NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2019
(Unaudited)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
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, hookup, commissioning, repair, maintenance and civil construction services. We operate and manage our business through
three
operating divisions ("Fabrication", "Shipyard" and "Services") and
one
non-operating division ("Corporate"), which represent our reportable segments. During the first quarter 2019, our former EPC Division was operationally combined with our Fabrication Division. See Note 7 for discussion of our realigned operating divisions and related financial information. Our corporate headquarters is located in Houston, Texas, with fabrication facilities located in Houma, Jennings and Lake Charles, Louisiana.
Significant projects in our backlog include the expansion of a paddle wheel riverboat, and the construction of a jacket and deck,
eight
harbor tug vessels,
two
offshore regional class marine research vessels,
two
vehicle ferries,
two
towboats, an ice-breaker tug, and a towing, salvage and rescue ship for the U.S. Navy. Recently completed projects include the fabrication of complex modules for a newbuild petrochemical facility and a meteorological tower and platform for an offshore wind project, and construction of
two
technologically-advanced OSVs and
two
harbor tug vessels. 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.
In April 2019, our customer for our regional class marine research vessels exercised its option for the construction of a third vessel and our customer for our towing, salvage and rescue ship exercised its option for the construction of
five
additional vessels (and continues to have options for the construction of
five
additional vessels).
Basis of Presentation
The accompanying unaudited Consolidated Financial Statements ("Financial Statements") reflect all wholly owned subsidiaries. Intercompany balances and transactions have been eliminated in consolidation. The Financial Statements have been prepared in accordance with accounting principles generally accepted in the U.S. ("GAAP") for interim financial statements, the instructions to Form 10-Q and Article 10 of Regulation S-X of the U.S. Securities and Exchange Commission (the "SEC"). Accordingly, the Financial Statements do not include all of the information and footnotes required by GAAP for complete financial statements. In our opinion, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the
three months ended
March 31, 2019
are not necessarily indicative of the results that may be expected for the year ending
December 31, 2019
.
The Consolidated Balance Sheet ("Balance Sheet") at
December 31, 2018
, has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by GAAP for complete financial statements. Certain amounts for the 2018 period have been reclassified within our Consolidated Statements of Operations ("Statement of Operations") and our Consolidated Statements of Cash Flows ("Statement of Cash Flows") to conform to our presentation for the 2019 period. For further information, refer to the Financial Statements and related footnotes included in our
2018
Annual Report.
Business Outlook
We continue to strategically position the Company to participate in the fabrication of petrochemical and industrial facilities, pursue offshore wind opportunities, and diversify our customer base within all operating divisions. In addition, we continue to focus on maintaining our liquidity and securing meaningful new project awards and backlog in the near-term, and generating operating income and cash flows from operations in the longer-term. We have made significant progress in our efforts to increase our backlog and improve and preserve our liquidity, including cost reductions and the sale of underutilized assets. See Note 3 for further discussion of our recent asset sales and assets held for sale at
March 31, 2019
.
We believe that our cash, cash equivalents and short-term investments at
March 31, 2019
, and availability under our Credit Agreement (defined in Note 4), will be sufficient to enable us to fund our operating expenses, meet our working capital and capital
expenditure requirements, and satisfy any debt service obligations or other funding requirements, for at least twelve months from the date of this Report.
Operating Cycle
The durations of our contracts vary and can extend beyond twelve months from the date of contract award. Consistent with industry practice, assets and liabilities have been classified as current under the operating cycle concept whereby all contract-related items are classified as current regardless of whether cash will be received or paid within a twelve month period. Assets and liabilities classified as current which may not be received or paid within the next twelve months include contract retainage, contract assets and contract liabilities. Variations from normal contract terms may result in the classification of assets and liabilities as noncurrent.
Use of Estimates
The preparation of our Financial Statements in conformity with GAAP requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses and related disclosures of contingent assets and liabilities. We believe our most significant estimates and judgments are associated with revenue recognition for our contracts, including application of the percentage-of-completion method, estimating costs to complete each contract and the recognition of incentives, unapproved change orders, claims, and liquidated damages; fair value and recoverability assessments that must be periodically performed with respect to long-lived assets and our assets held for sale; determination of deferred income tax assets, liabilities and related valuation allowances; reserves for bad debts; and liabilities related to self-insurance programs. If the underlying estimates and assumptions upon which our Financial Statements are based change in the future, actual amounts may differ materially from those included in the Financial Statements.
Earnings Per Share
We report basic and diluted earnings per share ("EPS") using the "two-class" method as required under GAAP. The calculation of EPS using the two-class method is required when a company has two or more classes of common stock or participating securities. Certain of our unvested restricted stock (which are not included in our basic or diluted weighted average shares outstanding) contain the right to receive non-refundable dividends and therefore represent participating securities. See Note 6 for calculations of our basic and diluted EPS.
Cash Equivalents and Short-term Investments
Cash equivalents
- We consider investments with original maturities of three months or less when purchased to be cash equivalents.
Short-term investments -
We consider investments with original maturities of more than three months but less than twelve months to be short-term investments. At March 31, 2019, our short-term investments include U.S. Treasuries with original maturities of less than six months. We intend to hold these investments until maturity and have stated them at amortized cost. Due to their near-term maturities, amortized cost approximates fair value. All short-term investments are traded on active markets with quoted prices and represent level 1 fair value measurements.
Inventory
Inventory is recorded at the lower of cost or net realizable value determined using the first-in-first-out basis. The cost of inventory includes acquisition costs, production or conversion costs, and other costs incurred to bring the inventory to a current location and condition. Net realizable value is our estimated selling price in the normal course of business, less reasonably predictable costs of completion, disposal and transportation. An allowance for excess or inactive inventory is recorded based on an analysis that considers current inventory levels, historical usage patterns, estimates of future sales and salvage value.
Allowance for Doubtful Accounts
In the normal course of business we extend credit to our customers on a short-term basis and contract receivables are generally not collateralized; however, we typically have the right to place liens on our projects in the event of nonpayment by our customers. We routinely review individual contract receivable balances for collectibility and make provisions for probable uncollectible amounts as necessary. Among the factors considered in our review are the financial condition of our customer and its access to financing, underlying disputes with the customer, the age and value of the receivable balance, and economic conditions in general.
Our customer base historically includes a significant number of energy related companies and their contractors. This concentration of customers in the energy sector may impact our overall exposure to credit risk, either positively or negatively, in that customers may be similarly affected by changes in economic or other conditions. See Note 2 for further discussion of our allowance for doubtful accounts.
Stock-Based Compensation
Awards under our stock-based compensation plans are calculated using a fair value-based measurement method. Compensation expense for share based awards is recognized only for those awards that are expected to vest. We use the straight-line method to recognize share-based compensation expense over the requisite service period of the award. We recognize the excess tax benefit or tax deficiency resulting from the difference between the deduction we receive for tax purposes and the stock-based compensation expense we recognize for financial reporting purposes created when common stock vests, as an income tax benefit or expense in our Statement of Operations.
Tax payments made on behalf of employees to taxing authorities in order to satisfy employee income tax withholding obligations from the vesting of shares under our stock-based compensation plans are classified as a financing activity in our Statement of Cash Flows.
Assets Held for Sale
Assets held for sale are measured at the lower of their carrying amount or fair value less cost to sell. See Note 3 for further discussion of our assets held for sale.
Depreciation Expense
We depreciate property, plant and equipment on a straight-line basis over estimated useful lives ranging from
three
to
25
years, absent any indicators of impairment. Ordinary maintenance and repairs, which do not extend the physical or economic lives of the plant or equipment, are charged to expense as incurred.
Long-Lived Assets
We review long-lived assets for impairment, which include property, plant and equipment and finite-lived intangible assets included within other assets, when events or changes in circumstances indicate that the carrying amount may not be recoverable. If a recoverability assessment is required, the estimated future undiscounted cash flow associated with the assets or asset groups are compared to their respective carrying amounts to determine if an impairment exists. An impairment loss is measured by comparing the fair value of the asset or asset group to its carrying amount and recording the excess of the carrying amount of the asset or asset group over its fair value as an impairment charge. An asset group constitutes the minimum level for which identifiable cash flows are principally independent of the cash flows of other assets or asset groups. Fair value is determined based on discounted cash flows, appraised values or third party indications of value, as appropriate. During the first quarter 2019, we identified no indicators of impairment.
Fair Value Measurements
Our fair value determinations for financial assets and liabilities are based on the particular facts and circumstances. Financial instruments are required to be categorized within a valuation hierarchy based upon the lowest level of input that is significant to the fair value measurement. The three levels of the valuation hierarchy are as follows:
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•
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Level 1 - inputs are based upon quoted prices for identical instruments traded in active markets.
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•
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Level 2 - inputs are based upon quoted prices for similar instruments in active markets and model-based valuation techniques for which all significant assumptions are observable in the market.
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•
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Level 3 - inputs are based upon model-based valuation techniques for which significant assumptions are generally not observable in the market and typically reflect estimates and assumptions that we believe market participants would use in pricing the asset or liability. These include discounted cash flow models and similar valuation techniques.
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The carrying amounts reported for financial instruments, including cash and cash equivalents, short-term investments, contracts receivable and accounts payable, approximate their fair values.
Revenue Recognition
General
- 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 and construction of steel structures, modules and marine vessels, and project management services and other service arrangements. We recognize revenue for our contracts in accordance with Accounting Standards Update ("ASU") 2014-09, Topic 606 “Revenue from Contracts with Customers” ("Topic 606"), which was adopted by us on January 1, 2018, and supersedes previous revenue recognition guidance, including industry-specific guidance.
Fixed-Price and Unit-Rate Contracts -
Revenue for our fixed-price and unit-rate contracts is recognized using the percentage-of-completion method (an input 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. Although our customers retain the right and ability to change, modify or discontinue further work at any stage of a contract, in the event our customers discontinue work, they are required to compensate us for the work performed to date. 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.
T&M Contracts -
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.
Variable Consideration
- Revenue and gross profit for contracts can be significantly affected by variable consideration, which can be in the form of unapproved change orders, claims, incentives, and liquidated damages that may not be resolved until the later stages of the contract or after the contract has been completed and delivery occurs. We estimate variable consideration based on the amount we expect to be entitled and include estimated amounts in transaction price to the extent it is probable that a significant future reversal of cumulative revenue recognized will not occur or when we conclude that any significant uncertainty associated with the variable consideration is resolved. For the three months ended March 31,
2019
and
2018
, we had no material amounts in revenue related to unapproved change orders, claims, or incentives. However, at
March 31, 2019
and
December 31, 2018
, certain projects in our Shipyard Division reflected a reduction to our estimated contract price for liquidated damages of
$11.2 million
. The reductions in contract price were recorded during 2017.
Adoption of Topic 606
- As discussed above, on January 1, 2018 we adopted Topic 606. Prior to our adoption of Topic 606, our determination of percentage-of-completion for our fixed-price and unit-rate contracts was based on the percentage of direct labor hours incurred to date compared to total estimated direct labor hours, and revenue for materials was recognized only to the extent of costs incurred. However, in our adoption of Topic 606, we adjusted our measure of progress for the determination of percentage-of-completion to include subcontract labor hours in addition to direct labor hours. Accordingly, our determination of percentage-of-completion for the first quarter 2018 was based on this method.
During the fourth quarter 2018, we concluded that the use of labor hours for the determination of percentage-of-completion for our fixed-price and unit-rate contracts was not appropriate based on the changing mix of our contracts, which include an increasing amount of engineered equipment, manufactured materials, and subcontracted services and materials. We also concluded that in our adoption of Topic 606 as of January 1, 2018, our determination of percentage-of-completion for our fixed-price and unit-rate contracts should have been based on total contract costs incurred to date compared to total estimated contact costs. We further concluded that material costs that are significant to a contract and do not reflect an accurate measure of project completion should be excluded from the determination of our contract progress, and revenue for such materials should only be recognized to the extent of costs incurred. Accordingly, during the fourth quarter 2018 we corrected our percentage-of-completion estimates for our fixed-price and unit-rate contracts to be based on total costs incurred to date compared to total estimated contract costs. Accordingly, our determination of percentage-of-completion for the first quarter 2019 was based on this method. The impact of the difference in methods of determining percentage-of-completion between the three months ended March 31, 2019 and 2018 was not material.
During 2018 we also evaluated the required cumulative effect adjustment to retained earnings as of January 1, 2018 for the adoption impact of Topic 606. Based on this evaluation, we determined that the cumulative effect adjustment would have been
$0.4 million
, which we did not believe was material to our Financial Statements. Accordingly,
no
cumulative adjustment to retained earnings as of January 1, 2018 was recorded.
Income Taxes
Income taxes have been provided using the liability method. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes using enacted rates expected to be in effect during the year in which the differences are expected to reverse.
A valuation allowance is provided to reserve for deferred tax assets ("DTA(s)") if, based upon the available evidence, it is more likely than not that some or all of the DTAs will not be realized. The realization of our DTAs depends on our ability to generate sufficient taxable income of the appropriate character and in the appropriate jurisdictions.
Reserves for uncertain tax positions are recognized when we consider it more likely than not that additional tax will be due in excess of amounts reflected in our income tax returns, irrespective of whether or not we have received tax assessments. Interest and penalties on uncertain tax positions are recorded within income tax expense.
Pre-contract Costs
Pre-contract costs are generally charged to cost of revenue as incurred, but in certain cases their recognition may be deferred if specific probability criteria are met. At March 31, 2019 and December 31, 2018, we had no deferred pre-contract costs.
Other (Income) Expense, Net
Other (income) expense, net, generally represents (recoveries) provisions for bad debts, (gains) losses associated with the sale or disposition of property and equipment other than assets held for sale, and (income) expense associated with certain nonrecurring items.
New Accounting Standards
Leases -
In the first quarter 2019, we adopted ASU 2016-02, “Leases,” which required us to record a lease liability on our Balance Sheet equal to the present value of our lease payments for leased assets, and record a lease asset on our Balance Sheet representing our right to use the underlying leased assets for all leases having an original term of longer than 12-months. In our adoption we elected the modified retrospective transition method, and accordingly, prior periods have not been restated and continue to be reported under the lease standard in effect during such periods. We also elected certain practical expedients provided by ASU 2016-02, including not recording an asset or liability for leases having a term of 12-months or less and not separating lease and non-lease components for our leases. Upon adoption, we recorded operating lease assets and lease liabilities of approximately
$7.2 million
and
$5.3 million
, respectively, at January 1, 2019. Included in our lease asset was an intangible asset of
$1.9 million
associated with two favorable lease obligations recorded in connection with a former acquisition, which was reclassified as a lease asset under ASU 2016-02.
The lease asset is reflected within other noncurrent assets, and the current and noncurrent portions of the lease liability are reflected within accrued expenses and other liabilities and other noncurrent liabilities, respectively, on our Balance Sheet. At
March 31, 2019
, our lease asset, current lease liability and long-term lease liability were
$7.0 million
,
$0.3 million
and
$4.9 million
, respectively. For leases with escalations over the life of the lease, we recognize expense on a straight-line basis. See Note 5 for further discussion of our lease liabilities.
Stock-based grants -
In the first quarter 2019, we adopted ASU 2018-07, "Improvements to Non-employee Share-Based Payment Accounting," which simplifies the accounting for share-based payments granted to non-employees for goods and services. Under the ASU, most of the guidance for such payments to non-employees is now aligned with the requirements for share-based payments to employees. The adoption of the new standard did not have a material impact on our financial position, results of operations or related disclosures.
Financial instruments -
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses - Measurement of Credit Losses on Financial Instruments,” which changes the way companies evaluate credit losses for most financial assets and certain other instruments. For trade and other receivables, short-term investments, loans and other instruments, entities will be required to use a new forward-looking “expected loss” model to evaluate impairment, potentially resulting in earlier recognition
of allowances for losses. The new standard also requires enhanced disclosures, including the requirement to disclose the information used to track credit quality by year of origination for most financing receivables. ASU 2016-13 will be effective for us in the first quarter 2020. Early adoption of the new standard is permitted; however, we have not elected to early adopt the standard. The new standard is required to be applied using a cumulative-effect transition method. We are currently evaluating the effect that ASU 2016-13 will have on our financial position, results of operations and related disclosures.
2. REVENUE, CONTRACT ASSETS AND LIABILITIES AND OTHER CONTRACT MATTERS
As discussed in Note 1, we recognize revenue for our contracts in accordance with Topic 606. Summarized below are required disclosures under Topic 606 and other relevant guidance.
Disaggregation of Revenue
The following tables summarize revenue for each of our operating segments, disaggregated by contract type, for the three months ended March 31,
2019
and
2018
(in thousands):
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Three Months Ended March 31, 2019
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Fabrication
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Shipyard
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Services
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Eliminations
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Total
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Contract Type
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Fixed-price and unit-rate
(1)
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$
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12,631
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|
|
$
|
33,626
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$
|
6,231
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$
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(614
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)
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$
|
51,874
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T&M
(2)
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—
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2,961
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|
10,622
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—
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13,583
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Other
|
—
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—
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2,749
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(601
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)
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|
2,148
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Total
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$
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12,631
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|
|
$
|
36,587
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|
$
|
19,602
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$
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(1,215
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)
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$
|
67,605
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Three Months Ended March 31, 2018
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Fabrication
|
|
Shipyard
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|
Services
|
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Eliminations
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Total
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Contract Type
|
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|
|
|
|
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Fixed-price and unit-rate
(1)
|
$
|
17,343
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|
|
$
|
17,222
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|
|
$
|
10,290
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|
|
$
|
(453
|
)
|
|
$
|
44,402
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T&M
(2)
|
—
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1,343
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|
10,585
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—
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11,928
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Other
|
—
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—
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995
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|
(35
|
)
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960
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Total
|
$
|
17,343
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|
|
$
|
18,565
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|
$
|
21,870
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|
$
|
(488
|
)
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$
|
57,290
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____________
(1) Revenue is recognized as the contract is progressed over time.
(2) Revenue is recognized at contracted rates when the work is performed and costs are incurred.
Future Performance Obligations Required Under Contracts
A summary of our remaining performance obligations by operating segment at
March 31, 2019
is as follows (in thousands).
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Segment
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Performance Obligations at March 31, 2019
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Fabrication
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$
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71,144
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Shipyard
(1) (2)
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226,250
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Services
|
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15,397
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Total
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$
|
312,791
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_____________
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(1)
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Amount excludes approximately
$21.9 million
of remaining performance obligations related to contracts for the construction of
two
MPSVs that are subject to dispute pursuant to a termination notice from our customer. See Note 5 for further discussion of these contracts.
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(2)
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Amount excludes remaining performance obligations related to contract awards in April 2019 for the construction of a regional class marine research vessel (approximately
$70.0 million
) and
two
towing, salvage and rescue ships (approximately
$129.0 million
).
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We expect to recognize revenue for our remaining performance obligations at March 31, 2019 in the following periods (in thousands):
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Year
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Total
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Remainder of 2019
|
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$
|
180,172
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|
2020
|
|
101,924
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2021
|
|
29,825
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Thereafter
|
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$
|
870
|
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Total
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$
|
312,791
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Contracts Assets and Liabilities
Revenue recognition and customer invoicing for our fixed-price and unit-rate contracts may occur at different times. Revenue recognition is based upon our estimated percentage-of-completion as discussed in Note 1; however, customer invoicing is generally dependent upon predetermined billing terms, which could provide for customer payments in advance of performing the work, milestone billings based on the completion of certain phases of the work, or billings when services are provided. Revenue recognized in excess of amounts billed is reflected as contract assets on our Balance Sheet. Amounts billed in excess of revenue recognized, and accrued contract losses, are reflected as contract liabilities on our Balance Sheet. Contract assets and contract liabilities included in our Balance Sheet at
March 31, 2019
and
December 31, 2018
, are as follows (in thousands):
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March 31,
|
|
December 31,
|
|
|
2019
|
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2018
|
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Contract assets
|
$
|
38,707
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|
|
$
|
29,982
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Contract liabilities
(1), (2), (3)
|
(9,234
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)
|
|
(16,845
|
)
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Contracts in progress, net
|
$
|
29,473
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|
|
$
|
13,137
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______________
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(1)
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The decrease in contract liabilities compared to December 31, 2018, was primarily due to the unwind of advance payments on
two
separate projects in our Fabrication and Shipyard Divisions.
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(2)
|
Revenue recognized during the three months ended March 31, 2019 and 2018 related to amounts included in our contract liabilities balance at December 31, 2018 and 2017, was
$13.5 million
and
$4.3 million
, respectively.
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(3)
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Contract liabilities at March 31, 2019 and December 31, 2018, includes accrued contract losses of
$1.5 million
and
$2.4 million
, respectively. See
"Project Changes in Estimates"
below for further discussion of our accrued contract losses.
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Allowance for Doubtful Accounts
Our provision for bad debts for the three months ended
March 31, 2019
and 2018 was
$53,000
and
$8,000
, respectively, and is included in other (income) expense, net on our Statement of Operations. Our allowance for doubtful accounts at
March 31, 2019
and
December 31, 2018
was
$0.4 million
and
$0.4 million
, respectively.
Changes in Project Estimates
For the three months ended
March 31, 2019
and 2018, individual projects with significant changes in estimated margins did not have a material net impact on our loss from operations. At
March 31, 2019
, our
eight
uncompleted harbor tug projects within our Shipyard Division were in a loss position and our reserve for estimated losses on the projects was
$1.3 million
. The loss position on the projects is a result of increased forecast costs incurred during the second half of 2018 associated primarily with lower than anticipated craft labor productivity related to pipe installation and testing and extensions of schedule for the projects. The projects are scheduled to be completed at various dates ranging from the second quarter 2019 through 2020. If future craft labor productivity differs from our current estimates, we are unable to achieve our progress estimates, our schedules are further extended or the projects incur schedule liquidated damages, the projects would experience further losses.
3. ASSETS HELD FOR SALE
A summary of our assets held for sale at
March 31, 2019
, is as follows (in thousands):
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Assets
|
|
Fabrication Division
|
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Shipyard Division
|
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Consolidated
|
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Machinery and equipment
|
|
$
|
25,583
|
|
|
$
|
1,222
|
|
|
$
|
26,805
|
|
|
Accumulated depreciation
|
|
(7,871
|
)
|
|
(298
|
)
|
|
(8,169
|
)
|
|
Total
|
|
$
|
17,712
|
|
|
$
|
924
|
|
|
$
|
18,636
|
|
Fabrication Division Assets Held for Sale
South Texas Properties -
During the first quarter 2017, we classified our fabrication yards and certain associated equipment in Ingleside, Texas ("Texas South Yard") and Aransas Pass, Texas ("Texas North Yard") (collectively, "South Texas Properties") as held for sale. During the second and fourth quarters of 2018, we completed the sale of the Texas South Yard and Texas North Yard, respectively, which included both fabrication yards and certain equipment. At
March 31, 2019
, our Fabrication Division continued to have
$17.7 million
of assets held for sale ("Fabrication AHFS") which were initially expected to be sold with the South Texas Properties. These assets consist primarily of
three
660-ton crawler cranes, a deck barge,
two
plate bending roll machines and panel line equipment. The Fabrication AHFS were relocated to our fabrication yard in Houma, Louisiana.
Hurricane Harvey Insurance Recoveries
- During the third quarter 2017, buildings and equipment located at our South Texas Properties were damaged by Hurricane Harvey. In connection therewith, during the three months ended March 31, 2018, we received
$2.2 million
of insurance proceeds as a partial payment from our insurance carriers, which offset impairments of property and equipment, primarily at our Texas North Yard, resulting in no net gain or loss.
Other -
During the three months ended
March 31, 2019
, we received proceeds of
$0.4 million
related to the sale of assets that were held for sale. During the three months ended
March 31, 2019
and 2018, we recorded a gain of
$70,000
and expense of
$0.8 million
, respectively, related to the net impact of impairments of assets and (gains) losses on the sale of assets that were held for sale. The net gain and charges are included within asset impairments and (gain) loss on assets held for sale, net on our Statement of Operations.
The sale of our South Texas Properties did not impact our ability to operate our Fabrication Division. Further, the sale of our South Texas Properties, and the Fabrication AHFS, did not qualify for discontinued operations presentation as we continue to operate our Fabrication Division at our fabrication yard in Houma, Louisiana.
Shipyard Division Assets Held for Sale
At
March 31, 2019
, our Shipyard Division had
$0.9 million
of assets held for sale ("Shipyard AHFS"), which consists of a 2,500-ton drydock located at our shipyard in Houma, Louisiana. The Shipyard AHFS did not qualify for discontinued operations presentation.
4. CREDIT FACILITIES
Credit Agreemen
t
We have a
$40.0 million
revolving credit facility with Hancock Whitney Bank ("Credit Agreement") that can be used for borrowings or letters of credit. On May 1, 2019, we amended our Credit Agreement to extend its maturity date from June 9, 2020 to June 9, 2021 and amend certain financial covenants. Our quarterly financial covenants at March 31, 2019, and for the remaining term of the Credit Agreement after our amendment, are as follows:
|
|
|
|
•
|
Ratio of current assets to current liabilities at March 31, 2019 of not less than
1.25
:1.00 (
2.0
:1.00 subsequent to the amendment);
|
|
|
|
|
•
|
Minimum tangible net worth at March 31, 2019 of at least the sum of
$180.0 million
(
$170.0 million
subsequent to the amendment), plus
100%
of the net proceeds from any issuance of stock or other equity after deducting any fees, commissions, expenses and other costs incurred in such offering; and
|
|
|
|
|
•
|
Ratio of funded debt to tangible net worth at March 31, 2019 of not more than
0.50
:1.00 (no change subsequent to the amendment).
|
Our Credit Agreement also includes restrictions regarding 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.
Interest on borrowings under the Credit Agreement may be designated, at our option, as either the
Wall Street Journal
published Prime Rate (
5.5%
at
March 31, 2019
) or LIBOR (
2.5%
at
March 31, 2019
) plus
2.0%
per annum. Commitment fees on the unused portion of the Credit Agreement are
0.4%
per annum, and interest on outstanding letters of credit is
2.0%
per annum. The Credit Agreement is secured by substantially all our assets (with a negative pledge on our real property).
At
March 31, 2019
, we had
no
outstanding borrowings under our Credit Agreement and
$2.9 million
of outstanding letters of credit, providing
$37.1 million
of available capacity. At
March 31, 2019
, we were in compliance with all of our financial covenants, with a tangible net worth of
$196.1 million
(as defined by the Credit Agreement), a ratio of current assets to current liabilities of
2.84
to 1.0 and a ratio of funded debt to tangible net worth of
0.01
:1.0.
Surety Bonds
We issue surety bonds in the ordinary course of business to support our projects. At March 31, 2019, we had
$334.9 million
of outstanding surety bonds.
5. COMMITMENTS AND CONTINGENCIES
We are subject to various routine legal proceedings in the normal conduct of business, primarily involving commercial disputes and claims, workers’ compensation claims, and claims for personal injury under general maritime laws of the U.S. and the Jones Act. While the outcome of these lawsuits, legal proceedings and claims cannot be predicted with certainty, we believe that the outcome of any such proceedings, even if determined adversely, would not have a material adverse effect on our financial position, results of operations or cash flows.
MPSV Termination Letter
We received notices of termination of the contracts for the construction of
two
MPSVs from one of our Shipyard Division customers. We dispute the purported terminations and disagree with the customer’s reasons for such terminations. Pending the resolution of the dispute, we have ceased all work and the partially completed MPSVs and associated equipment and materials remain at our shipyard in Houma, Louisiana. The customer also notified our Surety of its purported terminations of the construction contracts and made claims under the bonds issued by the Surety in connection with the construction of the two MPSVs. We have notified and met with our Surety regarding our disagreement with, and objection to, the customer's purported terminations and its claims. Discussions with the Surety are ongoing. On October 2, 2018, we filed a lawsuit against the customer to enforce our rights and remedies under the applicable construction contracts. Our lawsuit disputes the propriety of the customer’s purported terminations of the construction contracts and seeks to recover damages associated with the customer’s actions. The customer filed its response to our lawsuit denying many of the allegations in the lawsuit and asserting a counterclaim against us seeking, among other things, declaratory judgment as to the validity of the customer's purported terminations of the construction contracts and other purported claims for which the customer is seeking damages in an unspecified amount. We have filed a response to the counterclaim denying all of the customer's claims. The customer subsequently filed a motion with the court seeking, among other things, to obtain possession of the
two
MPSVs. A hearing on that motion is currently scheduled for May 28, 2019.
We are unable to determine the probability of a favorable or unfavorable outcome with respect to the dispute or estimate the amount of potential loss, if any, related to this matter. We can provide no assurances that we will not incur additional costs as we pursue our rights and remedies under the contracts and defend against the customer's claims. At
March 31, 2019
and December 31, 2018, other noncurrent assets on our Balance Sheet included a net contract asset of
$12.5 million
, which consisted of our contract asset, accrued contract losses, and deferred revenue balances at the time of the customer's purported termination of the contracts.
Insurance
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 deductibles and self-insured retentions to
be covered by insurance. 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.
Letters of Credit and Surety Bonds
We obtain letters of credit 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 payment 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. See Note 4 for further discussion of our Credit Agreement and surety bonds.
Leases
Our significant operating leases include our corporate office in Houston, Texas and our shipyard facilities in Lake Charles and Jennings, Louisiana. Our corporate office lease expires in 2025 and our Lake Charles and Jennings leases include renewal options that allow us to extend the lease terms through 2038 and 2045, respectively. We are reasonably certain we will exercise the renewal options and have therefore included the optional renewal periods in our expected lease terms and the measurement of our operating lease assets and liabilities. The table below sets forth the approximate future lease payments related to our operating leases with initial terms of more than one year (in thousands):
|
|
|
|
|
|
|
|
|
Period
|
|
Payments
|
|
Remainder of 2019
|
|
$
|
489
|
|
|
2020
|
|
659
|
|
|
2021
|
|
668
|
|
|
2022
|
|
677
|
|
|
2023
|
|
676
|
|
|
Thereafter
|
|
6,173
|
|
|
Total lease payments
|
|
9,342
|
|
|
Less interest
|
|
(4,181
|
)
|
|
Present value of lease liabilities
|
|
$
|
5,161
|
|
The discount rate used to determine the present value of our lease liabilities was based on the interest rate on our Credit Agreement adjusted for terms similar to that of our leased properties. At March 31, 2019, our weighted-average remaining lease term was approximately
16.1
years and the weighted-average discount rate used to derive our lease liability was
7.5%
. Cash paid for lease liabilities for the three months ended March 31, 2019 was
$0.2 million
.
Environmental Matters
Our operations are subject to extensive and changing U.S. federal, state and local laws and regulations, as well as the laws of other countries, that establish health and environmental quality standards. These standards, among others, relate to air and water pollutants and the management and disposal of hazardous substances and wastes. We are exposed to potential liability for personal injury or property damage caused by any release, spill, exposure or other accident involving such pollutants, substances or wastes. In connection with the historical operation of our facilities, including those associated with acquired operations, substances which currently are or might be considered hazardous were used or disposed of at some sites that will or may require us to make expenditures for remediation. We believe we are in compliance, in all material respects, with environmental laws and regulations and maintain insurance coverage to mitigate exposure to environmental liabilities. We do not believe any environmental matters will have a material adverse effect on our financial condition, results of operations or cash flow.
6. LOSS PER COMMON SHARE
The following table presents the computation of basic and diluted loss per share (in thousands, except for per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2019
|
|
2018
|
|
Net loss attributable to common shareholders
|
$
|
(3,042
|
)
|
|
$
|
(5,296
|
)
|
|
Weighted-average shares
(1)
|
15,151
|
|
|
14,964
|
|
|
Basic and diluted loss per common share
|
$
|
(0.20
|
)
|
|
$
|
(0.35
|
)
|
______________
(1) We have
no
dilutive securities.
7. SEGMENT DISCLOSURES
During 2018, we operated and managed our business through
four
operating divisions ("Fabrication", "Shipyard", "Services" and "EPC") and
one
non-operating division ("Corporate"), which represented our reportable segments. During the first quarter 2019, our EPC Division was operationally combined with our Fabrication Division. Our EPC Division was previously created to support the pursuit of the SeaOne Project and other projects that require project management of EPC activities. Our operational combination of the EPC Division with the Fabrication Division is a result of our reduced emphasis on the SeaOne Project and greater focus on offshore wind and modular fabrication opportunities. As a result of the aforementioned, we currently operate and manage our business through
three
operating divisions ("Fabrication", "Shipyard" and "Services") and
one
non-operating division ("Corporate"), which represent our current reportable segments. The segment results for the EPC Division for the three months ended March 31, 2018 were combined with the Fabrication Division to conform to the presentation of our reportable segments for the 2019 period. We believe that our operating divisions meet the criteria of reportable segments under GAAP. Our
three
operating divisions and Corporate Division are discussed below:
Fabrication Division
-
Our Fabrication Division fabricates modules for petrochemical and industrial facilities, foundations for alternative energy developments and other complex 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. In addition, our Fabrication Division supports our efforts to pursue offshore wind opportunities and other projects that require project management of EPC activities. These activities are performed 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, our Shipyard Division performs 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. These activities are performed at our shipyards in Houma, Jennings and Lake Charles, Louisiana.
Services Division
-
Our Services Division provides interconnect piping and related services on offshore platforms and inland structures. Interconnect piping services involve sending employee crews to offshore platforms in the GOM to perform welding and other activities required to connect production equipment, service modules and other equipment on a platform. Our Services Division also contracts with oil and gas companies that have platforms and other structures located in the inland lakes and bays throughout the southeastern U.S. for various on-site construction and maintenance activities. In addition, our Services Division fabricates packaged skid units and performs various municipal and drainage projects, such as pump stations, levee reinforcement, bulkheads and other public works projects for state and local governments. These services are performed at customer facilities or at our services yard in Houma, Louisiana.
Corporate Division
-
Our Corporate Division represents costs that do not directly relate to our
three
operating divisions. Such costs include, but are not limited 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. Costs incurred by our Corporate Division on behalf of our operating divisions are allocated to the operating divisions. Such costs include, but are not limited to, costs related to human resources, insurance, sales and marketing, information technology and accounting.
We generally evaluate the performance of, and allocate resources to, our operating divisions based upon revenue, gross profit (loss) and operating income (loss). Division assets are comprised of all assets attributable to each division. Intersegment revenues are priced at the estimated fair value of work performed. Summarized financial information for our segments as of and for the three months ended March 31,
2019
and
2018
, is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2019
|
|
|
Fabrication
|
|
Shipyard
|
|
Services
|
|
Corporate
|
|
Consolidated
|
|
Revenue
|
$
|
12,631
|
|
|
$
|
36,587
|
|
|
$
|
19,602
|
|
|
$
|
(1,215
|
)
|
|
$
|
67,605
|
|
|
Gross profit (loss)
|
(772
|
)
|
|
(280
|
)
|
|
1,741
|
|
|
(136
|
)
|
|
553
|
|
|
Operating income (loss)
|
(1,540
|
)
|
|
(904
|
)
|
|
1,289
|
|
|
(2,127
|
)
|
|
(3,282
|
)
|
|
Depreciation expense
|
967
|
|
|
1,109
|
|
|
374
|
|
|
102
|
|
|
2,552
|
|
|
Capital expenditures
|
14
|
|
|
22
|
|
|
214
|
|
|
—
|
|
|
250
|
|
|
Total assets
|
63,761
|
|
|
103,703
|
|
|
34,306
|
|
|
56,945
|
|
|
258,715
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2018
|
|
|
Fabrication
|
|
Shipyard
|
|
Services
|
|
Corporate
|
|
Consolidated
|
|
Revenue
|
$
|
17,343
|
|
|
$
|
18,565
|
|
|
$
|
21,870
|
|
|
$
|
(488
|
)
|
|
$
|
57,290
|
|
|
Gross profit (loss)
|
(527
|
)
|
|
(1,023
|
)
|
|
2,614
|
|
|
(385
|
)
|
|
679
|
|
|
Operating income (loss)
|
(2,506
|
)
|
|
(1,979
|
)
|
|
1,906
|
|
|
(2,511
|
)
|
|
(5,090
|
)
|
|
Depreciation expense
|
1,149
|
|
|
1,069
|
|
|
393
|
|
|
104
|
|
|
2,715
|
|
|
Capital expenditures
|
—
|
|
|
6
|
|
|
65
|
|
|
—
|
|
|
71
|
|
|
Total assets
|
149,116
|
|
|
76,150
|
|
|
35,529
|
|
|
8,327
|
|
|
269,122
|
|
8. SUBSEQUENT EVENTS
On May 1, 2019, we amended our Credit Agreement. See Note 4 for further discussion of our amendment.