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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

 

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

For the quarterly period ended

June 30, 2023

or

 

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

For the transition period from

to

Commission File Number 001-34279

 

 

img20452362_0.jpg 

Gulf Island Fabrication, Inc.

(Exact name of registrant as specified in its charter)

 

 

Louisiana

 

72-1147390

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

2170 Buckthorne Place, Suite 420

The woodlands, Texas

 

77380

 

 

 

(Address of principal executive offices)

 

(Zip Code)

 

(713) 714-6100

(Registrant’s telephone number, including area code)

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

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock

Gifi

Nasdaq

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

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

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

 

Large accelerated filer

 

 

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

 

Smaller reporting company

 

 

 

 

 

 

 

 

 

 

 

 

Emerging Growth Company

 

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

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

The number of shares of the registrant’s common stock, no par value per share, outstanding as of July 31, 2023, was 16,287,469.

 

 

 

 


GULF ISLAND FABRICATION, INC.

I N D E X

 

 

 

 

 

Page

 

 

 

PART I

 

FINANCIAL INFORMATION

 

1

Item 1.

 

Financial Statements

 

1

 

 

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

 

1

 

 

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

 

2

 

 

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

 

3

 

 

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

 

4

 

 

Notes to Consolidated Financial Statements (unaudited)

 

5

Item 2.

 

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

 

20

Item 4.

 

Controls and Procedures

 

40

 

 

 

 

 

PART II

 

OTHER INFORMATION

 

41

Item 1.

 

Legal Proceedings

 

41

Item 1A.

 

Risk Factors

 

41

Item 6.

 

Exhibits

 

43

Signatures

 

44

 

i

 


 

GLOSSARY OF TERMS

As used in this report filed on Form 10-Q for the quarter ended June 30, 2023 (“this Report”), the following abbreviations and terms have the meanings listed below. In addition, the terms “Gulf Island,” “the Company,” “we,” “us” and “our” refer to Gulf Island Fabrication, Inc. and its consolidated subsidiaries, unless the context clearly indicates otherwise. Certain terms defined below may be redefined separately within this Report when we believe providing a definition upon the first use of the term will assist users of this Report. Unless and as otherwise stated, any references in this Report to any agreement means such agreement and all schedules, exhibits and attachments in each case as amended, restated, supplemented or otherwise modified to the date of filing this Report.

 

2022 Annual Report

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

 

 

2022 Financial
Statements

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

 

 

Active Retained
Shipyard Contracts

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

 

 

ASC

Accounting Standards Codification.

 

 

ASU

Accounting Standards Update.

 

 

Balance Sheet

Our Consolidated Balance Sheets, as filed in this Report.

 

 

contract assets

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

 

contract liabilities

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

 

 

cost-reimbursable

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

 

 

COVID-19

The global coronavirus pandemic.

 

 

deck

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

 

 

DSS Acquisition

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

 

 

DTA(s)

Deferred Tax Asset(s).

 

 

EPC

Engineering, Procurement and Construction.

 

 

Exchange Act

Securities Exchange Act of 1934, as amended.

 

 

Fabrication Division

Our Fabrication reportable segment.

 

 

Facilities

Our Houma Facilities and other facilities that support our operations.

 

 

Financial Statements

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

 

 

GAAP

Generally Accepted Accounting Principles in the U.S.

 

 

GIS

Gulf Island Shipyards, LLC.

 

 

Gulf Coast

Along the coast of the Gulf of Mexico.

 

 

Hornbeck

Hornbeck Offshore Services, LLC.

 

 

Houma Facilities

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

 

 

inland

Typically, bays, lakes and marshy areas.

 

 

ii

 


 

Insurance Finance Arrangements

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

 

 

jacket

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

 

 

labor hours

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

 

 

LC Facility

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

 

 

LNG

Liquefied Natural Gas.

 

 

Mortgage Agreement

Multiple indebtedness mortgage arrangement with one of our Sureties, to secure our obligations and liabilities under our general indemnity agreement with such Surety associated with outstanding surety bonds for certain contracts, which encumbers the real estate associated with our Houma Facilities and includes certain covenants and events of default.

 

 

modules

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

 

 

MPSV(s)

Multi-Purpose Supply Vessel(s).

 

 

MPSV Litigation

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

 

 

offshore

In unprotected waters outside coastlines.

 

 

onshore

Inside the coastline on land.

 

 

Performance Bonds

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

 

 

performance obligation

A contractual obligation to construct and transfer a distinct good or service to a customer. It is the unit of account in Topic 606. The transaction price of a contract is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied.

 

 

piles

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

 

 

platform

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

 

 

POC

Percentage-of-completion.

 

 

Restrictive Covenant Agreement

Restrictive covenant arrangement with one of our Sureties, to secure our obligations and liabilities under our general indemnity agreement with such Surety associated with its outstanding surety bonds for certain contracts, which precludes us from paying dividends or repurchasing shares of our common stock.

 

 

SEC

U.S. Securities and Exchange Commission.

 

 

Services Division

Our Services reportable segment.

 

 

Shipyard Division

Our Shipyard reportable segment.

 

 

Shipyard Transaction

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

 

 

Statement of Cash Flows

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

 

 

Statement of Operations

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

 

 

Statement of Shareholders’ Equity

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

 

 

Surety or Sureties

A financial institution that issues bonds to customers on behalf of the Company for the purpose of providing third-party financial assurance related to the performance of our contracts. Payments by a Surety pursuant to one of our bonds in the event of non-performance are subject to reimbursement to such Surety by us under a general indemnity agreement relating to such bond.

 

 

iii

 


 

T&M

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

 

 

Topic 606

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

 

 

U.S.

The United States of America.

 

 

USL&H

United States Longshoreman and Harbor Workers Act.

 

 

VA(s)

Valuation Allowance(s).

 

 

Whitney Bank

Hancock Whitney Bank.

 

 

iv

 


 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

GULF ISLAND FABRICATION, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands)

 

 

 

June 30,
2023

 

 

December 31,
2022

 

 

 

(Unaudited)

 

 

 

 

ASSETS

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

23,858

 

 

$

33,221

 

Restricted cash, current

 

 

1,197

 

 

 

1,603

 

Short-term investments

 

 

15,165

 

 

 

9,905

 

Contract receivables and retainage, net

 

 

36,315

 

 

 

29,427

 

Contract assets

 

 

6,662

 

 

 

4,839

 

Prepaid expenses and other assets

 

 

5,015

 

 

 

6,475

 

Inventory

 

 

2,636

 

 

 

1,599

 

Total current assets

 

 

90,848

 

 

 

87,069

 

Property, plant and equipment, net

 

 

29,477

 

 

 

31,154

 

Goodwill

 

 

2,217

 

 

 

2,217

 

Other intangibles, net

 

 

771

 

 

 

842

 

Other noncurrent assets

 

 

13,180

 

 

 

13,584

 

Total assets

 

$

136,493

 

 

$

134,866

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

16,850

 

 

$

8,310

 

Contract liabilities

 

 

3,065

 

 

 

8,196

 

Accrued expenses and other liabilities

 

 

11,334

 

 

 

14,283

 

Total current liabilities

 

 

31,249

 

 

 

30,789

 

Other noncurrent liabilities

 

 

1,038

 

 

 

1,453

 

Total liabilities

 

 

32,287

 

 

 

32,242

 

Shareholders’ equity:

 

 

 

 

 

 

Preferred stock, no par value, 5,000 shares authorized, no shares issued
   and outstanding

 

 

 

 

 

 

Common stock, no par value, 30,000 shares authorized, 16,287 shares issued
   and outstanding at June 30, 2023 and
15,973 at December 31, 2022

 

 

11,638

 

 

 

11,591

 

Additional paid-in capital

 

 

107,796

 

 

 

107,372

 

Accumulated deficit

 

 

(15,228

)

 

 

(16,339

)

Total shareholders’ equity

 

 

104,206

 

 

 

102,624

 

Total liabilities and shareholders’ equity

 

$

136,493

 

 

$

134,866

 

 

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

- 1 -


 

GULF ISLAND FABRICATION, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

(in thousands, except per share data)

 

 

Three Months Ended
June 30,

 

 

Six Months Ended
June 30,

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Revenue

$

39,326

 

 

$

35,902

 

 

$

101,494

 

 

$

64,588

 

Cost of revenue

 

34,845

 

 

 

34,230

 

 

 

91,979

 

 

 

63,336

 

Gross profit

 

4,481

 

 

 

1,672

 

 

 

9,515

 

 

 

1,252

 

General and administrative expense

 

3,736

 

 

 

4,345

 

 

 

8,803

 

 

 

8,455

 

Other (income) expense, net

 

(4

)

 

 

(3,206

)

 

 

(365

)

 

 

(2,754

)

Operating income (loss)

 

749

 

 

 

533

 

 

 

1,077

 

 

 

(4,449

)

Interest (expense) income, net

 

340

 

 

 

(18

)

 

 

660

 

 

 

(58

)

Income (loss) before income taxes

 

1,089

 

 

 

515

 

 

 

1,737

 

 

 

(4,507

)

Income tax (expense) benefit

 

13

 

 

 

13

 

 

 

6

 

 

 

8

 

Net income (loss)

$

1,102

 

 

$

528

 

 

$

1,743

 

 

$

(4,499

)

 

 

 

 

 

 

 

 

 

 

 

 

Per share data:

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted income (loss) per share

$

0.07

 

 

$

0.03

 

 

$

0.11

 

 

$

(0.29

)

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

- 2 -


 

GULF ISLAND FABRICATION, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(UNAUDITED)

(in thousands)

 

 

 

Common Stock

 

 

Additional
Paid-In

 

 

Accumulated

 

 

Total
Shareholders’

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Equity

 

Balance at December 31, 2021

 

 

15,622

 

 

$

11,384

 

 

$

105,511

 

 

$

(12,987

)

 

$

103,908

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(5,027

)

 

 

(5,027

)

Vesting of restricted stock

 

 

153

 

 

 

(6

)

 

 

(53

)

 

 

 

 

 

(59

)

Stock-based compensation expense

 

 

 

 

 

57

 

 

 

514

 

 

 

 

 

 

571

 

Balance at March 31, 2022

 

 

15,775

 

 

 

11,435

 

 

 

105,972

 

 

 

(18,014

)

 

 

99,393

 

Net income

 

 

 

 

 

 

 

 

 

 

 

528

 

 

 

528

 

Vesting of restricted stock

 

 

148

 

 

 

(6

)

 

 

(56

)

 

 

 

 

 

(62

)

Stock-based compensation expense

 

 

 

 

 

49

 

 

 

440

 

 

 

 

 

 

489

 

Balance at June 30, 2022

 

 

15,923

 

 

 

11,478

 

 

 

106,356

 

 

 

(17,486

)

 

 

100,348

 

 

 

 

Common Stock

 

 

Additional
Paid-In

 

 

Accumulated

 

 

Total
Shareholders’

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Equity

 

Balance at December 31, 2022

 

 

15,973

 

 

$

11,591

 

 

$

107,372

 

 

$

(16,339

)

 

$

102,624

 

Adoption of ASU 2016-13

 

 

 

 

 

 

 

 

 

 

 

(632

)

 

 

(632

)

Balance at January 1, 2023

 

 

15,973

 

 

 

11,591

 

 

 

107,372

 

 

 

(16,971

)

 

 

101,992

 

Net income

 

 

 

 

 

 

 

 

 

 

 

641

 

 

 

641

 

Vesting of restricted stock

 

 

82

 

 

 

(18

)

 

 

(163

)

 

 

 

 

 

(181

)

Stock-based compensation expense

 

 

 

 

 

51

 

 

 

458

 

 

 

 

 

 

509

 

Balance at March 31, 2023

 

 

16,055

 

 

 

11,624

 

 

 

107,667

 

 

 

(16,330

)

 

 

102,961

 

Net income

 

 

 

 

 

 

 

 

 

 

 

1,102

 

 

 

1,102

 

Vesting of restricted stock

 

 

232

 

 

 

(30

)

 

 

(271

)

 

 

 

 

 

(301

)

Stock-based compensation expense

 

 

 

 

 

44

 

 

 

400

 

 

 

 

 

 

444

 

Balance at June 30, 2023

 

 

16,287

 

 

$

11,638

 

 

$

107,796

 

 

$

(15,228

)

 

$

104,206

 

 

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

- 3 -


 

GULF ISLAND FABRICATION, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(in thousands)

 

 

Six Months Ended June 30,

 

 

 

2023

 

 

2022

 

Cash flows from operating activities:

 

 

 

 

 

 

Net income (loss)

 

$

1,743

 

 

$

(4,499

)

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

 

 

 

 

 

 

Depreciation and amortization

 

 

2,725

 

 

 

2,524

 

Allowance for doubtful accounts and credit losses

 

 

(200

)

 

 

 

Gain on sale or disposal of fixed assets, net

 

 

(33

)

 

 

(42

)

Gain on insurance recoveries

 

 

(245

)

 

 

 

Stock-based compensation expense

 

 

953

 

 

 

1,060

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

Contract receivables and retainage, net

 

 

(7,110

)

 

 

(10,830

)

Contract assets

 

 

(1,823

)

 

 

(426

)

Prepaid expenses, inventory and other current assets

 

 

955

 

 

 

(430

)

Accounts payable

 

 

8,742

 

 

 

2,525

 

Contract liabilities

 

 

(5,131

)

 

 

(3,339

)

Accrued expenses and other current liabilities

 

 

(2,393

)

 

 

(72

)

Noncurrent assets and liabilities, net

 

 

(376

)

 

 

(346

)

Net cash used in operating activities

 

 

(2,193

)

 

 

(13,875

)

Cash flows from investing activities:

 

 

 

 

 

 

Capital expenditures

 

 

(1,056

)

 

 

(474

)

Proceeds from Shipyard Transaction

 

 

 

 

 

886

 

Proceeds from sale of property and equipment

 

 

106

 

 

 

63

 

Recoveries from insurance claims

 

 

245

 

 

 

 

Purchases of short-term investments

 

 

(15,260

)

 

 

 

Maturities of short-term investments

 

 

10,000

 

 

 

 

Net cash provided by (used in) investing activities

 

 

(5,965

)

 

 

475

 

Cash flows from financing activities:

 

 

 

 

 

 

Payments on Insurance Finance Arrangements

 

 

(1,129

)

 

 

(248

)

Tax payments for vested stock withholdings

 

 

(482

)

 

 

(121

)

Net cash used in financing activities

 

 

(1,611

)

 

 

(369

)

Net decrease in cash, cash equivalents and restricted cash

 

 

(9,769

)

 

 

(13,769

)

Cash, cash equivalents and restricted cash, beginning of period

 

 

34,824

 

 

 

54,589

 

Cash, cash equivalents and restricted cash, end of period

 

$

25,055

 

 

$

40,820

 

 

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

- 4 -


 

GULF ISLAND FABRICATION, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2023

(Unaudited)

 

 

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

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

On April 19, 2021, we sold our Shipyard Division operating assets and certain construction contracts (“Shipyard Transaction”) and intend to wind down our remaining Shipyard Division operations (which exclude the contracts that are subject to our MPSV Litigation) by the third quarter 2023 (previously the second quarter 2023, but was delayed and is subject to the potential schedule impacts discussed in Note 2). See Note 4 for further discussion of our MPSV Litigation.

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

Basis of Presentation

The accompanying unaudited Consolidated Financial Statements (“Financial Statements”) reflect all wholly owned subsidiaries. Intercompany balances and transactions have been eliminated in consolidation. The Financial Statements have been prepared in accordance with accounting principles generally accepted in the U.S. (“GAAP”) for interim financial statements, the instructions to Form 10-Q and Article 10 of Regulation S-X of the U.S. Securities and Exchange Commission (the “SEC”). Accordingly, the Financial Statements do not include all of the information and footnotes required by GAAP for complete financial statements. In our opinion, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three and six months ended June 30, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023. Our Consolidated Balance Sheet (“Balance Sheet”) at December 31, 2022, has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by GAAP for complete financial statements. For further information, refer to our 2022 Financial Statements.

Operating Cycle

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

- 5 -


 

Use of Estimates

General The preparation of our Financial Statements in conformity with GAAP requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses and related disclosures of contingent assets and liabilities. We believe our most significant estimates and judgments are associated with:

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

If the underlying estimates and assumptions upon which our Financial Statements are based change in the future, actual amounts may differ materially from those included in the Financial Statements.

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

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

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

Income (Loss) Per Share

Basic income (loss) per share is calculated by dividing net income or loss by the weighted average number of common shares outstanding for the period. Diluted income (loss) per share reflects the assumed conversion of dilutive securities in periods in which income is reported. See Note 5 for calculations of our basic and diluted income (loss) per share.

 

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Cash Equivalents, Restricted Cash and Short-Term Investments

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

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

Short-term Investments – We consider investments with original maturities of more than three months but less than twelve months to be short-term investments. At June 30, 2023 and December 31, 2022, our short-term investments included U.S. Treasuries with original maturities of four and six months, respectively. We intend to hold these investments until maturity and it is not more likely than not that we will be required to sell the investments prior to their maturity. The investments are stated at amortized costs, which approximates fair value due to their near-term maturities. All short-term investments are traded on active markets with quoted prices and represent Level 1 fair value measurements.

Inventory

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

Allowance for Doubtful Accounts and Credit Losses

As further discussed under “New Accounting Standards” below, we adopted the new accounting standard for measuring credit losses effective January 1, 2023. In the normal course of business, we extend credit to our customers on a short-term basis and contract receivables are generally not collateralized; however, we typically have the right to place liens on our projects in the event of nonpayment by our customers. We provide an allowance for credit losses and routinely review individual contract receivable balances and other financial assets for collectability and make provisions for probable uncollectible amounts as necessary. Among the factors considered in our review are the financial condition of our customer and its access to financing, underlying disputes with the customer, the age and value of the receivable balance, company-specific credit ratings, historical company-specific uncollectable amounts and economic conditions in general. See Note 2 for further discussion of our allowance for doubtful accounts and credit losses.

Stock-Based Compensation

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

Depreciation and Amortization Expense

Property, plant and equipment are depreciated on a straight-line basis over estimated useful lives ranging from three to 25 years. Ordinary maintenance and repairs, which do not extend the physical or economic lives of the plant or equipment, are charged to expense as incurred. Intangible assets are amortized on a straight-line basis over seven years and amortization expense is reflected within general and administrative expense on our Statement of Operations.

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Long-Lived Assets

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

Other Long-Lived Assets Our property, plant and equipment, lease assets (included within other noncurrent assets), and finite-lived intangible assets are reviewed for impairment when events or changes in circumstances indicate that the carrying amount may not be recoverable. If a recoverability assessment is required, we compare the estimated future undiscounted cash flow associated with the asset or asset group to its carrying amount to determine if an impairment exists. An asset group constitutes the minimum level for which identifiable cash flows are principally independent of the cash flows of other assets or asset groups. An impairment loss is measured by comparing the fair value of the asset or asset group to its carrying amount and the excess of the carrying amount of the asset or asset group over its fair value is recorded as an impairment charge. Fair value is determined based on discounted cash flows, appraised values or third-party indications of value, as appropriate. We had no indicators of impairment during the six months ended June 30, 2023.

Leases

We record a right-of-use asset and an offsetting lease liability on our Balance Sheet equal to the present value of our lease payments for leases with an original term of longer than twelve months. We do not record an asset or liability for leases with an original term of twelve months or less and we do not separate lease and