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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

September 30, 2023

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

 

 

img20455245_0.jpg 

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.)

 

 

2170 Buckthorne Place, Suite 420

The woodlands, Texas

 

77380

 

 

 

(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 October 31, 2023, was 16,287,469.

 

 

 

 


 

GULF ISLAND FABRICATION, INC.

I N D E X

 

 

 

 

 

Page

 

 

 

PART I

 

FINANCIAL INFORMATION

 

1

Item 1.

 

Financial Statements

 

1

 

 

Consolidated Balance Sheets at September 30, 2023 (unaudited) and December 31, 2022

 

1

 

 

Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2023 and 2022 (unaudited)

 

2

 

 

Consolidated Statements of Changes in Shareholders' Equity for the Three and Nine Months Ended September 30, 2023 and 2022 (unaudited)

 

3

 

 

Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2023 and 2022 (unaudited)

 

4

 

 

Notes to Consolidated Financial Statements (unaudited)

 

5

Item 2.

 

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

 

20

Item 4.

 

Controls and Procedures

 

42

 

 

 

 

 

PART II

 

OTHER INFORMATION

 

43

Item 1.

 

Legal Proceedings

 

43

Item 1A.

 

Risk Factors

 

43

Item 5.

 

Other Information

 

43

Item 6.

 

Exhibits

 

44

Signatures

 

45

 

i

 


 

GLOSSARY OF TERMS

As used in this report filed on Form 10-Q for the quarter ended September 30, 2023 (“this Report”), the following abbreviations and terms have the meanings 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.

 

2022 Annual Report

Our annual report for the year ended December 31, 2022, filed with the SEC on Form 10-K on March 28, 2023.

 

 

2022 Financial
Statements

Our Financial Statements for the year ended December 31, 2022 and related notes, included in our 2022 Annual Report.

 

 

Active Retained
Shipyard Contracts

Contracts and related obligations for our seventy-vehicle ferry and two forty-vehicle ferry projects that were under construction as of the date of the Shipyard Transaction, which were excluded from the Shipyard Transaction. The Active Retained Shipyard Contracts did not include the contracts and related obligations for the projects that were subject to our previous MPSV Litigation.

 

 

ASC

Accounting Standards Codification.

 

 

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.

 

 

cost-reimbursable

Work is performed and billed to the customer at cost plus a profit margin or other variable fee arrangements which can include a mark-up.

 

 

COVID-19

The global coronavirus pandemic.

 

 

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.

 

 

DSS Acquisition

The acquisition of a services and industrial staffing business on December 1, 2021.

 

 

DTA(s)

Deferred Tax Asset(s).

 

 

EPC

Engineering, Procurement and Construction.

 

 

Exchange Act

Securities Exchange Act of 1934, as amended.

 

 

Fabrication Division

Our Fabrication reportable segment.

 

 

Facilities

Our Houma Facilities and other facilities that support our operations.

 

 

FDC

Fidelity & Deposit Company of Maryland.

 

 

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.

 

 

GAAP

Generally Accepted Accounting Principles in the U.S.

 

 

GIS

Gulf Island Shipyards, LLC.

 

 

Gulf Coast

Along the coast of the Gulf of Mexico.

 

 

Hornbeck

Hornbeck Offshore Services, LLC.

 

 

Houma Facilities

Our owned facilities located in Houma, Louisiana that support our Fabrication Division and Services Division and represent our primary operating facilities.

 

 

inland

Typically, bays, lakes and marshy areas.

ii

 


 

 

 

Insurance Finance Arrangements

Short-term finance arrangements for insurance premiums associated with our property and equipment and general liability insurance coverages.

 

 

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 piles driven into the seabed. The jacket supports the deck structure located above the water.

 

 

labor hours

Hours worked by employees directly involved in the fabrication of our products or delivery of our services.

 

 

LC Facility

Our $10.0 million letter of credit facility with Whitney Bank maturing on June 30, 2024, as amended.

 

 

LNG

Liquefied Natural Gas.

 

 

Mortgage Agreement

Multiple indebtedness mortgage arrangement with Zurich, to secure our obligations and liabilities under our Note Agreement with Zurich and our general indemnity agreement with Zurich associated with outstanding surety bonds for certain contracts. The mortgage arrangement encumbers the real estate associated with our Houma Facilities and includes certain covenants and events of default.

 

 

modules

Fabricated structures that include structural steel, piping, valves, fittings, storage vessels and other equipment that are incorporated into a refining, petrochemical, LNG or industrial system.

 

 

MPSV(s)

Multi-Purpose Supply Vessel(s).

 

 

MPSV Litigation

The lawsuit filed in the Twenty-Second Judicial District Court for the Parish of St. Tammany, State of Louisiana and is styled Gulf Island Shipyards, LLC v. Hornbeck Offshore Services, LLC, bearing docket number 2018-14861, which was resolved on October 4, 2023.

 

 

Note Agreement

Promissory note entered into with Zurich, pursuant to which we will pay Zurich $20.0 million, plus interest at a fixed rate of 3.0% per annum, payable in 15 equal annual installments beginning on December 31, 2024. The promissory note was entered into in connection with the resolution of our MPSV Litigation.

 

 

offshore

In unprotected waters outside coastlines.

 

 

onshore

Inside the coastline on land.

 

 

Performance Bonds

The performance bonds issued by Zurich in connection with the construction of two MPSVs that were subject to our previous MPSV Litigation, for which the face amount of the bonds totaled $50.0 million.

 

 

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.

 

 

piles

Rigid tubular pipes that are driven into the seabed to anchor a jacket.

 

 

platform

A structure from which offshore oil and gas development drilling and production are conducted.

 

 

POC

Percentage-of-completion.

 

 

Restrictive Covenant Agreement

Restrictive covenant arrangement with Zurich, to secure our obligations and liabilities under our general indemnity agreement with Zurich associated with its outstanding surety bonds for certain contracts that precluded us from paying dividends or repurchasing shares of our common stock, which was terminated on November 6, 2023 in connection with the Settlement Agreement and Note Agreement.

 

 

SEC

U.S. Securities and Exchange Commission.

 

 

Services Division

Our Services reportable segment.

 

 

Settlement Agreement

Agreement with Zurich pursuant to which, among other things, Zurich released GIS and the Company from all of their obligations under the Performance Bonds and the associated general indemnity agreements relating to the Performance Bonds, and we agreed to release possession of the MPSVs to Zurich.

 

 

Shipyard Division

Our Shipyard reportable segment.

 

 

Shipyard Transaction

The sale of our Shipyard Division’s operating assets and certain construction contracts on April 19, 2021.

 

 

Statement of Cash Flows

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

 

 

iii

 


 

Statement of Operations

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

 

 

Statement of Shareholders’ Equity

Our Consolidated Statements of Changes in Shareholders’ Equity, as filed in this Report.

 

 

Surety or Sureties

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. Payments by a Surety pursuant to one of our bonds in the event of non-performance are subject to reimbursement to such Surety by us under a general indemnity agreement relating to such bond.

 

 

T&M

Time and materials. Work is performed and billed to the customer at contracted time and material rates.

 

 

Topic 606

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

 

 

U.S.

The United States of America.

 

 

USL&H

United States Longshoreman and Harbor Workers Act.

 

 

VA(s)

Valuation allowance(s).

 

 

Whitney Bank

Hancock Whitney Bank.

 

 

Zurich

FDC and Zurich American Insurance Company.

iv

 


 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

GULF ISLAND FABRICATION, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands)

 

 

 

September 30,
2023

 

 

December 31,
2022

 

 

 

(Unaudited)

 

 

 

 

ASSETS

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

25,125

 

 

$

33,221

 

Restricted cash

 

 

1,197

 

 

 

1,603

 

Short-term investments

 

 

15,437

 

 

 

9,905

 

Contract receivables and retainage, net

 

 

35,684

 

 

 

29,427

 

Contract assets

 

 

4,305

 

 

 

4,839

 

Prepaid expenses and other assets

 

 

3,438

 

 

 

6,475

 

Inventory

 

 

2,340

 

 

 

1,599

 

Total current assets

 

 

87,526

 

 

 

87,069

 

Property, plant and equipment, net

 

 

29,285

 

 

 

31,154

 

Goodwill

 

 

2,217

 

 

 

2,217

 

Other intangibles, net

 

 

735

 

 

 

842

 

Other noncurrent assets

 

 

839

 

 

 

13,584

 

Total assets

 

$

120,602

 

 

$

134,866

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

11,515

 

 

$

8,310

 

Contract liabilities

 

 

3,534

 

 

 

8,196

 

Accrued expenses and other liabilities

 

 

13,247

 

 

 

14,283

 

Total current liabilities

 

 

28,296

 

 

 

30,789

 

Contract liabilities, non-current

 

 

20,000

 

 

 

 

Other noncurrent liabilities

 

 

822

 

 

 

1,453

 

Total liabilities

 

 

49,118

 

 

 

32,242

 

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, 16,287 shares issued
   and outstanding at September 30, 2023 and
15,973 at December 31, 2022

 

 

11,690

 

 

 

11,591

 

Additional paid-in capital

 

 

108,257

 

 

 

107,372

 

Accumulated deficit

 

 

(48,463

)

 

 

(16,339

)

Total shareholders’ equity

 

 

71,484

 

 

 

102,624

 

Total liabilities and shareholders’ equity

 

$

120,602

 

 

$

134,866

 

 

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
September 30,

 

 

Nine Months Ended
September 30,

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Revenue

$

5,023

 

 

$

39,593

 

 

$

106,517

 

 

$

104,181

 

Cost of revenue

 

34,902

 

 

 

35,373

 

 

 

126,881

 

 

 

98,709

 

Gross profit (loss)

 

(29,879

)

 

 

4,220

 

 

 

(20,364

)

 

 

5,472

 

General and administrative expense

 

4,080

 

 

 

4,510

 

 

 

12,883

 

 

 

12,965

 

Other (income) expense, net

 

(324

)

 

 

(944

)

 

 

(689

)

 

 

(3,698

)

Operating income (loss)

 

(33,635

)

 

 

654

 

 

 

(32,558

)

 

 

(3,795

)

Interest (expense) income, net

 

397

 

 

 

(46

)

 

 

1,057

 

 

 

(104

)

Income (loss) before income taxes

 

(33,238

)

 

 

608

 

 

 

(31,501

)

 

 

(3,899

)

Income tax (expense) benefit

 

3

 

 

 

(10

)

 

 

9

 

 

 

(2

)

Net income (loss)

$

(33,235

)

 

$

598

 

 

$

(31,492

)

 

$

(3,901

)

 

 

 

 

 

 

 

 

 

 

 

 

Per share data:

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted income (loss) per share

$

(2.04

)

 

$

0.04

 

 

$

(1.95

)

 

$

(0.25

)

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

 

 

Accumulated

 

 

Total
Shareholders’

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Equity

 

Balance at December 31, 2021

 

 

15,622

 

 

$

11,384

 

 

$

105,511

 

 

$

(12,987

)

 

$

103,908

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(5,027

)

 

 

(5,027

)

Vesting of restricted stock

 

 

153

 

 

 

(6

)

 

 

(53

)

 

 

 

 

 

(59

)

Stock-based compensation expense

 

 

 

 

 

57

 

 

 

514

 

 

 

 

 

 

571

 

Balance at March 31, 2022

 

 

15,775

 

 

 

11,435

 

 

 

105,972

 

 

 

(18,014

)

 

 

99,393

 

Net income

 

 

 

 

 

 

 

 

 

 

 

528

 

 

 

528

 

Vesting of restricted stock

 

 

148

 

 

 

(6

)

 

 

(56

)

 

 

 

 

 

(62

)

Stock-based compensation expense

 

 

 

 

 

49

 

 

 

440

 

 

 

 

 

 

489

 

Balance at June 30, 2022

 

 

15,923

 

 

 

11,478

 

 

 

106,356

 

 

 

(17,486

)

 

 

100,348

 

Net income

 

 

 

 

 

 

 

 

 

 

 

598

 

 

 

598

 

Stock-based compensation expense

 

 

 

 

 

40

 

 

 

364

 

 

 

 

 

 

404

 

Balance at September 30, 2022

 

 

15,923

 

 

$

11,518

 

 

$

106,720

 

 

$

(16,888

)

 

$

101,350

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Additional
Paid-In

 

 

Accumulated

 

 

Total
Shareholders’

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Equity

 

Balance at December 31, 2022

 

 

15,973

 

 

$

11,591

 

 

$

107,372

 

 

$

(16,339

)

 

$

102,624

 

Adoption of ASU 2016-13

 

 

 

 

 

 

 

 

 

 

 

(632

)

 

 

(632

)

Balance at January 1, 2023

 

 

15,973

 

 

 

11,591

 

 

 

107,372

 

 

 

(16,971

)

 

 

101,992

 

Net income

 

 

 

 

 

 

 

 

 

 

 

641

 

 

 

641

 

Vesting of restricted stock

 

 

82

 

 

 

(18

)

 

 

(163

)

 

 

 

 

 

(181

)

Stock-based compensation expense

 

 

 

 

 

51

 

 

 

458

 

 

 

 

 

 

509

 

Balance at March 31, 2023

 

 

16,055

 

 

 

11,624

 

 

 

107,667

 

 

 

(16,330

)

 

 

102,961

 

Net income

 

 

 

 

 

 

 

 

 

 

 

1,102

 

 

 

1,102

 

Vesting of restricted stock

 

 

232

 

 

 

(30

)

 

 

(271

)

 

 

 

 

 

(301

)

Stock-based compensation expense

 

 

 

 

 

44

 

 

 

400

 

 

 

 

 

 

444

 

Balance at June 30, 2023

 

 

16,287

 

 

$

11,638

 

 

$

107,796

 

 

$

(15,228

)

 

$

104,206

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(33,235

)

 

 

(33,235

)

Stock-based compensation expense

 

 

 

 

 

52

 

 

 

461

 

 

 

 

 

 

513

 

Balance at September 30, 2023

 

 

16,287

 

 

$

11,690

 

 

$

108,257

 

 

$

(48,463

)

 

$

71,484

 

 

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

- 3 -


 

GULF ISLAND FABRICATION, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(in thousands)

 

 

Nine Months Ended September 30,

 

 

 

2023

 

 

2022

 

Cash flows from operating activities:

 

 

 

 

 

 

Net loss

 

$

(31,492

)

 

$

(3,901

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

 

4,115

 

 

 

3,764

 

Asset impairments

 

 

 

 

 

484

 

Change in allowance for doubtful accounts and credit losses

 

 

(410

)

 

 

 

Gain on sale or disposal of fixed assets, net

 

 

(249

)

 

 

(79

)

Gain on insurance recoveries

 

 

(245

)

 

 

(1,200

)

Stock-based compensation expense

 

 

1,466

 

 

 

1,464

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

Contract receivables and retainage, net

 

 

(6,479

)

 

 

(17,026

)

Contract assets

 

 

534

 

 

 

(3,048

)

Prepaid expenses, inventory and other current assets

 

 

2,829

 

 

 

1,203

 

Accounts payable

 

 

2,914

 

 

 

2,811

 

Contract liabilities

 

 

(4,662

)

 

 

(2,355

)

Accrued expenses and other current liabilities

 

 

(373

)

 

 

(288

)

Noncurrent assets and liabilities, net

 

 

31,880

 

 

 

(654

)

Net cash used in operating activities

 

 

(172

)

 

 

(18,825

)

Cash flows from investing activities:

 

 

 

 

 

 

Capital expenditures

 

 

(1,701

)

 

 

(1,032

)

Proceeds from Shipyard Transaction

 

 

 

 

 

886

 

Proceeds from sale of property and equipment

 

 

396

 

 

 

2,035

 

Recoveries from insurance claims

 

 

245

 

 

 

1,200

 

Purchases of short-term investments

 

 

(30,731

)

 

 

(9,809

)

Maturities of short-term investments

 

 

25,200

 

 

 

 

Net cash used in investing activities

 

 

(6,591

)

 

 

(6,720

)

Cash flows from financing activities:

 

 

 

 

 

 

Payments on Insurance Finance Arrangements

 

 

(1,257

)

 

 

(963

)

Tax payments for vested stock withholdings

 

 

(482

)

 

 

(121

)

Net cash used in financing activities

 

 

(1,739

)

 

 

(1,084

)

Net decrease in cash, cash equivalents and restricted cash

 

 

(8,502

)

 

 

(26,629

)

Cash, cash equivalents and restricted cash, beginning of period

 

 

34,824

 

 

 

54,589

 

Cash, cash equivalents and restricted cash, end of period

 

$

26,322

 

 

$

27,960

 

 

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

- 4 -


 

GULF ISLAND FABRICATION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023

(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 and modules and a provider of specialty services, including project management, hookup, commissioning, repair, maintenance, scaffolding, coatings, welding enclosures, civil construction and staffing services to the industrial and energy sectors. Our customers include U.S. and, to a lesser extent, international energy producers; refining, petrochemical, LNG, industrial and power operators; and EPC companies. We currently operate and manage our business through three operating divisions (“Services”, “Fabrication” and “Shipyard”) and one non-operating division (“Corporate”), which represent our reportable segments. Our corporate headquarters is located in The Woodlands, Texas and our primary operating facilities are located in Houma, Louisiana (“Houma Facilities”).

On April 19, 2021, we sold our Shipyard Division operating assets and certain construction contracts (“Shipyard Transaction”) and intend to wind down our remaining Shipyard Division operations by the fourth quarter 2023 (previously the third quarter 2023, but was delayed and is subject to the potential schedule impacts discussed in Note 2).

On December 1, 2021, we acquired a services and industrial staffing business (“DSS Acquisition”), which increased our skilled workforce, further diversified our customer base and expanded our service offerings for our Services Division.

On October 4, 2023, we resolved our MPSV Litigation. See Note 4 for further discussion of the resolution of our MPSV Litigation.

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 nine months ended September 30, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023. Our Consolidated Balance Sheet (“Balance Sheet”) at December 31, 2022, 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 our 2022 Financial Statements.

Operating Cycle

The duration of our contracts vary, but may 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. See Note 4 for discussion of the noncurrent contract liability associated with the resolution of our MPSV Litigation.

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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 long-term contracts, including application of the percentage-of-completion method (“POC"), estimating costs to complete each contract and the recognition of incentives, unapproved change orders, claims (including amounts arising from disputes with customers) and liquidated damages;
fair value and recoverability assessments that must be periodically performed with respect to long-lived tangible assets, goodwill and other intangible assets;
determination of deferred income tax assets, liabilities and related valuation allowances;
reserves for bad debts and credit losses;
liabilities related to self-insurance programs;
insurance recoveries associated with damage to our Houma Facilities resulting from Hurricane Ida discussed further in Note 2; and
the impacts of volatile oil and gas prices and macroeconomic conditions 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.

Oil and Gas Price Volatility and Macroeconomic Conditions – Since 2008, the prices of oil and gas have experienced significant volatility, including depressed prices over extended periods, resulting in reductions in capital spending and drilling activities from our traditional offshore oil and gas customer base. Consequently, our operating results and cash flows were negatively impacted as we experienced reductions in revenue, lower margins due to competitive pricing and under-utilization of our operating facilities and resources. Beginning in 2020, the global coronavirus pandemic (“COVID-19”) added another layer of pressure and uncertainty on oil and gas prices (with oil prices reaching a twenty-year low and gas prices reaching a four-year low), which further negatively impacted certain of our end markets through the first quarter 2022. This volatility in oil and gas prices was compounded by Russia’s invasion of Ukraine in February 2022 (and the related European energy crisis), and the U.S. and other countries actions in response (with oil prices reaching an eight-year high and gas prices reaching a fourteen-year high), which positively impacted certain of our end markets. While oil and gas prices have somewhat stabilized, the duration of such stability is uncertain and difficult to predict.

In addition, global economic factors that are beyond our control, have and could continue to impact our operations, including, but are not limited to, supply chain disruptions (including global shipping and logistics challenges that began in 2020), inflationary pressures, economic slowdowns and recessions, bank failures, natural disasters, public health crises (such as COVID-19), and geopolitical conflicts (such as the conflict in Ukraine and the Israel-Hamas conflict).

The ultimate business and financial impacts of oil and gas price volatility and macroeconomic conditions on our business and results of operations continues to be uncertain, but the impacts have included, or may continue to include, among other things, reduced bidding activity; suspension or termination of backlog; deterioration of customer financial condition; and unanticipated project costs and schedule delays due to supply chain disruptions, labor and material price increases, lower labor productivity, increased employee and contractor absenteeism and turnover, craft labor hiring challenges, increased safety incidents, lack of performance by subcontractors and suppliers, and contract disputes. We continue to monitor the impacts of oil and gas price volatility and macroeconomic conditions on our operations, and our estimates in future periods will be revised for any events and changes in circumstances arising after the date of this Report.

Income (Loss) Per Share

Basic income (loss) per share is calculated by dividing net income or 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 in periods in which income is reported. See Note 5 for calculations of our basic and diluted income (loss) per share.

 

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Cash Equivalents, Restricted Cash and Short-Term Investments

Cash Equivalents – We consider investments with original maturities of three months or less when purchased to be cash equivalents. We hold substantially all of our cash deposits with Hancock Whitney Bank (“Whitney Bank”).

Restricted Cash – At September 30, 2023 and December 31, 2022, we had $1.2 million and $1.6 million, respectively, of restricted cash as security for letters of credit issued under our letter of credit facility (“LC Facility”) with Whitney Bank. Our restricted cash is held in an interest-bearing money market account with Whitney Bank. The classification of the restricted cash as current and noncurrent is determined by the contractual maturity dates of the letters of credit being secured, with letters of credit having maturity dates of twelve months or less from the balance sheet date classified as current, and letters of credit having maturity dates of longer than twelve months from the balance sheet date classified as noncurrent. See Note 3 for further discussion of our letters of credit and associated security requirements.

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 September 30, 2023 and December 31, 2022, our short-term investments included U.S. Treasuries with original maturities of four and six months, respectively. We intend to hold these investments until maturity and it is not more likely than not that we will be required to sell the investments prior to their maturity. The investments are stated at amortized costs, 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.

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 and Credit Losses

As further discussed under “New Accounting Standards” below, we adopted the new accounting standard for measuring credit losses effective January 1, 2023. 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 provide an allowance for credit losses and routinely review individual contract receivable balances and other financial assets for collectability 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, company-specific credit ratings, historical company-specific uncollectable amounts and economic conditions in general. See Note 2 for further discussion of our allowance for doubtful accounts and credit losses.

Stock-Based Compensation

Awards under our stock-based compensation plans are calculated using a fair value-based measurement method. Depending on the terms of the award, we use the straight-line or graded vesting methods 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 Consolidated Statements of Operations (“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 Consolidated Statements of Cash Flows (“Statement of Cash Flows”).

Depreciation and Amortization 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. Intangible assets are amortized on a straight-line basis over seven years and amortization expense is reflected within general and administrative expense on our Statement of Operations.

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Long-Lived Assets

Goodwill Goodwill is not amortized, but instead is reviewed for impairment at least annually at a reporting unit level, absent any indicators of impairment or when other actions require an impairment assessment (such as a change in reporting units). Our Services Division represents our only reporting unit with goodwill. We perform our annual impairment assessment during the fourth quarter of each year based upon balances as of October 1. In evaluating goodwill for impairment, we have the option to first assess qualitative factors to determine whether it is more likely than not that the fair value of our reporting unit is greater than its carrying value. If we determine that it is more likely than not that the carrying value of the reporting unit is greater than its fair value, we perform a quantitative impairment test by calculating the fair value of the reporting unit and comparing it to the carrying value of the reporting unit, and we recognize an impairment charge to the extent its carrying value exceeds its fair value. To determine the fair value of our reporting unit and test for impairment, we utilize an income approach (discounted cash flow method) as we believe this is the most direct approach to incorporate the specific economic attributes and risk profile of our reporting unit into our valuation model. We had no indicators of impairment during the nine months ended September 30, 2023. If, based on future assessments, our goodwill is deemed to be impaired, the impairment would result in a charge to our operating results in the period of impairment.

Other Long-Lived Assets Our property, plant and equipment, lease assets (included within other noncurrent assets), and finite-lived intangible 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 the excess of the carrying amount of the asset or asset group over its fair value is recorded as an impairment charge. Fair value is determined based on discounted cash flows, appraised values or third-party indications of value, as appropriate. We had no indicators of impairment during the nine months ended September 30, 2023.

Leases

We record a right-of-use asset and an offsetting lease liability on our Balance Sheet equal to the present value of our lease payments for leases with an original term of longer than twelve months. We do not record an asset or liability for leases with an original term of twelve months or less and we do not separate lease and non-lease components for our leases. Our lease assets are reflected within other noncurrent assets, and the current and noncurrent portions of our lease liabilities are reflected within accrued expenses and other liabilities, and other noncurrent liabilities, respectively, on our Balance Sheet. For leases with escalations over the life of the lease, we recognize expense on a straight-line basis.

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.
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. Our fair value assessments for determining the impairments of inventory, goodwill and long-lived assets are non-recurring fair value measurements that fall within Level 3 of the fair value hierarchy.

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, time and materials (“T&M”) and cost-reimbursable, or a combination thereof. Our contracts primarily relate to the fabrication of steel structures and modules, and certain 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”).

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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 the customer has obtained control of a promised asset.

Long-term Contracts Satisfied Over Time – Revenue for our long-term contracts is recognized using the POC method based on contract costs incurred to date compared to total estimated contract costs (an input method). Fixed-price contracts, or contracts with a more significant fixed-price component, generally provide us with greater control over project schedule and the timing of when work is performed and costs are incurred, and accordingly, when revenue is recognized. Unit-rate, T&M and cost-reimbursable contracts generally have more variability in the scope of work and provide our customers with greater influence over the timing of when we perform our work, and accordingly, such contracts often result in less predictability with respect to the timing of when revenue is recognized. 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 or loss for contracts accounted for using the POC method can be significantly affected by changes in estimated cost to complete such contracts. Significant estimates impacting the cost to complete a contract include: forecast costs of engineering, materials, equipment and subcontracts; forecast costs of labor and 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 nine months ended September 30, 2023 and 2022.

Short-term Contracts and Contracts Satisfied at a Point In Time – Revenue for our short-term contracts (which includes revenue associated with our master services arrangements) and contracts that do not satisfy the criteria for revenue recognition over time is recognized when the work is performed or when control of the asset is transferred, the related costs are incurred and collection is reasonably assured.

Variable Consideration Revenue and gross profit or loss for contracts can be significantly affected by variable consideration, which can be in the form of unapproved change orders, claims (including amounts arising from disputes with customers), incentives and liquidated damages that may not be resolved until the later stages of the contract or after the contract has been completed. Variable consideration can also include revenue associated with work performed on a unit-rate, T&M or cost-reimbursable basis that is recognized using the POC method. 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 our unapproved change orders, claims, incentives and liquidated damages.

Additional Disclosures Topic 606 also requires 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.

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 September 30, 2023 and December 31, 2022, we had no deferred pre-contract costs.

Other (Income) Expense, Net

Other (income) expense, net, generally represents recoveries or provisions for bad debts and credit losses, gains or losses associated with the sale or disposition of property and equipment, and income or expense associated with certain nonrecurring items.

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Income Taxes

Income taxes have been provided for 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 state income tax laws related to the apportionment of revenue for our projects, judgment is required to estimate the effective tax rate expected to apply to tax differences that are anticipated 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. Our effective tax rate differs from our statutory rate for the three months ended September 30, 2023, and nine months ended September 30, 2023 and 2022, as no federal income tax benefit was recorded for our losses as a full valuation allowance was recorded against our net deferred tax assets generated during the periods, and for the three months ended September 30, 2022, as