NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
(Unaudited)
NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
We are a leading fabricator of complex steel structures, modules and marine vessels used in energy extraction and production, petrochemical and industrial facilities, power generation, alternative energy and shipping and marine transportation operations. We also provide related project management for EPC projects along with installation, hookup, commissioning and repair and maintenance services. In addition, we perform civil, drainage and other work for state and local governments. We operate and manage our business through
four
operating divisions: Fabrication, Shipyard, Services and EPC. Our corporate headquarters is located in Houston, Texas, with fabrication facilities located in Houma, Jennings and Lake Charles, Louisiana.
We recently completed the fabrication of complex modules for the construction of a new petrochemical facility and the newbuild construction and delivery of a technologically-advanced OSV. Current significant projects include the construction of
ten
harbor tug vessels,
two
offshore regional class marine research vessels, an ice-breaker tug, and the expansion of a paddle wheel riverboat. We were also recently awarded a contract for the construction of a towing, salvage and rescue ship for the U.S. Navy with options for
seven
additional vessels. Previous projects include the fabrication of wind turbine pedestals for the first offshore wind power project in the U.S., and construction of one of the largest liftboats servicing the GOM, one of the deepest production jackets in the GOM, and the first SPAR hull fabricated in the U.S. Our customers include U.S. and, to a lesser extent, international energy producers, petrochemical, industrial, power, and marine operators, EPC companies and certain agencies of the U.S. government.
The accompanying unaudited Consolidated Financial Statements include the accounts of Gulf Island Fabrication, Inc. and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. The Consolidated Financial Statements have been prepared in accordance with GAAP for interim financial statements, the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, the Consolidated Financial Statements do not include all of the information and footnotes required by GAAP for complete financial statements. In our opinion, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the
three and nine months ended
September 30, 2018
, are not necessarily indicative of the results that may be expected for the year ending
December 31, 2018
.
The Consolidated Balance Sheet at
December 31, 2017
, has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by GAAP for complete financial statements. Certain balances at December 31, 2017 have been reclassified within our Consolidated Balance Sheet to conform to our
September 30, 2018
presentation. For further information, refer to the Consolidated Financial Statements and notes thereto included in our 2017 Annual Report.
Business Outlook
We continue to strategically position the Company to participate in the fabrication of petrochemical and industrial facilities, pursue offshore wind opportunities, enter the EPC industry, and diversify our customer base within all of our operating divisions. In addition, we continue to focus on maintaining liquidity and securing meaningful new contract awards and backlog in the near-term, and generating operating income and cash flow from operations in the longer-term. We have made significant progress in our efforts to improve our liquidity, including reductions in costs (including reducing our workforce and reducing the cash compensation paid to our directors and the salaries of our executive officers) and the divestiture of underutilized assets.
During the second quarter 2018, we completed the sale our Texas South Yard for
$55.0 million
, less selling costs of
$1.5 million
, for total net proceeds during the nine months ended September 30, 2018 of
$53.5 million
and a gain of approximately
$3.9 million
. In addition, on September 26, 2018, we entered into an agreement to sell our Texas North Yard and certain associated equipment for
$28.0 million
. We received
$0.5 million
during the third quarter 2018 as a deposit on the property, which is refundable under certain circumstances. The sale is anticipated to close in the fourth quarter 2018 and is subject to customary closing conditions, including the purchaser’s right to conduct inspections of the property related to confirmation of title, surveys, environmental conditions, easements and access rights, and third-party consents. See Note 2 for further discussion of the sale of our Texas South Yard and the anticipated sale of our Texas North Yard.
We believe that our cash, cash equivalents and short-term investments at
September 30, 2018
, and availability under our Credit Agreement, will be sufficient to enable us to fund our operating expenses, meet our working capital and capital expenditure requirements, and satisfy any debt service obligations or other funding requirements, for at least twelve months from the date of this Report.
Cash and cash equivalents
We consider all highly liquid investments with original maturities of three months or less when purchased to be cash equivalents.
Short-term investments
Short-term investments include U.S. Treasuries and other investment-grade commercial paper with maturities of six months or less. We intend to hold these investments until maturity and have stated them at amortized cost. Due to their near-term maturities, amortized cost approximates fair value. All of our short-term investments are traded on active markets with quoted prices and represent level 1 fair value measurements. See Note 4 for further discussion of our fair value measurements.
Income Taxes
At
December 31, 2017
, we had gross federal NOL carryforwards to offset future taxable income of
$62.8 million
, of which
$4.0 million
will expire on December 31, 2035. Our remaining federal NOL carryforwards will expire December 31, 2037. We have provided a valuation allowance against our deferred tax assets if, based upon the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. At
September 30, 2018
and December 31, 2017, our net deferred tax assets were fully reserved with a valuation allowance.
During the fourth quarter 2018, we filed our 2017 federal tax return which did not result in any material adjustment to the provisional tax amounts we recorded under Staff Accounting Bulletin 118 at December 31, 2017, related to our evaluation of the Tax Cuts and Jobs Act of 2017. Our overall evaluation of the Tax Cuts and Jobs Act of 2017 is not complete as we expect to file certain remaining state tax returns during the fourth quarter 2018; however, adjustments to our remaining state returns, if any, are not expected to be material.
Revenue Recognition
Revenue for our fixed-price and unit-rate contracts is recognized under the percentage-of-completion method, computed by the significant inputs method, which measures the percentage of labor hours incurred to date as compared to estimated total labor hours for each contract. Revenue for our T&M contracts is recognized at contracted rates when the work is performed, the costs are incurred and collection is reasonably assured. See Note 3 for further discussion of our revenue recognition policy and related accounting for our contracts.
On January 1, 2018, we adopted ASU No. 2014-09, Topic 606 “Revenue from Contracts with Customers”, which supersedes the revenue recognition requirements in FASB ASC Topic 605, “Revenue Recognition.” Topic 606 requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Our adoption of Topic 606 included a detailed review of our significant contracts that were not substantially complete as of January 1, 2018. Based on our review, we concluded that revenue recognition for our fixed-price and unit-rate contracts using the percentage-of-completion method, computed by measuring the percentage of labor hours incurred to date as compared to estimated total labor hours for each contract, is still appropriate. Our review also determined that Topic 606 did not impact the timing of revenue recognition for our T&M contracts. Based on the aforementioned, we concluded that the impact of adoption of Topic 606 as of January 1, 2018, was immaterial to our Consolidated Financial Statements and no adjustment was required. See Note 3 for further discussion of our adoption of Topic 606.
New Accounting Standards
Leases -
In February 2016, the FASB issued ASU 2016-02, “Leases,” which requires lessees to record most leases on their balance sheet but recognize expense in a manner similar to current guidance. ASU 2016-02 will be effective for us in the first quarter 2019. The new standard is required to be applied using a modified retrospective approach. Upon adoption, we will record a right of use asset and corresponding liability for our operating leases.We continue to evaluate the effect that ASU 2016-02 will have on our financial position, results of operations and related disclosures. We are currently designing and implementing process changes and evaluating the information requirements necessary to properly account for ASU 2016-02.
Financial instruments -
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses - Measurement of Credit Losses on Financial Instruments,” which changes the way companies evaluate credit losses for most financial assets and certain other instruments. For trade and other receivables, short-term investments, loans and other instruments, entities will be required to use a new forward-looking “expected loss” model to evaluate impairment, potentially resulting in earlier recognition of allowances for losses. The new standard also requires enhanced disclosures, including the requirement to disclose the information used to track credit quality by year of origination for most financing receivables. ASU 2016-13 will be effective for us in the first quarter 2020. Early adoption of the new standard is permitted; however, we have not elected to early adopt the standard. The new standard is required to be applied using a cumulative-effect transition method. We are currently evaluating the effect that ASU 2016-13 will have on our financial position, results of operations and related disclosures.
NOTE 2 – ASSETS HELD FOR SALE
A summary of assets included in assets held for sale at
September 30, 2018
, is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Texas North Yard Assets
|
|
|
|
|
Assets
|
|
Assets Under Agreement For Sale
|
|
Remaining Assets
|
|
Shipyard Division Assets
|
|
Consolidated
|
Land
|
|
$
|
2,157
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,157
|
|
Buildings and improvements
|
|
31,798
|
|
|
189
|
|
|
—
|
|
|
31,987
|
|
Machinery and equipment
|
|
13,856
|
|
|
27,754
|
|
|
2,187
|
|
|
43,797
|
|
Less: accumulated depreciation
|
|
(24,176
|
)
|
|
(10,797
|
)
|
|
(298
|
)
|
|
(35,271
|
)
|
Total assets held for sale
|
|
$
|
23,635
|
|
|
$
|
17,146
|
|
|
$
|
1,889
|
|
|
$
|
42,670
|
|
South Texas Properties
Texas South Yard
- During the second quarter 2018, we completed the sale of our Texas South Yard for
$55.0 million
, less selling costs of
$1.5 million
, for total net proceeds during the nine-months ended September 30, 2018 of approximately
$53.5 million
and a gain of approximately
$3.9 million
, which is included within other income (expense), net on our Consolidated Statements of Operations.
Texas North Yard -
On September 26, 2018, we entered into an agreement to sell our Texas North Yard and certain associated equipment for
$28.0 million
.We received
$0.5 million
during the third quarter 2018 as a deposit on the property, which is refundable under certain circumstances, and has been recorded as a liability within accrued expenses and other liabilities on our Consolidated Balance Sheet at
September 30, 2018
. The sale is anticipated to close in the fourth quarter 2018 and is subject to customary closing conditions, including the purchaser’s right to conduct inspections of the property related to confirmation of title, surveys, environmental conditions, easements and access rights, and third-party consents. Based on the sales price and estimated closing and other costs, we expect to realize a gain on the transaction upon closing. We can provide no assurances that we will successfully close the transaction, that closing will occur under our expected timeline or that we will achieve our estimated net proceeds or a gain on the sale. We continue to actively market the remaining Texas North Yard assets held for sale, which primarily consist of
three
660-ton crawler cranes, a barge, a plate bending roll machine, and panel line equipment.
As a result of the agreement to sell our Texas North Yard, and the separation of such assets from the other remaining Texas North Yard Assets, we reevaluated the fair values of the assets under agreement for sale and the other remaining assets held for sale, giving consideration to previously recorded impairment amounts for such assets. Based on our assessment, we recaptured previously recorded impairments of the assets under agreement for sale and increased their carrying value. We also reduced the carrying value of the other remaining assets held for sale based upon our estimates of fair value using level 3 inputs, including broker estimates of fair value. Our assessment resulted in the recapture of approximately
$5.2 million
of previously recorded impairments on the assets under agreement for sale, with a similar amount of impairment on the remaining assets, with no net material change to the carrying value of the Texas North Yard assets held for sale.
During the first half of 2018, we recorded impairments of certain equipment that were classified as held for sale, resulting in a
$1.4 million
charge during the nine-months ended September 30, 2018, which is included within asset impairments on our Consolidated Statements of Operations. Our impairments were based upon our best estimate of the fair value of the related equipment. During the third quarter 2018, we sold assets that were classified as held for sale for proceeds of
$1.1 million
, which approximated their carrying values.
Hurricane Harvey Insurance Recoveries
- During the third quarter 2017, buildings and equipment located at our South Texas Properties were damaged by Hurricane Harvey. During the second quarter 2018, we agreed to a global settlement with our insurance carriers for total insurance recoveries of
$15.4 million
, resulting in a net gain on insurance recoveries of
$3.6 million
during the
nine months ended September 30, 2018
, which is included within other income (expense), net on our Consolidated Statements of Operations. As of September 30, 2018, all insurance proceeds had been received, including
$7.2 million
received during the third quarter 2018. In applying the settlement proceeds and determining our net gain for the nine months ended September 30, 2018, we allocated the claim amounts, less agreed upon deductibles, to the respective groups of assets and reimbursement of costs incurred as follows:
|
|
•
|
Insurance recoveries of
$8.9 million
, which offset impairments of damaged assets at our Texas North Yard, resulting in no net gain or loss. Our impairments were based upon our best estimate of the decline in the fair value of the property and related equipment.
|
|
|
•
|
Insurance recoveries of
$5.2 million
, which offset impairments of
two
buildings and
five
damaged cranes that were sold during the second quarter 2018, resulting in the aforementioned net gain on insurance recoveries of
$3.6 million
.
|
|
|
•
|
Insurance recoveries of
$1.3 million
, net of deductibles, which offset clean-up and repair related costs incurred directly related to the damage we incurred as a result of Hurricane Harvey.
|
Other -
We do not expect the sale of our South Texas Properties to impact our ability to operate our Fabrication Division. Further, the sale of our Texas South Yard and the Texas North Yard assets held for sale, do not qualify for discontinued operations presentation as we continue to operate our Fabrication Division at our Houma, Louisiana fabrication facility.
Shipyard Division Assets
Our Shipyard Division assets held for sale primarily consist of a
2,500
-ton drydock located at our Houma Shipyard. During the
nine months ended September 30, 2017
, we recorded impairments of
$0.4 million
for these assets based upon their estimated sales price. During the
nine months ended September 30, 2017
, we sold
two
drydocks for proceeds of
$2.0 million
and recorded a loss of
$0.3 million
. Our assets held for sale for the Shipyard Division do not qualify for discontinued operations presentation.
NOTE 3 – REVENUE RECOGNITION
Revenue for our fixed-price and unit-rate contracts is recognized using the percentage-of-completion method, computed by the significant inputs method, which measures the percentage of labor hours incurred to date as compared to estimated total labor hours for each contract. Direct materials and subcontract materials and services that represent an insignificant portion of the work to complete a contract or do not reflect an accurate measure of project completion are considered "pass-through costs." Revenue recognized in a period for a contract is the pro rata portion of the contract value (excluding pass-through costs), based upon the labor hour measure of progress, plus pass-through costs incurred during the period. Accordingly, pass-through costs are included in revenue and direct costs of revenue with no impact on gross profit recognized during the period.
Revenue for our T&M contracts is recognized at contracted rates when the work is performed, the costs are incurred and collection is reasonably assured. Our T&M contracts provide for labor and materials to be billed at rates specified within the contract. The consideration from the customer directly corresponds to the value of our performance completed at the time of invoicing. Accordingly, we have elected the “right to invoice” practical expedient under Topic 606 for the recognition of revenue for our T&M contracts. The practical expedient allows us to recognize revenue in the amount we have the right to invoice (at contracted rates when the work is performed and costs are incurred).
Revenue and gross profit for contracts can be significantly affected by variable consideration, which can be in the form of unapproved change orders, claims, incentives, penalties, and liquidated damages that may not be resolved until the later stages of the contract or after the contract has been completed and delivery occurs. We estimate variable consideration based on the most likely amount to which we expect to be entitled and include estimated amounts in the transaction price to the extent it is probable that a significant future reversal of cumulative revenue recognized will not occur or when we conclude that any significant uncertainty associated with the variable consideration is resolved. For the
three and nine months ended
September 30, 2018
and 2017, we had
no
material amounts in revenue related to unapproved change orders, claims, or incentives. However certain projects in our Shipyard Division reflect a reduction to our estimated contract price of
$11.7 million
for variable consideration related to liquidated damages. The reductions in contract price were recorded during the fourth quarter 2017.
Revenue and gross profit for contracts accounted for using the percentage-of-completion method can also be significantly affected by changes in estimated cost to complete such contracts. The cumulative impact of revisions in total cost estimates during the progress of work is reflected in the period in which these changes become known, including, to the extent required, the reversal of profit recognized in prior periods and the recognition of losses expected to be incurred on contracts. Due to the various estimates inherent in our contract accounting, actual results could differ from those estimates, which could result in material changes to our Consolidated Financial Statements and related disclosures.
Adoption of Topic 606
As discussed in Note 1, on January 1, 2018, we adopted ASU No. 2014-09, Topic 606 “Revenue from Contracts with Customers,” which supersedes the revenue recognition requirements in FASB ASC Topic 605, “Revenue Recognition.” Accordingly, the reported results for the
three and nine months ended
September 30, 2018
, reflect the application of Topic 606 guidance while the comparable reported results for 2017 were prepared under the guidance of Topic 605.
Topic 606 requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Our adoption of Topic 606 included a detailed review of our significant contracts that were not substantially complete as of January 1, 2018, to assess if revenue should be recognized "over time" (as the work is performed) or "at a point in time" (upon completion of the work). We determined that ownership and control of the work related to our fixed-price and unit-rate contracts transfer to our customers as the work progresses. Additionally, our customers retain the right and ability to change, modify or discontinue further fabrication or construction at any stage of the project. In the event our customers discontinue work, they are required to compensate us for the work performed to date.
Based on our review, we concluded that revenue recognition for our fixed-price and unit-rate contracts using the percentage-of-completion method, computed by measuring the percentage of labor hours incurred to date as compared to estimated total labor hours for each contract, is still appropriate as it most accurately reflects our primary profit generating activity and best represents our efforts to construct the asset for our customer. However, adoption of Topic 606 did require us to include subcontract labor and certain costs from outside services within our measure of progress and determination of our percentage-of-completion. We previously treated certain of these costs as pass-through costs and excluded such costs from our measure of progress. Our review also determined that Topic 606 did not impact the timing of revenue recognition for our T&M contracts. Based on the aforementioned, we concluded that the impact of the adoption of Topic 606 as of January 1, 2018, was immaterial to our Consolidated Financial Statements and no adjustment was required.
Topic 606 requires additional and enhanced disclosures related to the disaggregation of revenue and the anticipated timing and completion of remaining performance obligations, which are included below.
Disaggregation of Revenue -
The following tables summarize revenue for each of our operating segments, disaggregated by contract type and timing of revenue recognition, for the
three and nine months ended
September 30, 2018
and
2017
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2018
|
|
|
Fabrication
|
|
Shipyard
|
|
Services
|
|
EPC
|
|
Eliminations
|
|
Total
|
Contract Type
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-price and unit-rate
(1)
|
$
|
2,311
|
|
|
$
|
23,635
|
|
|
$
|
12,193
|
|
|
$
|
—
|
|
|
$
|
(779
|
)
|
|
$
|
37,360
|
|
T&M
(2)
|
—
|
|
|
857
|
|
|
10,424
|
|
|
—
|
|
|
—
|
|
|
11,281
|
|
Other
(3)
|
—
|
|
|
—
|
|
|
—
|
|
|
1,071
|
|
|
—
|
|
|
1,071
|
|
|
Total
|
$
|
2,311
|
|
|
$
|
24,492
|
|
|
$
|
22,617
|
|
|
$
|
1,071
|
|
|
$
|
(779
|
)
|
|
$
|
49,712
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2017
|
|
|
Fabrication
|
|
Shipyard
|
|
Services
|
|
EPC
|
|
Eliminations
|
|
Total
|
Contract Type
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-price and unit-rate
(1)
|
$
|
18,318
|
|
|
$
|
13,906
|
|
|
$
|
6,147
|
|
|
$
|
—
|
|
|
$
|
(1,159
|
)
|
|
$
|
37,212
|
|
T&M
(2)
|
—
|
|
|
1,168
|
|
|
11,504
|
|
|
—
|
|
|
—
|
|
|
12,672
|
|
Other
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total
|
$
|
18,318
|
|
|
$
|
15,074
|
|
|
$
|
17,651
|
|
|
$
|
—
|
|
|
$
|
(1,159
|
)
|
|
$
|
49,884
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2018
|
|
|
Fabrication
|
|
Shipyard
|
|
Services
|
|
EPC
|
|
Eliminations
|
|
Total
|
Contract Type
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-price and unit-rate
(1)
|
$
|
28,171
|
|
|
$
|
62,116
|
|
|
$
|
35,197
|
|
|
$
|
—
|
|
|
$
|
(2,550
|
)
|
|
$
|
122,934
|
|
T&M
(2)
|
—
|
|
|
4,561
|
|
|
31,495
|
|
|
—
|
|
|
—
|
|
|
36,056
|
|
Other
(3)
|
—
|
|
|
—
|
|
|
—
|
|
|
2,026
|
|
|
—
|
|
|
2,026
|
|
|
Total
|
$
|
28,171
|
|
|
$
|
66,677
|
|
|
$
|
66,692
|
|
|
$
|
2,026
|
|
|
$
|
(2,550
|
)
|
|
$
|
161,016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2017
|
|
|
Fabrication
|
|
Shipyard
|
|
Services
|
|
EPC
|
|
Eliminations
|
|
Total
|
Contract Type
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-price and unit-rate
(1)
|
$
|
42,517
|
|
|
$
|
47,632
|
|
|
$
|
20,969
|
|
|
$
|
—
|
|
|
$
|
(4,328
|
)
|
|
$
|
106,790
|
|
T&M
(2)
|
—
|
|
|
4,166
|
|
|
22,789
|
|
|
—
|
|
|
—
|
|
|
26,955
|
|
Other
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total
|
$
|
42,517
|
|
|
$
|
51,798
|
|
|
$
|
43,758
|
|
|
$
|
—
|
|
|
$
|
(4,328
|
)
|
|
$
|
133,745
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
____________
(1) Revenue is recognized as the contract is progressed over time.
(2) Revenue is recognized at contracted rates when the work is performed and costs are incurred.
(3) Revenue primarily represents early work authorized by SeaOne and is recognized as the contract is progressed over time.
Future Performance Obligations Required Under Contracts -
The following tables summarize the remaining revenue to be earned under performance obligations for the portion of contracts not yet completed as of
September 30, 2018
(in thousands).
|
|
|
|
|
Segment
|
Performance Obligations at September 30, 2018
|
Fabrication
|
$
|
44,746
|
|
Shipyard
(1)
|
282,912
|
|
Services
|
11,699
|
|
EPC
|
836
|
|
Intersegment eliminations
|
—
|
|
Total
|
$
|
340,193
|
|
|
|
_____________
(1) Amount excludes approximately
$30.1 million
in the aggregate of remaining performance obligations under dispute pursuant to a termination notice from our customer related to contracts for the construction of
two
MPSVs. See Note 8 for further discussion of these contracts.
We expect to recognize revenue for our remaining performance obligations in the following periods (in thousands):
|
|
|
|
|
|
Year
|
|
Total
|
Remainder of 2018
|
|
$
|
56,243
|
|
2019
|
|
199,922
|
|
2020
|
|
74,976
|
|
2021
|
|
8,405
|
|
2022
|
|
647
|
|
Total
|
|
$
|
340,193
|
|
|
|
|
Contracts Receivable and Retainage
Our customers include U.S. and, to a lesser extent, international energy producers, petrochemical, industrial, power, and marine operators, EPC companies and certain agencies of the U.S. government. Of our contracts receivable balance at
September 30, 2018
,
$18.4 million
was with
two
customers.
At
September 30, 2018
, we had an allowance for bad debt of
$3.7 million
within our contract receivable balance. During the
three months ended September 30, 2018
, we increased our allowance for bad debts by
$2.8 million
, which is included in general and administrative expenses on our Consolidated Statements of Operations and primarily relates to a customer within our Fabrication Division.
Contracts in Progress, Advance Billings on Contracts and Accrued Contract Losses
Revenue recognition and customer invoicing for our fixed-price and unit-rate contracts may occur at different times. Revenue recognition is based upon our estimated percentage-of-completion as discussed above; however, customer invoicing will generally depend upon predetermined billing terms which could provide for customer advance payments or invoicing based upon achievement of certain milestones or project progress. Revenue recognized in excess of amounts billed is reflected as contracts in progress on our Consolidated Balance Sheets. Amounts billed in excess of revenue recognized is reflected as advance billings on contracts on our Consolidated Balance Sheets. Contracts in progress totaled
$40.2 million
at
September 30, 2018
, with
$37.1 million
relating to
three
customers. Advance billings on contracts totaled
$14.9 million
at
September 30, 2018
, with
$11.2 million
relating to
one
customer. Accrued contract losses totaled
$6.0 million
and
$7.6 million
at
September 30, 2018
and
December 31, 2017
, respectively.
NOTE 4 – FAIR VALUE MEASUREMENTS
We make fair value determinations by applying the following hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:
|
|
•
|
Level 1 - inputs are based upon quoted prices for identical instruments traded in active markets;
|
|
|
•
|
Level 2 - inputs are based upon quoted prices for similar instruments in active markets and model-based valuation techniques for which all significant assumptions are observable in the market; and
|
|
|
•
|
Level 3 - inputs are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. These include discounted cash flow models and similar valuation techniques.
|
Recurring fair value measurements and financial instruments -
The carrying amounts reported for financial instruments, including cash and cash equivalents, short-term investments, contracts receivable and accounts payable, approximate their fair values.
Assets held for sale
- We measure and record assets held for sale at the lower of their carrying amount or fair value less costs to sell. The determination of fair value generally requires the use of significant judgments. See Note 2 for further discussion of our assets held for sale and their associated fair value measurements.
NOTE 5 – LOSS PER COMMON SHARE
The following table presents the computation of basic and diluted loss per share (in thousands, except for per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Basic and diluted
|
|
|
|
|
|
|
|
Net loss
|
$
|
(10,949
|
)
|
|
$
|
(3,110
|
)
|
|
$
|
(15,696
|
)
|
|
$
|
(20,488
|
)
|
Less: Distributed and undistributed loss (unvested restricted stock)
|
—
|
|
|
(14
|
)
|
|
—
|
|
|
(100
|
)
|
Net loss attributable to common shareholders
|
$
|
(10,949
|
)
|
|
$
|
(3,096
|
)
|
|
$
|
(15,696
|
)
|
|
$
|
(20,388
|
)
|
Weighted-average shares
(1)
|
15,044
|
|
|
14,852
|
|
|
15,017
|
|
|
14,821
|
|
Basic and diluted loss per common share
|
$
|
(0.73
|
)
|
|
$
|
(0.21
|
)
|
|
$
|
(1.05
|
)
|
|
$
|
(1.38
|
)
|
______________
(1) We have
no
dilutive securities.
NOTE 6 – LINE OF CREDIT
We have a
$40.0 million
Credit Agreement with Hancock Whitney Bank that can be used for borrowings or letters of credit. On August 27, 2018, we entered into a third amendment to our Credit Agreement, which extended its maturity date from June 9, 2019 to June 9, 2020, and reduced the base tangible net worth requirement from
$185.0 million
to
$180.0 million
. The third amendment also removed the inclusion of
50%
of Consolidated Net Income (as defined in the Credit Agreement) for each fiscal quarter and the inclusion of
50%
of the gain on the sale of our South Texas Properties from our minimum tangible net worth covenant. Accordingly, our amended quarterly financial covenants during the term of the Credit Agreement are as follows:
|
|
•
|
Ratio of current assets to current liabilities of not less than
1.25
:1.00;
|
|
|
•
|
Minimum tangible net worth of at least the sum of
$180.0 million
, plus
100%
of the proceeds from any issuance of stock or other equity after deducting any fees, commissions, expenses and other costs incurred in such offering; and
|
|
|
•
|
Ratio of funded debt to tangible net worth of not more than
0.50
:1.00.
|
Interest on borrowings under the Credit Agreement may be designated, at our option, as either the
Wall Street Journal
published Prime Rate or LIBOR plus
2.0%
per annum. Commitment fees on the unused portion of the Credit Agreement are
0.4%
per annum, and interest on outstanding letters of credit is
2.0%
per annum. The Credit Agreement is secured by substantially all our assets (other than the assets held for sale at our Texas North Yard).
At
September 30, 2018
, we had
no
outstanding borrowings under our Credit Agreement and
$2.5 million
of outstanding letters of credit, providing
$37.5 million
of available capacity. At
September 30, 2018
, we were in compliance with all of our financial covenants.
NOTE 7 - SEGMENT DISCLOSURES
We have structured our operations with
four
operating divisions, and
one
corporate non-operating division, which represent our reportable segments. As part of our efforts to strategically reposition the Company as discussed in Note 1, we may change how we manage the business which could result in changes to our reportable segments in future periods. Our reportable segments at
September 30, 2018
are discussed below.
Fabrication Division
-
Our Fabrication Division fabricates offshore drilling and production platforms and other steel structures for customers in the oil and gas industry including jackets and deck sections of fixed production platforms, hull, tendon, and/or deck sections of floating production platforms (such as TLPs, SPARs, FPSOs and MinDOCs), piles, wellhead protectors, subsea templates, and various production, compressor, and utility modules along with pressure vessels. Our Fabrication Division also fabricates structures for alternative energy customers (such as the
five
jackets and piles we constructed for the first offshore wind power project in the U.S.) as well as modules for petrochemical and industrial facilities. We perform these activities at our fabrication yard in Houma, Louisiana. As of
September 30, 2018
, our Texas North Yard is held for sale and our Texas South Yard had been sold. See Note 2 for further discussion of our South Texas Properties.
Shipyard Division -
Our Shipyard Division fabricates newbuild vessels and repairs various steel marine vessels including offshore supply vessels, anchor handling vessels and liftboats to support the construction and ongoing operation of offshore oil and gas production platforms, tug boats, towboats, barges, drydocks and other marine vessels. Our marine repair activities include steel repair, blasting and painting services, electrical systems repair, machinery and piping system repairs, and propeller, shaft, and rudder reconditioning. In addition, we perform conversion projects that consist of lengthening vessels, modifying vessels to permit their use for a different type of activity, and other modifications to enhance the capacity or functionality of a vessel. We perform these activities at our shipyards in Houma, Jennings and Lake Charles, Louisiana.
Services Division
-
Our Services Division provides interconnect piping and related services for offshore platforms and inland structures, which includes sending crews to offshore platforms in the GOM to perform welding and other activities required to connect production equipment, service modules and other equipment on a platform. We also contract with oil and gas companies that have platforms and other structures located in the inland lakes and bays throughout the southeastern U.S. for various on-site construction and maintenance activities. In addition, our Services Division fabricates packaged skid units and performs various civil and drainage projects, such as pump stations, levee reinforcement, bulkheads and other work for state and local governments. We perform these services at customer facilities or at our services yard in Houma, Louisiana.
EPC Division -
Our EPC Division was created during the fourth quarter 2017 to manage expected work we will perform for the SeaOne Project and other projects that may require EPC project management services. During the fourth quarter 2017, SeaOne selected us as the prime contractor for the engineering, procurement, construction, installation, commissioning and start-up operations for its SeaOne Project. This project will include execution of engineering, construction and installation of modules for an export facility in Gulfport, Mississippi, and import facilities in the Caribbean and South America. Our current activities include pricing, planning and scheduling for the project. SeaOne’s selection of the Company is non-binding and commencement of the project remains subject to a number of conditions, including agreement on terms of the engagement with SeaOne. We understand that SeaOne is in the process of securing financing for the project. We continue to enhance our internal project management capabilities through the hiring of additional personnel to service this potential project.
Corporate Division
-
Our Corporate Division represents expenses that do not directly relate to our
four
operating divisions and are not allocated to our operating divisions. Such expenses include, but are not limited to, costs related to executive management and directors' fees, clerical and administrative salaries, costs of maintaining our corporate office and costs associated with overall governance and being a publicly traded company.
We generally evaluate the performance of, and allocate resources to, our operating divisions based upon revenue, gross profit (loss) and operating income (loss). Division assets are comprised of all assets attributable to each division. Corporate administrative and overhead expenses directly related to our operating divisions, or costs related to shared services incurred by our Corporate Division on behalf of our operating divisions, are allocated to the
four
operating divisions. Shared services include human resources, insurance, business development, information technology and accounting. Intersegment revenue is priced at the estimated fair value of work performed.
Summarized financial information for each of our divisions for the
three and nine months ended
September 30, 2018
and
2017
, is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2018
|
|
Fabrication
|
Shipyard
|
Services
|
EPC
|
Corporate
|
Eliminations
|
Consolidated
|
Revenue
|
$
|
2,311
|
|
$
|
24,492
|
|
$
|
22,617
|
|
$
|
1,071
|
|
$
|
—
|
|
$
|
(779
|
)
|
$
|
49,712
|
|
Gross profit (loss)
|
(4,032
|
)
|
(1,764
|
)
|
3,191
|
|
(205
|
)
|
(402
|
)
|
—
|
|
(3,212
|
)
|
Operating income (loss)
|
(7,708
|
)
|
(2,460
|
)
|
2,486
|
|
(708
|
)
|
(2,494
|
)
|
—
|
|
(10,884
|
)
|
Total assets
(1)
|
100,115
|
|
92,839
|
|
37,201
|
|
2,217
|
|
30,585
|
|
—
|
|
262,957
|
|
Depreciation and amortization expense
|
1,023
|
|
1,050
|
|
365
|
|
—
|
|
36
|
|
—
|
|
2,474
|
|
Capital expenditures
|
—
|
|
783
|
|
545
|
|
142
|
|
1
|
|
—
|
|
1,471
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2017
|
|
Fabrication
|
Shipyard
|
Services
|
EPC
|
Corporate
|
Eliminations
|
Consolidated
|
Revenue
|
$
|
18,318
|
|
$
|
15,074
|
|
$
|
17,651
|
|
—
|
|
$
|
—
|
|
$
|
(1,159
|
)
|
$
|
49,884
|
|
Gross profit (loss)
|
1,250
|
|
(3,504
|
)
|
1,912
|
|
—
|
|
(152
|
)
|
—
|
|
(494
|
)
|
Operating income (loss)
|
472
|
|
(4,392
|
)
|
1,217
|
|
—
|
|
(2,161
|
)
|
—
|
|
(4,864
|
)
|
Total assets
(1)
|
164,677
|
|
96,614
|
|
33,024
|
|
—
|
|
9,065
|
|
—
|
|
303,380
|
|
Depreciation and amortization expense
|
1,133
|
|
1,030
|
|
413
|
|
—
|
|
95
|
|
—
|
|
2,671
|
|
Capital expenditures
|
1,479
|
|
1,054
|
|
94
|
|
—
|
|
25
|
|
—
|
|
2,652
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2018
|
|
Fabrication
|
Shipyard
|
Services
|
EPC
|
Corporate
|
Eliminations
|
Consolidated
|
Revenue
|
$
|
28,171
|
|
$
|
66,677
|
|
$
|
66,692
|
|
$
|
2,026
|
|
$
|
—
|
|
$
|
(2,550
|
)
|
$
|
161,016
|
|
Gross profit (loss)
|
(5,918
|
)
|
(5,563
|
)
|
9,390
|
|
30
|
|
(1,171
|
)
|
—
|
|
(3,232
|
)
|
Operating income (loss)
|
(12,529
|
)
|
(7,652
|
)
|
7,189
|
|
(1,375
|
)
|
(7,698
|
)
|
—
|
|
(22,065
|
)
|
Total assets
(1)
|
100,115
|
|
92,839
|
|
37,201
|
|
2,217
|
|
30,585
|
|
—
|
|
262,957
|
|
Depreciation and amortization expense
|
3,219
|
|
3,170
|
|
1,141
|
|
—
|
|
304
|
|
—
|
|
7,834
|
|
Capital expenditures
|
—
|
|
1,442
|
|
708
|
|
142
|
|
70
|
|
—
|
|
2,362
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2017
|
|
Fabrication
|
Shipyard
|
Services
|
EPC
|
Corporate
|
Eliminations
|
Consolidated
|
Revenue
|
$
|
42,517
|
|
$
|
51,798
|
|
$
|
43,758
|
|
$
|
—
|
|
$
|
—
|
|
$
|
(4,328
|
)
|
$
|
133,745
|
|
Gross profit (loss)
|
216
|
|
(19,061
|
)
|
2,335
|
|
—
|
|
(500
|
)
|
—
|
|
(17,010
|
)
|
Operating income (loss)
|
(2,216
|
)
|
(22,285
|
)
|
327
|
|
—
|
|
(6,165
|
)
|
—
|
|
(30,339
|
)
|
Total assets
(1)
|
164,677
|
|
96,614
|
|
33,024
|
|
—
|
|
9,065
|
|
—
|
|
303,380
|
|
Depreciation and amortization expense
|
5,420
|
|
3,034
|
|
1,266
|
|
—
|
|
421
|
|
—
|
|
10,141
|
|
Capital expenditures
|
2,327
|
|
1,872
|
|
199
|
|
—
|
|
117
|
|
—
|
|
4,515
|
|
_______________
(1) Intercompany balances have been excluded.
NOTE 8 – COMMITMENTS AND CONTINGENCIES
We are subject to various routine legal proceedings in the normal conduct of business, primarily involving commercial claims, workers’ compensation claims, and claims for personal injury under general maritime laws of the U.S. and the Jones Act. While the outcome of these lawsuits, legal proceedings and claims cannot be predicted with certainty, we believe that the outcome of any such proceedings, even if determined adversely, would not have a material adverse effect on our financial position, results of operations or cash flows.
MPSV Termination Letter
We received notices of termination of the contracts for the construction of
two
MPSVs from one of our Shipyard Division customers. We dispute the purported terminations and disagree with the customer’s reasons for such terminations. Pending the resolution of the dispute, we have ceased all work and the partially completed MPSVs and associated equipment and materials remain at our shipyard in Houma, Louisiana. The customer also notified our Surety of its purported terminations of the construction contracts and made claims under the bonds issued by the Surety in connection with the construction of the two MPSVs. We have notified and met with our Surety regarding our disagreement with, and objection to, the customer's purported termination and its claims. Discussions with the Surety are ongoing. On October 2, 2018, we filed a lawsuit against the customer to enforce our rights and remedies under the applicable construction contracts. Our lawsuit disputes the propriety of the customer’s purported termination
of the construction contracts and seeks to recover damages associated with the customer’s actions. We are unable to estimate the probability of a favorable or unfavorable outcome with respect to the dispute or estimate the amount of potential loss, if any, related to this matter. We can provide no assurances that we will not incur additional costs as we pursue our rights and remedies under the contracts. At
September 30, 2018
, our net balance sheet position for the contracts was
$12.5 million
.
Project Award Protest
During the first quarter 2018, we executed a contract for the construction and delivery of
one
towing, salvage and rescue ship vessel with the U.S. Navy for
$63.6 million
, with an option for
seven
additional vessels, which was subsequently protested by one of the unsuccessful bidders. On July 16, 2018, we were notified that the award was upheld by the U.S. Government Accountability Office and we were given a notification to proceed. On August 6, 2018, we were notified that the unsuccessful bidder had filed a subsequent protest with the Department of Justice. On August 9, 2018, we were granted a partial stay, which allows us to proceed with pre-construction design development, planning, scheduling and material ordering. Construction of the vessel cannot begin until a final ruling is issued by the U.S. Court of Federal Claims. We are working with the U.S. Navy to re-establish a timeline for construction under this contract.
NOTE 9 – SUBSEQUENT EVENTS
On October 2, 2018, we filed a lawsuit against a customer to enforce our rights and remedies under the applicable construction contracts for the construction of
two
MPSVs. See Note 8 for further discussion of our dispute and lawsuit.