TechnipFMC plc (FTI) FY 2024 MD&A

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

EXECUTIVE OVERVIEW

We are a global leader in energy projects, technologies, systems, and services. We have manufacturing operations worldwide, strategically located to facilitate efficient delivery of these products, technologies, systems, and services to our customers. We report our results of operations in two segments: Subsea and Surface Technologies. Management’s determination of our reporting segments was made on the basis of our strategic priorities and corresponds to the manner in which our Chief Executive Officer reviews and evaluates operating performance to make decisions about resource allocations to each segment.

A summarized description of our products and services and annual financial data for each segment can be found in Note 6 to our consolidated financial statements.

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Total Company

•Inbound orders improved 5% year-over-year to $11.6 billion, driving backlog to $14.4 billion and marking a fourth consecutive year of growth in backlog;

•Cash flow from operations grew 39% versus the prior year to $961.0 million, with free cash flow growing 45% to $679.4 million;

•Nearly doubled shareholder distributions versus the prior year by returning $486 million through dividends and share repurchases, and authorized additional share repurchases of up to $1.0 billion; and

•Achieved investment grade debt ratings from multiple credit rating agencies, reflecting a stronger financial profile and improved market outlook.

Subsea

•Orders increased 7% year-over-year to $10.4 billion, highlighting continued strength in offshore activity;

•Third consecutive year for combination of direct awards, iEPCI™ projects, and Subsea Services to reach at least 70% of total Subsea inbound orders, reflecting our differentiated offerings, innovative technologies and strong client relationships;

•Record year of integrated project orders, with nearly $5 billion of inbound awarded from a diversified set of operators across six offshore basins;

•Tree orders from our Subsea 2.0® product platforms significantly outpaced the growth of our total tree awards versus the prior year; and

•Growth in Subsea Services inbound for the year was driven by increased installation activity, a growing installed base and aging infrastructure.

Surface

•Inbound orders decreased 5% year-over-year to $1.2 billion;

•Successful execution on our multi-year framework agreement with Abu Dhabi National Oil Company and further activity ramp in Saudi Arabia provided increased contribution to the Company’s revenue in international markets; and

•Continued to benefit from proactive steps taken to refocus the business through targeted actions, including the sale of the Measurement Solutions business (“MSB”) and further optimization of our Americas portfolio.

Several new energy initiatives progressed as we were awarded an iEPCI™ contract by Petrobras to deliver the Mero 3 HISEP® project, which will utilize subsea processing to capture carbon dioxide-rich dense gases and then inject them into the reservoir. We were also awarded a contract for the first all-electric iEPCI™ for carbon transportation and storage by the Northern Endurance Partnership, a joint venture between bp, Equinor, and TotalEnergies. In addition, we announced a collaboration agreement with Prysmian to further accelerate the development of floating offshore wind by providing an integrated solution that accelerates time to first power and reduces cost, while improving overall system reliability.

We finished the year having delivered on many notable achievements. Importantly, these results reflect major milestones on our more ambitious journey ahead. We enter 2025 with a strong market outlook and a further step-up in our targeted financial performance.

BUSINESS OUTLOOK

Overall Outlook – Global economic growth is expected to continue in 2025, although with regional disparity. Central banks remain diligent in their efforts to curb inflation, with many successfully navigating the balance between growth and price stability. At the same time, persistent geopolitical conflicts and economic sanctions risk further impacts to energy flows around the world, underscoring the importance of energy security worldwide.

We maintain a positive outlook for both oil and gas given the anticipated growth in energy demand, with affordability and energy security now major considerations in addition to sustainability commitments. This is reflected in the resource mix of our clients’ project portfolios and the broader strength in upstream spending.

The price of oil in the near-term continues to be supported by supply-related actions, including more disciplined capital spend as well as voluntary reductions to production by OPEC+ countries. We believe that offshore and Middle East markets will maintain investment preference for operators, with deepwater attracting a growing share of global capital flows, driven by much-improved economic returns and broad access to these resources. We also expect an increasing role for technology innovation in both conventional and new energies in the delivery of energy supply. In that context, TechnipFMC is well positioned to translate our technological, operational, and financial strength into value for our clients, employees, and shareholders.

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In 2024, we announced a differentiated set of integrated awards, with three iEPCI™ projects all representing first-of-its-kind solutions. The Mero 3 HISEP® project was our first iEPCI™ for Petrobras and the first to utilize subsea processing to capture carbon dioxide (“CO2”) directly from the well stream for injection back into the reservoir, all on the seafloor. The Shell Sparta project was our first iEPCI™ to employ a 20,000-psi production system in the Paleogene play in the Gulf of America. And finally, we were awarded the first iEPCI™ encompassing an all-electric subsea system for carbon capture and storage from the Northern Endurance Partnership, a joint venture between bp, Equinor, and TotalEnergies. Each of these projects provides a unique solution to an industry challenge and exemplifies our differentiated technology portfolio that is creating new market opportunities for our company in existing offshore basins.

As evidenced by these awards, we believe that offshore will play a meaningful role in the development of renewable energy resources and the reduction of carbon emissions. Our efforts are focused on three main pillars: GHG removal, offshore floating renewables, and hydrogen solutions. We are also building on our partnerships as we look to expand our position as the leading architect for offshore energy.

In our New Energy business, we announced a new collaboration agreement in 2024 to deliver the industry’s first full water-column solution for offshore floating wind. Together with Prysmian, the leader in cabling solutions for the energy transition, we will combine our expertise in system design and integration capabilities in dynamic offshore applications to provide an iEPCI™ solution for the offshore floating wind market. We continue to create unique opportunities where we can leverage our onshore and offshore expertise and demonstrated project execution capabilities into leadership positions in evolving energy markets.

Subsea – Innovative approaches to subsea projects, like our iEPCI™ solution, have improved project economics through more efficient design and installation of the entire subsea field architecture. Our integrated commercial model, iEPCI™, brought together the complementary work scopes of the SPS with the SURF, and installation vessels. iEPCI™ created a new market and helped expand the deepwater opportunity set for our clients and has grown to represent nearly one-third of the addressable subsea market.

As the subsea industry continues to evolve, we are driving simplification, standardization, and industrialization to reduce cycle times and further reduce costs. An example of this is Subsea 2.0®, our pre-engineered configurable product offering. This technology simplifies projects by leveraging a CTO model that further accelerates time to first production while driving greater efficiencies for TechnipFMC.

With CTO, we have designed an architecture, process, tools, and culture, that are scalable and transformational to the future of our company. CTO has allowed us to redefine our sourcing strategy and transform our manufacturing flow, resulting in up to 25 percent lower product cost and a shortened 12-month delivery time for subsea production equipment—savings that are both real and sustainable. This has paved the way for other products within our portfolio to adopt a similar operating model, enabling an enterprise-wide way of working.

Given the significant improvement in project economics, more offshore discoveries can be developed economically well below today’s oil prices. We believe these fundamental changes are sustainable, as a result of new business models and technology pioneered by our company.

There is also momentum in new offshore frontiers as nations look to expand economic growth through the development of more recent resource discoveries. In late 2024, we were awarded TotalEnergies’ GranMorgu project—the first subsea development in Suriname. This project is also the first iEPCI™ to leverage our vessel ecosystem, which provides us the industry’s most comprehensive suite of pipelay solutions through partner relationships. In Namibia, there have been multiple discoveries, and operators have initiated appraisal drilling campaigns. We believe additional countries will seek to develop deepwater resources in other new frontiers during this decade, yielding additional inbound orders well beyond those projects currently in discussion.

Offshore development is likely to remain a significant part of many of our customers’ portfolios, not only because of improved economics, but because of the size and accessibility of these resources. We estimate over 35 MMBD of new oil production will be required by 2040 to meet future energy demand. Approximately 10 MMBD of the increase is expected to come from new deepwater production, which is significantly above the current level of offshore production.

After securing $20.2 billion of Subsea orders over the past two years, our strong market visibility gives us confidence we will exceed $10 billion of inbound in the current year—ensuring we deliver on our guidance of $30 billion over the three-years ending 2025. These orders are expected to include a more diversified mix of

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opportunities and further market adoption of Subsea 2.0® equipment and iEPCI™ projects. We also foresee the expanding reach of Subsea Services, derived from an aging installed base that continues to grow.

As we look beyond the current year, client discussions remain focused on future project activity as they seek to secure the quality capacity needed to execute their offshore developments. Our visibility into this pipeline of longer-term opportunities has improved, supported by a growing list of named projects identified for potential final investment decision that extend beyond the historical planning horizon. This gives us even greater confidence that activity will remain strong through the end of the decade.

Surface Technologies – International markets comprise a significant portion of segment revenue, representing over 60 percent in 2024. We continue to benefit from our exposure to the North Sea, Asia Pacific, and the Middle East. TechnipFMC’s unique capabilities in these markets – which demand higher specification equipment and local presence, including a services footprint – provide a platform for us to extend our leadership in these geographies.

Investment in international markets is less cyclical than in North America, as most activities are undertaken by national oil companies with long-term investment horizons that are less sensitive to fluctuations in commodity prices. This is most evident in the Middle East, where the growth we anticipated is materializing, driven by the ramp up in activity in the United Arab Emirates and the Kingdom of Saudi Arabia. This represents a differentiated growth opportunity for our company.

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CONSOLIDATED RESULTS OF OPERATIONS

This section of this Annual Report on Form 10-K generally discusses 2024 and 2023 items and year-to-year comparisons between 2024 and 2023. Discussions of 2022 items and year-to-year comparisons between 2023 and 2022 that are not included in this Annual Report on Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2023.

We report our results of operations in U.S. dollars; however, our earnings are generated in various currencies worldwide. In order to provide worldwide consolidated results, the earnings of subsidiaries functioning in their local currencies are translated into U.S. dollars based upon the average exchange rate during the period. While the U.S. dollar results reported reflect the actual economics of the period reported upon, the variances from prior periods include the impact of translating earnings at different rates.

n/m = Not meaningful

Results of Operations in 2024 Compared to 2023

Revenue

Revenue increased $1,259.1 million in 2024, compared to the same period in 2023. Subsea revenue increased by $1,385.1 million, driven by conversion of increased backlog, which was 49.6% higher as of December 31, 2023, when compared to December 31, 2022, and resulted in increased revenue from higher iEPCI™, installation, supply of flexible pipe and services activities particularly in Angola, the United States, Guyana and Australia. Surface Technologies revenue decreased by $126.0 million, compared to the same period in 2023. The decline was primarily due to lower activity in North America, Europe, Latin America and the sale of MSB during the three months ended March 31, 2024, which collectively decreased revenues by $202.9 million. This decrease was partially offset by $76.9 million of revenue growth from higher equipment delivery across the rest of the world, with the majority of the increase occurring in the Middle East.

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Gross Profit

Gross profit (revenue less cost of sales) increased to $1,723.1 million in 2024 compared to $1,274.1 million in 2023. Subsea gross profit increased year-over-year by $450.9 million, of which $230.2 million was due to volume increase and $220.7 million due to a favorable activity mix. Surface Technologies gross profit decreased by $2.9 million compared to the same period in 2023, primarily due to lower activity in North America, Europe, Latin America and the sale of MSB in the three months ended March 31, 2024 which collectively resulted in a decrease of $35.4 million, partially offset by $32.5 million of higher profitability from growth and higher operational leverage and efficiency across international markets especially in the Middle East.

Selling, General and Administrative Expense

Selling, general and administrative expense was flat year-over-year.

Other Income (Expense), Net

Other income (expense), net includes gains and losses associated with the remeasurement of net monetary assets and liabilities, gains and losses on sales of property, plant and equipment, and non-operating gains and losses. The net decrease in expense of $202.4 million was primarily driven by the $126.5 million non-recurring legal settlement charge recognized during 2023. Foreign currency loss decreased by $90.5 million, primarily due to a reduction in exposures to certain currencies with limited derivative hedging markets such as the Argentine peso and Angolan kwanza, compared to the prior year. These decreases were partially offset by a net increase in miscellaneous other non-operating charges.

Gain on disposal of Measurement Solutions business

For the year ended December 31, 2024, we recognized a gain of $71.3 million from the sale of equity interests and assets of MSB.

Income from Equity Affiliates

For the years ended December 31, 2024 and 2023, we recorded income from equity method affiliates of $21.7 million and $34.4 million, respectively. The year-over-year decline was driven by a decrease in the operational activity of our joint ventures.

Net Interest Expense

Net interest expense decreased by $25.2 million in 2024, compared to 2023, largely due to the reduction in outstanding debt.

Provision for Income Taxes

Our provision for income taxes for 2024 and 2023 reflected effective tax rates of 9.0% and 74.9%, respectively. The change in the effective tax rate was largely due to changes of valuation allowances on some of our deferred tax assets, changes in geographical profit mix year-over-year, and tax adjustments related to uncertain tax positions.

Our effective tax rate can fluctuate depending on our country mix of earnings, since our foreign earnings are generally subject to higher tax rates than in the United Kingdom.

OPERATING RESULTS OF BUSINESS SEGMENTS

Segment operating profit is defined as total segment revenue less segment operating expenses. Certain items have been excluded in computing segment operating profit and are included in corporate items. See Note 6 to our consolidated financial statements for further details.

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Subsea

Subsea revenue increased $1,385.1 million during the year ended December 31, 2024, compared to the same period in 2023, driven by increased backlog during 2023 related to higher energy demand and upstream spending, further aided by our unique commercial offerings. $428.8 million of the increase in revenue was from Angola, $296.5 million from the United States, $295.3 million from Guyana and $168.0 million from Australia, driven by higher iEPCI™, installation, supply of flexible pipe and services activities. The rest of the world contributed a net increase of $196.5 million.

Subsea operating profit for the year ended December 31, 2024, increased by $409.5 million. This was largely due to favorable activity mix, which contributed $220.7 million, and higher volume, which added $230.2 million. These improvements were partially offset by a $41.4 million increase in operating expense related to the higher activity.

Surface Technologies

Surface Technologies revenue decreased by $126.0 million, compared to the same period in 2023, primarily due to $202.9 million decrease in revenue as a result of lower drilling and completion activity in North America, Europe, Latin America and the sale of MSB during the three months ended March 31, 2024. This decrease was partially offset by $76.9 million of revenue growth from higher equipment delivery across the rest of the world, with the majority of the increase occurring in the Middle East.

Surface Technologies operating profit increased by $89.6 million compared to the same period in 2023 and was primarily driven by the $71.3 million gain on the sale of MSB, which was partially offset by lower activity in North America and Latin America, resulting in a net increase of $57.1million. Additionally, improved operating performance in Middle East, Asia Pacific and other operating units generated improved profitability of $32.5 million.

Corporate Items

Corporate expense decreased by $119.0 million compared to the same period in the prior year, primarily driven by the non-recurring legal settlement charge of $126.5 million incurred during 2023.

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INBOUND ORDERS AND ORDER BACKLOG

Inbound orders — Inbound orders represent the estimated sales value of confirmed customer orders received during the reporting period.

Order backlog - Order backlog is calculated as the estimated sales value of unfilled, confirmed customer orders at the reporting date. Backlog reflects the current expectations for the timing of project execution. See Note 5 to our consolidated financial statements for further details.

Subsea - Subsea backlog of $13,518.1 million as of December 31, 2024 increased by $1,354.0 million compared to December 31, 2023, and was composed of various subsea projects, including TotalEnergies GranMorgu and Mozambique LNG; Equinor Raia and Rosebank; Petrobras Mero 3 HISEP® and Buzios 6; bp NEP and Kaskida, ExxonMobil Whiptail and Uaru; Shell Bonga North and Sparta; Energean Katlan; AkerBP Utsira High and Azule Energy Agogo.

Surface Technologies - Order backlog for Surface Technologies as of December 31, 2024 decreased by $208.7 million, compared to December 31, 2023. Surface Technologies’ backlog of $858.2 million as of December 31, 2024, was composed primarily of projects for customers in the Middle East, namely ADNOC and Saudi Aramco. The remaining backlog was composed of various projects in the rest of the world.

LIQUIDITY AND CAPITAL RESOURCES

Most of our cash is managed centrally and flows through bank accounts controlled and maintained by TechnipFMC globally in various jurisdictions to best meet the liquidity needs of our global operations.

Net Cash (Debt) - Net cash (debt) is a non-GAAP financial measure reflecting cash and cash equivalents, net of debt. Management uses this non-GAAP financial measure to evaluate our capital structure and financial leverage. We believe net cash, or net debt, is a meaningful financial measure that may assist investors in understanding our financial condition and recognizing underlying trends in our capital structure. Net cash (debt) should not be considered an alternative to, or more meaningful than, cash and cash equivalents as determined in accordance with GAAP or as an indicator of our operating performance or liquidity.

The following table provides a reconciliation of our cash and cash equivalents to net debt, utilizing details of classifications from our consolidated balance sheets.

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Cash Flows

Cash flows for the years ended December 31, 2024, 2023, and 2022 were as follows:

Operating cash flows - During 2024 and 2023, we generated $961.0 million and $693.0 million in operating cash flows, respectively. The increase of $268.0 million in 2024, as compared to 2023, was due to increased volume and an improved mix of projects resulting in strong cash collections, offset by a higher volume of vendor payments to support the higher business activity.

Investing cash flows - We used $75.8 million and $125.6 million in investing activities during 2024 and 2023, respectively. The decrease of $49.8 million was primarily due to $186.1 million in proceeds received from the sale of MSB, which was partially offset by a decrease of $65.5 million of proceeds from the sale of other assets and an increase in capital expenditures of $56.4 million as compared to the same period in 2023.

Financing cash flows - Financing activities used $648.0 million and $656.5 million in 2024 and 2023, respectively. The decrease of $8.5 million was mainly due to a decrease in net debt repayments of $220.3 million and an increase in proceeds from the exercise of stock options of $31.1 million. These were partially offset by an increase of $195.0 million in share repurchases and $42.4 million in dividends paid as compared to 2023.

The change in working capital represents total changes in current assets and liabilities.

Free cash flow is defined as operating cash flows from operations less capital expenditures. Management uses this non-GAAP financial measure to evaluate our financial condition. We believe free cash flow is a meaningful financial measure that may assist investors in understanding our financial condition and results of operations. The following table reconciles cash provided by operating activities, which is the most directly comparable financial measure determined in accordance with GAAP, to free cash flow (non-GAAP measure).

Debt and Liquidity

We are committed to maintaining a capital structure that provides sufficient cash resources to support future operating and investment plans. We maintain a level of liquidity sufficient to allow us to meet our cash needs in both the short term and long term.

Availability of borrowings under the Revolving Credit Facility is reduced by the outstanding letters of credit issued against the facility. As of December 31, 2024 there were no letters of credit outstanding and availability of borrowings under the Revolving Credit Facility was $1,250.0 million.

As of December 31, 2024 TechnipFMC was in compliance with all debt covenants. See Note 16 to our consolidated financial statements for further detail.

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Credit Ratings - Our credit ratings with Standard and Poor’s (“S&P”) are ‘BBB-’ for our long-term unsecured, guaranteed debt (2021 Notes) and ‘BBB-’ for our 2012 and 2020 long-term unsecured debt (the 2012 and 2020 Private Placement Notes). Our credit rating with Moody’s is ‘Ba1’ for our long-term unsecured, guaranteed debt as of December 31, 2024. See Note 16 for further details regarding our debt.

On March 7, 2024, S&P upgraded TechnipFMC to investment grade, raising its rating to ‘BBB-’ from ‘BB+’ for both the issuer credit as well as the issue-level ratings on the Company’s senior unsecured notes. On June 27, 2024, Fitch assigned a first-time investment grade long-term issuer default rating of ’BB-' to TechnipFMC. As a result of the S&P and Fitch investment grade ratings and the satisfaction of certain other conditions precedent, the Investment Grade Debt Rating (as defined in the Credit Agreement) has occurred and the collateral securing the Credit Agreement and the Performance LC Credit Agreement was released.

On January 23, 2025, Moody’s upgraded TechnipFMC to ‘Baa3’ from ‘Ba1’, while maintaining a positive outlook, for the issuer-level ratings on the Company’s senior unsecured notes due 2026.

Dividends - Our Board of Directors authorized and declared a quarterly cash dividend of $0.05 per share during each quarter of 2024. The cash dividends paid during the year ended December 31, 2024 were $85.9 million. These dividends represent $0.20 per share on an annualized basis. We intend to pay dividends on a quarterly basis, subject to review and approval by our Board of Directors in its sole discretion.

Share Repurchase - On July 26, 2023 and October 23, 2024, our Board of Directors authorized share repurchases of up to $400.0 million and $1.0 billion, respectively. The Company’s total share repurchase authorization increased to $1.8 billion of our outstanding ordinary shares under our share repurchase program, and pursuant to this share repurchase program, we repurchased $400.1 million of ordinary shares during the year ended December 31, 2024.

Based upon the remaining repurchase authority of $1.1 billion and the closing stock price as of December 31, 2024, approximately 37.8 million ordinary shares could be subject to repurchase. Since the initial share repurchase authorization in July 2022, we have purchased an aggregate amount of $705.5 million of ordinary shares through December 31, 2024. All shares repurchased were immediately cancelled.

Credit Risk Analysis

For the purposes of mitigating the effect of the changes in exchange rates, we hold derivative financial instruments. Valuations of derivative assets and liabilities reflect the fair value of the instruments, including the values associated with counterparty risk. These values must also take into account our credit standing, thus including the valuation of the derivative instrument and the value of the net credit differential between the counterparties to the derivative contract. Adjustments to our derivative assets and liabilities related to credit risk were not material for any period presented.

The income approach was used as the valuation technique to measure the fair value of foreign currency derivative instruments on a recurring basis. This approach calculates the present value of the future cash flow by measuring the change from the derivative contract rate and the published market indicative currency rate, multiplied by the contract notional values. Credit risk is then incorporated by reducing the derivative’s fair value in asset positions by the result of multiplying the present value of the portfolio by the counterparty’s published credit spread. Portfolios in a liability position are adjusted by the same calculation; however, a spread representing our credit spread is used.

Our credit spread, and the credit spread of other counterparties not publicly available, are approximated using the spread of similar companies in the same industry, of similar size, and with the same credit rating. See Notes 23 and 24 to our consolidated financial statements for further details.

At this time, we have no credit-risk-related contingent features in our agreements with the financial institutions that would require us to post collateral for derivative positions in a liability position.

Contractual and Other Obligations

The Company’s principal contractual commitments include purchase obligations, repayments of long-term debt and related interest, and payments under operating and finance leases. As of December 31, 2024, we had $1.6 billion of purchase obligations, more than 90% of which is short-term. Substantially all of these commitments are associated with purchases made to fulfill our customer’s orders, the costs associated with these agreements will ultimately be reflected in cost of sales in our consolidated statements of income.

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Refer to respective notes to the consolidated financial statements for further information about our share repurchase program (Note 17), long-term debt obligations (Note 16), guarantees (Notes 12 and 20) and lease payment obligations (Note 4).

Financial Position Outlook

We are committed to a strong balance sheet. We continue to maintain sufficient liquidity to support the needs of the business through growth, cyclicality and unforeseen events. We continue to maintain and drive sustainable leverage to preserve access to capital throughout the cycle. Our capital expenditures can be adjusted and managed to match market demand and activity levels. Projected capital expenditures do not include any contingent capital that may be needed to respond to contract awards. In maintaining our commitment to sustainable leverage and liquidity, we expect to be able to continue to generate cash flow available for investment in growth and distribution to shareholders through the business cycle.

CRITICAL ACCOUNTING ESTIMATES

The preparation of financial statements in conformity with GAAP requires management to make certain estimates, judgments and assumptions about future events that affect the reported amounts of assets and liabilities at the date of the financial statements, the reported amounts of revenue and expenses during the periods presented and the related disclosures in the accompanying notes to the financial statements. Management has reviewed these critical accounting estimates with the Audit Committee of our Board of Directors. We believe the following critical accounting estimates used in preparing our financial statements address all important accounting areas where the nature of the estimates or assumptions is material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change. See Note 1 to our consolidated financial statements for further details.

Revenue Recognition

The majority of our revenue is derived from long-term contracts that can span several years. We account for revenue in accordance with Accounting Standard Codification (“ASC”) Topic 606, Revenues from Contracts with Customers. The unit of account in ASC Topic 606 is a performance obligation. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. Our performance obligations are satisfied over time as work progresses or at a point in time.

A significant portion of our total revenue recognized over time relates to our Subsea segment, for the subsea exploration and production equipment projects that involve the design, engineering, manufacturing, construction, and assembly of complex systems. Because of control transferring over time, revenue is recognized based on the extent of progress towards completion of the performance obligation. The selection of the method to measure progress towards completion requires judgment and is based on the nature of the products or services to be provided. We generally use the cost-to-cost measure of progress for our contracts because it best depicts the transfer of control to the customer that occurs as we incur costs on our contracts. Under the cost-to-cost measure of progress, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation. Revenues are recorded proportionally as costs are incurred.

Due to the nature of the work required to be performed on many of our performance obligations, the estimation of total revenue and cost at completion is complex, subject to many variables, and requires significant judgment. It is common for our long-term contracts to contain award fees, incentive fees, or other provisions that can either increase or decrease the transaction price. We include estimated amounts in the transaction price when we believe we have an enforceable right to the modification, the amount can be estimated reliably, and its realization is probable. The estimated amounts are included in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved.

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We execute contracts with our customers that clearly describe the equipment, systems, and/or services. After analyzing the drawings and specifications of the contract requirements, our project engineers estimate total contract costs based on their experience with similar projects and then adjust these estimates for specific risks associated with each project, such as technical risks associated with a new design. Costs associated with specific risks are estimated by assessing the probability that conditions arising from these specific risks will affect our total cost to complete the project. After work on a project begins, assumptions that form the basis for our calculation of total project cost are examined on a regular basis and our estimates are updated to reflect the most current information and management’s best judgment.

Adjustments to estimates of contract revenue, total contract cost, or extent of progress toward completion are often required as work progresses under the contract and as experience is gained, even though the scope of work required under the contract may not change. The nature of accounting for long-term contracts is such that refinements of the estimating process for changing conditions and new developments are continuous and characteristic of the process. Consequently, the amount of revenue recognized over time is sensitive to changes in our estimates of total contract costs. There are many factors, including, but not limited to, the ability to properly execute the engineering and design phases consistent with our customers’ expectations, the availability and costs of labor and material resources, productivity, and weather, all of which can affect the accuracy of our cost estimates, and ultimately, our future profitability.

Our gross profit for the year ended December 31, 2024 was negatively impacted on a net basis by approximately $55.1 million, as a result of aggregate changes in contract estimates related to projects that were in progress as of December 31, 2023 with net $57.1 million unfavorable and $2.0 million favorable in our Subsea and Surface Technologies segments, respectively.

Certain projects were significantly impacted negatively by changes to estimated project costs during this period totaled $102.2 million. These were offset partially by projects with material positive impacts from favorable negotiations of variable considerations of $97.3 million. The remaining other changes resulted in a net negative impact of $50.0 million.

Accounting for Income Taxes

Our income tax expense, deferred tax assets and liabilities, and reserves for uncertain tax positions reflect management’s best assessment of estimated future taxes to be paid. We are subject to income taxes in the United Kingdom and numerous foreign jurisdictions. Significant judgments and estimates are required in determining our consolidated income tax expense.

In determining our income tax provision, we assess temporary differences resulting from differing treatments of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are recorded in our consolidated balance sheets. When we maintain deferred tax assets, we must assess the likelihood that these assets will be recovered through adjustments to future taxable income. To the extent we believe recovery is not likely, we establish a valuation allowance. We record a valuation allowance to reduce the asset to a value we believe will be recoverable based on our expectation of future taxable income. We believe the accounting estimate related to the valuation allowance is a critical accounting estimate because it is highly susceptible to change from period to period, requires management to make assumptions about our future income over the lives of the deferred tax assets, and finally, the impact of increasing or decreasing the valuation allowance is potentially material to our results of operations.

Forecasting future income requires us to use a significant amount of judgment. In estimating future income, we use our internal operating budgets and long-range planning projections. We develop our budgets and long-range projections based on recent results, trends, economic and industry forecasts influencing our segments’ performance, our backlog, planned timing of new product launches; and customer sales commitments. Significant changes in our judgment related to the expected realizability of a deferred tax asset results in an adjustment to the associated valuation allowance.

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As of December 31, 2024, we have provided a valuation allowance against the related deferred tax assets where we believe it is not more likely than not that we will generate future taxable income sufficient to realize such assets. During the year ended December 31, 2024, we recorded a benefit of $194.9 million due to the release of a valuation allowance on US net deferred tax assets, the largest of which included net operating losses and a partial release of a valuation allowance on foreign tax credits. In reaching this determination, the Company considered the growing trend of profitability over the last three years in the US, as well as expectations regarding the generation of future taxable income and the sources of future taxable income. During the year we established a $63.9 million valuation allowance in a Brazil entity on the basis that it is not more likely than not that we will generate future taxable income sufficient to realize the entity’s net deferred tax assets, which resulted in additional income tax expense of $23.2 million and additional tax expense recognized within other comprehensive loss of $40.7 million.

The calculation of our income tax expense involves dealing with uncertainties in the application of complex tax laws and regulations in numerous jurisdictions in which we operate. We recognize tax benefits related to uncertain tax positions when, in our judgment, it is more likely than not that such positions will be sustained on examination, including resolutions of any related appeals or litigation, based on the technical merits. We adjust our liabilities for uncertain tax positions when our judgment changes as a result of new information previously unavailable. Due to the complexity of some of these uncertainties, their ultimate resolution may result in payments that are materially different from our current estimates. Any such differences will be reflected as adjustments to income tax expense in the periods in which they are determined.

Accounting for Pension and Other Post-retirement Benefit Plans

The determination of the projected benefit obligations of our pension and other post-retirement benefit plans are important to the recorded amounts of such obligations in our consolidated balance sheets and to the amount of pension expense in our consolidated statements of income. In order to measure the obligations and expense associated with our pension benefits, management must make a variety of estimates, including discount rates used to value certain liabilities, expected return on plan assets set aside to fund these costs, rate of compensation increase, employee turnover rates, retirement rates, mortality rates and other factors. We update these estimates on an annual basis or more frequently upon the occurrence of significant events. These accounting estimates bear the risk of change due to the uncertainty and difficulty in estimating these measures. Different estimates used by management could result in our recognition of different amounts of expense over different periods of time.

Due to the specialized and statistical nature of these calculations which attempt to anticipate future events, we engage third-party specialists to assist management in evaluating our assumptions as well as appropriately measuring the costs and obligations associated with these pension benefits. The discount rate and expected long-term rate of return on plan assets are based on investment yields available and the historical performance of our plan assets, respectively. The timing and amount of cash outflows related to the bonds included in the indices matches estimated defined benefits payments. These measures are critical accounting estimates because they are subject to management’s judgment and can materially affect net income.

The actuarial assumptions and estimates made by management in determining our pension benefit obligations may materially differ from actual results as a result of changing market and economic conditions and changes in plan participant assumptions. While we believe the assumptions and estimates used are appropriate, differences in actual experience or changes in plan participant assumptions may materially affect our financial position or results of operations.

The following table illustrates the sensitivity of changes in the discount rate and expected long-term return on plan assets on pension expense and the projected benefit obligation:

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Impairment of Long-Lived and Intangible Assets

Long-lived assets, including vessels, property, plant and equipment, identifiable intangible assets being amortized, and capitalized software costs are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of the long-lived asset may not be recoverable. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. If it is determined that an impairment loss has occurred, the loss is measured as the amount by which the carrying amount of the long-lived asset exceeds its fair value. The determination of future cash flows as well as the estimated fair value of long-lived assets involves significant estimates on the part of management. Because there usually is a lack of quoted market prices for long-lived assets, fair value of impaired assets is typically determined based on the present values of expected future cash flows using discount rates believed to be consistent with those used by principal market participants or based on a multiple of operating cash flows validated with historical market transactions of similar assets where possible. The expected future cash flows used for impairment reviews and related fair value calculations are based on judgmental assessments of revenue, forecasted utilization, operating costs and capital decisions, and all available information at the date of review. If future market conditions deteriorate beyond our current expectations and assumptions, impairments of long-lived assets may be identified if we conclude that the carrying amounts are no longer recoverable.

RECENTLY ISSUED ACCOUNTING STANDARDS

See Note 2 to our consolidated financial statements for further details.