UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2019
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 

corpcolora10.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.)
 
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  x    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  x    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
 
x
 
 
 
 
Non-accelerated filer
 
¨
  
Smaller reporting company
 
x
 
 
 
 
 
 
 
 
 
 
 
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  x
The number of shares of the registrant’s common stock, no par value per share, outstanding as of November 5, 2019, was 15,263,170.
 



GULF ISLAND FABRICATION, INC.
I N D E X
 
 
  
 
  
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GLOSSARY OF TERMS

As used in this report on Form 10-Q for the quarter ended September 30, 2019 ("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.

2018 Annual Report
Our annual report for the year ended December 31, 2018, filed with the SEC on Form 10-K on March 1, 2019.
 
 
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.
 
 
Credit Agreement
Our $40.0 million revolving credit facility with Hancock Whitney Bank maturing June 9, 2021, as amended.
 
 
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.
 
 
direct labor hours
Hours worked by employees directly involved in the production of our products. These hours do not include support personnel such as maintenance and warehousing.
 
 
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.
 
 
EPS
Income (loss) per share.
 
 
Exchange Act
Securities Exchange Act of 1934, as amended.
 
 
Fabrication AHFS
The machinery and equipment previously located at our Texas North Yard that was not sold in connection with the sale of the Texas North Yard and continues to be held for sale by our Fabrication Division.
 
 
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.
 
 
FPSO
Floating Production Storage and Offloading vessel. A floating vessel used by the offshore oil and gas industry for the production and processing of hydrocarbons and for the storage of oil.
 
 
GAAP
Generally accepted accounting principles in the U.S.
 
 
GOM
Gulf of Mexico.
 
 
inland or inshore
Typically in bays, lakes and marshy areas.

- ii -


 
 
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.
 
 
LIBOR
London Inter-Bank Offered Rate.
 
 
modules
Fabricated structures that include structural steel, piping, valves, fittings, storage vessels and other equipment that are incorporated into a petrochemical or industrial system. These modules are pre-fabricated at our facilities and then transported to the customer's location for final integration.
 
 
MPSV
Multi-Purpose Service Vessel.
 
 
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.
 
 
piles
Rigid tubular pipes that are driven into the seabed to support platforms.
 
 
platform
A structure from which offshore oil and gas development drilling and production are conducted.
 
 
pressure vessel
A metal container generally cylindrical or spheroid, capable of withstanding various internal pressure loads.
 
 
SEC
U.S. Securities and Exchange Commission.
 
 
Shipyard AHFS
A drydock held for sale by our Shipyard Division.
 
 
skid unit
Packaged equipment usually consisting of major production, utility or compression equipment with associated piping and control system(s).
 
 
South Texas Properties
Our former Texas North Yard and Texas South Yard. The Texas South Yard property was sold on April 20, 2018 and the Texas North Yard was sold on November 15, 2018.
 
 
SPAR
Single Point Anchor Reservoir. A floating vessel with a circular cross-section that sits vertically in the water and is used for infield flow lines and associated subsea infrastructure. The SPAR connects subsea production and injection wells for oil and gas production in deepwater environments.
 
 
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.
 
 
subsea templates
Tubular frames which are placed on the seabed and anchored with piles. Usually a series of oil and gas wells are drilled through these underwater structures.
 
 
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 which can include a mark-up.
 
 

- iii -


Texas North Yard
Our former fabrication yard, and certain related machinery and equipment, located in Aransas Pass, Texas, which was sold on November 15, 2018.
 
 
Texas South Yard
Our former fabrication yard, and certain related machinery and equipment, located in Ingleside, Texas, which was sold on April 20, 2018.
 
 
TLP
Tension Leg Platform. A floating hull and deck anchored by vertical tensioned cables or pipes connected to pilings driven into the seabed. A tension leg platform is typically used in water depths exceeding 1,200 feet.
 
 
Topic 606
The revenue recognition criteria prescribed under ASU 2014-09, Revenue from Contracts with Customers.
 
 
U.S.
The United States of America.
 
 


- iv -


PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
GULF ISLAND FABRICATION, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands) 
 
September 30,
2019
 
December 31,
2018
 
(Unaudited)
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
45,911

 
$
70,457

Short-term investments
25,457

 
8,720

Contracts receivable and retainage, net
30,268

 
22,505

Contract assets
50,855

 
29,982

Inventory
4,358

 
6,088

Prepaid expenses and other assets
3,437

 
3,268

Assets held for sale
18,518

 
18,935

Total current assets
178,804

 
159,955

Property, plant and equipment, net
74,770

 
79,930

Other noncurrent assets
23,591

 
18,405

Total assets
$
277,165

 
$
258,290

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
58,781

 
$
28,969

Contract liabilities
15,682

 
16,845

Accrued expenses and other liabilities
10,359

 
10,287

Total current liabilities
84,822

 
56,101

Other noncurrent liabilities
5,299

 
1,089

Total liabilities
90,121

 
57,190

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, 15,263 shares issued and outstanding at September 30, 2019 and 15,090 at December 31, 2018
11,123

 
11,021

Additional paid-in capital
103,154

 
102,243

Retained earnings
72,767

 
87,836

Total shareholders’ equity
187,044

 
201,100

Total liabilities and shareholders’ equity
$
277,165

 
$
258,290

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


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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,
 
2019
 
2018
 
2019
 
2018
Revenue
$
75,802

 
$
49,712

 
$
223,863

 
$
161,016

Cost of revenue
78,487

 
52,924

 
227,593

 
164,248

Gross loss
(2,685
)
 
(3,212
)
 
(3,730
)
 
(3,232
)
General and administrative expense
3,970

 
4,902

 
11,791

 
14,703

Asset impairment and (gain) loss on assets held for sale, net
324

 
146

 
254

 
(5,683
)
Other (income) expense, net
(51
)
 
2,484

 
(181
)
 
2,859

Operating loss
(6,928
)
 
(10,744
)
 
(15,594
)
 
(15,111
)
Interest (expense) income, net
139

 
72

 
527

 
(166
)
Net loss before income taxes
(6,789
)
 
(10,672
)
 
(15,067
)
 
(15,277
)
Income tax (expense) benefit
10

 
(277
)
 
(2
)
 
(419
)
Net loss
$
(6,779
)
 
$
(10,949
)
 
$
(15,069
)
 
$
(15,696
)
Per share data:
 
 
 
 
 
 
 
Basic and diluted loss per common share
$
(0.44
)
 
$
(0.73
)
 
$
(0.99
)
 
$
(1.05
)
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
Capital
 
Retained
Earnings
 
Total
Shareholders’
Equity
 
 
 
Shares
 
Amount
 
 
Balance at December 31, 2017
14,910

 
$
10,823

 
$
100,456

 
$
108,214

 
$
219,493

 
Net loss

 

 

 
(5,296
)
 
(5,296
)
 
Vesting of restricted stock
133

 
(79
)
 
(708
)
 

 
(787
)
 
Stock-based compensation expense

 
69

 
607

 

 
676

 
Balance at March 31, 2018
15,043

 
10,813

 
100,355

 
102,918

 
214,086

 
Net income

 

 

 
549

 
549

 
Stock-based compensation expense

 
75

 
680

 

 
755

 
Balance at June 30, 2018
15,043

 
10,888

 
101,035

 
103,467

 
215,390

 
Net loss

 

 

 
(10,949
)
 
(10,949
)
 
Vesting of restricted stock
1

 

 
(8
)
 

 
(8
)
 
Stock-based compensation expense

 
69

 
634

 

 
703

 
Balance at September 30, 2018
15,044

 
$
10,957

 
$
101,661

 
$
92,518

 
$
205,136



 
 
Common Stock
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
Total
Shareholders’
Equity
 
 
 
Shares
 
Amount
 
 
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

 
Net loss

 

 

 
(6,779
)
 
(6,779
)
 
Vesting of restricted stock
27

 
(8
)
 
(73
)
 

 
(81
)
 
Stock-based compensation expense

 
46

 
416

 

 
462

 
Balance at September 30, 2019
15,263

 
$
11,123

 
$
103,154

 
$
72,767

 
$
187,044

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


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GULF ISLAND FABRICATION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
 
Nine Months Ended 
 September 30,
 
 
2019
 
2018
Cash flows from operating activities:
 
 
 
Net loss
$
(15,069
)
 
$
(15,696
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Depreciation and lease asset amortization
7,264

 
7,788

Other amortization, net
37

 
(458
)
Bad debt expense
59

 
2,776

Asset impairments
622

 
1,360

(Gain) loss on sale of assets held for sale, net
(369
)
 
(3,701
)
(Gain) loss on sale of fixed assets and other assets, net
(565
)
 
87

(Gain) loss on insurance recoveries, net

 
(3,342
)
Stock-based compensation expense
1,808

 
2,134

Changes in operating assets and liabilities:
 
 
 
Contracts receivable and retainage, net
(7,822
)
 
(6,211
)
Contract assets
(20,873
)
 
(11,814
)
Prepaid expenses, inventory and other current assets
1,502

 
(1,722
)
Accounts payable
29,244

 
1,791

Contract liabilities
(1,164
)
 
6,588

Accrued expenses and other liabilities
(470
)
 
632

Noncurrent assets and liabilities, net (including long-term retainage)
(910
)
 
1,122

Net cash used in operating activities
(6,706
)
 
(18,666
)
Cash flows from investing activities:
 
 
 
Capital expenditures
(1,990
)
 
(2,362
)
Purchases of short-term investments
(45,366
)
 
(9,174
)
Maturities of short-term investments
28,761

 

Proceeds from sale of property, plant and equipment
1,598

 
57,716

Recoveries from insurance claims

 
9,362

Net cash provided by (used in) investing activities
(16,997
)
 
55,542

Cash flows from financing activities:
 
 
 
Proceeds from borrowings under Credit Agreement

 
15,000

Repayment of borrowings under Credit Agreement

 
(15,000
)
Payment of financing cost
(48
)
 
(44
)
Tax payments for vested stock withholdings
(795
)
 
(795
)
Net cash used in financing activities
(843
)
 
(839
)
Net increase (decrease) in cash and cash equivalents
(24,546
)
 
36,037

Cash and cash equivalents, beginning of period
70,457

 
8,983

Cash and cash equivalents, end of period
$
45,911

 
$
45,020


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

- 4 -


GULF ISLAND FABRICATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2019
(Unaudited)

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations

We are a leading fabricator of complex steel structures, modules and marine vessels used in energy extraction and production, petrochemical and industrial facilities, power generation, alternative energy and shipping and marine transportation operations. We also provide project management, hookup, commissioning, repair, maintenance and civil construction services. We operate and manage our business through three operating divisions ("Fabrication", "Shipyard" and "Services") and one non-operating division ("Corporate"), which represent our reportable segments. During the first quarter 2019, our former EPC Division was operationally combined with our Fabrication Division. See Note 7 for discussion of our realigned operating divisions and related financial information. Our corporate headquarters is located in Houston, Texas, with operating facilities located in Houma, Jennings and Lake Charles, Louisiana.

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

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, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019.

Our Consolidated Balance Sheet ("Balance Sheet") at December 31, 2018, has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by GAAP for complete financial statements. For further information, refer to the Financial Statements and related footnotes included in our 2018 Annual Report. Certain amounts for the 2018 period have been reclassified within our Consolidated Statements of Operations ("Statement of Operations") and our Consolidated Statements of Cash Flows ("Statement of Cash Flows") to conform to our presentation for the 2019 period.

Business Outlook

We continue to strategically position the Company to participate in the fabrication of petrochemical and industrial facilities, pursue offshore wind opportunities, and diversify our customer base within all operating divisions. In addition, we continue to focus on maintaining our liquidity and securing meaningful new project awards and backlog in the near-term and generating operating income and cash flows from operations in the longer-term. We have made significant progress in our efforts to increase our backlog and improve and preserve our liquidity, including cost reductions and the sale of underutilized assets. We are further focused on strengthening relationships with key customers and enhancing our proposal, estimating and operations resources, processes and procedures to improve our competitiveness and overall project execution. See Note 3 for further discussion of our recent asset sales and assets held for sale at September 30, 2019.

We believe that our cash, cash equivalents and short-term investments at September 30, 2019, and availability under our Credit Agreement (defined in Note 4), will be sufficient to enable us to fund our operating expenses, meet our working capital and capital expenditure requirements, and satisfy any debt service obligations or other funding requirements, for at least twelve months from the date of this Report.

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Operating Cycle

The durations of our contracts vary and can extend beyond twelve months from the date of contract award. Consistent with industry practice, assets and liabilities have been classified as current under the operating cycle concept whereby all contract-related items are classified as current regardless of whether cash will be received or paid within a twelve month period. Assets and liabilities classified as current which may not be received or paid within the next twelve months include contract retainage, contract assets and contract liabilities. Variations from normal contract terms may result in the classification of assets and liabilities as noncurrent.

Use of Estimates

The preparation of our Financial Statements in conformity with GAAP requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses and related disclosures of contingent assets and liabilities. We believe our most significant estimates and judgments are associated with revenue recognition for our contracts, including application of the percentage-of-completion method, estimating costs to complete each contract and the recognition of incentives, unapproved change orders, claims, and liquidated damages; fair value and recoverability assessments that must be periodically performed with respect to long-lived assets and our assets held for sale; determination of deferred income tax assets, liabilities and related valuation allowances; reserves for bad debts; and liabilities related to self-insurance programs. If the underlying estimates and assumptions upon which our Financial Statements are based change in the future, actual amounts may differ materially from those included in the Financial Statements.

Income (Loss) Per Share

We report basic and diluted income (loss) per share ("EPS") using the "two-class" method as required under GAAP. The calculation of EPS using the two-class method is required when a company has two or more classes of common stock or participating securities. Certain of our unvested restricted stock (which are not included in our basic or diluted weighted average shares outstanding) contain the right to receive non-refundable dividends and therefore represent participating securities. See Note 6 for calculations of our basic and diluted EPS.

Cash Equivalents and Short-term Investments
Cash equivalents - We consider investments with original maturities of three months or less when purchased to be cash equivalents.
Short-term investments - We consider investments with original maturities of more than three months but less than twelve months to be short-term investments. At September 30, 2019, our short-term investments include U.S. Treasuries with original maturities of less than six months. We intend to hold these investments until maturity and have stated them at amortized cost. Due to their near-term maturities, amortized cost approximates fair value. All short-term investments are traded on active markets with quoted prices and represent level 1 fair value measurements.

Inventory
Inventory is recorded at the lower of cost or net realizable value determined using the first-in-first-out basis. The cost of inventory includes acquisition costs, production or conversion costs, and other costs incurred to bring the inventory to a current location and condition. Net realizable value is our estimated selling price in the normal course of business, less reasonably predictable costs of completion, disposal and transportation. An allowance for excess or inactive inventory is recorded based on an analysis that considers current inventory levels, historical usage patterns, estimates of future sales and salvage value.

Allowance for Doubtful Accounts
In the normal course of business, we extend credit to our customers on a short-term basis and contract receivables are generally not collateralized; however, we typically have the right to place liens on our projects in the event of nonpayment by our customers. We routinely review individual contract receivable balances for collectibility and make provisions for probable uncollectible amounts as necessary. Among the factors considered in our review are the financial condition of our customer and its access to financing, underlying disputes with the customer, the age and value of the receivable balance, and economic conditions in general.
Our customer base historically includes a significant number of energy related companies and their contractors. This concentration of customers in the energy sector may impact our overall exposure to credit risk, either positively or negatively, in

- 6 -


that customers may be similarly affected by changes in economic or other conditions. See Note 2 for further discussion of our allowance for doubtful accounts.

Stock-Based Compensation
Awards under our stock-based compensation plans are calculated using a fair value-based measurement method. We use the straight-line method to recognize share-based compensation expense over the requisite service period of the award. We recognize the excess tax benefit or tax deficiency resulting from the difference between the deduction we receive for tax purposes and the stock-based compensation expense we recognize for financial reporting purposes created when common stock vests, as an income tax benefit or expense in our Statement of Operations.
Tax payments made on behalf of employees to taxing authorities in order to satisfy employee income tax withholding obligations from the vesting of shares under our stock-based compensation plans are classified as a financing activity in our Statement of Cash Flows.

Assets Held for Sale
Assets held for sale are measured at the lower of their carrying amount or fair value less cost to sell. See Note 3 for further discussion of our assets held for sale.

Depreciation Expense
We depreciate property, plant and equipment on a straight-line basis over estimated useful lives ranging from three to 25 years, absent any indicators of impairment. Ordinary maintenance and repairs, which do not extend the physical or economic lives of the plant or equipment, are charged to expense as incurred.

Long-Lived Assets
We review long-lived assets for impairment, which include property, plant and equipment and our lease assets included within other noncurrent assets, when events or changes in circumstances indicate that the carrying amount may not be recoverable. If a recoverability assessment is required, the estimated future undiscounted cash flow associated with the assets or asset groups are compared to their respective carrying amounts to determine if an impairment exists. An impairment loss is measured by comparing the fair value of the asset or asset group to its carrying amount and recording the excess of the carrying amount of the asset or asset group over its fair value as an impairment charge. An asset group constitutes the minimum level for which identifiable cash flows are principally independent of the cash flows of other assets or asset groups. Fair value is determined based on discounted cash flows, appraised values or third-party indications of value, as appropriate. During the three and nine months ended September 30, 2019, we identified no indicators of impairment.

Fair Value Measurements
Our fair value determinations for financial assets and liabilities are based on the particular facts and circumstances. Financial instruments are required to be categorized within a valuation hierarchy based upon the lowest level of input that is significant to the fair value measurement. The three levels of the valuation hierarchy are as follows:
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 reported for financial instruments, including cash and cash equivalents, short-term investments, contracts receivable and accounts payable, approximate their fair values.

Revenue Recognition

General - Our revenue is derived from customer contracts and agreements that are awarded on a competitively bid and negotiated basis using a range of contracting options, including fixed-price, unit-rate and T&M. Our contracts primarily relate to the fabrication and construction of steel structures, modules and marine vessels, and project management services and other service

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arrangements. We recognize revenue for our contracts in accordance with Accounting Standards Update ("ASU") 2014-09, Topic 606 “Revenue from Contracts with Customers” ("Topic 606"), which was adopted by us on January 1, 2018, and supersedes previous revenue recognition guidance, including industry-specific guidance.

Fixed-Price and Unit-Rate Contracts - Revenue for our fixed-price and unit-rate contracts is recognized using the percentage-of-completion method (an input method), based on contract costs incurred to date compared to total estimated contract costs. Contract costs include direct costs, such as materials and labor, and indirect costs that are attributable to contract activity. Material costs that are significant to a contract and do not reflect an accurate measure of project completion are excluded from the determination of our contract progress. Revenue for such materials is only recognized to the extent of costs incurred. Revenue and gross profit for contracts accounted for using the percentage-of-completion method can be significantly affected by changes in estimated cost to complete such contracts. Significant estimates impacting the cost to complete a contract include: costs of engineering, materials, components, equipment, labor and subcontracts; labor productivity; schedule durations, including subcontractor and supplier progress; contract disputes, including claims; achievement of contractual performance requirements; and contingency, among others. Although our customers retain the right and ability to change, modify or discontinue further work at any stage of a contract, in the event our customers discontinue work, they are required to compensate us for the work performed to date. The cumulative impact of revisions in total cost estimates during the progress of work is reflected in the period in which these changes become known, including, to the extent required, the reversal of profit recognized in prior periods and the recognition of losses expected to be incurred on contracts. Due to the various estimates inherent in our contract accounting, actual results could differ from those estimates, which could result in material changes to our Financial Statements and related disclosures.

T&M Contracts - Revenue for our T&M contracts is recognized at contracted rates when the work is performed, the costs are incurred, and collection is reasonably assured. Our T&M contracts provide for labor and materials to be billed at rates specified within the contract. The consideration from the customer directly corresponds to the value of our performance completed at the time of invoicing.

Variable Consideration - Revenue and gross profit for contracts can be significantly affected by variable consideration, which can be in the form of unapproved change orders, claims, incentives, and liquidated damages that may not be resolved until the later stages of the contract or after the contract has been completed and delivery occurs. We estimate variable consideration based on the amount we expect to be entitled and include estimated amounts in transaction price to the extent it is probable that a significant future reversal of cumulative revenue recognized will not occur or when we conclude that any significant uncertainty associated with the variable consideration is resolved.

Adoption of Topic 606 - As discussed above, on January 1, 2018 we adopted Topic 606. Prior to our adoption of Topic 606, our determination of percentage-of-completion for our fixed-price and unit-rate contracts was based on the percentage of direct labor hours incurred to date compared to total estimated direct labor hours, and revenue for materials was recognized only to the extent of costs incurred. However, in our adoption of Topic 606, we adjusted our measure of progress for the determination of percentage-of-completion to include subcontract labor hours in addition to direct labor hours. Accordingly, our determination of percentage-of-completion for the three and nine months ended September 30, 2018, was based on this method.

During the fourth quarter 2018, we concluded that the use of labor hours for the determination of percentage-of-completion for our fixed-price and unit-rate contracts was not appropriate based on the changing mix of our contracts, which include an increasing amount of engineered equipment, manufactured materials, and subcontracted services and materials. We also concluded that in our adoption of Topic 606 as of January 1, 2018, our determination of percentage-of-completion for our fixed-price and unit-rate contracts should have been based on total contract costs incurred to date compared to total estimated contract costs. We further concluded that material costs that are significant to a contract and do not reflect an accurate measure of project completion should be excluded from the determination of our contract progress, and revenue for such materials should only be recognized to the extent of costs incurred. Accordingly, during the fourth quarter 2018, we corrected our percentage-of-completion estimates for our fixed-price and unit-rate contracts to be based on total costs incurred to date compared to total estimated contract costs. Accordingly, our determination of percentage-of-completion for the three and nine months ended September 30, 2019, was based on this method. The impact of the difference in methods of determining percentage-of-completion between the 2019 and 2018 periods was not material.
During 2018 we also evaluated the required cumulative effect adjustment to retained earnings as of January 1, 2018 for the adoption impact of Topic 606. Based on this evaluation, we determined that the cumulative effect adjustment would have been $0.4 million, which we did not believe was material to our Financial Statements. Accordingly, no cumulative adjustment to retained earnings as of January 1, 2018 was recorded.

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Income Taxes

Income taxes have been provided using the liability method. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes using enacted rates expected to be in effect during the year in which the differences are expected to reverse.

A valuation allowance is provided to reserve for deferred tax assets ("DTA(s)") if, based upon the available evidence, it is more likely than not that some or all of the DTAs will not be realized. The realization of our DTAs depends on our ability to generate sufficient taxable income of the appropriate character and in the appropriate jurisdictions.

Reserves for uncertain tax positions are recognized when we consider it more likely than not that additional tax will be due in excess of amounts reflected in our income tax returns, irrespective of whether or not we have received tax assessments. Interest and penalties on uncertain tax positions are recorded within income tax expense.

Pre-contract Costs

Pre-contract costs are generally charged to cost of revenue as incurred, but in certain cases their recognition may be deferred if specific probability criteria are met. At September 30, 2019 and December 31, 2018, we had no deferred pre-contract costs.

Other (Income) Expense, Net

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

New Accounting Standards

Leases - In the first quarter 2019, we adopted ASU 2016-02, “Leases,” which required us to record a lease liability on our Balance Sheet equal to the present value of our lease payments for leased assets, and record a lease asset on our Balance Sheet representing our right to use the underlying leased assets for all leases having an original term of longer than 12-months. In our adoption we elected the modified retrospective transition method, and accordingly, prior periods have not been restated and continue to be reported under the lease standard in effect during such periods. We also elected certain practical expedients provided by ASU 2016-02, including not recording an asset or liability for leases having a term of 12-months or less and not separating lease and non-lease components for our leases. Upon adoption, we recorded operating lease assets and lease liabilities of approximately $7.2 million and $5.3 million, respectively, at January 1, 2019. Included in our lease asset was an intangible asset of $1.9 million associated with two favorable lease obligations recorded in connection with a former acquisition, which was reclassified as a lease asset under ASU 2016-02. 

The lease asset is reflected within other noncurrent assets, and the current and noncurrent portions of the lease liability are reflected within accrued expenses and other liabilities, and other noncurrent liabilities, respectively, on our Balance Sheet. At September 30, 2019, our lease asset, current lease liability and long-term lease liability were $6.8 million, $0.3 million and $4.7 million, respectively. For leases with escalations over the life of the lease, we recognize expense on a straight-line basis. See Note 5 for further discussion of our lease liabilities.

Stock-based grants - In the first quarter 2019, we adopted ASU 2018-07, "Improvements to Non-employee Share-Based Payment Accounting," which simplifies the accounting for share-based payments granted to non-employees for goods and services. Under the ASU, most of the guidance for such payments to non-employees is now aligned with the requirements for share-based payments to employees. The adoption of the new standard did not have a material impact on our financial position, results of operations or related disclosures.

Financial instruments - In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses - Measurement of Credit Losses on Financial Instruments,” which changes the way companies evaluate credit losses for most financial assets and certain other instruments. For trade and other receivables, short-term investments, loans and other instruments, entities will be required to use a new forward-looking “expected loss” model to evaluate impairment, potentially resulting in earlier recognition of allowances for losses. The new standard also requires enhanced disclosures, including the requirement to disclose the information used to track credit quality by year of origination for most financing receivables. ASU 2016-13 will be effective for us in the first quarter 2020. Early adoption of the new standard is permitted; however, we have not elected to early adopt the standard. The new standard is required to be applied using a cumulative-effect transition method. We are currently evaluating the effect that ASU 2016-13 will have on our financial position, results of operations and related disclosures.

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2. REVENUE, CONTRACT ASSETS AND LIABILITIES AND OTHER CONTRACT MATTERS
As discussed in Note 1, we recognize revenue for our contracts in accordance with Topic 606. Summarized below are required disclosures under Topic 606 and other relevant guidance.

Disaggregation of Revenue

The following tables summarize revenue for each of our operating segments, disaggregated by contract type, for the three and nine months ended September 30, 2019 and 2018 (in thousands):

 
 
Three Months Ended September 30, 2019
 
 
Fabrication

Shipyard

Services

Eliminations

Total
Contract Type
 
 
 
 
 
 
 
 
 
Fixed-price and unit-rate (1)
$
19,474

 
$
38,128

 
$
6,770

 
$
(65
)
 
$
64,307

T&M (2)

 
1,308

 
9,442

 

 
10,750

Other

 

 
1,295

 
(550
)
 
745

 
Total
$
19,474

 
$
39,436

 
$
17,507

 
$
(615
)
 
$
75,802


 
 
Three Months Ended September 30, 2018
 
 
Fabrication

Shipyard

Services

Eliminations

Total
Contract Type
 
 
 
 
 
 
 
 
 
Fixed-price and unit-rate (1)
$
3,382

 
$
23,635

 
$
10,422

 
$
(494
)
 
$
36,945

T&M (2)

 
857

 
10,424

 

 
11,281

Other

 

 
1,771

 
(285
)
 
1,486

 
Total
$
3,382

 
$
24,492

 
$
22,617

 
$
(779
)
 
$
49,712


 
 
Nine Months Ended September 30, 2019
 
 
Fabrication
 
Shipyard
 
Services
 
Eliminations
 
Total
Contract Type
 
 
 
 
 
 
 
 
 
Fixed-price and unit-rate (1)
$
54,520

 
$
108,361

 
$
23,517

 
$
(4,311
)
 
$
182,087

T&M (2)

 
5,229

 
30,403

 

 
35,632

Other

 

 
7,254

 
(1,110
)
 
6,144

 
Total
$
54,520

 
$
113,590

 
$
61,174

 
$
(5,421
)
 
$
223,863


 
 
Nine Months Ended September 30, 2018
 
 
Fabrication
 
Shipyard
 
Services
 
Eliminations
 
Total
Contract Type
 
 
 
 
 
 
 
 
 
Fixed-price and unit-rate (1)
$
30,197

 
$
62,116

 
$
31,288

 
$
(1,989
)
 
$
121,612

T&M (2)

 
4,561

 
31,495

 

 
36,056

Other

 

 
3,909

 
(561
)
 
3,348

 
Total
$
30,197

 
$
66,677

 
$
66,692

 
$
(2,550
)
 
$
161,016

____________
(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.


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Future Performance Obligations Required Under Contracts

A summary of our remaining performance obligations by operating segment at September 30, 2019, is as follows (in thousands).
Segment
 
Performance Obligations
Fabrication
 
$
39,894

Shipyard (1)
 
384,852

Services
 
15,189

Total
 
$
439,935

 
 
 
_____________
(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.

We expect to recognize revenue for our remaining performance obligations at September 30, 2019, in the following periods (in thousands):
Year
 
Performance Obligations
Remainder of 2019
 
$
79,028

2020
 
230,699

2021
 
122,068

Thereafter
 
8,140

Total
 
$
439,935

 
 
 

Contracts Assets and Liabilities
Revenue recognition and customer invoicing for our fixed-price and unit-rate contracts may occur at different times. Revenue recognition is based upon our estimated percentage-of-completion as discussed in Note 1; however, customer invoicing is generally dependent upon predetermined billing terms, which could provide for customer payments in advance of performing the work, milestone billings based on the completion of certain phases of the work, or billings when services are provided. Revenue recognized in excess of amounts billed is reflected as contract assets on our Balance Sheet. Amounts billed in excess of revenue recognized, and accrued contract losses, are reflected as contract liabilities on our Balance Sheet. Contract assets and contract liabilities included in our Balance Sheet at September 30, 2019 and December 31, 2018, are as follows (in thousands):
 
September 30,
 
December 31,
 
2019
 
2018
Contract assets
$
50,855

 
$
29,982

Contract liabilities (1), (2), (3)
(15,682
)
 
(16,845
)
Contracts in progress, net
$
35,173

 
$
13,137

______________
(1)
The decrease in contract liabilities compared to December 31, 2018, was primarily due to the unwind of advance payments on a project in our Fabrication Division, offset partially by an increase in billings on a project in our Fabrication Division and advance payments on a project in our Shipyard Division.
(2)
Revenue recognized during the three months ended September 30, 2019 and 2018, which related to amounts included in our contract liabilities balance at June 30, 2019 and 2018, was $8.5 million and $2.6 million respectively. Revenue recognized during the nine months ended September 30, 2019 and 2018, which related to amounts included in our contract liabilities balance at December 31, 2018 and 2017, was $14.3 million and $5.1 million, respectively.
(3)
Contract liabilities at September 30, 2019 and December 31, 2018, includes accrued contract losses of $3.0 million and $2.4 million, respectively. See "Project Changes in Estimates" below for further discussion of our accrued contract losses.


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Allowance for Doubtful Accounts

For the three months ended September 30, 2019, we had no provision for bad debts, and for the three months ended September 30, 2018, our provision for bad debts was $2.8 million. For the nine months ended September 30, 2019 and 2018, our provision for bad debts was $0.1 million and $2.8 million, respectively. Our provision for bad debts is included in other (income) expense, net on our Statement of Operations. Our allowance for doubtful accounts at September 30, 2019 and December 31, 2018 was $0.1 million and $0.4 million, respectively.

Variable Consideration

For the three and nine months ended September 30, 2019 and 2018, we had no material amounts in revenue related to unapproved change orders, claims, or incentives. However, at September 30, 2019 and December 31, 2018, certain projects in our Shipyard and Services divisions reflected a reduction to our estimated contract price for liquidated damages of $11.8 million and $11.2 million, respectively, of which $11.2 million was recorded during 2017.

Changes in Project Estimates

For the three and nine months ended September 30, 2019, significant changes in estimated margins on projects resulted in an increase in our operating loss of $3.9 million and $5.8 million, respectively. The changes in estimates were associated with our harbor tug projects and ice-breaker tug project in our Shipyard Division and a project in our Services Division.

The changes in estimates for the harbor tug projects totaled $1.9 million and $3.1 million for the three and nine months ended September 30, 2019, respectively. The changes in estimates for the third quarter 2019 were the result of increased forecast costs and liquidated damages, primarily associated with the need to supplement and re-perform work for an under-performing paint subcontractor, higher cost estimates from our electrical and instrumentation subcontractor, and our inability to achieve previously anticipated labor productivity improvements on our uncompleted vessels, resulting in increased craft labor and subcontracted services and extensions of schedule for the projects. The changes in estimates for the first half of 2019 were the result of increased forecast costs, primarily associated with limitations in craft labor availability and the required use of contract labor in lieu of direct hire labor, resulting in lower than anticipated craft labor productivity and extensions of schedule for the projects. The revised forecasts incorporate actual results obtained from completion of the fifth vessel in the third quarter 2019 and progress achieved on the remaining five vessels. At September 30, 2019, the uncompleted vessels were at various stages of completion ranging from approximately 13% to 88% and are forecast to be completed at various dates ranging from the fourth quarter 2019 through the third quarter 2020. The projects were in a loss position at September 30, 2019 and our reserve for estimated losses was $1.9 million. If future craft labor productivity differs from our current estimates, we are unable to achieve our progress estimates, our schedules are further extended or the projects incur additional schedule liquidated damages, the projects would experience further losses.

The changes in estimates for the ice-breaker tug project totaled $0.5 million and $1.3 million for the three and nine months ended September 30, 2019, respectively. The changes in estimates for the third quarter 2019 were the result of increased forecast costs, primarily associated with difficulties encountered to launch the vessel and anticipated delays and costs to deliver the vessel, resulting in additional craft labor, subcontracted services and support, and an extension of schedule for the project. The changes in estimates for the first half of 2019 were the result of increased forecast costs, primarily associated with incomplete and deficient subcontracted production engineering, resulting in construction rework and disruption, lower than anticipated craft labor productivity and an extension of schedule for the project. At September 30, 2019, the vessel was approximately 85% complete and is forecast to be completed in the fourth quarter 2019 and delivered in the first quarter 2020. The project was in a loss position at September 30, 2019 and our reserve for estimated losses was $0.1 million. If future craft labor productivity differs from our current estimates, we are unable to achieve our progress estimates, our schedule is further extended, or we experience further delays or additional costs to deliver the vessel, the project would experience further losses.

The changes in estimates for our Services project totaled $1.5 million and $1.4 million for the three and nine months ended September 30, 2019, respectively. The changes in estimates were the result of increased forecast costs and liquidated damages, primarily associated with stringent welding procedure requirements and customer specifications for subsea components, resulting in additional materials, craft labor and subcontracted services and support, and an extension of schedule for the project. At September 30, 2019, the project was approximately 56% complete and is forecast to be completed in the first quarter 2020. The project was in a loss position at September 30, 2019 and our reserve for estimated losses was $0.6 million. If we continue to experience difficulties with the procedure requirements and specifications for the project or the schedule is further extended, the project would experience further losses.

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For the three and nine months ended September 30, 2018, individual projects with significant changes in estimated margins did not have a material net impact on our loss from operations.

Other Project Matters

Project Tariffs - Certain imported materials used, or forecast to be used, for our projects are currently subject to existing, new or increased tariffs or duties. We believe such amounts, if incurred, are recoverable from our customers under the contractual provisions of our contracts; however, we can provide no assurances that we will successfully recover such amounts.

Other - At September 30, 2019 and December 31, 2018, other noncurrent assets on our Balance Sheet included $3.0 million of retention for a previously completed project in our Fabrication Division for the fabrication of modules for a petrochemical facility. This retention is billable to the customer upon expiration of the contractual warranty period, which is expected to occur in the second quarter 2020; however, the customer has recently announced it is pursuing strategic alternatives and has executed amendments to its financing arrangements that could delay the timing of collection of the retention.

3. ASSETS HELD FOR SALE
A summary of our assets held for sale at September 30, 2019, is as follows (in thousands):







Assets

Fabrication Division

Shipyard Division

Consolidated
Machinery and equipment

$
25,789


$
898


$
26,687

Accumulated depreciation

(7,871
)

(298
)

(8,169
)
Total

$
17,918


$
600


$
18,518


Fabrication Division Assets Held for Sale

South Texas Properties - During the first quarter 2017, we classified our fabrication yards and certain associated equipment in Ingleside, Texas ("Texas South Yard") and Aransas Pass, Texas ("Texas North Yard") (collectively, "South Texas Properties") as held for sale. During the second and fourth quarters of 2018, we completed the sale of the Texas South Yard and Texas North Yard, respectively, which included both fabrication yards and certain equipment. In connection with the sale of the Texas South Yard, during the nine months ended September 30, 2018, we received net proceeds of $53.8 million and recognized a gain of $3.9 million, which is included within asset impairments and (gain) loss on assets held for sale, net on our Statement of Operations.

At September 30, 2019, our Fabrication Division continued to have $17.9 million of assets held for sale ("Fabrication AHFS"), which were initially expected to be sold with the South Texas Properties. These assets consist primarily of three 660-ton crawler cranes, a deck barge, two plate bending roll machines and panel line equipment. The Fabrication AHFS were relocated to our fabrication yard in Houma, Louisiana.

Hurricane Harvey Insurance Recoveries - During the third quarter 2017, buildings and equipment located at our South Texas Properties were damaged by Hurricane Harvey. In connection therewith, during 2017 we received $6.0 million of insurance proceeds as an initial payment from our insurance carriers, of which approximately $3.2 million was reflected as a liability on our Balance Sheet at December 31, 2017, related to estimated future repairs associated with Hurricane Harvey. In addition, during the second quarter 2018, we agreed to a global settlement with our insurance carriers for total insurance payments of $15.4 million, inclusive of the $6.0 million payment received during 2017 and $9.4 million of payments received during the nine months ended September 30, 2018. In applying the settlement proceeds (which were inclusive of agreed upon deductibles), we allocated the 2018 recoveries and the liability accrued at December 31, 2017, as follows:

$9.0 million, which offset impairments of property and equipment, primarily at our Texas North Yard, resulting in no net gain or loss. Our evaluation considered the Texas North Yard as a single asset group given the sale of our Texas South Yard had been completed. The impairments were based upon our best estimate of the decline in fair value of the asset group as a result of Hurricane Harvey; and
$3.6 million gain recorded during the nine months ended September 30, 2018, which is included within asset impairments and (gain) loss on assets held for sale, net on our Statement of Operations.


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Other - During the nine months ended September 30, 2019 and 2018, we received proceeds of $0.4 million and $1.2 million, respectively, related to the sale of assets that were held for sale, which resulted in a gain of $0.3 million and loss of $0.4 million for the nine months ended September 30, 2019 and 2018, respectively. During the nine months ended September 30, 2019 and 2018, we recorded expense of $0.3 million and $1.4 million related to the impairment of other assets that were held for sale. The net expense of $1.8 million for the nine months ended September 30, 2018 is included within asset impairments and (gain) loss on assets held for sale, net on our Statement of Operations.

The sale of our South Texas Properties did not impact our ability to operate our Fabrication Division. Further, the sale of our South Texas Properties, and the Fabrication AHFS, did not qualify for discontinued operations presentation as we continue to operate our Fabrication Division at our fabrication yard in Houma, Louisiana.

Shipyard Division Assets Held for Sale

At September 30, 2019, our Shipyard Division had $0.6 million of assets held for sale ("Shipyard AHFS"), which consists of a 2,500-ton drydock located at our shipyard in Houma, Louisiana. The carrying value reflects an impairment of $0.3 million recorded during the three and nine months ended September 30, 2019, as we sold the drydock in October 2019 for net proceeds of $0.6 million, which was $0.3 million less than its carrying value. The Shipyard AHFS did not qualify for discontinued operations presentation.

4. CREDIT FACILITIES
Credit Agreement

We have a $40.0 million revolving credit facility with Hancock Whitney Bank ("Credit Agreement") that can be used for borrowings or letters of credit. On May 1, 2019, we amended our Credit Agreement to extend its maturity date to June 9, 2021 and amend certain financial covenants. Our amended quarterly financial covenants for the remaining term of the Credit Agreement are as follows:

Ratio of current assets to current liabilities of not less than 2.00:1.00;
Minimum tangible net worth of at least the sum of $170.0 million, plus 100% of the net proceeds from any issuance of stock or other equity after deducting any fees, commissions, expenses and other costs incurred in such offering; and
Ratio of funded debt (which includes outstanding letters of credit) to tangible net worth of not more than 0.50:1.00.

Our Credit Agreement also includes restrictions regarding our ability to: (i) grant liens; (ii) make certain loans or investments; (iii) incur additional indebtedness or guarantee other indebtedness in excess of specified levels; (iv) make any material change to the nature of our business or undergo a fundamental change; (v) make any material dispositions; (vi) acquire another company or all or substantially all of its assets; (vii) enter into a merger, consolidation, or sale leaseback transaction; or (viii) declare and pay dividends if any potential default or event of default occurs.

Interest on borrowings under the Credit Agreement may be designated, at our option, as either the Wall Street Journal published Prime Rate (5.0% at September 30, 2019) or LIBOR (2.0% at September 30, 2019) plus 2.0% per annum. Commitment fees on the unused portion of the Credit Agreement are 0.4% per annum, and interest on outstanding letters of credit is 2.0% per annum. The Credit Agreement is secured by substantially all our assets (with a negative pledge on our real property).

At September 30, 2019, we had no outstanding borrowings under our Credit Agreement and $10.4 million of outstanding letters of credit, providing $29.6 million of available capacity. At September 30, 2019, we were in compliance with all of our financial covenants, with a tangible net worth of $185.2 million (as defined by the Credit Agreement), a ratio of current assets to current liabilities of 2.11:1.00, and a ratio of funded debt to tangible net worth of 0.06:1.00.

Surety Bonds

We issue surety bonds in the ordinary course of business to support our projects. At September 30, 2019, we had $409.3 million of outstanding surety bonds.


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5. COMMITMENTS AND CONTINGENCIES

We are subject to various routine legal proceedings in the normal conduct of business, primarily involving commercial disputes and claims, workers’ compensation claims, and claims for personal injury under general maritime laws of the U.S. and the Jones Act. While the outcome of these lawsuits, legal proceedings and claims cannot be predicted with certainty, we believe that the outcome of any such proceedings, even if determined adversely, would not have a material adverse effect on our financial position, results of operations or cash flows.

MPSV Termination Letter

During the first quarter 2018, we received notices of termination of the contracts for the construction of two MPSVs from one of our Shipyard Division customers.  We dispute the purported terminations and disagree with the customer’s reasons for such terminations. Pending the resolution of the dispute, we have ceased all work and the partially completed vessels and associated equipment and materials remain at our shipyard in Houma, Louisiana. The customer also made claims under the bonds issued by the Surety in connection with the construction of the vessels.  We have discussed with the Surety our disagreement with the customer’s purported terminations and its claims and continue to confer with the Surety regarding the dispute with the customer.

On October 2, 2018, we filed a lawsuit against the customer to enforce our rights and remedies under the applicable construction contracts. Our lawsuit disputes the propriety of the customer’s purported terminations of the construction contracts and seeks to recover damages associated with the customer’s actions. The customer filed its response to our lawsuit denying many of the allegations in the lawsuit and asserting a counterclaim against us seeking, among other things, declaratory judgment as to the validity of the customer's purported terminations of the construction contracts and other purported claims for which the customer is seeking damages in an unspecified amount. We filed a response to the counterclaim denying all of the customer's claims. The customer subsequently filed a motion with the court seeking, among other things, to obtain possession of the vessels. A hearing on that motion was held on May 28, 2019, and the customer's request to obtain possession of the vessels was denied by the court. The customer recently filed an amendment to its counterclaim to add claims by the customer against the Surety.  The customer also recently filed a second motion for summary judgment re-urging its previously denied request to obtain possession of the vessels.  A hearing on the second motion is currently scheduled for November 5, 2019.  Discovery in connection with the lawsuit is underway.

We are unable to determine the probability of a favorable or unfavorable outcome with respect to the dispute or estimate the amount of potential loss, if any, related to this matter. We can provide no assurances that we will not incur additional costs as we pursue our rights and remedies under the contracts and defend against the customer's claims. At September 30, 2019 and December 31, 2018, other noncurrent assets on our Balance Sheet included a net contract asset of $12.5 million, which consisted of our contract asset, accrued contract losses, and deferred revenue balances at the time of the customer's purported termination of the contracts.

Insurance

We may be exposed to future losses through our use of deductibles and self-insured retentions for our exposures related to third party liability and workers' compensation. We expect liabilities in excess of any deductibles and self-insured retentions to be covered by insurance. To the extent we are self-insured, reserves are recorded based upon our estimates, with input from legal and insurance advisors. Changes in assumptions, as well as changes in actual experience, could cause these estimates to change.

Letters of Credit and Surety Bonds
We obtain letters of credit under our Credit Agreement or surety bonds from financial institutions to provide to our customers in order to secure advance payments or guarantee performance under our contracts, or in lieu of retention being withheld on our contracts. With respect to a letter of credit under our Credit Agreement, any advance payment in the event of non-performance under a contract would become a borrowing under our Credit Agreement and thus a direct obligation. With respect to a surety bond, any advance payment in the event of non-performance is subject to indemnification of the Surety by us, which may require us to borrow under our Credit Agreement. When a contract is complete, the contingent obligation terminates, and letters of credit or surety bonds are returned. See Note 4 for further discussion of our Credit Agreement and surety bonds.

Leases
Our significant operating leases include our corporate office in Houston, Texas and our shipyard facilities in Lake Charles and Jennings, Louisiana. Our corporate office lease expires in 2025 and our Lake Charles and Jennings leases include renewal options that allow us to extend the lease terms through 2038 and 2045, respectively. We are reasonably certain we will exercise

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the renewal options and have therefore included the optional renewal periods in our expected lease terms and the measurement of our operating lease assets and liabilities. The table below sets forth the approximate future lease payments related to our operating leases with initial terms of more than one year (in thousands):
Period
 
Payments
Remainder of 2019
 
$
163

2020
 
659

2021
 
668

2022
 
677

2023
 
676

Thereafter
 
6,173

Total lease payments
 
9,016

Less interest
 
(3,989
)
Present value of lease liabilities
 
$
5,027


The discount rate used to determine the present value of our lease liabilities was based on the interest rate on our Credit Agreement adjusted for terms similar to that of our leased properties.  At September 30, 2019, our weighted-average remaining lease term was approximately 15.8 years and the weighted-average discount rate used to derive our lease liability was 7.5%. Cash paid for lease liabilities for the three and nine months ended September 30, 2019 was $0.2 million and $0.5 million, respectively.

Environmental Matters
Our operations are subject to extensive and changing U.S. federal, state and local laws and regulations, as well as the laws of other countries, that establish health and environmental quality standards. These standards, among others, relate to air and water pollutants and the management and disposal of hazardous substances and wastes. We are exposed to potential liability for personal injury or property damage caused by any release, spill, exposure or other accident involving such pollutants, substances or wastes. In connection with the historical operation of our facilities, including those associated with acquired operations, substances which currently are or might be considered hazardous were used or disposed of at some sites that will or may require us to make expenditures for remediation. We believe we are in compliance, in all material respects, with environmental laws and regulations and maintain insurance coverage to mitigate exposure to environmental liabilities. We do not believe any environmental matters will have a material adverse effect on our financial condition, results of operations or cash flow.

6. INCOME (LOSS) PER COMMON SHARE
The following table presents the computation of basic and diluted income (loss) per share for the three and nine months ended September 30, 2019 and 2018 (in thousands, except for per share amounts):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
Net loss attributable to common shareholders
$
(6,779
)
 
$
(10,949
)
 
$
(15,069
)
 
$
(15,696
)
Weighted-average shares (1)
15,254

 
15,044

 
15,214

 
15,017

Basic and diluted loss per common share
$
(0.44
)
 
$
(0.73
)
 
$
(0.99
)
 
$
(1.05
)
______________
(1) We have no dilutive securities.

7. SEGMENT DISCLOSURES

During 2018, we operated and managed our business through four operating divisions ("Fabrication", "Shipyard", "Services" and "EPC") and one non-operating division ("Corporate"), which represented our reportable segments. During the first quarter 2019, our EPC Division was operationally combined with our Fabrication Division. Our EPC Division was previously created to support the pursuit of a specific EPC project and other projects that require project management of EPC activities. Our operational combination of the EPC Division with the Fabrication Division is the result of our reduced emphasis on EPC project management opportunities and greater focus on modular fabrication and offshore wind opportunities. As a result of the aforementioned, we currently operate and manage our business through three operating divisions ("Fabrication", "Shipyard" and "Services") and one non-operating division ("Corporate"), which represent our current reportable segments. The segment results for the EPC Division for the three and nine months ended September 30, 2018 were combined with the Fabrication Division to conform to the

- 16 -


presentations of our reportable segments for the 2019 periods. We believe that our operating divisions meet the criteria of reportable segments under GAAP. Our three operating divisions and Corporate Division are discussed below:
Fabrication Division - Our Fabrication Division fabricates modules for petrochemical and industrial facilities, foundations for alternative energy developments and other complex structures. Our Fabrication Division also fabricates offshore drilling and production platforms and other offshore structures for customers in the oil and gas industry, including jackets and deck sections of fixed production platforms, hull and/or deck sections of floating production platforms (such as TLPs, SPARs, FPSOs), piles, wellhead protectors, subsea templates, and various production, compressor, and utility modules along with pressure vessels. In addition, our Fabrication Division supports our efforts to pursue offshore wind opportunities and other projects that require project management of EPC activities. These activities are performed at our fabrication yard in Houma, Louisiana.

Shipyard Division - Our Shipyard Division fabricates newbuild vessels, including OSVs, MPSVs, research vessels, tugboats, salvage vessels, towboats, barges, drydocks, anchor handling vessels, lift boats and other marine vessels. Our Shipyard Division also performs marine repair activities, including steel repair, blasting and painting services, electrical systems repair, machinery and piping system repairs, and propeller, shaft, and rudder reconditioning. In addition, our Shipyard Division performs conversion projects that consist of lengthening vessels, modifying vessels to permit their use for a different type of activity, and other modifications to enhance the capacity or functionality of a vessel. These activities are performed at our shipyards in Houma, Jennings and Lake Charles, Louisiana.

Services Division - Our Services Division provides interconnect piping and related services on offshore platforms and inland structures. Interconnect piping services involve sending employee crews to offshore platforms in the GOM to perform welding and other activities required to connect production equipment, service modules and other equipment on a platform. Our Services Division also contracts with oil and gas companies that have platforms and other structures located in the inland lakes and bays throughout the southeastern U.S. for various on-site construction and maintenance activities. In addition, our Services Division fabricates packaged skid units and performs various municipal and drainage projects, such as pump stations, levee reinforcement, bulkheads and other public works projects for state and local governments. These services are performed at customer facilities or at our services yard in Houma, Louisiana.

Corporate Division - Our Corporate Division represents costs that do not directly relate to our three operating divisions. Such costs include, but are not limited to, executive management and directors' fees, clerical and administrative salaries, costs of maintaining our corporate office and costs associated with overall governance and being a publicly traded company. Costs incurred by our Corporate Division on behalf of our operating divisions are allocated to the operating divisions. Such costs include, but are not limited to, costs related to human resources, insurance, sales and marketing, information technology and accounting.

We generally evaluate the performance of, and allocate resources to, our operating divisions based upon revenue, gross profit (loss) and operating income (loss). Division assets are comprised of all assets attributable to each division. Intersegment revenues are priced at the estimated fair value of work performed. Summarized financial information for our segments as of and for the three and nine months ended September 30, 2019 and 2018, is as follows (in thousands):
 
Three Months Ended September 30, 2019
 
Fabrication
 
Shipyard
 
Services
 
Corporate
 
Consolidated
Revenue
$
19,474

 
$
39,436

 
$
17,507

 
$
(615
)
 
$
75,802

Gross profit (loss)
(428
)
 
(2,402
)
 
210

 
(65
)
 
(2,685
)
Operating loss
(848
)
 
(3,349
)
 
(407
)
 
(2,324
)
 
(6,928
)
Depreciation and amortization expense
840

 
992

 
362

 
96

 
2,290

Capital expenditures
137

 
326

 
168

 

 
631

Total assets (1)
63,098

 
109,129

 
28,604

 
76,334

 
277,165


- 17 -


 
Three Months Ended September 30, 2018
 
Fabrication
 
Shipyard
 
Services
 
Corporate
 
Consolidated
Revenue
$
3,382

 
$
24,492

 
$
22,617

 
$
(779
)
 
$
49,712

Gross profit (loss)
(4,237
)
 
(1,764
)
 
3,191

 
(402
)
 
(3,212
)
Operating income (loss)
(8,277
)
 
(2,454
)
 
2,482

 
(2,495
)
 
(10,744
)
Depreciation and amortization expense
1,023

 
1,050

 
365

 
42

 
2,480

Capital expenditures
142

 
783

 
545

 
1

 
1,471

Total assets (1)
85,780

 
86,162

 
32,427

 
58,595

 
262,964

 
Nine Months Ended September 30, 2019
 
Fabrication
 
Shipyard
 
Services
 
Corporate
 
Consolidated
Revenue
$
54,520

 
$
113,590

 
$
61,174

 
$
(5,421
)
 
$
223,863

Gross profit (loss)
(1,877
)
 
(5,594
)
 
4,088

 
(347
)
 
(3,730
)
Operating income (loss)
(3,599
)
 
(7,817
)
 
2,610

 
(6,788
)
 
(15,594
)
Depreciation and amortization expense
2,698

 
3,148

 
1,099

 
319

 
7,264

Capital expenditures
282

 
1,060

 
648

 

 
1,990

Total assets (1)
63,098

 
109,129

 
28,604

 
76,334

 
277,165

 
Nine Months Ended September 30, 2018
 
Fabrication
 
Shipyard
 
Services
 
Corporate
 
Consolidated
Revenue
$
30,197

 
$
66,677

 
$
66,692

 
$
(2,550
)
 
$
161,016

Gross profit (loss)
(5,888
)
 
(5,563
)
 
9,390

 
(1,171
)
 
(3,232
)
Operating income (loss)
(6,572
)
 
(7,810
)
 
7,223

 
(7,952
)
 
(15,111
)
Depreciation and amortization expense
3,219

 
3,170

 
1,141

 
258

 
7,788

Capital expenditures
142

 
1,442

 
708

 
70

 
2,362

Total assets (1)
85,780

 
86,162

 
32,427

 
58,595

 
262,964

____________
(1)
Cash and short-term investments are reported within our Corporate Division. Total assets previously reported for 2018 have been recast to conform to our presentation for 2019.


- 18 -


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following “Management’s Discussion and Analysis of Financial Condition and Results of Operations” is provided to assist readers in understanding our financial performance during the periods presented and significant trends that may impact our future performance. This discussion should be read in conjunction with our Financial Statements and the related notes thereto.

Cautionary Statement on Forward-Looking Information
This Report contains forward-looking statements in which we discuss our potential future performance. Forward-looking statements, within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995, are all statements other than statements of historical facts, such as projections or expectations relating to oil and gas prices, operating cash flows, capital expenditures, liquidity and tax rates. The words “anticipates,” “may,” “can,” “plans,” “believes,” “estimates,” “expects,” “projects,” “targets,” “intends,” “likely,” “will,” “should,” “to be,” “potential” and any similar expressions are intended to identify those assertions as forward-looking statements.
We caution readers that forward-looking statements are not guarantees of future performance and actual results may differ materially from those anticipated, projected or assumed in the forward-looking statements. Important factors that can cause our actual results to differ materially from those anticipated in the forward-looking statements include the cyclical nature of the oil and gas industry, competition, consolidation of our customers, timing and award of new contracts, reliance on significant customers, financial ability and credit worthiness of our customers, nature of our contract terms, competitive pricing and cost overruns on our projects, adjustments to previously reported profits or losses under the percentage-of-completion method, weather conditions, changes in backlog estimates, suspension or termination of projects, ability to raise additional capital, ability to amend or obtain new debt financing or credit facilities on favorable terms, ability to remain in compliance with our covenants contained in our Credit Agreement, ability to generate sufficient cash flow, ability to sell certain assets, customer or subcontractor disputes, ability to resolve the dispute with a customer relating to the purported termination of contracts to build two MPSVs, operating dangers and limits on insurance coverage, barriers to entry into new lines of business, ability to employ skilled workers, loss of key personnel, performance of subcontractors and dependence on suppliers, changes in trade policies of the U.S. and other countries, compliance with regulatory and environmental laws, lack of navigability of canals and rivers, shutdowns of the U.S. government, systems and information technology interruption or failure and data security breaches, performance of partners in our joint ventures and other strategic alliances, and other factors described in Item 1A "Risk Factors" in our 2018 Annual Report as may be updated by subsequent filings with the SEC.
Investors are cautioned that many of the assumptions upon which our forward-looking statements are based are likely to change after the forward-looking statements are made, which we cannot control. Further, we may make changes to our business plans that could affect our results. We caution investors that we do not intend to update forward-looking statements more frequently than quarterly notwithstanding any changes in our assumptions, changes in business plans, actual experience or other changes, and we undertake no obligation to update any forward-looking statements.


- 19 -


Overview

Certain terms are defined in the “Glossary of Terms” beginning on page ii.

We are a leading fabricator of complex steel structures, modules and marine vessels used in energy extraction and production, petrochemical and industrial facilities, power generation, alternative energy and shipping and marine transportation operations. We also provide project management, hookup, commissioning, repair, maintenance and civil construction services. Our customers include United States ("U.S.") and, to a lesser extent, international energy producers; petrochemical, industrial, power, and marine operators; EPC companies; and agencies of the U.S. Government.

We operate and manage our business through three operating divisions ("Fabrication", "Shipyard" and "Services") and one non-operating division ("Corporate"), which represent our reportable segments. During the first quarter 2019, our former EPC Division was operationally combined with our Fabrication Division, and accordingly, the segment results for the EPC Division for the three and nine months ended September 30, 2018 were combined with the Fabrication Division to conform to the presentation of our reportable segments for the 2019 period. See Note 7 of our Financial Statements for further discussion of our realigned operating divisions. Our corporate headquarters is located in Houston, Texas, with operating facilities located in Houma, Jennings and Lake Charles, Louisiana.

Beginning in late 2014, a severe and sustained decline in oil and gas prices led to a significant decline in oil and gas industry drilling activities and capital spending from our traditional offshore customer base. As a result, our operating results and cash flows were negatively impacted as we experienced reductions in revenue, lower margins due to competitive pricing and a significant underutilization of our facilities in our Fabrication and Shipyard Divisions. In addition, we incurred losses on certain projects in our Shipyard and Fabrication Divisions. As a result of these market changes and project losses, we implemented initiatives to preserve and improve our liquidity through cost reduction efforts and the sale of underutilized assets. Further, to reduce our Fabrication Division's reliance on offshore oil and gas construction and our Shipyard Division's reliance on marine vessel work related to the oil and gas sector, we began to strategically reposition the Company to participate in the fabrication of petrochemical and industrial facilities, pursue offshore wind opportunities and diversify our customer base within all our operating divisions. We have made significant progress in our efforts to reposition the Company, increase our backlog and improve and preserve our liquidity, including cost reductions (including reducing the compensation paid to our directors and executive officers) and the sale of underutilized assets. We are further focused on strengthening relationships with key customers and enhancing our proposal, estimating and operations resources, processes and procedures to improve our competitiveness and overall project execution.

Ongoing Effort to Divest of Underutilized Assets

Fabrication Assets Held for Sale - At September 30, 2019, our Fabrication Division had $17.9 million of assets held for sale ("Fabrication AHFS") which were initially expected to be sold with the South Texas Properties. These assets consist primarily of three 660-ton crawler cranes, a deck barge, two plate bending roll machines and panel line equipment. The Fabrication AHFS were relocated to our fabrication yard in Houma, Louisiana. See Note 3 of our Financial Statements for further discussion of our assets held for sale, including recent sales of underutilized assets.

Shipyard Assets Held for Sale - At September 30, 2019, our Shipyard Division had $0.6 million of assets held for sale, which consists of a 2,500-ton drydock. We sold the drydock in October 2019 for net proceeds of $0.6 million.

Ongoing Efforts to Increase Our Backlog, Diversify Our Customer Base and Resolve Customer Dispute

Pursuit of petrochemical and industrial fabrication work - We continue to focus our business development efforts on petrochemical and industrial fabrication opportunities in response to the depressed offshore fabrication market. Although our pursuit of certain large project opportunities has been negatively affected by the timing and delay of such opportunities and the competitive market environment, we have experienced success with several smaller project opportunities, and our volume of bidding activity for onshore modules and structures continues to be at its highest level since we commenced our initiative. In addition, during 2018 we completed the fabrication and timely delivery of four large modules for a new petrochemical facility in the U.S., providing increased confidence to our customers that we can successfully compete and execute in the onshore fabrication market.

Pursuit of offshore wind - We continue to believe that future requirements to provide electricity from renewable and green sources will result in growth of offshore wind projects. Further, we believe we possess the expertise and relationships to successfully participate in this growing market. During 2015, we fabricated wind turbine foundations for the first offshore wind power project in the U.S., and during 2018, we fabricated a meteorological tower and platform for an offshore wind project located off the U.S.

- 20 -


coast of Maryland. These projects demonstrate our ability to provide structures for this emerging industry. We are also strengthening our project management capabilities to support potential offshore wind projects and, during the first quarter 2019, executed a cooperation agreement with Smulders to jointly pursue U.S. offshore wind opportunities. Smulders, a Belgian company, is a major fabrication supplier of offshore wind structures in Europe. Although we believe such a relationship will help to strategically position us in our pursuit of offshore wind projects, we can provide no assurances that we will successfully obtain future project awards as a result of this arrangement.

Diversification and Growth of our Customer Base - We are continuing to diversify our customer base within our operating divisions.
Shipyard Division - Within our Shipyard Division we have increased our backlog with customers outside of the oil and gas sector. At September 30, 2019, projects in our backlog include:
The construction of three towing, salvage and rescue ships (individual project values of approximately $64.0 million), with customer options for five additional vessels;
The construction of three regional class research vessels (individual project values of approximately $69.0 to $77.0 million);
The construction of a seventy-vehicle ferry; and
The construction of five harbor tug vessels.
Fabrication Division - Within our Fabrication Division we have increased our backlog with traditional and non-traditional fabrication work as we continue to pursue petrochemical and industrial fabrication opportunities for modules and structures. At September 30, 2019, projects in our backlog include:
The fabrication of an offshore jacket and deck (destined for Trinidad);
The expansion and delivery of a 245-guest paddle wheel riverboat. The riverboat will be reconfigured using the existing hull of a former gaming vessel; and
The construction of two, forty-vehicle ferries.
These projects represent large steel structures that are well suited for our fabrication yard in Houma, Louisiana.
Services Division - Within our Services Division our activity has been impacted by the timing of new project awards and fluctuations in the demand for our products and services. Further, in recent periods we have experienced an increasing amount of lower margin maintenance work and material sales compared to services associated with offshore tie-backs and fabricated products, which have historically provided higher margin opportunities. We anticipate this recent mix of work will continue for the remainder of 2019. Although visibility beyond 2019 is uncertain, and fluctuations in the timing and mix of work are normal, we believe that the overall market demand for the products and services offered by this Division is strong. We are continuing to pursue opportunities for offshore and onshore plant expansion and maintenance work, and we are receiving indications from our customers that the need for offshore tie-backs and fabricated products is increasing.

MPSV Contracts Dispute - During the first quarter 2018, we received notices of termination of the contracts for the construction of two MPSVs from one of our Shipyard Division customers.  We dispute the purported terminations and disagree with the customer’s reasons for such terminations. Pending the resolution of the dispute, we have ceased all work, and the partially completed vessels and associated equipment and materials remain at our shipyard in Houma, Louisiana. The customer also made claims under the bonds issued by the Surety in connection with the construction of the vessels.  We have discussed with the Surety our disagreement with the customer’s purported terminations and its claims and continue to confer with the Surety regarding the dispute with the customer.

On October 2, 2018, we filed a lawsuit against the customer to enforce our rights and remedies under the applicable construction contracts. Our lawsuit disputes the propriety of the customer’s purported terminations of the construction contracts and seeks to recover damages associated with the customer’s actions. The customer filed its response to our lawsuit denying many of the allegations in the lawsuit and asserting a counterclaim against us seeking, among other things, declaratory judgment as to the validity of the customer's purported terminations of the construction contracts and other purported claims for which the customer is seeking damages in an unspecified amount. We filed a response to the counterclaim denying all of the customer's claims. The customer subsequently filed a motion with the court seeking, among other things, to obtain possession of the vessels. A hearing on that motion was held on May 28, 2019, and the customer's request to obtain possession of the vessels was denied by the court. The customer recently filed an amendment to its counterclaim to add claims by the customer against the Surety.  The customer also recently filed a second motion for summary judgment re-urging its previously denied request to obtain possession of the

- 21 -


vessels.  A hearing on the second motion is currently scheduled for November 5, 2019.  Discovery in connection with the lawsuit is underway.

We are unable to determine the probability of a favorable or unfavorable outcome with respect to the dispute or estimate the amount of potential loss, if any, related to this matter. We can provide no assurances that we will not incur additional costs as we pursue our rights and remedies under the contracts and defend against the customer’s claims. At September 30, 2019, other noncurrent assets on our Balance Sheet included a net contract asset of $12.5 million related to these projects. See "Legal Proceedings" in Part II, Item 1 of this Report and Note 5 of our Financial Statements for further discussion of our dispute.
 
Review of Alternative Strategies

On November 4, 2019, we announced the completion of our previously announced review of alternative strategies that began in early May 2019.

Operating Outlook

Our results of operations will be affected prospectively by the overall demand and market for our services. Further, our success in strategically repositioning the Company to participate in the fabrication of petrochemical and industrial facilities, pursue offshore wind opportunities and diversify our customer base within all of our operating divisions, will be determined by, among other things:

The level of construction and fabrication projects in the new markets we are pursuing for our Fabrication Division, including petrochemical and industrial facilities and offshore wind developments, and our ability to secure new project awards;
Continued growth within our Shipyard and Services Divisions;
Our ability to secure new project awards through competitive bidding and/or alliance and partnering arrangements;
Our ability to execute projects within our cost estimates and successfully manage them through completion; and
Our ability to resolve our dispute with our customer related to the construction of two MPSVs.

We continue to respond to the competitive environment within our industry and actively compete for additional opportunities. Our focus remains on maintaining our liquidity and securing meaningful new project awards and backlog in the near-term and generating operating income and cash flows from operations in the longer-term. Although we experienced a decline in backlog for our Fabrication and Shipyard Divisions during the third quarter 2019, we believe we will be successful securing new project awards and growing our backlog in the future. Further, we are experiencing significantly improved utilization of our Shipyard facilities as we ramp up construction activities for our large projects in backlog; however, we anticipate that our Fabrication Division will be negatively impacted in the near-term by the underutilization of its facilities due to the delay in timing of new project awards. Both divisions will also be impacted by lower margin backlog related to previous project awards bid at competitive pricing. In addition, certain projects within our backlog are in a loss position, and the projects will result in future revenue with no gross profit.

Safety

We are committed to the safety and health of our employees and subcontractors. We believe that a strong safety culture is a critical element of our success. We continue to improve and maintain a stringent safety assurance program designed to ensure the safety of our employees and allow us to remain in compliance with all applicable federal and state mandated safety regulations. We are committed to maintaining a well-trained workforce and providing timely instruction to ensure our employees have the knowledge and skills to perform their work safely while maintaining the highest standards of quality. We provide continuous safety education and training to employees and subcontractors to ensure they are ready for the challenges inherent in all our projects. Our employees commence training on their first day of employment with a comprehensive orientation class that addresses Company policies and procedures and provides clear expectations for working safely. We have a zero-tolerance policy for drugs and alcohol use in the workplace. We support this policy through the use of a comprehensive drug and alcohol screening program that includes initial screenings for all employees and periodic random screenings throughout employment. Additionally, we require our subcontractors to follow alcohol and drug screening policies substantially the same as ours.




- 22 -


Critical Accounting Policies
For a discussion of critical accounting policies and estimates used in the preparation of our Financial Statements, refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 included in our 2018 Annual Report. There have been no changes to our critical accounting policies since December 31, 2018.

New Project Awards and Backlog
New project awards represent expected revenue values of commitments received during a given period, including scope growth on existing commitments. A commitment represents authorization from our customer to begin work or purchase materials pursuant to a written agreement, letter of intent or other form of authorization. Backlog represents the unearned value of our new project awards and may differ from the value of remaining performance obligations for our contracts required to be disclosed under Topic 606 and presented in Note 2 of our Financial Statements. In general, a performance obligation is a contractual obligation to construct and/or transfer a distinct good or service to a customer. The transaction price of a contract is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. Backlog includes our performance obligations at September 30, 2019, plus signed contracts that are temporarily suspended or under protest that may not meet the criteria to be reported as future performance obligations under Topic 606 but represent future work that we believe will be performed. We believe that backlog, a non-GAAP financial measure, provides useful information to investors. New project awards and backlog may vary significantly each reporting period based on the timing of our major new contract commitments.

Projects in our backlog are generally subject to delay, suspension, termination, or an increase or reduction in scope at the option of the customer, although the customer is required to pay us for work performed and materials purchased through the date of termination, suspension, or reduction in scope. Depending on the size of the project, the delay, suspension, termination or increase or reduction in scope of any one contract could significantly impact our backlog and change the expected amount and timing of revenue recognized.

A reconciliation of our remaining performance obligations under Topic 606 (the most comparable GAAP measure as presented in Note 2 of our Financial Statements) to our reported backlog at September 30, 2019, is provided below (in thousands).
 
September 30, 2019
 
Fabrication
 
Shipyard
 
Services
 
Consolidated
Remaining performance obligations under Topic 606
$
39,894

 
$
384,852

 
$
15,189

 
$
439,935

Contracts under purported termination (1)

 
21,888

 

 
21,888

Total Backlog (2)
$
39,894


$
406,740

 
$
15,189

 
$
461,823

 
 
 
 
 
 
 
 


Backlog by Division at September 30, 2019 and December 31, 2018, is as follows (in thousands):

September 30, 2019

December 31, 2018
Division
Amount
 
Labor hours
 
Amount
 
Labor hours
Fabrication
$
39,894

 
253

 
$
63,883

 
369

Shipyard
406,740

 
2,364

 
281,531

 
1,684

Services
15,189

 
283

 
11,046

 
171

Total Backlog (2)
$
461,823

 
2,900

 
$
356,460

 
2,224



- 23 -


Backlog at September 30, 2019 is expected to be recognized as revenue in the following periods (in thousands, except for percentages):
Year (3)
 
Total
Remainder of 2019
 
$
79,028

2020
 
230,699

2021
 
122,068

Thereafter
 
8,140

Future performance obligations under Topic 606
 
439,935

Contracts under purported termination (1)
 
21,888

Backlog (2)
 
$
461,823

___________
(1)
Represents backlog within our Shipyard Division related to contracts for the construction of two MPSVs that are subject to a purported notice of termination by our customer. We dispute the purported termination and disagree with the customer’s reasons for the same. We can provide no assurances that we will reach a favorable resolution with the customer for completion of the two MPSVs. See Note 5 of our Financial Statements for further discussion of the dispute.
(2)
At September 30, 2019, nine customers represented approximately 95% of our backlog, and at December 31, 2018, seven customers represented approximately 90% of our backlog. At September 30, 2019, backlog from the nine customers consisted of:
(i)
Construction of two harbor tugs within our Shipyard Division. The third of five vessels was completed in the third quarter 2019. We estimate completion of the remaining vessels in 2020;
(ii)
Construction of three harbor tugs within our Shipyard Division (separate from above). The second of five vessels was completed in the second quarter 2019. We estimate completion of the remaining vessels in 2019 and 2020;
(iii)
Construction of three regional class research vessels within our Shipyard Division. We estimate completion of the vessels in 2021 and 2022;
(iv)
Construction of three towing, salvage and rescue ships within our Shipyard Division. We estimate completion of the vessels in 2021 and 2022. Our customer has options for the construction of five additional vessels;
(v)
Expansion of a 245-guest paddle wheel riverboat within our Fabrication Division. We estimate completion of the vessel in 2020;
(vi)
Construction of two, forty-vehicle ferries within our Fabrication Division. We estimate completion of the vessels in 2020;
(vii)
Fabrication of an offshore jacket and deck (destined for Trinidad) within our Fabrication Division. We estimate completion of the project in 2020;
(viii)
Construction of a seventy-vehicle ferry within our Shipyard Division. We estimate completion of the vessel in 2020; and
(ix)
Construction of two MPSV's within our Shipyard Division. See footnote 1 above for further discussion.
(3)
The timing of recognition of the revenue presented in our backlog is based on our current estimates to complete the projects. Certain factors and circumstances could cause changes in the amounts ultimately recognized and the timing of recognition of revenue from our backlog.
Our contracts for the construction of three towing, salvage and rescue ships contain options which grant our customer (the U.S. Navy) the right, if exercised, for the construction of additional vessels at contracted prices. We do not include options in our backlog. If all options under our current contracts were exercised by our customer, our backlog would increase by approximately $333.0 million. We have not received any commitments from our customer related to the exercise of these options, and we can provide no assurances that any options will be exercised. We believe disclosing these options provides investors with useful information to evaluate additional potential work that we would be contractually obligated to perform under our current contracts as well as the potential significance of these options, if exercised.
As our backlog increases, we will add personnel with critical project management and fabrication skills to ensure we have the resources necessary to properly execute our projects and support our project risk mitigation discipline for all projects. This may negatively impact near-term results.


- 24 -


Results of Operations
Comparison of Three Months Ended September 30, 2019 and 2018 (in thousands in each table, except for percentages):
In the comparative tables below, percentage changes that are not considered meaningful (generally when the prior period amount is immaterial or when the percentage change is significantly greater than 100%) are shown below as "nm" (not meaningful).

Consolidated
 
Three Months Ended 
 September 30,
 
Favorable (Unfavorable) Change
 
2019
 
2018
 
Amount
 
Percent
Revenue
$
75,802

 
$
49,712

 
$
26,090

 
52.5%
Cost of revenue
78,487

 
52,924

 
(25,563
)
 
(48.3)%
Gross loss
(2,685
)
 
(3,212
)
 
527

 
16.4%
Gross loss percentage
(3.5
)%
 
(6.5
)%
 
 
 
 
General and administrative expense
3,970

 
4,902

 
932

 
19.0%
Asset impairments and (gain) loss on assets held for sale, net
324

 
146

 
(178
)
 
(121.9)%
Other (income) expense, net
(51
)
 
2,484

 
2,535

 
nm
Operating loss
(6,928
)
 
(10,744
)
 
3,816

 
35.5%
Interest (expense) income, net
139

 
72

 
67

 
93.1%
Net loss before income taxes
(6,789
)
 
(10,672
)
 
3,883

 
36.4%
Income tax (expense) benefit
10

 
(277
)
 
287

 
nm
Net loss
$
(6,779
)
 
$
(10,949
)
 
$
4,170

 
38.1%

Revenue - Revenue for 2019 and 2018 was $75.8 million and $49.7 million, respectively, representing an increase of 52.5%. The increase was primarily due to:

Increased revenue for our Shipyard Division of $14.9 million, primarily due to progress on our regional class research vessel projects and towing, salvage and rescue ship projects, offset partially by lower revenue for our harbor tug projects and ice-breaker tug project; and
Increased revenue for our Fabrication Division of $16.1 million, primarily due to progress on our paddle wheel riverboat project, vehicle ferry projects and offshore jacket and deck project, which were not under construction in the prior period; offset partially by,
Decreased revenue for our Services Division of $5.1 million, primarily due to the timing of new project awards and materials representing a lower percentage of revenue.

Gross loss - Gross loss for 2019 and 2018 was $2.7 million (3.5% of revenue) and $3.2 million (6.5% of revenue), respectively. The gross loss for 2019 was primarily due to:

Under recovery of overhead costs (primarily associated with the underutilization of our facilities within our Fabrication Division, and to a lesser extent within our Shipyard Division), including a $0.4 million impact due to Hurricane Barry associated with the costs of hurricane preparation and its impact on the utilization of our facilities and personnel;
Charge of $1.9 million related to forecast cost increases and liquidated damages on our harbor tug projects in our Shipyard Division (see Note 2 of our Financial Statements for further discussion of the changes in estimates on these projects);
Charge of $1.5 million related to forecast cost increases and liquidated damages on a subsea components fabrication project in our Services Division (see Note 2 of our Financial Statements for further discussion of the changes in estimates on this project); and
Charge of $0.5 million related to forecast cost increases on our ice-breaker tug project in our Shipyard Division (see Note 2 of our Financial Statements for further discussion of the changes in estimates on this project).


- 25 -


The decrease in gross loss for 2019 relative to the prior period was primarily due to:

Higher revenue and increased recoveries of overhead costs due to higher activity; and
A higher margin project mix for our Shipyard Division (excluding the aforementioned project charges); offset partially by,
The aforementioned project charges of $3.9 million for 2019; and
A lower margin project mix for our Services Division (excluding the aforementioned project charge).

General and administrative expense - General and administrative expense for 2019 and 2018 was $4.0 million (5.2% of revenue) and $4.9 million (9.9% of revenue), respectively, representing a decrease of 19.0%. The decrease was primarily due to:

Lower incentive plan costs, board of director compensation costs, and legal and advisory fees related to customer disputes; offset partially by,
Higher professional fees and other costs associated with the evaluation of strategic alternatives and initiatives to diversify and enhance our business.

The customer disputes relate primarily to the pursuit of claims against a customer for disputed change orders for a completed project, and our MPSV projects which are subject to a purported termination and for which construction has been suspended. Legal and advisory fees related to such disputes totaled $0.3 million and $0.6 million for 2019 and 2018, respectively.

Asset impairments and (gain) loss on assets held for sale, net - Asset impairments and (gain) loss on assets held for sale, net for 2019 and 2018 was a loss of $0.3 million and $0.1 million, respectively. The loss for 2019 was primarily due to the impairment of a drydock held for sale in our Shipyard Division as we sold the drydock for net proceeds of $0.6 million in October 2019, which was $0.3 million less than its carrying value. See Note 3 of our Financial Statements for further discussion of our assets held for sale.

Other (income) expense, net - Other (income) expense, net for 2019 and 2018 was income of $0.1 million and expense of $2.5 million, respectively. Other (income) expense, net generally represents (recoveries) provisions for bad debts, (gains) losses associated with the sale or disposition of property and equipment other than assets held for sale, and (income) expense associated with certain nonrecurring items. The expense for 2018 was primarily due to bad debt expense of $2.8 million related to a contracts receivable reserve recorded during the quarter within our Fabrication Division as we received indications that collectibility of the receivable was no longer probable, offset partially by net gains on the sales of equipment. The reserved receivable was ultimately collected in the fourth quarter 2018.

Interest (expense) income, net - Interest (expense) income, net for 2019 and 2018, was income of $0.1 million and $0.1 million, respectively. The net interest income for 2019 was primarily due to interest earned on our cash and short-term investment balances, offset partially by interest amortization associated with our long-term lease liability. The net interest income for 2018 was primarily due to interest earned on our cash and short-term investment balances.

Income tax (expense) benefit - Income tax (expense) benefit for 2019 and 2018 was a benefit of $10,000 and expense of $0.3 million, respectively. Income tax (expense) benefit represents state income taxes. No federal tax benefit was recorded for losses during 2019 or 2018 as a full valuation allowance was recorded against our deferred tax assets generated during the periods.


- 26 -


Operating Segments

Fabrication Division(1) 
 
Three Months Ended 
 September 30,
 
Favorable (Unfavorable) Change
 
2019
 
2018
 
Amount
 
Percent
Revenue
$
19,474

 
$
3,382

 
$
16,092

 
475.8%
Gross loss
(428
)
 
(4,237
)
 
3,809

 
89.9%
Gross loss percentage
(2.2
)%
 
(125.3
)%
 
 
 

General and administrative expense
440

 
1,409

 
969

 
68.8%
Asset impairments and (gain) loss on assets held for sale, net

 
146

 
146

 
100.0%
Other (income) expense, net
(20
)
 
2,485

 
2,505

 
100.8%
Operating loss
(848
)
 
(8,277
)
 
7,429

 
89.8%
___________
(1)
During the first quarter 2019, our former EPC Division was operationally combined with our Fabrication Division. Accordingly, results for our former EPC Division for the 2018 period have been combined with the Fabrication Division to conform to the presentation of our reportable segments for the 2019 period. See Note 7 of our Financial Statements for further discussion of our realigned operating divisions and related financial information.

Revenue - Revenue for 2019 and 2018 was $19.5 million and $3.4 million, respectively, representing an increase of 475.8%. The increase was primarily due to progress on our paddle wheel riverboat project, vehicle ferry projects and jacket and deck project, which were not under construction in the prior period.

Gross loss - Gross loss for 2019 and 2018 was $0.4 million (2.2% of revenue) and $4.2 million (125.3% of revenue), respectively. The gross loss for 2019 was primarily due to the under recovery of overhead costs. The decrease in gross loss for 2019 relative to the prior period was primarily due to higher revenue and increased recoveries of overhead costs due to higher activity.

General and administrative expense - General and administrative expense for 2019 and 2018 was $0.4 million (2.3% of revenue) and $1.4 million (41.7% of revenue), respectively, representing a decrease of 68.8%. The decrease was primarily due to lower costs associated with our former EPC Division and lower legal and advisory fees related to a customer dispute as the costs are reflected within the Corporate Division in 2019.

Asset impairments and (gain) loss on assets held for sale, net - Asset impairments and (gain) loss on assets held for sale, net for 2018 was a loss of $0.1 million.

Other (income) expense, net - Other (income) expense, net for 2019 and 2018 was income of $20,000 and expense of $2.5 million, respectively. The expense for 2018 was primarily due to bad debt expense of $2.8 million related to a contracts receivable reserve recorded during the quarter as we received indications that collectibility of the receivable was no longer probable, offset partially by net gains on the sales of equipment. The reserved receivable was ultimately collected in the fourth quarter 2018.


- 27 -


Shipyard
 
Three Months Ended 
 September 30,
 
Favorable (Unfavorable) Change
 
2019
 
2018
 
Amount
 
Percent
Revenue
$
39,436

 
$
24,492

 
$
14,944

 
61.0%
Gross loss
(2,402
)
 
(1,764
)
 
(638
)
 
(36.2)%
Gross loss percentage
(6.1
)%
 
(7.2
)%
 
 
 

General and administrative expense
657

 
696

 
39

 
5.6%
Asset impairments and (gain) loss on assets held for sale, net
324

 

 
(324
)
 
nm
Other (income) expense, net
(34
)
 
(6
)
 
28

 
nm
Operating loss
(3,349
)
 
(2,454
)
 
(895
)
 
(36.5)%

Revenue - Revenue for 2019 and 2018 was $39.4 million and $24.5 million, respectively, representing an increase of 61.0%. The increase was primarily due to:

Progress on our regional class research vessel projects and towing, salvage and rescue ship projects; offset partially by,
Lower revenue for our harbor tug projects and ice-breaker tug project.

Gross loss - Gross loss for 2019 and 2018 was $2.4 million (6.1% of revenue) and $1.8 million (7.2% of revenue), respectively. The gross loss for 2019 was primarily due to:

Charge of $1.9 million related to forecast cost increases and liquidated damages on our harbor tug projects (see Note 2 of our Financial Statements for further discussion of the changes in estimates on these projects);
Charge of $0.5 million related to forecast cost increases on our ice-breaker tug project (see Note 2 of our Financial Statements for further discussion of the changes in estimates on this project); and
Under recovery of overhead costs.

The increase in gross loss for 2019 relative to the prior period was primarily due to:

The aforementioned project charges of $2.4 million for 2019; offset partially by,
Higher revenue and increased recoveries of overhead costs due to higher activity; and
A higher margin project mix (excluding the aforementioned project charges).

General and administrative expense - General and administrative expense for 2019 and 2018 was $0.7 million (1.7% of revenue) and $0.7 million (2.8% of revenue), respectively, representing a decrease of 5.6%. The decrease was primarily due to lower legal and advisory fees related to a customer dispute as the costs are reflected within the Corporate Division in 2019.

Asset impairments and (gain) loss on assets held for sale, net - Asset impairments and (gain) loss on assets held for sale, net for 2019 was a loss of $0.3 million. The loss for 2019 was primarily due to the impairment of a drydock held for sale as we sold the drydock for net proceeds of $0.6 million in October 2019, which was $0.3 million less than its carrying value.


- 28 -


Services
 
Three Months Ended 
 September 30,
 
Favorable (Unfavorable) Change
 
2019
 
2018
 
Amount
 
Percent
Revenue
$
17,507

 
$
22,617

 
$
(5,110
)
 
(22.6)%
Gross profit
210

 
3,191

 
(2,981
)
 
(93.4)%
Gross profit percentage
1.2
%
 
14.1
%
 
 
 

General and administrative expense
614

 
705

 
91

 
12.9%
Other (income) expense, net
3

 
4

 
1

 
nm
Operating income (loss)
(407
)
 
2,482

 
(2,889
)
 
(116.4)%

Revenue - Revenue for 2019 and 2018 was $17.5 million and $22.6 million, respectively, representing a decrease of 22.6%. The decrease was primarily due to the timing of new project awards and materials representing a lower percentage of revenue.

Gross profit - Gross profit for 2019 and 2018 was $0.2 million (1.2% of revenue) and $3.2 million (14.1% of revenue), respectively. Gross profit for 2019 was impacted by a charge of $1.5 million related to forecast cost increases and liquidated damages on a subsea components fabrication project (see Note 2 of our Financial Statements for further discussion of the changes in estimates on this project). The 2019 period was also impacted by $0.2 million due to Hurricane Barry associated with the costs of hurricane preparation and its impact on the utilization of our facilities and personnel.

The decrease in gross profit for 2019 relative to the prior period was primarily due to the aforementioned project charge, lower revenue and a lower margin project mix (excluding the project charge).

General and administrative expense - General and administrative expense for 2019 and 2018 was $0.6 million (3.5% of revenue) and $0.7 million (3.1% of revenue), respectively, representing a decrease of 12.9%. The decrease was primarily due to lower incentive plan costs other cost reductions.

Corporate
 
Three Months Ended 
 September 30,
 
Favorable (Unfavorable) Change
 
2019
 
2018
 
Amount
 
Percent
Revenue (eliminations)
$
(615
)
 
$
(779
)
 
$
164

 
nm
Gross loss
(65
)
 
(402
)
 
337

 
83.8%
Gross loss percentage
n/a

 
n/a

 
 
 
 
General and administrative expense
2,259

 
2,092

 
(167
)
 
(8.0)%
Other (income) expense, net

 
1

 
1

 
100.0%
Operating loss
(2,324
)
 
(2,495
)
 
171

 
6.9%

Gross loss - Gross loss for 2019 and 2018 was $0.1 million and $0.4 million, respectively. The decrease was primarily due to lower costs related to supporting our former EPC Division.

General and administrative expense - General and administrative expense for 2019 and 2018 was $2.3 million (3.0% of consolidated revenue) and $2.1 million (4.2% of consolidated revenue), respectively, representing an increase of 8.0%. The increase was primarily due to:

Increased legal and advisory fees related to customer disputes as the costs were reflected within the operating divisions in 2018; and
Higher professional fees and other costs associated with the evaluation of strategic alternatives and initiatives to diversify and enhance our business; offset partially by,
Lower incentive plan costs and board of director compensation costs.
    

- 29 -


The customer disputes relate primarily to the pursuit of claims against a customer for disputed change orders for a completed project, and our MPSV projects which are subject to a purported termination and for which construction has been suspended.

Comparison of Nine Months Ended September 30, 2019 and 2018 (in thousands for each table, except for percentages):
In the comparative tables below, percentage changes that are not considered meaningful (generally when the prior period amount is immaterial or when the percentage change is significantly greater than 100%) are shown below as "nm" (not meaningful).

Consolidated
 
Nine Months Ended
September 30,
 
Favorable (Unfavorable) Change
 
2019
 
2018
 
Amount
 
Percent
Revenue
$
223,863

 
$
161,016

 
$
62,847

 
39.0%
Cost of revenue
227,593

 
164,248

 
(63,345
)
 
(38.6)%
Gross loss
(3,730
)
 
(3,232
)
 
(498
)
 
(15.4)%
Gross loss percentage
(1.7
)%
 
(2.0
)%
 
 
 
 
General and administrative expense
11,791

 
14,703

 
2,912

 
19.8%
Asset impairments and (gain) loss on assets held for sale, net
254

 
(5,683
)
 
(5,937
)
 
(104.5)%
Other (income) expense, net
(181
)
 
2,859

 
3,040

 
nm
Operating loss
(15,594
)
 
(15,111
)
 
(483
)
 
(3.2)%
Interest (expense) income, net
527

 
(166
)
 
693

 
nm
Net loss before income taxes
(15,067
)
 
(15,277
)
 
210

 
1.4%
Income tax (expense) benefit
(2
)

(419
)
 
417

 
nm
Net loss
$
(15,069
)
 
$
(15,696
)
 
$
627

 
4.0%

Revenue - Revenue for 2019 and 2018 was $223.9 million and $161.0 million, respectively, representing an increase of 39.0%. The increase was primarily due to:

Increased revenue for our Shipyard Division of $46.9 million, primarily due to progress on our regional class research vessel projects and towing, salvage and rescue ship projects, offset partially by lower revenue for our harbor tug projects and the prior period including revenue on our two MPSV contracts which were suspended during the first quarter 2018 (See Note 5 of our Financial Statements for further discussion of our MPSV contracts); and
Increased revenue for our Fabrication Division of $24.3 million, primarily due to progress on our paddle wheel riverboat project, vehicle ferry projects and jacket and deck project, which were not under construction in the prior period, offset partially by the prior period including revenue associated with the fabrication of modules for a petrochemical facility which was completed during the second quarter 2018; offset partially by,
Decreased revenue for our Services Division of $5.5 million due to the timing of new project awards.

Gross loss - Gross loss for 2019 and 2018 was $3.7 million (1.7% of revenue) and $3.2 million (2.0% of revenue), respectively. The gross loss for 2019 was primarily due to:

Under recovery of overhead costs (primarily associated with the underutilization of our facilities within our Fabrication Division, and to a lesser extent within our Shipyard Division);
Holding costs of $1.0 million related to the two MPSV vessels which remain in our possession and are subject to dispute (See Note 5 of our Financial Statements for further discussion of our MPSV dispute);
Charge of $3.1 million related to forecast cost increases and liquidated damages on our harbor tug projects in our Shipyard Division (see Note 2 of our Financial Statements for further discussion of the changes in estimates on these projects);
Charge of $1.4 million related to forecast cost increases and liquidated damages on a subsea components fabrication project in our Services Division (see Note 2 of our Financial Statements for further discussion of the changes in estimates on this project); and
Charge of $1.3 million related to forecast cost increases on our ice-breaker tug project in our Shipyard Division (see Note 2 of our Financial Statements for further discussion of the changes in estimates on this project).

- 30 -



The increase in gross loss for 2019 relative to the prior period was primarily due to:

The aforementioned project charges of $5.8 million for 2019; and
A lower margin project mix for our Services Division (excluding the aforementioned project charge); offset partially by,
Higher revenue and increased recoveries of overhead costs due to higher activity; and
A higher margin project mix for our Fabrication Division and Shipyard Division (excluding the aforementioned project charges).

General and administrative expense - General and administrative expense for 2019 and 2018 was $11.8 million (5.3% of revenue) and $14.7 million (9.1% of revenue), respectively, representing a decrease of 19.8%. The decrease was primarily due to:

Lower incentive plan costs, board of director compensation costs, and legal and advisory fees related to customer disputes; offset partially by,
Higher professional fees and other costs associated with the evaluation of strategic alternatives and initiatives to diversify and enhance our business.

The customer disputes relate primarily to the pursuit of claims against a customer for disputed change orders for a completed project, and our MPSV projects which are subject to a purported termination and for which construction has been suspended. Legal and advisory fees related to such disputes totaled $0.8 million and $1.5 million for 2019 and 2018, respectively.

Asset impairments and (gain) loss on assets held for sale, net - Asset impairments and (gain) loss on assets held for sale, net for 2019 and 2018 was a loss of $0.3 million and a gain $5.7 million, respectively. The loss for 2019 was primarily due to the impairment of a drydock held for sale. The gain for 2018 was primarily due to the net impact of:

A gain of $3.9 million from the sale of our Texas South Yard; and
A gain of $3.6 million from the settlement of our insurance claim related to Hurricane Harvey damage at our South Texas Properties incurred during 2017; offset partially by,
Impairments of $1.4 million related to assets held for sale.

See Note 3 of our Financial Statements for further discussion of our assets held for sale.

Other (income) expense, net - Other (income) expense, net for 2019 and 2018 was income of $0.2 million and expense of $2.9 million, respectively. Other (income) expense, net generally represents (recoveries) provisions for bad debts, (gains) losses associated with the sale or disposition of property and equipment other than assets held for sale, and (income) expense associated with certain nonrecurring items. The income for 2019 was primarily due to net gains on the sales of equipment. The expense for 2018 was primarily due to bad debt expense of $2.8 million related to a contracts receivable reserve recorded within our Fabrication Division as we received indications that collectibility of the receivable was no longer probable, offset partially by net gains on the sales of equipment. The reserved receivable was ultimately collected in the fourth quarter 2018.

Interest (expense) income, net - Interest (expense) income, net for 2019 and 2018, was income of $0.5 million and expense of