| Year | |
Contracts in Progress and Advance Billings on Contracts
Revenue recognition and customer invoicing may occur at different times. Revenue recognition is based upon our calculation of percent of work complete; however, customer invoicing will generally depend upon a predetermined billing schedule as stated in the contract which could allow for customer advance payments or invoicing based upon achievement of certain milestones. Revenue earned but not yet invoiced is reflected as contracts in progress and included in current assets on our consolidated balance sheet. Billings made to our customers in advance of revenue being earned are reflected as advance billings on contracts and included in current liabilities on our balance sheet. Contracts in progress at March 31,June 30, 2018, totaled $37.5$36.5 million with $27$31.1 million relating to twothree major customers. Advance billings on contracts at March 31,June 30, 2018, was $4.3$4.2 million and included advances of $2.8$3.5 million from threefive major customers. Accrued contract losses were $6.3$6.0 million and $7.6 million as of March 31,June 30, 2018, and December 31, 2017, respectively.
NOTE 4 – CONTRACTS RECEIVABLE AND RETAINAGE Our customers includeinclude: (1) major and large independent oil and gas companies, (2) petrochemical and industrial facilities, (3) marine companies and their contractors and (4) agencies of the U.S. Government. Of our contracts receivable balance at March 31,June 30, 2018, $18.5$12.3 million, or 67.7%38.4%, was with three customers.one customer. The significant projects for these three customersthis one customer consist of: The fabrication of four modules for a customer within our Fabrication Division associated with a U.S. ethane cracker project (completed in April 2018);
Offshoreoffshore services related to repair, installation and hook-up work for a customer within our Services Division; and
Inshore service repair and installation work for a customer within our Services Division.
As of March 31,June 30, 2018, we included an allowance for bad debt of $2$0.9 million in our contract receivable balance which primarily relates to a customer within our Fabrication Division for the storage of an offshore drilling platform that was fully reserved in 2016. NOTE 5 – FAIR VALUE MEASUREMENTS The Company makes 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 that we have reported for financial instruments, including cash and cash equivalents, held-to-maturity, short-term investments, accounts receivables and accounts payables, 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 judgment. We have classified our assets at our South Texas PropertiesNorth Yard and a drydock within our Shipyard Division assets that were at our former Prospect Shipyard as assets held for sale at March 31,June 30, 2018. See Note 2 for further disclosure relating to our assets held for sale. During the three months ended March 31, 2017, we recorded an impairment of $389,000 related to the Shipyard Division assets held for sale.
Our South Texas facilities were impacted by Hurricane Harvey, which made landfall asOn June 28, 2018, we agreed to a Category 4 hurricane.global settlement with our insurance carriers in the amount of $15.4 million. In applying the settlement amounts, we allocated the claim amounts less agreed upon deductibles included in our settlement agreement to the respective groups of assets and reimbursement of costs incurred related to our storm preparation and clean-up. During the first quarter of 2018, management determined its intention was to sell the remaining Texas North Yard and related equipment and not to expend any of the insurance funds for repairs. As of June 30, 2018, we determined that we do not expect to repairreviewed the remaining buildings and equipment at the Texas North Yard, in conjunction with its planned sale. Accordingly,and we impaired our Texas North Yard in total by $8.9 million, $5.1 million for damage and loss andof which was previously recorded a corresponding insurance recovery offsetting the impairment.
We recorded an impairment of $750,000 during the three months ended March 31, 2018, based upon our best estimate of the decline in the fair value of the property and related equipment. We recorded a corresponding insurance recovery fully offsetting this amount. See further discussion of the application of our Hurricane Harvey insurance recoveries in Note 2.
During the second quarter of 2018, we recorded an impairment of $0.6 million related to a piece of equipment that we sold during the third quarter of 2018. During the three months ended March 31, 2018, we recorded an impairment of $0.8 million related to a piece of equipment at our Texas North Yard that we intend to sell at auction. This piece of equipment was not damaged from Hurricane Harvey. The impairment wasimpairments were calculated as management's estimated net proceeds from the salesales less itstheir net book value.values. During the six months ended June 30, 2017, we recorded an impairment of $0.4 related to the Shipyard Division assets held for sale. Our impairments represent level 3 fair value measurements.
NOTE 6 – EARNINGS PER SHARE AND SHAREHOLDERS' EQUITY Earnings per Share: The following table sets forth the computation of basic and diluted earningsloss per share (in thousands, except per share data): | | | | Three Months Ended March 31, | Three Months Ended June 30, | | Six Months Ended June 30, | | | 2018 | | 2017 | 2018 | | 2017 | | 2018 | | 2017 | | Basic and diluted: | | | | | | | | | | | | Numerator: | | | | | | | | | | | | Net loss | $ | (5,296 | ) | | $ | (6,454 | ) | | | Net income (loss) | | $ | 549 |
| | $ | (10,923 | ) | | $ | (4,747 | ) | | $ | (17,378 | ) | | Less: Distributed and undistributed loss (unvested restricted stock) | — |
| | (34 | ) | — |
| | (53 | ) | | — |
| | (87 | ) | | Net loss attributable to common shareholders | $ | (5,296 | ) | | $ | (6,420 | ) | | | Net income (loss) attributable to common shareholders | | $ | 549 |
| | $ | (10,870 | ) | | $ | (4,747 | ) | | $ | (17,291 | ) | | Denominator: | | | | | | | | | | | Weighted-average shares (1) | 14,964 |
| | 14,758 |
| 15,043 |
| | 14,851 |
| | 15,004 |
| | 14,805 |
| | Basic and diluted loss per share - common shareholders | $ | (0.35 | ) | | $ | (0.44 | ) | | | Basic and diluted income (loss per share - common shareholders | | $ | 0.04 |
| | $ | (0.73 | ) | | $ | (0.32 | ) | | $ | (1.17 | ) |
______________ (1) We have no dilutive securities.
NOTE 7 – LINE OF CREDIT We have a $40$40.0 million Credit Agreement maturing June 9, 2019. The Credit Agreement allows the Company to use up to the full amount of the available borrowing base for letters of credit and general corporate purposes. We believe that our Credit Agreement, will provide us with additional working capital flexibility to expand operations as backlog improves, respond to market opportunities and support our ongoing operations. Interest on drawings under the Credit Agreement may be designated, at our option, as either Base Rate (as defined in the Credit Agreement) or LIBOR plus 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 Credit Agreement are 0.4% per annum, and interest on undrawn stated amounts under letters of credit issued by the lender is 2% per annum. At March 31, 2018, the interest rate on our outstanding borrowings was 3.75% per annum. The Credit Agreement is secured by substantially all of our assets (other than the remaining assets held for sale at our South Texas Properties).
At March 31,June 30, 2018, $10 million waswe had no amount outstanding under theour Credit Agreement, and we had outstanding letters of credit of $2.5$5.5 million outstanding leaving availability of $27.5$34.5 million. Subsequent to March 31, 2018, we re-issued a letter of credit for $3 million related to outstanding contractual obligations which we expect to remain outstanding until July of 2018.
We must comply with the following financial covenants each quarter during the term of the Credit Agreement:
| | | i. | Ratio of current assets to current liabilities of not less than 1.25:1.00; |
| | | ii. | Minimum tangible net worth requirement of at least the sum of: |
| | | a) | $185185.0 million, plus |
| | | b) | An amount equal to 50% of consolidated net income for each fiscal quarter ending after June 30, 2017, including 50% of any gain attributable to the sale of all or substantially all of our South Texas Properties (with no deduction for a net loss in any such fiscal quarter), plus |
| | | c) | 100% of the proceeds of any issuance of any stock or other equity after deducting of any fees, commissions, expenses and other costs incurred in such offering; and |
| | | iii. | Ratio of funded debt to tangible net worth of not more than 0.50:1.00. |
As of March 31,June 30, 2018, we were in compliance with all of our financial covenants.
NOTE 8 - SEGMENT DISCLOSURES
We have structured our operations with four operating divisions, including our newly formed EPC Division, and one corporate non-operating division. We believe that our operating divisions and our corporate non-operating division each represent a reportable segment under GAAP. Our newly formed EPC Division was created in December 2017 to manage expected work we will perform for the SeaOne Project and other projects that may require EPC project management services. As part of our efforts to strategically reposition the Company (see Note 1), we may change how we manage the business which could result in a change in our reporting segments in future periods. Our operating divisions and Corporate Divisioncorporate non-operating division at June 30, 2018 are discussed below.
Fabrication Division - Our Fabrication Division primarily fabricates structures such as 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 United States during 2015)States) as well as modules for petrochemical facilities. We perform these activities out of our fabrication yards in Houma, Louisiana. As of the date of this Report, our Texas South Yard has been sold and our Texas North Yard is marketedheld for sale. See Note 2 for further disclosure relating to our South Texas Properties.
Shipyard Division - Our Shipyard Division primarily manufactures newbuild vessels and repairs various steel marine vessels in the United States 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 primarily provides interconnect piping services on offshore platforms and inshore structures. Interconnect piping services involve sending employee 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 United States for various on-site construction and maintenance activities. In addition, our Services Division fabricates packaged skid units and performs various municipal and drainage projects, such as pump stations, levee reinforcement, bulkheads and other public works projects for state and local governments. We perform these services at customer facilities or at our Houma Services Yard.
EPC Division - Late in the fourth quarter of 2017, SeaOne selected us as the prime contractor for the engineering, procurement, construction, installation, commissioning and start-up operations for their 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. SeaOne’s selection of the Company is non-binding and commencement of the project remains subject to a number
of conditions, including agreement on the terms of the engagement with SeaOne. We have created our EPC Division to manage this project and future similar projects. We understand that SeaOne is in the process of securing financing to move forward with its project. We are hopeful that the SeaOne Project will initiate planning and start-upinitial construction efforts mid-2018 with construction to start in early 2019. We are strengthening our internal project management capabilities through the hiring of additional personnel to service this potential project.
Corporate Division - Our Corporate Division primarily includes expenses that do not directly relate to the operations or shared services provided to our four operating divisions. Expenses for shared services such as human resources, insurance, business development and accounting salaries are allocated to the operating divisions. Expenses that are not allocated include, but are not limited to, costs related to executive management and directors' fees, clerical and administrative salaries, costs of maintaining the 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 divisions based upon gross profit (loss) and operating income (loss). Division assets are comprised of all assets attributable to each division. Corporate administrative costs and overhead are allocated to our four operating divisions for expenses that directly relate to the operations or relate to shared services as discussed above. Intersegment revenue is priced at the estimated fair value of work performed. Summarized financial information concerning our divisions as of and for the three and six months ended March 31,June 30, 2018, and 2017, is as follows (in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | Three Months Ended March 31, 2018 | | | Fabrication | Shipyard | Services | EPC | Corporate | Eliminations | Consolidated | | Revenue | $ | 17,270 |
| $ | 18,565 |
| $ | 21,870 |
| $ | 73 |
| $ | — |
| $ | (488 | ) | $ | 57,290 |
| | Gross profit (loss) | (219 | ) | (1,023 | ) | 2,614 |
| (308 | ) | (385 | ) | — |
| 679 |
| | Operating income (loss) | (1,593 | ) | (1,819 | ) | 1,880 |
| (725 | ) | (2,523 | ) | — |
| (4,780 | ) | | Total assets | 184,263 |
| 76,150 |
| 105,632 |
| 12 |
| 318,137 |
| (415,072 | ) | 269,122 |
| | Depreciation and amortization expense | 1,149 |
| 1,069 |
| 393 |
| — |
| 138 |
| — |
| 2,749 |
| | Capital expenditures | — |
| 6 |
| 65 |
| — |
| — |
| — |
| 71 |
| | | | | | | | | |
| | | | Three Months Ended March 31, 2017 | Three Months Ended June 30, 2018 | | | Fabrication | Shipyard | Services | EPC | Corporate | Eliminations | Consolidated | Fabrication | Shipyard | Services | EPC | Corporate | Eliminations | Consolidated | | Revenue | $ | 10,209 |
| $ | 18,422 |
| $ | 10,712 |
| — |
| $ | — |
| $ | (1,350 | ) | $ | 37,993 |
| $ | 8,590 |
| $ | 23,620 |
| $ | 22,205 |
| $ | 882 |
| $ | — |
| $ | (1,283 | ) | $ | 54,014 |
| | Gross profit (loss) | (2,966 | ) | (1,704 | ) | 33 |
| — |
| (260 | ) | — |
| (4,897 | ) | (1,667 | ) | (2,776 | ) | 3,585 |
| 543 |
| (384 | ) | — |
| (699 | ) | | Operating income (loss) | (3,787 | ) | (3,057 | ) | (633 | ) | — |
| (1,739 | ) | — |
| (9,216 | ) | (3,227 | ) | (3,374 | ) | 2,823 |
| 58 |
| (2,681 | ) | — |
| (6,401 | ) | Total assets | 197,834 |
| 88,489 |
| 95,562 |
| — |
| 349,917 |
| (427,142 | ) | 304,660 |
| 101,498 |
| 88,305 |
| 35,197 |
| 888 |
| 30,801 |
| — |
| 256,689 |
| | Depreciation and amortization expense | 3,135 |
| 1,009 |
| 432 |
| — |
| 124 |
| — |
| 4,700 |
| 1,047 |
| 1,051 |
| 383 |
| — |
| 130 |
| — |
| 2,611 |
| | Capital expenditures | 102 |
| 272 |
| — |
| — |
| 17 |
| — |
| 391 |
| — |
| 653 |
| 98 |
| — |
| 69 |
| — |
| 820 |
| | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | Three Months Ended June 30, 2017 | | | Fabrication | Shipyard | Services | EPC | Corporate | Eliminations | Consolidated | | Revenue | $ | 13,990 |
| $ | 18,303 |
| $ | 15,396 |
| — |
| $ | — |
| $ | (1,821 | ) | $ | 45,868 |
| | Gross profit (loss) | 1,931 |
| (13,851 | ) | 390 |
| — |
| (90 | ) | — |
| (11,620 | ) | | Operating income (loss) | 1,098 |
| (14,834 | ) | (257 | ) | — |
| (2,267 | ) | — |
| (16,260 | ) | Total assets (1) | 164,211 |
| 98,393 |
| 30,592 |
| — |
| 14,390 |
| — |
| 307,586 |
| | Depreciation and amortization expense | 1,152 |
| 995 |
| 422 |
| — |
| 207 |
| — |
| 2,776 |
| | Capital expenditures | 746 |
| 546 |
| 106 |
| — |
| 35 |
| — |
| 1,433 |
| | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | Six Months Ended June 30, 2018 | | | Fabrication | Shipyard | Services | EPC | Corporate | Eliminations | Consolidated | | Revenue | $ | 25,860 |
| $ | 42,185 |
| $ | 44,075 |
| $ | 955 |
| $ | — |
| $ | (1,771 | ) | $ | 111,304 |
| | Gross profit (loss) | (1,886 | ) | (3,799 | ) | 6,199 |
| 235 |
| (769 | ) | — |
| (20 | ) | | Operating income (loss) | (4,821 | ) | (5,192 | ) | 4,703 |
| (667 | ) | (5,204 | ) | — |
| (11,181 | ) | Total assets (1) | 101,498 |
| 88,305 |
| 35,197 |
| 888 |
| 30,801 |
| — |
| 256,689 |
| | Depreciation and amortization expense | 2,196 |
| 2,120 |
| 776 |
| — |
| 268 |
| — |
| 5,360 |
| | Capital expenditures | — |
| 659 |
| 163 |
| — |
| 69 |
| — |
| 891 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | Six Months Ended June 30, 2017 | | | Fabrication | Shipyard | Services | EPC | Corporate | Eliminations | Consolidated | | Revenue | $ | 24,199 |
| $ | 36,724 |
| $ | 26,107 |
| $ | — |
| $ | — |
| $ | (3,170 | ) | $ | 83,860 |
| | Gross profit (loss) | (1,034 | ) | (15,556 | ) | 423 |
| — |
| (351 | ) | — |
| (16,518 | ) | | Operating loss | (2,688 | ) | (17,892 | ) | (890 | ) | — |
| (4,007 | ) | — |
| (25,477 | ) | Total assets (1) | 164,211 |
| 98,393 |
| 30,592 |
| — |
| 14,390 |
| — |
| 307,586 |
| | Depreciation and amortization expense | 4,287 |
| 2,004 |
| 854 |
| — |
| 331 |
| — |
| 7,476 |
| | Capital expenditures | 848 |
| 818 |
| 106 |
| — |
| 52 |
| — |
| 1,824 |
|
_______________ 1) Intercompany balances have been excluded.
NOTE 9 – COMMITMENTS AND CONTINGENCIES
The Company is subject to various routine legal proceedings in the normal conduct of its business, primarily involving commercial claims, workers’ compensation claims, and claims for personal injury under general maritime laws of the United States and the Jones Act. While the outcome of these lawsuits, legal proceedings and claims cannot be predicted with certainty, management believes that the outcome of any such proceedings, even if determined adversely, would not have a material adverse effect on the financial position, results of operations or cash flows of the Company.
MPSV Termination Letter
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 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 notified our Surety of its intent to require completion of the vessel under the Surety's
bond. We have notified and met with our Surety regarding our disagreement with our customer's claims. Discussion with the Surety are ongoing. The Company will continue to enforce its rights under the agreements and defend any claims asserted against the Company by its customer. Management is unable to estimate the probability of a favorable or unfavorable outcome aas well as an estimate of potential loss, if any, at this time. We cannot guarantee that we will not incur additional costs as we negotiate with this customer. At March 31,June 30, 2018, our net balance sheet exposure was $12$12.4 million.
NOTE 10 – SUBSEQUENT EVENTS
See Note 2 regardingDuring the salefirst quarter of our Texas South Yard on April 20, 2018.2018, we executed a contract for the construction and delivery of one towing, salvage and rescue ship ("T-ATS") 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 thus given a notification to proceed. We were recently notified that this unsuccessful bidder has filed a subsequent protest with the Department of Justice. We have been granted a partial stay which allows us to proceed with design development, planning, scheduling and material ordering leading up to the start of construction. Actual construction of the vessel cannot begin until a final ruling is issued by the Department of Justice. We are in process of working with the U.S. Navy to re-establish a timeline under this contract.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Cautionary Statement on Forward-Looking Information This Report contains forward-looking statements in which we discuss our potential future performance, primarily in the sectionssection entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Forward-looking statements are all statements other than statements of historical facts, 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. We caution readers that forward-looking statements are not guarantees of future performance and actual results may differ materially from those anticipated, projected or assumed in the forward-looking statements. Important factors that can cause our actual results to differ materially from those anticipated in the forward-looking statements include the cyclical nature of the oil and gas industry, changes in backlog estimates, suspension or termination 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 disputesdispute with a customer relating to the purported termination of contracts to build MPSVs, ability to remain in compliance with our covenants contained in our Credit Agreement,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” included in our 2017 Annual Report as may be updated by subsequent filings with the SEC. Investors are cautioned that many of the assumptions upon which our forward-looking statements are based are likely to change after the forward-looking statements are made, which we cannot control. Further, we may make changes to our business plans that could affect our results. We caution investors that we do not intend to update forward-looking statements more frequently than quarterly notwithstanding any changes in our assumptions, changes in business plans, actual experience or other changes, and we undertake no obligation to update any forward-looking statements.
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 recently completed of the fabrication of complex modules for the construction of a new petrochemical plant, and we are completing newbuild construction of a technologically-advanced OSV with scheduled delivery in the second quarter of 2018. We fabricated wind turbine pedestals for the first offshore wind power project in the United States. We have also constructed 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 United States. Our customers include U.S. and, to a lesser extent, international energy producers, petrochemical, industrial, power and marine 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.EPC. 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, we have sold our Texas South Yard, in Ingleside, Texas has been sold and our Texas North Yard in Aransas Pass, Texas is marketedheld for sale.
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 and, reducing the cash compensation paid to our directors and the salaries of our executive officers as well as developing a plan to sell certain underutilized assets.
Sales of Assets
In early 2017, we announced our plan to rationalize underutilized assets including the two fabrication yards and related equipment located at our South Texas Properties.
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$0.8 million of earnest money previously received on January 3, 2018, related to the option to purchase the Texas South Yard. We plan to use theearnest money. The net proceeds to rebuildreceived rebuilt our liquidity, toprovided support for upcoming projects, continue investingcontinued investment 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 recordrecognized a gain on sale during the second quarter of 2018 related to this transaction of approximately $3.8$3.9 million. Completing the sale of the Texas South Yard iswas an important liquidity generating event and will facilitate the Company’s continued strategic repositioning from offshore oil and gas markets.
markets to a more diversified customer base. We will continue to incur costs associated with holding and maintaining our Texas North Yard. These costs include insurance, general maintenance of the property in its current state, property taxes and retained employees which will be expensed as incurred.
Hurricane Harvey and Insurance Recoveries
On August 25, 2017, our South Texas Properties were impacted by Hurricane Harvey, which 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 not accrued for any insurance recovery at March 31, 2018, in excess of insurance claim payments received to date.
To date, our insurance underwriters have made advance insurance claim payments of $8.2 million in the 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:
Clean-up and repair related costs of $1.6 million that we have incurred since August 25, 2017, through March 31, 2018;
A building at our Texas South Yard and a building atmarket our Texas North Yard were determinedand hope to be total losses. Ashave a result, we impairednegotiated contract for the remaining net book valuesale of $1.5 million related to these buildings and recorded a corresponding insurance recovery offsettingour Texas North Yard in the impairment during the fourth quarter of 2017; andnear future.
During the firstsecond quarter of 2018, we determined that we do not expect to repair the damaged buildings and equipment at the Texas North Yard. Accordingly, we impaired our Texas North Yard by $5.1 million, which represents our best estimate of the decline in the fair value of the property and equipment as a result of our decision to not repair the facility and recorded a corresponding insurance recovery offsetting the impairment.
As we work with our insurance agents and adjusters to finalize our estimate of the damage, it is 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 our 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$0.6 million primarily related to a piece of equipment that we sold in July 2018. During the three months ended March 31, 2018, we recorded an impairment of $0.8 million related to 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 wasimpairments were calculated as management's estimated net proceeds from the salesales less itstheir net book value.values.
Based Hurricane Harvey and Insurance Recoveries
On August 25, 2017, buildings and equipment located at our South Texas Properties were damaged by Hurricane Harvey, which made landfall as a Category 4 hurricane. On June 28, 2018, we agreed to a global settlement with our insurance carriers in the amount of $15.4 million. As of June 30, 2018, we had received payments totaling $8.2 million and the remaining $7.2 million has been recorded as an insurance receivable on our Consolidated Balance Sheet as of June 30, 2018, which represents a non-cash change within our Consolidated Statement of Cash Flows related to our insurance receivable. As of the date of this Report, we have received payment for the full settlement amount.
In applying the settlement, we allocated the claim amounts less agreed upon deductibles to the respective groups of assets and reimbursement of costs incurred included in our settlement agreement as follows:
Clean-up and repair related costs of $1.6 million, less deductibles applied of approximately $0.3 million that we have incurred since August 25, 2017 through June 30, 2018. A gain on insurance recoveries of $3.6 million included within other income (expense) on our Consolidated Statement of Operations that was recorded during the second quarter of 2018 primarily related to two buildings that were declared a total loss and five damaged cranes that were sold during the second quarter of 2018. Insurance recoveries of $8.9 million which offset impairment of damaged assets at the Texas North Yard. Because we do not intend to repair the remaining buildings, improvements and related equipment, we recorded impairment of $8.9 million, $5.1 million of which was recorded during the three months ended March 31, 2018. Our impairment was based
upon our initial assessmentbest estimate of the damages and insurance coverage anddecline in the fair value of the assets held for sale. Management believes that there is no basis to record additional impairment atproperty and related equipment. The insurance recovery fully offset this time.
Preservation of Cash
We will continue to monitor and preserve our cash. At March 31, 2018, we had $6.5 million in cash, debt of $10 million and working capital of $137.1 million which includes $98.4 million in assets held for sale, primarily related to our South Texas Properties. As of May 4, 2018, our liquidity has significantly improved due to the sale of our Texas South Yard, the proceeds of which will be used to rebuild our liquidity, to support upcoming projects, continue investing in our newly created EPC Division and for other general corporate purposes. After the sale of our Texas South Yard, our cash balance was $55 million, and the amount outstanding under our Credit Agreement was $10 million with remaining availability under our Credit Agreement of approximately $27.5 million for total liquidity of approximately $82.5 million. Our primary liquidity requirements for 2018 and beyond are for costs associated with fabrication and shipyard projects, capital expenditures related to our EPC Division and enhancements to our shipyards.
We currently believe that cash on hand 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 do not improve, or we are unable to sell our Texas North Yard or the sale is delayed, or we are unable to increase our backlog, we would expect to take additional measures to preserve our cash flows until such time when we are able to generate cash flows from operations. Since the beginning of 2016, we have implemented wage adjustments along with employee benefit and overall cost reductions within all of our divisions. We have reduced the level of our workforce in the past and we will continue to do so based on booked work in all of our facilities. We have reduced the compensation paid to our directors and the salaries of our executive officers, and we have reduced our capital expenditures and placed assets that are either underutilized, under-performing or not expected to provide sufficient long-term value for sale, which include our South Texas Properties.amount.
Ongoing Efforts to Increase Our Backlog, and DiversificationDiversify of Our Customer Base and Resolve Customer Dispute
Petrochemical work - We recentlyDuring the second quarter of 2018, we completed the fabrication of four modules for a new petrochemical facility. We delivered these modules on time and within budget.time. We continue to search for additional fabrication work in the petrochemical industry to add to our current backlog.
Pursuit of offshore wind - We believe that future requirements from generators and utilities to provide electricity from renewable and green sources will result in continued growth of offshore wind projects. We fabricated the first-of-a-kind wind turbine pedestals for the first offshore wind power project in the United States in 2015, and we believe that we possess the expertise
to obtain significant future work in this sector. During the first quarter of 2018, we signed a contract for the fabrication of one Meteorologicalmeteorological tower and platform for a customer's offshore wind project located off the U.S. coast of Maryland. We completed the fabrication work in the second quarter of 2018 and have included invoiced amounts in contracts receivable on our Consolidated Balance Sheet. This project iswas relatively 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 it relates to their letter of intent with their customer for structures off the coast of Maryland. Along with this letter of intent, we have executed a teaming agreement with the EEW Group forto source future U.S. offshore wind projects. There is no guarantee that we will be successful in participating in any of these plannedfuture projects.
Diversification of our Shipyard Division customer base - We continue to be successful in our efforts to diversify our capabilities within our Shipyard Division.
During the first quarter of 2018, we executed a contract for the construction and delivery of one towing, salvage and rescue ship ("T-ATS") vessel with the U.S. Navy for $63.6 million with an option for seven additional vessels with an additional value of approximately $459.1 million if all options are exercised. Our T-ATS vessel contract is currently under a bid protest from a competitor. Bid protests can result in an award decision being overturned, requiring a re-bidwhich was subsequently protested by one of the contract. Even whenunsuccessful bidders. On July 16, 2018, we were notified that the award was upheld by the U.S. Government Accountability Office and thus given a bidnotification to proceed. We were recently notified that this unsuccessful bidder has filed a subsequent protest does not result inwith the Department of Justice. We have been granted a re-bid, resolutionpartial stay which allows us to proceed with design development, planning, scheduling and material ordering leading up to the start of construction. Actual construction of the matter typically extendsvessel cannot begin until a final ruling is issued by the time until contract performance can begin, which may reduce our earningsDepartment of Justice. We are in process of working with the period in which the contract would otherwise be performed. Further, weU.S. Navy to re-establish a timeline under this contract.
We signed change orders on May 1, 2018, with two customers, eachdifferent customers. Each change order was for the construction of one additional harbor tug boat for approximately $13$13.0 million each with theper boat. Each customer has an additional option for one more harbor tug boat for approximately $12.2 million each. This is in addition to the eightboat. We are now constructing a total of five harbor tug boats for each customer. If the additional options are exercised, we are currently constructingwill build a total of 12 harbor tug boats for these two customers.
On June 11, 2018, one of our customers exercised their option for a second, newbuild construction of an additional Regional Class Research Vessel ("RCRV") for $67.6 million. The first vessel was awarded in July of 2017 which included options for two additional vessels.
Continued growth within our Services Division - Generally, we expectbelieve demand for our Services Division towill increase in 2018 beyond the contractual backlog amount in place as of March 31,June 30, 2018. Work associated with offshore tie-backs, upgrades and maintenance remains strong. We will continue to pursue opportunities within the offshore/inshore plant expansion and maintenance programs as well as targeting growth of developing fields in West Texas.
Our newly formed EPC Division - As discussed in our 2017 Annual Report, we were selected as the prime contractor for the 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. SeaOne’s selection of us is non-binding and commencement of the project remains subject to a number of conditions, including agreement on terms of the engagement with SeaOne. In anticipation of this project advancing, we are enhancing our internal project management capabilities through the hiring of additional personnel to service this project. Subsequent to March 31, 2018, weWe received an additional early works purchase order from SeaOne for approximately $1.0$1.2 million. We continue to work with SeaOne on finalizing Initial Engineering Designinitial engineering design and project pricing. We understand that SeaOne is in the process of securing financing to move forward with its project. We are hopeful that the SeaOne Project will initiate planning and start-upinitial construction efforts mid-2018 with construction to start in early 2019.
Completion of our MPSV contract - As previously disclosed, on March 19, 2018, 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 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 notified our Surety of its intent to require completion of the vessel under the Surety's bond. We have notified and met with our Surety regarding our disagreement with our customer's claims. Discussions with the Surety are ongoing. The Company will continue to enforce its rights under the agreements and defend any claims asserted against the Company by its customer. Management is unable to estimate the probability of a favorable or unfavorable outcome aas well as an estimate of potential loss, if any, at this time. We cannot guarantee that we will not incur additional costs as we negotiate with this customer. At June 30, 2018, our net balance sheet exposure was $12.4 million.
Outlook
Looking forward, our results of operations will be affected primarily by:
Our ability to execute on projects in accordance with our cost estimates and manage them to successful completion;
Our ability to win contracts through competitive bidding or alliance/partnering arrangements;
Demandby demand for our services and the overall number of projects in the market place. As discussed above, a significant portion of our historical customer base has been impacted by the continued level of exploration and development activity maintained byfor oil and gas exploration and production companiesgas. We have implemented a number of initiatives to strategically reposition the Company to attract new customers, participate in the GOM,buildup of petrochemical facilities, pursue offshore wind markets, enter the EPC industry and diversify our customers within our Shipyard Division. The success of our initiatives to a lesser extent, overseas locations, which is dependent uponstrategically reposition the price of oilCompany and gas;our future operations will be determined by:
The level of petrochemical facilitynew construction and improvements;fabrication projects in the new markets we are pursuing including petrochemical facilities and offshore wind;
Our successful execution of an agreement with SeaOne;SeaOne and the ability of SeaOne to obtain financing;
Continued growth within our Shipyard and Services divisions;
Our ability to resolve our disputes with our customer for the completion of the two MPSV vessels; andwin contracts through competitive bidding or alliance/partnering arrangements;
Our ability to secure additional fabrication offshore wind projects.execute projects in accordance with our cost estimates and successfully manage them through completion; and
Our ability to resolve a dispute over purported with a Shipyard customer related to the construction of two MPSVs.
We continue to respond to the competitive forces within our industry and continue 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 period of competitive pricing with lower than desired margins. Additionally, revenue from these awards will not be realized until later in 2018 and beyond.
Safety
We operate in an environment that exposes our employees to risk of injury, and we are committed to safety. We believe safety is a key metric for our success. Poor safety performance increases our costs, results in construction delays and limits 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 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. There have been no changes in our evaluation of our critical accounting policies since December 31, 2017.
Backlog We believe that backlog, a non-GAAP financial measure, provides useful information to investors. Backlog differs from the GAAP requirement to disclose future performance obligations required under fixed-price contracts as required under Topic 606 of the ASC. See Note 3 of the Notes to Consolidated Financial Statements for further discussion of Topic 606. Backlog includes future work that has been entered intosecured subsequent to the balance sheet date frompursuant to letters of intent or other forms of authorization as well as signed contracts that are temporarily suspended or under protest that may not meet the criteria to be reported as future performance
obligations under Topic 606 (the most comparable GAAP measure); however, represents future work that management believes is probable of being performed. Our backlog is based on management’s estimate of the direct labor hours required to complete, and the remaining revenue to be recognized with respect to those projects for which a customer has authorized us to begin work or purchase materials pursuant to written contracts, letters of intent or other forms of authorization. As engineering and design plans are finalized or changes to existing plans are made, management’s estimate of the direct labor hours required to complete a project and the price of a project at completion is likely to change. All projects currently included in our backlog are generally subject to suspension, termination, or a reduction in scope at the option of the customer, although the customer is required to pay us for work performed and materials purchased through the date of termination, suspension, or reduction in scope. In addition, customers have the ability to delay the execution of projects. We exclude suspended projects from contract backlog when they are expected to be suspended more than 12 months because resumption of work and timing of revenue recognition for these projects are difficult to predict. Depending on the size of the project, the termination, postponement, or reduction in scope of any one project could significantly reduce our backlog and could have a material adverse effect on future revenue, net income (loss) and cash flow. A reconciliation of future revenue performance obligations under Topic 606 of the ASC (the most comparable GAAP measure as included in Note 3 of the Notes to Consolidated Financial Statements) to our reported backlog is provided below (in thousands).
| | | | March 31, 2018 | June 30, 2018 | | | Fabrication | | Shipyard | | Services | | EPC | | Eliminations | | Consolidated | Fabrication | | Shipyard | | Services | | EPC | | Eliminations | | Consolidated | | Future performance obligations required under fixed-price contracts under Topic 606 of ASC | $ | 6,706 |
| | $ | 149,590 |
| | $ | 11,858 |
| | $ | — |
| | $ | (990 | ) | | $ | 167,164 |
| $ | 1,871 |
| | $ | 295,506 |
| | $ | 7,607 |
| | $ | 1,618 |
| | $ | (193 | ) | | $ | 306,409 |
| | Contracts signed subsequent to March, 31, 2018 | — |
| | 29,874 |
| | — |
| | 1,037 |
| | — |
| | 30,911 |
| | Signed contracts under purported termination or third party protest (1), (2) | — |
| | 94,176 |
| | — |
| | — |
| | — |
| | 94,176 |
| | | Contracts signed subsequent to June 30, 2018 | | — |
| | — |
| | 9,788 |
| | 1,200 |
| | — |
| | 10,988 |
| Signed contracts under purported termination (1) | | — |
| | 30,157 |
| | — |
| | — |
| | — |
| | 30,157 |
| | Backlog | $ | 6,706 |
| | $ | 273,640 |
| | $ | 11,858 |
| | $ | 1,037 |
| | $ | (990 | ) | | $ | 292,251 |
| $ | 1,871 |
| | $ | 325,663 |
| | $ | 17,394 |
| | $ | 2,818 |
| | $ | (193 | ) | | $ | 347,553 |
| | | | | | | | | | | | | | | | | | | | | | | | |
___________ | | | (1) | Includes backlog for a customer for which we have received a notice of purported termination within our Shipyard Division related to the construction of two MPSVs. We dispute the purported termination and disagree with the customer’s reasons for same.Wesame. We cannot guarantee that we will be able to favorably negotiate completion of the MPSVs with this customer. See Note 9 of the Notes to Consolidated Financial Statements. |
| | (2) | Includes our signed contract with the U.S. Navy for the construction of the T-ATS Salvage vessel which is under bid protest from a competitor. Bid protests can result in an award decision being overturned, requiring a re-bid of the contract. Even when a bid protest does not result in a re-bid, resolution of the matter typically extends the time until contract performance can begin, which may reduce our earnings in the period in which the contract would otherwise be performed. |
Our backlog at March 31,June 30, 2018, as compared to December 31, 2017, consisted of the following (in thousands, except for percentages):
| | | | March 31, 2018 | | December 31, 2017 | June 30, 2018 |
| December 31, 2017 | | Division |
| | | | | | | | |
| June 30, 2018 |
| December 31, 2017 | | | Number | Percentage | | Number | Percentage | Major customers (1) | four | 77.8% | | four | 73.0% | | | | | | | | Backlog is expected to be recognized in revenue during:(2) | $'s | Percentage | | | | | 2018 | $ | 97,366 |
| 28.0% | | | | | 2019 | 170,987 |
| 49.2% | | | | | 2020 | 69,890 |
| 20.1% | | | | | 2021 | 8,645 |
| 2.5% | | | | | 2022 | 665 |
| 0.2% | | | | | Total | $ | 347,553 |
| 100.0% | |
| | | | | | | | |
___________
| | | (1) | At March 31,June 30, 2018, projects for our fivefour largest customers in terms of revenue backlog consisted of: |
| | | (i) | Two large MPSVs for one customer for which we have received a purported notice of termination as discussed above; |
| | (ii) | Newbuildnewbuild construction of five harbor tugs for one customer (to be completed in 2018 through 2020); |
| | (iii)(ii) | Newbuildnewbuild construction of five harbor tugs for one customer (separate from above) (to be completed in 2018 through 2020); |
| | (iv)(iii) | Newbuildnewbuild construction of antwo offshore marine research vesselvessels (to be completed in 2020)2020 and 2022); and |
| | (v)(iv) | Newbuildnewbuild construction of one T-ATS vessel (to be completed in 2020)2021). This contract is currently underwas 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 thus given a bid protest.notification to proceed. We were recently notified that this unsuccessful bidder has filed a subsequent protest with the Department of Justice. We have been granted a partial stay which allows us to proceed with design development, planning, scheduling and material ordering leading up to the start of construction. |
| | | (2) | The timing of recognition of the revenue represented in our backlog is based on management’s current estimates to complete the projects. Certain factors and circumstances could cause changes in the amounts ultimately recognized and the timing of the recognition of revenue from our backlog. |
Certain of our contracts contain options which grant the right to our customer, if exercised, for the construction of additional vessels at contracted prices.Weprices. We do not include options in our backlog above. If all options under our current contracts were exercised, our backlog would increase by $626.2$562.7 million. We believe disclosing these options provides investors with useful information in order to evaluate additional potential work that we would be contractually obligated to perform under our current contracts as well as the potential significance of these options, if exercised. We have not received any commitments related to the exercise of these options from our customers, and we can provide no assurance that any or all of these options will be exercised. As we add backlog, we will add personnel with critical project management and fabrication skills to ensure we have the resources necessary to execute our projects well and to support our project risk mitigation discipline for all new projects. This may negatively impact near-term results. Workforce As of March 31,June 30, 2018, we had 961847 employees compared to 977 employees as of December 31, 2017. Labor hours worked were 496,000947,000 during the threesix months ended March 31,June 30, 2018, compared to 479,0001 million for the threesix months ended March 31,June 30, 2017. The overall increase in labor hours worked for the three months ended March 31, 2018, was due to improved offshore demand within our Services Division. As of April 29, 2018, we had 870 employees. The decrease in our workforce subsequent to March 31, 2018,labor hours worked is primarily within our Fabrication Division due to completion of complex modules for the construction of a new petrochemical plant with no significant futureimmediate replacement Fabrication backlog forecasted in the near-term as well as the stoppagesuspension of construction of the two MPSVs within our Shipyard Division pending resolution of our dispute over termination with our MPSV customer. This was partially offset by improved demand within our Services Division. See Note 9 of the Notes to Consolidated Financial Statements related to our MPSV contract termination dispute.
Results of Operations Three Months Ended March 31,June 30, 2018, Compared to Three Months Ended March 31,June 30, 2017(in thousands, except for percentages): Consolidated | | | | Three Months Ended March 31, | | Increase or (Decrease) | Three Months Ended June 30, | | Increase or (Decrease) | | | 2018 | | 2017 | | Amount | Percent | 2018 | | 2017 | | Amount | Percent | | Revenue | $ | 57,290 |
| | $ | 37,993 |
| | $ | 19,297 |
| 50.8% | $ | 54,014 |
| | $ | 45,868 |
| | $ | 8,146 |
| 17.8% | | Cost of revenue | 56,611 |
| | 42,890 |
| | 13,721 |
| 32.0% | 54,713 |
| | 57,488 |
| | (2,775 | ) | (4.8)% | | Gross profit (loss) | 679 |
| | (4,897 | ) | | 5,576 |
| 113.9% | | | Gross profit (loss) percentage | 1.2 | % | | (12.9 | )% | | | | | | Gross loss | | (699 | ) | | (11,620 | ) | | 10,921 |
| 94.0% | | Gross loss percentage | | (1.3 | )% | | (25.3 | )% | | | | | General and administrative expenses | 4,709 |
| | 3,930 |
| | 779 |
| 19.8% | 5,092 |
| | 4,640 |
| | 452 |
| 9.7% | | Asset impairment | 750 |
| | 389 |
| | 361 |
| 92.8% | 610 |
| | — |
| | 610 |
| 100.0% | | Operating income (loss) | (4,780 | ) | | (9,216 | ) | | (4,436 | ) |
| | | Operating loss | | (6,401 | ) | | (16,260 | ) | | 9,859 |
| 60.6% | | Other income (expense): | | | | | | | | | | | | | | Interest expense | (469 | ) | | (59 | ) | | (410 | ) | (694.9)% | | | Interest expense, net | | (92 | ) | | (146 | ) | | 54 |
| 37.0% | | Other income (expense), net | 12 |
| | 9 |
| | 3 |
| 33.3% | 7,125 |
| | (266 | ) | | 7,391 |
| 2,778.6% | | Total other income (expense) | (457 | ) | | (50 | ) | | (407 | ) | (814.0)% | 7,033 |
| | (412 | ) | | 7,445 |
| 1,807.0% | | Net loss before income taxes | (5,237 | ) | | (9,266 | ) | | (4,029 | ) | (43.5)% | | | Net income (loss) before income taxes | | 632 |
| | (16,672 | ) | | 17,304 |
| 103.8% | | Income tax expense (benefit) | 59 |
| | (2,812 | ) | | 2,871 |
| 102.1% | 83 |
| | (5,749 | ) | | 5,832 |
| 101.4% | | Net loss | $ | (5,296 | ) | | $ | (6,454 | ) | | $ | 6,900 |
|
| | | Net income (loss) | | $ | 549 |
| | $ | (10,923 | ) | | $ | 11,472 |
| 105.0% |
Revenue - Our revenue for the three months ended March 31,June 30, 2018 and 2017, was $57.3$54.0 million and $38.0$45.9 million, respectively, representing an increase of 50.8%17.8%. The increase is primarily attributable to:
An increase of $11.2$6.8 million within our Services Division from additional demand for offshore oil and gas service related projects; and An increase of $7.1$5.3 million within our Shipyard Division related to the newbuild construction of ten harbor tug vessels and an offshore marine research vessel which were not under construction during the second quarter of 2017 and $10.2 million in contract losses recorded during the three months ended June 30, 2017, which reduced our measurement of revenue progress under percentage of completion accounting for the second quarter of 2017. Additionally, we re-commenced newbuild construction for the second of two OSV's during the fourth quarter of 2017 which was in process in the second quarter of 2018 but was suspended during the second quarter of 2017.
The increase in revenue was partially offset by a decrease of $5.4 million of revenue within our Fabrication Division primarily attributable to the constructioncompletion of four modules for a petrochemical plant.plant in April 2018.
Gross profit (loss)loss - Our gross profitloss for the three months ended March 31,June 30, 2018, was $679,000$0.7 million compared to a gross loss of $4.9$11.6 million for the three months ended March 31,June 30, 2017. The increase in gross profitimprovement was primarily due to increased revenue within our Services Division as discussed above and a lower gross loss from our Shipyard Division related to $10.2 million in contract losses recorded during the three months ended June 30, 2017, reflecting cost overruns and re-work identified on two contracts relating to the construction of two MPSVs with no comparable adjustments to contract losses in the second quarter of 2018. Additionally, we decreased expenses within our Fabrication Division which included $1.9 million of depreciation expense for the three months ended March 31, 2017, related to our South Texas Properties with no depreciation expense during the three months ended March 31, 2018, for our South Texas Properties as these assets are classified as held for sale.Division.
General and administrative expenses - Our general and administrative expenses were $4.7$5.1 million for the three months ended March 31,June 30, 2018, compared to $3.9$4.6 million for the three months ended March 31,June 30, 2017. The increase in general and administrative expenses for the three months ended March 31,June 30, 2018, was primarily attributable toto:
Build-up of additional personnel for our newly created EPC Division;Division in anticipation of the SeaOne Project; Increased legal and advisory fees related to customer disputes, strategic planning and diversification of our business; and Increased employee incentiveincentives accruals of approximately $300,000 for all divisions related to our safety incentive program and higher employee profitability incentives within our Services Division as well as the addition of personnel as we build up our EPC Division in anticipation of the SeaOne Project; and Higher stock compensation expense of approximately $220,000.Division.
This was partially offset by cost reductions and continued cost minimization efforts implemented by management for the period.
Asset impairment - We recorded an impairmentsecond quarter of $750,000 during the three months ended March 31, 2018, related to 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 management's estimated net proceeds from the sale less its net book value. See also Note 2 of the Notes to Consolidated Financial Statements for additional information regarding our assets held for sale. During the three months ended March 31, 2017, we recorded an impairment of $389,000 related to the Shipyard Division assets held for sale.2017.
Interest expense, net - Interest expense, increasednet decreased due to drawingsfewer letters of credit issued under our Credit Agreement for the three months ended March 31,June 30, 2018, with no such drawings under our Credit Agreementcompared to the three months ended June 30, 2017, as well as increased interest income from investments in cash equivalents and held-to-maturity, short-term investments during the three months ended June 30, 2018.
Other income (expense) - Other income, net was $7.1 million for the three months ended March 31, 2017, as well as increased amortizationJune 30, 2018, compared to other expense, net of deferred financing costs during$0.3 million for the three months ended March 31, 2018.June 30, 2017. Other income, net for the three months ended June 30, 2018 is primarily due to a gain on the sale of our Texas South Yard of $3.9 million and a gain on settlement of insurance recovery proceeds related to Hurricane Harvey of $3.6 million.
Income tax expense (benefit) - Our effective income tax rate for the three months ended March 31,June 30, 2018, was (1.1)%expense of 13.1%, compared to an effective tax rate benefit of 30.3%34.5% for the comparable period during 2017. Current expense represents state taxesincome tax within our Services Division. The decrease in the effective tax rate is the result of a valuation allowance against our deferred tax assets. See Note 1 of the Notes to Consolidated Financial Statements regarding our NOLs and deferred tax assets.
Operating Segments
The results of our four operating divisions and Corporate Divisionnon-operating corporate division for the three months ended March 31,June 30, 2018 and 2017, are presented below (in thousands, except for percentages).
| | | Fabrication | | Three Months Ended March 31, | | Increase or (Decrease) | | Three Months Ended June 30, | | Increase or (Decrease) | | | | 2018 | | 2017 | | Amount | | Percent | | 2018 | | 2017 | | Amount | | Percent | | Revenue | | $ | 17,270 |
| | $ | 10,209 |
| | $ | 7,061 |
| | 69.2% | | $ | 8,590 |
| | $ | 13,990 |
| | $ | (5,400 | ) | | (38.6)% | | Gross profit (loss) | | (219 | ) | | (2,966 | ) | | (2,747 | ) | | (92.6)% | | (1,667 | ) | | 1,931 |
| | (3,598 | ) | | (186.3)% | | Gross profit (loss) percentage | | (1.3 | )% | | (29.1 | )% | | | |
| | (19.4 | )% | | 13.8 | % | | | |
| | General and administrative expenses | | 624 |
| | 821 |
| | (197 | ) | | (24.0)% | | 951 |
| | 833 |
| | 118 |
| | 14.2% | | Asset impairment | | 750 |
| | — |
| | 750 |
| | 100.0% | | 610 |
| | — |
| | 610 |
| | 100.0% | | Operating income (loss) | | $ | (1,593 | ) | | $ | (3,787 | ) | | $ | (2,194 | ) | |
| | (3,227 | ) | | 1,098 |
| | (4,325 | ) | |
|
Revenue - Revenue from our Fabrication Division increased $7.1decreased $5.4 million for the three months ended March 31,June 30, 2018, compared to the three months ended March 31,June 30, 2017. The increasedecrease is attributable to the constructioncompletion and delivery of four modules for a petrochemical plant during April 2018 with very little immediate replacement backlog started as a result of the three months ended March 31, 2018, and lower revenue during the three months ended March 31, 2017, resultingtemporary impacts from previously depressed oil and gas prices and the corresponding reduction in customer demand for offshore fabrication projects during the period. This was partially offset, by decreased revenue of $2.4 million for the three months ended March 31, 2018, at our South Texas Properties as these were placed for sale during the first quarter of 2017 and project work completed or transfered to our Houma Fabrication Yard during 2017.prices.
Gross profit (loss) - Gross loss from our Fabrication Division for the three months ended March 31,June 30, 2018, was $219,000$1.7 million compared to a gross lossprofit of $3.0$1.9 million for the three months ended March 31,June 30, 2017. The decrease in gross loss was due to increaseddecreased revenue with minimal new fabrication work started during the second quarter of 2018 as discussed above and a reduction in depreciation expense of $1.9 million in depreciation expense during the three months ended March 31, 2018 for our South Texas Properties as these assets are classified as held for sale.above.
General and administrative expenses - General and administrative expenses for our Fabrication Division decreased $197,000increased $0.1 million for the three months ended March 31,June 30, 2018, compared to the three months ended March 31,June 30, 2017. The decreaseincrease is primarily due to an increase in legal expense of $0.4 million for our pursuit of claims against a customer related to disputed change orders for a large deepwater project we delivered to our customer in November 2015 partially offset by decreases in workforce at our South Texas Properties,salaries and employee incentives of $0.2 million due to employee reductions and decreases in corporate allocations of $0.1 million as a portion of these are now allocated to our EPC Division and continued cost minimization efforts implemented by management for the period.Division.
Asset impairment - We recorded an impairment of $750,000$0.6 million during the three months ended March 31,June 30, 2018, primarily related to 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.Yard. The impairment was calculated as management's estimated net proceeds from the sale less its net book value. See Note 2 of the Notes to Consolidated Financial Statements for additional information regarding our assets held for sale. We did not record any asset impairments during the three months ended March 31,June 30, 2017, within our Fabrication Division.
| | | | | | | | | | | | | | | | | Shipyard | | Three Months Ended March 31, | | Increase or (Decrease) | | | | 2018 | | 2017 | | Amount | | Percent | Revenue (1) | | $ | 18,565 |
| | $ | 18,422 |
| | $ | 143 |
| | 0.8% | Gross profit (loss) (1) | | (1,023 | ) | | (1,704 | ) | | (681 | ) | | (40.0)% | | Gross profit (loss) percentage | | (5.5 | )% | | (9.2 | )% | | | |
| | General and administrative expenses | | 796 |
| | 964 |
| | (168 | ) | | (17.4)% | | Asset impairment | | — |
| | 389 |
| | (389 | ) | | (100.0)% | Operating income (loss) (1) | | $ | (1,819 | ) | | $ | (3,057 | ) | | $ | (1,238 | ) | |
|
| | | | | | | | | | | | | | | | | Shipyard | | Three Months Ended June 30, | | Increase or (Decrease) | | | | 2018 | | 2017 | | Amount | | Percent | Revenue (1) | | $ | 23,620 |
| | $ | 18,303 |
| | $ | 5,317 |
| | 29.0% | Gross loss (1) | | (2,776 | ) | | (13,851 | ) | | 11,075 |
| | 80.0% | | Gross loss percentage | | (11.8 | )% | | (75.7 | )% | | | |
| | General and administrative expenses | | 597 |
| | 983 |
| | (386 | ) | | (39.3)% | Operating loss (1) | | (3,374 | ) | | (14,834 | ) | | 11,460 |
| |
|
___________ | | | (1) | Revenue for the three months ended March 31,June 30, 2018 and 2017, includes $390,000$0.1 million and $1.6$0.3 million of non-cash amortization of deferred revenue related to the values assigned to the contracts acquired in the LEEVAC transaction, respectively. |
Revenue - Revenue from our Shipyard Division increased $143,000$5.3 million for the three months ended March 31,June 30, 2018, compared to the three months ended March 31,June 30, 2017. During the firstsecond quarter of 2018, we were able to make progress on the construction of eightten harbor tugstug vessels and an offshore marine research vessel which were not under construction during the firstsecond quarter of 2017. During the three months ended June 30, 2017, we also recorded $10.2 million in contract losses which reduced our measure of revenue progress under percentage of completion accounting. Additionally, we re-commenced newbuild construction for the second of two OSV's during the fourth quarter of 2017, which was suspended during the second quarter of 2017. This was partially offset by lower revenue from construction of our two OSV and two MPSV vessel contracts that were under construction during 2017, but suspended during the first quarter of 2018.
During the first quarter of 2017, we completed the first of the OSVs and tendered it for delivery on February 6, 2017, and suspended construction of the second OSV due to a customer dispute. We recommenced construction of the second OSV during the fourth quarter of 2017 which is scheduled for completion during the second quarter of 2018. During the first quarter of 2018, 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 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. See also Note 9 of the Notes to Consolidated Financial Statements for additional information relating to this customer dispute.the suspension of construction of two MPSVs.
Gross profit (loss)loss - Gross loss from our Shipyard Division was $1.0$2.8 million for the three months ended March 31,June 30, 2018, compared to a gross loss of $1.7$13.9 million for the three months ended March 31,June 30, 2017. The decreasegross loss for the three months ended June 30, 2018, was primarily attributable to underutilization of our Houma and Lake Charles shipyards and competitive pricing on current work. The improvement in gross loss of $11.1 million was primarily due to improved cost management efforts and efficiencies learned from the construction of two OSV and two MPSV vesselsto:
$10.2 million in contract losses recorded during the three months ended March 31,June 30, 2017, related to cost overruns and appliedre-work identified on the two contracts relating to the construction of eight harbor tugstwo MPSVs; holding and closing costs during the three months ended MarchJune 30, 2017, related to our former Prospect shipyard. We terminated the lease of this facility effective December 31, 2017; and holding costs during the three months ended June 30, 2017 related to a completed OSV that was delivered on February 6, 2017, but refused by our customer as well as the suspension of work on the second OSV vessel. We resolved our disputes with our OSV customer during the fourth quarter of 2017 and construction of the second OSV re-commenced. We subsequently delivered the second OSV on July 31, 2018.
General and administrative expenses - General and administrative expenses for our Shipyard Division decreased $168,000$0.4 for the three months ended March 31,June 30, 2018, compared to the three months ended March 31,June 30, 2017, primarily due to reductions in salaries and employee incentives of $0.4 million related to reductions in our workforce period over period and decreases in corporate allocations of $0.1 million as a portion of these are now allocated to our EPC Division. This was partially offset by increases in legal expense related to our customer dispute relating to the suspension of construction of two MPSVs. See also Note 9 of the Notes to Consolidated Financial Statements for additional information relating to the suspension of construction of two MPSVs.
| | | | | | | | | | | | | | | | | Services | | Three Months Ended June 30, | | Increase or (Decrease) | | | | 2018 | | 2017 | | Amount | | Percent | | Revenue | | $ | 22,205 |
| | $ | 15,396 |
| | $ | 6,809 |
| | 44.2% | | Gross profit | | 3,585 |
| | 390 |
| | 3,195 |
| | 819.2% | | Gross profit percentage | | 16.1 | % | | 2.5 | % | | | |
| | General and administrative expenses | | 762 |
| | 647 |
| | 115 |
| | 17.8% | | Operating income (loss) | | 2,823 |
| | (257 | ) | | 3,080 |
| |
|
Revenue - Revenue from our Services Division increased $6.8 million for the three months ended June 30, 2018, compared to the three months ended June 30, 2017, due to an overall increase in work resulting from increases in customer demand for offshore oil and gas related service projects.
Gross profit - Gross profit from our Services Division increased $3.2 million for the three months ended June 30, 2018, compared to the three months ended June 30, 2017, due to increased revenue discussed above. Our gross profit percentage increased from 2.5% during the period for 2017 to 16.1% for 2018. The increase in gross profit percentage was due to a higher recovery of fixed costs with increased work.
General and administrative expenses - General and administrative expenses for our Services Division increased $0.1 for the three months ended June 30, 2018, compared to the three months ended June 30, 2017, due to support of increased work as well as increases in employee incentive compensation with allocation of corporate expenses remaining comparable period over period.
| | | | | | | | | | | | | | | | | EPC | | Three Months Ended June 30, | | Increase or (Decrease) | | | | 2018 | | 2017 | | Amount | | Percent | | Revenue | | $ | 882 |
| | $ | — |
| | $ | 882 |
| | 100.0% | | Gross profit | | 543 |
| | — |
| | 543 |
| | 100.0% | | Gross profit percentage | | 61.6 | % | | n/a |
| | | | | | General and administrative expenses | | 485 |
| | — |
| | 485 |
| | 100.0% | | Operating income | | 58 |
| | — |
| | 58 |
| |
|
Revenue - Our EPC Division did not exist at June 30, 2017. Revenue for the three months ended June 30, 2018 consists of early work and engineering studies authorized by SeaOne. See Note 8 of the Notes to Consolidated Financial Statements for further discussion of our EPC Division and the SeaOne Project.
Gross profit - Gross profit for the three months ended June 30, 2018, consists of early work and engineering studies authorized by SeaOne.
General and administrative expenses - General and administrative expenses for our EPC Division include the addition of personnel and allocations of corporate expenses as we invest in this new line of business.
| | | | | | | | | | | | | | | | | Corporate | | Three Months Ended June 30, | | Increase or (Decrease) | | | | 2018 | | 2017 | | Amount | | Percent | | Revenue | | $ | — |
| | $ | — |
| | $ | — |
| | | | Gross loss | | (384 | ) | | (90 | ) | | (294 | ) | | (326.7)% | | Gross loss percentage | | n/a |
| | n/a |
| | | | | | General and administrative expenses | | 2,297 |
| | 2,177 |
| | 120 |
| | 5.5% | | Operating loss | | (2,681 | ) | | (2,267 | ) | | (414 | ) | |
|
Gross loss - Gross loss from our Corporate Division increased primarily due to lower allocation of expenses and build-up of personnel to support our EPC Division.
General and administrative expenses - General and administrative expenses for our Corporate Division increased primarily due to increased legal and advisory fees related to customer disputes, strategic planning and diversification of our business and increased employee incentive accruals.
Six Months Ended June 30, 2018, Compared to Six Months Ended June 30, 2017(in thousands, except for percentages): Consolidated | | | | | | | | | | | | | | | | Six Months Ended June 30, | | Increase or (Decrease) | | | 2018 | | 2017 | | Amount | Percent | | Revenue | $ | 111,304 |
| | $ | 83,860 |
| | $ | 27,444 |
| 32.7% | | Cost of revenue | 111,324 |
| | 100,378 |
| | 10,946 |
| 10.9% | | Gross loss | (20 | ) | | (16,518 | ) | | 16,498 |
| 99.9% | | Gross profit percentage | — | % | | (19.7 | )% | | | | | General and administrative expenses | 9,801 |
| | 8,570 |
| | 1,231 |
| 14.4% | | Asset impairment | 1,360 |
| | 389 |
| | 971 |
| 249.6% | | Operating loss | (11,181 | ) | | (25,477 | ) | | 14,296 |
| 56.1% | | Other income (expense): | | | | | | | | Interest expense, net | (238 | ) | | (205 | ) | | (33 | ) | (16.1)% | | Other income (expense), net | 6,814 |
| | (257 | ) | | 7,071 |
| 2,751.4% | | Total other income (expense) | 6,576 |
| | (462 | ) | | 7,038 |
| 1,523.4% | | Net loss before income taxes | (4,605 | ) | | (25,939 | ) | | 21,334 |
| 82.2% | | Income tax expense (benefit) | 142 |
| | (8,561 | ) | | 8,703 |
| 101.7% | | Net loss | $ | (4,747 | ) | | $ | (17,378 | ) | | $ | 12,631 |
| 72.7% |
Revenue - Our revenue for the six months ended June 30, 2018 and 2017, was $111.3 million and $83.9 million, respectively, representing an increase of 32.7%. The increase is primarily attributable to:
An increase of $1.7 million within our Fabrication Division primarily attributable to the construction and completion of four modules for a petrochemical plant; An increase of $5.5 million within our Shipyard Division primarily related to construction of ten harbor tug vessels and an offshore marine research vessel which were not under construction during the first half of 2017 and $10.6 million in contract losses recorded during the six months ended June 30, 2017, which reduced our measure of revenue progress under percentage of completion accounting; Additionally, we re-commenced newbuild construction for the second of two OSV's during the fourth quarter of 2017, which continued through the first half of 2018 but had been suspended during the second quarter of 2017; and An increase of $18.0 million within our Services Division from additional demand for offshore oil and gas service related projects.
Gross loss - Our gross loss for the six months ended June 30, 2018, was $20,000 compared to a gross loss of $16.5 million for the six months ended June 30, 2017. The improvement in gross loss was primarily due to increased revenue within our Services Division as discussed above and $10.6 million in contract losses related to cost overruns and re-work that was identified and recorded during the six months ended June 30, 2017 on two contracts relating to the construction of two MPSVs with no comparable adjustments to contract losses in the first half of 2018.
General and administrative expenses - Our general and administrative expenses were $9.8 million for the six months ended June 30, 2018, compared to $8.6 million for the six months ended June 30, 2017. The increase in general and administrative expenses for the six months ended June 30, 2018, was primarily attributable to:
Build-up of additional personnel for our newly created EPC Division; Increased legal and advisory fees related to customer disputes, strategic planning and diversification of our business; and Increased employee incentive accruals for all divisions related to our safety incentive program and higher employee profitability incentives within our Services Division. This was partially offset by cost reductions and continued cost minimization efforts implemented by management during the second half of 2017.
Asset impairment - We recorded an impairment of $1.4 million during the six months ended June 30, 2018, primarily related to two pieces of equipment at our Texas North Yard that are held for sale. The impairment was calculated as management's estimated net proceeds from the sale less the equipment's net book value. See Note 2 of the Notes to Consolidated Financial Statements for additional information regarding our assets held for sale. During the six months ended June 30, 2017, we recorded an impairment of $0.4 million related to our Shipyard Division assets held for sale.
Other income (expense), net - Other income, net was $6.8 million for the six months ended June 30, 2018, compared to other expense, net of $0.3 million for the six months ended June 30, 2017. Other income, net for the six months ended June 30, 2018 is primarily due to a gain on the sale of our Texas South Yard of $3.9 million and a gain on settlement of insurance recovery proceeds related to Hurricane Harvey of $3.6 million.
Income tax expense (benefit) - Our effective income tax rate for the six months ended June 30, 2018, was expense of 3.1%, compared to an effective tax rate benefit of 33.0% for the comparable period during 2017. Current expense represents state income tax within our Services Division. The decrease in the effective tax rate is the result of a valuation allowance against our deferred tax assets. See Note 1 of the Notes to Consolidated Financial Statements regarding our NOLs and deferred tax assets.
Operating Segments
The results of our four operating divisions and non-operating corporate division for the six months ended June 30, 2018 and 2017, are presented below (in thousands, except for percentages).
| | | | | | | | | | | | | | | | | Fabrication | | Six Months Ended June 30, | | Increase or (Decrease) | | | | 2018 | | 2017 | | Amount | | Percent | | Revenue | | $ | 25,860 |
| | $ | 24,199 |
| | $ | 1,661 |
| | 6.9% | | Gross loss | | (1,886 | ) | | (1,034 | ) | | (852 | ) | | (82.4)% | | Gross loss percentage | | (7.3 | )% | | (4.3 | )% | | | | | | General and administrative expenses | | 1,575 |
| | 1,654 |
| | (79 | ) | | (4.8)% | | Asset impairment | | 1,360 |
| | — |
| | 1,360 |
| | 100.0% | | Operating loss | | (4,821 | ) | | (2,688 | ) | | (2,133 | ) | | |
Revenue - Revenue from our Fabrication Division increased $1.7 million for the six months ended June 30, 2018, compared to the six months ended June 30, 2017. The increase is attributable to the construction and completion of four modules for a petrochemical plant during the six months ended June 30, 2018. This was partially offset, by decreased revenue of $2.8 million for the six months ended June 30, 2018, at our South Texas Properties as these were marketed for sale.
Gross loss - Gross loss from our Fabrication Division for the six months ended June 30, 2018, was $1.9 million compared to a gross loss of $1.0 million for the six months ended June 30, 2017. The increase in gross loss was due to increased material costs incurred on the construction and completion of four modules for a petrochemical plant during the six months ended June 30, 2018 as well as current work being bid at more competitive pricing. This was partially offset by a reduction in depreciation expense of $1.9 million during the six months ended June 30, 2018 for our South Texas Properties as these assets are classified as held for sale.
General and administrative expenses - General and administrative expenses for our Fabrication Division decreased $0.1 million for the six months ended June 30, 2018, compared to the six months ended June 30, 2017. The decrease is primarily due to decreases in salaries and employee incentives of $0.3 million due to reductions in workforce, decreases in corporate allocations of $0.3 million as a portion of these are now allocated to our EPC Division and continued cost minimization efforts implemented by management for the first half of 2018, partially offset by an increase in legal expense of $0.5 million.
Asset impairment - We recorded an impairment of $1.4 million during the six months ended June 30, 2018, primarily related to two pieces of equipment at our Texas North Yard. One piece of equipment was sold in July 2018, and we intend to sell the other piece of equipment at auction. The impairment was calculated as management's estimated net proceeds from the sale less the equipment's net book value. See Note 2 of the Notes to Consolidated Financial Statements for additional information regarding our assets held for sale. We did not record any asset impairments during the six months ended June 30, 2017, within our Fabrication Division.
| | | | | | | | | | | | | | | | | Shipyard | | Six Months Ended June 30, | | Increase or (Decrease) | | | | 2018 | | 2017 | | Amount | | Percent | Revenue (1) | | $ | 42,185 |
| | $ | 36,724 |
| | $ | 5,461 |
| | 14.9% | Gross loss (1) | | (3,799 | ) | | (15,556 | ) | | 11,757 |
| | 75.6% | | Gross loss percentage | | (9.0 | )% | | (42.4 | )% | | | | | | General and administrative expenses | | 1,393 |
| | 1,947 |
| | (554 | ) | | (28.5)% | | Asset impairment | | — |
| | 389 |
| | (389 | ) | | (100.0)% | Operating loss (1) | | (5,192 | ) | | (17,892 | ) | | 12,700 |
| | |
___________ | | | (1) | Revenue for the six months ended June 30, 2018, and 2017, includes $0.5 million and $1.9 million, respectively, of non-cash amortization of deferred revenue related to the values assigned to the contracts acquired in the LEEVAC transaction. |
Revenue - Revenue from our Shipyard Division increased $5.5 million for the six months ended June 30, 2018, compared to the six months ended June 30, 2017. During the first half of 2018, we made progress on the construction of ten harbor tug vessels and an offshore marine research vessel that were not under construction during the first half of 2017. The increase in revenue also resulted from re-commencing the newbuild construction for the second of two OSV's during the fourth quarter of 2017, which continued through the first half of 2018 but was suspended during the second quarter of 2017. This was partially offset by lower revenue from construction of two MPSVs that were under construction during 2017, but suspended during the first quarter of 2018. During the six months ended June 30, 2017, we also recorded $10.2 million in contract losses which reduced our measure of revenue progress under percentage of completion accounting. See also Note 9 of the Notes to Consolidated Financial Statements for additional information relating to the suspension of construction of two MPSVs.
Gross loss - Gross loss from our Shipyard Division was $3.8 million for the six months ended June 30, 2018, compared to a gross loss of $15.6 million for the six months ended June 30, 2017. The gross loss for the six months ended June 30, 2018, was primarily attributable to underutilization of our Houma and Lake Charles shipyards and competitive pricing on current work. The decrease in gross loss compared to the six months ended June 30, 2017, was due to:
$10.6 million in contract losses related to cost overruns and re-work that was identified and recorded during the six months ended June 30, 2017 relating to the construction of two MPSVs; Holding and closing costs during the six months ended June 30, 2017, related to our Prospect shipyard. We terminated the lease of this facility effective December 31, 2017; and Holding costs during the six months ended June 30, 2017, related to a completed OSV that was delivered on February 6, 2017, but refused by our customer as well as the suspension of work on the second OSV vessel. We resolved our disputes with our OSV customer during the fourth quarter of 2017 and construction of the second OSV re-commenced. We subsequently delivered the second OSV on July 31, 2018.
General and administrative expenses - General and administrative expenses for our Shipyard Division decreased construction activity.$0.6 million for the six months ended June 30, 2018, compared to the six months ended June 30, 2017, primarily due to decreases in salaries and employee incentives of $0.5 million due to reductions in workforce and decreases in corporate allocations of $0.1 million as a portion of these are now allocated to our EPC Division.
Asset impairment - During the threesix months ended March 31,June 30, 2017, we recorded an impairment of $389,000$0.4 million related to the Shipyard Division assets held for sale. See Note 2 of the Notes to Consolidated Financial Statements for additional information relating to our assets held for sale. We did not record any asset impairment during the threesix months ended March 31,June 30, 2018, in our Shipyard Division.
| | | Services | | Three Months Ended March 31, | | Increase or (Decrease) | | Six Months Ended June 30, | | Increase or (Decrease) | | | | 2018 | | 2017 | | Amount | | Percent | | 2018 | | 2017 | | Amount | | Percent | | Revenue | | $ | 21,870 |
| | $ | 10,712 |
| | $ | 11,158 |
| | 104.2% | | $ | 44,075 |
| | $ | 26,107 |
| | $ | 17,968 |
| | 68.8% | | Gross profit (loss) | | 2,614 |
| | 33 |
| | 2,581 |
| | 7,821.2% | | | Gross profit (loss) percentage | | 12.0 | % | | 0.3 | % | | | |
| | | Gross profit | | | 6,199 |
| | 423 |
| | 5,776 |
| | 1,365.5% | | Gross profit percentage | | | 14.1 | % | | 1.6 | % | | | | | General and administrative expenses | | 734 |
| | 666 |
| | 68 |
| | 10.2% | | 1,496 |
| | 1,313 |
| | 183 |
| | 13.9% | | Operating income (loss) | | $ | 1,880 |
| | $ | (633 | ) | | $ | 2,513 |
| |
| | 4,703 |
| | (890 | ) | | 5,593 |
| |
|
Revenue - Revenue from our Services Division increased $11.2$18.0 million for the threesix months ended March 31,June 30, 2018, compared to the threesix months ended March 31,June 30, 2017, due to an overall increase in work experienced due toresulting from increases in customer demand for offshore oil and gas related service projects.
Gross profit - Gross profit from our Services Division increased $2.6$5.8 million for the threesix months ended March 31,June 30, 2018, compared to the threesix months ended March 31,June 30, 2017, due to increased revenue discussed above. Our gross profit percentage increased from 1.6% during the period for 2017 to 14.1% for 2018. The increase in gross profit percentage was due to a higher recovery of fixed costs with increased work.
General and administrative expenses - General and administrative expenses for our Services Division increased $68,000$0.2 million for the threesix months ended March 31,June 30, 2018, compared to the threesix months ended March 31,June 30, 2017, due to support of increased work as well as increases in employee incentive compensation with allocation of approximately $120,000 resulting from increased operating income. This was partially offset by decreases in corporate allocations as a portion of these are now allocated to our EPC Division and continued cost minimization efforts implemented by management for theexpenses remaining comparable period over period.
| | | EPC | | Three Months Ended March 31, | | Increase or (Decrease) | | Six Months Ended June 30, | | Increase or (Decrease) | | | | 2018 | | 2017 | | Amount | | Percent | | 2018 | | 2017 | | Amount | | Percent | | Revenue | | 73 |
| | $ | — |
| | $ | 73 |
| | 100.0% | | $ | 955 |
| | $ | — |
| | $ | 955 |
| | 100.0% | | Gross profit (loss) | | (308 | ) | | — |
| | (308 | ) | | (100.0)% | | | Gross profit | | | 235 |
| | — |
| | 235 |
| | 100.0% | | Gross profit (loss) percentage | | n/a |
| | n/a |
| | | |
| | 24.6 | % | | n/a |
| | | | | General and administrative expenses | | 417 |
| | — |
| | 417 |
| | 100.0% | | 902 |
| | — |
| | 902 |
| | 100.0% | | Operating income (loss) | | $ | (725 | ) | | $ | — |
| | $ | (725 | ) | |
| | | Operating loss | | | (667 | ) | | — |
| | (667 | ) | |
|
Revenue - Our EPC Division did not exist at March 31,June 30, 2017. Revenue for the threesix months ended March 31,June 30, 2018, consists of early work and engineering studies authorized by SeaOne. See Note 8 of the Notes to Consolidated Financial Statements for further discussion of our EPC Division and the SeaOne Project.
Gross profit (loss) - Gross lossprofit from our EPC Division occurred as we added personnel and overhead infrastructure related to the anticipated SeaOne project.
General and administrative expenses - General and administrative expenses for our EPC Division include the addition of personnel and allocations of corporate expenses as we invest in this new line of business. | | | Corporate | | Three Months Ended March 31, | | Increase or (Decrease) | | Six Months Ended June 30, | | Increase or (Decrease) | | | | 2018 | | 2017 | | Amount | | Percent | | 2018 | | 2017 | | Amount | | Percent | | Revenue | | $ | — |
| | $ | — |
| | $ | — |
| | —% | | $ | — |
| | $ | — |
| | $ | — |
| | | | Gross profit (loss) | | $ | (385 | ) | | (260 | ) | | 125 |
| | 48.1% | | | Gross profit (loss) percentage | | n/a |
| | n/a |
| | | | | | Gross loss | | | (769 | ) | | (351 | ) | | (418 | ) | | (119.1)% | | Gross loss percentage | | | n/a |
| | n/a |
| | | | | General and administrative expenses | | 2,138 |
| | 1,479 |
| | 659 |
| | 44.6% | | 4,435 |
| | 3,656 |
| | 779 |
| | 21.3% | | Operating income (loss) | | $ | (2,523 | ) | | $ | (1,739 | ) | | $ | 784 |
| |
| | | Operating loss | | | (5,204 | ) | | (4,007 | ) | | (1,197 | ) | |
|
Gross profit (loss)loss - Gross loss from our Corporate Division increased primarily due to lower allocation of expenses and as well as increased insurance costs.buildup of personnel to support our EPC Division.
General and administrative expenses - General and administrative expenses for our Corporate Division increased primarily due to increased legal and advisory fees related to customer disputes, strategic planning and diversification of our business and increased employee incentive accruals and higher stock compensation expense of approximately $220,000.accruals.
Liquidity and Capital Resources Our immediate liquidity remains dependent on our cash on hand, anticipatedscheduled maturities of our held-to-maturity, short-term investments, potential proceeds from the sales of assets, availability of future drawings from our Credit Agreement and collections of accounts receivable. At March 31, 2018, we had $10 million outstanding under our Credit Agreement, $2.5 million in outstanding letters of credit, and cash and cash equivalents totaling $6.5 million compared to $9.0 million at December 31, 2017. As of May 4, 2018, our liquidity has significantly improved due to the saleA summary of our Texas South Yard the net proceedsimmediately available liquidity as of which willJune 30, 2018 is as follows: | | | | | | | Available Liquidity | | $ (in thousands) | | Cash and cash equivalents on hand | | $ | 32,004 |
| Held-to-maturity, short-term investments (1) | | 7,481 |
| | Revolving credit agreement | | 40,000 |
| | Less: | |
| | Borrowings under our Credit Agreement | | — |
| | Outstanding letters of credit | | (5,495 | ) | | Total available liquidity | | $ | 73,990 |
|
___________ (1) Our held-to-maturity, short-term investments include U.S. Treasuries and other investment-grade commercial paper and can be used to rebuild our liquidity, to support upcoming projects, continue investingliquidated quickly in our newly created EPC Division and for other general corporate purposes. After the sale of our Texas South Yard, our cash balance was $55.0 million, and the amount outstanding under our Credit Agreement was $10 million with remaining availability under our Credit Agreement of approximately $27.5 million for total liquidity of approximately $82.5 million.open markets. Working capital was $137.1$132.7 million and our ratio of current assets to current liabilities was 4.344.67 to 1 at March 31,June 30, 2018, compared to $130.5 million and 3.68 to 1, respectively, at December 31, 2017. Working capital at March 31,June 30, 2018, includes $98.4$7.5 million of held-to-maturity, short-term investments, $7.2 million of insurance receivables and $43.8 million related to assets held for sale, primarily related to our remaining South Texas Properties which decreased after the sale of our Texas South Yards to $48.5 million.Properties. At March 31,June 30, 2018, our contracts receivable balance was $27.4$31.9 million of which we have subsequently collected $14.9$14.4 million through May 4, 2018.as of the date of this Report and our insurance receivable was $7.2 million of which we have received payment for the full amount as of the date of this Report. Our primary usesources/uses of cash during the threesix months ended March 31,June 30, 2018, isare referenced in the Cash Flow Activities section below. As discussed in our Executive Summary, we are implementing several strategies to diversify our business, increase backlog, reduce operating expenses and monetize assets. Our South Texas Properties are held for sale. A significant portion of our near-term plan is to generate liquidity from the sale of theseunderutilized assets. On April 20, 2018, we closed on the sale of our Texas South Yard for a sale price of $55$55.0 million, less selling costs of $1.5 million. We received approximately $52.7 million at closing, which was in addition to the $750,000$0.8 million of earnest money previously received on January 3, 2018, related to the option to purchase the Texas South Yard. We plan to use theearnest money. The net proceeds to rebuildreceived rebuilt our liquidity, toprovided support for upcoming projects, continue investingcontinued investment in our newly created EPC Division and for other general corporate purposes. See further discussion of the sale of our Texas South Yard in Note 2 of the Notes to Consolidated Financial Statements. We currently believe that cash on hand coupled with proceeds received fromcontinue to market our Texas North Yard, and hope to have a negotiated contract for 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 the twelve months from the date of this Report.
As of the date of this Report our Texas North Yard remains held for sale. The book value ofin the Texas North Yard is $46.6 million at March 31, 2018. We will continue to incur costs associated with holding and maintaining our Texas North Yard. These costs include insurance, general maintenance of the properties in their current state, property taxes and retained employees which will be expensed as incurred.near future.
We have a $40$40.0 million Credit Agreement maturing June 9, 2019. The Credit Agreement allows the Company to use up to the full amount of the available borrowing base for letters of credit and general corporate purposes. We believe that our Credit Agreement will provide us with additional working capital flexibility to expand operations as backlog improves, respond to market opportunities and support our ongoing operations. Interest on drawings under the Credit Agreement may be designated, at our option, as either Base Rate (as defined in the credit facility) or LIBOR plus 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 Credit Agreement are 0.4% per annum, and interest on undrawn stated amounts under letters of credit issued by the lender is 2% per annum. At March 31, 2018, the interest rate on our outstanding borrowings was 3.75% per annum. The Credit Agreement is secured by substantially all of our assets (other than the South Texas Properties).
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 we expect to remain outstanding until July of 2018.
We must comply with the following financial covenants each quarter during the term of the Credit Agreement:
| | | i. | Ratio of current assets to current liabilities of not less than 1.25:1.00; |
| | | ii. | Minimum tangible net worth requirement of at least the sum of: |
$185 million, plus An amount equal to 50% of consolidated net income for each fiscal quarter ending after June 30, 2017, including 50% of any gain attributable to the sale of all or substantially all our South Texas Properties (with no deduction for a net loss in any such fiscal quarter), plus
| | b) | An amount equal to 50% of consolidated net income for each fiscal quarter ending after June 30, 2017, including 50% of any gain attributable to the sale of our South Texas Properties (with no deduction for a net loss in any such fiscal quarter), plus |
| | c) | 100% of the proceeds of any issuance of any stock or other equity after deducting of any fees, commissions, expenses and other costs incurred in such offering; and |
100% of the proceeds of any issuance of any stock or other equity after deducting of any fees, commissions, expenses and other costs incurred in such offering; and
| | | iii. | Ratio of funded debt to tangible net worth of not more than 0.50:1.00. |
As of March 31,June 30, 2018, we were in compliance with all of our financial covenants.
We will continue to monitor and preserve our cash. Our primary liquidity requirements for 2018 and beyond are for the costs associated with fabricationFabrication and shipyardShipyard projects, capital expenditures related to the creationexpansion of our EPC Division and enhancements to our shipyards.Shipyard facilities. Future capital expenditures will be highly dependent upon the amount and timing of future projects. Capital expenditures for the quartersix months ended March 31,June 30, 2018, were $71,000.$0.8 million. We do not anticipate significant capital expenditures for the remainder of 2018.
If industry conditions for offshore oil and gas do not improve, we are unable to sell our Texas North Yard or the sale is delayed, or we are unable to increase our backlog, we would expect to take additional measures to preserve our cash flows until such time we are able to generate cash flows from operations. Since the beginning of 2016, we have implemented wage adjustments along with employee benefit and overall cost reductions within all of our divisions. We have reduced the level of our workforce in the past and we will continue to do so based on booked work in all of our facilities. We have reduced the cash compensation paid to our directors and the salaries of our executive officers, and we have reduced our capital expenditures and placed assets that are either underutilized, under-performing or not expected to provide sufficient long-term value for sale, which include our South Texas Properties.
We currently believe that cash and cash equivalents on hand and held-to-maturity, short-term investments 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 twelve months from the date of this Report. Our view regarding sufficiency of cash and liquidity is primarily based on our financial forecast for the remainder of 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 forecast, 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 requirements. Accordingly, we may be required to further draw on our Credit Agreement, obtain additional bank financing, sell additional assets or conduct equity or debt offerings at a time when it is not beneficial to do so.
Cash Flow Activities
For the threesix months ended March 31,June 30, 2018, net cash used in operating activities was $14.1$26.4 million, compared to net cash used in operating activities of $15.1$27.9 million for the threesix months ended March 31,June 30, 2017. The use of cash in operations during the period was primarily due to the following:
Operating losses for the threesix months ended March 31,June 30, 2018, excluding gains on sales of assets and insurance recoveries as well as amounts in excess of non-cash depreciation, amortization, impairment, and stock compensation expense of approximately $1.5$3.5 million;
Slower collections of receivables of $6.4 million
Build-up of costs for contracts in progress of $9.1$8.1 million;
Build-up ofIncreased retainage on projects of $1.5 million; and
PaymentIncreased payments of property taxes related to our South Texas Propertiesaccounts payable of $2 million.$2.4 million; and
Other general uses of working capital.
Net cash provided by investing activities for the threesix months ended March 31,June 30, 2018, was $2.4$50.2 million, compared to cash used inprovided by investing activities of $391,000$0.3 million for the threesix months ended March 31,June 30, 2017. The changeincrease in cash used inprovided by investing activities is due primarily due to the sales of assets, primarily our Texas South Yard, in the amount of $56.4 million and the insurance proceeds received for hurricane damage to assets at our South Texas Properties. This was partially offset by the purchase of held-to-maturity investments of $7.5 million.
Net cash providedused by financing activities for the threesix months ended March 31,June 30, 2018, and 2017, was $9.2$0.8 million compared to $1.0$1.2 million in cash used in financing activities, respectively. The increase in cash provided by financing activities is due to $10 million in net borrowings under our Credit Agreement.
Contractual Obligations There have been no material changes from the information included in our 2017 Annual Report. For more information on our contractual obligations, refer to Part II, Item 7 of our 2017 Annual Report. Off-Balance Sheet Arrangements There have been no material changes from the information included in our 2017 Annual Report. Item 3. Quantitative and Qualitative Disclosures About Market Risk. There have been no material changes in the Company’s market risks during the quarter ended March 31,June 30, 2018. For more information on market risk, refer to Part II, Item 7A. of our Annual Report on Form 10-K for the year ended December 31, 2017. Item 4. Controls and Procedures. The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and that such information is communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this Report. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that the design and operation of our disclosure controls and procedures were effective as of the end of the period covered by this Report. There have been no changes during the fiscal quarter ended March 31,June 30, 2018, in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION Item 1. Legal Proceedings. The Company is subject to various routine legal proceedings in the normal conduct of its business primarily involving commercial claims, workers’ compensation claims, and claims for personal injury under general maritime laws of the United States and the Jones Act. While the outcome of these lawsuits, legal proceedings and claims cannot be predicted with certainty, management believes that the outcome of any such proceedings, even if determined adversely, would not have a material adverse effect on the financial position, results of operations or cash flows of the Company. Item 1A. Risk Factors. There have been no material changes from the information included in Item 1A “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2017. Item 6. Exhibits. | | | | | Exhibit Number | | Description of Exhibit | | | | | 3.1 | | 2009 (SEC File no. 001-34279). | | 3.2 | | 2016 (SEC File no. 001-34279). | | 10.1 | |
| 10.2 | |
| 10.3 | |
| 10.4 | |
| | 31.1 | | | | 31.2 | | | | 32 | | | | | | | | 101 | | Attached as Exhibit 101 to this report are the following items formatted in XBRL (Extensible Business Reporting Language): | | | | (i) | Consolidated Balance Sheets, | | | | (ii) | Consolidated Statements of Operations, | | | | (iii) | Consolidated Statement of Changes in Shareholders’ Equity, | | | | (iv) | Consolidated Statements of Cash Flows, and | | | | (v) | Notes to Consolidated Financial Statements. | | | | | | * | | Filed herewith. | | † | | Management Contract or Compensatory Plan. |
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized. | | | | GULF ISLAND FABRICATION, INC. | | | | BY: | /s/ David S. Schorlemer | | | David S. Schorlemer | | | Executive Vice President, Chief Financial Officer, Secretary and Treasurer (Principal Financial Officer) |
Date: May 4,August 9, 2018
s | |
Contracts in Progress and Advance Billings on Contracts
Revenue recognition and customer invoicing may occur at different times. Revenue recognition is based upon our calculation of percent of work complete; however, customer invoicing will generally depend upon a predetermined billing schedule as stated in the contract which could allow for customer advance payments or invoicing based upon achievement of certain milestones. Revenue earned but not yet invoiced is reflected as contracts in progress and included in current assets on our consolidated balance sheet. Billings made to our customers in advance of revenue being earned are reflected as advance billings on contracts and included in current liabilities on our balance sheet. Contracts in progress at March 31,June 30, 2018, totaled $37.5$36.5 million with $27$31.1 million relating to twothree major customers. Advance billings on contracts at March 31,June 30, 2018, was $4.3$4.2 million and included advances of $2.8$3.5 million from threefive major customers. Accrued contract losses were $6.3$6.0 million and $7.6 million as of March 31,June 30, 2018, and December 31, 2017, respectively.
NOTE 4 – CONTRACTS RECEIVABLE AND RETAINAGE Our customers includeinclude: (1) major and large independent oil and gas companies, (2) petrochemical and industrial facilities, (3) marine companies and their contractors and (4) agencies of the U.S. Government. Of our contracts receivable balance at March 31,June 30, 2018, $18.5$12.3 million, or 67.7%38.4%, was with three customers.one customer. The significant projects for these three customersthis one customer consist of: The fabrication of four modules for a customer within our Fabrication Division associated with a U.S. ethane cracker project (completed in April 2018);
Offshoreoffshore services related to repair, installation and hook-up work for a customer within our Services Division; and
Inshore service repair and installation work for a customer within our Services Division.
As of March 31,June 30, 2018, we included an allowance for bad debt of $2$0.9 million in our contract receivable balance which primarily relates to a customer within our Fabrication Division for the storage of an offshore drilling platform that was fully reserved in 2016. NOTE 5 – FAIR VALUE MEASUREMENTS The Company makes 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 that we have reported for financial instruments, including cash and cash equivalents, held-to-maturity, short-term investments, accounts receivables and accounts payables, 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 judgment. We have classified our assets at our South Texas PropertiesNorth Yard and a drydock within our Shipyard Division assets that were at our former Prospect Shipyard as assets held for sale at March 31,June 30, 2018. See Note 2 for further disclosure relating to our assets held for sale. During the three months ended March 31, 2017, we recorded an impairment of $389,000 related to the Shipyard Division assets held for sale.
Our South Texas facilities were impacted by Hurricane Harvey, which made landfall asOn June 28, 2018, we agreed to a Category 4 hurricane.global settlement with our insurance carriers in the amount of $15.4 million. In applying the settlement amounts, we allocated the claim amounts less agreed upon deductibles included in our settlement agreement to the respective groups of assets and reimbursement of costs incurred related to our storm preparation and clean-up. During the first quarter of 2018, management determined its intention was to sell the remaining Texas North Yard and related equipment and not to expend any of the insurance funds for repairs. As of June 30, 2018, we determined that we do not expect to repairreviewed the remaining buildings and equipment at the Texas North Yard, in conjunction with its planned sale. Accordingly,and we impaired our Texas North Yard in total by $8.9 million, $5.1 million for damage and loss andof which was previously recorded a corresponding insurance recovery offsetting the impairment.
We recorded an impairment of $750,000 during the three months ended March 31, 2018, based upon our best estimate of the decline in the fair value of the property and related equipment. We recorded a corresponding insurance recovery fully offsetting this amount. See further discussion of the application of our Hurricane Harvey insurance recoveries in Note 2.
During the second quarter of 2018, we recorded an impairment of $0.6 million related to a piece of equipment that we sold during the third quarter of 2018. During the three months ended March 31, 2018, we recorded an impairment of $0.8 million related to a piece of equipment at our Texas North Yard that we intend to sell at auction. This piece of equipment was not damaged from Hurricane Harvey. The impairment wasimpairments were calculated as management's estimated net proceeds from the salesales less itstheir net book value.values. During the six months ended June 30, 2017, we recorded an impairment of $0.4 related to the Shipyard Division assets held for sale. Our impairments represent level 3 fair value measurements.
NOTE 6 – EARNINGS PER SHARE AND SHAREHOLDERS' EQUITY Earnings per Share: The following table sets forth the computation of basic and diluted earningsloss per share (in thousands, except per share data): | | | | | | | | | | | Three Months Ended March 31, | | | 2018 | | 2017 | | Basic and diluted: | | | | | Numerator: | | | | | Net loss | $ | (5,296 | ) | | $ | (6,454 | ) | | Less: Distributed and undistributed loss (unvested restricted stock) | — |
| | (34 | ) | | Net loss attributable to common shareholders | $ | (5,296 | ) | | $ | (6,420 | ) | | Denominator: | | | | Weighted-average shares (1) | 14,964 |
| | 14,758 |
| | Basic and diluted loss per share - common shareholders | $ | (0.35 | ) | | $ | (0.44 | ) |
| | | | | | | | | | | | | | | | | | | Three Months Ended June 30, | | Six Months Ended June 30, | | | 2018 | | 2017 | | 2018 | | 2017 | | Basic and diluted: | | | | | | | | | Numerator: | | | | | | | | | Net income (loss) | $ | 549 |
| | $ | (10,923 | ) | | $ | (4,747 | ) | | $ | (17,378 | ) | | Less: Distributed and undistributed loss (unvested restricted stock) | — |
| | (53 | ) | | — |
| | (87 | ) | | Net income (loss) attributable to common shareholders | $ | 549 |
| | $ | (10,870 | ) | | $ | (4,747 | ) | | $ | (17,291 | ) | | Denominator: | | | | | | | | Weighted-average shares (1) | 15,043 |
| | 14,851 |
| | 15,004 |
| | 14,805 |
| | Basic and diluted income (loss per share - common shareholders | $ | 0.04 |
| | $ | (0.73 | ) | | $ | (0.32 | ) | | $ | (1.17 | ) |
______________ (1) We have no dilutive securities.
NOTE 7 – LINE OF CREDIT We have a $40$40.0 million Credit Agreement maturing June 9, 2019. The Credit Agreement allows the Company to use up to the full amount of the available borrowing base for letters of credit and general corporate purposes. We believe that our Credit Agreement, will provide us with additional working capital flexibility to expand operations as backlog improves, respond to market opportunities and support our ongoing operations. Interest on drawings under the Credit Agreement may be designated, at our option, as either Base Rate (as defined in the Credit Agreement) or LIBOR plus 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 Credit Agreement are 0.4% per annum, and interest on undrawn stated amounts under letters of credit issued by the lender is 2% per annum. At March 31, 2018, the interest rate on our outstanding borrowings was 3.75% per annum. The Credit Agreement is secured by substantially all of our assets (other than the remaining assets held for sale at our South Texas Properties).
At March 31,June 30, 2018, $10 million waswe had no amount outstanding under theour Credit Agreement, and we had outstanding letters of credit of $2.5$5.5 million outstanding leaving availability of $27.5$34.5 million. Subsequent to March 31, 2018, we re-issued a letter of credit for $3 million related to outstanding contractual obligations which we expect to remain outstanding until July of 2018.
We must comply with the following financial covenants each quarter during the term of the Credit Agreement:
| | | i. | Ratio of current assets to current liabilities of not less than 1.25:1.00; |
| | | ii. | Minimum tangible net worth requirement of at least the sum of: |
| | | a) | $185185.0 million, plus |
| | | b) | An amount equal to 50% of consolidated net income for each fiscal quarter ending after June 30, 2017, including 50% of any gain attributable to the sale of all or substantially all of our South Texas Properties (with no deduction for a net loss in any such fiscal quarter), plus |
| | | c) | 100% of the proceeds of any issuance of any stock or other equity after deducting of any fees, commissions, expenses and other costs incurred in such offering; and |
| | | iii. | Ratio of funded debt to tangible net worth of not more than 0.50:1.00. |
As of March 31,June 30, 2018, we were in compliance with all of our financial covenants.
NOTE 8 - SEGMENT DISCLOSURES
We have structured our operations with four operating divisions, including our newly formed EPC Division, and one corporate non-operating division. We believe that our operating divisions and our corporate non-operating division each represent a reportable segment under GAAP. Our newly formed EPC Division was created in December 2017 to manage expected work we will perform for the SeaOne Project and other projects that may require EPC project management services. As part of our efforts to strategically reposition the Company (see Note 1), we may change how we manage the business which could result in a change in our reporting segments in future periods. Our operating divisions and Corporate Divisioncorporate non-operating division at June 30, 2018 are discussed below.
Fabrication Division - Our Fabrication Division primarily fabricates structures such as 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 United States during 2015)States) as well as modules for petrochemical facilities. We perform these activities out of our fabrication yards in Houma, Louisiana. As of the date of this Report, our Texas South Yard has been sold and our Texas North Yard is marketedheld for sale. See Note 2 for further disclosure relating to our South Texas Properties.
Shipyard Division - Our Shipyard Division primarily manufactures newbuild vessels and repairs various steel marine vessels in the United States 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 primarily provides interconnect piping services on offshore platforms and inshore structures. Interconnect piping services involve sending employee 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 United States for various on-site construction and maintenance activities. In addition, our Services Division fabricates packaged skid units and performs various municipal and drainage projects, such as pump stations, levee reinforcement, bulkheads and other public works projects for state and local governments. We perform these services at customer facilities or at our Houma Services Yard.
EPC Division - Late in the fourth quarter of 2017, SeaOne selected us as the prime contractor for the engineering, procurement, construction, installation, commissioning and start-up operations for their 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. SeaOne’s selection of the Company is non-binding and commencement of the project remains subject to a number
of conditions, including agreement on the terms of the engagement with SeaOne. We have created our EPC Division to manage this project and future similar projects. We understand that SeaOne is in the process of securing financing to move forward with its project. We are hopeful that the SeaOne Project will initiate planning and start-upinitial construction efforts mid-2018 with construction to start in early 2019. We are strengthening our internal project management capabilities through the hiring of additional personnel to service this potential project.
Corporate Division - Our Corporate Division primarily includes expenses that do not directly relate to the operations or shared services provided to our four operating divisions. Expenses for shared services such as human resources, insurance, business development and accounting salaries are allocated to the operating divisions. Expenses that are not allocated include, but are not limited to, costs related to executive management and directors' fees, clerical and administrative salaries, costs of maintaining the 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 divisions based upon gross profit (loss) and operating income (loss). Division assets are comprised of all assets attributable to each division. Corporate administrative costs and overhead are allocated to our four operating divisions for expenses that directly relate to the operations or relate to shared services as discussed above. Intersegment revenue is priced at the estimated fair value of work performed. Summarized financial information concerning our divisions as of and for the three and six months ended March 31,June 30, 2018, and 2017, is as follows (in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | Three Months Ended March 31, 2018 | | | Fabrication | Shipyard | Services | EPC | Corporate | Eliminations | Consolidated | | Revenue | $ | 17,270 |
| $ | 18,565 |
| $ | 21,870 |
| $ | 73 |
| $ | — |
| $ | (488 | ) | $ | 57,290 |
| | Gross profit (loss) | (219 | ) | (1,023 | ) | 2,614 |
| (308 | ) | (385 | ) | — |
| 679 |
| | Operating income (loss) | (1,593 | ) | (1,819 | ) | 1,880 |
| (725 | ) | (2,523 | ) | — |
| (4,780 | ) | | Total assets | 184,263 |
| 76,150 |
| 105,632 |
| 12 |
| 318,137 |
| (415,072 | ) | 269,122 |
| | Depreciation and amortization expense | 1,149 |
| 1,069 |
| 393 |
| — |
| 138 |
| — |
| 2,749 |
| | Capital expenditures | — |
| 6 |
| 65 |
| — |
| — |
| — |
| 71 |
| | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | Three Months Ended March 31, 2017 | | | Fabrication | Shipyard | Services | EPC | Corporate | Eliminations | Consolidated | | Revenue | $ | 10,209 |
| $ | 18,422 |
| $ | 10,712 |
| — |
| $ | — |
| $ | (1,350 | ) | $ | 37,993 |
| | Gross profit (loss) | (2,966 | ) | (1,704 | ) | 33 |
| — |
| (260 | ) | — |
| (4,897 | ) | | Operating income (loss) | (3,787 | ) | (3,057 | ) | (633 | ) | — |
| (1,739 | ) | — |
| (9,216 | ) | | Total assets | 197,834 |
| 88,489 |
| 95,562 |
| — |
| 349,917 |
| (427,142 | ) | 304,660 |
| | Depreciation and amortization expense | 3,135 |
| 1,009 |
| 432 |
| — |
| 124 |
| — |
| 4,700 |
| | Capital expenditures | 102 |
| 272 |
| — |
| — |
| 17 |
| — |
| 391 |
| | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | Three Months Ended June 30, 2018 | | | Fabrication | Shipyard | Services | EPC | Corporate | Eliminations | Consolidated | | Revenue | $ | 8,590 |
| $ | 23,620 |
| $ | 22,205 |
| $ | 882 |
| $ | — |
| $ | (1,283 | ) | $ | 54,014 |
| | Gross profit (loss) | (1,667 | ) | (2,776 | ) | 3,585 |
| 543 |
| (384 | ) | — |
| (699 | ) | | Operating income (loss) | (3,227 | ) | (3,374 | ) | 2,823 |
| 58 |
| (2,681 | ) | — |
| (6,401 | ) | Total assets (1) | 101,498 |
| 88,305 |
| 35,197 |
| 888 |
| 30,801 |
| — |
| 256,689 |
| | Depreciation and amortization expense | 1,047 |
| 1,051 |
| 383 |
| — |
| 130 |
| — |
| 2,611 |
| | Capital expenditures | — |
| 653 |
| 98 |
| — |
| 69 |
| — |
| 820 |
| | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | Three Months Ended June 30, 2017 | | | Fabrication | Shipyard | Services | EPC | Corporate | Eliminations | Consolidated | | Revenue | $ | 13,990 |
| $ | 18,303 |
| $ | 15,396 |
| — |
| $ | — |
| $ | (1,821 | ) | $ | 45,868 |
| | Gross profit (loss) | 1,931 |
| (13,851 | ) | 390 |
| — |
| (90 | ) | — |
| (11,620 | ) | | Operating income (loss) | 1,098 |
| (14,834 | ) | (257 | ) | — |
| (2,267 | ) | — |
| (16,260 | ) | Total assets (1) | 164,211 |
| 98,393 |
| 30,592 |
| — |
| 14,390 |
| — |
| 307,586 |
| | Depreciation and amortization expense | 1,152 |
| 995 |
| 422 |
| — |
| 207 |
| — |
| 2,776 |
| | Capital expenditures | 746 |
| 546 |
| 106 |
| — |
| 35 |
| — |
| 1,433 |
| | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | Six Months Ended June 30, 2018 | | | Fabrication | Shipyard | Services | EPC | Corporate | Eliminations | Consolidated | | Revenue | $ | 25,860 |
| $ | 42,185 |
| $ | 44,075 |
| $ | 955 |
| $ | — |
| $ | (1,771 | ) | $ | 111,304 |
| | Gross profit (loss) | (1,886 | ) | (3,799 | ) | 6,199 |
| 235 |
| (769 | ) | — |
| (20 | ) | | Operating income (loss) | (4,821 | ) | (5,192 | ) | 4,703 |
| (667 | ) | (5,204 | ) | — |
| (11,181 | ) | Total assets (1) | 101,498 |
| 88,305 |
| 35,197 |
| 888 |
| 30,801 |
| — |
| 256,689 |
| | Depreciation and amortization expense | 2,196 |
| 2,120 |
| 776 |
| — |
| 268 |
| — |
| 5,360 |
| | Capital expenditures | — |
| 659 |
| 163 |
| — |
| 69 |
| — |
| 891 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | Six Months Ended June 30, 2017 | | | Fabrication | Shipyard | Services | EPC | Corporate | Eliminations | Consolidated | | Revenue | $ | 24,199 |
| $ | 36,724 |
| $ | 26,107 |
| $ | — |
| $ | — |
| $ | (3,170 | ) | $ | 83,860 |
| | Gross profit (loss) | (1,034 | ) | (15,556 | ) | 423 |
| — |
| (351 | ) | — |
| (16,518 | ) | | Operating loss | (2,688 | ) | (17,892 | ) | (890 | ) | — |
| (4,007 | ) | — |
| (25,477 | ) | Total assets (1) | 164,211 |
| 98,393 |
| 30,592 |
| — |
| 14,390 |
| — |
| 307,586 |
| | Depreciation and amortization expense | 4,287 |
| 2,004 |
| 854 |
| — |
| 331 |
| — |
| 7,476 |
| | Capital expenditures | 848 |
| 818 |
| 106 |
| — |
| 52 |
| — |
| 1,824 |
|
_______________ 1) Intercompany balances have been excluded.
NOTE 9 – COMMITMENTS AND CONTINGENCIES
The Company is subject to various routine legal proceedings in the normal conduct of its business, primarily involving commercial claims, workers’ compensation claims, and claims for personal injury under general maritime laws of the United States and the Jones Act. While the outcome of these lawsuits, legal proceedings and claims cannot be predicted with certainty, management believes that the outcome of any such proceedings, even if determined adversely, would not have a material adverse effect on the financial position, results of operations or cash flows of the Company.
MPSV Termination Letter
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 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 notified our Surety of its intent to require completion of the vessel under the Surety's
bond. We have notified and met with our Surety regarding our disagreement with our customer's claims. Discussion with the Surety are ongoing. The Company will continue to enforce its rights under the agreements and defend any claims asserted against the Company by its customer. Management is unable to estimate the probability of a favorable or unfavorable outcome aas well as an estimate of potential loss, if any, at this time. We cannot guarantee that we will not incur additional costs as we negotiate with this customer. At March 31,June 30, 2018, our net balance sheet exposure was $12$12.4 million.
NOTE 10 – SUBSEQUENT EVENTS
See Note 2 regardingDuring the salefirst quarter of our Texas South Yard on April 20, 2018.2018, we executed a contract for the construction and delivery of one towing, salvage and rescue ship ("T-ATS") 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 thus given a notification to proceed. We were recently notified that this unsuccessful bidder has filed a subsequent protest with the Department of Justice. We have been granted a partial stay which allows us to proceed with design development, planning, scheduling and material ordering leading up to the start of construction. Actual construction of the vessel cannot begin until a final ruling is issued by the Department of Justice. We are in process of working with the U.S. Navy to re-establish a timeline under this contract.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Cautionary Statement on Forward-Looking Information This Report contains forward-looking statements in which we discuss our potential future performance, primarily in the sectionssection entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Forward-looking statements are all statements other than statements of historical facts, 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. We caution readers that forward-looking statements are not guarantees of future performance and actual results may differ materially from those anticipated, projected or assumed in the forward-looking statements. Important factors that can cause our actual results to differ materially from those anticipated in the forward-looking statements include the cyclical nature of the oil and gas industry, changes in backlog estimates, suspension or termination 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 disputesdispute with a customer relating to the purported termination of contracts to build MPSVs, ability to remain in compliance with our covenants contained in our Credit Agreement,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” included in our 2017 Annual Report as may be updated by subsequent filings with the SEC. Investors are cautioned that many of the assumptions upon which our forward-looking statements are based are likely to change after the forward-looking statements are made, which we cannot control. Further, we may make changes to our business plans that could affect our results. We caution investors that we do not intend to update forward-looking statements more frequently than quarterly notwithstanding any changes in our assumptions, changes in business plans, actual experience or other changes, and we undertake no obligation to update any forward-looking statements.
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 recently completed of the fabrication of complex modules for the construction of a new petrochemical plant, and we are completing newbuild construction of a technologically-advanced OSV with scheduled delivery in the second quarter of 2018. We fabricated wind turbine pedestals for the first offshore wind power project in the United States. We have also constructed 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 United States. Our customers include U.S. and, to a lesser extent, international energy producers, petrochemical, industrial, power and marine 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.EPC. 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, we have sold our Texas South Yard, in Ingleside, Texas has been sold and our Texas North Yard in Aransas Pass, Texas is marketedheld for sale.
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 and, reducing the cash compensation paid to our directors and the salaries of our executive officers as well as developing a plan to sell certain underutilized assets.
Sales of Assets
In early 2017, we announced our plan to rationalize underutilized assets including the two fabrication yards and related equipment located at our South Texas Properties.
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$0.8 million of earnest money previously received on January 3, 2018, related to the option to purchase the Texas South Yard. We plan to use theearnest money. The net proceeds to rebuildreceived rebuilt our liquidity, toprovided support for upcoming projects, continue investingcontinued investment 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 recordrecognized a gain on sale during the second quarter of 2018 related to this transaction of approximately $3.8$3.9 million. Completing the sale of the Texas South Yard iswas an important liquidity generating event and will facilitate the Company’s continued strategic repositioning from offshore oil and gas markets.
markets to a more diversified customer base. We will continue to incur costs associated with holding and maintaining our Texas North Yard. These costs include insurance, general maintenance of the property in its current state, property taxes and retained employees which will be expensed as incurred.
Hurricane Harvey and Insurance Recoveries
On August 25, 2017, our South Texas Properties were impacted by Hurricane Harvey, which 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 not accrued for any insurance recovery at March 31, 2018, in excess of insurance claim payments received to date.
To date, our insurance underwriters have made advance insurance claim payments of $8.2 million in the 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:
Clean-up and repair related costs of $1.6 million that we have incurred since August 25, 2017, through March 31, 2018;
A building at our Texas South Yard and a building atmarket our Texas North Yard were determinedand hope to be total losses. Ashave a result, we impairednegotiated contract for the remaining net book valuesale of $1.5 million related to these buildings and recorded a corresponding insurance recovery offsettingour Texas North Yard in the impairment during the fourth quarter of 2017; andnear future.
During the firstsecond quarter of 2018, we determined that we do not expect to repair the damaged buildings and equipment at the Texas North Yard. Accordingly, we impaired our Texas North Yard by $5.1 million, which represents our best estimate of the decline in the fair value of the property and equipment as a result of our decision to not repair the facility and recorded a corresponding insurance recovery offsetting the impairment.
As we work with our insurance agents and adjusters to finalize our estimate of the damage, it is 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 our 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$0.6 million primarily related to a piece of equipment that we sold in July 2018. During the three months ended March 31, 2018, we recorded an impairment of $0.8 million related to 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 wasimpairments were calculated as management's estimated net proceeds from the salesales less itstheir net book value.values.
Based Hurricane Harvey and Insurance Recoveries
On August 25, 2017, buildings and equipment located at our South Texas Properties were damaged by Hurricane Harvey, which made landfall as a Category 4 hurricane. On June 28, 2018, we agreed to a global settlement with our insurance carriers in the amount of $15.4 million. As of June 30, 2018, we had received payments totaling $8.2 million and the remaining $7.2 million has been recorded as an insurance receivable on our Consolidated Balance Sheet as of June 30, 2018, which represents a non-cash change within our Consolidated Statement of Cash Flows related to our insurance receivable. As of the date of this Report, we have received payment for the full settlement amount.
In applying the settlement, we allocated the claim amounts less agreed upon deductibles to the respective groups of assets and reimbursement of costs incurred included in our settlement agreement as follows:
Clean-up and repair related costs of $1.6 million, less deductibles applied of approximately $0.3 million that we have incurred since August 25, 2017 through June 30, 2018. A gain on insurance recoveries of $3.6 million included within other income (expense) on our Consolidated Statement of Operations that was recorded during the second quarter of 2018 primarily related to two buildings that were declared a total loss and five damaged cranes that were sold during the second quarter of 2018. Insurance recoveries of $8.9 million which offset impairment of damaged assets at the Texas North Yard. Because we do not intend to repair the remaining buildings, improvements and related equipment, we recorded impairment of $8.9 million, $5.1 million of which was recorded during the three months ended March 31, 2018. Our impairment was based
upon our initial assessmentbest estimate of the damages and insurance coverage anddecline in the fair value of the assets held for sale. Management believes that there is no basis to record additional impairment atproperty and related equipment. The insurance recovery fully offset this time.
Preservation of Cash
We will continue to monitor and preserve our cash. At March 31, 2018, we had $6.5 million in cash, debt of $10 million and working capital of $137.1 million which includes $98.4 million in assets held for sale, primarily related to our South Texas Properties. As of May 4, 2018, our liquidity has significantly improved due to the sale of our Texas South Yard, the proceeds of which will be used to rebuild our liquidity, to support upcoming projects, continue investing in our newly created EPC Division and for other general corporate purposes. After the sale of our Texas South Yard, our cash balance was $55 million, and the amount outstanding under our Credit Agreement was $10 million with remaining availability under our Credit Agreement of approximately $27.5 million for total liquidity of approximately $82.5 million. Our primary liquidity requirements for 2018 and beyond are for costs associated with fabrication and shipyard projects, capital expenditures related to our EPC Division and enhancements to our shipyards.
We currently believe that cash on hand 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 do not improve, or we are unable to sell our Texas North Yard or the sale is delayed, or we are unable to increase our backlog, we would expect to take additional measures to preserve our cash flows until such time when we are able to generate cash flows from operations. Since the beginning of 2016, we have implemented wage adjustments along with employee benefit and overall cost reductions within all of our divisions. We have reduced the level of our workforce in the past and we will continue to do so based on booked work in all of our facilities. We have reduced the compensation paid to our directors and the salaries of our executive officers, and we have reduced our capital expenditures and placed assets that are either underutilized, under-performing or not expected to provide sufficient long-term value for sale, which include our South Texas Properties.amount.
Ongoing Efforts to Increase Our Backlog, and DiversificationDiversify of Our Customer Base and Resolve Customer Dispute
Petrochemical work - We recentlyDuring the second quarter of 2018, we completed the fabrication of four modules for a new petrochemical facility. We delivered these modules on time and within budget.time. We continue to search for additional fabrication work in the petrochemical industry to add to our current backlog.
Pursuit of offshore wind - We believe that future requirements from generators and utilities to provide electricity from renewable and green sources will result in continued growth of offshore wind projects. We fabricated the first-of-a-kind wind turbine pedestals for the first offshore wind power project in the United States in 2015, and we believe that we possess the expertise
to obtain significant future work in this sector. During the first quarter of 2018, we signed a contract for the fabrication of one Meteorologicalmeteorological tower and platform for a customer's offshore wind project located off the U.S. coast of Maryland. We completed the fabrication work in the second quarter of 2018 and have included invoiced amounts in contracts receivable on our Consolidated Balance Sheet. This project iswas relatively 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 it relates to their letter of intent with their customer for structures off the coast of Maryland. Along with this letter of intent, we have executed a teaming agreement with the EEW Group forto source future U.S. offshore wind projects. There is no guarantee that we will be successful in participating in any of these plannedfuture projects.
Diversification of our Shipyard Division customer base - We continue to be successful in our efforts to diversify our capabilities within our Shipyard Division.
During the first quarter of 2018, we executed a contract for the construction and delivery of one towing, salvage and rescue ship ("T-ATS") vessel with the U.S. Navy for $63.6 million with an option for seven additional vessels with an additional value of approximately $459.1 million if all options are exercised. Our T-ATS vessel contract is currently under a bid protest from a competitor. Bid protests can result in an award decision being overturned, requiring a re-bidwhich was subsequently protested by one of the contract. Even whenunsuccessful bidders. On July 16, 2018, we were notified that the award was upheld by the U.S. Government Accountability Office and thus given a bidnotification to proceed. We were recently notified that this unsuccessful bidder has filed a subsequent protest does not result inwith the Department of Justice. We have been granted a re-bid, resolutionpartial stay which allows us to proceed with design development, planning, scheduling and material ordering leading up to the start of construction. Actual construction of the matter typically extendsvessel cannot begin until a final ruling is issued by the time until contract performance can begin, which may reduce our earningsDepartment of Justice. We are in process of working with the period in which the contract would otherwise be performed. Further, weU.S. Navy to re-establish a timeline under this contract.
We signed change orders on May 1, 2018, with two customers, eachdifferent customers. Each change order was for the construction of one additional harbor tug boat for approximately $13$13.0 million each with theper boat. Each customer has an additional option for one more harbor tug boat for approximately $12.2 million each. This is in addition to the eightboat. We are now constructing a total of five harbor tug boats for each customer. If the additional options are exercised, we are currently constructingwill build a total of 12 harbor tug boats for these two customers.
On June 11, 2018, one of our customers exercised their option for a second, newbuild construction of an additional Regional Class Research Vessel ("RCRV") for $67.6 million. The first vessel was awarded in July of 2017 which included options for two additional vessels.
Continued growth within our Services Division - Generally, we expectbelieve demand for our Services Division towill increase in 2018 beyond the contractual backlog amount in place as of March 31,June 30, 2018. Work associated with offshore tie-backs, upgrades and maintenance remains strong. We will continue to pursue opportunities within the offshore/inshore plant expansion and maintenance programs as well as targeting growth of developing fields in West Texas.
Our newly formed EPC Division - As discussed in our 2017 Annual Report, we were selected as the prime contractor for the 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. SeaOne’s selection of us is non-binding and commencement of the project remains subject to a number of conditions, including agreement on terms of the engagement with SeaOne. In anticipation of this project advancing, we are enhancing our internal project management capabilities through the hiring of additional personnel to service this project. Subsequent to March 31, 2018, weWe received an additional early works purchase order from SeaOne for approximately $1.0$1.2 million. We continue to work with SeaOne on finalizing Initial Engineering Designinitial engineering design and project pricing. We understand that SeaOne is in the process of securing financing to move forward with its project. We are hopeful that the SeaOne Project will initiate planning and start-upinitial construction efforts mid-2018 with construction to start in early 2019.
Completion of our MPSV contract - As previously disclosed, on March 19, 2018, 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 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 notified our Surety of its intent to require completion of the vessel under the Surety's bond. We have notified and met with our Surety regarding our disagreement with our customer's claims. Discussions with the Surety are ongoing. The Company will continue to enforce its rights under the agreements and defend any claims asserted against the Company by its customer. Management is unable to estimate the probability of a favorable or unfavorable outcome aas well as an estimate of potential loss, if any, at this time. We cannot guarantee that we will not incur additional costs as we negotiate with this customer. At June 30, 2018, our net balance sheet exposure was $12.4 million.
Outlook
Looking forward, our results of operations will be affected primarily by:
Our ability to execute on projects in accordance with our cost estimates and manage them to successful completion;
Our ability to win contracts through competitive bidding or alliance/partnering arrangements;
Demandby demand for our services and the overall number of projects in the market place. As discussed above, a significant portion of our historical customer base has been impacted by the continued level of exploration and development activity maintained byfor oil and gas exploration and production companiesgas. We have implemented a number of initiatives to strategically reposition the Company to attract new customers, participate in the GOM,buildup of petrochemical facilities, pursue offshore wind markets, enter the EPC industry and diversify our customers within our Shipyard Division. The success of our initiatives to a lesser extent, overseas locations, which is dependent uponstrategically reposition the price of oilCompany and gas;our future operations will be determined by:
The level of petrochemical facilitynew construction and improvements;fabrication projects in the new markets we are pursuing including petrochemical facilities and offshore wind;
Our successful execution of an agreement with SeaOne;SeaOne and the ability of SeaOne to obtain financing;
Continued growth within our Shipyard and Services divisions;
Our ability to resolve our disputes with our customer for the completion of the two MPSV vessels; andwin contracts through competitive bidding or alliance/partnering arrangements;
Our ability to secure additional fabrication offshore wind projects.execute projects in accordance with our cost estimates and successfully manage them through completion; and
Our ability to resolve a dispute over purported with a Shipyard customer related to the construction of two MPSVs.
We continue to respond to the competitive forces within our industry and continue 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 period of competitive pricing with lower than desired margins. Additionally, revenue from these awards will not be realized until later in 2018 and beyond.
Safety
We operate in an environment that exposes our employees to risk of injury, and we are committed to safety. We believe safety is a key metric for our success. Poor safety performance increases our costs, results in construction delays and limits 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 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. There have been no changes in our evaluation of our critical accounting policies since December 31, 2017.
Backlog We believe that backlog, a non-GAAP financial measure, provides useful information to investors. Backlog differs from the GAAP requirement to disclose future performance obligations required under fixed-price contracts as required under Topic 606 of the ASC. See Note 3 of the Notes to Consolidated Financial Statements for further discussion of Topic 606. Backlog includes future work that has been entered intosecured subsequent to the balance sheet date frompursuant to letters of intent or other forms of authorization as well as signed contracts that are temporarily suspended or under protest that may not meet the criteria to be reported as future performance
obligations under Topic 606 (the most comparable GAAP measure); however, represents future work that management believes is probable of being performed. Our backlog is based on management’s estimate of the direct labor hours required to complete, and the remaining revenue to be recognized with respect to those projects for which a customer has authorized us to begin work or purchase materials pursuant to written contracts, letters of intent or other forms of authorization. As engineering and design plans are finalized or changes to existing plans are made, management’s estimate of the direct labor hours required to complete a project and the price of a project at completion is likely to change. All projects currently included in our backlog are generally subject to suspension, termination, or a reduction in scope at the option of the customer, although the customer is required to pay us for work performed and materials purchased through the date of termination, suspension, or reduction in scope. In addition, customers have the ability to delay the execution of projects. We exclude suspended projects from contract backlog when they are expected to be suspended more than 12 months because resumption of work and timing of revenue recognition for these projects are difficult to predict. Depending on the size of the project, the termination, postponement, or reduction in scope of any one project could significantly reduce our backlog and could have a material adverse effect on future revenue, net income (loss) and cash flow. A reconciliation of future revenue performance obligations under Topic 606 of the ASC (the most comparable GAAP measure as included in Note 3 of the Notes to Consolidated Financial Statements) to our reported backlog is provided below (in thousands).
| | | | | | | | | | | | | | | | | | | | | | | | | | | March 31, 2018 | | | Fabrication | | Shipyard | | Services | | EPC | | Eliminations | | Consolidated | | Future performance obligations required under fixed-price contracts under Topic 606 of ASC | $ | 6,706 |
| | $ | 149,590 |
| | $ | 11,858 |
| | $ | — |
| | $ | (990 | ) | | $ | 167,164 |
| | Contracts signed subsequent to March, 31, 2018 | — |
| | 29,874 |
| | — |
| | 1,037 |
| | — |
| | 30,911 |
| Signed contracts under purported termination or third party protest (1), (2) | — |
| | 94,176 |
| | — |
| | — |
| | — |
| | 94,176 |
| | Backlog | $ | 6,706 |
| | $ | 273,640 |
| | $ | 11,858 |
| | $ | 1,037 |
| | $ | (990 | ) | | $ | 292,251 |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | June 30, 2018 | | | Fabrication | | Shipyard | | Services | | EPC | | Eliminations | | Consolidated | | Future performance obligations required under fixed-price contracts under Topic 606 of ASC | $ | 1,871 |
| | $ | 295,506 |
| | $ | 7,607 |
| | $ | 1,618 |
| | $ | (193 | ) | | $ | 306,409 |
| | Contracts signed subsequent to June 30, 2018 | — |
| | — |
| | 9,788 |
| | 1,200 |
| | — |
| | 10,988 |
| Signed contracts under purported termination (1) | — |
| | 30,157 |
| | — |
| | — |
| | — |
| | 30,157 |
| | Backlog | $ | 1,871 |
| | $ | 325,663 |
| | $ | 17,394 |
| | $ | 2,818 |
| | $ | (193 | ) | | $ | 347,553 |
| | | | | | | | | | | | | |
___________ | | | (1) | Includes backlog for a customer for which we have received a notice of purported termination within our Shipyard Division related to the construction of two MPSVs. We dispute the purported termination and disagree with the customer’s reasons for same.Wesame. We cannot guarantee that we will be able to favorably negotiate completion of the MPSVs with this customer. See Note 9 of the Notes to Consolidated Financial Statements. |
| | (2) | Includes our signed contract with the U.S. Navy for the construction of the T-ATS Salvage vessel which is under bid protest from a competitor. Bid protests can result in an award decision being overturned, requiring a re-bid of the contract. Even when a bid protest does not result in a re-bid, resolution of the matter typically extends the time until contract performance can begin, which may reduce our earnings in the period in which the contract would otherwise be performed. |
Our backlog at March 31,June 30, 2018, as compared to December 31, 2017, consisted of the following (in thousands, except for percentages):
| | | | | | | | | | | | | March 31, 2018 | | December 31, 2017 | | Division | $'s | Labor hours | | $'s | Labor hours | | Fabrication | $ | 6,706 |
| 54 | | $ | 15,771 |
| 150 | | Shipyard | 273,640 |
| 1,493 | | 184,035 |
| 1,104 | | Services | 11,858 |
| 130 | | 23,181 |
| 290 | | EPC | 1,037 |
| — | | — |
| — | | Intersegment eliminations | (990 | ) | — | | (370 | ) | — | | Total backlog | $ | 292,251 |
| 1,677 | | $ | 222,617 |
| 1,544 | | | | | | | | | | Number | Percentage | | Number | Percentage | Major customers (1) | 5 | 85.4% | | 4 | 73.0% | | | | | | | | Backlog is expected to be recognized in revenue during:(2)
| $'s | Percentage | | | | | 2018 | $ | 90,879 |
| 31.1% | | | | | 2019 | 142,274 |
| 48.7% | | | | | 2020 | 59,098 |
| 20.2% | | | | | Total | $ | 292,251 |
| 100.0% | |
|
| | | | | | | | |
| | | | | | | | | | | | |
| June 30, 2018 |
| December 31, 2017 | | Division | $'s | Labor hours | | $'s | Labor hours | | Fabrication | $ | 1,871 |
| 12 |
| | $ | 15,771 |
| 150 |
| | Shipyard | 325,663 |
| 1,784 |
| | 184,035 |
| 1,104 |
| | Services | 17,394 |
| 83 |
| | 23,181 |
| 290 |
| | EPC | 2,818 |
| — |
| | — |
| — |
| | Intersegment eliminations | (193 | ) | — |
| | (370 | ) | — |
| | Total backlog | $ | 347,553 |
| 1,879 |
| | $ | 222,617 |
| 1,544 |
|
| | | | | | | | |
| June 30, 2018 |
| December 31, 2017 | | | Number | Percentage | | Number | Percentage | Major customers (1) | four | 77.8% | | four | 73.0% | | | | | | | | Backlog is expected to be recognized in revenue during:(2) | $'s | Percentage | | | | | 2018 | $ | 97,366 |
| 28.0% | | | | | 2019 | 170,987 |
| 49.2% | | | | | 2020 | 69,890 |
| 20.1% | | | | | 2021 | 8,645 |
| 2.5% | | | | | 2022 | 665 |
| 0.2% | | | | | Total | $ | 347,553 |
| 100.0% | |
| | | | | | | | |
___________
| | | (1) | At March 31,June 30, 2018, projects for our fivefour largest customers in terms of revenue backlog consisted of: |
| | | (i) | Two large MPSVs for one customer for which we have received a purported notice of termination as discussed above; |
| | (ii) | Newbuildnewbuild construction of five harbor tugs for one customer (to be completed in 2018 through 2020); |
| | (iii)(ii) | Newbuildnewbuild construction of five harbor tugs for one customer (separate from above) (to be completed in 2018 through 2020); |
| | (iv)(iii) | Newbuildnewbuild construction of antwo offshore marine research vesselvessels (to be completed in 2020)2020 and 2022); and |
| | (v)(iv) | Newbuildnewbuild construction of one T-ATS vessel (to be completed in 2020)2021). This contract is currently underwas 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 thus given a bid protest.notification to proceed. We were recently notified that this unsuccessful bidder has filed a subsequent protest with the Department of Justice. We have been granted a partial stay which allows us to proceed with design development, planning, scheduling and material ordering leading up to the start of construction. |
| | | (2) | The timing of recognition of the revenue represented in our backlog is based on management’s current estimates to complete the projects. Certain factors and circumstances could cause changes in the amounts ultimately recognized and the timing of the recognition of revenue from our backlog. |
Certain of our contracts contain options which grant the right to our customer, if exercised, for the construction of additional vessels at contracted prices.Weprices. We do not include options in our backlog above. If all options under our current contracts were exercised, our backlog would increase by $626.2$562.7 million. We believe disclosing these options provides investors with useful information in order to evaluate additional potential work that we would be contractually obligated to perform under our current contracts as well as the potential significance of these options, if exercised. We have not received any commitments related to the exercise of these options from our customers, and we can provide no assurance that any or all of these options will be exercised. As we add backlog, we will add personnel with critical project management and fabrication skills to ensure we have the resources necessary to execute our projects well and to support our project risk mitigation discipline for all new projects. This may negatively impact near-term results. Workforce As of March 31,June 30, 2018, we had 961847 employees compared to 977 employees as of December 31, 2017. Labor hours worked were 496,000947,000 during the threesix months ended March 31,June 30, 2018, compared to 479,0001 million for the threesix months ended March 31,June 30, 2017. The overall increase in labor hours worked for the three months ended March 31, 2018, was due to improved offshore demand within our Services Division. As of April 29, 2018, we had 870 employees. The decrease in our workforce subsequent to March 31, 2018,labor hours worked is primarily within our Fabrication Division due to completion of complex modules for the construction of a new petrochemical plant with no significant futureimmediate replacement Fabrication backlog forecasted in the near-term as well as the stoppagesuspension of construction of the two MPSVs within our Shipyard Division pending resolution of our dispute over termination with our MPSV customer. This was partially offset by improved demand within our Services Division. See Note 9 of the Notes to Consolidated Financial Statements related to our MPSV contract termination dispute.
Results of Operations Three Months Ended March 31,June 30, 2018, Compared to Three Months Ended March 31,June 30, 2017(in thousands, except for percentages): Consolidated | | | | | | | | | | | | | | | | Three Months Ended March 31, | | Increase or (Decrease) | | | 2018 | | 2017 | | Amount | Percent | | Revenue | $ | 57,290 |
| | $ | 37,993 |
| | $ | 19,297 |
| 50.8% | | Cost of revenue | 56,611 |
| | 42,890 |
| | 13,721 |
| 32.0% | | Gross profit (loss) | 679 |
| | (4,897 | ) | | 5,576 |
| 113.9% | | Gross profit (loss) percentage | 1.2 | % | | (12.9 | )% | | | | | General and administrative expenses | 4,709 |
| | 3,930 |
| | 779 |
| 19.8% | | Asset impairment | 750 |
| | 389 |
| | 361 |
| 92.8% | | Operating income (loss) | (4,780 | ) | | (9,216 | ) | | (4,436 | ) |
| | Other income (expense): | | | | | | | | Interest expense | (469 | ) | | (59 | ) | | (410 | ) | (694.9)% | | Other income (expense), net | 12 |
| | 9 |
| | 3 |
| 33.3% | | Total other income (expense) | (457 | ) | | (50 | ) | | (407 | ) | (814.0)% | | Net loss before income taxes | (5,237 | ) | | (9,266 | ) | | (4,029 | ) | (43.5)% | | Income tax expense (benefit) | 59 |
| | (2,812 | ) | | 2,871 |
| 102.1% | | Net loss | $ | (5,296 | ) | | $ | (6,454 | ) | | $ | 6,900 |
|
|
| | | | | | | | | | | | | | | | Three Months Ended June 30, | | Increase or (Decrease) | | | 2018 | | 2017 | | Amount | Percent | | Revenue | $ | 54,014 |
| | $ | 45,868 |
| | $ | 8,146 |
| 17.8% | | Cost of revenue | 54,713 |
| | 57,488 |
| | (2,775 | ) | (4.8)% | | Gross loss | (699 | ) | | (11,620 | ) | | 10,921 |
| 94.0% | | Gross loss percentage | (1.3 | )% | | (25.3 | )% | | | | | General and administrative expenses | 5,092 |
| | 4,640 |
| | 452 |
| 9.7% | | Asset impairment | 610 |
| | — |
| | 610 |
| 100.0% | | Operating loss | (6,401 | ) | | (16,260 | ) | | 9,859 |
| 60.6% | | Other income (expense): | | | | | | | | Interest expense, net | (92 | ) | | (146 | ) | | 54 |
| 37.0% | | Other income (expense), net | 7,125 |
| | (266 | ) | | 7,391 |
| 2,778.6% | | Total other income (expense) | 7,033 |
| | (412 | ) | | 7,445 |
| 1,807.0% | | Net income (loss) before income taxes | 632 |
| | (16,672 | ) | | 17,304 |
| 103.8% | | Income tax expense (benefit) | 83 |
| | (5,749 | ) | | 5,832 |
| 101.4% | | Net income (loss) | $ | 549 |
| | $ | (10,923 | ) | | $ | 11,472 |
| 105.0% |
Revenue - Our revenue for the three months ended March 31,June 30, 2018 and 2017, was $57.3$54.0 million and $38.0$45.9 million, respectively, representing an increase of 50.8%17.8%. The increase is primarily attributable to:
An increase of $11.2$6.8 million within our Services Division from additional demand for offshore oil and gas service related projects; and An increase of $7.1$5.3 million within our Shipyard Division related to the newbuild construction of ten harbor tug vessels and an offshore marine research vessel which were not under construction during the second quarter of 2017 and $10.2 million in contract losses recorded during the three months ended June 30, 2017, which reduced our measurement of revenue progress under percentage of completion accounting for the second quarter of 2017. Additionally, we re-commenced newbuild construction for the second of two OSV's during the fourth quarter of 2017 which was in process in the second quarter of 2018 but was suspended during the second quarter of 2017.
The increase in revenue was partially offset by a decrease of $5.4 million of revenue within our Fabrication Division primarily attributable to the constructioncompletion of four modules for a petrochemical plant.plant in April 2018.
Gross profit (loss)loss - Our gross profitloss for the three months ended March 31,June 30, 2018, was $679,000$0.7 million compared to a gross loss of $4.9$11.6 million for the three months ended March 31,June 30, 2017. The increase in gross profitimprovement was primarily due to increased revenue within our Services Division as discussed above and a lower gross loss from our Shipyard Division related to $10.2 million in contract losses recorded during the three months ended June 30, 2017, reflecting cost overruns and re-work identified on two contracts relating to the construction of two MPSVs with no comparable adjustments to contract losses in the second quarter of 2018. Additionally, we decreased expenses within our Fabrication Division which included $1.9 million of depreciation expense for the three months ended March 31, 2017, related to our South Texas Properties with no depreciation expense during the three months ended March 31, 2018, for our South Texas Properties as these assets are classified as held for sale.Division.
General and administrative expenses - Our general and administrative expenses were $4.7$5.1 million for the three months ended March 31,June 30, 2018, compared to $3.9$4.6 million for the three months ended March 31,June 30, 2017. The increase in general and administrative expenses for the three months ended March 31,June 30, 2018, was primarily attributable toto:
Build-up of additional personnel for our newly created EPC Division;Division in anticipation of the SeaOne Project; Increased legal and advisory fees related to customer disputes, strategic planning and diversification of our business; and Increased employee incentiveincentives accruals of approximately $300,000 for all divisions related to our safety incentive program and higher employee profitability incentives within our Services Division as well as the addition of personnel as we build up our EPC Division in anticipation of the SeaOne Project; and Higher stock compensation expense of approximately $220,000.Division.
This was partially offset by cost reductions and continued cost minimization efforts implemented by management for the period.
Asset impairment - We recorded an impairmentsecond quarter of $750,000 during the three months ended March 31, 2018, related to 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 management's estimated net proceeds from the sale less its net book value. See also Note 2 of the Notes to Consolidated Financial Statements for additional information regarding our assets held for sale. During the three months ended March 31, 2017, we recorded an impairment of $389,000 related to the Shipyard Division assets held for sale.2017.
Interest expense, net - Interest expense, increasednet decreased due to drawingsfewer letters of credit issued under our Credit Agreement for the three months ended March 31,June 30, 2018, with no such drawings under our Credit Agreementcompared to the three months ended June 30, 2017, as well as increased interest income from investments in cash equivalents and held-to-maturity, short-term investments during the three months ended June 30, 2018.
Other income (expense) - Other income, net was $7.1 million for the three months ended March 31, 2017, as well as increased amortizationJune 30, 2018, compared to other expense, net of deferred financing costs during$0.3 million for the three months ended March 31, 2018.June 30, 2017. Other income, net for the three months ended June 30, 2018 is primarily due to a gain on the sale of our Texas South Yard of $3.9 million and a gain on settlement of insurance recovery proceeds related to Hurricane Harvey of $3.6 million.
Income tax expense (benefit) - Our effective income tax rate for the three months ended March 31,June 30, 2018, was (1.1)%expense of 13.1%, compared to an effective tax rate benefit of 30.3%34.5% for the comparable period during 2017. Current expense represents state taxesincome tax within our Services Division. The decrease in the effective tax rate is the result of a valuation allowance against our deferred tax assets. See Note 1 of the Notes to Consolidated Financial Statements regarding our NOLs and deferred tax assets.
Operating Segments
The results of our four operating divisions and Corporate Divisionnon-operating corporate division for the three months ended March 31,June 30, 2018 and 2017, are presented below (in thousands, except for percentages).
| | | | | | | | | | | | | | | | | Fabrication | | Three Months Ended March 31, | | Increase or (Decrease) | | | | 2018 | | 2017 | | Amount | | Percent | | Revenue | | $ | 17,270 |
| | $ | 10,209 |
| | $ | 7,061 |
| | 69.2% | | Gross profit (loss) | | (219 | ) | | (2,966 | ) | | (2,747 | ) | | (92.6)% | | Gross profit (loss) percentage | | (1.3 | )% | | (29.1 | )% | | | |
| | General and administrative expenses | | 624 |
| | 821 |
| | (197 | ) | | (24.0)% | | Asset impairment | | 750 |
| | — |
| | 750 |
| | 100.0% | | Operating income (loss) | | $ | (1,593 | ) | | $ | (3,787 | ) | | $ | (2,194 | ) | |
|
| | | | | | | | | | | | | | | | | Fabrication | | Three Months Ended June 30, | | Increase or (Decrease) | | | | 2018 | | 2017 | | Amount | | Percent | | Revenue | | $ | 8,590 |
| | $ | 13,990 |
| | $ | (5,400 | ) | | (38.6)% | | Gross profit (loss) | | (1,667 | ) | | 1,931 |
| | (3,598 | ) | | (186.3)% | | Gross profit (loss) percentage | | (19.4 | )% | | 13.8 | % | | | |
| | General and administrative expenses | | 951 |
| | 833 |
| | 118 |
| | 14.2% | | Asset impairment | | 610 |
| | — |
| | 610 |
| | 100.0% | | Operating income (loss) | | (3,227 | ) | | 1,098 |
| | (4,325 | ) | |
|
Revenue - Revenue from our Fabrication Division increased $7.1decreased $5.4 million for the three months ended March 31,June 30, 2018, compared to the three months ended March 31,June 30, 2017. The increasedecrease is attributable to the constructioncompletion and delivery of four modules for a petrochemical plant during April 2018 with very little immediate replacement backlog started as a result of the three months ended March 31, 2018, and lower revenue during the three months ended March 31, 2017, resultingtemporary impacts from previously depressed oil and gas prices and the corresponding reduction in customer demand for offshore fabrication projects during the period. This was partially offset, by decreased revenue of $2.4 million for the three months ended March 31, 2018, at our South Texas Properties as these were placed for sale during the first quarter of 2017 and project work completed or transfered to our Houma Fabrication Yard during 2017.prices.
Gross profit (loss) - Gross loss from our Fabrication Division for the three months ended March 31,June 30, 2018, was $219,000$1.7 million compared to a gross lossprofit of $3.0$1.9 million for the three months ended March 31,June 30, 2017. The decrease in gross loss was due to increaseddecreased revenue with minimal new fabrication work started during the second quarter of 2018 as discussed above and a reduction in depreciation expense of $1.9 million in depreciation expense during the three months ended March 31, 2018 for our South Texas Properties as these assets are classified as held for sale.above.
General and administrative expenses - General and administrative expenses for our Fabrication Division decreased $197,000increased $0.1 million for the three months ended March 31,June 30, 2018, compared to the three months ended March 31,June 30, 2017. The decreaseincrease is primarily due to an increase in legal expense of $0.4 million for our pursuit of claims against a customer related to disputed change orders for a large deepwater project we delivered to our customer in November 2015 partially offset by decreases in workforce at our South Texas Properties,salaries and employee incentives of $0.2 million due to employee reductions and decreases in corporate allocations of $0.1 million as a portion of these are now allocated to our EPC Division and continued cost minimization efforts implemented by management for the period.Division.
Asset impairment - We recorded an impairment of $750,000$0.6 million during the three months ended March 31,June 30, 2018, primarily related to 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.Yard. The impairment was calculated as management's estimated net proceeds from the sale less its net book value. See Note 2 of the Notes to Consolidated Financial Statements for additional information regarding our assets held for sale. We did not record any asset impairments during the three months ended March 31,June 30, 2017, within our Fabrication Division.
| | | | | | | | | | | | | | | | | Shipyard | | Three Months Ended March 31, | | Increase or (Decrease) | | | | 2018 | | 2017 | | Amount | | Percent | Revenue (1) | | $ | 18,565 |
| | $ | 18,422 |
| | $ | 143 |
| | 0.8% | Gross profit (loss) (1) | | (1,023 | ) | | (1,704 | ) | | (681 | ) | | (40.0)% | | Gross profit (loss) percentage | | (5.5 | )% | | (9.2 | )% | | | |
| | General and administrative expenses | | 796 |
| | 964 |
| | (168 | ) | | (17.4)% | | Asset impairment | | — |
| | 389 |
| | (389 | ) | | (100.0)% | Operating income (loss) (1) | | $ | (1,819 | ) | | $ | (3,057 | ) | | $ | (1,238 | ) | |
|
| | | | | | | | | | | | | | | | | Shipyard | | Three Months Ended June 30, | | Increase or (Decrease) | | | | 2018 | | 2017 | | Amount | | Percent | Revenue (1) | | $ | 23,620 |
| | $ | 18,303 |
| | $ | 5,317 |
| | 29.0% | Gross loss (1) | | (2,776 | ) | | (13,851 | ) | | 11,075 |
| | 80.0% | | Gross loss percentage | | (11.8 | )% | | (75.7 | )% | | | |
| | General and administrative expenses | | 597 |
| | 983 |
| | (386 | ) | | (39.3)% | Operating loss (1) | | (3,374 | ) | | (14,834 | ) | | 11,460 |
| |
|
___________ | | | (1) | Revenue for the three months ended March 31,June 30, 2018 and 2017, includes $390,000$0.1 million and $1.6$0.3 million of non-cash amortization of deferred revenue related to the values assigned to the contracts acquired in the LEEVAC transaction, respectively. |
Revenue - Revenue from our Shipyard Division increased $143,000$5.3 million for the three months ended March 31,June 30, 2018, compared to the three months ended March 31,June 30, 2017. During the firstsecond quarter of 2018, we were able to make progress on the construction of eightten harbor tugstug vessels and an offshore marine research vessel which were not under construction during the firstsecond quarter of 2017. During the three months ended June 30, 2017, we also recorded $10.2 million in contract losses which reduced our measure of revenue progress under percentage of completion accounting. Additionally, we re-commenced newbuild construction for the second of two OSV's during the fourth quarter of 2017, which was suspended during the second quarter of 2017. This was partially offset by lower revenue from construction of our two OSV and two MPSV vessel contracts that were under construction during 2017, but suspended during the first quarter of 2018.
During the first quarter of 2017, we completed the first of the OSVs and tendered it for delivery on February 6, 2017, and suspended construction of the second OSV due to a customer dispute. We recommenced construction of the second OSV during the fourth quarter of 2017 which is scheduled for completion during the second quarter of 2018. During the first quarter of 2018, 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 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. See also Note 9 of the Notes to Consolidated Financial Statements for additional information relating to this customer dispute.the suspension of construction of two MPSVs.
Gross profit (loss)loss - Gross loss from our Shipyard Division was $1.0$2.8 million for the three months ended March 31,June 30, 2018, compared to a gross loss of $1.7$13.9 million for the three months ended March 31,June 30, 2017. The decreasegross loss for the three months ended June 30, 2018, was primarily attributable to underutilization of our Houma and Lake Charles shipyards and competitive pricing on current work. The improvement in gross loss of $11.1 million was primarily due to improved cost management efforts and efficiencies learned from the construction of two OSV and two MPSV vesselsto:
$10.2 million in contract losses recorded during the three months ended March 31,June 30, 2017, related to cost overruns and appliedre-work identified on the two contracts relating to the construction of eight harbor tugstwo MPSVs; holding and closing costs during the three months ended MarchJune 30, 2017, related to our former Prospect shipyard. We terminated the lease of this facility effective December 31, 2017; and holding costs during the three months ended June 30, 2017 related to a completed OSV that was delivered on February 6, 2017, but refused by our customer as well as the suspension of work on the second OSV vessel. We resolved our disputes with our OSV customer during the fourth quarter of 2017 and construction of the second OSV re-commenced. We subsequently delivered the second OSV on July 31, 2018.
General and administrative expenses - General and administrative expenses for our Shipyard Division decreased $168,000$0.4 for the three months ended March 31,June 30, 2018, compared to the three months ended March 31,June 30, 2017, primarily due to reductions in salaries and employee incentives of $0.4 million related to reductions in our workforce period over period and decreases in corporate allocations of $0.1 million as a portion of these are now allocated to our EPC Division. This was partially offset by increases in legal expense related to our customer dispute relating to the suspension of construction of two MPSVs. See also Note 9 of the Notes to Consolidated Financial Statements for additional information relating to the suspension of construction of two MPSVs.
| | | | | | | | | | | | | | | | | Services | | Three Months Ended June 30, | | Increase or (Decrease) | | | | 2018 | | 2017 | | Amount | | Percent | | Revenue | | $ | 22,205 |
| | $ | 15,396 |
| | $ | 6,809 |
| | 44.2% | | Gross profit | | 3,585 |
| | 390 |
| | 3,195 |
| | 819.2% | | Gross profit percentage | | 16.1 | % | | 2.5 | % | | | |
| | General and administrative expenses | | 762 |
| | 647 |
| | 115 |
| | 17.8% | | Operating income (loss) | | 2,823 |
| | (257 | ) | | 3,080 |
| |
|
Revenue - Revenue from our Services Division increased $6.8 million for the three months ended June 30, 2018, compared to the three months ended June 30, 2017, due to an overall increase in work resulting from increases in customer demand for offshore oil and gas related service projects.
Gross profit - Gross profit from our Services Division increased $3.2 million for the three months ended June 30, 2018, compared to the three months ended June 30, 2017, due to increased revenue discussed above. Our gross profit percentage increased from 2.5% during the period for 2017 to 16.1% for 2018. The increase in gross profit percentage was due to a higher recovery of fixed costs with increased work.
General and administrative expenses - General and administrative expenses for our Services Division increased $0.1 for the three months ended June 30, 2018, compared to the three months ended June 30, 2017, due to support of increased work as well as increases in employee incentive compensation with allocation of corporate expenses remaining comparable period over period.
| | | | | | | | | | | | | | | | | EPC | | Three Months Ended June 30, | | Increase or (Decrease) | | | | 2018 | | 2017 | | Amount | | Percent | | Revenue | | $ | 882 |
| | $ | — |
| | $ | 882 |
| | 100.0% | | Gross profit | | 543 |
| | — |
| | 543 |
| | 100.0% | | Gross profit percentage | | 61.6 | % | | n/a |
| | | | | | General and administrative expenses | | 485 |
| | — |
| | 485 |
| | 100.0% | | Operating income | | 58 |
| | — |
| | 58 |
| |
|
Revenue - Our EPC Division did not exist at June 30, 2017. Revenue for the three months ended June 30, 2018 consists of early work and engineering studies authorized by SeaOne. See Note 8 of the Notes to Consolidated Financial Statements for further discussion of our EPC Division and the SeaOne Project.
Gross profit - Gross profit for the three months ended June 30, 2018, consists of early work and engineering studies authorized by SeaOne.
General and administrative expenses - General and administrative expenses for our EPC Division include the addition of personnel and allocations of corporate expenses as we invest in this new line of business.
| | | | | | | | | | | | | | | | | Corporate | | Three Months Ended June 30, | | Increase or (Decrease) | | | | 2018 | | 2017 | | Amount | | Percent | | Revenue | | $ | — |
| | $ | — |
| | $ | — |
| | | | Gross loss | | (384 | ) | | (90 | ) | | (294 | ) | | (326.7)% | | Gross loss percentage | | n/a |
| | n/a |
| | | | | | General and administrative expenses | | 2,297 |
| | 2,177 |
| | 120 |
| | 5.5% | | Operating loss | | (2,681 | ) | | (2,267 | ) | | (414 | ) | |
|
Gross loss - Gross loss from our Corporate Division increased primarily due to lower allocation of expenses and build-up of personnel to support our EPC Division.
General and administrative expenses - General and administrative expenses for our Corporate Division increased primarily due to increased legal and advisory fees related to customer disputes, strategic planning and diversification of our business and increased employee incentive accruals.
Six Months Ended June 30, 2018, Compared to Six Months Ended June 30, 2017(in thousands, except for percentages): Consolidated | | | | | | | | | | | | | | | | Six Months Ended June 30, | | Increase or (Decrease) | | | 2018 | | 2017 | | Amount | Percent | | Revenue | $ | 111,304 |
| | $ | 83,860 |
| | $ | 27,444 |
| 32.7% | | Cost of revenue | 111,324 |
| | 100,378 |
| | 10,946 |
| 10.9% | | Gross loss | (20 | ) | | (16,518 | ) | | 16,498 |
| 99.9% | | Gross profit percentage | — | % | | (19.7 | )% | | | | | General and administrative expenses | 9,801 |
| | 8,570 |
| | 1,231 |
| 14.4% | | Asset impairment | 1,360 |
| | 389 |
| | 971 |
| 249.6% | | Operating loss | (11,181 | ) | | (25,477 | ) | | 14,296 |
| 56.1% | | Other income (expense): | | | | | | | | Interest expense, net | (238 | ) | | (205 | ) | | (33 | ) | (16.1)% | | Other income (expense), net | 6,814 |
| | (257 | ) | | 7,071 |
| 2,751.4% | | Total other income (expense) | 6,576 |
| | (462 | ) | | 7,038 |
| 1,523.4% | | Net loss before income taxes | (4,605 | ) | | (25,939 | ) | | 21,334 |
| 82.2% | | Income tax expense (benefit) | 142 |
| | (8,561 | ) | | 8,703 |
| 101.7% | | Net loss | $ | (4,747 | ) | | $ | (17,378 | ) | | $ | 12,631 |
| 72.7% |
Revenue - Our revenue for the six months ended June 30, 2018 and 2017, was $111.3 million and $83.9 million, respectively, representing an increase of 32.7%. The increase is primarily attributable to:
An increase of $1.7 million within our Fabrication Division primarily attributable to the construction and completion of four modules for a petrochemical plant; An increase of $5.5 million within our Shipyard Division primarily related to construction of ten harbor tug vessels and an offshore marine research vessel which were not under construction during the first half of 2017 and $10.6 million in contract losses recorded during the six months ended June 30, 2017, which reduced our measure of revenue progress under percentage of completion accounting; Additionally, we re-commenced newbuild construction for the second of two OSV's during the fourth quarter of 2017, which continued through the first half of 2018 but had been suspended during the second quarter of 2017; and An increase of $18.0 million within our Services Division from additional demand for offshore oil and gas service related projects.
Gross loss - Our gross loss for the six months ended June 30, 2018, was $20,000 compared to a gross loss of $16.5 million for the six months ended June 30, 2017. The improvement in gross loss was primarily due to increased revenue within our Services Division as discussed above and $10.6 million in contract losses related to cost overruns and re-work that was identified and recorded during the six months ended June 30, 2017 on two contracts relating to the construction of two MPSVs with no comparable adjustments to contract losses in the first half of 2018.
General and administrative expenses - Our general and administrative expenses were $9.8 million for the six months ended June 30, 2018, compared to $8.6 million for the six months ended June 30, 2017. The increase in general and administrative expenses for the six months ended June 30, 2018, was primarily attributable to:
Build-up of additional personnel for our newly created EPC Division; Increased legal and advisory fees related to customer disputes, strategic planning and diversification of our business; and Increased employee incentive accruals for all divisions related to our safety incentive program and higher employee profitability incentives within our Services Division. This was partially offset by cost reductions and continued cost minimization efforts implemented by management during the second half of 2017.
Asset impairment - We recorded an impairment of $1.4 million during the six months ended June 30, 2018, primarily related to two pieces of equipment at our Texas North Yard that are held for sale. The impairment was calculated as management's estimated net proceeds from the sale less the equipment's net book value. See Note 2 of the Notes to Consolidated Financial Statements for additional information regarding our assets held for sale. During the six months ended June 30, 2017, we recorded an impairment of $0.4 million related to our Shipyard Division assets held for sale.
Other income (expense), net - Other income, net was $6.8 million for the six months ended June 30, 2018, compared to other expense, net of $0.3 million for the six months ended June 30, 2017. Other income, net for the six months ended June 30, 2018 is primarily due to a gain on the sale of our Texas South Yard of $3.9 million and a gain on settlement of insurance recovery proceeds related to Hurricane Harvey of $3.6 million.
Income tax expense (benefit) - Our effective income tax rate for the six months ended June 30, 2018, was expense of 3.1%, compared to an effective tax rate benefit of 33.0% for the comparable period during 2017. Current expense represents state income tax within our Services Division. The decrease in the effective tax rate is the result of a valuation allowance against our deferred tax assets. See Note 1 of the Notes to Consolidated Financial Statements regarding our NOLs and deferred tax assets.
Operating Segments
The results of our four operating divisions and non-operating corporate division for the six months ended June 30, 2018 and 2017, are presented below (in thousands, except for percentages).
| | | | | | | | | | | | | | | | | Fabrication | | Six Months Ended June 30, | | Increase or (Decrease) | | | | 2018 | | 2017 | | Amount | | Percent | | Revenue | | $ | 25,860 |
| | $ | 24,199 |
| | $ | 1,661 |
| | 6.9% | | Gross loss | | (1,886 | ) | | (1,034 | ) | | (852 | ) | | (82.4)% | | Gross loss percentage | | (7.3 | )% | | (4.3 | )% | | | | | | General and administrative expenses | | 1,575 |
| | 1,654 |
| | (79 | ) | | (4.8)% | | Asset impairment | | 1,360 |
| | — |
| | 1,360 |
| | 100.0% | | Operating loss | | (4,821 | ) | | (2,688 | ) | | (2,133 | ) | | |
Revenue - Revenue from our Fabrication Division increased $1.7 million for the six months ended June 30, 2018, compared to the six months ended June 30, 2017. The increase is attributable to the construction and completion of four modules for a petrochemical plant during the six months ended June 30, 2018. This was partially offset, by decreased revenue of $2.8 million for the six months ended June 30, 2018, at our South Texas Properties as these were marketed for sale.
Gross loss - Gross loss from our Fabrication Division for the six months ended June 30, 2018, was $1.9 million compared to a gross loss of $1.0 million for the six months ended June 30, 2017. The increase in gross loss was due to increased material costs incurred on the construction and completion of four modules for a petrochemical plant during the six months ended June 30, 2018 as well as current work being bid at more competitive pricing. This was partially offset by a reduction in depreciation expense of $1.9 million during the six months ended June 30, 2018 for our South Texas Properties as these assets are classified as held for sale.
General and administrative expenses - General and administrative expenses for our Fabrication Division decreased $0.1 million for the six months ended June 30, 2018, compared to the six months ended June 30, 2017. The decrease is primarily due to decreases in salaries and employee incentives of $0.3 million due to reductions in workforce, decreases in corporate allocations of $0.3 million as a portion of these are now allocated to our EPC Division and continued cost minimization efforts implemented by management for the first half of 2018, partially offset by an increase in legal expense of $0.5 million.
Asset impairment - We recorded an impairment of $1.4 million during the six months ended June 30, 2018, primarily related to two pieces of equipment at our Texas North Yard. One piece of equipment was sold in July 2018, and we intend to sell the other piece of equipment at auction. The impairment was calculated as management's estimated net proceeds from the sale less the equipment's net book value. See Note 2 of the Notes to Consolidated Financial Statements for additional information regarding our assets held for sale. We did not record any asset impairments during the six months ended June 30, 2017, within our Fabrication Division.
| | | | | | | | | | | | | | | | | Shipyard | | Six Months Ended June 30, | | Increase or (Decrease) | | | | 2018 | | 2017 | | Amount | | Percent | Revenue (1) | | $ | 42,185 |
| | $ | 36,724 |
| | $ | 5,461 |
| | 14.9% | Gross loss (1) | | (3,799 | ) | | (15,556 | ) | | 11,757 |
| | 75.6% | | Gross loss percentage | | (9.0 | )% | | (42.4 | )% | | | | | | General and administrative expenses | | 1,393 |
| | 1,947 |
| | (554 | ) | | (28.5)% | | Asset impairment | | — |
| | 389 |
| | (389 | ) | | (100.0)% | Operating loss (1) | | (5,192 | ) | | (17,892 | ) | | 12,700 |
| | |
___________ | | | (1) | Revenue for the six months ended June 30, 2018, and 2017, includes $0.5 million and $1.9 million, respectively, of non-cash amortization of deferred revenue related to the values assigned to the contracts acquired in the LEEVAC transaction. |
Revenue - Revenue from our Shipyard Division increased $5.5 million for the six months ended June 30, 2018, compared to the six months ended June 30, 2017. During the first half of 2018, we made progress on the construction of ten harbor tug vessels and an offshore marine research vessel that were not under construction during the first half of 2017. The increase in revenue also resulted from re-commencing the newbuild construction for the second of two OSV's during the fourth quarter of 2017, which continued through the first half of 2018 but was suspended during the second quarter of 2017. This was partially offset by lower revenue from construction of two MPSVs that were under construction during 2017, but suspended during the first quarter of 2018. During the six months ended June 30, 2017, we also recorded $10.2 million in contract losses which reduced our measure of revenue progress under percentage of completion accounting. See also Note 9 of the Notes to Consolidated Financial Statements for additional information relating to the suspension of construction of two MPSVs.
Gross loss - Gross loss from our Shipyard Division was $3.8 million for the six months ended June 30, 2018, compared to a gross loss of $15.6 million for the six months ended June 30, 2017. The gross loss for the six months ended June 30, 2018, was primarily attributable to underutilization of our Houma and Lake Charles shipyards and competitive pricing on current work. The decrease in gross loss compared to the six months ended June 30, 2017, was due to:
$10.6 million in contract losses related to cost overruns and re-work that was identified and recorded during the six months ended June 30, 2017 relating to the construction of two MPSVs; Holding and closing costs during the six months ended June 30, 2017, related to our Prospect shipyard. We terminated the lease of this facility effective December 31, 2017; and Holding costs during the six months ended June 30, 2017, related to a completed OSV that was delivered on February 6, 2017, but refused by our customer as well as the suspension of work on the second OSV vessel. We resolved our disputes with our OSV customer during the fourth quarter of 2017 and construction of the second OSV re-commenced. We subsequently delivered the second OSV on July 31, 2018.
General and administrative expenses - General and administrative expenses for our Shipyard Division decreased construction activity.$0.6 million for the six months ended June 30, 2018, compared to the six months ended June 30, 2017, primarily due to decreases in salaries and employee incentives of $0.5 million due to reductions in workforce and decreases in corporate allocations of $0.1 million as a portion of these are now allocated to our EPC Division.
Asset impairment - During the threesix months ended March 31,June 30, 2017, we recorded an impairment of $389,000$0.4 million related to the Shipyard Division assets held for sale. See Note 2 of the Notes to Consolidated Financial Statements for additional information relating to our assets held for sale. We did not record any asset impairment during the threesix months ended March 31,June 30, 2018, in our Shipyard Division.
| | | | | | | | | | | | | | | | | Services | | Three Months Ended March 31, | | Increase or (Decrease) | | | | 2018 | | 2017 | | Amount | | Percent | | Revenue | | $ | 21,870 |
| | $ | 10,712 |
| | $ | 11,158 |
| | 104.2% | | Gross profit (loss) | | 2,614 |
| | 33 |
| | 2,581 |
| | 7,821.2% | | Gross profit (loss) percentage | | 12.0 | % | | 0.3 | % | | | |
| | General and administrative expenses | | 734 |
| | 666 |
| | 68 |
| | 10.2% | | Operating income (loss) | | $ | 1,880 |
| | $ | (633 | ) | | $ | 2,513 |
| |
|
| | | | | | | | | | | | | | | | | Services | | Six Months Ended June 30, | | Increase or (Decrease) | | | | 2018 | | 2017 | | Amount | | Percent | | Revenue | | $ | 44,075 |
| | $ | 26,107 |
| | $ | 17,968 |
| | 68.8% | | Gross profit | | 6,199 |
| | 423 |
| | 5,776 |
| | 1,365.5% | | Gross profit percentage | | 14.1 | % | | 1.6 | % | | | | | | General and administrative expenses | | 1,496 |
| | 1,313 |
| | 183 |
| | 13.9% | | Operating income (loss) | | 4,703 |
| | (890 | ) | | 5,593 |
| |
|
Revenue - Revenue from our Services Division increased $11.2$18.0 million for the threesix months ended March 31,June 30, 2018, compared to the threesix months ended March 31,June 30, 2017, due to an overall increase in work experienced due toresulting from increases in customer demand for offshore oil and gas related service projects.
Gross profit - Gross profit from our Services Division increased $2.6$5.8 million for the threesix months ended March 31,June 30, 2018, compared to the threesix months ended March 31,June 30, 2017, due to increased revenue discussed above. Our gross profit percentage increased from 1.6% during the period for 2017 to 14.1% for 2018. The increase in gross profit percentage was due to a higher recovery of fixed costs with increased work.
General and administrative expenses - General and administrative expenses for our Services Division increased $68,000$0.2 million for the threesix months ended March 31,June 30, 2018, compared to the threesix months ended March 31,June 30, 2017, due to support of increased work as well as increases in employee incentive compensation with allocation of approximately $120,000 resulting from increased operating income. This was partially offset by decreases in corporate allocations as a portion of these are now allocated to our EPC Division and continued cost minimization efforts implemented by management for theexpenses remaining comparable period over period.
| | | | | | | | | | | | | | | | | EPC | | Three Months Ended March 31, | | Increase or (Decrease) | | | | 2018 | | 2017 | | Amount | | Percent | | Revenue | | 73 |
| | $ | — |
| | $ | 73 |
| | 100.0% | | Gross profit (loss) | | (308 | ) | | — |
| | (308 | ) | | (100.0)% | | Gross profit (loss) percentage | | n/a |
| | n/a |
| | | |
| | General and administrative expenses | | 417 |
| | — |
| | 417 |
| | 100.0% | | Operating income (loss) | | $ | (725 | ) | | $ | — |
| | $ | (725 | ) | |
|
| | | | | | | | | | | | | | | | | EPC | | Six Months Ended June 30, | | Increase or (Decrease) | | | | 2018 | | 2017 | | Amount | | Percent | | Revenue | | $ | 955 |
| | $ | — |
| | $ | 955 |
| | 100.0% | | Gross profit | | 235 |
| | — |
| | 235 |
| | 100.0% | | Gross profit (loss) percentage | | 24.6 | % | | n/a |
| | | | | | General and administrative expenses | | 902 |
| | — |
| | 902 |
| | 100.0% | | Operating loss | | (667 | ) | | — |
| | (667 | ) | |
|
Revenue - Our EPC Division did not exist at March 31,June 30, 2017. Revenue for the threesix months ended March 31,June 30, 2018, consists of early work and engineering studies authorized by SeaOne. See Note 8 of the Notes to Consolidated Financial Statements for further discussion of our EPC Division and the SeaOne Project.
Gross profit (loss) - Gross lossprofit from our EPC Division occurred as we added personnel and overhead infrastructure related to the anticipated SeaOne project.
General and administrative expenses - General and administrative expenses for our EPC Division include the addition of personnel and allocations of corporate expenses as we invest in this new line of business. | | | | | | | | | | | | | | | | | Corporate | | Three Months Ended March 31, | | Increase or (Decrease) | | | | 2018 | | 2017 | | Amount | | Percent | | Revenue | | $ | — |
| | $ | — |
| | $ | — |
| | —% | | Gross profit (loss) | | $ | (385 | ) | | (260 | ) | | 125 |
| | 48.1% | | Gross profit (loss) percentage | | n/a |
| | n/a |
| | | | | | General and administrative expenses | | 2,138 |
| | 1,479 |
| | 659 |
| | 44.6% | | Operating income (loss) | | $ | (2,523 | ) | | $ | (1,739 | ) | | $ | 784 |
| |
|
| | | | | | | | | | | | | | | | | Corporate | | Six Months Ended June 30, | | Increase or (Decrease) | | | | 2018 | | 2017 | | Amount | | Percent | | Revenue | | $ | — |
| | $ | — |
| | $ | — |
| | | | Gross loss | | (769 | ) | | (351 | ) | | (418 | ) | | (119.1)% | | Gross loss percentage | | n/a |
| | n/a |
| | | | | | General and administrative expenses | | 4,435 |
| | 3,656 |
| | 779 |
| | 21.3% | | Operating loss | | (5,204 | ) | | (4,007 | ) | | (1,197 | ) | |
|
Gross profit (loss)loss - Gross loss from our Corporate Division increased primarily due to lower allocation of expenses and as well as increased insurance costs.buildup of personnel to support our EPC Division.
General and administrative expenses - General and administrative expenses for our Corporate Division increased primarily due to increased legal and advisory fees related to customer disputes, strategic planning and diversification of our business and increased employee incentive accruals and higher stock compensation expense of approximately $220,000.accruals.
Liquidity and Capital Resources Our immediate liquidity remains dependent on our cash on hand, anticipatedscheduled maturities of our held-to-maturity, short-term investments, potential proceeds from the sales of assets, availability of future drawings from our Credit Agreement and collections of accounts receivable. At March 31, 2018, we had $10 million outstanding under our Credit Agreement, $2.5 million in outstanding letters of credit, and cash and cash equivalents totaling $6.5 million compared to $9.0 million at December 31, 2017. As of May 4, 2018, our liquidity has significantly improved due to the saleA summary of our Texas South Yard the net proceedsimmediately available liquidity as of which willJune 30, 2018 is as follows: | | | | | | | Available Liquidity | | $ (in thousands) | | Cash and cash equivalents on hand | | $ | 32,004 |
| Held-to-maturity, short-term investments (1) | | 7,481 |
| | Revolving credit agreement | | 40,000 |
| | Less: | |
| | Borrowings under our Credit Agreement | | — |
| | Outstanding letters of credit | | (5,495 | ) | | Total available liquidity | | $ | 73,990 |
|
___________ (1) Our held-to-maturity, short-term investments include U.S. Treasuries and other investment-grade commercial paper and can be used to rebuild our liquidity, to support upcoming projects, continue investingliquidated quickly in our newly created EPC Division and for other general corporate purposes. After the sale of our Texas South Yard, our cash balance was $55.0 million, and the amount outstanding under our Credit Agreement was $10 million with remaining availability under our Credit Agreement of approximately $27.5 million for total liquidity of approximately $82.5 million.open markets. Working capital was $137.1$132.7 million and our ratio of current assets to current liabilities was 4.344.67 to 1 at March 31,June 30, 2018, compared to $130.5 million and 3.68 to 1, respectively, at December 31, 2017. Working capital at March 31,June 30, 2018, includes $98.4$7.5 million of held-to-maturity, short-term investments, $7.2 million of insurance receivables and $43.8 million related to assets held for sale, primarily related to our remaining South Texas Properties which decreased after the sale of our Texas South Yards to $48.5 million.Properties. At March 31,June 30, 2018, our contracts receivable balance was $27.4$31.9 million of which we have subsequently collected $14.9$14.4 million through May 4, 2018.as of the date of this Report and our insurance receivable was $7.2 million of which we have received payment for the full amount as of the date of this Report. Our primary usesources/uses of cash during the threesix months ended March 31,June 30, 2018, isare referenced in the Cash Flow Activities section below. As discussed in our Executive Summary, we are implementing several strategies to diversify our business, increase backlog, reduce operating expenses and monetize assets. Our South Texas Properties are held for sale. A significant portion of our near-term plan is to generate liquidity from the sale of theseunderutilized assets. On April 20, 2018, we closed on the sale of our Texas South Yard for a sale price of $55$55.0 million, less selling costs of $1.5 million. We received approximately $52.7 million at closing, which was in addition to the $750,000$0.8 million of earnest money previously received on January 3, 2018, related to the option to purchase the Texas South Yard. We plan to use theearnest money. The net proceeds to rebuildreceived rebuilt our liquidity, toprovided support for upcoming projects, continue investingcontinued investment in our newly created EPC Division and for other general corporate purposes. See further discussion of the sale of our Texas South Yard in Note 2 of the Notes to Consolidated Financial Statements. We currently believe that cash on hand coupled with proceeds received fromcontinue to market our Texas North Yard, and hope to have a negotiated contract for 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 the twelve months from the date of this Report.
As of the date of this Report our Texas North Yard remains held for sale. The book value ofin the Texas North Yard is $46.6 million at March 31, 2018. We will continue to incur costs associated with holding and maintaining our Texas North Yard. These costs include insurance, general maintenance of the properties in their current state, property taxes and retained employees which will be expensed as incurred.near future.
We have a $40$40.0 million Credit Agreement maturing June 9, 2019. The Credit Agreement allows the Company to use up to the full amount of the available borrowing base for letters of credit and general corporate purposes. We believe that our Credit Agreement will provide us with additional working capital flexibility to expand operations as backlog improves, respond to market opportunities and support our ongoing operations. Interest on drawings under the Credit Agreement may be designated, at our option, as either Base Rate (as defined in the credit facility) or LIBOR plus 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 Credit Agreement are 0.4% per annum, and interest on undrawn stated amounts under letters of credit issued by the lender is 2% per annum. At March 31, 2018, the interest rate on our outstanding borrowings was 3.75% per annum. The Credit Agreement is secured by substantially all of our assets (other than the South Texas Properties).
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 we expect to remain outstanding until July of 2018.
We must comply with the following financial covenants each quarter during the term of the Credit Agreement:
| | | i. | Ratio of current assets to current liabilities of not less than 1.25:1.00; |
| | | ii. | Minimum tangible net worth requirement of at least the sum of: |
$185 million, plus An amount equal to 50% of consolidated net income for each fiscal quarter ending after June 30, 2017, including 50% of any gain attributable to the sale of all or substantially all our South Texas Properties (with no deduction for a net loss in any such fiscal quarter), plus
| | b) | An amount equal to 50% of consolidated net income for each fiscal quarter ending after June 30, 2017, including 50% of any gain attributable to the sale of our South Texas Properties (with no deduction for a net loss in any such fiscal quarter), plus |
| | c) | 100% of the proceeds of any issuance of any stock or other equity after deducting of any fees, commissions, expenses and other costs incurred in such offering; and |
100% of the proceeds of any issuance of any stock or other equity after deducting of any fees, commissions, expenses and other costs incurred in such offering; and
| | | iii. | Ratio of funded debt to tangible net worth of not more than 0.50:1.00. |
As of March 31,June 30, 2018, we were in compliance with all of our financial covenants.
We will continue to monitor and preserve our cash. Our primary liquidity requirements for 2018 and beyond are for the costs associated with fabricationFabrication and shipyardShipyard projects, capital expenditures related to the creationexpansion of our EPC Division and enhancements to our shipyards.Shipyard facilities. Future capital expenditures will be highly dependent upon the amount and timing of future projects. Capital expenditures for the quartersix months ended March 31,June 30, 2018, were $71,000.$0.8 million. We do not anticipate significant capital expenditures for the remainder of 2018.
If industry conditions for offshore oil and gas do not improve, we are unable to sell our Texas North Yard or the sale is delayed, or we are unable to increase our backlog, we would expect to take additional measures to preserve our cash flows until such time we are able to generate cash flows from operations. Since the beginning of 2016, we have implemented wage adjustments along with employee benefit and overall cost reductions within all of our divisions. We have reduced the level of our workforce in the past and we will continue to do so based on booked work in all of our facilities. We have reduced the cash compensation paid to our directors and the salaries of our executive officers, and we have reduced our capital expenditures and placed assets that are either underutilized, under-performing or not expected to provide sufficient long-term value for sale, which include our South Texas Properties.
We currently believe that cash and cash equivalents on hand and held-to-maturity, short-term investments 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 twelve months from the date of this Report. Our view regarding sufficiency of cash and liquidity is primarily based on our financial forecast for the remainder of 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 forecast, 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 requirements. Accordingly, we may be required to further draw on our Credit Agreement, obtain additional bank financing, sell additional assets or conduct equity or debt offerings at a time when it is not beneficial to do so.
Cash Flow Activities
For the threesix months ended March 31,June 30, 2018, net cash used in operating activities was $14.1$26.4 million, compared to net cash used in operating activities of $15.1$27.9 million for the threesix months ended March 31,June 30, 2017. The use of cash in operations during the period was primarily due to the following:
Operating losses for the threesix months ended March 31,June 30, 2018, excluding gains on sales of assets and insurance recoveries as well as amounts in excess of non-cash depreciation, amortization, impairment, and stock compensation expense of approximately $1.5$3.5 million;
Slower collections of receivables of $6.4 million
Build-up of costs for contracts in progress of $9.1$8.1 million;
Build-up ofIncreased retainage on projects of $1.5 million; and
PaymentIncreased payments of property taxes related to our South Texas Propertiesaccounts payable of $2 million.$2.4 million; and
Other general uses of working capital.
Net cash provided by investing activities for the threesix months ended March 31,June 30, 2018, was $2.4$50.2 million, compared to cash used inprovided by investing activities of $391,000$0.3 million for the threesix months ended March 31,June 30, 2017. The changeincrease in cash used inprovided by investing activities is due primarily due to the sales of assets, primarily our Texas South Yard, in the amount of $56.4 million and the insurance proceeds received for hurricane damage to assets at our South Texas Properties. This was partially offset by the purchase of held-to-maturity investments of $7.5 million.
Net cash providedused by financing activities for the threesix months ended March 31,June 30, 2018, and 2017, was $9.2$0.8 million compared to $1.0$1.2 million in cash used in financing activities, respectively. The increase in cash provided by financing activities is due to $10 million in net borrowings under our Credit Agreement.
Contractual Obligations There have been no material changes from the information included in our 2017 Annual Report. For more information on our contractual obligations, refer to Part II, Item 7 of our 2017 Annual Report. Off-Balance Sheet Arrangements There have been no material changes from the information included in our 2017 Annual Report. Item 3. Quantitative and Qualitative Disclosures About Market Risk. There have been no material changes in the Company’s market risks during the quarter ended March 31,June 30, 2018. For more information on market risk, refer to Part II, Item 7A. of our Annual Report on Form 10-K for the year ended December 31, 2017. Item 4. Controls and Procedures. The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and that such information is communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this Report. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that the design and operation of our disclosure controls and procedures were effective as of the end of the period covered by this Report. There have been no changes during the fiscal quarter ended March 31,June 30, 2018, in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION Item 1. Legal Proceedings. The Company is subject to various routine legal proceedings in the normal conduct of its business primarily involving commercial claims, workers’ compensation claims, and claims for personal injury under general maritime laws of the United States and the Jones Act. While the outcome of these lawsuits, legal proceedings and claims cannot be predicted with certainty, management believes that the outcome of any such proceedings, even if determined adversely, would not have a material adverse effect on the financial position, results of operations or cash flows of the Company. Item 1A. Risk Factors. There have been no material changes from the information included in Item 1A “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2017. Item 6. Exhibits. | | | | | Exhibit Number | | Description of Exhibit | | | | | 3.1 | | 2009 (SEC File no. 001-34279). | | 3.2 | | 2016 (SEC File no. 001-34279). | | 10.1 | |
| 10.2 | |
| 10.3 | |
| 10.4 | |
| | 31.1 | | | | 31.2 | | | | 32 | | | | | | | | 101 | | Attached as Exhibit 101 to this report are the following items formatted in XBRL (Extensible Business Reporting Language): | | | | (i) | Consolidated Balance Sheets, | | | | (ii) | Consolidated Statements of Operations, | | | | (iii) | Consolidated Statement of Changes in Shareholders’ Equity, | | | | (iv) | Consolidated Statements of Cash Flows, and | | | | (v) | Notes to Consolidated Financial Statements. | | | | | | * | | Filed herewith. | | † | | Management Contract or Compensatory Plan. |
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized. | | | | GULF ISLAND FABRICATION, INC. | | | | BY: | /s/ David S. Schorlemer | | | David S. Schorlemer | | | Executive Vice President, Chief Financial Officer, Secretary and Treasurer (Principal Financial Officer) |
Date: May 4,August 9, 2018
s | | Remainder of 2018 | | $ | 88,573 |
| | $ | 86,378 |
| | 2019 | | 59,231 |
| | 140,831 |
| | 2020 | | 19,360 |
| | 69,890 |
| | 2021 | | | 8,645 |
| | 2022 | | | 665 |
| | Total | | $ | 167,164 |
| | $ | 306,409 |
| | | | | | |
Contracts in Progress and Advance Billings on Contracts
Revenue recognition and customer invoicing may occur at different times. Revenue recognition is based upon our calculation of percent of work complete; however, customer invoicing will generally depend upon a predetermined billing schedule as stated in the contract which could allow for customer advance payments or invoicing based upon achievement of certain milestones. Revenue earned but not yet invoiced is reflected as contracts in progress and included in current assets on our consolidated balance sheet. Billings made to our customers in advance of revenue being earned are reflected as advance billings on contracts and included in current liabilities on our balance sheet. Contracts in progress at March 31,June 30, 2018, totaled $37.5$36.5 million with $27$31.1 million relating to twothree major customers. Advance billings on contracts at March 31,June 30, 2018, was $4.3$4.2 million and included advances of $2.8$3.5 million from threefive major customers. Accrued contract losses were $6.3$6.0 million and $7.6 million as of March 31,June 30, 2018, and December 31, 2017, respectively.
NOTE 4 – CONTRACTS RECEIVABLE AND RETAINAGE Our customers includeinclude: (1) major and large independent oil and gas companies, (2) petrochemical and industrial facilities, (3) marine companies and their contractors and (4) agencies of the U.S. Government. Of our contracts receivable balance at March 31,June 30, 2018, $18.5$12.3 million, or 67.7%38.4%, was with three customers.one customer. The significant projects for these three customersthis one customer consist of: The fabrication of four modules for a customer within our Fabrication Division associated with a U.S. ethane cracker project (completed in April 2018);
Offshoreoffshore services related to repair, installation and hook-up work for a customer within our Services Division; and
Inshore service repair and installation work for a customer within our Services Division.
As of March 31,June 30, 2018, we included an allowance for bad debt of $2$0.9 million in our contract receivable balance which primarily relates to a customer within our Fabrication Division for the storage of an offshore drilling platform that was fully reserved in 2016. NOTE 5 – FAIR VALUE MEASUREMENTS The Company makes 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 that we have reported for financial instruments, including cash and cash equivalents, held-to-maturity, short-term investments, accounts receivables and accounts payables, 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 judgment. We have classified our assets at our South Texas PropertiesNorth Yard and a drydock within our Shipyard Division assets that were at our former Prospect Shipyard as assets held for sale at March 31,June 30, 2018. See Note 2 for further disclosure relating to our assets held for sale. During the three months ended March 31, 2017, we recorded an impairment of $389,000 related to the Shipyard Division assets held for sale.
Our South Texas facilities were impacted by Hurricane Harvey, which made landfall asOn June 28, 2018, we agreed to a Category 4 hurricane.global settlement with our insurance carriers in the amount of $15.4 million. In applying the settlement amounts, we allocated the claim amounts less agreed upon deductibles included in our settlement agreement to the respective groups of assets and reimbursement of costs incurred related to our storm preparation and clean-up. During the first quarter of 2018, management determined its intention was to sell the remaining Texas North Yard and related equipment and not to expend any of the insurance funds for repairs. As of June 30, 2018, we determined that we do not expect to repairreviewed the remaining buildings and equipment at the Texas North Yard, in conjunction with its planned sale. Accordingly,and we impaired our Texas North Yard in total by $8.9 million, $5.1 million for damage and loss andof which was previously recorded a corresponding insurance recovery offsetting the impairment.
We recorded an impairment of $750,000 during the three months ended March 31, 2018, based upon our best estimate of the decline in the fair value of the property and related equipment. We recorded a corresponding insurance recovery fully offsetting this amount. See further discussion of the application of our Hurricane Harvey insurance recoveries in Note 2.
During the second quarter of 2018, we recorded an impairment of $0.6 million related to a piece of equipment that we sold during the third quarter of 2018. During the three months ended March 31, 2018, we recorded an impairment of $0.8 million related to a piece of equipment at our Texas North Yard that we intend to sell at auction. This piece of equipment was not damaged from Hurricane Harvey. The impairment wasimpairments were calculated as management's estimated net proceeds from the salesales less itstheir net book value.values. During the six months ended June 30, 2017, we recorded an impairment of $0.4 related to the Shipyard Division assets held for sale. Our impairments represent level 3 fair value measurements.
NOTE 6 – EARNINGS PER SHARE AND SHAREHOLDERS' EQUITY Earnings per Share: The following table sets forth the computation of basic and diluted earningsloss per share (in thousands, except per share data): | | | | | | | | | | | Three Months Ended March 31, | | | 2018 | | 2017 | | Basic and diluted: | | | | | Numerator: | | | | | Net loss | $ | (5,296 | ) | | $ | (6,454 | ) | | Less: Distributed and undistributed loss (unvested restricted stock) | — |
| | (34 | ) | | Net loss attributable to common shareholders | $ | (5,296 | ) | | $ | (6,420 | ) | | Denominator: | | | | Weighted-average shares (1) | 14,964 |
| | 14,758 |
| | Basic and diluted loss per share - common shareholders | $ | (0.35 | ) | | $ | (0.44 | ) |
| | | | | | | | | | | | | | | | | | | Three Months Ended June 30, | | Six Months Ended June 30, | | | 2018 | | 2017 | | 2018 | | 2017 | | Basic and diluted: | | | | | | | | | Numerator: | | | | | | | | | Net income (loss) | $ | 549 |
| | $ | (10,923 | ) | | $ | (4,747 | ) | | $ | (17,378 | ) | | Less: Distributed and undistributed loss (unvested restricted stock) | — |
| | (53 | ) | | — |
| | (87 | ) | | Net income (loss) attributable to common shareholders | $ | 549 |
| | $ | (10,870 | ) | | $ | (4,747 | ) | | $ | (17,291 | ) | | Denominator: | | | | | | | | Weighted-average shares (1) | 15,043 |
| | 14,851 |
| | 15,004 |
| | 14,805 |
| | Basic and diluted income (loss per share - common shareholders | $ | 0.04 |
| | $ | (0.73 | ) | | $ | (0.32 | ) | | $ | (1.17 | ) |
______________ (1) We have no dilutive securities.
NOTE 7 – LINE OF CREDIT We have a $40$40.0 million Credit Agreement maturing June 9, 2019. The Credit Agreement allows the Company to use up to the full amount of the available borrowing base for letters of credit and general corporate purposes. We believe that our Credit Agreement, will provide us with additional working capital flexibility to expand operations as backlog improves, respond to market opportunities and support our ongoing operations. Interest on drawings under the Credit Agreement may be designated, at our option, as either Base Rate (as defined in the Credit Agreement) or LIBOR plus 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 Credit Agreement are 0.4% per annum, and interest on undrawn stated amounts under letters of credit issued by the lender is 2% per annum. At March 31, 2018, the interest rate on our outstanding borrowings was 3.75% per annum. The Credit Agreement is secured by substantially all of our assets (other than the remaining assets held for sale at our South Texas Properties).
At March 31,June 30, 2018, $10 million waswe had no amount outstanding under theour Credit Agreement, and we had outstanding letters of credit of $2.5$5.5 million outstanding leaving availability of $27.5$34.5 million. Subsequent to March 31, 2018, we re-issued a letter of credit for $3 million related to outstanding contractual obligations which we expect to remain outstanding until July of 2018.
We must comply with the following financial covenants each quarter during the term of the Credit Agreement:
| | | i. | Ratio of current assets to current liabilities of not less than 1.25:1.00; |
| | | ii. | Minimum tangible net worth requirement of at least the sum of: |
| | | a) | $185185.0 million, plus |
| | | b) | An amount equal to 50% of consolidated net income for each fiscal quarter ending after June 30, 2017, including 50% of any gain attributable to the sale of all or substantially all of our South Texas Properties (with no deduction for a net loss in any such fiscal quarter), plus |
| | | c) | 100% of the proceeds of any issuance of any stock or other equity after deducting of any fees, commissions, expenses and other costs incurred in such offering; and |
| | | iii. | Ratio of funded debt to tangible net worth of not more than 0.50:1.00. |
As of March 31,June 30, 2018, we were in compliance with all of our financial covenants.
NOTE 8 - SEGMENT DISCLOSURES
We have structured our operations with four operating divisions, including our newly formed EPC Division, and one corporate non-operating division. We believe that our operating divisions and our corporate non-operating division each represent a reportable segment under GAAP. Our newly formed EPC Division was created in December 2017 to manage expected work we will perform for the SeaOne Project and other projects that may require EPC project management services. As part of our efforts to strategically reposition the Company (see Note 1), we may change how we manage the business which could result in a change in our reporting segments in future periods. Our operating divisions and Corporate Divisioncorporate non-operating division at June 30, 2018 are discussed below.
Fabrication Division - Our Fabrication Division primarily fabricates structures such as 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 United States during 2015)States) as well as modules for petrochemical facilities. We perform these activities out of our fabrication yards in Houma, Louisiana. As of the date of this Report, our Texas South Yard has been sold and our Texas North Yard is marketedheld for sale. See Note 2 for further disclosure relating to our South Texas Properties.
Shipyard Division - Our Shipyard Division primarily manufactures newbuild vessels and repairs various steel marine vessels in the United States 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 primarily provides interconnect piping services on offshore platforms and inshore structures. Interconnect piping services involve sending employee 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 United States for various on-site construction and maintenance activities. In addition, our Services Division fabricates packaged skid units and performs various municipal and drainage projects, such as pump stations, levee reinforcement, bulkheads and other public works projects for state and local governments. We perform these services at customer facilities or at our Houma Services Yard.
EPC Division - Late in the fourth quarter of 2017, SeaOne selected us as the prime contractor for the engineering, procurement, construction, installation, commissioning and start-up operations for their 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. SeaOne’s selection of the Company is non-binding and commencement of the project remains subject to a number
of conditions, including agreement on the terms of the engagement with SeaOne. We have created our EPC Division to manage this project and future similar projects. We understand that SeaOne is in the process of securing financing to move forward with its project. We are hopeful that the SeaOne Project will initiate planning and start-upinitial construction efforts mid-2018 with construction to start in early 2019. We are strengthening our internal project management capabilities through the hiring of additional personnel to service this potential project.
Corporate Division - Our Corporate Division primarily includes expenses that do not directly relate to the operations or shared services provided to our four operating divisions. Expenses for shared services such as human resources, insurance, business development and accounting salaries are allocated to the operating divisions. Expenses that are not allocated include, but are not limited to, costs related to executive management and directors' fees, clerical and administrative salaries, costs of maintaining the 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 divisions based upon gross profit (loss) and operating income (loss). Division assets are comprised of all assets attributable to each division. Corporate administrative costs and overhead are allocated to our four operating divisions for expenses that directly relate to the operations or relate to shared services as discussed above. Intersegment revenue is priced at the estimated fair value of work performed. Summarized financial information concerning our divisions as of and for the three and six months ended March 31,June 30, 2018, and 2017, is as follows (in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | Three Months Ended March 31, 2018 | | | Fabrication | Shipyard | Services | EPC | Corporate | Eliminations | Consolidated | | Revenue | $ | 17,270 |
| $ | 18,565 |
| $ | 21,870 |
| $ | 73 |
| $ | — |
| $ | (488 | ) | $ | 57,290 |
| | Gross profit (loss) | (219 | ) | (1,023 | ) | 2,614 |
| (308 | ) | (385 | ) | — |
| 679 |
| | Operating income (loss) | (1,593 | ) | (1,819 | ) | 1,880 |
| (725 | ) | (2,523 | ) | — |
| (4,780 | ) | | Total assets | 184,263 |
| 76,150 |
| 105,632 |
| 12 |
| 318,137 |
| (415,072 | ) | 269,122 |
| | Depreciation and amortization expense | 1,149 |
| 1,069 |
| 393 |
| — |
| 138 |
| — |
| 2,749 |
| | Capital expenditures | — |
| 6 |
| 65 |
| — |
| — |
| — |
| 71 |
| | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | Three Months Ended March 31, 2017 | | | Fabrication | Shipyard | Services | EPC | Corporate | Eliminations | Consolidated | | Revenue | $ | 10,209 |
| $ | 18,422 |
| $ | 10,712 |
| — |
| $ | — |
| $ | (1,350 | ) | $ | 37,993 |
| | Gross profit (loss) | (2,966 | ) | (1,704 | ) | 33 |
| — |
| (260 | ) | — |
| (4,897 | ) | | Operating income (loss) | (3,787 | ) | (3,057 | ) | (633 | ) | — |
| (1,739 | ) | — |
| (9,216 | ) | | Total assets | 197,834 |
| 88,489 |
| 95,562 |
| — |
| 349,917 |
| (427,142 | ) | 304,660 |
| | Depreciation and amortization expense | 3,135 |
| 1,009 |
| 432 |
| — |
| 124 |
| — |
| 4,700 |
| | Capital expenditures | 102 |
| 272 |
| — |
| — |
| 17 |
| — |
| 391 |
| | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | Three Months Ended June 30, 2018 | | | Fabrication | Shipyard | Services | EPC | Corporate | Eliminations | Consolidated | | Revenue | $ | 8,590 |
| $ | 23,620 |
| $ | 22,205 |
| $ | 882 |
| $ | — |
| $ | (1,283 | ) | $ | 54,014 |
| | Gross profit (loss) | (1,667 | ) | (2,776 | ) | 3,585 |
| 543 |
| (384 | ) | — |
| (699 | ) | | Operating income (loss) | (3,227 | ) | (3,374 | ) | 2,823 |
| 58 |
| (2,681 | ) | — |
| (6,401 | ) | Total assets (1) | 101,498 |
| 88,305 |
| 35,197 |
| 888 |
| 30,801 |
| — |
| 256,689 |
| | Depreciation and amortization expense | 1,047 |
| 1,051 |
| 383 |
| — |
| 130 |
| — |
| 2,611 |
| | Capital expenditures | — |
| 653 |
| 98 |
| — |
| 69 |
| — |
| 820 |
| | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | Three Months Ended June 30, 2017 | | | Fabrication | Shipyard | Services | EPC | Corporate | Eliminations | Consolidated | | Revenue | $ | 13,990 |
| $ | 18,303 |
| $ | 15,396 |
| — |
| $ | — |
| $ | (1,821 | ) | $ | 45,868 |
| | Gross profit (loss) | 1,931 |
| (13,851 | ) | 390 |
| — |
| (90 | ) | — |
| (11,620 | ) | | Operating income (loss) | 1,098 |
| (14,834 | ) | (257 | ) | — |
| (2,267 | ) | — |
| (16,260 | ) | Total assets (1) | 164,211 |
| 98,393 |
| 30,592 |
| — |
| 14,390 |
| — |
| 307,586 |
| | Depreciation and amortization expense | 1,152 |
| 995 |
| 422 |
| — |
| 207 |
| — |
| 2,776 |
| | Capital expenditures | 746 |
| 546 |
| 106 |
| — |
| 35 |
| — |
| 1,433 |
| | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | Six Months Ended June 30, 2018 | | | Fabrication | Shipyard | Services | EPC | Corporate | Eliminations | Consolidated | | Revenue | $ | 25,860 |
| $ | 42,185 |
| $ | 44,075 |
| $ | 955 |
| $ | — |
| $ | (1,771 | ) | $ | 111,304 |
| | Gross profit (loss) | (1,886 | ) | (3,799 | ) | 6,199 |
| 235 |
| (769 | ) | — |
| (20 | ) | | Operating income (loss) | (4,821 | ) | (5,192 | ) | 4,703 |
| (667 | ) | (5,204 | ) | — |
| (11,181 | ) | Total assets (1) | 101,498 |
| 88,305 |
| 35,197 |
| 888 |
| 30,801 |
| — |
| 256,689 |
| | Depreciation and amortization expense | 2,196 |
| 2,120 |
| 776 |
| — |
| 268 |
| — |
| 5,360 |
| | Capital expenditures | — |
| 659 |
| 163 |
| — |
| 69 |
| — |
| 891 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | Six Months Ended June 30, 2017 | | | Fabrication | Shipyard | Services | EPC | Corporate | Eliminations | Consolidated | | Revenue | $ | 24,199 |
| $ | 36,724 |
| $ | 26,107 |
| $ | — |
| $ | — |
| $ | (3,170 | ) | $ | 83,860 |
| | Gross profit (loss) | (1,034 | ) | (15,556 | ) | 423 |
| — |
| (351 | ) | — |
| (16,518 | ) | | Operating loss | (2,688 | ) | (17,892 | ) | (890 | ) | — |
| (4,007 | ) | — |
| (25,477 | ) | Total assets (1) | 164,211 |
| 98,393 |
| 30,592 |
| — |
| 14,390 |
| — |
| 307,586 |
| | Depreciation and amortization expense | 4,287 |
| 2,004 |
| 854 |
| — |
| 331 |
| — |
| 7,476 |
| | Capital expenditures | 848 |
| 818 |
| 106 |
| — |
| 52 |
| — |
| 1,824 |
|
_______________ 1) Intercompany balances have been excluded.
NOTE 9 – COMMITMENTS AND CONTINGENCIES
The Company is subject to various routine legal proceedings in the normal conduct of its business, primarily involving commercial claims, workers’ compensation claims, and claims for personal injury under general maritime laws of the United States and the Jones Act. While the outcome of these lawsuits, legal proceedings and claims cannot be predicted with certainty, management believes that the outcome of any such proceedings, even if determined adversely, would not have a material adverse effect on the financial position, results of operations or cash flows of the Company.
MPSV Termination Letter
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 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 notified our Surety of its intent to require completion of the vessel under the Surety's
bond. We have notified and met with our Surety regarding our disagreement with our customer's claims. Discussion with the Surety are ongoing. The Company will continue to enforce its rights under the agreements and defend any claims asserted against the Company by its customer. Management is unable to estimate the probability of a favorable or unfavorable outcome aas well as an estimate of potential loss, if any, at this time. We cannot guarantee that we will not incur additional costs as we negotiate with this customer. At March 31,June 30, 2018, our net balance sheet exposure was $12$12.4 million.
NOTE 10 – SUBSEQUENT EVENTS
See Note 2 regardingDuring the salefirst quarter of our Texas South Yard on April 20, 2018.2018, we executed a contract for the construction and delivery of one towing, salvage and rescue ship ("T-ATS") 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 thus given a notification to proceed. We were recently notified that this unsuccessful bidder has filed a subsequent protest with the Department of Justice. We have been granted a partial stay which allows us to proceed with design development, planning, scheduling and material ordering leading up to the start of construction. Actual construction of the vessel cannot begin until a final ruling is issued by the Department of Justice. We are in process of working with the U.S. Navy to re-establish a timeline under this contract.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Cautionary Statement on Forward-Looking Information This Report contains forward-looking statements in which we discuss our potential future performance, primarily in the sectionssection entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Forward-looking statements are all statements other than statements of historical facts, 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. We caution readers that forward-looking statements are not guarantees of future performance and actual results may differ materially from those anticipated, projected or assumed in the forward-looking statements. Important factors that can cause our actual results to differ materially from those anticipated in the forward-looking statements include the cyclical nature of the oil and gas industry, changes in backlog estimates, suspension or termination 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 disputesdispute with a customer relating to the purported termination of contracts to build MPSVs, ability to remain in compliance with our covenants contained in our Credit Agreement,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” included in our 2017 Annual Report as may be updated by subsequent filings with the SEC. Investors are cautioned that many of the assumptions upon which our forward-looking statements are based are likely to change after the forward-looking statements are made, which we cannot control. Further, we may make changes to our business plans that could affect our results. We caution investors that we do not intend to update forward-looking statements more frequently than quarterly notwithstanding any changes in our assumptions, changes in business plans, actual experience or other changes, and we undertake no obligation to update any forward-looking statements.
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 recently completed of the fabrication of complex modules for the construction of a new petrochemical plant, and we are completing newbuild construction of a technologically-advanced OSV with scheduled delivery in the second quarter of 2018. We fabricated wind turbine pedestals for the first offshore wind power project in the United States. We have also constructed 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 United States. Our customers include U.S. and, to a lesser extent, international energy producers, petrochemical, industrial, power and marine 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.EPC. 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, we have sold our Texas South Yard, in Ingleside, Texas has been sold and our Texas North Yard in Aransas Pass, Texas is marketedheld for sale.
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 and, reducing the cash compensation paid to our directors and the salaries of our executive officers as well as developing a plan to sell certain underutilized assets.
Sales of Assets
In early 2017, we announced our plan to rationalize underutilized assets including the two fabrication yards and related equipment located at our South Texas Properties.
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$0.8 million of earnest money previously received on January 3, 2018, related to the option to purchase the Texas South Yard. We plan to use theearnest money. The net proceeds to rebuildreceived rebuilt our liquidity, toprovided support for upcoming projects, continue investingcontinued investment 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 recordrecognized a gain on sale during the second quarter of 2018 related to this transaction of approximately $3.8$3.9 million. Completing the sale of the Texas South Yard iswas an important liquidity generating event and will facilitate the Company’s continued strategic repositioning from offshore oil and gas markets.
markets to a more diversified customer base. We will continue to incur costs associated with holding and maintaining our Texas North Yard. These costs include insurance, general maintenance of the property in its current state, property taxes and retained employees which will be expensed as incurred.
Hurricane Harvey and Insurance Recoveries
On August 25, 2017, our South Texas Properties were impacted by Hurricane Harvey, which 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 not accrued for any insurance recovery at March 31, 2018, in excess of insurance claim payments received to date.
To date, our insurance underwriters have made advance insurance claim payments of $8.2 million in the 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:
Clean-up and repair related costs of $1.6 million that we have incurred since August 25, 2017, through March 31, 2018;
A building at our Texas South Yard and a building atmarket our Texas North Yard were determinedand hope to be total losses. Ashave a result, we impairednegotiated contract for the remaining net book valuesale of $1.5 million related to these buildings and recorded a corresponding insurance recovery offsettingour Texas North Yard in the impairment during the fourth quarter of 2017; andnear future.
During the firstsecond quarter of 2018, we determined that we do not expect to repair the damaged buildings and equipment at the Texas North Yard. Accordingly, we impaired our Texas North Yard by $5.1 million, which represents our best estimate of the decline in the fair value of the property and equipment as a result of our decision to not repair the facility and recorded a corresponding insurance recovery offsetting the impairment.
As we work with our insurance agents and adjusters to finalize our estimate of the damage, it is 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 our 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$0.6 million primarily related to a piece of equipment that we sold in July 2018. During the three months ended March 31, 2018, we recorded an impairment of $0.8 million related to 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 wasimpairments were calculated as management's estimated net proceeds from the salesales less itstheir net book value.values.
Based Hurricane Harvey and Insurance Recoveries
On August 25, 2017, buildings and equipment located at our South Texas Properties were damaged by Hurricane Harvey, which made landfall as a Category 4 hurricane. On June 28, 2018, we agreed to a global settlement with our insurance carriers in the amount of $15.4 million. As of June 30, 2018, we had received payments totaling $8.2 million and the remaining $7.2 million has been recorded as an insurance receivable on our Consolidated Balance Sheet as of June 30, 2018, which represents a non-cash change within our Consolidated Statement of Cash Flows related to our insurance receivable. As of the date of this Report, we have received payment for the full settlement amount.
In applying the settlement, we allocated the claim amounts less agreed upon deductibles to the respective groups of assets and reimbursement of costs incurred included in our settlement agreement as follows:
Clean-up and repair related costs of $1.6 million, less deductibles applied of approximately $0.3 million that we have incurred since August 25, 2017 through June 30, 2018. A gain on insurance recoveries of $3.6 million included within other income (expense) on our Consolidated Statement of Operations that was recorded during the second quarter of 2018 primarily related to two buildings that were declared a total loss and five damaged cranes that were sold during the second quarter of 2018. Insurance recoveries of $8.9 million which offset impairment of damaged assets at the Texas North Yard. Because we do not intend to repair the remaining buildings, improvements and related equipment, we recorded impairment of $8.9 million, $5.1 million of which was recorded during the three months ended March 31, 2018. Our impairment was based
upon our initial assessmentbest estimate of the damages and insurance coverage anddecline in the fair value of the assets held for sale. Management believes that there is no basis to record additional impairment atproperty and related equipment. The insurance recovery fully offset this time.
Preservation of Cash
We will continue to monitor and preserve our cash. At March 31, 2018, we had $6.5 million in cash, debt of $10 million and working capital of $137.1 million which includes $98.4 million in assets held for sale, primarily related to our South Texas Properties. As of May 4, 2018, our liquidity has significantly improved due to the sale of our Texas South Yard, the proceeds of which will be used to rebuild our liquidity, to support upcoming projects, continue investing in our newly created EPC Division and for other general corporate purposes. After the sale of our Texas South Yard, our cash balance was $55 million, and the amount outstanding under our Credit Agreement was $10 million with remaining availability under our Credit Agreement of approximately $27.5 million for total liquidity of approximately $82.5 million. Our primary liquidity requirements for 2018 and beyond are for costs associated with fabrication and shipyard projects, capital expenditures related to our EPC Division and enhancements to our shipyards.
We currently believe that cash on hand 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 do not improve, or we are unable to sell our Texas North Yard or the sale is delayed, or we are unable to increase our backlog, we would expect to take additional measures to preserve our cash flows until such time when we are able to generate cash flows from operations. Since the beginning of 2016, we have implemented wage adjustments along with employee benefit and overall cost reductions within all of our divisions. We have reduced the level of our workforce in the past and we will continue to do so based on booked work in all of our facilities. We have reduced the compensation paid to our directors and the salaries of our executive officers, and we have reduced our capital expenditures and placed assets that are either underutilized, under-performing or not expected to provide sufficient long-term value for sale, which include our South Texas Properties.amount.
Ongoing Efforts to Increase Our Backlog, and DiversificationDiversify of Our Customer Base and Resolve Customer Dispute
Petrochemical work - We recentlyDuring the second quarter of 2018, we completed the fabrication of four modules for a new petrochemical facility. We delivered these modules on time and within budget.time. We continue to search for additional fabrication work in the petrochemical industry to add to our current backlog.
Pursuit of offshore wind - We believe that future requirements from generators and utilities to provide electricity from renewable and green sources will result in continued growth of offshore wind projects. We fabricated the first-of-a-kind wind turbine pedestals for the first offshore wind power project in the United States in 2015, and we believe that we possess the expertise
to obtain significant future work in this sector. During the first quarter of 2018, we signed a contract for the fabrication of one Meteorologicalmeteorological tower and platform for a customer's offshore wind project located off the U.S. coast of Maryland. We completed the fabrication work in the second quarter of 2018 and have included invoiced amounts in contracts receivable on our Consolidated Balance Sheet. This project iswas relatively 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 it relates to their letter of intent with their customer for structures off the coast of Maryland. Along with this letter of intent, we have executed a teaming agreement with the EEW Group forto source future U.S. offshore wind projects. There is no guarantee that we will be successful in participating in any of these plannedfuture projects.
Diversification of our Shipyard Division customer base - We continue to be successful in our efforts to diversify our capabilities within our Shipyard Division.
During the first quarter of 2018, we executed a contract for the construction and delivery of one towing, salvage and rescue ship ("T-ATS") vessel with the U.S. Navy for $63.6 million with an option for seven additional vessels with an additional value of approximately $459.1 million if all options are exercised. Our T-ATS vessel contract is currently under a bid protest from a competitor. Bid protests can result in an award decision being overturned, requiring a re-bidwhich was subsequently protested by one of the contract. Even whenunsuccessful bidders. On July 16, 2018, we were notified that the award was upheld by the U.S. Government Accountability Office and thus given a bidnotification to proceed. We were recently notified that this unsuccessful bidder has filed a subsequent protest does not result inwith the Department of Justice. We have been granted a re-bid, resolutionpartial stay which allows us to proceed with design development, planning, scheduling and material ordering leading up to the start of construction. Actual construction of the matter typically extendsvessel cannot begin until a final ruling is issued by the time until contract performance can begin, which may reduce our earningsDepartment of Justice. We are in process of working with the period in which the contract would otherwise be performed. Further, weU.S. Navy to re-establish a timeline under this contract.
We signed change orders on May 1, 2018, with two customers, eachdifferent customers. Each change order was for the construction of one additional harbor tug boat for approximately $13$13.0 million each with theper boat. Each customer has an additional option for one more harbor tug boat for approximately $12.2 million each. This is in addition to the eightboat. We are now constructing a total of five harbor tug boats for each customer. If the additional options are exercised, we are currently constructingwill build a total of 12 harbor tug boats for these two customers.
On June 11, 2018, one of our customers exercised their option for a second, newbuild construction of an additional Regional Class Research Vessel ("RCRV") for $67.6 million. The first vessel was awarded in July of 2017 which included options for two additional vessels.
Continued growth within our Services Division - Generally, we expectbelieve demand for our Services Division towill increase in 2018 beyond the contractual backlog amount in place as of March 31,June 30, 2018. Work associated with offshore tie-backs, upgrades and maintenance remains strong. We will continue to pursue opportunities within the offshore/inshore plant expansion and maintenance programs as well as targeting growth of developing fields in West Texas.
Our newly formed EPC Division - As discussed in our 2017 Annual Report, we were selected as the prime contractor for the 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. SeaOne’s selection of us is non-binding and commencement of the project remains subject to a number of conditions, including agreement on terms of the engagement with SeaOne. In anticipation of this project advancing, we are enhancing our internal project management capabilities through the hiring of additional personnel to service this project. Subsequent to March 31, 2018, weWe received an additional early works purchase order from SeaOne for approximately $1.0$1.2 million. We continue to work with SeaOne on finalizing Initial Engineering Designinitial engineering design and project pricing. We understand that SeaOne is in the process of securing financing to move forward with its project. We are hopeful that the SeaOne Project will initiate planning and start-upinitial construction efforts mid-2018 with construction to start in early 2019.
Completion of our MPSV contract - As previously disclosed, on March 19, 2018, 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 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 notified our Surety of its intent to require completion of the vessel under the Surety's bond. We have notified and met with our Surety regarding our disagreement with our customer's claims. Discussions with the Surety are ongoing. The Company will continue to enforce its rights under the agreements and defend any claims asserted against the Company by its customer. Management is unable to estimate the probability of a favorable or unfavorable outcome aas well as an estimate of potential loss, if any, at this time. We cannot guarantee that we will not incur additional costs as we negotiate with this customer. At June 30, 2018, our net balance sheet exposure was $12.4 million.
Outlook
Looking forward, our results of operations will be affected primarily by:
Our ability to execute on projects in accordance with our cost estimates and manage them to successful completion;
Our ability to win contracts through competitive bidding or alliance/partnering arrangements;
Demandby demand for our services and the overall number of projects in the market place. As discussed above, a significant portion of our historical customer base has been impacted by the continued level of exploration and development activity maintained byfor oil and gas exploration and production companiesgas. We have implemented a number of initiatives to strategically reposition the Company to attract new customers, participate in the GOM,buildup of petrochemical facilities, pursue offshore wind markets, enter the EPC industry and diversify our customers within our Shipyard Division. The success of our initiatives to a lesser extent, overseas locations, which is dependent uponstrategically reposition the price of oilCompany and gas;our future operations will be determined by:
The level of petrochemical facilitynew construction and improvements;fabrication projects in the new markets we are pursuing including petrochemical facilities and offshore wind;
Our successful execution of an agreement with SeaOne;SeaOne and the ability of SeaOne to obtain financing;
Continued growth within our Shipyard and Services divisions;
Our ability to resolve our disputes with our customer for the completion of the two MPSV vessels; andwin contracts through competitive bidding or alliance/partnering arrangements;
Our ability to secure additional fabrication offshore wind projects.execute projects in accordance with our cost estimates and successfully manage them through completion; and
Our ability to resolve a dispute over purported with a Shipyard customer related to the construction of two MPSVs.
We continue to respond to the competitive forces within our industry and continue 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 period of competitive pricing with lower than desired margins. Additionally, revenue from these awards will not be realized until later in 2018 and beyond.
Safety
We operate in an environment that exposes our employees to risk of injury, and we are committed to safety. We believe safety is a key metric for our success. Poor safety performance increases our costs, results in construction delays and limits 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 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. There have been no changes in our evaluation of our critical accounting policies since December 31, 2017.
Backlog We believe that backlog, a non-GAAP financial measure, provides useful information to investors. Backlog differs from the GAAP requirement to disclose future performance obligations required under fixed-price contracts as required under Topic 606 of the ASC. See Note 3 of the Notes to Consolidated Financial Statements for further discussion of Topic 606. Backlog includes future work that has been entered intosecured subsequent to the balance sheet date frompursuant to letters of intent or other forms of authorization as well as signed contracts that are temporarily suspended or under protest that may not meet the criteria to be reported as future performance
obligations under Topic 606 (the most comparable GAAP measure); however, represents future work that management believes is probable of being performed. Our backlog is based on management’s estimate of the direct labor hours required to complete, and the remaining revenue to be recognized with respect to those projects for which a customer has authorized us to begin work or purchase materials pursuant to written contracts, letters of intent or other forms of authorization. As engineering and design plans are finalized or changes to existing plans are made, management’s estimate of the direct labor hours required to complete a project and the price of a project at completion is likely to change. All projects currently included in our backlog are generally subject to suspension, termination, or a reduction in scope at the option of the customer, although the customer is required to pay us for work performed and materials purchased through the date of termination, suspension, or reduction in scope. In addition, customers have the ability to delay the execution of projects. We exclude suspended projects from contract backlog when they are expected to be suspended more than 12 months because resumption of work and timing of revenue recognition for these projects are difficult to predict. Depending on the size of the project, the termination, postponement, or reduction in scope of any one project could significantly reduce our backlog and could have a material adverse effect on future revenue, net income (loss) and cash flow. A reconciliation of future revenue performance obligations under Topic 606 of the ASC (the most comparable GAAP measure as included in Note 3 of the Notes to Consolidated Financial Statements) to our reported backlog is provided below (in thousands).
| | | | | | | | | | | | | | | | | | | | | | | | | | | March 31, 2018 | | | Fabrication | | Shipyard | | Services | | EPC | | Eliminations | | Consolidated | | Future performance obligations required under fixed-price contracts under Topic 606 of ASC | $ | 6,706 |
| | $ | 149,590 |
| | $ | 11,858 |
| | $ | — |
| | $ | (990 | ) | | $ | 167,164 |
| | Contracts signed subsequent to March, 31, 2018 | — |
| | 29,874 |
| | — |
| | 1,037 |
| | — |
| | 30,911 |
| Signed contracts under purported termination or third party protest (1), (2) | — |
| | 94,176 |
| | — |
| | — |
| | — |
| | 94,176 |
| | Backlog | $ | 6,706 |
| | $ | 273,640 |
| | $ | 11,858 |
| | $ | 1,037 |
| | $ | (990 | ) | | $ | 292,251 |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | June 30, 2018 | | | Fabrication | | Shipyard | | Services | | EPC | | Eliminations | | Consolidated | | Future performance obligations required under fixed-price contracts under Topic 606 of ASC | $ | 1,871 |
| | $ | 295,506 |
| | $ | 7,607 |
| | $ | 1,618 |
| | $ | (193 | ) | | $ | 306,409 |
| | Contracts signed subsequent to June 30, 2018 | — |
| | — |
| | 9,788 |
| | 1,200 |
| | — |
| | 10,988 |
| Signed contracts under purported termination (1) | — |
| | 30,157 |
| | — |
| | — |
| | — |
| | 30,157 |
| | Backlog | $ | 1,871 |
| | $ | 325,663 |
| | $ | 17,394 |
| | $ | 2,818 |
| | $ | (193 | ) | | $ | 347,553 |
| | | | | | | | | | | | | |
___________ | | | (1) | Includes backlog for a customer for which we have received a notice of purported termination within our Shipyard Division related to the construction of two MPSVs. We dispute the purported termination and disagree with the customer’s reasons for same.Wesame. We cannot guarantee that we will be able to favorably negotiate completion of the MPSVs with this customer. See Note 9 of the Notes to Consolidated Financial Statements. |
| | (2) | Includes our signed contract with the U.S. Navy for the construction of the T-ATS Salvage vessel which is under bid protest from a competitor. Bid protests can result in an award decision being overturned, requiring a re-bid of the contract. Even when a bid protest does not result in a re-bid, resolution of the matter typically extends the time until contract performance can begin, which may reduce our earnings in the period in which the contract would otherwise be performed. |
Our backlog at March 31,June 30, 2018, as compared to December 31, 2017, consisted of the following (in thousands, except for percentages):
| | | | | | | | | | | | | March 31, 2018 | | December 31, 2017 | | Division | $'s | Labor hours | | $'s | Labor hours | | Fabrication | $ | 6,706 |
| 54 | | $ | 15,771 |
| 150 | | Shipyard | 273,640 |
| 1,493 | | 184,035 |
| 1,104 | | Services | 11,858 |
| 130 | | 23,181 |
| 290 | | EPC | 1,037 |
| — | | — |
| — | | Intersegment eliminations | (990 | ) | — | | (370 | ) | — | | Total backlog | $ | 292,251 |
| 1,677 | | $ | 222,617 |
| 1,544 | | | | | | | | | | Number | Percentage | | Number | Percentage | Major customers (1) | 5 | 85.4% | | 4 | 73.0% | | | | | | | | Backlog is expected to be recognized in revenue during:(2)
| $'s | Percentage | | | | | 2018 | $ | 90,879 |
| 31.1% | | | | | 2019 | 142,274 |
| 48.7% | | | | | 2020 | 59,098 |
| 20.2% | | | | | Total | $ | 292,251 |
| 100.0% | |
|
| | | | | | | | |
| | | | | | | | | | | | |
| June 30, 2018 |
| December 31, 2017 | | Division | $'s | Labor hours | | $'s | Labor hours | | Fabrication | $ | 1,871 |
| 12 |
| | $ | 15,771 |
| 150 |
| | Shipyard | 325,663 |
| 1,784 |
| | 184,035 |
| 1,104 |
| | Services | 17,394 |
| 83 |
| | 23,181 |
| 290 |
| | EPC | 2,818 |
| — |
| | — |
| — |
| | Intersegment eliminations | (193 | ) | — |
| | (370 | ) | — |
| | Total backlog | $ | 347,553 |
| 1,879 |
| | $ | 222,617 |
| 1,544 |
|
| | | | | | | | |
| June 30, 2018 |
| December 31, 2017 | | | Number | Percentage | | Number | Percentage | Major customers (1) | four | 77.8% | | four | 73.0% | | | | | | | | Backlog is expected to be recognized in revenue during:(2) | $'s | Percentage | | | | | 2018 | $ | 97,366 |
| 28.0% | | | | | 2019 | 170,987 |
| 49.2% | | | | | 2020 | 69,890 |
| 20.1% | | | | | 2021 | 8,645 |
| 2.5% | | | | | 2022 | 665 |
| 0.2% | | | | | Total | $ | 347,553 |
| 100.0% | |
| | | | | | | | |
___________
| | | (1) | At March 31,June 30, 2018, projects for our fivefour largest customers in terms of revenue backlog consisted of: |
| | | (i) | Two large MPSVs for one customer for which we have received a purported notice of termination as discussed above; |
| | (ii) | Newbuildnewbuild construction of five harbor tugs for one customer (to be completed in 2018 through 2020); |
| | (iii)(ii) | Newbuildnewbuild construction of five harbor tugs for one customer (separate from above) (to be completed in 2018 through 2020); |
| | (iv)(iii) | Newbuildnewbuild construction of antwo offshore marine research vesselvessels (to be completed in 2020)2020 and 2022); and |
| | (v)(iv) | Newbuildnewbuild construction of one T-ATS vessel (to be completed in 2020)2021). This contract is currently underwas 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 thus given a bid protest.notification to proceed. We were recently notified that this unsuccessful bidder has filed a subsequent protest with the Department of Justice. We have been granted a partial stay which allows us to proceed with design development, planning, scheduling and material ordering leading up to the start of construction. |
| | | (2) | The timing of recognition of the revenue represented in our backlog is based on management’s current estimates to complete the projects. Certain factors and circumstances could cause changes in the amounts ultimately recognized and the timing of the recognition of revenue from our backlog. |
Certain of our contracts contain options which grant the right to our customer, if exercised, for the construction of additional vessels at contracted prices.Weprices. We do not include options in our backlog above. If all options under our current contracts were exercised, our backlog would increase by $626.2$562.7 million. We believe disclosing these options provides investors with useful information in order to evaluate additional potential work that we would be contractually obligated to perform under our current contracts as well as the potential significance of these options, if exercised. We have not received any commitments related to the exercise of these options from our customers, and we can provide no assurance that any or all of these options will be exercised. As we add backlog, we will add personnel with critical project management and fabrication skills to ensure we have the resources necessary to execute our projects well and to support our project risk mitigation discipline for all new projects. This may negatively impact near-term results. Workforce As of March 31,June 30, 2018, we had 961847 employees compared to 977 employees as of December 31, 2017. Labor hours worked were 496,000947,000 during the threesix months ended March 31,June 30, 2018, compared to 479,0001 million for the threesix months ended March 31,June 30, 2017. The overall increase in labor hours worked for the three months ended March 31, 2018, was due to improved offshore demand within our Services Division. As of April 29, 2018, we had 870 employees. The decrease in our workforce subsequent to March 31, 2018,labor hours worked is primarily within our Fabrication Division due to completion of complex modules for the construction of a new petrochemical plant with no significant futureimmediate replacement Fabrication backlog forecasted in the near-term as well as the stoppagesuspension of construction of the two MPSVs within our Shipyard Division pending resolution of our dispute over termination with our MPSV customer. This was partially offset by improved demand within our Services Division. See Note 9 of the Notes to Consolidated Financial Statements related to our MPSV contract termination dispute.
Results of Operations Three Months Ended March 31,June 30, 2018, Compared to Three Months Ended March 31,June 30, 2017(in thousands, except for percentages): Consolidated | | | | | | | | | | | | | | | | Three Months Ended March 31, | | Increase or (Decrease) | | | 2018 | | 2017 | | Amount | Percent | | Revenue | $ | 57,290 |
| | $ | 37,993 |
| | $ | 19,297 |
| 50.8% | | Cost of revenue | 56,611 |
| | 42,890 |
| | 13,721 |
| 32.0% | | Gross profit (loss) | 679 |
| | (4,897 | ) | | 5,576 |
| 113.9% | | Gross profit (loss) percentage | 1.2 | % | | (12.9 | )% | | | | | General and administrative expenses | 4,709 |
| | 3,930 |
| | 779 |
| 19.8% | | Asset impairment | 750 |
| | 389 |
| | 361 |
| 92.8% | | Operating income (loss) | (4,780 | ) | | (9,216 | ) | | (4,436 | ) |
| | Other income (expense): | | | | | | | | Interest expense | (469 | ) | | (59 | ) | | (410 | ) | (694.9)% | | Other income (expense), net | 12 |
| | 9 |
| | 3 |
| 33.3% | | Total other income (expense) | (457 | ) | | (50 | ) | | (407 | ) | (814.0)% | | Net loss before income taxes | (5,237 | ) | | (9,266 | ) | | (4,029 | ) | (43.5)% | | Income tax expense (benefit) | 59 |
| | (2,812 | ) | | 2,871 |
| 102.1% | | Net loss | $ | (5,296 | ) | | $ | (6,454 | ) | | $ | 6,900 |
|
|
| | | | | | | | | | | | | | | | Three Months Ended June 30, | | Increase or (Decrease) | | | 2018 | | 2017 | | Amount | Percent | | Revenue | $ | 54,014 |
| | $ | 45,868 |
| | $ | 8,146 |
| 17.8% | | Cost of revenue | 54,713 |
| | 57,488 |
| | (2,775 | ) | (4.8)% | | Gross loss | (699 | ) | | (11,620 | ) | | 10,921 |
| 94.0% | | Gross loss percentage | (1.3 | )% | | (25.3 | )% | | | | | General and administrative expenses | 5,092 |
| | 4,640 |
| | 452 |
| 9.7% | | Asset impairment | 610 |
| | — |
| | 610 |
| 100.0% | | Operating loss | (6,401 | ) | | (16,260 | ) | | 9,859 |
| 60.6% | | Other income (expense): | | | | | | | | Interest expense, net | (92 | ) | | (146 | ) | | 54 |
| 37.0% | | Other income (expense), net | 7,125 |
| | (266 | ) | | 7,391 |
| 2,778.6% | | Total other income (expense) | 7,033 |
| | (412 | ) | | 7,445 |
| 1,807.0% | | Net income (loss) before income taxes | 632 |
| | (16,672 | ) | | 17,304 |
| 103.8% | | Income tax expense (benefit) | 83 |
| | (5,749 | ) | | 5,832 |
| 101.4% | | Net income (loss) | $ | 549 |
| | $ | (10,923 | ) | | $ | 11,472 |
| 105.0% |
Revenue - Our revenue for the three months ended March 31,June 30, 2018 and 2017, was $57.3$54.0 million and $38.0$45.9 million, respectively, representing an increase of 50.8%17.8%. The increase is primarily attributable to:
An increase of $11.2$6.8 million within our Services Division from additional demand for offshore oil and gas service related projects; and An increase of $7.1$5.3 million within our Shipyard Division related to the newbuild construction of ten harbor tug vessels and an offshore marine research vessel which were not under construction during the second quarter of 2017 and $10.2 million in contract losses recorded during the three months ended June 30, 2017, which reduced our measurement of revenue progress under percentage of completion accounting for the second quarter of 2017. Additionally, we re-commenced newbuild construction for the second of two OSV's during the fourth quarter of 2017 which was in process in the second quarter of 2018 but was suspended during the second quarter of 2017.
The increase in revenue was partially offset by a decrease of $5.4 million of revenue within our Fabrication Division primarily attributable to the constructioncompletion of four modules for a petrochemical plant.plant in April 2018.
Gross profit (loss)loss - Our gross profitloss for the three months ended March 31,June 30, 2018, was $679,000$0.7 million compared to a gross loss of $4.9$11.6 million for the three months ended March 31,June 30, 2017. The increase in gross profitimprovement was primarily due to increased revenue within our Services Division as discussed above and a lower gross loss from our Shipyard Division related to $10.2 million in contract losses recorded during the three months ended June 30, 2017, reflecting cost overruns and re-work identified on two contracts relating to the construction of two MPSVs with no comparable adjustments to contract losses in the second quarter of 2018. Additionally, we decreased expenses within our Fabrication Division which included $1.9 million of depreciation expense for the three months ended March 31, 2017, related to our South Texas Properties with no depreciation expense during the three months ended March 31, 2018, for our South Texas Properties as these assets are classified as held for sale.Division.
General and administrative expenses - Our general and administrative expenses were $4.7$5.1 million for the three months ended March 31,June 30, 2018, compared to $3.9$4.6 million for the three months ended March 31,June 30, 2017. The increase in general and administrative expenses for the three months ended March 31,June 30, 2018, was primarily attributable toto:
Build-up of additional personnel for our newly created EPC Division;Division in anticipation of the SeaOne Project; Increased legal and advisory fees related to customer disputes, strategic planning and diversification of our business; and Increased employee incentiveincentives accruals of approximately $300,000 for all divisions related to our safety incentive program and higher employee profitability incentives within our Services Division as well as the addition of personnel as we build up our EPC Division in anticipation of the SeaOne Project; and Higher stock compensation expense of approximately $220,000.Division.
This was partially offset by cost reductions and continued cost minimization efforts implemented by management for the period.
Asset impairment - We recorded an impairmentsecond quarter of $750,000 during the three months ended March 31, 2018, related to 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 management's estimated net proceeds from the sale less its net book value. See also Note 2 of the Notes to Consolidated Financial Statements for additional information regarding our assets held for sale. During the three months ended March 31, 2017, we recorded an impairment of $389,000 related to the Shipyard Division assets held for sale.2017.
Interest expense, net - Interest expense, increasednet decreased due to drawingsfewer letters of credit issued under our Credit Agreement for the three months ended March 31,June 30, 2018, with no such drawings under our Credit Agreementcompared to the three months ended June 30, 2017, as well as increased interest income from investments in cash equivalents and held-to-maturity, short-term investments during the three months ended June 30, 2018.
Other income (expense) - Other income, net was $7.1 million for the three months ended March 31, 2017, as well as increased amortizationJune 30, 2018, compared to other expense, net of deferred financing costs during$0.3 million for the three months ended March 31, 2018.June 30, 2017. Other income, net for the three months ended June 30, 2018 is primarily due to a gain on the sale of our Texas South Yard of $3.9 million and a gain on settlement of insurance recovery proceeds related to Hurricane Harvey of $3.6 million.
Income tax expense (benefit) - Our effective income tax rate for the three months ended March 31,June 30, 2018, was (1.1)%expense of 13.1%, compared to an effective tax rate benefit of 30.3%34.5% for the comparable period during 2017. Current expense represents state taxesincome tax within our Services Division. The decrease in the effective tax rate is the result of a valuation allowance against our deferred tax assets. See Note 1 of the Notes to Consolidated Financial Statements regarding our NOLs and deferred tax assets.
Operating Segments
The results of our four operating divisions and Corporate Divisionnon-operating corporate division for the three months ended March 31,June 30, 2018 and 2017, are presented below (in thousands, except for percentages).
| | | | | | | | | | | | | | | | | Fabrication | | Three Months Ended March 31, | | Increase or (Decrease) | | | | 2018 | | 2017 | | Amount | | Percent | | Revenue | | $ | 17,270 |
| | $ | 10,209 |
| | $ | 7,061 |
| | 69.2% | | Gross profit (loss) | | (219 | ) | | (2,966 | ) | | (2,747 | ) | | (92.6)% | | Gross profit (loss) percentage | | (1.3 | )% | | (29.1 | )% | | | |
| | General and administrative expenses | | 624 |
| | 821 |
| | (197 | ) | | (24.0)% | | Asset impairment | | 750 |
| | — |
| | 750 |
| | 100.0% | | Operating income (loss) | | $ | (1,593 | ) | | $ | (3,787 | ) | | $ | (2,194 | ) | |
|
| | | | | | | | | | | | | | | | | Fabrication | | Three Months Ended June 30, | | Increase or (Decrease) | | | | 2018 | | 2017 | | Amount | | Percent | | Revenue | | $ | 8,590 |
| | $ | 13,990 |
| | $ | (5,400 | ) | | (38.6)% | | Gross profit (loss) | | (1,667 | ) | | 1,931 |
| | (3,598 | ) | | (186.3)% | | Gross profit (loss) percentage | | (19.4 | )% | | 13.8 | % | | | |
| | General and administrative expenses | | 951 |
| | 833 |
| | 118 |
| | 14.2% | | Asset impairment | | 610 |
| | — |
| | 610 |
| | 100.0% | | Operating income (loss) | | (3,227 | ) | | 1,098 |
| | (4,325 | ) | |
|
Revenue - Revenue from our Fabrication Division increased $7.1decreased $5.4 million for the three months ended March 31,June 30, 2018, compared to the three months ended March 31,June 30, 2017. The increasedecrease is attributable to the constructioncompletion and delivery of four modules for a petrochemical plant during April 2018 with very little immediate replacement backlog started as a result of the three months ended March 31, 2018, and lower revenue during the three months ended March 31, 2017, resultingtemporary impacts from previously depressed oil and gas prices and the corresponding reduction in customer demand for offshore fabrication projects during the period. This was partially offset, by decreased revenue of $2.4 million for the three months ended March 31, 2018, at our South Texas Properties as these were placed for sale during the first quarter of 2017 and project work completed or transfered to our Houma Fabrication Yard during 2017.prices.
Gross profit (loss) - Gross loss from our Fabrication Division for the three months ended March 31,June 30, 2018, was $219,000$1.7 million compared to a gross lossprofit of $3.0$1.9 million for the three months ended March 31,June 30, 2017. The decrease in gross loss was due to increaseddecreased revenue with minimal new fabrication work started during the second quarter of 2018 as discussed above and a reduction in depreciation expense of $1.9 million in depreciation expense during the three months ended March 31, 2018 for our South Texas Properties as these assets are classified as held for sale.above.
General and administrative expenses - General and administrative expenses for our Fabrication Division decreased $197,000increased $0.1 million for the three months ended March 31,June 30, 2018, compared to the three months ended March 31,June 30, 2017. The decreaseincrease is primarily due to an increase in legal expense of $0.4 million for our pursuit of claims against a customer related to disputed change orders for a large deepwater project we delivered to our customer in November 2015 partially offset by decreases in workforce at our South Texas Properties,salaries and employee incentives of $0.2 million due to employee reductions and decreases in corporate allocations of $0.1 million as a portion of these are now allocated to our EPC Division and continued cost minimization efforts implemented by management for the period.Division.
Asset impairment - We recorded an impairment of $750,000$0.6 million during the three months ended March 31,June 30, 2018, primarily related to 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.Yard. The impairment was calculated as management's estimated net proceeds from the sale less its net book value. See Note 2 of the Notes to Consolidated Financial Statements for additional information regarding our assets held for sale. We did not record any asset impairments during the three months ended March 31,June 30, 2017, within our Fabrication Division.
| | | | | | | | | | | | | | | | | Shipyard | | Three Months Ended March 31, | | Increase or (Decrease) | | | | 2018 | | 2017 | | Amount | | Percent | Revenue (1) | | $ | 18,565 |
| | $ | 18,422 |
| | $ | 143 |
| | 0.8% | Gross profit (loss) (1) | | (1,023 | ) | | (1,704 | ) | | (681 | ) | | (40.0)% | | Gross profit (loss) percentage | | (5.5 | )% | | (9.2 | )% | | | |
| | General and administrative expenses | | 796 |
| | 964 |
| | (168 | ) | | (17.4)% | | Asset impairment | | — |
| | 389 |
| | (389 | ) | | (100.0)% | Operating income (loss) (1) | | $ | (1,819 | ) | | $ | (3,057 | ) | | $ | (1,238 | ) | |
|
| | | | | | | | | | | | | | | | | Shipyard | | Three Months Ended June 30, | | Increase or (Decrease) | | | | 2018 | | 2017 | | Amount | | Percent | Revenue (1) | | $ | 23,620 |
| | $ | 18,303 |
| | $ | 5,317 |
| | 29.0% | Gross loss (1) | | (2,776 | ) | | (13,851 | ) | | 11,075 |
| | 80.0% | | Gross loss percentage | | (11.8 | )% | | (75.7 | )% | | | |
| | General and administrative expenses | | 597 |
| | 983 |
| | (386 | ) | | (39.3)% | Operating loss (1) | | (3,374 | ) | | (14,834 | ) | | 11,460 |
| |
|
___________ | | | (1) | Revenue for the three months ended March 31,June 30, 2018 and 2017, includes $390,000$0.1 million and $1.6$0.3 million of non-cash amortization of deferred revenue related to the values assigned to the contracts acquired in the LEEVAC transaction, respectively. |
Revenue - Revenue from our Shipyard Division increased $143,000$5.3 million for the three months ended March 31,June 30, 2018, compared to the three months ended March 31,June 30, 2017. During the firstsecond quarter of 2018, we were able to make progress on the construction of eightten harbor tugstug vessels and an offshore marine research vessel which were not under construction during the firstsecond quarter of 2017. During the three months ended June 30, 2017, we also recorded $10.2 million in contract losses which reduced our measure of revenue progress under percentage of completion accounting. Additionally, we re-commenced newbuild construction for the second of two OSV's during the fourth quarter of 2017, which was suspended during the second quarter of 2017. This was partially offset by lower revenue from construction of our two OSV and two MPSV vessel contracts that were under construction during 2017, but suspended during the first quarter of 2018.
During the first quarter of 2017, we completed the first of the OSVs and tendered it for delivery on February 6, 2017, and suspended construction of the second OSV due to a customer dispute. We recommenced construction of the second OSV during the fourth quarter of 2017 which is scheduled for completion during the second quarter of 2018. During the first quarter of 2018, 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 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. See also Note 9 of the Notes to Consolidated Financial Statements for additional information relating to this customer dispute.the suspension of construction of two MPSVs.
Gross profit (loss)loss - Gross loss from our Shipyard Division was $1.0$2.8 million for the three months ended March 31,June 30, 2018, compared to a gross loss of $1.7$13.9 million for the three months ended March 31,June 30, 2017. The decreasegross loss for the three months ended June 30, 2018, was primarily attributable to underutilization of our Houma and Lake Charles shipyards and competitive pricing on current work. The improvement in gross loss of $11.1 million was primarily due to improved cost management efforts and efficiencies learned from the construction of two OSV and two MPSV vesselsto:
$10.2 million in contract losses recorded during the three months ended March 31,June 30, 2017, related to cost overruns and appliedre-work identified on the two contracts relating to the construction of eight harbor tugstwo MPSVs; holding and closing costs during the three months ended MarchJune 30, 2017, related to our former Prospect shipyard. We terminated the lease of this facility effective December 31, 2017; and holding costs during the three months ended June 30, 2017 related to a completed OSV that was delivered on February 6, 2017, but refused by our customer as well as the suspension of work on the second OSV vessel. We resolved our disputes with our OSV customer during the fourth quarter of 2017 and construction of the second OSV re-commenced. We subsequently delivered the second OSV on July 31, 2018.
General and administrative expenses - General and administrative expenses for our Shipyard Division decreased $168,000$0.4 for the three months ended March 31,June 30, 2018, compared to the three months ended March 31,June 30, 2017, primarily due to reductions in salaries and employee incentives of $0.4 million related to reductions in our workforce period over period and decreases in corporate allocations of $0.1 million as a portion of these are now allocated to our EPC Division. This was partially offset by increases in legal expense related to our customer dispute relating to the suspension of construction of two MPSVs. See also Note 9 of the Notes to Consolidated Financial Statements for additional information relating to the suspension of construction of two MPSVs.
| | | | | | | | | | | | | | | | | Services | | Three Months Ended June 30, | | Increase or (Decrease) | | | | 2018 | | 2017 | | Amount | | Percent | | Revenue | | $ | 22,205 |
| | $ | 15,396 |
| | $ | 6,809 |
| | 44.2% | | Gross profit | | 3,585 |
| | 390 |
| | 3,195 |
| | 819.2% | | Gross profit percentage | | 16.1 | % | | 2.5 | % | | | |
| | General and administrative expenses | | 762 |
| | 647 |
| | 115 |
| | 17.8% | | Operating income (loss) | | 2,823 |
| | (257 | ) | | 3,080 |
| |
|
Revenue - Revenue from our Services Division increased $6.8 million for the three months ended June 30, 2018, compared to the three months ended June 30, 2017, due to an overall increase in work resulting from increases in customer demand for offshore oil and gas related service projects.
Gross profit - Gross profit from our Services Division increased $3.2 million for the three months ended June 30, 2018, compared to the three months ended June 30, 2017, due to increased revenue discussed above. Our gross profit percentage increased from 2.5% during the period for 2017 to 16.1% for 2018. The increase in gross profit percentage was due to a higher recovery of fixed costs with increased work.
General and administrative expenses - General and administrative expenses for our Services Division increased $0.1 for the three months ended June 30, 2018, compared to the three months ended June 30, 2017, due to support of increased work as well as increases in employee incentive compensation with allocation of corporate expenses remaining comparable period over period.
| | | | | | | | | | | | | | | | | EPC | | Three Months Ended June 30, | | Increase or (Decrease) | | | | 2018 | | 2017 | | Amount | | Percent | | Revenue | | $ | 882 |
| | $ | — |
| | $ | 882 |
| | 100.0% | | Gross profit | | 543 |
| | — |
| | 543 |
| | 100.0% | | Gross profit percentage | | 61.6 | % | | n/a |
| | | | | | General and administrative expenses | | 485 |
| | — |
| | 485 |
| | 100.0% | | Operating income | | 58 |
| | — |
| | 58 |
| |
|
Revenue - Our EPC Division did not exist at June 30, 2017. Revenue for the three months ended June 30, 2018 consists of early work and engineering studies authorized by SeaOne. See Note 8 of the Notes to Consolidated Financial Statements for further discussion of our EPC Division and the SeaOne Project.
Gross profit - Gross profit for the three months ended June 30, 2018, consists of early work and engineering studies authorized by SeaOne.
General and administrative expenses - General and administrative expenses for our EPC Division include the addition of personnel and allocations of corporate expenses as we invest in this new line of business.
| | | | | | | | | | | | | | | | | Corporate | | Three Months Ended June 30, | | Increase or (Decrease) | | | | 2018 | | 2017 | | Amount | | Percent | | Revenue | | $ | — |
| | $ | — |
| | $ | — |
| | | | Gross loss | | (384 | ) | | (90 | ) | | (294 | ) | | (326.7)% | | Gross loss percentage | | n/a |
| | n/a |
| | | | | | General and administrative expenses | | 2,297 |
| | 2,177 |
| | 120 |
| | 5.5% | | Operating loss | | (2,681 | ) | | (2,267 | ) | | (414 | ) | |
|
Gross loss - Gross loss from our Corporate Division increased primarily due to lower allocation of expenses and build-up of personnel to support our EPC Division.
General and administrative expenses - General and administrative expenses for our Corporate Division increased primarily due to increased legal and advisory fees related to customer disputes, strategic planning and diversification of our business and increased employee incentive accruals.
Six Months Ended June 30, 2018, Compared to Six Months Ended June 30, 2017(in thousands, except for percentages): Consolidated | | | | | | | | | | | | | | | | Six Months Ended June 30, | | Increase or (Decrease) | | | 2018 | | 2017 | | Amount | Percent | | Revenue | $ | 111,304 |
| | $ | 83,860 |
| | $ | 27,444 |
| 32.7% | | Cost of revenue | 111,324 |
| | 100,378 |
| | 10,946 |
| 10.9% | | Gross loss | (20 | ) | | (16,518 | ) | | 16,498 |
| 99.9% | | Gross profit percentage | — | % | | (19.7 | )% | | | | | General and administrative expenses | 9,801 |
| | 8,570 |
| | 1,231 |
| 14.4% | | Asset impairment | 1,360 |
| | 389 |
| | 971 |
| 249.6% | | Operating loss | (11,181 | ) | | (25,477 | ) | | 14,296 |
| 56.1% | | Other income (expense): | | | | | | | | Interest expense, net | (238 | ) | | (205 | ) | | (33 | ) | (16.1)% | | Other income (expense), net | 6,814 |
| | (257 | ) | | 7,071 |
| 2,751.4% | | Total other income (expense) | 6,576 |
| | (462 | ) | | 7,038 |
| 1,523.4% | | Net loss before income taxes | (4,605 | ) | | (25,939 | ) | | 21,334 |
| 82.2% | | Income tax expense (benefit) | 142 |
| | (8,561 | ) | | 8,703 |
| 101.7% | | Net loss | $ | (4,747 | ) | | $ | (17,378 | ) | | $ | 12,631 |
| 72.7% |
Revenue - Our revenue for the six months ended June 30, 2018 and 2017, was $111.3 million and $83.9 million, respectively, representing an increase of 32.7%. The increase is primarily attributable to:
An increase of $1.7 million within our Fabrication Division primarily attributable to the construction and completion of four modules for a petrochemical plant; An increase of $5.5 million within our Shipyard Division primarily related to construction of ten harbor tug vessels and an offshore marine research vessel which were not under construction during the first half of 2017 and $10.6 million in contract losses recorded during the six months ended June 30, 2017, which reduced our measure of revenue progress under percentage of completion accounting; Additionally, we re-commenced newbuild construction for the second of two OSV's during the fourth quarter of 2017, which continued through the first half of 2018 but had been suspended during the second quarter of 2017; and An increase of $18.0 million within our Services Division from additional demand for offshore oil and gas service related projects.
Gross loss - Our gross loss for the six months ended June 30, 2018, was $20,000 compared to a gross loss of $16.5 million for the six months ended June 30, 2017. The improvement in gross loss was primarily due to increased revenue within our Services Division as discussed above and $10.6 million in contract losses related to cost overruns and re-work that was identified and recorded during the six months ended June 30, 2017 on two contracts relating to the construction of two MPSVs with no comparable adjustments to contract losses in the first half of 2018.
General and administrative expenses - Our general and administrative expenses were $9.8 million for the six months ended June 30, 2018, compared to $8.6 million for the six months ended June 30, 2017. The increase in general and administrative expenses for the six months ended June 30, 2018, was primarily attributable to:
Build-up of additional personnel for our newly created EPC Division; Increased legal and advisory fees related to customer disputes, strategic planning and diversification of our business; and Increased employee incentive accruals for all divisions related to our safety incentive program and higher employee profitability incentives within our Services Division. This was partially offset by cost reductions and continued cost minimization efforts implemented by management during the second half of 2017.
Asset impairment - We recorded an impairment of $1.4 million during the six months ended June 30, 2018, primarily related to two pieces of equipment at our Texas North Yard that are held for sale. The impairment was calculated as management's estimated net proceeds from the sale less the equipment's net book value. See Note 2 of the Notes to Consolidated Financial Statements for additional information regarding our assets held for sale. During the six months ended June 30, 2017, we recorded an impairment of $0.4 million related to our Shipyard Division assets held for sale.
Other income (expense), net - Other income, net was $6.8 million for the six months ended June 30, 2018, compared to other expense, net of $0.3 million for the six months ended June 30, 2017. Other income, net for the six months ended June 30, 2018 is primarily due to a gain on the sale of our Texas South Yard of $3.9 million and a gain on settlement of insurance recovery proceeds related to Hurricane Harvey of $3.6 million.
Income tax expense (benefit) - Our effective income tax rate for the six months ended June 30, 2018, was expense of 3.1%, compared to an effective tax rate benefit of 33.0% for the comparable period during 2017. Current expense represents state income tax within our Services Division. The decrease in the effective tax rate is the result of a valuation allowance against our deferred tax assets. See Note 1 of the Notes to Consolidated Financial Statements regarding our NOLs and deferred tax assets.
Operating Segments
The results of our four operating divisions and non-operating corporate division for the six months ended June 30, 2018 and 2017, are presented below (in thousands, except for percentages).
| | | | | | | | | | | | | | | | | Fabrication | | Six Months Ended June 30, | | Increase or (Decrease) | | | | 2018 | | 2017 | | Amount | | Percent | | Revenue | | $ | 25,860 |
| | $ | 24,199 |
| | $ | 1,661 |
| | 6.9% | | Gross loss | | (1,886 | ) | | (1,034 | ) | | (852 | ) | | (82.4)% | | Gross loss percentage | | (7.3 | )% | | (4.3 | )% | | | | | | General and administrative expenses | | 1,575 |
| | 1,654 |
| | (79 | ) | | (4.8)% | | Asset impairment | | 1,360 |
| | — |
| | 1,360 |
| | 100.0% | | Operating loss | | (4,821 | ) | | (2,688 | ) | | (2,133 | ) | | |
Revenue - Revenue from our Fabrication Division increased $1.7 million for the six months ended June 30, 2018, compared to the six months ended June 30, 2017. The increase is attributable to the construction and completion of four modules for a petrochemical plant during the six months ended June 30, 2018. This was partially offset, by decreased revenue of $2.8 million for the six months ended June 30, 2018, at our South Texas Properties as these were marketed for sale.
Gross loss - Gross loss from our Fabrication Division for the six months ended June 30, 2018, was $1.9 million compared to a gross loss of $1.0 million for the six months ended June 30, 2017. The increase in gross loss was due to increased material costs incurred on the construction and completion of four modules for a petrochemical plant during the six months ended June 30, 2018 as well as current work being bid at more competitive pricing. This was partially offset by a reduction in depreciation expense of $1.9 million during the six months ended June 30, 2018 for our South Texas Properties as these assets are classified as held for sale.
General and administrative expenses - General and administrative expenses for our Fabrication Division decreased $0.1 million for the six months ended June 30, 2018, compared to the six months ended June 30, 2017. The decrease is primarily due to decreases in salaries and employee incentives of $0.3 million due to reductions in workforce, decreases in corporate allocations of $0.3 million as a portion of these are now allocated to our EPC Division and continued cost minimization efforts implemented by management for the first half of 2018, partially offset by an increase in legal expense of $0.5 million.
Asset impairment - We recorded an impairment of $1.4 million during the six months ended June 30, 2018, primarily related to two pieces of equipment at our Texas North Yard. One piece of equipment was sold in July 2018, and we intend to sell the other piece of equipment at auction. The impairment was calculated as management's estimated net proceeds from the sale less the equipment's net book value. See Note 2 of the Notes to Consolidated Financial Statements for additional information regarding our assets held for sale. We did not record any asset impairments during the six months ended June 30, 2017, within our Fabrication Division.
| | | | | | | | | | | | | | | | | Shipyard | | Six Months Ended June 30, | | Increase or (Decrease) | | | | 2018 | | 2017 | | Amount | | Percent | Revenue (1) | | $ | 42,185 |
| | $ | 36,724 |
| | $ | 5,461 |
| | 14.9% | Gross loss (1) | | (3,799 | ) | | (15,556 | ) | | 11,757 |
| | 75.6% | | Gross loss percentage | | (9.0 | )% | | (42.4 | )% | | | | | | General and administrative expenses | | 1,393 |
| | 1,947 |
| | (554 | ) | | (28.5)% | | Asset impairment | | — |
| | 389 |
| | (389 | ) | | (100.0)% | Operating loss (1) | | (5,192 | ) | | (17,892 | ) | | 12,700 |
| | |
___________ | | | (1) | Revenue for the six months ended June 30, 2018, and 2017, includes $0.5 million and $1.9 million, respectively, of non-cash amortization of deferred revenue related to the values assigned to the contracts acquired in the LEEVAC transaction. |
Revenue - Revenue from our Shipyard Division increased $5.5 million for the six months ended June 30, 2018, compared to the six months ended June 30, 2017. During the first half of 2018, we made progress on the construction of ten harbor tug vessels and an offshore marine research vessel that were not under construction during the first half of 2017. The increase in revenue also resulted from re-commencing the newbuild construction for the second of two OSV's during the fourth quarter of 2017, which continued through the first half of 2018 but was suspended during the second quarter of 2017. This was partially offset by lower revenue from construction of two MPSVs that were under construction during 2017, but suspended during the first quarter of 2018. During the six months ended June 30, 2017, we also recorded $10.2 million in contract losses which reduced our measure of revenue progress under percentage of completion accounting. See also Note 9 of the Notes to Consolidated Financial Statements for additional information relating to the suspension of construction of two MPSVs.
Gross loss - Gross loss from our Shipyard Division was $3.8 million for the six months ended June 30, 2018, compared to a gross loss of $15.6 million for the six months ended June 30, 2017. The gross loss for the six months ended June 30, 2018, was primarily attributable to underutilization of our Houma and Lake Charles shipyards and competitive pricing on current work. The decrease in gross loss compared to the six months ended June 30, 2017, was due to:
$10.6 million in contract losses related to cost overruns and re-work that was identified and recorded during the six months ended June 30, 2017 relating to the construction of two MPSVs; Holding and closing costs during the six months ended June 30, 2017, related to our Prospect shipyard. We terminated the lease of this facility effective December 31, 2017; and Holding costs during the six months ended June 30, 2017, related to a completed OSV that was delivered on February 6, 2017, but refused by our customer as well as the suspension of work on the second OSV vessel. We resolved our disputes with our OSV customer during the fourth quarter of 2017 and construction of the second OSV re-commenced. We subsequently delivered the second OSV on July 31, 2018.
General and administrative expenses - General and administrative expenses for our Shipyard Division decreased construction activity.$0.6 million for the six months ended June 30, 2018, compared to the six months ended June 30, 2017, primarily due to decreases in salaries and employee incentives of $0.5 million due to reductions in workforce and decreases in corporate allocations of $0.1 million as a portion of these are now allocated to our EPC Division.
Asset impairment - During the threesix months ended March 31,June 30, 2017, we recorded an impairment of $389,000$0.4 million related to the Shipyard Division assets held for sale. See Note 2 of the Notes to Consolidated Financial Statements for additional information relating to our assets held for sale. We did not record any asset impairment during the threesix months ended March 31,June 30, 2018, in our Shipyard Division.
| | | | | | | | | | | | | | | | | Services | | Three Months Ended March 31, | | Increase or (Decrease) | | | | 2018 | | 2017 | | Amount | | Percent | | Revenue | | $ | 21,870 |
| | $ | 10,712 |
| | $ | 11,158 |
| | 104.2% | | Gross profit (loss) | | 2,614 |
| | 33 |
| | 2,581 |
| | 7,821.2% | | Gross profit (loss) percentage | | 12.0 | % | | 0.3 | % | | | |
| | General and administrative expenses | | 734 |
| | 666 |
| | 68 |
| | 10.2% | | Operating income (loss) | | $ | 1,880 |
| | $ | (633 | ) | | $ | 2,513 |
| |
|
| | | | | | | | | | | | | | | | | Services | | Six Months Ended June 30, | | Increase or (Decrease) | | | | 2018 | | 2017 | | Amount | | Percent | | Revenue | | $ | 44,075 |
| | $ | 26,107 |
| | $ | 17,968 |
| | 68.8% | | Gross profit | | 6,199 |
| | 423 |
| | 5,776 |
| | 1,365.5% | | Gross profit percentage | | 14.1 | % | | 1.6 | % | | | | | | General and administrative expenses | | 1,496 |
| | 1,313 |
| | 183 |
| | 13.9% | | Operating income (loss) | | 4,703 |
| | (890 | ) | | 5,593 |
| |
|
Revenue - Revenue from our Services Division increased $11.2$18.0 million for the threesix months ended March 31,June 30, 2018, compared to the threesix months ended March 31,June 30, 2017, due to an overall increase in work experienced due toresulting from increases in customer demand for offshore oil and gas related service projects.
Gross profit - Gross profit from our Services Division increased $2.6$5.8 million for the threesix months ended March 31,June 30, 2018, compared to the threesix months ended March 31,June 30, 2017, due to increased revenue discussed above. Our gross profit percentage increased from 1.6% during the period for 2017 to 14.1% for 2018. The increase in gross profit percentage was due to a higher recovery of fixed costs with increased work.
General and administrative expenses - General and administrative expenses for our Services Division increased $68,000$0.2 million for the threesix months ended March 31,June 30, 2018, compared to the threesix months ended March 31,June 30, 2017, due to support of increased work as well as increases in employee incentive compensation with allocation of approximately $120,000 resulting from increased operating income. This was partially offset by decreases in corporate allocations as a portion of these are now allocated to our EPC Division and continued cost minimization efforts implemented by management for theexpenses remaining comparable period over period.
| | | | | | | | | | | | | | | | | EPC | | Three Months Ended March 31, | | Increase or (Decrease) | | | | 2018 | | 2017 | | Amount | | Percent | | Revenue | | 73 |
| | $ | — |
| | $ | 73 |
| | 100.0% | | Gross profit (loss) | | (308 | ) | | — |
| | (308 | ) | | (100.0)% | | Gross profit (loss) percentage | | n/a |
| | n/a |
| | | |
| | General and administrative expenses | | 417 |
| | — |
| | 417 |
| | 100.0% | | Operating income (loss) | | $ | (725 | ) | | $ | — |
| | $ | (725 | ) | |
|
| | | | | | | | | | | | | | | | | EPC | | Six Months Ended June 30, | | Increase or (Decrease) | | | | 2018 | | 2017 | | Amount | | Percent | | Revenue | | $ | 955 |
| | $ | — |
| | $ | 955 |
| | 100.0% | | Gross profit | | 235 |
| | — |
| | 235 |
| | 100.0% | | Gross profit (loss) percentage | | 24.6 | % | | n/a |
| | | | | | General and administrative expenses | | 902 |
| | — |
| | 902 |
| | 100.0% | | Operating loss | | (667 | ) | | — |
| | (667 | ) | |
|
Revenue - Our EPC Division did not exist at March 31,June 30, 2017. Revenue for the threesix months ended March 31,June 30, 2018, consists of early work and engineering studies authorized by SeaOne. See Note 8 of the Notes to Consolidated Financial Statements for further discussion of our EPC Division and the SeaOne Project.
Gross profit (loss) - Gross lossprofit from our EPC Division occurred as we added personnel and overhead infrastructure related to the anticipated SeaOne project.
General and administrative expenses - General and administrative expenses for our EPC Division include the addition of personnel and allocations of corporate expenses as we invest in this new line of business. | | | | | | | | | | | | | | | | | Corporate | | Three Months Ended March 31, | | Increase or (Decrease) | | | | 2018 | | 2017 | | Amount | | Percent | | Revenue | | $ | — |
| | $ | — |
| | $ | — |
| | —% | | Gross profit (loss) | | $ | (385 | ) | | (260 | ) | | 125 |
| | 48.1% | | Gross profit (loss) percentage | | n/a |
| | n/a |
| | | | | | General and administrative expenses | | 2,138 |
| | 1,479 |
| | 659 |
| | 44.6% | | Operating income (loss) | | $ | (2,523 | ) | | $ | (1,739 | ) | | $ | 784 |
| |
|
| | | | | | | | | | | | | | | | | Corporate | | Six Months Ended June 30, | | Increase or (Decrease) | | | | 2018 | | 2017 | | Amount | | Percent | | Revenue | | $ | — |
| | $ | — |
| | $ | — |
| | | | Gross loss | | (769 | ) | | (351 | ) | | (418 | ) | | (119.1)% | | Gross loss percentage | | n/a |
| | n/a |
| | | | | | General and administrative expenses | | 4,435 |
| | 3,656 |
| | 779 |
| | 21.3% | | Operating loss | | (5,204 | ) | | (4,007 | ) | | (1,197 | ) | |
|
Gross profit (loss)loss - Gross loss from our Corporate Division increased primarily due to lower allocation of expenses and as well as increased insurance costs.buildup of personnel to support our EPC Division.
General and administrative expenses - General and administrative expenses for our Corporate Division increased primarily due to increased legal and advisory fees related to customer disputes, strategic planning and diversification of our business and increased employee incentive accruals and higher stock compensation expense of approximately $220,000.accruals.
Liquidity and Capital Resources Our immediate liquidity remains dependent on our cash on hand, anticipatedscheduled maturities of our held-to-maturity, short-term investments, potential proceeds from the sales of assets, availability of future drawings from our Credit Agreement and collections of accounts receivable. At March 31, 2018, we had $10 million outstanding under our Credit Agreement, $2.5 million in outstanding letters of credit, and cash and cash equivalents totaling $6.5 million compared to $9.0 million at December 31, 2017. As of May 4, 2018, our liquidity has significantly improved due to the saleA summary of our Texas South Yard the net proceedsimmediately available liquidity as of which willJune 30, 2018 is as follows: | | | | | | | Available Liquidity | | $ (in thousands) | | Cash and cash equivalents on hand | | $ | 32,004 |
| Held-to-maturity, short-term investments (1) | | 7,481 |
| | Revolving credit agreement | | 40,000 |
| | Less: | |
| | Borrowings under our Credit Agreement | | — |
| | Outstanding letters of credit | | (5,495 | ) | | Total available liquidity | | $ | 73,990 |
|
___________ (1) Our held-to-maturity, short-term investments include U.S. Treasuries and other investment-grade commercial paper and can be used to rebuild our liquidity, to support upcoming projects, continue investingliquidated quickly in our newly created EPC Division and for other general corporate purposes. After the sale of our Texas South Yard, our cash balance was $55.0 million, and the amount outstanding under our Credit Agreement was $10 million with remaining availability under our Credit Agreement of approximately $27.5 million for total liquidity of approximately $82.5 million.open markets. Working capital was $137.1$132.7 million and our ratio of current assets to current liabilities was 4.344.67 to 1 at March 31,June 30, 2018, compared to $130.5 million and 3.68 to 1, respectively, at December 31, 2017. Working capital at March 31,June 30, 2018, includes $98.4$7.5 million of held-to-maturity, short-term investments, $7.2 million of insurance receivables and $43.8 million related to assets held for sale, primarily related to our remaining South Texas Properties which decreased after the sale of our Texas South Yards to $48.5 million.Properties. At March 31,June 30, 2018, our contracts receivable balance was $27.4$31.9 million of which we have subsequently collected $14.9$14.4 million through May 4, 2018.as of the date of this Report and our insurance receivable was $7.2 million of which we have received payment for the full amount as of the date of this Report. Our primary usesources/uses of cash during the threesix months ended March 31,June 30, 2018, isare referenced in the Cash Flow Activities section below. As discussed in our Executive Summary, we are implementing several strategies to diversify our business, increase backlog, reduce operating expenses and monetize assets. Our South Texas Properties are held for sale. A significant portion of our near-term plan is to generate liquidity from the sale of theseunderutilized assets. On April 20, 2018, we closed on the sale of our Texas South Yard for a sale price of $55$55.0 million, less selling costs of $1.5 million. We received approximately $52.7 million at closing, which was in addition to the $750,000$0.8 million of earnest money previously received on January 3, 2018, related to the option to purchase the Texas South Yard. We plan to use theearnest money. The net proceeds to rebuildreceived rebuilt our liquidity, toprovided support for upcoming projects, continue investingcontinued investment in our newly created EPC Division and for other general corporate purposes. See further discussion of the sale of our Texas South Yard in Note 2 of the Notes to Consolidated Financial Statements. We currently believe that cash on hand coupled with proceeds received fromcontinue to market our Texas North Yard, and hope to have a negotiated contract for 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 the twelve months from the date of this Report.
As of the date of this Report our Texas North Yard remains held for sale. The book value ofin the Texas North Yard is $46.6 million at March 31, 2018. We will continue to incur costs associated with holding and maintaining our Texas North Yard. These costs include insurance, general maintenance of the properties in their current state, property taxes and retained employees which will be expensed as incurred.near future.
We have a $40$40.0 million Credit Agreement maturing June 9, 2019. The Credit Agreement allows the Company to use up to the full amount of the available borrowing base for letters of credit and general corporate purposes. We believe that our Credit Agreement will provide us with additional working capital flexibility to expand operations as backlog improves, respond to market opportunities and support our ongoing operations. Interest on drawings under the Credit Agreement may be designated, at our option, as either Base Rate (as defined in the credit facility) or LIBOR plus 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 Credit Agreement are 0.4% per annum, and interest on undrawn stated amounts under letters of credit issued by the lender is 2% per annum. At March 31, 2018, the interest rate on our outstanding borrowings was 3.75% per annum. The Credit Agreement is secured by substantially all of our assets (other than the South Texas Properties).
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 we expect to remain outstanding until July of 2018.
We must comply with the following financial covenants each quarter during the term of the Credit Agreement:
| | | i. | Ratio of current assets to current liabilities of not less than 1.25:1.00; |
| | | ii. | Minimum tangible net worth requirement of at least the sum of: |
$185 million, plus An amount equal to 50% of consolidated net income for each fiscal quarter ending after June 30, 2017, including 50% of any gain attributable to the sale of all or substantially all our South Texas Properties (with no deduction for a net loss in any such fiscal quarter), plus
| | b) | An amount equal to 50% of consolidated net income for each fiscal quarter ending after June 30, 2017, including 50% of any gain attributable to the sale of our South Texas Properties (with no deduction for a net loss in any such fiscal quarter), plus |
| | c) | 100% of the proceeds of any issuance of any stock or other equity after deducting of any fees, commissions, expenses and other costs incurred in such offering; and |
100% of the proceeds of any issuance of any stock or other equity after deducting of any fees, commissions, expenses and other costs incurred in such offering; and
| | | iii. | Ratio of funded debt to tangible net worth of not more than 0.50:1.00. |
As of March 31,June 30, 2018, we were in compliance with all of our financial covenants.
We will continue to monitor and preserve our cash. Our primary liquidity requirements for 2018 and beyond are for the costs associated with fabricationFabrication and shipyardShipyard projects, capital expenditures related to the creationexpansion of our EPC Division and enhancements to our shipyards.Shipyard facilities. Future capital expenditures will be highly dependent upon the amount and timing of future projects. Capital expenditures for the quartersix months ended March 31,June 30, 2018, were $71,000.$0.8 million. We do not anticipate significant capital expenditures for the remainder of 2018.
If industry conditions for offshore oil and gas do not improve, we are unable to sell our Texas North Yard or the sale is delayed, or we are unable to increase our backlog, we would expect to take additional measures to preserve our cash flows until such time we are able to generate cash flows from operations. Since the beginning of 2016, we have implemented wage adjustments along with employee benefit and overall cost reductions within all of our divisions. We have reduced the level of our workforce in the past and we will continue to do so based on booked work in all of our facilities. We have reduced the cash compensation paid to our directors and the salaries of our executive officers, and we have reduced our capital expenditures and placed assets that are either underutilized, under-performing or not expected to provide sufficient long-term value for sale, which include our South Texas Properties.
We currently believe that cash and cash equivalents on hand and held-to-maturity, short-term investments 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 twelve months from the date of this Report. Our view regarding sufficiency of cash and liquidity is primarily based on our financial forecast for the remainder of 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 forecast, 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 requirements. Accordingly, we may be required to further draw on our Credit Agreement, obtain additional bank financing, sell additional assets or conduct equity or debt offerings at a time when it is not beneficial to do so.
Cash Flow Activities
For the threesix months ended March 31,June 30, 2018, net cash used in operating activities was $14.1$26.4 million, compared to net cash used in operating activities of $15.1$27.9 million for the threesix months ended March 31,June 30, 2017. The use of cash in operations during the period was primarily due to the following:
Operating losses for the threesix months ended March 31,June 30, 2018, excluding gains on sales of assets and insurance recoveries as well as amounts in excess of non-cash depreciation, amortization, impairment, and stock compensation expense of approximately $1.5$3.5 million;
Slower collections of receivables of $6.4 million
Build-up of costs for contracts in progress of $9.1$8.1 million;
Build-up ofIncreased retainage on projects of $1.5 million; and
PaymentIncreased payments of property taxes related to our South Texas Propertiesaccounts payable of $2 million.$2.4 million; and
Other general uses of working capital.
Net cash provided by investing activities for the threesix months ended March 31,June 30, 2018, was $2.4$50.2 million, compared to cash used inprovided by investing activities of $391,000$0.3 million for the threesix months ended March 31,June 30, 2017. The changeincrease in cash used inprovided by investing activities is due primarily due to the sales of assets, primarily our Texas South Yard, in the amount of $56.4 million and the insurance proceeds received for hurricane damage to assets at our South Texas Properties. This was partially offset by the purchase of held-to-maturity investments of $7.5 million.
Net cash providedused by financing activities for the threesix months ended March 31,June 30, 2018, and 2017, was $9.2$0.8 million compared to $1.0$1.2 million in cash used in financing activities, respectively. The increase in cash provided by financing activities is due to $10 million in net borrowings under our Credit Agreement.
Contractual Obligations There have been no material changes from the information included in our 2017 Annual Report. For more information on our contractual obligations, refer to Part II, Item 7 of our 2017 Annual Report. Off-Balance Sheet Arrangements There have been no material changes from the information included in our 2017 Annual Report. Item 3. Quantitative and Qualitative Disclosures About Market Risk. There have been no material changes in the Company’s market risks during the quarter ended March 31,June 30, 2018. For more information on market risk, refer to Part II, Item 7A. of our Annual Report on Form 10-K for the year ended December 31, 2017. Item 4. Controls and Procedures. The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and that such information is communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this Report. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that the design and operation of our disclosure controls and procedures were effective as of the end of the period covered by this Report. There have been no changes during the fiscal quarter ended March 31,June 30, 2018, in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION Item 1. Legal Proceedings. The Company is subject to various routine legal proceedings in the normal conduct of its business primarily involving commercial claims, workers’ compensation claims, and claims for personal injury under general maritime laws of the United States and the Jones Act. While the outcome of these lawsuits, legal proceedings and claims cannot be predicted with certainty, management believes that the outcome of any such proceedings, even if determined adversely, would not have a material adverse effect on the financial position, results of operations or cash flows of the Company. Item 1A. Risk Factors. There have been no material changes from the information included in Item 1A “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2017. Item 6. Exhibits. | | | | | Exhibit Number | | Description of Exhibit | | | | | 3.1 | | 2009 (SEC File no. 001-34279). | | 3.2 | | 2016 (SEC File no. 001-34279). | | 10.1 | |
| 10.2 | |
| 10.3 | |
| 10.4 | |
| | 31.1 | | | | 31.2 | | | | 32 | | | | | | | | 101 | | Attached as Exhibit 101 to this report are the following items formatted in XBRL (Extensible Business Reporting Language): | | | | (i) | Consolidated Balance Sheets, | | | | (ii) | Consolidated Statements of Operations, | | | | (iii) | Consolidated Statement of Changes in Shareholders’ Equity, | | | | (iv) | Consolidated Statements of Cash Flows, and | | | | (v) | Notes to Consolidated Financial Statements. | | | | | | * | | Filed herewith. | | † | | Management Contract or Compensatory Plan. |
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized. | | | | GULF ISLAND FABRICATION, INC. | | | | BY: | /s/ David S. Schorlemer | | | David S. Schorlemer | | | Executive Vice President, Chief Financial Officer, Secretary and Treasurer (Principal Financial Officer) |
Date: May 4,August 9, 2018
s | Labor hours | |
| | | | | | | | |
| June 30, 2018 |
| December 31, 2017 | | | Number | Percentage | | Number | Percentage | Major customers (1) | four | 77.8% | | four | 73.0% | | | | | | | | Backlog is expected to be recognized in revenue during:(2) | $'s | Percentage | | | | | 2018 | $ | 97,366 |
| 28.0% | | | | | 2019 | 170,987 |
| 49.2% | | | | | 2020 | 69,890 |
| 20.1% | | | | | 2021 | 8,645 |
| 2.5% | | | | | 2022 | 665 |
| 0.2% | | | | | Total | $ | 347,553 |
| 100.0% | |
| | | | | | | | |
___________
| | | (1) | At March 31,June 30, 2018, projects for our fivefour largest customers in terms of revenue backlog consisted of: |
| | | (i) | Two large MPSVs for one customer for which we have received a purported notice of termination as discussed above; |
| | (ii) | Newbuildnewbuild construction of five harbor tugs for one customer (to be completed in 2018 through 2020); |
| | (iii)(ii) | Newbuildnewbuild construction of five harbor tugs for one customer (separate from above) (to be completed in 2018 through 2020); |
| | (iv)(iii) | Newbuildnewbuild construction of antwo offshore marine research vesselvessels (to be completed in 2020)2020 and 2022); and |
| | (v)(iv) | Newbuildnewbuild construction of one T-ATS vessel (to be completed in 2020)2021). This contract is currently underwas 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 thus given a bid protest.notification to proceed. We were recently notified that this unsuccessful bidder has filed a subsequent protest with the Department of Justice. We have been granted a partial stay which allows us to proceed with design development, planning, scheduling and material ordering leading up to the start of construction. |
| | | (2) | The timing of recognition of the revenue represented in our backlog is based on management’s current estimates to complete the projects. Certain factors and circumstances could cause changes in the amounts ultimately recognized and the timing of the recognition of revenue from our backlog. |
Certain of our contracts contain options which grant the right to our customer, if exercised, for the construction of additional vessels at contracted prices.Weprices. We do not include options in our backlog above. If all options under our current contracts were exercised, our backlog would increase by $626.2$562.7 million. We believe disclosing these options provides investors with useful information in order to evaluate additional potential work that we would be contractually obligated to perform under our current contracts as well as the potential significance of these options, if exercised. We have not received any commitments related to the exercise of these options from our customers, and we can provide no assurance that any or all of these options will be exercised. As we add backlog, we will add personnel with critical project management and fabrication skills to ensure we have the resources necessary to execute our projects well and to support our project risk mitigation discipline for all new projects. This may negatively impact near-term results. Workforce As of March 31,June 30, 2018, we had 961847 employees compared to 977 employees as of December 31, 2017. Labor hours worked were 496,000947,000 during the threesix months ended March 31,June 30, 2018, compared to 479,0001 million for the threesix months ended March 31,June 30, 2017. The overall increase in labor hours worked for the three months ended March 31, 2018, was due to improved offshore demand within our Services Division. As of April 29, 2018, we had 870 employees. The decrease in our workforce subsequent to March 31, 2018,labor hours worked is primarily within our Fabrication Division due to completion of complex modules for the construction of a new petrochemical plant with no significant futureimmediate replacement Fabrication backlog forecasted in the near-term as well as the stoppagesuspension of construction of the two MPSVs within our Shipyard Division pending resolution of our dispute over termination with our MPSV customer. This was partially offset by improved demand within our Services Division. See Note 9 of the Notes to Consolidated Financial Statements related to our MPSV contract termination dispute.
Results of Operations Three Months Ended March 31,June 30, 2018, Compared to Three Months Ended March 31,June 30, 2017(in thousands, except for percentages): Consolidated | | | | | | | | | | | | | | | | Three Months Ended March 31, | | Increase or (Decrease) | | | 2018 | | 2017 | | Amount | Percent | | Revenue | $ | 57,290 |
| | $ | 37,993 |
| | $ | 19,297 |
| 50.8% | | Cost of revenue | 56,611 |
| | 42,890 |
| | 13,721 |
| 32.0% | | Gross profit (loss) | 679 |
| | (4,897 | ) | | 5,576 |
| 113.9% | | Gross profit (loss) percentage | 1.2 | % | | (12.9 | )% | | | | | General and administrative expenses | 4,709 |
| | 3,930 |
| | 779 |
| 19.8% | | Asset impairment | 750 |
| | 389 |
| | 361 |
| 92.8% | | Operating income (loss) | (4,780 | ) | | (9,216 | ) | | (4,436 | ) |
| | Other income (expense): | | | | | | | | Interest expense | (469 | ) | | (59 | ) | | (410 | ) | (694.9)% | | Other income (expense), net | 12 |
| | 9 |
| | 3 |
| 33.3% | | Total other income (expense) | (457 | ) | | (50 | ) | | (407 | ) | (814.0)% | | Net loss before income taxes | (5,237 | ) | | (9,266 | ) | | (4,029 | ) | (43.5)% | | Income tax expense (benefit) | 59 |
| | (2,812 | ) | | 2,871 |
| 102.1% | | Net loss | $ | (5,296 | ) | | $ | (6,454 | ) | | $ | 6,900 |
|
|
| | | | | | | | | | | | | | | | Three Months Ended June 30, | | Increase or (Decrease) | | | 2018 | | 2017 | | Amount | Percent | | Revenue | $ | 54,014 |
| | $ | 45,868 |
| | $ | 8,146 |
| 17.8% | | Cost of revenue | 54,713 |
| | 57,488 |
| | (2,775 | ) | (4.8)% | | Gross loss | (699 | ) | | (11,620 | ) | | 10,921 |
| 94.0% | | Gross loss percentage | (1.3 | )% | | (25.3 | )% | | | | | General and administrative expenses | 5,092 |
| | 4,640 |
| | 452 |
| 9.7% | | Asset impairment | 610 |
| | — |
| | 610 |
| 100.0% | | Operating loss | (6,401 | ) | | (16,260 | ) | | 9,859 |
| 60.6% | | Other income (expense): | | | | | | | | Interest expense, net | (92 | ) | | (146 | ) | | 54 |
| 37.0% | | Other income (expense), net | 7,125 |
| | (266 | ) | | 7,391 |
| 2,778.6% | | Total other income (expense) | 7,033 |
| | (412 | ) | | 7,445 |
| 1,807.0% | | Net income (loss) before income taxes | 632 |
| | (16,672 | ) | | 17,304 |
| 103.8% | | Income tax expense (benefit) | 83 |
| | (5,749 | ) | | 5,832 |
| 101.4% | | Net income (loss) | $ | 549 |
| | $ | (10,923 | ) | | $ | 11,472 |
| 105.0% |
Revenue - Our revenue for the three months ended March 31,June 30, 2018 and 2017, was $57.3$54.0 million and $38.0$45.9 million, respectively, representing an increase of 50.8%17.8%. The increase is primarily attributable to:
An increase of $11.2$6.8 million within our Services Division from additional demand for offshore oil and gas service related projects; and An increase of $7.1$5.3 million within our Shipyard Division related to the newbuild construction of ten harbor tug vessels and an offshore marine research vessel which were not under construction during the second quarter of 2017 and $10.2 million in contract losses recorded during the three months ended June 30, 2017, which reduced our measurement of revenue progress under percentage of completion accounting for the second quarter of 2017. Additionally, we re-commenced newbuild construction for the second of two OSV's during the fourth quarter of 2017 which was in process in the second quarter of 2018 but was suspended during the second quarter of 2017.
The increase in revenue was partially offset by a decrease of $5.4 million of revenue within our Fabrication Division primarily attributable to the constructioncompletion of four modules for a petrochemical plant.plant in April 2018.
Gross profit (loss)loss - Our gross profitloss for the three months ended March 31,June 30, 2018, was $679,000$0.7 million compared to a gross loss of $4.9$11.6 million for the three months ended March 31,June 30, 2017. The increase in gross profitimprovement was primarily due to increased revenue within our Services Division as discussed above and a lower gross loss from our Shipyard Division related to $10.2 million in contract losses recorded during the three months ended June 30, 2017, reflecting cost overruns and re-work identified on two contracts relating to the construction of two MPSVs with no comparable adjustments to contract losses in the second quarter of 2018. Additionally, we decreased expenses within our Fabrication Division which included $1.9 million of depreciation expense for the three months ended March 31, 2017, related to our South Texas Properties with no depreciation expense during the three months ended March 31, 2018, for our South Texas Properties as these assets are classified as held for sale.Division.
General and administrative expenses - Our general and administrative expenses were $4.7$5.1 million for the three months ended March 31,June 30, 2018, compared to $3.9$4.6 million for the three months ended March 31,June 30, 2017. The increase in general and administrative expenses for the three months ended March 31,June 30, 2018, was primarily attributable toto:
Build-up of additional personnel for our newly created EPC Division;Division in anticipation of the SeaOne Project; Increased legal and advisory fees related to customer disputes, strategic planning and diversification of our business; and Increased employee incentiveincentives accruals of approximately $300,000 for all divisions related to our safety incentive program and higher employee profitability incentives within our Services Division as well as the addition of personnel as we build up our EPC Division in anticipation of the SeaOne Project; and Higher stock compensation expense of approximately $220,000.Division.
This was partially offset by cost reductions and continued cost minimization efforts implemented by management for the period.
Asset impairment - We recorded an impairmentsecond quarter of $750,000 during the three months ended March 31, 2018, related to 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 management's estimated net proceeds from the sale less its net book value. See also Note 2 of the Notes to Consolidated Financial Statements for additional information regarding our assets held for sale. During the three months ended March 31, 2017, we recorded an impairment of $389,000 related to the Shipyard Division assets held for sale.2017.
Interest expense, net - Interest expense, increasednet decreased due to drawingsfewer letters of credit issued under our Credit Agreement for the three months ended March 31,June 30, 2018, with no such drawings under our Credit Agreementcompared to the three months ended June 30, 2017, as well as increased interest income from investments in cash equivalents and held-to-maturity, short-term investments during the three months ended June 30, 2018.
Other income (expense) - Other income, net was $7.1 million for the three months ended March 31, 2017, as well as increased amortizationJune 30, 2018, compared to other expense, net of deferred financing costs during$0.3 million for the three months ended March 31, 2018.June 30, 2017. Other income, net for the three months ended June 30, 2018 is primarily due to a gain on the sale of our Texas South Yard of $3.9 million and a gain on settlement of insurance recovery proceeds related to Hurricane Harvey of $3.6 million.
Income tax expense (benefit) - Our effective income tax rate for the three months ended March 31,June 30, 2018, was (1.1)%expense of 13.1%, compared to an effective tax rate benefit of 30.3%34.5% for the comparable period during 2017. Current expense represents state taxesincome tax within our Services Division. The decrease in the effective tax rate is the result of a valuation allowance against our deferred tax assets. See Note 1 of the Notes to Consolidated Financial Statements regarding our NOLs and deferred tax assets.
Operating Segments
The results of our four operating divisions and Corporate Divisionnon-operating corporate division for the three months ended March 31,June 30, 2018 and 2017, are presented below (in thousands, except for percentages).
| | | | | | | | | | | | | | | | | Fabrication | | Three Months Ended March 31, | | Increase or (Decrease) | | | | 2018 | | 2017 | | Amount | | Percent | | Revenue | | $ | 17,270 |
| | $ | 10,209 |
| | $ | 7,061 |
| | 69.2% | | Gross profit (loss) | | (219 | ) | | (2,966 | ) | | (2,747 | ) | | (92.6)% | | Gross profit (loss) percentage | | (1.3 | )% | | (29.1 | )% | | | |
| | General and administrative expenses | | 624 |
| | 821 |
| | (197 | ) | | (24.0)% | | Asset impairment | | 750 |
| | — |
| | 750 |
| | 100.0% | | Operating income (loss) | | $ | (1,593 | ) | | $ | (3,787 | ) | | $ | (2,194 | ) | |
|
| | | | | | | | | | | | | | | | | Fabrication | | Three Months Ended June 30, | | Increase or (Decrease) | | | | 2018 | | 2017 | | Amount | | Percent | | Revenue | | $ | 8,590 |
| | $ | 13,990 |
| | $ | (5,400 | ) | | (38.6)% | | Gross profit (loss) | | (1,667 | ) | | 1,931 |
| | (3,598 | ) | | (186.3)% | | Gross profit (loss) percentage | | (19.4 | )% | | 13.8 | % | | | |
| | General and administrative expenses | | 951 |
| | 833 |
| | 118 |
| | 14.2% | | Asset impairment | | 610 |
| | — |
| | 610 |
| | 100.0% | | Operating income (loss) | | (3,227 | ) | | 1,098 |
| | (4,325 | ) | |
|
Revenue - Revenue from our Fabrication Division increased $7.1decreased $5.4 million for the three months ended March 31,June 30, 2018, compared to the three months ended March 31,June 30, 2017. The increasedecrease is attributable to the constructioncompletion and delivery of four modules for a petrochemical plant during April 2018 with very little immediate replacement backlog started as a result of the three months ended March 31, 2018, and lower revenue during the three months ended March 31, 2017, resultingtemporary impacts from previously depressed oil and gas prices and the corresponding reduction in customer demand for offshore fabrication projects during the period. This was partially offset, by decreased revenue of $2.4 million for the three months ended March 31, 2018, at our South Texas Properties as these were placed for sale during the first quarter of 2017 and project work completed or transfered to our Houma Fabrication Yard during 2017.prices.
Gross profit (loss) - Gross loss from our Fabrication Division for the three months ended March 31,June 30, 2018, was $219,000$1.7 million compared to a gross lossprofit of $3.0$1.9 million for the three months ended March 31,June 30, 2017. The decrease in gross loss was due to increaseddecreased revenue with minimal new fabrication work started during the second quarter of 2018 as discussed above and a reduction in depreciation expense of $1.9 million in depreciation expense during the three months ended March 31, 2018 for our South Texas Properties as these assets are classified as held for sale.above.
General and administrative expenses - General and administrative expenses for our Fabrication Division decreased $197,000increased $0.1 million for the three months ended March 31,June 30, 2018, compared to the three months ended March 31,June 30, 2017. The decreaseincrease is primarily due to an increase in legal expense of $0.4 million for our pursuit of claims against a customer related to disputed change orders for a large deepwater project we delivered to our customer in November 2015 partially offset by decreases in workforce at our South Texas Properties,salaries and employee incentives of $0.2 million due to employee reductions and decreases in corporate allocations of $0.1 million as a portion of these are now allocated to our EPC Division and continued cost minimization efforts implemented by management for the period.Division.
Asset impairment - We recorded an impairment of $750,000$0.6 million during the three months ended March 31,June 30, 2018, primarily related to 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.Yard. The impairment was calculated as management's estimated net proceeds from the sale less its net book value. See Note 2 of the Notes to Consolidated Financial Statements for additional information regarding our assets held for sale. We did not record any asset impairments during the three months ended March 31,June 30, 2017, within our Fabrication Division.
| | | | | | | | | | | | | | | | | Shipyard | | Three Months Ended March 31, | | Increase or (Decrease) | | | | 2018 | | 2017 | | Amount | | Percent | Revenue (1) | | $ | 18,565 |
| | $ | 18,422 |
| | $ | 143 |
| | 0.8% | Gross profit (loss) (1) | | (1,023 | ) | | (1,704 | ) | | (681 | ) | | (40.0)% | | Gross profit (loss) percentage | | (5.5 | )% | | (9.2 | )% | | | |
| | General and administrative expenses | | 796 |
| | 964 |
| | (168 | ) | | (17.4)% | | Asset impairment | | — |
| | 389 |
| | (389 | ) | | (100.0)% | Operating income (loss) (1) | | $ | (1,819 | ) | | $ | (3,057 | ) | | $ | (1,238 | ) | |
|
| | | | | | | | | | | | | | | | | Shipyard | | Three Months Ended June 30, | | Increase or (Decrease) | | | | 2018 | | 2017 | | Amount | | Percent | Revenue (1) | | $ | 23,620 |
| | $ | 18,303 |
| | $ | 5,317 |
| | 29.0% | Gross loss (1) | | (2,776 | ) | | (13,851 | ) | | 11,075 |
| | 80.0% | | Gross loss percentage | | (11.8 | )% | | (75.7 | )% | | | |
| | General and administrative expenses | | 597 |
| | 983 |
| | (386 | ) | | (39.3)% | Operating loss (1) | | (3,374 | ) | | (14,834 | ) | | 11,460 |
| |
|
___________ | | | (1) | Revenue for the three months ended March 31,June 30, 2018 and 2017, includes $390,000$0.1 million and $1.6$0.3 million of non-cash amortization of deferred revenue related to the values assigned to the contracts acquired in the LEEVAC transaction, respectively. |
Revenue - Revenue from our Shipyard Division increased $143,000$5.3 million for the three months ended March 31,June 30, 2018, compared to the three months ended March 31,June 30, 2017. During the firstsecond quarter of 2018, we were able to make progress on the construction of eightten harbor tugstug vessels and an offshore marine research vessel which were not under construction during the firstsecond quarter of 2017. During the three months ended June 30, 2017, we also recorded $10.2 million in contract losses which reduced our measure of revenue progress under percentage of completion accounting. Additionally, we re-commenced newbuild construction for the second of two OSV's during the fourth quarter of 2017, which was suspended during the second quarter of 2017. This was partially offset by lower revenue from construction of our two OSV and two MPSV vessel contracts that were under construction during 2017, but suspended during the first quarter of 2018.
During the first quarter of 2017, we completed the first of the OSVs and tendered it for delivery on February 6, 2017, and suspended construction of the second OSV due to a customer dispute. We recommenced construction of the second OSV during the fourth quarter of 2017 which is scheduled for completion during the second quarter of 2018. During the first quarter of 2018, 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 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. See also Note 9 of the Notes to Consolidated Financial Statements for additional information relating to this customer dispute.the suspension of construction of two MPSVs.
Gross profit (loss)loss - Gross loss from our Shipyard Division was $1.0$2.8 million for the three months ended March 31,June 30, 2018, compared to a gross loss of $1.7$13.9 million for the three months ended March 31,June 30, 2017. The decreasegross loss for the three months ended June 30, 2018, was primarily attributable to underutilization of our Houma and Lake Charles shipyards and competitive pricing on current work. The improvement in gross loss of $11.1 million was primarily due to improved cost management efforts and efficiencies learned from the construction of two OSV and two MPSV vesselsto:
$10.2 million in contract losses recorded during the three months ended March 31,June 30, 2017, related to cost overruns and appliedre-work identified on the two contracts relating to the construction of eight harbor tugstwo MPSVs; holding and closing costs during the three months ended MarchJune 30, 2017, related to our former Prospect shipyard. We terminated the lease of this facility effective December 31, 2017; and holding costs during the three months ended June 30, 2017 related to a completed OSV that was delivered on February 6, 2017, but refused by our customer as well as the suspension of work on the second OSV vessel. We resolved our disputes with our OSV customer during the fourth quarter of 2017 and construction of the second OSV re-commenced. We subsequently delivered the second OSV on July 31, 2018.
General and administrative expenses - General and administrative expenses for our Shipyard Division decreased $168,000$0.4 for the three months ended March 31,June 30, 2018, compared to the three months ended March 31,June 30, 2017, primarily due to reductions in salaries and employee incentives of $0.4 million related to reductions in our workforce period over period and decreases in corporate allocations of $0.1 million as a portion of these are now allocated to our EPC Division. This was partially offset by increases in legal expense related to our customer dispute relating to the suspension of construction of two MPSVs. See also Note 9 of the Notes to Consolidated Financial Statements for additional information relating to the suspension of construction of two MPSVs.
| | | | | | | | | | | | | | | | | Services | | Three Months Ended June 30, | | Increase or (Decrease) | | | | 2018 | | 2017 | | Amount | | Percent | | Revenue | | $ | 22,205 |
| | $ | 15,396 |
| | $ | 6,809 |
| | 44.2% | | Gross profit | | 3,585 |
| | 390 |
| | 3,195 |
| | 819.2% | | Gross profit percentage | | 16.1 | % | | 2.5 | % | | | |
| | General and administrative expenses | | 762 |
| | 647 |
| | 115 |
| | 17.8% | | Operating income (loss) | | 2,823 |
| | (257 | ) | | 3,080 |
| |
|
Revenue - Revenue from our Services Division increased $6.8 million for the three months ended June 30, 2018, compared to the three months ended June 30, 2017, due to an overall increase in work resulting from increases in customer demand for offshore oil and gas related service projects.
Gross profit - Gross profit from our Services Division increased $3.2 million for the three months ended June 30, 2018, compared to the three months ended June 30, 2017, due to increased revenue discussed above. Our gross profit percentage increased from 2.5% during the period for 2017 to 16.1% for 2018. The increase in gross profit percentage was due to a higher recovery of fixed costs with increased work.
General and administrative expenses - General and administrative expenses for our Services Division increased $0.1 for the three months ended June 30, 2018, compared to the three months ended June 30, 2017, due to support of increased work as well as increases in employee incentive compensation with allocation of corporate expenses remaining comparable period over period.
| | | | | | | | | | | | | | | | | EPC | | Three Months Ended June 30, | | Increase or (Decrease) | | | | 2018 | | 2017 | | Amount | | Percent | | Revenue | | $ | 882 |
| | $ | — |
| | $ | 882 |
| | 100.0% | | Gross profit | | 543 |
| | — |
| | 543 |
| | 100.0% | | Gross profit percentage | | 61.6 | % | | n/a |
| | | | | | General and administrative expenses | | 485 |
| | — |
| | 485 |
| | 100.0% | | Operating income | | 58 |
| | — |
| | 58 |
| |
|
Revenue - Our EPC Division did not exist at June 30, 2017. Revenue for the three months ended June 30, 2018 consists of early work and engineering studies authorized by SeaOne. See Note 8 of the Notes to Consolidated Financial Statements for further discussion of our EPC Division and the SeaOne Project.
Gross profit - Gross profit for the three months ended June 30, 2018, consists of early work and engineering studies authorized by SeaOne.
General and administrative expenses - General and administrative expenses for our EPC Division include the addition of personnel and allocations of corporate expenses as we invest in this new line of business.
| | | | | | | | | | | | | | | | | Corporate | | Three Months Ended June 30, | | Increase or (Decrease) | | | | 2018 | | 2017 | | Amount | | Percent | | Revenue | | $ | — |
| | $ | — |
| | $ | — |
| | | | Gross loss | | (384 | ) | | (90 | ) | | (294 | ) | | (326.7)% | | Gross loss percentage | | n/a |
| | n/a |
| | | | | | General and administrative expenses | | 2,297 |
| | 2,177 |
| | 120 |
| | 5.5% | | Operating loss | | (2,681 | ) | | (2,267 | ) | | (414 | ) | |
|
Gross loss - Gross loss from our Corporate Division increased primarily due to lower allocation of expenses and build-up of personnel to support our EPC Division.
General and administrative expenses - General and administrative expenses for our Corporate Division increased primarily due to increased legal and advisory fees related to customer disputes, strategic planning and diversification of our business and increased employee incentive accruals.
Six Months Ended June 30, 2018, Compared to Six Months Ended June 30, 2017(in thousands, except for percentages): Consolidated | | | | | | | | | | | | | | | | Six Months Ended June 30, | | Increase or (Decrease) | | | 2018 | | 2017 | | Amount | Percent | | Revenue | $ | 111,304 |
| | $ | 83,860 |
| | $ | 27,444 |
| 32.7% | | Cost of revenue | 111,324 |
| | 100,378 |
| | 10,946 |
| 10.9% | | Gross loss | (20 | ) | | (16,518 | ) | | 16,498 |
| 99.9% | | Gross profit percentage | — | % | | (19.7 | )% | | | | | General and administrative expenses | 9,801 |
| | 8,570 |
| | 1,231 |
| 14.4% | | Asset impairment | 1,360 |
| | 389 |
| | 971 |
| 249.6% | | Operating loss | (11,181 | ) | | (25,477 | ) | | 14,296 |
| 56.1% | | Other income (expense): | | | | | | | | Interest expense, net | (238 | ) | | (205 | ) | | (33 | ) | (16.1)% | | Other income (expense), net | 6,814 |
| | (257 | ) | | 7,071 |
| 2,751.4% | | Total other income (expense) | 6,576 |
| | (462 | ) | | 7,038 |
| 1,523.4% | | Net loss before income taxes | (4,605 | ) | | (25,939 | ) | | 21,334 |
| 82.2% | | Income tax expense (benefit) | 142 |
| | (8,561 | ) | | 8,703 |
| 101.7% | | Net loss | $ | (4,747 | ) | | $ | (17,378 | ) | | $ | 12,631 |
| 72.7% |
Revenue - Our revenue for the six months ended June 30, 2018 and 2017, was $111.3 million and $83.9 million, respectively, representing an increase of 32.7%. The increase is primarily attributable to:
An increase of $1.7 million within our Fabrication Division primarily attributable to the construction and completion of four modules for a petrochemical plant; An increase of $5.5 million within our Shipyard Division primarily related to construction of ten harbor tug vessels and an offshore marine research vessel which were not under construction during the first half of 2017 and $10.6 million in contract losses recorded during the six months ended June 30, 2017, which reduced our measure of revenue progress under percentage of completion accounting; Additionally, we re-commenced newbuild construction for the second of two OSV's during the fourth quarter of 2017, which continued through the first half of 2018 but had been suspended during the second quarter of 2017; and An increase of $18.0 million within our Services Division from additional demand for offshore oil and gas service related projects.
Gross loss - Our gross loss for the six months ended June 30, 2018, was $20,000 compared to a gross loss of $16.5 million for the six months ended June 30, 2017. The improvement in gross loss was primarily due to increased revenue within our Services Division as discussed above and $10.6 million in contract losses related to cost overruns and re-work that was identified and recorded during the six months ended June 30, 2017 on two contracts relating to the construction of two MPSVs with no comparable adjustments to contract losses in the first half of 2018.
General and administrative expenses - Our general and administrative expenses were $9.8 million for the six months ended June 30, 2018, compared to $8.6 million for the six months ended June 30, 2017. The increase in general and administrative expenses for the six months ended June 30, 2018, was primarily attributable to:
Build-up of additional personnel for our newly created EPC Division; Increased legal and advisory fees related to customer disputes, strategic planning and diversification of our business; and Increased employee incentive accruals for all divisions related to our safety incentive program and higher employee profitability incentives within our Services Division. This was partially offset by cost reductions and continued cost minimization efforts implemented by management during the second half of 2017.
Asset impairment - We recorded an impairment of $1.4 million during the six months ended June 30, 2018, primarily related to two pieces of equipment at our Texas North Yard that are held for sale. The impairment was calculated as management's estimated net proceeds from the sale less the equipment's net book value. See Note 2 of the Notes to Consolidated Financial Statements for additional information regarding our assets held for sale. During the six months ended June 30, 2017, we recorded an impairment of $0.4 million related to our Shipyard Division assets held for sale.
Other income (expense), net - Other income, net was $6.8 million for the six months ended June 30, 2018, compared to other expense, net of $0.3 million for the six months ended June 30, 2017. Other income, net for the six months ended June 30, 2018 is primarily due to a gain on the sale of our Texas South Yard of $3.9 million and a gain on settlement of insurance recovery proceeds related to Hurricane Harvey of $3.6 million.
Income tax expense (benefit) - Our effective income tax rate for the six months ended June 30, 2018, was expense of 3.1%, compared to an effective tax rate benefit of 33.0% for the comparable period during 2017. Current expense represents state income tax within our Services Division. The decrease in the effective tax rate is the result of a valuation allowance against our deferred tax assets. See Note 1 of the Notes to Consolidated Financial Statements regarding our NOLs and deferred tax assets.
Operating Segments
The results of our four operating divisions and non-operating corporate division for the six months ended June 30, 2018 and 2017, are presented below (in thousands, except for percentages).
| | | | | | | | | | | | | | | | | Fabrication | | Six Months Ended June 30, | | Increase or (Decrease) | | | | 2018 | | 2017 | | Amount | | Percent | | Revenue | | $ | 25,860 |
| | $ | 24,199 |
| | $ | 1,661 |
| | 6.9% | | Gross loss | | (1,886 | ) | | (1,034 | ) | | (852 | ) | | (82.4)% | | Gross loss percentage | | (7.3 | )% | | (4.3 | )% | | | | | | General and administrative expenses | | 1,575 |
| | 1,654 |
| | (79 | ) | | (4.8)% | | Asset impairment | | 1,360 |
| | — |
| | 1,360 |
| | 100.0% | | Operating loss | | (4,821 | ) | | (2,688 | ) | | (2,133 | ) | | |
Revenue - Revenue from our Fabrication Division increased $1.7 million for the six months ended June 30, 2018, compared to the six months ended June 30, 2017. The increase is attributable to the construction and completion of four modules for a petrochemical plant during the six months ended June 30, 2018. This was partially offset, by decreased revenue of $2.8 million for the six months ended June 30, 2018, at our South Texas Properties as these were marketed for sale.
Gross loss - Gross loss from our Fabrication Division for the six months ended June 30, 2018, was $1.9 million compared to a gross loss of $1.0 million for the six months ended June 30, 2017. The increase in gross loss was due to increased material costs incurred on the construction and completion of four modules for a petrochemical plant during the six months ended June 30, 2018 as well as current work being bid at more competitive pricing. This was partially offset by a reduction in depreciation expense of $1.9 million during the six months ended June 30, 2018 for our South Texas Properties as these assets are classified as held for sale.
General and administrative expenses - General and administrative expenses for our Fabrication Division decreased $0.1 million for the six months ended June 30, 2018, compared to the six months ended June 30, 2017. The decrease is primarily due to decreases in salaries and employee incentives of $0.3 million due to reductions in workforce, decreases in corporate allocations of $0.3 million as a portion of these are now allocated to our EPC Division and continued cost minimization efforts implemented by management for the first half of 2018, partially offset by an increase in legal expense of $0.5 million.
Asset impairment - We recorded an impairment of $1.4 million during the six months ended June 30, 2018, primarily related to two pieces of equipment at our Texas North Yard. One piece of equipment was sold in July 2018, and we intend to sell the other piece of equipment at auction. The impairment was calculated as management's estimated net proceeds from the sale less the equipment's net book value. See Note 2 of the Notes to Consolidated Financial Statements for additional information regarding our assets held for sale. We did not record any asset impairments during the six months ended June 30, 2017, within our Fabrication Division.
| | | | | | | | | | | | | | | | | Shipyard | | Six Months Ended June 30, | | Increase or (Decrease) | | | | 2018 | | 2017 | | Amount | | Percent | Revenue (1) | | $ | 42,185 |
| | $ | 36,724 |
| | $ | 5,461 |
| | 14.9% | Gross loss (1) | | (3,799 | ) | | (15,556 | ) | | 11,757 |
| | 75.6% | | Gross loss percentage | | (9.0 | )% | | (42.4 | )% | | | | | | General and administrative expenses | | 1,393 |
| | 1,947 |
| | (554 | ) | | (28.5)% | | Asset impairment | | — |
| | 389 |
| | (389 | ) | | (100.0)% | Operating loss (1) | | (5,192 | ) | | (17,892 | ) | | 12,700 |
| | |
___________ | | | (1) | Revenue for the six months ended June 30, 2018, and 2017, includes $0.5 million and $1.9 million, respectively, of non-cash amortization of deferred revenue related to the values assigned to the contracts acquired in the LEEVAC transaction. |
Revenue - Revenue from our Shipyard Division increased $5.5 million for the six months ended June 30, 2018, compared to the six months ended June 30, 2017. During the first half of 2018, we made progress on the construction of ten harbor tug vessels and an offshore marine research vessel that were not under construction during the first half of 2017. The increase in revenue also resulted from re-commencing the newbuild construction for the second of two OSV's during the fourth quarter of 2017, which continued through the first half of 2018 but was suspended during the second quarter of 2017. This was partially offset by lower revenue from construction of two MPSVs that were under construction during 2017, but suspended during the first quarter of 2018. During the six months ended June 30, 2017, we also recorded $10.2 million in contract losses which reduced our measure of revenue progress under percentage of completion accounting. See also Note 9 of the Notes to Consolidated Financial Statements for additional information relating to the suspension of construction of two MPSVs.
Gross loss - Gross loss from our Shipyard Division was $3.8 million for the six months ended June 30, 2018, compared to a gross loss of $15.6 million for the six months ended June 30, 2017. The gross loss for the six months ended June 30, 2018, was primarily attributable to underutilization of our Houma and Lake Charles shipyards and competitive pricing on current work. The decrease in gross loss compared to the six months ended June 30, 2017, was due to:
$10.6 million in contract losses related to cost overruns and re-work that was identified and recorded during the six months ended June 30, 2017 relating to the construction of two MPSVs; Holding and closing costs during the six months ended June 30, 2017, related to our Prospect shipyard. We terminated the lease of this facility effective December 31, 2017; and Holding costs during the six months ended June 30, 2017, related to a completed OSV that was delivered on February 6, 2017, but refused by our customer as well as the suspension of work on the second OSV vessel. We resolved our disputes with our OSV customer during the fourth quarter of 2017 and construction of the second OSV re-commenced. We subsequently delivered the second OSV on July 31, 2018.
General and administrative expenses - General and administrative expenses for our Shipyard Division decreased construction activity.$0.6 million for the six months ended June 30, 2018, compared to the six months ended June 30, 2017, primarily due to decreases in salaries and employee incentives of $0.5 million due to reductions in workforce and decreases in corporate allocations of $0.1 million as a portion of these are now allocated to our EPC Division.
Asset impairment - During the threesix months ended March 31,June 30, 2017, we recorded an impairment of $389,000$0.4 million related to the Shipyard Division assets held for sale. See Note 2 of the Notes to Consolidated Financial Statements for additional information relating to our assets held for sale. We did not record any asset impairment during the threesix months ended March 31,June 30, 2018, in our Shipyard Division.
| | | | | | | | | | | | | | | | | Services | | Three Months Ended March 31, | | Increase or (Decrease) | | | | 2018 | | 2017 | | Amount | | Percent | | Revenue | | $ | 21,870 |
| | $ | 10,712 |
| | $ | 11,158 |
| | 104.2% | | Gross profit (loss) | | 2,614 |
| | 33 |
| | 2,581 |
| | 7,821.2% | | Gross profit (loss) percentage | | 12.0 | % | | 0.3 | % | | | |
| | General and administrative expenses | | 734 |
| | 666 |
| | 68 |
| | 10.2% | | Operating income (loss) | | $ | 1,880 |
| | $ | (633 | ) | | $ | 2,513 |
| |
|
| | | | | | | | | | | | | | | | | Services | | Six Months Ended June 30, | | Increase or (Decrease) | | | | 2018 | | 2017 | | Amount | | Percent | | Revenue | | $ | 44,075 |
| | $ | 26,107 |
| | $ | 17,968 |
| | 68.8% | | Gross profit | | 6,199 |
| | 423 |
| | 5,776 |
| | 1,365.5% | | Gross profit percentage | | 14.1 | % | | 1.6 | % | | | | | | General and administrative expenses | | 1,496 |
| | 1,313 |
| | 183 |
| | 13.9% | | Operating income (loss) | | 4,703 |
| | (890 | ) | | 5,593 |
| |
|
Revenue - Revenue from our Services Division increased $11.2$18.0 million for the threesix months ended March 31,June 30, 2018, compared to the threesix months ended March 31,June 30, 2017, due to an overall increase in work experienced due toresulting from increases in customer demand for offshore oil and gas related service projects.
Gross profit - Gross profit from our Services Division increased $2.6$5.8 million for the threesix months ended March 31,June 30, 2018, compared to the threesix months ended March 31,June 30, 2017, due to increased revenue discussed above. Our gross profit percentage increased from 1.6% during the period for 2017 to 14.1% for 2018. The increase in gross profit percentage was due to a higher recovery of fixed costs with increased work.
General and administrative expenses - General and administrative expenses for our Services Division increased $68,000$0.2 million for the threesix months ended March 31,June 30, 2018, compared to the threesix months ended March 31,June 30, 2017, due to support of increased work as well as increases in employee incentive compensation with allocation of approximately $120,000 resulting from increased operating income. This was partially offset by decreases in corporate allocations as a portion of these are now allocated to our EPC Division and continued cost minimization efforts implemented by management for theexpenses remaining comparable period over period.
| | | | | | | | | | | | | | | | | EPC | | Three Months Ended March 31, | | Increase or (Decrease) | | | | 2018 | | 2017 | | Amount | | Percent | | Revenue | | 73 |
| | $ | — |
| | $ | 73 |
| | 100.0% | | Gross profit (loss) | | (308 | ) | | — |
| | (308 | ) | | (100.0)% | | Gross profit (loss) percentage | | n/a |
| | n/a |
| | | |
| | General and administrative expenses | | 417 |
| | — |
| | 417 |
| | 100.0% | | Operating income (loss) | | $ | (725 | ) | | $ | — |
| | $ | (725 | ) | |
|
| | | | | | | | | | | | | | | | | EPC | | Six Months Ended June 30, | | Increase or (Decrease) | | | | 2018 | | 2017 | | Amount | | Percent | | Revenue | | $ | 955 |
| | $ | — |
| | $ | 955 |
| | 100.0% | | Gross profit | | 235 |
| | — |
| | 235 |
| | 100.0% | | Gross profit (loss) percentage | | 24.6 | % | | n/a |
| | | | | | General and administrative expenses | | 902 |
| | — |
| | 902 |
| | 100.0% | | Operating loss | | (667 | ) | | — |
| | (667 | ) | |
|
Revenue - Our EPC Division did not exist at March 31,June 30, 2017. Revenue for the threesix months ended March 31,June 30, 2018, consists of early work and engineering studies authorized by SeaOne. See Note 8 of the Notes to Consolidated Financial Statements for further discussion of our EPC Division and the SeaOne Project.
Gross profit (loss) - Gross lossprofit from our EPC Division occurred as we added personnel and overhead infrastructure related to the anticipated SeaOne project.
General and administrative expenses - General and administrative expenses for our EPC Division include the addition of personnel and allocations of corporate expenses as we invest in this new line of business. | | | | | | | | | | | | | | | | | Corporate | | Three Months Ended March 31, | | Increase or (Decrease) | | | | 2018 | | 2017 | | Amount | | Percent | | Revenue | | $ | — |
| | $ | — |
| | $ | — |
| | —% | | Gross profit (loss) | | $ | (385 | ) | | (260 | ) | | 125 |
| | 48.1% | | Gross profit (loss) percentage | | n/a |
| | n/a |
| | | | | | General and administrative expenses | | 2,138 |
| | 1,479 |
| | 659 |
| | 44.6% | | Operating income (loss) | | $ | (2,523 | ) | | $ | (1,739 | ) | | $ | 784 |
| |
|
| | | | | | | | | | | | | | | | | Corporate | | Six Months Ended June 30, | | Increase or (Decrease) | | | | 2018 | | 2017 | | Amount | | Percent | | Revenue | | $ | — |
| | $ | — |
| | $ | — |
| | | | Gross loss | | (769 | ) | | (351 | ) | | (418 | ) | | (119.1)% | | Gross loss percentage | | n/a |
| | n/a |
| | | | | | General and administrative expenses | | 4,435 |
| | 3,656 |
| | 779 |
| | 21.3% | | Operating loss | | (5,204 | ) | | (4,007 | ) | | (1,197 | ) | |
|
Gross profit (loss)loss - Gross loss from our Corporate Division increased primarily due to lower allocation of expenses and as well as increased insurance costs.buildup of personnel to support our EPC Division.
General and administrative expenses - General and administrative expenses for our Corporate Division increased primarily due to increased legal and advisory fees related to customer disputes, strategic planning and diversification of our business and increased employee incentive accruals and higher stock compensation expense of approximately $220,000.accruals.
Liquidity and Capital Resources Our immediate liquidity remains dependent on our cash on hand, anticipatedscheduled maturities of our held-to-maturity, short-term investments, potential proceeds from the sales of assets, availability of future drawings from our Credit Agreement and collections of accounts receivable. At March 31, 2018, we had $10 million outstanding under our Credit Agreement, $2.5 million in outstanding letters of credit, and cash and cash equivalents totaling $6.5 million compared to $9.0 million at December 31, 2017. As of May 4, 2018, our liquidity has significantly improved due to the saleA summary of our Texas South Yard the net proceedsimmediately available liquidity as of which willJune 30, 2018 is as follows: | | | | | | | Available Liquidity | | $ (in thousands) | | Cash and cash equivalents on hand | | $ | 32,004 |
| Held-to-maturity, short-term investments (1) | | 7,481 |
| | Revolving credit agreement | | 40,000 |
| | Less: | |
| | Borrowings under our Credit Agreement | | — |
| | Outstanding letters of credit | | (5,495 | ) | | Total available liquidity | | $ | 73,990 |
|
___________ (1) Our held-to-maturity, short-term investments include U.S. Treasuries and other investment-grade commercial paper and can be used to rebuild our liquidity, to support upcoming projects, continue investingliquidated quickly in our newly created EPC Division and for other general corporate purposes. After the sale of our Texas South Yard, our cash balance was $55.0 million, and the amount outstanding under our Credit Agreement was $10 million with remaining availability under our Credit Agreement of approximately $27.5 million for total liquidity of approximately $82.5 million.open markets. Working capital was $137.1$132.7 million and our ratio of current assets to current liabilities was 4.344.67 to 1 at March 31,June 30, 2018, compared to $130.5 million and 3.68 to 1, respectively, at December 31, 2017. Working capital at March 31,June 30, 2018, includes $98.4$7.5 million of held-to-maturity, short-term investments, $7.2 million of insurance receivables and $43.8 million related to assets held for sale, primarily related to our remaining South Texas Properties which decreased after the sale of our Texas South Yards to $48.5 million.Properties. At March 31,June 30, 2018, our contracts receivable balance was $27.4$31.9 million of which we have subsequently collected $14.9$14.4 million through May 4, 2018.as of the date of this Report and our insurance receivable was $7.2 million of which we have received payment for the full amount as of the date of this Report. Our primary usesources/uses of cash during the threesix months ended March 31,June 30, 2018, isare referenced in the Cash Flow Activities section below. As discussed in our Executive Summary, we are implementing several strategies to diversify our business, increase backlog, reduce operating expenses and monetize assets. Our South Texas Properties are held for sale. A significant portion of our near-term plan is to generate liquidity from the sale of theseunderutilized assets. On April 20, 2018, we closed on the sale of our Texas South Yard for a sale price of $55$55.0 million, less selling costs of $1.5 million. We received approximately $52.7 million at closing, which was in addition to the $750,000$0.8 million of earnest money previously received on January 3, 2018, related to the option to purchase the Texas South Yard. We plan to use theearnest money. The net proceeds to rebuildreceived rebuilt our liquidity, toprovided support for upcoming projects, continue investingcontinued investment in our newly created EPC Division and for other general corporate purposes. See further discussion of the sale of our Texas South Yard in Note 2 of the Notes to Consolidated Financial Statements. We currently believe that cash on hand coupled with proceeds received fromcontinue to market our Texas North Yard, and hope to have a negotiated contract for 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 the twelve months from the date of this Report.
As of the date of this Report our Texas North Yard remains held for sale. The book value ofin the Texas North Yard is $46.6 million at March 31, 2018. We will continue to incur costs associated with holding and maintaining our Texas North Yard. These costs include insurance, general maintenance of the properties in their current state, property taxes and retained employees which will be expensed as incurred.near future.
We have a $40$40.0 million Credit Agreement maturing June 9, 2019. The Credit Agreement allows the Company to use up to the full amount of the available borrowing base for letters of credit and general corporate purposes. We believe that our Credit Agreement will provide us with additional working capital flexibility to expand operations as backlog improves, respond to market opportunities and support our ongoing operations. Interest on drawings under the Credit Agreement may be designated, at our option, as either Base Rate (as defined in the credit facility) or LIBOR plus 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 Credit Agreement are 0.4% per annum, and interest on undrawn stated amounts under letters of credit issued by the lender is 2% per annum. At March 31, 2018, the interest rate on our outstanding borrowings was 3.75% per annum. The Credit Agreement is secured by substantially all of our assets (other than the South Texas Properties).
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 we expect to remain outstanding until July of 2018.
We must comply with the following financial covenants each quarter during the term of the Credit Agreement:
| | | i. | Ratio of current assets to current liabilities of not less than 1.25:1.00; |
| | | ii. | Minimum tangible net worth requirement of at least the sum of: |
$185 million, plus An amount equal to 50% of consolidated net income for each fiscal quarter ending after June 30, 2017, including 50% of any gain attributable to the sale of all or substantially all our South Texas Properties (with no deduction for a net loss in any such fiscal quarter), plus
| | b) | An amount equal to 50% of consolidated net income for each fiscal quarter ending after June 30, 2017, including 50% of any gain attributable to the sale of our South Texas Properties (with no deduction for a net loss in any such fiscal quarter), plus |
| | c) | 100% of the proceeds of any issuance of any stock or other equity after deducting of any fees, commissions, expenses and other costs incurred in such offering; and |
100% of the proceeds of any issuance of any stock or other equity after deducting of any fees, commissions, expenses and other costs incurred in such offering; and
| | | iii. | Ratio of funded debt to tangible net worth of not more than 0.50:1.00. |
As of March 31,June 30, 2018, we were in compliance with all of our financial covenants.
We will continue to monitor and preserve our cash. Our primary liquidity requirements for 2018 and beyond are for the costs associated with fabricationFabrication and shipyardShipyard projects, capital expenditures related to the creationexpansion of our EPC Division and enhancements to our shipyards.Shipyard facilities. Future capital expenditures will be highly dependent upon the amount and timing of future projects. Capital expenditures for the quartersix months ended March 31,June 30, 2018, were $71,000.$0.8 million. We do not anticipate significant capital expenditures for the remainder of 2018.
If industry conditions for offshore oil and gas do not improve, we are unable to sell our Texas North Yard or the sale is delayed, or we are unable to increase our backlog, we would expect to take additional measures to preserve our cash flows until such time we are able to generate cash flows from operations. Since the beginning of 2016, we have implemented wage adjustments along with employee benefit and overall cost reductions within all of our divisions. We have reduced the level of our workforce in the past and we will continue to do so based on booked work in all of our facilities. We have reduced the cash compensation paid to our directors and the salaries of our executive officers, and we have reduced our capital expenditures and placed assets that are either underutilized, under-performing or not expected to provide sufficient long-term value for sale, which include our South Texas Properties.
We currently believe that cash and cash equivalents on hand and held-to-maturity, short-term investments 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 twelve months from the date of this Report. Our view regarding sufficiency of cash and liquidity is primarily based on our financial forecast for the remainder of 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 forecast, 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 requirements. Accordingly, we may be required to further draw on our Credit Agreement, obtain additional bank financing, sell additional assets or conduct equity or debt offerings at a time when it is not beneficial to do so.
Cash Flow Activities
For the threesix months ended March 31,June 30, 2018, net cash used in operating activities was $14.1$26.4 million, compared to net cash used in operating activities of $15.1$27.9 million for the threesix months ended March 31,June 30, 2017. The use of cash in operations during the period was primarily due to the following:
Operating losses for the threesix months ended March 31,June 30, 2018, excluding gains on sales of assets and insurance recoveries as well as amounts in excess of non-cash depreciation, amortization, impairment, and stock compensation expense of approximately $1.5$3.5 million;
Slower collections of receivables of $6.4 million
Build-up of costs for contracts in progress of $9.1$8.1 million;
Build-up ofIncreased retainage on projects of $1.5 million; and
PaymentIncreased payments of property taxes related to our South Texas Propertiesaccounts payable of $2 million.$2.4 million; and
Other general uses of working capital.
Net cash provided by investing activities for the threesix months ended March 31,June 30, 2018, was $2.4$50.2 million, compared to cash used inprovided by investing activities of $391,000$0.3 million for the threesix months ended March 31,June 30, 2017. The changeincrease in cash used inprovided by investing activities is due primarily due to the sales of assets, primarily our Texas South Yard, in the amount of $56.4 million and the insurance proceeds received for hurricane damage to assets at our South Texas Properties. This was partially offset by the purchase of held-to-maturity investments of $7.5 million.
Net cash providedused by financing activities for the threesix months ended March 31,June 30, 2018, and 2017, was $9.2$0.8 million compared to $1.0$1.2 million in cash used in financing activities, respectively. The increase in cash provided by financing activities is due to $10 million in net borrowings under our Credit Agreement.
Contractual Obligations There have been no material changes from the information included in our 2017 Annual Report. For more information on our contractual obligations, refer to Part II, Item 7 of our 2017 Annual Report. Off-Balance Sheet Arrangements There have been no material changes from the information included in our 2017 Annual Report. Item 3. Quantitative and Qualitative Disclosures About Market Risk. There have been no material changes in the Company’s market risks during the quarter ended March 31,June 30, 2018. For more information on market risk, refer to Part II, Item 7A. of our Annual Report on Form 10-K for the year ended December 31, 2017. Item 4. Controls and Procedures. The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and that such information is communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this Report. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that the design and operation of our disclosure controls and procedures were effective as of the end of the period covered by this Report. There have been no changes during the fiscal quarter ended March 31,June 30, 2018, in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION Item 1. Legal Proceedings. The Company is subject to various routine legal proceedings in the normal conduct of its business primarily involving commercial claims, workers’ compensation claims, and claims for personal injury under general maritime laws of the United States and the Jones Act. While the outcome of these lawsuits, legal proceedings and claims cannot be predicted with certainty, management believes that the outcome of any such proceedings, even if determined adversely, would not have a material adverse effect on the financial position, results of operations or cash flows of the Company. Item 1A. Risk Factors. There have been no material changes from the information included in Item 1A “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2017. Item 6. Exhibits. | | | | | Exhibit Number | | Description of Exhibit | | | | | 3.1 | | 2009 (SEC File no. 001-34279). | | 3.2 | | 2016 (SEC File no. 001-34279). | | 10.1 | |
| 10.2 | |
| 10.3 | |
| 10.4 | |
| | 31.1 | | | | 31.2 | | | | 32 | | | | | | | | 101 | | Attached as Exhibit 101 to this report are the following items formatted in XBRL (Extensible Business Reporting Language): | | | | (i) | Consolidated Balance Sheets, | | | | (ii) | Consolidated Statements of Operations, | | | | (iii) | Consolidated Statement of Changes in Shareholders’ Equity, | | | | (iv) | Consolidated Statements of Cash Flows, and | | | | (v) | Notes to Consolidated Financial Statements. | | | | | | * | | Filed herewith. | | † | | Management Contract or Compensatory Plan. |
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized. | | | | GULF ISLAND FABRICATION, INC. | | | | BY: | /s/ David S. Schorlemer | | | David S. Schorlemer | | | Executive Vice President, Chief Financial Officer, Secretary and Treasurer (Principal Financial Officer) |
Date: May 4,August 9, 2018
s | |
Contracts in Progress and Advance Billings on Contracts
Revenue recognition and customer invoicing may occur at different times. Revenue recognition is based upon our calculation of percent of work complete; however, customer invoicing will generally depend upon a predetermined billing schedule as stated in the contract which could allow for customer advance payments or invoicing based upon achievement of certain milestones. Revenue earned but not yet invoiced is reflected as contracts in progress and included in current assets on our consolidated balance sheet. Billings made to our customers in advance of revenue being earned are reflected as advance billings on contracts and included in current liabilities on our balance sheet. Contracts in progress at March 31,June 30, 2018, totaled $37.5$36.5 million with $27$31.1 million relating to twothree major customers. Advance billings on contracts at March 31,June 30, 2018, was $4.3$4.2 million and included advances of $2.8$3.5 million from threefive major customers. Accrued contract losses were $6.3$6.0 million and $7.6 million as of March 31,June 30, 2018, and December 31, 2017, respectively.
NOTE 4 – CONTRACTS RECEIVABLE AND RETAINAGE Our customers includeinclude: (1) major and large independent oil and gas companies, (2) petrochemical and industrial facilities, (3) marine companies and their contractors and (4) agencies of the U.S. Government. Of our contracts receivable balance at March 31,June 30, 2018, $18.5$12.3 million, or 67.7%38.4%, was with three customers.one customer. The significant projects for these three customersthis one customer consist of: The fabrication of four modules for a customer within our Fabrication Division associated with a U.S. ethane cracker project (completed in April 2018);
Offshoreoffshore services related to repair, installation and hook-up work for a customer within our Services Division; and
Inshore service repair and installation work for a customer within our Services Division.
As of March 31,June 30, 2018, we included an allowance for bad debt of $2$0.9 million in our contract receivable balance which primarily relates to a customer within our Fabrication Division for the storage of an offshore drilling platform that was fully reserved in 2016. NOTE 5 – FAIR VALUE MEASUREMENTS The Company makes 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 that we have reported for financial instruments, including cash and cash equivalents, held-to-maturity, short-term investments, accounts receivables and accounts payables, 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 judgment. We have classified our assets at our South Texas PropertiesNorth Yard and a drydock within our Shipyard Division assets that were at our former Prospect Shipyard as assets held for sale at March 31,June 30, 2018. See Note 2 for further disclosure relating to our assets held for sale. During the three months ended March 31, 2017, we recorded an impairment of $389,000 related to the Shipyard Division assets held for sale.
Our South Texas facilities were impacted by Hurricane Harvey, which made landfall asOn June 28, 2018, we agreed to a Category 4 hurricane.global settlement with our insurance carriers in the amount of $15.4 million. In applying the settlement amounts, we allocated the claim amounts less agreed upon deductibles included in our settlement agreement to the respective groups of assets and reimbursement of costs incurred related to our storm preparation and clean-up. During the first quarter of 2018, management determined its intention was to sell the remaining Texas North Yard and related equipment and not to expend any of the insurance funds for repairs. As of June 30, 2018, we determined that we do not expect to repairreviewed the remaining buildings and equipment at the Texas North Yard, in conjunction with its planned sale. Accordingly,and we impaired our Texas North Yard in total by $8.9 million, $5.1 million for damage and loss andof which was previously recorded a corresponding insurance recovery offsetting the impairment.
We recorded an impairment of $750,000 during the three months ended March 31, 2018, based upon our best estimate of the decline in the fair value of the property and related equipment. We recorded a corresponding insurance recovery fully offsetting this amount. See further discussion of the application of our Hurricane Harvey insurance recoveries in Note 2.
During the second quarter of 2018, we recorded an impairment of $0.6 million related to a piece of equipment that we sold during the third quarter of 2018. During the three months ended March 31, 2018, we recorded an impairment of $0.8 million related to a piece of equipment at our Texas North Yard that we intend to sell at auction. This piece of equipment was not damaged from Hurricane Harvey. The impairment wasimpairments were calculated as management's estimated net proceeds from the salesales less itstheir net book value.values. During the six months ended June 30, 2017, we recorded an impairment of $0.4 related to the Shipyard Division assets held for sale. Our impairments represent level 3 fair value measurements.
NOTE 6 – EARNINGS PER SHARE AND SHAREHOLDERS' EQUITY Earnings per Share: The following table sets forth the computation of basic and diluted earningsloss per share (in thousands, except per share data): | | | | | | | | | | | Three Months Ended March 31, | | | 2018 | | 2017 | | Basic and diluted: | | | | | Numerator: | | | | | Net loss | $ | (5,296 | ) | | $ | (6,454 | ) | | Less: Distributed and undistributed loss (unvested restricted stock) | — |
| | (34 | ) | | Net loss attributable to common shareholders | $ | (5,296 | ) | | $ | (6,420 | ) | | Denominator: | | | | Weighted-average shares (1) | 14,964 |
| | 14,758 |
| | Basic and diluted loss per share - common shareholders | $ | (0.35 | ) | | $ | (0.44 | ) |
| | | | | | | | | | | | | | | | | | | Three Months Ended June 30, | | Six Months Ended June 30, | | | 2018 | | 2017 | | 2018 | | 2017 | | Basic and diluted: | | | | | | | | | Numerator: | | | | | | | | | Net income (loss) | $ | 549 |
| | $ | (10,923 | ) | | $ | (4,747 | ) | | $ | (17,378 | ) | | Less: Distributed and undistributed loss (unvested restricted stock) | — |
| | (53 | ) | | — |
| | (87 | ) | | Net income (loss) attributable to common shareholders | $ | 549 |
| | $ | (10,870 | ) | | $ | (4,747 | ) | | $ | (17,291 | ) | | Denominator: | | | | | | | | Weighted-average shares (1) | 15,043 |
| | 14,851 |
| | 15,004 |
| | 14,805 |
| | Basic and diluted income (loss per share - common shareholders | $ | 0.04 |
| | $ | (0.73 | ) | | $ | (0.32 | ) | | $ | (1.17 | ) |
______________ (1) We have no dilutive securities.
NOTE 7 – LINE OF CREDIT We have a $40$40.0 million Credit Agreement maturing June 9, 2019. The Credit Agreement allows the Company to use up to the full amount of the available borrowing base for letters of credit and general corporate purposes. We believe that our Credit Agreement, will provide us with additional working capital flexibility to expand operations as backlog improves, respond to market opportunities and support our ongoing operations. Interest on drawings under the Credit Agreement may be designated, at our option, as either Base Rate (as defined in the Credit Agreement) or LIBOR plus 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 Credit Agreement are 0.4% per annum, and interest on undrawn stated amounts under letters of credit issued by the lender is 2% per annum. At March 31, 2018, the interest rate on our outstanding borrowings was 3.75% per annum. The Credit Agreement is secured by substantially all of our assets (other than the remaining assets held for sale at our South Texas Properties).
At March 31,June 30, 2018, $10 million waswe had no amount outstanding under theour Credit Agreement, and we had outstanding letters of credit of $2.5$5.5 million outstanding leaving availability of $27.5$34.5 million. Subsequent to March 31, 2018, we re-issued a letter of credit for $3 million related to outstanding contractual obligations which we expect to remain outstanding until July of 2018.
We must comply with the following financial covenants each quarter during the term of the Credit Agreement:
| | | i. | Ratio of current assets to current liabilities of not less than 1.25:1.00; |
| | | ii. | Minimum tangible net worth requirement of at least the sum of: |
| | | a) | $185185.0 million, plus |
| | | b) | An amount equal to 50% of consolidated net income for each fiscal quarter ending after June 30, 2017, including 50% of any gain attributable to the sale of all or substantially all of our South Texas Properties (with no deduction for a net loss in any such fiscal quarter), plus |
| | | c) | 100% of the proceeds of any issuance of any stock or other equity after deducting of any fees, commissions, expenses and other costs incurred in such offering; and |
| | | iii. | Ratio of funded debt to tangible net worth of not more than 0.50:1.00. |
As of March 31,June 30, 2018, we were in compliance with all of our financial covenants.
NOTE 8 - SEGMENT DISCLOSURES
We have structured our operations with four operating divisions, including our newly formed EPC Division, and one corporate non-operating division. We believe that our operating divisions and our corporate non-operating division each represent a reportable segment under GAAP. Our newly formed EPC Division was created in December 2017 to manage expected work we will perform for the SeaOne Project and other projects that may require EPC project management services. As part of our efforts to strategically reposition the Company (see Note 1), we may change how we manage the business which could result in a change in our reporting segments in future periods. Our operating divisions and Corporate Divisioncorporate non-operating division at June 30, 2018 are discussed below.
Fabrication Division - Our Fabrication Division primarily fabricates structures such as 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 United States during 2015)States) as well as modules for petrochemical facilities. We perform these activities out of our fabrication yards in Houma, Louisiana. As of the date of this Report, our Texas South Yard has been sold and our Texas North Yard is marketedheld for sale. See Note 2 for further disclosure relating to our South Texas Properties.
Shipyard Division - Our Shipyard Division primarily manufactures newbuild vessels and repairs various steel marine vessels in the United States 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 primarily provides interconnect piping services on offshore platforms and inshore structures. Interconnect piping services involve sending employee 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 United States for various on-site construction and maintenance activities. In addition, our Services Division fabricates packaged skid units and performs various municipal and drainage projects, such as pump stations, levee reinforcement, bulkheads and other public works projects for state and local governments. We perform these services at customer facilities or at our Houma Services Yard.
EPC Division - Late in the fourth quarter of 2017, SeaOne selected us as the prime contractor for the engineering, procurement, construction, installation, commissioning and start-up operations for their 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. SeaOne’s selection of the Company is non-binding and commencement of the project remains subject to a number
of conditions, including agreement on the terms of the engagement with SeaOne. We have created our EPC Division to manage this project and future similar projects. We understand that SeaOne is in the process of securing financing to move forward with its project. We are hopeful that the SeaOne Project will initiate planning and start-upinitial construction efforts mid-2018 with construction to start in early 2019. We are strengthening our internal project management capabilities through the hiring of additional personnel to service this potential project.
Corporate Division - Our Corporate Division primarily includes expenses that do not directly relate to the operations or shared services provided to our four operating divisions. Expenses for shared services such as human resources, insurance, business development and accounting salaries are allocated to the operating divisions. Expenses that are not allocated include, but are not limited to, costs related to executive management and directors' fees, clerical and administrative salaries, costs of maintaining the 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 divisions based upon gross profit (loss) and operating income (loss). Division assets are comprised of all assets attributable to each division. Corporate administrative costs and overhead are allocated to our four operating divisions for expenses that directly relate to the operations or relate to shared services as discussed above. Intersegment revenue is priced at the estimated fair value of work performed. Summarized financial information concerning our divisions as of and for the three and six months ended March 31,June 30, 2018, and 2017, is as follows (in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | Three Months Ended March 31, 2018 | | | Fabrication | Shipyard | Services | EPC | Corporate | Eliminations | Consolidated | | Revenue | $ | 17,270 |
| $ | 18,565 |
| $ | 21,870 |
| $ | 73 |
| $ | — |
| $ | (488 | ) | $ | 57,290 |
| | Gross profit (loss) | (219 | ) | (1,023 | ) | 2,614 |
| (308 | ) | (385 | ) | — |
| 679 |
| | Operating income (loss) | (1,593 | ) | (1,819 | ) | 1,880 |
| (725 | ) | (2,523 | ) | — |
| (4,780 | ) | | Total assets | 184,263 |
| 76,150 |
| 105,632 |
| 12 |
| 318,137 |
| (415,072 | ) | 269,122 |
| | Depreciation and amortization expense | 1,149 |
| 1,069 |
| 393 |
| — |
| 138 |
| — |
| 2,749 |
| | Capital expenditures | — |
| 6 |
| 65 |
| — |
| — |
| — |
| 71 |
| | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | Three Months Ended March 31, 2017 | | | Fabrication | Shipyard | Services | EPC | Corporate | Eliminations | Consolidated | | Revenue | $ | 10,209 |
| $ | 18,422 |
| $ | 10,712 |
| — |
| $ | — |
| $ | (1,350 | ) | $ | 37,993 |
| | Gross profit (loss) | (2,966 | ) | (1,704 | ) | 33 |
| — |
| (260 | ) | — |
| (4,897 | ) | | Operating income (loss) | (3,787 | ) | (3,057 | ) | (633 | ) | — |
| (1,739 | ) | — |
| (9,216 | ) | | Total assets | 197,834 |
| 88,489 |
| 95,562 |
| — |
| 349,917 |
| (427,142 | ) | 304,660 |
| | Depreciation and amortization expense | 3,135 |
| 1,009 |
| 432 |
| — |
| 124 |
| — |
| 4,700 |
| | Capital expenditures | 102 |
| 272 |
| — |
| — |
| 17 |
| — |
| 391 |
| | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | Three Months Ended June 30, 2018 | | | Fabrication | Shipyard | Services | EPC | Corporate | Eliminations | Consolidated | | Revenue | $ | 8,590 |
| $ | 23,620 |
| $ | 22,205 |
| $ | 882 |
| $ | — |
| $ | (1,283 | ) | $ | 54,014 |
| | Gross profit (loss) | (1,667 | ) | (2,776 | ) | 3,585 |
| 543 |
| (384 | ) | — |
| (699 | ) | | Operating income (loss) | (3,227 | ) | (3,374 | ) | 2,823 |
| 58 |
| (2,681 | ) | — |
| (6,401 | ) | Total assets (1) | 101,498 |
| 88,305 |
| 35,197 |
| 888 |
| 30,801 |
| — |
| 256,689 |
| | Depreciation and amortization expense | 1,047 |
| 1,051 |
| 383 |
| — |
| 130 |
| — |
| 2,611 |
| | Capital expenditures | — |
| 653 |
| 98 |
| — |
| 69 |
| — |
| 820 |
| | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | Three Months Ended June 30, 2017 | | | Fabrication | Shipyard | Services | EPC | Corporate | Eliminations | Consolidated | | Revenue | $ | 13,990 |
| $ | 18,303 |
| $ | 15,396 |
| — |
| $ | — |
| $ | (1,821 | ) | $ | 45,868 |
| | Gross profit (loss) | 1,931 |
| (13,851 | ) | 390 |
| — |
| (90 | ) | — |
| (11,620 | ) | | Operating income (loss) | 1,098 |
| (14,834 | ) | (257 | ) | — |
| (2,267 | ) | — |
| (16,260 | ) | Total assets (1) | 164,211 |
| 98,393 |
| 30,592 |
| — |
| 14,390 |
| — |
| 307,586 |
| | Depreciation and amortization expense | 1,152 |
| 995 |
| 422 |
| — |
| 207 |
| — |
| 2,776 |
| | Capital expenditures | 746 |
| 546 |
| 106 |
| — |
| 35 |
| — |
| 1,433 |
| | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | Six Months Ended June 30, 2018 | | | Fabrication | Shipyard | Services | EPC | Corporate | Eliminations | Consolidated | | Revenue | $ | 25,860 |
| $ | 42,185 |
| $ | 44,075 |
| $ | 955 |
| $ | — |
| $ | (1,771 | ) | $ | 111,304 |
| | Gross profit (loss) | (1,886 | ) | (3,799 | ) | 6,199 |
| 235 |
| (769 | ) | — |
| (20 | ) | | Operating income (loss) | (4,821 | ) | (5,192 | ) | 4,703 |
| (667 | ) | (5,204 | ) | — |
| (11,181 | ) | Total assets (1) | 101,498 |
| 88,305 |
| 35,197 |
| 888 |
| 30,801 |
| — |
| 256,689 |
| | Depreciation and amortization expense | 2,196 |
| 2,120 |
| 776 |
| — |
| 268 |
| — |
| 5,360 |
| | Capital expenditures | — |
| 659 |
| 163 |
| — |
| 69 |
| — |
| 891 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | Six Months Ended June 30, 2017 | | | Fabrication | Shipyard | Services | EPC | Corporate | Eliminations | Consolidated | | Revenue | $ | 24,199 |
| $ | 36,724 |
| $ | 26,107 |
| $ | — |
| $ | — |
| $ | (3,170 | ) | $ | 83,860 |
| | Gross profit (loss) | (1,034 | ) | (15,556 | ) | 423 |
| — |
| (351 | ) | — |
| (16,518 | ) | | Operating loss | (2,688 | ) | (17,892 | ) | (890 | ) | — |
| (4,007 | ) | — |
| (25,477 | ) | Total assets (1) | 164,211 |
| 98,393 |
| 30,592 |
| — |
| 14,390 |
| — |
| 307,586 |
| | Depreciation and amortization expense | 4,287 |
| 2,004 |
| 854 |
| — |
| 331 |
| — |
| 7,476 |
| | Capital expenditures | 848 |
| 818 |
| 106 |
| — |
| 52 |
| — |
| 1,824 |
|
_______________ 1) Intercompany balances have been excluded.
NOTE 9 – COMMITMENTS AND CONTINGENCIES
The Company is subject to various routine legal proceedings in the normal conduct of its business, primarily involving commercial claims, workers’ compensation claims, and claims for personal injury under general maritime laws of the United States and the Jones Act. While the outcome of these lawsuits, legal proceedings and claims cannot be predicted with certainty, management believes that the outcome of any such proceedings, even if determined adversely, would not have a material adverse effect on the financial position, results of operations or cash flows of the Company.
MPSV Termination Letter
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 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 notified our Surety of its intent to require completion of the vessel under the Surety's
bond. We have notified and met with our Surety regarding our disagreement with our customer's claims. Discussion with the Surety are ongoing. The Company will continue to enforce its rights under the agreements and defend any claims asserted against the Company by its customer. Management is unable to estimate the probability of a favorable or unfavorable outcome aas well as an estimate of potential loss, if any, at this time. We cannot guarantee that we will not incur additional costs as we negotiate with this customer. At March 31,June 30, 2018, our net balance sheet exposure was $12$12.4 million.
NOTE 10 – SUBSEQUENT EVENTS
See Note 2 regardingDuring the salefirst quarter of our Texas South Yard on April 20, 2018.2018, we executed a contract for the construction and delivery of one towing, salvage and rescue ship ("T-ATS") 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 thus given a notification to proceed. We were recently notified that this unsuccessful bidder has filed a subsequent protest with the Department of Justice. We have been granted a partial stay which allows us to proceed with design development, planning, scheduling and material ordering leading up to the start of construction. Actual construction of the vessel cannot begin until a final ruling is issued by the Department of Justice. We are in process of working with the U.S. Navy to re-establish a timeline under this contract.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Cautionary Statement on Forward-Looking Information This Report contains forward-looking statements in which we discuss our potential future performance, primarily in the sectionssection entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Forward-looking statements are all statements other than statements of historical facts, 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. We caution readers that forward-looking statements are not guarantees of future performance and actual results may differ materially from those anticipated, projected or assumed in the forward-looking statements. Important factors that can cause our actual results to differ materially from those anticipated in the forward-looking statements include the cyclical nature of the oil and gas industry, changes in backlog estimates, suspension or termination 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 disputesdispute with a customer relating to the purported termination of contracts to build MPSVs, ability to remain in compliance with our covenants contained in our Credit Agreement,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” included in our 2017 Annual Report as may be updated by subsequent filings with the SEC. Investors are cautioned that many of the assumptions upon which our forward-looking statements are based are likely to change after the forward-looking statements are made, which we cannot control. Further, we may make changes to our business plans that could affect our results. We caution investors that we do not intend to update forward-looking statements more frequently than quarterly notwithstanding any changes in our assumptions, changes in business plans, actual experience or other changes, and we undertake no obligation to update any forward-looking statements.
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 recently completed of the fabrication of complex modules for the construction of a new petrochemical plant, and we are completing newbuild construction of a technologically-advanced OSV with scheduled delivery in the second quarter of 2018. We fabricated wind turbine pedestals for the first offshore wind power project in the United States. We have also constructed 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 United States. Our customers include U.S. and, to a lesser extent, international energy producers, petrochemical, industrial, power and marine 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.EPC. 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, we have sold our Texas South Yard, in Ingleside, Texas has been sold and our Texas North Yard in Aransas Pass, Texas is marketedheld for sale.
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 and, reducing the cash compensation paid to our directors and the salaries of our executive officers as well as developing a plan to sell certain underutilized assets.
Sales of Assets
In early 2017, we announced our plan to rationalize underutilized assets including the two fabrication yards and related equipment located at our South Texas Properties.
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$0.8 million of earnest money previously received on January 3, 2018, related to the option to purchase the Texas South Yard. We plan to use theearnest money. The net proceeds to rebuildreceived rebuilt our liquidity, toprovided support for upcoming projects, continue investingcontinued investment 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 recordrecognized a gain on sale during the second quarter of 2018 related to this transaction of approximately $3.8$3.9 million. Completing the sale of the Texas South Yard iswas an important liquidity generating event and will facilitate the Company’s continued strategic repositioning from offshore oil and gas markets.
markets to a more diversified customer base. We will continue to incur costs associated with holding and maintaining our Texas North Yard. These costs include insurance, general maintenance of the property in its current state, property taxes and retained employees which will be expensed as incurred.
Hurricane Harvey and Insurance Recoveries
On August 25, 2017, our South Texas Properties were impacted by Hurricane Harvey, which 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 not accrued for any insurance recovery at March 31, 2018, in excess of insurance claim payments received to date.
To date, our insurance underwriters have made advance insurance claim payments of $8.2 million in the 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:
Clean-up and repair related costs of $1.6 million that we have incurred since August 25, 2017, through March 31, 2018;
A building at our Texas South Yard and a building atmarket our Texas North Yard were determinedand hope to be total losses. Ashave a result, we impairednegotiated contract for the remaining net book valuesale of $1.5 million related to these buildings and recorded a corresponding insurance recovery offsettingour Texas North Yard in the impairment during the fourth quarter of 2017; andnear future.
During the firstsecond quarter of 2018, we determined that we do not expect to repair the damaged buildings and equipment at the Texas North Yard. Accordingly, we impaired our Texas North Yard by $5.1 million, which represents our best estimate of the decline in the fair value of the property and equipment as a result of our decision to not repair the facility and recorded a corresponding insurance recovery offsetting the impairment.
As we work with our insurance agents and adjusters to finalize our estimate of the damage, it is 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 our 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$0.6 million primarily related to a piece of equipment that we sold in July 2018. During the three months ended March 31, 2018, we recorded an impairment of $0.8 million related to 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 wasimpairments were calculated as management's estimated net proceeds from the salesales less itstheir net book value.values.
Based Hurricane Harvey and Insurance Recoveries
On August 25, 2017, buildings and equipment located at our South Texas Properties were damaged by Hurricane Harvey, which made landfall as a Category 4 hurricane. On June 28, 2018, we agreed to a global settlement with our insurance carriers in the amount of $15.4 million. As of June 30, 2018, we had received payments totaling $8.2 million and the remaining $7.2 million has been recorded as an insurance receivable on our Consolidated Balance Sheet as of June 30, 2018, which represents a non-cash change within our Consolidated Statement of Cash Flows related to our insurance receivable. As of the date of this Report, we have received payment for the full settlement amount.
In applying the settlement, we allocated the claim amounts less agreed upon deductibles to the respective groups of assets and reimbursement of costs incurred included in our settlement agreement as follows:
Clean-up and repair related costs of $1.6 million, less deductibles applied of approximately $0.3 million that we have incurred since August 25, 2017 through June 30, 2018. A gain on insurance recoveries of $3.6 million included within other income (expense) on our Consolidated Statement of Operations that was recorded during the second quarter of 2018 primarily related to two buildings that were declared a total loss and five damaged cranes that were sold during the second quarter of 2018. Insurance recoveries of $8.9 million which offset impairment of damaged assets at the Texas North Yard. Because we do not intend to repair the remaining buildings, improvements and related equipment, we recorded impairment of $8.9 million, $5.1 million of which was recorded during the three months ended March 31, 2018. Our impairment was based
upon our initial assessmentbest estimate of the damages and insurance coverage anddecline in the fair value of the assets held for sale. Management believes that there is no basis to record additional impairment atproperty and related equipment. The insurance recovery fully offset this time.
Preservation of Cash
We will continue to monitor and preserve our cash. At March 31, 2018, we had $6.5 million in cash, debt of $10 million and working capital of $137.1 million which includes $98.4 million in assets held for sale, primarily related to our South Texas Properties. As of May 4, 2018, our liquidity has significantly improved due to the sale of our Texas South Yard, the proceeds of which will be used to rebuild our liquidity, to support upcoming projects, continue investing in our newly created EPC Division and for other general corporate purposes. After the sale of our Texas South Yard, our cash balance was $55 million, and the amount outstanding under our Credit Agreement was $10 million with remaining availability under our Credit Agreement of approximately $27.5 million for total liquidity of approximately $82.5 million. Our primary liquidity requirements for 2018 and beyond are for costs associated with fabrication and shipyard projects, capital expenditures related to our EPC Division and enhancements to our shipyards.
We currently believe that cash on hand 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 do not improve, or we are unable to sell our Texas North Yard or the sale is delayed, or we are unable to increase our backlog, we would expect to take additional measures to preserve our cash flows until such time when we are able to generate cash flows from operations. Since the beginning of 2016, we have implemented wage adjustments along with employee benefit and overall cost reductions within all of our divisions. We have reduced the level of our workforce in the past and we will continue to do so based on booked work in all of our facilities. We have reduced the compensation paid to our directors and the salaries of our executive officers, and we have reduced our capital expenditures and placed assets that are either underutilized, under-performing or not expected to provide sufficient long-term value for sale, which include our South Texas Properties.amount.
Ongoing Efforts to Increase Our Backlog, and DiversificationDiversify of Our Customer Base and Resolve Customer Dispute
Petrochemical work - We recentlyDuring the second quarter of 2018, we completed the fabrication of four modules for a new petrochemical facility. We delivered these modules on time and within budget.time. We continue to search for additional fabrication work in the petrochemical industry to add to our current backlog.
Pursuit of offshore wind - We believe that future requirements from generators and utilities to provide electricity from renewable and green sources will result in continued growth of offshore wind projects. We fabricated the first-of-a-kind wind turbine pedestals for the first offshore wind power project in the United States in 2015, and we believe that we possess the expertise
to obtain significant future work in this sector. During the first quarter of 2018, we signed a contract for the fabrication of one Meteorologicalmeteorological tower and platform for a customer's offshore wind project located off the U.S. coast of Maryland. We completed the fabrication work in the second quarter of 2018 and have included invoiced amounts in contracts receivable on our Consolidated Balance Sheet. This project iswas relatively 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 it relates to their letter of intent with their customer for structures off the coast of Maryland. Along with this letter of intent, we have executed a teaming agreement with the EEW Group forto source future U.S. offshore wind projects. There is no guarantee that we will be successful in participating in any of these plannedfuture projects.
Diversification of our Shipyard Division customer base - We continue to be successful in our efforts to diversify our capabilities within our Shipyard Division.
During the first quarter of 2018, we executed a contract for the construction and delivery of one towing, salvage and rescue ship ("T-ATS") vessel with the U.S. Navy for $63.6 million with an option for seven additional vessels with an additional value of approximately $459.1 million if all options are exercised. Our T-ATS vessel contract is currently under a bid protest from a competitor. Bid protests can result in an award decision being overturned, requiring a re-bidwhich was subsequently protested by one of the contract. Even whenunsuccessful bidders. On July 16, 2018, we were notified that the award was upheld by the U.S. Government Accountability Office and thus given a bidnotification to proceed. We were recently notified that this unsuccessful bidder has filed a subsequent protest does not result inwith the Department of Justice. We have been granted a re-bid, resolutionpartial stay which allows us to proceed with design development, planning, scheduling and material ordering leading up to the start of construction. Actual construction of the matter typically extendsvessel cannot begin until a final ruling is issued by the time until contract performance can begin, which may reduce our earningsDepartment of Justice. We are in process of working with the period in which the contract would otherwise be performed. Further, weU.S. Navy to re-establish a timeline under this contract.
We signed change orders on May 1, 2018, with two customers, eachdifferent customers. Each change order was for the construction of one additional harbor tug boat for approximately $13$13.0 million each with theper boat. Each customer has an additional option for one more harbor tug boat for approximately $12.2 million each. This is in addition to the eightboat. We are now constructing a total of five harbor tug boats for each customer. If the additional options are exercised, we are currently constructingwill build a total of 12 harbor tug boats for these two customers.
On June 11, 2018, one of our customers exercised their option for a second, newbuild construction of an additional Regional Class Research Vessel ("RCRV") for $67.6 million. The first vessel was awarded in July of 2017 which included options for two additional vessels.
Continued growth within our Services Division - Generally, we expectbelieve demand for our Services Division towill increase in 2018 beyond the contractual backlog amount in place as of March 31,June 30, 2018. Work associated with offshore tie-backs, upgrades and maintenance remains strong. We will continue to pursue opportunities within the offshore/inshore plant expansion and maintenance programs as well as targeting growth of developing fields in West Texas.
Our newly formed EPC Division - As discussed in our 2017 Annual Report, we were selected as the prime contractor for the 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. SeaOne’s selection of us is non-binding and commencement of the project remains subject to a number of conditions, including agreement on terms of the engagement with SeaOne. In anticipation of this project advancing, we are enhancing our internal project management capabilities through the hiring of additional personnel to service this project. Subsequent to March 31, 2018, weWe received an additional early works purchase order from SeaOne for approximately $1.0$1.2 million. We continue to work with SeaOne on finalizing Initial Engineering Designinitial engineering design and project pricing. We understand that SeaOne is in the process of securing financing to move forward with its project. We are hopeful that the SeaOne Project will initiate planning and start-upinitial construction efforts mid-2018 with construction to start in early 2019.
Completion of our MPSV contract - As previously disclosed, on March 19, 2018, 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 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 notified our Surety of its intent to require completion of the vessel under the Surety's bond. We have notified and met with our Surety regarding our disagreement with our customer's claims. Discussions with the Surety are ongoing. The Company will continue to enforce its rights under the agreements and defend any claims asserted against the Company by its customer. Management is unable to estimate the probability of a favorable or unfavorable outcome aas well as an estimate of potential loss, if any, at this time. We cannot guarantee that we will not incur additional costs as we negotiate with this customer. At June 30, 2018, our net balance sheet exposure was $12.4 million.
Outlook
Looking forward, our results of operations will be affected primarily by:
Our ability to execute on projects in accordance with our cost estimates and manage them to successful completion;
Our ability to win contracts through competitive bidding or alliance/partnering arrangements;
Demandby demand for our services and the overall number of projects in the market place. As discussed above, a significant portion of our historical customer base has been impacted by the continued level of exploration and development activity maintained byfor oil and gas exploration and production companiesgas. We have implemented a number of initiatives to strategically reposition the Company to attract new customers, participate in the GOM,buildup of petrochemical facilities, pursue offshore wind markets, enter the EPC industry and diversify our customers within our Shipyard Division. The success of our initiatives to a lesser extent, overseas locations, which is dependent uponstrategically reposition the price of oilCompany and gas;our future operations will be determined by:
The level of petrochemical facilitynew construction and improvements;fabrication projects in the new markets we are pursuing including petrochemical facilities and offshore wind;
Our successful execution of an agreement with SeaOne;SeaOne and the ability of SeaOne to obtain financing;
Continued growth within our Shipyard and Services divisions;
Our ability to resolve our disputes with our customer for the completion of the two MPSV vessels; andwin contracts through competitive bidding or alliance/partnering arrangements;
Our ability to secure additional fabrication offshore wind projects.execute projects in accordance with our cost estimates and successfully manage them through completion; and
Our ability to resolve a dispute over purported with a Shipyard customer related to the construction of two MPSVs.
We continue to respond to the competitive forces within our industry and continue 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 period of competitive pricing with lower than desired margins. Additionally, revenue from these awards will not be realized until later in 2018 and beyond.
Safety
We operate in an environment that exposes our employees to risk of injury, and we are committed to safety. We believe safety is a key metric for our success. Poor safety performance increases our costs, results in construction delays and limits 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 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. There have been no changes in our evaluation of our critical accounting policies since December 31, 2017.
Backlog We believe that backlog, a non-GAAP financial measure, provides useful information to investors. Backlog differs from the GAAP requirement to disclose future performance obligations required under fixed-price contracts as required under Topic 606 of the ASC. See Note 3 of the Notes to Consolidated Financial Statements for further discussion of Topic 606. Backlog includes future work that has been entered intosecured subsequent to the balance sheet date frompursuant to letters of intent or other forms of authorization as well as signed contracts that are temporarily suspended or under protest that may not meet the criteria to be reported as future performance
obligations under Topic 606 (the most comparable GAAP measure); however, represents future work that management believes is probable of being performed. Our backlog is based on management’s estimate of the direct labor hours required to complete, and the remaining revenue to be recognized with respect to those projects for which a customer has authorized us to begin work or purchase materials pursuant to written contracts, letters of intent or other forms of authorization. As engineering and design plans are finalized or changes to existing plans are made, management’s estimate of the direct labor hours required to complete a project and the price of a project at completion is likely to change. All projects currently included in our backlog are generally subject to suspension, termination, or a reduction in scope at the option of the customer, although the customer is required to pay us for work performed and materials purchased through the date of termination, suspension, or reduction in scope. In addition, customers have the ability to delay the execution of projects. We exclude suspended projects from contract backlog when they are expected to be suspended more than 12 months because resumption of work and timing of revenue recognition for these projects are difficult to predict. Depending on the size of the project, the termination, postponement, or reduction in scope of any one project could significantly reduce our backlog and could have a material adverse effect on future revenue, net income (loss) and cash flow. A reconciliation of future revenue performance obligations under Topic 606 of the ASC (the most comparable GAAP measure as included in Note 3 of the Notes to Consolidated Financial Statements) to our reported backlog is provided below (in thousands).
| | | | | | | | | | | | | | | | | | | | | | | | | | | March 31, 2018 | | | Fabrication | | Shipyard | | Services | | EPC | | Eliminations | | Consolidated | | Future performance obligations required under fixed-price contracts under Topic 606 of ASC | $ | 6,706 |
| | $ | 149,590 |
| | $ | 11,858 |
| | $ | — |
| | $ | (990 | ) | | $ | 167,164 |
| | Contracts signed subsequent to March, 31, 2018 | — |
| | 29,874 |
| | — |
| | 1,037 |
| | — |
| | 30,911 |
| Signed contracts under purported termination or third party protest (1), (2) | — |
| | 94,176 |
| | — |
| | — |
| | — |
| | 94,176 |
| | Backlog | $ | 6,706 |
| | $ | 273,640 |
| | $ | 11,858 |
| | $ | 1,037 |
| | $ | (990 | ) | | $ | 292,251 |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | June 30, 2018 | | | Fabrication | | Shipyard | | Services | | EPC | | Eliminations | | Consolidated | | Future performance obligations required under fixed-price contracts under Topic 606 of ASC | $ | 1,871 |
| | $ | 295,506 |
| | $ | 7,607 |
| | $ | 1,618 |
| | $ | (193 | ) | | $ | 306,409 |
| | Contracts signed subsequent to June 30, 2018 | — |
| | — |
| | 9,788 |
| | 1,200 |
| | — |
| | 10,988 |
| Signed contracts under purported termination (1) | — |
| | 30,157 |
| | — |
| | — |
| | — |
| | 30,157 |
| | Backlog | $ | 1,871 |
| | $ | 325,663 |
| | $ | 17,394 |
| | $ | 2,818 |
| | $ | (193 | ) | | $ | 347,553 |
| | | | | | | | | | | | | |
___________ | | | (1) | Includes backlog for a customer for which we have received a notice of purported termination within our Shipyard Division related to the construction of two MPSVs. We dispute the purported termination and disagree with the customer’s reasons for same.Wesame. We cannot guarantee that we will be able to favorably negotiate completion of the MPSVs with this customer. See Note 9 of the Notes to Consolidated Financial Statements. |
| | (2) | Includes our signed contract with the U.S. Navy for the construction of the T-ATS Salvage vessel which is under bid protest from a competitor. Bid protests can result in an award decision being overturned, requiring a re-bid of the contract. Even when a bid protest does not result in a re-bid, resolution of the matter typically extends the time until contract performance can begin, which may reduce our earnings in the period in which the contract would otherwise be performed. |
Our backlog at March 31,June 30, 2018, as compared to December 31, 2017, consisted of the following (in thousands, except for percentages):
| | | | | | | | | | | | | March 31, 2018 | | December 31, 2017 | | Division | $'s | Labor hours | | $'s | Labor hours | | Fabrication | $ | 6,706 |
| 54 | | $ | 15,771 |
| 150 | | Shipyard | 273,640 |
| 1,493 | | 184,035 |
| 1,104 | | Services | 11,858 |
| 130 | | 23,181 |
| 290 | | EPC | 1,037 |
| — | | — |
| — | | Intersegment eliminations | (990 | ) | — | | (370 | ) | — | | Total backlog | $ | 292,251 |
| 1,677 | | $ | 222,617 |
| 1,544 | | | | | | | | | | Number | Percentage | | Number | Percentage | Major customers (1) | 5 | 85.4% | | 4 | 73.0% | | | | | | | | Backlog is expected to be recognized in revenue during:(2)
| $'s | Percentage | | | | | 2018 | $ | 90,879 |
| 31.1% | | | | | 2019 | 142,274 |
| 48.7% | | | | | 2020 | 59,098 |
| 20.2% | | | | | Total | $ | 292,251 |
| 100.0% | |
|
| | | | | | | | |
| | | | | | | | | | | | |
| June 30, 2018 |
| December 31, 2017 | | Division | $'s | Labor hours | | $'s | Labor hours | | Fabrication | $ | 1,871 |
| 12 |
| | $ | 15,771 |
| 150 |
| | Shipyard | 325,663 |
| 1,784 |
| | 184,035 |
| 1,104 |
| | Services | 17,394 |
| 83 |
| | 23,181 |
| 290 |
| | EPC | 2,818 |
| — |
| | — |
| — |
| | Intersegment eliminations | (193 | ) | — |
| | (370 | ) | — |
| | Total backlog | $ | 347,553 |
| 1,879 |
| | $ | 222,617 |
| 1,544 |
|
| | | | | | | | |
| June 30, 2018 |
| December 31, 2017 | | | Number | Percentage | | Number | Percentage | Major customers (1) | four | 77.8% | | four | 73.0% | | | | | | | | Backlog is expected to be recognized in revenue during:(2) | $'s | Percentage | | | | | 2018 | $ | 97,366 |
| 28.0% | | | | | 2019 | 170,987 |
| 49.2% | | | | | 2020 | 69,890 |
| 20.1% | | | | | 2021 | 8,645 |
| 2.5% | | | | | 2022 | 665 |
| 0.2% | | | | | Total | $ | 347,553 |
| 100.0% | |
| | | | | | | | |
___________
| | | (1) | At March 31,June 30, 2018, projects for our fivefour largest customers in terms of revenue backlog consisted of: |
| | | (i) | Two large MPSVs for one customer for which we have received a purported notice of termination as discussed above; |
| | (ii) | Newbuildnewbuild construction of five harbor tugs for one customer (to be completed in 2018 through 2020); |
| | (iii)(ii) | Newbuildnewbuild construction of five harbor tugs for one customer (separate from above) (to be completed in 2018 through 2020); |
| | (iv)(iii) | Newbuildnewbuild construction of antwo offshore marine research vesselvessels (to be completed in 2020)2020 and 2022); and |
| | (v)(iv) | Newbuildnewbuild construction of one T-ATS vessel (to be completed in 2020)2021). This contract is currently underwas 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 thus given a bid protest.notification to proceed. We were recently notified that this unsuccessful bidder has filed a subsequent protest with the Department of Justice. We have been granted a partial stay which allows us to proceed with design development, planning, scheduling and material ordering leading up to the start of construction. |
| | | (2) | The timing of recognition of the revenue represented in our backlog is based on management’s current estimates to complete the projects. Certain factors and circumstances could cause changes in the amounts ultimately recognized and the timing of the recognition of revenue from our backlog. |
Certain of our contracts contain options which grant the right to our customer, if exercised, for the construction of additional vessels at contracted prices.Weprices. We do not include options in our backlog above. If all options under our current contracts were exercised, our backlog would increase by $626.2$562.7 million. We believe disclosing these options provides investors with useful information in order to evaluate additional potential work that we would be contractually obligated to perform under our current contracts as well as the potential significance of these options, if exercised. We have not received any commitments related to the exercise of these options from our customers, and we can provide no assurance that any or all of these options will be exercised. As we add backlog, we will add personnel with critical project management and fabrication skills to ensure we have the resources necessary to execute our projects well and to support our project risk mitigation discipline for all new projects. This may negatively impact near-term results. Workforce As of March 31,June 30, 2018, we had 961847 employees compared to 977 employees as of December 31, 2017. Labor hours worked were 496,000947,000 during the threesix months ended March 31,June 30, 2018, compared to 479,0001 million for the threesix months ended March 31,June 30, 2017. The overall increase in labor hours worked for the three months ended March 31, 2018, was due to improved offshore demand within our Services Division. As of April 29, 2018, we had 870 employees. The decrease in our workforce subsequent to March 31, 2018,labor hours worked is primarily within our Fabrication Division due to completion of complex modules for the construction of a new petrochemical plant with no significant futureimmediate replacement Fabrication backlog forecasted in the near-term as well as the stoppagesuspension of construction of the two MPSVs within our Shipyard Division pending resolution of our dispute over termination with our MPSV customer. This was partially offset by improved demand within our Services Division. See Note 9 of the Notes to Consolidated Financial Statements related to our MPSV contract termination dispute.
Results of Operations Three Months Ended March 31,June 30, 2018, Compared to Three Months Ended March 31,June 30, 2017(in thousands, except for percentages): Consolidated | | | | | | | | | | | | | | | | Three Months Ended March 31, | | Increase or (Decrease) | | | 2018 | | 2017 | | Amount | Percent | | Revenue | $ | 57,290 |
| | $ | 37,993 |
| | $ | 19,297 |
| 50.8% | | Cost of revenue | 56,611 |
| | 42,890 |
| | 13,721 |
| 32.0% | | Gross profit (loss) | 679 |
| | (4,897 | ) | | 5,576 |
| 113.9% | | Gross profit (loss) percentage | 1.2 | % | | (12.9 | )% | | | | | General and administrative expenses | 4,709 |
| | 3,930 |
| | 779 |
| 19.8% | | Asset impairment | 750 |
| | 389 |
| | 361 |
| 92.8% | | Operating income (loss) | (4,780 | ) | | (9,216 | ) | | (4,436 | ) |
| | Other income (expense): | | | | | | | | Interest expense | (469 | ) | | (59 | ) | | (410 | ) | (694.9)% | | Other income (expense), net | 12 |
| | 9 |
| | 3 |
| 33.3% | | Total other income (expense) | (457 | ) | | (50 | ) | | (407 | ) | (814.0)% | | Net loss before income taxes | (5,237 | ) | | (9,266 | ) | | (4,029 | ) | (43.5)% | | Income tax expense (benefit) | 59 |
| | (2,812 | ) | | 2,871 |
| 102.1% | | Net loss | $ | (5,296 | ) | | $ | (6,454 | ) | | $ | 6,900 |
|
|
| | | | | | | | | | | | | | | | Three Months Ended June 30, | | Increase or (Decrease) | | | 2018 | | 2017 | | Amount | Percent | | Revenue | $ | 54,014 |
| | $ | 45,868 |
| | $ | 8,146 |
| 17.8% | | Cost of revenue | 54,713 |
| | 57,488 |
| | (2,775 | ) | (4.8)% | | Gross loss | (699 | ) | | (11,620 | ) | | 10,921 |
| 94.0% | | Gross loss percentage | (1.3 | )% | | (25.3 | )% | | | | | General and administrative expenses | 5,092 |
| | 4,640 |
| | 452 |
| 9.7% | | Asset impairment | 610 |
| | — |
| | 610 |
| 100.0% | | Operating loss | (6,401 | ) | | (16,260 | ) | | 9,859 |
| 60.6% | | Other income (expense): | | | | | | | | Interest expense, net | (92 | ) | | (146 | ) | | 54 |
| 37.0% | | Other income (expense), net | 7,125 |
| | (266 | ) | | 7,391 |
| 2,778.6% | | Total other income (expense) | 7,033 |
| | (412 | ) | | 7,445 |
| 1,807.0% | | Net income (loss) before income taxes | 632 |
| | (16,672 | ) | | 17,304 |
| 103.8% | | Income tax expense (benefit) | 83 |
| | (5,749 | ) | | 5,832 |
| 101.4% | | Net income (loss) | $ | 549 |
| | $ | (10,923 | ) | | $ | 11,472 |
| 105.0% |
Revenue - Our revenue for the three months ended March 31,June 30, 2018 and 2017, was $57.3$54.0 million and $38.0$45.9 million, respectively, representing an increase of 50.8%17.8%. The increase is primarily attributable to:
An increase of $11.2$6.8 million within our Services Division from additional demand for offshore oil and gas service related projects; and An increase of $7.1$5.3 million within our Shipyard Division related to the newbuild construction of ten harbor tug vessels and an offshore marine research vessel which were not under construction during the second quarter of 2017 and $10.2 million in contract losses recorded during the three months ended June 30, 2017, which reduced our measurement of revenue progress under percentage of completion accounting for the second quarter of 2017. Additionally, we re-commenced newbuild construction for the second of two OSV's during the fourth quarter of 2017 which was in process in the second quarter of 2018 but was suspended during the second quarter of 2017.
The increase in revenue was partially offset by a decrease of $5.4 million of revenue within our Fabrication Division primarily attributable to the constructioncompletion of four modules for a petrochemical plant.plant in April 2018.
Gross profit (loss)loss - Our gross profitloss for the three months ended March 31,June 30, 2018, was $679,000$0.7 million compared to a gross loss of $4.9$11.6 million for the three months ended March 31,June 30, 2017. The increase in gross profitimprovement was primarily due to increased revenue within our Services Division as discussed above and a lower gross loss from our Shipyard Division related to $10.2 million in contract losses recorded during the three months ended June 30, 2017, reflecting cost overruns and re-work identified on two contracts relating to the construction of two MPSVs with no comparable adjustments to contract losses in the second quarter of 2018. Additionally, we decreased expenses within our Fabrication Division which included $1.9 million of depreciation expense for the three months ended March 31, 2017, related to our South Texas Properties with no depreciation expense during the three months ended March 31, 2018, for our South Texas Properties as these assets are classified as held for sale.Division.
General and administrative expenses - Our general and administrative expenses were $4.7$5.1 million for the three months ended March 31,June 30, 2018, compared to $3.9$4.6 million for the three months ended March 31,June 30, 2017. The increase in general and administrative expenses for the three months ended March 31,June 30, 2018, was primarily attributable toto:
Build-up of additional personnel for our newly created EPC Division;Division in anticipation of the SeaOne Project; Increased legal and advisory fees related to customer disputes, strategic planning and diversification of our business; and Increased employee incentiveincentives accruals of approximately $300,000 for all divisions related to our safety incentive program and higher employee profitability incentives within our Services Division as well as the addition of personnel as we build up our EPC Division in anticipation of the SeaOne Project; and Higher stock compensation expense of approximately $220,000.Division.
This was partially offset by cost reductions and continued cost minimization efforts implemented by management for the period.
Asset impairment - We recorded an impairmentsecond quarter of $750,000 during the three months ended March 31, 2018, related to 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 management's estimated net proceeds from the sale less its net book value. See also Note 2 of the Notes to Consolidated Financial Statements for additional information regarding our assets held for sale. During the three months ended March 31, 2017, we recorded an impairment of $389,000 related to the Shipyard Division assets held for sale.2017.
Interest expense, net - Interest expense, increasednet decreased due to drawingsfewer letters of credit issued under our Credit Agreement for the three months ended March 31,June 30, 2018, with no such drawings under our Credit Agreementcompared to the three months ended June 30, 2017, as well as increased interest income from investments in cash equivalents and held-to-maturity, short-term investments during the three months ended June 30, 2018.
Other income (expense) - Other income, net was $7.1 million for the three months ended March 31, 2017, as well as increased amortizationJune 30, 2018, compared to other expense, net of deferred financing costs during$0.3 million for the three months ended March 31, 2018.June 30, 2017. Other income, net for the three months ended June 30, 2018 is primarily due to a gain on the sale of our Texas South Yard of $3.9 million and a gain on settlement of insurance recovery proceeds related to Hurricane Harvey of $3.6 million.
Income tax expense (benefit) - Our effective income tax rate for the three months ended March 31,June 30, 2018, was (1.1)%expense of 13.1%, compared to an effective tax rate benefit of 30.3%34.5% for the comparable period during 2017. Current expense represents state taxesincome tax within our Services Division. The decrease in the effective tax rate is the result of a valuation allowance against our deferred tax assets. See Note 1 of the Notes to Consolidated Financial Statements regarding our NOLs and deferred tax assets.
Operating Segments
The results of our four operating divisions and Corporate Divisionnon-operating corporate division for the three months ended March 31,June 30, 2018 and 2017, are presented below (in thousands, except for percentages).
| | | | | | | | | | | | | | | | | Fabrication | | Three Months Ended March 31, | | Increase or (Decrease) | | | | 2018 | | 2017 | | Amount | | Percent | | Revenue | | $ | 17,270 |
| | $ | 10,209 |
| | $ | 7,061 |
| | 69.2% | | Gross profit (loss) | | (219 | ) | | (2,966 | ) | | (2,747 | ) | | (92.6)% | | Gross profit (loss) percentage | | (1.3 | )% | | (29.1 | )% | | | |
| | General and administrative expenses | | 624 |
| | 821 |
| | (197 | ) | | (24.0)% | | Asset impairment | | 750 |
| | — |
| | 750 |
| | 100.0% | | Operating income (loss) | | $ | (1,593 | ) | | $ | (3,787 | ) | | $ | (2,194 | ) | |
|
| | | | | | | | | | | | | | | | | Fabrication | | Three Months Ended June 30, | | Increase or (Decrease) | | | | 2018 | | 2017 | | Amount | | Percent | | Revenue | | $ | 8,590 |
| | $ | 13,990 |
| | $ | (5,400 | ) | | (38.6)% | | Gross profit (loss) | | (1,667 | ) | | 1,931 |
| | (3,598 | ) | | (186.3)% | | Gross profit (loss) percentage | | (19.4 | )% | | 13.8 | % | | | |
| | General and administrative expenses | | 951 |
| | 833 |
| | 118 |
| | 14.2% | | Asset impairment | | 610 |
| | — |
| | 610 |
| | 100.0% | | Operating income (loss) | | (3,227 | ) | | 1,098 |
| | (4,325 | ) | |
|
Revenue - Revenue from our Fabrication Division increased $7.1decreased $5.4 million for the three months ended March 31,June 30, 2018, compared to the three months ended March 31,June 30, 2017. The increasedecrease is attributable to the constructioncompletion and delivery of four modules for a petrochemical plant during April 2018 with very little immediate replacement backlog started as a result of the three months ended March 31, 2018, and lower revenue during the three months ended March 31, 2017, resultingtemporary impacts from previously depressed oil and gas prices and the corresponding reduction in customer demand for offshore fabrication projects during the period. This was partially offset, by decreased revenue of $2.4 million for the three months ended March 31, 2018, at our South Texas Properties as these were placed for sale during the first quarter of 2017 and project work completed or transfered to our Houma Fabrication Yard during 2017.prices.
Gross profit (loss) - Gross loss from our Fabrication Division for the three months ended March 31,June 30, 2018, was $219,000$1.7 million compared to a gross lossprofit of $3.0$1.9 million for the three months ended March 31,June 30, 2017. The decrease in gross loss was due to increaseddecreased revenue with minimal new fabrication work started during the second quarter of 2018 as discussed above and a reduction in depreciation expense of $1.9 million in depreciation expense during the three months ended March 31, 2018 for our South Texas Properties as these assets are classified as held for sale.above.
General and administrative expenses - General and administrative expenses for our Fabrication Division decreased $197,000increased $0.1 million for the three months ended March 31,June 30, 2018, compared to the three months ended March 31,June 30, 2017. The decreaseincrease is primarily due to an increase in legal expense of $0.4 million for our pursuit of claims against a customer related to disputed change orders for a large deepwater project we delivered to our customer in November 2015 partially offset by decreases in workforce at our South Texas Properties,salaries and employee incentives of $0.2 million due to employee reductions and decreases in corporate allocations of $0.1 million as a portion of these are now allocated to our EPC Division and continued cost minimization efforts implemented by management for the period.Division.
Asset impairment - We recorded an impairment of $750,000$0.6 million during the three months ended March 31,June 30, 2018, primarily related to 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.Yard. The impairment was calculated as management's estimated net proceeds from the sale less its net book value. See Note 2 of the Notes to Consolidated Financial Statements for additional information regarding our assets held for sale. We did not record any asset impairments during the three months ended March 31,June 30, 2017, within our Fabrication Division.
| | | | | | | | | | | | | | | | | Shipyard | | Three Months Ended March 31, | | Increase or (Decrease) | | | | 2018 | | 2017 | | Amount | | Percent | Revenue (1) | | $ | 18,565 |
| | $ | 18,422 |
| | $ | 143 |
| | 0.8% | Gross profit (loss) (1) | | (1,023 | ) | | (1,704 | ) | | (681 | ) | | (40.0)% | | Gross profit (loss) percentage | | (5.5 | )% | | (9.2 | )% | | | |
| | General and administrative expenses | | 796 |
| | 964 |
| | (168 | ) | | (17.4)% | | Asset impairment | | — |
| | 389 |
| | (389 | ) | | (100.0)% | Operating income (loss) (1) | | $ | (1,819 | ) | | $ | (3,057 | ) | | $ | (1,238 | ) | |
|
| | | | | | | | | | | | | | | | | Shipyard | | Three Months Ended June 30, | | Increase or (Decrease) | | | | 2018 | | 2017 | | Amount | | Percent | Revenue (1) | | $ | 23,620 |
| | $ | 18,303 |
| | $ | 5,317 |
| | 29.0% | Gross loss (1) | | (2,776 | ) | | (13,851 | ) | | 11,075 |
| | 80.0% | | Gross loss percentage | | (11.8 | )% | | (75.7 | )% | | | |
| | General and administrative expenses | | 597 |
| | 983 |
| | (386 | ) | | (39.3)% | Operating loss (1) | | (3,374 | ) | | (14,834 | ) | | 11,460 |
| |
|
___________ | | | (1) | Revenue for the three months ended March 31,June 30, 2018 and 2017, includes $390,000$0.1 million and $1.6$0.3 million of non-cash amortization of deferred revenue related to the values assigned to the contracts acquired in the LEEVAC transaction, respectively. |
Revenue - Revenue from our Shipyard Division increased $143,000$5.3 million for the three months ended March 31,June 30, 2018, compared to the three months ended March 31,June 30, 2017. During the firstsecond quarter of 2018, we were able to make progress on the construction of eightten harbor tugstug vessels and an offshore marine research vessel which were not under construction during the firstsecond quarter of 2017. During the three months ended June 30, 2017, we also recorded $10.2 million in contract losses which reduced our measure of revenue progress under percentage of completion accounting. Additionally, we re-commenced newbuild construction for the second of two OSV's during the fourth quarter of 2017, which was suspended during the second quarter of 2017. This was partially offset by lower revenue from construction of our two OSV and two MPSV vessel contracts that were under construction during 2017, but suspended during the first quarter of 2018.
During the first quarter of 2017, we completed the first of the OSVs and tendered it for delivery on February 6, 2017, and suspended construction of the second OSV due to a customer dispute. We recommenced construction of the second OSV during the fourth quarter of 2017 which is scheduled for completion during the second quarter of 2018. During the first quarter of 2018, 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 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. See also Note 9 of the Notes to Consolidated Financial Statements for additional information relating to this customer dispute.the suspension of construction of two MPSVs.
Gross profit (loss)loss - Gross loss from our Shipyard Division was $1.0$2.8 million for the three months ended March 31,June 30, 2018, compared to a gross loss of $1.7$13.9 million for the three months ended March 31,June 30, 2017. The decreasegross loss for the three months ended June 30, 2018, was primarily attributable to underutilization of our Houma and Lake Charles shipyards and competitive pricing on current work. The improvement in gross loss of $11.1 million was primarily due to improved cost management efforts and efficiencies learned from the construction of two OSV and two MPSV vesselsto:
$10.2 million in contract losses recorded during the three months ended March 31,June 30, 2017, related to cost overruns and appliedre-work identified on the two contracts relating to the construction of eight harbor tugstwo MPSVs; holding and closing costs during the three months ended MarchJune 30, 2017, related to our former Prospect shipyard. We terminated the lease of this facility effective December 31, 2017; and holding costs during the three months ended June 30, 2017 related to a completed OSV that was delivered on February 6, 2017, but refused by our customer as well as the suspension of work on the second OSV vessel. We resolved our disputes with our OSV customer during the fourth quarter of 2017 and construction of the second OSV re-commenced. We subsequently delivered the second OSV on July 31, 2018.
General and administrative expenses - General and administrative expenses for our Shipyard Division decreased $168,000$0.4 for the three months ended March 31,June 30, 2018, compared to the three months ended March 31,June 30, 2017, primarily due to reductions in salaries and employee incentives of $0.4 million related to reductions in our workforce period over period and decreases in corporate allocations of $0.1 million as a portion of these are now allocated to our EPC Division. This was partially offset by increases in legal expense related to our customer dispute relating to the suspension of construction of two MPSVs. See also Note 9 of the Notes to Consolidated Financial Statements for additional information relating to the suspension of construction of two MPSVs.
| | | | | | | | | | | | | | | | | Services | | Three Months Ended June 30, | | Increase or (Decrease) | | | | 2018 | | 2017 | | Amount | | Percent | | Revenue | | $ | 22,205 |
| | $ | 15,396 |
| | $ | 6,809 |
| | 44.2% | | Gross profit | | 3,585 |
| | 390 |
| | 3,195 |
| | 819.2% | | Gross profit percentage | | 16.1 | % | | 2.5 | % | | | |
| | General and administrative expenses | | 762 |
| | 647 |
| | 115 |
| | 17.8% | | Operating income (loss) | | 2,823 |
| | (257 | ) | | 3,080 |
| |
|
Revenue - Revenue from our Services Division increased $6.8 million for the three months ended June 30, 2018, compared to the three months ended June 30, 2017, due to an overall increase in work resulting from increases in customer demand for offshore oil and gas related service projects.
Gross profit - Gross profit from our Services Division increased $3.2 million for the three months ended June 30, 2018, compared to the three months ended June 30, 2017, due to increased revenue discussed above. Our gross profit percentage increased from 2.5% during the period for 2017 to 16.1% for 2018. The increase in gross profit percentage was due to a higher recovery of fixed costs with increased work.
General and administrative expenses - General and administrative expenses for our Services Division increased $0.1 for the three months ended June 30, 2018, compared to the three months ended June 30, 2017, due to support of increased work as well as increases in employee incentive compensation with allocation of corporate expenses remaining comparable period over period.
| | | | | | | | | | | | | | | | | EPC | | Three Months Ended June 30, | | Increase or (Decrease) | | | | 2018 | | 2017 | | Amount | | Percent | | Revenue | | $ | 882 |
| | $ | — |
| | $ | 882 |
| | 100.0% | | Gross profit | | 543 |
| | — |
| | 543 |
| | 100.0% | | Gross profit percentage | | 61.6 | % | | n/a |
| | | | | | General and administrative expenses | | 485 |
| | — |
| | 485 |
| | 100.0% | | Operating income | | 58 |
| | — |
| | 58 |
| |
|
Revenue - Our EPC Division did not exist at June 30, 2017. Revenue for the three months ended June 30, 2018 consists of early work and engineering studies authorized by SeaOne. See Note 8 of the Notes to Consolidated Financial Statements for further discussion of our EPC Division and the SeaOne Project.
Gross profit - Gross profit for the three months ended June 30, 2018, consists of early work and engineering studies authorized by SeaOne.
General and administrative expenses - General and administrative expenses for our EPC Division include the addition of personnel and allocations of corporate expenses as we invest in this new line of business.
| | | | | | | | | | | | | | | | | Corporate | | Three Months Ended June 30, | | Increase or (Decrease) | | | | 2018 | | 2017 | | Amount | | Percent | | Revenue | | $ | — |
| | $ | — |
| | $ | — |
| | | | Gross loss | | (384 | ) | | (90 | ) | | (294 | ) | | (326.7)% | | Gross loss percentage | | n/a |
| | n/a |
| | | | | | General and administrative expenses | | 2,297 |
| | 2,177 |
| | 120 |
| | 5.5% | | Operating loss | | (2,681 | ) | | (2,267 | ) | | (414 | ) | |
|
Gross loss - Gross loss from our Corporate Division increased primarily due to lower allocation of expenses and build-up of personnel to support our EPC Division.
General and administrative expenses - General and administrative expenses for our Corporate Division increased primarily due to increased legal and advisory fees related to customer disputes, strategic planning and diversification of our business and increased employee incentive accruals.
Six Months Ended June 30, 2018, Compared to Six Months Ended June 30, 2017(in thousands, except for percentages): Consolidated | | | | | | | | | | | | | | | | Six Months Ended June 30, | | Increase or (Decrease) | | | 2018 | | 2017 | | Amount | Percent | | Revenue | $ | 111,304 |
| | $ | 83,860 |
| | $ | 27,444 |
| 32.7% | | Cost of revenue | 111,324 |
| | 100,378 |
| | 10,946 |
| 10.9% | | Gross loss | (20 | ) | | (16,518 | ) | | 16,498 |
| 99.9% | | Gross profit percentage | — | % | | (19.7 | )% | | | | | General and administrative expenses | 9,801 |
| | 8,570 |
| | 1,231 |
| 14.4% | | Asset impairment | 1,360 |
| | 389 |
| | 971 |
| 249.6% | | Operating loss | (11,181 | ) | | (25,477 | ) | | 14,296 |
| 56.1% | | Other income (expense): | | | | | | | | Interest expense, net | (238 | ) | | (205 | ) | | (33 | ) | (16.1)% | | Other income (expense), net | 6,814 |
| | (257 | ) | | 7,071 |
| 2,751.4% | | Total other income (expense) | 6,576 |
| | (462 | ) | | 7,038 |
| 1,523.4% | | Net loss before income taxes | (4,605 | ) | | (25,939 | ) | | 21,334 |
| 82.2% | | Income tax expense (benefit) | 142 |
| | (8,561 | ) | | 8,703 |
| 101.7% | | Net loss | $ | (4,747 | ) | | $ | (17,378 | ) | | $ | 12,631 |
| 72.7% |
Revenue - Our revenue for the six months ended June 30, 2018 and 2017, was $111.3 million and $83.9 million, respectively, representing an increase of 32.7%. The increase is primarily attributable to:
An increase of $1.7 million within our Fabrication Division primarily attributable to the construction and completion of four modules for a petrochemical plant; An increase of $5.5 million within our Shipyard Division primarily related to construction of ten harbor tug vessels and an offshore marine research vessel which were not under construction during the first half of 2017 and $10.6 million in contract losses recorded during the six months ended June 30, 2017, which reduced our measure of revenue progress under percentage of completion accounting; Additionally, we re-commenced newbuild construction for the second of two OSV's during the fourth quarter of 2017, which continued through the first half of 2018 but had been suspended during the second quarter of 2017; and An increase of $18.0 million within our Services Division from additional demand for offshore oil and gas service related projects.
Gross loss - Our gross loss for the six months ended June 30, 2018, was $20,000 compared to a gross loss of $16.5 million for the six months ended June 30, 2017. The improvement in gross loss was primarily due to increased revenue within our Services Division as discussed above and $10.6 million in contract losses related to cost overruns and re-work that was identified and recorded during the six months ended June 30, 2017 on two contracts relating to the construction of two MPSVs with no comparable adjustments to contract losses in the first half of 2018.
General and administrative expenses - Our general and administrative expenses were $9.8 million for the six months ended June 30, 2018, compared to $8.6 million for the six months ended June 30, 2017. The increase in general and administrative expenses for the six months ended June 30, 2018, was primarily attributable to:
Build-up of additional personnel for our newly created EPC Division; Increased legal and advisory fees related to customer disputes, strategic planning and diversification of our business; and Increased employee incentive accruals for all divisions related to our safety incentive program and higher employee profitability incentives within our Services Division. This was partially offset by cost reductions and continued cost minimization efforts implemented by management during the second half of 2017.
Asset impairment - We recorded an impairment of $1.4 million during the six months ended June 30, 2018, primarily related to two pieces of equipment at our Texas North Yard that are held for sale. The impairment was calculated as management's estimated net proceeds from the sale less the equipment's net book value. See Note 2 of the Notes to Consolidated Financial Statements for additional information regarding our assets held for sale. During the six months ended June 30, 2017, we recorded an impairment of $0.4 million related to our Shipyard Division assets held for sale.
Other income (expense), net - Other income, net was $6.8 million for the six months ended June 30, 2018, compared to other expense, net of $0.3 million for the six months ended June 30, 2017. Other income, net for the six months ended June 30, 2018 is primarily due to a gain on the sale of our Texas South Yard of $3.9 million and a gain on settlement of insurance recovery proceeds related to Hurricane Harvey of $3.6 million.
Income tax expense (benefit) - Our effective income tax rate for the six months ended June 30, 2018, was expense of 3.1%, compared to an effective tax rate benefit of 33.0% for the comparable period during 2017. Current expense represents state income tax within our Services Division. The decrease in the effective tax rate is the result of a valuation allowance against our deferred tax assets. See Note 1 of the Notes to Consolidated Financial Statements regarding our NOLs and deferred tax assets.
Operating Segments
The results of our four operating divisions and non-operating corporate division for the six months ended June 30, 2018 and 2017, are presented below (in thousands, except for percentages).
| | | | | | | | | | | | | | | | | Fabrication | | Six Months Ended June 30, | | Increase or (Decrease) | | | | 2018 | | 2017 | | Amount | | Percent | | Revenue | | $ | 25,860 |
| | $ | 24,199 |
| | $ | 1,661 |
| | 6.9% | | Gross loss | | (1,886 | ) | | (1,034 | ) | | (852 | ) | | (82.4)% | | Gross loss percentage | | (7.3 | )% | | (4.3 | )% | | | | | | General and administrative expenses | | 1,575 |
| | 1,654 |
| | (79 | ) | | (4.8)% | | Asset impairment | | 1,360 |
| | — |
| | 1,360 |
| | 100.0% | | Operating loss | | (4,821 | ) | | (2,688 | ) | | (2,133 | ) | | |
Revenue - Revenue from our Fabrication Division increased $1.7 million for the six months ended June 30, 2018, compared to the six months ended June 30, 2017. The increase is attributable to the construction and completion of four modules for a petrochemical plant during the six months ended June 30, 2018. This was partially offset, by decreased revenue of $2.8 million for the six months ended June 30, 2018, at our South Texas Properties as these were marketed for sale.
Gross loss - Gross loss from our Fabrication Division for the six months ended June 30, 2018, was $1.9 million compared to a gross loss of $1.0 million for the six months ended June 30, 2017. The increase in gross loss was due to increased material costs incurred on the construction and completion of four modules for a petrochemical plant during the six months ended June 30, 2018 as well as current work being bid at more competitive pricing. This was partially offset by a reduction in depreciation expense of $1.9 million during the six months ended June 30, 2018 for our South Texas Properties as these assets are classified as held for sale.
General and administrative expenses - General and administrative expenses for our Fabrication Division decreased $0.1 million for the six months ended June 30, 2018, compared to the six months ended June 30, 2017. The decrease is primarily due to decreases in salaries and employee incentives of $0.3 million due to reductions in workforce, decreases in corporate allocations of $0.3 million as a portion of these are now allocated to our EPC Division and continued cost minimization efforts implemented by management for the first half of 2018, partially offset by an increase in legal expense of $0.5 million.
Asset impairment - We recorded an impairment of $1.4 million during the six months ended June 30, 2018, primarily related to two pieces of equipment at our Texas North Yard. One piece of equipment was sold in July 2018, and we intend to sell the other piece of equipment at auction. The impairment was calculated as management's estimated net proceeds from the sale less the equipment's net book value. See Note 2 of the Notes to Consolidated Financial Statements for additional information regarding our assets held for sale. We did not record any asset impairments during the six months ended June 30, 2017, within our Fabrication Division.
| | | | | | | | | | | | | | | | | Shipyard | | Six Months Ended June 30, | | Increase or (Decrease) | | | | 2018 | | 2017 | | Amount | | Percent | Revenue (1) | | $ | 42,185 |
| | $ | 36,724 |
| | $ | 5,461 |
| | 14.9% | Gross loss (1) | | (3,799 | ) | | (15,556 | ) | | 11,757 |
| | 75.6% | | Gross loss percentage | | (9.0 | )% | | (42.4 | )% | | | | | | General and administrative expenses | | 1,393 |
| | 1,947 |
| | (554 | ) | | (28.5)% | | Asset impairment | | — |
| | 389 |
| | (389 | ) | | (100.0)% | Operating loss (1) | | (5,192 | ) | | (17,892 | ) | | 12,700 |
| | |
___________ | | | (1) | Revenue for the six months ended June 30, 2018, and 2017, includes $0.5 million and $1.9 million, respectively, of non-cash amortization of deferred revenue related to the values assigned to the contracts acquired in the LEEVAC transaction. |
Revenue - Revenue from our Shipyard Division increased $5.5 million for the six months ended June 30, 2018, compared to the six months ended June 30, 2017. During the first half of 2018, we made progress on the construction of ten harbor tug vessels and an offshore marine research vessel that were not under construction during the first half of 2017. The increase in revenue also resulted from re-commencing the newbuild construction for the second of two OSV's during the fourth quarter of 2017, which continued through the first half of 2018 but was suspended during the second quarter of 2017. This was partially offset by lower revenue from construction of two MPSVs that were under construction during 2017, but suspended during the first quarter of 2018. During the six months ended June 30, 2017, we also recorded $10.2 million in contract losses which reduced our measure of revenue progress under percentage of completion accounting. See also Note 9 of the Notes to Consolidated Financial Statements for additional information relating to the suspension of construction of two MPSVs.
Gross loss - Gross loss from our Shipyard Division was $3.8 million for the six months ended June 30, 2018, compared to a gross loss of $15.6 million for the six months ended June 30, 2017. The gross loss for the six months ended June 30, 2018, was primarily attributable to underutilization of our Houma and Lake Charles shipyards and competitive pricing on current work. The decrease in gross loss compared to the six months ended June 30, 2017, was due to:
$10.6 million in contract losses related to cost overruns and re-work that was identified and recorded during the six months ended June 30, 2017 relating to the construction of two MPSVs; Holding and closing costs during the six months ended June 30, 2017, related to our Prospect shipyard. We terminated the lease of this facility effective December 31, 2017; and Holding costs during the six months ended June 30, 2017, related to a completed OSV that was delivered on February 6, 2017, but refused by our customer as well as the suspension of work on the second OSV vessel. We resolved our disputes with our OSV customer during the fourth quarter of 2017 and construction of the second OSV re-commenced. We subsequently delivered the second OSV on July 31, 2018.
General and administrative expenses - General and administrative expenses for our Shipyard Division decreased construction activity.$0.6 million for the six months ended June 30, 2018, compared to the six months ended June 30, 2017, primarily due to decreases in salaries and employee incentives of $0.5 million due to reductions in workforce and decreases in corporate allocations of $0.1 million as a portion of these are now allocated to our EPC Division.
Asset impairment - During the threesix months ended March 31,June 30, 2017, we recorded an impairment of $389,000$0.4 million related to the Shipyard Division assets held for sale. See Note 2 of the Notes to Consolidated Financial Statements for additional information relating to our assets held for sale. We did not record any asset impairment during the threesix months ended March 31,June 30, 2018, in our Shipyard Division.
| | | | | | | | | | | | | | | | | Services | | Three Months Ended March 31, | | Increase or (Decrease) | | | | 2018 | | 2017 | | Amount | | Percent | | Revenue | | $ | 21,870 |
| | $ | 10,712 |
| | $ | 11,158 |
| | 104.2% | | Gross profit (loss) | | 2,614 |
| | 33 |
| | 2,581 |
| | 7,821.2% | | Gross profit (loss) percentage | | 12.0 | % | | 0.3 | % | | | |
| | General and administrative expenses | | 734 |
| | 666 |
| | 68 |
| | 10.2% | | Operating income (loss) | | $ | 1,880 |
| | $ | (633 | ) | | $ | 2,513 |
| |
|
| | | | | | | | | | | | | | | | | Services | | Six Months Ended June 30, | | Increase or (Decrease) | | | | 2018 | | 2017 | | Amount | | Percent | | Revenue | | $ | 44,075 |
| | $ | 26,107 |
| | $ | 17,968 |
| | 68.8% | | Gross profit | | 6,199 |
| | 423 |
| | 5,776 |
| | 1,365.5% | | Gross profit percentage | | 14.1 | % | | 1.6 | % | | | | | | General and administrative expenses | | 1,496 |
| | 1,313 |
| | 183 |
| | 13.9% | | Operating income (loss) | | 4,703 |
| | (890 | ) | | 5,593 |
| |
|
Revenue - Revenue from our Services Division increased $11.2$18.0 million for the threesix months ended March 31,June 30, 2018, compared to the threesix months ended March 31,June 30, 2017, due to an overall increase in work experienced due toresulting from increases in customer demand for offshore oil and gas related service projects.
Gross profit - Gross profit from our Services Division increased $2.6$5.8 million for the threesix months ended March 31,June 30, 2018, compared to the threesix months ended March 31,June 30, 2017, due to increased revenue discussed above. Our gross profit percentage increased from 1.6% during the period for 2017 to 14.1% for 2018. The increase in gross profit percentage was due to a higher recovery of fixed costs with increased work.
General and administrative expenses - General and administrative expenses for our Services Division increased $68,000$0.2 million for the threesix months ended March 31,June 30, 2018, compared to the threesix months ended March 31,June 30, 2017, due to support of increased work as well as increases in employee incentive compensation with allocation of approximately $120,000 resulting from increased operating income. This was partially offset by decreases in corporate allocations as a portion of these are now allocated to our EPC Division and continued cost minimization efforts implemented by management for theexpenses remaining comparable period over period.
| | | | | | | | | | | | | | | | | EPC | | Three Months Ended March 31, | | Increase or (Decrease) | | | | 2018 | | 2017 | | Amount | | Percent | | Revenue | | 73 |
| | $ | — |
| | $ | 73 |
| | 100.0% | | Gross profit (loss) | | (308 | ) | | — |
| | (308 | ) | | (100.0)% | | Gross profit (loss) percentage | | n/a |
| | n/a |
| | | |
| | General and administrative expenses | | 417 |
| | — |
| | 417 |
| | 100.0% | | Operating income (loss) | | $ | (725 | ) | | $ | — |
| | $ | (725 | ) | |
|
| | | | | | | | | | | | | | | | | EPC | | Six Months Ended June 30, | | Increase or (Decrease) | | | | 2018 | | 2017 | | Amount | | Percent | | Revenue | | $ | 955 |
| | $ | — |
| | $ | 955 |
| | 100.0% | | Gross profit | | 235 |
| | — |
| | 235 |
| | 100.0% | | Gross profit (loss) percentage | | 24.6 | % | | n/a |
| | | | | | General and administrative expenses | | 902 |
| | — |
| | 902 |
| | 100.0% | | Operating loss | | (667 | ) | | — |
| | (667 | ) | |
|
Revenue - Our EPC Division did not exist at March 31,June 30, 2017. Revenue for the threesix months ended March 31,June 30, 2018, consists of early work and engineering studies authorized by SeaOne. See Note 8 of the Notes to Consolidated Financial Statements for further discussion of our EPC Division and the SeaOne Project.
Gross profit (loss) - Gross lossprofit from our EPC Division occurred as we added personnel and overhead infrastructure related to the anticipated SeaOne project.
General and administrative expenses - General and administrative expenses for our EPC Division include the addition of personnel and allocations of corporate expenses as we invest in this new line of business. | | | | | | | | | | | | | | | | | Corporate | | Three Months Ended March 31, | | Increase or (Decrease) | | | | 2018 | | 2017 | | Amount | | Percent | | Revenue | | $ | — |
| | $ | — |
| | $ | — |
| | —% | | Gross profit (loss) | | $ | (385 | ) | | (260 | ) | | 125 |
| | 48.1% | | Gross profit (loss) percentage | | n/a |
| | n/a |
| | | | | | General and administrative expenses | | 2,138 |
| | 1,479 |
| | 659 |
| | 44.6% | | Operating income (loss) | | $ | (2,523 | ) | | $ | (1,739 | ) | | $ | 784 |
| |
|
| | | | | | | | | | | | | | | | | Corporate | | Six Months Ended June 30, | | Increase or (Decrease) | | | | 2018 | | 2017 | | Amount | | Percent | | Revenue | | $ | — |
| | $ | — |
| | $ | — |
| | | | Gross loss | | (769 | ) | | (351 | ) | | (418 | ) | | (119.1)% | | Gross loss percentage | | n/a |
| | n/a |
| | | | | | General and administrative expenses | | 4,435 |
| | 3,656 |
| | 779 |
| | 21.3% | | Operating loss | | (5,204 | ) | | (4,007 | ) | | (1,197 | ) | |
|
Gross profit (loss)loss - Gross loss from our Corporate Division increased primarily due to lower allocation of expenses and as well as increased insurance costs.buildup of personnel to support our EPC Division.
General and administrative expenses - General and administrative expenses for our Corporate Division increased primarily due to increased legal and advisory fees related to customer disputes, strategic planning and diversification of our business and increased employee incentive accruals and higher stock compensation expense of approximately $220,000.accruals.
Liquidity and Capital Resources Our immediate liquidity remains dependent on our cash on hand, anticipatedscheduled maturities of our held-to-maturity, short-term investments, potential proceeds from the sales of assets, availability of future drawings from our Credit Agreement and collections of accounts receivable. At March 31, 2018, we had $10 million outstanding under our Credit Agreement, $2.5 million in outstanding letters of credit, and cash and cash equivalents totaling $6.5 million compared to $9.0 million at December 31, 2017. As of May 4, 2018, our liquidity has significantly improved due to the saleA summary of our Texas South Yard the net proceedsimmediately available liquidity as of which willJune 30, 2018 is as follows: | | | | | | | Available Liquidity | | $ (in thousands) | | Cash and cash equivalents on hand | | $ | 32,004 |
| Held-to-maturity, short-term investments (1) | | 7,481 |
| | Revolving credit agreement | | 40,000 |
| | Less: | |
| | Borrowings under our Credit Agreement | | — |
| | Outstanding letters of credit | | (5,495 | ) | | Total available liquidity | | $ | 73,990 |
|
___________ (1) Our held-to-maturity, short-term investments include U.S. Treasuries and other investment-grade commercial paper and can be used to rebuild our liquidity, to support upcoming projects, continue investingliquidated quickly in our newly created EPC Division and for other general corporate purposes. After the sale of our Texas South Yard, our cash balance was $55.0 million, and the amount outstanding under our Credit Agreement was $10 million with remaining availability under our Credit Agreement of approximately $27.5 million for total liquidity of approximately $82.5 million.open markets. Working capital was $137.1$132.7 million and our ratio of current assets to current liabilities was 4.344.67 to 1 at March 31,June 30, 2018, compared to $130.5 million and 3.68 to 1, respectively, at December 31, 2017. Working capital at March 31,June 30, 2018, includes $98.4$7.5 million of held-to-maturity, short-term investments, $7.2 million of insurance receivables and $43.8 million related to assets held for sale, primarily related to our remaining South Texas Properties which decreased after the sale of our Texas South Yards to $48.5 million.Properties. At March 31,June 30, 2018, our contracts receivable balance was $27.4$31.9 million of which we have subsequently collected $14.9$14.4 million through May 4, 2018.as of the date of this Report and our insurance receivable was $7.2 million of which we have received payment for the full amount as of the date of this Report. Our primary usesources/uses of cash during the threesix months ended March 31,June 30, 2018, isare referenced in the Cash Flow Activities section below. As discussed in our Executive Summary, we are implementing several strategies to diversify our business, increase backlog, reduce operating expenses and monetize assets. Our South Texas Properties are held for sale. A significant portion of our near-term plan is to generate liquidity from the sale of theseunderutilized assets. On April 20, 2018, we closed on the sale of our Texas South Yard for a sale price of $55$55.0 million, less selling costs of $1.5 million. We received approximately $52.7 million at closing, which was in addition to the $750,000$0.8 million of earnest money previously received on January 3, 2018, related to the option to purchase the Texas South Yard. We plan to use theearnest money. The net proceeds to rebuildreceived rebuilt our liquidity, toprovided support for upcoming projects, continue investingcontinued investment in our newly created EPC Division and for other general corporate purposes. See further discussion of the sale of our Texas South Yard in Note 2 of the Notes to Consolidated Financial Statements. We currently believe that cash on hand coupled with proceeds received fromcontinue to market our Texas North Yard, and hope to have a negotiated contract for 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 the twelve months from the date of this Report.
As of the date of this Report our Texas North Yard remains held for sale. The book value ofin the Texas North Yard is $46.6 million at March 31, 2018. We will continue to incur costs associated with holding and maintaining our Texas North Yard. These costs include insurance, general maintenance of the properties in their current state, property taxes and retained employees which will be expensed as incurred.near future.
We have a $40$40.0 million Credit Agreement maturing June 9, 2019. The Credit Agreement allows the Company to use up to the full amount of the available borrowing base for letters of credit and general corporate purposes. We believe that our Credit Agreement will provide us with additional working capital flexibility to expand operations as backlog improves, respond to market opportunities and support our ongoing operations. Interest on drawings under the Credit Agreement may be designated, at our option, as either Base Rate (as defined in the credit facility) or LIBOR plus 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 Credit Agreement are 0.4% per annum, and interest on undrawn stated amounts under letters of credit issued by the lender is 2% per annum. At March 31, 2018, the interest rate on our outstanding borrowings was 3.75% per annum. The Credit Agreement is secured by substantially all of our assets (other than the South Texas Properties).
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 we expect to remain outstanding until July of 2018.
We must comply with the following financial covenants each quarter during the term of the Credit Agreement:
| | | i. | Ratio of current assets to current liabilities of not less than 1.25:1.00; |
| | | ii. | Minimum tangible net worth requirement of at least the sum of: |
$185 million, plus An amount equal to 50% of consolidated net income for each fiscal quarter ending after June 30, 2017, including 50% of any gain attributable to the sale of all or substantially all our South Texas Properties (with no deduction for a net loss in any such fiscal quarter), plus
| | b) | An amount equal to 50% of consolidated net income for each fiscal quarter ending after June 30, 2017, including 50% of any gain attributable to the sale of our South Texas Properties (with no deduction for a net loss in any such fiscal quarter), plus |
| | c) | 100% of the proceeds of any issuance of any stock or other equity after deducting of any fees, commissions, expenses and other costs incurred in such offering; and |
100% of the proceeds of any issuance of any stock or other equity after deducting of any fees, commissions, expenses and other costs incurred in such offering; and
| | | iii. | Ratio of funded debt to tangible net worth of not more than 0.50:1.00. |
As of March 31,June 30, 2018, we were in compliance with all of our financial covenants.
We will continue to monitor and preserve our cash. Our primary liquidity requirements for 2018 and beyond are for the costs associated with fabricationFabrication and shipyardShipyard projects, capital expenditures related to the creationexpansion of our EPC Division and enhancements to our shipyards.Shipyard facilities. Future capital expenditures will be highly dependent upon the amount and timing of future projects. Capital expenditures for the quartersix months ended March 31,June 30, 2018, were $71,000.$0.8 million. We do not anticipate significant capital expenditures for the remainder of 2018.
If industry conditions for offshore oil and gas do not improve, we are unable to sell our Texas North Yard or the sale is delayed, or we are unable to increase our backlog, we would expect to take additional measures to preserve our cash flows until such time we are able to generate cash flows from operations. Since the beginning of 2016, we have implemented wage adjustments along with employee benefit and overall cost reductions within all of our divisions. We have reduced the level of our workforce in the past and we will continue to do so based on booked work in all of our facilities. We have reduced the cash compensation paid to our directors and the salaries of our executive officers, and we have reduced our capital expenditures and placed assets that are either underutilized, under-performing or not expected to provide sufficient long-term value for sale, which include our South Texas Properties.
We currently believe that cash and cash equivalents on hand and held-to-maturity, short-term investments 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 twelve months from the date of this Report. Our view regarding sufficiency of cash and liquidity is primarily based on our financial forecast for the remainder of 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 forecast, 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 requirements. Accordingly, we may be required to further draw on our Credit Agreement, obtain additional bank financing, sell additional assets or conduct equity or debt offerings at a time when it is not beneficial to do so.
Cash Flow Activities
For the threesix months ended March 31,June 30, 2018, net cash used in operating activities was $14.1$26.4 million, compared to net cash used in operating activities of $15.1$27.9 million for the threesix months ended March 31,June 30, 2017. The use of cash in operations during the period was primarily due to the following:
Operating losses for the threesix months ended March 31,June 30, 2018, excluding gains on sales of assets and insurance recoveries as well as amounts in excess of non-cash depreciation, amortization, impairment, and stock compensation expense of approximately $1.5$3.5 million;
Slower collections of receivables of $6.4 million
Build-up of costs for contracts in progress of $9.1$8.1 million;
Build-up ofIncreased retainage on projects of $1.5 million; and
PaymentIncreased payments of property taxes related to our South Texas Propertiesaccounts payable of $2 million.$2.4 million; and
Other general uses of working capital.
Net cash provided by investing activities for the threesix months ended March 31,June 30, 2018, was $2.4$50.2 million, compared to cash used inprovided by investing activities of $391,000$0.3 million for the threesix months ended March 31,June 30, 2017. The changeincrease in cash used inprovided by investing activities is due primarily due to the sales of assets, primarily our Texas South Yard, in the amount of $56.4 million and the insurance proceeds received for hurricane damage to assets at our South Texas Properties. This was partially offset by the purchase of held-to-maturity investments of $7.5 million.
Net cash providedused by financing activities for the threesix months ended March 31,June 30, 2018, and 2017, was $9.2$0.8 million compared to $1.0$1.2 million in cash used in financing activities, respectively. The increase in cash provided by financing activities is due to $10 million in net borrowings under our Credit Agreement.
Contractual Obligations There have been no material changes from the information included in our 2017 Annual Report. For more information on our contractual obligations, refer to Part II, Item 7 of our 2017 Annual Report. Off-Balance Sheet Arrangements There have been no material changes from the information included in our 2017 Annual Report. Item 3. Quantitative and Qualitative Disclosures About Market Risk. There have been no material changes in the Company’s market risks during the quarter ended March 31,June 30, 2018. For more information on market risk, refer to Part II, Item 7A. of our Annual Report on Form 10-K for the year ended December 31, 2017. Item 4. Controls and Procedures. The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and that such information is communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this Report. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that the design and operation of our disclosure controls and procedures were effective as of the end of the period covered by this Report. There have been no changes during the fiscal quarter ended March 31,June 30, 2018, in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION Item 1. Legal Proceedings. The Company is subject to various routine legal proceedings in the normal conduct of its business primarily involving commercial claims, workers’ compensation claims, and claims for personal injury under general maritime laws of the United States and the Jones Act. While the outcome of these lawsuits, legal proceedings and claims cannot be predicted with certainty, management believes that the outcome of any such proceedings, even if determined adversely, would not have a material adverse effect on the financial position, results of operations or cash flows of the Company. Item 1A. Risk Factors. There have been no material changes from the information included in Item 1A “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2017. Item 6. Exhibits. | | | | | Exhibit Number | | Description of Exhibit | | | | | 3.1 | | 2009 (SEC File no. 001-34279). | | 3.2 | | 2016 (SEC File no. 001-34279). | | 10.1 | |
| 10.2 | |
| 10.3 | |
| 10.4 | |
| | 31.1 | | | | 31.2 | | | | 32 | | | | | | | | 101 | | Attached as Exhibit 101 to this report are the following items formatted in XBRL (Extensible Business Reporting Language): | | | | (i) | Consolidated Balance Sheets, | | | | (ii) | Consolidated Statements of Operations, | | | | (iii) | Consolidated Statement of Changes in Shareholders’ Equity, | | | | (iv) | Consolidated Statements of Cash Flows, and | | | | (v) | Notes to Consolidated Financial Statements. | | | | | | * | | Filed herewith. | | † | | Management Contract or Compensatory Plan. |
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized. | | | | GULF ISLAND FABRICATION, INC. | | | | BY: | /s/ David S. Schorlemer | | | David S. Schorlemer | | | Executive Vice President, Chief Financial Officer, Secretary and Treasurer (Principal Financial Officer) |
Date: May 4,August 9, 2018
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