Items 1 and 2. Business and Properties
Certain terms are defined in the “Glossary of Terms” beginning on page ii.
Description of our Operations
Gulf Island Fabrication, Inc. ("Gulf Island"), together with its subsidiaries ("the Company," "we," "us" and "our"), is a Louisiana corporation, which was incorporated in 1985. We are a leading fabricator of complex steel structures, modules and marine vessels used in energy extraction and production, petrochemical and industrial facilities, power generation, alternative energy and shipping and marine transportation operations. We also provide project management for engineering, procurement and construction ("EPC") projects along with installation, hookup, commissioning, and repair and maintenance services. In addition, we perform civil, drainage and other work for state and local governments. Our customers include United States ("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. Our corporate headquarters is located in Houston, Texas, with fabrication facilities located in Houma, Jennings and Lake Charles, Louisiana. See
"Overview"
section in Item 7 for discussion of our current business and outlook.
Significant projects in our backlog include the expansion of a paddle wheel riverboat, and the construction of nine harbor tugs, two offshore regional class marine research vessels (with a customer option for a third vessel), two vehicle ferries, two towboats, an ice-breaker tug, and a towing, salvage and rescue ship for the U.S. Navy (with customer options for seven additional vessels). Recently completed projects include the fabrication of complex modules for a newbuild petrochemical facility and construction of two technologically-advanced OSVs, and a harbor tug. Previous projects also include the fabrication of wind turbine foundations for the first offshore wind project in the U.S., and construction of two of the largest liftboats servicing the Gulf of Mexico ("GOM"), one of the deepest production jackets in the GOM, and the first single point anchor reservoir ("SPAR") hull fabricated in the U.S.
We operate and manage our business through four operating divisions ("Fabrication", "Shipyard", "Services" and "EPC") and one non-operating division ("Corporate"), which represent our reportable segments. See
“Results of Operations”
in Item 7 and Note 12 of our Consolidated Financial Statements ("Financial Statements") in Item 8 for segment financial information by division.
Fabrication Division
-
Our Fabrication Division fabricates modules for petrochemical and industrial facilities, foundations for alternative energy developments and other complex steel structures. Our Fabrication Division also fabricates offshore drilling and production platforms and other offshore 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. We perform these activities at our fabrication yard in Houma, Louisiana.
Shipyard Division -
Our Shipyard Division fabricates newbuild vessels, including OSVs, MPSVs, research vessels, tug boats, salvage vessels, towboats, barges, drydocks, anchor handling vessels, lift boats and other marine vessels. Our Shipyard Division also performs marine repair activities, including steel repair, blasting and painting services, electrical systems repair, machinery and piping system repairs, and propeller, shaft, and rudder reconditioning. In addition, we perform conversion projects that consist of lengthening vessels, modifying vessels to permit their use for a different type of activity, and other modifications to enhance the capacity or functionality of a vessel. We perform these activities at our shipyards in Houma, Jennings and Lake Charles, Louisiana.
Services Division
-
Our Services Division provides interconnect piping and related services for offshore platforms and inland structures, which includes sending crews to offshore platforms in the GOM to perform welding and other activities required to connect production equipment, service modules and other equipment on a platform. We also contract with oil and gas companies that have platforms and other structures located in the inland lakes and bays throughout the southeastern U.S. for various on-site construction and maintenance activities. In addition, we fabricate packaged skid units and perform various civil and drainage projects, such as pump stations, levee reinforcement, bulkheads and other work for state and local governments. We perform these services at customer facilities or at our services yard in Houma, Louisiana.
EPC Division -
Our EPC Division was created during the fourth quarter 2017 to manage potential work for the SeaOne Project, offshore wind opportunities and other projects that may require project management of EPC activities. During the fourth quarter 2017, SeaOne selected us as the prime contractor for the engineering, procurement, construction, installation, commissioning and start-up operations for its SeaOne Project. This project is expected to consist of an export facility in Gulfport, Mississippi and import facilities in the Caribbean and South America. Our current activities include pricing, planning and scheduling for the project.
SeaOne’s selection of the Company is non-binding and commencement of the project remains subject to a number of conditions, including agreement on terms of the engagement with SeaOne. We understand that SeaOne is in the process of securing financing for the project.
Corporate Division
-
Our Corporate Division represents expenses that do not directly relate to our four operating divisions and are not allocated to our operating divisions. Such expenses include, but are not limited to, costs related to executive management and directors' fees, clerical and administrative salaries, costs of maintaining our corporate office and costs associated with overall governance and being a publicly traded company.
Facilities and Equipment
Our operating facilities are located in Houma, Jennings and Lake Charles, Louisiana. Although our divisional operations are managed separately and represent separate reportable segments, we may move labor and resources among our divisions and facilities from time to time to ensure we have the proper resources dedicated to our projects and to maximize our utilization. The following summarizes the facilities and equipment that are significant to our business.
Fabrication Division Facilities -
Our Fabrication Division operates from our fabrication yard located on the Houma Navigation Canal in Houma, Louisiana, approximately 30 miles from the GOM (“Houma Fabrication Yard”). Our Houma Fabrication Yard is an owned facility and includes:
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163 developed acres located on the east bank of the Houma Navigation Canal. The yard includes 54,000 square feet of administrative and operations facilities, 267,000 square feet of covered fabrication facilities, 52,300 square feet of warehouse facilities and 8,000 square feet of training and medical facilities. The yard has 4,650 linear feet of water frontage, including 1,880 feet of steel bulkheads that permit docking of vessels and the load out of heavy structures; and
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437 acres located on the west bank of the Houma Navigation Canal, of which 150 acres are developed for fabrication and the remainder is unimproved land that is available for expansion. The developed portion of the yard includes 8,000 square feet of administrative and operations facilities, 151,600 square feet of covered fabrication facilities, and 21,000 square feet of warehouse facilities. The yard has 6,750 linear feet of water frontage, including 2,350 feet of steel bulkheads that permit docking of vessels and the load out of heavy structures.
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Significant equipment in the Houma Fabrication Yard includes:
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two plate bending rolls that have the capability to roll and weld steel into approximately 25,000 tons of tubular pipe sections per year;
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computerized Vernon brace coping machines that can handle pipe of 1,000 pounds per foot and 48-inch outer diameter up to 1,500 pounds per foot and up to 54-inch outer diameter;
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a computerized numeric controlled plasma-arc cutting system that cuts and bevels steel up to one inch thick at a rate of 200 inches per minute and can etch steel for piece markings and layout markings at a rate of 300 inches per minute;
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a state of the art blast and coating facility that allows us to provide blast and paint services;
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a pipe fabrication shop equipped with one CNC multi-axis pipe bender, four inch to ten inch pipe, one CNC multi-axis bender for one inch to four inch pipe, one CNC Plasma multi-axis pipe cutter, pipe spooling stations, pipe welding stations, three 2.5-ton gantry cranes and various equipment for pipe fitting and welding;
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10 crawler cranes, which each range in tonnage capacity from 230 to 500 tons;
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18 rubber-tired hydraulic modular transporters with a 200-ton individual weight capacity. The transporters easily relocate and allow fabricated structures to be transported within our yard. When used in tandem, the transporters allow fabricated structures weighing as much as 3,600 tons to be transported within our yard. The transporters allow easier load-out of smaller structures and provide more agility for the movement of larger structures; and
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two grit blast systems, a hydraulic plate shear, a hydraulic press brake, and various other equipment needed to fabricate steel structures and components.
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During 2018, we completed the sale of our fabrication yards and certain associated equipment in Ingleside, Texas ("Texas South Yard") and Aransas Pass, Texas ("Texas North Yard") (collectively, "South Texas Properties"), and accordingly, we no longer have any fabrication facilities in Texas. See
“Sales of Assets”
in Item 7 and Note 3 of our Financial Statements in Item 8 for further discussion of the sale of our South Texas Properties.
Shipyard Division Facilities
- Our Shipyard Division operates from our shipyards in Houma (“Houma Shipyard”), Jennings (“Jennings Shipyard”) and Lake Charles (“Lake Charles Shipyard”), Louisiana (collectively, “Shipyards”).
Our Houma Shipyard is located within our Houma Fabrication Yard on the west bank of the Houma Navigation Canal and shares certain of the aforementioned facilities with the Houma Fabrication Yard. Significant equipment in the Houma Shipyard includes:
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a prefabrication shop equipped with a 750-ton press brake for forming plate, multiple hydraulic iron workers, various equipment for welding and fitting, and three 10-ton gantry cranes;
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an automated panel line shop equipped with a NC plasma cutting table, a one-sided plate welder with magnetic holding system, a plate marking station, a magnetic stiffener fitting station, a six head stiffener welding station, a secondary structure fitting station, two 20-ton gantry cranes, one 15-ton gantry crane and other various equipment for welding and fitting;
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a main assembly shop equipped with four 20-ton gantry cranes and various equipment for welding and fitting;
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a 400’x160’floating drydock with a 15,000-ton lift capacity used for repair and conversion of ships; and
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two crawler cranes each with 230-ton capacity.
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Our Jennings Shipyard is a leased facility and includes 180 acres located five miles east of Jennings, Louisiana, on the west bank of the Mermentau River approximately 25 miles north of the Intracoastal waterway. The yard has four covered construction bays with over 100,000 square feet of covered fabrication facilities and 3,000 feet of linear water frontage with two launch ways. The lease, including exercisable renewal options, extends through January 2045. Significant owned equipment in the Jennings Shipyard includes:
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a pipe fabrication shop equipped with one CNC plasma multi-axis pipe cutter, pipe spooling stations, pipe welding stations, various equipment for pipe fitting & welding, and one 5-ton gantry crane;
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a multi-bay fabrication shop equipped with a 500-ton press brake for forming plate, one hydraulic iron worker, one CNC plasma cutting table, two 10-ton gantry cranes, three 5-ton gantry cranes, four 20-ton gantry cranes and various equipment for welding and fitting; and
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two 235-ton crawler cranes, one 230-ton crawler crane and one 200-ton module mover.
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Our Lake Charles Shipyard is a subleased facility and includes 10 paved acres near Lake Charles, Louisiana located 17 miles from the GOM on the Calcasieu River and one mile from the main ship channel and the Intracoastal Waterway. The yard includes 1,100 linear feet of bulkhead water frontage with a water depth of 40 feet. The sublease, including exercisable renewal options (subject to sublessor renewals), extends through July 2038. Significant owned equipment in the facility includes three floating drydocks used for repair and conversion of ships, two 200-ton crawler cranes and various equipment for welding and fitting and repair work. Our three floating drydocks include one 200’x96’ drydock with a 4,200 ton lift capacity, one 300’x74’ drydock with a 3,000 ton lift capacity and one 150’x74’ drydock with a 1,500 ton lift capacity.
Services Division Facilities -
Our Services Division operates from our service yard in Houma, Louisiana (“Houma Services Yard”). Our Houma Services Yard is an owned facility and includes 63-acres located approximately a quarter of a mile from our Houma Fabrication Yard on a channel adjacent to the Houma Navigation Canal. The yard has 14,500 square feet of administrative and operations facilities, 40,800 square feet of covered fabrication facilities, 29,600 square feet of warehouse facilities, and a 10,000 square foot blasting and coating facility. The yard has nine crawler cranes, which range in tonnage capacity from 60 to 230 tons, and has 1,320 linear feet of water frontage, including 660 feet of steel bulkhead. We also own three spud barges for use in our inshore construction activities. Each barge is equipped with a crane that has a lifting capacity of 60 to 100 tons.
Materials and Supplies
The principal materials and supplies used in our operations across all our divisions include standard steel shapes, steel plate, steel pipe, welding gases, fuel, oil, gasoline and paint, all of which are currently available from many sources. We do not depend upon any single supplier or source for our materials and supplies. We anticipate being able to obtain these materials for the foreseeable future; however, the price, availability and schedule validities offered by our suppliers may vary significantly from year to year due to various factors, including supplier consolidations, supplier raw material shortages, costs and surcharges, supplier capacity, customer demand, market conditions, and any duties and tariffs imposed on the materials.
The majority of steel used in our operations arrives at our fabrication yards as steel plate. The steel plate is cut and rolled into the form needed or into tubular sections at rolling mills in our fabrication yards. Tubular sections (which vary in diameter up to 23 feet) can be welded together in long straight tubes to become legs or into shorter tubes to become part of the network of bracing. Various cuts and welds in the fabrication process are performed by computer-controlled equipment.
Standard delivery from domestic steel mills can be weeks or months for as-rolled steel and longer durations for heat treated steel. Due to pricing or the inability of domestic mills to produce all customer required steel grades, we are often required to procure material from foreign steel mills. The delivery from these foreign mills, including transit time, can be several months. Additionally, the U.S. began to impose tariffs on imported steel during 2018 which we expect will increase the price we pay for foreign steel. To mitigate the risk of increasing cost of materials during the life of a contract, we often negotiate escalation clauses in our customer contracts for steel pricing adjustments tied to changes in relevant indexes.
In addition to materials and supplies described above that we use in our fabrication process, we also use third-party manufacturers for engineered and manufactured equipment that are added to the structures, modules and vessels that we fabricate. Such manufactured equipment includes, but is not limited to valves, fittings, propulsion systems (such as engines), cranes, pumps, electrical and communications systems and other technologically advanced equipment. To mitigate our risk of increasing costs, we often negotiate and purchase equipment from the manufacturer at a fixed price. Additionally, we may use subcontractors when their use enables us to meet customer requirements for resources, schedule, cost or technical expertise. Subcontractors may range from small local entities to companies with global capabilities, some of which may be utilized on a repetitive or preferred basis. See
"We depend on third parties to provide services to perform our contractual obligations and supply raw materials"
in Item 1A for further discussion of our use of raw materials and supplies.
Safety
We are committed to the safety and health of our employees and subcontractors. We believe that a strong safety culture is a critical element of our success. We continue to improve and maintain a stringent safety assurance program designed to ensure the safety of our employees and allow us to remain in compliance with all applicable federal and state mandated safety regulations. We are committed to maintaining a well-trained workforce and providing timely instruction to ensure our employees have the knowledge and skills to perform their work safely while maintaining the highest standards of quality. We provide continuous safety education and training to employees and subcontractors to ensure they are ready for the challenges inherent in all our projects. Our employees commence training on their first day of employment with a comprehensive orientation class that addresses Company policies and procedures and provides clear expectations for working safely. We have a zero-tolerance policy for drugs and alcohol use in the workplace. We support this policy through the use of a comprehensive drug and alcohol screening program that includes initial screenings for all employees and periodic random screenings throughout employment. Additionally, we require our subcontractors to follow alcohol and drug screening policies substantially the same as ours.
Our employees are given opportunities to be a part of a dedicated safety committee which is comprised of peer-elected craft employees and members of management to assist in supporting our efforts to continuously improve safety performance. A safety component is also included in our annual incentive program guidelines for our executive officers and other key employees. See
"Our employees work on projects that are inherently dangerous. If we fail to maintain safe work sites, we can be exposed to significant financial losses and reputational harm"
in Item 1A for further discussion of our safety.
Quality Assurance
We use modern welding and fabrication technology, and all of our fabrication projects are executed in accordance with industry standards, specifications and regulations, including those published by the American Petroleum Institute, the American Welding Society, the American Society of Mechanical Engineers, the American Bureau of Shipping, the U.S. Coast Guard, the U.S. Navy and customer specifications. We maintain training programs for technical fitting and welding instruction in order to prepare and upgrade our skilled labor workforce and maintain high standards of quality. In addition, we maintain on-site facilities for the non-destructive testing of all welds, a process performed by an independent contractor.
Our quality management systems are certified as ISO 9001-2015 programs. ISO 9001-2015 is an internationally recognized verification system for quality management overseen by the International Standard Organization based in Geneva, Switzerland. The certification is based on a review of our programs and procedures designed to maintain and enhance quality production and is subject to semi-annual review and full recertification every three years.
Customers
Our principal 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. While our customers may consider other factors, including the availability, capability, reputation and safety record of a contractor, we believe price and the ability to meet a customer’s delivery schedule are the principal factors weighed by customers in awarding contracts.
Our U.S. versus International sales fluctuate from year to year depending on the extent our customers require installation of fabricated structures outside of the U.S. Revenue for fabricated structures installed outside the U.S. were not material for
2018
and
2017
and were
14%
of consolidated revenue for
2016
.
A large portion of our revenue has historically been generated by only a few customers, although not necessarily the same customers from year to year. For
2018
, three customers accounted for
44%
of our consolidated revenue, which related to the construction of our ten harbor tug vessels for two customers within our Shipyard Division and offshore hook-up and installation work within our Services Division for the third customer. For
2017
, two customers accounted for
39%
of our consolidated revenue, which related to the fabrication of modules for a petrochemical facility within our Fabrication Division and offshore hook-up and installation work within our Services Division. For
2016
, one customer accounted for 23% of our consolidated revenue.
We continue to strategically position the Company to participate in the fabrication of petrochemical and industrial facilities, pursue offshore wind opportunities, enter the EPC industry and diversify our customer base within all of our operating divisions. See
"We depend on significant customers for our revenue"
in Item 1A and
"Overview" and
"New Awards and Backlog"
sections in Item 7 for further discussion of our backlog by significant customer, the changing mix of our backlog based on recent new project awards, and our ongoing efforts to strategically reposition the Company.
Contracting
Our revenue is derived from customer contracts and agreements that are awarded on a competitively bid and negotiated basis using a range of contracting options, including fixed-price, unit-rate and T&M. Our contracts primarily relate to the fabrication of complex steel structures, modules and marine vessels, and project management services and other service arrangements. Our contracts vary in length depending on the size and complexity of the project.
Revenue for our fixed-price and unit-rate contracts is recognized using the percentage-of-completion method, based on contract costs incurred to date compared to total estimated contract costs. Contract costs include direct costs, such as materials and labor, and indirect costs that are attributable to contract activity. Material costs that are significant to a contract and do not reflect an accurate measure of project completion are excluded from the determination of our contract progress. Revenue for such materials is only recognized to the extent of costs incurred.
Revenue for our T&M contracts is recognized at contracted rates when the work is performed, the costs are incurred and collection is reasonably assured. Our T&M contracts provide for labor and materials to be billed at rates specified within the contract. The consideration from the customer directly corresponds to the value of our performance completed at the time of invoicing. See
"The nature of our contracting terms for our contracts could adversely affect our operating results"
and
"Our method of accounting for revenue using the percentage-of-completion method could have a negative impact on our results of operations"
in Item 1A,
"Critical Accounting Policies"
section in Item 7, and Note 1 and Note 2 of our Financial Statements in Item 8 for further discussion of our contracting and revenue recognition.
New Awards and Backlog
New project awards represent expected revenue values of commitments received during a given period, including scope growth on existing commitments. A commitment represents authorization from our customer to begin work or purchase materials pursuant to a written agreement, letter of intent or other form 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 2 of our Financial Statements in Item 8. In general, a performance obligation is a contractual obligation to construct and/or transfer a distinct good or service to a customer. The transaction price of a contract is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. Backlog includes our performance obligations at
December 31, 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 but represent future work that we believe will be performed. We believe that backlog, a non-GAAP financial measure, provides useful information to investors. New project awards and backlog may vary significantly each reporting period based on the timing of our major new contract commitments.
Projects in our backlog are generally subject to delay, suspension, termination, or an increase or 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. Depending on the size of the project, the delay, suspension, termination or increase or reduction in scope of any one contract could significantly impact our backlog and change the expected amount and timing of revenue recognized. See Note 2 of our Financial Statements in Item 8 for a reconciliation of our future performance obligations under Topic 606 (the most comparable GAAP measure) to our reported backlog.
At December 31, 2018, we had a backlog of
$356.5 million
, compared with
$222.6 million
at December 31, 2017. Backlog includes
$21.9 million
of backlog 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 can provide no assurances that we will reach a favorable resolution with the customer for completion of the MPSVs. The increase in backlog is primarily due to new project awards exceeding revenue for our Shipyard and Fabrication Divisions for 2018. Approximately
34%
of our
December 31, 2018
backlog is anticipated to be recognized as revenue beyond 2019. See
"New Awards and Backlog"
section in Item 7 for further discussion of our MPSV dispute, new awards and backlog.
Seasonality
Our operations have historically been subject to seasonal variations due to weather conditions and daylight hours. We attempt to mitigate the impact on productivity from weather conditions through the use of our covered fabrication facilities. However, a significant amount of our construction activities take place outdoors. Accordingly the number of direct labor hours worked generally declines during the winter months due to an increase in rain, cold temperatures and a decrease in daylight hours. The seasonality of oil and gas industry activity in the Gulf Coast region also affects our operations. Our offshore oil and gas customers often schedule the completion of their projects during the summer months in order to take advantage of more favorable weather during such months. Further, rainy weather, tropical storms, hurricanes and other storms prevalent in the GOM and along the Gulf Coast throughout the year may also affect our operations. See
"We are susceptible to adverse weather conditions in our market areas"
in Item 1A for further discussion of the seasonal impacts to our operations.
Competition
We operate within highly competitive markets which are significantly impacted by oil and gas prices and government spending. Even as we continue to strategically position the Company to participate in the fabrication of petrochemical and industrial facilities, pursue offshore wind opportunities, enter the EPC industry and diversify our customer base, significant declines in oil and gas prices and limits on government spending can create excess capacity and underutilization of our competitor's facilities, resulting in more intense competition for work. There are numerous regional, national and global competitors that offer similar services to those offered by each of our operating divisions, some of which are larger than us with more resources and have fabrication facilities in both the U.S. and abroad. Competition with foreign competitors can also be challenging as such competitors often have lower operating costs and lower wage rates, and foreign governments often use subsidies and incentives to create local jobs, impose import duties and fees on products and tax foreign operators. In addition, as a result of recent technological innovations, decreased transportation costs incurred by our customers when exporting structures from foreign locations to the GOM may hinder our ability to successfully bid against foreign competitors for large construction and fabrication projects. Uncertainties with respect to tariffs on materials and fluctuations in the value of the U.S. dollar and other factors, may also impact our ability to compete effectively.
Although we believe price and the contractor’s ability to meet a customer’s delivery schedule are the principal factors in determining which contractor is awarded a project, customers also consider, among other things, the availability of technically capable personnel, facility space, production efficiency, condition of equipment, reputation, safety record and customer relations. We believe that our competitive pricing, expertise in fabricating onshore and offshore structures, and the certification of our facilities as ISO 9001-2015 will enable us to continue to compete effectively for projects. See
"We operate in an industry that is highly competitive"
in Item 1A for further discussion of our competitive landscape.
Government and Environmental Regulation
Our operations and properties are subject to a wide variety of increasingly complex and stringent foreign, federal, state and local environmental laws and other regulations, including those governing discharges into the air and water, the handling and disposal of solid and hazardous wastes, the remediation of soil and groundwater contaminated by hazardous substances and the health and safety of employees. Compliance with many of these laws is becoming increasingly complex, stringent and expensive.
These laws may impose “strict liability” for damages to natural resources and threats to public health and safety, rendering a party liable for the environmental damage without regard to negligence or fault on the part of such party.
Our operations are also governed by laws and regulations relating to workplace safety and worker health, primarily the Occupational Safety and Health Act and regulations promulgated thereunder. Various governmental and quasi-governmental agencies require certain permits, licenses and certificates with respect to our operations. We believe that we have all material permits, licenses and certificates necessary for the conduct of our existing business.
Our employees may engage in certain activities, including interconnect piping and other service activities conducted on offshore platforms, activities performed on the spud barges owned or chartered by us, and marine vessel fabrication and repair activities performed at our facilities and barges owned by us, that are covered in either the provisions of the Jones Act or U.S. Longshoreman and Harbor Workers Act (“USL&H”). These laws make the liability limits established under state workers’ compensation laws inapplicable to these employees and, instead, permit them or their representatives to pursue actions against us for damages or job-related injuries, with generally no limitations on our potential liability.
Many aspects of our operations and properties are materially affected by federal, state and local regulations, as well as certain international conventions and private industry organizations. The exploration and development of oil and gas properties located on the outer continental shelf of the U.S. is regulated primarily by the Bureau of Ocean Energy Management and Enforcement (“BOEM”) of the Department of Interior (“DOI”). The Secretary of the Interior, through the BOEM, is responsible for the administration of federal regulations under the Outer Continental Shelf Lands Act requiring the construction of offshore platforms located on the outer continental shelf to meet stringent engineering and construction specifications. Violations of these regulations and related laws can result in substantial civil and criminal penalties as well as injunctions curtailing operations. We believe that our operations are in compliance with these and all other regulations affecting the fabrication of platforms for delivery to the outer continental shelf of the U.S. In addition, we depend on the demand for our services from the oil and gas and marine industries and, therefore, can be affected by changes in taxes, price controls and other laws and regulations affecting these industries. Offshore construction and drilling in certain areas has also been opposed by environmental groups and, in certain areas, has been restricted. To the extent laws are enacted or other governmental actions are taken that prohibit or restrict offshore construction and drilling or impose environmental protection requirements that result in increased costs to the oil and gas industry in general and the offshore construction industry in particular, our business and prospects could be adversely affected. We cannot determine to what extent future operations and earnings may be affected by new legislation, new regulations or changes in existing regulations.
The Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended and similar laws provide for responses to and liability for releases of hazardous substances into the environment. Additionally, the Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery Act, the Safe Drinking Water Act, the Emergency Planning and Community Right to Know Act, each as amended, and similar foreign, state or local counterparts to these federal laws, regulate air emissions, water discharges, hazardous substances and wastes, and require public disclosure related to the use of various hazardous substances. Compliance with such environmental laws and regulations may require the acquisition of permits or other authorizations for certain activities and compliance with various standards or procedural requirements. We believe that our facilities are in substantial compliance with current regulatory standards.
In addition, our operations are subject to extensive government regulation by the U.S. Coast Guard, as well as various private industry organizations such as the American Petroleum Institute, American Society of Mechanical Engineers, American Welding Society and the American Bureau of Shipping.
Our compliance with these laws and regulations has entailed certain additional expenses and changes in operating procedures; however, we believe that compliance efforts have not resulted in a material adverse effect on our business or financial condition. However, future events, such as changes in existing laws and regulations or their interpretation, more vigorous enforcement policies of regulatory agencies, or stricter or different interpretations of existing laws and regulations, may require additional expenditures by us. See "
The nature of our industry subjects us to compliance with regulatory and environmental laws"
and
"Our business is highly dependent on our ability to utilize the navigation canals adjacent to our facilities"
in Item 1A for further discussion of government and environmental regulations impacting our business.
Insurance
We maintain insurance against property damage caused by fire, flood, explosion and similar catastrophic events that may result in physical damage or destruction to our facilities. All policies are subject to deductibles and other coverage limitations. We also maintain builder’s risk, general liability and maritime employer’s liability insurance, which are also subject to deductibles and coverage limitations. We are further self-insured for workers’ compensation and USL&H claims through our use of deductibles and self-insured retentions up to per occurrence threshold amounts. See
"The limits on our insurance coverage could expose us to potentially significantly liability and costs"
in Item 1A for further discussion of our insurance.
Employees
Our workforce varies based on the level of ongoing fabrication and services activity at any particular time. At December 31,
2018
and
2017
, we had approximately
875
and
977
employees, respectively. None of our employees are employed pursuant to a collective bargaining agreement, and we believe our relationship with our employees is good. Labor hours worked during
2018
,
2017
and
2016
, were
1.9 million
,
1.9 million
, and
2.8 million
, respectively. See
"We may be unable to employ a sufficient number of skilled personnel to execute our projects
" and
"Our success is dependent on key personnel"
in Item 1A for further discussion of our ability to attract and retain qualified employees.
Available Information
We make available our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports, free of charge through our Internet website at www.gulfisland.com as soon as reasonably practicable after such materials are electronically filed with or furnished to the U.S. Securities and Exchange Commission (the “SEC”). The SEC also maintains an Internet website at
www.sec.gov
that contains periodic reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. Our website and the information contained therein or connected thereto are not intended to be incorporated into this Report.
Item 1A. Risk Factors
The following discussion of risk factors contains forward-looking statements (see "Cautionary Statement on Forward-Looking Information"). These risk factors are important to understanding other statements in this Report. The following information should be read in conjunction with Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Item 8 “Financial Statements and Supplementary Data” found elsewhere in this Report.
Our business, prospects, financial condition, operating results, cash flows and stock price may be affected materially and adversely, in whole or in part, by a number of factors, whether currently known or unknown, including but not limited to those described below, any one or more of which could, directly or indirectly, cause our actual financial condition and operating results to vary materially from historical operating results or those anticipated, projected or assumed in our forward-looking statements. Our business, prospects, financial condition, operating results, cash flows and stock price could also be affected by additional factors that apply to all companies generally which are not specifically mentioned below.
Our revenue and profitability may be impacted by the cyclical nature of the oil and gas industry.
Our business is significantly dependent on the level of capital expenditures by oil and gas companies and their contractors, alternative energy companies, marine companies operating in the GOM and along the Gulf Coast and federal, state and local governments. The level of activity by these parties has traditionally been volatile and they have been significantly impacted by fluctuations in oil and gas prices. Oil and gas prices continue to be depressed and have not increased to a level that supports a recovery in offshore exploration and production spending. In addition to the price of oil and gas, the levels of our customers’ capital expenditures are influenced by, among other things:
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the cost of exploring for, producing and delivering oil and gas;
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the ability of oil and gas companies to generate capital;
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the sale and expiration dates of offshore leases in the U.S. and overseas;
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the discovery rate, size and location of new oil and gas reserves;
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demand for hydrocarbon production;
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the ability of the Organization of the Petroleum Exporting Countries (“OPEC”) to set and maintain production levels for oil and the level of production by non-OPEC countries;
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local, federal and international political and economic conditions;
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demand for, availability of and technological viability of, alternative sources of energy;
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technological advances affecting energy exploration, production, transportation and consumption; and
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uncertainty regarding the U.S. energy policy, particularly any revision, reinterpretation or creation of environmental and tax laws and regulations that would negatively impact the oil and gas industry.
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The above factors have not favored increased capital spending by offshore oil and gas companies in recent years. Further, although a reduction in gas prices has benefited capital spending for petrochemical and other facilities, the timing of, and our ability to secure, new project awards for this end market continues to be uncertain. As a result, there are fewer project awards to replace completed projects, and pricing of new contracts remains increasingly competitive.This creates challenges with respect to our ability to operate our fabrication facilities at desired utilization levels and may result in decreased revenue, lower margins, and losses in certain periods. Should industry conditions not improve, we may continue to suffer such decreased revenue, lower margins, and losses in future quarters. In addition, we believe that the downturn in the oil and gas industry has also adversely impacted many of our customers' businesses.
We are unable to predict future oil and gas prices or the level of oil and gas industry activity for the products and services we provide. Further, an increase in oil and gas prices may not necessarily translate into immediate or long- term increased activity, and even during periods of relatively high oil prices, our customers may cancel or curtail programs, or reduce their levels of capital expenditures for exploration and production. Advances in onshore exploration and development technologies, particularly with respect to large, onshore shale production areas, could result in our historical customers allocating a higher percentage of their capital expenditure budgets to onshore exploration and production activities and we may not be successful securing new project awards related to these onshore activities. An increase in gas prices could also negatively impact future investments in petrochemical and other facilities that benefit from lower gas prices. These factors could cause our revenue and margins to remain depressed and limit our future growth prospects.
We operate in an industry that is highly competitive.
The onshore and offshore oil and gas industries and marine fabrication industries are highly competitive and influenced by events largely outside of our control. Contracts for our services are often awarded on a competitively bid basis, and our customers consider many factors when awarding a project. These factors include price, ability to meet the customer’s schedule, the availability and capacity of equipment, and the reputation, experience, and safety record of the contractor. Although we believe we have an excellent reputation for safety and quality, we can provide no assurances that we will be able to maintain our competitive position. In addition, we often compete with companies that have greater resources, which may make them more competitive for certain projects.
Competition with foreign competitors can also be challenging as such competitors often have lower operating costs and lower wage rates, and foreign governments often use subsidies and incentives to create local jobs, impose import duties and fees on products and tax foreign operators. In addition, as a result of technological innovations, decreased transportation costs incurred by our customers when exporting structures from foreign locations to the GOM may hinder our ability to successfully bid for projects in the GOM against foreign competitors. See
"Competition"
within Item 1 for further discussion of the competitive nature of our industry.
Our customers are facing significant challenges and a period of consolidation within their industry.
The oil and gas industry is facing significant challenges due to a prolonged period of depressed oil and gas prices. This has also negatively impacted the marine industry that supports offshore exploration and production. Accordingly, many companies are unable to compete and, in some cases, are unable to pay their liabilities as they become due. This has resulted in many companies within the oil and gas and marine industries seeking bankruptcy protection or pursuing consolidation through mergers with, or acquisition by, other companies. We expect these trends to continue.
The consolidation of one or more of our primary customers, the acquisition of one or more of our primary customers by a company that is not a customer, and a primary customer’s acquisition of another company that provides services similar to those provided by us, could result in a reduction in such customers’ capital spending and a decrease in the demand for our products and services. We can provide no assurances that we will be able to maintain our level of revenue with a customer that has consolidated or replace lost revenue. We are unable to predict what effect consolidations in the industry may have on contract pricing, capital spending by our customers, our selling strategies, our competitive position, our ability to retain customers or our ability to negotiate favorable agreements with our customers.
We are dependent upon the award of new contracts and the timing of those awards.
It is difficult to predict whether or when we will be awarded a new contract due to complex bidding and selection processes, changes in existing or forecast market conditions, governmental regulations, permitting and environmental matters. Because our revenue is derived from new project awards, our results of operations and cash flows can fluctuate materially from period to period as contracts are typically awarded on a project-by-project basis.
The timing of new project awards may reduce our short-term profitability as we balance our current capacity with expectations of future project awards. If an expected new project award is delayed or not received, we may incur costs to maintain an idle workforce and facilities, or alternatively, we may determine that our long-term interests are best served by reducing our workforce and incurring increased costs associated with termination benefits. A reduction in our workforce could also impact our results of operations if customers are hesitant to award new contracts based upon our staffing levels or if we are unable to adequately increase our labor force and staff projects that are awarded subsequent to workforce reductions.
We depend on significant customers for our revenue.
We derive a significant amount of our revenue from a small number of customers, including U.S. and, to a lesser extent, international energy producers; petrochemical, industrial, power, and marine operations; EPC companies; and certain agencies of the U.S. government. Because the level of services that we may provide to any customer depends, among other things, on the amount of that customer’s capital expenditure budget and our ability to meet the customer’s delivery schedule, customers that account for a significant portion of our revenue in one year may represent an immaterial portion of revenue in subsequent years. We define significant customers as those that individually comprise 10% or more of our consolidated revenue. For
2018
, three customers accounted for
44%
of our consolidated revenue. For
2017
,
two
customers accounted for
39%
of our consolidated revenue. For
2016
, one customer accounted for
23%
of our consolidated revenue. The loss of a significant customer in any given
year for any reason, including a sustained decline in that customer’s capital expenditure budget or competitive factors, could result in a substantial loss of revenue. See
"Customers"
in Item 1 for further discussion of our customers.
We are exposed to the credit risks of our customers, including nonpayment and nonperformance by our customers.
The concentration of our customers in the oil and gas and marine industries may impact our overall exposure to credit risk as customers may be similarly affected by prolonged changes in economic and industry conditions. Our business could be impacted due to nonpayment or nonperformance by our customers. We believe certain of our customers finance their activities through cash flows from operations and debt or equity financing. Many of these customers are facing significant challenges within the current oil and gas market. As a result, many of our customers are facing decreased cash flows, a reduction in borrowing capacity, inability to access capital or credit markets, and a reduction in their liquidity and ability to pay or otherwise perform on their obligations to us. We perform ongoing credit evaluations of our customers and do not generally require collateral in support of our trade receivables. While we maintain reserves for potential credit losses, we can provide no assurances that such reserves will be sufficient to cover uncollectible receivable amounts or that our losses from such receivables will be consistent with our expectations.
Furthermore, some of our customers may be highly leveraged and subject to their own operating and regulatory risks, which increases the risk that they may default on their obligations to us. To the extent one or more of our key customers is in financial distress or commences bankruptcy proceedings, contracts with these customers may be subject to renegotiation or rejection under applicable provisions of the U.S. Bankruptcy Code and similar International laws.
The nature of our contracting terms for our contracts could adversely affect our operating results.
As is common in the fabrication and marine construction industries, a substantial number of our projects are performed on a fixed-price or unit-rate basis. Under fixed-price contracts, our contract price is fixed, subject to adjustment only for changes in scope by the customer. Under unit rate contracts, material items or labor tasks are assigned unit rates of measure. The unit rates of measure will generally be an amount of dollars per ton, per foot, per square foot or per item installed. A typical unit rate contract can contain hundreds to thousands of unit rates of measure. Profit margins are built into the unit rates and, similar to a fixed price contract, we retain cost savings but are also responsible for cost overruns. In many cases, our fixed-price and unit rate contracts involve complex design and engineering, significant procurement of equipment, supplies and extensive construction management. We employ best efforts to properly estimate the costs to complete our projects; however, our actual costs incurred to complete our projects could materially exceed our estimates. The revenue, costs and profit realized on a contract will often vary from the estimated amounts on which such contract was originally estimated due to the following:
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Failure to properly estimate costs of engineering, materials, components, equipment, labor or subcontractors;
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Changes in the costs of engineering, materials, components, equipment, labor or subcontractors;
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Difficulties in engaging third-party subcontractors, equipment manufacturers or materials suppliers, or failures by third-party subcontractors, equipment manufacturers or materials suppliers to perform, resulting in project delays and additional costs;
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Late delivery of materials by our vendors or the inability of subcontractors to deliver contracted services on schedule or at the agreed upon price;
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Increased costs due to poor execution or productivity and/or weather conditions;
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Unanticipated costs or claims, including costs for project modifications, delays, errors or changes in specifications or designs, regulatory changes or contract termination;
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Unrecoverable costs associated with customer changes in scope and schedule;
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Payment of liquidated damages due to a failure to meet contracted delivery dates;
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Changes in labor conditions, including the availability, wage and productivity of labor;
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Termination, temporary suspension or significant reduction in scope of our projects by our customers;
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Unanticipated technical problems with the structures, equipment or systems we supply;
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Under-utilization of our facilities and an idle labor force; and
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Changes in general economic conditions.
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These variations and risks are inherent within our industry and may result in revenue and profit that differ from those originally estimated and alter profitability or result in losses on projects. Depending on the size of a project, variations from estimated contract performance can have a significant impact on our operating results for any quarter or year. In addition, substantially all of our contracts require us to continue work in accordance with the contractually agreed schedule (and thus,
continue to incur expenses for labor and materials) notwithstanding the occurrence of a disagreement with customers over increased pricing and/or unresolved change orders or claim.
Competitive pricing common in the fabrication and marine construction industry may not provide sufficient protection from cost overruns.
The prices we charge for our services and the demand for such services are currently severely depressed. Even when industry conditions are favorable, we operate in a very competitive industry and as a result, we are not always successful in fully recovering our cost structure or realizing a profit. Additionally, during periods of increased market demand, a significant amount of new service capacity may enter the market, which also places pressure on the pricing of our services. Furthermore, during periods of declining pricing for our services, we may not be able to reduce our costs accordingly, which could further affect our profitability.
Our method of accounting for revenue using the percentage-of-completion method could have a negative impact on our results of operations.
Revenue for our fixed-price and unit-rate contracts is recognized using the percentage-of-completion method, based on contract costs incurred to date compared to total estimated contract costs. Contract costs include direct costs, such as materials and labor, and indirect costs that are attributable to contract activity. Material costs that are significant to a contract and do not reflect an accurate measure of project completion are excluded from the determination of our contract progress. Revenue for such materials is only recognized to the extent of costs incurred. Revenue and gross profit for contracts accounted for using the percentage-of-completion method can be significantly affected by changes in estimated cost to complete such contracts. Significant estimates impacting the cost to complete a contract include: costs of engineering, materials, components, equipment, labor and subcontracts; labor productivity; schedule durations, including subcontractor and supplier progress; contract disputes, including claims; achievement of contractual performance requirements; and contingency, among others. The cumulative impact of revisions in total cost estimates during the progress of work is reflected in the period in which these changes become known, including, to the extent required, the reversal of profit recognized in prior periods and the recognition of losses expected to be incurred on contracts. Due to the various estimates inherent in our contract accounting, actual results could differ from those estimates, which could result in material changes to our Financial Statements and related disclosures.
We are susceptible to adverse weather conditions in our market areas.
Our operations have historically been subject to seasonal variations due to weather conditions and daylight hours. We attempt to mitigate the impact on productivity from weather conditions through the use of our covered fabrication facilities. However, a significant amount of our construction activities take place outdoors. Accordingly, the number of direct labor hours worked generally declines in the winter months due to an increase in rain, colder temperatures and a decrease in daylight hours. The seasonality of oil and gas industry activity in the Gulf Coast region also affects our operations. Our offshore oil and gas customers often schedule the completion of their projects during the summer months in order to take advantage of more favorable weather during such months. Further, the rainy weather, tropical storms, hurricanes and other storms prevalent in the GOM and along the Gulf Coast throughout the year may also affect our operations. Repercussions of severe weather conditions may include curtailment of services, weather-related damage to facilities and equipment, resulting in suspension of operations, inability to deliver equipment, personnel and products to job sites in accordance with contract schedules; and loss of productivity. Furthermore, our customers’ operations may be materially and adversely affected by severe weather and seasonal weather conditions, resulting in reduced demand for services. Accordingly, our operating results may vary from quarter to quarter, depending on factors outside of our control. As a result, full year results are not likely to be a direct multiple of any quarter or combination of quarters. We believe that we maintain adequate insurance coverage related to potential damage from weather. See
"Executive Overview and Summary"
in Item 7 for further discussion.
Our backlog is subject to change as a result of suspension or termination of projects currently in backlog or our failure to secure additional projects.
New project awards represent expected revenue values of commitments received during a given period, including scope growth on existing commitments. A commitment represents authorization from our customer to begin work or purchase materials pursuant to a written agreement, letter of intent or other form of authorization. Backlog represents the unearned revenue of our new project awards and includes signed contracts that are temporarily suspended or under protest but represent future work that we believe will be performed. The revenue projected in our backlog may not be realized or, if realized, may not be profitable.
Projects included in our backlog are generally subject to delay, suspension, termination, or an increase or 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. Depending on the size of the project, the delay, suspension, termination,
increase or reduction in scope of any project could significantly impact our backlog and change the expected amount and timing of revenue recognized. We may be at greater risk of delays, suspensions and cancellations in the current low oil and gas price environment. In addition, where a project proceeds as scheduled, it is possible that the customer may default by failing to pay amounts owed to us. Accordingly, our backlog as of any date is an uncertain indicator of future results of operations.
We may need to obtain debt financing or new credit facilities or raise equity capital in the future for working capital, capital expenditures, contract commitments and/or acquisitions, and we may not be able to do so or do so on favorable terms, which would impair our ability to operate our business or execute our strategy.
If our existing cash, cash equivalents, scheduled maturities of our short-term investments and cash flows from operating activities are not sufficient to fund our working capital requirements, capital expenditures, contract commitments, and/or acquisition opportunities, we would be required to reduce our capital expenditures and/or forego certain contracts and/or acquisition opportunities or we would be required to fund such needs through debt or equity issuances or through other financing alternatives, including the sale of assets.
We have created our EPC Division to manage the potential SeaOne Project, offshore wind opportunities and other projects that may require engineering, procurement and construction and project management services. We are working to strengthen our internal project management capabilities through the hiring of additional personnel to service such projects. Additionally, we may be required to make capital investments in our existing or new facilities and increase our working capital to support our backlog or new project awards, including potential additional projects for the U.S. Navy, the potential SeaOne Project and potential offshore wind projects. The capital outlays and working capital required by us to execute such projects could exceed the availability under our Credit Agreement and we may not be able to obtain alternative debt financing or new credit facilities to fund any capital investment or working capital requirements.
Our ability to successfully obtain debt financing or new credit facilities or raise equity capital in the future will depend in part upon prevailing capital market conditions, as well as conditions in our business and our operating results, and those factors may affect our efforts to obtain additional capital on terms that are satisfactory to us. If adequate capital is not available, or not available on beneficial terms, we may not be able to make future investments, take advantage of acquisitions or other investment opportunities, or respond to competitive challenges. This could limit our ability to bid on new project opportunities, thereby limiting our potential growth and profitability.
We may not be able to amend our Credit Agreement or obtain debt financing or new credit facilities if and when needed on favorable terms, if at all.
Our primary sources of liquidity are our cash, cash equivalents, scheduled maturities of our short-term investments, and availability under our
$40.0 million
revolving credit facility with Hancock Whitney Bank (“Credit Agreement”). Our available liquidity is impacted by changes in our working capital (excluding cash, cash equivalents and short-term investments) and our capital expenditure requirements. At
December 31, 2018
, our cash, cash equivalents and short-term investments totaled
$79.2 million
and we had
$37.1 million
of available capacity under our Credit Agreement.
There are a number of potential negative consequences for the energy sector that may result if oil and gas prices remain depressed or decline or if oil and gas companies continue to de-prioritize investments in exploration, development and production, including the continued or worsening of outflow of credit and capital from the energy sector and/or energy focused companies, further efforts by lenders to reduce their exposure to the energy sector, the imposition of increased lending standards for the energy sector, higher borrowing costs and collateral requirements, or a refusal to extend new credit or amend existing credit facilities in the energy sector. These potential negative consequences may be exacerbated by the pressure exerted on financial institutions by regulatory agencies to respond quickly and decisively to credit risk that develops in distressed industries. All these factors may complicate our ability to achieve a favorable outcome in obtaining debt financing, negotiating new credit facilities or amending or extending our Credit Agreement.
In order to extend our Credit Agreement or secure debt financing or new credit facilities, if available, we may be required to provide collateral, pay higher interest rates and otherwise agree to more restrictive terms. Collateral requirements and higher borrowing costs may limit our long- and short-term financial flexibility, and any failure to obtain amendments to our Credit Agreement or to secure debt financing or new credit facilities on terms that are acceptable to us could jeopardize our ability to fund, among other things, capital expenditures and general working capital needs or meet our other financial commitments.
We may obtain letters of credit under our Credit Agreement (which will reduce our availability under our Credit Agreement) or surety bonds from financial institutions to provide to our customers in order to secure advance payments or guarantee performance under our contracts, or in lieu of retention being withheld on our contracts. With respect to a letter of credit under
our Credit Agreement, any advance in the event of non-performance under a contract would become a borrowing under our Credit Agreement and thus a direct obligation. With respect to a surety bond, any advance payment in the event of non-performance is subject to indemnification of the surety by us, which may require us to borrow under our Credit Agreement. When a contract is complete, the contingent obligation terminates, and letters of credit or surety bonds are returned. Although we believe there is sufficient bonding capacity available to us from one or more financial institutions, such capacity is uncommitted, and accordingly, we can provide no assurances that necessary bonding capacity will be available to support our future bonding requirements. See Note 7 of our Financial Statements in Item 8 and
"Liquidity and Capital Resources"
in Item 7 for further discussion of our Credit Agreement and surety bonds.
Our Credit Agreement contains operating and financial restrictions and covenants that may restrict our financial and operating flexibility.
Operating and financial restrictions and covenants in our Credit Agreement could restrict our ability to finance future operations or capital needs or to engage, expand or pursue our business activities. For example, our Credit Agreement restricts our ability to: (i) grant liens; (ii) make certain loans or investments; (iii) incur additional indebtedness or guarantee other indebtedness in excess of specified levels; (iv) make any material change to the nature of our business or undergo a fundamental change; (v) make any material dispositions; (vi) acquire another company or all or substantially all of its assets; (vii) enter into a merger, consolidation, or sale leaseback transaction; or (viii) declare and pay dividends if any potential default or event of default occurs.
Our ability to comply with the covenants and restrictions contained in our Credit Agreement may be affected by events beyond our control, including prevailing economic, financial and industry conditions. If market or other economic conditions deteriorate, our ability to comply with these covenants may be impaired. If we breach any of our covenants under our Credit Agreement, repayment of any amounts borrowed could be accelerated when potentially we would not have the liquidity to do so and our credit capacity for the issuance of letters of credit may be terminated. If this were to happen, we could be required to seek additional debt financing or new credit facilities at higher capital costs, significantly curtail our operations, defer execution of our strategy, sell assets at discounted prices, or a combination of any of the aforementioned. In addition, our obligations under our Credit Agreement are secured by substantially all of our assets (with a negative pledge on our real property), and if we are unable to repay our indebtedness under our Credit Agreement, our lender could seek to foreclose on such assets. See Note 7 of our Financial Statements in Item 8 and "
Liquidity and Capital Resources
" in Item 7 for further discussion of our Credit Agreement.
In addition, if we were to borrow under our Credit Agreement it could have a significant impact on our operations, including:
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increasing our vulnerability to adverse economic or industry conditions;
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limiting our flexibility in operating our business;
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requiring us to dedicate a portion of our cash flow from operations to payments on any debt, thereby reducing the availability of our cash flow to fund working capital, capital expenditures, strategic initiatives and general corporate purposes;
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making it more difficult for us to satisfy our obligations under our Credit Agreement and increasing the risk that we may default on our Credit Agreement;
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limiting our ability to obtain debt financing or new credit facilities for working capital, capital expenditures, acquisitions, general corporate purposes and other activities;
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placing us at a competitive disadvantage against less leveraged competitors; and
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making us vulnerable to increases in interest rates, as borrowings under our Credit Agreement are subject to variable interest rates.
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We may not be able to generate sufficient cash flow to meet our obligations.
Lower levels of offshore exploration and development activity and spending by our customers globally has had a direct and significant impact on our financial performance, financial condition and financial outlook. Our ability to fund our operations depends on our ability to generate future cash flows from operations. This, to a large extent, is subject to conditions in the oil and gas industry, including commodity prices, demand for our services and the prices we are able to charge for our services, general economic and financial conditions, competition in the markets in which we operate, the impact of legislative and regulatory actions on how we conduct our business and other factors, all of which are beyond our control. During
2018
, we had negative cash flows from operations, and this trend could continue if conditions in our industry continue or worsen. See
"Liquidity and Capital Resources"
in Item 7 for further discussion of our business outlook.
We may not be able to sell our assets held for sale and / or any sales we consummate may not produce the desired results.
At December 31,
2018
, our assets held for sale total
$18.9 million
and primarily consist of three 660-ton crawler cranes, a deck barge, two plate bending roll machines, panel line equipment and a 2,500-ton drydock. We can provide no assurances that we will successfully sell these assets, that we will do so in accordance with our expected timeline or that we will recover the carrying value of the assets. Additionally, any decisions made regarding our deployment or use of any sales proceeds we receive in any sale involves risks and uncertainties. As a result, our decisions with respect to such proceeds may not lead to increased long-term shareholder value. See Note 3 of our Financial Statements in Item 8 for further discussion of our assets held for sale.
We may be unable to successfully defend against claims made against us by customers or subcontractors, or recover claims made by us against customers or subcontractors.
Our projects are generally complex, and we may encounter difficulties in design, engineering, schedule changes and other factors, some of which may be beyond our control, that affect our ability to complete projects in accordance with contracted delivery schedules or to otherwise meet contractual performance obligations. We may bring claims against customers for additional costs incurred by us as a result of customer-caused delays or changes in project scope initiated by our customers that are not part of the original contract scope. In addition, claims may be brought against us by customers relating to, among other things, alleged defective or incomplete work, breaches of warranty and/or late completion of work. We may also incur claims with our subcontractors that are similar to those described above. These claims may be subject to lengthy and/or expensive litigation or arbitration proceedings and may require us to invest significant working capital in projects to cover cost increases pending resolution of the claims.
Our employees work on projects that are inherently dangerous. If we fail to maintain safe work sites, we can be exposed to significant financial losses and reputational harm.
Safety is a leading focus of our business, and our safety record is critical to our reputation and is of paramount importance to our employees, customers and shareholders. We work on projects with large mechanized equipment, moving vehicles, and dangerous processes, which can place our employees and others in challenging environments. In addition, the failure of structures during and after installation can also result in personal injury or loss of life, severe damage to and destruction of property and equipment and suspension of operations. Management is focused on the implementation of effective quality, health, safety, environmental and security procedures. If we fail to implement these procedures, our employees and others may become injured, disabled or lose their lives, and our projects may be delayed causing exposure to litigation or investigations by regulators.
Unsafe conditions at project work sites also have the potential to increase employee turnover, increase project costs and raise our operating costs. In addition, our customers require that we meet certain safety criteria for eligibility to bid for contracts. Our failure to maintain adequate safety standards, could result in lost project awards, customers and our ability to tender future bids.
These risks may be greater should we acquire companies that have not allocated sufficient resources and management focus on safety and have poor safety records requiring corrective actions during the integration process. This may result in liabilities before such corrective actions are implemented.
The limits on our insurance coverage could expose us to potentially significant liability and costs.
The fabrication of structures and the services we provide involves operating hazards that can cause personal injury or loss of life, severe damage to and destruction of property and equipment and suspension of operations. In addition, due to the proximity to the GOM, our facilities are subject to the possibility of physical damage caused by hurricanes or flooding.
In addition, our employees may engage in certain activities, including interconnect piping and other service activities conducted on offshore platforms, activities performed on spud barges owned or chartered by us, and marine vessel fabrication and repair activities performed at our facilities and barges owned by us, that are covered in either the provisions of the Jones Act or USL&H. These laws make the liability limits established under state workers’ compensation laws inapplicable to these employees and, instead, permit them or their representatives to pursue actions against us for damages or job-related injuries, with generally no limitations on our potential liability. For example, our ownership and operation of vessels and our fabrication and repair of customer vessels can give rise to large and varied liability risks, such as risks of collisions with other vessels or structures, sinking, fires and other marine casualties, which can result in significant claims for damages against both us and third parties. Litigation arising from any such occurrences may result in our being named as a defendant in lawsuits asserting large claims.
We may be exposed to future losses through our use of deductibles and self-insured retentions for our exposures related to third party liability and workers' compensation. We expect liabilities in excess of any deductible to be covered by insurance. Although we believe that our insurance coverage is adequate, there can be no assurance that we will be able to maintain adequate insurance at rates we consider reasonable or that our insurance coverage will be adequate to cover claims that may arise. To the extent we are self-insured, reserves are recorded based upon our estimates, with input from legal and insurance advisors. Changes in assumptions, as well as changes in actual experience, could cause these estimates to change.
Changes in the insurance industry have generally led to higher insurance costs and decreased availability of coverage. The availability of insurance that covers risks we typically insure against may decrease, and the insurance that we are able to obtain may have higher deductibles, higher premiums and more restrictive policy terms.
Our entry into a new line of business may not result in increased shareholder value.
Our operations historically focused on offshore fabrication services for the oil and gas industry. We have diversified our fabrication business through the pursuit of onshore fabrication opportunities, expanded and diversified our shipyard capability through the acquisition of a shipyard business in 2016, and expanded our EPC capability through the creation of our EPC Division to manage the potential SeaOne Project, offshore wind opportunities and other projects that may require EPC services. We may expand our capabilities further and enter into additional lines of business. Entry into, or further development of, lines of business in which we have not historically operated may expose us to business and operational risks that are different from those we have experienced historically. We may not be able to effectively manage these additional risks or implement successful business strategies in new lines of business. Additionally, our competitors in these lines of business may possess greater operational knowledge, resources and experience than we do. These diversification initiatives may not result in an increase in shareholder value and could result in a reduction in shareholder value depending upon our capital investment and success.
We may be unable to employ a sufficient number of skilled personnel to execute our projects.
In recent years we have reduced our skilled workforce in response to decreases in utilization of our facilities. Our productivity and profitability are significantly dependent upon our ability to attract and retain skilled construction supervision and craft labor, primarily welders, fitters and equipment operators. Reductions in our labor force may make it more difficult to increase our labor force to desirable levels during periods of expanding customer demand and increases in our backlog. Our ability to expand our operations to support growth in our backlog is highly dependent on our ability to increase our labor force when necessary with an appropriate skilled construction workforce.
In addition, in periods of increased demand for construction labor, the supply of such labor becomes increasingly limited resulting in higher costs of labor, including increases in the wage rates as well as recruiting or training costs to attract and retain qualified employees. During previous periods of high activity, we have enhanced several incentive programs and expanded our training facility to maintain our workforce and attract new employees. During times of higher demand for our services, if qualified personnel become scarce, it could also increase our use of contract labor, which may have a higher cost and lower levels of productivity. Further, if we fail to attract and retain qualified personnel, we could incur difficulties performing our contracts and attracting new project awards. Moreover, any shortage of qualified personnel or the inability to obtain and retain qualified personnel could negatively affect the quality, safety and timeliness of our operations.
Our success is dependent on key personnel.
Part of our success depends on the abilities of our executives, management, and other key employees who have significant experience within our industry. Our success also depends on our ability to attract, retain and motivate highly-skilled personnel in various areas, including engineering, skilled laborers and craftsmen, project management, procurement, project controls and finance. The loss of one or more key personnel or our inability to attract, retain and motivate necessary personnel could impact our operations. In addition, we may not be able to retain key employees assumed in an acquisition, which may impact our ability to successfully integrate or operate the business acquired.
We depend on third parties to provide services to perform our contractual obligations and supply raw materials.
We rely on third parties to provide raw materials, and major components and to perform certain services required by our contracts. For example, we rely on steel purchased from domestic and foreign steel mills as well as subcontractors for the installation of electrical and mechanical testing of equipment. Disruptions and performance problems caused by our suppliers and subcontractors, or a misalignment between our contractual obligations to our customers and our agreements with our subcontractors and suppliers, could have an adverse effect on our ability to meet our commitments to customers. Our ability to perform our obligations on a timely basis could be adversely affected if one or more of our suppliers or subcontractors are unable
to provide the agreed-upon products or materials or perform the agreed-upon services in a timely, compliant and cost-effective manner or otherwise fail to satisfy contractual requirements. The inability of our suppliers or subcontractors to perform could also result in the need to transition to alternate suppliers, which could result in significant incremental cost and delay, or the need for us to provide other supplemental means to support our existing suppliers and subcontractors.
We depend upon subcontractors for a variety of reasons, including:
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to perform work we would otherwise perform with our employees but are unable to do so as a result of scheduling demands;
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to supervise and/or perform certain aspects of the contract more efficiently considering the conditions of the contract; and
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to perform certain services that we are unable to do or which we believe can be performed more efficiently or at a lower cost by subcontractors.
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We work closely with these subcontractors to monitor progress and address our customer requirements. However, the inability of our subcontractors to perform under the terms of their contracts could cause us to incur additional costs that reduce profitability or create losses on projects.
The costs to provide our products and services can increase over the terms of our contracts, including any increases in material costs. We may be protected from increases in material costs through cost escalation provisions in some of our contracts. Even with these provisions, however, the difference between our actual material costs and these escalation provisions may expose us to cost uncertainty. In addition, we may experience significant delays in deliveries of key raw materials, which may occur as a result of availability or price.
Recent and potential changes in U.S. trade policies and retaliatory responses from other countries may significantly increase the costs or limit supplies of materials and products used in our fabrication projects.
The federal government recently imposed new or increased tariffs or duties on an array of imported materials and goods that are used in connection with our fabrication business, including steel, raising our costs for these items (or products made with them), and has threatened to impose further tariffs, duties and/or trade restrictions on imports. Foreign governments, including China and Canada, and trading blocs, such as the European Union, have responded by imposing or increasing tariffs, duties and/or trade restrictions on U.S. goods, and are reportedly considering other measures. These trading conflicts and related escalating governmental actions that result in additional tariffs, duties and/or trade restrictions could increase our costs further, cause disruptions or shortages in our supply chains and/or negatively impact the U.S., regional or local economies.
The nature of our industry subjects us to compliance with regulatory and environmental laws.
Our operations and properties are subject to a wide variety of foreign, federal, state and local laws and other regulations, including those governing discharges into the air and water, the handling and disposal of solid and hazardous wastes, the remediation of soil and groundwater contaminated by hazardous substances and the health and safety of employees. Compliance with many of these laws is becoming increasingly complex, stringent and expensive. These laws may impose “strict liability” for damages to natural resources or threats to public health and safety, rendering a party liable for the environmental damage without regard to its negligence or fault. Certain environmental laws provide for strict, joint and several liability for remediation of spills and other releases of hazardous substances, as well as damage to natural resources. In addition, we could be subject to claims alleging personal injury or property damage as a result of alleged exposure to hazardous substances. Such laws and regulations may also expose us to liability for the conduct of or conditions caused by others or acts for which we were in compliance with applicable laws at the time such acts were performed. We believe that our present operations materially comply with applicable federal and state pollution control and environmental protection laws and regulations. We also believe that compliance with such laws has not resulted in a material adverse effect on our operations. However, such environmental laws are changed frequently. Sanctions for noncompliance may include revocation of permits, corrective action orders, administrative or civil penalties and criminal prosecution. We are unable to predict whether environmental laws will have a material adverse effect on our future operations and financial results. See “
Business and Properties - Government and Environmental Regulation
” in Item 1 for further discussion.
The demand for our services is also affected by changing taxes, price controls and other laws and regulations related to the oil and gas and marine industries. We may not be able to pass any potential increases in taxes on to our customers.
Offshore construction and drilling in certain areas is opposed by many environmental groups and, in certain areas, has been restricted. To the extent laws are enacted or other governmental actions are taken that prohibit or restrict offshore construction
and drilling or impose environmental protection requirements that result in increased costs to the oil and gas industry in general and the offshore construction industry, our business and prospects could be adversely affected. We cannot determine to what extent future operations and results of operations may be affected by new legislation, new regulations or changes in existing regulations.
Our business is highly dependent on our ability to utilize the navigation canals adjacent to our facilities.
Our shipyard and fabrication yards are located on the Houma Navigation Canal approximately 30 miles from the GOM and our services yard is located on a slip adjacent to the Houma Navigation Canal. The Houma Navigation Canal provides the shortest and least restrictive means of access from our facilities to open waters. Our shipyard in Jennings, Louisiana, is located on the west bank of the Mermentau River approximately 25 miles north of the U.S. Intracoastal Waterway and our shipyard near Lake Charles located 17 miles from the GOM on the Calcasieu River. All these waterways are navigable waterways of the U.S. and, as such, are protected by federal law from unauthorized obstructions that would hinder water-borne traffic. Federal law also authorizes maintenance of these waterways by the U.S. Army Corps of Engineers. These waterways are dredged from time to time to maintain water depth and, while federal funding for dredging has historically been provided, there is no assurance that Congressional appropriations sufficient for adequate dredging and other maintenance of these waterways will be continued. If funding were not appropriated for that purpose, some or all of these waterways could become impassable by barges or other vessels required to transport many of our products.
Any additional government shutdowns may adversely affect our business.
A government shutdown could impact inspections, regulatory review and certifications, grants or approvals. In addition, during the first quarter 2018, we executed a contract for the construction and delivery of one towing, salvage and rescue ship for the U.S. Navy with customer options for seven additional vessels. A government shutdown could result in a delay or cancellation of this project or result in our incurring substantial labor or other costs without reimbursement from the government.
Systems and information technology interruption or failure and data security breaches could adversely impact our ability to operate or expose us to significant financial losses and reputational harm.
We rely heavily on computer information, communications technology and related systems in order to properly operate our business. From time to time, we experience occasional system interruptions and delays. In the event we are unable to deploy software and hardware, effectively upgrade our systems and network infrastructure, and take other steps to maintain or improve the efficiency and efficacy of our systems, the operation of such systems could be interrupted or result in the loss, corruption or release of data. In addition, our computer and communications systems and operations could be damaged or interrupted by natural disasters, force majeure events, telecommunications failures, power loss, acts of war or terrorism, computer viruses, malicious code, physical or electronic security breaches, intentional or inadvertent user misuse or error, or similar events or disruptions. Any of these or other events could cause interruptions, delays, loss of critical and/or sensitive data or similar effects, which could have a material adverse impact on us and our clients.
In addition, we face the threat to our computer systems of unauthorized access, computer hackers, computer viruses, malicious code, organized cyber-attacks and other security problems and system disruptions. If we were to be subject to a cyber incident or attack, it could result in the disclosure of confidential or proprietary customer information, theft or loss of intellectual property, damage to our reputation with our customers and the market, failure to meet customer requirements or customer dissatisfaction, theft or exposure to litigation, damage to equipment and other financial costs and losses. We rely on industry accepted security measures and technology to securely maintain all confidential and proprietary information on our computer systems, but they are still vulnerable to these threats. In addition, as cybersecurity threats continue to evolve, we may be required to expend significant resources to protect against the threat of these system disruptions and security breaches or to alleviate problems caused by these disruptions and breaches.
We may conduct a portion of our operations through joint ventures and strategic alliances over which we may have limited control, and our partners in such arrangements may not perform.
We recently entered into a cooperation agreement with Smulders. In the future we may conduct a portion of our operations through joint ventures and strategic alliances with business partners. In any such arrangement, differences in views among the participants may result in delayed decisions or in failures to reach agreement on certain matters, or to do so in a timely manner. In any joint ventures or strategic alliance in which we hold a non-controlling interest, we may have limited control over many decisions relating to joint venture operations and internal controls relating to operations. We also cannot control the actions of our partners, including any non-performance, default, or bankruptcy of our partners, and we would likely share liability or have joint and/or several liability with our partners for joint venture matters.