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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended

June 30, 2020

or

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from

to

Commission File Number 001-34279

 

 

Gulf Island Fabrication, Inc.

(Exact name of registrant as specified in its charter)

 

 

Louisiana

 

72-1147390

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

16225 Park Ten Place, Suite 300

Houston, Texas

 

77084

 

(Address of principal executive offices)

 

(Zip Code)

 

(713) 714-6100

(Registrant’s telephone number, including area code)

Securities registered pursuant to 12(b) of the Act:

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock

Gifi

Nasdaq

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

 

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

 

Smaller reporting company

 

 

 

 

 

 

 

 

 

 

 

 

Emerging Growth Company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

The number of shares of the registrant’s common stock, no par value per share, outstanding as of August 4, 2020, was 15,308,604.

 

 

 

 


 

GULF ISLAND FABRICATION, INC.

I N D E X

 

 

 

 

 

Page

 

 

 

PART I

 

FINANCIAL INFORMATION

 

1

Item 1.

 

Financial Statements

 

1

 

 

Consolidated Balance Sheets at June 30, 2020 (unaudited) and December 31, 2019

 

1

 

 

Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2020 and 2019 (unaudited)

 

2

 

 

Consolidated Statements of Changes in Shareholders' Equity for the Three and Six Months Ended June 30, 2020 and 2019 (unaudited)

 

3

 

 

Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2020 and 2019 (unaudited)

 

4

 

 

Notes to Consolidated Financial Statements (unaudited)

 

5

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

18

Item 4.

 

Controls and Procedures

 

38

 

 

 

 

 

PART II

 

Other Information

 

39

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

39

Item 1A.

 

Risk Factors

 

39

Item 5.

 

Other Information

 

40

Item 6.

 

Exhibits

 

40

Signatures

 

42

 

- i -


 

GLOSSARY OF TERMS

 

As used in this report on Form 10-Q for the quarter ended June 30, 2020 ("this Report"), the following abbreviations and terms have the meanings as listed below. In addition, the terms “Gulf Island,” “the Company,” “we,” “us” and “our” refer to Gulf Island Fabrication, Inc. and its consolidated subsidiaries, unless the context clearly indicates otherwise. Certain terms defined below may be redefined separately within this Report when we believe providing a definition upon the first use of the term will assist users of this Report.  Unless and as otherwise stated, any references in this Report to any agreement means such agreement and all schedules, exhibits and attachments in each case as amended, restated, supplemented or otherwise modified to the date of filing this Report.

 

2019 Annual Report

Our annual report for the year ended December 31, 2019, filed with the SEC on Form 10-K on March 5, 2020.

 

 

ASU

Accounting Standards Update.

 

 

Balance Sheet

Our Consolidated Balance Sheets, as filed in this Report.

 

 

contract assets

Costs and estimated earnings recognized to date in excess of cumulative billings.

 

 

contract liabilities

Cumulative billings in excess of costs and estimated earnings recognized to date and accrued contract losses.

 

 

CARES Act

The Coronavirus Aid, Relief and Economic Security Act.

 

 

Covered Period

The eight-week period following the date of the PPP Loan of April 17, 2020.

 

 

Credit Agreement

Our $40.0 million revolving credit facility with Whitney Bank.

 

 

deck

The component of a platform on which drilling, production, separating, gathering, piping, compression, well support, crew quartering and other functions related to offshore oil and gas development are conducted.

 

 

labor hours

Hours worked by employees directly involved in the production of our products.

 

 

DTA(s)

Deferred Tax Asset(s).

 

 

EPC

Engineering, procurement and construction phases of a complex project that requires project management and coordination of these significant activities.

 

 

Exchange Act

Securities Exchange Act of 1934, as amended.

 

 

Fabrication & Services

Our Fabrication & Services Division (also referred to herein as F&S).

 

 

FASB

Financial Accounting Standards Board.

 

 

Financial Statements

Our Consolidated Financial Statements, including comparative Consolidated Balance Sheets, Statements of Operations, Statements of Changes in Shareholders' Equity and Statements of Cash Flows, as filed in this Report.

 

 

Flexibility Act

The Paycheck Protection Program Flexibility Act of 2020, which amended the Cares Act.

 

 

GAAP

Generally Accepted Accounting Principles in the U.S.

 

 

Houma Yards

Our Shipyard Division and Fabrication & Services Division facilities located in Houma, Louisiana.

 

 

inland or inshore

Typically, bays, lakes and marshy areas.

 

 

jacket

A component of a fixed platform consisting of a tubular steel, braced structure extending from the mudline of the seabed to a point above the water surface. The jacket is anchored with tubular steel pilings driven into the seabed. The jacket supports the deck structure located above the water.

 

 

Jennings Yard

Our Shipyard Division's facility located near Jennings, Louisiana.

 

 

LIBOR

London Inter-Bank Offered Rate.

 

 

LNG

Liquified Natural Gas.

 

 

- ii -


 

modules

Fabricated structures including structural steel, piping, valves, fittings, storage vessels and other equipment that are incorporated into a refining, petrochemical, LNG or industrial system. These modules are prefabricated at our facilities and then transported to the customer's location for final integration.

 

 

mooring and breasting dolphins

A fixed, steel support structure within or part of a vessel docking/mooring facility that helps prevent movement of marine vessels while loading and unloading the vessel.

 

 

MPSV

Multi-Purpose Support Vessel.

 

 

NOL(s)

Net operating loss(es) that are available to offset future taxable income, subject to certain limitations.

 

 

offshore

In unprotected waters outside coastlines.

 

 

onshore

Inside the coastline on land.

 

 

OSV

Offshore Support Vessel.

 

 

performance obligation

A contractual obligation to construct and transfer a distinct good or service to a customer. It is the unit of account in Topic 606. 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.

 

 

Permissible Expenses

Expenses which may be paid using proceeds from the PPP Loan. Such expenses are limited to payroll costs, rent, utilities, mortgage interest and interest on other pre-existing indebtedness.

 

 

piles

Rigid tubular pipes that are driven into the seabed to support platforms.

 

 

PPP

Paycheck Protection Program administered by the SBA under the CARES Act.  

 

 

PPP Loan

Our $10.0 million loan from Whitney Bank issued pursuant to the PPP.

 

 

SEC

U.S. Securities and Exchange Commission.

 

 

Shipyard

Our Shipyard Division.

 

 

SBA

Small Business Administration.

 

 

Statement of Cash Flows

Our Consolidated Statements of Cash Flows, as filed in this Report.

 

 

Statement of Operations

Our Consolidated Statements of Operations, as filed in this Report.

 

 

Surety

A financial institution that issues bonds to customers on behalf of the Company for the purpose of providing third-party financial assurance related to the performance of our contracts.

 

 

T&M

Work performed and billed to the customer generally at contracted time and material rates, cost plus or other variable fee arrangements.

 

 

Topic 606

The revenue recognition criteria prescribed under ASU 2014-09, Revenue from Contracts with Customers.

 

 

U.S.

The United States of America.

 

 

Whitney Bank

Hancock Whitney Bank.

 

 

 

 

 

 

 

 

- iii -


 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

GULF ISLAND FABRICATION, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands)

 

 

 

June 30,

2020

 

 

December 31,

2019

 

 

 

(Unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

49,184

 

 

$

49,703

 

Short-term investments

 

 

19,992

 

 

 

19,918

 

Contracts receivable and retainage, net

 

 

13,391

 

 

 

26,095

 

Contract assets

 

 

77,860

 

 

 

52,128

 

Prepaid expenses and other assets

 

 

3,120

 

 

 

3,948

 

Inventory

 

 

2,761

 

 

 

2,676

 

Assets held for sale

 

 

8,107

 

 

 

9,006

 

Total current assets

 

 

174,415

 

 

 

163,474

 

Property, plant and equipment, net

 

 

72,376

 

 

 

70,484

 

Other noncurrent assets

 

 

15,763

 

 

 

18,819

 

Total assets

 

$

262,554

 

 

$

252,777

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

62,062

 

 

$

61,542

 

Contract liabilities

 

 

26,973

 

 

 

26,271

 

Accrued expenses and other liabilities

 

 

8,167

 

 

 

10,031

 

Long-term debt, current

 

 

2,143

 

 

 

 

Total current liabilities

 

 

99,345

 

 

 

97,844

 

Long-term debt, noncurrent

 

 

7,857

 

 

 

 

Other noncurrent liabilities

 

 

1,933

 

 

 

2,248

 

Total liabilities

 

 

109,135

 

 

 

100,092

 

Shareholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock, no par value, 5,000 shares authorized, no shares

   issued and outstanding

 

 

 

 

 

 

Common stock, no par value, 30,000 shares authorized, 15,309 shares issued

   and outstanding at June 30, 2020 and 15,263 at December 31, 2019

 

 

11,155

 

 

 

11,119

 

Additional paid-in capital

 

 

103,454

 

 

 

103,124

 

Retained earnings

 

 

38,810

 

 

 

38,442

 

Total shareholders’ equity

 

 

153,419

 

 

 

152,685

 

Total liabilities and shareholders’ equity

 

$

262,554

 

 

$

252,777

 

 

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

- 1 -


 

GULF ISLAND FABRICATION, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

(in thousands, except per share data)

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Revenue

 

$

59,974

 

 

$

80,456

 

 

$

138,529

 

 

$

148,061

 

Cost of revenue

 

 

61,677

 

 

 

82,054

 

 

 

140,486

 

 

 

149,106

 

Gross loss

 

 

(1,703

)

 

 

(1,598

)

 

 

(1,957

)

 

 

(1,045

)

General and administrative expense

 

 

3,722

 

 

 

3,987

 

 

 

7,466

 

 

 

7,821

 

Impairments and (gain) loss on assets held for sale

 

 

 

 

 

 

 

 

 

 

 

(70

)

Other (income) expense, net

 

 

1

 

 

 

(201

)

 

 

(9,933

)

 

 

(130

)

Operating income (loss)

 

 

(5,426

)

 

 

(5,384

)

 

 

510

 

 

 

(8,666

)

Interest (expense) income, net

 

 

(89

)

 

 

126

 

 

 

(36

)

 

 

388

 

Income (loss) before income taxes

 

 

(5,515

)

 

 

(5,258

)

 

 

474

 

 

 

(8,278

)

Income tax (expense) benefit

 

 

(22

)

 

 

10

 

 

 

(106

)

 

 

(12

)

Net income (loss)

 

$

(5,537

)

 

$

(5,248

)

 

$

368

 

 

$

(8,290

)

Per share data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted income (loss) per common share

 

$

(0.36

)

 

$

(0.34

)

 

$

0.02

 

 

$

(0.55

)

 

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

- 2 -


 

GULF ISLAND FABRICATION, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(UNAUDITED)

(in thousands)

 

 

 

Common Stock

 

 

Additional

Paid-In

 

 

Retained

 

 

Total

Shareholders’

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Earnings

 

 

Equity

 

Balance at December 31, 2018

 

 

15,090

 

 

$

11,021

 

 

$

102,243

 

 

$

87,836

 

 

$

201,100

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(3,042

)

 

 

(3,042

)

Vesting of restricted stock

 

 

146

 

 

 

(71

)

 

 

(643

)

 

 

 

 

 

(714

)

Stock-based compensation expense

 

 

 

 

 

56

 

 

 

504

 

 

 

 

 

 

560

 

Balance at March 31, 2019

 

 

15,236

 

 

 

11,006

 

 

 

102,104

 

 

 

84,794

 

 

 

197,904

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(5,248

)

 

 

(5,248

)

Stock-based compensation expense

 

 

 

 

 

79

 

 

 

707

 

 

 

 

 

 

786

 

Balance at June 30, 2019

 

 

15,236

 

 

$

11,085

 

 

$

102,811

 

 

$

79,546

 

 

$

193,442

 

 

 

 

Common Stock

 

 

Additional

Paid-In

 

 

Retained

 

 

Total

Shareholders’

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Earnings

 

 

Equity

 

Balance at December 31, 2019

 

 

15,263

 

 

$

11,119

 

 

$

103,124

 

 

$

38,442

 

 

$

152,685

 

Net income

 

 

 

 

 

 

 

 

 

 

 

5,905

 

 

 

5,905

 

Vesting of restricted stock

 

 

27

 

 

 

(8

)

 

 

(65

)

 

 

 

 

 

(73

)

Stock-based compensation expense

 

 

 

 

 

10

 

 

 

85

 

 

 

 

 

 

95

 

Balance at March 31, 2020

 

 

15,290

 

 

 

11,121

 

 

 

103,144

 

 

 

44,347

 

 

 

158,612

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(5,537

)

 

 

(5,537

)

Vesting of restricted stock

 

 

19

 

 

 

 

 

 

(1

)

 

 

 

 

 

(1

)

Stock-based compensation expense

 

 

 

 

 

34

 

 

 

311

 

 

 

 

 

 

345

 

Balance at June 30, 2020

 

 

15,309

 

 

$

11,155

 

 

$

103,454

 

 

$

38,810

 

 

$

153,419

 

 

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

 

- 3 -


 

GULF ISLAND FABRICATION, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(in thousands)

 

 

Six Months Ended June 30,

 

 

 

2020

 

 

2019

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income (loss)

 

$

368

 

 

$

(8,290

)

Adjustments to reconcile net income (loss) to net cash used in operating activities:

 

 

 

 

 

 

 

 

Depreciation and lease asset amortization

 

 

4,287

 

 

 

4,974

 

Other amortization, net

 

 

31

 

 

 

26

 

Bad debt expense

 

 

 

 

 

59

 

Asset impairments

 

 

 

 

 

299

 

(Gain) loss on sale of assets held for sale, net

 

 

 

 

 

(369

)

(Gain) loss on sale of fixed assets and other assets, net

 

 

(5

)

 

 

(565

)

Stock-based compensation expense

 

 

440

 

 

 

1,346

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Contracts receivable and retainage, net

 

 

12,704

 

 

 

(896

)

Contract assets

 

 

(25,732

)

 

 

(21,352

)

Prepaid expenses, inventory and other current assets

 

 

668

 

 

 

212

 

Accounts payable

 

 

2,081

 

 

 

26,269

 

Contract liabilities

 

 

702

 

 

 

(3,023

)

Accrued expenses and other current liabilities

 

 

(1,840

)

 

 

(1,108

)

Noncurrent assets and liabilities, net (including long-term retainage)

 

 

2,538

 

 

 

(466

)

Net cash used in operating activities

 

 

(3,758

)

 

 

(2,884

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(7,745

)

 

 

(1,359

)

Proceeds from sale of property, plant and equipment

 

 

1,080

 

 

 

1,598

 

Purchases of short-term investments

 

 

(19,991

)

 

 

(45,366

)

Maturities of short-term investments

 

 

20,000

 

 

 

8,500

 

Net cash used in investing activities

 

 

(6,656

)

 

 

(36,627

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from borrowings

 

 

10,000

 

 

 

 

Payment of financing cost

 

 

(31

)

 

 

(40

)

Tax payments for vested stock withholdings

 

 

(74

)

 

 

(714

)

Net cash provided by (used in) financing activities

 

 

9,895

 

 

 

(754

)

Net decrease in cash and cash equivalents

 

 

(519

)

 

 

(40,265

)

Cash and cash equivalents, beginning of period

 

 

49,703

 

 

 

70,457

 

Cash and cash equivalents, end of period

 

$

49,184

 

 

$

30,192

 

 

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

 

- 4 -


 

GULF ISLAND FABRICATION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2020

(Unaudited)

 

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

Gulf Island Fabrication, Inc. (together with its subsidiaries, “Gulf Island,” "the Company," "we," "us" and "our") is a leading fabricator of complex steel structures, modules and marine vessels, and a provider of project management, hookup, commissioning, repair, maintenance and civil construction services. Our customers include United States ("U.S.") and, to a lesser extent, international energy producers; refining, petrochemical, LNG, industrial, power and marine operators; EPC companies; and certain agencies of the U.S. government. We operate and manage our business through two operating divisions ("Shipyard" and "Fabrication & Services") and one non-operating division ("Corporate"), which represent our reportable segments. Our corporate headquarters is located in Houston, Texas, with operating facilities located in Houma, Jennings and Lake Charles, Louisiana.  See Note 7 for discussion of our realigned reportable segments and discussion of our anticipated closure of the Jennings Yard.

Significant projects in our backlog include the fabrication of an offshore jacket and deck, mooring and breasting dolphins, and modules for an offshore facility; material supply for an offshore jacket and deck; and construction of two harbor tugs, three regional class research vessels, three vehicle ferries, and five towing, salvage and rescue ships.  Projects completed in recent years include the expansion of a paddlewheel riverboat; fabrication of modules for a petrochemical facility and a meteorological tower and platform for an offshore wind project; and construction of eight harbor tugs, an ice-breaker tug and two towboats. Other completed projects include the fabrication of wind turbine foundations for the first offshore wind project in the U.S.; and construction of two technologically-advanced OSVs, two of the largest liftboats servicing the Gulf of Mexico, one of the deepest production jackets in the Gulf of Mexico, and the first single point anchor reservoir hull fabricated in the U.S.

 

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 and six months ended June 30, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020.

 

Our Consolidated Balance Sheet ("Balance Sheet") at December 31, 2019, has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by GAAP for complete financial statements. For further information, refer to the Financial Statements and related footnotes included in our 2019 Annual Report.

Liquidity Outlook

In recent years our operating results and cash flows have been impacted by lower margins due to competitive pricing, a significant underutilization of our facilities and losses on certain projects.  As a result, we implemented initiatives to improve and maintain our liquidity (including further reducing the compensation of our executive officers and directors and reducing the size of our board), reduce our reliance on the fabrication of structures and marine vessels associated with the offshore oil and gas sector, improve our resource utilization and centralize key project resources (including the closure of the Jennings Yard and combination of our former Fabrication and Services Divisions), and improve our competitiveness and project execution. See Note 7 for discussion of our realigned reportable segments and discussion of our anticipated closure of the Jennings Yard. These initiatives are ongoing, and while our ability to achieve our goals has been negatively impacted by the coronavirus (“COVID-19”) and volatile oil prices (discussed further below) and while we can provide no assurances that the initiatives will achieve our desired results, we believe our cash, cash equivalents, short-term investments 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 filing date of this Report.

- 5 -


 

Operating Cycle

The duration of our contracts vary, but typically 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 long-term.

Use of Estimates

General - 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; liabilities related to self-insurance programs; and the impacts of COVID-19 and volatile oil prices on our business, estimates and judgments as discussed further below. 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.

 

COVID-19 and Volatile Oil Prices - COVID-19 is a widespread public health crisis that continues to adversely affect economies and financial markets globally. In March 2020, the World Health Organization declared COVID-19 a pandemic and the U.S. President announced a national emergency relating to COVID-19. National, state and local authorities recommended social distancing and many authorities imposed quarantine and isolation measures on large portions of the population, including mandatory business closures. Although authorities in some areas of the U.S. began to relax these quarantine and isolation measures, a recent resurgence of COVID-19 infections in many regions of the country, including areas where we have our headquarters and operating facilities, has in some instances caused authorities to either defer the phasing out of these restrictions or re-impose quarantine and isolation measures. These measures, while intended to protect human life, have had and are expected to continue to have a significant impact on domestic and foreign economies of uncertain severity and duration. On June 8, 2020, the National Bureau of Economic Research indicated that the U.S. economy entered a recession in February 2020, and the duration and severity of this recession is unclear at this time. The longer-term effectiveness of economic stabilization efforts, including government payments to affected citizens and industries, is uncertain. Moreover, governmental and commercial responses to COVID-19 has exacerbated the already weakened condition of the energy industry, further reducing the demand for oil, and further depressing and creating volatility in oil prices.  The extent to which COVID-19 and a low and volatile pricing environment for oil may adversely impact our business, prospects, financial condition, operating results and cash flows depends on future developments that are highly uncertain and unpredictable.  The business and financial impacts of these challenging conditions cannot be reasonably estimated at this time, but may include, among other things, unanticipated project costs due to project disruptions and schedule delays, lower labor productivity, lack of performance by subcontractors and suppliers, and contract disputes. Events and changes in circumstances arising after this Report resulting from the impacts of COVID-19 and volatile oil prices, if any, will be reflected in management’s estimates for future periods.

Income (Loss) Per Share

Basic income (loss) per share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted income (loss) per share reflects the assumed conversion of dilutive securities.  See Note 6 for calculations of our basic and diluted income (loss) per share.

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 June 30, 2020, 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 it is not more likely than not that we would be required to sell the investments prior to their maturity.  The investments are stated at amortized cost, which approximates fair value due to their near-term maturities. All short-term investments are traded on active markets with quoted prices and represent level 1 fair value measurements.

- 6 -


 

Inventory

Inventory is recorded at the lower of its 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. 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. 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 on 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 on 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

Property, plant and equipment are depreciated on a straight-line basis over estimated useful lives ranging from three to 25 years. 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

Long-lived assets, which include property, plant and equipment and our lease assets included within other noncurrent assets, are reviewed for impairment when events or changes in circumstances indicate that the carrying amount may not be recoverable.  If a recoverability assessment is required, we compare the estimated future undiscounted cash flow associated with the asset or asset group to its carrying amount to determine if an impairment exists. 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. 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. Fair value is determined based on discounted cash flows, appraised values or third-party indications of value, as appropriate.

Fair Value Measurements

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:

 

Level 1 - inputs are based upon quoted prices for identical instruments traded in active markets.

 

Level 2 - inputs are based upon quoted prices for similar instruments in active markets and model-based valuation techniques for which all significant assumptions are observable in the market.

- 7 -


 

 

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.

The carrying amounts of our financial instruments, including cash and cash equivalents, short-term investments, accounts receivable and accounts payable approximate their fair values. See Note 3 for discussion of our assets held for sale.

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 from our contracts in accordance with Accounting Standards Update ("ASU") 2014-09, Topic 606 “Revenue from Contracts with Customers” ("Topic 606").  

Topic 606 requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Additionally, provisions of Topic 606 specify which goods and services are distinct and represent separate performance obligations (representing the unit of account in Topic 606) within a contract and which goods and services (which could include multiple contracts or agreements) should be aggregated. 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. Revenue for performance obligations satisfied over time are recognized as the work progresses. Revenue for performance obligations that do not meet the criteria for over time recognition are recognized at a point-in-time when a performance obligation is complete and a customer has obtained control of a promised asset.

Fixed-Price and Unit-Rate Contracts - 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 (an input method).  Contract costs include direct costs, such as materials and labor, and indirect costs 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.  See Note 2 for further discussion of projects with significant changes in estimated margins during the three and six months ended June 30, 2020 and 2019.

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. 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. See Note 2 for further discussion of unapproved change orders, claims, incentives and liquidated damages for our projects.  

Additional Disclosures - Topic 606 also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenues and cash flows from contracts with customers. See Note 2 for required disclosures under Topic 606.

- 8 -


 

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 June 30, 2020 and December 31, 2019, we had no deferred pre-contract costs.

Other (Income) Expense, Net

Other (income) expense, net, generally represents recoveries or provisions for bad debts, gains or losses associated with the sale or disposition of property and equipment other than assets held for sale, and income or expense associated with certain nonrecurring items.  For the six months ended June 30, 2020, other (income) expense also includes a gain of approximately $10.0 million associated with the settlement of a contract dispute in the first quarter 2020 for a project completed in 2015.

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. Due to changing tax laws, significant judgment is required to estimate the effective tax rate expected to apply to tax differences that are expected to reverse in the future.

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.  

 

New Accounting Standards

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 2023. 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 the new standard will have on our financial position, results of operations and related disclosures.

Income taxes - In December 2019, the FASB issued ASU 2019-12, “Income Taxes,” to simplify the accounting for income taxes by removing certain exceptions to the general principles and simplify areas such as franchise taxes, step-up in tax basis goodwill, separate entity financial statements and interim recognition of enacted tax laws or rate changes. The new standard will be effective for us in the first quarter 2021. We are currently evaluating the effect that the new standard will have on our financial position, results of operations and related disclosures.

- 9 -


 

2. REVENUE, CONTRACT ASSETS AND LIABILITIES AND OTHER CONTRACT MATTERS

As discussed in Note 1, we recognize revenue from 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 and six months ended June 30, 2020 and 2019 (in thousands):

 

 

 

Three Months Ended June 30, 2020

 

Contract Type

 

Shipyard

 

 

F&S

 

 

Eliminations

 

 

Total

 

Fixed-price and unit-rate(1)

 

$

33,513

 

 

$

20,853

 

 

$

(239

)

 

$

54,127

 

T&M(2)

 

 

375

 

 

 

4,455

 

 

 

 

 

 

4,830

 

Other

 

 

 

 

 

1,298

 

 

 

(281

)

 

 

1,017

 

Total

 

$

33,888

 

 

$

26,606

 

 

$

(520

)

 

$

59,974

 

 

 

 

Six Months Ended June 30, 2020

 

Contract Type

 

Shipyard

 

 

F&S

 

 

Eliminations

 

 

Total

 

Fixed-price and unit-rate(1)

 

$

77,815

 

 

$

45,410

 

 

$

(324

)

 

$

122,901

 

T&M(2)

 

 

1,632

 

 

 

11,380

 

 

 

 

 

 

13,012

 

Other

 

 

 

 

 

3,259

 

 

 

(643

)

 

 

2,616

 

Total

 

$

79,447

 

 

$

60,049

 

 

$

(967

)

 

$

138,529

 

 

 

 

Three Months Ended June 30, 2019(3)

 

Contract Type

 

Shipyard

 

 

F&S

 

 

Eliminations

 

 

Total

 

Fixed-price and unit-rate(1)

 

$

39,093

 

 

$

29,470

 

 

$

(105

)

 

$

68,458

 

T&M(2)

 

 

960

 

 

 

8,187

 

 

 

 

 

 

9,147

 

Other

 

 

 

 

 

2,996

 

 

 

(145

)

 

 

2,851

 

Total

 

$

40,053

 

 

$

40,653

 

 

$

(250

)

 

$

80,456

 

 

 

 

Six Months Ended June 30, 2019(3)

 

Contract Type

 

Shipyard

 

 

F&S

 

 

Eliminations

 

 

Total

 

Fixed-price and unit-rate(1)

 

$

73,543

 

 

$

46,967

 

 

$

(178

)

 

$

120,332

 

T&M(2)

 

 

3,921

 

 

 

18,809

 

 

 

 

 

 

22,730

 

Other

 

 

 

 

 

5,470

 

 

 

(471

)

 

 

4,999

 

Total

 

$

77,464

 

 

$

71,246

 

 

$

(649

)

 

$

148,061

 

 

 

(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.

 

(3)

See Note 7 for discussion of our realigned operating divisions.

Future Performance Obligations Required Under Contracts

The following table summarizes our remaining performance obligations by operating segment at June 30, 2020 (in thousands):

 

Segment

 

Performance

Obligations

 

Shipyard(1)

 

$

417,557

 

Fabrication & Services

 

 

30,547

 

Total

 

$

448,104

 

 

 

(1)

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 termination notices from our customer. See Note 5 for further discussion of these contracts.

 

- 10 -


 

We expect to recognize revenue for our remaining performance obligations at June 30, 2020, in the following periods (in thousands):

 

Year

 

Performance

Obligations

 

Remainder of 2020

 

$

105,155

 

2021

 

 

206,331

 

2022

 

 

115,870

 

Thereafter

 

 

20,748

 

Total

 

$

448,104

 

 

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 contractual 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 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. Information with respect to uncompleted contracts at June 30, 2020 and December 31, 2019 is as follows (in thousands):

 

<

 

 

June 30,

 

 

December 31,

 

 

 

2020

 

 

2019

 

Contract assets

 

$

77,860

 

 

$

52,128

 

Contract liabilities(1), (2), (3)

 

 

(26,973

)

 

 

(26,271

)

Contracts in progress, net

 

$

50,887

 

 

$

25,857