| Year | |
Contracts Receivable and Retainage Our customers include U.S. and, to a lesser extent, international energy producers, petrochemical, industrial, power, and marine operators, EPC companies and certain agencies of the U.S. government. Of our contracts receivable balance at September 30, 2018, $18.4 million was with two customers.
At September 30, 2018, we had an allowance for bad debt of $3.7 million within our contract receivable balance. During the three months ended September 30, 2018, we increased our allowance for bad debts by $2.8 million, which is included in general and administrative expenses on our Consolidated Statements of Operations and primarily relates to a customer within our Fabrication Division.
Contracts in Progress, and Advance Billings on Contracts and Accrued Contract Losses
Revenue recognition and customer invoicing for our fixed-price and unit-rate contracts may occur at different times. Revenue recognition is based upon our calculation of percent of work complete;estimated percentage-of-completion as discussed above; however, customer invoicing will generally depend upon a predetermined billing schedule as stated in the contractterms which could allowprovide for customer advance payments or invoicing based upon achievement of certain milestones.milestones or project progress. Revenue earned but not yet invoicedrecognized in excess of amounts billed is reflected as contracts in progress and included in current assets on our consolidated balance sheet. Billings made to our customersConsolidated Balance Sheets. Amounts billed in advanceexcess of revenue being earned arerecognized is reflected as advance billings on contracts and included in current liabilities on our balance sheet.Consolidated Balance Sheets. Contracts in progress totaled $40.2 million at JuneSeptember 30, 2018, totaled $36.5 million with $31.1$37.1 million relating to three major customers. Advance billings on contracts totaled $14.9 million at JuneSeptember 30, 2018, was $4.2with $11.2 million and included advances of $3.5 million from five major customers.relating to one customer. Accrued contract losses weretotaled $6.0 million and $7.6 million as of Juneat September 30, 2018 and December 31, 2017, respectively.
NOTE 4 – CONTRACTS RECEIVABLE AND RETAINAGE
Our customers include: (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 June 30, 2018, $12.3 million, or 38.4%, was with one customer. The significant projects for this one customer consist of offshore services related to repair, installation and hook-up work within our Services Division.
As of June 30, 2018, we included an allowance for bad debt of $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 54 – FAIR VALUE MEASUREMENTS The Company makesWe make fair value determinations by applying the following hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:
Level 1 - inputs are based upon quoted prices for identical instruments traded in active markets; Level 2 - inputs are based upon quoted prices for similar instruments in active markets and model-based valuation techniques for which all significant assumptions are observable in the market; and Level 3 - inputs are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. These include discounted cash flow models and similar valuation techniques. Recurring fair value measurements and financial instruments - The carrying amounts that we have reported for financial instruments, including cash and cash equivalents, held-to-maturity, short-term investments, accounts receivablescontracts receivable and accounts payables,payable, approximate their fair values.
Assets held for sale - We measure and record assets held for sale at the lower of their carrying amount or fair value less costs to sell. The determination of fair value generally requires the use of significant judgment. We have classified our assets at our Texas North Yard and a drydock within our Shipyard Division as assets held for sale at June 30, 2018.judgments. See Note 2 for further disclosure relating todiscussion of our assets held for sale.
On June 28, 2018, we agreed to a 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 assetssale 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 reviewed the remaining buildings and equipment at the Texas North Yard, and we impaired our Texas North Yard in total by $8.9 million, $5.1 million of which was previously recorded during the three months ended March 31, 2018, based upon our best estimate of the decline in thetheir associated 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. The impairments were calculated as management's estimated net proceeds from the sales less their net book 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 65 – EARNINGSLOSS PER COMMON SHARE AND SHAREHOLDERS' EQUITY Earnings per Share:
The following table sets forthpresents the computation of basic and diluted loss per share (in thousands, except for per share data)amounts): | | | | | | | | | | | | | | | | | | | 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 | ) |
| | | | | | | | | | | | | | | | | | | Three Months Ended September 30, | | Nine Months Ended September 30, | | | 2018 | | 2017 | | 2018 | | 2017 | | Basic and diluted | | | | | | | | | Net loss | $ | (10,949 | ) | | $ | (3,110 | ) | | $ | (15,696 | ) | | $ | (20,488 | ) | | Less: Distributed and undistributed loss (unvested restricted stock) | — |
| | (14 | ) | | — |
| | (100 | ) | | Net loss attributable to common shareholders | $ | (10,949 | ) | | $ | (3,096 | ) | | $ | (15,696 | ) | | $ | (20,388 | ) | Weighted-average shares (1) | 15,044 |
| | 14,852 |
| | 15,017 |
| | 14,821 |
| | Basic and diluted loss per common share | $ | (0.73 | ) | | $ | (0.21 | ) | | $ | (1.05 | ) | | $ | (1.38 | ) |
______________ (1) We have no dilutive securities.
NOTE 76 – LINE OF CREDIT We have a $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 basewith Hancock Whitney Bank that can be used for borrowings or letters of credit and general corporate purposes. We believe thatcredit. On August 27, 2018, we entered into a third amendment to our Credit Agreement, will provide us with additional working capital flexibilitywhich extended its maturity date from June 9, 2019 to expand operationsJune 9, 2020, and reduced the base tangible net worth requirement from $185.0 million to $180.0 million. The third amendment also removed the inclusion of 50% of Consolidated Net Income (as defined in the Credit Agreement) for each fiscal quarter and the inclusion of 50% of the gain on the sale of our South Texas Properties from our minimum tangible net worth covenant. Accordingly, our amended quarterly financial covenants during the term of the Credit Agreement are as backlog improves, respondfollows:
Ratio of current assets to market opportunitiescurrent liabilities of not less than 1.25:1.00; Minimum tangible net worth of at least the sum of $180.0 million, plus 100% of the proceeds from any issuance of stock or other equity after deducting any fees, commissions, expenses and support our ongoing operations. other costs incurred in such offering; and Ratio of funded debt to tangible net worth of not more than 0.50:1.00.
Interest on drawingsborrowings under the Credit Agreement may be designated, at our option, as either Basethe Wall Street Journal published Prime Rate (as defined in the Credit Agreement) or LIBOR plus 2%2.0% per annum. Unused commitmentCommitment fees on the undrawnunused portion of the Credit Agreement are 0.4% per annum, and interest on undrawn stated amounts underoutstanding letters of credit issued by the lender is 2%2.0% 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)North Yard).
At JuneSeptember 30, 2018, we had no amount outstanding borrowings under our Credit Agreement and we had$2.5 million of outstanding letters of credit, providing $37.5 million of $5.5 million leaving availability of $34.5 million.
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: |
| | 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 Juneavailable capacity. At September 30, 2018, we were in compliance with all of our financial covenants.
NOTE 87 - SEGMENT DISCLOSURES
We have structured our operations with four operating divisions, and one corporate non-operating division. We believe thatdivision, which represent our operating divisions and our corporate non-operating division each represent a reportable segment under GAAP. Our 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.segments. As part of our efforts to strategically reposition the Company (seeas discussed in Note 1),1, we may change how we manage the business which could result in a change inchanges to our reportingreportable segments in future periods. Our operating divisions and corporate non-operating divisionreportable segments at JuneSeptember 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)U.S.) as well as modules for petrochemical and industrial facilities. We perform these activities out ofat our fabrication yardsyard in Houma, Louisiana. As of the date of this Report, our Texas South Yard has been sold andSeptember 30, 2018, our Texas North Yard is held for sale.sale and our Texas South Yard had been sold. See Note 2 for further disclosure relating todiscussion of our South Texas Properties.
Shipyard Division - Our Shipyard Division primarily manufacturesfabricates 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 and related services onfor offshore platforms and inshore structures. Interconnect piping services involveinland structures, which includes 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 StatesU.S. for various on-site construction and maintenance activities. In addition, our Services Division fabricates packaged skid units and performs various municipalcivil and drainage projects, such as pump stations, levee reinforcement, bulkheads and other public works projectswork for state and local governments. We perform these services at customer facilities or at our services yard in Houma, Services Yard.Louisiana.
EPC Division - Late inOur EPC Division was created during the fourth quarter of2017 to manage expected work we will perform for the SeaOne Project and other projects that may require EPC project management services. During the fourth quarter 2017, SeaOne selected us as the prime contractor for the engineering, procurement, construction, installation, commissioning and start-up operations for theirits SeaOne Project. This project will include execution of engineering, construction and installation of modules for an export facility in Gulfport, Mississippi, and import facilities in the Caribbean and South America. Our current activities include pricing, planning and scheduling for the project. SeaOne’s selection of the Company is non-binding and commencement of the project remains subject to a number of conditions, including agreement on the terms of the engagement with SeaOne. We 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 itsfor the project. We are hopeful that the SeaOne Project will initiate planning and initial construction efforts in early 2019. We are strengtheningcontinue to enhance our internal project management capabilities through the hiring of additional personnel to service this potential project.
Corporate Division - Our Corporate Division primarily includesrepresents 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 developmentdivisions and accounting salaries are not allocated to theour operating divisions. Expenses that are not allocatedSuch expenses include, but are not limited to, costs related to executive management and directors' fees, clerical and administrative salaries, costs of maintaining theour corporate office and costs associated with overall governance and being a publicly traded company.
We generally evaluate the performance of, and allocate resources to, our operating divisions based upon revenue, gross profit (loss) and operating income (loss). Division assets are comprised of all assets attributable to each division. Corporate administrative costs and overhead expenses directly related to our operating divisions, or costs related to shared services incurred by our Corporate Division on behalf of our operating divisions, are allocated to ourthe four operating divisions for expenses that directly relate to the operations or relate to shareddivisions. Shared services as discussed above.include human resources, insurance, business development, information technology and accounting. Intersegment revenue is priced at the estimated fair value of work performed.
Summarized financial information concerningfor each of our divisions as of and for the three and sixnine months ended JuneSeptember 30, 2018 and 2017, is as follows (in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | Three Months Ended September 30, 2018 | | | Fabrication | Shipyard | Services | EPC | Corporate | Eliminations | Consolidated | | Revenue | $ | 2,311 |
| $ | 24,492 |
| $ | 22,617 |
| $ | 1,071 |
| $ | — |
| $ | (779 | ) | $ | 49,712 |
| | Gross profit (loss) | (4,032 | ) | (1,764 | ) | 3,191 |
| (205 | ) | (402 | ) | — |
| (3,212 | ) | | Operating income (loss) | (7,708 | ) | (2,460 | ) | 2,486 |
| (708 | ) | (2,494 | ) | — |
| (10,884 | ) | Total assets (1) | 100,115 |
| 92,839 |
| 37,201 |
| 2,217 |
| 30,585 |
| — |
| 262,957 |
| | Depreciation and amortization expense | 1,023 |
| 1,050 |
| 365 |
| — |
| 36 |
| — |
| 2,474 |
| | Capital expenditures | — |
| 783 |
| 545 |
| 142 |
| 1 |
| — |
| 1,471 |
| | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | Three Months Ended September 30, 2017 | | | Fabrication | Shipyard | Services | EPC | Corporate | Eliminations | Consolidated | | Revenue | $ | 18,318 |
| $ | 15,074 |
| $ | 17,651 |
| — |
| $ | — |
| $ | (1,159 | ) | $ | 49,884 |
| | Gross profit (loss) | 1,250 |
| (3,504 | ) | 1,912 |
| — |
| (152 | ) | — |
| (494 | ) | | Operating income (loss) | 472 |
| (4,392 | ) | 1,217 |
| — |
| (2,161 | ) | — |
| (4,864 | ) | Total assets (1) | 164,677 |
| 96,614 |
| 33,024 |
| — |
| 9,065 |
| — |
| 303,380 |
| | Depreciation and amortization expense | 1,133 |
| 1,030 |
| 413 |
| — |
| 95 |
| — |
| 2,671 |
| | Capital expenditures | 1,479 |
| 1,054 |
| 94 |
| — |
| 25 |
| — |
| 2,652 |
| | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | 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 | Nine Months Ended September 30, 2018 | | | Fabrication | Shipyard | Services | EPC | Corporate | Eliminations | Consolidated | Fabrication | Shipyard | Services | EPC | Corporate | Eliminations | Consolidated | | Revenue | $ | 25,860 |
| $ | 42,185 |
| $ | 44,075 |
| $ | 955 |
| $ | — |
| $ | (1,771 | ) | $ | 111,304 |
| $ | 28,171 |
| $ | 66,677 |
| $ | 66,692 |
| $ | 2,026 |
| $ | — |
| $ | (2,550 | ) | $ | 161,016 |
| | Gross profit (loss) | (1,886 | ) | (3,799 | ) | 6,199 |
| 235 |
| (769 | ) | — |
| (20 | ) | (5,918 | ) | (5,563 | ) | 9,390 |
| 30 |
| (1,171 | ) | — |
| (3,232 | ) | | Operating income (loss) | (4,821 | ) | (5,192 | ) | 4,703 |
| (667 | ) | (5,204 | ) | — |
| (11,181 | ) | (12,529 | ) | (7,652 | ) | 7,189 |
| (1,375 | ) | (7,698 | ) | — |
| (22,065 | ) | Total assets (1) | 101,498 |
| 88,305 |
| 35,197 |
| 888 |
| 30,801 |
| — |
| 256,689 |
| 100,115 |
| 92,839 |
| 37,201 |
| 2,217 |
| 30,585 |
| — |
| 262,957 |
| | Depreciation and amortization expense | 2,196 |
| 2,120 |
| 776 |
| — |
| 268 |
| — |
| 5,360 |
| 3,219 |
| 3,170 |
| 1,141 |
| — |
| 304 |
| — |
| 7,834 |
| | Capital expenditures | — |
| 659 |
| 163 |
| — |
| 69 |
| — |
| 891 |
| — |
| 1,442 |
| 708 |
| 142 |
| 70 |
| — |
| 2,362 |
|
| | | | Six Months Ended June 30, 2017 | Nine Months Ended September 30, 2017 | | | Fabrication | Shipyard | Services | EPC | Corporate | Eliminations | Consolidated | Fabrication | Shipyard | Services | EPC | Corporate | Eliminations | Consolidated | | Revenue | $ | 24,199 |
| $ | 36,724 |
| $ | 26,107 |
| $ | — |
| $ | — |
| $ | (3,170 | ) | $ | 83,860 |
| $ | 42,517 |
| $ | 51,798 |
| $ | 43,758 |
| $ | — |
| $ | — |
| $ | (4,328 | ) | $ | 133,745 |
| | Gross profit (loss) | (1,034 | ) | (15,556 | ) | 423 |
| — |
| (351 | ) | — |
| (16,518 | ) | 216 |
| (19,061 | ) | 2,335 |
| — |
| (500 | ) | — |
| (17,010 | ) | | Operating loss | (2,688 | ) | (17,892 | ) | (890 | ) | — |
| (4,007 | ) | — |
| (25,477 | ) | | | Operating income (loss) | | (2,216 | ) | (22,285 | ) | 327 |
| — |
| (6,165 | ) | — |
| (30,339 | ) | Total assets (1) | 164,211 |
| 98,393 |
| 30,592 |
| — |
| 14,390 |
| — |
| 307,586 |
| 164,677 |
| 96,614 |
| 33,024 |
| — |
| 9,065 |
| — |
| 303,380 |
| | Depreciation and amortization expense | 4,287 |
| 2,004 |
| 854 |
| — |
| 331 |
| — |
| 7,476 |
| 5,420 |
| 3,034 |
| 1,266 |
| — |
| 421 |
| — |
| 10,141 |
| | Capital expenditures | 848 |
| 818 |
| 106 |
| — |
| 52 |
| — |
| 1,824 |
| 2,327 |
| 1,872 |
| 199 |
| — |
| 117 |
| — |
| 4,515 |
|
_______________ 1)(1) Intercompany balances have been excluded.
NOTE 98 – COMMITMENTS AND CONTINGENCIES
The Company isWe are 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 StatesU.S. and the Jones Act. While the outcome of these lawsuits, legal proceedings and claims cannot be predicted with certainty, management believeswe believe that the outcome of any such proceedings, even if determined adversely, would not have a material adverse effect on theour financial position, results of operations or cash flows of the Company.flows.
MPSV Termination Letter
We received a noticenotices of purported termination from a customer within our Shipyard Division related toof the contracts for the construction of two MPSVs.MPSVs from one of our Shipyard Division customers. We dispute the purported terminationterminations and disagree with the customer’s reasons for same.such terminations. Pending the resolution of the dispute, we have ceased all work has been stopped and the vesselspartially completed MPSVs and associated equipment and material are in our care and custodymaterials remain at our shipyard in Houma, Louisiana. The customer hasalso notified our Surety of its intent to require completionpurported terminations of the vesselconstruction contracts and made claims under the Surety's bond.bonds issued by the Surety in connection with the construction of the two MPSVs. We have notified and met with our Surety regarding our disagreement with, ourand objection to, the customer's purported termination and its claims. DiscussionDiscussions with the Surety are ongoing. The Company will continueOn October 2, 2018, we filed a lawsuit against the customer to enforce itsour rights and remedies under the agreementsapplicable construction contracts. Our lawsuit disputes the propriety of the customer’s purported termination
of the construction contracts and defend any claims asserted againstseeks to recover damages associated with the Company by its customer. Management iscustomer’s actions. We are unable to estimate the probability of a favorable or unfavorable outcome as well as anwith respect to the dispute or estimate the amount of potential loss, if any, atrelated to this time.matter. We cannot guaranteecan provide no assurances that we will not incur additional costs as we negotiate with this customer.pursue our rights and remedies under the contracts. At JuneSeptember 30, 2018, our net balance sheet exposureposition for the contracts was $12.4$12.5 million.
Project Award Protest
During the first quarter 2018, we executed a contract for the construction and delivery of one towing, salvage and rescue ship vessel with the U.S. Navy for $63.6 million, with an option for seven additional vessels, which was subsequently protested by one of the unsuccessful bidders. On July 16, 2018, we were notified that the award was upheld by the U.S. Government Accountability Office and we were given a notification to proceed. On August 6, 2018, we were notified that the unsuccessful bidder had filed a subsequent protest with the Department of Justice. On August 9, 2018, we were granted a partial stay, which allows us to proceed with pre-construction design development, planning, scheduling and material ordering. Construction of the vessel cannot begin until a final ruling is issued by the U.S. Court of Federal Claims. We are working with the U.S. Navy to re-establish a timeline for construction under this contract.
NOTE 109 – SUBSEQUENT EVENTS
During the first quarter ofOn October 2, 2018, we executedfiled a contractlawsuit against a customer to enforce our rights and remedies under the applicable construction contracts for the construction of two MPSVs. See Note 8 for further discussion of our dispute and 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.lawsuit.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. The following “Management’s Discussion and Analysis of Financial Condition and Results of Operations” is provided to assist readers in understanding our financial performance during the periods presented and significant trends that may impact our future performance. This discussion should be read in conjunction with our Consolidated Financial Statements and the related notes thereto.
Cautionary Statement on Forward-Looking Information This Report contains forward-looking statements in which we discuss our potential future performance, primarily in the section 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, advancement on the SeaOne Project, ability to resolve the dispute with a customer relating to the purported termination of contracts to build two 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 or loss under the percentage-of-completion method, loss of key personnel, compliance with regulatory and environmental laws, ability to utilize navigation canals, performance of subcontractors,sub-contractors, 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 SummaryOverview
We are a leading fabricator of complex steel structures, modules and marine vessels used in energy extraction and production, petrochemical and industrial facilities, power generation, and alternative energy projects and shipping and marine transportation operations. We also provide related project management for EPC projects along with installation, hookup, commissioning and repair and maintenance services with specialized crewsservices. In addition, we perform civil, drainage and integrated project management capabilities.other work for state and local governments. Our customers include U.S. and, to a lesser extent, international energy producers, petrochemical, industrial, power, and marine operators, EPC companies and agencies of the United States Government.U.S. Government. We operate and manage our business through four operating divisions:divisions, and one non-operating division, which represent our reportable segments. Our operating divisions include: Fabrication, Shipyard, Services and 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, andAt September 30, 2018, our Texas North Yard is held for sale.sale and our Texas South Yard had been sold.
Beginning in 2015 and through the date of this Report, we have implemented a number of initiativesWe continue to strategically repositionposition the Company to attract new customers, participate in the buildupfabrication of petrochemical and industrial facilities, pursue offshore wind markets,opportunities, enter the EPC industry and diversify our customerscustomer base within all of our Shipyard Division. Additionally,operating divisions. In addition, we initiatedcontinue to focus on maintaining liquidity and securing meaningful new contract awards and backlog in the near-term, and generating operating income and cash flow from operations in the longer-term. We have made significant progress in our efforts to rebuildimprove our liquidity, preserve cash and lowerincluding reductions in costs including(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 certainofficers) and the divestiture of underutilized assets.
Sales of Assets
In early 2017, we announced our plan to rationalize underutilized assets includingTexas South Yard - During the two fabrication yards and related equipment located at our South Texas Properties.
On April 20,second quarter 2018, we closed oncompleted the sale of our Texas South Yard for $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 $0.8 million of previously received earnest money. Thefor total net proceeds received rebuilt our liquidity, provided support for upcoming projects, continued investment in our 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 recognized a gain on sale during the second quarternine-months ended September 30, 2018 of 2018 related to this transactionapproximately $53.5 million and a gain of approximately $3.9 million. Completing the sale of the
Texas SouthNorth Yard was- On September 26, 2018, we entered into an important liquidity generating event and will facilitate the Company’s continued strategic repositioning from offshore oil and gas marketsagreement to a more diversified customer base. We continue to marketsell our Texas North Yard and hopecertain associated equipment for $28.0 million. We received $0.5 million during the third quarter 2018 as a deposit on the property, which is refundable under certain circumstances. The sale is anticipated to haveclose during the fourth quarter 2018 and is subject to customary closing conditions, including the purchaser’s right to conduct inspections of the property related to confirmation of title, surveys, environmental conditions, easements and access rights and third-party consents. Based on the sales price and estimated closing and other costs, we expect to realize a negotiated contract forgain on the sale oftransaction upon closing. We can provide no assurances that we will successfully close the transaction, that closing will occur under our expected timeline or that we will achieve our estimated net proceeds or a gain on the sale. We continue to actively market the remaining Texas North Yard in the near future.assets held for sale, which primarily consist of three 660-ton crawler cranes, a barge, a plate bending roll machine and panel line equipment.
Hurricane Harvey Insurance Recoveries - During the secondthird quarter of 2018, we recorded an impairment of $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. The impairments were calculated as management's estimated net proceeds from the sales less their net book values.
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,Harvey. During the second quarter 2018, we agreed to a global settlement with our insurance carriers in the amountfor total insurance recoveries 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 representsresulting in 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.
Anet 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 quarternine months ended September 30, 2018. As of September 30, 2018, primarily related to two buildings that were declared a total loss and five damaged cranes that were soldall insurance proceeds had been received, including $7.2 million received during the secondthird 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 best estimate of the decline in the fair value of the property and related equipment. The insurance recovery fully offset this amount.
Ongoing Efforts to Increase Our Backlog, Diversify of Our Customer Base and Resolve Customer Dispute
PetrochemicalPursuit of petrochemical and industrial fabrication work - During the second quarter of 2018, we completed the fabrication and timely delivery of four modules for a new petrochemical facility. We delivered thesecurrently have several bids outstanding for the fabrication of modules on time. Weand continue to search forpursue additional fabrication work in the petrochemical industry to add to our current backlog.and industrial industries.
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 wind turbine pedestals for the first offshore wind power project in the United StatesU.S. 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 meteorological tower and platform for a customer'san offshore wind project located off the U.S. coast of Maryland. We completed theThe fabrication work was completed in the second quarter of 2018 and have included invoiced amounts in contracts receivable on our Consolidated Balance Sheet. This project was relatively small; however, it represents our continued ability to provide structures for this emerging industry. We may also partner with other companies to take advantage of growth in this area. Wearea and have executed a teaming agreement with the EEW Group to sourcepursue future U.S. offshore wind projects. There isWe can provide no guaranteeassurances that we will be successful in participating in any of theseobtaining future projects.wind project awards from this arrangement.
Diversification of our Shipyard Division customer base - We continue to be successful in our effortsare continuing to diversify our capabilitiescustomer base within our Shipyard Division.operating divisions. Specifically:
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, 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 thuswe were given a notification to proceed. WeOn August 6, 2018, we were recently notified that thisthe unsuccessful bidder hashad filed a subsequent protest with the Department of Justice. We have beenOn August 9, 2018, we were granted a partial stay, which allows us to proceed with pre-construction design development, planning, scheduling and material ordering leading up to the start of construction. Actual constructionordering. Construction of the vessel cannot begin until a final ruling is issued by the DepartmentU.S. Court of Justice.Federal Claims. We are in process of working with the U.S. Navy to re-establish a timeline for construction under this contract.
WeDuring the second quarter 2018, we signed change orders on May 1, 2018, with two different customers. Each change order wascustomers for the construction of one additional harbor tug boat for each customer. Each change order was approximately $13.0 million per boat. Each customer has an additional option for one more harbor tug boat.million. We are now constructing a total of five harbor tug boats for each customer. If
During the additional options are exercised,third quarter 2018, we signed a contract for the expansion and delivery of a 245-guest paddle wheel riverboat. The paddle wheel boat will buildbe built using the existing hull of 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 firstformer gaming vessel was awardedbuilt in July of 2017 which included options for two additional vessels.
1995.
Continued growth withinof our Services Divisionservices related work - Generally, we believe demandDemand for our Services Division will increase in 2018 beyond the contractual backlog amount in place as of June 30, 2018. Workservices associated with offshore tie-backs, upgrades and maintenance remains strong.strong, and we anticipate it will continue for the remainder of 2018 and into 2019. We will continue to pursue opportunities within the offshore/inshorefor offshore and onshore plant expansion and maintenance programs as well as targeting growth of developing fieldsand have targeted service opportunities within the shale basins in West Texas.
OurPursuit of EPC Divisionwork - As discussed in ourDuring the fourth quarter 2017, Annual Report, we wereSeaOne 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. Our current activities include pricing, planning and scheduling for the project. SeaOne’s selection of usthe Company is non-binding and commencement of the project remains subject to a number of conditions, including agreement on terms of the engagement with SeaOne. In anticipationWe understand that SeaOne is in the process of this project advancing, we are enhancingsecuring financing for the project. We continue to enhance our internal project management capabilities through the hiring of additional personnel to service this potential project. We received an additional early works purchase order from SeaOne for approximately $1.2 million. We continue to work with SeaOne on finalizing initial 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 initial construction efforts in early 2019.
Completion of our MPSV contract dispute - As previously disclosed, on March 19, 2018,discussed in Note 8 to our Consolidated Financial Statements, we received a noticenotices of purportedtermination from a customer within our Shipyard Division related toof the contracts for the construction of two MPSVs.MPSVs from one of our Shipyard Division customers. We dispute the purported terminationterminations and disagree with the customer’s reasons for same.such terminations. Pending the resolution of the dispute, we have ceased all work has been stopped and the vessels
partially completed MPSVs and associated equipment and material are in our care and custodymaterials remain at our shipyard in Houma, Louisiana. The customer hasalso notified our Surety of its intent to require completionpurported terminations of the vesselconstruction contracts and made claims under the Surety's bond.bonds issued by the Surety in connection with the construction of the two MPSVs. We have notified and met with our Surety regarding our disagreement with, ourand objection to, the customer's purported termination and its claims. Discussions with the Surety are ongoing. The Company will continueOn October 2, 2018, we filed a lawsuit against the customer to enforce itsour rights and remedies under the agreementsapplicable construction contracts. Our lawsuit disputes the propriety of the customer’s purported termination of the construction contracts and defend any claims asserted againstseeks to recover damages associated with the Company by its customer. Management iscustomer’s actions. We are unable to estimate the probability of a favorable or unfavorable outcome as well as anwith respect to the dispute or estimate the amount of potential loss, if any, atrelated to this time.matter. We cannot guaranteecan provide no assurances that we will not incur additional costs as we negotiate with this customer. At June 30, 2018,pursue our net balance sheet exposure was $12.4 million.rights and remedies under the contracts.
Outlook
Looking forward, our results of operations will be affected primarily by the overall demand and market for our services and the overall number of projects in the market place. As discussed above,services. In recent years, a significant portion of our historical customer base has been impactednegatively affected by the continued level ofa decline in offshore oil and gas exploration and development activity for oilas companies focus on onshore development opportunities. As a result, and gas. Weas discussed above, we have implemented a number of initiatives to strategically reposition the Company to attract new customers, participate in the buildupfabrication of petrochemical and industrial facilities, pursue offshore wind markets,opportunities, enter the EPC industry, and diversify our customers within all of our Shipyard Division.operating divisions. The success of ourthese initiatives to strategically reposition the Company and our future operations will be determined by:by, among other things:
The level of new construction and fabrication projects in the new markets we are pursuing, including petrochemical and industrial facilities and offshore wind;
OurThe ability of SeaOne to obtain financing and our successful execution of an agreement with SeaOne andfor the ability of SeaOne to obtain financing;
Project;
Continued growth within our Shipyard and Services divisions;
Divisions;
Our ability to winsecure contracts through competitive bidding or alliance/partnering arrangements;
Our ability to execute projects in accordance withwithin our cost estimates and successfully manage them through completion; and
Our ability to resolve aour dispute over purportedwith a Shipyard customer related to the construction of two MPSVs.
We continue to respond to the competitive forcesenvironment within our industry and continue to actively compete for additional bidding opportunities. We have increased our backlog within our Shipyard, Fabrication and Services Divisions and believe that we will be successful securing new project awards and growing our backlog. However, our operations will be negatively impacted in obtainingthe near term due to an anticipated lag in the commencement of fabrication activities for our recent and anticipated 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 inawards. Further, our Shipyard and Services Divisions, these backlogprevious project awards were receivedsold 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 weinjury. We are committed to safety. Wethe safety of our employees and believe safetyit is a key metric forto 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 measuresmetrics 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 useused 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 ofto our critical accounting policies since December 31, 2017.
New Awards and Backlog New project awards represent the expected revenue value of new contract commitments received during a given period, as well as scope growth on existing commitments. New contract commitments represent contracts for which a customer has authorized us to begin work or purchase materials pursuant to written agreement, letters of intent or other forms of authorization. Backlog represents the unearned value of our new project awards and may differ from the value of future performance obligations for our contracts required to be disclosed under Topic 606, and presented in Note 3 to our Consolidated Financial Statements. We believe that backlog, a non-GAAP financial measure, provides useful information to investors. Backlog differs from the GAAP requirement to disclose futureincludes our 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 secured subsequent to the balance sheet date pursuant to letters of intent or other forms of authorization as well asat September 30, 2018, plus 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, representsbut represent future work that management believes is probablewe believe will be performed. New project awards and backlog may vary significantly each reporting period based on the timing of being performed.our major new contract commitments. 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 generally exclude suspended projects from contract backlog when they are expected to be suspended more than 12twelve 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 projectcontract could significantly reduce our backlog and could have a material adverse effect on future revenue, net income (loss)operating results and cash flow.flows. A reconciliation of our future revenue performance obligations under Topic 606 of the ASC (the most comparable GAAP measure as includedpresented in Note 3 of the Notes to our Consolidated Financial Statements) to our reported backlog is provided below (in thousands).
| | | | June 30, 2018 | September 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 | $ | 1,871 |
| | $ | 295,506 |
| | $ | 7,607 |
| | $ | 1,618 |
| | $ | (193 | ) | | $ | 306,409 |
| | | Contracts signed subsequent to June 30, 2018 | — |
| | — |
| | 9,788 |
| | 1,200 |
| | — |
| | 10,988 |
| | | Future performance obligations under Topic 606 | | $ | 44,746 |
| | $ | 282,912 |
| | $ | 11,699 |
| | $ | 836 |
| | $ | — |
| | $ | 340,193 |
| Signed contracts under purported termination (1) | — |
| | 30,157 |
| | — |
| | — |
| | — |
| | 30,157 |
| — |
| | 30,148 |
| | — |
| | — |
| | — |
| | 30,148 |
| | Backlog | $ | 1,871 |
| | $ | 325,663 |
| | $ | 17,394 |
| | $ | 2,818 |
| | $ | (193 | ) | | $ | 347,553 |
| $ | 44,746 |
| | $ | 313,060 |
| | $ | 11,699 |
| | $ | 836 |
| | $ | — |
| | $ | 370,341 |
| | | | | | | | | | | | | | | | | | | | | | | | |
___________ | | | (1) | Includes backlog for a customer for which we have received a notice of purported termination within our Shipyard Division pursuant to a purported notice of termination from our customer related to contracts for the construction of two MPSVs. We dispute the purported termination and disagree with the customer’s reasons for the same. We cannot guaranteecan provide no assurances that we will be able to favorably negotiatereach a favorable resolution with the customer for completion of the MPSVs with this customer.MPSVs. See Note 98 to our Consolidated Financial Statements for further discussion of the Notes to Consolidated Financial Statements.dispute. |
Our backlog at JuneSeptember 30, 2018 as compared toand December 31, 2017, consisted of the following (in thousands, except for percentages)thousands): | | | | | | | | | | | | | | |
| September 30, 2018 |
| December 31, 2017 | | Division | Amount | | Labor hours | | Amount | | Labor hours | | Fabrication | $ | 44,746 |
| | 220 |
| | $ | 15,771 |
| | 150 |
| | Shipyard | 313,060 |
| | 1,741 |
| | 184,035 |
| | 1,104 |
| | Services | 11,699 |
| | 158 |
| | 23,181 |
| | 290 |
| | EPC | 836 |
| | — |
| | — |
| | — |
| | Intersegment eliminations | — |
| | — |
| | (370 | ) | | — |
| Total (1) | $ | 370,341 |
| | 2,119 |
| | $ | 222,617 |
| | 1,544 |
|
Backlog at September 30, 2018 is expected to be recognized as revenue in the following periods (in thousands):
| | | | | | | | | | | | |
| 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) | ___________
| | | (1) | At JuneSeptember 30, 2018, projects forsix customers represented approximately 89% of our backlog, and at December 31, 2017, four largest customers in termsrepresented approximately 73% of revenueour backlog. At September 30, 2018, backlog from the six customers consisted of: |
| | | (i) | newbuildNewbuild construction of five harbor tugs for one customer (to be completed in 2018 through 2020); |
| | | (ii) | newbuildNewbuild construction of five harbor tugs for one customer (separate from above) (to be completed in 20182019 through 2020); |
| | | (iii) | newbuildNewbuild construction of two offshore marineregional class research vessels (both to be completed in 2021); |
| | | (iv) | Newbuild construction of one towing, salvage and rescue ship vessel (to be completed in 2020 and 2022)2021). During the first quarter 2018, we executed a contract 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. Construction of the vessel cannot begin until a final ruling is issued by the U.S. Court of Federal Claims. See Note 8 to our Consolidated Financial Statements for further discussion. We are working with the U.S. Navy to re-establish a timeline for construction under this contract; |
| | | (v) | Expansion of a 245-guest paddle wheel riverboat (to be competed in 2020); and |
| | (iv)(vi) | newbuildNewbuild construction of one T-ATS vessel (to be completedtwo MPSV's. We are currently in 2021). This contract was protested by onedispute with our customer pursuant to a purported notice of termination related to these contracts. We dispute the purported termination and disagree with the customer’s reasons for the same. We can provide no assurances that we will reach a favorable resolution with the customer for completion of the unsuccessful bidders. On July 16, 2018, we were notified thatMPSVs. See Note 8 to our Consolidated Financial Statements for further discussion of 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. dispute. |
| | | (2) | The timing of recognition of the revenue represented in our backlog is based on management’sour 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. We do not include options in our backlog above.backlog. If all options under our current contracts were exercised by our customers, our backlog would increase by $562.7approximately $534.0 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 from our customers related to the exercise of these options, from our customers, and we can provide no assuranceassurances that any or all of these options will be exercised. As we addour backlog increases, we will add personnel with critical project management and fabrication skills to ensure we have the resources necessary to properly 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 JuneAt September 30, 2018, we had 847816 employees compared to 977 employees as ofat December 31, 2017. Labor hours worked were 947,0001.4 million during the sixnine months ended JuneSeptember 30, 2018, compared to 11.5 million for the sixnine months ended JuneSeptember 30, 2017. The decrease in our labor hours worked is primarily within our Fabrication Division due to completion of complex modules for the construction of a new petrochemical plantfacility with no immediate replacement backlog for our Fabrication backlogDivision during the 2018 period, as well as the suspension of construction of the two MPSVs within our Shipyard Division pending resolution of ourthe dispute over termination with our MPSV customer. ThisSee Note 8 to our Consolidated Financial Statements for further discussion of the dispute.This decrease 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 JuneSeptember 30, 2018, Compared to Three Months Ended JuneSeptember 30, 2017 (in thousands, except for percentages): Consolidated | | | | Three Months Ended June 30, | | Increase or (Decrease) | Three Months Ended September 30, | | Increase (Decrease) | | | 2018 | | 2017 | | Amount | Percent | 2018 | | 2017 | | Amount | | Percent | | Revenue | $ | 54,014 |
| | $ | 45,868 |
| | $ | 8,146 |
| 17.8% | $ | 49,712 |
| | $ | 49,884 |
| | $ | (172 | ) | | (0.3)% | | Cost of revenue | 54,713 |
| | 57,488 |
| | (2,775 | ) | (4.8)% | 52,924 |
| | 50,378 |
| | 2,546 |
| | 5.1% | | Gross loss | (699 | ) | | (11,620 | ) | | 10,921 |
| 94.0% | (3,212 | ) | | (494 | ) | | (2,718 | ) | | (550.2)% | | Gross loss percentage | (1.3 | )% | | (25.3 | )% | | | | (6.5 | )% | | (1.0 | )% | | | | | General and administrative expenses | 5,092 |
| | 4,640 |
| | 452 |
| 9.7% | 7,672 |
| | 4,370 |
| | 3,302 |
| | 75.6% | | Asset impairment | 610 |
| | — |
| | 610 |
| 100.0% | | | Operating loss | (6,401 | ) | | (16,260 | ) | | 9,859 |
| 60.6% | (10,884 | ) | | (4,864 | ) | | (6,020 | ) | | (123.8)% | | 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% | | | Interest income (expense), net | | 72 |
| | (45 | ) | | 117 |
| | 260.0% | | Other income, net | | 140 |
| | 38 |
| | 102 |
| | 268.4% | | Net loss before income taxes | | (10,672 | ) | | (4,871 | ) | | (5,801 | ) | | (119.1)% | | Income tax expense (benefit) | 83 |
| | (5,749 | ) | | 5,832 |
| 101.4% | 277 |
| | (1,761 | ) | | 2,038 |
| | 115.7% | | Net income (loss) | $ | 549 |
| | $ | (10,923 | ) | | $ | 11,472 |
| 105.0% | | | Net loss | | $ | (10,949 | ) | | $ | (3,110 | ) | | $ | (7,839 | ) | | (252.1)% |
Revenue - Our revenueRevenue for the three months ended JuneSeptember 30, 2018 and 2017, was $54.0$49.7 million and $45.9$49.9 million, respectively, representing an increasea decrease of 17.8%0.3%. The increase isRevenue for the 2018 period approximated revenue for the 2017 period primarily due to lower revenue for our Fabrication Division of $16.0 million attributable to:to the completion and delivery of four modules for a petrochemical facility in the second quarter 2018, which was substantially offset by:
AnA $5.0 million increase of $6.8 millionin revenue within our Services Division fromdue to additional demand for onshore and offshore oil and gas service related projects; and
AnA $9.4 million net increase of $5.3 millionin revenue within our Shipyard Division relateddue to additional progress on the newbuild construction of ten harbor tug vessels and an offshore marine research vessel which wereice-breaker tug that was not under construction during the secondthird quarter of 2017, and $10.2 million in contract losses recorded during the three months ended June 30, 2017, which reducedoffset partially by lower revenue from 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 wasMPSV contracts that were suspended during the secondfirst quarter 2018. See Note 8 to our Consolidated Financial Statements for further discussion 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 completion of four modules for a petrochemical plant in April 2018.MPSV contracts.
Gross loss - Our grossGross loss for the three months ended JuneSeptember 30, 2018 and 2017, was $0.7$3.2 million compared to a(6.5% of revenue) and $0.5 million (1.0% of revenue), respectively. The gross loss of $11.6 million forduring the three months ended June 30, 2017. The improvement2018 period was primarily due to increased revenueunder recovery of our overhead costs (including holding costs for our Texas North Yard of $0.7 million) and the impact of lower margin backlog within our Services Division as discussed above and a lower gross loss from our Shipyard Division related to $10.2previous project awards sold during a period of competitive pricing. The increase in gross loss relative to the prior period was primarily due to a higher gross loss for our Fabrication Division of $5.3 million related to decreased fabrication revenue, offset partially by:
A decrease in gross loss within our Shipyard Division of $1.7 million due to increased revenue, a reduction in overhead costs, and the prior period including $2.1 million in contract losses recorded during the three months ended June 30, 2017, reflectingrelated to cost overruns and re-work identifiedincreases 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 expensesMPSVs; and Increased gross profit within our Fabrication Division.Services Division of $1.3 million due to increased revenue and higher recovery of our overhead costs.
General and administrative expenses - Our general and administrative expenses were $5.1 million for the three months ended June 30, 2018, compared to $4.6 million for the three months ended June 30, 2017. The increase in generalGeneral and administrative expenses for the three months ended JuneSeptember 30, 2018 and 2017, were $7.7 million (15.4% of revenue) and $4.4 million (8.8% of revenue), respectively, representing an increase of 75.6%. The increase was primarily attributabledue to:
Build-upBad debt expense of additional personnel for$2.8 million related to a contracts receivable reserve recorded during the third quarter 2018 within our newly created EPCFabrication Division in anticipationas we received indications that collectability of the SeaOne Project;receivable was no longer probable;
Increased legal and advisory fees related to customer disputes,disputes;
Costs associated with the evaluation of strategic planningalternatives and diversification ofinitiatives to diversify our business; and Increased employee incentives accruals related toAn increase in administrative personnel for our safety incentive program and higher employee profitability incentives within our Servicesnewly created EPC Division.
This wasThese increases were offset partially offset by cost reductions and continued cost minimization efforts implemented by management for the second quarter of 2017.headcount reductions.
Interest expense,income (expense), net - Interest expense,income (expense), net decreased due to fewer letters of credit issued under our Credit Agreement for the three months ended JuneSeptember 30, 2018 compared to the three months ended June 30,and 2017, as well as increasedwas income of $72,000 and expense of $45,000, respectively. The net interest income for the 2018 period was primarily due to interest earned from investments in cash equivalents and held-to-maturity, short-term investments during the three months ended June 30, 2018.investments.
Other income, (expense)net - - Other income, net was $7.1 million for the three months ended June 30, 2018, compared to other expense, net of $0.3 million for the three months ended June 30, 2017. Other income, net for the three months ended JuneSeptember 30, 2018 isand 2017, was income of $0.1 million and $38,000, respectively. Other income, net for the period was primarily due to a gainnet gains on the salesales 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.assets.
Income tax expense (benefit) - Our effective incomeIncome tax rateexpense (benefit) for the three months ended JuneSeptember 30, 2018 and 2017, was expense of 13.1%, compared to an effective tax rate$0.3 million and benefit of 34.5% for the comparable period during 2017.$1.8 million, respectively. Current expense represents state income taxes. No federal tax within our Services Division. The decrease inbenefit was recorded during the effective tax rate is the result of2018 period as a full valuation allowance was recorded against our net NOL deferred tax assets.assets generated during the period. See Note 1 of the Notes to our Consolidated Financial Statements regardingfor further discussion of our NOLs and deferred tax assets.
Operating Segments
The results of our four operating divisions and non-operating corporate division for the three months ended JuneSeptember 30, 2018 and 2017, are presented below (in thousands, except for percentages).
| | | Fabrication | | Three Months Ended June 30, | | Increase or (Decrease) | | Three Months Ended September 30, | | Increase (Decrease) | | | | 2018 | | 2017 | | Amount | | Percent | | 2018 | | 2017 | | Amount | | Percent | | Revenue | | $ | 8,590 |
| | $ | 13,990 |
| | $ | (5,400 | ) | | (38.6)% | | $ | 2,311 |
| | $ | 18,318 |
| | $ | (16,007 | ) | | (87.4)% | | Gross profit (loss) | | (1,667 | ) | | 1,931 |
| | (3,598 | ) | | (186.3)% | | (4,032 | ) | | 1,250 |
| | (5,282 | ) | | (422.6)% | | Gross profit (loss) percentage | | (19.4 | )% | | 13.8 | % | | | |
| | (174.5 | )% | | 6.8 | % | | | |
| | General and administrative expenses | | 951 |
| | 833 |
| | 118 |
| | 14.2% | | 3,676 |
| | 778 |
| | 2,898 |
| | 372.5% | | Asset impairment | | 610 |
| | — |
| | 610 |
| | 100.0% | | | Operating income (loss) | | (3,227 | ) | | 1,098 |
| | (4,325 | ) | |
| | (7,708 | ) | | 472 |
| | (8,180 | ) | |
|
Revenue - Revenue from our Fabrication Division decreased $5.4 million for the three months ended JuneSeptember 30, 2018 compared to the three months ended June 30, 2017.and 2017, was $2.3 million and $18.3 million, respectively, representing a decrease of 87.4%. The decrease is attributablewas primarily due to the completion and delivery of four modules for a petrochemical plantfacility during Aprilthe second quarter 2018, with very little immediate replacement backlog started asno significant projects under construction during the third quarter 2018. We were awarded a resultnew project for the expansion of a paddle wheel riverboat during the temporary impacts from previously depressed oil and gas prices.third quarter 2018 that will be constructed by our Fabrication Division; however, construction did not commence until the fourth quarter 2018.
Gross profit (loss) - Gross loss from our Fabrication Divisionprofit (loss) for the three months ended JuneSeptember 30, 2018 and 2017, was $1.7a gross loss of $4.0 million compared to(174.5% of revenue) and a gross profit of $1.9$1.3 million for the three months ended June 30, 2017.(6.8% of revenue), respectively. The gross loss during the 2018 period was primarily due to under recovery of our overhead costs (including holding costs for our Texas North Yard of $0.7 million). The gross loss for 2018 relative to the prior period gross profit was primarily due to decreased revenue, with minimal new fabrication work started during the second quarter of 2018 as discussed above.offset partially by a reduction in overhead costs.
General and administrative expenses - General and administrative expenses for our Fabrication Division increased $0.1 million for the three months ended JuneSeptember 30, 2018 compared to the three months ended June 30, 2017.and 2017, were $3.7 million (159.1% of revenue) and $0.8 million (4.2% of revenue), respectively, representing an increase of 372.5%. The increase iswas primarily due to an increase in legalbad debt expense of $0.4$2.8 million for ourrelated to a contracts receivable reserve recorded during the third quarter 2018 as we received indications that collectability of the receivable was no longer probable and higher legal and advisory fees related to the pursuit of claims against a customer related tofor disputed change orders for a large deepwater project we deliveredcompleted prior to our customer in November 20152017, offset partially offset by decreases in 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.
Asset impairment - We recorded an impairment of $0.6 million during the three months ended June 30, 2018, primarily related to a piece of equipment at our Texas North 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 June 30, 2017, within our Fabrication Division.headcount reductions.
| | | Shipyard | | Three Months Ended June 30, | | Increase or (Decrease) | | Three Months Ended September 30, | | Increase (Decrease) | | | | 2018 | | 2017 | | Amount | | Percent | | 2018 | | 2017 | | Amount | | Percent | Revenue (1) | | $ | 23,620 |
| | $ | 18,303 |
| | $ | 5,317 |
| | 29.0% | | $ | 24,492 |
| | $ | 15,074 |
| | $ | 9,418 |
| | 62.5% | Gross loss (1) | | (2,776 | ) | | (13,851 | ) | | 11,075 |
| | 80.0% | | (1,764 | ) | | (3,504 | ) | | 1,740 |
| | 49.7% | | Gross loss percentage | | (11.8 | )% | | (75.7 | )% | | | |
| | (7.2 | )% | | (23.2 | )% | | | |
| | General and administrative expenses | | 597 |
| | 983 |
| | (386 | ) | | (39.3)% | | 696 |
| | 888 |
| | (192 | ) | | (21.6)% | Operating loss (1) | | (3,374 | ) | | (14,834 | ) | | 11,460 |
| |
| | (2,460 | ) | | (4,392 | ) | | 1,932 |
| |
|
___________ | | | (1) | Revenue for the three months ended JuneSeptember 30, 2018 and 2017, includes $0.1$15,000 and $0.5 million, and $0.3 millionrespectively, of non-cash amortization of deferred revenue related to the values assigned to the contracts acquired in the LEEVAC transaction, respectively.a previous acquisition. |
Revenue - Revenue from our Shipyard Division increased $5.3 million for the three months ended JuneSeptember 30, 2018 comparedand 2017, was $24.5 million and $15.1 million, respectively, representing an increase of 62.5%. The increase was primarily due to the three months ended June 30, 2017. During the second quarter of 2018, we were able to makeadditional progress on the construction of ten harbor tug vessels and an offshore marine research vessel which wereice-breaker tug that was not under construction during the secondthird 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 wasoffset partially offset by lower revenue from construction of our two MPSV contracts that were under construction during 2017, but suspended during the first quarter of 2018. See also Note 9 of the Notes8 to our Consolidated Financial Statements for additional information relating tofurther discussion of the suspension of construction of two MPSVs.MPSV contracts.
Gross loss - Gross loss from our Shipyard Division was $2.8 million for the three months ended JuneSeptember 30, 2018 compared toand 2017, was $1.8 million (7.2% of revenue) and $3.5 million (23.2% of revenue), respectively, representing a gross lossdecrease of $13.9 million for the three months ended June 30, 2017.49.7%. The gross loss forduring the three months ended June 30, 2018 period was primarily attributabledue to underutilizationunder recovery of our Houmaoverhead costs and Lake Charles shipyards andthe impact of lower margin backlog related to previous project awards sold during a period of competitive pricing on current work. pricing.
The improvementdecrease in gross loss of $11.1 millionrelative to the 2017 period was primarily due to:
$10.2to higher revenue, a reduction in overhead costs, and the prior period including $2.1 million in contract losses recorded during the three months ended June 30, 2017, related to cost overruns and re-work identifiedincreases on the two contracts relating to the construction of two MPSVs;
holding and closing costs during the three months ended June 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.MPSVs.
General and administrative expenses - General and administrative expenses for our Shipyard Division decreased $0.4 for the three months ended JuneSeptember 30, 2018 compared to the three months ended June 30,and 2017, were $0.7 million (2.8% of revenue) and $0.9 million (5.9% of revenue), respectively, representing a decrease of 21.6%. The decrease was 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.headcount reductions.
| | | Services | | Three Months Ended June 30, | | Increase or (Decrease) | | Three Months Ended September 30, | | Increase (Decrease) | | | | 2018 | | 2017 | | Amount | | Percent | | 2018 | | 2017 | | Amount | | Percent | | Revenue | | $ | 22,205 |
| | $ | 15,396 |
| | $ | 6,809 |
| | 44.2% | | $ | 22,617 |
| | $ | 17,651 |
| | $ | 4,966 |
| | 28.1% | | Gross profit | | 3,585 |
| | 390 |
| | 3,195 |
| | 819.2% | | 3,191 |
| | 1,912 |
| | 1,279 |
| | 66.9% | | Gross profit percentage | | 16.1 | % | | 2.5 | % | | | |
| | 14.1 | % | | 10.8 | % | | | |
| | General and administrative expenses | | 762 |
| | 647 |
| | 115 |
| | 17.8% | | 705 |
| | 695 |
| | 10 |
| | 1.4% | | Operating income (loss) | | 2,823 |
| | (257 | ) | | 3,080 |
| |
| | | Operating income | | | 2,486 |
| | 1,217 |
| | 1,269 |
| |
|
Revenue - Revenue from our Services Division increased $6.8 million for the three months ended JuneSeptember 30, 2018 compared to the three months ended June 30,and 2017, was $22.6 million and $17.7 million, respectively, representing an increase of 28.1%. The increase was due to an overall increase in workactivity resulting from increases in customerhigher demand for our onshore and offshore oil and gas related service projects.services.
Gross profit - Gross profit from our Services Division increased $3.2 million for the three months ended JuneSeptember 30, 2018 compared to the three months ended June 30,and 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.was $3.2 million (14.1% of revenue) and $1.9 million (10.8% of revenue), respectively, representing an increase of 66.9%. The increase in gross profit percentage was due to a higher revenue and improved recovery of fixed costs with increased work.overhead costs.
General and administrative expenses - General and administrative expenses for our Services Division increased $0.1 for the three months ended JuneSeptember 30, 2018 compared to the three months ended June 30,and 2017, due to supportwere $0.7 million (3.1% of increased work as well as increases in employee incentive compensation with allocationrevenue) and $0.7 million (3.9% of corporate expenses remaining comparable period over period.revenue), respectively, representing an increase of 1.4%.
| | | EPC | | Three Months Ended June 30, | | Increase or (Decrease) | | Three Months Ended September 30, | | Increase (Decrease) | | | | 2018 | | 2017 | | Amount | | Percent | | 2018 | | 2017 | | Amount | | Percent | | Revenue | | $ | 882 |
| | $ | — |
| | $ | 882 |
| | 100.0% | | $ | 1,071 |
| | $ | — |
| | $ | 1,071 |
| | 100.0% | | Gross profit | | 543 |
| | — |
| | 543 |
| | 100.0% | | | Gross profit percentage | | 61.6 | % | | n/a |
| | | | | | Gross loss | | | (205 | ) | | — |
| | (205 | ) | | (100.0)% | | Gross loss percentage | | | (19.1 | )% | | n/a |
| | | | | General and administrative expenses | | 485 |
| | — |
| | 485 |
| | 100.0% | | 503 |
| | — |
| | 503 |
| | 100.0% | | Operating income | | 58 |
| | — |
| | 58 |
| |
| | | Operating loss | | | (708 | ) | | — |
| | (708 | ) | |
|
Revenue - Our EPC Division did not exist at JuneSeptember 30, 2017. Revenue for the three months ended JuneSeptember 30, 2018 consists of earlypricing, planning and scheduling work and engineering studies authorized by SeaOne.for the SeaOne Project. See Note 8 of the Notes7 to our Consolidated Financial Statements for further discussion of our EPC Division and the SeaOne Project.
Gross profitloss - Gross profitloss for the three months ended JuneSeptember 30, 2018, consistswas primarily due to costs incurred that are not yet fully recoverable under our current scope 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 administrative personnel and allocations of corporate expensesother costs as we invest in this new line of business.
| | | Corporate | | Three Months Ended June 30, | | Increase or (Decrease) | | Three Months Ended September 30, | | Increase (Decrease) | | | | 2018 | | 2017 | | Amount | | Percent | | 2018 | | 2017 | | Amount | | Percent | | Revenue | | $ | — |
| | $ | — |
| | $ | — |
| | | | $ | — |
| | $ | — |
| | $ | — |
| | | | Gross loss | | (384 | ) | | (90 | ) | | (294 | ) | | (326.7)% | | (402 | ) | | (152 | ) | | (250 | ) | | (164.5)% | | Gross loss percentage | | n/a |
| | n/a |
| | | | | n/a |
| | n/a |
| | | | | General and administrative expenses | | 2,297 |
| | 2,177 |
| | 120 |
| | 5.5% | | 2,092 |
| | 2,009 |
| | 83 |
| | 4.1% | | Operating loss | | (2,681 | ) | | (2,267 | ) | | (414 | ) | |
| | (2,494 | ) | | (2,161 | ) | | (333 | ) | |
|
Gross loss - Gross loss from our Corporate Division increasedfor the three months ended September 30, 2018 and 2017, was $0.4 million and $0.2 million, respectively, representing an increase of 164.5%. The increase was primarily due to lower allocation of expenses and build-up of personnelhigher costs to support our strategic initiatives and EPC Division.
General and administrative expenses - General and administrative expenses for our Corporate Division increased primarily due to increased legalthe three months ended September 30, 2018 and advisory fees related to customer disputes, strategic planning2017, were $2.1 million (4.2% of consolidated revenue) and diversification$2.0 million (4.0% of our business and increased employee incentive accruals.consolidated revenue), respectively, representing an increase of 4.1%.
SixNine Months Ended JuneSeptember 30, 2018, Compared to SixNine Months Ended JuneSeptember 30, 2017 (in thousands, except for percentages):
Consolidated | | | | Six Months Ended June 30, | | Increase or (Decrease) | Nine Months Ended September 30, | | Increase (Decrease) | | | 2018 | | 2017 | | Amount | Percent | 2018 | | 2017 | | Amount | | Percent | | Revenue | $ | 111,304 |
| | $ | 83,860 |
| | $ | 27,444 |
| 32.7% | $ | 161,016 |
| | $ | 133,745 |
| | $ | 27,271 |
| | 20.4% | | Cost of revenue | 111,324 |
| | 100,378 |
| | 10,946 |
| 10.9% | 164,248 |
| | 150,755 |
| | 13,493 |
| | 9.0% | | Gross loss | (20 | ) | | (16,518 | ) | | 16,498 |
| 99.9% | (3,232 | ) | | (17,010 | ) | | 13,778 |
| | 81.0% | | Gross profit percentage | — | % | | (19.7 | )% | | | | | | Gross loss percentage | | (2.0 | )% | | (12.7 | )% | | | | | General and administrative expenses | 9,801 |
| | 8,570 |
| | 1,231 |
| 14.4% | 17,473 |
| | 12,940 |
| | 4,533 |
| | 35.0% | | Asset impairment | 1,360 |
| | 389 |
| | 971 |
| 249.6% | | | Asset impairments | | 1,360 |
| | 389 |
| | 971 |
| | 249.6% | | Operating loss | (11,181 | ) | | (25,477 | ) | | 14,296 |
| 56.1% | (22,065 | ) | | (30,339 | ) | | 8,274 |
| | 27.3% | | Other income (expense): | | | | | | | | | Interest expense, net | (238 | ) | | (205 | ) | | (33 | ) | (16.1)% | (166 | ) | | (262 | ) | | 96 |
| | 36.6% | | Other income (expense), net | 6,814 |
| | (257 | ) | | 7,071 |
| 2,751.4% | 6,954 |
| | (209 | ) | | 7,163 |
| | 3,427.3% | | 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% | (15,277 | ) | | (30,810 | ) | | 15,533 |
| | 50.4% | | Income tax expense (benefit) | 142 |
| | (8,561 | ) | | 8,703 |
| 101.7% | 419 |
| | (10,322 | ) | | 10,741 |
| | 104.1% | | Net loss | $ | (4,747 | ) | | $ | (17,378 | ) | | $ | 12,631 |
| 72.7% | $ | (15,696 | ) | | $ | (20,488 | ) | | $ | 4,792 |
| | 23.4% |
Revenue - Our revenueRevenue for the sixnine months ended JuneSeptember 30, 2018 and 2017, was $111.3$161.0 million and $83.9$133.7 million, respectively, representing an increase of 32.7%20.4%. The increase iswas primarily attributable to:
Andue to a $22.9 million 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 both onshore and offshore oilservices and gas service related projects.a $14.9 million increase within our Shipyard Division primarily due to additional progress on the construction of ten harbor tug vessels, two regional class research vessels and an ice-breaker tug that was not under construction during the prior period. These increases were partially offset by a decrease in revenue of $14.3 million within our Fabrication Division primarily due to the completion and delivery of four modules for a petrochemical facility during the second quarter 2018 and lower revenue from our two MPSV contracts that were suspended during the first quarter 2018.
Gross loss - Our grossGross loss for the sixnine months ended JuneSeptember 30, 2018 and 2017, was $20,000 compared to$3.2 million (2.0% of revenue) and $17.0 million (12.7% of revenue), respectively, representing a decrease of 81.0%. The gross loss of $16.5 million forduring the six months ended June 30, 2017. The improvement in gross loss2018 period was primarily due to under recovery of our overhead costs (including holding costs for our South Texas Properties of $1.6 million) and the impact of lower margin backlog within our Shipyard Division related to previous project awards sold during a period of competitive pricing.
The decrease in gross loss relative to the prior period was primarily due to a decrease in gross loss within our Shipyard Division of $13.5 million due to increased revenue, within our Services Division as discussed abovea reduction in overhead costs, and $10.6the prior period including $12.7 million in contract losses related to cost overruns and re-work that was identified and recorded during the six months ended June 30, 2017increases on two contracts relating to the construction of two MPSVs, with no comparable adjustmentsand increased gross profit within our Services Division of $7.1 million due to contract losses in the first halfincreased revenue and higher recovery of 2018.our overhead costs, offset partially by a gross loss for our Fabrication Division of $5.9 million related to decreased fabrication revenue.
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 generalGeneral and administrative expenses for the sixnine months ended JuneSeptember 30, 2018 and 2017, were $17.5 million (10.9% of revenue) and $12.9 million (9.7% of revenue), respectively, representing and increase of 35.0%. The increase was primarily attributabledue to:
Build-upBad debt expense of additional$2.8 million related to a contracts receivable reserve recorded during the third quarter 2018 within our Fabrication Division as we received indications that collectability of the receivable was no longer probable;
Higher legal and advisory fees related to customer disputes; Costs associated with the evaluation of strategic alternatives and initiatives to diversify our business;
An increase in administrative 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 employeeHigher short term incentive accrualsplan costs for allcertain 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.long-term incentive plan costs.
These increases were offset partially by headcount reductions.
Asset impairmentimpairments - We recorded an impairment ofAsset impairments for the nine months ended September 30, 2018 and 2017, were $1.4 million and $0.4 million, respectively. The impairments were recorded during the six months ended June 30,first half of 2018 primarilyand 2017, respectively, and were related to two pieces of equipment at our Texas North Yardcertain assets that arewere held for sale. The impairment was calculated as management's estimated net proceeds from the sale less the equipment's net book value.within our Fabrication and Shipyard Divisions. See Note 2 of the Notes to our Consolidated Financial Statements for additional information regardingfurther discussion of our assets held for sale. During
Interest expense, net - Interest expense, net for the sixnine months ended JuneSeptember 30, 2018 and 2017, we recorded an impairmentwas expense of $0.4$0.2 million relatedand $0.3 million, respectively. Interest expense, net deceased for the period primarily due to our Shipyard Division assets held for sale.interest earned from cash equivalents and short-term investments, partially offset by interest expense on borrowings outstanding earlier in 2018.
Other income (expense), net - Other income (expense), net was $6.8 million for the sixnine months ended JuneSeptember 30, 2018 compared to otherand 2017, was income of $7.0 million and expense net of $0.3$0.2 million, for the six months ended June 30, 2017.respectively. Other income, net for the six months ended June 30, 2018 isperiod was primarily due to a gain on the sale of our Texas South Yard of $3.9 million and a gain on settlement offrom insurance recovery proceeds related to Hurricane Harvey of $3.6 million.million recorded during the first half of 2018.
Income tax expense (benefit) - Our effective incomeIncome tax rateexpense (benefit) for the sixnine months ended JuneSeptember 30, 2018 and 2017, was expense of 3.1%, compared to an effective tax rate$0.4 million and a benefit of 33.0% for the comparable period during 2017.$10.3 million, respectively. Current expense represents state income taxes. No federal tax within our Services Division. The decrease inbenefit was recorded during the effective tax rate is the result of2018 period as a full valuation allowance was recorded against our NOL deferred tax assets.assets generated during the period. See Note 1 of the Notes to our Consolidated Financial Statements regardingfor further discussion of our NOLs and deferred tax assets.
Operating Segments
The results of our four operating divisions and non-operating corporate division for the sixnine months ended JuneSeptember 30, 2018 and 2017, are presented below (in(amounts in thousands, except for percentages).
| | | Fabrication | | Six Months Ended June 30, | | Increase or (Decrease) | | Nine Months Ended September 30, | | Increase (Decrease) | | | | 2018 | | 2017 | | Amount | | Percent | | 2018 | | 2017 | | Amount | | Percent | | Revenue | | $ | 25,860 |
| | $ | 24,199 |
| | $ | 1,661 |
| | 6.9% | | $ | 28,171 |
| | $ | 42,517 |
| | $ | (14,346 | ) | | (33.7)% | | Gross loss | | (1,886 | ) | | (1,034 | ) | | (852 | ) | | (82.4)% | | | Gross loss percentage | | (7.3 | )% | | (4.3 | )% | | | | | | Gross profit (loss) | | | (5,918 | ) | | 216 |
| | (6,134 | ) | | (2,839.8)% | | Gross profit (loss) percentage | | | (21.0 | )% | | 0.5 | % | | | | | General and administrative expenses | | 1,575 |
| | 1,654 |
| | (79 | ) | | (4.8)% | | 5,251 |
| | 2,432 |
| | 2,819 |
| | 115.9% | | Asset impairment | | 1,360 |
| | — |
| | 1,360 |
| | 100.0% | | | Asset impairments | | | 1,360 |
| | — |
| | 1,360 |
| | 100.0% | | Operating loss | | (4,821 | ) | | (2,688 | ) | | (2,133 | ) | | | (12,529 | ) | | (2,216 | ) | | (10,313 | ) | |
Revenue - Revenue from our Fabrication Division increased $1.7 million for the sixnine months ended JuneSeptember 30, 2018 comparedand 2017, was $28.2 million and $42.5 million, respectively, representing a decrease of 33.7%. The decrease was primarily due to the six months ended June 30, 2017. The increase is attributable to the constructioncompletion and completiondelivery of four modules for a petrochemical plantfacility during the six months ended June 30,second quarter 2018 with no other significant projects under construction during the remaining period of 2018. This was partially offset, by decreased revenue of $2.8 millionWe were awarded a new project for the six months ended June 30,expansion of a paddle wheel riverboat during the third quarter 2018 atthat will be constructed by our Fabrication Division; however, construction did not commence until the fourth quarter 2018. In addition, revenue from our South Texas Properties decreased $3.5 million as these properties were either sold and/or marketed for sale.sale during all of 2018. See Note 2 to our Consolidated Financial Statements for further discussion of our South Texas Properties.
Gross lossprofit (loss) - Gross loss from our Fabrication Divisionprofit (loss) for the sixnine months ended JuneSeptember 30, 2018 and 2017, was $1.9 million compared to a gross loss of $1.0$5.9 million for the six months ended June 30, 2017.(21.0% of revenue) and a gross profit of $0.2 million (0.5% of revenue), respectively. The increase in gross loss during the 2018 period was primarily due to increased materialunder recovery of our overhead costs incurred on(including holding costs for our South Texas Properties of $1.6 million). The gross loss for 2018 relative to 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. Thisprior period gross profit was primarily due to decreased revenue, offset partially offset by a reduction in overhead costs and lower depreciation expense of $1.9 million during the six months ended June 30, 2018 for our South Texas Properties as these assets arewere classified as held for sale.sale during all of 2018.
General and administrative expenses - General and administrative expenses for our Fabrication Division decreased $0.1 million for the sixnine months ended JuneSeptember 30, 2018 compared to the six months ended June 30, 2017.and 2017, were $5.3 million (18.6% of revenue) and $2.4 million (5.7% of revenue), respectively, representing an increase of 115.9%. The decreaseincrease is primarily due to:
Bad debt expense of $2.8 million related to decreases in salariesa contracts receivable reserve recorded during the third quarter 2018 as we received indications that collectability of the receivable was no longer probable; Legal and employee incentivesadvisory fees related to pursuit of $0.3 million dueclaims against a customer for disputed change orders for a project completed prior to reductions in workforce, decreases in corporate allocations of $0.3 million as a portion of these are now allocated2017; and Legal expenses incurred to market and sell our EPC Division and continued cost minimization efforts implementedSouth Texas Properties.
These increases were offset partially by managementheadcount reductions.
Asset impairments - Asset impairments for the nine months ended September 30, 2018 were $1.4 million. The impairments were recorded during 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, primarilyand were 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.certain assets that were held for sale. See Note 2 of the Notes to our Consolidated Financial Statements for additional information regardingfurther discussion of 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) | | Nine Months Ended September 30, | | Increase (Decrease) | | | | 2018 | | 2017 | | Amount | | Percent | | 2018 | | 2017 | | Amount | | Percent | Revenue (1) | | $ | 42,185 |
| | $ | 36,724 |
| | $ | 5,461 |
| | 14.9% | | $ | 66,677 |
| | $ | 51,798 |
| | $ | 14,879 |
| | 28.7% | Gross loss (1) | | (3,799 | ) | | (15,556 | ) | | 11,757 |
| | 75.6% | | (5,563 | ) | | (19,061 | ) | | 13,498 |
| | 70.8% | | Gross loss percentage | | (9.0 | )% | | (42.4 | )% | | | | | (8.3 | )% | | (36.8 | )% | | | | | General and administrative expenses | | 1,393 |
| | 1,947 |
| | (554 | ) | | (28.5)% | | 2,089 |
| | 2,835 |
| | (746 | ) | | (26.3)% | | Asset impairment | | — |
| | 389 |
| | (389 | ) | | (100.0)% | | | Asset impairments | | | — |
| | 389 |
| | (389 | ) | | (100.0)% | Operating loss (1) | | (5,192 | ) | | (17,892 | ) | | 12,700 |
| | | (7,652 | ) | | (22,285 | ) | | 14,633 |
| |
___________ | | | (1) | Revenue for the sixnine months ended JuneSeptember 30, 2018, and 2017, includes $0.5 million and $1.9$2.4 million, respectively, of non-cash amortization of deferred revenue related to the values assigned to the contracts acquired in the LEEVAC transaction.a previous acquisition. |
Revenue - Revenue from our Shipyard Division increased $5.5 million for the sixnine months ended JuneSeptember 30, 2018 comparedand 2017, was $66.7 million and $51.8 million, respectively, representing an increase of 28.7%. The increase was primarily due to the six months ended June 30, 2017. During the first half of 2018, we madeadditional progress on the construction of ten harbor tug vessels, two regional class research vessels and an offshore marine research vesselice-breaker tug that werewas 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 wasprior period, partially offset by lower revenue from construction ofour two MPSVsMPSV contracts 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 sixnine months ended JuneSeptember 30, 2018 compared toand 2017, was $5.6 million (8.3% of revenue) and $19.1 million (36.8% of revenue), respectively, representing a gross lossdecrease of $15.6 million for the six months ended June 30, 2017.70.8%. The gross loss forduring the six months ended June 30, 2018 period was primarily attributabledue to underutilizationunder recovery of our Houmaoverhead costs and Lake Charles shipyards andthe impact of lower margin backlog related to previous project awards sold during a period of competitive pricing on current work.pricing. The decrease in gross loss comparedrelative to the six months ended June 30, 2017,prior period was primarily due to:
$10.6Higher revenue and a reduction in overhead costs;
Contract losses of $12.7 million in contract lossesduring the prior period related to cost overruns and re-work that was identified and recorded during the six months ended June 30, 2017 relating toincreases on the construction of two MPSVs; and Holding and closing costs during the six months ended June 30, 2017,prior period of approximately $0.8 million related to our Prospect shipyard. We terminated theshipyard, for which our lease of thisthe 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 customerterminated during the fourth quarter of 2017 and construction of the second OSV re-commenced. We subsequently delivered the second OSV on July 31, 2018.2017.
General and administrative expenses - General and administrative expenses for our Shipyard Division decreased $0.6 million for the sixnine months ended JuneSeptember 30, 2018 compared to the six months ended June 30,and 2017, were $2.1 million (3.1% of revenue) and $2.8 million (5.5% of revenue), respectively, representing a decrease of 26.3%. The decrease was 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.headcount reductions.
Asset impairmentimpairments - DuringAsset impairments for the sixnine months ended JuneSeptember 30, 2017 wewere $0.4 million. The impairments were recorded an impairmentduring the first half of $0.4 million2017 and were related to the Shipyard Divisioncertain assets that were held for sale. See Note 2 of the Notes to our Consolidated Financial Statements for additional information relating todiscussion of our assets held for sale. We did not record any asset impairment during the six months ended June 30, 2018, in our Shipyard Division.
| | | Services | | Six Months Ended June 30, | | Increase or (Decrease) | | Nine Months Ended September 30, | | Increase (Decrease) | | | | 2018 | | 2017 | | Amount | | Percent | | 2018 | | 2017 | | Amount | | Percent | | Revenue | | $ | 44,075 |
| | $ | 26,107 |
| | $ | 17,968 |
| | 68.8% | | $ | 66,692 |
| | $ | 43,758 |
| | $ | 22,934 |
| | 52.4% | | Gross profit | | 6,199 |
| | 423 |
| | 5,776 |
| | 1,365.5% | | 9,390 |
| | 2,335 |
| | 7,055 |
| | 302.1% | | Gross profit percentage | | 14.1 | % | | 1.6 | % | | | | | 14.1 | % | | 5.3 | % | | | | | General and administrative expenses | | 1,496 |
| | 1,313 |
| | 183 |
| | 13.9% | | 2,201 |
| | 2,008 |
| | 193 |
| | 9.6% | | Operating income (loss) | | 4,703 |
| | (890 | ) | | 5,593 |
| |
| | | Operating income | | | 7,189 |
| | 327 |
| | 6,862 |
| |
|
Revenue - Revenue from our Services Division increased $18.0 million for the sixnine months ended JuneSeptember 30, 2018 compared to the six months ended June 30,and 2017, was $66.7 million and $43.8 million, respectively, representing and increase of 52.4%. The increase was due to an overall increase in workactivity resulting from increases in customerhigher demand for our onshore and offshore oil and gas related service projects.services.
Gross profit - Gross profit from our Services Division increased $5.8 million for the sixnine months ended JuneSeptember 30, 2018 compared to the six months ended June 30,and 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.was $9.4 million (14.1% of revenue) and $2.3 million (5.3% of revenue), respectively, representing an increase of 302.1%. The increase in gross profit percentage was due to a higher revenue and improved recovery of fixed costs with increased work.overhead costs.
General and administrative expenses - General and administrative expenses for our Services Division increased $0.2 million for the sixnine months ended JuneSeptember 30, 2018 compared to the six months ended June 30,and 2017, were $2.2 million (3.3% of revenue) and $2.0 million (4.6% of revenue), respectively, representing an increase of 9.6%. The increase was due to additional costs to support of increased work as well as increases inhigher activity and higher employee incentive compensation with allocation of corporate expenses remaining comparable period over period.costs.
| | | EPC | | Six Months Ended June 30, | | Increase or (Decrease) | | Nine Months Ended September 30, | | Increase (Decrease) | | | | 2018 | | 2017 | | Amount | | Percent | | 2018 | | 2017 | | Amount | | Percent | | Revenue | | $ | 955 |
| | $ | — |
| | $ | 955 |
| | 100.0% | | $ | 2,026 |
| | $ | — |
| | $ | 2,026 |
| | 100.0% | | Gross profit | | 235 |
| | — |
| | 235 |
| | 100.0% | | 30 |
| | — |
| | 30 |
| | 100.0% | | Gross profit (loss) percentage | | 24.6 | % | | n/a |
| | | | | | Gross profit percentage | | | 1.5 | % | | n/a |
| | | | | General and administrative expenses | | 902 |
| | — |
| | 902 |
| | 100.0% | | 1,405 |
| | — |
| | 1,405 |
| | 100.0% | | Operating loss | | (667 | ) | | — |
| | (667 | ) | |
| | (1,375 | ) | | — |
| | (1,375 | ) | |
|
Revenue - Our EPC Division did not exist at JuneSeptember 30, 2017. Revenue for the sixnine months ended JuneSeptember 30, 2018, consists of earlypricing, planning and scheduling work and engineering studies authorized by SeaOne.for the SeaOne Project. See Note 8 of the Notes7 to our Consolidated Financial Statements for further discussion of our EPC Division and the SeaOne Project.
Gross profit - Gross profit 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 administrative personnel and allocations of corporate expensesother costs as we invest in this new line of business.
| | | Corporate | | Six Months Ended June 30, | | Increase or (Decrease) | | Nine Months Ended September 30, | | Increase (Decrease) | | | | 2018 | | 2017 | | Amount | | Percent | | 2018 | | 2017 | | Amount | | Percent | | Revenue | | $ | — |
| | $ | — |
| | $ | — |
| | | | $ | — |
| | $ | — |
| | $ | — |
| | | | Gross loss | | (769 | ) | | (351 | ) | | (418 | ) | | (119.1)% | | (1,171 | ) | | (500 | ) | | (671 | ) | | (134.2)% | | Gross loss percentage | | n/a |
| | n/a |
| | | | | n/a |
| | n/a |
| | | | | General and administrative expenses | | 4,435 |
| | 3,656 |
| | 779 |
| | 21.3% | | 6,527 |
| | 5,665 |
| | 862 |
| | 15.2% | | Operating loss | | (5,204 | ) | | (4,007 | ) | | (1,197 | ) | |
| | (7,698 | ) | | (6,165 | ) | | (1,533 | ) | |
|
Gross loss - Gross loss from our Corporate Division increasedfor the nine months ended September 30, 2018 and 2017, was $1.2 million and $0.5 million, respectively, representing an increase in gross loss of 134.2%. The increase in gross loss was primarily due to lower allocation of expenses and as well as buildup of personnelhigher costs to support our strategic initiatives and EPC Division.
General and administrative expenses - General and administrative expenses for our Corporate Division increasedthe nine months ended September 30, 2018 and 2017, were $6.5 million (4.1% of consolidated revenue) and $5.7 million (4.2% of consolidated revenue), respectively, representing and increase of 15.2%. The increase was primarily due to increased legal and advisory fees related to customer disputes, costs associated with the evaluation of strategic planningalternatives and diversification ofinitiatives to diversify our business, and increased employeehigher long-term incentive accruals.plan costs.
Liquidity and Capital Resources Our primary sources of liquidity remains dependent onare our cash on hand,and cash equivalents, scheduled maturities of our held-to-maturity, short-term investments, potential proceeds from the salessale of assets held for sale, and availability of future drawings fromunder our Credit Agreement (discussed below). Our available liquidity is impacted by changes in our working capital (excluding cash and cash equivalents and short-term investments) and our capital expenditure requirements. At September 30, 2018, our cash and cash equivalents and short-term investments totaled $54.5 million and our working capital was $124.0 million. Working capital includes $9.5 million of short-term investments and $42.7 million of assets held for sale. Fluctuations in our working capital balance, and its components, are not unusual in our business and are impacted by the size of our projects and the mix of our backlog. Our working capital is particularly impacted by the timing of new project awards and related payments in advance of performing work, and the subsequent achievement of billing milestones or progress billings on backlog as we complete certain phases of work. Working capital is also impacted at period-end by the timing of contracts receivable collections ofand accounts receivable. payable payments on our projects.
A summary of our immediately available liquidity as of Juneat September 30, 2018, is as follows:follows (in thousands): | | | | | | | 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 |
|
| | | | | | | Available Liquidity | | Total | | Cash and cash equivalents | | $ | 45,020 |
| Short-term investments (1) | | 9,494 |
| | Total cash, cash equivalents and short-term investments | | 54,514 |
| | Credit Agreement capacity | | 40,000 |
| | Less: Outstanding letters of credit | | 2,475 |
| | Credit Agreement availability | | 37,525 |
| | Total available liquidity | | $ | 92,039 |
|
___________ (1) Our held-to-maturity, short-term investments includeIncludes U.S. Treasuries and other investment-grade commercial paper andwhich can be liquidated quickly in open markets. Working capital was $132.7 million and our ratio
Sales of current assets to current liabilities was 4.67 to 1 at June 30, 2018, compared to $130.5 million and 3.68 to 1, respectively, at December 31, 2017. Working capital at June 30, 2018, includes $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. At June 30, 2018, our contracts receivable balance was $31.9 million of which we have subsequently collected $14.4 million 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.Assets Our primary sources/uses of cash during the six months ended June 30, 2018, are referenced in the Cash Flow Activities section below.
As discussed in our Executive Summary,Overview, we are implementinghave initiated several strategies to diversify our business, increase backlog, reduce operating expenses and monetize underutilized assets. Specifically, during the On April 20,second quarter 2018, we closed oncompleted the sale of our Texas South Yard for a sale price of $55.0 million, less selling costs of $1.5 million. We received approximately $52.7 million, at closing, which was in addition to the $0.8 million of previously received earnest money. Thefor total net proceeds received rebuilt our liquidity, provided support for upcoming projects, continued investment in our EPC Divisionduring the nine-months ended September 30, 2018 of approximately $53.5 million and for other general corporate purposes. See further discussiona gain of the sale of our Texas South Yard in Note 2 of the Notesapproximately $3.9 million.
In addition, on September 26, 2018, we entered into an agreement to Consolidated Financial Statements. We continue to market oursell the Texas North Yard and hopecertain associated equipment for $28.0 million. We received $0.5 million during the third quarter 2018 as a deposit on the property, which is refundable under certain circumstances. The sale is anticipated to haveclose in the fourth quarter 2018 and is subject to customary closing conditions, including the purchaser’s right to conduct inspections of the property related to confirmation of title, surveys, environmental conditions, easements and access rights, and third-party consents. Based on the sales price and estimated closing and other costs, we expect to realize a negotiated contract forgain on the sale oftransaction upon closing. We can provide no assurances that we will successfully close the transaction, that closing will occur under our expected timeline or that we will achieve our estimated net proceeds or a gain on the sale. We continue to actively market the remaining Texas North Yard in the near future.assets held for sale, which primarily consist of three 660-ton crawler cranes, a barge, a plate bending roll machine, and panel line equipment.
Line of Credit
We have a $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 basewith Hancock Whitney Bank that can be used for borrowings or letters of credit and general corporate purposes. We believe thatcredit. On August 27, 2018, we entered into a third amendment to our Credit Agreement, will provide us with additional working capital flexibilitywhich extended its maturity date from June 9, 2019 to expand operations as backlog improves, respondJune 9, 2020, and reduced the base tangible net worth requirement from $185.0 million to market opportunities and support our ongoing operations. Interest on drawings under$180.0 million. The third amendment also removed the Credit Agreement may be designated, at our option, as either Base Rateinclusion of 50% of Consolidated Net Income (as defined in the credit facility) or LIBOR plus 2% per annum. Unused commitment feesCredit Agreement) for each fiscal quarter and the inclusion of 50% of the gain on the undrawn portionsale 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. The Credit Agreement is secured by substantially all our assets (other than the South Texas Properties).
We must comply with the followingProperties from our minimum tangible net worth covenant. Accordingly, our amended quarterly 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), plusAgreement are as follows:
Ratio of current assets to current liabilities of not less than 1.25:1.00; Minimum tangible net worth of at least the sum of $180.0 million, plus 100% of the proceeds offrom any issuance of any stock or other equity after deducting of any fees, commissions, expenses and other costs incurred in such offering; and
Ratio of funded debt to tangible net worth of not more than 0.50:1.00.
| | iii. | Ratio of funded debt to tangible net worth of not more than 0.50:1.00. |
AsInterest on borrowings under the Credit Agreement may be designated, at our option, as either the Wall Street Journal published Prime Rate or LIBOR plus 2.0% per annum. Commitment fees on the unused portion of Junethe Credit Agreement are 0.4% per annum, and interest on outstanding letters of credit is 2.0% per annum. The Credit Agreement is secured by substantially all our assets (other than the assets held for sale at our Texas North Yard).
At September 30, 2018, we had no outstanding borrowings under our Credit Agreement and $2.5 million of outstanding letters of credit, providing $37.5 million of available capacity. At September 30, 2018, we were in compliance with all of our financial covenants.covenants, with a tangible net worth of $203.2 million (as defined by the Credit Agreement) and a ratio of current assets to current liabilities of 3.37 to 1.0.
We willCash Flow Activity
During the nine months ended September 30, 2018 and 2017, net cash used in operating activities was $18.7 million and $29.6 million, respectively. During the three months ended September 30, 2018 and 2017, net cash provided by operating activities was $7.8 million, compared to cash used in operating activities of $1.6 million, respectively. The use of cash during the nine months ended September 30, 2018, was primarily due to the following:
Operating losses for the period, excluding gains from asset sales and insurance recoveries of $6.8 million, bad debt expense of $2.8 million, non-cash amortization of deferred revenue of $0.5 million, and non-cash depreciation and amortization, asset impairments, and stock compensation expense totaling $11.3 million; Increase in contracts receivable and retainage of $6.2 million (exclusive of bad debt expense of $2.8 million and a $3.0 million reclassification of retainage to other noncurrent assets during the period as we do not anticipate collection within the next twelve months). The increase in contracts receivable, net of the reclassification, is primarily due to slower collections of receivables for our T&M work; Increase in contracts in progress of $11.8 million, primarily related to the net billing positions on projects in our Shipyard Division; Increase in prepaid expenses, inventory and other assets of $2.5 million, primarily due to the aforementioned reclassification of retainage to other noncurrent assets; and Decrease in accrued contract losses and noncurrent deferred revenue of $3.2 million.
These uses of cash were partially offset by:
Increase in advance billings on contracts of $9.8 million, primarily related to the net billing position on projects in our Fabrication Division; and Increase in accounts payable and accrued expenses of $4.2 million;
During the nine months ended September 30, 2018, net cash provided by investing activities was $55.5 million, compared to net cash used in investing activities of $2.4 million for the nine months ended September 30, 2017. Cash provided by investing activities during the 2018 period was due to proceeds received from asset sales of $57.7 million, primarily related to the sale of our Texas South Yard and insurance proceeds of $9.4 million resulting from hurricane damage to our facilities, offset partially by the purchase of short-term investments of $9.2 million and capital expenditures of $2.4 million.
During the nine months ended September 30, 2018 and 2017, net cash used in financing activities was $0.8 million and $1.4 million, respectively. Cash used in financing activities primarily related to tax payments made on behalf of employees from vested stock withholdings.
Future Liquidity Outlook As discussed in our Overview, we continue to monitorfocus on maintaining liquidity and preservesecuring meaningful new contract awards and backlog in the near-term, and generating operating income and cash flow from operations in the longer-term. We have made significant progress in our cash. Ourefforts to improve our liquidity, including reductions in costs (including reducing our workforce and reducing the cash compensation paid to our directors and the salaries of our executive officers) and the divestiture of underutilized assets. The primary uses of our liquidity for the remainder 2018 and the foreseeable future are to fund the underutilization of our fabrication facilities in our Shipyard and Fabrication Divisions until we secure and/or begin to execute sufficient backlog to fully recover our overhead costs, working capital requirements for 2018 and beyond are for the costs associated with Fabrication and Shipyardour projects, capital expenditures relatedand enhancements to our Shipyard facilities, the expansion of our EPC Division, corporate administrative expenses and enhancements to our Shipyard facilities.strategic initiatives. Future capital expenditures will be highly dependent upon the amount and timing of future projects.new project awards. Capital expenditures for the sixnine months ended JuneSeptember 30, 2018 were $0.8 million. We do not$2.4 million and we anticipate significant capital expenditures of approximately $1.0 million for the remainder of 2018.
If industry conditions for offshore oil and gas do not improve, or we are unable to increase our backlog, or we are unable to diversify our customer base, we would expect to take additional measures to reduce costs and preserve our cash 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 believe that our cash, and cash equivalents on hand and held-to-maturity, short-term investments at September 30, 2018, and funds availableavailability under our Credit Agreement, will be sufficient to enable us to fund our operating expenses, meet our working capital and capital expenditure requirements, and satisfy any future debt service andobligations or other funding requirements, for at least twelve months from the date of this Report. Our view regardingevaluation of the sufficiency of our cash and liquidity is primarily based on our financial forecast for the remainder of 2018 and early 2019, which is impacted by our existing backlog and a reasonable amountestimates of forecast, non-contractual backlog. There isfuture new project awards. We can provide no guaranteeassurances that our financial forecast will be attainableachieved or that we will have sufficient cash including funds availableor availability under our Credit Agreement to meet planned operating expenses and other unforeseen cash requirements. Accordingly, we may be required to 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 six months ended June 30, 2018, net cash used in operating activities was $26.4 million, compared to net cash used in operating activities of $27.9 million for the six months ended June 30, 2017. The use of cash in operations during the period was primarily due to the following:
Operating losses for the six months ended 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 $3.5 million;
Slower collections of receivables of $6.4 million
Build-up of costs for contracts in progress of $8.1 million;
Increased retainage on projects of $1.5 million;
Increased payments of accounts payable of $2.4 million; and
Other general uses of working capital.
Net cash provided by investing activities for the six months ended June 30, 2018, was $50.2 million, compared to cash provided by investing activities of $0.3 million for the six months ended June 30, 2017. The increase in cash provided by investing activities is due primarily 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 used by financing activities for the six months ended June 30, 2018, and 2017, was $0.8 million compared to $1.2 million in cash used in financing activities, respectively.
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 JuneSeptember 30, 2018. For more information on market risk, refer to Part II, Item 7A.7A of our 2017 Annual Report on Form 10-K for the year ended December 31, 2017.Report. 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 JuneSeptember 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 isWe are subject to various routine legal proceedings in the normal conduct of itsour business primarily involving commercial claims, workers’ compensation claims, and claims for personal injury under general maritime laws of the United StatesU.S. and the Jones Act. While the outcome of these lawsuits, legal proceedings and claims cannot be predicted with certainty, management believeswe believe that the outcome of any such proceedings, even if determined adversely, would not have a material adverse effect on theour financial position, results of operations or cash flowsflows.
On October 2, 2018, we filed a lawsuit against our customer to enforce our rights and remedies under the applicable construction contracts for two MPSVs. The lawsuit was filed in the Twenty-Second Judicial District Court for the Parish of the Company.St. Tammany, State of Louisiana and is styled Gulf Island Shipyards, LLC v. Hornbeck Offshore Services, LLC. See Note 8 to our Consolidated Financial Statements for further information relating to this recent litigation.
Item 1A. Risk Factors. There have been no material changes from the information included in Item 1A “Risk Factors” included in our 2017 Annual Report on Form 10-K for the year ended December 31, 2017.Report. Item 6. Exhibits. | | | | | Exhibit Number | | Description of Exhibit | | | | | 3.1 | | | | 3.2 | | | | 10.1 | | | | 10.2 | | | | 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/ DavidWestley S. SchorlemerStockton | | | DavidWestley S. SchorlemerStockton | | | Executive Vice President, Chief Financial Officer, Secretary and Treasurer (Principal Financial Officer) |
Date: August 9,November 8, 2018
s | | Total | | Remainder of 2018 | | $ | 86,378 |
| | $ | 56,243 |
| | 2019 | | 140,831 |
| | 199,922 |
| | 2020 | | 69,890 |
| | 74,976 |
| | 2021 | | 8,645 |
| | 8,405 |
| | 2022 | | 665 |
| | 647 |
| | Total | | $ | 306,409 |
| | $ | 340,193 |
| | | | | | |
Contracts Receivable and Retainage Our customers include U.S. and, to a lesser extent, international energy producers, petrochemical, industrial, power, and marine operators, EPC companies and certain agencies of the U.S. government. Of our contracts receivable balance at September 30, 2018, $18.4 million was with two customers.
At September 30, 2018, we had an allowance for bad debt of $3.7 million within our contract receivable balance. During the three months ended September 30, 2018, we increased our allowance for bad debts by $2.8 million, which is included in general and administrative expenses on our Consolidated Statements of Operations and primarily relates to a customer within our Fabrication Division.
Contracts in Progress, and Advance Billings on Contracts and Accrued Contract Losses
Revenue recognition and customer invoicing for our fixed-price and unit-rate contracts may occur at different times. Revenue recognition is based upon our calculation of percent of work complete;estimated percentage-of-completion as discussed above; however, customer invoicing will generally depend upon a predetermined billing schedule as stated in the contractterms which could allowprovide for customer advance payments or invoicing based upon achievement of certain milestones.milestones or project progress. Revenue earned but not yet invoicedrecognized in excess of amounts billed is reflected as contracts in progress and included in current assets on our consolidated balance sheet. Billings made to our customersConsolidated Balance Sheets. Amounts billed in advanceexcess of revenue being earned arerecognized is reflected as advance billings on contracts and included in current liabilities on our balance sheet.Consolidated Balance Sheets. Contracts in progress totaled $40.2 million at JuneSeptember 30, 2018, totaled $36.5 million with $31.1$37.1 million relating to three major customers. Advance billings on contracts totaled $14.9 million at JuneSeptember 30, 2018, was $4.2with $11.2 million and included advances of $3.5 million from five major customers.relating to one customer. Accrued contract losses weretotaled $6.0 million and $7.6 million as of Juneat September 30, 2018 and December 31, 2017, respectively.
NOTE 4 – CONTRACTS RECEIVABLE AND RETAINAGE
Our customers include: (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 June 30, 2018, $12.3 million, or 38.4%, was with one customer. The significant projects for this one customer consist of offshore services related to repair, installation and hook-up work within our Services Division.
As of June 30, 2018, we included an allowance for bad debt of $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 54 – FAIR VALUE MEASUREMENTS The Company makesWe make fair value determinations by applying the following hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:
Level 1 - inputs are based upon quoted prices for identical instruments traded in active markets; Level 2 - inputs are based upon quoted prices for similar instruments in active markets and model-based valuation techniques for which all significant assumptions are observable in the market; and Level 3 - inputs are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. These include discounted cash flow models and similar valuation techniques. Recurring fair value measurements and financial instruments - The carrying amounts that we have reported for financial instruments, including cash and cash equivalents, held-to-maturity, short-term investments, accounts receivablescontracts receivable and accounts payables,payable, approximate their fair values.
Assets held for sale - We measure and record assets held for sale at the lower of their carrying amount or fair value less costs to sell. The determination of fair value generally requires the use of significant judgment. We have classified our assets at our Texas North Yard and a drydock within our Shipyard Division as assets held for sale at June 30, 2018.judgments. See Note 2 for further disclosure relating todiscussion of our assets held for sale.
On June 28, 2018, we agreed to a 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 assetssale 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 reviewed the remaining buildings and equipment at the Texas North Yard, and we impaired our Texas North Yard in total by $8.9 million, $5.1 million of which was previously recorded during the three months ended March 31, 2018, based upon our best estimate of the decline in thetheir associated 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. The impairments were calculated as management's estimated net proceeds from the sales less their net book 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 65 – EARNINGSLOSS PER COMMON SHARE AND SHAREHOLDERS' EQUITY Earnings per Share:
The following table sets forthpresents the computation of basic and diluted loss per share (in thousands, except for per share data)amounts): | | | | | | | | | | | | | | | | | | | 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 | ) |
| | | | | | | | | | | | | | | | | | | Three Months Ended September 30, | | Nine Months Ended September 30, | | | 2018 | | 2017 | | 2018 | | 2017 | | Basic and diluted | | | | | | | | | Net loss | $ | (10,949 | ) | | $ | (3,110 | ) | | $ | (15,696 | ) | | $ | (20,488 | ) | | Less: Distributed and undistributed loss (unvested restricted stock) | — |
| | (14 | ) | | — |
| | (100 | ) | | Net loss attributable to common shareholders | $ | (10,949 | ) | | $ | (3,096 | ) | | $ | (15,696 | ) | | $ | (20,388 | ) | Weighted-average shares (1) | 15,044 |
| | 14,852 |
| | 15,017 |
| | 14,821 |
| | Basic and diluted loss per common share | $ | (0.73 | ) | | $ | (0.21 | ) | | $ | (1.05 | ) | | $ | (1.38 | ) |
______________ (1) We have no dilutive securities.
NOTE 76 – LINE OF CREDIT We have a $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 basewith Hancock Whitney Bank that can be used for borrowings or letters of credit and general corporate purposes. We believe thatcredit. On August 27, 2018, we entered into a third amendment to our Credit Agreement, will provide us with additional working capital flexibilitywhich extended its maturity date from June 9, 2019 to expand operationsJune 9, 2020, and reduced the base tangible net worth requirement from $185.0 million to $180.0 million. The third amendment also removed the inclusion of 50% of Consolidated Net Income (as defined in the Credit Agreement) for each fiscal quarter and the inclusion of 50% of the gain on the sale of our South Texas Properties from our minimum tangible net worth covenant. Accordingly, our amended quarterly financial covenants during the term of the Credit Agreement are as backlog improves, respondfollows:
Ratio of current assets to market opportunitiescurrent liabilities of not less than 1.25:1.00; Minimum tangible net worth of at least the sum of $180.0 million, plus 100% of the proceeds from any issuance of stock or other equity after deducting any fees, commissions, expenses and support our ongoing operations. other costs incurred in such offering; and Ratio of funded debt to tangible net worth of not more than 0.50:1.00.
Interest on drawingsborrowings under the Credit Agreement may be designated, at our option, as either Basethe Wall Street Journal published Prime Rate (as defined in the Credit Agreement) or LIBOR plus 2%2.0% per annum. Unused commitmentCommitment fees on the undrawnunused portion of the Credit Agreement are 0.4% per annum, and interest on undrawn stated amounts underoutstanding letters of credit issued by the lender is 2%2.0% 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)North Yard).
At JuneSeptember 30, 2018, we had no amount outstanding borrowings under our Credit Agreement and we had$2.5 million of outstanding letters of credit, providing $37.5 million of $5.5 million leaving availability of $34.5 million.
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: |
| | 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 Juneavailable capacity. At September 30, 2018, we were in compliance with all of our financial covenants.
NOTE 87 - SEGMENT DISCLOSURES
We have structured our operations with four operating divisions, and one corporate non-operating division. We believe thatdivision, which represent our operating divisions and our corporate non-operating division each represent a reportable segment under GAAP. Our 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.segments. As part of our efforts to strategically reposition the Company (seeas discussed in Note 1),1, we may change how we manage the business which could result in a change inchanges to our reportingreportable segments in future periods. Our operating divisions and corporate non-operating divisionreportable segments at JuneSeptember 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)U.S.) as well as modules for petrochemical and industrial facilities. We perform these activities out ofat our fabrication yardsyard in Houma, Louisiana. As of the date of this Report, our Texas South Yard has been sold andSeptember 30, 2018, our Texas North Yard is held for sale.sale and our Texas South Yard had been sold. See Note 2 for further disclosure relating todiscussion of our South Texas Properties.
Shipyard Division - Our Shipyard Division primarily manufacturesfabricates 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 and related services onfor offshore platforms and inshore structures. Interconnect piping services involveinland structures, which includes 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 StatesU.S. for various on-site construction and maintenance activities. In addition, our Services Division fabricates packaged skid units and performs various municipalcivil and drainage projects, such as pump stations, levee reinforcement, bulkheads and other public works projectswork for state and local governments. We perform these services at customer facilities or at our services yard in Houma, Services Yard.Louisiana.
EPC Division - Late inOur EPC Division was created during the fourth quarter of2017 to manage expected work we will perform for the SeaOne Project and other projects that may require EPC project management services. During the fourth quarter 2017, SeaOne selected us as the prime contractor for the engineering, procurement, construction, installation, commissioning and start-up operations for theirits SeaOne Project. This project will include execution of engineering, construction and installation of modules for an export facility in Gulfport, Mississippi, and import facilities in the Caribbean and South America. Our current activities include pricing, planning and scheduling for the project. SeaOne’s selection of the Company is non-binding and commencement of the project remains subject to a number of conditions, including agreement on the terms of the engagement with SeaOne. We 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 itsfor the project. We are hopeful that the SeaOne Project will initiate planning and initial construction efforts in early 2019. We are strengtheningcontinue to enhance our internal project management capabilities through the hiring of additional personnel to service this potential project.
Corporate Division - Our Corporate Division primarily includesrepresents 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 developmentdivisions and accounting salaries are not allocated to theour operating divisions. Expenses that are not allocatedSuch expenses include, but are not limited to, costs related to executive management and directors' fees, clerical and administrative salaries, costs of maintaining theour corporate office and costs associated with overall governance and being a publicly traded company.
We generally evaluate the performance of, and allocate resources to, our operating divisions based upon revenue, gross profit (loss) and operating income (loss). Division assets are comprised of all assets attributable to each division. Corporate administrative costs and overhead expenses directly related to our operating divisions, or costs related to shared services incurred by our Corporate Division on behalf of our operating divisions, are allocated to ourthe four operating divisions for expenses that directly relate to the operations or relate to shareddivisions. Shared services as discussed above.include human resources, insurance, business development, information technology and accounting. Intersegment revenue is priced at the estimated fair value of work performed.
Summarized financial information concerningfor each of our divisions as of and for the three and sixnine months ended JuneSeptember 30, 2018 and 2017, is as follows (in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | Three Months Ended September 30, 2018 | | | Fabrication | Shipyard | Services | EPC | Corporate | Eliminations | Consolidated | | Revenue | $ | 2,311 |
| $ | 24,492 |
| $ | 22,617 |
| $ | 1,071 |
| $ | — |
| $ | (779 | ) | $ | 49,712 |
| | Gross profit (loss) | (4,032 | ) | (1,764 | ) | 3,191 |
| (205 | ) | (402 | ) | — |
| (3,212 | ) | | Operating income (loss) | (7,708 | ) | (2,460 | ) | 2,486 |
| (708 | ) | (2,494 | ) | — |
| (10,884 | ) | Total assets (1) | 100,115 |
| 92,839 |
| 37,201 |
| 2,217 |
| 30,585 |
| — |
| 262,957 |
| | Depreciation and amortization expense | 1,023 |
| 1,050 |
| 365 |
| — |
| 36 |
| — |
| 2,474 |
| | Capital expenditures | — |
| 783 |
| 545 |
| 142 |
| 1 |
| — |
| 1,471 |
| | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | Three Months Ended September 30, 2017 | | | Fabrication | Shipyard | Services | EPC | Corporate | Eliminations | Consolidated | | Revenue | $ | 18,318 |
| $ | 15,074 |
| $ | 17,651 |
| — |
| $ | — |
| $ | (1,159 | ) | $ | 49,884 |
| | Gross profit (loss) | 1,250 |
| (3,504 | ) | 1,912 |
| — |
| (152 | ) | — |
| (494 | ) | | Operating income (loss) | 472 |
| (4,392 | ) | 1,217 |
| — |
| (2,161 | ) | — |
| (4,864 | ) | Total assets (1) | 164,677 |
| 96,614 |
| 33,024 |
| — |
| 9,065 |
| — |
| 303,380 |
| | Depreciation and amortization expense | 1,133 |
| 1,030 |
| 413 |
| — |
| 95 |
| — |
| 2,671 |
| | Capital expenditures | 1,479 |
| 1,054 |
| 94 |
| — |
| 25 |
| — |
| 2,652 |
| | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | 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 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | Nine Months Ended September 30, 2018 | | | Fabrication | Shipyard | Services | EPC | Corporate | Eliminations | Consolidated | | Revenue | $ | 28,171 |
| $ | 66,677 |
| $ | 66,692 |
| $ | 2,026 |
| $ | — |
| $ | (2,550 | ) | $ | 161,016 |
| | Gross profit (loss) | (5,918 | ) | (5,563 | ) | 9,390 |
| 30 |
| (1,171 | ) | — |
| (3,232 | ) | | Operating income (loss) | (12,529 | ) | (7,652 | ) | 7,189 |
| (1,375 | ) | (7,698 | ) | — |
| (22,065 | ) | Total assets (1) | 100,115 |
| 92,839 |
| 37,201 |
| 2,217 |
| 30,585 |
| — |
| 262,957 |
| | Depreciation and amortization expense | 3,219 |
| 3,170 |
| 1,141 |
| — |
| 304 |
| — |
| 7,834 |
| | Capital expenditures | — |
| 1,442 |
| 708 |
| 142 |
| 70 |
| — |
| 2,362 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | 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 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | Nine Months Ended September 30, 2017 | | | Fabrication | Shipyard | Services | EPC | Corporate | Eliminations | Consolidated | | Revenue | $ | 42,517 |
| $ | 51,798 |
| $ | 43,758 |
| $ | — |
| $ | — |
| $ | (4,328 | ) | $ | 133,745 |
| | Gross profit (loss) | 216 |
| (19,061 | ) | 2,335 |
| — |
| (500 | ) | — |
| (17,010 | ) | | Operating income (loss) | (2,216 | ) | (22,285 | ) | 327 |
| — |
| (6,165 | ) | — |
| (30,339 | ) | Total assets (1) | 164,677 |
| 96,614 |
| 33,024 |
| — |
| 9,065 |
| — |
| 303,380 |
| | Depreciation and amortization expense | 5,420 |
| 3,034 |
| 1,266 |
| — |
| 421 |
| — |
| 10,141 |
| | Capital expenditures | 2,327 |
| 1,872 |
| 199 |
| — |
| 117 |
| — |
| 4,515 |
|
_______________ 1)(1) Intercompany balances have been excluded.
NOTE 98 – COMMITMENTS AND CONTINGENCIES
The Company isWe are 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 StatesU.S. and the Jones Act. While the outcome of these lawsuits, legal proceedings and claims cannot be predicted with certainty, management believeswe believe that the outcome of any such proceedings, even if determined adversely, would not have a material adverse effect on theour financial position, results of operations or cash flows of the Company.flows.
MPSV Termination Letter
We received a noticenotices of purported termination from a customer within our Shipyard Division related toof the contracts for the construction of two MPSVs.MPSVs from one of our Shipyard Division customers. We dispute the purported terminationterminations and disagree with the customer’s reasons for same.such terminations. Pending the resolution of the dispute, we have ceased all work has been stopped and the vesselspartially completed MPSVs and associated equipment and material are in our care and custodymaterials remain at our shipyard in Houma, Louisiana. The customer hasalso notified our Surety of its intent to require completionpurported terminations of the vesselconstruction contracts and made claims under the Surety's bond.bonds issued by the Surety in connection with the construction of the two MPSVs. We have notified and met with our Surety regarding our disagreement with, ourand objection to, the customer's purported termination and its claims. DiscussionDiscussions with the Surety are ongoing. The Company will continueOn October 2, 2018, we filed a lawsuit against the customer to enforce itsour rights and remedies under the agreementsapplicable construction contracts. Our lawsuit disputes the propriety of the customer’s purported termination
of the construction contracts and defend any claims asserted againstseeks to recover damages associated with the Company by its customer. Management iscustomer’s actions. We are unable to estimate the probability of a favorable or unfavorable outcome as well as anwith respect to the dispute or estimate the amount of potential loss, if any, atrelated to this time.matter. We cannot guaranteecan provide no assurances that we will not incur additional costs as we negotiate with this customer.pursue our rights and remedies under the contracts. At JuneSeptember 30, 2018, our net balance sheet exposureposition for the contracts was $12.4$12.5 million.
Project Award Protest
During the first quarter 2018, we executed a contract for the construction and delivery of one towing, salvage and rescue ship vessel with the U.S. Navy for $63.6 million, with an option for seven additional vessels, which was subsequently protested by one of the unsuccessful bidders. On July 16, 2018, we were notified that the award was upheld by the U.S. Government Accountability Office and we were given a notification to proceed. On August 6, 2018, we were notified that the unsuccessful bidder had filed a subsequent protest with the Department of Justice. On August 9, 2018, we were granted a partial stay, which allows us to proceed with pre-construction design development, planning, scheduling and material ordering. Construction of the vessel cannot begin until a final ruling is issued by the U.S. Court of Federal Claims. We are working with the U.S. Navy to re-establish a timeline for construction under this contract.
NOTE 109 – SUBSEQUENT EVENTS
During the first quarter ofOn October 2, 2018, we executedfiled a contractlawsuit against a customer to enforce our rights and remedies under the applicable construction contracts for the construction of two MPSVs. See Note 8 for further discussion of our dispute and 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.lawsuit.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. The following “Management’s Discussion and Analysis of Financial Condition and Results of Operations” is provided to assist readers in understanding our financial performance during the periods presented and significant trends that may impact our future performance. This discussion should be read in conjunction with our Consolidated Financial Statements and the related notes thereto.
Cautionary Statement on Forward-Looking Information This Report contains forward-looking statements in which we discuss our potential future performance, primarily in the section 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, advancement on the SeaOne Project, ability to resolve the dispute with a customer relating to the purported termination of contracts to build two 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 or loss under the percentage-of-completion method, loss of key personnel, compliance with regulatory and environmental laws, ability to utilize navigation canals, performance of subcontractors,sub-contractors, 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 SummaryOverview
We are a leading fabricator of complex steel structures, modules and marine vessels used in energy extraction and production, petrochemical and industrial facilities, power generation, and alternative energy projects and shipping and marine transportation operations. We also provide related project management for EPC projects along with installation, hookup, commissioning and repair and maintenance services with specialized crewsservices. In addition, we perform civil, drainage and integrated project management capabilities.other work for state and local governments. Our customers include U.S. and, to a lesser extent, international energy producers, petrochemical, industrial, power, and marine operators, EPC companies and agencies of the United States Government.U.S. Government. We operate and manage our business through four operating divisions:divisions, and one non-operating division, which represent our reportable segments. Our operating divisions include: Fabrication, Shipyard, Services and 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, andAt September 30, 2018, our Texas North Yard is held for sale.sale and our Texas South Yard had been sold.
Beginning in 2015 and through the date of this Report, we have implemented a number of initiativesWe continue to strategically repositionposition the Company to attract new customers, participate in the buildupfabrication of petrochemical and industrial facilities, pursue offshore wind markets,opportunities, enter the EPC industry and diversify our customerscustomer base within all of our Shipyard Division. Additionally,operating divisions. In addition, we initiatedcontinue to focus on maintaining liquidity and securing meaningful new contract awards and backlog in the near-term, and generating operating income and cash flow from operations in the longer-term. We have made significant progress in our efforts to rebuildimprove our liquidity, preserve cash and lowerincluding reductions in costs including(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 certainofficers) and the divestiture of underutilized assets.
Sales of Assets
In early 2017, we announced our plan to rationalize underutilized assets includingTexas South Yard - During the two fabrication yards and related equipment located at our South Texas Properties.
On April 20,second quarter 2018, we closed oncompleted the sale of our Texas South Yard for $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 $0.8 million of previously received earnest money. Thefor total net proceeds received rebuilt our liquidity, provided support for upcoming projects, continued investment in our 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 recognized a gain on sale during the second quarternine-months ended September 30, 2018 of 2018 related to this transactionapproximately $53.5 million and a gain of approximately $3.9 million. Completing the sale of the
Texas SouthNorth Yard was- On September 26, 2018, we entered into an important liquidity generating event and will facilitate the Company’s continued strategic repositioning from offshore oil and gas marketsagreement to a more diversified customer base. We continue to marketsell our Texas North Yard and hopecertain associated equipment for $28.0 million. We received $0.5 million during the third quarter 2018 as a deposit on the property, which is refundable under certain circumstances. The sale is anticipated to haveclose during the fourth quarter 2018 and is subject to customary closing conditions, including the purchaser’s right to conduct inspections of the property related to confirmation of title, surveys, environmental conditions, easements and access rights and third-party consents. Based on the sales price and estimated closing and other costs, we expect to realize a negotiated contract forgain on the sale oftransaction upon closing. We can provide no assurances that we will successfully close the transaction, that closing will occur under our expected timeline or that we will achieve our estimated net proceeds or a gain on the sale. We continue to actively market the remaining Texas North Yard in the near future.assets held for sale, which primarily consist of three 660-ton crawler cranes, a barge, a plate bending roll machine and panel line equipment.
Hurricane Harvey Insurance Recoveries - During the secondthird quarter of 2018, we recorded an impairment of $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. The impairments were calculated as management's estimated net proceeds from the sales less their net book values.
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,Harvey. During the second quarter 2018, we agreed to a global settlement with our insurance carriers in the amountfor total insurance recoveries 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 representsresulting in 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.
Anet 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 quarternine months ended September 30, 2018. As of September 30, 2018, primarily related to two buildings that were declared a total loss and five damaged cranes that were soldall insurance proceeds had been received, including $7.2 million received during the secondthird 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 best estimate of the decline in the fair value of the property and related equipment. The insurance recovery fully offset this amount.
Ongoing Efforts to Increase Our Backlog, Diversify of Our Customer Base and Resolve Customer Dispute
PetrochemicalPursuit of petrochemical and industrial fabrication work - During the second quarter of 2018, we completed the fabrication and timely delivery of four modules for a new petrochemical facility. We delivered thesecurrently have several bids outstanding for the fabrication of modules on time. Weand continue to search forpursue additional fabrication work in the petrochemical industry to add to our current backlog.and industrial industries.
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 wind turbine pedestals for the first offshore wind power project in the United StatesU.S. 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 meteorological tower and platform for a customer'san offshore wind project located off the U.S. coast of Maryland. We completed theThe fabrication work was completed in the second quarter of 2018 and have included invoiced amounts in contracts receivable on our Consolidated Balance Sheet. This project was relatively small; however, it represents our continued ability to provide structures for this emerging industry. We may also partner with other companies to take advantage of growth in this area. Wearea and have executed a teaming agreement with the EEW Group to sourcepursue future U.S. offshore wind projects. There isWe can provide no guaranteeassurances that we will be successful in participating in any of theseobtaining future projects.wind project awards from this arrangement.
Diversification of our Shipyard Division customer base - We continue to be successful in our effortsare continuing to diversify our capabilitiescustomer base within our Shipyard Division.operating divisions. Specifically:
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, 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 thuswe were given a notification to proceed. WeOn August 6, 2018, we were recently notified that thisthe unsuccessful bidder hashad filed a subsequent protest with the Department of Justice. We have beenOn August 9, 2018, we were granted a partial stay, which allows us to proceed with pre-construction design development, planning, scheduling and material ordering leading up to the start of construction. Actual constructionordering. Construction of the vessel cannot begin until a final ruling is issued by the DepartmentU.S. Court of Justice.Federal Claims. We are in process of working with the U.S. Navy to re-establish a timeline for construction under this contract.
WeDuring the second quarter 2018, we signed change orders on May 1, 2018, with two different customers. Each change order wascustomers for the construction of one additional harbor tug boat for each customer. Each change order was approximately $13.0 million per boat. Each customer has an additional option for one more harbor tug boat.million. We are now constructing a total of five harbor tug boats for each customer. If
During the additional options are exercised,third quarter 2018, we signed a contract for the expansion and delivery of a 245-guest paddle wheel riverboat. The paddle wheel boat will buildbe built using the existing hull of 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 firstformer gaming vessel was awardedbuilt in July of 2017 which included options for two additional vessels.
1995.
Continued growth withinof our Services Divisionservices related work - Generally, we believe demandDemand for our Services Division will increase in 2018 beyond the contractual backlog amount in place as of June 30, 2018. Workservices associated with offshore tie-backs, upgrades and maintenance remains strong.strong, and we anticipate it will continue for the remainder of 2018 and into 2019. We will continue to pursue opportunities within the offshore/inshorefor offshore and onshore plant expansion and maintenance programs as well as targeting growth of developing fieldsand have targeted service opportunities within the shale basins in West Texas.
OurPursuit of EPC Divisionwork - As discussed in ourDuring the fourth quarter 2017, Annual Report, we wereSeaOne 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. Our current activities include pricing, planning and scheduling for the project. SeaOne’s selection of usthe Company is non-binding and commencement of the project remains subject to a number of conditions, including agreement on terms of the engagement with SeaOne. In anticipationWe understand that SeaOne is in the process of this project advancing, we are enhancingsecuring financing for the project. We continue to enhance our internal project management capabilities through the hiring of additional personnel to service this potential project. We received an additional early works purchase order from SeaOne for approximately $1.2 million. We continue to work with SeaOne on finalizing initial 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 initial construction efforts in early 2019.
Completion of our MPSV contract dispute - As previously disclosed, on March 19, 2018,discussed in Note 8 to our Consolidated Financial Statements, we received a noticenotices of purportedtermination from a customer within our Shipyard Division related toof the contracts for the construction of two MPSVs.MPSVs from one of our Shipyard Division customers. We dispute the purported terminationterminations and disagree with the customer’s reasons for same.such terminations. Pending the resolution of the dispute, we have ceased all work has been stopped and the vessels
partially completed MPSVs and associated equipment and material are in our care and custodymaterials remain at our shipyard in Houma, Louisiana. The customer hasalso notified our Surety of its intent to require completionpurported terminations of the vesselconstruction contracts and made claims under the Surety's bond.bonds issued by the Surety in connection with the construction of the two MPSVs. We have notified and met with our Surety regarding our disagreement with, ourand objection to, the customer's purported termination and its claims. Discussions with the Surety are ongoing. The Company will continueOn October 2, 2018, we filed a lawsuit against the customer to enforce itsour rights and remedies under the agreementsapplicable construction contracts. Our lawsuit disputes the propriety of the customer’s purported termination of the construction contracts and defend any claims asserted againstseeks to recover damages associated with the Company by its customer. Management iscustomer’s actions. We are unable to estimate the probability of a favorable or unfavorable outcome as well as anwith respect to the dispute or estimate the amount of potential loss, if any, atrelated to this time.matter. We cannot guaranteecan provide no assurances that we will not incur additional costs as we negotiate with this customer. At June 30, 2018,pursue our net balance sheet exposure was $12.4 million.rights and remedies under the contracts.
Outlook
Looking forward, our results of operations will be affected primarily by the overall demand and market for our services and the overall number of projects in the market place. As discussed above,services. In recent years, a significant portion of our historical customer base has been impactednegatively affected by the continued level ofa decline in offshore oil and gas exploration and development activity for oilas companies focus on onshore development opportunities. As a result, and gas. Weas discussed above, we have implemented a number of initiatives to strategically reposition the Company to attract new customers, participate in the buildupfabrication of petrochemical and industrial facilities, pursue offshore wind markets,opportunities, enter the EPC industry, and diversify our customers within all of our Shipyard Division.operating divisions. The success of ourthese initiatives to strategically reposition the Company and our future operations will be determined by:by, among other things:
The level of new construction and fabrication projects in the new markets we are pursuing, including petrochemical and industrial facilities and offshore wind;
OurThe ability of SeaOne to obtain financing and our successful execution of an agreement with SeaOne andfor the ability of SeaOne to obtain financing;
Project;
Continued growth within our Shipyard and Services divisions;
Divisions;
Our ability to winsecure contracts through competitive bidding or alliance/partnering arrangements;
Our ability to execute projects in accordance withwithin our cost estimates and successfully manage them through completion; and
Our ability to resolve aour dispute over purportedwith a Shipyard customer related to the construction of two MPSVs.
We continue to respond to the competitive forcesenvironment within our industry and continue to actively compete for additional bidding opportunities. We have increased our backlog within our Shipyard, Fabrication and Services Divisions and believe that we will be successful securing new project awards and growing our backlog. However, our operations will be negatively impacted in obtainingthe near term due to an anticipated lag in the commencement of fabrication activities for our recent and anticipated 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 inawards. Further, our Shipyard and Services Divisions, these backlogprevious project awards were receivedsold 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 weinjury. We are committed to safety. Wethe safety of our employees and believe safetyit is a key metric forto 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 measuresmetrics 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 useused 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 ofto our critical accounting policies since December 31, 2017.
New Awards and Backlog New project awards represent the expected revenue value of new contract commitments received during a given period, as well as scope growth on existing commitments. New contract commitments represent contracts for which a customer has authorized us to begin work or purchase materials pursuant to written agreement, letters of intent or other forms of authorization. Backlog represents the unearned value of our new project awards and may differ from the value of future performance obligations for our contracts required to be disclosed under Topic 606, and presented in Note 3 to our Consolidated Financial Statements. We believe that backlog, a non-GAAP financial measure, provides useful information to investors. Backlog differs from the GAAP requirement to disclose futureincludes our 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 secured subsequent to the balance sheet date pursuant to letters of intent or other forms of authorization as well asat September 30, 2018, plus 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, representsbut represent future work that management believes is probablewe believe will be performed. New project awards and backlog may vary significantly each reporting period based on the timing of being performed.our major new contract commitments. 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 generally exclude suspended projects from contract backlog when they are expected to be suspended more than 12twelve 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 projectcontract could significantly reduce our backlog and could have a material adverse effect on future revenue, net income (loss)operating results and cash flow.flows. A reconciliation of our future revenue performance obligations under Topic 606 of the ASC (the most comparable GAAP measure as includedpresented in Note 3 of the Notes to our Consolidated Financial Statements) to our reported backlog is provided below (in thousands).
| | | | | | | | | | | | | | | | | | | | | | | | | | | 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 |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | September 30, 2018 | | | Fabrication | | Shipyard | | Services | | EPC | | Eliminations | | Consolidated | | Future performance obligations under Topic 606 | $ | 44,746 |
| | $ | 282,912 |
| | $ | 11,699 |
| | $ | 836 |
| | $ | — |
| | $ | 340,193 |
| Signed contracts under purported termination (1) | — |
| | 30,148 |
| | — |
| | — |
| | — |
| | 30,148 |
| | Backlog | $ | 44,746 |
| | $ | 313,060 |
| | $ | 11,699 |
| | $ | 836 |
| | $ | — |
| | $ | 370,341 |
| | | | | | | | | | | | | |
___________ | | | (1) | Includes backlog for a customer for which we have received a notice of purported termination within our Shipyard Division pursuant to a purported notice of termination from our customer related to contracts for the construction of two MPSVs. We dispute the purported termination and disagree with the customer’s reasons for the same. We cannot guaranteecan provide no assurances that we will be able to favorably negotiatereach a favorable resolution with the customer for completion of the MPSVs with this customer.MPSVs. See Note 98 to our Consolidated Financial Statements for further discussion of the Notes to Consolidated Financial Statements.dispute. |
Our backlog at JuneSeptember 30, 2018 as compared toand December 31, 2017, consisted of the following (in thousands, except for percentages)thousands): | | | | | | | | | | | | | | |
| September 30, 2018 |
| December 31, 2017 | | Division | Amount | | Labor hours | | Amount | | Labor hours | | Fabrication | $ | 44,746 |
| | 220 |
| | $ | 15,771 |
| | 150 |
| | Shipyard | 313,060 |
| | 1,741 |
| | 184,035 |
| | 1,104 |
| | Services | 11,699 |
| | 158 |
| | 23,181 |
| | 290 |
| | EPC | 836 |
| | — |
| | — |
| | — |
| | Intersegment eliminations | — |
| | — |
| | (370 | ) | | — |
| Total (1) | $ | 370,341 |
| | 2,119 |
| | $ | 222,617 |
| | 1,544 |
|
Backlog at September 30, 2018 is expected to be recognized as revenue in the following periods (in thousands):
| | | | | | | | | | | | |
| 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% | |
| | | | | | | | |
| | | | | | | | Year (2) | | Total | | Percentage | | Remainder of 2018 | | 56,243 |
| | 15.2% | | 2019 | | 199,922 |
| | 54.0% | | 2020 | | 105,124 |
| | 28.4% | | 2021 | | 8,405 |
| | 2.2% | | 2022 | | 647 |
| | 0.2% | | Thereafter | | — |
| | —% | | Total | | $ | 370,341 |
| | 100.0% |
___________
| | | (1) | At JuneSeptember 30, 2018, projects forsix customers represented approximately 89% of our backlog, and at December 31, 2017, four largest customers in termsrepresented approximately 73% of revenueour backlog. At September 30, 2018, backlog from the six customers consisted of: |
| | | (i) | newbuildNewbuild construction of five harbor tugs for one customer (to be completed in 2018 through 2020); |
| | | (ii) | newbuildNewbuild construction of five harbor tugs for one customer (separate from above) (to be completed in 20182019 through 2020); |
| | | (iii) | newbuildNewbuild construction of two offshore marineregional class research vessels (both to be completed in 2021); |
| | | (iv) | Newbuild construction of one towing, salvage and rescue ship vessel (to be completed in 2020 and 2022)2021). During the first quarter 2018, we executed a contract 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. Construction of the vessel cannot begin until a final ruling is issued by the U.S. Court of Federal Claims. See Note 8 to our Consolidated Financial Statements for further discussion. We are working with the U.S. Navy to re-establish a timeline for construction under this contract; |
| | | (v) | Expansion of a 245-guest paddle wheel riverboat (to be competed in 2020); and |
| | (iv)(vi) | newbuildNewbuild construction of one T-ATS vessel (to be completedtwo MPSV's. We are currently in 2021). This contract was protested by onedispute with our customer pursuant to a purported notice of termination related to these contracts. We dispute the purported termination and disagree with the customer’s reasons for the same. We can provide no assurances that we will reach a favorable resolution with the customer for completion of the unsuccessful bidders. On July 16, 2018, we were notified thatMPSVs. See Note 8 to our Consolidated Financial Statements for further discussion of 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. dispute. |
| | | (2) | The timing of recognition of the revenue represented in our backlog is based on management’sour 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. We do not include options in our backlog above.backlog. If all options under our current contracts were exercised by our customers, our backlog would increase by $562.7approximately $534.0 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 from our customers related to the exercise of these options, from our customers, and we can provide no assuranceassurances that any or all of these options will be exercised. As we addour backlog increases, we will add personnel with critical project management and fabrication skills to ensure we have the resources necessary to properly 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 JuneAt September 30, 2018, we had 847816 employees compared to 977 employees as ofat December 31, 2017. Labor hours worked were 947,0001.4 million during the sixnine months ended JuneSeptember 30, 2018, compared to 11.5 million for the sixnine months ended JuneSeptember 30, 2017. The decrease in our labor hours worked is primarily within our Fabrication Division due to completion of complex modules for the construction of a new petrochemical plantfacility with no immediate replacement backlog for our Fabrication backlogDivision during the 2018 period, as well as the suspension of construction of the two MPSVs within our Shipyard Division pending resolution of ourthe dispute over termination with our MPSV customer. ThisSee Note 8 to our Consolidated Financial Statements for further discussion of the dispute.This decrease 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 JuneSeptember 30, 2018, Compared to Three Months Ended JuneSeptember 30, 2017 (in thousands, except for percentages): Consolidated | | | | | | | | | | | | | | | | 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% |
| | | | | | | | | | | | | | | | | Three Months Ended September 30, | | Increase (Decrease) | | | 2018 | | 2017 | | Amount | | Percent | | Revenue | $ | 49,712 |
| | $ | 49,884 |
| | $ | (172 | ) | | (0.3)% | | Cost of revenue | 52,924 |
| | 50,378 |
| | 2,546 |
| | 5.1% | | Gross loss | (3,212 | ) | | (494 | ) | | (2,718 | ) | | (550.2)% | | Gross loss percentage | (6.5 | )% | | (1.0 | )% | | | | | | General and administrative expenses | 7,672 |
| | 4,370 |
| | 3,302 |
| | 75.6% | | Operating loss | (10,884 | ) | | (4,864 | ) | | (6,020 | ) | | (123.8)% | | Interest income (expense), net | 72 |
| | (45 | ) | | 117 |
| | 260.0% | | Other income, net | 140 |
| | 38 |
| | 102 |
| | 268.4% | | Net loss before income taxes | (10,672 | ) | | (4,871 | ) | | (5,801 | ) | | (119.1)% | | Income tax expense (benefit) | 277 |
| | (1,761 | ) | | 2,038 |
| | 115.7% | | Net loss | $ | (10,949 | ) | | $ | (3,110 | ) | | $ | (7,839 | ) | | (252.1)% |
Revenue - Our revenueRevenue for the three months ended JuneSeptember 30, 2018 and 2017, was $54.0$49.7 million and $45.9$49.9 million, respectively, representing an increasea decrease of 17.8%0.3%. The increase isRevenue for the 2018 period approximated revenue for the 2017 period primarily due to lower revenue for our Fabrication Division of $16.0 million attributable to:to the completion and delivery of four modules for a petrochemical facility in the second quarter 2018, which was substantially offset by:
AnA $5.0 million increase of $6.8 millionin revenue within our Services Division fromdue to additional demand for onshore and offshore oil and gas service related projects; and
AnA $9.4 million net increase of $5.3 millionin revenue within our Shipyard Division relateddue to additional progress on the newbuild construction of ten harbor tug vessels and an offshore marine research vessel which wereice-breaker tug that was not under construction during the secondthird quarter of 2017, and $10.2 million in contract losses recorded during the three months ended June 30, 2017, which reducedoffset partially by lower revenue from 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 wasMPSV contracts that were suspended during the secondfirst quarter 2018. See Note 8 to our Consolidated Financial Statements for further discussion 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 completion of four modules for a petrochemical plant in April 2018.MPSV contracts.
Gross loss - Our grossGross loss for the three months ended JuneSeptember 30, 2018 and 2017, was $0.7$3.2 million compared to a(6.5% of revenue) and $0.5 million (1.0% of revenue), respectively. The gross loss of $11.6 million forduring the three months ended June 30, 2017. The improvement2018 period was primarily due to increased revenueunder recovery of our overhead costs (including holding costs for our Texas North Yard of $0.7 million) and the impact of lower margin backlog within our Services Division as discussed above and a lower gross loss from our Shipyard Division related to $10.2previous project awards sold during a period of competitive pricing. The increase in gross loss relative to the prior period was primarily due to a higher gross loss for our Fabrication Division of $5.3 million related to decreased fabrication revenue, offset partially by:
A decrease in gross loss within our Shipyard Division of $1.7 million due to increased revenue, a reduction in overhead costs, and the prior period including $2.1 million in contract losses recorded during the three months ended June 30, 2017, reflectingrelated to cost overruns and re-work identifiedincreases 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 expensesMPSVs; and Increased gross profit within our Fabrication Division.Services Division of $1.3 million due to increased revenue and higher recovery of our overhead costs.
General and administrative expenses - Our general and administrative expenses were $5.1 million for the three months ended June 30, 2018, compared to $4.6 million for the three months ended June 30, 2017. The increase in generalGeneral and administrative expenses for the three months ended JuneSeptember 30, 2018 and 2017, were $7.7 million (15.4% of revenue) and $4.4 million (8.8% of revenue), respectively, representing an increase of 75.6%. The increase was primarily attributabledue to:
Build-upBad debt expense of additional personnel for$2.8 million related to a contracts receivable reserve recorded during the third quarter 2018 within our newly created EPCFabrication Division in anticipationas we received indications that collectability of the SeaOne Project;receivable was no longer probable;
Increased legal and advisory fees related to customer disputes,disputes;
Costs associated with the evaluation of strategic planningalternatives and diversification ofinitiatives to diversify our business; and Increased employee incentives accruals related toAn increase in administrative personnel for our safety incentive program and higher employee profitability incentives within our Servicesnewly created EPC Division.
This wasThese increases were offset partially offset by cost reductions and continued cost minimization efforts implemented by management for the second quarter of 2017.headcount reductions.
Interest expense,income (expense), net - Interest expense,income (expense), net decreased due to fewer letters of credit issued under our Credit Agreement for the three months ended JuneSeptember 30, 2018 compared to the three months ended June 30,and 2017, as well as increasedwas income of $72,000 and expense of $45,000, respectively. The net interest income for the 2018 period was primarily due to interest earned from investments in cash equivalents and held-to-maturity, short-term investments during the three months ended June 30, 2018.investments.
Other income, (expense)net - - Other income, net was $7.1 million for the three months ended June 30, 2018, compared to other expense, net of $0.3 million for the three months ended June 30, 2017. Other income, net for the three months ended JuneSeptember 30, 2018 isand 2017, was income of $0.1 million and $38,000, respectively. Other income, net for the period was primarily due to a gainnet gains on the salesales 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.assets.
Income tax expense (benefit) - Our effective incomeIncome tax rateexpense (benefit) for the three months ended JuneSeptember 30, 2018 and 2017, was expense of 13.1%, compared to an effective tax rate$0.3 million and benefit of 34.5% for the comparable period during 2017.$1.8 million, respectively. Current expense represents state income taxes. No federal tax within our Services Division. The decrease inbenefit was recorded during the effective tax rate is the result of2018 period as a full valuation allowance was recorded against our net NOL deferred tax assets.assets generated during the period. See Note 1 of the Notes to our Consolidated Financial Statements regardingfor further discussion of our NOLs and deferred tax assets.
Operating Segments
The results of our four operating divisions and non-operating corporate division for the three months ended JuneSeptember 30, 2018 and 2017, are presented below (in thousands, except for percentages).
| | | | | | | | | | | | | | | | | 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 | ) | |
|
| | | | | | | | | | | | | | | | | Fabrication | | Three Months Ended September 30, | | Increase (Decrease) | | | | 2018 | | 2017 | | Amount | | Percent | | Revenue | | $ | 2,311 |
| | $ | 18,318 |
| | $ | (16,007 | ) | | (87.4)% | | Gross profit (loss) | | (4,032 | ) | | 1,250 |
| | (5,282 | ) | | (422.6)% | | Gross profit (loss) percentage | | (174.5 | )% | | 6.8 | % | | | |
| | General and administrative expenses | | 3,676 |
| | 778 |
| | 2,898 |
| | 372.5% | | Operating income (loss) | | (7,708 | ) | | 472 |
| | (8,180 | ) | |
|
Revenue - Revenue from our Fabrication Division decreased $5.4 million for the three months ended JuneSeptember 30, 2018 compared to the three months ended June 30, 2017.and 2017, was $2.3 million and $18.3 million, respectively, representing a decrease of 87.4%. The decrease is attributablewas primarily due to the completion and delivery of four modules for a petrochemical plantfacility during Aprilthe second quarter 2018, with very little immediate replacement backlog started asno significant projects under construction during the third quarter 2018. We were awarded a resultnew project for the expansion of a paddle wheel riverboat during the temporary impacts from previously depressed oil and gas prices.third quarter 2018 that will be constructed by our Fabrication Division; however, construction did not commence until the fourth quarter 2018.
Gross profit (loss) - Gross loss from our Fabrication Divisionprofit (loss) for the three months ended JuneSeptember 30, 2018 and 2017, was $1.7a gross loss of $4.0 million compared to(174.5% of revenue) and a gross profit of $1.9$1.3 million for the three months ended June 30, 2017.(6.8% of revenue), respectively. The gross loss during the 2018 period was primarily due to under recovery of our overhead costs (including holding costs for our Texas North Yard of $0.7 million). The gross loss for 2018 relative to the prior period gross profit was primarily due to decreased revenue, with minimal new fabrication work started during the second quarter of 2018 as discussed above.offset partially by a reduction in overhead costs.
General and administrative expenses - General and administrative expenses for our Fabrication Division increased $0.1 million for the three months ended JuneSeptember 30, 2018 compared to the three months ended June 30, 2017.and 2017, were $3.7 million (159.1% of revenue) and $0.8 million (4.2% of revenue), respectively, representing an increase of 372.5%. The increase iswas primarily due to an increase in legalbad debt expense of $0.4$2.8 million for ourrelated to a contracts receivable reserve recorded during the third quarter 2018 as we received indications that collectability of the receivable was no longer probable and higher legal and advisory fees related to the pursuit of claims against a customer related tofor disputed change orders for a large deepwater project we deliveredcompleted prior to our customer in November 20152017, offset partially offset by decreases in 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.
Asset impairment - We recorded an impairment of $0.6 million during the three months ended June 30, 2018, primarily related to a piece of equipment at our Texas North 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 June 30, 2017, within our Fabrication Division.headcount reductions.
| | | | | | | | | | | | | | | | | 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 |
| |
|
| | | | | | | | | | | | | | | | | Shipyard | | Three Months Ended September 30, | | Increase (Decrease) | | | | 2018 | | 2017 | | Amount | | Percent | Revenue (1) | | $ | 24,492 |
| | $ | 15,074 |
| | $ | 9,418 |
| | 62.5% | | Gross loss | | (1,764 | ) | | (3,504 | ) | | 1,740 |
| | 49.7% | | Gross loss percentage | | (7.2 | )% | | (23.2 | )% | | | |
| | General and administrative expenses | | 696 |
| | 888 |
| | (192 | ) | | (21.6)% | Operating loss (1) | | (2,460 | ) | | (4,392 | ) | | 1,932 |
| |
|
___________ | | | (1) | Revenue for the three months ended JuneSeptember 30, 2018 and 2017, includes $0.1$15,000 and $0.5 million, and $0.3 millionrespectively, of non-cash amortization of deferred revenue related to the values assigned to the contracts acquired in the LEEVAC transaction, respectively.a previous acquisition. |
Revenue - Revenue from our Shipyard Division increased $5.3 million for the three months ended JuneSeptember 30, 2018 comparedand 2017, was $24.5 million and $15.1 million, respectively, representing an increase of 62.5%. The increase was primarily due to the three months ended June 30, 2017. During the second quarter of 2018, we were able to makeadditional progress on the construction of ten harbor tug vessels and an offshore marine research vessel which wereice-breaker tug that was not under construction during the secondthird 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 wasoffset partially offset by lower revenue from construction of our two MPSV contracts that were under construction during 2017, but suspended during the first quarter of 2018. See also Note 9 of the Notes8 to our Consolidated Financial Statements for additional information relating tofurther discussion of the suspension of construction of two MPSVs.MPSV contracts.
Gross loss - Gross loss from our Shipyard Division was $2.8 million for the three months ended JuneSeptember 30, 2018 compared toand 2017, was $1.8 million (7.2% of revenue) and $3.5 million (23.2% of revenue), respectively, representing a gross lossdecrease of $13.9 million for the three months ended June 30, 2017.49.7%. The gross loss forduring the three months ended June 30, 2018 period was primarily attributabledue to underutilizationunder recovery of our Houmaoverhead costs and Lake Charles shipyards andthe impact of lower margin backlog related to previous project awards sold during a period of competitive pricing on current work. pricing.
The improvementdecrease in gross loss of $11.1 millionrelative to the 2017 period was primarily due to:
$10.2to higher revenue, a reduction in overhead costs, and the prior period including $2.1 million in contract losses recorded during the three months ended June 30, 2017, related to cost overruns and re-work identifiedincreases on the two contracts relating to the construction of two MPSVs;
holding and closing costs during the three months ended June 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.MPSVs.
General and administrative expenses - General and administrative expenses for our Shipyard Division decreased $0.4 for the three months ended JuneSeptember 30, 2018 compared to the three months ended June 30,and 2017, were $0.7 million (2.8% of revenue) and $0.9 million (5.9% of revenue), respectively, representing a decrease of 21.6%. The decrease was 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.headcount reductions.
| | | | | | | | | | | | | | | | | 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 |
| |
|
| | | | | | | | | | | | | | | | | Services | | Three Months Ended September 30, | | Increase (Decrease) | | | | 2018 | | 2017 | | Amount | | Percent | | Revenue | | $ | 22,617 |
| | $ | 17,651 |
| | $ | 4,966 |
| | 28.1% | | Gross profit | | 3,191 |
| | 1,912 |
| | 1,279 |
| | 66.9% | | Gross profit percentage | | 14.1 | % | | 10.8 | % | | | |
| | General and administrative expenses | | 705 |
| | 695 |
| | 10 |
| | 1.4% | | Operating income | | 2,486 |
| | 1,217 |
| | 1,269 |
| |
|
Revenue - Revenue from our Services Division increased $6.8 million for the three months ended JuneSeptember 30, 2018 compared to the three months ended June 30,and 2017, was $22.6 million and $17.7 million, respectively, representing an increase of 28.1%. The increase was due to an overall increase in workactivity resulting from increases in customerhigher demand for our onshore and offshore oil and gas related service projects.services.
Gross profit - Gross profit from our Services Division increased $3.2 million for the three months ended JuneSeptember 30, 2018 compared to the three months ended June 30,and 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.was $3.2 million (14.1% of revenue) and $1.9 million (10.8% of revenue), respectively, representing an increase of 66.9%. The increase in gross profit percentage was due to a higher revenue and improved recovery of fixed costs with increased work.overhead costs.
General and administrative expenses - General and administrative expenses for our Services Division increased $0.1 for the three months ended JuneSeptember 30, 2018 compared to the three months ended June 30,and 2017, due to supportwere $0.7 million (3.1% of increased work as well as increases in employee incentive compensation with allocationrevenue) and $0.7 million (3.9% of corporate expenses remaining comparable period over period.revenue), respectively, representing an increase of 1.4%.
| | | | | | | | | | | | | | | | | 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 |
| |
|
| | | | | | | | | | | | | | | | | EPC | | Three Months Ended September 30, | | Increase (Decrease) | | | | 2018 | | 2017 | | Amount | | Percent | | Revenue | | $ | 1,071 |
| | $ | — |
| | $ | 1,071 |
| | 100.0% | | Gross loss | | (205 | ) | | — |
| | (205 | ) | | (100.0)% | | Gross loss percentage | | (19.1 | )% | | n/a |
| | | | | | General and administrative expenses | | 503 |
| | — |
| | 503 |
| | 100.0% | | Operating loss | | (708 | ) | | — |
| | (708 | ) | |
|
Revenue - Our EPC Division did not exist at JuneSeptember 30, 2017. Revenue for the three months ended JuneSeptember 30, 2018 consists of earlypricing, planning and scheduling work and engineering studies authorized by SeaOne.for the SeaOne Project. See Note 8 of the Notes7 to our Consolidated Financial Statements for further discussion of our EPC Division and the SeaOne Project.
Gross profitloss - Gross profitloss for the three months ended JuneSeptember 30, 2018, consistswas primarily due to costs incurred that are not yet fully recoverable under our current scope 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 administrative personnel and allocations of corporate expensesother costs 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 | ) | |
|
| | | | | | | | | | | | | | | | | Corporate | | Three Months Ended September 30, | | Increase (Decrease) | | | | 2018 | | 2017 | | Amount | | Percent | | Revenue | | $ | — |
| | $ | — |
| | $ | — |
| | | | Gross loss | | (402 | ) | | (152 | ) | | (250 | ) | | (164.5)% | | Gross loss percentage | | n/a |
| | n/a |
| | | | | | General and administrative expenses | | 2,092 |
| | 2,009 |
| | 83 |
| | 4.1% | | Operating loss | | (2,494 | ) | | (2,161 | ) | | (333 | ) | |
|
Gross loss - Gross loss from our Corporate Division increasedfor the three months ended September 30, 2018 and 2017, was $0.4 million and $0.2 million, respectively, representing an increase of 164.5%. The increase was primarily due to lower allocation of expenses and build-up of personnelhigher costs to support our strategic initiatives and EPC Division.
General and administrative expenses - General and administrative expenses for our Corporate Division increased primarily due to increased legalthe three months ended September 30, 2018 and advisory fees related to customer disputes, strategic planning2017, were $2.1 million (4.2% of consolidated revenue) and diversification$2.0 million (4.0% of our business and increased employee incentive accruals.consolidated revenue), respectively, representing an increase of 4.1%.
SixNine Months Ended JuneSeptember 30, 2018, Compared to SixNine Months Ended JuneSeptember 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% |
| | | | | | | | | | | | | | | | | Nine Months Ended September 30, | | Increase (Decrease) | | | 2018 | | 2017 | | Amount | | Percent | | Revenue | $ | 161,016 |
| | $ | 133,745 |
| | $ | 27,271 |
| | 20.4% | | Cost of revenue | 164,248 |
| | 150,755 |
| | 13,493 |
| | 9.0% | | Gross loss | (3,232 | ) | | (17,010 | ) | | 13,778 |
| | 81.0% | | Gross loss percentage | (2.0 | )% | | (12.7 | )% | | | | | | General and administrative expenses | 17,473 |
| | 12,940 |
| | 4,533 |
| | 35.0% | | Asset impairments | 1,360 |
| | 389 |
| | 971 |
| | 249.6% | | Operating loss | (22,065 | ) | | (30,339 | ) | | 8,274 |
| | 27.3% | | Interest expense, net | (166 | ) | | (262 | ) | | 96 |
| | 36.6% | | Other income (expense), net | 6,954 |
| | (209 | ) | | 7,163 |
| | 3,427.3% | | Net loss before income taxes | (15,277 | ) | | (30,810 | ) | | 15,533 |
| | 50.4% | | Income tax expense (benefit) | 419 |
| | (10,322 | ) | | 10,741 |
| | 104.1% | | Net loss | $ | (15,696 | ) | | $ | (20,488 | ) | | $ | 4,792 |
| | 23.4% |
Revenue - Our revenueRevenue for the sixnine months ended JuneSeptember 30, 2018 and 2017, was $111.3$161.0 million and $83.9$133.7 million, respectively, representing an increase of 32.7%20.4%. The increase iswas primarily attributable to:
Andue to a $22.9 million 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 both onshore and offshore oilservices and gas service related projects.a $14.9 million increase within our Shipyard Division primarily due to additional progress on the construction of ten harbor tug vessels, two regional class research vessels and an ice-breaker tug that was not under construction during the prior period. These increases were partially offset by a decrease in revenue of $14.3 million within our Fabrication Division primarily due to the completion and delivery of four modules for a petrochemical facility during the second quarter 2018 and lower revenue from our two MPSV contracts that were suspended during the first quarter 2018.
Gross loss - Our grossGross loss for the sixnine months ended JuneSeptember 30, 2018 and 2017, was $20,000 compared to$3.2 million (2.0% of revenue) and $17.0 million (12.7% of revenue), respectively, representing a decrease of 81.0%. The gross loss of $16.5 million forduring the six months ended June 30, 2017. The improvement in gross loss2018 period was primarily due to under recovery of our overhead costs (including holding costs for our South Texas Properties of $1.6 million) and the impact of lower margin backlog within our Shipyard Division related to previous project awards sold during a period of competitive pricing.
The decrease in gross loss relative to the prior period was primarily due to a decrease in gross loss within our Shipyard Division of $13.5 million due to increased revenue, within our Services Division as discussed abovea reduction in overhead costs, and $10.6the prior period including $12.7 million in contract losses related to cost overruns and re-work that was identified and recorded during the six months ended June 30, 2017increases on two contracts relating to the construction of two MPSVs, with no comparable adjustmentsand increased gross profit within our Services Division of $7.1 million due to contract losses in the first halfincreased revenue and higher recovery of 2018.our overhead costs, offset partially by a gross loss for our Fabrication Division of $5.9 million related to decreased fabrication revenue.
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 generalGeneral and administrative expenses for the sixnine months ended JuneSeptember 30, 2018 and 2017, were $17.5 million (10.9% of revenue) and $12.9 million (9.7% of revenue), respectively, representing and increase of 35.0%. The increase was primarily attributabledue to:
Build-upBad debt expense of additional$2.8 million related to a contracts receivable reserve recorded during the third quarter 2018 within our Fabrication Division as we received indications that collectability of the receivable was no longer probable;
Higher legal and advisory fees related to customer disputes; Costs associated with the evaluation of strategic alternatives and initiatives to diversify our business;
An increase in administrative 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 employeeHigher short term incentive accrualsplan costs for allcertain 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.long-term incentive plan costs.
These increases were offset partially by headcount reductions.
Asset impairmentimpairments - We recorded an impairment ofAsset impairments for the nine months ended September 30, 2018 and 2017, were $1.4 million and $0.4 million, respectively. The impairments were recorded during the six months ended June 30,first half of 2018 primarilyand 2017, respectively, and were related to two pieces of equipment at our Texas North Yardcertain assets that arewere held for sale. The impairment was calculated as management's estimated net proceeds from the sale less the equipment's net book value.within our Fabrication and Shipyard Divisions. See Note 2 of the Notes to our Consolidated Financial Statements for additional information regardingfurther discussion of our assets held for sale. During
Interest expense, net - Interest expense, net for the sixnine months ended JuneSeptember 30, 2018 and 2017, we recorded an impairmentwas expense of $0.4$0.2 million relatedand $0.3 million, respectively. Interest expense, net deceased for the period primarily due to our Shipyard Division assets held for sale.interest earned from cash equivalents and short-term investments, partially offset by interest expense on borrowings outstanding earlier in 2018.
Other income (expense), net - Other income (expense), net was $6.8 million for the sixnine months ended JuneSeptember 30, 2018 compared to otherand 2017, was income of $7.0 million and expense net of $0.3$0.2 million, for the six months ended June 30, 2017.respectively. Other income, net for the six months ended June 30, 2018 isperiod was primarily due to a gain on the sale of our Texas South Yard of $3.9 million and a gain on settlement offrom insurance recovery proceeds related to Hurricane Harvey of $3.6 million.million recorded during the first half of 2018.
Income tax expense (benefit) - Our effective incomeIncome tax rateexpense (benefit) for the sixnine months ended JuneSeptember 30, 2018 and 2017, was expense of 3.1%, compared to an effective tax rate$0.4 million and a benefit of 33.0% for the comparable period during 2017.$10.3 million, respectively. Current expense represents state income taxes. No federal tax within our Services Division. The decrease inbenefit was recorded during the effective tax rate is the result of2018 period as a full valuation allowance was recorded against our NOL deferred tax assets.assets generated during the period. See Note 1 of the Notes to our Consolidated Financial Statements regardingfor further discussion of our NOLs and deferred tax assets.
Operating Segments
The results of our four operating divisions and non-operating corporate division for the sixnine months ended JuneSeptember 30, 2018 and 2017, are presented below (in(amounts 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 | ) | | |
| | | | | | | | | | | | | | | | | Fabrication | | Nine Months Ended September 30, | | Increase (Decrease) | | | | 2018 | | 2017 | | Amount | | Percent | | Revenue | | $ | 28,171 |
| | $ | 42,517 |
| | $ | (14,346 | ) | | (33.7)% | | Gross profit (loss) | | (5,918 | ) | | 216 |
| | (6,134 | ) | | (2,839.8)% | | Gross profit (loss) percentage | | (21.0 | )% | | 0.5 | % | | | | | | General and administrative expenses | | 5,251 |
| | 2,432 |
| | 2,819 |
| | 115.9% | | Asset impairments | | 1,360 |
| | — |
| | 1,360 |
| | 100.0% | | Operating loss | | (12,529 | ) | | (2,216 | ) | | (10,313 | ) | | |
Revenue - Revenue from our Fabrication Division increased $1.7 million for the sixnine months ended JuneSeptember 30, 2018 comparedand 2017, was $28.2 million and $42.5 million, respectively, representing a decrease of 33.7%. The decrease was primarily due to the six months ended June 30, 2017. The increase is attributable to the constructioncompletion and completiondelivery of four modules for a petrochemical plantfacility during the six months ended June 30,second quarter 2018 with no other significant projects under construction during the remaining period of 2018. This was partially offset, by decreased revenue of $2.8 millionWe were awarded a new project for the six months ended June 30,expansion of a paddle wheel riverboat during the third quarter 2018 atthat will be constructed by our Fabrication Division; however, construction did not commence until the fourth quarter 2018. In addition, revenue from our South Texas Properties decreased $3.5 million as these properties were either sold and/or marketed for sale.sale during all of 2018. See Note 2 to our Consolidated Financial Statements for further discussion of our South Texas Properties.
Gross lossprofit (loss) - Gross loss from our Fabrication Divisionprofit (loss) for the sixnine months ended JuneSeptember 30, 2018 and 2017, was $1.9 million compared to a gross loss of $1.0$5.9 million for the six months ended June 30, 2017.(21.0% of revenue) and a gross profit of $0.2 million (0.5% of revenue), respectively. The increase in gross loss during the 2018 period was primarily due to increased materialunder recovery of our overhead costs incurred on(including holding costs for our South Texas Properties of $1.6 million). The gross loss for 2018 relative to 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. Thisprior period gross profit was primarily due to decreased revenue, offset partially offset by a reduction in overhead costs and lower depreciation expense of $1.9 million during the six months ended June 30, 2018 for our South Texas Properties as these assets arewere classified as held for sale.sale during all of 2018.
General and administrative expenses - General and administrative expenses for our Fabrication Division decreased $0.1 million for the sixnine months ended JuneSeptember 30, 2018 compared to the six months ended June 30, 2017.and 2017, were $5.3 million (18.6% of revenue) and $2.4 million (5.7% of revenue), respectively, representing an increase of 115.9%. The decreaseincrease is primarily due to:
Bad debt expense of $2.8 million related to decreases in salariesa contracts receivable reserve recorded during the third quarter 2018 as we received indications that collectability of the receivable was no longer probable; Legal and employee incentivesadvisory fees related to pursuit of $0.3 million dueclaims against a customer for disputed change orders for a project completed prior to reductions in workforce, decreases in corporate allocations of $0.3 million as a portion of these are now allocated2017; and Legal expenses incurred to market and sell our EPC Division and continued cost minimization efforts implementedSouth Texas Properties.
These increases were offset partially by managementheadcount reductions.
Asset impairments - Asset impairments for the nine months ended September 30, 2018 were $1.4 million. The impairments were recorded during 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, primarilyand were 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.certain assets that were held for sale. See Note 2 of the Notes to our Consolidated Financial Statements for additional information regardingfurther discussion of 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 |
| | |
| | | | | | | | | | | | | | | | | Shipyard | | Nine Months Ended September 30, | | Increase (Decrease) | | | | 2018 | | 2017 | | Amount | | Percent | Revenue (1) | | $ | 66,677 |
| | $ | 51,798 |
| | $ | 14,879 |
| | 28.7% | Gross loss (1) | | (5,563 | ) | | (19,061 | ) | | 13,498 |
| | 70.8% | | Gross loss percentage | | (8.3 | )% | | (36.8 | )% | | | | | | General and administrative expenses | | 2,089 |
| | 2,835 |
| | (746 | ) | | (26.3)% | | Asset impairments | | — |
| | 389 |
| | (389 | ) | | (100.0)% | Operating loss (1) | | (7,652 | ) | | (22,285 | ) | | 14,633 |
| | |
___________ | | | (1) | Revenue for the sixnine months ended JuneSeptember 30, 2018, and 2017, includes $0.5 million and $1.9$2.4 million, respectively, of non-cash amortization of deferred revenue related to the values assigned to the contracts acquired in the LEEVAC transaction.a previous acquisition. |
Revenue - Revenue from our Shipyard Division increased $5.5 million for the sixnine months ended JuneSeptember 30, 2018 comparedand 2017, was $66.7 million and $51.8 million, respectively, representing an increase of 28.7%. The increase was primarily due to the six months ended June 30, 2017. During the first half of 2018, we madeadditional progress on the construction of ten harbor tug vessels, two regional class research vessels and an offshore marine research vesselice-breaker tug that werewas 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 wasprior period, partially offset by lower revenue from construction ofour two MPSVsMPSV contracts 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 sixnine months ended JuneSeptember 30, 2018 compared toand 2017, was $5.6 million (8.3% of revenue) and $19.1 million (36.8% of revenue), respectively, representing a gross lossdecrease of $15.6 million for the six months ended June 30, 2017.70.8%. The gross loss forduring the six months ended June 30, 2018 period was primarily attributabledue to underutilizationunder recovery of our Houmaoverhead costs and Lake Charles shipyards andthe impact of lower margin backlog related to previous project awards sold during a period of competitive pricing on current work.pricing. The decrease in gross loss comparedrelative to the six months ended June 30, 2017,prior period was primarily due to:
$10.6Higher revenue and a reduction in overhead costs;
Contract losses of $12.7 million in contract lossesduring the prior period related to cost overruns and re-work that was identified and recorded during the six months ended June 30, 2017 relating toincreases on the construction of two MPSVs; and Holding and closing costs during the six months ended June 30, 2017,prior period of approximately $0.8 million related to our Prospect shipyard. We terminated theshipyard, for which our lease of thisthe 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 customerterminated during the fourth quarter of 2017 and construction of the second OSV re-commenced. We subsequently delivered the second OSV on July 31, 2018.2017.
General and administrative expenses - General and administrative expenses for our Shipyard Division decreased $0.6 million for the sixnine months ended JuneSeptember 30, 2018 compared to the six months ended June 30,and 2017, were $2.1 million (3.1% of revenue) and $2.8 million (5.5% of revenue), respectively, representing a decrease of 26.3%. The decrease was 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.headcount reductions.
Asset impairmentimpairments - DuringAsset impairments for the sixnine months ended JuneSeptember 30, 2017 wewere $0.4 million. The impairments were recorded an impairmentduring the first half of $0.4 million2017 and were related to the Shipyard Divisioncertain assets that were held for sale. See Note 2 of the Notes to our Consolidated Financial Statements for additional information relating todiscussion of our assets held for sale. We did not record any asset impairment during the six months ended June 30, 2018, in our Shipyard Division.
| | | | | | | | | | | | | | | | | 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 |
| |
|
| | | | | | | | | | | | | | | | | Services | | Nine Months Ended September 30, | | Increase (Decrease) | | | | 2018 | | 2017 | | Amount | | Percent | | Revenue | | $ | 66,692 |
| | $ | 43,758 |
| | $ | 22,934 |
| | 52.4% | | Gross profit | | 9,390 |
| | 2,335 |
| | 7,055 |
| | 302.1% | | Gross profit percentage | | 14.1 | % | | 5.3 | % | | | | | | General and administrative expenses | | 2,201 |
| | 2,008 |
| | 193 |
| | 9.6% | | Operating income | | 7,189 |
| | 327 |
| | 6,862 |
| |
|
Revenue - Revenue from our Services Division increased $18.0 million for the sixnine months ended JuneSeptember 30, 2018 compared to the six months ended June 30,and 2017, was $66.7 million and $43.8 million, respectively, representing and increase of 52.4%. The increase was due to an overall increase in workactivity resulting from increases in customerhigher demand for our onshore and offshore oil and gas related service projects.services.
Gross profit - Gross profit from our Services Division increased $5.8 million for the sixnine months ended JuneSeptember 30, 2018 compared to the six months ended June 30,and 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.was $9.4 million (14.1% of revenue) and $2.3 million (5.3% of revenue), respectively, representing an increase of 302.1%. The increase in gross profit percentage was due to a higher revenue and improved recovery of fixed costs with increased work.overhead costs.
General and administrative expenses - General and administrative expenses for our Services Division increased $0.2 million for the sixnine months ended JuneSeptember 30, 2018 compared to the six months ended June 30,and 2017, were $2.2 million (3.3% of revenue) and $2.0 million (4.6% of revenue), respectively, representing an increase of 9.6%. The increase was due to additional costs to support of increased work as well as increases inhigher activity and higher employee incentive compensation with allocation of corporate expenses remaining comparable period over period.costs.
| | | | | | | | | | | | | | | | | 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 | ) | |
|
| | | | | | | | | | | | | | | | | EPC | | Nine Months Ended September 30, | | Increase (Decrease) | | | | 2018 | | 2017 | | Amount | | Percent | | Revenue | | $ | 2,026 |
| | $ | — |
| | $ | 2,026 |
| | 100.0% | | Gross profit | | 30 |
| | — |
| | 30 |
| | 100.0% | | Gross profit percentage | | 1.5 | % | | n/a |
| | | | | | General and administrative expenses | | 1,405 |
| | — |
| | 1,405 |
| | 100.0% | | Operating loss | | (1,375 | ) | | — |
| | (1,375 | ) | |
|
Revenue - Our EPC Division did not exist at JuneSeptember 30, 2017. Revenue for the sixnine months ended JuneSeptember 30, 2018, consists of earlypricing, planning and scheduling work and engineering studies authorized by SeaOne.for the SeaOne Project. See Note 8 of the Notes7 to our Consolidated Financial Statements for further discussion of our EPC Division and the SeaOne Project.
Gross profit - Gross profit 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 administrative personnel and allocations of corporate expensesother costs as we invest in this new line of business.
| | | | | | | | | | | | | | | | | 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 | ) | |
|
| | | | | | | | | | | | | | | | | Corporate | | Nine Months Ended September 30, | | Increase (Decrease) | | | | 2018 | | 2017 | | Amount | | Percent | | Revenue | | $ | — |
| | $ | — |
| | $ | — |
| | | | Gross loss | | (1,171 | ) | | (500 | ) | | (671 | ) | | (134.2)% | | Gross loss percentage | | n/a |
| | n/a |
| | | | | | General and administrative expenses | | 6,527 |
| | 5,665 |
| | 862 |
| | 15.2% | | Operating loss | | (7,698 | ) | | (6,165 | ) | | (1,533 | ) | |
|
Gross loss - Gross loss from our Corporate Division increasedfor the nine months ended September 30, 2018 and 2017, was $1.2 million and $0.5 million, respectively, representing an increase in gross loss of 134.2%. The increase in gross loss was primarily due to lower allocation of expenses and as well as buildup of personnelhigher costs to support our strategic initiatives and EPC Division.
General and administrative expenses - General and administrative expenses for our Corporate Division increasedthe nine months ended September 30, 2018 and 2017, were $6.5 million (4.1% of consolidated revenue) and $5.7 million (4.2% of consolidated revenue), respectively, representing and increase of 15.2%. The increase was primarily due to increased legal and advisory fees related to customer disputes, costs associated with the evaluation of strategic planningalternatives and diversification ofinitiatives to diversify our business, and increased employeehigher long-term incentive accruals.plan costs.
Liquidity and Capital Resources Our primary sources of liquidity remains dependent onare our cash on hand,and cash equivalents, scheduled maturities of our held-to-maturity, short-term investments, potential proceeds from the salessale of assets held for sale, and availability of future drawings fromunder our Credit Agreement (discussed below). Our available liquidity is impacted by changes in our working capital (excluding cash and cash equivalents and short-term investments) and our capital expenditure requirements. At September 30, 2018, our cash and cash equivalents and short-term investments totaled $54.5 million and our working capital was $124.0 million. Working capital includes $9.5 million of short-term investments and $42.7 million of assets held for sale. Fluctuations in our working capital balance, and its components, are not unusual in our business and are impacted by the size of our projects and the mix of our backlog. Our working capital is particularly impacted by the timing of new project awards and related payments in advance of performing work, and the subsequent achievement of billing milestones or progress billings on backlog as we complete certain phases of work. Working capital is also impacted at period-end by the timing of contracts receivable collections ofand accounts receivable. payable payments on our projects.
A summary of our immediately available liquidity as of Juneat September 30, 2018, is as follows:follows (in thousands): | | | | | | | 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 |
|
| | | | | | | Available Liquidity | | Total | | Cash and cash equivalents | | $ | 45,020 |
| Short-term investments (1) | | 9,494 |
| | Total cash, cash equivalents and short-term investments | | 54,514 |
| | Credit Agreement capacity | | 40,000 |
| | Less: Outstanding letters of credit | | 2,475 |
| | Credit Agreement availability | | 37,525 |
| | Total available liquidity | | $ | 92,039 |
|
___________ (1) Our held-to-maturity, short-term investments includeIncludes U.S. Treasuries and other investment-grade commercial paper andwhich can be liquidated quickly in open markets. Working capital was $132.7 million and our ratio
Sales of current assets to current liabilities was 4.67 to 1 at June 30, 2018, compared to $130.5 million and 3.68 to 1, respectively, at December 31, 2017. Working capital at June 30, 2018, includes $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. At June 30, 2018, our contracts receivable balance was $31.9 million of which we have subsequently collected $14.4 million 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.Assets Our primary sources/uses of cash during the six months ended June 30, 2018, are referenced in the Cash Flow Activities section below.
As discussed in our Executive Summary,Overview, we are implementinghave initiated several strategies to diversify our business, increase backlog, reduce operating expenses and monetize underutilized assets. Specifically, during the On April 20,second quarter 2018, we closed oncompleted the sale of our Texas South Yard for a sale price of $55.0 million, less selling costs of $1.5 million. We received approximately $52.7 million, at closing, which was in addition to the $0.8 million of previously received earnest money. Thefor total net proceeds received rebuilt our liquidity, provided support for upcoming projects, continued investment in our EPC Divisionduring the nine-months ended September 30, 2018 of approximately $53.5 million and for other general corporate purposes. See further discussiona gain of the sale of our Texas South Yard in Note 2 of the Notesapproximately $3.9 million.
In addition, on September 26, 2018, we entered into an agreement to Consolidated Financial Statements. We continue to market oursell the Texas North Yard and hopecertain associated equipment for $28.0 million. We received $0.5 million during the third quarter 2018 as a deposit on the property, which is refundable under certain circumstances. The sale is anticipated to haveclose in the fourth quarter 2018 and is subject to customary closing conditions, including the purchaser’s right to conduct inspections of the property related to confirmation of title, surveys, environmental conditions, easements and access rights, and third-party consents. Based on the sales price and estimated closing and other costs, we expect to realize a negotiated contract forgain on the sale oftransaction upon closing. We can provide no assurances that we will successfully close the transaction, that closing will occur under our expected timeline or that we will achieve our estimated net proceeds or a gain on the sale. We continue to actively market the remaining Texas North Yard in the near future.assets held for sale, which primarily consist of three 660-ton crawler cranes, a barge, a plate bending roll machine, and panel line equipment.
Line of Credit
We have a $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 basewith Hancock Whitney Bank that can be used for borrowings or letters of credit and general corporate purposes. We believe thatcredit. On August 27, 2018, we entered into a third amendment to our Credit Agreement, will provide us with additional working capital flexibilitywhich extended its maturity date from June 9, 2019 to expand operations as backlog improves, respondJune 9, 2020, and reduced the base tangible net worth requirement from $185.0 million to market opportunities and support our ongoing operations. Interest on drawings under$180.0 million. The third amendment also removed the Credit Agreement may be designated, at our option, as either Base Rateinclusion of 50% of Consolidated Net Income (as defined in the credit facility) or LIBOR plus 2% per annum. Unused commitment feesCredit Agreement) for each fiscal quarter and the inclusion of 50% of the gain on the undrawn portionsale 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. The Credit Agreement is secured by substantially all our assets (other than the South Texas Properties).
We must comply with the followingProperties from our minimum tangible net worth covenant. Accordingly, our amended quarterly 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), plusAgreement are as follows:
Ratio of current assets to current liabilities of not less than 1.25:1.00; Minimum tangible net worth of at least the sum of $180.0 million, plus 100% of the proceeds offrom any issuance of any stock or other equity after deducting of any fees, commissions, expenses and other costs incurred in such offering; and
Ratio of funded debt to tangible net worth of not more than 0.50:1.00.
| | iii. | Ratio of funded debt to tangible net worth of not more than 0.50:1.00. |
AsInterest on borrowings under the Credit Agreement may be designated, at our option, as either the Wall Street Journal published Prime Rate or LIBOR plus 2.0% per annum. Commitment fees on the unused portion of Junethe Credit Agreement are 0.4% per annum, and interest on outstanding letters of credit is 2.0% per annum. The Credit Agreement is secured by substantially all our assets (other than the assets held for sale at our Texas North Yard).
At September 30, 2018, we had no outstanding borrowings under our Credit Agreement and $2.5 million of outstanding letters of credit, providing $37.5 million of available capacity. At September 30, 2018, we were in compliance with all of our financial covenants.covenants, with a tangible net worth of $203.2 million (as defined by the Credit Agreement) and a ratio of current assets to current liabilities of 3.37 to 1.0.
We willCash Flow Activity
During the nine months ended September 30, 2018 and 2017, net cash used in operating activities was $18.7 million and $29.6 million, respectively. During the three months ended September 30, 2018 and 2017, net cash provided by operating activities was $7.8 million, compared to cash used in operating activities of $1.6 million, respectively. The use of cash during the nine months ended September 30, 2018, was primarily due to the following:
Operating losses for the period, excluding gains from asset sales and insurance recoveries of $6.8 million, bad debt expense of $2.8 million, non-cash amortization of deferred revenue of $0.5 million, and non-cash depreciation and amortization, asset impairments, and stock compensation expense totaling $11.3 million; Increase in contracts receivable and retainage of $6.2 million (exclusive of bad debt expense of $2.8 million and a $3.0 million reclassification of retainage to other noncurrent assets during the period as we do not anticipate collection within the next twelve months). The increase in contracts receivable, net of the reclassification, is primarily due to slower collections of receivables for our T&M work; Increase in contracts in progress of $11.8 million, primarily related to the net billing positions on projects in our Shipyard Division; Increase in prepaid expenses, inventory and other assets of $2.5 million, primarily due to the aforementioned reclassification of retainage to other noncurrent assets; and Decrease in accrued contract losses and noncurrent deferred revenue of $3.2 million.
These uses of cash were partially offset by:
Increase in advance billings on contracts of $9.8 million, primarily related to the net billing position on projects in our Fabrication Division; and Increase in accounts payable and accrued expenses of $4.2 million;
During the nine months ended September 30, 2018, net cash provided by investing activities was $55.5 million, compared to net cash used in investing activities of $2.4 million for the nine months ended September 30, 2017. Cash provided by investing activities during the 2018 period was due to proceeds received from asset sales of $57.7 million, primarily related to the sale of our Texas South Yard and insurance proceeds of $9.4 million resulting from hurricane damage to our facilities, offset partially by the purchase of short-term investments of $9.2 million and capital expenditures of $2.4 million.
During the nine months ended September 30, 2018 and 2017, net cash used in financing activities was $0.8 million and $1.4 million, respectively. Cash used in financing activities primarily related to tax payments made on behalf of employees from vested stock withholdings.
Future Liquidity Outlook As discussed in our Overview, we continue to monitorfocus on maintaining liquidity and preservesecuring meaningful new contract awards and backlog in the near-term, and generating operating income and cash flow from operations in the longer-term. We have made significant progress in our cash. Ourefforts to improve our liquidity, including reductions in costs (including reducing our workforce and reducing the cash compensation paid to our directors and the salaries of our executive officers) and the divestiture of underutilized assets. The primary uses of our liquidity for the remainder 2018 and the foreseeable future are to fund the underutilization of our fabrication facilities in our Shipyard and Fabrication Divisions until we secure and/or begin to execute sufficient backlog to fully recover our overhead costs, working capital requirements for 2018 and beyond are for the costs associated with Fabrication and Shipyardour projects, capital expenditures relatedand enhancements to our Shipyard facilities, the expansion of our EPC Division, corporate administrative expenses and enhancements to our Shipyard facilities.strategic initiatives. Future capital expenditures will be highly dependent upon the amount and timing of future projects.new project awards. Capital expenditures for the sixnine months ended JuneSeptember 30, 2018 were $0.8 million. We do not$2.4 million and we anticipate significant capital expenditures of approximately $1.0 million for the remainder of 2018.
If industry conditions for offshore oil and gas do not improve, or we are unable to increase our backlog, or we are unable to diversify our customer base, we would expect to take additional measures to reduce costs and preserve our cash 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 believe that our cash, and cash equivalents on hand and held-to-maturity, short-term investments at September 30, 2018, and funds availableavailability under our Credit Agreement, will be sufficient to enable us to fund our operating expenses, meet our working capital and capital expenditure requirements, and satisfy any future debt service andobligations or other funding requirements, for at least twelve months from the date of this Report. Our view regardingevaluation of the sufficiency of our cash and liquidity is primarily based on our financial forecast for the remainder of 2018 and early 2019, which is impacted by our existing backlog and a reasonable amountestimates of forecast, non-contractual backlog. There isfuture new project awards. We can provide no guaranteeassurances that our financial forecast will be attainableachieved or that we will have sufficient cash including funds availableor availability under our Credit Agreement to meet planned operating expenses and other unforeseen cash requirements. Accordingly, we may be required to 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 six months ended June 30, 2018, net cash used in operating activities was $26.4 million, compared to net cash used in operating activities of $27.9 million for the six months ended June 30, 2017. The use of cash in operations during the period was primarily due to the following:
Operating losses for the six months ended 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 $3.5 million;
Slower collections of receivables of $6.4 million
Build-up of costs for contracts in progress of $8.1 million;
Increased retainage on projects of $1.5 million;
Increased payments of accounts payable of $2.4 million; and
Other general uses of working capital.
Net cash provided by investing activities for the six months ended June 30, 2018, was $50.2 million, compared to cash provided by investing activities of $0.3 million for the six months ended June 30, 2017. The increase in cash provided by investing activities is due primarily 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 used by financing activities for the six months ended June 30, 2018, and 2017, was $0.8 million compared to $1.2 million in cash used in financing activities, respectively.
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 JuneSeptember 30, 2018. For more information on market risk, refer to Part II, Item 7A.7A of our 2017 Annual Report on Form 10-K for the year ended December 31, 2017.Report. 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 JuneSeptember 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 isWe are subject to various routine legal proceedings in the normal conduct of itsour business primarily involving commercial claims, workers’ compensation claims, and claims for personal injury under general maritime laws of the United StatesU.S. and the Jones Act. While the outcome of these lawsuits, legal proceedings and claims cannot be predicted with certainty, management believeswe believe that the outcome of any such proceedings, even if determined adversely, would not have a material adverse effect on theour financial position, results of operations or cash flowsflows.
On October 2, 2018, we filed a lawsuit against our customer to enforce our rights and remedies under the applicable construction contracts for two MPSVs. The lawsuit was filed in the Twenty-Second Judicial District Court for the Parish of the Company.St. Tammany, State of Louisiana and is styled Gulf Island Shipyards, LLC v. Hornbeck Offshore Services, LLC. See Note 8 to our Consolidated Financial Statements for further information relating to this recent litigation.
Item 1A. Risk Factors. There have been no material changes from the information included in Item 1A “Risk Factors” included in our 2017 Annual Report on Form 10-K for the year ended December 31, 2017.Report. Item 6. Exhibits. | | | | | Exhibit Number | | Description of Exhibit | | | | | 3.1 | | | | 3.2 | | | | 10.1 | | | | 10.2 | | | | 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/ DavidWestley S. SchorlemerStockton | | | DavidWestley S. SchorlemerStockton | | | Executive Vice President, Chief Financial Officer, Secretary and Treasurer (Principal Financial Officer) |
Date: August 9,November 8, 2018
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