EXPRO GROUP HOLDINGS N.V. - Quarter Report: 2023 March (Form 10-Q)

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Expro Group Holdings N.V.

Condensed Consolidated Statements of Operations (Unaudited)

(In thousands, except share data)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

Expro Group Holdings N.V.

Condensed Consolidated Statements of Comprehensive Loss (Unaudited)

(in thousands)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

Expro Group Holdings N.V.

Condensed Consolidated Balance Sheets

(in thousands, except share data)

Expro Group Holdings N.V.

Condensed Consolidated Statements of Cash Flows (Unaudited)

(in thousands)

Expro Group Holdings N.V.

Condensed Consolidated Statements of Stockholders’ Equity (Unaudited)

(in thousands)

With roots dating to 1938, Expro Group Holdings N.V. (the “Company,” “Expro,” “we,” “our” or “us”) 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 which enhance production and improve recovery across the well lifecycle, from exploration through abandonment.

On March 10, 2021, the Company 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 the Company (“Merger Sub”), entered into an Agreement and Plan of Merger with Expro Group Holdings International Limited (“Legacy Expro”) 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 the Company (the “Merger”). The Merger closed on October 1, 2021, and the Company, previously known as Frank’s International N.V. (“Frank’s”), was renamed Expro Group Holdings N.V. 

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 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 the Company to repurchase any particular amount of common stock, and it could be modified, suspended or discontinued at any time. Under the stock repurchase plan, the Company has repurchased approximately 0.6 million shares at an average price of $17.99 per share, for a total cost of approximately $10.0 million during the three months ended March 31, 2023. Since the inception of the stock repurchase program, the Company has repurchased total of approximately 1.7 million shares at an average price of $13.89 per share, for a total cost of $23.0 million through March 31, 2023.

Basis of presentation

The unaudited condensed 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 unaudited condensed 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.

The accompanying condensed consolidated financial statements have not been audited by our independent registered public accounting firm. The unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim consolidated financial information. Accordingly, these unaudited condensed consolidated financial statements do not include all of the information and footnotes required by U.S. GAAP for annual consolidated financial statements and should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2022, included in our most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on February 23, 2023.

In the opinion of management, these unaudited condensed consolidated financial statements, which are prepared in accordance with the rules of the SEC and U.S. GAAP for interim financial reporting, included herein contain all adjustments necessary to present fairly our financial position as of March 31, 2023, the results of our operations for the three months ended March 31, 2023 and 2022 and our cash flows for the three months ended March 31, 2023 and 2022. 

Such adjustments are of a normal recurring nature. Operating results for the three months ended  March 31, 2023, are not necessarily indicative of the results that may be expected for the year ending  December 31, 2023, or for any other period.

The unaudited condensed consolidated financial statements have been prepared on an historical cost basis using the United States dollar (“$” or “U.S. dollar”) as the reporting currency.

Significant accounting policies

Refer to Note 2 “Basis of presentation and significant accounting policies” of our consolidated financial statements as of and for the year ended December 31, 2022, which are included in our most recent Annual Report on Form 10-K filed with the SEC on February 23, 2023, for a discussion of our significant accounting policies. There have been no material changes in our significant accounting policies as compared to the significant accounting policies described in our consolidated financial statements as of and for the year ended  December 31, 2022.

Recent accounting pronouncements

Changes to U.S. GAAP are established by the Financial Accounting Standards Board (“FASB”) generally in the form of accounting standards updates (“ASUs”) to the FASB’s Accounting Standards Codification.

We consider the applicability and impact of all accounting pronouncements. Recently issued ASUs were assessed and were either determined to be not applicable or are expected to have immaterial impact on our consolidated financial position, results of operations and cash flows.

DeltaTek Oil Tools Limited

On February 8, 2023 (“Closing Date”), DeltaTek Oil Tools Limited, a limited liability company registered in the United Kingdom, and its subsidiary (“DeltaTek”), was acquired (“the Acquisition”) by our wholly owned subsidiary Exploration and Production Services (Holdings) Limited, a limited liability company registered in the United Kingdom (“EPSH”). DeltaTek has developed a number of innovative technologies and solutions and their range of low-risk open water cementing solutions increases clients’ operational efficiency, delivers rig time and cost savings, and improves the quality of cementing operations of clients. We estimated the fair value of consideration for the Acquisition to be $17.5 million, including cash consideration paid at closing of $9.0 million, subject to a true-up for net of customary working capital adjustments, and contingent consideration which is estimated to be $8.5 million. 

The contingent consideration arrangement requires the Company to pay the former owners of DeltaTek a percentage of future revenues generated specifically from the acquired technology over a period of seven years. The fair value of the contingent consideration arrangement of $8.5 million was estimated by applying the income approach and is reflected in “Other liabilities” on the consolidated balance sheets. That measure is based on significant inputs that are not observable in the market, referred to as Level 3 inputs in accordance with ASC 820. To the extent our estimates and assumptions change during the measurement period and such changes are based on facts and circumstances that existed as of the Closing Date, an adjustment to the contingent consideration liability would be recorded with an offsetting adjustment to goodwill. To the extent our estimates and assumptions change based on facts and circumstances subsequent to the Closing Date or after the measurement period, an adjustment to the contingent consideration liability would be recorded with an offsetting adjustment to earnings during the applicable period.

The Acquisition is accounted for as a business combination and 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 DeltaTek’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 following table sets forth the preliminary allocation of the Acquisition 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):

Due to the recency of the Acquisition, these amounts, including the estimated fair values, are based on preliminary calculations and subject to change as our fair value estimates and assumptions are finalized during the measurement period. The final fair value determination could result in material adjustments to the values presented in the preliminary purchase price allocation table above. The fair values of identifiable intangible assets were prepared using an income valuation approach, which requires a forecast of expected future cash flows either using 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 5 to 15 years life. We expect annual amortization to be approximately $1.0 million associated with these intangible assets. An associated deferred tax liability has been recorded in regards to these intangible assets. Refer to Note 14 – Intangible assets, net for additional information regarding the various acquired intangible assets.

The goodwill consists largely of the synergies and economies of scale expected from the technology providing more efficient services and expected future developments resulting from the assembled workforce. The goodwill is not subject to amortization but will be evaluated at least annually for impairment or more frequently if impairment indicators are present. Goodwill recorded in the Acquisition is not expected to be deductible for tax purposes.

The Company has determined the estimated unaudited pro forma information to be insignificant for the three months ended March 31, 2023, and 2022, assuming the Acquisition were to have been completed as of January 1, 2023 and 2022, respectively. This is not necessarily indicative of the results that would have occurred had the Acquisition been completed on either date indicated or of future operating results.

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 March 31, 2023 and December 31, 2022, were as follows (in thousands):

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 Chief Executive Officer, in deciding how to allocate resources and assess performance. Our CODM manages our operational segments that are aligned with our geographical regions as below:

The following table presents our revenue disaggregated by our operating segments (in thousands):

Segment EBITDA

Our CODM regularly evaluates the performance of our operating segments using Segment EBITDA, which we define as income (loss) before income taxes adjusted for corporate costs, equity in income of joint ventures, depreciation and amortization expense, impairment expense, gain on disposal of assets, merger and integration expense, severance and other expense, stock-based compensation expense, foreign exchange gains (losses), other income (expense), net, and interest and finance income (expense), net.

The following table presents our Segment EBITDA disaggregated by our operating segments and a reconciliation to loss before income taxes (in thousands):

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.

Disaggregation of revenue

We disaggregate our revenue from contracts with customers by geography, as disclosed in Note 5 “Business segment reporting,” 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 main areas of capabilities.

The following table sets forth the total amount of revenue by main area of capabilities as follows (in thousands):

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 customer’s payment, which results in the recognition of unbilled receivables and deferred revenue.

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 March 31, 2023, and December 31, 2022 (in thousands):

The Company recognized revenue of $25.2 million and $7.9 million for the three months ended March 31, 2023 and 2022, respectively, out of the deferred revenue balance as of the beginning of the applicable year.

As of March 31, 2023, $62.6 million of our deferred revenue was classified as current and is included in “Other current liabilities” on the condensed consolidated balance sheets, with the remainder classified as non-current and included in “Other non-current liabilities” on the condensed 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 construction contracts, revenue allocated to remaining performance obligations is $116.1 million.

For interim financial reporting, the annual tax rate is based on pre-tax income (loss) before equity in income of joint ventures. We have historically calculated the income tax expense/(benefit) during interim reporting periods by applying a full year estimated Annual Effective Tax Rate ("AETR") to income (loss) before income taxes, excluding infrequent or unusual discrete items, for the reporting period. For the three months ended March 31, 2023, we determined that using an AETR would not provide a reliable estimate of income taxes due to the forecasting methodology used to project income (loss) before income taxes, resulting in significant changes in the estimated AETR. Thus, we concluded to use a discrete effective tax rate, which treats the year-to-date period as an annual period, to calculate income taxes for the three months ended March 31, 2023.

Our effective tax rates were (137.4)% and (42.2)% for the three ended March 31, 2023, and 2022, respectively.

Our effective tax rate was impacted primarily due to changes in the mix of taxable profits between jurisdictions with different tax regimes, in particular in Europe and Sub-Saharan Africa and the Middle East.

We have investments in two joint venture companies, 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 Expro 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 Expro, but each company is independently managed.

The carrying value of our investment in joint ventures as of March 31, 2023, and December 31, 2022, was as follows (in thousands):

Accounts receivable, net consisted of the following as of March 31, 2023, and December 31, 2022 (in thousands):

Inventories consisted of the following as of March 31, 2023, and December 31, 2022 (in thousands):

Other assets consisted of the following as of March 31, 2023,and December 31, 2022 (in thousands):

Other liabilities consisted of the following as of March 31, 2023, and December 31, 2022 (in thousands):

Accounts payable and accrued liabilities consisted of the following as of March 31, 2023, and December 31, 2022 (in thousands):

Property, plant and equipment, net consisted of the following as of March 31, 2023, and December 31, 2022 (in thousands):

The carrying amount of our property, plant and equipment recognized in respect of assets held under finance leases as of March 31, 2023 and December 31, 2022 and included in amounts above is as follows (in thousands):

Depreciation expense relating to property, plant and equipment, including assets under finance leases, was $25.5 million and $26.0 million for the three months ended March 31, 2023 and 2022, respectively.

The following table summarizes our intangible assets comprising of Customer Relationships & Contracts (“CR&C”), Trademarks, Technology and Software as of March 31, 2023 and December 31, 2022 (in thousands):

Amortization expense for intangible assets was $9.2 million and $9.0 million for the three months ended March 31, 2023 and 2022, respectively.

The following table summarizes the intangible assets which were acquired pursuant to the Acquisition (in thousands):

Our reporting units are our operating segments which are NLA, ESSA, MENA and APAC.

The allocation of goodwill by operating segment as of March 31, 2023 and December 31, 2022 is as follows (in thousands):

The following table summarizes the goodwill by operating segment which were acquired pursuant to the Acquisition (in thousands):

As of March 31, 2023, we did not identify any triggering events that would represent an indicator of impairment of our goodwill. Accordingly, no impairment charges related to goodwill have been recorded during the three months ended March 31, 2023.

On October 1, 2021, 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 New Facility remained undrawn on a cash basis (i.e., no loans were outstanding), as of  March 31, 2023 and December 31, 2022. We utilized $51.0 million and $53.8 million as of  March 31, 2023 and December 31, 2022, respectively, for bonds and guarantees.

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 $49.5 million and $45.5 million as of March 31, 2023 and December 31, 2022, respectively.

Contingencies

Certain conditions may exist as of the date our unaudited condensed 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 of 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 reasonably estimated, then the estimated liability would be accrued in our unaudited condensed 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 March 31, 2023 and December 31, 2022. 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 the Company’s foreign subsidiaries in West Africa including possible violations of the U.S. Foreign Corrupt Practices Act, 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. On the basis of discussions with the SEC up to the end of the first quarter of 2023, we believed that a final resolution of this matter was likely to include a civil penalty in the amount of approximately $8 million and, accordingly, we had recorded a loss contingency in that amount within “Other current liabilities” on our condensed consolidated balance sheet as of March 31, 2023, with the offset taken as an increase to goodwill as a measurement period adjustment associated with the Merger.

On April 26, 2023, the SEC issued a cease-and-desist order against the Company pursuant to section 21C of the Securities Exchange Act of 1934 (“Exchange Act”).  Under this Order, the Company neither admitted nor denied any of the SEC’s findings and agreed to cease and desist from committing or causing any violations and any future violations of the anti-bribery, books and records and internal accounting controls requirements of the FCPA and the Exchange Act.  In addition, the Company agreed to pay $8 million to the SEC in respect of disgorgement, prejudgment interest and civil penalty. In accepting the Company’s settlement offer, the SEC noted the Company’s self-reporting, co-operation afforded to the SEC staff and remedial action including improving the Company’s internal controls and further enhancements to its internal controls environment and compliance program following the Merger.

Other than discussed above, we had no other material legal accruals for loss contingencies, individually or in the aggregate, as of  March 31, 2023 and December 31, 2022.

Amounts recognized in the unaudited condensed consolidated statements of operations in respect of the defined benefit schemes were as follows (in thousands):

The Company contributed $1.2 million and $1.3 million for the three months ended March 31, 2023 and 2022, respectively, to defined benefit schemes.

Amortization of prior service credit, interest cost and expected return on plan assets have been recognized in “Other income, net” in the unaudited condensed consolidated statements of operations.  

Basic loss per share attributable to Company stockholders is calculated by dividing net loss attributable to the Company by the weighted-average number of common shares outstanding for the period. When there is net income for the period. diluted earnings per share attributable to Company stockholders is computed giving effect to all potential dilutive common stock. We apply the treasury stock method to determine the dilutive weighted average common shares represented by unvested restricted stock units, stock options and Employee Stock Purchase Program (“ESPP”) shares.

The calculation of basic and diluted loss per share attributable to Company stockholders for the three months ended  March 31, 2023 and 2022, respectively, are as follows (in thousands, except shares outstanding and per share amounts):

Approximately 0.7 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 both the three months ended March 31, 2023 and 2022.

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 various members of the Mosing family, including Erich Mosing, a member of our board of directors, and affiliates. During the three months ended March 31, 2023 and 2022, we provided goods and services to related parties totaling $2.1 million and $0.9 million, respectively. During the three months ended March 31, 2023, we received services from related parties totaling $0.4 million.

Additionally, we entered into various operating lease agreements to lease facilities with affiliated companies. Rent expense associated with our related party leases was $0.1 million and $0.2 million, respectively, for the three months ended March 31, 2023 and 2022.

As of March 31, 2023 and December 31, 2022 amounts receivable from related parties were $2.1 million and $2.4 million, respectively, and amounts payable to related parties were $1.1 million and $0.8 million, respectively.

As of March 31, 2023, $0.5 million of our operating lease right-of-use assets and $0.5 million of our lease liabilities were associated with related party leases. 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.

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 realized (or were deemed to be realized 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. 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.

The Company recognized $0.5 million and $2.7 million of stock-based compensation expense attributable to the Management Incentive Plan (“MIP”) stock options during the three months ended  March 31, 2023 and 2022, respectively. Stock-based compensation expense relating to the Long-Term Incentive Plan (“LTIP”), including restricted stock units (“RSUs”) and performance restricted stock units (“PRSUs”) for the three months ended  March 31, 2023 and 2022 was $3.6 million and $3.1 million, respectively. 

During the three months ended  March 31, 2023, 722,674 RSUs and 260,762 PRSUs were granted to employees and directors at a weighted average grant date fair value of $18.59 per RSU and $33.76 per PRSU.

During the three months ended March 31, 2023 and 2022, we recognized $0.1 million and $0.2 million of compensation expense related to stock purchased under the Employee Stock Purchase Program (“ESPP”).

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and the related notes thereto included elsewhere in this Form 10-Q and the audited consolidated financial statements and notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report.

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” and “Risk Factors” of this Form 10-Q. 

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:

Our well management offerings consist of well flow management, subsea well access and well intervention and integrity services:

We operate a global business and have a diverse and 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) North and Latin America (“NLA”), (ii) Europe and Sub-Saharan Africa (“ESSA”), (iii) Middle East and North Africa (“MENA”) and (iv) Asia-Pacific (“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 services 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.

Market Conditions and Price of Oil and Gas

The first quarter of 2023 has seen continued recovery and increased activity in the market following the impact of the pandemic and the Russian war in Ukraine, although the market continues to be impacted by general economic conditions, such as inflationary pressures and instability in certain financial institutions. There are a number of market factors that have had, and may continue to have, an effect on our business, including:

Outlook

Demand continues to improve in the face of near-term fluctuations in oil prices, with oil demand returning to pre-pandemic levels during the first quarter in 2023, with expectations of continued growth throughout the following quarters.

The U.S. Energy Information Administration (“EIA”) predicts that global liquid fuels consumption will grow to 100.9 million b/d in 2023, up from 99.4 million b/d in 2022, and rising to 102.7 million b/d in 2024 (surpassing pre-pandemic consumption levels of 100.8 million b/d). The EIA expects a slight decline in crude oil production by Organization of Petroleum Exporting Countries and certain other oil producing nations (“OPEC+”) in 2023, as a result of a 2 million b/d supply target cut in the fourth quarter of 2022 and a further 1.2 million b/d cut at the start of the second quarter of 2023, with production averaging 28.3 million b/d (down 0.4 million b/d from 2022). OPEC+ production is then set to increase to average 29.2 million b/d in 2024. Despite the decline in OPEC+ supply, global liquid fuels production is anticipated to increase by 1.5 million b/d in 2023 to 101.3 million b/d due to strong growth from non-OPEC countries, driven largely by countries in North and South America. Global liquids production is then expected to increase a further 2.0 million b/d in 2024 to 103.4 million b/d driven by non-OPEC production and the expiration of the current OPEC+ cuts. As a result, the EIA expects global oil markets will be in relative balance over 2023, and has increased its latest price forecast slightly to $85 per barrel for 2023 and $81 per barrel for 2024, compared to an average of $101 per barrel in 2022. The EIA is increasingly forecasting an oil price that remains above $75/bbl through 2024.

In addition to the positive oil market outlook, global natural gas prices are also stabilizing 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 EIA expects Henry Hub spot prices to decrease to an average of $2.95 per million British thermal unit (“MMBtu”) in 2023, a more than 50% decrease from the $6.42/MMBtu average in 2022 as lower-than average storage withdrawals through the winter have led to high inventories compared to recent history. The Henry Hub spot price is then expected to increase in 2024 to average $3.71/MMBtu. Rystad forecasts the European and Asian LNG spot price to trade at approximately $14.8/MMBtu and $14.3/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 gas market is expected to remain tight for 2023, with lower European and Asian price levels stimulating demand in the power, industrial and agricultural sectors. In January 2023, gas was price competitive with coal in the power mix and fertilizer margins were positive for the first time since the first half of 2022. A further reduction in Russian gas and LNG exports, colder weather in the northern hemisphere, and a recovery in Chinese and Indian demand could increase gas market tightness and prices through 2023.

The outlook for 2023 also indicates a continuing recovery in exploration and production expenditures, with upstream investments forecast to exceed pre-pandemic levels and growth maintained in offshore shelf and deepwater activity driven by Latin America and Sub-Saharan Africa, 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.

As a result, we expect demand for our services and solutions to continue trending positively through 2023.

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) income, 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 (used in) operating activities, the most directly comparable liquidity measure calculated and presented in accordance with GAAP.

Executive Overview

Three months ended March 31, 2023, compared to three months ended December 31, 2022

Certain highlights of our financial results and other key developments include:

Non-GAAP Financial Measures

We include in this Form 10-Q 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 (used in) 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) income 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 (expense), net, (i) interest and finance (income) expense, net and (j) foreign exchange (gain) loss. Adjusted EBITDA margin reflects our Adjusted EBITDA as a percentage of revenues.

We define Adjusted Cash Flow from Operations as net cash (used in) 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 three months presented (in thousands): 

The following table provides a reconciliation of net cash (used in) provided by operating activities to Adjusted Cash Flow from Operations for each of the three months presented (in thousands):

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 three months ended March 31, 2023, December 31, 2022 and March 31, 2022:

The following table shows Segment EBITDA and Segment EBITDA margin by segment and a reconciliation to income (loss) before income taxes for the three months ended  March 31, 2023, December 31, 2022 and March 31, 2022:

Three months ended March 31, 2023 compared to three months ended December 31, 2022

NLA

Revenue for the NLA segment was $126.2 million for the three months ended March 31, 2023, a decrease of $5.5 million, or 4.1%, compared to $131.7 million for the three months ended December 31, 2022. The decrease was primarily due to non-repeat of well construction product sales in the current quarter and lower well construction services revenue in the U.S. from decreased customer activities, partially offset by higher well construction revenue in Guyana.

Segment EBITDA for the NLA segment was $31.9 million, or 25.3% of revenues, during the three months ended March 31, 2023, compared to $35.2 million or 26.7% of revenues during the three months ended December 31, 2022. The decrease in Segment EBITDA and Segment EBITDA margin was attributable to lower activity and less favorable product mix during the three months ended March 31, 2023.

ESSA

Revenue for the ESSA segment was $113.7 million for the three months ended March 31, 2023, a decrease of $3.6 million, or 3.1%, compared to $117.3 million for the three months ended December 31, 2022. The decrease in revenues was primarily driven by lower well flow management revenue in United Kingdom, Norway and Nigeria and non-repeat of equipment sales revenue in Central Europe. The decrease in revenues was partially offset by higher well flow management revenue in Congo.

Segment EBITDA for the ESSA segment was $20.8 million, or 18.3% of revenues, for the three months ended March 31, 2023, a decrease of $9.4 million, or 31.1%, compared to $30.2 million, or 25.7% of revenues, for the three months ended December 31, 2022. The decrease of $9.4 million was primarily attributable to lower activity levels, a less favorable activity mix reflecting lower well flow management revenues and a non-repeat of higher margin equipment sales during the three months ended March 31, 2023.

MENA

Revenue for the MENA segment was $50.9 million for the three months ended March 31, 2023, a decrease of $4.5 million, or 8.0%, compared to $55.4 million for the three months ended December 31, 2022. The decrease in revenue was driven by a decrease in well flow management revenue in Saudi Arabia and Algeria, partially offset by increased well flow management revenue in the United Arab Emirates.

Segment EBITDA for the MENA segment was $14.6 million, or 28.6% of revenues, for the three months ended March 31, 2023, a decrease of $4.8 million, or 25.0%, compared to $19.4 million, or 35.1% of revenues, for the three months ended December 31, 2022. The decrease in Segment EBITDA and Segment EBITDA margin was primarily due to lower activity and a less favorable activity mix during the three months ended March 31, 2023.

APAC

Revenue for the APAC segment was $48.5 million for the three months ended March 31, 2023, an increase of $1.9 million, or 4.1%, compared to $46.6 million for the three months ended December 31, 2022. The increase in revenue was primarily due to higher subsea well access revenue and well intervention and integrity services revenue in Australia as well as higher well construction services revenue in Malaysia. The increase in revenue was partially offset by lower well flow management revenue in Malaysia.

Segment EBITDA for the APAC segment was $(2.7) million, or (5.6)% of revenues, for the three months ended March 31, 2023, a decrease of $6.4 million compared to $3.7 million, or 7.9% of revenues, for the three months ended December 31, 2022. The reduction in Segment EBITDA despite the increase in revenues was primarily due to $10.6 million of unrecoverable subsea mobilization costs, and higher start-up and commissioning costs incurred during the three months ended March 31, 2023, on subsea projects in APAC, as compared to $4.8 million for the three months ended December 31, 2022. Excluding $10.6 million and $4.8 million, respectively, of such mobilization, start-up and commissioning costs during the three months ended March 31, 2023, and December 31, 2022, Segment EBITDA would have been $7.9 million and $8.5 million, respectively, and Segment EBITDA margin would have been 16.4% and 18.2%, respectively. Start-up and commissioning costs relate to the Company’s vessel-deployed, light well intervention ("LWI") system which commenced operations during the first quarter of 2023.

Equity in income of joint ventures

Equity in income of joint ventures for the three months ended March 31, 2023, decreased by $3.2 million, or 56.4%, to $2.4 million as compared to $5.6 million for the three months ended December 31, 2022. The decrease reflects lower income from our joint venture in China during the three months ended March 31, 2023.

Merger and integration expense

Merger and integration expense for the three months ended March 31, 2023, decreased by $2.9 million, to $2.1 million as compared to $5.0 million for the three months ended December 31, 2022. The decrease was primarily attributable to lower integration related expenses incurred during the three months ended March 31, 2023, as compared to the three months ended December 31, 2022.

Income tax expense

Income tax expense for the three months ended March 31, 2023, decreased by $6.6 million to $5.1 million from $11.7 million for the three months ended December 31, 2022, primarily due to changes in the mix of taxable profits between jurisdictions, and non-recurring discrete items in the three months ended December 31, 2022, partially offset by discrete tax credits in the three months ended March 31, 2023, arising from the Acquisition.

Three months ended March 31, 2023 compared to three months ended March 31, 2022

NLA

Revenue for the NLA segment was $126.2 million for the three months ended March 31, 2023, an increase of $22.3 million, or 21.5%, compared to $103.9 million for the three months ended March 31, 2022. The increase was primarily due to higher well construction services revenue in the U.S. and higher well intervention and integrity services revenue in Argentina due to increased customer activities.

Segment EBITDA for the NLA segment was $31.9 million, or 25.3% of revenues, during the three months ended March 31, 2023, compared to $21.8 million or 21.0% of revenues during the three months ended March 31, 2022. The increase of $10.1 million in Segment EBITDA was attributable to higher activity and favorable product mix during the three months ended March 31, 2023.

ESSA

Revenue for the ESSA segment was $113.7 million for the three months ended March 31, 2023, an increase of $31.6 million, or 38.5%, compared to $82.1 million for the three months ended March 31, 2022. The increase in revenues was primarily driven by higher well flow management revenue in Congo from a new contract, from increased customer activities in the U.K. and higher subsea well access revenue in Angola.

Segment EBITDA for the ESSA segment was $20.8 million, or 18.3% of revenues, for the three months ended March 31, 2023, an increase of $8.9 million, or 75.0%, compared to $11.9 million, or 14.5% of revenues, for the three months ended March 31, 2022. The increase of $8.9 million was primarily attributable to higher activity levels and a more favorable activity mix during the three months ended March 31, 2023.

MENA

Revenue for the MENA segment was $50.9 million for the three months ended March 31, 2023, an increase of $0.2 million, or 0.5%, compared to $50.7 million for the three months ended March 31, 2022. The increase in revenue was driven by increased well flow management revenue in Algeria, partially offset by a decrease in well flow management revenue in Saudi Arabia.

Segment EBITDA for the MENA segment was $14.6 million, or 28.6% of revenues, for the three months ended March 31, 2023, a decrease of $0.9 million, or 5.8%, compared to $15.5 million, or 30.5% of revenues, for the three months ended March 31, 2022. The decrease in Segment EBITDA was primarily due to a less favorable activity mix.

APAC

Revenue for the APAC segment was $48.5 million for the three months ended March 31, 2023, an increase of $4.7 million, or 10.6%, compared to $43.8 million for the three months ended March 31, 2022. The increase in revenue was primarily due to higher subsea well access revenue in Australia and China and higher well construction revenue in Malaysia. The increase in revenue was partially offset by lower well flow management services in Thailand.

Segment EBITDA for the APAC segment was $(2.7) million, or (5.6)% of revenues, for the three months ended March 31, 2023, a decrease of $8.1 million compared to $5.4 million, or 12.4% of revenues, for the three months ended March 31, 2022. The reduction in Segment EBITDA despite the increase in revenues was primarily due to $10.6 million of unrecoverable subsea mobilization costs, and higher start-up and commissioning costs subsea projects in APAC, as compared to $2.1 million for the three months ended March 31, 2022. Excluding $10.6 million and $2.1 million, respectively, of such mobilization, start-up and commissioning costs during the three months ended March 31, 2023, and March 31, 2022, Segment EBITDA would have been $7.9 million and $7.5 million, respectively, and Segment EBITDA margin would have been 16.4% and 17.2%, respectively. Start-up and commissioning costs relate to the Company’s vessel-deployed, light well intervention ("LWI") system which commenced operations during the first quarter of 2023.

Equity in income of joint ventures

Equity in income of joint ventures for the three months ended March 31, 2023, decreased by $1.8 million, or 42.0%, to $2.4 million as compared to $4.2 million for the three months ended March 31, 2022. The decrease reflects lower income from our joint venture in China during the three months ended March 31, 2023.

Merger and integration expense

Merger and integration expense for the three months ended March 31, 2023, decreased by $2.6 million, to $2.1 million as compared to $4.7 million for the three months ended March 31, 2022. The decrease was primarily attributable to lower integration related expenses incurred during the three months ended March 31, 2023, as compared to the three months ended March 31, 2022.

Income tax expense

Income tax expense for the three months ended March 31, 2023, increased by $0.5 million to $5.1 million from $4.6 million for the three months ended March 31, 2022, primarily due to changes in the mix of taxable profits between jurisdictions with different tax regimes, in particular in Europe and Sub-Saharan Africa and the Middle East.

Liquidity and Capital Resources

Liquidity

Our financial objectives include the maintenance of sufficient liquidity, adequate financial resources and financial flexibility to fund our business. As of March 31, 2023, total available liquidity was $316.3 million, including cash and cash equivalents and restricted cash of $186.3 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 $90 million and $100 million for the last three quarters of 2023. Our total capital expenditures were $28.8 million for the three months ended March 31, 2023, 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. In addition, we used net cash of $7.5 million during the three months ended March 31, 2023, for the acquisition of DeltaTek. 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 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 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 the Company to repurchase any amount of common stock, and it could be modified, suspended or discontinued at any time. Under the stock repurchase plan, the Company has repurchased approximately 0.6 million shares at an average price of $17.99 per share, for a total cost of approximately $10.0 million during the three months ended March 31, 2023. Since the inception of the stock repurchase program, the Company has repurchased total of approximately 1.7 million shares at an average price of $13.89 per share, for a total cost of $23.0 million through March 31, 2023.

Credit Facility

Revolving Credit Facility

On October 1, 2021, 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. Proceeds of the New Facility may be used for general corporate and working capital purposes. 

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.

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.

Please see Note 16 “Interest bearing loans” in the Notes to the Unaudited Condensed Consolidated Financial Statements for additional information.

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):

Analysis of cash flow changes between the three months ended March 31, 2023 and March 31, 2022

Net cash provided by (used in) operating activities

Net cash provided by operating activities was $21.3 million during the three months ended March 31, 2023 as compared to net cash used in operating activities of $14.2 million during the three months ended March 31, 2022. The increase in net cash provided by operating activities of $35.5 million for the three months ended March 31, 2023, was primarily due to a favorable movement in net working capital of $23.7 million, lower payments for merger and integration expenses of $9.3 million and an increase in Adjusted EBITDA of $5.0 million, partially offset by higher payments for severance expense of $2.5 million for the three months ended March 31, 2023.

Adjusted Cash Flows from Operations during the three months ended March 31, 2023, was $27.2 million as compared to Adjusted Cash Flows from Operations of ($1.4) million during the three months ended March 31, 2022. Our primary uses of cash from operating activities were capital expenditures and funding obligations related to our financing arrangements.

Net cash used in investing activities

Net cash used in investing activities was $36.3 million during the three months ended March 31, 2023, as compared to $5.0 million during the three months ended March 31, 2022, an increase of $31.3 million. Our principal recurring investing activity is our capital expenditures. The increase in net cash used in investing activities was primarily due to an increase in capital expenditures of $18.2 million and payment of net cash of $7.5 million for the acquisition of DeltaTek during the three months ended March 31, 2023.

Net cash used in financing activities

Net cash used in financing activities was $16.4 million during the three months ended March 31, 2023, as compared to $2.4 million during the three months ended March 31, 2022. The increase of $14.0 million in net cash used in financing activities is primarily due to the acquisition of common stock of $10.0 million, higher payment of withholding taxes on stock-based compensation plans of $1.9 million and higher repayment of financed insurance premium of $1.9 million during the three months ended March 31, 2023.

New accounting pronouncements

See Note 2 “Basis of presentation and significant accounting policies” in our unaudited condensed consolidated financial statements under the heading “Recent accounting pronouncements.”

Critical accounting policies and estimates

There were no changes to our critical accounting policies and estimates from those disclosed in our Annual Report.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q (this “Form 10-Q”) includes certain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements include those that express a belief, expectation or intention, as well as those that are not statements of historical fact. Forward-looking statements include information regarding our future plans and goals and our current expectations with respect to, among other things:

These forward-looking statements are generally accompanied by words such as “anticipate,” “believe,” “estimate,” “expect,” “goal,” “plan,” “intend,” “potential,” “predict,” “project,” “may,” “outlook,” or other terms that convey the uncertainty of future events or outcomes, although not all forward-looking statements contain such identifying words. The forward-looking statements in this Form 10-Q speak only as of the date of this report; we disclaim any obligation to update these statements unless required by law, and we caution you not to rely on them unduly. Forward-looking statements are not assurances of future performance and involve risks and uncertainties. We have based these forward-looking statements on our current expectations and assumptions about future events. While our management considers these expectations and assumptions to be reasonable, they are inherently subject to significant business, economic, competitive, regulatory and other risks, contingencies and uncertainties, most of which are difficult to predict and many of which are beyond our control. These risks, contingencies and uncertainties include, but are not limited to, the following:

These and other important factors that could affect our operating results and performance are described in (1) “Risk Factors” in Part II, Item 1A of this Form 10-Q, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part I, Item 2 of this Form 10-Q, and elsewhere within this Form 10-Q, (2) our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on February 23, 2023 (our “Annual Report”), (3) our other reports and filings we make with the SEC from time to time and (4) other announcements we make from time to time. Should one or more of the risks or uncertainties described in the documents above or in this Form 10-Q occur, or should underlying assumptions prove incorrect, our actual results, performance, achievements or plans could differ materially from those expressed or implied in any forward-looking statements. All such forward-looking statements in this Form 10-Q are expressly qualified in their entirety by the cautionary statements in this section.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

For quantitative and qualitative disclosures about market risk, see Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” in the Annual Report. Our exposure to market risk has not changed materially since December 31, 2022.

Item 4. Controls and Procedures

As required by Rule 13a-15(b) of the Exchange Act, we have evaluated, under the supervision and with the participation of our management, including our Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the three months covered by this Form 10-Q. Our disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed by us in reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure, and such information is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. Based upon our evaluation, our CEO and CFO have concluded that our disclosure controls and procedures were effective as of March 31, 2023 at the reasonable assurance level.

As of March 31, 2023, management has concluded that there have been no changes in our internal control over financial reporting that occurred during the quarter ended March 31, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1.    Legal Proceedings

Please see Note 17 “Commitments and contingencies” in the Notes to the Unaudited Condensed Consolidated Financial Statements.

Item 1A.     Risk Factors

In addition to the other information set forth in this report, you should carefully consider the risks discussed under the heading “Risk Factors” in our Annual Report, which risks could materially affect our business, financial condition or future results. These risks are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or results of operations.

Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds

Following is a summary of repurchases of Company common stock during the three months ended March 31, 2023.