Sunday, June 10, 2012

NY Boatbuilder Heads for the Wind

The East Basin of Mamaroneck Harbor offers sailboats a well-
protected nook in which to set anchor away from the ocean swells and wind waves found in the open waters off the Northeast Coast.  

But while this inlet protects its residents from the torrents of Mother Nature, it cannot shelter inhabitants against the economic
winds of change that often originate 25 miles south in the turbulent
canyons of Manhattan’s financial world.  

On the shore of this bay, just in from the cluster of boats anchored
in its calm waters, is the headquarters of Derecktor Shipyards. It is a family owned builder of yachts and workboats with three facilities on the East Coast – its original location in the village of Mamaroneck, one in Bridgeport Connecticut, and another in Florida.  

This boat builder is currently navigating a financial storm.  

Six years ago, Derecktor Shipyards gambled big.  It jumped headfirst into a market few American boat builders dare enter – mega yachts for the world’s super rich.  But the entry into this niche industry hasn’t paid off.  Despite the launch of one high-profile mega yacht, additional orders haven’t materialized.

Compounded by a drop in demand for all boats caused by the Great
Recession and its aftermath, this move forced Derecktor Shipyard’s
two Northeast facilities to recently file for Chapter 11 bankruptcy.

“Sales are down 40% in Florida, and its even worse in our other
yards,” said James Brewer, Director Shipyards’ head of sales of

But Derecktor’s chief financial officer, Ken Fisher, believes there is a promising future for this historic shipbuilder.

He says the bankruptcies will stop a drain on the company’s
finances.  High debt payments, as well as the litigation costs of one
particularly onerous lawsuit with a past client, Fisher says, were
constraining the company’s actions.  Shedding these costs will allow it to steer straight for its next big initiative – the wind.

Or, more specifically, offshore wind farms, and all the support ships
necessary to maintain that industry.

“We have an opportunity to build wind farm vessels for turbines off the coast,” said Fisher.

Robert E Derecktor opened his Mamaroneck shipyard in 1947.  He
was never shy about committing to big new initiatives.  In the
1960s, his shipyard began to build large aluminum ships when
this burgeoning industry was just lifting off the ground.  As these
light weight boats gained popularity over their wood and fiberglass
counterparts, Derecktor’s profits grew.    

His son, Paul, who now manages the company, followed his father’s high-risk high-reward business strategy.  But this audacious way of doing business hasn’t always led to better outcomes.

Six years ago, Charles Gallagher, the manager of a private equity 
firm in Denver, approached Derecktor Shipyards about constructing
his next yacht. This project wouldn’t be like any the company had
taken on.  In fact, no American shipyard had built a yacht as large as Gallagher was requesting since the 1930s.  

Paul Derecktor didn’t balk at this offer.  

Despite requiring costly upgrades to his facilities in Connecticut – such as rebuilding and enlarging that yard’s 4000-ton dry dock – Derecktor saw this as an opportunity to move into a market that had been dominated by Europeans.   

In 2010, this project proved to be a success – sort of.  

When launched in the summer of that year, Gallagher’s new vessel,
called the Cakewalk, was 287 feet long and bigger by volume than
any yacht ever built in the US.  Plus, it was decadent.  It featured six floors connected by a spiral staircase, two workout facilities, a spa, seven staterooms, and a fireplace on the main deck.

“The Cakewalk today has been a fantastic vessel,” Ken Fisher said.

With this launch, Derecktor Shipyards attracted considerable publicity from across the yachting world.  What it didn’t attract, however, were additional mega yacht orders.

Chris McKesson, a naval architect who teaches at the University of
New Orleans’ School of Naval Architecture and Marine Engineering, thinks American boat builders face an image problem.  The challenge, he says, is that few mega yacht buyers look to the United States to build these floating testaments to wealth.

“We’re the General Motors of shipbuilding,” McKesson said.  Similar to the car industry, it’s the Italian shipyards that are known for producing the highest-end luxury. “Those are the first-rate yards,” McKesson added.

This dearth of new mega yacht orders was a problem for Derecktor
Shipyards. When building the Cakewalk, the company had gone into debt as it upgraded its facilities to accommodate this new production line.

In addition to these investments, the Cakewalk forced
Derecktor to put at least one other project on hold.  According to
a lawsuit against the company, Derecktor was building a 144-foot
catamaran, called Gemini, at the time of the Cakewalk’s construction.

The buyer had paid $20 million of that vessel’s $24 million cost.  He claimed Derecktor Shipyards stopped working on Gemini when
the Cakewalk project began, and simply parked the catamaran’s
uncompleted hull in a shed. That boat was later brought to England to be completed by a different company.  

“I think in hindsight, some of our management systems were
overwhelmed,” Fisher said.

Delaying the construction of smaller vessels, and upgrading the
shipyard’s infrastructure were significant costs for the company, and these sacrifices would have been worthwhile had new orders similar to the Cakewalk materialized.  But that hasn’t happened.

What’s worse: These challenges occurred as the Great Recession
was impacting other segments of Derecktor’s business.

State and local governments historically were the bread and butter for American boat builders.  Their demand for ferries and police boats provided a stable and steady cushion that maritime
manufacturers could rely upon.  But, starting in 2008, government
budgets were slashed as the economic downturn decreased tax
revenues.  As a result, Derecktor Shipyard’s business plunged.

“It’s been pretty bleak for government contracts,” said James Brewer.  

Over the first two months of 2012, Derecktor Shipyards’ facilities in Bridgeport Connecticut, and Mamaroneck, New York filed for Chapter 11 bankruptcy.  Rather than a sign of defeat, however, CFO Ken Fisher sees this as an opportunity.  

The bankruptcies will allow the company to restructure its debt to
be more manageable, he says.  It will also allow it to walk away
unscathed from a lengthy lawsuit with the State of Alaska over
warranties on a ferry it delivered to that state in 2005.

“Our bankruptcy stopped the drain on our money that the litigation was causing,” said Fisher.

With this clean slate, Paul Derecktor can now point his company on a new heading; wind energy.  

Part of a nationwide push to build more alternative energy power
plants, windmills are being constructed off the Atlantic Coast from
Virginia to Maine. Workboats are necessary for the construction and maintenance of these power generators, and boat builders are eager to cash in on this new market.     

"That market’s buzzing right now,” said Chris McKesson.

Derecktor Shipyards is not waiting for this burgeoning industry to
grow on its own. It is pushing the Federal Government to
support offshore wind farms. In September, Derecktor’s vice president of business development, Gavin Higgins, testified before Congress.  In front of the House Subcommittee on Natural Resources he argued in favor of the so-called POWER Act, a bill that would promote offshore wind energy by amending certain maritime laws.  

The potential for the Altlantic Coast’s offshore wind energy is massive, around 6000 megawatts, Higgins said – or enough energy to power six million homes annually.  More importantly for Derecktor Shipyards, this energy potential would send a flow of money through offshore wind companies and into the bank accounts of boat builders.    

“(The Power Act) would provide a much needed lifeline to the US
maritime industry and ailing manufacturing base,” Higgins said in front of that House committee.

There is no guarantee, however, wind energy companies will look to Derecktor Shipyards for their support vessels. There is some debate as to whether a current US law, called the Jones Act, would even require these companies to buy American built boats, and European boat builders would gladly capitalize on this budding industry.  

Even within the United States, Derecktor faces stiff
competition.  There are numerous ship builders along the Gulf
Coast that build boats to support that region’s offshore oil platforms.

Because of their experience with energy production in general, these companies are well positioned to move horizontally into the wind farm sector.  

“The workboat market is owned by the Gulf Coast, with some coming out of the Northwest,” said Chris McKesson.  

CFO Ken Fisher, however, remains bullish.

He says you only need to look at Derecktor Shipyards’ track record
to be confident in its long-term future.  In addition to the Cakewalk,
Derecktor has built America’s Cup champion sailboats, 100-foot
tugboats, and high-speed jet-propelled ferries.  

“I think a company that can build a Cakewalk can survive in this
economy,” Fisher said

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