UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

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

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

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

NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Gulf Island Fabrication, Inc. ("Gulf Island," and together with its subsidiaries "the Company," "we" or "our"), isWe are a leading fabricator of complex steel structures and marine vessels used in energy extraction and production, petrochemical and industrial facilities, power generation, alternative energy projects and shipping and marine transportation operations. We also provide related installation, hookup, commissioning, repair and maintenance services with specialized crews and integrated project management capabilities.capabilities for EPC projects. We are currently fabricatingrecently completed the fabrication of complex modules for the construction of a new petrochemical plant, and two multi-purpose service vessels.we are completing newbuild construction of a technologically-advanced OSV with scheduled delivery in the second quarter of 2018. We recently fabricated offshore wind turbine foundationspedestals for the first offshore wind power project in the United States. We also constructed one of the largest liftboats servicing the Gulf of Mexico ("GOM"),GOM, one of the deepest production jackets in the GOM and the first SPAR hull fabricated in the United States. Our customers include U.S. and, to a lesser extent, international energy producers, petrochemical, industrial, power and marine operators. We operate and manage our business through threefour operating divisions: Fabrication, ShipyardsShipyard, Services and Services.our recently formed EPC Division. Our corporate headquarters is located in Houston, Texas, with fabrication facilities located in Houma, Jennings and Lake Charles, Louisiana. Our fabrication facilitiesAs of the date of this Report, our Texas South Yard in Ingleside, Texas, has been sold and our Texas North Yard in Aransas Pass, and Ingleside, Texas, are currently beingis marketed for sale.

The consolidated financial statements include the accounts of Gulf Island Fabrication, Inc. and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

The balance sheet at December 31, 2016,2017, 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. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s 2017 Annual Report.

Given the ongoing challenging business environment in several of our core segments, our primary focus continues to be generating liquidity and securing meaningful backlog in the near-term and generating cash flows from operations in the longer-term. Beginning in 2015 and through the date of this Report, we have implemented a number of initiatives to strategically reposition the Company to attract new customers, participate in the buildup of petrochemical facilities, pursue offshore wind markets, enter the EPC industry and diversify our customers within our Shipyard Division. Additionally, we initiated efforts to rebuild liquidity, preserve cash and lower costs including reducing our workforce, reducing the compensation paid to our directors and the salaries of our executive officers as well as developing a plan to sell certain underutilized assets.

On April 20, 2018, we closed the sale of our Texas South Yard for a sales price of $55 million, less selling costs of $1.5 million. We received approximately $52.7 million at closing, which was in addition to the $750,000 of earnest money previously received on Form 10-KJanuary 3, 2018, related to the option to purchase the Texas South Yard. We plan to use the net proceeds to rebuild our liquidity, to support upcoming projects, continue investing in our newly created EPC Division and for other general corporate purposes. See further discussion of our the year endedsale of our Texas South Yard in Note 2. We currently believe that cash on hand coupled with proceeds received from the sale of our Texas South Yard and funds available under our Credit Agreement will enable the Company to meet its working capital needs, capital expenditure requirements, any debt service obligations and other funding requirements for at least twelve months from the date of this Report.

As of December 31, 2016.

We madecontinue to evaluate the following reclassifications to our financial statements forimpact of the Tax Cuts and Jobs Act of 2017. No revisions were recorded during the three and nine months ended September 30, 2016, to conform to current period presentation:

New Accounting Standards

On May 28, 2014, the Financial Accounting Standards Board ("FASB")FASB issued Accounting Standards Update ("ASU")ASU No. 2014-09, Topic 606 “Revenue from Contracts with Customers” ("Topic 606"), which supersedes the revenue recognition requirements in

We adopted Topic 606, as required, effective January 1, 2018. Our implementation included a detailed review of our significant contracts that were not substantially complete. We concluded that Topic 606 did not impact the timing of recognition of revenue from T&M contracts which is recognized as the work is performed and the costs are incurred. Topic 606 will be effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years.

In February 2016, the FASB issued ASU 2016-02, “Leases,” which requires lessees to record most leases on their balance sheetssheet but recognize expenses in a manner similar to current guidance. ASU 2016-02 will be effective for annual periods beginning after December 15, 2018. The guidance is required to be applied using a modified retrospective approach. We are currently evaluating the effect that ASU 2016-02 will have on our financial position, results of operations and related disclosures; however, we expect to record our lease obligations on our balance sheet.

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, held-to-maturity debt securities, 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 annual periods beginning after December 15, 2019. Early adoption is permitted for all entities for annual periods beginning after December 15, 2018. We have not elected to early adopt this guidance. The guidance must 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

South Texas Assets:Properties:

On February 23, 2017, our BoardWe measure and record assets held for sale at the lower of Directors approved management's recommendationtheir carrying amount or fair value less costs to place our South Texas facilities located in Aransas Pass and Ingleside, Texas, up for sale. Our Texas South Yard in Ingleside, Texas, is located on the northwest corner of the intersection of the U.S. Intracoastal Waterway and the Corpus Christi Ship Channel. The 45-foot deep Corpus Christi Ship Channel provides direct and unrestricted access to the Gulf of Mexico.sell. Our Texas North Yard in Aransas Pass, Texas, is located along the U.S. Intracoastal Waterway and is approximately three miles north of the Corpus Christi Ship Channel. These properties are currently underutilized and representThis property represents excess capacity within our Fabrication division. Our net book valueDivision.

On April 20, 2018, we closed the sale of property, plant and equipmentour Texas South Yard for these assets was $104.5a sale price of $55 million, less selling costs of $1.5 million. We received approximately $52.7 million at September 30, 2017.closing which was in addition to the $750,000 of earnest money previously received on January 3, 2018, related to the option to purchase the Texas South Yard. We measureplan to use the net proceeds to rebuild liquidity, to support upcoming projects, continue investing in our newly created EPC Division and recordfor other general corporate purposes. We expect to recognize a gain of approximately $3.8 million from the sale during the second quarter of 2018; however, we do not anticipate any material cash tax liability given our NOLs. Subsequent to March 31, 2018, and in connection with the sale, our cash increased approximately $52.7 million and our assets held for sale at the lower of their carrying amount or fair value less cost to sell.

As a result of the decision to placedate of this Report, our South Texas facilities upNorth Yard and machinery and equipment remains held for sale, wesale. We have and will continue to incur costs associated with maintaining these facilities.assets until their sale. These costs include insurance, general maintenance of the propertiesassets in their current state, property taxes and retained employees which will be expensed as incurred. We do not expect the sale of these assets to impact our ability to operate our Fabrication division.Division. Our South Texas assets held for saleProperties do not qualify for discontinued operations presentation.presentation as we continue to operate our Fabrication Division at other facilities.

Shipyard Division Assets:

Our remaining lease payments are not material. We have classified the machinery and equipment remaining at this shipyard asShipyard Division assets held for sale.sale at March 31, 2018, primarily consist of a 2,500-ton drydock located at our Houma Shipyard. During the first quarter of 2017, management placed the assets at our former Prospect Shipyard for sale, and we recorded an impairment of $389,000 related to those assets based upon their estimated sale price. During the second quarter of 2017, we sold two drydocks for proceeds of $2 million and recorded a loss on sale of $259,000. During the fourth quarter of 2017, we recorded an additional impairment of $600,000 as we terminated the former Prospect Shipyard lease. Our net book value of property, plant and equipment for these assets was $2.5$1.9 million at September 30, 2017. We measure and record assets held for sale at the lower of their carrying amount or fair value less cost to sell. We recorded an impairment of $389,000 during the nine months ended September 30, 2017. Additionally, we sold two drydocks from our

A summary of the significant assets included in assets held for sale as of September 30, 2017,March 31, 2018, at our South Texas facilitiesProperties and our Prospectthe Shipyard Division assets is as follows (in thousands):

NOTE 3 – REVENUE AND CONTRACT COSTSRECOGNITION

The Company uses the percentage-of-completion accounting method to recognize revenue from fixed-price and unit-rate contracts computed using the percentage of labor hours incurred as compared to estimated total labor hours to complete each contract. 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 hours incurred to the total labor hours estimated to complete the contract plus pass-through costs incurred during the period. We define

Materials and subcontractor services that represent an insignificant portion of the work to complete the project do not reflect an accurate measure of project completion are considered pass-through costs. Prior to the adoption of Topic 606, we defined pass-through costs as material, freight, equipment rental, and sub-contractor services thatwhen they are included innot significant to the direct costsprogress of revenue associated with projects. Consequently, pass-throughthe project. Pass-through costs are included in revenue but haveand direct costs of revenue with no impact on the gross profit realized for that particular period. Our pass-through costs as a percentage of revenue for each period presented were as follows:

Revenue and gross profit on contracts can be significantly affected by variable consideration, which can be in the form of unpriced change orders, claims, incentives, penalties, and claimsliquidating damages that may not be resolved until the later stages of the contract or after the contract has been completed and delivery occurs. At September 30,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 months ended March 31, 2018 and 2017, we included no amounts in revenue related to unpriced change orders, on projects which have been approved as to scope but not price. During the nine months ended September 30, 2016,claims, or incentives. As disclosed in our 2017 Annual Report, we recorded a lossreduction to our estimated contract price of $488,000 for a single customer$11.7 million of variable consideration related to revenueliquidating damages on change orders recognizedprojects in prior periods that were not recovered.our Shipyard Division.

NOTE 4 – CONTRACTS RECEIVABLE AND RETAINAGE

Our customers include major and large independent oil and gas companies, petrochemical and industrial facilities, marine companies and their contractors.contractors and agencies of the U.S. Government. Of our contracts receivable balance at September 30, 2017, $16.3March 31, 2018, $18.5 million, or 64.0%67.7%, was with three customers. The significant projects for these three customers consist of:

NOTE 5 – FAIR VALUE MEASUREMENTS

On August 25, 2017, ourOur South Texas facilities were impacted by Hurricane Harvey, which made landfall as a categoryCategory 4 hurricane. As a result,During the first quarter of 2018, we suffered damagesdetermined that we do not expect to our South Texasrepair the buildings and equipment. See Note 2. Based uponequipment at the Texas North Yard in conjunction with its planned sale. Accordingly, we impaired our initial assessment ofTexas North Yard by $5.1 million for damage and loss and recorded a corresponding insurance recovery offsetting the damages and insurance coverage, management believes that there is no basis to record a net loss at this time and that insurance proceeds will at a minimum be sufficient to reimburse us for all damages and repair costs.impairment.

During the nine months ended September 30, 2017, weWe recorded an impairment of $389,000$750,000 during the three months ended March 31, 2018, related to the assets held for salea piece of equipment at our Prospect shipyard. See Note 2.Texas North Yard that we intend to sell at auction. This piece of equipment was not damaged from Hurricane Harvey. The impairment was calculated as management's estimated net proceeds from the sale less its net book value.

NOTE 6 – EARNINGS PER SHARE AND SHAREHOLDERS' EQUITY

The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share data):

OnWe have a $40 million Credit Agreement maturing June 9, 2017, we entered into a $40.0 million credit agreement with Whitney Bank, as lender.2019. The credit facility matures June 9, 2019, and may be usedCredit Agreement allows the Company to use up to the full amount of the available borrowing base for issuing letters of credit and/orand general corporate andpurposes. We believe that our Credit Agreement, will provide us with additional working capital purposes.flexibility to expand operations as backlog improves, respond to market opportunities and support our ongoing operations. Interest on drawings under the credit facilityCredit Agreement may be designated, at our option, as either Base Rate (as defined in the credit facility)Credit Agreement) or LIBOR plus 2.0%2% per annum. Our outstanding balance of $10 million at March 31, 2018, is designated as a LIBOR rate loan. Unused commitment fees on the undrawn portion of the facilityCredit Agreement are 0.4% per annum, and interest on undrawn stated amounts under letters of credit issued by the lenderslender is 2.0%2% per annum. At March 31, 2018, the interest rate on our outstanding borrowings was 3.75% per annum. The credit facilityCredit Agreement is secured by substantially all of our assets (other than the assets of Gulf Marine Fabricators, L.P., the legal entity that holds our South Texas assetsProperties).

At March 31, 2018, $10 million was outstanding under the Credit Agreement and, we had letters of credit of $2.5 million outstanding leaving availability of $27.5 million. Subsequent to March 31, 2018, we re-issued a letter of credit for $3 million related to outstanding contractual obligations which are currently held for sale).we expect to remain outstanding until July of 2018.

We must comply with the following financial covenants each quarter during the term of the facility:Credit Agreement:

We have structured our operations with threefour operating divisions, including our newly formed EPC Division, and one corporate non-operating division. We believe that our operating divisions and a corporate non-operating division. Beginning in 2017, management reduced its allocation of corporate administrative costs and overhead expenses from itsour corporate non-operating division to its operating divisions in order to individually evaluate corporate administrative costs and overhead within our Corporate division as well as to not overly burden our operating divisions with costs that do not directly relate to their operations. Accordingly,each represent a significant portion of our corporate administrative costs and overhead expenses are retained within the results of our corporate division. In addition, we have also allocated certain personnel previously included in the operating divisions to our Corporate division. In doing so, management believes that it has created a fourth reportable segment with each of its three operating divisionsunder GAAP. Our newly formed EPC Division was created in December 2017 to manage expected work we will perform for the SeaOne Project and its Corporate division each meeting the criteria of reportable segments under GAAP.other projects that may require EPC project management services. Our operating divisions and Corporate divisionDivision are discussed below.

We generally evaluate the performance of, and allocate resources to, our segmentsdivisions based upon gross profit (loss) and operating income (loss). SegmentDivision assets are comprised of all assets attributable to each segment.division. Corporate administrative costs and overhead are allocated to our threefour operating divisions for expenses that directly relate to the operations or relate to shared services as discussed above. During 2016, we allocated substantially all of our corporate administrative costs and overhead to our three operating divisions. We have recast our 2016 segment data below in order to conform to the current period presentation. Intersegment revenues arerevenue is priced at the estimated fair value of work performed. Summarized financial information concerning our segmentsdivisions as of and for the three and nine months ended September 30,March 31, 2018, and 2017, and 2016, is as follows (in thousands):

We received a notice of purported termination from a customer within our Shipyard Division related to the construction of two MPSVs. We dispute the purported termination and disagree with the customer’s reasons for reorganization under a negotiated, pre-packaged plan.same. Pending resolution of the dispute, all work has been stopped and the vessels and associated equipment and material are in our care and custody at our shipyard in Houma, Louisiana. The customer has emerged from Chapter 11 Bankruptcynotified our Surety of its intent to require completion of the vessel under the Surety's

bond. We have notified and the Bankruptcy Court has approved the customer's retention and acceptance of both contracts. As of September 30, 2017, approximately $4.6 million remained due and outstanding from our customer for the first vessel. The balance due to us for the second vessel upon completion and delivery is approximately $4.9 million. We are working with legal counsel to protect our contractual claims, and we have re-initiated arbitration proceedings in accordancemet with our contracts. We are in the process of discovery. The customer has recently named a new interim chief executive officer who has made contactSurety regarding our disagreement with our management,customer's claims. The Company will continue to enforce its rights under the agreements and we are workingdefend any claims asserted against the Company by its customer. Management is unable to resolve our dispute inestimate the probability of a constructive manner. We believe that will be able to recover remaining amounts due to us.

On October 26, 2017,See Note 2 regarding the sale of our Board of Directors declared a dividend of $0.01 per shareTexas South Yard on our shares of common stock outstanding, payable November 24, 2017, to shareholders of record on November 10, 2017.April 20, 2018.

Cautionary Statement on Forward-Looking StatementsInformation

Statements under “Backlog,” “Results of Operations” and “Liquidity and Capital Resources” and otherThis Report contains forward-looking statements in this reportwhich we discuss our potential future performance, primarily in the sections entitled “Management’s Discussion and the exhibits hereto thatAnalysis of Financial Condition and Results of Operations.” Forward-looking statements are notall statements other than statements of historical factfacts, such as projections or expectations relating to oil and gas prices, operating cash flows, capital expenditures, liquidity and tax rates. The words “anticipates,” “may,” “can,” “plans,” “believes,” “estimates,” “expects,” “projects,” “targets,” “intends,” “likely,” “will,” “should,” “to be,” “potential” and any similar expressions are intended to identify those assertions as forward-looking statements. These

We caution readers that forward-looking statements are subject to certain risksnot guarantees of future performance and uncertainties that could cause actual results and outcomes tomay differ materially from the results and outcomes predictedthose anticipated, projected or assumed in such forward-looking statements. Investors are cautioned not to place undue reliance upon suchthe forward-looking statements. Important factors that maycan cause our actual results to differ materially from expectationsthose anticipated in the forward-looking statements include the cyclical nature of the oil and gas industry, changes in backlog estimates, suspension or projections include thosetermination of projects, timing and award of new contracts, financial ability and credit worthiness of our customers, consolidation of our customers, competitive pricing and cost overruns, entry into new lines of business, ability to raise additional capital, ability to sell certain assets, receipt of additional insurance proceeds, advancement on the SeaOne Project, ability to resolve disputes with a customer relating to the contracts to build MPSVs, ability to remain in compliance with our covenants contained in our Credit Agreement, ability to employ skilled workers, operating dangers and limits on insurance coverage, weather conditions, competition, customer disputes, adjustments to previously reported profits under the percentage-of-completion method, loss of key personnel, compliance with regulatory and environmental laws, ability to utilize navigation canals, performance of subcontractors, systems and information technology interruption or failure and data security breaches and other factors described in Item 1A. Risk Factors“Risk Factors” included in our 2017 Annual Report on Form 10-K foras may be updated by subsequent filings with the year ended December 31, 2016.SEC.

Executive Summary

We are a leading fabricator of complex steel structures and marine vessels used in energy extraction and production, petrochemical and industrial facilities, power generation and alternative energy projects and shipping and marine transportation operations. We also provide related installation, hookup, commissioning, repair and maintenance services with specialized crews and integrated project management capabilities. We are currently fabricatingrecently completed of the fabrication of complex modules for the construction of a new petrochemical plant, and two multi-purpose service vessels.we are completing newbuild construction of a technologically-advanced OSV with scheduled delivery in the second quarter of 2018. We recently fabricated offshore wind turbine foundationspedestals for the first offshore wind power project in the United States. We have also constructed one of the largest liftboats servicing the Gulf of Mexico ("GOM"),GOM, one of the deepest production jackets in the GOM and the first SPAR hull fabricated in the United States. Our customers include U.S. and, to a lesser extent, international energy producers, petrochemical, industrial, power and marine operators.operators and agencies of the United States Government. We operate and manage our business through four operating divisions: Fabrication, Shipyard, Services and our recently formed EPC Division. Our corporate headquarters is located in Houston, Texas, with fabrication facilities located in Houma, Jennings and Lake Charles, Louisiana. As of the date of this Report, our Texas South Yard in Ingleside, Texas has been sold and our Texas North Yard in Aransas Pass, Texas is marketed for sale.

Our industryGiven the ongoing challenging business environment in several of our core segments, our primary focus continues to be challengedgenerating liquidity and securing meaningful backlog in the near-term and generating cash flows from operations in the longer-term. Beginning in 2015 and through the date of this Report, we have implemented a number of initiatives to strategically reposition the Company to attract new customers, participate in the buildup of petrochemical facilities, pursue offshore wind markets, enter the EPC industry and diversify our customers within our Shipyard Division. Additionally, we initiated efforts to rebuild liquidity, preserve cash and lower costs including reducing our workforce, reducing the compensation paid to our directors and the salaries of our executive officers as lowwell as developing a plan to sell certain underutilized assets.

On April 20, 2018, we closed on the sale of our Texas South Yard for $55 million, less selling costs of $1.5 million. We received approximately $52.7 million at closing, which was in addition to the $750,000 of earnest money previously received on January 3, 2018, related to the option to purchase the Texas South Yard. We plan to use the net proceeds to rebuild our liquidity, to support upcoming projects, continue investing in our newly created EPC Division and for other general corporate purposes. See Note 2 of the Notes to Consolidated Financial Statements for further discussion of the sale of our Texas South Yard. We expect to record a gain on sale during the second quarter of 2018 related to this transaction of approximately $3.8 million. Completing the sale of the Texas South Yard is an important liquidity generating event and will facilitate the Company’s continued strategic repositioning from offshore oil and gas prices remain. Our customers in the global oil and gas industrymarkets.

We will continue to limit capital spending relative toincur costs associated with holding and maintaining our Texas North Yard. These costs include insurance, general maintenance of the already reduced spending levels from 2015property in its current state, property taxes and 2016. This has also negativelyretained employees which will be expensed as incurred.

On August 25, 2017, our South Texas Properties were impacted the marine and offshore service industries that support offshore exploration and productionby Hurricane Harvey, which has had an adverse effect on our overall backlog levels and created challenges with respect to our ability to operate our facilities at desired utilization levels.made landfall as a Category 4 hurricane. As a result, we suffered damages to buildings and equipment at our South Texas Properties. We maintain coverage on these assets up to a maximum of $25 million, subject to a 3% deductible with a minimum deductible of $500,000. Our estimate of the claim that we believe is recoverable through our property and casualty insurance is approximately $17.8 million; however, final settlement with our insurance carrier could be less and such difference could be material. We have experienced significant decreasesnot accrued for any insurance recovery at March 31, 2018, in revenue. Oil and gas producers are not expectedexcess of insurance claim payments received to increase drilling activitydate.

To date, our insurance underwriters have made advance insurance claim payments of $8.2 million in the near term.aggregate, including $2.2 million that was received during three months ended March 31, 2018. We have applied the $8.2 million received to date as follows:

As we work with our insurance agents and adjusters to finalize our estimate of the damage, it relatesis our belief that final settlement of our claim will most likely be based upon a global settlement. Our final assessment of the damages incurred to offshore investmentour South Texas Properties as well as the amount of insurance proceeds we actually receive could be less than our estimate of the claim above when it is ultimately settled and such differences could be material.

We recorded an impairment of $750,000 during the three months ended March 31, 2018, related project activityto a piece of equipment at our Texas North Yard that we intend to sell at auction. This piece of equipment was not damaged by Hurricane Harvey. The impairment was calculated as producers focusmanagement's estimated net proceeds from the sale less its net book value.

We currently believe that cash on land-basedhand and funds available under our Credit Agreement will be sufficient to meet our working capital and capital expenditure requirements, any future debt service and other funding requirements for at least 12 months from the date of this Report. Our view regarding sufficiency of cash and liquidity is primarily based on our financial forecast for 2018 and early 2019, which is impacted by various assumptions regarding the sale of our Texas North Yard, our existing backlog and a reasonable amount of forecasted, non-contractual backlog. There is no guarantee that our financial forecast will be attainable or that we will have sufficient cash, including funds available under our Credit Agreement, to meet planned operating expenses and other unforeseen cash needs.

If industry conditions for offshore oil and gas production through newly discovered shale finds.

to obtain significant future work in this sector. During the first quarter of 2018, we signed a contract for the fabrication of one Meteorological tower and platform for a customer's offshore wind project located off the U.S. coast of Maryland. This project is small; however, it represents our continued ability to provide structures for this emerging industry. There are currently 28 offshore wind projects in various planning stages. We may also partner with other companies to take advantage of growth in this area. We have a non-binding letter of intent with the EEW Group as necessary. As a resultit relates to their letter of intent with their customer for structures off the decision to market our South Texas facilities for sale and the underutilization currently being experienced,coast of Maryland. Along with this letter of intent, we expect to incur costs associated with maintaining the facility that will not be recoverable until such time as we are able to consummate one or more sales of these assets. These costs include insurance, general maintenance of the property in its current state, property taxes and retained employees which will be expensed as incurred. We have executed a letterteaming agreement with the EEW Group for future U.S. offshore wind projects. There is no guarantee that we will be successful in participating in any of interest withthese planned projects.

Shipyards customers. The future anticipated costs expected toLooking forward, our results of operations will be incurred prior to the termination of this lease are not significant to our consolidated financial statements.affected primarily by:

We continue to monitorrespond to the competitive forces within our industry and maintaincontinue to actively compete for additional bidding opportunities. We believe that we will be successful in obtaining new, additional backlog awards in 2018 and 2019; however, management believes that even if we are successful in obtaining these awards there is an expected lag of several months before these awards will materialize. While we have been successful in obtaining new backlog in recent months, primarily in our Shipyard and Services Divisions, these backlog awards were received during a conservative capital structure asperiod of competitive pricing with lower than desired margins. Additionally, revenue from these awards will not be realized until later in 2018 and beyond.

We operate in an environment that exposes our employees to risk of injury, and we navigate through the current oilare committed to safety. We believe safety is a key metric for our success. Poor safety performance increases our costs, results in construction delays and gas industry downturnlimits our ability to compete for project awards within our market. Safety performance measures are incorporated into our annual incentive compensation measures for our executives and as we further transition our focus on securing future work outside of the offshore upstream oil and gas sector.senior management.

Critical Accounting Policies and Estimates

For a discussion of critical accounting policies and estimates we use in the preparation of our Consolidated Financial Statements, refer to  Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our 2017 Annual Report on Form 10-K for the year ended December 31, 2016.Report. There have been no changes in our evaluation of our critical accounting policies since December 31, 2016.2017.

Backlog

Our backlog at September 30, 2017, andMarch 31, 2018, as compared to December 31, 2016,2017, consisted of the following (in thousands, except for percentages):