | | $ | 289,235 | | | $ | 236,158 | |
Unbilled receivables (included within accounts receivable, net) | | $ | 139,690 | | | $ | 94,659 | |
Deferred revenue (included within other liabilities) | | $ | 51,192 | | | $ | 17,038 | |
The Company recognized revenue of $15.5 million, $15.4 million and $6.3 million for the years ended December 31, 2022, 2021 and 2020, respectively, out of the deferred revenue balance as of the beginning of the applicable year.
As of December 31, 2022, $50.9 million of our deferred revenue was classified as current and is included in “Other current liabilities” on the consolidated balance sheets, with the remainder classified as non-current and included in “Other non-current liabilities” on the consolidated balance sheets.
Transaction price allocated to remaining performance obligations
Remaining performance obligations represent firm contracts for which work has not been performed and future revenue recognition is expected. We have elected the practical expedient permitting the exclusion of disclosing remaining performance obligations for contracts that have an original expected duration of one year or less and for our long-term contracts we have a right to consideration from customers in an amount that corresponds directly with the value to the customer of the performance completed to date. With respect to our long term construction contracts, revenue allocated to remaining performance obligations is $139.2 million.
7. Income taxes
The components of income tax expense (benefit) for the years ended December 31, 2022, 2021 and 2020 were as follows (in thousands):
| | Year Ended December 31, | |
| | 2022 | | | 2021 | | | 2020 | |
Current tax: | | | | | | | | | | | | |
Netherlands (2020: U.K.) | | $ | 283 | | | $ | 216 | | | $ | (707 | ) |
Foreign | | | 42,308 | | | | 16,777 | | | | 17,883 | |
Total current tax | | | 42,591 | | | | 16,993 | | | | 17,176 | |
Deferred tax: | | | | | | | | | | | | |
Netherlands (2020: U.K.) | | | - | | | | - | | | | - | |
Foreign | | | (1,344 | ) | | | (726 | ) | | | (20,576 | ) |
Total deferred tax | | | (1,344 | ) | | | (726 | ) | | | (20,576 | ) |
Income tax expense (benefit) | | $ | 41,247 | | | $ | 16,267 | | | $ | (3,400 | ) |
EXPRO GROUP HOLDINGS N.V.
Notes to the Consolidated Financial Statements
Following the closing of the Merger on October 1, 2021, the tax domicile of the Company changed from the U.K. to the Netherlands. As a result of this change in domicile due to the Merger, income tax expense (benefit) is split between the Netherlands and foreign tax jurisdictions for the year ended December 31, 2022 and 2021 and between the U.K. and foreign tax jurisdictions for the year ended December 31, 2020.
The Netherland, U.K. and foreign components of income (loss) from continuing operations before income taxes and equity in income of joint ventures for the years ended December 31, 2022, 2021 and 2020 were as follows (in thousands):
| | Year Ended December 31, | |
| | 2022 | | | 2021 | | | 2020 | |
Netherlands (2020: U.K.) | | $ | (13,984 | ) | | $ | (19,190 | ) | | $ | 22,819 | |
Foreign | | | 19,355 | | | | (113,181 | ) | | | (346,853 | ) |
Total | | $ | 5,371 | | | $ | (132,371 | ) | | $ | (324,034 | ) |
A reconciliation of the differences between the income tax provision computed at the Netherlands statutory rate of 25.8% and 25.0% for the year ended December 31, 2022 and 2021, respectively, and the U.K. statutory rate of 19.0% for the years ended December 31, 2020 to income (loss) from continuing operations before taxes and equity in joint ventures for the reasons below (in thousands):
| | Year Ended December 31, | |
| | 2022 | | | 2021 | | | 2020 | |
Statutory tax rate | | | 25.8 | % | | | 25.0 | % | | | 19.0 | % |
| | | | | | | | | | | | |
Income tax expense (benefit) at statutory rate | | $ | 1,387 | | | $ | (33,093 | ) | | $ | (61,566 | ) |
Permanent differences | | | 12,187 | | | | 14,123 | | | | 120,239 | |
Effect of overseas tax rates | | | (4,024 | ) | | | 9,905 | | | | (1,754 | ) |
Net tax charge related to attributes with full valuation allowance | | | 28,267 | | | | 28,607 | | | | (71,259 | ) |
Exempt dividends from joint ventures | | | (2,649 | ) | | | (1,014 | ) | | | 14 | |
Return to provision adjustments | | | (5,966 | ) | | | (5,001 | ) | | | 6,150 | |
Withholding taxes | | | 3,029 | | | | 1,995 | | | | 984 | |
Foreign exchange movements on tax balances | | | 694 | | | | 67 | | | | 1,216 | |
Movement in uncertain tax positions | | | 8,322 | | | | 678 | | | | 2,576 | |
Income tax expense (benefit) | | $ | 41,247 | | | $ | 16,267 | | | $ | (3,400 | ) |
| | | | | | | | | | | | |
Effective tax rate | | | 768.0 | % | | | -12.3 | % | | | 1.0 | % |
EXPRO GROUP HOLDINGS N.V.
Notes to the Consolidated Financial Statements
Deferred tax assets and liabilities are recorded for the anticipated future tax effects of temporary differences between the financial statement basis and tax basis of our assets and liabilities and are measured using the tax rates and laws expected to be in effect when the differences are projected to reverse.
The primary components of our deferred tax assets and liabilities as of December 31, 2022 and 2021 were as follows (in thousands):
| | December 31, | |
| | 2022 | | | 2021 | |
Deferred tax assets: | | | | | | | | |
Net operating loss carry forwards | | $ | 771,963 | | | $ | 731,315 | |
Employee compensation and benefits | | | 9,977 | | | | 12,958 | |
Depreciation | | | 66,300 | | | | 44,253 | |
Other | | | 44,133 | | | | 34,734 | |
Investment in partnership | | | - | | | | 51,890 | |
Intangibles | | | 16,197 | | | | 22,980 | |
Valuation allowance | | | (881,286 | ) | | | (829,087 | ) |
Total deferred tax assets | | | 27,284 | | | | 69,043 | |
Deferred tax liabilities: | | | | | | | | |
Depreciation | | | (13,630 | ) | | | (1,935 | ) |
Goodwill and other intangibles | | | (36,968 | ) | | | (42,784 | ) |
Investment in partnership | | | (911 | ) | | | (48,856 | ) |
Other | | | (6,194 | ) | | | (7,212 | ) |
Total deferred tax liabilities | | | (57,703 | ) | | | (100,787 | ) |
Net deferred tax liabilities | | $ | (30,419 | ) | | $ | (31,744 | ) |
We recognize a valuation allowance where it is more likely than not that some or all of the deferred tax assets will not be realized. The realization of a deferred tax asset is dependent upon the ability to generate sufficient taxable income in the appropriate taxing jurisdictions where the deferred tax assets are initially recognized.
The changes in valuation allowances were as follows (in thousands):
| | Year Ended December 31 | |
| | | | | | | | | | | | |
| | 2022 | | | 2021 | | | 2020 | |
Balance at the beginning of the period | | $ | 829,087 | | | $ | 512,711 | | | $ | 443,398 | |
Additions attributable to the Merger | | | - | | | | 187,319 | | | | - | |
Additions not attributable to the Merger | | | 146,451 | | | | 160,299 | | | | 72,025 | |
Reductions | | | (94,252 | ) | | | (31,242 | ) | | | (2,712 | ) |
Balance at end of period | | $ | 881,286 | | | $ | 829,087 | | | $ | 512,711 | |
EXPRO GROUP HOLDINGS N.V.
Notes to the Consolidated Financial Statements
As of December 31, 2022, the Company had U.S. federal net operating loss carryforwards (“NOLs”) of approximately $628.7 million, net of existing Section 382 (as defined below) limitations, $160.6 million, of which were incurred prior to January 1, 2018 (and will begin to expire, if unused, in 2036) and $468.1 million of which were incurred on or after January 1, 2018 (and will not expire and will be carried forward indefinitely).
Section 382 of the Code (“Section 382”) imposes an annual limitation on the amount of NOLs that may be used to offset taxable income when a corporation has undergone an “ownership change” (as determined under Section 382). An ownership change generally occurs if one or more stockholders (or groups of stockholders) who are each deemed to own at least 5% of such corporation’s stock increase their ownership by more than 50 percentage points over their lowest ownership percentage within a rolling three-year period. In the event that an ownership change occurs, utilization of the relevant corporation’s NOLs would be subject to an annual limitation under Section 382, generally determined, subject to certain adjustments, by multiplying (i) the fair market value of such corporation’s stock at the time of the ownership change by (ii) a percentage approximately equivalent to the yield on long-term tax-exempt bonds during the month in which the ownership change occurs. Any unused annual limitation may be carried over to later years.
The Company underwent an ownership change under Section 382 as a result of the Merger, which will trigger a limitation (calculated as described above) on the combined company’s ability to utilize any historic Frank’s NOLs and will cause some of the Frank’s NOLs incurred prior to January 1, 2018 to expire before the combined company will be able to utilize them to reduce taxable income in future periods.
The exchange of ordinary shares of Legacy Expro for shares of the Company's common stock (“Company Common Stock”) in the Merger was, standing alone, insufficient to result in an ownership change with respect to Legacy Expro. However, the Company will undergo an ownership change as a result of the Merger taking into account other changes in ownership of Company stock occurring within the relevant three-year period described above. Due to the ownership change with respect to Legacy Expro as a result of the Merger, the combined company will be prevented from fully utilizing Legacy Expro’s historic NOLs incurred prior to January 1, 2018 prior to their expiration.
We have performed an analysis of uncertain tax positions in the various jurisdictions in which we operate and concluded that we are adequately provided. Our tax filings are subject to regular audits by tax authorities in the various jurisdictions in which we operate. Tax liabilities are based on estimates, however due to the uncertain and complex application of tax legislation, the ultimate resolution of audits may be materially different to our estimates.
The Company is subject to income taxation in many jurisdictions around the world. The following table presents the changes in our uncertain tax positions as of December 31, 2022 and 2021 (in thousands):
| | Year ended December 31 | |
| | 2022 | | | 2021 | |
Balance at the beginning of the period | | $ | 76,114 | | | $ | 35,377 | |
Additions attributable to the Merger | | | 7,259 | | | | 40,144 | |
Additions based on tax positions related to current period not attributable to the Merger | | | 8,009 | | | | 5,774 | |
Additions for tax positions of prior year period not attributable to the Merger | | | 2,371 | | | | 5,094 | |
Settlements with tax authorities | | | (2,490 | ) | | | (2,370 | ) |
Reductions for tax positions of prior years | | | (547 | ) | | | (5,138 | ) |
Reductions due to the lapse of statute of limitations | | | (1,525 | ) | | | (2,094 | ) |
Effect of changes in foreign exchange rates | | | (1,054 | ) | | | (673 | ) |
Balance at the end of the period | | $ | 88,137 | | | $ | 76,114 | |
EXPRO GROUP HOLDINGS N.V.
Notes to the Consolidated Financial Statements
The amounts above include penalties and interest of $9.8 million and $4.2 million for the years ended December 31, 2022 and 2021, respectively. We classify penalties and interest relating to uncertain tax positions within income tax (expense) benefit in the consolidated statements of operations.
Approximately $58.0 million and $46.0 million of unrecognized tax benefits as of December 31, 2022 and December 31, 2021 respectively, included in “Other non-current liabilities” on the consolidated balance sheet, would positively impact our future rate and be recognized as additional tax benefit in our statement of operations if resolved in our favor. Approximately $30.1 million of unrecognized tax benefits as of December 31, 2022 and at December 31, 2021 relate to certain deductions and should not impact our future rate. We do not foresee material resolution of these positions in the coming 12 months.
We file income tax returns in the Netherlands and in various other foreign jurisdictions in respect of the Company’s subsidiaries. In all cases we are no longer subject to income tax examination by tax authorities for years prior to 2008. Tax filings of our subsidiaries, branches and related entities are routinely examined in the normal course of business by the relevant tax authorities. We believe that there are no jurisdictions in which the outcome of unresolved issues is likely to be material to our results of operations, financial position or cash flows.
8. Investment in joint ventures
We have investments in two joint ventures, which together provide us access to certain Asian markets that otherwise would be challenging for us to penetrate or develop effectively on our own. COSL - Expro Testing Services (Tianjin) Co. Ltd (“CETS”), in which we have a 50% equity interest, has extensive offshore well testing and completions capabilities and a reputation for providing technology-driven solutions in China. Similarly, PV Drilling Expro International Co. Ltd. (“PVD-Expro”) in which we have a 49% equity interest, offers the full suite of the Company’s products and services, including well testing and completions, in Vietnam. Both of these are strategic to our activities and offer the full capabilities and technology of the Company, but each company is independently managed.
The carrying value of our investment in joint ventures as of December 31, 2022 and 2021 was as follows (in thousands):
| | December 31, | |
| | 2022 | | | 2021 | |
CETS | | $ | 62,471 | | | $ | 54,014 | |
PVD-Expro | | | 3,567 | | | | 3,590 | |
Total | | $ | 66,038 | | | $ | 57,604 | |
9. Accounts receivable, net
Accounts receivable, net consisted of the following as of December 31, 2022 and 2021 (in thousands):
| | December 31, | |
| | 2022 | | | 2021 | |
Accounts receivable | | $ | 441,605 | | | $ | 340,209 | |
Less: Expected credit losses | | | (12,680 | ) | | | (9,392 | ) |
Total | | $ | 428,925 | | | $ | 330,817 | |
| | | | | | | | |
Current | | | 419,237 | | | | 319,286 | |
Non – current | | | 9,688 | | | | 11,531 | |
Total | | $ | 428,925 | | | $ | 330,817 | |
EXPRO GROUP HOLDINGS N.V.
Notes to the Consolidated Financial Statements
The movement of expected credit losses for the years ended December 31, 2022, 2021 and 2020 was as follows (in thousands):
| | Year Ended December 31, | |
| | 2022 | | | 2021 | | | 2020 | |
Balance at beginning of year | | $ | 9,392 | | | $ | 6,917 | | | $ | 6,313 | |
Additions - Acquired in the Merger | | | - | | | | 992 | | | | - | |
Additions - Charged to expense | | | 4,096 | | | | 1,527 | | | | 965 | |
Deductions | | | (808 | ) | | | (44 | ) | | | (361 | ) |
Balance at end of year | | $ | 12,680 | | | $ | 9,392 | | | $ | 6,917 | |
10. Inventories
Inventories consisted of the following as of December 31, 2022 and 2021 (in thousands):
| | December 31, | |
| | 2022 | | | 2021 | |
Finished goods | | $ | 26,810 | | | $ | 34,899 | |
Raw materials, equipment spares and consumables | | | 102,395 | | | | 76,025 | |
Work-in progress | | | 24,513 | | | | 14,192 | |
Total | | $ | 153,718 | | | $ | 125,116 | |
11. Other assets and liabilities
Other assets consisted of the following as of December 31, 2022 and 2021 (in thousands):
| | December 31, | |
| | 2022 | | | 2021 | |
Cash surrender value of life insurance policies | | $ | - | | | $ | 18,857 | |
Prepayments | | | 18,084 | | | | 19,891 | |
Value-added tax receivables | | | 20,727 | | | | 22,524 | |
Collateral deposits | | | 1,669 | | | | 1,599 | |
Deposits | | | 7,245 | | | | 7,331 | |
Other | | | 5,513 | | | | 9,197 | |
Total | | $ | 53,238 | | | $ | 79,399 | |
| | | | | | | | |
Current | | | 44,975 | | | | 52,938 | |
Non – current | | | 8,263 | | | | 26,461 | |
Total | | $ | 53,238 | | | $ | 79,399 | |
EXPRO GROUP HOLDINGS N.V.
Notes to the Consolidated Financial Statements
Other liabilities consisted of the following as of December 31, 2022 and 2021 (in thousands):
| | December 31, | |
| | 2022 | | | 2021 | |
Deferred revenue | | $ | 51,192 | | | $ | 17,038 | |
Other tax and social security | | | 28,557 | | | | 27,893 | |
Income tax liabilities - non-current portion | | | 58,036 | | | | 45,741 | |
Deferred compensation plan | | | - | | | | 9,339 | |
Provisions | | | 45,248 | | | | 32,964 | |
Other | | | 21,882 | | | | 16,775 | |
Total | | $ | 204,915 | | | $ | 149,750 | |
| | | | | | | | |
Current | | | 107,750 | | | | 74,213 | |
Non – current | | | 97,165 | | | | 75,537 | |
Total | | $ | 204,915 | | | $ | 149,750 | |
Cash Surrender Value of Life Insurance Policies
We had $18.9 million of cash surrender value of life insurance policies as of December 31, 2021, that were held within a trust established to settle payment of future executive deferred compensation benefit obligations. During 2022, the Company terminated the executive deferred compensation benefit plan. Please see Note 19 “Post-retirement benefits” for additional information. Prior to the termination of the executive deferred compensation plan, the impact of cash distributions from the trust for benefits paid pursuant to the executive deferred compensation benefit plan was included in “Proceeds from sale / maturity of investments” on the consolidated statements of cash flows. Loss associated with these policies was included in “Other income, net” on our condensed consolidated statements of operations. Loss on changes in the cash surrender value of life insurance policies was $0.3 million for the year ended December 31, 2022.
12. Accounts payable and accrued liabilities
Accounts payable and accrued liabilities consisted of the following as of December 31, 2022 and 2021 (in thousands):
| | December 31, | |
| | 2022 | | | 2021 | |
Accounts payable – trade | | $ | 100,951 | | | $ | 84,952 | |
Payroll, vacation and other employee benefits | | | 46,935 | | | | 42,671 | |
Accruals for goods received not invoiced | | | 32,102 | | | | 18,666 | |
Other accrued liabilities | | | 92,716 | | | | 66,863 | |
Total | | $ | 272,704 | | | $ | 213,152 | |
EXPRO GROUP HOLDINGS N.V.
Notes to the Consolidated Financial Statements
13. Property, plant and equipment, net
Property, plant and equipment, net consisted of the following as of December 31, 2022 and 2021 (in thousands):
| | December 31, | |
| | 2022 | | | 2021 | |
Cost: | | | | | | | | |
Land | | $ | 22,261 | | | $ | 21,580 | |
Land improvement | | | 3,054 | | | | 3,054 | |
Buildings and lease hold improvements | | | 98,490 | | | | 104,660 | |
Plant and equipment | | | 789,910 | | | | 701,400 | |
| | | 913,715 | | | | 830,694 | |
Less: accumulated depreciation | | | (451,399 | ) | | | (352,114 | ) |
Total | | $ | 462,316 | | | $ | 478,580 | |
The carrying amount of our property, plant and equipment recognized in respect of assets held under finance leases as of December 31, 2022 and 2021 and included in amounts above is as follows (in thousands):
| | December 31, | |
| | 2022 | | | 2021 | |
Cost: | | | | | | | | |
Buildings | | $ | 18,623 | | | $ | 18,623 | |
Plant and equipment | | | 1,275 | | | | 1,275 | |
| | | 19,898 | | | | 19,898 | |
Less: accumulated amortization | | | (9,085 | ) | | | (7,733 | ) |
Total | | $ | 10,813 | | | $ | 12,165 | |
Depreciation expense related to property, plant and equipment, including assets under finance leases, was $102.3 million, $95.8 million and $85.4 million for the years ended December 31, 2022, 2021 and 2020, respectively.
No impairment expense related to property, plant and equipment was recognized for the years ended December 31, 2022 and 2021. We recognized impairment expense related to property, plant and equipment of $20.0 million for the year ended December 31, 2020, which is included in “Impairment expense” on our consolidated statement of operations. Refer to Note 4 “Fair value measurements” for further details.
During the year ended December 31, 2022, a building classified as assets held for sale as of December 31, 2021, was sold for net proceeds of $6.3 million. Additionally, during the year ended December 31, 2022, a building with net carrying value of $2.2 million met the criteria to be classified as held for sale and was reclassified from property plant and equipment, net to assets held for sale on our consolidated balance sheet.
EXPRO GROUP HOLDINGS N.V.
Notes to the Consolidated Financial Statements
14. Intangible assets, net
The following table summarizes our intangible assets comprising of Customer Relationships & Contracts (“CR&C”), Trademarks, Technology and Software as of December 31, 2022 and 2021 (in thousands):
| | December 31, 2022 | | | December 31, 2021 | | | December 31, 2022 | |
| | | | | | Accumulated | | | | | | | | | | | Accumulated | | | | | | | Weighted | |
| | Gross | | | impairment | | | | | | | Gross | | | impairment | | | | | | | average | |
| | carrying | | | and | | | Net book | | | carrying | | | and | | | Net book | | | remaining | |
| | amount | | | amortization | | | value | | | amount | | | amortization | | | value | | | life (years) | |
CR&C | | $ | 222,200 | | | $ | (118,221 | ) | | $ | 103,979 | | | $ | 222,200 | | | $ | (98,271 | ) | | $ | 123,929 | | | | 5.3 | |
Trademarks | | | 57,100 | | | | (32,921 | ) | | | 24,179 | | | | 57,100 | | | | (29,392 | ) | | | 27,708 | | | | 7.5 | |
Technology | | | 170,652 | | | | (71,191 | ) | | | 99,461 | | | | 159,458 | | | | (60,979 | ) | | | 98,479 | | | | 11.7 | |
Software | | | 11,556 | | | | (9,671 | ) | | | 1,885 | | | | 8,754 | | | | (5,817 | ) | | | 2,937 | | | | 0.8 | |
Total | | $ | 461,508 | | | $ | (232,004 | ) | | $ | 229,504 | | | $ | 447,512 | | | $ | (194,459 | ) | | $ | 253,053 | | | | 8.3 | |
Amortization expense for intangible assets was $37.4 million, $28.1 million and $28.2 million for the years ended December 31, 2022, 2021 and 2020, respectively.
During the first quarter of 2022, we acquired technology to bolster our well intervention and integrity product offering, resulting in an increase in intangible assets of $11.2 million which will be amortized over a five-year life. The impact of this asset acquisition is included in “Acquisition of technology” on the consolidated statements of cash flows.
The following table summarizes the intangible assets which were acquired pursuant to the Merger (in thousands):
| | Acquired Fair Value | | | Weighted average life | |
CR&C | | $ | 7,000 | | | | 10.0 | |
Trademarks | | | 17,000 | | | | 10.0 | |
Technology | | | 79,920 | | | | 15.0 | |
Software | | | 871 | | | | 1.0 | |
Total | | $ | 104,791 | | | | 13.7 | |
No impairment expense associated with our intangible assets was recognized during the years ended December 31, 2022 and 2021. We recognized impairment expense associated with our intangible assets of $60.4 million for the year ended December 31, 2020, which is included in “Impairment expense” in our consolidated statement of operations. Refer to Note 4 “Fair value measurements” for further details.
The following table summarizes our intangible asset impairment expense by operating segment for the year ended December 31, 2020 (in thousands):
2020: | | CR&C | | | Technology | | | Trademarks | | | Total | |
NLA | | $ | 10,262 | | | $ | 20,616 | | | $ | 11,437 | | | $ | 42,315 | |
ESSA | | | - | | | | 6,909 | | | | 4,070 | | | | 10,979 | |
APAC | | | - | | | | 7,100 | | | | - | | | | 7,100 | |
Total | | $ | 10,262 | | | $ | 34,625 | | | $ | 15,507 | | | $ | 60,394 | |
EXPRO GROUP HOLDINGS N.V.
Notes to the Consolidated Financial Statements
Expected future intangible asset amortization as of December 31, 2022 is as follows (in thousands):
Years ending December 31, | | | | |
2023 | | $ | 35,467 | |
2024 | | | 33,582 | |
2025 | | | 33,582 | |
2026 | | | 33,582 | |
2027 | | | 33,582 | |
Thereafter | | | 59,709 | |
Total | | $ | 229,504 | |
15. Goodwill
Our reporting units are either our operating segments or components of our operating segments depending on the level at which segment management oversees the business. Prior to the Merger, Legacy Expro’s reporting units included Europe and the Commonwealth of Independent States, Sub-Saharan Africa, MENA, Asia, North America and Latin America. During 2021, due to the Merger we changed our internal organization and reporting structure and as a result, our operating segments, NLA, ESSA, MENA and APAC, are also our reporting units. The allocation of goodwill by operating segment was as follows (in thousands):
| | December 31, | |
| | 2022 | | | 2021 | |
NLA | | $ | 118,511 | | | $ | 93,608 | |
ESSA | | | 80,058 | | | | 66,283 | |
MENA | | | 4,218 | | | | 3,331 | |
APAC | | | 18,193 | | | | 16,681 | |
Total | | $ | 220,980 | | | $ | 179,903 | |
The following table provides the gross carrying amount and cumulative impairment expense of goodwill for each operating segment as of December 31, 2022 and 2021 (in thousands):
| | 2022 | | | 2021 | |
| | Cost | | | Measurement period adjustments | | | Accumulated impairment | | | Net Book Value | | | Cost | | | Acquired in Merger | | | Accumulated impairment | | | Net Book Value | |
NLA | | $ | 130,949 | | | $ | 24,903 | | | $ | (37,341 | ) | | $ | 118,511 | | | $ | 37,341 | | | $ | 93,608 | | | $ | (37,341 | ) | | $ | 93,608 | |
ESSA | | | 80,761 | | | | 13,775 | | | | (14,478 | ) | | | 80,058 | | | | 28,982 | | | | 51,779 | | | | (14,478 | ) | | | 66,283 | |
MENA | | | 129,714 | | | | 887 | | | | (126,383 | ) | | | 4,218 | | | | 126,383 | | | | 3,331 | | | | (126,383 | ) | | | 3,331 | |
APAC | | | 56,794 | | | | 1,512 | | | | (40,113 | ) | | | 18,193 | | | | 51,113 | | | | 5,681 | | | | (40,113 | ) | | | 16,681 | |
Total | | $ | 398,218 | | | $ | 41,077 | | | $ | (218,315 | ) | | $ | 220,980 | | | $ | 243,819 | | | $ | 154,399 | | | $ | (218,315 | ) | | $ | 179,903 | |
During the third quarter of 2022, goodwill associated with the Merger increased by $41.1 million as a result of measurement period adjustments to our preliminary estimates due to additional information received. Please see Note 3 “Business combinations and dispositions” for additional information.
EXPRO GROUP HOLDINGS N.V.
Notes to the Consolidated Financial Statements
No goodwill impairment expense was recognized during the years ended December 31, 2022 and 2021. We recorded goodwill impairment expense of $191.9 million for the year ended December 31, 2020. Refer to Note 4 “Fair value measurements” for further details.
The following table summarizes our goodwill impairment expense by operating segment for the year ended December 31, 2020 (in thousands):
| | Year Ended December 31, | |
| | 2020 | |
NLA | | $ | 25,397 | |
ESSA | | | - | |
MENA | | | 126,383 | |
APAC | | | 40,113 | |
Total | | $ | 191,893 | |
16. Interest bearing loans
On October 1, 2021, in connection with the closing of the Merger, we entered into a new revolving credit facility (the “New Facility”) with DNB Bank ASA, London Branch, as agent (the “Agent”), with total commitments of $200.0 million, of which $130.0 million was available for drawdowns as loans and $70.0 million was available for letters of credit. On July 21, 2022, the Company increased the facility available for letters of credit to $92.5 million and total commitments to $222.5 million. Proceeds of the New Facility may be used for general corporate and working capital purposes.
All obligations under the New Facility are guaranteed jointly and severally by the Company and certain of the Company’s subsidiaries incorporated in the U.S., the U.K., the Netherlands, Norway, Hungary, Australia, Cyprus, the Cayman Islands and Guernsey. Going forward, the guarantors must comprise at least 80% of the EBITDA (as defined in the New Facility) and 70% of the consolidated assets of the Company and its subsidiaries, as well as subsidiaries individually representing 5% or more of the EBITDA or assets of the group, subject to customary exceptions and exclusions. In addition, the obligations under the New Facility are secured by first priority liens on certain assets of the borrowers and guarantors, including pledges of equity interests in certain of the Company’s subsidiaries, including all of the borrowers and subsidiary guarantors, material operating bank accounts, intercompany loans receivable and, in jurisdictions where customary, including the U.S., the U.K., Australia and the Cayman Islands, substantially all of the assets and property of the borrowers and guarantors incorporated in such jurisdictions, in each case subject to customary exceptions and exclusions.
Borrowings under the New Facility bear interest at a rate per annum of LIBOR, subject to a 0.00% floor, plus an applicable margin of 3.75% for cash borrowings or 3.00% for letters of credit. A 0.75% per annum fronting fee applies to letters of credit, and an additional 0.25% or 0.50% per annum utilization fee is payable on drawdowns as loans to the extent one-third or two-thirds, respectively, or more of commitments are drawn. The unused portion of the New Facility is subject to a commitment fee of 30% per annum of the applicable margin. Interest on loans is payable at the end of the selected interest period, but no less frequently than semi-annually.
The New Facility contains various undertakings and affirmative and negative covenants which limit, subject to certain customary exceptions and thresholds, the Company and its subsidiaries’ ability to, among other things, (1) enter into asset sales; (2) incur additional indebtedness; (3) make investments, acquisitions, or loans and create or incur liens; (4) pay certain dividends or make other distributions; and (5) engage in transactions with affiliates. The New Facility also requires the Company to maintain (i) a minimum cash flow cover ratio of 1.5 to 1.0 based on the ratio of cash flow to debt service; (ii) a minimum interest cover ratio of 4.0 to 1.0 based on the ratio of EBITDA to net finance charges; and (iii) a maximum senior leverage ratio of 2.25 to 1.0 based on the ratio of total net debt to EBITDA, in each case tested quarterly on a last-twelve-months basis, subject to certain exceptions. In addition, the aggregate capital expenditure of the Company and its subsidiaries cannot exceed 110% of the forecasted amount in the relevant annual budget, subject to certain exceptions. If the Company fails to perform its obligations under the agreement that results in an event of default, the commitments under the New Facility could be terminated and any outstanding borrowings under the New Facility may be declared immediately due and payable. The New Facility also contains cross-default provisions that apply to the Company and its subsidiaries’ other indebtedness.
On March 31, 2022, the Agent, on behalf of the consenting lenders, countersigned a Consent Request Letter dated March 10, 2022 to the New Facility (the “Consent”). Pursuant to the Consent, the lenders consented to, among other things, an amendment to the New Facility permitting dividends or distributions by the Company, or the repurchase or redemption of the Company’s shares in an aggregate amount of $50.0 million over the life of the New Facility, subject to pro forma compliance with the 2.25 to 1.0 maximum senior leverage ratio financial covenant.
The Facility remained undrawn on a cash basis (i.e., no loans were outstanding) as of December 31, 2022 and December 31, 2021. We utilized $53.8 million and $33.4 million as of December 31, 2022 and December 31, 2021, respectively, for bonds and guarantees.
EXPRO GROUP HOLDINGS N.V.
Notes to the Consolidated Financial Statements
17. Leases
We are a lessee for numerous operating leases, primarily related to real estate, transportation and equipment. The terms and conditions for these leases vary by the type of underlying asset. The vast majority of our operating leases have terms ranging between one and fifteen years, some of which include options to extend the leases, and some of which include options to terminate the leases. We include the renewal or termination options in the lease terms, when it is reasonably certain that we will exercise that option. We also lease certain real estate and equipment under finance leases. Our lease contracts generally do not provide any guaranteed residual values.
The accounting for some of our leases may require significant judgment, which includes determining whether a contract contains a lease, determining the incremental borrowing rates to utilize in our net present value calculation of lease payments for lease agreements which do not provide an implicit rate, and assessing the likelihood of renewal or termination options.
The following tables illustrate the financial impact of our leases as of and for the years ended December 31, 2022, 2021 and 2020, along with other supplemental information about our existing leases (in thousands, except years and percentages):
| | Year Ended December 31, | |
| | 2022 | | | 2021 | | | 2020 | |
Components of lease expenses: | | | | | | | | | | | | |
Finance lease expense: | | | | | | | | | | | | |
Amortization of right of use assets | | $ | 1,352 | | | $ | 967 | | | $ | 1,649 | |
Interest incurred on lease liabilities | | | 2,006 | | | | 2,246 | | | | 2,386 | |
Operating lease expense | | | 26,231 | | | | 21,479 | | | | 19,870 | |
Short term lease expense | | | 84,045 | | | | 54,756 | | | | 56,156 | |
Total lease expense | | $ | 113,634 | | | $ | 79,448 | | | $ | 80,061 | |
| | December 31, | |
| | 2022 | | | 2021 | | | 2020 | |
Other supplementary information (in thousands, except years and discount rates): | | | | | | | | | | | | |
Cash paid for amounts included in measurement of lease liabilities: | | | | | | | | | | | | |
Operating cash flows from operating leases | | $ | 28,454 | | | $ | 25,348 | | | $ | 23,134 | |
Right-of-use assets obtained in an exchange for lease obligations | | | | | | | | | | | | |
Operating leases | | $ | 15,051 | | | $ | 8,529 | | | $ | 8,917 | |
Weighted average remaining lease term: | | | | | | | | | | | | |
Operating leases | | | 6.9 | | | | 7.3 | | | | 8.5 | |
Finance leases | | | 10.1 | | | | 11.0 | | | | 11.7 | |
Weighted average discount rate for operating leases | | | 8.9 | % | | | 8.8 | % | | | 10.0 | % |
Weighted average discount rate for finance leases | | | 12.9 | % | | | 13.1 | % | | | 13.5 | % |
The operating cash flows for finance leases approximates the interest expense for the year.
EXPRO GROUP HOLDINGS N.V.
Notes to the Consolidated Financial Statements
As of December 31, 2022, maturity of our lease liabilities are as follows (in thousands):
| | Operating | | | Finance | |
| | Leases | | | Leases | |
Years ending December 31, | | | | | | | | |
2023 | | $ | 25,486 | | | $ | 3,026 | |
2024 | | | 19,398 | | | | 2,759 | |
2025 | | | 13,365 | | | | 2,703 | |
2026 | | | 9,331 | | | | 2,703 | |
2027 | | | 8,033 | | | | 2,680 | |
Due after 5 years | | | 35,584 | | | | 13,069 | |
| | $ | 111,197 | | | $ | 26,940 | |
Less: amounts representing interest | | | (31,293 | ) | | | (12,120 | ) |
Total | | $ | 79,904 | | | $ | 14,820 | |
| | | | | | | | |
Short-term portion | | $ | 19,057 | | | $ | 1,047 | |
Long-term portion | | | 60,847 | | | | 13,773 | |
Total | | $ | 79,904 | | | $ | 14,820 | |
EXPRO GROUP HOLDINGS N.V.
Notes to the Consolidated Financial Statements
18. Commitments and contingencies
Commercial Commitments
During the normal course of business, we enter into commercial commitments in the form of letters of credit and bank guarantees to provide financial and performance assurance to third parties.
We entered into contractual commitments for the acquisition of property, plant and equipment totaling $45.5 million and $26.3 million as of December 31, 2022 and 2021, respectively. We also entered into purchase commitments related to inventory on an as-needed basis. As of December 31, 2022 and 2021, inventory purchase commitments were $25.8 million and $14.2 million, respectively.
We are committed under various lease agreements primarily related to real estate, vehicles and certain equipment that expire at various dates throughout the next several years. Refer to Note 17 “Leases” for further details.
Contingencies
Certain conditions may exist as of the date our consolidated financial statements are issued that may result in a loss to us, but which will only be resolved when one or more future events occur or fail to occur. Our management, with input from legal counsel, assesses such contingent liabilities, and such assessment inherently involves an exercise in judgment. In assessing loss contingencies related to legal proceedings pending against us or unasserted claims that may result in proceedings, our management, with input from legal counsel, evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought therein.
If the assessment of a contingency indicates it is probable a material loss has been incurred and the amount of liability can be estimated, then the estimated liability would be accrued in our consolidated financial statements. If the assessment indicates a potentially material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material, is disclosed.
Loss contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the guarantees would be disclosed.
We are the subject of lawsuits and claims arising in the ordinary course of business from time to time. A liability is accrued when a loss is both probable and can be reasonably estimated. We had no material accruals for loss contingencies, individually or in the aggregate, as of December 31, 2022 and December 31, 2021. We believe the probability is remote that the ultimate outcome of these matters would have a material adverse effect on our financial position, results of operations or cash flows.
We have conducted an internal investigation of the operations of certain of Frank’s foreign subsidiaries in West Africa including for possible violations of the U.S. Foreign Corrupt Practices Act (“FCPA”), our policies and other applicable laws. In June 2016, we voluntarily disclosed the existence of our internal review to the SEC and the U.S. Department of Justice (“DOJ”). The DOJ has provided a declination, subject to the Company and the SEC reaching a satisfactory settlement of civil claims. We are discussing a possible resolution with the SEC and, based on the course of these discussions to date, we believe that a final resolution of this matter is likely to include a civil penalty in the amount of approximately $8 million and, accordingly, we have recorded a loss contingency in that amount within “Other current liabilities” on our consolidated balance sheet as of December 31, 2022, with the offset taken as an increase to goodwill as a measurement period adjustment associated with the Merger. While we believe the final resolution, including the amount of any civil penalty, of this matter is nearing a conclusion, there can be no assurance as to the timing or the terms of any final resolution, or that a settlement will be reached at all. In the event a settlement is not reached, litigation may ensue and, accordingly, the actual loss incurred in connection with this matter could be less than or exceed the amount accrued and may have a material adverse effect on our financial position, results of operations or cash flows. At the present time, we are unable to reasonably estimate the amount of any potential loss in excess of the amount already accrued relating to this matter. Other than discussed above, we had no other material legal accruals for loss contingencies, individually or in the aggregate, as of December 31, 2022 and December 31, 2021.
Our Board and management are committed to continuously enhancing our internal controls that support improved compliance and transparency throughout our global operations, including the integration of the legacy Frank’s compliance related processes into the Expro compliance framework and program.
EXPRO GROUP HOLDINGS N.V.
Notes to the Consolidated Financial Statements
19. Post-retirement benefits
We operate a number of post-retirement benefit plans, primarily consisting of defined contribution plans for U.S. and non-U.S. employees. We also sponsor defined benefit pension plans for certain employees located in the U.K., Norway and Indonesia. The majority of our post-retirement expense relates to defined contribution plans. The assets of the various defined benefit plans are held separately from those of the Company. Our principal retirement savings plans and pension plans are discussed below.
Defined contribution plans
We offer various defined contribution plans for employees around the globe as per local statute and market practice. Specific to our largest employee populations, for employees in the U.S., we offer a 401(K) plan, which is a defined contribution retirement savings plan to which the employer matches employee contributions up to 4% of eligible earnings. For U.K. employees, we offer the Group Personal Pension plan (“GPP”), which is a portable, personal pension plan to which the employer contributes on a matching basis between a base of 4.5% and a ceiling of 6% of base salary.
Expense recognized in respect of these plans were $8.4 million, $7.3 million and $6.4 million for the years ended December 31, 2022, 2021 and 2020, respectively.
Defined benefit plans
We offer a pension plan to certain of our U.K. employees, which qualifies as a defined benefit plan. Effective October 1, 1999, this plan was closed to new entrants. The contributions to the plan are determined by a qualified external actuary on the basis of an annual valuation.
In December 2015, the decision was taken to close the U.K. defined benefit plan (“DB Plan”) to new accruals. The status of the DB Plan’s remaining active members has changed to that of deferred members. This change affected approximately 80 employees. As deferred members, these employees will no longer accrue further benefits under the DB Plan through their service. However, benefits earned through past service are retained and will continue to increase with inflation. In addition, affected individuals were auto-enrolled in the Company’s defined contribution pension plan.
On December 28, 2020, the Company, with the written consent of the trustees, amended the DB Plan rules to introduce a new pension option for members who retire before their state pension age, a bridging pension option. Under this new option, a plan member who receives his or her pension before the later of age 65 or their state pension age can elect to have their pension temporarily increased at retirement and then reduced at the time of state pension.
EXPRO GROUP HOLDINGS N.V.
Notes to the Consolidated Financial Statements
Key assumptions
The major assumptions, included on a weighted average basis across the defined benefit plans, used to calculate the defined benefit plan liabilities were:
| | December 31, | |
| | 2022 | | | 2021 | | | 2020 | |
Discount rate | | | 4.7 | % | | | 1.8 | % | | | 1.3 | % |
Expected return on plan assets | | | 5.6 | % | | | 3.2 | % | | | 2.7 | % |
Expected rate of salary increases | | | 0.1 | % | | | 0.1 | % | | | 0.1 | % |
The discount rate has been calculated with reference to AA rated corporate bonds of a suitable maturity. Expected rates of salary increases have been estimated by management following a review of the participant data. Within the U.K. plans pensionable salary was frozen in 2012 resulting in the reduction in the weighted average assumption for salary increases disclosed above.
The expected long-term return on cash is based on cash deposit rates available at the reporting date. The expected return on bonds is determined by reference to U.K. long term government bonds and bond yields at the reporting date. The expected rates of return on equities and property have been determined by setting an appropriate risk premium above government bond yields having regard to market conditions at the reporting date.
Net periodic benefit cost
Amounts recognized in the consolidated statements of operations and in the consolidated statements of comprehensive loss in respect of the defined benefit plans were as follows (in thousands):
| | Year Ended December 31, | |
| | 2022 | | | 2021 | | | 2020 | |
Current service cost | | $ | (357 | ) | | $ | (439 | ) | | $ | (539 | ) |
Interest cost | | | (4,307 | ) | | | (3,407 | ) | | | (4,551 | ) |
Expected return on plan assets | | | 6,796 | | | | 5,499 | | | | 6,064 | |
Plan curtailment / amendment events recognized in consolidated statements of operations | | | - | | | | - | | | | 2,269 | |
Amortization of prior service credit | | | 249 | | | | 249 | | | | - | |
Reclassified net remeasurement (loss) gains | | | - | | | | 244 | | | | (104 | ) |
Amounts included in consolidated statements of operations | | $ | 2,381 | | | $ | 2,146 | | | $ | 3,139 | |
| | | | | | | | | | | | |
Actuarial gain (loss) on defined benefit plans | | $ | 7,440 | | | $ | 22,345 | | | $ | (9,356 | ) |
Plan curtailment / amendment credit recognized in consolidated statements of other comprehensive loss | | | - | | | | - | | | | 5,510 | |
Amortization of prior service credit | | | (249 | ) | | | (249 | ) | | | - | |
Reclassified net remeasurement (loss) gains | | | - | | | | (244 | ) | | | 104 | |
Other comprehensive income (loss) | | | 7,191 | | | | 21,852 | | | | (3,742 | ) |
| | | | | | | | | | | | |
Total comprehensive income (loss) | | $ | 9,572 | | | $ | 23,998 | | | $ | (603 | ) |
EXPRO GROUP HOLDINGS N.V.
Notes to the Consolidated Financial Statements
The service costs have primarily been included in “Cost of revenue, excluding depreciation and amortization” in the consolidated statements of operations. Interest cost, expected return on plan assets and plan curtailment / amendment events have been recognized in “Other income, net” in the consolidated statements of operations.
The actuarial gain (loss) is derived from the components shown in the table below (in thousands):
| | Year Ended December 31, | |
| | 2022 | | | 2021 | | | 2020 | |
Actuarial (loss) gain on assets | | $ | (74,332 | ) | | $ | 11,378 | | | $ | 16,678 | |
Actuarial gain (loss) on liabilities | | | 81,772 | | | | 10,967 | | | | (26,034 | ) |
Actuarial gain (loss) on defined benefit plans | | $ | 7,440 | | | $ | 22,345 | | | $ | (9,356 | ) |
The actuarial gain on the benefit obligation for the year December 31, 2022 has arisen primarily as a result of increases in corporate bond yields, offset slightly by a loss relating to recognition of known inflation increases over 2022. The gain on the benefit obligation has been further offset by the lower than expected asset returns over the period which again was primarily caused by the increase in corporate and government bond yields.
The amount of employer contributions expected to be paid to our defined benefit plans during the years to December 31, 2032 is set out below (in thousands):
Years ending December 31: | | | | |
2023 | | $ | 5,481 | |
2024 | | $ | 5,691 | |
2025 | | $ | 5,886 | |
2026 | | $ | 6,135 | |
2027 | | $ | 6,416 | |
Thereafter to December 31, 2032 | | $ | 22,495 | |
EXPRO GROUP HOLDINGS N.V.
Notes to the Consolidated Financial Statements
The amounts included in the consolidated balance sheets arising from our obligations in respect of defined retirement benefit plans and post-employment benefits was as follows (in thousands):
| | December 31, | |
| | 2022 | | | 2021 | |
Present value of defined benefit obligations | | $ | (135,182 | ) | | $ | (241,808 | ) |
Fair value of plan assets | | | 123,840 | | | | 212,688 | |
Deficit recognized under non-current liabilities | | $ | (11,342 | ) | | $ | (29,120 | ) |
Changes in the present value of defined benefit obligations were as follows (in thousands):
| | December 31, | |
| | 2022 | | | 2021 | |
Opening balance | | $ | (241,808 | ) | | $ | (261,576 | ) |
Current service cost | | | (357 | ) | | | (439 | ) |
Interest cost | | | (4,307 | ) | | | (3,407 | ) |
Actuarial gain | | | 81,772 | | | | 10,967 | |
Exchange differences | | | 23,823 | | | | 2,378 | |
Benefits paid | | | 5,695 | | | | 10,269 | |
Ending balance | | $ | (135,182 | ) | | $ | (241,808 | ) |
Movements in fair value of plan assets were as follows (in thousands):
| | December 31, | |
| | 2022 | | | 2021 | |
Opening balance | | $ | 212,688 | | | $ | 203,630 | |
Actual return on plan assets | | | (67,536 | ) | | | 16,877 | |
Exchange differences | | | (20,776 | ) | | | (2,245 | ) |
Contributions from the sponsoring companies | | | 5,159 | | | | 4,695 | |
Benefits paid | | | (5,695 | ) | | | (10,269 | ) |
Ending balance | | $ | 123,840 | | | $ | 212,688 | |
EXPRO GROUP HOLDINGS N.V.
Notes to the Consolidated Financial Statements
The actual return on plan assets consists of the following (in thousands):
| | December 31, | |
| | 2022 | | | 2021 | | | 2020 | |
Expected return on plan assets | | $ | 6,796 | | | $ | 5,499 | | | $ | 6,064 | |
Actuarial (loss) gain on plan assets | | | (74,332 | ) | | | 11,378 | | | | 16,678 | |
Actual return on plan assets | | $ | (67,536 | ) | | $ | 16,877 | | | $ | 22,742 | |
Information for pension plans with an accumulated benefit obligation in excess of plan assets were as follows (in thousands):
| | December 31, | |
| | 2022 | | | 2021 | |
Accumulated benefit obligation | | $ | 134,102 | | | $ | 240,644 | |
Fair value of plan assets | | | 123,840 | | | | 212,688 | |
The investment strategy of the main U.K. plan (“U.K. Plan”) is set by the trustees and is based on advice received from an investment consultant. The primary investment objective for the U.K. Plan is to achieve an overall rate of return that is sufficient to ensure that assets are available to meet all liabilities as and when they become due. In doing so, the aim is to maximize returns at an acceptable level of risk taking into consideration the circumstances of the U.K. Plan.
The investment strategy has been determined after considering the U.K. Plan’s liability profile and requirements of the U.K. statutory funding objective, and an appropriate level of investment risk.
Taking all these factors into consideration, approximately 45% of the assets are invested in a growth portfolio, comprising diversified growth funds (“DGFs”) and property, and approximately 55% of the assets in a stabilizing portfolio, comprising corporate bonds and liability driven investments. DGFs are actively managed multi-asset funds. The managers of the DGFs aim to deliver equity like returns in the long term, with lower volatility. They seek to do this by investing in a wide range of assets and investment contracts in order to implement their market views.
The present value of the U.K. Plan’s future benefits payments to members is sensitive to changes in long term interest rates and long-term inflation expectations. Liability driven investment (“LDI”) funds are more sensitive to changes in these factors and therefore provide more efficient hedging than traditional bonds. A small proportion of the assets have therefore been invested in LDI funds to help to reduce the volatility of the U.K. Plan’s funding position. The hedging level is expected to be increased over time as the U.K. Plan’s funding position improves.
Assets of the other plans are invested in a combination of equity, bonds, real estate and insurance contracts.
The analysis of the plan assets and the expected rate of return at the reporting date were as follows (in thousands):
| | December 31, 2022 | | | December 31, 2021 | |
| | Expected rate | | | Fair value of | | | Expected rate | | | Fair value of | |
| | of return % | | | asset | | | of return % | | | asset | |
Mutual funds | | | | | | | | | | | | | | | | |
DGFs | | | 7.5 | | | $ | 55,633 | | | | 4.6 | | | $ | 123,460 | |
LDI funds | | | 4.0 | | | | 45,170 | | | | 1.1 | | | | 61,163 | |
Bond funds | | | 4.5 | | | | 21,899 | | | | 1.8 | | | | 26,571 | |
Equities | | | 1.8 | | | | 188 | | | | 1.5 | | | | 360 | |
Other assets | | | 2.2 | | | | 950 | | | | 1.5 | | | | 1,134 | |
Total | | | | | | $ | 123,840 | | | | | | | $ | 212,688 | |
EXPRO GROUP HOLDINGS N.V.
Notes to the Consolidated Financial Statements
The aggregated asset categorization for the plans were as follows (in thousands):
| | December 31, 2022 | |
| | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
Mutual funds | | | | | | | | | | | | | | | | |
DGFs | | $ | 55,633 | | | $ | - | | | $ | - | | | $ | 55,633 | |
LDI funds | | | 45,170 | | | | - | | | | - | | | | 45,170 | |
Bond funds | | | 21,899 | | | | - | | | | - | | | | 21,899 | |
Equities | | | 188 | | | | - | | | | - | | | | 188 | |
Other assets | | | 172 | | | | 395 | | | | 383 | | | | 950 | |
Total | | $ | 123,062 | | | $ | 395 | | | $ | 383 | | | $ | 123,840 | |
| | December 31, 2021 | |
| | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
Mutual funds | | | | | | | | | | | | | | | | |
DGFs | | $ | 123,460 | | | $ | - | | | $ | - | | | $ | 123,460 | |
LDI funds | | | 61,163 | | | | - | | | | - | | | | 61,163 | |
Bond funds | | | 26,571 | | | | - | | | | - | | | | 26,571 | |
Equities | | | 360 | | | | - | | | | - | | | | 360 | |
Other assets | | | 445 | | | | 329 | | | | 360 | | | | 1,134 | |
Total | | $ | 211,999 | | | $ | 329 | | | $ | 360 | | | $ | 212,688 | |
Other assets primarily represent insurance contracts. The fair value is estimated, based on the underlying defined benefit obligation assumed by the insurers.
Movements in fair value of Level 3 assets were as follows (in thousands):
| | December 31, | |
| | 2022 | | | 2021 | |
Opening balance | | $ | 360 | | | $ | 292 | |
Actual return on plan assets | | | 6 | | | | 5 | |
Exchange differences | | | (6 | ) | | | 33 | |
Contributions from the sponsoring companies | | | 23 | | | | 30 | |
Ending balance | | $ | 383 | | | $ | 360 | |
Executive Deferred Compensation Plan
The Company maintained the Executive Deferred Compensation Plan (the “EDC Plan”) for certain current and former Frank’s employees. Effective during 2015, this plan was closed to new entrants. The purpose of the EDC Plan was to provide participants with an opportunity to defer receipt of a portion of their salary, bonus, and other specified cash compensation. Participant contributions were immediately vested. Company contributions vested after five years of service. Participant benefits under the EDC Plan were paid from the general funds of the Company or a grantor trust, commonly referred to as a Rabbi Trust, created for the purpose of informally funding the EDC Plan. The assets of the EDC Plan’s trust were invested in corporate-owned, split-dollar life insurance policies and mutual funds.
During 2022, the Company terminated the EDC Plan and settled substantially all remaining obligations under the plan by liquidating the cash surrender value of life insurance policies that were held within the Rabbi Trust.
As of December 31, 2021, the total liability related to the EDC Plan was $9.3 million and was included in “Other non-current liabilities” on the consolidated balance sheets. As of December 31, 2021, the cash surrender value of life insurance policies that are held within a Rabbi Trust for the purpose of paying future executive deferred compensation benefit obligations was $18.9 million.
EXPRO GROUP HOLDINGS N.V.
Notes to the Consolidated Financial Statements
20. Stock-based compensation
Management Incentive Plan
During October 2018, Legacy Expro’s board of directors approved the Management Incentive Plan (“MIP”) which was comprised of (a) stock options to non-executive directors and key management personnel and (b) restricted stock units. The outstanding awards under the MIP were assumed by the Company in connection with the Merger.
MIP Stock options
Stock options issued under the MIP vest over a three or four year vesting period as defined in the award agreement, subject to the fulfilment of continued service and a performance condition related to the occurrence of a Liquidity Event as defined in the MIP. Additionally, a portion of the management options are subject to performance conditions linked to an internal rate of return.
There were 5.8 million MIP stock options issued and outstanding as of December 31, 2020 under the MIP. Legacy Expro granted no stock options in 2020.
Due to the nature of the performance conditions, recognition of compensation expense for the stock options was deferred until the occurrence of a Liquidity Event as defined in the MIP as the performance condition was deemed to be improbable. On October 1, 2021, the MIP stock options were modified to redefine the occurrence of the Liquidity Event to the closing of the Merger. Upon Closing, the MIP stock options were exchanged for options to purchase Company common stock based on the post-reverse stock split Exchange Ratio of 1.2120 to 1. As of the modification date, there were 6.9 million MIP stock options issued and outstanding.
The aforementioned event was accounted for as an improbable-to-probable modification and as a result, the fair value of all of the issued and outstanding MIP stock options was determined as of the Closing Date. Compensation expense was immediately recognized upon the Merger closing for all MIP stock options in which the service period was fulfilled. For the stock options in which the service period was not fulfilled, stock-based compensation expense is to be recognized based on the total modification date fair value of the associated awards on a straight-line basis over the remaining service period.
The Company recognized stock-based compensation expense related to the MIP stock options of $3.6 million and $39.5 million during the years ended December 31, 2022 and 2021 respectively. As of December 31, 2022, unrecognized stock compensation expense relating to MIP stock options totaled $0.9 million which will be expensed over a weighted average period of 0.6 years.
As of December 31, 2022 and 2021, there were 6.7 million and 6.9 million, respectively, MIP stock options issued and outstanding with a weighted average exercise price of $17.19 and 17.20, respectively. There were no stock options granted during 2021 or 2022 and there are no plans to grant stock options in 2023. During the year ended December 31, 2022 there were 0.1 million options forfeited; the number of options exercised was not material. Both options forfeited and options exercised had a weighted average exercise price of $17.08. As of December 31, 2022, there were 2.7 million exercisable MIP stock options with a weighted average exercise price of $17.15 per option.
The intrinsic value of a stock option is the amount by which the current market value of the underlying stock exceeds the exercise price of the option. The total intrinsic value of options exercised was not material during 2022. There were no stock option exercises during 2021 and 2020. At December 31, 2022, options outstanding had an intrinsic value of approximately $6.3 million with a weighted-average remaining life of 5.4 years. At December 31, 2022, options exercisable had an intrinsic value of $2.6 million, with a weighted-average remaining life of 5.4 years.
The fair value of the time-based MIP stock options granted to non-executive directors and management was estimated at the Closing Date using a Black-Scholes model and the fair value of the performance-based MIP stock options granted to management was estimated at the Closing Date using a Monte-Carlo Option valuation model. The Closing Date fair value of the Company’s shares is a key input in the determination of the fair value of the awards.
The key assumptions used to estimate the fair value of the MIP stock options were as follows:
Risk free interest rate | | | 0.04 | % |
Expected volatility | | | 55 | % |
Dividend yield | | | 0.0 | % |
Stock price on valuation date | | $ | 18.90 | |
EXPRO GROUP HOLDINGS N.V.
Notes to the Consolidated Financial Statements
MIP Restricted stock units (“MIP RSUs”)
RSUs granted under the MIP were subject to vesting over a three year period. There were 0.1 million outstanding MIP RSUs as of December 31, 2020. No stock-based compensation expense attributable to the MIP RSUs was recognized during the year ended December 31, 2020 as the performance conditions within the agreements were deemed to be improbable. In February 2021, the MIP RSU awards were modified so that upon the closing of the Merger, the MIP RSUs would convert to RSUs of the Company based on the post-reverse stock split Exchange Ratio of 1.2120 to 1 and would immediately vest pursuant to the terms of the Merger Agreement. As the MIP RSUs were fully vested on the closing of the Merger, the Company recognized $2.6 million of stock-based compensation expense attributable to the MIP RSUs during the year ended December 31, 2021 and had no further expenses outstanding to be recognized for the MIP RSUs as of December 31, 2021 or during the year ended December 31, 2022.
Expro Group Holdings N.V. Long-Term Incentive Plan
Effective October 1, 2021, in connection with the consummation of the Merger, the Company amended its 2013 Long-Term Incentive Plan to the Expro Group Holdings N.V. Long-Term Incentive Plan, As Amended and Restated. Further, effective May 25, 2022, the Expro Group Holdings N.V. Long-Term Incentive Plan, As Amended and Restated was terminated and the Expro Group Holdings N.V. 2022 Long-Term Incentive Plan (the “2022 LTIP” plan) was adopted and established by the Board and approved by the Company’s stockholders. Pursuant to the 2022 LTIP, stock options, stock appreciation rights, restricted stock, restricted stock units, dividend equivalent rights and other types of equity and cash incentive awards may be granted to employees, non-employee directors and consultants. The LTIP expires after 10 years, unless prior to that date the maximum number of shares available for issuance under the plan has been issued or our Board terminates the plan. There are approximately 13.2 million shares of common stock reserved for issuance under the LTIP. As of December 31, 2022, approximately 11.5 million shares remained available for issuance.
LTIP Restricted Stock Units (“LTIP RSUs”)
All RSUs granted under the LTIP vest ratably over a period of one to three years. Shares withheld from employees to settle personal tax obligations that arose as a result of RSUs that vested are included in our treasury stock. Certain RSU awards provide for accelerated vesting for qualifying terminations of employment or service.
Employees granted LTIP RSUs are not entitled to dividends declared on the underlying shares while the RSU is unvested. As such, the grant date fair value of the award is measured by reducing the grant date price of our common stock by the present value of the dividends expected to be paid on the underlying shares during the requisite service period, discounted at the appropriate risk-free interest rate.
Stock-based compensation expense relating to LTIP RSUs was $11.2 million and $6.8 million for the years ended December 31, 2022 and 2021, respectively. No stock based compensation expense relating to the LTIP RSUs was recognized for the year ended December 31, 2020. The total fair value of LTIP RSUs vested during the years ended December 31, 2022 and 2021 was $13.0 million and $2.0 million respectively. As of December 31, 2022, unrecognized stock compensation expense relating to LTIP RSUs totaled approximately $16.8 million, which will be expensed over a weighted average period of 1.0 years.
The following is a summary of RSU information and weighted-average grant-date fair values for Expro’s LTIP RSUs:
| | Number | | | Weighted Average | |
| | of | | | Grant Date | |
| | Shares | | | Fair Value | |
Non-vested on the Closing Date | | | 883,079 | | | $ | 21.97 | |
Granted | | | 458,258 | | | | 17.64 | |
Vested | | | (93,688 | ) | | | 21.80 | |
Forfeited | | | (12,549 | ) | | | 22.59 | |
Non-vested at December 31, 2021 | | | 1,235,100 | | | | 20.49 | |
Granted | | | 913,034 | | | | 16.51 | |
Vested | | | (593,037 | ) | | | 21.91 | |
Forfeited | | | (70,899 | ) | | | 18.80 | |
Non-vested at December 31, 2022 | | | 1,484,198 | | | $ | 17.51 | |
EXPRO GROUP HOLDINGS N.V.
Notes to the Consolidated Financial Statements
Performance Restricted Stock Units (“PRSUs”)
The purpose of the PRSUs is to closely align the incentive compensation of the executive leadership team for the duration of the performance cycle with returns to the Company’s shareholders and thereby further motivate the executive leadership team to create sustained value to the Company shareholders. The design of the PRSU grants effectuates this purpose by placing a material amount of incentive compensation for each executive at risk by offering an extraordinary reward for the attainment of extraordinary results. Design features of the PRSU grant that in furtherance of this purpose include the following: (1) The vesting of the PRSUs is based on total shareholder return (“TSR”) based on a comparison to the returns of a peer group, which is the SPDR S&P Oil & Gas Equipment and Services ETF. (2) TSR performance is calculated separately with respect to three separate one-year achievement periods included in the three-year Performance Period (as defined below), resulting in a weighted average payout at the end of the three-year Performance Period. The TSR calculation will assume reinvestment of dividends. (3) The ultimate number of shares to be issued pursuant to the PRSU awards will vary in proportion to the actual TSR achieved as a percentile compared to the peer group during the Performance Period as follows: (i) no shares will be issued if the Company’s performance falls below the 25th percentile; (ii) 50% of the Target Level (as defined below) if the Company achieves a rank in the 25th percentile (the threshold level); (iii) 100% of the Target Level if the Company achieves a rank in the 50th percentile (the target level); (iv) 150% of the Target Level if the Company achieves a rank in the 75th percentile; and 200% of the Target Level if the Company achieves a rank in the 90th percentile and above (the maximum level). (4) Unless there is a qualifying termination as defined in the PRSU award agreement, the PRSUs of an executive will be forfeited upon an executive’s termination of employment during the Performance Period.
Though the value of the PRSU grant may change for each participant, the compensation expense recorded by the Company is determined on the date of grant. Expected volatility is based on historical equity volatility of our stock-based on 50% of historical and 50% of implied volatility weighting commensurate with the expected term of the PRSU. The expected volatility considers factors such as the historical volatility of our share price and our peer group companies, implied volatility of our share price, length of time our shares have been publicly traded, and split- and dividend-adjusted closing stock prices.
In 2022, no shares were granted under the PRSU program. In 2021, we granted 354,275 PRSUs (“Target Level”). The performance period for these grants is the three-year period from January 1, 2022 to December 31, 2024 (“Performance Period”), but with separate one-year achievement periods from January 1, 2022 to December 31, 2022, January 1, 2023 to December 31, 2023, and January 1, 2024 to December 31, 2024, resulting in a weighted average payout at the end of the Performance Period.
The weighted average assumptions for the PRSUs granted in 2021 were as follows:
| | 2021 | |
Total expected term (in years) | | | 3.25 | |
Expected volatility | | | 84.2 | |
Risk-free interest rate | | | 0.54 | % |
Correlation range | | | 21.2% to 79.5 | % |
In the event of death or disability, the restrictions related to forfeiture as defined in the performance awards agreement will lapse with respect to 100% of the PRSUs at the target level effective on the date of such event. In the event of involuntary termination except for cause, the Company may enter into a special vesting agreement with the executive under which the restrictions for forfeiture will not lapse upon such termination. In the event of a termination for any other reason prior to the end of the Performance Period, all PRSUs will be forfeited.
Stock-based compensation expense related to PRSUs was $3.2 million and $5.2 million, respectively, for the year ended December 31, 2022 and December 31, 2021. No stock based compensation expense relating to the PRSUs was recognized for the year ended December 31, 2020. The total fair value of PRSUs vested during the years ended December 31, 2022 and 2021, was $9.9 million and $0.1 million respectively. As of December 31, 2022, unrecognized stock compensation expense relating to PRSUs totaled approximately $5.4 million, which will be expensed over a weighted average period of 0.5 years.
EXPRO GROUP HOLDINGS N.V.
Notes to the Consolidated Financial Statements
The following is a summary of PRSU information and weighted-average grant-date fair values for Expro’s PRSUs:
| | Number | | | Weighted Average | |
| | of | | | Grant Date | |
| | Shares | | | Fair Value | |
Non-vested on the Closing Date | | | 340,071 | | | $ | 32.38 | |
Granted | | | 354,275 | | | | 23.34 | |
Vested | | | (2,715 | ) | | | 29.72 | |
Non-vested at December 31, 2021 | | | 691,631 | | | $ | 27.75 | |
Vested | | | (305,119 | ) | | | 32.50 | |
Non-vested at December 31, 2022 | | | 386,512 | | | $ | 24.00 | |
Employee Stock Purchase Plan
Under the Expro Group Holdings N.V. Employee Stock Purchase Program (“ESPP”), eligible employees have the right to purchase shares of common stock at the lesser of (i) 85% of the last reported sale price of our common stock on the last trading date immediately preceding the first day of the option period, or (ii) 85% of the last reported sale price of our common stock on the last trading date immediately preceding the last day of the option period. The ESPP is intended to qualify as an employee stock purchase plan under Section 423 of the Internal Revenue Code. We have reserved 500,000 shares of our common stock for issuance under the ESPP, of which 133,863 shares were available for issuance as of December 31, 2022. For the years ended December 31, 2022 and 2021, we recognized $0.5 million and $0.1 million of compensation expense related to stock purchased under the ESPP, respectively.
EXPRO GROUP HOLDINGS N.V.
Notes to the Consolidated Financial Statements
21. Loss per share
Basic income (loss) per share attributable to Company stockholders is calculated by dividing net income (loss) attributable to the Company by the weighted-average number of common shares outstanding for the period. Diluted income (loss) per share attributable to Company stockholders is computed giving effect to all potential dilutive common stock, unless there is a net loss for the period. We apply the treasury stock method to determine the dilutive weighted average common shares represented by unvested restricted stock units and ESPP shares.
The calculation of basic and diluted loss per share attributable to the Company stockholder for years ended December 31, 2022, 2021 and 2020 respectively, are as follows (in thousands, except shares outstanding and per share amounts):
| | Year Ended December 31, | |
| | 2022 | | | 2021 | | | 2020 | |
Net loss | | $ | (20,145 | ) | | $ | (131,891 | ) | | $ | (307,045 | ) |
Basic and diluted weighted average number of shares outstanding | | | 109,072,761 | | | | 80,525,694 | | | | 70,889,753 | |
Total basic and diluted loss per share | | $ | (0.18 | ) | | $ | (1.64 | ) | | $ | (4.33 | ) |
Approximately 0.3 million shares of unvested restricted stock units and stock to be issued pursuant to the ESPP have been excluded from the computation of diluted loss per share as the effect would be anti-dilutive for the year ended December 31, 2022.
Additionally, since the conditions upon which shares were issuable for outstanding warrants and stock options were not satisfied as of December 31, 2020, assuming the respective balance sheet date was at the end of the contingency period, they had not been included in determining the number of anti-dilutive shares.
EXPRO GROUP HOLDINGS N.V.
Notes to the Consolidated Financial Statements
22. Related party transactions
Our related parties consist primarily of CETS and PVD-Expro, the two companies in which we exert significant influence, and Mosing Holdings LLC, a company that is owned by a member of our Board, and its affiliates. During the years ended December 31, 2022, 2021 and 2020, we provided goods and services to related parties totaling $5.4 million, $6.8 million and $13.9 million, respectively. During the year ended December 31, 2022, we received services from related parties totaling $1.0 million.
Additionally, we entered into various operating lease agreements to lease facilities with affiliated companies. Rent expense associated with our related party leases was $0.6 million and $0.5 million for the years ended December 31, 2022 and 2021, respectively.
Further, during the years ended December 31, 2022, 2021 and 2020, we received dividends from CETS and PVD-Expro totaling $7.3 million, $4.1 million and $3.6 million, respectively.
As of December 31, 2022 and 2021, amounts receivable from related parties were $2.4 million and $1.6 million, respectively, and amounts payable to related parties were $0.8 million and $2.1 million as of December 31, 2022 and 2021, respectively.
As of December 31, 2022, $0.7 million of our operating lease right-of-use assets and $0.7 million of our lease liabilities were associated with related party leases. As of December 31, 2021, $1.3 million of our operating lease right-of-use assets and $1.3 million of our lease liabilities were associated with related party leases.
Tax Receivable Agreement
Mosing Holdings, LLC, a Delaware limited liability company (“Mosing Holdings”), converted all of its shares of Frank’s Series A convertible preferred stock into shares of Frank’s common stock on August 26, 2016, in connection with its delivery to Frank’s of all of its interests in Frank’s International C.V. (“FICV”) (the “Conversion”).
The tax receivable agreement (the “Original TRA”) that Frank’s entered into with FICV and Mosing Holdings in connection with Frank’s initial public offering (“IPO”) generally provided for the payment by Frank’s to Mosing Holdings of 85% of the net cash savings, if any, in U.S. federal, state and local income tax and franchise tax that Frank’s actually realize (or are deemed to realize in certain circumstances) in periods after the IPO as a result of (i) tax basis increases resulting from the Conversion and (ii) imputed interest deemed to be paid by Frank’s as a result of, and additional tax basis arising from, payments under the Original TRA. Frank’s retained the benefit of the remaining 15% of these cash savings, if any.
In connection with the Merger Agreement, Frank’s, FICV and Mosing Holdings entered into the Amended and Restated Tax Receivable Agreement, dated as of March 10, 2021 (the “A&R TRA”). Pursuant to the A&R TRA, on October 1, 2021, the Company made a payment of $15 million to settle the early termination payment obligations that would otherwise have been owed to Mosing Holdings under the Original TRA as a result of the Merger. As the payment was a condition precedent to effect the Merger, it was included in the determination of Merger consideration exchanged. Refer to Note 3 “Business combinations and dispositions” for more details. The A&R TRA also provides for other contingent payments to be made by the Company to Mosing Holdings in the future in the event the Company realizes cash tax savings from tax attributes covered under the Original TRA during the ten year period following October 1, 2021 in excess of $18.1 million.
EXPRO GROUP HOLDINGS N.V.
Notes to the Consolidated Financial Statements
23. Supplemental Cash Flow
| | Year Ended December 31, | |
| | 2022 | | | 2021 | | | 2020 | |
Supplemental disclosure of cash flow information: | | | | | | | | | | | | |
Cash paid for income taxes net of refunds | | $ | (33,171 | ) | | $ | (20,130 | ) | | $ | (21,437 | ) |
Cash paid for interest, net | | | (3,851 | ) | | | (4,192 | ) | | | (2,630 | ) |
Change in accounts payable and accrued expenses related to capital expenditures | | | (14,721 | ) | | | (8,191 | ) | | | (9,375 | ) |
Fair value of net assets acquired in the Merger, net of cash and cash equivalents and restricted cash | | | - | | | | 552,543 | | | | - | |