Segment | ___________ | | 1. | Backlog as of September 30, 2016March 31, 2017, includes commitments received through October 27, 2016.April 26, 2017. We exclude suspended projects from contract backlog thatwhen they are expected to be suspended more than twelve months because resumption of work and timing of revenue recognition for these projects are difficult to predict. Our backlog also includes the new build construction that was acquired in the LEEVAC transaction on January 1, 2016. Included in our backlog at September 30, 2016, is $5.1 million of non-cash revenue related to purchase price fair value of contracts acquired in the LEEVAC transaction and included in deferred revenue in our consolidated Balance sheet at September 30, 2016. |
| | 2. | At September 30, 2016,March 31, 2017, projects for our threetwo largest customers in terms of revenue backlog consisted of: |
| | (i) | two large petroleum supply vessels for one customer in our Shipyards segment, which commenced in the second quarter of 2013 and will be completed during the first and second quarter of 2017; |
| | (ii) | two large multi-purpose service vessels for one customer in our Shipyards segment, which commenced in the first quarter of 2014 and will be completed during the first and second quarterquarters of 2018; and |
(iii) the fabrication of four modules associated with a U.S. ethane cracker project.
| | (ii) | the fabrication of four modules associated with a U.S. ethane cracker project. |
| | 3. | The timing of recognition of the revenue represented in our backlog is based on management’s current estimates to complete the projects. Certain factors and circumstances could cause changes in the amounts ultimately recognized and the timing of the recognition of revenue from our backlog. |
Depending on the size of the project, the termination, postponement, or reduction in scope of any one project could significantly reduce our backlog and could have a material adverse effect on revenue, net income and cash flow. As of September 30, 2016,March 31, 2017, we had 1,336922 employees and 163133 contract employees inclusive of 380 employees hired in the LEEVAC transaction, compared to 1,2551,178 employees and 7192 contract employees as of December 31, 2015. 2016.
Labor hours worked were 2.3 million479,000 during the ninethree months ended September 30, 2016,March 31, 2017, compared to 2.1 million695,000 for the ninethree months ended September 30, 2015.March 31, 2016. The overall increasedecrease in labor hours worked for the three months ended September 30, 2016March 31, 2017, was due to 636,000 labor hours worked from projects acquired in the LEEVAC transaction partially offset by a reduction in fabrication activity due primarily to the downturn in the oil and gas industry.
Results of Operations
Our results of operations are affected primarily by our ability to effectively manage contracts to a successful completion along with producing maximum efficiencies as it relates to manhours.
Three Months Ended September 30, 2016 Compared to Three Months Ended September 30, 2015 (in thousands, except for percentages):
Consolidated
| | | | | | | | | | | | | | | | Three Months Ended September 30, | | Increase or (Decrease) | | 2016 | | 2015 | | Amount | Percent | Revenue | $ | 65,384 |
| | $ | 67,531 |
| | $ | (2,147 | ) | (3.2 | )% | Cost of revenue | 60,125 |
| | 75,368 |
| | (15,243 | ) | (20.2 | )% | Gross profit (loss) | 5,259 |
| | (7,837 | ) | | 13,096 |
| 167.1 | % | Gross profit percentage | 8.0% | | (11.6)% | | | | General and administrative expenses | 5,086 |
| | 3,798 |
| | 1,288 |
| 33.9 | % | Asset impairment | — |
| | 6,600 |
| | (6,600 | ) | n/a |
| Operating income | 173 |
| | (18,235 | ) | | 18,408 |
| 100.9 | % | Other income (expense): | | | | | | | Interest expense | (110 | ) | | (39 | ) | | (71 | ) |
|
| Interest income | 12 |
| | 8 |
| | 4 |
|
|
| Other income, net | 599 |
| | — |
| | 599 |
|
|
| | 501 |
| | (31 | ) | | 532 |
| 1,716.1 | % | Net income (loss) before income taxes | 674 |
| | (18,266 | ) | | 18,940 |
| 103.7 | % | Income taxes | 133 |
| | (6,129 | ) | | 6,262 |
| 102.2 | % | Net income (loss) | $ | 541 |
| | $ | (12,137 | ) | | $ | 12,678 |
| 104.5 | % |
Revenue - Our revenue for the three months ended September 30, 2016 and 2015 was $65.4 million and $67.5 million, respectively, representing a decrease of 3.2%. The decrease is primarily attributable to an overall decrease in work experienced in our fabrication yardsfacilities as a result of depressed oil and gas prices and the corresponding reduction in customer demand within all of our operating divisions.
Results of Operations Three Months Ended March 31, 2017 Compared to Three Months Ended March 31, 2016 (in thousands, except for offshore projects in our Fabrication segment. During 2015, we completed the fabrication of a 1,200 foot jacket, piles and an approximate 450 short ton topside with no similar project in 2016.percentages): Consolidated | | | | | | | | | | | | | | | Three Months Ended March 31, | | Increase or (Decrease) | | 2017 | | 2016 | | Amount | Percent | Revenue | $ | 37,993 |
| | $ | 83,979 |
| | $ | (45,986 | ) | (54.8)% | Cost of revenue | 42,890 |
| | 78,278 |
| | (35,388 | ) | (45.2)% | Gross profit (loss) | (4,897 | ) | | 5,701 |
| | (10,598 | ) | 185.9% | Gross profit (loss) percentage | (12.9)% | | 6.8% | | | | General and administrative expenses | 3,930 |
| | 4,485 |
| | (555 | ) | (12.4)% | Asset impairment | 389 |
| | — |
| | 389 |
| 100.0% | Operating income (loss) | (9,216 | ) | | 1,216 |
| | (10,432 | ) | (857.9)% | Other income (expense): | | | | | | | Interest expense | (59 | ) | | (50 | ) | | (9 | ) | | Interest income | — |
| | 6 |
| | (6 | ) | | Other income, net | 9 |
| | 398 |
| | (389 | ) | | Total other income (expense) | (50 | ) | | 354 |
| | (404 | ) | (114.1)% | Net income (loss) before income taxes | (9,266 | ) | | 1,570 |
| | (10,836 | ) | (690.2)% | Income taxes | (2,812 | ) | | 581 |
| | (3,393 | ) | (584.0)% | Net income (loss) | $ | (6,454 | ) | | $ | 989 |
| | $ | (7,443 | ) | (752.6)% |
Revenue - Our decrease in revenue earned from offshore fabrication work was partially offset by the results of the assets and operations acquired in the LEEVAC transaction (see LEEVAC Transaction above), which contributed $16.8 million in revenue for the three months ended September 30, 2016.March 31, 2017 and 2016, was $38.0 million and $84.0 million, respectively, representing a decrease of 54.8%. The decrease is primarily attributable to an overall decrease in work experienced in our facilities as a result of depressed oil and gas prices and the corresponding reduction in customer demand within all of our operating divisions. Pass-through costs as a percentage of revenue were 33.8%29.4% and 45.3%40.0% for the three-months ended September 30,March 31, 2017 and 2016, and 2015, respectively. Pass-through costs, as described in Note 3 of the Notes to Consolidated Financial Statements, are included in revenue but have no impact on the gross profit recognized on a project for a particular period.
Gross profit (loss)- Our gross profit (loss)loss for the three months ended September 30, 2016 and 2015March 31, 2017, was $5.3$4.9 million (8.0% of revenue) and $(7.8) million, respectively. Ourcompared to a gross profit improved compared to third quarter of 2015$5.7 million for the three months ended March 31, 2016. The decrease was primarily due to contract losses of $14.3 million that were recorded during the third quarter of 2015 resulting from our inability to recover certain costs related to a deckdecreased revenue as discussed above and jacket for one of our deepwater projects. We had no such loss during the third quarter of 2016 and implemented cost cutting measures. This wastighter margins on current work partially offset by tighter margins within all of our segments due to a decreasedecreases in work as a result of the downturn in the oil and gas industry.costs resulting from additional cost cutting measures implemented by management.
General and administrative expenses - Our general and administrative expenses were $5.1$3.9 million for the three months ended September 30, 2016,March 31, 2017, compared to $3.8$4.5 million for the three months ended September 30, 2015.March 31, 2016. The increasedecrease in general
and administrative expenses for the three months ended September 30, 2016March 31, 2017, was primarily attributable to the operations acquired in the LEEVAC transaction and bonus expense, partially offset by cost cutting effortsmeasures implemented by management during 2016.the first part of 2016 as well as lower bonuses accrued during 2017 as a result of a combination of a smaller workforce and our consolidated gross loss.
Asset impairmentImpairment - During the three months ended September 30, 2015,March 31, 2017, we recorded an asset impairment charge of $6.6 million$389 related to a partially constructed topside, related valves, piping and equipment that we acquired from a customer following its default under a contract in 2012. Due to the sustained downturn in the energy sector, our ability to effectively market these assets was significantly limited, and we reassessed the asset’s net realizable value based on the estimated scrap valueheld for sale at our Prospect Shipyard. See also Note 2 of the assets. We had no such impairments during the three months ended September 30, 2016.Notes to Consolidated Financial statements. Interest expense,
Other income, net - The Company had net interest expense of $98,000Other income decreased $389,000 for the three months ended September 30, 2016 compared to net interest expense of $31,000 for the three months ended September 30, 2015.March 31, 2017. The increase was primarily driven by an increase in the cost of unused credit facility fees under our credit agreement. Other income, net - Other income increased $599,000 for the three months ended September 30, 2016. The increasedecrease was primarily due to gains on sales of assets from our Fabrication division.division recorded during three months ended March 31, 2016.
Income taxes - Our effective income tax rate for the three months ended September 30, 2016March 31, 2017, was 19.7%30.3%, compared to an effective tax rate of 34.0%37.0% for the comparable period during 2015.2016. The changedecrease in ourthe effective tax rate is duethe result of limitations on the deductibility of executive compensation and $210,000 in tax expense recognized during the three months ended March 31, 2017, for the tax effect of the difference between the actual tax deduction allowed upon vesting of common stock and the compensation cost recognized for financial reporting purposes resulting from the adoption of Accounting Standards Update 2016-09 as further discussed in Note 1 of the Notes to the decrease in our effective rate for the year-to-date period.Consolidated Financial Statements.
Operating Segments
As discussed in Note 8 of the Notes to Consolidated Financial Statements, management reduced its allocation of corporate administrative costs and overhead expenses to its operating divisions during the three months ended March 31, 2017, such that a significant portion of its corporate expenses are retained in its non-operating Corporate division. In addition, it has also allocated certain personnel previously included in the operating divisions to within the Corporate division. In doing so, management believes that it has created a fourth reportable segment with each of its three operating divisions and it's Corporate division each meeting the criteria of reportable segments under GAAP. During the three months ended March 31, 2016, we allocated substantially all of our corporate administrative costs and overhead expenses to our three operating divisions. We have recast our 2016 segment data below in order to conform to the current period presentation. Our results of our three operating divisions and Corporate division for the three months ended March 31, 2017 and 2016, are presented below (in thousands, except for percentages).
| | Fabrication | | Three Months Ended September 30, | | Increase or (Decrease) | | Three Months Ended March 31, | | Increase or (Decrease) | | | 2016 | | 2015 | | Amount | | Percent | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | 22,311 |
| | $ | 32,133 |
| | $ | (9,822 | ) | | (30.6 | )% | | $ | 10,209 |
| | $ | 23,829 |
| | $ | (13,620 | ) | | (57.2)% | Gross profit (loss) | | $ | 532 |
| | $ | (14,009 | ) | | $ | 14,541 |
| | 103.8 | % | | (2,966 | ) | | 86 |
| | (3,052 | ) | | (3,548.8)% | Gross profit percentage | | 2.4 | % | | (43.6 | )% | | | | 46.0 | % | | Gross profit (loss) percentage | | | (29.1 | )% | | 0.4 | % | | | | (29.5)% | General and administrative expenses | | $ | 1,481 |
| | $ | 2,138 |
| | $ | (657 | ) | | (30.7 | )% | | 821 |
| | 795 |
| | 26 |
| | 3.3% | Asset impairment | | $ | — |
| | $ | 6,600 |
| | $ | (6,600 | ) | | n/a |
| | Operating income (loss) | | $ | (949 | ) | | $ | (22,747 | ) | | | | | | (3,787 | ) | | (709 | ) | | | |
Revenue - Revenue from our Fabrication division decreased $9.8$13.6 million for the three months ended September 30, 2016March 31, 2017, compared to the three months ended September 30, 2015.March 31, 2016. The decrease is attributable to an overall decrease in work experienced in our fabrication yards as a result of depressed oil and gas prices and the corresponding reduction in customer demand for offshore fabrication projects. As discussed above, management has classified our South Texas assets as assets held for sale in response to the underutilization of our Fabrication assets.
Gross profit increased $14.5 million to $532,000(loss) - Gross loss from our Fabrication division for the three months ended September 30, 2016March 31, 2017, was $3.0 million compared to a gross lossprofit of $14.0 million$86,000 for the three months ended September 30, 2015March 31, 2016. The decrease was due to contract losseslower revenue as discussed above, payment of $14.3termination benefits as we reduce our South Texas workforce and depreciation expense of $1.9 million that were recorded during the third quarter of 2015related to our South Texas assets prior to their classification as assets held for sale. This was partially offset by decreases in costs resulting from our inability to recover certain costs related to a deck and jacket for one of our deepwater projects. We had no such loss during the third quarter of 2016 and implementedadditional cost cutting measures in response to decreases in work at our fabrication facilities.implemented by management.
General and administrative expenses - General and administrative expenses decreased $657,000for our Fabrication division increased $26,000 for the three months ended September 30, 2016March 31, 2017, compared to the three months ended September 30, 2015March 31, 2016. The increase is primarily due to cost cutting measures implemented during 2016 in responseexpenses incurred to decreases in work atmarket our fabrication facilities.South Texas assets for sale and payment of termination benefits as we reduce its workforce and complete those operations.
Asset impairment - During the three months ended September 30, 2015, we recorded an asset impairment charge of $6.6 million related to a partially constructed topside, related valves, piping and equipment that we acquired from a customer following its default under a contract in 2012. Due to the sustained downturn in the energy sector, our ability to effectively market these assets was significantly limited, and we reassessed the asset’s net realizable value based on the estimated scrap value of the assets. We had no such impairments during the three months ended September 30, 2016.
| | Shipyards | | Three Months Ended September 30, | | Increase or (Decrease) | | Three Months Ended March 31, | | Increase or (Decrease) | | | 2016 | | 2015 | | Amount | | Percent | | 2017 | | 2016 | | Amount | | Percent | Revenue (1) | | $ | 23,060 |
| | $ | 12,936 |
| | $ | 10,124 |
| | 78.3 | % | | $ | 18,422 |
| | $ | 34,120 |
| | $ | (15,698 | ) | | (46.0)% | Gross profit (1) | | $ | 1,877 |
| | $ | 1,937 |
| | $ | (60 | ) | | (3.1 | )% | | Gross profit percentage | | 8.1 | % | | 15.0 | % | | | | (6.9 | )% | | Gross profit (loss)(1) | | | (1,704 | ) | | 2,375 |
| | (4,079 | ) | | (171.7)% | Gross profit (loss) percentage | | | (9.2 | )% | | 7.0 | % | | | | (16.2)% | General and administrative expenses | | $ | 2,065 |
| | $ | 392 |
| | $ | 1,673 |
| | 426.8 | % | | 964 |
| | 1,296 |
| | (332 | ) | | (25.6)% | Asset impairment | | | 389 |
| | — |
| | 389 |
| | 100.0% | Operating income (loss) (1) | | $ | (188 | ) | | $ | 1,545 |
| | | | | | (3,057 | ) | | 1,079 |
| | | |
___________ | | (1) | Revenue for the three months ended September 30,March 31, 2017, and 2016, includes $1.5$1.6 million and $1.2 million of non-cash amortization of deferred revenue related to the values assigned to the contracts acquired in the LEEVAC transaction.transaction, respectively. |
Revenue increased $10.1- Revenue from our Shipyards division decreased $15.7 million for the three months ended September 30, 2016March 31, 2017, compared to the three months ended September 30, 2015March 31, 2016, due to the operations acquiredoverall decreases in work as we complete work under our contracts
including completion of a vessel that we assumed in the LEEVAC transaction (see LEEVAC Transaction above), which contributed $16.8 million in revenue forand delivered to a customer on February 6, 2017, with less new, replacement work starting during the three months ended September 30, 2016.
Gross profit decreased $60,000 for the three months ended September 30, 2016period as compared to the three months ended September 30, 2015March 31, 2016. The decrease in new, replacement work is due to tighter marginsdepressed oil and gas prices and the corresponding reduction in customer demand for shipbuilding and repair services supporting the oil and gas industry.
Gross profit (loss) - Gross loss from our Shipyards division was $1.7 million for the three months ended March 31, 2017, compared to a gross profit of $2.4 million for the three months ended March 31, 2016. The decrease was due to:
continued cost overruns on new work and inefficiencies incurred on the contracts acquiredthat were assigned to us in the LEEVAC transaction transaction; holding costs related to a completed vessel that was delivered on February 6, 2017; however, was refused by our customer alleging certain technical deficiencies (see also Note 9 of the Notes to Consolidated Financial Statements); and overall decreases in work under other various contracts as discussed above; partially offset by savings realized from cost cutting measures implemented by management during 2016.
General and administrative expenses - General and administrative expenses increased $1.7for our Shipyards division decreased $332,000 for the three months ended March 31, 2017, compared to the three months ended March 31, 2016, primarily due to cost cutting measures implemented by management during 2016 as well as lower bonuses accrued during 2017 as a result of a combination of a smaller workforce and our consolidated gross loss.
Asset Impairment - During three months ended March 31, 2017, we recorded an impairment of $389 related to our assets held for sale at our Prospect Shipyard. See also Note 2 of the Notes to Consolidated Financial statements.
| | | | | | | | | | | | | | | | Services | | Three Months Ended March 31, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | 10,712 |
| | $ | 26,559 |
| | $ | (15,847 | ) | | (59.7)% | Gross profit | | 33 |
| | 3,376 |
| | (3,343 | ) | | (99.0)% | Gross profit (loss) percentage | | 0.3 | % | | 12.7 | % | | | | (12.4)% | General and administrative expenses | | 666 |
| | 726 |
| | (60 | ) | | (8.3)% | Operating income (loss) | | (633 | ) | | 2,650 |
| | | | |
Revenue - Revenue from our Services division decreased $15.8 million for the three months ended September 30, 2016March 31, 2017, compared to the three months ended September 30, 2015 primarilyMarch 31, 2016, due to the expenses associated with the operations acquired in the LEEVAC transaction and bonus expense. | | | | | | | | | | | | | | | | | Services | | Three Months Ended September 30, | | Increase or (Decrease) | | | 2016 | | 2015 | | Amount | | Percent | Revenue | | $ | 20,928 |
| | $ | 23,487 |
| | $ | (2,559 | ) | | (10.9 | )% | Gross profit | | $ | 2,850 |
| | $ | 4,235 |
| | $ | (1,385 | ) | | (32.7 | )% | Gross profit percentage | | 13.6 | % | | 18.0 | % | | | | (4.4 | )% | General and administrative expenses | | $ | 1,540 |
| | $ | 994 |
| | $ | 546 |
| | 54.9 | % | Operating income | | $ | 1,310 |
| | $ | 3,241 |
| | | | | | | | | | | | | |
Revenue decreased $2.6 million for the three months ended September 30, 2016 compared to the three months ended September 30, 2015 due to the winding down of two large offshore service projects from the first half of 2016 and the downturn in the oil and gas industry.
Gross profit decreased $1.4 million for the three months ended September 30, 2016 compared to the three months ended September 30, 2015 due to decreases in revenues and tighter margins on new work.
General and administrative expenses increased $546,000 for the three months ended September 30, 2016 compared to the three months ended September 30, 2015 due to bonuses and additional administrative support added during the first half of 2016.
Nine Months Ended September 30, 2016 Compared to Nine Months Ended September 30, 2015 (in thousands, except for percentages):
Consolidated
| | | | | | | | | | | | | | | | Nine Months Ended September 30, | | Increase or (Decrease) | | 2016 | | 2015 | | Amount | Percent | Revenue | $ | 230,864 |
| | $ | 251,102 |
| | $ | (20,238 | ) | (8.1 | )% | Cost of revenue | 205,839 |
| | 248,686 |
| | (42,847 | ) | (17.2 | )% | Gross profit | 25,025 |
| | 2,416 |
| | 22,609 |
| 935.8 | % | Gross profit percentage | 10.8% | | 1.0% | | | | General and administrative expenses | 14,633 |
| | 11,817 |
| | 2,816 |
| 23.8 | % | Asset impairment | — |
| | 6,600 |
| | (6,600 | ) | n/a |
| Operating income (loss) | 10,392 |
| | (16,001 | ) | | 26,393 |
| 164.9 | % | Other income (expense): | | | | | | | Interest expense | (248 | ) | | (126 | ) | | (122 | ) |
|
| Interest income | 20 |
| | 21 |
| | (1 | ) |
|
| Other income, net | 1,039 |
| | 20 |
| | 1,019 |
|
|
| | 811 |
| | (85 | ) | | 896 |
| 1,054.1 | % | Net income (loss) before income taxes | 11,203 |
| | (16,086 | ) | | 27,289 |
| 169.6 | % | Income taxes | 4,134 |
| | (5,389 | ) | | 9,523 |
| 176.7 | % | Net income (loss) | $ | 7,069 |
| | $ | (10,697 | ) | | $ | 17,766 |
| 166.1 | % |
Revenue - Our revenue for the nine months ended September 30, 2016 and 2015 was $230.9 million and $251.1 million, respectively, representing a decrease of 8.1%. The decrease is primarily attributable to an overall decrease in work experienced in our fabrication yards primarily as a result of depressed oil and gas prices and the corresponding reduction in customer demand for offshore projects inoil and gas related service projects.
Gross profit - Gross profit from our Fabrication segment. During 2015, we completed the fabrication of a 1,200 foot jacket, piles and an approximate 450 short ton topside with no similar project in 2016. Our decrease in revenue earned from offshore fabrication work was partially offset by the assets and operations acquired in the LEEVAC transaction (see LEEVAC Transaction above), which contributed $55.9Services division decreased $3.3 million in revenue for the ninethree months ended September 30, 2016. Pass-through costs as a percentage of revenue were 35.0% and 43.2% forMarch 31, 2017, compared to the ninethree months ended September 30,March 31, 2016, and 2015, respectively. Pass-through costs, as described in Note 3 of the Notes to Consolidated Financial Statements, are included in revenue but have no impact on the gross profit recognized on a project for a particular period. Gross profit - Our gross profit for the nine months ended September 30, 2016 and 2015 was $25.0 million (10.8% of revenue) and $2.4 million (1.0% of revenue), respectively. Our gross profit improved compared to 2015 primarily due to the LEEVAC transactiondecreased revenue discussed above and contract losses of $14.3 million that were recordedtighter margins on new work performed during the third quarter of 2015 resulting from our inability to recover certain costs related to a deck and jacket for one of our deepwater projects. We had no such loss during the third quarter of 2016 and implemented cost cutting measures in response to decreases in work at our fabrication facilities.2017.
General and administrative expenses - Our general and administrative expenses were $14.6 million for the nine months ended September 30, 2016, compared to $11.8 million for the nine months ended September 30, 2015. The increase in generalGeneral and administrative expenses for our Services division decreased $60,000 for the ninethree months ended September 30,March 31, 2017, compared to the three months ended March 31, 2016, was primarily attributable to:
an increase of stock-based compensation expense of $589,000,
due to lower bonuses and the LEEVAC transaction; partially offset by
cost cutting efforts implementedaccrued during 2017, as a result of a combination of a smaller workforce and the downturnreduction in the oil and gas industry.gross profit.
Asset impairment
| | | | | | | | | | | | | | | | Corporate | | Three Months Ended March 31, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | — |
| | $ | — |
| | $ | — |
| | —% | Gross loss | | (260 | ) | | (136 | ) | | (124 | ) | | (91.2)% | Gross profit (loss) percentage | | n/a |
| | n/a |
| | | |
| General and administrative expenses | | 1,479 |
| | 1,668 |
| | (189 | ) | | (11.3)% | Operating loss | | (1,739 | ) | | (1,804 | ) | | 65 |
| | |
Gross loss - During the nine months ended September 30, 2015, we recorded an asset impairment charge of $6.6 million related to a partially constructed topside, related valves, piping and equipment that we acquiredGross loss from a customer following its default under a contract in 2012. Due to the sustained downturn in the energy sector, our ability to effectively
market these assets was significantly limited, and we reassessed the asset’s net realizable value based on the estimated scrap value of the assets. We had no such impairments during the nine months ended September 30, 2016.
Interest expense, net - The Company had net interest expense of $228,000 for the nine months ended September 30, 2016 compared to net interest expense of $105,000 for the nine months ended September 30, 2015. The increase in net interest expense for the nine months ended September 30, 2016 was primarily driven by an increase in the cost of unused credit facility fees under our credit agreement.
Other income, net - Other incomeCorporate division increased $1.0 million for the nine months ended September 30, 2016. The increase was primarily due to gainsa restructuring of $924,000 relatedour corporate division with additional personnel allocated to the sale of three cranes at our Texas facilitycorporate division during 2017 as well as sales of smaller assets bydiscussed above.
General and administrative expenses - General and administrative expenses for our Shipyards division. Income taxes - Our effective income tax rate for the nine months ended September 30, 2016 was 36.9%, compared to an effective tax rate of 34.0% for the comparable period during 2015. The increase in our effective rate isCorporate division decreased primarily due to the effect of state income taxes from income generated within Louisiana with no offsetting tax benefit from losses generated within Texas.
Operating Segments
| | | | | | | | | | | | | | | | | Fabrication | | Nine Months Ended September 30, | | Increase or (Decrease) | | | 2016 | | 2015 | | Amount | | Percent | Revenue | | $ | 70,436 |
| | $ | 137,431 |
| | $ | (66,995 | ) | | (48.7 | )% | Gross profit (loss) | | $ | 4,418 |
| | $ | (14,055 | ) | | $ | 18,473 |
| | 131.4 | % | Gross profit (loss) percentage | | 6.3 | % | | (10.2 | )% | | | | 16.5 | % | General and administrative expenses | | $ | 4,479 |
| | $ | 7,026 |
| | $ | (2,547 | ) | | (36.3 | )% | Asset impairment | | $ | — |
| | $ | 6,600 |
| | $ | (6,600 | ) | | n/a |
| Operating income (loss) | | $ | (61 | ) | | $ | (27,681 | ) | |
| |
|
Revenue decreased $67.0 million for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015. The decrease is attributable to an overall decrease in work experienced in our fabrication yardsbonuses as a result of depressed oil and gas prices and the corresponding reduction in customer demand for offshore fabrication projects. During 2015, we completed the fabrication of a 1,200 foot jacket, piles and an approximate 450 short ton topside with no similar project in 2016.
Gross profit increased $18.5 million to $4.4 million for the nine months ended September 30, 2016 compared to aour consolidated gross loss, of $14.1 million for the nine months ended September 30, 2015. The increase is due to contract losses of $14.3 million that were recorded during the third quarter of 2015 resulting from our inability to recover certain costs related to a deck and jacket for one of our deepwater projects. We had no such loss during the third quarter of 2016 and implemented cost cutting measures in response to decreases in work at our fabrication facilities.
General and administrative expenses decreased $2.5 million for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015 due to cost cutting measures implemented during 2016 in response to decreases in work at our fabrication facilities.
Asset impairment - During the nine months ended September 30, 2015, we recorded an asset impairment charge of $6.6 million related to a partially constructed topside, related valves, piping and equipment that we acquired from a customer following its default under a contract in 2012. Due to the sustained downturn in the energy sector, our ability to effectively market these assets was significantly limited, and we reassessed the asset’s net realizable value based on the estimated scrap value of the assets. We had no such impairments during the nine months ended September 30, 2016.
| | | | | | | | | | | | | | | | | Shipyards | | Nine Months Ended September 30, | | Increase or (Decrease) | | | 2016 | | 2015 | | Amount | | Percent | Revenue (1) | | $ | 86,553 |
| | $ | 47,177 |
| | $ | 39,376 |
| | 83.5 | % | Gross profit (1) | | $ | 9,595 |
| | $ | 6,022 |
| | $ | 3,573 |
| | 59.3 | % | Gross profit percentage | | 11.1 | % | | 12.8 | % | | | | (1.7 | )% | General and administrative expenses | | $ | 5,875 |
| | $ | 1,243 |
| | $ | 4,632 |
| | 372.6 | % | Operating income (1) | | $ | 3,720 |
| | $ | 4,779 |
| | | | |
____________
| | (1) | Revenue for the nine months ended September 30, 2016, includes $4.1 million of non-cash amortization of deferred revenue related to the values assigned to the contracts acquired in the LEEVAC transaction. |
Revenue increased $39.4 million for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015 due to the assets and operations acquired in the LEEVAC transaction (see LEEVAC Transaction above), which contributed $55.9 million in revenue for the nine months ended September 30, 2016. The increase was partially offset by decreases in work dueadditional personnel allocated to the downturn in the oil and gas industry.
Gross profit increased $3.6 million for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015 due to the LEEVAC transaction as well as increases in profitability estimates for other jobs in progress due to cost cutting measures.
General and administrative expenses increased $4.6 million for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015 due to the expenses associated with the operations acquired in the LEEVAC transaction and bonuses.
| | | | | | | | | | | | | | | | | Services | | Nine Months Ended September 30, | | Increase or (Decrease) | | | 2016 | | 2015 | | Amount | | Percent | Revenue | | $ | 76,179 |
| | $ | 70,987 |
| | $ | 5,192 |
| | 7.3 | % | Gross profit | | $ | 11,012 |
| | $ | 10,449 |
| | $ | 563 |
| | 5.4 | % | Gross profit percentage | | 14.5 | % | | 14.7 | % | | | | (0.2 | )% | General and administrative expenses | | $ | 4,119 |
| | $ | 3,008 |
| | $ | 1,111 |
| | 36.9 | % | Operating income | | $ | 6,893 |
| | $ | 7,441 |
| | | | | | | | | | | | | |
Revenue increased $5.2 million for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015 due to increases in the scope of two large offshore service projectsour corporate division during the first half of 2016.
Gross profit increased $563,000 for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015 due to increases in revenues and improved absorption of fixed costs resulting from an increase in labor hours worked.
General and administrative expenses increased $1.1 million for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015 due to additional administrative support costs related to increases in activity and bonuses.2017.
Liquidity and Capital Resources Historically, we have funded our business activities through cash generated from operations. At September 30, 2016March 31, 2017, we had no amounts outstanding under our credit facility, $4.5$4.6 million in outstanding letters of credit, and cash and cash equivalents totaling $55.6$34.7 million, compared to $34.8$51.2 million at December 31, 2015.2016. Working capital was $79.8$182.9 million and our ratio of current assets to current liabilities was 2.837.56 to 1 at September 30,March 31, 2017, compared to $78.0 million and 3.2 to 1, respectively, at December 31, 2016. Working capital at March 31, 2017, includes $110.5 million related to assets held for sale, primarily related to our South Texas facilities. Our primary sourceuse of cash during the three months ended March 31, 2017, was due to: Operating losses for the nine months ended September 30, 2016, wasquarter exclusive of non-cash depreciation, amortization, impairment and stock compensation expense of approximately $3.7 million, Payment of year-end bonuses related to 2016, Progress on liabilities from assumed contracts in the collection of accounts receivable under various customer contracts and sales of three cranes atLEEVAC transaction.While our Texas facility for $5.8 million. At September 30, 2016, our contracts receivable balance was $26.6 million of which we have subsequently collected $12.1 million through October 31, 2016. On January 1, 2016, we acquired substantially all of the assets and assumed certain specified liabilities of LEEVAC. The purchase price for the acquisition of the LEEVAC assets during 2016 was $20.0 million, subject to a working capital adjustment whereby we received a dollar-for-
dollar reductionnet $3.0 million in cash from the seller for the assumption of certain net liabilities of LEEVAC at closing and settlement payments from sureties on certain ongoing fabricationshipbuilding projects of $23.0 million that were assigned to us in the transaction. After taking into accountWe have significantly progressed these adjustments, wecontracts which in turn, has resulted in utilization of the working capital and settlement payments received approximately $1.6during 2016.
Fewer receipts from accounts receivable, primarily $4.6 million in cash at closing. Duringfrom one customer that refused delivery of a vessel on February 6, 2017, and has not paid. We have initiated arbitration proceedings during the quarter we presentedto enforce our working capital true-uprights under our construction contract, and Build-up of costs for contracts in progress related to a customer in our Shipyards division with significant milestone payments occurring in the seller, which resulted in an additional $1.5 million due to us. Additionally, we hired 380 employees upon acquisitionlater stages of the facilities representing substantially all of the former LEEVAC employees. Strategically, the transaction expands our marine fabrication and repair and maintenance presenceprojects which are expected to occur beginning in the Gulf South market. third quarter of 2017 through the first quarter of 2018. At the date of transaction, we acquired approximately $121.2March 31, 2017, our contracts receivable balance was $21.1 million of new build construction backlog inclusive of approximately $9.2which we have subsequently collected $4.1 million of purchase price fair value allocated to four, new build construction projects to be delivered in 2017 and 2018 for two customers. through April 21, 2017.
As of September 30, 2016,March 31, 2017, we had a credit agreement with Whitney Bank and JPMorgan Chase Bank N.A. that provides for an $80.0a $40.0 million revolving credit facility maturing January 2, 2017.November 29, 2018. The credit agreement allows the Company to use up to the full amount of the available borrowing base for letters of credit and up to $20.0 million for general corporate purposes. Our obligations under the credit agreement are secured by substantially all of our assets other(other than real property located in the state of Louisiana. On February 29, 2016, we entered into an amendment to our credit agreement. The amendment (i) extends the term of the Credit Facility from February 29, 2016 to January 2, 2017; (ii) increases the commitment feeestate). Commitment fees on undrawn amounts from 0.25% to 0.50%are 0.5% per annum; (iii) increases theannum and letter of credit fee,fees, subject to certain limited exceptions, to 2.00%are 2.0% per annum on undrawn stated amounts under letters of credit issued by the lenders; and (iv) limits the maximum amount of loans outstanding at any time for general corporate purposes to $20.0 million.lenders. Amounts borrowed under our the credit agreement bear interest, at our option, at either the prime lending rate established by JPMorgan Chase Bank, N.A. or LIBOR plus 2.0 percent. Under the amendment ourOur financial covenants beginning with the quarter endingat March 31, 20162017, are as follows:
| | (i) | minimum net worth requirement of not less than $250.0255.0 million plus |
| | a) | 50% of net income earned in each quarter beginning MarchDecember 31, 2016, and |
| | b) | 100% of proceeds from any issuance of common stock; |
| | c) | less the amount of any impairment on certain assets owned by Gulf Marine Fabricators, L.P. (our South Texas assets held for sale) up to $30.0 million; |
| | (ii) | debt to EBITDA ratio not greater than 3.02.5 to 1.0; and |
| | (iii) | interest coverage ratio not less than 2.0 to 1.0. |
At September 30, 2016,March 31, 2017, no amounts were outstanding under the credit facility, and we had outstanding letters of credit totaling $4.5$4.6 million, reducing the unused portion of our credit facility for additional letters of credit and borrowings to $75.5$35.4 million. As of September 30, 2016,March 31, 2017, we were in compliance with all covenants. During the fourth quarter, we expect
We are currently in discussions with one of our financial institutions to enter into a two-year, $40.0 million amendednew revolving line of credit with comparable availability, but with less restrictive financial covenants and restatedreduced fees as compared to our current revolving credit facility. We expect to close on this new revolving credit facility withand terminate our current lenders that will be secured by substantially all of our assets (other than real property). We anticipate the amendedexisting revolving credit facility will allow us to use the full $40.0 million borrowing base for both letters of credit and general corporate purposes. Given the historically low levels of borrowings under our current facility and our cash position, we requested a reduction in the amountsecond quarter of available credit under our revolver from $80.0 million to $40.0 million to decrease the commitment fees payable to our lenders for the undrawn portion of the facility.2017.
Our primary liquidity requirements are for the costs associated with servicingfabrication projects, and capital expenditures inand payment of dividends to our Fabrication and Shipyards segments. In particular, as further discussed in Note 2 in our Notes to Consolidated Financial Statements, in connection with the LEEVAC transaction, we received at closing a net cash amount that included consideration for billings in excess of costs and estimated earnings on uncompleted contracts and other payments from sureties representing pre-payment on the partially constructed vessels totaling $21.9 million as adjusted for the working capital true-up. Consequently, there will be required cash outflows for costs associated with the prepaid amounts without corresponding milestone billings.shareholders. We anticipate capital expenditures for the remainder of 20162017 to be approximately $1.8range between $6.0 million to $8.0 million primarily for the following: extension of one of our dry docks, and
improvements to our newly acquired facilities.Jennings and Lake Charles leased shipyards, improvement to the bulkhead at our Houma facility, and
computer system upgrades.
On October 21, 2016, a customer of our Shipyards’ segmentShipyards division announced it had received limited waivers from its lenders and noteholders through November 11, 2016 with respect towas in noncompliance with certain financial covenants included in the customer’s debt agreements. TheThis customer also announcedstated it had received limited waivers from its lenders and noteholders, but its debt agreements will require further negotiation and amendment. InOn April 19, 2017, the eventcustomer stated it had allowed the waivers to expire and remains in default of its covenants.
This same customer has rejected delivery of the vessel that we tendered for delivery on February 6, 2017, alleging certain technical deficiencies exist with respect to the vessel and is seeking recovery of all purchase price amounts previously paid by the customer under the contract. We are also building a second vessel for this customer that is scheduled for delivery during the second quarter of 2017. We disagree with our customer is unsuccessful inconcerning these efforts,alleged technical deficiencies and have put the customer will consider other options including a possible reorganizationin default under Chapter 11the terms of the Federal bankruptcy laws. At September 30, 2016, no contracts receivable werefor both vessels. As of March 31, 2017, approximately $4.6 million remained due and outstanding from our customer for the first vessel. The balance due to us upon delivery for a second vessel which is expected in May of this year, is approximately $4.9 million. On March 10, 2017, we gave notice for arbitration with our customer in an effort to resolve this matter. We intend to take all legal action as may be necessary to protect our rights under the contracts and deferred revenue exceeded our costs and estimated earnings in excess of billings on this contract. recover the remaining balances owed to us.
We continue to monitor our work performed in relation to our customer’s status and its ability to pay under the terms of its contract. Based on our evaluation to date,these contracts. Because these vessels have been completed or are substantially complete, we do not believe that they have significant fair value, and that we would be able to fully recover any loss on this contract is probable or estimable at this time.amounts due to us.
In February 2016,anticipation of the proceeds to be received from the sale of our BoardSouth Texas assets, we have engaged in a strategic financial analysis project with advisors to determine the appropriate use of Directors approvedproceeds from this transaction. We will be evaluating a decrease inmix of options including tactical capital improvement projects, strategic growth investment opportunities that support our quarterly dividend to $0.01 in an effort to conserve cash. business plan, stock buy-backs and/or dividends and working capital reinvestment.
On October 27, 2016,April 26, 2017, our Board of Directors declared a dividend of $0.01 per share on our shares of common stock outstanding, payable November 23, 2016May 25, 2017, to shareholders of record on November 10, 2016.May 11, 2017.
We believe our cash and cash equivalents generated by our operating activities and funds available under our credit facilityproceeds to be received from future assets sales will be sufficient to fund our capital expenditures issue future letters of credit and meet our working capital needs for both the near and longer term to continue our operations, satisfy our contractual operations and pay dividends to our shareholders. Additionally, we expect to close on a new revolving line of credit during the second quarter of 2017 as discussed above. We believe that the new facility will provide us with additional working capital flexibility to ramp up our operations quickly in times of rapid increasing demand, to continue to issue future letters of credit and to quickly take advantage of market opportunities.
Cash Flow Activities
For the ninethree months ended September 30, 2016March 31, 2017, net cash provided byused in operating activities was $19.3$15.1 million, compared to $18.7$1.6 million for the ninethree months ended September 30, 2015.March 31, 2016. The increase in cash provided byused in operations was primarily due to increased gross profitthe following:
Operating losses for the quarter in excess of non-cash depreciation, amortization, impairment and collectionsstock compensation expense of contract receivablesapproximately $3.7 million, Payment of year-end bonuses related to 2016, Progress on liabilities from assumed contracts in the LEEVAC transaction.While our purchase price for the acquisition of the LEEVAC assets during 2016 somewhat offset bywas $20.0 million, we received a net $3.0 million in cash from the seller for the assumption of certain net liabilities and settlement payments required for trade payableson ongoing shipbuilding projects of $23.0 million that were assigned to us in the transaction. We have significantly progressed these contracts which in turn, has resulted in utilization of the working capital and settlement payments received during 2016. Fewer receipts from accounts receivable, primarily $4.6 million from one customer that refused delivery of a vessel on February 6, 2017, and has not paid. We have initiated arbitration proceedings during the ninequarter to enforce our rights under our construction contract, and
Build-up of costs for contracts in progress related to a customer in our Shipyards division with significant milestone payments occurring in the later stages of the projects which are expected to occur beginning in the third quarter of 2017 through the first quarter of 2018.
Net cash used in investing activities for the three months ended September 30, 2016 asMarch 31, 2017, was $391,000, compared to 2015. Net cash provided by investing activities for the nine months ended September 30, 2016 was $2.0 million, compared to cash used in investing activities of $5.0$6.2 million for the ninethree months ended September 30, 2015.March 31, 2016. The increasechange in cash used in/provided by investing activities is primarily due to cash received from the sale of three cranes at our Texas facility for $5.8$5.4 million and $1.6 million of cash acquired in the LEEVAC transaction.
Net cash used in financing activities for the ninethree months ended September 30,March 31, 2017 and 2016, was $1.0 million and 2015 was $440,000 and $4.4 million,$291,000, respectively. The decreaseincrease in cash used in financing activities is due to the reduction in the cash dividend in 2016.payments made to taxing authorities on behalf of employees' for their vesting of common stock.
Contractual Obligations There have been no material changes from the information included in our Annual Report on Form 10-K for the year ended December 31, 2015.2016. For more information on our contractual obligations, refer to Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2015.2016. Off-Balance Sheet Arrangements There have been no material changes from the information included in our Annual Report on Form 10-K for the year ended December 31, 2015.2016. Item 3. Quantitative and Qualitative Disclosures About Market Risk. There have been no material changes in the Company’s market risks during the quarter ended September 30, 2016.March 31, 2017. For more information on market risk, refer to Part II, Item 7A. of our Annual Report on Form 10-K for the year ended December 31, 2015.2016. Item 4. Controls and Procedures. The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and that such information is communicated to the Company’s management, including its Chief Executive Officer and Interim Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. The Company’s management, with the participation of the Company’s Chief Executive Officer and Interim Chief Financial Officer, hashave evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based on this evaluation, our Chief Executive Officer and Interim Chief Financial Officer hashave concluded that the design and operation of our disclosure controls and procedures were effective as of the end of the period covered by this report. There have been no changes during the fiscal quarter ended September 30, 2016March 31, 2017, in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. PART II. OTHER INFORMATION Item 1. Legal Proceedings. The Company is subject to various routine legal proceedings in the normal conduct of its business primarily involving commercial claims, workers’ compensation claims, and claims for personal injury under general maritime laws of the United
States and the Jones Act. While the outcome of these lawsuits, legal proceedings and claims cannot be predicted with certainty, management believes that the outcome of any such proceedings, even if determined adversely, would not have a material adverse effect on the financial position, results of operations or cash flows of the Company. Item 1A. Risk Factors. There have been no material changes from the information included in Item 1A “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2015.2016. | | | | | 2.1Exhibit Number | | Asset Purchase Agreement, dated December 23, 2015 by and among Gulf Island Shipyards, LLC, LEEVAC Shipyards, LLC and certain related affiliates, incorporated by reference toDescription of Exhibit 2.1 of the Company's Form 8-K filed on December 23, 2015. | | | 3.1 | | Composite Articles of Incorporation of the Company incorporated by reference to Exhibit 3.1 of the Company’s Form 10-Q filed April 23, 2009. | 3.2 | | Amended and Restated Bylaws of the Company, as amended and restated through April 26, 2012, incorporated by reference to Exhibit 3.1 of the Company’s Form 8-K filed on April 30, 2012. | 4.1 | | Specimen Common Stock Certificate, incorporated by reference to the Company’s Form S-1/A filed March 19, 1997 (Registration No. 333-21863).November 4, 2016. | 10.1 | | Change of Control Agreement, dated March 1, 2017, between the Company and David S. Schorlemer, incorporated by reference to Exhibit 10.15 of the Company's Form of Long-Term Performance-Based Cash Award Agreement.10-K for the year ended December 31, 2016 filed on March 2, 2017. | 3131.1 | | CEO and Certifications pursuant to Rule 13a-14 under the Securities Exchange Act of 1934. | 31.2 | | CFO CertificationCertifications pursuant to Rule 13a-14 under the Securities Exchange Act of 1934. | 32 | | Section 906 Certification furnished pursuant to 18 U.S.C. Section 1350. | 99.1 | | Press release issued by | 101 | | Attached as Exhibit 101 to this report are the following items formatted in XBRL (Extensible Business Reporting Language): | | | (i) | Consolidated Balance Sheets, | | | (ii) | Consolidated Statements of Operations, | | | (iii) | Consolidated Statement of Changes in Shareholders’ Equity, | | | (iv) | Consolidated Statements of Cash Flows and | | | (v) | Notes to Consolidated Financial Statements. |
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. | | | GULF ISLAND FABRICATION, INC. | | BY: | /s/ David S. Schorlemer | | David S. Schorlemer | | Executive Vice President, Chief Financial Officer, and Treasurer (Principal Financial and Accounting Officer) |
Date: May 2, 2017
GULF ISLAND FABRICATION, INC. EXHIBIT INDEX | | | | | Exhibit Number | | Description of Exhibit | | | 3.1 | | Composite Articles of Incorporation of the Company on October 27, 2016, incorporated by reference to Exhibit 99.13.1 of the Company’s Form 10-Q filed April 23, 2009. | 3.2 | | Amended and Restated Bylaws of the Company, incorporated by reference to Exhibit 3.1 of the Company’s Form 8-K filed November 4, 2016. | 10.1 | | Change of Control Agreement, dated March 1, 2017, between the Company and David S. Schorlemer, incorporated by reference to Exhibit 10.15 of the Company's Form 10-K for the year ended December 31, 2016 filed on October 27, 2016.March 2, 2017. | 31.1 | | CEO Certifications pursuant to Rule 13a-14 under the Securities Exchange Act of 1934. | 31.2 | | CFO Certifications pursuant to Rule 13a-14 under the Securities Exchange Act of 1934. | 32 | | Section 906 Certification furnished pursuant to 18 U.S.C. Section 1350. | | | | 101 | | Attached as Exhibit 101 to this report are the following items formatted in XBRL (Extensible Business Reporting Language): | | | | | | (i) | Consolidated Balance Sheets, | | | (ii) | Consolidated Statements of Operations, | | | (iii) | Consolidated Statement of Changes in Shareholders’ Equity, | | | (iv) | Consolidated Statements of Cash Flows and | | | (v) | Notes to Consolidated Financial Statements. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | GULF ISLAND FABRICATION, INC. | | BY: | /s/ Kirk J. Meche | | Kirk J. Meche | | President, Chief Executive Officer, Director and Interim Chief Financial Officer, Treasurer and Secretary (Principal Executive Officer and Interim Principal Financial and Accounting Officer) |
Date: November 2, 2016
GULF ISLAND FABRICATION, INC.
EXHIBIT INDEX
| | | | | Exhibit
Number
| | Description of Exhibit | | | 2.1 | | Asset Purchase Agreement, dated December 23, 2015 by and among Gulf Island Shipyards, LLC, LEEVAC Shipyards, LLC and certain related affiliates, incorporated by reference to Exhibit 2.1 of the Company's Form 8-K filed on December 23, 2015.
| 3.1 | | Composite Articles of Incorporation of the Company, incorporated by reference to Exhibit 3.1 of the Company’s Form 10-Q filed April 23, 2009. | 3.2 | | Bylaws of the Company, as amended and restated through April 26, 2012, incorporated by reference to Exhibit 3.1 of the Company’s Form 8-K filed on April 30, 2012. | 4.1 | | Specimen Common Stock Certificate, incorporated by reference to the Company’s Form S-1/A filed March 19, 1997 (Registration No. 333-21863). | 10.1 | | Form of Long-Term Performance-Based Cash Award Agreement. | 31 | | CEO and CFO Certifications pursuant to Rule 13a-14 under the Securities Exchange Act of 1934. | 32 | | Section 906 Certification furnished pursuant to 18 U.S.C. Section 1350. | 99.1 | | Press release issued by the Company on October 27, 2016, incorporated by reference to Exhibit 99.1 of the Company’s Form 8-K filed on October 27, 2016. | 101 | | Attached as Exhibit 101 to this report are the following items formatted in XBRL (Extensible Business Reporting Language): | | | | | | (i) | Consolidated Balance Sheets, | | | (ii) | Consolidated Statements of Operations, | | | (iii) | Consolidated Statement of Changes in Shareholders’ Equity, | | | (iv) | Consolidated Statements of Cash Flows and | | | (v) | Notes to Consolidated Financial Statements. |
s | Labor hours | | ___________ | | 1. | Backlog as of September 30, 2016March 31, 2017, includes commitments received through October 27, 2016.April 26, 2017. We exclude suspended projects from contract backlog thatwhen they are expected to be suspended more than twelve months because resumption of work and timing of revenue recognition for these projects are difficult to predict. Our backlog also includes the new build construction that was acquired in the LEEVAC transaction on January 1, 2016. Included in our backlog at September 30, 2016, is $5.1 million of non-cash revenue related to purchase price fair value of contracts acquired in the LEEVAC transaction and included in deferred revenue in our consolidated Balance sheet at September 30, 2016. |
| | 2. | At September 30, 2016,March 31, 2017, projects for our threetwo largest customers in terms of revenue backlog consisted of: |
| | (i) | two large petroleum supply vessels for one customer in our Shipyards segment, which commenced in the second quarter of 2013 and will be completed during the first and second quarter of 2017; |
| | (ii) | two large multi-purpose service vessels for one customer in our Shipyards segment, which commenced in the first quarter of 2014 and will be completed during the first and second quarterquarters of 2018; and |
(iii) the fabrication of four modules associated with a U.S. ethane cracker project.
| | (ii) | the fabrication of four modules associated with a U.S. ethane cracker project. |
| | 3. | The timing of recognition of the revenue represented in our backlog is based on management’s current estimates to complete the projects. Certain factors and circumstances could cause changes in the amounts ultimately recognized and the timing of the recognition of revenue from our backlog. |
Depending on the size of the project, the termination, postponement, or reduction in scope of any one project could significantly reduce our backlog and could have a material adverse effect on revenue, net income and cash flow. As of September 30, 2016,March 31, 2017, we had 1,336922 employees and 163133 contract employees inclusive of 380 employees hired in the LEEVAC transaction, compared to 1,2551,178 employees and 7192 contract employees as of December 31, 2015. 2016.
Labor hours worked were 2.3 million479,000 during the ninethree months ended September 30, 2016,March 31, 2017, compared to 2.1 million695,000 for the ninethree months ended September 30, 2015.March 31, 2016. The overall increasedecrease in labor hours worked for the three months ended September 30, 2016March 31, 2017, was due to 636,000 labor hours worked from projects acquired in the LEEVAC transaction partially offset by a reduction in fabrication activity due primarily to the downturn in the oil and gas industry.
Results of Operations
Our results of operations are affected primarily by our ability to effectively manage contracts to a successful completion along with producing maximum efficiencies as it relates to manhours.
Three Months Ended September 30, 2016 Compared to Three Months Ended September 30, 2015 (in thousands, except for percentages):
Consolidated
| | | | | | | | | | | | | | | | Three Months Ended September 30, | | Increase or (Decrease) | | 2016 | | 2015 | | Amount | Percent | Revenue | $ | 65,384 |
| | $ | 67,531 |
| | $ | (2,147 | ) | (3.2 | )% | Cost of revenue | 60,125 |
| | 75,368 |
| | (15,243 | ) | (20.2 | )% | Gross profit (loss) | 5,259 |
| | (7,837 | ) | | 13,096 |
| 167.1 | % | Gross profit percentage | 8.0% | | (11.6)% | | | | General and administrative expenses | 5,086 |
| | 3,798 |
| | 1,288 |
| 33.9 | % | Asset impairment | — |
| | 6,600 |
| | (6,600 | ) | n/a |
| Operating income | 173 |
| | (18,235 | ) | | 18,408 |
| 100.9 | % | Other income (expense): | | | | | | | Interest expense | (110 | ) | | (39 | ) | | (71 | ) |
|
| Interest income | 12 |
| | 8 |
| | 4 |
|
|
| Other income, net | 599 |
| | — |
| | 599 |
|
|
| | 501 |
| | (31 | ) | | 532 |
| 1,716.1 | % | Net income (loss) before income taxes | 674 |
| | (18,266 | ) | | 18,940 |
| 103.7 | % | Income taxes | 133 |
| | (6,129 | ) | | 6,262 |
| 102.2 | % | Net income (loss) | $ | 541 |
| | $ | (12,137 | ) | | $ | 12,678 |
| 104.5 | % |
Revenue - Our revenue for the three months ended September 30, 2016 and 2015 was $65.4 million and $67.5 million, respectively, representing a decrease of 3.2%. The decrease is primarily attributable to an overall decrease in work experienced in our fabrication yardsfacilities as a result of depressed oil and gas prices and the corresponding reduction in customer demand within all of our operating divisions.
Results of Operations Three Months Ended March 31, 2017 Compared to Three Months Ended March 31, 2016 (in thousands, except for offshore projects in our Fabrication segment. During 2015, we completed the fabrication of a 1,200 foot jacket, piles and an approximate 450 short ton topside with no similar project in 2016.percentages): Consolidated | | | | | | | | | | | | | | | Three Months Ended March 31, | | Increase or (Decrease) | | 2017 | | 2016 | | Amount | Percent | Revenue | $ | 37,993 |
| | $ | 83,979 |
| | $ | (45,986 | ) | (54.8)% | Cost of revenue | 42,890 |
| | 78,278 |
| | (35,388 | ) | (45.2)% | Gross profit (loss) | (4,897 | ) | | 5,701 |
| | (10,598 | ) | 185.9% | Gross profit (loss) percentage | (12.9)% | | 6.8% | | | | General and administrative expenses | 3,930 |
| | 4,485 |
| | (555 | ) | (12.4)% | Asset impairment | 389 |
| | — |
| | 389 |
| 100.0% | Operating income (loss) | (9,216 | ) | | 1,216 |
| | (10,432 | ) | (857.9)% | Other income (expense): | | | | | | | Interest expense | (59 | ) | | (50 | ) | | (9 | ) | | Interest income | — |
| | 6 |
| | (6 | ) | | Other income, net | 9 |
| | 398 |
| | (389 | ) | | Total other income (expense) | (50 | ) | | 354 |
| | (404 | ) | (114.1)% | Net income (loss) before income taxes | (9,266 | ) | | 1,570 |
| | (10,836 | ) | (690.2)% | Income taxes | (2,812 | ) | | 581 |
| | (3,393 | ) | (584.0)% | Net income (loss) | $ | (6,454 | ) | | $ | 989 |
| | $ | (7,443 | ) | (752.6)% |
Revenue - Our decrease in revenue earned from offshore fabrication work was partially offset by the results of the assets and operations acquired in the LEEVAC transaction (see LEEVAC Transaction above), which contributed $16.8 million in revenue for the three months ended September 30, 2016.March 31, 2017 and 2016, was $38.0 million and $84.0 million, respectively, representing a decrease of 54.8%. The decrease is primarily attributable to an overall decrease in work experienced in our facilities as a result of depressed oil and gas prices and the corresponding reduction in customer demand within all of our operating divisions. Pass-through costs as a percentage of revenue were 33.8%29.4% and 45.3%40.0% for the three-months ended September 30,March 31, 2017 and 2016, and 2015, respectively. Pass-through costs, as described in Note 3 of the Notes to Consolidated Financial Statements, are included in revenue but have no impact on the gross profit recognized on a project for a particular period.
Gross profit (loss)- Our gross profit (loss)loss for the three months ended September 30, 2016 and 2015March 31, 2017, was $5.3$4.9 million (8.0% of revenue) and $(7.8) million, respectively. Ourcompared to a gross profit improved compared to third quarter of 2015$5.7 million for the three months ended March 31, 2016. The decrease was primarily due to contract losses of $14.3 million that were recorded during the third quarter of 2015 resulting from our inability to recover certain costs related to a deckdecreased revenue as discussed above and jacket for one of our deepwater projects. We had no such loss during the third quarter of 2016 and implemented cost cutting measures. This wastighter margins on current work partially offset by tighter margins within all of our segments due to a decreasedecreases in work as a result of the downturn in the oil and gas industry.costs resulting from additional cost cutting measures implemented by management.
General and administrative expenses - Our general and administrative expenses were $5.1$3.9 million for the three months ended September 30, 2016,March 31, 2017, compared to $3.8$4.5 million for the three months ended September 30, 2015.March 31, 2016. The increasedecrease in general
and administrative expenses for the three months ended September 30, 2016March 31, 2017, was primarily attributable to the operations acquired in the LEEVAC transaction and bonus expense, partially offset by cost cutting effortsmeasures implemented by management during 2016.the first part of 2016 as well as lower bonuses accrued during 2017 as a result of a combination of a smaller workforce and our consolidated gross loss.
Asset impairmentImpairment - During the three months ended September 30, 2015,March 31, 2017, we recorded an asset impairment charge of $6.6 million$389 related to a partially constructed topside, related valves, piping and equipment that we acquired from a customer following its default under a contract in 2012. Due to the sustained downturn in the energy sector, our ability to effectively market these assets was significantly limited, and we reassessed the asset’s net realizable value based on the estimated scrap valueheld for sale at our Prospect Shipyard. See also Note 2 of the assets. We had no such impairments during the three months ended September 30, 2016.Notes to Consolidated Financial statements. Interest expense,
Other income, net - The Company had net interest expense of $98,000Other income decreased $389,000 for the three months ended September 30, 2016 compared to net interest expense of $31,000 for the three months ended September 30, 2015.March 31, 2017. The increase was primarily driven by an increase in the cost of unused credit facility fees under our credit agreement. Other income, net - Other income increased $599,000 for the three months ended September 30, 2016. The increasedecrease was primarily due to gains on sales of assets from our Fabrication division.division recorded during three months ended March 31, 2016.
Income taxes - Our effective income tax rate for the three months ended September 30, 2016March 31, 2017, was 19.7%30.3%, compared to an effective tax rate of 34.0%37.0% for the comparable period during 2015.2016. The changedecrease in ourthe effective tax rate is duethe result of limitations on the deductibility of executive compensation and $210,000 in tax expense recognized during the three months ended March 31, 2017, for the tax effect of the difference between the actual tax deduction allowed upon vesting of common stock and the compensation cost recognized for financial reporting purposes resulting from the adoption of Accounting Standards Update 2016-09 as further discussed in Note 1 of the Notes to the decrease in our effective rate for the year-to-date period.Consolidated Financial Statements.
Operating Segments
As discussed in Note 8 of the Notes to Consolidated Financial Statements, management reduced its allocation of corporate administrative costs and overhead expenses to its operating divisions during the three months ended March 31, 2017, such that a significant portion of its corporate expenses are retained in its non-operating Corporate division. In addition, it has also allocated certain personnel previously included in the operating divisions to within the Corporate division. In doing so, management believes that it has created a fourth reportable segment with each of its three operating divisions and it's Corporate division each meeting the criteria of reportable segments under GAAP. During the three months ended March 31, 2016, we allocated substantially all of our corporate administrative costs and overhead expenses to our three operating divisions. We have recast our 2016 segment data below in order to conform to the current period presentation. Our results of our three operating divisions and Corporate division for the three months ended March 31, 2017 and 2016, are presented below (in thousands, except for percentages).
| | | | | | | | | | | | | | | | | Fabrication | | Three Months Ended September 30, | | Increase or (Decrease) | | | 2016 | | 2015 | | Amount | | Percent | Revenue | | $ | 22,311 |
| | $ | 32,133 |
| | $ | (9,822 | ) | | (30.6 | )% | Gross profit (loss) | | $ | 532 |
| | $ | (14,009 | ) | | $ | 14,541 |
| | 103.8 | % | Gross profit percentage | | 2.4 | % | | (43.6 | )% | | | | 46.0 | % | General and administrative expenses | | $ | 1,481 |
| | $ | 2,138 |
| | $ | (657 | ) | | (30.7 | )% | Asset impairment | | $ | — |
| | $ | 6,600 |
| | $ | (6,600 | ) | | n/a |
| Operating income (loss) | | $ | (949 | ) | | $ | (22,747 | ) | | | | |
| | | | | | | | | | | | | | | | Fabrication | | Three Months Ended March 31, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | 10,209 |
| | $ | 23,829 |
| | $ | (13,620 | ) | | (57.2)% | Gross profit (loss) | | (2,966 | ) | | 86 |
| | (3,052 | ) | | (3,548.8)% | Gross profit (loss) percentage | | (29.1 | )% | | 0.4 | % | | | | (29.5)% | General and administrative expenses | | 821 |
| | 795 |
| | 26 |
| | 3.3% | Operating income (loss) | | (3,787 | ) | | (709 | ) | | | | |
Revenue - Revenue from our Fabrication division decreased $9.8$13.6 million for the three months ended September 30, 2016March 31, 2017, compared to the three months ended September 30, 2015.March 31, 2016. The decrease is attributable to an overall decrease in work experienced in our fabrication yards as a result of depressed oil and gas prices and the corresponding reduction in customer demand for offshore fabrication projects. As discussed above, management has classified our South Texas assets as assets held for sale in response to the underutilization of our Fabrication assets.
Gross profit increased $14.5 million to $532,000(loss) - Gross loss from our Fabrication division for the three months ended September 30, 2016March 31, 2017, was $3.0 million compared to a gross lossprofit of $14.0 million$86,000 for the three months ended September 30, 2015March 31, 2016. The decrease was due to contract losseslower revenue as discussed above, payment of $14.3termination benefits as we reduce our South Texas workforce and depreciation expense of $1.9 million that were recorded during the third quarter of 2015related to our South Texas assets prior to their classification as assets held for sale. This was partially offset by decreases in costs resulting from our inability to recover certain costs related to a deck and jacket for one of our deepwater projects. We had no such loss during the third quarter of 2016 and implementedadditional cost cutting measures in response to decreases in work at our fabrication facilities.implemented by management.
General and administrative expenses - General and administrative expenses decreased $657,000for our Fabrication division increased $26,000 for the three months ended September 30, 2016March 31, 2017, compared to the three months ended September 30, 2015March 31, 2016. The increase is primarily due to cost cutting measures implemented during 2016 in responseexpenses incurred to decreases in work atmarket our fabrication facilities.South Texas assets for sale and payment of termination benefits as we reduce its workforce and complete those operations.
Asset impairment - During the three months ended September 30, 2015, we recorded an asset impairment charge of $6.6 million related to a partially constructed topside, related valves, piping and equipment that we acquired from a customer following its default under a contract in 2012. Due to the sustained downturn in the energy sector, our ability to effectively market these assets was significantly limited, and we reassessed the asset’s net realizable value based on the estimated scrap value of the assets. We had no such impairments during the three months ended September 30, 2016.
| | | | | | | | | | | | | | | | | Shipyards | | Three Months Ended September 30, | | Increase or (Decrease) | | | 2016 | | 2015 | | Amount | | Percent | Revenue (1) | | $ | 23,060 |
| | $ | 12,936 |
| | $ | 10,124 |
| | 78.3 | % | Gross profit (1) | | $ | 1,877 |
| | $ | 1,937 |
| | $ | (60 | ) | | (3.1 | )% | Gross profit percentage | | 8.1 | % | | 15.0 | % | | | | (6.9 | )% | General and administrative expenses | | $ | 2,065 |
| | $ | 392 |
| | $ | 1,673 |
| | 426.8 | % | Operating income (loss) (1) | | $ | (188 | ) | | $ | 1,545 |
| | | | |
| | | | | | | | | | | | | | | | Shipyards | | Three Months Ended March 31, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue (1) | | $ | 18,422 |
| | $ | 34,120 |
| | $ | (15,698 | ) | | (46.0)% | Gross profit (loss)(1) | | (1,704 | ) | | 2,375 |
| | (4,079 | ) | | (171.7)% | Gross profit (loss) percentage | | (9.2 | )% | | 7.0 | % | | | | (16.2)% | General and administrative expenses | | 964 |
| | 1,296 |
| | (332 | ) | | (25.6)% | Asset impairment | | 389 |
| | — |
| | 389 |
| | 100.0% | Operating income (loss) (1) | | (3,057 | ) | | 1,079 |
| | | | |
___________ | | (1) | Revenue for the three months ended September 30,March 31, 2017, and 2016, includes $1.5$1.6 million and $1.2 million of non-cash amortization of deferred revenue related to the values assigned to the contracts acquired in the LEEVAC transaction.transaction, respectively. |
Revenue increased $10.1- Revenue from our Shipyards division decreased $15.7 million for the three months ended September 30, 2016March 31, 2017, compared to the three months ended September 30, 2015March 31, 2016, due to the operations acquiredoverall decreases in work as we complete work under our contracts
including completion of a vessel that we assumed in the LEEVAC transaction (see LEEVAC Transaction above), which contributed $16.8 million in revenue forand delivered to a customer on February 6, 2017, with less new, replacement work starting during the three months ended September 30, 2016.
Gross profit decreased $60,000 for the three months ended September 30, 2016period as compared to the three months ended September 30, 2015March 31, 2016. The decrease in new, replacement work is due to tighter marginsdepressed oil and gas prices and the corresponding reduction in customer demand for shipbuilding and repair services supporting the oil and gas industry.
Gross profit (loss) - Gross loss from our Shipyards division was $1.7 million for the three months ended March 31, 2017, compared to a gross profit of $2.4 million for the three months ended March 31, 2016. The decrease was due to:
continued cost overruns on new work and inefficiencies incurred on the contracts acquiredthat were assigned to us in the LEEVAC transaction transaction; holding costs related to a completed vessel that was delivered on February 6, 2017; however, was refused by our customer alleging certain technical deficiencies (see also Note 9 of the Notes to Consolidated Financial Statements); and overall decreases in work under other various contracts as discussed above; partially offset by savings realized from cost cutting measures implemented by management during 2016.
General and administrative expenses - General and administrative expenses increased $1.7for our Shipyards division decreased $332,000 for the three months ended March 31, 2017, compared to the three months ended March 31, 2016, primarily due to cost cutting measures implemented by management during 2016 as well as lower bonuses accrued during 2017 as a result of a combination of a smaller workforce and our consolidated gross loss.
Asset Impairment - During three months ended March 31, 2017, we recorded an impairment of $389 related to our assets held for sale at our Prospect Shipyard. See also Note 2 of the Notes to Consolidated Financial statements.
| | | | | | | | | | | | | | | | Services | | Three Months Ended March 31, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | 10,712 |
| | $ | 26,559 |
| | $ | (15,847 | ) | | (59.7)% | Gross profit | | 33 |
| | 3,376 |
| | (3,343 | ) | | (99.0)% | Gross profit (loss) percentage | | 0.3 | % | | 12.7 | % | | | | (12.4)% | General and administrative expenses | | 666 |
| | 726 |
| | (60 | ) | | (8.3)% | Operating income (loss) | | (633 | ) | | 2,650 |
| | | | |
Revenue - Revenue from our Services division decreased $15.8 million for the three months ended September 30, 2016March 31, 2017, compared to the three months ended September 30, 2015 primarilyMarch 31, 2016, due to the expenses associated with the operations acquired in the LEEVAC transaction and bonus expense. | | | | | | | | | | | | | | | | | Services | | Three Months Ended September 30, | | Increase or (Decrease) | | | 2016 | | 2015 | | Amount | | Percent | Revenue | | $ | 20,928 |
| | $ | 23,487 |
| | $ | (2,559 | ) | | (10.9 | )% | Gross profit | | $ | 2,850 |
| | $ | 4,235 |
| | $ | (1,385 | ) | | (32.7 | )% | Gross profit percentage | | 13.6 | % | | 18.0 | % | | | | (4.4 | )% | General and administrative expenses | | $ | 1,540 |
| | $ | 994 |
| | $ | 546 |
| | 54.9 | % | Operating income | | $ | 1,310 |
| | $ | 3,241 |
| | | | | | | | | | | | | |
Revenue decreased $2.6 million for the three months ended September 30, 2016 compared to the three months ended September 30, 2015 due to the winding down of two large offshore service projects from the first half of 2016 and the downturn in the oil and gas industry.
Gross profit decreased $1.4 million for the three months ended September 30, 2016 compared to the three months ended September 30, 2015 due to decreases in revenues and tighter margins on new work.
General and administrative expenses increased $546,000 for the three months ended September 30, 2016 compared to the three months ended September 30, 2015 due to bonuses and additional administrative support added during the first half of 2016.
Nine Months Ended September 30, 2016 Compared to Nine Months Ended September 30, 2015 (in thousands, except for percentages):
Consolidated
| | | | | | | | | | | | | | | | Nine Months Ended September 30, | | Increase or (Decrease) | | 2016 | | 2015 | | Amount | Percent | Revenue | $ | 230,864 |
| | $ | 251,102 |
| | $ | (20,238 | ) | (8.1 | )% | Cost of revenue | 205,839 |
| | 248,686 |
| | (42,847 | ) | (17.2 | )% | Gross profit | 25,025 |
| | 2,416 |
| | 22,609 |
| 935.8 | % | Gross profit percentage | 10.8% | | 1.0% | | | | General and administrative expenses | 14,633 |
| | 11,817 |
| | 2,816 |
| 23.8 | % | Asset impairment | — |
| | 6,600 |
| | (6,600 | ) | n/a |
| Operating income (loss) | 10,392 |
| | (16,001 | ) | | 26,393 |
| 164.9 | % | Other income (expense): | | | | | | | Interest expense | (248 | ) | | (126 | ) | | (122 | ) |
|
| Interest income | 20 |
| | 21 |
| | (1 | ) |
|
| Other income, net | 1,039 |
| | 20 |
| | 1,019 |
|
|
| | 811 |
| | (85 | ) | | 896 |
| 1,054.1 | % | Net income (loss) before income taxes | 11,203 |
| | (16,086 | ) | | 27,289 |
| 169.6 | % | Income taxes | 4,134 |
| | (5,389 | ) | | 9,523 |
| 176.7 | % | Net income (loss) | $ | 7,069 |
| | $ | (10,697 | ) | | $ | 17,766 |
| 166.1 | % |
Revenue - Our revenue for the nine months ended September 30, 2016 and 2015 was $230.9 million and $251.1 million, respectively, representing a decrease of 8.1%. The decrease is primarily attributable to an overall decrease in work experienced in our fabrication yards primarily as a result of depressed oil and gas prices and the corresponding reduction in customer demand for offshore projects inoil and gas related service projects.
Gross profit - Gross profit from our Fabrication segment. During 2015, we completed the fabrication of a 1,200 foot jacket, piles and an approximate 450 short ton topside with no similar project in 2016. Our decrease in revenue earned from offshore fabrication work was partially offset by the assets and operations acquired in the LEEVAC transaction (see LEEVAC Transaction above), which contributed $55.9Services division decreased $3.3 million in revenue for the ninethree months ended September 30, 2016. Pass-through costs as a percentage of revenue were 35.0% and 43.2% forMarch 31, 2017, compared to the ninethree months ended September 30,March 31, 2016, and 2015, respectively. Pass-through costs, as described in Note 3 of the Notes to Consolidated Financial Statements, are included in revenue but have no impact on the gross profit recognized on a project for a particular period. Gross profit - Our gross profit for the nine months ended September 30, 2016 and 2015 was $25.0 million (10.8% of revenue) and $2.4 million (1.0% of revenue), respectively. Our gross profit improved compared to 2015 primarily due to the LEEVAC transactiondecreased revenue discussed above and contract losses of $14.3 million that were recordedtighter margins on new work performed during the third quarter of 2015 resulting from our inability to recover certain costs related to a deck and jacket for one of our deepwater projects. We had no such loss during the third quarter of 2016 and implemented cost cutting measures in response to decreases in work at our fabrication facilities.2017.
General and administrative expenses - Our general and administrative expenses were $14.6 million for the nine months ended September 30, 2016, compared to $11.8 million for the nine months ended September 30, 2015. The increase in generalGeneral and administrative expenses for our Services division decreased $60,000 for the ninethree months ended September 30,March 31, 2017, compared to the three months ended March 31, 2016, was primarily attributable to:
an increase of stock-based compensation expense of $589,000,
due to lower bonuses and the LEEVAC transaction; partially offset by
cost cutting efforts implementedaccrued during 2017, as a result of a combination of a smaller workforce and the downturnreduction in the oil and gas industry.gross profit.
Asset impairment
| | | | | | | | | | | | | | | | Corporate | | Three Months Ended March 31, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | — |
| | $ | — |
| | $ | — |
| | —% | Gross loss | | (260 | ) | | (136 | ) | | (124 | ) | | (91.2)% | Gross profit (loss) percentage | | n/a |
| | n/a |
| | | |
| General and administrative expenses | | 1,479 |
| | 1,668 |
| | (189 | ) | | (11.3)% | Operating loss | | (1,739 | ) | | (1,804 | ) | | 65 |
| | |
Gross loss - During the nine months ended September 30, 2015, we recorded an asset impairment charge of $6.6 million related to a partially constructed topside, related valves, piping and equipment that we acquiredGross loss from a customer following its default under a contract in 2012. Due to the sustained downturn in the energy sector, our ability to effectively
market these assets was significantly limited, and we reassessed the asset’s net realizable value based on the estimated scrap value of the assets. We had no such impairments during the nine months ended September 30, 2016.
Interest expense, net - The Company had net interest expense of $228,000 for the nine months ended September 30, 2016 compared to net interest expense of $105,000 for the nine months ended September 30, 2015. The increase in net interest expense for the nine months ended September 30, 2016 was primarily driven by an increase in the cost of unused credit facility fees under our credit agreement.
Other income, net - Other incomeCorporate division increased $1.0 million for the nine months ended September 30, 2016. The increase was primarily due to gainsa restructuring of $924,000 relatedour corporate division with additional personnel allocated to the sale of three cranes at our Texas facilitycorporate division during 2017 as well as sales of smaller assets bydiscussed above.
General and administrative expenses - General and administrative expenses for our Shipyards division. Income taxes - Our effective income tax rate for the nine months ended September 30, 2016 was 36.9%, compared to an effective tax rate of 34.0% for the comparable period during 2015. The increase in our effective rate isCorporate division decreased primarily due to the effect of state income taxes from income generated within Louisiana with no offsetting tax benefit from losses generated within Texas.
Operating Segments
| | | | | | | | | | | | | | | | | Fabrication | | Nine Months Ended September 30, | | Increase or (Decrease) | | | 2016 | | 2015 | | Amount | | Percent | Revenue | | $ | 70,436 |
| | $ | 137,431 |
| | $ | (66,995 | ) | | (48.7 | )% | Gross profit (loss) | | $ | 4,418 |
| | $ | (14,055 | ) | | $ | 18,473 |
| | 131.4 | % | Gross profit (loss) percentage | | 6.3 | % | | (10.2 | )% | | | | 16.5 | % | General and administrative expenses | | $ | 4,479 |
| | $ | 7,026 |
| | $ | (2,547 | ) | | (36.3 | )% | Asset impairment | | $ | — |
| | $ | 6,600 |
| | $ | (6,600 | ) | | n/a |
| Operating income (loss) | | $ | (61 | ) | | $ | (27,681 | ) | |
| |
|
Revenue decreased $67.0 million for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015. The decrease is attributable to an overall decrease in work experienced in our fabrication yardsbonuses as a result of depressed oil and gas prices and the corresponding reduction in customer demand for offshore fabrication projects. During 2015, we completed the fabrication of a 1,200 foot jacket, piles and an approximate 450 short ton topside with no similar project in 2016.
Gross profit increased $18.5 million to $4.4 million for the nine months ended September 30, 2016 compared to aour consolidated gross loss, of $14.1 million for the nine months ended September 30, 2015. The increase is due to contract losses of $14.3 million that were recorded during the third quarter of 2015 resulting from our inability to recover certain costs related to a deck and jacket for one of our deepwater projects. We had no such loss during the third quarter of 2016 and implemented cost cutting measures in response to decreases in work at our fabrication facilities.
General and administrative expenses decreased $2.5 million for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015 due to cost cutting measures implemented during 2016 in response to decreases in work at our fabrication facilities.
Asset impairment - During the nine months ended September 30, 2015, we recorded an asset impairment charge of $6.6 million related to a partially constructed topside, related valves, piping and equipment that we acquired from a customer following its default under a contract in 2012. Due to the sustained downturn in the energy sector, our ability to effectively market these assets was significantly limited, and we reassessed the asset’s net realizable value based on the estimated scrap value of the assets. We had no such impairments during the nine months ended September 30, 2016.
| | | | | | | | | | | | | | | | | Shipyards | | Nine Months Ended September 30, | | Increase or (Decrease) | | | 2016 | | 2015 | | Amount | | Percent | Revenue (1) | | $ | 86,553 |
| | $ | 47,177 |
| | $ | 39,376 |
| | 83.5 | % | Gross profit (1) | | $ | 9,595 |
| | $ | 6,022 |
| | $ | 3,573 |
| | 59.3 | % | Gross profit percentage | | 11.1 | % | | 12.8 | % | | | | (1.7 | )% | General and administrative expenses | | $ | 5,875 |
| | $ | 1,243 |
| | $ | 4,632 |
| | 372.6 | % | Operating income (1) | | $ | 3,720 |
| | $ | 4,779 |
| | | | |
____________
| | (1) | Revenue for the nine months ended September 30, 2016, includes $4.1 million of non-cash amortization of deferred revenue related to the values assigned to the contracts acquired in the LEEVAC transaction. |
Revenue increased $39.4 million for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015 due to the assets and operations acquired in the LEEVAC transaction (see LEEVAC Transaction above), which contributed $55.9 million in revenue for the nine months ended September 30, 2016. The increase was partially offset by decreases in work dueadditional personnel allocated to the downturn in the oil and gas industry.
Gross profit increased $3.6 million for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015 due to the LEEVAC transaction as well as increases in profitability estimates for other jobs in progress due to cost cutting measures.
General and administrative expenses increased $4.6 million for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015 due to the expenses associated with the operations acquired in the LEEVAC transaction and bonuses.
| | | | | | | | | | | | | | | | | Services | | Nine Months Ended September 30, | | Increase or (Decrease) | | | 2016 | | 2015 | | Amount | | Percent | Revenue | | $ | 76,179 |
| | $ | 70,987 |
| | $ | 5,192 |
| | 7.3 | % | Gross profit | | $ | 11,012 |
| | $ | 10,449 |
| | $ | 563 |
| | 5.4 | % | Gross profit percentage | | 14.5 | % | | 14.7 | % | | | | (0.2 | )% | General and administrative expenses | | $ | 4,119 |
| | $ | 3,008 |
| | $ | 1,111 |
| | 36.9 | % | Operating income | | $ | 6,893 |
| | $ | 7,441 |
| | | | | | | | | | | | | |
Revenue increased $5.2 million for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015 due to increases in the scope of two large offshore service projectsour corporate division during the first half of 2016.
Gross profit increased $563,000 for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015 due to increases in revenues and improved absorption of fixed costs resulting from an increase in labor hours worked.
General and administrative expenses increased $1.1 million for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015 due to additional administrative support costs related to increases in activity and bonuses.2017.
Liquidity and Capital Resources Historically, we have funded our business activities through cash generated from operations. At September 30, 2016March 31, 2017, we had no amounts outstanding under our credit facility, $4.5$4.6 million in outstanding letters of credit, and cash and cash equivalents totaling $55.6$34.7 million, compared to $34.8$51.2 million at December 31, 2015.2016. Working capital was $79.8$182.9 million and our ratio of current assets to current liabilities was 2.837.56 to 1 at September 30,March 31, 2017, compared to $78.0 million and 3.2 to 1, respectively, at December 31, 2016. Working capital at March 31, 2017, includes $110.5 million related to assets held for sale, primarily related to our South Texas facilities. Our primary sourceuse of cash during the three months ended March 31, 2017, was due to: Operating losses for the nine months ended September 30, 2016, wasquarter exclusive of non-cash depreciation, amortization, impairment and stock compensation expense of approximately $3.7 million, Payment of year-end bonuses related to 2016, Progress on liabilities from assumed contracts in the collection of accounts receivable under various customer contracts and sales of three cranes atLEEVAC transaction.While our Texas facility for $5.8 million. At September 30, 2016, our contracts receivable balance was $26.6 million of which we have subsequently collected $12.1 million through October 31, 2016. On January 1, 2016, we acquired substantially all of the assets and assumed certain specified liabilities of LEEVAC. The purchase price for the acquisition of the LEEVAC assets during 2016 was $20.0 million, subject to a working capital adjustment whereby we received a dollar-for-
dollar reductionnet $3.0 million in cash from the seller for the assumption of certain net liabilities of LEEVAC at closing and settlement payments from sureties on certain ongoing fabricationshipbuilding projects of $23.0 million that were assigned to us in the transaction. After taking into accountWe have significantly progressed these adjustments, wecontracts which in turn, has resulted in utilization of the working capital and settlement payments received approximately $1.6during 2016.
Fewer receipts from accounts receivable, primarily $4.6 million in cash at closing. Duringfrom one customer that refused delivery of a vessel on February 6, 2017, and has not paid. We have initiated arbitration proceedings during the quarter we presentedto enforce our working capital true-uprights under our construction contract, and Build-up of costs for contracts in progress related to a customer in our Shipyards division with significant milestone payments occurring in the seller, which resulted in an additional $1.5 million due to us. Additionally, we hired 380 employees upon acquisitionlater stages of the facilities representing substantially all of the former LEEVAC employees. Strategically, the transaction expands our marine fabrication and repair and maintenance presenceprojects which are expected to occur beginning in the Gulf South market. third quarter of 2017 through the first quarter of 2018. At the date of transaction, we acquired approximately $121.2March 31, 2017, our contracts receivable balance was $21.1 million of new build construction backlog inclusive of approximately $9.2which we have subsequently collected $4.1 million of purchase price fair value allocated to four, new build construction projects to be delivered in 2017 and 2018 for two customers. through April 21, 2017.
As of September 30, 2016,March 31, 2017, we had a credit agreement with Whitney Bank and JPMorgan Chase Bank N.A. that provides for an $80.0a $40.0 million revolving credit facility maturing January 2, 2017.November 29, 2018. The credit agreement allows the Company to use up to the full amount of the available borrowing base for letters of credit and up to $20.0 million for general corporate purposes. Our obligations under the credit agreement are secured by substantially all of our assets other(other than real property located in the state of Louisiana. On February 29, 2016, we entered into an amendment to our credit agreement. The amendment (i) extends the term of the Credit Facility from February 29, 2016 to January 2, 2017; (ii) increases the commitment feeestate). Commitment fees on undrawn amounts from 0.25% to 0.50%are 0.5% per annum; (iii) increases theannum and letter of credit fee,fees, subject to certain limited exceptions, to 2.00%are 2.0% per annum on undrawn stated amounts under letters of credit issued by the lenders; and (iv) limits the maximum amount of loans outstanding at any time for general corporate purposes to $20.0 million.lenders. Amounts borrowed under our the credit agreement bear interest, at our option, at either the prime lending rate established by JPMorgan Chase Bank, N.A. or LIBOR plus 2.0 percent. Under the amendment ourOur financial covenants beginning with the quarter endingat March 31, 20162017, are as follows:
| | (i) | minimum net worth requirement of not less than $250.0255.0 million plus |
| | a) | 50% of net income earned in each quarter beginning MarchDecember 31, 2016, and |
| | b) | 100% of proceeds from any issuance of common stock; |
| | c) | less the amount of any impairment on certain assets owned by Gulf Marine Fabricators, L.P. (our South Texas assets held for sale) up to $30.0 million; |
| | (ii) | debt to EBITDA ratio not greater than 3.02.5 to 1.0; and |
| | (iii) | interest coverage ratio not less than 2.0 to 1.0. |
At September 30, 2016,March 31, 2017, no amounts were outstanding under the credit facility, and we had outstanding letters of credit totaling $4.5$4.6 million, reducing the unused portion of our credit facility for additional letters of credit and borrowings to $75.5$35.4 million. As of September 30, 2016,March 31, 2017, we were in compliance with all covenants. During the fourth quarter, we expect
We are currently in discussions with one of our financial institutions to enter into a two-year, $40.0 million amendednew revolving line of credit with comparable availability, but with less restrictive financial covenants and restatedreduced fees as compared to our current revolving credit facility. We expect to close on this new revolving credit facility withand terminate our current lenders that will be secured by substantially all of our assets (other than real property). We anticipate the amendedexisting revolving credit facility will allow us to use the full $40.0 million borrowing base for both letters of credit and general corporate purposes. Given the historically low levels of borrowings under our current facility and our cash position, we requested a reduction in the amountsecond quarter of available credit under our revolver from $80.0 million to $40.0 million to decrease the commitment fees payable to our lenders for the undrawn portion of the facility.2017.
Our primary liquidity requirements are for the costs associated with servicingfabrication projects, and capital expenditures inand payment of dividends to our Fabrication and Shipyards segments. In particular, as further discussed in Note 2 in our Notes to Consolidated Financial Statements, in connection with the LEEVAC transaction, we received at closing a net cash amount that included consideration for billings in excess of costs and estimated earnings on uncompleted contracts and other payments from sureties representing pre-payment on the partially constructed vessels totaling $21.9 million as adjusted for the working capital true-up. Consequently, there will be required cash outflows for costs associated with the prepaid amounts without corresponding milestone billings.shareholders. We anticipate capital expenditures for the remainder of 20162017 to be approximately $1.8range between $6.0 million to $8.0 million primarily for the following: extension of one of our dry docks, and
improvements to our newly acquired facilities.Jennings and Lake Charles leased shipyards, improvement to the bulkhead at our Houma facility, and
computer system upgrades.
On October 21, 2016, a customer of our Shipyards’ segmentShipyards division announced it had received limited waivers from its lenders and noteholders through November 11, 2016 with respect towas in noncompliance with certain financial covenants included in the customer’s debt agreements. TheThis customer also announcedstated it had received limited waivers from its lenders and noteholders, but its debt agreements will require further negotiation and amendment. InOn April 19, 2017, the eventcustomer stated it had allowed the waivers to expire and remains in default of its covenants.
This same customer has rejected delivery of the vessel that we tendered for delivery on February 6, 2017, alleging certain technical deficiencies exist with respect to the vessel and is seeking recovery of all purchase price amounts previously paid by the customer under the contract. We are also building a second vessel for this customer that is scheduled for delivery during the second quarter of 2017. We disagree with our customer is unsuccessful inconcerning these efforts,alleged technical deficiencies and have put the customer will consider other options including a possible reorganizationin default under Chapter 11the terms of the Federal bankruptcy laws. At September 30, 2016, no contracts receivable werefor both vessels. As of March 31, 2017, approximately $4.6 million remained due and outstanding from our customer for the first vessel. The balance due to us upon delivery for a second vessel which is expected in May of this year, is approximately $4.9 million. On March 10, 2017, we gave notice for arbitration with our customer in an effort to resolve this matter. We intend to take all legal action as may be necessary to protect our rights under the contracts and deferred revenue exceeded our costs and estimated earnings in excess of billings on this contract. recover the remaining balances owed to us.
We continue to monitor our work performed in relation to our customer’s status and its ability to pay under the terms of its contract. Based on our evaluation to date,these contracts. Because these vessels have been completed or are substantially complete, we do not believe that they have significant fair value, and that we would be able to fully recover any loss on this contract is probable or estimable at this time.amounts due to us.
In February 2016,anticipation of the proceeds to be received from the sale of our BoardSouth Texas assets, we have engaged in a strategic financial analysis project with advisors to determine the appropriate use of Directors approvedproceeds from this transaction. We will be evaluating a decrease inmix of options including tactical capital improvement projects, strategic growth investment opportunities that support our quarterly dividend to $0.01 in an effort to conserve cash. business plan, stock buy-backs and/or dividends and working capital reinvestment.
On October 27, 2016,April 26, 2017, our Board of Directors declared a dividend of $0.01 per share on our shares of common stock outstanding, payable November 23, 2016May 25, 2017, to shareholders of record on November 10, 2016.May 11, 2017.
We believe our cash and cash equivalents generated by our operating activities and funds available under our credit facilityproceeds to be received from future assets sales will be sufficient to fund our capital expenditures issue future letters of credit and meet our working capital needs for both the near and longer term to continue our operations, satisfy our contractual operations and pay dividends to our shareholders. Additionally, we expect to close on a new revolving line of credit during the second quarter of 2017 as discussed above. We believe that the new facility will provide us with additional working capital flexibility to ramp up our operations quickly in times of rapid increasing demand, to continue to issue future letters of credit and to quickly take advantage of market opportunities.
Cash Flow Activities
For the ninethree months ended September 30, 2016March 31, 2017, net cash provided byused in operating activities was $19.3$15.1 million, compared to $18.7$1.6 million for the ninethree months ended September 30, 2015.March 31, 2016. The increase in cash provided byused in operations was primarily due to increased gross profitthe following:
Operating losses for the quarter in excess of non-cash depreciation, amortization, impairment and collectionsstock compensation expense of contract receivablesapproximately $3.7 million, Payment of year-end bonuses related to 2016, Progress on liabilities from assumed contracts in the LEEVAC transaction.While our purchase price for the acquisition of the LEEVAC assets during 2016 somewhat offset bywas $20.0 million, we received a net $3.0 million in cash from the seller for the assumption of certain net liabilities and settlement payments required for trade payableson ongoing shipbuilding projects of $23.0 million that were assigned to us in the transaction. We have significantly progressed these contracts which in turn, has resulted in utilization of the working capital and settlement payments received during 2016. Fewer receipts from accounts receivable, primarily $4.6 million from one customer that refused delivery of a vessel on February 6, 2017, and has not paid. We have initiated arbitration proceedings during the ninequarter to enforce our rights under our construction contract, and
Build-up of costs for contracts in progress related to a customer in our Shipyards division with significant milestone payments occurring in the later stages of the projects which are expected to occur beginning in the third quarter of 2017 through the first quarter of 2018.
Net cash used in investing activities for the three months ended September 30, 2016 asMarch 31, 2017, was $391,000, compared to 2015. Net cash provided by investing activities for the nine months ended September 30, 2016 was $2.0 million, compared to cash used in investing activities of $5.0$6.2 million for the ninethree months ended September 30, 2015.March 31, 2016. The increasechange in cash used in/provided by investing activities is primarily due to cash received from the sale of three cranes at our Texas facility for $5.8$5.4 million and $1.6 million of cash acquired in the LEEVAC transaction.
Net cash used in financing activities for the ninethree months ended September 30,March 31, 2017 and 2016, was $1.0 million and 2015 was $440,000 and $4.4 million,$291,000, respectively. The decreaseincrease in cash used in financing activities is due to the reduction in the cash dividend in 2016.payments made to taxing authorities on behalf of employees' for their vesting of common stock.
Contractual Obligations There have been no material changes from the information included in our Annual Report on Form 10-K for the year ended December 31, 2015.2016. For more information on our contractual obligations, refer to Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2015.2016. Off-Balance Sheet Arrangements There have been no material changes from the information included in our Annual Report on Form 10-K for the year ended December 31, 2015.2016. Item 3. Quantitative and Qualitative Disclosures About Market Risk. There have been no material changes in the Company’s market risks during the quarter ended September 30, 2016.March 31, 2017. For more information on market risk, refer to Part II, Item 7A. of our Annual Report on Form 10-K for the year ended December 31, 2015.2016. Item 4. Controls and Procedures. The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and that such information is communicated to the Company’s management, including its Chief Executive Officer and Interim Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. The Company’s management, with the participation of the Company’s Chief Executive Officer and Interim Chief Financial Officer, hashave evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based on this evaluation, our Chief Executive Officer and Interim Chief Financial Officer hashave concluded that the design and operation of our disclosure controls and procedures were effective as of the end of the period covered by this report. There have been no changes during the fiscal quarter ended September 30, 2016March 31, 2017, in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. PART II. OTHER INFORMATION Item 1. Legal Proceedings. The Company is subject to various routine legal proceedings in the normal conduct of its business primarily involving commercial claims, workers’ compensation claims, and claims for personal injury under general maritime laws of the United
States and the Jones Act. While the outcome of these lawsuits, legal proceedings and claims cannot be predicted with certainty, management believes that the outcome of any such proceedings, even if determined adversely, would not have a material adverse effect on the financial position, results of operations or cash flows of the Company. Item 1A. Risk Factors. There have been no material changes from the information included in Item 1A “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2015.2016. | | | | | 2.1Exhibit Number | | Asset Purchase Agreement, dated December 23, 2015 by and among Gulf Island Shipyards, LLC, LEEVAC Shipyards, LLC and certain related affiliates, incorporated by reference toDescription of Exhibit 2.1 of the Company's Form 8-K filed on December 23, 2015. | | | 3.1 | | Composite Articles of Incorporation of the Company incorporated by reference to Exhibit 3.1 of the Company’s Form 10-Q filed April 23, 2009. | 3.2 | | Amended and Restated Bylaws of the Company, as amended and restated through April 26, 2012, incorporated by reference to Exhibit 3.1 of the Company’s Form 8-K filed on April 30, 2012. | 4.1 | | Specimen Common Stock Certificate, incorporated by reference to the Company’s Form S-1/A filed March 19, 1997 (Registration No. 333-21863).November 4, 2016. | 10.1 | | Change of Control Agreement, dated March 1, 2017, between the Company and David S. Schorlemer, incorporated by reference to Exhibit 10.15 of the Company's Form of Long-Term Performance-Based Cash Award Agreement.10-K for the year ended December 31, 2016 filed on March 2, 2017. | 3131.1 | | CEO and Certifications pursuant to Rule 13a-14 under the Securities Exchange Act of 1934. | 31.2 | | CFO CertificationCertifications pursuant to Rule 13a-14 under the Securities Exchange Act of 1934. | 32 | | Section 906 Certification furnished pursuant to 18 U.S.C. Section 1350. | 99.1 | | Press release issued by | 101 | | Attached as Exhibit 101 to this report are the following items formatted in XBRL (Extensible Business Reporting Language): | | | (i) | Consolidated Balance Sheets, | | | (ii) | Consolidated Statements of Operations, | | | (iii) | Consolidated Statement of Changes in Shareholders’ Equity, | | | (iv) | Consolidated Statements of Cash Flows and | | | (v) | Notes to Consolidated Financial Statements. |
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. | | | GULF ISLAND FABRICATION, INC. | | BY: | /s/ David S. Schorlemer | | David S. Schorlemer | | Executive Vice President, Chief Financial Officer, and Treasurer (Principal Financial and Accounting Officer) |
Date: May 2, 2017
GULF ISLAND FABRICATION, INC. EXHIBIT INDEX | | | | | Exhibit Number | | Description of Exhibit | | | 3.1 | | Composite Articles of Incorporation of the Company on October 27, 2016, incorporated by reference to Exhibit 99.13.1 of the Company’s Form 10-Q filed April 23, 2009. | 3.2 | | Amended and Restated Bylaws of the Company, incorporated by reference to Exhibit 3.1 of the Company’s Form 8-K filed November 4, 2016. | 10.1 | | Change of Control Agreement, dated March 1, 2017, between the Company and David S. Schorlemer, incorporated by reference to Exhibit 10.15 of the Company's Form 10-K for the year ended December 31, 2016 filed on October 27, 2016.March 2, 2017. | 31.1 | | CEO Certifications pursuant to Rule 13a-14 under the Securities Exchange Act of 1934. | 31.2 | | CFO Certifications pursuant to Rule 13a-14 under the Securities Exchange Act of 1934. | 32 | | Section 906 Certification furnished pursuant to 18 U.S.C. Section 1350. | | | | 101 | | Attached as Exhibit 101 to this report are the following items formatted in XBRL (Extensible Business Reporting Language): | | | | | | (i) | Consolidated Balance Sheets, | | | (ii) | Consolidated Statements of Operations, | | | (iii) | Consolidated Statement of Changes in Shareholders’ Equity, | | | (iv) | Consolidated Statements of Cash Flows and | | | (v) | Notes to Consolidated Financial Statements. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | GULF ISLAND FABRICATION, INC. | | BY: | /s/ Kirk J. Meche | | Kirk J. Meche | | President, Chief Executive Officer, Director and Interim Chief Financial Officer, Treasurer and Secretary (Principal Executive Officer and Interim Principal Financial and Accounting Officer) |
Date: November 2, 2016
GULF ISLAND FABRICATION, INC.
EXHIBIT INDEX
| | | | | Exhibit
Number
| | Description of Exhibit | | | 2.1 | | Asset Purchase Agreement, dated December 23, 2015 by and among Gulf Island Shipyards, LLC, LEEVAC Shipyards, LLC and certain related affiliates, incorporated by reference to Exhibit 2.1 of the Company's Form 8-K filed on December 23, 2015.
| 3.1 | | Composite Articles of Incorporation of the Company, incorporated by reference to Exhibit 3.1 of the Company’s Form 10-Q filed April 23, 2009. | 3.2 | | Bylaws of the Company, as amended and restated through April 26, 2012, incorporated by reference to Exhibit 3.1 of the Company’s Form 8-K filed on April 30, 2012. | 4.1 | | Specimen Common Stock Certificate, incorporated by reference to the Company’s Form S-1/A filed March 19, 1997 (Registration No. 333-21863). | 10.1 | | Form of Long-Term Performance-Based Cash Award Agreement. | 31 | | CEO and CFO Certifications pursuant to Rule 13a-14 under the Securities Exchange Act of 1934. | 32 | | Section 906 Certification furnished pursuant to 18 U.S.C. Section 1350. | 99.1 | | Press release issued by the Company on October 27, 2016, incorporated by reference to Exhibit 99.1 of the Company’s Form 8-K filed on October 27, 2016. | 101 | | Attached as Exhibit 101 to this report are the following items formatted in XBRL (Extensible Business Reporting Language): | | | | | | (i) | Consolidated Balance Sheets, | | | (ii) | Consolidated Statements of Operations, | | | (iii) | Consolidated Statement of Changes in Shareholders’ Equity, | | | (iv) | Consolidated Statements of Cash Flows and | | | (v) | Notes to Consolidated Financial Statements. |
s | Labor hours | | ___________ | | 1. | Backlog as of September 30, 2016March 31, 2017, includes commitments received through October 27, 2016.April 26, 2017. We exclude suspended projects from contract backlog thatwhen they are expected to be suspended more than twelve months because resumption of work and timing of revenue recognition for these projects are difficult to predict. Our backlog also includes the new build construction that was acquired in the LEEVAC transaction on January 1, 2016. Included in our backlog at September 30, 2016, is $5.1 million of non-cash revenue related to purchase price fair value of contracts acquired in the LEEVAC transaction and included in deferred revenue in our consolidated Balance sheet at September 30, 2016. |
| | 2. | At September 30, 2016,March 31, 2017, projects for our threetwo largest customers in terms of revenue backlog consisted of: |
| | (i) | two large petroleum supply vessels for one customer in our Shipyards segment, which commenced in the second quarter of 2013 and will be completed during the first and second quarter of 2017; |
| | (ii) | two large multi-purpose service vessels for one customer in our Shipyards segment, which commenced in the first quarter of 2014 and will be completed during the first and second quarterquarters of 2018; and |
(iii) the fabrication of four modules associated with a U.S. ethane cracker project.
| | (ii) | the fabrication of four modules associated with a U.S. ethane cracker project. |
| | 3. | The timing of recognition of the revenue represented in our backlog is based on management’s current estimates to complete the projects. Certain factors and circumstances could cause changes in the amounts ultimately recognized and the timing of the recognition of revenue from our backlog. |
Depending on the size of the project, the termination, postponement, or reduction in scope of any one project could significantly reduce our backlog and could have a material adverse effect on revenue, net income and cash flow. As of September 30, 2016,March 31, 2017, we had 1,336922 employees and 163133 contract employees inclusive of 380 employees hired in the LEEVAC transaction, compared to 1,2551,178 employees and 7192 contract employees as of December 31, 2015. 2016.
Labor hours worked were 2.3 million479,000 during the ninethree months ended September 30, 2016,March 31, 2017, compared to 2.1 million695,000 for the ninethree months ended September 30, 2015.March 31, 2016. The overall increasedecrease in labor hours worked for the three months ended September 30, 2016March 31, 2017, was due to 636,000 labor hours worked from projects acquired in the LEEVAC transaction partially offset by a reduction in fabrication activity due primarily to the downturn in the oil and gas industry.
Results of Operations
Our results of operations are affected primarily by our ability to effectively manage contracts to a successful completion along with producing maximum efficiencies as it relates to manhours.
Three Months Ended September 30, 2016 Compared to Three Months Ended September 30, 2015 (in thousands, except for percentages):
Consolidated
| | | | | | | | | | | | | | | | Three Months Ended September 30, | | Increase or (Decrease) | | 2016 | | 2015 | | Amount | Percent | Revenue | $ | 65,384 |
| | $ | 67,531 |
| | $ | (2,147 | ) | (3.2 | )% | Cost of revenue | 60,125 |
| | 75,368 |
| | (15,243 | ) | (20.2 | )% | Gross profit (loss) | 5,259 |
| | (7,837 | ) | | 13,096 |
| 167.1 | % | Gross profit percentage | 8.0% | | (11.6)% | | | | General and administrative expenses | 5,086 |
| | 3,798 |
| | 1,288 |
| 33.9 | % | Asset impairment | — |
| | 6,600 |
| | (6,600 | ) | n/a |
| Operating income | 173 |
| | (18,235 | ) | | 18,408 |
| 100.9 | % | Other income (expense): | | | | | | | Interest expense | (110 | ) | | (39 | ) | | (71 | ) |
|
| Interest income | 12 |
| | 8 |
| | 4 |
|
|
| Other income, net | 599 |
| | — |
| | 599 |
|
|
| | 501 |
| | (31 | ) | | 532 |
| 1,716.1 | % | Net income (loss) before income taxes | 674 |
| | (18,266 | ) | | 18,940 |
| 103.7 | % | Income taxes | 133 |
| | (6,129 | ) | | 6,262 |
| 102.2 | % | Net income (loss) | $ | 541 |
| | $ | (12,137 | ) | | $ | 12,678 |
| 104.5 | % |
Revenue - Our revenue for the three months ended September 30, 2016 and 2015 was $65.4 million and $67.5 million, respectively, representing a decrease of 3.2%. The decrease is primarily attributable to an overall decrease in work experienced in our fabrication yardsfacilities as a result of depressed oil and gas prices and the corresponding reduction in customer demand within all of our operating divisions.
Results of Operations Three Months Ended March 31, 2017 Compared to Three Months Ended March 31, 2016 (in thousands, except for offshore projects in our Fabrication segment. During 2015, we completed the fabrication of a 1,200 foot jacket, piles and an approximate 450 short ton topside with no similar project in 2016.percentages): Consolidated | | | | | | | | | | | | | | | Three Months Ended March 31, | | Increase or (Decrease) | | 2017 | | 2016 | | Amount | Percent | Revenue | $ | 37,993 |
| | $ | 83,979 |
| | $ | (45,986 | ) | (54.8)% | Cost of revenue | 42,890 |
| | 78,278 |
| | (35,388 | ) | (45.2)% | Gross profit (loss) | (4,897 | ) | | 5,701 |
| | (10,598 | ) | 185.9% | Gross profit (loss) percentage | (12.9)% | | 6.8% | | | | General and administrative expenses | 3,930 |
| | 4,485 |
| | (555 | ) | (12.4)% | Asset impairment | 389 |
| | — |
| | 389 |
| 100.0% | Operating income (loss) | (9,216 | ) | | 1,216 |
| | (10,432 | ) | (857.9)% | Other income (expense): | | | | | | | Interest expense | (59 | ) | | (50 | ) | | (9 | ) | | Interest income | — |
| | 6 |
| | (6 | ) | | Other income, net | 9 |
| | 398 |
| | (389 | ) | | Total other income (expense) | (50 | ) | | 354 |
| | (404 | ) | (114.1)% | Net income (loss) before income taxes | (9,266 | ) | | 1,570 |
| | (10,836 | ) | (690.2)% | Income taxes | (2,812 | ) | | 581 |
| | (3,393 | ) | (584.0)% | Net income (loss) | $ | (6,454 | ) | | $ | 989 |
| | $ | (7,443 | ) | (752.6)% |
Revenue - Our decrease in revenue earned from offshore fabrication work was partially offset by the results of the assets and operations acquired in the LEEVAC transaction (see LEEVAC Transaction above), which contributed $16.8 million in revenue for the three months ended September 30, 2016.March 31, 2017 and 2016, was $38.0 million and $84.0 million, respectively, representing a decrease of 54.8%. The decrease is primarily attributable to an overall decrease in work experienced in our facilities as a result of depressed oil and gas prices and the corresponding reduction in customer demand within all of our operating divisions. Pass-through costs as a percentage of revenue were 33.8%29.4% and 45.3%40.0% for the three-months ended September 30,March 31, 2017 and 2016, and 2015, respectively. Pass-through costs, as described in Note 3 of the Notes to Consolidated Financial Statements, are included in revenue but have no impact on the gross profit recognized on a project for a particular period.
Gross profit (loss)- Our gross profit (loss)loss for the three months ended September 30, 2016 and 2015March 31, 2017, was $5.3$4.9 million (8.0% of revenue) and $(7.8) million, respectively. Ourcompared to a gross profit improved compared to third quarter of 2015$5.7 million for the three months ended March 31, 2016. The decrease was primarily due to contract losses of $14.3 million that were recorded during the third quarter of 2015 resulting from our inability to recover certain costs related to a deckdecreased revenue as discussed above and jacket for one of our deepwater projects. We had no such loss during the third quarter of 2016 and implemented cost cutting measures. This wastighter margins on current work partially offset by tighter margins within all of our segments due to a decreasedecreases in work as a result of the downturn in the oil and gas industry.costs resulting from additional cost cutting measures implemented by management.
General and administrative expenses - Our general and administrative expenses were $5.1$3.9 million for the three months ended September 30, 2016,March 31, 2017, compared to $3.8$4.5 million for the three months ended September 30, 2015.March 31, 2016. The increasedecrease in general
and administrative expenses for the three months ended September 30, 2016March 31, 2017, was primarily attributable to the operations acquired in the LEEVAC transaction and bonus expense, partially offset by cost cutting effortsmeasures implemented by management during 2016.the first part of 2016 as well as lower bonuses accrued during 2017 as a result of a combination of a smaller workforce and our consolidated gross loss.
Asset impairmentImpairment - During the three months ended September 30, 2015,March 31, 2017, we recorded an asset impairment charge of $6.6 million$389 related to a partially constructed topside, related valves, piping and equipment that we acquired from a customer following its default under a contract in 2012. Due to the sustained downturn in the energy sector, our ability to effectively market these assets was significantly limited, and we reassessed the asset’s net realizable value based on the estimated scrap valueheld for sale at our Prospect Shipyard. See also Note 2 of the assets. We had no such impairments during the three months ended September 30, 2016.Notes to Consolidated Financial statements. Interest expense,
Other income, net - The Company had net interest expense of $98,000Other income decreased $389,000 for the three months ended September 30, 2016 compared to net interest expense of $31,000 for the three months ended September 30, 2015.March 31, 2017. The increase was primarily driven by an increase in the cost of unused credit facility fees under our credit agreement. Other income, net - Other income increased $599,000 for the three months ended September 30, 2016. The increasedecrease was primarily due to gains on sales of assets from our Fabrication division.division recorded during three months ended March 31, 2016.
Income taxes - Our effective income tax rate for the three months ended September 30, 2016March 31, 2017, was 19.7%30.3%, compared to an effective tax rate of 34.0%37.0% for the comparable period during 2015.2016. The changedecrease in ourthe effective tax rate is duethe result of limitations on the deductibility of executive compensation and $210,000 in tax expense recognized during the three months ended March 31, 2017, for the tax effect of the difference between the actual tax deduction allowed upon vesting of common stock and the compensation cost recognized for financial reporting purposes resulting from the adoption of Accounting Standards Update 2016-09 as further discussed in Note 1 of the Notes to the decrease in our effective rate for the year-to-date period.Consolidated Financial Statements.
Operating Segments
As discussed in Note 8 of the Notes to Consolidated Financial Statements, management reduced its allocation of corporate administrative costs and overhead expenses to its operating divisions during the three months ended March 31, 2017, such that a significant portion of its corporate expenses are retained in its non-operating Corporate division. In addition, it has also allocated certain personnel previously included in the operating divisions to within the Corporate division. In doing so, management believes that it has created a fourth reportable segment with each of its three operating divisions and it's Corporate division each meeting the criteria of reportable segments under GAAP. During the three months ended March 31, 2016, we allocated substantially all of our corporate administrative costs and overhead expenses to our three operating divisions. We have recast our 2016 segment data below in order to conform to the current period presentation. Our results of our three operating divisions and Corporate division for the three months ended March 31, 2017 and 2016, are presented below (in thousands, except for percentages).
| | | | | | | | | | | | | | | | | Fabrication | | Three Months Ended September 30, | | Increase or (Decrease) | | | 2016 | | 2015 | | Amount | | Percent | Revenue | | $ | 22,311 |
| | $ | 32,133 |
| | $ | (9,822 | ) | | (30.6 | )% | Gross profit (loss) | | $ | 532 |
| | $ | (14,009 | ) | | $ | 14,541 |
| | 103.8 | % | Gross profit percentage | | 2.4 | % | | (43.6 | )% | | | | 46.0 | % | General and administrative expenses | | $ | 1,481 |
| | $ | 2,138 |
| | $ | (657 | ) | | (30.7 | )% | Asset impairment | | $ | — |
| | $ | 6,600 |
| | $ | (6,600 | ) | | n/a |
| Operating income (loss) | | $ | (949 | ) | | $ | (22,747 | ) | | | | |
| | | | | | | | | | | | | | | | Fabrication | | Three Months Ended March 31, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | 10,209 |
| | $ | 23,829 |
| | $ | (13,620 | ) | | (57.2)% | Gross profit (loss) | | (2,966 | ) | | 86 |
| | (3,052 | ) | | (3,548.8)% | Gross profit (loss) percentage | | (29.1 | )% | | 0.4 | % | | | | (29.5)% | General and administrative expenses | | 821 |
| | 795 |
| | 26 |
| | 3.3% | Operating income (loss) | | (3,787 | ) | | (709 | ) | | | | |
Revenue - Revenue from our Fabrication division decreased $9.8$13.6 million for the three months ended September 30, 2016March 31, 2017, compared to the three months ended September 30, 2015.March 31, 2016. The decrease is attributable to an overall decrease in work experienced in our fabrication yards as a result of depressed oil and gas prices and the corresponding reduction in customer demand for offshore fabrication projects. As discussed above, management has classified our South Texas assets as assets held for sale in response to the underutilization of our Fabrication assets.
Gross profit increased $14.5 million to $532,000(loss) - Gross loss from our Fabrication division for the three months ended September 30, 2016March 31, 2017, was $3.0 million compared to a gross lossprofit of $14.0 million$86,000 for the three months ended September 30, 2015March 31, 2016. The decrease was due to contract losseslower revenue as discussed above, payment of $14.3termination benefits as we reduce our South Texas workforce and depreciation expense of $1.9 million that were recorded during the third quarter of 2015related to our South Texas assets prior to their classification as assets held for sale. This was partially offset by decreases in costs resulting from our inability to recover certain costs related to a deck and jacket for one of our deepwater projects. We had no such loss during the third quarter of 2016 and implementedadditional cost cutting measures in response to decreases in work at our fabrication facilities.implemented by management.
General and administrative expenses - General and administrative expenses decreased $657,000for our Fabrication division increased $26,000 for the three months ended September 30, 2016March 31, 2017, compared to the three months ended September 30, 2015March 31, 2016. The increase is primarily due to cost cutting measures implemented during 2016 in responseexpenses incurred to decreases in work atmarket our fabrication facilities.South Texas assets for sale and payment of termination benefits as we reduce its workforce and complete those operations.
Asset impairment - During the three months ended September 30, 2015, we recorded an asset impairment charge of $6.6 million related to a partially constructed topside, related valves, piping and equipment that we acquired from a customer following its default under a contract in 2012. Due to the sustained downturn in the energy sector, our ability to effectively market these assets was significantly limited, and we reassessed the asset’s net realizable value based on the estimated scrap value of the assets. We had no such impairments during the three months ended September 30, 2016.
| | | | | | | | | | | | | | | | | Shipyards | | Three Months Ended September 30, | | Increase or (Decrease) | | | 2016 | | 2015 | | Amount | | Percent | Revenue (1) | | $ | 23,060 |
| | $ | 12,936 |
| | $ | 10,124 |
| | 78.3 | % | Gross profit (1) | | $ | 1,877 |
| | $ | 1,937 |
| | $ | (60 | ) | | (3.1 | )% | Gross profit percentage | | 8.1 | % | | 15.0 | % | | | | (6.9 | )% | General and administrative expenses | | $ | 2,065 |
| | $ | 392 |
| | $ | 1,673 |
| | 426.8 | % | Operating income (loss) (1) | | $ | (188 | ) | | $ | 1,545 |
| | | | |
| | | | | | | | | | | | | | | | Shipyards | | Three Months Ended March 31, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue (1) | | $ | 18,422 |
| | $ | 34,120 |
| | $ | (15,698 | ) | | (46.0)% | Gross profit (loss)(1) | | (1,704 | ) | | 2,375 |
| | (4,079 | ) | | (171.7)% | Gross profit (loss) percentage | | (9.2 | )% | | 7.0 | % | | | | (16.2)% | General and administrative expenses | | 964 |
| | 1,296 |
| | (332 | ) | | (25.6)% | Asset impairment | | 389 |
| | — |
| | 389 |
| | 100.0% | Operating income (loss) (1) | | (3,057 | ) | | 1,079 |
| | | | |
___________ | | (1) | Revenue for the three months ended September 30,March 31, 2017, and 2016, includes $1.5$1.6 million and $1.2 million of non-cash amortization of deferred revenue related to the values assigned to the contracts acquired in the LEEVAC transaction.transaction, respectively. |
Revenue increased $10.1- Revenue from our Shipyards division decreased $15.7 million for the three months ended September 30, 2016March 31, 2017, compared to the three months ended September 30, 2015March 31, 2016, due to the operations acquiredoverall decreases in work as we complete work under our contracts
including completion of a vessel that we assumed in the LEEVAC transaction (see LEEVAC Transaction above), which contributed $16.8 million in revenue forand delivered to a customer on February 6, 2017, with less new, replacement work starting during the three months ended September 30, 2016.
Gross profit decreased $60,000 for the three months ended September 30, 2016period as compared to the three months ended September 30, 2015March 31, 2016. The decrease in new, replacement work is due to tighter marginsdepressed oil and gas prices and the corresponding reduction in customer demand for shipbuilding and repair services supporting the oil and gas industry.
Gross profit (loss) - Gross loss from our Shipyards division was $1.7 million for the three months ended March 31, 2017, compared to a gross profit of $2.4 million for the three months ended March 31, 2016. The decrease was due to:
continued cost overruns on new work and inefficiencies incurred on the contracts acquiredthat were assigned to us in the LEEVAC transaction transaction; holding costs related to a completed vessel that was delivered on February 6, 2017; however, was refused by our customer alleging certain technical deficiencies (see also Note 9 of the Notes to Consolidated Financial Statements); and overall decreases in work under other various contracts as discussed above; partially offset by savings realized from cost cutting measures implemented by management during 2016.
General and administrative expenses - General and administrative expenses increased $1.7for our Shipyards division decreased $332,000 for the three months ended March 31, 2017, compared to the three months ended March 31, 2016, primarily due to cost cutting measures implemented by management during 2016 as well as lower bonuses accrued during 2017 as a result of a combination of a smaller workforce and our consolidated gross loss.
Asset Impairment - During three months ended March 31, 2017, we recorded an impairment of $389 related to our assets held for sale at our Prospect Shipyard. See also Note 2 of the Notes to Consolidated Financial statements.
| | | | | | | | | | | | | | | | Services | | Three Months Ended March 31, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | 10,712 |
| | $ | 26,559 |
| | $ | (15,847 | ) | | (59.7)% | Gross profit | | 33 |
| | 3,376 |
| | (3,343 | ) | | (99.0)% | Gross profit (loss) percentage | | 0.3 | % | | 12.7 | % | | | | (12.4)% | General and administrative expenses | | 666 |
| | 726 |
| | (60 | ) | | (8.3)% | Operating income (loss) | | (633 | ) | | 2,650 |
| | | | |
Revenue - Revenue from our Services division decreased $15.8 million for the three months ended September 30, 2016March 31, 2017, compared to the three months ended September 30, 2015 primarilyMarch 31, 2016, due to the expenses associated with the operations acquired in the LEEVAC transaction and bonus expense. | | | | | | | | | | | | | | | | | Services | | Three Months Ended September 30, | | Increase or (Decrease) | | | 2016 | | 2015 | | Amount | | Percent | Revenue | | $ | 20,928 |
| | $ | 23,487 |
| | $ | (2,559 | ) | | (10.9 | )% | Gross profit | | $ | 2,850 |
| | $ | 4,235 |
| | $ | (1,385 | ) | | (32.7 | )% | Gross profit percentage | | 13.6 | % | | 18.0 | % | | | | (4.4 | )% | General and administrative expenses | | $ | 1,540 |
| | $ | 994 |
| | $ | 546 |
| | 54.9 | % | Operating income | | $ | 1,310 |
| | $ | 3,241 |
| | | | | | | | | | | | | |
Revenue decreased $2.6 million for the three months ended September 30, 2016 compared to the three months ended September 30, 2015 due to the winding down of two large offshore service projects from the first half of 2016 and the downturn in the oil and gas industry.
Gross profit decreased $1.4 million for the three months ended September 30, 2016 compared to the three months ended September 30, 2015 due to decreases in revenues and tighter margins on new work.
General and administrative expenses increased $546,000 for the three months ended September 30, 2016 compared to the three months ended September 30, 2015 due to bonuses and additional administrative support added during the first half of 2016.
Nine Months Ended September 30, 2016 Compared to Nine Months Ended September 30, 2015 (in thousands, except for percentages):
Consolidated
| | | | | | | | | | | | | | | | Nine Months Ended September 30, | | Increase or (Decrease) | | 2016 | | 2015 | | Amount | Percent | Revenue | $ | 230,864 |
| | $ | 251,102 |
| | $ | (20,238 | ) | (8.1 | )% | Cost of revenue | 205,839 |
| | 248,686 |
| | (42,847 | ) | (17.2 | )% | Gross profit | 25,025 |
| | 2,416 |
| | 22,609 |
| 935.8 | % | Gross profit percentage | 10.8% | | 1.0% | | | | General and administrative expenses | 14,633 |
| | 11,817 |
| | 2,816 |
| 23.8 | % | Asset impairment | — |
| | 6,600 |
| | (6,600 | ) | n/a |
| Operating income (loss) | 10,392 |
| | (16,001 | ) | | 26,393 |
| 164.9 | % | Other income (expense): | | | | | | | Interest expense | (248 | ) | | (126 | ) | | (122 | ) |
|
| Interest income | 20 |
| | 21 |
| | (1 | ) |
|
| Other income, net | 1,039 |
| | 20 |
| | 1,019 |
|
|
| | 811 |
| | (85 | ) | | 896 |
| 1,054.1 | % | Net income (loss) before income taxes | 11,203 |
| | (16,086 | ) | | 27,289 |
| 169.6 | % | Income taxes | 4,134 |
| | (5,389 | ) | | 9,523 |
| 176.7 | % | Net income (loss) | $ | 7,069 |
| | $ | (10,697 | ) | | $ | 17,766 |
| 166.1 | % |
Revenue - Our revenue for the nine months ended September 30, 2016 and 2015 was $230.9 million and $251.1 million, respectively, representing a decrease of 8.1%. The decrease is primarily attributable to an overall decrease in work experienced in our fabrication yards primarily as a result of depressed oil and gas prices and the corresponding reduction in customer demand for offshore projects inoil and gas related service projects.
Gross profit - Gross profit from our Fabrication segment. During 2015, we completed the fabrication of a 1,200 foot jacket, piles and an approximate 450 short ton topside with no similar project in 2016. Our decrease in revenue earned from offshore fabrication work was partially offset by the assets and operations acquired in the LEEVAC transaction (see LEEVAC Transaction above), which contributed $55.9Services division decreased $3.3 million in revenue for the ninethree months ended September 30, 2016. Pass-through costs as a percentage of revenue were 35.0% and 43.2% forMarch 31, 2017, compared to the ninethree months ended September 30,March 31, 2016, and 2015, respectively. Pass-through costs, as described in Note 3 of the Notes to Consolidated Financial Statements, are included in revenue but have no impact on the gross profit recognized on a project for a particular period. Gross profit - Our gross profit for the nine months ended September 30, 2016 and 2015 was $25.0 million (10.8% of revenue) and $2.4 million (1.0% of revenue), respectively. Our gross profit improved compared to 2015 primarily due to the LEEVAC transactiondecreased revenue discussed above and contract losses of $14.3 million that were recordedtighter margins on new work performed during the third quarter of 2015 resulting from our inability to recover certain costs related to a deck and jacket for one of our deepwater projects. We had no such loss during the third quarter of 2016 and implemented cost cutting measures in response to decreases in work at our fabrication facilities.2017.
General and administrative expenses - Our general and administrative expenses were $14.6 million for the nine months ended September 30, 2016, compared to $11.8 million for the nine months ended September 30, 2015. The increase in generalGeneral and administrative expenses for our Services division decreased $60,000 for the ninethree months ended September 30,March 31, 2017, compared to the three months ended March 31, 2016, was primarily attributable to:
an increase of stock-based compensation expense of $589,000,
due to lower bonuses and the LEEVAC transaction; partially offset by
cost cutting efforts implementedaccrued during 2017, as a result of a combination of a smaller workforce and the downturnreduction in the oil and gas industry.gross profit.
Asset impairment
| | | | | | | | | | | | | | | | Corporate | | Three Months Ended March 31, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | — |
| | $ | — |
| | $ | — |
| | —% | Gross loss | | (260 | ) | | (136 | ) | | (124 | ) | | (91.2)% | Gross profit (loss) percentage | | n/a |
| | n/a |
| | | |
| General and administrative expenses | | 1,479 |
| | 1,668 |
| | (189 | ) | | (11.3)% | Operating loss | | (1,739 | ) | | (1,804 | ) | | 65 |
| | |
Gross loss - During the nine months ended September 30, 2015, we recorded an asset impairment charge of $6.6 million related to a partially constructed topside, related valves, piping and equipment that we acquiredGross loss from a customer following its default under a contract in 2012. Due to the sustained downturn in the energy sector, our ability to effectively
market these assets was significantly limited, and we reassessed the asset’s net realizable value based on the estimated scrap value of the assets. We had no such impairments during the nine months ended September 30, 2016.
Interest expense, net - The Company had net interest expense of $228,000 for the nine months ended September 30, 2016 compared to net interest expense of $105,000 for the nine months ended September 30, 2015. The increase in net interest expense for the nine months ended September 30, 2016 was primarily driven by an increase in the cost of unused credit facility fees under our credit agreement.
Other income, net - Other incomeCorporate division increased $1.0 million for the nine months ended September 30, 2016. The increase was primarily due to gainsa restructuring of $924,000 relatedour corporate division with additional personnel allocated to the sale of three cranes at our Texas facilitycorporate division during 2017 as well as sales of smaller assets bydiscussed above.
General and administrative expenses - General and administrative expenses for our Shipyards division. Income taxes - Our effective income tax rate for the nine months ended September 30, 2016 was 36.9%, compared to an effective tax rate of 34.0% for the comparable period during 2015. The increase in our effective rate isCorporate division decreased primarily due to the effect of state income taxes from income generated within Louisiana with no offsetting tax benefit from losses generated within Texas.
Operating Segments
| | | | | | | | | | | | | | | | | Fabrication | | Nine Months Ended September 30, | | Increase or (Decrease) | | | 2016 | | 2015 | | Amount | | Percent | Revenue | | $ | 70,436 |
| | $ | 137,431 |
| | $ | (66,995 | ) | | (48.7 | )% | Gross profit (loss) | | $ | 4,418 |
| | $ | (14,055 | ) | | $ | 18,473 |
| | 131.4 | % | Gross profit (loss) percentage | | 6.3 | % | | (10.2 | )% | | | | 16.5 | % | General and administrative expenses | | $ | 4,479 |
| | $ | 7,026 |
| | $ | (2,547 | ) | | (36.3 | )% | Asset impairment | | $ | — |
| | $ | 6,600 |
| | $ | (6,600 | ) | | n/a |
| Operating income (loss) | | $ | (61 | ) | | $ | (27,681 | ) | |
| |
|
Revenue decreased $67.0 million for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015. The decrease is attributable to an overall decrease in work experienced in our fabrication yardsbonuses as a result of depressed oil and gas prices and the corresponding reduction in customer demand for offshore fabrication projects. During 2015, we completed the fabrication of a 1,200 foot jacket, piles and an approximate 450 short ton topside with no similar project in 2016.
Gross profit increased $18.5 million to $4.4 million for the nine months ended September 30, 2016 compared to aour consolidated gross loss, of $14.1 million for the nine months ended September 30, 2015. The increase is due to contract losses of $14.3 million that were recorded during the third quarter of 2015 resulting from our inability to recover certain costs related to a deck and jacket for one of our deepwater projects. We had no such loss during the third quarter of 2016 and implemented cost cutting measures in response to decreases in work at our fabrication facilities.
General and administrative expenses decreased $2.5 million for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015 due to cost cutting measures implemented during 2016 in response to decreases in work at our fabrication facilities.
Asset impairment - During the nine months ended September 30, 2015, we recorded an asset impairment charge of $6.6 million related to a partially constructed topside, related valves, piping and equipment that we acquired from a customer following its default under a contract in 2012. Due to the sustained downturn in the energy sector, our ability to effectively market these assets was significantly limited, and we reassessed the asset’s net realizable value based on the estimated scrap value of the assets. We had no such impairments during the nine months ended September 30, 2016.
| | | | | | | | | | | | | | | | | Shipyards | | Nine Months Ended September 30, | | Increase or (Decrease) | | | 2016 | | 2015 | | Amount | | Percent | Revenue (1) | | $ | 86,553 |
| | $ | 47,177 |
| | $ | 39,376 |
| | 83.5 | % | Gross profit (1) | | $ | 9,595 |
| | $ | 6,022 |
| | $ | 3,573 |
| | 59.3 | % | Gross profit percentage | | 11.1 | % | | 12.8 | % | | | | (1.7 | )% | General and administrative expenses | | $ | 5,875 |
| | $ | 1,243 |
| | $ | 4,632 |
| | 372.6 | % | Operating income (1) | | $ | 3,720 |
| | $ | 4,779 |
| | | | |
____________
| | (1) | Revenue for the nine months ended September 30, 2016, includes $4.1 million of non-cash amortization of deferred revenue related to the values assigned to the contracts acquired in the LEEVAC transaction. |
Revenue increased $39.4 million for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015 due to the assets and operations acquired in the LEEVAC transaction (see LEEVAC Transaction above), which contributed $55.9 million in revenue for the nine months ended September 30, 2016. The increase was partially offset by decreases in work dueadditional personnel allocated to the downturn in the oil and gas industry.
Gross profit increased $3.6 million for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015 due to the LEEVAC transaction as well as increases in profitability estimates for other jobs in progress due to cost cutting measures.
General and administrative expenses increased $4.6 million for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015 due to the expenses associated with the operations acquired in the LEEVAC transaction and bonuses.
| | | | | | | | | | | | | | | | | Services | | Nine Months Ended September 30, | | Increase or (Decrease) | | | 2016 | | 2015 | | Amount | | Percent | Revenue | | $ | 76,179 |
| | $ | 70,987 |
| | $ | 5,192 |
| | 7.3 | % | Gross profit | | $ | 11,012 |
| | $ | 10,449 |
| | $ | 563 |
| | 5.4 | % | Gross profit percentage | | 14.5 | % | | 14.7 | % | | | | (0.2 | )% | General and administrative expenses | | $ | 4,119 |
| | $ | 3,008 |
| | $ | 1,111 |
| | 36.9 | % | Operating income | | $ | 6,893 |
| | $ | 7,441 |
| | | | | | | | | | | | | |
Revenue increased $5.2 million for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015 due to increases in the scope of two large offshore service projectsour corporate division during the first half of 2016.
Gross profit increased $563,000 for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015 due to increases in revenues and improved absorption of fixed costs resulting from an increase in labor hours worked.
General and administrative expenses increased $1.1 million for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015 due to additional administrative support costs related to increases in activity and bonuses.2017.
Liquidity and Capital Resources Historically, we have funded our business activities through cash generated from operations. At September 30, 2016March 31, 2017, we had no amounts outstanding under our credit facility, $4.5$4.6 million in outstanding letters of credit, and cash and cash equivalents totaling $55.6$34.7 million, compared to $34.8$51.2 million at December 31, 2015.2016. Working capital was $79.8$182.9 million and our ratio of current assets to current liabilities was 2.837.56 to 1 at September 30,March 31, 2017, compared to $78.0 million and 3.2 to 1, respectively, at December 31, 2016. Working capital at March 31, 2017, includes $110.5 million related to assets held for sale, primarily related to our South Texas facilities. Our primary sourceuse of cash during the three months ended March 31, 2017, was due to: Operating losses for the nine months ended September 30, 2016, wasquarter exclusive of non-cash depreciation, amortization, impairment and stock compensation expense of approximately $3.7 million, Payment of year-end bonuses related to 2016, Progress on liabilities from assumed contracts in the collection of accounts receivable under various customer contracts and sales of three cranes atLEEVAC transaction.While our Texas facility for $5.8 million. At September 30, 2016, our contracts receivable balance was $26.6 million of which we have subsequently collected $12.1 million through October 31, 2016. On January 1, 2016, we acquired substantially all of the assets and assumed certain specified liabilities of LEEVAC. The purchase price for the acquisition of the LEEVAC assets during 2016 was $20.0 million, subject to a working capital adjustment whereby we received a dollar-for-
dollar reductionnet $3.0 million in cash from the seller for the assumption of certain net liabilities of LEEVAC at closing and settlement payments from sureties on certain ongoing fabricationshipbuilding projects of $23.0 million that were assigned to us in the transaction. After taking into accountWe have significantly progressed these adjustments, wecontracts which in turn, has resulted in utilization of the working capital and settlement payments received approximately $1.6during 2016.
Fewer receipts from accounts receivable, primarily $4.6 million in cash at closing. Duringfrom one customer that refused delivery of a vessel on February 6, 2017, and has not paid. We have initiated arbitration proceedings during the quarter we presentedto enforce our working capital true-uprights under our construction contract, and Build-up of costs for contracts in progress related to a customer in our Shipyards division with significant milestone payments occurring in the seller, which resulted in an additional $1.5 million due to us. Additionally, we hired 380 employees upon acquisitionlater stages of the facilities representing substantially all of the former LEEVAC employees. Strategically, the transaction expands our marine fabrication and repair and maintenance presenceprojects which are expected to occur beginning in the Gulf South market. third quarter of 2017 through the first quarter of 2018. At the date of transaction, we acquired approximately $121.2March 31, 2017, our contracts receivable balance was $21.1 million of new build construction backlog inclusive of approximately $9.2which we have subsequently collected $4.1 million of purchase price fair value allocated to four, new build construction projects to be delivered in 2017 and 2018 for two customers. through April 21, 2017.
As of September 30, 2016,March 31, 2017, we had a credit agreement with Whitney Bank and JPMorgan Chase Bank N.A. that provides for an $80.0a $40.0 million revolving credit facility maturing January 2, 2017.November 29, 2018. The credit agreement allows the Company to use up to the full amount of the available borrowing base for letters of credit and up to $20.0 million for general corporate purposes. Our obligations under the credit agreement are secured by substantially all of our assets other(other than real property located in the state of Louisiana. On February 29, 2016, we entered into an amendment to our credit agreement. The amendment (i) extends the term of the Credit Facility from February 29, 2016 to January 2, 2017; (ii) increases the commitment feeestate). Commitment fees on undrawn amounts from 0.25% to 0.50%are 0.5% per annum; (iii) increases theannum and letter of credit fee,fees, subject to certain limited exceptions, to 2.00%are 2.0% per annum on undrawn stated amounts under letters of credit issued by the lenders; and (iv) limits the maximum amount of loans outstanding at any time for general corporate purposes to $20.0 million.lenders. Amounts borrowed under our the credit agreement bear interest, at our option, at either the prime lending rate established by JPMorgan Chase Bank, N.A. or LIBOR plus 2.0 percent. Under the amendment ourOur financial covenants beginning with the quarter endingat March 31, 20162017, are as follows:
| | (i) | minimum net worth requirement of not less than $250.0255.0 million plus |
| | a) | 50% of net income earned in each quarter beginning MarchDecember 31, 2016, and |
| | b) | 100% of proceeds from any issuance of common stock; |
| | c) | less the amount of any impairment on certain assets owned by Gulf Marine Fabricators, L.P. (our South Texas assets held for sale) up to $30.0 million; |
| | (ii) | debt to EBITDA ratio not greater than 3.02.5 to 1.0; and |
| | (iii) | interest coverage ratio not less than 2.0 to 1.0. |
At September 30, 2016,March 31, 2017, no amounts were outstanding under the credit facility, and we had outstanding letters of credit totaling $4.5$4.6 million, reducing the unused portion of our credit facility for additional letters of credit and borrowings to $75.5$35.4 million. As of September 30, 2016,March 31, 2017, we were in compliance with all covenants. During the fourth quarter, we expect
We are currently in discussions with one of our financial institutions to enter into a two-year, $40.0 million amendednew revolving line of credit with comparable availability, but with less restrictive financial covenants and restatedreduced fees as compared to our current revolving credit facility. We expect to close on this new revolving credit facility withand terminate our current lenders that will be secured by substantially all of our assets (other than real property). We anticipate the amendedexisting revolving credit facility will allow us to use the full $40.0 million borrowing base for both letters of credit and general corporate purposes. Given the historically low levels of borrowings under our current facility and our cash position, we requested a reduction in the amountsecond quarter of available credit under our revolver from $80.0 million to $40.0 million to decrease the commitment fees payable to our lenders for the undrawn portion of the facility.2017.
Our primary liquidity requirements are for the costs associated with servicingfabrication projects, and capital expenditures inand payment of dividends to our Fabrication and Shipyards segments. In particular, as further discussed in Note 2 in our Notes to Consolidated Financial Statements, in connection with the LEEVAC transaction, we received at closing a net cash amount that included consideration for billings in excess of costs and estimated earnings on uncompleted contracts and other payments from sureties representing pre-payment on the partially constructed vessels totaling $21.9 million as adjusted for the working capital true-up. Consequently, there will be required cash outflows for costs associated with the prepaid amounts without corresponding milestone billings.shareholders. We anticipate capital expenditures for the remainder of 20162017 to be approximately $1.8range between $6.0 million to $8.0 million primarily for the following: extension of one of our dry docks, and
improvements to our newly acquired facilities.Jennings and Lake Charles leased shipyards, improvement to the bulkhead at our Houma facility, and
computer system upgrades.
On October 21, 2016, a customer of our Shipyards’ segmentShipyards division announced it had received limited waivers from its lenders and noteholders through November 11, 2016 with respect towas in noncompliance with certain financial covenants included in the customer’s debt agreements. TheThis customer also announcedstated it had received limited waivers from its lenders and noteholders, but its debt agreements will require further negotiation and amendment. InOn April 19, 2017, the eventcustomer stated it had allowed the waivers to expire and remains in default of its covenants.
This same customer has rejected delivery of the vessel that we tendered for delivery on February 6, 2017, alleging certain technical deficiencies exist with respect to the vessel and is seeking recovery of all purchase price amounts previously paid by the customer under the contract. We are also building a second vessel for this customer that is scheduled for delivery during the second quarter of 2017. We disagree with our customer is unsuccessful inconcerning these efforts,alleged technical deficiencies and have put the customer will consider other options including a possible reorganizationin default under Chapter 11the terms of the Federal bankruptcy laws. At September 30, 2016, no contracts receivable werefor both vessels. As of March 31, 2017, approximately $4.6 million remained due and outstanding from our customer for the first vessel. The balance due to us upon delivery for a second vessel which is expected in May of this year, is approximately $4.9 million. On March 10, 2017, we gave notice for arbitration with our customer in an effort to resolve this matter. We intend to take all legal action as may be necessary to protect our rights under the contracts and deferred revenue exceeded our costs and estimated earnings in excess of billings on this contract. recover the remaining balances owed to us.
We continue to monitor our work performed in relation to our customer’s status and its ability to pay under the terms of its contract. Based on our evaluation to date,these contracts. Because these vessels have been completed or are substantially complete, we do not believe that they have significant fair value, and that we would be able to fully recover any loss on this contract is probable or estimable at this time.amounts due to us.
In February 2016,anticipation of the proceeds to be received from the sale of our BoardSouth Texas assets, we have engaged in a strategic financial analysis project with advisors to determine the appropriate use of Directors approvedproceeds from this transaction. We will be evaluating a decrease inmix of options including tactical capital improvement projects, strategic growth investment opportunities that support our quarterly dividend to $0.01 in an effort to conserve cash. business plan, stock buy-backs and/or dividends and working capital reinvestment.
On October 27, 2016,April 26, 2017, our Board of Directors declared a dividend of $0.01 per share on our shares of common stock outstanding, payable November 23, 2016May 25, 2017, to shareholders of record on November 10, 2016.May 11, 2017.
We believe our cash and cash equivalents generated by our operating activities and funds available under our credit facilityproceeds to be received from future assets sales will be sufficient to fund our capital expenditures issue future letters of credit and meet our working capital needs for both the near and longer term to continue our operations, satisfy our contractual operations and pay dividends to our shareholders. Additionally, we expect to close on a new revolving line of credit during the second quarter of 2017 as discussed above. We believe that the new facility will provide us with additional working capital flexibility to ramp up our operations quickly in times of rapid increasing demand, to continue to issue future letters of credit and to quickly take advantage of market opportunities.
Cash Flow Activities
For the ninethree months ended September 30, 2016March 31, 2017, net cash provided byused in operating activities was $19.3$15.1 million, compared to $18.7$1.6 million for the ninethree months ended September 30, 2015.March 31, 2016. The increase in cash provided byused in operations was primarily due to increased gross profitthe following:
Operating losses for the quarter in excess of non-cash depreciation, amortization, impairment and collectionsstock compensation expense of contract receivablesapproximately $3.7 million, Payment of year-end bonuses related to 2016, Progress on liabilities from assumed contracts in the LEEVAC transaction.While our purchase price for the acquisition of the LEEVAC assets during 2016 somewhat offset bywas $20.0 million, we received a net $3.0 million in cash from the seller for the assumption of certain net liabilities and settlement payments required for trade payableson ongoing shipbuilding projects of $23.0 million that were assigned to us in the transaction. We have significantly progressed these contracts which in turn, has resulted in utilization of the working capital and settlement payments received during 2016. Fewer receipts from accounts receivable, primarily $4.6 million from one customer that refused delivery of a vessel on February 6, 2017, and has not paid. We have initiated arbitration proceedings during the ninequarter to enforce our rights under our construction contract, and
Build-up of costs for contracts in progress related to a customer in our Shipyards division with significant milestone payments occurring in the later stages of the projects which are expected to occur beginning in the third quarter of 2017 through the first quarter of 2018.
Net cash used in investing activities for the three months ended September 30, 2016 asMarch 31, 2017, was $391,000, compared to 2015. Net cash provided by investing activities for the nine months ended September 30, 2016 was $2.0 million, compared to cash used in investing activities of $5.0$6.2 million for the ninethree months ended September 30, 2015.March 31, 2016. The increasechange in cash used in/provided by investing activities is primarily due to cash received from the sale of three cranes at our Texas facility for $5.8$5.4 million and $1.6 million of cash acquired in the LEEVAC transaction.
Net cash used in financing activities for the ninethree months ended September 30,March 31, 2017 and 2016, was $1.0 million and 2015 was $440,000 and $4.4 million,$291,000, respectively. The decreaseincrease in cash used in financing activities is due to the reduction in the cash dividend in 2016.payments made to taxing authorities on behalf of employees' for their vesting of common stock.
Contractual Obligations There have been no material changes from the information included in our Annual Report on Form 10-K for the year ended December 31, 2015.2016. For more information on our contractual obligations, refer to Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2015.2016. Off-Balance Sheet Arrangements There have been no material changes from the information included in our Annual Report on Form 10-K for the year ended December 31, 2015.2016. Item 3. Quantitative and Qualitative Disclosures About Market Risk. There have been no material changes in the Company’s market risks during the quarter ended September 30, 2016.March 31, 2017. For more information on market risk, refer to Part II, Item 7A. of our Annual Report on Form 10-K for the year ended December 31, 2015.2016. Item 4. Controls and Procedures. The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and that such information is communicated to the Company’s management, including its Chief Executive Officer and Interim Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. The Company’s management, with the participation of the Company’s Chief Executive Officer and Interim Chief Financial Officer, hashave evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based on this evaluation, our Chief Executive Officer and Interim Chief Financial Officer hashave concluded that the design and operation of our disclosure controls and procedures were effective as of the end of the period covered by this report. There have been no changes during the fiscal quarter ended September 30, 2016March 31, 2017, in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. PART II. OTHER INFORMATION Item 1. Legal Proceedings. The Company is subject to various routine legal proceedings in the normal conduct of its business primarily involving commercial claims, workers’ compensation claims, and claims for personal injury under general maritime laws of the United
States and the Jones Act. While the outcome of these lawsuits, legal proceedings and claims cannot be predicted with certainty, management believes that the outcome of any such proceedings, even if determined adversely, would not have a material adverse effect on the financial position, results of operations or cash flows of the Company. Item 1A. Risk Factors. There have been no material changes from the information included in Item 1A “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2015.2016. | | | | | 2.1Exhibit Number | | Asset Purchase Agreement, dated December 23, 2015 by and among Gulf Island Shipyards, LLC, LEEVAC Shipyards, LLC and certain related affiliates, incorporated by reference toDescription of Exhibit 2.1 of the Company's Form 8-K filed on December 23, 2015. | | | 3.1 | | Composite Articles of Incorporation of the Company incorporated by reference to Exhibit 3.1 of the Company’s Form 10-Q filed April 23, 2009. | 3.2 | | Amended and Restated Bylaws of the Company, as amended and restated through April 26, 2012, incorporated by reference to Exhibit 3.1 of the Company’s Form 8-K filed on April 30, 2012. | 4.1 | | Specimen Common Stock Certificate, incorporated by reference to the Company’s Form S-1/A filed March 19, 1997 (Registration No. 333-21863).November 4, 2016. | 10.1 | | Change of Control Agreement, dated March 1, 2017, between the Company and David S. Schorlemer, incorporated by reference to Exhibit 10.15 of the Company's Form of Long-Term Performance-Based Cash Award Agreement.10-K for the year ended December 31, 2016 filed on March 2, 2017. | 3131.1 | | CEO and Certifications pursuant to Rule 13a-14 under the Securities Exchange Act of 1934. | 31.2 | | CFO CertificationCertifications pursuant to Rule 13a-14 under the Securities Exchange Act of 1934. | 32 | | Section 906 Certification furnished pursuant to 18 U.S.C. Section 1350. | 99.1 | | Press release issued by | 101 | | Attached as Exhibit 101 to this report are the following items formatted in XBRL (Extensible Business Reporting Language): | | | (i) | Consolidated Balance Sheets, | | | (ii) | Consolidated Statements of Operations, | | | (iii) | Consolidated Statement of Changes in Shareholders’ Equity, | | | (iv) | Consolidated Statements of Cash Flows and | | | (v) | Notes to Consolidated Financial Statements. |
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. | | | GULF ISLAND FABRICATION, INC. | | BY: | /s/ David S. Schorlemer | | David S. Schorlemer | | Executive Vice President, Chief Financial Officer, and Treasurer (Principal Financial and Accounting Officer) |
Date: May 2, 2017
GULF ISLAND FABRICATION, INC. EXHIBIT INDEX | | | | | Exhibit Number | | Description of Exhibit | | | 3.1 | | Composite Articles of Incorporation of the Company on October 27, 2016, incorporated by reference to Exhibit 99.13.1 of the Company’s Form 10-Q filed April 23, 2009. | 3.2 | | Amended and Restated Bylaws of the Company, incorporated by reference to Exhibit 3.1 of the Company’s Form 8-K filed November 4, 2016. | 10.1 | | Change of Control Agreement, dated March 1, 2017, between the Company and David S. Schorlemer, incorporated by reference to Exhibit 10.15 of the Company's Form 10-K for the year ended December 31, 2016 filed on October 27, 2016.March 2, 2017. | 31.1 | | CEO Certifications pursuant to Rule 13a-14 under the Securities Exchange Act of 1934. | 31.2 | | CFO Certifications pursuant to Rule 13a-14 under the Securities Exchange Act of 1934. | 32 | | Section 906 Certification furnished pursuant to 18 U.S.C. Section 1350. | | | | 101 | | Attached as Exhibit 101 to this report are the following items formatted in XBRL (Extensible Business Reporting Language): | | | | | | (i) | Consolidated Balance Sheets, | | | (ii) | Consolidated Statements of Operations, | | | (iii) | Consolidated Statement of Changes in Shareholders’ Equity, | | | (iv) | Consolidated Statements of Cash Flows and | | | (v) | Notes to Consolidated Financial Statements. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | GULF ISLAND FABRICATION, INC. | | BY: | /s/ Kirk J. Meche | | Kirk J. Meche | | President, Chief Executive Officer, Director and Interim Chief Financial Officer, Treasurer and Secretary (Principal Executive Officer and Interim Principal Financial and Accounting Officer) |
Date: November 2, 2016
GULF ISLAND FABRICATION, INC.
EXHIBIT INDEX
| | | | | Exhibit
Number
| | Description of Exhibit | | | 2.1 | | Asset Purchase Agreement, dated December 23, 2015 by and among Gulf Island Shipyards, LLC, LEEVAC Shipyards, LLC and certain related affiliates, incorporated by reference to Exhibit 2.1 of the Company's Form 8-K filed on December 23, 2015.
| 3.1 | | Composite Articles of Incorporation of the Company, incorporated by reference to Exhibit 3.1 of the Company’s Form 10-Q filed April 23, 2009. | 3.2 | | Bylaws of the Company, as amended and restated through April 26, 2012, incorporated by reference to Exhibit 3.1 of the Company’s Form 8-K filed on April 30, 2012. | 4.1 | | Specimen Common Stock Certificate, incorporated by reference to the Company’s Form S-1/A filed March 19, 1997 (Registration No. 333-21863). | 10.1 | | Form of Long-Term Performance-Based Cash Award Agreement. | 31 | | CEO and CFO Certifications pursuant to Rule 13a-14 under the Securities Exchange Act of 1934. | 32 | | Section 906 Certification furnished pursuant to 18 U.S.C. Section 1350. | 99.1 | | Press release issued by the Company on October 27, 2016, incorporated by reference to Exhibit 99.1 of the Company’s Form 8-K filed on October 27, 2016. | 101 | | Attached as Exhibit 101 to this report are the following items formatted in XBRL (Extensible Business Reporting Language): | | | | | | (i) | Consolidated Balance Sheets, | | | (ii) | Consolidated Statements of Operations, | | | (iii) | Consolidated Statement of Changes in Shareholders’ Equity, | | | (iv) | Consolidated Statements of Cash Flows and | | | (v) | Notes to Consolidated Financial Statements. |
s | Labor hours | ___________ | | 1. | Backlog as of September 30, 2016March 31, 2017, includes commitments received through October 27, 2016.April 26, 2017. We exclude suspended projects from contract backlog thatwhen they are expected to be suspended more than twelve months because resumption of work and timing of revenue recognition for these projects are difficult to predict. Our backlog also includes the new build construction that was acquired in the LEEVAC transaction on January 1, 2016. Included in our backlog at September 30, 2016, is $5.1 million of non-cash revenue related to purchase price fair value of contracts acquired in the LEEVAC transaction and included in deferred revenue in our consolidated Balance sheet at September 30, 2016. |
| | 2. | At September 30, 2016,March 31, 2017, projects for our threetwo largest customers in terms of revenue backlog consisted of: |
| | (i) | two large petroleum supply vessels for one customer in our Shipyards segment, which commenced in the second quarter of 2013 and will be completed during the first and second quarter of 2017; |
| | (ii) | two large multi-purpose service vessels for one customer in our Shipyards segment, which commenced in the first quarter of 2014 and will be completed during the first and second quarterquarters of 2018; and |
(iii) the fabrication of four modules associated with a U.S. ethane cracker project.
| | (ii) | the fabrication of four modules associated with a U.S. ethane cracker project. |
| | 3. | The timing of recognition of the revenue represented in our backlog is based on management’s current estimates to complete the projects. Certain factors and circumstances could cause changes in the amounts ultimately recognized and the timing of the recognition of revenue from our backlog. |
Depending on the size of the project, the termination, postponement, or reduction in scope of any one project could significantly reduce our backlog and could have a material adverse effect on revenue, net income and cash flow. As of September 30, 2016,March 31, 2017, we had 1,336922 employees and 163133 contract employees inclusive of 380 employees hired in the LEEVAC transaction, compared to 1,2551,178 employees and 7192 contract employees as of December 31, 2015. 2016.
Labor hours worked were 2.3 million479,000 during the ninethree months ended September 30, 2016,March 31, 2017, compared to 2.1 million695,000 for the ninethree months ended September 30, 2015.March 31, 2016. The overall increasedecrease in labor hours worked for the three months ended September 30, 2016March 31, 2017, was due to 636,000 labor hours worked from projects acquired in the LEEVAC transaction partially offset by a reduction in fabrication activity due primarily to the downturn in the oil and gas industry.
Results of Operations
Our results of operations are affected primarily by our ability to effectively manage contracts to a successful completion along with producing maximum efficiencies as it relates to manhours.
Three Months Ended September 30, 2016 Compared to Three Months Ended September 30, 2015 (in thousands, except for percentages):
Consolidated
| | | | | | | | | | | | | | | | Three Months Ended September 30, | | Increase or (Decrease) | | 2016 | | 2015 | | Amount | Percent | Revenue | $ | 65,384 |
| | $ | 67,531 |
| | $ | (2,147 | ) | (3.2 | )% | Cost of revenue | 60,125 |
| | 75,368 |
| | (15,243 | ) | (20.2 | )% | Gross profit (loss) | 5,259 |
| | (7,837 | ) | | 13,096 |
| 167.1 | % | Gross profit percentage | 8.0% | | (11.6)% | | | | General and administrative expenses | 5,086 |
| | 3,798 |
| | 1,288 |
| 33.9 | % | Asset impairment | — |
| | 6,600 |
| | (6,600 | ) | n/a |
| Operating income | 173 |
| | (18,235 | ) | | 18,408 |
| 100.9 | % | Other income (expense): | | | | | | | Interest expense | (110 | ) | | (39 | ) | | (71 | ) |
|
| Interest income | 12 |
| | 8 |
| | 4 |
|
|
| Other income, net | 599 |
| | — |
| | 599 |
|
|
| | 501 |
| | (31 | ) | | 532 |
| 1,716.1 | % | Net income (loss) before income taxes | 674 |
| | (18,266 | ) | | 18,940 |
| 103.7 | % | Income taxes | 133 |
| | (6,129 | ) | | 6,262 |
| 102.2 | % | Net income (loss) | $ | 541 |
| | $ | (12,137 | ) | | $ | 12,678 |
| 104.5 | % |
Revenue - Our revenue for the three months ended September 30, 2016 and 2015 was $65.4 million and $67.5 million, respectively, representing a decrease of 3.2%. The decrease is primarily attributable to an overall decrease in work experienced in our fabrication yardsfacilities as a result of depressed oil and gas prices and the corresponding reduction in customer demand within all of our operating divisions.
Results of Operations Three Months Ended March 31, 2017 Compared to Three Months Ended March 31, 2016 (in thousands, except for offshore projects in our Fabrication segment. During 2015, we completed the fabrication of a 1,200 foot jacket, piles and an approximate 450 short ton topside with no similar project in 2016.percentages): Consolidated | | | | | | | | | | | | | | | Three Months Ended March 31, | | Increase or (Decrease) | | 2017 | | 2016 | | Amount | Percent | Revenue | $ | 37,993 |
| | $ | 83,979 |
| | $ | (45,986 | ) | (54.8)% | Cost of revenue | 42,890 |
| | 78,278 |
| | (35,388 | ) | (45.2)% | Gross profit (loss) | (4,897 | ) | | 5,701 |
| | (10,598 | ) | 185.9% | Gross profit (loss) percentage | (12.9)% | | 6.8% | | | | General and administrative expenses | 3,930 |
| | 4,485 |
| | (555 | ) | (12.4)% | Asset impairment | 389 |
| | — |
| | 389 |
| 100.0% | Operating income (loss) | (9,216 | ) | | 1,216 |
| | (10,432 | ) | (857.9)% | Other income (expense): | | | | | | | Interest expense | (59 | ) | | (50 | ) | | (9 | ) | | Interest income | — |
| | 6 |
| | (6 | ) | | Other income, net | 9 |
| | 398 |
| | (389 | ) | | Total other income (expense) | (50 | ) | | 354 |
| | (404 | ) | (114.1)% | Net income (loss) before income taxes | (9,266 | ) | | 1,570 |
| | (10,836 | ) | (690.2)% | Income taxes | (2,812 | ) | | 581 |
| | (3,393 | ) | (584.0)% | Net income (loss) | $ | (6,454 | ) | | $ | 989 |
| | $ | (7,443 | ) | (752.6)% |
Revenue - Our decrease in revenue earned from offshore fabrication work was partially offset by the results of the assets and operations acquired in the LEEVAC transaction (see LEEVAC Transaction above), which contributed $16.8 million in revenue for the three months ended September 30, 2016.March 31, 2017 and 2016, was $38.0 million and $84.0 million, respectively, representing a decrease of 54.8%. The decrease is primarily attributable to an overall decrease in work experienced in our facilities as a result of depressed oil and gas prices and the corresponding reduction in customer demand within all of our operating divisions. Pass-through costs as a percentage of revenue were 33.8%29.4% and 45.3%40.0% for the three-months ended September 30,March 31, 2017 and 2016, and 2015, respectively. Pass-through costs, as described in Note 3 of the Notes to Consolidated Financial Statements, are included in revenue but have no impact on the gross profit recognized on a project for a particular period.
Gross profit (loss)- Our gross profit (loss)loss for the three months ended September 30, 2016 and 2015March 31, 2017, was $5.3$4.9 million (8.0% of revenue) and $(7.8) million, respectively. Ourcompared to a gross profit improved compared to third quarter of 2015$5.7 million for the three months ended March 31, 2016. The decrease was primarily due to contract losses of $14.3 million that were recorded during the third quarter of 2015 resulting from our inability to recover certain costs related to a deckdecreased revenue as discussed above and jacket for one of our deepwater projects. We had no such loss during the third quarter of 2016 and implemented cost cutting measures. This wastighter margins on current work partially offset by tighter margins within all of our segments due to a decreasedecreases in work as a result of the downturn in the oil and gas industry.costs resulting from additional cost cutting measures implemented by management.
General and administrative expenses - Our general and administrative expenses were $5.1$3.9 million for the three months ended September 30, 2016,March 31, 2017, compared to $3.8$4.5 million for the three months ended September 30, 2015.March 31, 2016. The increasedecrease in general
and administrative expenses for the three months ended September 30, 2016March 31, 2017, was primarily attributable to the operations acquired in the LEEVAC transaction and bonus expense, partially offset by cost cutting effortsmeasures implemented by management during 2016.the first part of 2016 as well as lower bonuses accrued during 2017 as a result of a combination of a smaller workforce and our consolidated gross loss.
Asset impairmentImpairment - During the three months ended September 30, 2015,March 31, 2017, we recorded an asset impairment charge of $6.6 million$389 related to a partially constructed topside, related valves, piping and equipment that we acquired from a customer following its default under a contract in 2012. Due to the sustained downturn in the energy sector, our ability to effectively market these assets was significantly limited, and we reassessed the asset’s net realizable value based on the estimated scrap valueheld for sale at our Prospect Shipyard. See also Note 2 of the assets. We had no such impairments during the three months ended September 30, 2016.Notes to Consolidated Financial statements. Interest expense,
Other income, net - The Company had net interest expense of $98,000Other income decreased $389,000 for the three months ended September 30, 2016 compared to net interest expense of $31,000 for the three months ended September 30, 2015.March 31, 2017. The increase was primarily driven by an increase in the cost of unused credit facility fees under our credit agreement. Other income, net - Other income increased $599,000 for the three months ended September 30, 2016. The increasedecrease was primarily due to gains on sales of assets from our Fabrication division.division recorded during three months ended March 31, 2016.
Income taxes - Our effective income tax rate for the three months ended September 30, 2016March 31, 2017, was 19.7%30.3%, compared to an effective tax rate of 34.0%37.0% for the comparable period during 2015.2016. The changedecrease in ourthe effective tax rate is duethe result of limitations on the deductibility of executive compensation and $210,000 in tax expense recognized during the three months ended March 31, 2017, for the tax effect of the difference between the actual tax deduction allowed upon vesting of common stock and the compensation cost recognized for financial reporting purposes resulting from the adoption of Accounting Standards Update 2016-09 as further discussed in Note 1 of the Notes to the decrease in our effective rate for the year-to-date period.Consolidated Financial Statements.
Operating Segments
As discussed in Note 8 of the Notes to Consolidated Financial Statements, management reduced its allocation of corporate administrative costs and overhead expenses to its operating divisions during the three months ended March 31, 2017, such that a significant portion of its corporate expenses are retained in its non-operating Corporate division. In addition, it has also allocated certain personnel previously included in the operating divisions to within the Corporate division. In doing so, management believes that it has created a fourth reportable segment with each of its three operating divisions and it's Corporate division each meeting the criteria of reportable segments under GAAP. During the three months ended March 31, 2016, we allocated substantially all of our corporate administrative costs and overhead expenses to our three operating divisions. We have recast our 2016 segment data below in order to conform to the current period presentation. Our results of our three operating divisions and Corporate division for the three months ended March 31, 2017 and 2016, are presented below (in thousands, except for percentages).
| | | | | | | | | | | | | | | | | Fabrication | | Three Months Ended September 30, | | Increase or (Decrease) | | | 2016 | | 2015 | | Amount | | Percent | Revenue | | $ | 22,311 |
| | $ | 32,133 |
| | $ | (9,822 | ) | | (30.6 | )% | Gross profit (loss) | | $ | 532 |
| | $ | (14,009 | ) | | $ | 14,541 |
| | 103.8 | % | Gross profit percentage | | 2.4 | % | | (43.6 | )% | | | | 46.0 | % | General and administrative expenses | | $ | 1,481 |
| | $ | 2,138 |
| | $ | (657 | ) | | (30.7 | )% | Asset impairment | | $ | — |
| | $ | 6,600 |
| | $ | (6,600 | ) | | n/a |
| Operating income (loss) | | $ | (949 | ) | | $ | (22,747 | ) | | | | |
| | | | | | | | | | | | | | | | Fabrication | | Three Months Ended March 31, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | 10,209 |
| | $ | 23,829 |
| | $ | (13,620 | ) | | (57.2)% | Gross profit (loss) | | (2,966 | ) | | 86 |
| | (3,052 | ) | | (3,548.8)% | Gross profit (loss) percentage | | (29.1 | )% | | 0.4 | % | | | | (29.5)% | General and administrative expenses | | 821 |
| | 795 |
| | 26 |
| | 3.3% | Operating income (loss) | | (3,787 | ) | | (709 | ) | | | | |
Revenue - Revenue from our Fabrication division decreased $9.8$13.6 million for the three months ended September 30, 2016March 31, 2017, compared to the three months ended September 30, 2015.March 31, 2016. The decrease is attributable to an overall decrease in work experienced in our fabrication yards as a result of depressed oil and gas prices and the corresponding reduction in customer demand for offshore fabrication projects. As discussed above, management has classified our South Texas assets as assets held for sale in response to the underutilization of our Fabrication assets.
Gross profit increased $14.5 million to $532,000(loss) - Gross loss from our Fabrication division for the three months ended September 30, 2016March 31, 2017, was $3.0 million compared to a gross lossprofit of $14.0 million$86,000 for the three months ended September 30, 2015March 31, 2016. The decrease was due to contract losseslower revenue as discussed above, payment of $14.3termination benefits as we reduce our South Texas workforce and depreciation expense of $1.9 million that were recorded during the third quarter of 2015related to our South Texas assets prior to their classification as assets held for sale. This was partially offset by decreases in costs resulting from our inability to recover certain costs related to a deck and jacket for one of our deepwater projects. We had no such loss during the third quarter of 2016 and implementedadditional cost cutting measures in response to decreases in work at our fabrication facilities.implemented by management.
General and administrative expenses - General and administrative expenses decreased $657,000for our Fabrication division increased $26,000 for the three months ended September 30, 2016March 31, 2017, compared to the three months ended September 30, 2015March 31, 2016. The increase is primarily due to cost cutting measures implemented during 2016 in responseexpenses incurred to decreases in work atmarket our fabrication facilities.South Texas assets for sale and payment of termination benefits as we reduce its workforce and complete those operations.
Asset impairment - During the three months ended September 30, 2015, we recorded an asset impairment charge of $6.6 million related to a partially constructed topside, related valves, piping and equipment that we acquired from a customer following its default under a contract in 2012. Due to the sustained downturn in the energy sector, our ability to effectively market these assets was significantly limited, and we reassessed the asset’s net realizable value based on the estimated scrap value of the assets. We had no such impairments during the three months ended September 30, 2016.
| | | | | | | | | | | | | | | | | Shipyards | | Three Months Ended September 30, | | Increase or (Decrease) | | | 2016 | | 2015 | | Amount | | Percent | Revenue (1) | | $ | 23,060 |
| | $ | 12,936 |
| | $ | 10,124 |
| | 78.3 | % | Gross profit (1) | | $ | 1,877 |
| | $ | 1,937 |
| | $ | (60 | ) | | (3.1 | )% | Gross profit percentage | | 8.1 | % | | 15.0 | % | | | | (6.9 | )% | General and administrative expenses | | $ | 2,065 |
| | $ | 392 |
| | $ | 1,673 |
| | 426.8 | % | Operating income (loss) (1) | | $ | (188 | ) | | $ | 1,545 |
| | | | |
| | | | | | | | | | | | | | | | Shipyards | | Three Months Ended March 31, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue (1) | | $ | 18,422 |
| | $ | 34,120 |
| | $ | (15,698 | ) | | (46.0)% | Gross profit (loss)(1) | | (1,704 | ) | | 2,375 |
| | (4,079 | ) | | (171.7)% | Gross profit (loss) percentage | | (9.2 | )% | | 7.0 | % | | | | (16.2)% | General and administrative expenses | | 964 |
| | 1,296 |
| | (332 | ) | | (25.6)% | Asset impairment | | 389 |
| | — |
| | 389 |
| | 100.0% | Operating income (loss) (1) | | (3,057 | ) | | 1,079 |
| | | | |
___________ | | (1) | Revenue for the three months ended September 30,March 31, 2017, and 2016, includes $1.5$1.6 million and $1.2 million of non-cash amortization of deferred revenue related to the values assigned to the contracts acquired in the LEEVAC transaction.transaction, respectively. |
Revenue increased $10.1- Revenue from our Shipyards division decreased $15.7 million for the three months ended September 30, 2016March 31, 2017, compared to the three months ended September 30, 2015March 31, 2016, due to the operations acquiredoverall decreases in work as we complete work under our contracts
including completion of a vessel that we assumed in the LEEVAC transaction (see LEEVAC Transaction above), which contributed $16.8 million in revenue forand delivered to a customer on February 6, 2017, with less new, replacement work starting during the three months ended September 30, 2016.
Gross profit decreased $60,000 for the three months ended September 30, 2016period as compared to the three months ended September 30, 2015March 31, 2016. The decrease in new, replacement work is due to tighter marginsdepressed oil and gas prices and the corresponding reduction in customer demand for shipbuilding and repair services supporting the oil and gas industry.
Gross profit (loss) - Gross loss from our Shipyards division was $1.7 million for the three months ended March 31, 2017, compared to a gross profit of $2.4 million for the three months ended March 31, 2016. The decrease was due to:
continued cost overruns on new work and inefficiencies incurred on the contracts acquiredthat were assigned to us in the LEEVAC transaction transaction; holding costs related to a completed vessel that was delivered on February 6, 2017; however, was refused by our customer alleging certain technical deficiencies (see also Note 9 of the Notes to Consolidated Financial Statements); and overall decreases in work under other various contracts as discussed above; partially offset by savings realized from cost cutting measures implemented by management during 2016.
General and administrative expenses - General and administrative expenses increased $1.7for our Shipyards division decreased $332,000 for the three months ended March 31, 2017, compared to the three months ended March 31, 2016, primarily due to cost cutting measures implemented by management during 2016 as well as lower bonuses accrued during 2017 as a result of a combination of a smaller workforce and our consolidated gross loss.
Asset Impairment - During three months ended March 31, 2017, we recorded an impairment of $389 related to our assets held for sale at our Prospect Shipyard. See also Note 2 of the Notes to Consolidated Financial statements.
| | | | | | | | | | | | | | | | Services | | Three Months Ended March 31, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | 10,712 |
| | $ | 26,559 |
| | $ | (15,847 | ) | | (59.7)% | Gross profit | | 33 |
| | 3,376 |
| | (3,343 | ) | | (99.0)% | Gross profit (loss) percentage | | 0.3 | % | | 12.7 | % | | | | (12.4)% | General and administrative expenses | | 666 |
| | 726 |
| | (60 | ) | | (8.3)% | Operating income (loss) | | (633 | ) | | 2,650 |
| | | | |
Revenue - Revenue from our Services division decreased $15.8 million for the three months ended September 30, 2016March 31, 2017, compared to the three months ended September 30, 2015 primarilyMarch 31, 2016, due to the expenses associated with the operations acquired in the LEEVAC transaction and bonus expense. | | | | | | | | | | | | | | | | | Services | | Three Months Ended September 30, | | Increase or (Decrease) | | | 2016 | | 2015 | | Amount | | Percent | Revenue | | $ | 20,928 |
| | $ | 23,487 |
| | $ | (2,559 | ) | | (10.9 | )% | Gross profit | | $ | 2,850 |
| | $ | 4,235 |
| | $ | (1,385 | ) | | (32.7 | )% | Gross profit percentage | | 13.6 | % | | 18.0 | % | | | | (4.4 | )% | General and administrative expenses | | $ | 1,540 |
| | $ | 994 |
| | $ | 546 |
| | 54.9 | % | Operating income | | $ | 1,310 |
| | $ | 3,241 |
| | | | | | | | | | | | | |
Revenue decreased $2.6 million for the three months ended September 30, 2016 compared to the three months ended September 30, 2015 due to the winding down of two large offshore service projects from the first half of 2016 and the downturn in the oil and gas industry.
Gross profit decreased $1.4 million for the three months ended September 30, 2016 compared to the three months ended September 30, 2015 due to decreases in revenues and tighter margins on new work.
General and administrative expenses increased $546,000 for the three months ended September 30, 2016 compared to the three months ended September 30, 2015 due to bonuses and additional administrative support added during the first half of 2016.
Nine Months Ended September 30, 2016 Compared to Nine Months Ended September 30, 2015 (in thousands, except for percentages):
Consolidated
| | | | | | | | | | | | | | | | Nine Months Ended September 30, | | Increase or (Decrease) | | 2016 | | 2015 | | Amount | Percent | Revenue | $ | 230,864 |
| | $ | 251,102 |
| | $ | (20,238 | ) | (8.1 | )% | Cost of revenue | 205,839 |
| | 248,686 |
| | (42,847 | ) | (17.2 | )% | Gross profit | 25,025 |
| | 2,416 |
| | 22,609 |
| 935.8 | % | Gross profit percentage | 10.8% | | 1.0% | | | | General and administrative expenses | 14,633 |
| | 11,817 |
| | 2,816 |
| 23.8 | % | Asset impairment | — |
| | 6,600 |
| | (6,600 | ) | n/a |
| Operating income (loss) | 10,392 |
| | (16,001 | ) | | 26,393 |
| 164.9 | % | Other income (expense): | | | | | | | Interest expense | (248 | ) | | (126 | ) | | (122 | ) |
|
| Interest income | 20 |
| | 21 |
| | (1 | ) |
|
| Other income, net | 1,039 |
| | 20 |
| | 1,019 |
|
|
| | 811 |
| | (85 | ) | | 896 |
| 1,054.1 | % | Net income (loss) before income taxes | 11,203 |
| | (16,086 | ) | | 27,289 |
| 169.6 | % | Income taxes | 4,134 |
| | (5,389 | ) | | 9,523 |
| 176.7 | % | Net income (loss) | $ | 7,069 |
| | $ | (10,697 | ) | | $ | 17,766 |
| 166.1 | % |
Revenue - Our revenue for the nine months ended September 30, 2016 and 2015 was $230.9 million and $251.1 million, respectively, representing a decrease of 8.1%. The decrease is primarily attributable to an overall decrease in work experienced in our fabrication yards primarily as a result of depressed oil and gas prices and the corresponding reduction in customer demand for offshore projects inoil and gas related service projects.
Gross profit - Gross profit from our Fabrication segment. During 2015, we completed the fabrication of a 1,200 foot jacket, piles and an approximate 450 short ton topside with no similar project in 2016. Our decrease in revenue earned from offshore fabrication work was partially offset by the assets and operations acquired in the LEEVAC transaction (see LEEVAC Transaction above), which contributed $55.9Services division decreased $3.3 million in revenue for the ninethree months ended September 30, 2016. Pass-through costs as a percentage of revenue were 35.0% and 43.2% forMarch 31, 2017, compared to the ninethree months ended September 30,March 31, 2016, and 2015, respectively. Pass-through costs, as described in Note 3 of the Notes to Consolidated Financial Statements, are included in revenue but have no impact on the gross profit recognized on a project for a particular period. Gross profit - Our gross profit for the nine months ended September 30, 2016 and 2015 was $25.0 million (10.8% of revenue) and $2.4 million (1.0% of revenue), respectively. Our gross profit improved compared to 2015 primarily due to the LEEVAC transactiondecreased revenue discussed above and contract losses of $14.3 million that were recordedtighter margins on new work performed during the third quarter of 2015 resulting from our inability to recover certain costs related to a deck and jacket for one of our deepwater projects. We had no such loss during the third quarter of 2016 and implemented cost cutting measures in response to decreases in work at our fabrication facilities.2017.
General and administrative expenses - Our general and administrative expenses were $14.6 million for the nine months ended September 30, 2016, compared to $11.8 million for the nine months ended September 30, 2015. The increase in generalGeneral and administrative expenses for our Services division decreased $60,000 for the ninethree months ended September 30,March 31, 2017, compared to the three months ended March 31, 2016, was primarily attributable to:
an increase of stock-based compensation expense of $589,000,
due to lower bonuses and the LEEVAC transaction; partially offset by
cost cutting efforts implementedaccrued during 2017, as a result of a combination of a smaller workforce and the downturnreduction in the oil and gas industry.gross profit.
Asset impairment
| | | | | | | | | | | | | | | | Corporate | | Three Months Ended March 31, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | — |
| | $ | — |
| | $ | — |
| | —% | Gross loss | | (260 | ) | | (136 | ) | | (124 | ) | | (91.2)% | Gross profit (loss) percentage | | n/a |
| | n/a |
| | | |
| General and administrative expenses | | 1,479 |
| | 1,668 |
| | (189 | ) | | (11.3)% | Operating loss | | (1,739 | ) | | (1,804 | ) | | 65 |
| | |
Gross loss - During the nine months ended September 30, 2015, we recorded an asset impairment charge of $6.6 million related to a partially constructed topside, related valves, piping and equipment that we acquiredGross loss from a customer following its default under a contract in 2012. Due to the sustained downturn in the energy sector, our ability to effectively
market these assets was significantly limited, and we reassessed the asset’s net realizable value based on the estimated scrap value of the assets. We had no such impairments during the nine months ended September 30, 2016.
Interest expense, net - The Company had net interest expense of $228,000 for the nine months ended September 30, 2016 compared to net interest expense of $105,000 for the nine months ended September 30, 2015. The increase in net interest expense for the nine months ended September 30, 2016 was primarily driven by an increase in the cost of unused credit facility fees under our credit agreement.
Other income, net - Other incomeCorporate division increased $1.0 million for the nine months ended September 30, 2016. The increase was primarily due to gainsa restructuring of $924,000 relatedour corporate division with additional personnel allocated to the sale of three cranes at our Texas facilitycorporate division during 2017 as well as sales of smaller assets bydiscussed above.
General and administrative expenses - General and administrative expenses for our Shipyards division. Income taxes - Our effective income tax rate for the nine months ended September 30, 2016 was 36.9%, compared to an effective tax rate of 34.0% for the comparable period during 2015. The increase in our effective rate isCorporate division decreased primarily due to the effect of state income taxes from income generated within Louisiana with no offsetting tax benefit from losses generated within Texas.
Operating Segments
| | | | | | | | | | | | | | | | | Fabrication | | Nine Months Ended September 30, | | Increase or (Decrease) | | | 2016 | | 2015 | | Amount | | Percent | Revenue | | $ | 70,436 |
| | $ | 137,431 |
| | $ | (66,995 | ) | | (48.7 | )% | Gross profit (loss) | | $ | 4,418 |
| | $ | (14,055 | ) | | $ | 18,473 |
| | 131.4 | % | Gross profit (loss) percentage | | 6.3 | % | | (10.2 | )% | | | | 16.5 | % | General and administrative expenses | | $ | 4,479 |
| | $ | 7,026 |
| | $ | (2,547 | ) | | (36.3 | )% | Asset impairment | | $ | — |
| | $ | 6,600 |
| | $ | (6,600 | ) | | n/a |
| Operating income (loss) | | $ | (61 | ) | | $ | (27,681 | ) | |
| |
|
Revenue decreased $67.0 million for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015. The decrease is attributable to an overall decrease in work experienced in our fabrication yardsbonuses as a result of depressed oil and gas prices and the corresponding reduction in customer demand for offshore fabrication projects. During 2015, we completed the fabrication of a 1,200 foot jacket, piles and an approximate 450 short ton topside with no similar project in 2016.
Gross profit increased $18.5 million to $4.4 million for the nine months ended September 30, 2016 compared to aour consolidated gross loss, of $14.1 million for the nine months ended September 30, 2015. The increase is due to contract losses of $14.3 million that were recorded during the third quarter of 2015 resulting from our inability to recover certain costs related to a deck and jacket for one of our deepwater projects. We had no such loss during the third quarter of 2016 and implemented cost cutting measures in response to decreases in work at our fabrication facilities.
General and administrative expenses decreased $2.5 million for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015 due to cost cutting measures implemented during 2016 in response to decreases in work at our fabrication facilities.
Asset impairment - During the nine months ended September 30, 2015, we recorded an asset impairment charge of $6.6 million related to a partially constructed topside, related valves, piping and equipment that we acquired from a customer following its default under a contract in 2012. Due to the sustained downturn in the energy sector, our ability to effectively market these assets was significantly limited, and we reassessed the asset’s net realizable value based on the estimated scrap value of the assets. We had no such impairments during the nine months ended September 30, 2016.
| | | | | | | | | | | | | | | | | Shipyards | | Nine Months Ended September 30, | | Increase or (Decrease) | | | 2016 | | 2015 | | Amount | | Percent | Revenue (1) | | $ | 86,553 |
| | $ | 47,177 |
| | $ | 39,376 |
| | 83.5 | % | Gross profit (1) | | $ | 9,595 |
| | $ | 6,022 |
| | $ | 3,573 |
| | 59.3 | % | Gross profit percentage | | 11.1 | % | | 12.8 | % | | | | (1.7 | )% | General and administrative expenses | | $ | 5,875 |
| | $ | 1,243 |
| | $ | 4,632 |
| | 372.6 | % | Operating income (1) | | $ | 3,720 |
| | $ | 4,779 |
| | | | |
____________
| | (1) | Revenue for the nine months ended September 30, 2016, includes $4.1 million of non-cash amortization of deferred revenue related to the values assigned to the contracts acquired in the LEEVAC transaction. |
Revenue increased $39.4 million for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015 due to the assets and operations acquired in the LEEVAC transaction (see LEEVAC Transaction above), which contributed $55.9 million in revenue for the nine months ended September 30, 2016. The increase was partially offset by decreases in work dueadditional personnel allocated to the downturn in the oil and gas industry.
Gross profit increased $3.6 million for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015 due to the LEEVAC transaction as well as increases in profitability estimates for other jobs in progress due to cost cutting measures.
General and administrative expenses increased $4.6 million for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015 due to the expenses associated with the operations acquired in the LEEVAC transaction and bonuses.
| | | | | | | | | | | | | | | | | Services | | Nine Months Ended September 30, | | Increase or (Decrease) | | | 2016 | | 2015 | | Amount | | Percent | Revenue | | $ | 76,179 |
| | $ | 70,987 |
| | $ | 5,192 |
| | 7.3 | % | Gross profit | | $ | 11,012 |
| | $ | 10,449 |
| | $ | 563 |
| | 5.4 | % | Gross profit percentage | | 14.5 | % | | 14.7 | % | | | | (0.2 | )% | General and administrative expenses | | $ | 4,119 |
| | $ | 3,008 |
| | $ | 1,111 |
| | 36.9 | % | Operating income | | $ | 6,893 |
| | $ | 7,441 |
| | | | | | | | | | | | | |
Revenue increased $5.2 million for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015 due to increases in the scope of two large offshore service projectsour corporate division during the first half of 2016.
Gross profit increased $563,000 for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015 due to increases in revenues and improved absorption of fixed costs resulting from an increase in labor hours worked.
General and administrative expenses increased $1.1 million for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015 due to additional administrative support costs related to increases in activity and bonuses.2017.
Liquidity and Capital Resources Historically, we have funded our business activities through cash generated from operations. At September 30, 2016March 31, 2017, we had no amounts outstanding under our credit facility, $4.5$4.6 million in outstanding letters of credit, and cash and cash equivalents totaling $55.6$34.7 million, compared to $34.8$51.2 million at December 31, 2015.2016. Working capital was $79.8$182.9 million and our ratio of current assets to current liabilities was 2.837.56 to 1 at September 30,March 31, 2017, compared to $78.0 million and 3.2 to 1, respectively, at December 31, 2016. Working capital at March 31, 2017, includes $110.5 million related to assets held for sale, primarily related to our South Texas facilities. Our primary sourceuse of cash during the three months ended March 31, 2017, was due to: Operating losses for the nine months ended September 30, 2016, wasquarter exclusive of non-cash depreciation, amortization, impairment and stock compensation expense of approximately $3.7 million, Payment of year-end bonuses related to 2016, Progress on liabilities from assumed contracts in the collection of accounts receivable under various customer contracts and sales of three cranes atLEEVAC transaction.While our Texas facility for $5.8 million. At September 30, 2016, our contracts receivable balance was $26.6 million of which we have subsequently collected $12.1 million through October 31, 2016. On January 1, 2016, we acquired substantially all of the assets and assumed certain specified liabilities of LEEVAC. The purchase price for the acquisition of the LEEVAC assets during 2016 was $20.0 million, subject to a working capital adjustment whereby we received a dollar-for-
dollar reductionnet $3.0 million in cash from the seller for the assumption of certain net liabilities of LEEVAC at closing and settlement payments from sureties on certain ongoing fabricationshipbuilding projects of $23.0 million that were assigned to us in the transaction. After taking into accountWe have significantly progressed these adjustments, wecontracts which in turn, has resulted in utilization of the working capital and settlement payments received approximately $1.6during 2016.
Fewer receipts from accounts receivable, primarily $4.6 million in cash at closing. Duringfrom one customer that refused delivery of a vessel on February 6, 2017, and has not paid. We have initiated arbitration proceedings during the quarter we presentedto enforce our working capital true-uprights under our construction contract, and Build-up of costs for contracts in progress related to a customer in our Shipyards division with significant milestone payments occurring in the seller, which resulted in an additional $1.5 million due to us. Additionally, we hired 380 employees upon acquisitionlater stages of the facilities representing substantially all of the former LEEVAC employees. Strategically, the transaction expands our marine fabrication and repair and maintenance presenceprojects which are expected to occur beginning in the Gulf South market. third quarter of 2017 through the first quarter of 2018. At the date of transaction, we acquired approximately $121.2March 31, 2017, our contracts receivable balance was $21.1 million of new build construction backlog inclusive of approximately $9.2which we have subsequently collected $4.1 million of purchase price fair value allocated to four, new build construction projects to be delivered in 2017 and 2018 for two customers. through April 21, 2017.
As of September 30, 2016,March 31, 2017, we had a credit agreement with Whitney Bank and JPMorgan Chase Bank N.A. that provides for an $80.0a $40.0 million revolving credit facility maturing January 2, 2017.November 29, 2018. The credit agreement allows the Company to use up to the full amount of the available borrowing base for letters of credit and up to $20.0 million for general corporate purposes. Our obligations under the credit agreement are secured by substantially all of our assets other(other than real property located in the state of Louisiana. On February 29, 2016, we entered into an amendment to our credit agreement. The amendment (i) extends the term of the Credit Facility from February 29, 2016 to January 2, 2017; (ii) increases the commitment feeestate). Commitment fees on undrawn amounts from 0.25% to 0.50%are 0.5% per annum; (iii) increases theannum and letter of credit fee,fees, subject to certain limited exceptions, to 2.00%are 2.0% per annum on undrawn stated amounts under letters of credit issued by the lenders; and (iv) limits the maximum amount of loans outstanding at any time for general corporate purposes to $20.0 million.lenders. Amounts borrowed under our the credit agreement bear interest, at our option, at either the prime lending rate established by JPMorgan Chase Bank, N.A. or LIBOR plus 2.0 percent. Under the amendment ourOur financial covenants beginning with the quarter endingat March 31, 20162017, are as follows:
| | (i) | minimum net worth requirement of not less than $250.0255.0 million plus |
| | a) | 50% of net income earned in each quarter beginning MarchDecember 31, 2016, and |
| | b) | 100% of proceeds from any issuance of common stock; |
| | c) | less the amount of any impairment on certain assets owned by Gulf Marine Fabricators, L.P. (our South Texas assets held for sale) up to $30.0 million; |
| | (ii) | debt to EBITDA ratio not greater than 3.02.5 to 1.0; and |
| | (iii) | interest coverage ratio not less than 2.0 to 1.0. |
At September 30, 2016,March 31, 2017, no amounts were outstanding under the credit facility, and we had outstanding letters of credit totaling $4.5$4.6 million, reducing the unused portion of our credit facility for additional letters of credit and borrowings to $75.5$35.4 million. As of September 30, 2016,March 31, 2017, we were in compliance with all covenants. During the fourth quarter, we expect
We are currently in discussions with one of our financial institutions to enter into a two-year, $40.0 million amendednew revolving line of credit with comparable availability, but with less restrictive financial covenants and restatedreduced fees as compared to our current revolving credit facility. We expect to close on this new revolving credit facility withand terminate our current lenders that will be secured by substantially all of our assets (other than real property). We anticipate the amendedexisting revolving credit facility will allow us to use the full $40.0 million borrowing base for both letters of credit and general corporate purposes. Given the historically low levels of borrowings under our current facility and our cash position, we requested a reduction in the amountsecond quarter of available credit under our revolver from $80.0 million to $40.0 million to decrease the commitment fees payable to our lenders for the undrawn portion of the facility.2017.
Our primary liquidity requirements are for the costs associated with servicingfabrication projects, and capital expenditures inand payment of dividends to our Fabrication and Shipyards segments. In particular, as further discussed in Note 2 in our Notes to Consolidated Financial Statements, in connection with the LEEVAC transaction, we received at closing a net cash amount that included consideration for billings in excess of costs and estimated earnings on uncompleted contracts and other payments from sureties representing pre-payment on the partially constructed vessels totaling $21.9 million as adjusted for the working capital true-up. Consequently, there will be required cash outflows for costs associated with the prepaid amounts without corresponding milestone billings.shareholders. We anticipate capital expenditures for the remainder of 20162017 to be approximately $1.8range between $6.0 million to $8.0 million primarily for the following: extension of one of our dry docks, and
improvements to our newly acquired facilities.Jennings and Lake Charles leased shipyards, improvement to the bulkhead at our Houma facility, and
computer system upgrades.
On October 21, 2016, a customer of our Shipyards’ segmentShipyards division announced it had received limited waivers from its lenders and noteholders through November 11, 2016 with respect towas in noncompliance with certain financial covenants included in the customer’s debt agreements. TheThis customer also announcedstated it had received limited waivers from its lenders and noteholders, but its debt agreements will require further negotiation and amendment. InOn April 19, 2017, the eventcustomer stated it had allowed the waivers to expire and remains in default of its covenants.
This same customer has rejected delivery of the vessel that we tendered for delivery on February 6, 2017, alleging certain technical deficiencies exist with respect to the vessel and is seeking recovery of all purchase price amounts previously paid by the customer under the contract. We are also building a second vessel for this customer that is scheduled for delivery during the second quarter of 2017. We disagree with our customer is unsuccessful inconcerning these efforts,alleged technical deficiencies and have put the customer will consider other options including a possible reorganizationin default under Chapter 11the terms of the Federal bankruptcy laws. At September 30, 2016, no contracts receivable werefor both vessels. As of March 31, 2017, approximately $4.6 million remained due and outstanding from our customer for the first vessel. The balance due to us upon delivery for a second vessel which is expected in May of this year, is approximately $4.9 million. On March 10, 2017, we gave notice for arbitration with our customer in an effort to resolve this matter. We intend to take all legal action as may be necessary to protect our rights under the contracts and deferred revenue exceeded our costs and estimated earnings in excess of billings on this contract. recover the remaining balances owed to us.
We continue to monitor our work performed in relation to our customer’s status and its ability to pay under the terms of its contract. Based on our evaluation to date,these contracts. Because these vessels have been completed or are substantially complete, we do not believe that they have significant fair value, and that we would be able to fully recover any loss on this contract is probable or estimable at this time.amounts due to us.
In February 2016,anticipation of the proceeds to be received from the sale of our BoardSouth Texas assets, we have engaged in a strategic financial analysis project with advisors to determine the appropriate use of Directors approvedproceeds from this transaction. We will be evaluating a decrease inmix of options including tactical capital improvement projects, strategic growth investment opportunities that support our quarterly dividend to $0.01 in an effort to conserve cash. business plan, stock buy-backs and/or dividends and working capital reinvestment.
On October 27, 2016,April 26, 2017, our Board of Directors declared a dividend of $0.01 per share on our shares of common stock outstanding, payable November 23, 2016May 25, 2017, to shareholders of record on November 10, 2016.May 11, 2017.
We believe our cash and cash equivalents generated by our operating activities and funds available under our credit facilityproceeds to be received from future assets sales will be sufficient to fund our capital expenditures issue future letters of credit and meet our working capital needs for both the near and longer term to continue our operations, satisfy our contractual operations and pay dividends to our shareholders. Additionally, we expect to close on a new revolving line of credit during the second quarter of 2017 as discussed above. We believe that the new facility will provide us with additional working capital flexibility to ramp up our operations quickly in times of rapid increasing demand, to continue to issue future letters of credit and to quickly take advantage of market opportunities.
Cash Flow Activities
For the ninethree months ended September 30, 2016March 31, 2017, net cash provided byused in operating activities was $19.3$15.1 million, compared to $18.7$1.6 million for the ninethree months ended September 30, 2015.March 31, 2016. The increase in cash provided byused in operations was primarily due to increased gross profitthe following:
Operating losses for the quarter in excess of non-cash depreciation, amortization, impairment and collectionsstock compensation expense of contract receivablesapproximately $3.7 million, Payment of year-end bonuses related to 2016, Progress on liabilities from assumed contracts in the LEEVAC transaction.While our purchase price for the acquisition of the LEEVAC assets during 2016 somewhat offset bywas $20.0 million, we received a net $3.0 million in cash from the seller for the assumption of certain net liabilities and settlement payments required for trade payableson ongoing shipbuilding projects of $23.0 million that were assigned to us in the transaction. We have significantly progressed these contracts which in turn, has resulted in utilization of the working capital and settlement payments received during 2016. Fewer receipts from accounts receivable, primarily $4.6 million from one customer that refused delivery of a vessel on February 6, 2017, and has not paid. We have initiated arbitration proceedings during the ninequarter to enforce our rights under our construction contract, and
Build-up of costs for contracts in progress related to a customer in our Shipyards division with significant milestone payments occurring in the later stages of the projects which are expected to occur beginning in the third quarter of 2017 through the first quarter of 2018.
Net cash used in investing activities for the three months ended September 30, 2016 asMarch 31, 2017, was $391,000, compared to 2015. Net cash provided by investing activities for the nine months ended September 30, 2016 was $2.0 million, compared to cash used in investing activities of $5.0$6.2 million for the ninethree months ended September 30, 2015.March 31, 2016. The increasechange in cash used in/provided by investing activities is primarily due to cash received from the sale of three cranes at our Texas facility for $5.8$5.4 million and $1.6 million of cash acquired in the LEEVAC transaction.
Net cash used in financing activities for the ninethree months ended September 30,March 31, 2017 and 2016, was $1.0 million and 2015 was $440,000 and $4.4 million,$291,000, respectively. The decreaseincrease in cash used in financing activities is due to the reduction in the cash dividend in 2016.payments made to taxing authorities on behalf of employees' for their vesting of common stock.
Contractual Obligations There have been no material changes from the information included in our Annual Report on Form 10-K for the year ended December 31, 2015.2016. For more information on our contractual obligations, refer to Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2015.2016. Off-Balance Sheet Arrangements There have been no material changes from the information included in our Annual Report on Form 10-K for the year ended December 31, 2015.2016. Item 3. Quantitative and Qualitative Disclosures About Market Risk. There have been no material changes in the Company’s market risks during the quarter ended September 30, 2016.March 31, 2017. For more information on market risk, refer to Part II, Item 7A. of our Annual Report on Form 10-K for the year ended December 31, 2015.2016. Item 4. Controls and Procedures. The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and that such information is communicated to the Company’s management, including its Chief Executive Officer and Interim Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. The Company’s management, with the participation of the Company’s Chief Executive Officer and Interim Chief Financial Officer, hashave evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based on this evaluation, our Chief Executive Officer and Interim Chief Financial Officer hashave concluded that the design and operation of our disclosure controls and procedures were effective as of the end of the period covered by this report. There have been no changes during the fiscal quarter ended September 30, 2016March 31, 2017, in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. PART II. OTHER INFORMATION Item 1. Legal Proceedings. The Company is subject to various routine legal proceedings in the normal conduct of its business primarily involving commercial claims, workers’ compensation claims, and claims for personal injury under general maritime laws of the United
States and the Jones Act. While the outcome of these lawsuits, legal proceedings and claims cannot be predicted with certainty, management believes that the outcome of any such proceedings, even if determined adversely, would not have a material adverse effect on the financial position, results of operations or cash flows of the Company. Item 1A. Risk Factors. There have been no material changes from the information included in Item 1A “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2015.2016. | | | | | 2.1Exhibit Number | | Asset Purchase Agreement, dated December 23, 2015 by and among Gulf Island Shipyards, LLC, LEEVAC Shipyards, LLC and certain related affiliates, incorporated by reference toDescription of Exhibit 2.1 of the Company's Form 8-K filed on December 23, 2015. | | | 3.1 | | Composite Articles of Incorporation of the Company incorporated by reference to Exhibit 3.1 of the Company’s Form 10-Q filed April 23, 2009. | 3.2 | | Amended and Restated Bylaws of the Company, as amended and restated through April 26, 2012, incorporated by reference to Exhibit 3.1 of the Company’s Form 8-K filed on April 30, 2012. | 4.1 | | Specimen Common Stock Certificate, incorporated by reference to the Company’s Form S-1/A filed March 19, 1997 (Registration No. 333-21863).November 4, 2016. | 10.1 | | Change of Control Agreement, dated March 1, 2017, between the Company and David S. Schorlemer, incorporated by reference to Exhibit 10.15 of the Company's Form of Long-Term Performance-Based Cash Award Agreement.10-K for the year ended December 31, 2016 filed on March 2, 2017. | 3131.1 | | CEO and Certifications pursuant to Rule 13a-14 under the Securities Exchange Act of 1934. | 31.2 | | CFO CertificationCertifications pursuant to Rule 13a-14 under the Securities Exchange Act of 1934. | 32 | | Section 906 Certification furnished pursuant to 18 U.S.C. Section 1350. | 99.1 | | Press release issued by | 101 | | Attached as Exhibit 101 to this report are the following items formatted in XBRL (Extensible Business Reporting Language): | | | (i) | Consolidated Balance Sheets, | | | (ii) | Consolidated Statements of Operations, | | | (iii) | Consolidated Statement of Changes in Shareholders’ Equity, | | | (iv) | Consolidated Statements of Cash Flows and | | | (v) | Notes to Consolidated Financial Statements. |
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. | | | GULF ISLAND FABRICATION, INC. | | BY: | /s/ David S. Schorlemer | | David S. Schorlemer | | Executive Vice President, Chief Financial Officer, and Treasurer (Principal Financial and Accounting Officer) |
Date: May 2, 2017
GULF ISLAND FABRICATION, INC. EXHIBIT INDEX | | | | | Exhibit Number | | Description of Exhibit | | | 3.1 | | Composite Articles of Incorporation of the Company on October 27, 2016, incorporated by reference to Exhibit 99.13.1 of the Company’s Form 10-Q filed April 23, 2009. | 3.2 | | Amended and Restated Bylaws of the Company, incorporated by reference to Exhibit 3.1 of the Company’s Form 8-K filed November 4, 2016. | 10.1 | | Change of Control Agreement, dated March 1, 2017, between the Company and David S. Schorlemer, incorporated by reference to Exhibit 10.15 of the Company's Form 10-K for the year ended December 31, 2016 filed on October 27, 2016.March 2, 2017. | 31.1 | | CEO Certifications pursuant to Rule 13a-14 under the Securities Exchange Act of 1934. | 31.2 | | CFO Certifications pursuant to Rule 13a-14 under the Securities Exchange Act of 1934. | 32 | | Section 906 Certification furnished pursuant to 18 U.S.C. Section 1350. | | | | 101 | | Attached as Exhibit 101 to this report are the following items formatted in XBRL (Extensible Business Reporting Language): | | | | | | (i) | Consolidated Balance Sheets, | | | (ii) | Consolidated Statements of Operations, | | | (iii) | Consolidated Statement of Changes in Shareholders’ Equity, | | | (iv) | Consolidated Statements of Cash Flows and | | | (v) | Notes to Consolidated Financial Statements. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | GULF ISLAND FABRICATION, INC. | | BY: | /s/ Kirk J. Meche | | Kirk J. Meche | | President, Chief Executive Officer, Director and Interim Chief Financial Officer, Treasurer and Secretary (Principal Executive Officer and Interim Principal Financial and Accounting Officer) |
Date: November 2, 2016
GULF ISLAND FABRICATION, INC.
EXHIBIT INDEX
| | | | | Exhibit
Number
| | Description of Exhibit | | | 2.1 | | Asset Purchase Agreement, dated December 23, 2015 by and among Gulf Island Shipyards, LLC, LEEVAC Shipyards, LLC and certain related affiliates, incorporated by reference to Exhibit 2.1 of the Company's Form 8-K filed on December 23, 2015.
| 3.1 | | Composite Articles of Incorporation of the Company, incorporated by reference to Exhibit 3.1 of the Company’s Form 10-Q filed April 23, 2009. | 3.2 | | Bylaws of the Company, as amended and restated through April 26, 2012, incorporated by reference to Exhibit 3.1 of the Company’s Form 8-K filed on April 30, 2012. | 4.1 | | Specimen Common Stock Certificate, incorporated by reference to the Company’s Form S-1/A filed March 19, 1997 (Registration No. 333-21863). | 10.1 | | Form of Long-Term Performance-Based Cash Award Agreement. | 31 | | CEO and CFO Certifications pursuant to Rule 13a-14 under the Securities Exchange Act of 1934. | 32 | | Section 906 Certification furnished pursuant to 18 U.S.C. Section 1350. | 99.1 | | Press release issued by the Company on October 27, 2016, incorporated by reference to Exhibit 99.1 of the Company’s Form 8-K filed on October 27, 2016. | 101 | | Attached as Exhibit 101 to this report are the following items formatted in XBRL (Extensible Business Reporting Language): | | | | | | (i) | Consolidated Balance Sheets, | | | (ii) | Consolidated Statements of Operations, | | | (iii) | Consolidated Statement of Changes in Shareholders’ Equity, | | | (iv) | Consolidated Statements of Cash Flows and | | | (v) | Notes to Consolidated Financial Statements. |
s | Labor hours | | ___________ | | 1. | Backlog as of September 30, 2016March 31, 2017, includes commitments received through October 27, 2016.April 26, 2017. We exclude suspended projects from contract backlog thatwhen they are expected to be suspended more than twelve months because resumption of work and timing of revenue recognition for these projects are difficult to predict. Our backlog also includes the new build construction that was acquired in the LEEVAC transaction on January 1, 2016. Included in our backlog at September 30, 2016, is $5.1 million of non-cash revenue related to purchase price fair value of contracts acquired in the LEEVAC transaction and included in deferred revenue in our consolidated Balance sheet at September 30, 2016. |
| | 2. | At September 30, 2016,March 31, 2017, projects for our threetwo largest customers in terms of revenue backlog consisted of: |
| | (i) | two large petroleum supply vessels for one customer in our Shipyards segment, which commenced in the second quarter of 2013 and will be completed during the first and second quarter of 2017; |
| | (ii) | two large multi-purpose service vessels for one customer in our Shipyards segment, which commenced in the first quarter of 2014 and will be completed during the first and second quarterquarters of 2018; and |
(iii) the fabrication of four modules associated with a U.S. ethane cracker project.
| | (ii) | the fabrication of four modules associated with a U.S. ethane cracker project. |
| | 3. | The timing of recognition of the revenue represented in our backlog is based on management’s current estimates to complete the projects. Certain factors and circumstances could cause changes in the amounts ultimately recognized and the timing of the recognition of revenue from our backlog. |
Depending on the size of the project, the termination, postponement, or reduction in scope of any one project could significantly reduce our backlog and could have a material adverse effect on revenue, net income and cash flow. As of September 30, 2016,March 31, 2017, we had 1,336922 employees and 163133 contract employees inclusive of 380 employees hired in the LEEVAC transaction, compared to 1,2551,178 employees and 7192 contract employees as of December 31, 2015. 2016.
Labor hours worked were 2.3 million479,000 during the ninethree months ended September 30, 2016,March 31, 2017, compared to 2.1 million695,000 for the ninethree months ended September 30, 2015.March 31, 2016. The overall increasedecrease in labor hours worked for the three months ended September 30, 2016March 31, 2017, was due to 636,000 labor hours worked from projects acquired in the LEEVAC transaction partially offset by a reduction in fabrication activity due primarily to the downturn in the oil and gas industry.
Results of Operations
Our results of operations are affected primarily by our ability to effectively manage contracts to a successful completion along with producing maximum efficiencies as it relates to manhours.
Three Months Ended September 30, 2016 Compared to Three Months Ended September 30, 2015 (in thousands, except for percentages):
Consolidated
| | | | | | | | | | | | | | | | Three Months Ended September 30, | | Increase or (Decrease) | | 2016 | | 2015 | | Amount | Percent | Revenue | $ | 65,384 |
| | $ | 67,531 |
| | $ | (2,147 | ) | (3.2 | )% | Cost of revenue | 60,125 |
| | 75,368 |
| | (15,243 | ) | (20.2 | )% | Gross profit (loss) | 5,259 |
| | (7,837 | ) | | 13,096 |
| 167.1 | % | Gross profit percentage | 8.0% | | (11.6)% | | | | General and administrative expenses | 5,086 |
| | 3,798 |
| | 1,288 |
| 33.9 | % | Asset impairment | — |
| | 6,600 |
| | (6,600 | ) | n/a |
| Operating income | 173 |
| | (18,235 | ) | | 18,408 |
| 100.9 | % | Other income (expense): | | | | | | | Interest expense | (110 | ) | | (39 | ) | | (71 | ) |
|
| Interest income | 12 |
| | 8 |
| | 4 |
|
|
| Other income, net | 599 |
| | — |
| | 599 |
|
|
| | 501 |
| | (31 | ) | | 532 |
| 1,716.1 | % | Net income (loss) before income taxes | 674 |
| | (18,266 | ) | | 18,940 |
| 103.7 | % | Income taxes | 133 |
| | (6,129 | ) | | 6,262 |
| 102.2 | % | Net income (loss) | $ | 541 |
| | $ | (12,137 | ) | | $ | 12,678 |
| 104.5 | % |
Revenue - Our revenue for the three months ended September 30, 2016 and 2015 was $65.4 million and $67.5 million, respectively, representing a decrease of 3.2%. The decrease is primarily attributable to an overall decrease in work experienced in our fabrication yardsfacilities as a result of depressed oil and gas prices and the corresponding reduction in customer demand within all of our operating divisions.
Results of Operations Three Months Ended March 31, 2017 Compared to Three Months Ended March 31, 2016 (in thousands, except for offshore projects in our Fabrication segment. During 2015, we completed the fabrication of a 1,200 foot jacket, piles and an approximate 450 short ton topside with no similar project in 2016.percentages): Consolidated | | | | | | | | | | | | | | | Three Months Ended March 31, | | Increase or (Decrease) | | 2017 | | 2016 | | Amount | Percent | Revenue | $ | 37,993 |
| | $ | 83,979 |
| | $ | (45,986 | ) | (54.8)% | Cost of revenue | 42,890 |
| | 78,278 |
| | (35,388 | ) | (45.2)% | Gross profit (loss) | (4,897 | ) | | 5,701 |
| | (10,598 | ) | 185.9% | Gross profit (loss) percentage | (12.9)% | | 6.8% | | | | General and administrative expenses | 3,930 |
| | 4,485 |
| | (555 | ) | (12.4)% | Asset impairment | 389 |
| | — |
| | 389 |
| 100.0% | Operating income (loss) | (9,216 | ) | | 1,216 |
| | (10,432 | ) | (857.9)% | Other income (expense): | | | | | | | Interest expense | (59 | ) | | (50 | ) | | (9 | ) | | Interest income | — |
| | 6 |
| | (6 | ) | | Other income, net | 9 |
| | 398 |
| | (389 | ) | | Total other income (expense) | (50 | ) | | 354 |
| | (404 | ) | (114.1)% | Net income (loss) before income taxes | (9,266 | ) | | 1,570 |
| | (10,836 | ) | (690.2)% | Income taxes | (2,812 | ) | | 581 |
| | (3,393 | ) | (584.0)% | Net income (loss) | $ | (6,454 | ) | | $ | 989 |
| | $ | (7,443 | ) | (752.6)% |
Revenue - Our decrease in revenue earned from offshore fabrication work was partially offset by the results of the assets and operations acquired in the LEEVAC transaction (see LEEVAC Transaction above), which contributed $16.8 million in revenue for the three months ended September 30, 2016.March 31, 2017 and 2016, was $38.0 million and $84.0 million, respectively, representing a decrease of 54.8%. The decrease is primarily attributable to an overall decrease in work experienced in our facilities as a result of depressed oil and gas prices and the corresponding reduction in customer demand within all of our operating divisions. Pass-through costs as a percentage of revenue were 33.8%29.4% and 45.3%40.0% for the three-months ended September 30,March 31, 2017 and 2016, and 2015, respectively. Pass-through costs, as described in Note 3 of the Notes to Consolidated Financial Statements, are included in revenue but have no impact on the gross profit recognized on a project for a particular period.
Gross profit (loss)- Our gross profit (loss)loss for the three months ended September 30, 2016 and 2015March 31, 2017, was $5.3$4.9 million (8.0% of revenue) and $(7.8) million, respectively. Ourcompared to a gross profit improved compared to third quarter of 2015$5.7 million for the three months ended March 31, 2016. The decrease was primarily due to contract losses of $14.3 million that were recorded during the third quarter of 2015 resulting from our inability to recover certain costs related to a deckdecreased revenue as discussed above and jacket for one of our deepwater projects. We had no such loss during the third quarter of 2016 and implemented cost cutting measures. This wastighter margins on current work partially offset by tighter margins within all of our segments due to a decreasedecreases in work as a result of the downturn in the oil and gas industry.costs resulting from additional cost cutting measures implemented by management.
General and administrative expenses - Our general and administrative expenses were $5.1$3.9 million for the three months ended September 30, 2016,March 31, 2017, compared to $3.8$4.5 million for the three months ended September 30, 2015.March 31, 2016. The increasedecrease in general
and administrative expenses for the three months ended September 30, 2016March 31, 2017, was primarily attributable to the operations acquired in the LEEVAC transaction and bonus expense, partially offset by cost cutting effortsmeasures implemented by management during 2016.the first part of 2016 as well as lower bonuses accrued during 2017 as a result of a combination of a smaller workforce and our consolidated gross loss.
Asset impairmentImpairment - During the three months ended September 30, 2015,March 31, 2017, we recorded an asset impairment charge of $6.6 million$389 related to a partially constructed topside, related valves, piping and equipment that we acquired from a customer following its default under a contract in 2012. Due to the sustained downturn in the energy sector, our ability to effectively market these assets was significantly limited, and we reassessed the asset’s net realizable value based on the estimated scrap valueheld for sale at our Prospect Shipyard. See also Note 2 of the assets. We had no such impairments during the three months ended September 30, 2016.Notes to Consolidated Financial statements. Interest expense,
Other income, net - The Company had net interest expense of $98,000Other income decreased $389,000 for the three months ended September 30, 2016 compared to net interest expense of $31,000 for the three months ended September 30, 2015.March 31, 2017. The increase was primarily driven by an increase in the cost of unused credit facility fees under our credit agreement. Other income, net - Other income increased $599,000 for the three months ended September 30, 2016. The increasedecrease was primarily due to gains on sales of assets from our Fabrication division.division recorded during three months ended March 31, 2016.
Income taxes - Our effective income tax rate for the three months ended September 30, 2016March 31, 2017, was 19.7%30.3%, compared to an effective tax rate of 34.0%37.0% for the comparable period during 2015.2016. The changedecrease in ourthe effective tax rate is duethe result of limitations on the deductibility of executive compensation and $210,000 in tax expense recognized during the three months ended March 31, 2017, for the tax effect of the difference between the actual tax deduction allowed upon vesting of common stock and the compensation cost recognized for financial reporting purposes resulting from the adoption of Accounting Standards Update 2016-09 as further discussed in Note 1 of the Notes to the decrease in our effective rate for the year-to-date period.Consolidated Financial Statements.
Operating Segments
As discussed in Note 8 of the Notes to Consolidated Financial Statements, management reduced its allocation of corporate administrative costs and overhead expenses to its operating divisions during the three months ended March 31, 2017, such that a significant portion of its corporate expenses are retained in its non-operating Corporate division. In addition, it has also allocated certain personnel previously included in the operating divisions to within the Corporate division. In doing so, management believes that it has created a fourth reportable segment with each of its three operating divisions and it's Corporate division each meeting the criteria of reportable segments under GAAP. During the three months ended March 31, 2016, we allocated substantially all of our corporate administrative costs and overhead expenses to our three operating divisions. We have recast our 2016 segment data below in order to conform to the current period presentation. Our results of our three operating divisions and Corporate division for the three months ended March 31, 2017 and 2016, are presented below (in thousands, except for percentages).
| | | | | | | | | | | | | | | | | Fabrication | | Three Months Ended September 30, | | Increase or (Decrease) | | | 2016 | | 2015 | | Amount | | Percent | Revenue | | $ | 22,311 |
| | $ | 32,133 |
| | $ | (9,822 | ) | | (30.6 | )% | Gross profit (loss) | | $ | 532 |
| | $ | (14,009 | ) | | $ | 14,541 |
| | 103.8 | % | Gross profit percentage | | 2.4 | % | | (43.6 | )% | | | | 46.0 | % | General and administrative expenses | | $ | 1,481 |
| | $ | 2,138 |
| | $ | (657 | ) | | (30.7 | )% | Asset impairment | | $ | — |
| | $ | 6,600 |
| | $ | (6,600 | ) | | n/a |
| Operating income (loss) | | $ | (949 | ) | | $ | (22,747 | ) | | | | |
| | | | | | | | | | | | | | | | Fabrication | | Three Months Ended March 31, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | 10,209 |
| | $ | 23,829 |
| | $ | (13,620 | ) | | (57.2)% | Gross profit (loss) | | (2,966 | ) | | 86 |
| | (3,052 | ) | | (3,548.8)% | Gross profit (loss) percentage | | (29.1 | )% | | 0.4 | % | | | | (29.5)% | General and administrative expenses | | 821 |
| | 795 |
| | 26 |
| | 3.3% | Operating income (loss) | | (3,787 | ) | | (709 | ) | | | | |
Revenue - Revenue from our Fabrication division decreased $9.8$13.6 million for the three months ended September 30, 2016March 31, 2017, compared to the three months ended September 30, 2015.March 31, 2016. The decrease is attributable to an overall decrease in work experienced in our fabrication yards as a result of depressed oil and gas prices and the corresponding reduction in customer demand for offshore fabrication projects. As discussed above, management has classified our South Texas assets as assets held for sale in response to the underutilization of our Fabrication assets.
Gross profit increased $14.5 million to $532,000(loss) - Gross loss from our Fabrication division for the three months ended September 30, 2016March 31, 2017, was $3.0 million compared to a gross lossprofit of $14.0 million$86,000 for the three months ended September 30, 2015March 31, 2016. The decrease was due to contract losseslower revenue as discussed above, payment of $14.3termination benefits as we reduce our South Texas workforce and depreciation expense of $1.9 million that were recorded during the third quarter of 2015related to our South Texas assets prior to their classification as assets held for sale. This was partially offset by decreases in costs resulting from our inability to recover certain costs related to a deck and jacket for one of our deepwater projects. We had no such loss during the third quarter of 2016 and implementedadditional cost cutting measures in response to decreases in work at our fabrication facilities.implemented by management.
General and administrative expenses - General and administrative expenses decreased $657,000for our Fabrication division increased $26,000 for the three months ended September 30, 2016March 31, 2017, compared to the three months ended September 30, 2015March 31, 2016. The increase is primarily due to cost cutting measures implemented during 2016 in responseexpenses incurred to decreases in work atmarket our fabrication facilities.South Texas assets for sale and payment of termination benefits as we reduce its workforce and complete those operations.
Asset impairment - During the three months ended September 30, 2015, we recorded an asset impairment charge of $6.6 million related to a partially constructed topside, related valves, piping and equipment that we acquired from a customer following its default under a contract in 2012. Due to the sustained downturn in the energy sector, our ability to effectively market these assets was significantly limited, and we reassessed the asset’s net realizable value based on the estimated scrap value of the assets. We had no such impairments during the three months ended September 30, 2016.
| | | | | | | | | | | | | | | | | Shipyards | | Three Months Ended September 30, | | Increase or (Decrease) | | | 2016 | | 2015 | | Amount | | Percent | Revenue (1) | | $ | 23,060 |
| | $ | 12,936 |
| | $ | 10,124 |
| | 78.3 | % | Gross profit (1) | | $ | 1,877 |
| | $ | 1,937 |
| | $ | (60 | ) | | (3.1 | )% | Gross profit percentage | | 8.1 | % | | 15.0 | % | | | | (6.9 | )% | General and administrative expenses | | $ | 2,065 |
| | $ | 392 |
| | $ | 1,673 |
| | 426.8 | % | Operating income (loss) (1) | | $ | (188 | ) | | $ | 1,545 |
| | | | |
| | | | | | | | | | | | | | | | Shipyards | | Three Months Ended March 31, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue (1) | | $ | 18,422 |
| | $ | 34,120 |
| | $ | (15,698 | ) | | (46.0)% | Gross profit (loss)(1) | | (1,704 | ) | | 2,375 |
| | (4,079 | ) | | (171.7)% | Gross profit (loss) percentage | | (9.2 | )% | | 7.0 | % | | | | (16.2)% | General and administrative expenses | | 964 |
| | 1,296 |
| | (332 | ) | | (25.6)% | Asset impairment | | 389 |
| | — |
| | 389 |
| | 100.0% | Operating income (loss) (1) | | (3,057 | ) | | 1,079 |
| | | | |
___________ | | (1) | Revenue for the three months ended September 30,March 31, 2017, and 2016, includes $1.5$1.6 million and $1.2 million of non-cash amortization of deferred revenue related to the values assigned to the contracts acquired in the LEEVAC transaction.transaction, respectively. |
Revenue increased $10.1- Revenue from our Shipyards division decreased $15.7 million for the three months ended September 30, 2016March 31, 2017, compared to the three months ended September 30, 2015March 31, 2016, due to the operations acquiredoverall decreases in work as we complete work under our contracts
including completion of a vessel that we assumed in the LEEVAC transaction (see LEEVAC Transaction above), which contributed $16.8 million in revenue forand delivered to a customer on February 6, 2017, with less new, replacement work starting during the three months ended September 30, 2016.
Gross profit decreased $60,000 for the three months ended September 30, 2016period as compared to the three months ended September 30, 2015March 31, 2016. The decrease in new, replacement work is due to tighter marginsdepressed oil and gas prices and the corresponding reduction in customer demand for shipbuilding and repair services supporting the oil and gas industry.
Gross profit (loss) - Gross loss from our Shipyards division was $1.7 million for the three months ended March 31, 2017, compared to a gross profit of $2.4 million for the three months ended March 31, 2016. The decrease was due to:
continued cost overruns on new work and inefficiencies incurred on the contracts acquiredthat were assigned to us in the LEEVAC transaction transaction; holding costs related to a completed vessel that was delivered on February 6, 2017; however, was refused by our customer alleging certain technical deficiencies (see also Note 9 of the Notes to Consolidated Financial Statements); and overall decreases in work under other various contracts as discussed above; partially offset by savings realized from cost cutting measures implemented by management during 2016.
General and administrative expenses - General and administrative expenses increased $1.7for our Shipyards division decreased $332,000 for the three months ended March 31, 2017, compared to the three months ended March 31, 2016, primarily due to cost cutting measures implemented by management during 2016 as well as lower bonuses accrued during 2017 as a result of a combination of a smaller workforce and our consolidated gross loss.
Asset Impairment - During three months ended March 31, 2017, we recorded an impairment of $389 related to our assets held for sale at our Prospect Shipyard. See also Note 2 of the Notes to Consolidated Financial statements.
| | | | | | | | | | | | | | | | Services | | Three Months Ended March 31, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | 10,712 |
| | $ | 26,559 |
| | $ | (15,847 | ) | | (59.7)% | Gross profit | | 33 |
| | 3,376 |
| | (3,343 | ) | | (99.0)% | Gross profit (loss) percentage | | 0.3 | % | | 12.7 | % | | | | (12.4)% | General and administrative expenses | | 666 |
| | 726 |
| | (60 | ) | | (8.3)% | Operating income (loss) | | (633 | ) | | 2,650 |
| | | | |
Revenue - Revenue from our Services division decreased $15.8 million for the three months ended September 30, 2016March 31, 2017, compared to the three months ended September 30, 2015 primarilyMarch 31, 2016, due to the expenses associated with the operations acquired in the LEEVAC transaction and bonus expense. | | | | | | | | | | | | | | | | | Services | | Three Months Ended September 30, | | Increase or (Decrease) | | | 2016 | | 2015 | | Amount | | Percent | Revenue | | $ | 20,928 |
| | $ | 23,487 |
| | $ | (2,559 | ) | | (10.9 | )% | Gross profit | | $ | 2,850 |
| | $ | 4,235 |
| | $ | (1,385 | ) | | (32.7 | )% | Gross profit percentage | | 13.6 | % | | 18.0 | % | | | | (4.4 | )% | General and administrative expenses | | $ | 1,540 |
| | $ | 994 |
| | $ | 546 |
| | 54.9 | % | Operating income | | $ | 1,310 |
| | $ | 3,241 |
| | | | | | | | | | | | | |
Revenue decreased $2.6 million for the three months ended September 30, 2016 compared to the three months ended September 30, 2015 due to the winding down of two large offshore service projects from the first half of 2016 and the downturn in the oil and gas industry.
Gross profit decreased $1.4 million for the three months ended September 30, 2016 compared to the three months ended September 30, 2015 due to decreases in revenues and tighter margins on new work.
General and administrative expenses increased $546,000 for the three months ended September 30, 2016 compared to the three months ended September 30, 2015 due to bonuses and additional administrative support added during the first half of 2016.
Nine Months Ended September 30, 2016 Compared to Nine Months Ended September 30, 2015 (in thousands, except for percentages):
Consolidated
| | | | | | | | | | | | | | | | Nine Months Ended September 30, | | Increase or (Decrease) | | 2016 | | 2015 | | Amount | Percent | Revenue | $ | 230,864 |
| | $ | 251,102 |
| | $ | (20,238 | ) | (8.1 | )% | Cost of revenue | 205,839 |
| | 248,686 |
| | (42,847 | ) | (17.2 | )% | Gross profit | 25,025 |
| | 2,416 |
| | 22,609 |
| 935.8 | % | Gross profit percentage | 10.8% | | 1.0% | | | | General and administrative expenses | 14,633 |
| | 11,817 |
| | 2,816 |
| 23.8 | % | Asset impairment | — |
| | 6,600 |
| | (6,600 | ) | n/a |
| Operating income (loss) | 10,392 |
| | (16,001 | ) | | 26,393 |
| 164.9 | % | Other income (expense): | | | | | | | Interest expense | (248 | ) | | (126 | ) | | (122 | ) |
|
| Interest income | 20 |
| | 21 |
| | (1 | ) |
|
| Other income, net | 1,039 |
| | 20 |
| | 1,019 |
|
|
| | 811 |
| | (85 | ) | | 896 |
| 1,054.1 | % | Net income (loss) before income taxes | 11,203 |
| | (16,086 | ) | | 27,289 |
| 169.6 | % | Income taxes | 4,134 |
| | (5,389 | ) | | 9,523 |
| 176.7 | % | Net income (loss) | $ | 7,069 |
| | $ | (10,697 | ) | | $ | 17,766 |
| 166.1 | % |
Revenue - Our revenue for the nine months ended September 30, 2016 and 2015 was $230.9 million and $251.1 million, respectively, representing a decrease of 8.1%. The decrease is primarily attributable to an overall decrease in work experienced in our fabrication yards primarily as a result of depressed oil and gas prices and the corresponding reduction in customer demand for offshore projects inoil and gas related service projects.
Gross profit - Gross profit from our Fabrication segment. During 2015, we completed the fabrication of a 1,200 foot jacket, piles and an approximate 450 short ton topside with no similar project in 2016. Our decrease in revenue earned from offshore fabrication work was partially offset by the assets and operations acquired in the LEEVAC transaction (see LEEVAC Transaction above), which contributed $55.9Services division decreased $3.3 million in revenue for the ninethree months ended September 30, 2016. Pass-through costs as a percentage of revenue were 35.0% and 43.2% forMarch 31, 2017, compared to the ninethree months ended September 30,March 31, 2016, and 2015, respectively. Pass-through costs, as described in Note 3 of the Notes to Consolidated Financial Statements, are included in revenue but have no impact on the gross profit recognized on a project for a particular period. Gross profit - Our gross profit for the nine months ended September 30, 2016 and 2015 was $25.0 million (10.8% of revenue) and $2.4 million (1.0% of revenue), respectively. Our gross profit improved compared to 2015 primarily due to the LEEVAC transactiondecreased revenue discussed above and contract losses of $14.3 million that were recordedtighter margins on new work performed during the third quarter of 2015 resulting from our inability to recover certain costs related to a deck and jacket for one of our deepwater projects. We had no such loss during the third quarter of 2016 and implemented cost cutting measures in response to decreases in work at our fabrication facilities.2017.
General and administrative expenses - Our general and administrative expenses were $14.6 million for the nine months ended September 30, 2016, compared to $11.8 million for the nine months ended September 30, 2015. The increase in generalGeneral and administrative expenses for our Services division decreased $60,000 for the ninethree months ended September 30,March 31, 2017, compared to the three months ended March 31, 2016, was primarily attributable to:
an increase of stock-based compensation expense of $589,000,
due to lower bonuses and the LEEVAC transaction; partially offset by
cost cutting efforts implementedaccrued during 2017, as a result of a combination of a smaller workforce and the downturnreduction in the oil and gas industry.gross profit.
Asset impairment
| | | | | | | | | | | | | | | | Corporate | | Three Months Ended March 31, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | — |
| | $ | — |
| | $ | — |
| | —% | Gross loss | | (260 | ) | | (136 | ) | | (124 | ) | | (91.2)% | Gross profit (loss) percentage | | n/a |
| | n/a |
| | | |
| General and administrative expenses | | 1,479 |
| | 1,668 |
| | (189 | ) | | (11.3)% | Operating loss | | (1,739 | ) | | (1,804 | ) | | 65 |
| | |
Gross loss - During the nine months ended September 30, 2015, we recorded an asset impairment charge of $6.6 million related to a partially constructed topside, related valves, piping and equipment that we acquiredGross loss from a customer following its default under a contract in 2012. Due to the sustained downturn in the energy sector, our ability to effectively
market these assets was significantly limited, and we reassessed the asset’s net realizable value based on the estimated scrap value of the assets. We had no such impairments during the nine months ended September 30, 2016.
Interest expense, net - The Company had net interest expense of $228,000 for the nine months ended September 30, 2016 compared to net interest expense of $105,000 for the nine months ended September 30, 2015. The increase in net interest expense for the nine months ended September 30, 2016 was primarily driven by an increase in the cost of unused credit facility fees under our credit agreement.
Other income, net - Other incomeCorporate division increased $1.0 million for the nine months ended September 30, 2016. The increase was primarily due to gainsa restructuring of $924,000 relatedour corporate division with additional personnel allocated to the sale of three cranes at our Texas facilitycorporate division during 2017 as well as sales of smaller assets bydiscussed above.
General and administrative expenses - General and administrative expenses for our Shipyards division. Income taxes - Our effective income tax rate for the nine months ended September 30, 2016 was 36.9%, compared to an effective tax rate of 34.0% for the comparable period during 2015. The increase in our effective rate isCorporate division decreased primarily due to the effect of state income taxes from income generated within Louisiana with no offsetting tax benefit from losses generated within Texas.
Operating Segments
| | | | | | | | | | | | | | | | | Fabrication | | Nine Months Ended September 30, | | Increase or (Decrease) | | | 2016 | | 2015 | | Amount | | Percent | Revenue | | $ | 70,436 |
| | $ | 137,431 |
| | $ | (66,995 | ) | | (48.7 | )% | Gross profit (loss) | | $ | 4,418 |
| | $ | (14,055 | ) | | $ | 18,473 |
| | 131.4 | % | Gross profit (loss) percentage | | 6.3 | % | | (10.2 | )% | | | | 16.5 | % | General and administrative expenses | | $ | 4,479 |
| | $ | 7,026 |
| | $ | (2,547 | ) | | (36.3 | )% | Asset impairment | | $ | — |
| | $ | 6,600 |
| | $ | (6,600 | ) | | n/a |
| Operating income (loss) | | $ | (61 | ) | | $ | (27,681 | ) | |
| |
|
Revenue decreased $67.0 million for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015. The decrease is attributable to an overall decrease in work experienced in our fabrication yardsbonuses as a result of depressed oil and gas prices and the corresponding reduction in customer demand for offshore fabrication projects. During 2015, we completed the fabrication of a 1,200 foot jacket, piles and an approximate 450 short ton topside with no similar project in 2016.
Gross profit increased $18.5 million to $4.4 million for the nine months ended September 30, 2016 compared to aour consolidated gross loss, of $14.1 million for the nine months ended September 30, 2015. The increase is due to contract losses of $14.3 million that were recorded during the third quarter of 2015 resulting from our inability to recover certain costs related to a deck and jacket for one of our deepwater projects. We had no such loss during the third quarter of 2016 and implemented cost cutting measures in response to decreases in work at our fabrication facilities.
General and administrative expenses decreased $2.5 million for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015 due to cost cutting measures implemented during 2016 in response to decreases in work at our fabrication facilities.
Asset impairment - During the nine months ended September 30, 2015, we recorded an asset impairment charge of $6.6 million related to a partially constructed topside, related valves, piping and equipment that we acquired from a customer following its default under a contract in 2012. Due to the sustained downturn in the energy sector, our ability to effectively market these assets was significantly limited, and we reassessed the asset’s net realizable value based on the estimated scrap value of the assets. We had no such impairments during the nine months ended September 30, 2016.
| | | | | | | | | | | | | | | | | Shipyards | | Nine Months Ended September 30, | | Increase or (Decrease) | | | 2016 | | 2015 | | Amount | | Percent | Revenue (1) | | $ | 86,553 |
| | $ | 47,177 |
| | $ | 39,376 |
| | 83.5 | % | Gross profit (1) | | $ | 9,595 |
| | $ | 6,022 |
| | $ | 3,573 |
| | 59.3 | % | Gross profit percentage | | 11.1 | % | | 12.8 | % | | | | (1.7 | )% | General and administrative expenses | | $ | 5,875 |
| | $ | 1,243 |
| | $ | 4,632 |
| | 372.6 | % | Operating income (1) | | $ | 3,720 |
| | $ | 4,779 |
| | | | |
____________
| | (1) | Revenue for the nine months ended September 30, 2016, includes $4.1 million of non-cash amortization of deferred revenue related to the values assigned to the contracts acquired in the LEEVAC transaction. |
Revenue increased $39.4 million for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015 due to the assets and operations acquired in the LEEVAC transaction (see LEEVAC Transaction above), which contributed $55.9 million in revenue for the nine months ended September 30, 2016. The increase was partially offset by decreases in work dueadditional personnel allocated to the downturn in the oil and gas industry.
Gross profit increased $3.6 million for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015 due to the LEEVAC transaction as well as increases in profitability estimates for other jobs in progress due to cost cutting measures.
General and administrative expenses increased $4.6 million for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015 due to the expenses associated with the operations acquired in the LEEVAC transaction and bonuses.
| | | | | | | | | | | | | | | | | Services | | Nine Months Ended September 30, | | Increase or (Decrease) | | | 2016 | | 2015 | | Amount | | Percent | Revenue | | $ | 76,179 |
| | $ | 70,987 |
| | $ | 5,192 |
| | 7.3 | % | Gross profit | | $ | 11,012 |
| | $ | 10,449 |
| | $ | 563 |
| | 5.4 | % | Gross profit percentage | | 14.5 | % | | 14.7 | % | | | | (0.2 | )% | General and administrative expenses | | $ | 4,119 |
| | $ | 3,008 |
| | $ | 1,111 |
| | 36.9 | % | Operating income | | $ | 6,893 |
| | $ | 7,441 |
| | | | | | | | | | | | | |
Revenue increased $5.2 million for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015 due to increases in the scope of two large offshore service projectsour corporate division during the first half of 2016.
Gross profit increased $563,000 for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015 due to increases in revenues and improved absorption of fixed costs resulting from an increase in labor hours worked.
General and administrative expenses increased $1.1 million for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015 due to additional administrative support costs related to increases in activity and bonuses.2017.
Liquidity and Capital Resources Historically, we have funded our business activities through cash generated from operations. At September 30, 2016March 31, 2017, we had no amounts outstanding under our credit facility, $4.5$4.6 million in outstanding letters of credit, and cash and cash equivalents totaling $55.6$34.7 million, compared to $34.8$51.2 million at December 31, 2015.2016. Working capital was $79.8$182.9 million and our ratio of current assets to current liabilities was 2.837.56 to 1 at September 30,March 31, 2017, compared to $78.0 million and 3.2 to 1, respectively, at December 31, 2016. Working capital at March 31, 2017, includes $110.5 million related to assets held for sale, primarily related to our South Texas facilities. Our primary sourceuse of cash during the three months ended March 31, 2017, was due to: Operating losses for the nine months ended September 30, 2016, wasquarter exclusive of non-cash depreciation, amortization, impairment and stock compensation expense of approximately $3.7 million, Payment of year-end bonuses related to 2016, Progress on liabilities from assumed contracts in the collection of accounts receivable under various customer contracts and sales of three cranes atLEEVAC transaction.While our Texas facility for $5.8 million. At September 30, 2016, our contracts receivable balance was $26.6 million of which we have subsequently collected $12.1 million through October 31, 2016. On January 1, 2016, we acquired substantially all of the assets and assumed certain specified liabilities of LEEVAC. The purchase price for the acquisition of the LEEVAC assets during 2016 was $20.0 million, subject to a working capital adjustment whereby we received a dollar-for-
dollar reductionnet $3.0 million in cash from the seller for the assumption of certain net liabilities of LEEVAC at closing and settlement payments from sureties on certain ongoing fabricationshipbuilding projects of $23.0 million that were assigned to us in the transaction. After taking into accountWe have significantly progressed these adjustments, wecontracts which in turn, has resulted in utilization of the working capital and settlement payments received approximately $1.6during 2016.
Fewer receipts from accounts receivable, primarily $4.6 million in cash at closing. Duringfrom one customer that refused delivery of a vessel on February 6, 2017, and has not paid. We have initiated arbitration proceedings during the quarter we presentedto enforce our working capital true-uprights under our construction contract, and Build-up of costs for contracts in progress related to a customer in our Shipyards division with significant milestone payments occurring in the seller, which resulted in an additional $1.5 million due to us. Additionally, we hired 380 employees upon acquisitionlater stages of the facilities representing substantially all of the former LEEVAC employees. Strategically, the transaction expands our marine fabrication and repair and maintenance presenceprojects which are expected to occur beginning in the Gulf South market. third quarter of 2017 through the first quarter of 2018. At the date of transaction, we acquired approximately $121.2March 31, 2017, our contracts receivable balance was $21.1 million of new build construction backlog inclusive of approximately $9.2which we have subsequently collected $4.1 million of purchase price fair value allocated to four, new build construction projects to be delivered in 2017 and 2018 for two customers. through April 21, 2017.
As of September 30, 2016,March 31, 2017, we had a credit agreement with Whitney Bank and JPMorgan Chase Bank N.A. that provides for an $80.0a $40.0 million revolving credit facility maturing January 2, 2017.November 29, 2018. The credit agreement allows the Company to use up to the full amount of the available borrowing base for letters of credit and up to $20.0 million for general corporate purposes. Our obligations under the credit agreement are secured by substantially all of our assets other(other than real property located in the state of Louisiana. On February 29, 2016, we entered into an amendment to our credit agreement. The amendment (i) extends the term of the Credit Facility from February 29, 2016 to January 2, 2017; (ii) increases the commitment feeestate). Commitment fees on undrawn amounts from 0.25% to 0.50%are 0.5% per annum; (iii) increases theannum and letter of credit fee,fees, subject to certain limited exceptions, to 2.00%are 2.0% per annum on undrawn stated amounts under letters of credit issued by the lenders; and (iv) limits the maximum amount of loans outstanding at any time for general corporate purposes to $20.0 million.lenders. Amounts borrowed under our the credit agreement bear interest, at our option, at either the prime lending rate established by JPMorgan Chase Bank, N.A. or LIBOR plus 2.0 percent. Under the amendment ourOur financial covenants beginning with the quarter endingat March 31, 20162017, are as follows:
| | (i) | minimum net worth requirement of not less than $250.0255.0 million plus |
| | a) | 50% of net income earned in each quarter beginning MarchDecember 31, 2016, and |
| | b) | 100% of proceeds from any issuance of common stock; |
| | c) | less the amount of any impairment on certain assets owned by Gulf Marine Fabricators, L.P. (our South Texas assets held for sale) up to $30.0 million; |
| | (ii) | debt to EBITDA ratio not greater than 3.02.5 to 1.0; and |
| | (iii) | interest coverage ratio not less than 2.0 to 1.0. |
At September 30, 2016,March 31, 2017, no amounts were outstanding under the credit facility, and we had outstanding letters of credit totaling $4.5$4.6 million, reducing the unused portion of our credit facility for additional letters of credit and borrowings to $75.5$35.4 million. As of September 30, 2016,March 31, 2017, we were in compliance with all covenants. During the fourth quarter, we expect
We are currently in discussions with one of our financial institutions to enter into a two-year, $40.0 million amendednew revolving line of credit with comparable availability, but with less restrictive financial covenants and restatedreduced fees as compared to our current revolving credit facility. We expect to close on this new revolving credit facility withand terminate our current lenders that will be secured by substantially all of our assets (other than real property). We anticipate the amendedexisting revolving credit facility will allow us to use the full $40.0 million borrowing base for both letters of credit and general corporate purposes. Given the historically low levels of borrowings under our current facility and our cash position, we requested a reduction in the amountsecond quarter of available credit under our revolver from $80.0 million to $40.0 million to decrease the commitment fees payable to our lenders for the undrawn portion of the facility.2017.
Our primary liquidity requirements are for the costs associated with servicingfabrication projects, and capital expenditures inand payment of dividends to our Fabrication and Shipyards segments. In particular, as further discussed in Note 2 in our Notes to Consolidated Financial Statements, in connection with the LEEVAC transaction, we received at closing a net cash amount that included consideration for billings in excess of costs and estimated earnings on uncompleted contracts and other payments from sureties representing pre-payment on the partially constructed vessels totaling $21.9 million as adjusted for the working capital true-up. Consequently, there will be required cash outflows for costs associated with the prepaid amounts without corresponding milestone billings.shareholders. We anticipate capital expenditures for the remainder of 20162017 to be approximately $1.8range between $6.0 million to $8.0 million primarily for the following: extension of one of our dry docks, and
improvements to our newly acquired facilities.Jennings and Lake Charles leased shipyards, improvement to the bulkhead at our Houma facility, and
computer system upgrades.
On October 21, 2016, a customer of our Shipyards’ segmentShipyards division announced it had received limited waivers from its lenders and noteholders through November 11, 2016 with respect towas in noncompliance with certain financial covenants included in the customer’s debt agreements. TheThis customer also announcedstated it had received limited waivers from its lenders and noteholders, but its debt agreements will require further negotiation and amendment. InOn April 19, 2017, the eventcustomer stated it had allowed the waivers to expire and remains in default of its covenants.
This same customer has rejected delivery of the vessel that we tendered for delivery on February 6, 2017, alleging certain technical deficiencies exist with respect to the vessel and is seeking recovery of all purchase price amounts previously paid by the customer under the contract. We are also building a second vessel for this customer that is scheduled for delivery during the second quarter of 2017. We disagree with our customer is unsuccessful inconcerning these efforts,alleged technical deficiencies and have put the customer will consider other options including a possible reorganizationin default under Chapter 11the terms of the Federal bankruptcy laws. At September 30, 2016, no contracts receivable werefor both vessels. As of March 31, 2017, approximately $4.6 million remained due and outstanding from our customer for the first vessel. The balance due to us upon delivery for a second vessel which is expected in May of this year, is approximately $4.9 million. On March 10, 2017, we gave notice for arbitration with our customer in an effort to resolve this matter. We intend to take all legal action as may be necessary to protect our rights under the contracts and deferred revenue exceeded our costs and estimated earnings in excess of billings on this contract. recover the remaining balances owed to us.
We continue to monitor our work performed in relation to our customer’s status and its ability to pay under the terms of its contract. Based on our evaluation to date,these contracts. Because these vessels have been completed or are substantially complete, we do not believe that they have significant fair value, and that we would be able to fully recover any loss on this contract is probable or estimable at this time.amounts due to us.
In February 2016,anticipation of the proceeds to be received from the sale of our BoardSouth Texas assets, we have engaged in a strategic financial analysis project with advisors to determine the appropriate use of Directors approvedproceeds from this transaction. We will be evaluating a decrease inmix of options including tactical capital improvement projects, strategic growth investment opportunities that support our quarterly dividend to $0.01 in an effort to conserve cash. business plan, stock buy-backs and/or dividends and working capital reinvestment.
On October 27, 2016,April 26, 2017, our Board of Directors declared a dividend of $0.01 per share on our shares of common stock outstanding, payable November 23, 2016May 25, 2017, to shareholders of record on November 10, 2016.May 11, 2017.
We believe our cash and cash equivalents generated by our operating activities and funds available under our credit facilityproceeds to be received from future assets sales will be sufficient to fund our capital expenditures issue future letters of credit and meet our working capital needs for both the near and longer term to continue our operations, satisfy our contractual operations and pay dividends to our shareholders. Additionally, we expect to close on a new revolving line of credit during the second quarter of 2017 as discussed above. We believe that the new facility will provide us with additional working capital flexibility to ramp up our operations quickly in times of rapid increasing demand, to continue to issue future letters of credit and to quickly take advantage of market opportunities.
Cash Flow Activities
For the ninethree months ended September 30, 2016March 31, 2017, net cash provided byused in operating activities was $19.3$15.1 million, compared to $18.7$1.6 million for the ninethree months ended September 30, 2015.March 31, 2016. The increase in cash provided byused in operations was primarily due to increased gross profitthe following:
Operating losses for the quarter in excess of non-cash depreciation, amortization, impairment and collectionsstock compensation expense of contract receivablesapproximately $3.7 million, Payment of year-end bonuses related to 2016, Progress on liabilities from assumed contracts in the LEEVAC transaction.While our purchase price for the acquisition of the LEEVAC assets during 2016 somewhat offset bywas $20.0 million, we received a net $3.0 million in cash from the seller for the assumption of certain net liabilities and settlement payments required for trade payableson ongoing shipbuilding projects of $23.0 million that were assigned to us in the transaction. We have significantly progressed these contracts which in turn, has resulted in utilization of the working capital and settlement payments received during 2016. Fewer receipts from accounts receivable, primarily $4.6 million from one customer that refused delivery of a vessel on February 6, 2017, and has not paid. We have initiated arbitration proceedings during the ninequarter to enforce our rights under our construction contract, and
Build-up of costs for contracts in progress related to a customer in our Shipyards division with significant milestone payments occurring in the later stages of the projects which are expected to occur beginning in the third quarter of 2017 through the first quarter of 2018.
Net cash used in investing activities for the three months ended September 30, 2016 asMarch 31, 2017, was $391,000, compared to 2015. Net cash provided by investing activities for the nine months ended September 30, 2016 was $2.0 million, compared to cash used in investing activities of $5.0$6.2 million for the ninethree months ended September 30, 2015.March 31, 2016. The increasechange in cash used in/provided by investing activities is primarily due to cash received from the sale of three cranes at our Texas facility for $5.8$5.4 million and $1.6 million of cash acquired in the LEEVAC transaction.
Net cash used in financing activities for the ninethree months ended September 30,March 31, 2017 and 2016, was $1.0 million and 2015 was $440,000 and $4.4 million,$291,000, respectively. The decreaseincrease in cash used in financing activities is due to the reduction in the cash dividend in 2016.payments made to taxing authorities on behalf of employees' for their vesting of common stock.
Contractual Obligations There have been no material changes from the information included in our Annual Report on Form 10-K for the year ended December 31, 2015.2016. For more information on our contractual obligations, refer to Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2015.2016. Off-Balance Sheet Arrangements There have been no material changes from the information included in our Annual Report on Form 10-K for the year ended December 31, 2015.2016. Item 3. Quantitative and Qualitative Disclosures About Market Risk. There have been no material changes in the Company’s market risks during the quarter ended September 30, 2016.March 31, 2017. For more information on market risk, refer to Part II, Item 7A. of our Annual Report on Form 10-K for the year ended December 31, 2015.2016. Item 4. Controls and Procedures. The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and that such information is communicated to the Company’s management, including its Chief Executive Officer and Interim Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. The Company’s management, with the participation of the Company’s Chief Executive Officer and Interim Chief Financial Officer, hashave evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based on this evaluation, our Chief Executive Officer and Interim Chief Financial Officer hashave concluded that the design and operation of our disclosure controls and procedures were effective as of the end of the period covered by this report. There have been no changes during the fiscal quarter ended September 30, 2016March 31, 2017, in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. PART II. OTHER INFORMATION Item 1. Legal Proceedings. The Company is subject to various routine legal proceedings in the normal conduct of its business primarily involving commercial claims, workers’ compensation claims, and claims for personal injury under general maritime laws of the United
States and the Jones Act. While the outcome of these lawsuits, legal proceedings and claims cannot be predicted with certainty, management believes that the outcome of any such proceedings, even if determined adversely, would not have a material adverse effect on the financial position, results of operations or cash flows of the Company. Item 1A. Risk Factors. There have been no material changes from the information included in Item 1A “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2015.2016. | | | | | 2.1Exhibit Number | | Asset Purchase Agreement, dated December 23, 2015 by and among Gulf Island Shipyards, LLC, LEEVAC Shipyards, LLC and certain related affiliates, incorporated by reference toDescription of Exhibit 2.1 of the Company's Form 8-K filed on December 23, 2015. | | | 3.1 | | Composite Articles of Incorporation of the Company incorporated by reference to Exhibit 3.1 of the Company’s Form 10-Q filed April 23, 2009. | 3.2 | | Amended and Restated Bylaws of the Company, as amended and restated through April 26, 2012, incorporated by reference to Exhibit 3.1 of the Company’s Form 8-K filed on April 30, 2012. | 4.1 | | Specimen Common Stock Certificate, incorporated by reference to the Company’s Form S-1/A filed March 19, 1997 (Registration No. 333-21863).November 4, 2016. | 10.1 | | Change of Control Agreement, dated March 1, 2017, between the Company and David S. Schorlemer, incorporated by reference to Exhibit 10.15 of the Company's Form of Long-Term Performance-Based Cash Award Agreement.10-K for the year ended December 31, 2016 filed on March 2, 2017. | 3131.1 | | CEO and Certifications pursuant to Rule 13a-14 under the Securities Exchange Act of 1934. | 31.2 | | CFO CertificationCertifications pursuant to Rule 13a-14 under the Securities Exchange Act of 1934. | 32 | | Section 906 Certification furnished pursuant to 18 U.S.C. Section 1350. | 99.1 | | Press release issued by | 101 | | Attached as Exhibit 101 to this report are the following items formatted in XBRL (Extensible Business Reporting Language): | | | (i) | Consolidated Balance Sheets, | | | (ii) | Consolidated Statements of Operations, | | | (iii) | Consolidated Statement of Changes in Shareholders’ Equity, | | | (iv) | Consolidated Statements of Cash Flows and | | | (v) | Notes to Consolidated Financial Statements. |
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. | | | GULF ISLAND FABRICATION, INC. | | BY: | /s/ David S. Schorlemer | | David S. Schorlemer | | Executive Vice President, Chief Financial Officer, and Treasurer (Principal Financial and Accounting Officer) |
Date: May 2, 2017
GULF ISLAND FABRICATION, INC. EXHIBIT INDEX | | | | | Exhibit Number | | Description of Exhibit | | | 3.1 | | Composite Articles of Incorporation of the Company on October 27, 2016, incorporated by reference to Exhibit 99.13.1 of the Company’s Form 10-Q filed April 23, 2009. | 3.2 | | Amended and Restated Bylaws of the Company, incorporated by reference to Exhibit 3.1 of the Company’s Form 8-K filed November 4, 2016. | 10.1 | | Change of Control Agreement, dated March 1, 2017, between the Company and David S. Schorlemer, incorporated by reference to Exhibit 10.15 of the Company's Form 10-K for the year ended December 31, 2016 filed on October 27, 2016.March 2, 2017. | 31.1 | | CEO Certifications pursuant to Rule 13a-14 under the Securities Exchange Act of 1934. | 31.2 | | CFO Certifications pursuant to Rule 13a-14 under the Securities Exchange Act of 1934. | 32 | | Section 906 Certification furnished pursuant to 18 U.S.C. Section 1350. | | | | 101 | | Attached as Exhibit 101 to this report are the following items formatted in XBRL (Extensible Business Reporting Language): | | | | | | (i) | Consolidated Balance Sheets, | | | (ii) | Consolidated Statements of Operations, | | | (iii) | Consolidated Statement of Changes in Shareholders’ Equity, | | | (iv) | Consolidated Statements of Cash Flows and | | | (v) | Notes to Consolidated Financial Statements. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | GULF ISLAND FABRICATION, INC. | | BY: | /s/ Kirk J. Meche | | Kirk J. Meche | | President, Chief Executive Officer, Director and Interim Chief Financial Officer, Treasurer and Secretary (Principal Executive Officer and Interim Principal Financial and Accounting Officer) |
Date: November 2, 2016
GULF ISLAND FABRICATION, INC.
EXHIBIT INDEX
| | | | | Exhibit
Number
| | Description of Exhibit | | | 2.1 | | Asset Purchase Agreement, dated December 23, 2015 by and among Gulf Island Shipyards, LLC, LEEVAC Shipyards, LLC and certain related affiliates, incorporated by reference to Exhibit 2.1 of the Company's Form 8-K filed on December 23, 2015.
| 3.1 | | Composite Articles of Incorporation of the Company, incorporated by reference to Exhibit 3.1 of the Company’s Form 10-Q filed April 23, 2009. | 3.2 | | Bylaws of the Company, as amended and restated through April 26, 2012, incorporated by reference to Exhibit 3.1 of the Company’s Form 8-K filed on April 30, 2012. | 4.1 | | Specimen Common Stock Certificate, incorporated by reference to the Company’s Form S-1/A filed March 19, 1997 (Registration No. 333-21863). | 10.1 | | Form of Long-Term Performance-Based Cash Award Agreement. | 31 | | CEO and CFO Certifications pursuant to Rule 13a-14 under the Securities Exchange Act of 1934. | 32 | | Section 906 Certification furnished pursuant to 18 U.S.C. Section 1350. | 99.1 | | Press release issued by the Company on October 27, 2016, incorporated by reference to Exhibit 99.1 of the Company’s Form 8-K filed on October 27, 2016. | 101 | | Attached as Exhibit 101 to this report are the following items formatted in XBRL (Extensible Business Reporting Language): | | | | | | (i) | Consolidated Balance Sheets, | | | (ii) | Consolidated Statements of Operations, | | | (iii) | Consolidated Statement of Changes in Shareholders’ Equity, | | | (iv) | Consolidated Statements of Cash Flows and | | | (v) | Notes to Consolidated Financial Statements. |
s | Labor hours | |
| ___________ | | 1. | Backlog as of September 30, 2016March 31, 2017, includes commitments received through October 27, 2016.April 26, 2017. We exclude suspended projects from contract backlog thatwhen they are expected to be suspended more than twelve months because resumption of work and timing of revenue recognition for these projects are difficult to predict. Our backlog also includes the new build construction that was acquired in the LEEVAC transaction on January 1, 2016. Included in our backlog at September 30, 2016, is $5.1 million of non-cash revenue related to purchase price fair value of contracts acquired in the LEEVAC transaction and included in deferred revenue in our consolidated Balance sheet at September 30, 2016. |
| | 2. | At September 30, 2016,March 31, 2017, projects for our threetwo largest customers in terms of revenue backlog consisted of: |
| | (i) | two large petroleum supply vessels for one customer in our Shipyards segment, which commenced in the second quarter of 2013 and will be completed during the first and second quarter of 2017; |
| | (ii) | two large multi-purpose service vessels for one customer in our Shipyards segment, which commenced in the first quarter of 2014 and will be completed during the first and second quarterquarters of 2018; and |
(iii) the fabrication of four modules associated with a U.S. ethane cracker project.
| | (ii) | the fabrication of four modules associated with a U.S. ethane cracker project. |
| | 3. | The timing of recognition of the revenue represented in our backlog is based on management’s current estimates to complete the projects. Certain factors and circumstances could cause changes in the amounts ultimately recognized and the timing of the recognition of revenue from our backlog. |
Depending on the size of the project, the termination, postponement, or reduction in scope of any one project could significantly reduce our backlog and could have a material adverse effect on revenue, net income and cash flow. As of September 30, 2016,March 31, 2017, we had 1,336922 employees and 163133 contract employees inclusive of 380 employees hired in the LEEVAC transaction, compared to 1,2551,178 employees and 7192 contract employees as of December 31, 2015. 2016.
Labor hours worked were 2.3 million479,000 during the ninethree months ended September 30, 2016,March 31, 2017, compared to 2.1 million695,000 for the ninethree months ended September 30, 2015.March 31, 2016. The overall increasedecrease in labor hours worked for the three months ended September 30, 2016March 31, 2017, was due to 636,000 labor hours worked from projects acquired in the LEEVAC transaction partially offset by a reduction in fabrication activity due primarily to the downturn in the oil and gas industry.
Results of Operations
Our results of operations are affected primarily by our ability to effectively manage contracts to a successful completion along with producing maximum efficiencies as it relates to manhours.
Three Months Ended September 30, 2016 Compared to Three Months Ended September 30, 2015 (in thousands, except for percentages):
Consolidated
| | | | | | | | | | | | | | | | Three Months Ended September 30, | | Increase or (Decrease) | | 2016 | | 2015 | | Amount | Percent | Revenue | $ | 65,384 |
| | $ | 67,531 |
| | $ | (2,147 | ) | (3.2 | )% | Cost of revenue | 60,125 |
| | 75,368 |
| | (15,243 | ) | (20.2 | )% | Gross profit (loss) | 5,259 |
| | (7,837 | ) | | 13,096 |
| 167.1 | % | Gross profit percentage | 8.0% | | (11.6)% | | | | General and administrative expenses | 5,086 |
| | 3,798 |
| | 1,288 |
| 33.9 | % | Asset impairment | — |
| | 6,600 |
| | (6,600 | ) | n/a |
| Operating income | 173 |
| | (18,235 | ) | | 18,408 |
| 100.9 | % | Other income (expense): | | | | | | | Interest expense | (110 | ) | | (39 | ) | | (71 | ) |
|
| Interest income | 12 |
| | 8 |
| | 4 |
|
|
| Other income, net | 599 |
| | — |
| | 599 |
|
|
| | 501 |
| | (31 | ) | | 532 |
| 1,716.1 | % | Net income (loss) before income taxes | 674 |
| | (18,266 | ) | | 18,940 |
| 103.7 | % | Income taxes | 133 |
| | (6,129 | ) | | 6,262 |
| 102.2 | % | Net income (loss) | $ | 541 |
| | $ | (12,137 | ) | | $ | 12,678 |
| 104.5 | % |
Revenue - Our revenue for the three months ended September 30, 2016 and 2015 was $65.4 million and $67.5 million, respectively, representing a decrease of 3.2%. The decrease is primarily attributable to an overall decrease in work experienced in our fabrication yardsfacilities as a result of depressed oil and gas prices and the corresponding reduction in customer demand within all of our operating divisions.
Results of Operations Three Months Ended March 31, 2017 Compared to Three Months Ended March 31, 2016 (in thousands, except for offshore projects in our Fabrication segment. During 2015, we completed the fabrication of a 1,200 foot jacket, piles and an approximate 450 short ton topside with no similar project in 2016.percentages): Consolidated | | | | | | | | | | | | | | | Three Months Ended March 31, | | Increase or (Decrease) | | 2017 | | 2016 | | Amount | Percent | Revenue | $ | 37,993 |
| | $ | 83,979 |
| | $ | (45,986 | ) | (54.8)% | Cost of revenue | 42,890 |
| | 78,278 |
| | (35,388 | ) | (45.2)% | Gross profit (loss) | (4,897 | ) | | 5,701 |
| | (10,598 | ) | 185.9% | Gross profit (loss) percentage | (12.9)% | | 6.8% | | | | General and administrative expenses | 3,930 |
| | 4,485 |
| | (555 | ) | (12.4)% | Asset impairment | 389 |
| | — |
| | 389 |
| 100.0% | Operating income (loss) | (9,216 | ) | | 1,216 |
| | (10,432 | ) | (857.9)% | Other income (expense): | | | | | | | Interest expense | (59 | ) | | (50 | ) | | (9 | ) | | Interest income | — |
| | 6 |
| | (6 | ) | | Other income, net | 9 |
| | 398 |
| | (389 | ) | | Total other income (expense) | (50 | ) | | 354 |
| | (404 | ) | (114.1)% | Net income (loss) before income taxes | (9,266 | ) | | 1,570 |
| | (10,836 | ) | (690.2)% | Income taxes | (2,812 | ) | | 581 |
| | (3,393 | ) | (584.0)% | Net income (loss) | $ | (6,454 | ) | | $ | 989 |
| | $ | (7,443 | ) | (752.6)% |
Revenue - Our decrease in revenue earned from offshore fabrication work was partially offset by the results of the assets and operations acquired in the LEEVAC transaction (see LEEVAC Transaction above), which contributed $16.8 million in revenue for the three months ended September 30, 2016.March 31, 2017 and 2016, was $38.0 million and $84.0 million, respectively, representing a decrease of 54.8%. The decrease is primarily attributable to an overall decrease in work experienced in our facilities as a result of depressed oil and gas prices and the corresponding reduction in customer demand within all of our operating divisions. Pass-through costs as a percentage of revenue were 33.8%29.4% and 45.3%40.0% for the three-months ended September 30,March 31, 2017 and 2016, and 2015, respectively. Pass-through costs, as described in Note 3 of the Notes to Consolidated Financial Statements, are included in revenue but have no impact on the gross profit recognized on a project for a particular period.
Gross profit (loss)- Our gross profit (loss)loss for the three months ended September 30, 2016 and 2015March 31, 2017, was $5.3$4.9 million (8.0% of revenue) and $(7.8) million, respectively. Ourcompared to a gross profit improved compared to third quarter of 2015$5.7 million for the three months ended March 31, 2016. The decrease was primarily due to contract losses of $14.3 million that were recorded during the third quarter of 2015 resulting from our inability to recover certain costs related to a deckdecreased revenue as discussed above and jacket for one of our deepwater projects. We had no such loss during the third quarter of 2016 and implemented cost cutting measures. This wastighter margins on current work partially offset by tighter margins within all of our segments due to a decreasedecreases in work as a result of the downturn in the oil and gas industry.costs resulting from additional cost cutting measures implemented by management.
General and administrative expenses - Our general and administrative expenses were $5.1$3.9 million for the three months ended September 30, 2016,March 31, 2017, compared to $3.8$4.5 million for the three months ended September 30, 2015.March 31, 2016. The increasedecrease in general
and administrative expenses for the three months ended September 30, 2016March 31, 2017, was primarily attributable to the operations acquired in the LEEVAC transaction and bonus expense, partially offset by cost cutting effortsmeasures implemented by management during 2016.the first part of 2016 as well as lower bonuses accrued during 2017 as a result of a combination of a smaller workforce and our consolidated gross loss.
Asset impairmentImpairment - During the three months ended September 30, 2015,March 31, 2017, we recorded an asset impairment charge of $6.6 million$389 related to a partially constructed topside, related valves, piping and equipment that we acquired from a customer following its default under a contract in 2012. Due to the sustained downturn in the energy sector, our ability to effectively market these assets was significantly limited, and we reassessed the asset’s net realizable value based on the estimated scrap valueheld for sale at our Prospect Shipyard. See also Note 2 of the assets. We had no such impairments during the three months ended September 30, 2016.Notes to Consolidated Financial statements. Interest expense,
Other income, net - The Company had net interest expense of $98,000Other income decreased $389,000 for the three months ended September 30, 2016 compared to net interest expense of $31,000 for the three months ended September 30, 2015.March 31, 2017. The increase was primarily driven by an increase in the cost of unused credit facility fees under our credit agreement. Other income, net - Other income increased $599,000 for the three months ended September 30, 2016. The increasedecrease was primarily due to gains on sales of assets from our Fabrication division.division recorded during three months ended March 31, 2016.
Income taxes - Our effective income tax rate for the three months ended September 30, 2016March 31, 2017, was 19.7%30.3%, compared to an effective tax rate of 34.0%37.0% for the comparable period during 2015.2016. The changedecrease in ourthe effective tax rate is duethe result of limitations on the deductibility of executive compensation and $210,000 in tax expense recognized during the three months ended March 31, 2017, for the tax effect of the difference between the actual tax deduction allowed upon vesting of common stock and the compensation cost recognized for financial reporting purposes resulting from the adoption of Accounting Standards Update 2016-09 as further discussed in Note 1 of the Notes to the decrease in our effective rate for the year-to-date period.Consolidated Financial Statements.
Operating Segments
As discussed in Note 8 of the Notes to Consolidated Financial Statements, management reduced its allocation of corporate administrative costs and overhead expenses to its operating divisions during the three months ended March 31, 2017, such that a significant portion of its corporate expenses are retained in its non-operating Corporate division. In addition, it has also allocated certain personnel previously included in the operating divisions to within the Corporate division. In doing so, management believes that it has created a fourth reportable segment with each of its three operating divisions and it's Corporate division each meeting the criteria of reportable segments under GAAP. During the three months ended March 31, 2016, we allocated substantially all of our corporate administrative costs and overhead expenses to our three operating divisions. We have recast our 2016 segment data below in order to conform to the current period presentation. Our results of our three operating divisions and Corporate division for the three months ended March 31, 2017 and 2016, are presented below (in thousands, except for percentages).
| | | | | | | | | | | | | | | | | Fabrication | | Three Months Ended September 30, | | Increase or (Decrease) | | | 2016 | | 2015 | | Amount | | Percent | Revenue | | $ | 22,311 |
| | $ | 32,133 |
| | $ | (9,822 | ) | | (30.6 | )% | Gross profit (loss) | | $ | 532 |
| | $ | (14,009 | ) | | $ | 14,541 |
| | 103.8 | % | Gross profit percentage | | 2.4 | % | | (43.6 | )% | | | | 46.0 | % | General and administrative expenses | | $ | 1,481 |
| | $ | 2,138 |
| | $ | (657 | ) | | (30.7 | )% | Asset impairment | | $ | — |
| | $ | 6,600 |
| | $ | (6,600 | ) | | n/a |
| Operating income (loss) | | $ | (949 | ) | | $ | (22,747 | ) | | | | |
| | | | | | | | | | | | | | | | Fabrication | | Three Months Ended March 31, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | 10,209 |
| | $ | 23,829 |
| | $ | (13,620 | ) | | (57.2)% | Gross profit (loss) | | (2,966 | ) | | 86 |
| | (3,052 | ) | | (3,548.8)% | Gross profit (loss) percentage | | (29.1 | )% | | 0.4 | % | | | | (29.5)% | General and administrative expenses | | 821 |
| | 795 |
| | 26 |
| | 3.3% | Operating income (loss) | | (3,787 | ) | | (709 | ) | | | | |
Revenue - Revenue from our Fabrication division decreased $9.8$13.6 million for the three months ended September 30, 2016March 31, 2017, compared to the three months ended September 30, 2015.March 31, 2016. The decrease is attributable to an overall decrease in work experienced in our fabrication yards as a result of depressed oil and gas prices and the corresponding reduction in customer demand for offshore fabrication projects. As discussed above, management has classified our South Texas assets as assets held for sale in response to the underutilization of our Fabrication assets.
Gross profit increased $14.5 million to $532,000(loss) - Gross loss from our Fabrication division for the three months ended September 30, 2016March 31, 2017, was $3.0 million compared to a gross lossprofit of $14.0 million$86,000 for the three months ended September 30, 2015March 31, 2016. The decrease was due to contract losseslower revenue as discussed above, payment of $14.3termination benefits as we reduce our South Texas workforce and depreciation expense of $1.9 million that were recorded during the third quarter of 2015related to our South Texas assets prior to their classification as assets held for sale. This was partially offset by decreases in costs resulting from our inability to recover certain costs related to a deck and jacket for one of our deepwater projects. We had no such loss during the third quarter of 2016 and implementedadditional cost cutting measures in response to decreases in work at our fabrication facilities.implemented by management.
General and administrative expenses - General and administrative expenses decreased $657,000for our Fabrication division increased $26,000 for the three months ended September 30, 2016March 31, 2017, compared to the three months ended September 30, 2015March 31, 2016. The increase is primarily due to cost cutting measures implemented during 2016 in responseexpenses incurred to decreases in work atmarket our fabrication facilities.South Texas assets for sale and payment of termination benefits as we reduce its workforce and complete those operations.
Asset impairment - During the three months ended September 30, 2015, we recorded an asset impairment charge of $6.6 million related to a partially constructed topside, related valves, piping and equipment that we acquired from a customer following its default under a contract in 2012. Due to the sustained downturn in the energy sector, our ability to effectively market these assets was significantly limited, and we reassessed the asset’s net realizable value based on the estimated scrap value of the assets. We had no such impairments during the three months ended September 30, 2016.
| | | | | | | | | | | | | | | | | Shipyards | | Three Months Ended September 30, | | Increase or (Decrease) | | | 2016 | | 2015 | | Amount | | Percent | Revenue (1) | | $ | 23,060 |
| | $ | 12,936 |
| | $ | 10,124 |
| | 78.3 | % | Gross profit (1) | | $ | 1,877 |
| | $ | 1,937 |
| | $ | (60 | ) | | (3.1 | )% | Gross profit percentage | | 8.1 | % | | 15.0 | % | | | | (6.9 | )% | General and administrative expenses | | $ | 2,065 |
| | $ | 392 |
| | $ | 1,673 |
| | 426.8 | % | Operating income (loss) (1) | | $ | (188 | ) | | $ | 1,545 |
| | | | |
| | | | | | | | | | | | | | | | Shipyards | | Three Months Ended March 31, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue (1) | | $ | 18,422 |
| | $ | 34,120 |
| | $ | (15,698 | ) | | (46.0)% | Gross profit (loss)(1) | | (1,704 | ) | | 2,375 |
| | (4,079 | ) | | (171.7)% | Gross profit (loss) percentage | | (9.2 | )% | | 7.0 | % | | | | (16.2)% | General and administrative expenses | | 964 |
| | 1,296 |
| | (332 | ) | | (25.6)% | Asset impairment | | 389 |
| | — |
| | 389 |
| | 100.0% | Operating income (loss) (1) | | (3,057 | ) | | 1,079 |
| | | | |
___________ | | (1) | Revenue for the three months ended September 30,March 31, 2017, and 2016, includes $1.5$1.6 million and $1.2 million of non-cash amortization of deferred revenue related to the values assigned to the contracts acquired in the LEEVAC transaction.transaction, respectively. |
Revenue increased $10.1- Revenue from our Shipyards division decreased $15.7 million for the three months ended September 30, 2016March 31, 2017, compared to the three months ended September 30, 2015March 31, 2016, due to the operations acquiredoverall decreases in work as we complete work under our contracts
including completion of a vessel that we assumed in the LEEVAC transaction (see LEEVAC Transaction above), which contributed $16.8 million in revenue forand delivered to a customer on February 6, 2017, with less new, replacement work starting during the three months ended September 30, 2016.
Gross profit decreased $60,000 for the three months ended September 30, 2016period as compared to the three months ended September 30, 2015March 31, 2016. The decrease in new, replacement work is due to tighter marginsdepressed oil and gas prices and the corresponding reduction in customer demand for shipbuilding and repair services supporting the oil and gas industry.
Gross profit (loss) - Gross loss from our Shipyards division was $1.7 million for the three months ended March 31, 2017, compared to a gross profit of $2.4 million for the three months ended March 31, 2016. The decrease was due to:
continued cost overruns on new work and inefficiencies incurred on the contracts acquiredthat were assigned to us in the LEEVAC transaction transaction; holding costs related to a completed vessel that was delivered on February 6, 2017; however, was refused by our customer alleging certain technical deficiencies (see also Note 9 of the Notes to Consolidated Financial Statements); and overall decreases in work under other various contracts as discussed above; partially offset by savings realized from cost cutting measures implemented by management during 2016.
General and administrative expenses - General and administrative expenses increased $1.7for our Shipyards division decreased $332,000 for the three months ended March 31, 2017, compared to the three months ended March 31, 2016, primarily due to cost cutting measures implemented by management during 2016 as well as lower bonuses accrued during 2017 as a result of a combination of a smaller workforce and our consolidated gross loss.
Asset Impairment - During three months ended March 31, 2017, we recorded an impairment of $389 related to our assets held for sale at our Prospect Shipyard. See also Note 2 of the Notes to Consolidated Financial statements.
| | | | | | | | | | | | | | | | Services | | Three Months Ended March 31, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | 10,712 |
| | $ | 26,559 |
| | $ | (15,847 | ) | | (59.7)% | Gross profit | | 33 |
| | 3,376 |
| | (3,343 | ) | | (99.0)% | Gross profit (loss) percentage | | 0.3 | % | | 12.7 | % | | | | (12.4)% | General and administrative expenses | | 666 |
| | 726 |
| | (60 | ) | | (8.3)% | Operating income (loss) | | (633 | ) | | 2,650 |
| | | | |
Revenue - Revenue from our Services division decreased $15.8 million for the three months ended September 30, 2016March 31, 2017, compared to the three months ended September 30, 2015 primarilyMarch 31, 2016, due to the expenses associated with the operations acquired in the LEEVAC transaction and bonus expense. | | | | | | | | | | | | | | | | | Services | | Three Months Ended September 30, | | Increase or (Decrease) | | | 2016 | | 2015 | | Amount | | Percent | Revenue | | $ | 20,928 |
| | $ | 23,487 |
| | $ | (2,559 | ) | | (10.9 | )% | Gross profit | | $ | 2,850 |
| | $ | 4,235 |
| | $ | (1,385 | ) | | (32.7 | )% | Gross profit percentage | | 13.6 | % | | 18.0 | % | | | | (4.4 | )% | General and administrative expenses | | $ | 1,540 |
| | $ | 994 |
| | $ | 546 |
| | 54.9 | % | Operating income | | $ | 1,310 |
| | $ | 3,241 |
| | | | | | | | | | | | | |
Revenue decreased $2.6 million for the three months ended September 30, 2016 compared to the three months ended September 30, 2015 due to the winding down of two large offshore service projects from the first half of 2016 and the downturn in the oil and gas industry.
Gross profit decreased $1.4 million for the three months ended September 30, 2016 compared to the three months ended September 30, 2015 due to decreases in revenues and tighter margins on new work.
General and administrative expenses increased $546,000 for the three months ended September 30, 2016 compared to the three months ended September 30, 2015 due to bonuses and additional administrative support added during the first half of 2016.
Nine Months Ended September 30, 2016 Compared to Nine Months Ended September 30, 2015 (in thousands, except for percentages):
Consolidated
| | | | | | | | | | | | | | | | Nine Months Ended September 30, | | Increase or (Decrease) | | 2016 | | 2015 | | Amount | Percent | Revenue | $ | 230,864 |
| | $ | 251,102 |
| | $ | (20,238 | ) | (8.1 | )% | Cost of revenue | 205,839 |
| | 248,686 |
| | (42,847 | ) | (17.2 | )% | Gross profit | 25,025 |
| | 2,416 |
| | 22,609 |
| 935.8 | % | Gross profit percentage | 10.8% | | 1.0% | | | | General and administrative expenses | 14,633 |
| | 11,817 |
| | 2,816 |
| 23.8 | % | Asset impairment | — |
| | 6,600 |
| | (6,600 | ) | n/a |
| Operating income (loss) | 10,392 |
| | (16,001 | ) | | 26,393 |
| 164.9 | % | Other income (expense): | | | | | | | Interest expense | (248 | ) | | (126 | ) | | (122 | ) |
|
| Interest income | 20 |
| | 21 |
| | (1 | ) |
|
| Other income, net | 1,039 |
| | 20 |
| | 1,019 |
|
|
| | 811 |
| | (85 | ) | | 896 |
| 1,054.1 | % | Net income (loss) before income taxes | 11,203 |
| | (16,086 | ) | | 27,289 |
| 169.6 | % | Income taxes | 4,134 |
| | (5,389 | ) | | 9,523 |
| 176.7 | % | Net income (loss) | $ | 7,069 |
| | $ | (10,697 | ) | | $ | 17,766 |
| 166.1 | % |
Revenue - Our revenue for the nine months ended September 30, 2016 and 2015 was $230.9 million and $251.1 million, respectively, representing a decrease of 8.1%. The decrease is primarily attributable to an overall decrease in work experienced in our fabrication yards primarily as a result of depressed oil and gas prices and the corresponding reduction in customer demand for offshore projects inoil and gas related service projects.
Gross profit - Gross profit from our Fabrication segment. During 2015, we completed the fabrication of a 1,200 foot jacket, piles and an approximate 450 short ton topside with no similar project in 2016. Our decrease in revenue earned from offshore fabrication work was partially offset by the assets and operations acquired in the LEEVAC transaction (see LEEVAC Transaction above), which contributed $55.9Services division decreased $3.3 million in revenue for the ninethree months ended September 30, 2016. Pass-through costs as a percentage of revenue were 35.0% and 43.2% forMarch 31, 2017, compared to the ninethree months ended September 30,March 31, 2016, and 2015, respectively. Pass-through costs, as described in Note 3 of the Notes to Consolidated Financial Statements, are included in revenue but have no impact on the gross profit recognized on a project for a particular period. Gross profit - Our gross profit for the nine months ended September 30, 2016 and 2015 was $25.0 million (10.8% of revenue) and $2.4 million (1.0% of revenue), respectively. Our gross profit improved compared to 2015 primarily due to the LEEVAC transactiondecreased revenue discussed above and contract losses of $14.3 million that were recordedtighter margins on new work performed during the third quarter of 2015 resulting from our inability to recover certain costs related to a deck and jacket for one of our deepwater projects. We had no such loss during the third quarter of 2016 and implemented cost cutting measures in response to decreases in work at our fabrication facilities.2017.
General and administrative expenses - Our general and administrative expenses were $14.6 million for the nine months ended September 30, 2016, compared to $11.8 million for the nine months ended September 30, 2015. The increase in generalGeneral and administrative expenses for our Services division decreased $60,000 for the ninethree months ended September 30,March 31, 2017, compared to the three months ended March 31, 2016, was primarily attributable to:
an increase of stock-based compensation expense of $589,000,
due to lower bonuses and the LEEVAC transaction; partially offset by
cost cutting efforts implementedaccrued during 2017, as a result of a combination of a smaller workforce and the downturnreduction in the oil and gas industry.gross profit.
Asset impairment
| | | | | | | | | | | | | | | | Corporate | | Three Months Ended March 31, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | — |
| | $ | — |
| | $ | — |
| | —% | Gross loss | | (260 | ) | | (136 | ) | | (124 | ) | | (91.2)% | Gross profit (loss) percentage | | n/a |
| | n/a |
| | | |
| General and administrative expenses | | 1,479 |
| | 1,668 |
| | (189 | ) | | (11.3)% | Operating loss | | (1,739 | ) | | (1,804 | ) | | 65 |
| | |
Gross loss - During the nine months ended September 30, 2015, we recorded an asset impairment charge of $6.6 million related to a partially constructed topside, related valves, piping and equipment that we acquiredGross loss from a customer following its default under a contract in 2012. Due to the sustained downturn in the energy sector, our ability to effectively
market these assets was significantly limited, and we reassessed the asset’s net realizable value based on the estimated scrap value of the assets. We had no such impairments during the nine months ended September 30, 2016.
Interest expense, net - The Company had net interest expense of $228,000 for the nine months ended September 30, 2016 compared to net interest expense of $105,000 for the nine months ended September 30, 2015. The increase in net interest expense for the nine months ended September 30, 2016 was primarily driven by an increase in the cost of unused credit facility fees under our credit agreement.
Other income, net - Other incomeCorporate division increased $1.0 million for the nine months ended September 30, 2016. The increase was primarily due to gainsa restructuring of $924,000 relatedour corporate division with additional personnel allocated to the sale of three cranes at our Texas facilitycorporate division during 2017 as well as sales of smaller assets bydiscussed above.
General and administrative expenses - General and administrative expenses for our Shipyards division. Income taxes - Our effective income tax rate for the nine months ended September 30, 2016 was 36.9%, compared to an effective tax rate of 34.0% for the comparable period during 2015. The increase in our effective rate isCorporate division decreased primarily due to the effect of state income taxes from income generated within Louisiana with no offsetting tax benefit from losses generated within Texas.
Operating Segments
| | | | | | | | | | | | | | | | | Fabrication | | Nine Months Ended September 30, | | Increase or (Decrease) | | | 2016 | | 2015 | | Amount | | Percent | Revenue | | $ | 70,436 |
| | $ | 137,431 |
| | $ | (66,995 | ) | | (48.7 | )% | Gross profit (loss) | | $ | 4,418 |
| | $ | (14,055 | ) | | $ | 18,473 |
| | 131.4 | % | Gross profit (loss) percentage | | 6.3 | % | | (10.2 | )% | | | | 16.5 | % | General and administrative expenses | | $ | 4,479 |
| | $ | 7,026 |
| | $ | (2,547 | ) | | (36.3 | )% | Asset impairment | | $ | — |
| | $ | 6,600 |
| | $ | (6,600 | ) | | n/a |
| Operating income (loss) | | $ | (61 | ) | | $ | (27,681 | ) | |
| |
|
Revenue decreased $67.0 million for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015. The decrease is attributable to an overall decrease in work experienced in our fabrication yardsbonuses as a result of depressed oil and gas prices and the corresponding reduction in customer demand for offshore fabrication projects. During 2015, we completed the fabrication of a 1,200 foot jacket, piles and an approximate 450 short ton topside with no similar project in 2016.
Gross profit increased $18.5 million to $4.4 million for the nine months ended September 30, 2016 compared to aour consolidated gross loss, of $14.1 million for the nine months ended September 30, 2015. The increase is due to contract losses of $14.3 million that were recorded during the third quarter of 2015 resulting from our inability to recover certain costs related to a deck and jacket for one of our deepwater projects. We had no such loss during the third quarter of 2016 and implemented cost cutting measures in response to decreases in work at our fabrication facilities.
General and administrative expenses decreased $2.5 million for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015 due to cost cutting measures implemented during 2016 in response to decreases in work at our fabrication facilities.
Asset impairment - During the nine months ended September 30, 2015, we recorded an asset impairment charge of $6.6 million related to a partially constructed topside, related valves, piping and equipment that we acquired from a customer following its default under a contract in 2012. Due to the sustained downturn in the energy sector, our ability to effectively market these assets was significantly limited, and we reassessed the asset’s net realizable value based on the estimated scrap value of the assets. We had no such impairments during the nine months ended September 30, 2016.
| | | | | | | | | | | | | | | | | Shipyards | | Nine Months Ended September 30, | | Increase or (Decrease) | | | 2016 | | 2015 | | Amount | | Percent | Revenue (1) | | $ | 86,553 |
| | $ | 47,177 |
| | $ | 39,376 |
| | 83.5 | % | Gross profit (1) | | $ | 9,595 |
| | $ | 6,022 |
| | $ | 3,573 |
| | 59.3 | % | Gross profit percentage | | 11.1 | % | | 12.8 | % | | | | (1.7 | )% | General and administrative expenses | | $ | 5,875 |
| | $ | 1,243 |
| | $ | 4,632 |
| | 372.6 | % | Operating income (1) | | $ | 3,720 |
| | $ | 4,779 |
| | | | |
____________
| | (1) | Revenue for the nine months ended September 30, 2016, includes $4.1 million of non-cash amortization of deferred revenue related to the values assigned to the contracts acquired in the LEEVAC transaction. |
Revenue increased $39.4 million for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015 due to the assets and operations acquired in the LEEVAC transaction (see LEEVAC Transaction above), which contributed $55.9 million in revenue for the nine months ended September 30, 2016. The increase was partially offset by decreases in work dueadditional personnel allocated to the downturn in the oil and gas industry.
Gross profit increased $3.6 million for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015 due to the LEEVAC transaction as well as increases in profitability estimates for other jobs in progress due to cost cutting measures.
General and administrative expenses increased $4.6 million for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015 due to the expenses associated with the operations acquired in the LEEVAC transaction and bonuses.
| | | | | | | | | | | | | | | | | Services | | Nine Months Ended September 30, | | Increase or (Decrease) | | | 2016 | | 2015 | | Amount | | Percent | Revenue | | $ | 76,179 |
| | $ | 70,987 |
| | $ | 5,192 |
| | 7.3 | % | Gross profit | | $ | 11,012 |
| | $ | 10,449 |
| | $ | 563 |
| | 5.4 | % | Gross profit percentage | | 14.5 | % | | 14.7 | % | | | | (0.2 | )% | General and administrative expenses | | $ | 4,119 |
| | $ | 3,008 |
| | $ | 1,111 |
| | 36.9 | % | Operating income | | $ | 6,893 |
| | $ | 7,441 |
| | | | | | | | | | | | | |
Revenue increased $5.2 million for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015 due to increases in the scope of two large offshore service projectsour corporate division during the first half of 2016.
Gross profit increased $563,000 for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015 due to increases in revenues and improved absorption of fixed costs resulting from an increase in labor hours worked.
General and administrative expenses increased $1.1 million for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015 due to additional administrative support costs related to increases in activity and bonuses.2017.
Liquidity and Capital Resources Historically, we have funded our business activities through cash generated from operations. At September 30, 2016March 31, 2017, we had no amounts outstanding under our credit facility, $4.5$4.6 million in outstanding letters of credit, and cash and cash equivalents totaling $55.6$34.7 million, compared to $34.8$51.2 million at December 31, 2015.2016. Working capital was $79.8$182.9 million and our ratio of current assets to current liabilities was 2.837.56 to 1 at September 30,March 31, 2017, compared to $78.0 million and 3.2 to 1, respectively, at December 31, 2016. Working capital at March 31, 2017, includes $110.5 million related to assets held for sale, primarily related to our South Texas facilities. Our primary sourceuse of cash during the three months ended March 31, 2017, was due to: Operating losses for the nine months ended September 30, 2016, wasquarter exclusive of non-cash depreciation, amortization, impairment and stock compensation expense of approximately $3.7 million, Payment of year-end bonuses related to 2016, Progress on liabilities from assumed contracts in the collection of accounts receivable under various customer contracts and sales of three cranes atLEEVAC transaction.While our Texas facility for $5.8 million. At September 30, 2016, our contracts receivable balance was $26.6 million of which we have subsequently collected $12.1 million through October 31, 2016. On January 1, 2016, we acquired substantially all of the assets and assumed certain specified liabilities of LEEVAC. The purchase price for the acquisition of the LEEVAC assets during 2016 was $20.0 million, subject to a working capital adjustment whereby we received a dollar-for-
dollar reductionnet $3.0 million in cash from the seller for the assumption of certain net liabilities of LEEVAC at closing and settlement payments from sureties on certain ongoing fabricationshipbuilding projects of $23.0 million that were assigned to us in the transaction. After taking into accountWe have significantly progressed these adjustments, wecontracts which in turn, has resulted in utilization of the working capital and settlement payments received approximately $1.6during 2016.
Fewer receipts from accounts receivable, primarily $4.6 million in cash at closing. Duringfrom one customer that refused delivery of a vessel on February 6, 2017, and has not paid. We have initiated arbitration proceedings during the quarter we presentedto enforce our working capital true-uprights under our construction contract, and Build-up of costs for contracts in progress related to a customer in our Shipyards division with significant milestone payments occurring in the seller, which resulted in an additional $1.5 million due to us. Additionally, we hired 380 employees upon acquisitionlater stages of the facilities representing substantially all of the former LEEVAC employees. Strategically, the transaction expands our marine fabrication and repair and maintenance presenceprojects which are expected to occur beginning in the Gulf South market. third quarter of 2017 through the first quarter of 2018. At the date of transaction, we acquired approximately $121.2March 31, 2017, our contracts receivable balance was $21.1 million of new build construction backlog inclusive of approximately $9.2which we have subsequently collected $4.1 million of purchase price fair value allocated to four, new build construction projects to be delivered in 2017 and 2018 for two customers. through April 21, 2017.
As of September 30, 2016,March 31, 2017, we had a credit agreement with Whitney Bank and JPMorgan Chase Bank N.A. that provides for an $80.0a $40.0 million revolving credit facility maturing January 2, 2017.November 29, 2018. The credit agreement allows the Company to use up to the full amount of the available borrowing base for letters of credit and up to $20.0 million for general corporate purposes. Our obligations under the credit agreement are secured by substantially all of our assets other(other than real property located in the state of Louisiana. On February 29, 2016, we entered into an amendment to our credit agreement. The amendment (i) extends the term of the Credit Facility from February 29, 2016 to January 2, 2017; (ii) increases the commitment feeestate). Commitment fees on undrawn amounts from 0.25% to 0.50%are 0.5% per annum; (iii) increases theannum and letter of credit fee,fees, subject to certain limited exceptions, to 2.00%are 2.0% per annum on undrawn stated amounts under letters of credit issued by the lenders; and (iv) limits the maximum amount of loans outstanding at any time for general corporate purposes to $20.0 million.lenders. Amounts borrowed under our the credit agreement bear interest, at our option, at either the prime lending rate established by JPMorgan Chase Bank, N.A. or LIBOR plus 2.0 percent. Under the amendment ourOur financial covenants beginning with the quarter endingat March 31, 20162017, are as follows:
| | (i) | minimum net worth requirement of not less than $250.0255.0 million plus |
| | a) | 50% of net income earned in each quarter beginning MarchDecember 31, 2016, and |
| | b) | 100% of proceeds from any issuance of common stock; |
| | c) | less the amount of any impairment on certain assets owned by Gulf Marine Fabricators, L.P. (our South Texas assets held for sale) up to $30.0 million; |
| | (ii) | debt to EBITDA ratio not greater than 3.02.5 to 1.0; and |
| | (iii) | interest coverage ratio not less than 2.0 to 1.0. |
At September 30, 2016,March 31, 2017, no amounts were outstanding under the credit facility, and we had outstanding letters of credit totaling $4.5$4.6 million, reducing the unused portion of our credit facility for additional letters of credit and borrowings to $75.5$35.4 million. As of September 30, 2016,March 31, 2017, we were in compliance with all covenants. During the fourth quarter, we expect
We are currently in discussions with one of our financial institutions to enter into a two-year, $40.0 million amendednew revolving line of credit with comparable availability, but with less restrictive financial covenants and restatedreduced fees as compared to our current revolving credit facility. We expect to close on this new revolving credit facility withand terminate our current lenders that will be secured by substantially all of our assets (other than real property). We anticipate the amendedexisting revolving credit facility will allow us to use the full $40.0 million borrowing base for both letters of credit and general corporate purposes. Given the historically low levels of borrowings under our current facility and our cash position, we requested a reduction in the amountsecond quarter of available credit under our revolver from $80.0 million to $40.0 million to decrease the commitment fees payable to our lenders for the undrawn portion of the facility.2017.
Our primary liquidity requirements are for the costs associated with servicingfabrication projects, and capital expenditures inand payment of dividends to our Fabrication and Shipyards segments. In particular, as further discussed in Note 2 in our Notes to Consolidated Financial Statements, in connection with the LEEVAC transaction, we received at closing a net cash amount that included consideration for billings in excess of costs and estimated earnings on uncompleted contracts and other payments from sureties representing pre-payment on the partially constructed vessels totaling $21.9 million as adjusted for the working capital true-up. Consequently, there will be required cash outflows for costs associated with the prepaid amounts without corresponding milestone billings.shareholders. We anticipate capital expenditures for the remainder of 20162017 to be approximately $1.8range between $6.0 million to $8.0 million primarily for the following: extension of one of our dry docks, and
improvements to our newly acquired facilities.Jennings and Lake Charles leased shipyards, improvement to the bulkhead at our Houma facility, and
computer system upgrades.
On October 21, 2016, a customer of our Shipyards’ segmentShipyards division announced it had received limited waivers from its lenders and noteholders through November 11, 2016 with respect towas in noncompliance with certain financial covenants included in the customer’s debt agreements. TheThis customer also announcedstated it had received limited waivers from its lenders and noteholders, but its debt agreements will require further negotiation and amendment. InOn April 19, 2017, the eventcustomer stated it had allowed the waivers to expire and remains in default of its covenants.
This same customer has rejected delivery of the vessel that we tendered for delivery on February 6, 2017, alleging certain technical deficiencies exist with respect to the vessel and is seeking recovery of all purchase price amounts previously paid by the customer under the contract. We are also building a second vessel for this customer that is scheduled for delivery during the second quarter of 2017. We disagree with our customer is unsuccessful inconcerning these efforts,alleged technical deficiencies and have put the customer will consider other options including a possible reorganizationin default under Chapter 11the terms of the Federal bankruptcy laws. At September 30, 2016, no contracts receivable werefor both vessels. As of March 31, 2017, approximately $4.6 million remained due and outstanding from our customer for the first vessel. The balance due to us upon delivery for a second vessel which is expected in May of this year, is approximately $4.9 million. On March 10, 2017, we gave notice for arbitration with our customer in an effort to resolve this matter. We intend to take all legal action as may be necessary to protect our rights under the contracts and deferred revenue exceeded our costs and estimated earnings in excess of billings on this contract. recover the remaining balances owed to us.
We continue to monitor our work performed in relation to our customer’s status and its ability to pay under the terms of its contract. Based on our evaluation to date,these contracts. Because these vessels have been completed or are substantially complete, we do not believe that they have significant fair value, and that we would be able to fully recover any loss on this contract is probable or estimable at this time.amounts due to us.
In February 2016,anticipation of the proceeds to be received from the sale of our BoardSouth Texas assets, we have engaged in a strategic financial analysis project with advisors to determine the appropriate use of Directors approvedproceeds from this transaction. We will be evaluating a decrease inmix of options including tactical capital improvement projects, strategic growth investment opportunities that support our quarterly dividend to $0.01 in an effort to conserve cash. business plan, stock buy-backs and/or dividends and working capital reinvestment.
On October 27, 2016,April 26, 2017, our Board of Directors declared a dividend of $0.01 per share on our shares of common stock outstanding, payable November 23, 2016May 25, 2017, to shareholders of record on November 10, 2016.May 11, 2017.
We believe our cash and cash equivalents generated by our operating activities and funds available under our credit facilityproceeds to be received from future assets sales will be sufficient to fund our capital expenditures issue future letters of credit and meet our working capital needs for both the near and longer term to continue our operations, satisfy our contractual operations and pay dividends to our shareholders. Additionally, we expect to close on a new revolving line of credit during the second quarter of 2017 as discussed above. We believe that the new facility will provide us with additional working capital flexibility to ramp up our operations quickly in times of rapid increasing demand, to continue to issue future letters of credit and to quickly take advantage of market opportunities.
Cash Flow Activities
For the ninethree months ended September 30, 2016March 31, 2017, net cash provided byused in operating activities was $19.3$15.1 million, compared to $18.7$1.6 million for the ninethree months ended September 30, 2015.March 31, 2016. The increase in cash provided byused in operations was primarily due to increased gross profitthe following:
Operating losses for the quarter in excess of non-cash depreciation, amortization, impairment and collectionsstock compensation expense of contract receivablesapproximately $3.7 million, Payment of year-end bonuses related to 2016, Progress on liabilities from assumed contracts in the LEEVAC transaction.While our purchase price for the acquisition of the LEEVAC assets during 2016 somewhat offset bywas $20.0 million, we received a net $3.0 million in cash from the seller for the assumption of certain net liabilities and settlement payments required for trade payableson ongoing shipbuilding projects of $23.0 million that were assigned to us in the transaction. We have significantly progressed these contracts which in turn, has resulted in utilization of the working capital and settlement payments received during 2016. Fewer receipts from accounts receivable, primarily $4.6 million from one customer that refused delivery of a vessel on February 6, 2017, and has not paid. We have initiated arbitration proceedings during the ninequarter to enforce our rights under our construction contract, and
Build-up of costs for contracts in progress related to a customer in our Shipyards division with significant milestone payments occurring in the later stages of the projects which are expected to occur beginning in the third quarter of 2017 through the first quarter of 2018.
Net cash used in investing activities for the three months ended September 30, 2016 asMarch 31, 2017, was $391,000, compared to 2015. Net cash provided by investing activities for the nine months ended September 30, 2016 was $2.0 million, compared to cash used in investing activities of $5.0$6.2 million for the ninethree months ended September 30, 2015.March 31, 2016. The increasechange in cash used in/provided by investing activities is primarily due to cash received from the sale of three cranes at our Texas facility for $5.8$5.4 million and $1.6 million of cash acquired in the LEEVAC transaction.
Net cash used in financing activities for the ninethree months ended September 30,March 31, 2017 and 2016, was $1.0 million and 2015 was $440,000 and $4.4 million,$291,000, respectively. The decreaseincrease in cash used in financing activities is due to the reduction in the cash dividend in 2016.payments made to taxing authorities on behalf of employees' for their vesting of common stock.
Contractual Obligations There have been no material changes from the information included in our Annual Report on Form 10-K for the year ended December 31, 2015.2016. For more information on our contractual obligations, refer to Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2015.2016. Off-Balance Sheet Arrangements There have been no material changes from the information included in our Annual Report on Form 10-K for the year ended December 31, 2015.2016. Item 3. Quantitative and Qualitative Disclosures About Market Risk. There have been no material changes in the Company’s market risks during the quarter ended September 30, 2016.March 31, 2017. For more information on market risk, refer to Part II, Item 7A. of our Annual Report on Form 10-K for the year ended December 31, 2015.2016. Item 4. Controls and Procedures. The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and that such information is communicated to the Company’s management, including its Chief Executive Officer and Interim Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. The Company’s management, with the participation of the Company’s Chief Executive Officer and Interim Chief Financial Officer, hashave evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based on this evaluation, our Chief Executive Officer and Interim Chief Financial Officer hashave concluded that the design and operation of our disclosure controls and procedures were effective as of the end of the period covered by this report. There have been no changes during the fiscal quarter ended September 30, 2016March 31, 2017, in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. PART II. OTHER INFORMATION Item 1. Legal Proceedings. The Company is subject to various routine legal proceedings in the normal conduct of its business primarily involving commercial claims, workers’ compensation claims, and claims for personal injury under general maritime laws of the United
States and the Jones Act. While the outcome of these lawsuits, legal proceedings and claims cannot be predicted with certainty, management believes that the outcome of any such proceedings, even if determined adversely, would not have a material adverse effect on the financial position, results of operations or cash flows of the Company. Item 1A. Risk Factors. There have been no material changes from the information included in Item 1A “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2015.2016. | | | | | 2.1Exhibit Number | | Asset Purchase Agreement, dated December 23, 2015 by and among Gulf Island Shipyards, LLC, LEEVAC Shipyards, LLC and certain related affiliates, incorporated by reference toDescription of Exhibit 2.1 of the Company's Form 8-K filed on December 23, 2015. | | | 3.1 | | Composite Articles of Incorporation of the Company incorporated by reference to Exhibit 3.1 of the Company’s Form 10-Q filed April 23, 2009. | 3.2 | | Amended and Restated Bylaws of the Company, as amended and restated through April 26, 2012, incorporated by reference to Exhibit 3.1 of the Company’s Form 8-K filed on April 30, 2012. | 4.1 | | Specimen Common Stock Certificate, incorporated by reference to the Company’s Form S-1/A filed March 19, 1997 (Registration No. 333-21863).November 4, 2016. | 10.1 | | Change of Control Agreement, dated March 1, 2017, between the Company and David S. Schorlemer, incorporated by reference to Exhibit 10.15 of the Company's Form of Long-Term Performance-Based Cash Award Agreement.10-K for the year ended December 31, 2016 filed on March 2, 2017. | 3131.1 | | CEO and Certifications pursuant to Rule 13a-14 under the Securities Exchange Act of 1934. | 31.2 | | CFO CertificationCertifications pursuant to Rule 13a-14 under the Securities Exchange Act of 1934. | 32 | | Section 906 Certification furnished pursuant to 18 U.S.C. Section 1350. | 99.1 | | Press release issued by | 101 | | Attached as Exhibit 101 to this report are the following items formatted in XBRL (Extensible Business Reporting Language): | | | (i) | Consolidated Balance Sheets, | | | (ii) | Consolidated Statements of Operations, | | | (iii) | Consolidated Statement of Changes in Shareholders’ Equity, | | | (iv) | Consolidated Statements of Cash Flows and | | | (v) | Notes to Consolidated Financial Statements. |
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. | | | GULF ISLAND FABRICATION, INC. | | BY: | /s/ David S. Schorlemer | | David S. Schorlemer | | Executive Vice President, Chief Financial Officer, and Treasurer (Principal Financial and Accounting Officer) |
Date: May 2, 2017
GULF ISLAND FABRICATION, INC. EXHIBIT INDEX | | | | | Exhibit Number | | Description of Exhibit | | | 3.1 | | Composite Articles of Incorporation of the Company on October 27, 2016, incorporated by reference to Exhibit 99.13.1 of the Company’s Form 10-Q filed April 23, 2009. | 3.2 | | Amended and Restated Bylaws of the Company, incorporated by reference to Exhibit 3.1 of the Company’s Form 8-K filed November 4, 2016. | 10.1 | | Change of Control Agreement, dated March 1, 2017, between the Company and David S. Schorlemer, incorporated by reference to Exhibit 10.15 of the Company's Form 10-K for the year ended December 31, 2016 filed on October 27, 2016.March 2, 2017. | 31.1 | | CEO Certifications pursuant to Rule 13a-14 under the Securities Exchange Act of 1934. | 31.2 | | CFO Certifications pursuant to Rule 13a-14 under the Securities Exchange Act of 1934. | 32 | | Section 906 Certification furnished pursuant to 18 U.S.C. Section 1350. | | | | 101 | | Attached as Exhibit 101 to this report are the following items formatted in XBRL (Extensible Business Reporting Language): | | | | | | (i) | Consolidated Balance Sheets, | | | (ii) | Consolidated Statements of Operations, | | | (iii) | Consolidated Statement of Changes in Shareholders’ Equity, | | | (iv) | Consolidated Statements of Cash Flows and | | | (v) | Notes to Consolidated Financial Statements. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | GULF ISLAND FABRICATION, INC. | | BY: | /s/ Kirk J. Meche | | Kirk J. Meche | | President, Chief Executive Officer, Director and Interim Chief Financial Officer, Treasurer and Secretary (Principal Executive Officer and Interim Principal Financial and Accounting Officer) |
Date: November 2, 2016
GULF ISLAND FABRICATION, INC.
EXHIBIT INDEX
| | | | | Exhibit
Number
| | Description of Exhibit | | | 2.1 | | Asset Purchase Agreement, dated December 23, 2015 by and among Gulf Island Shipyards, LLC, LEEVAC Shipyards, LLC and certain related affiliates, incorporated by reference to Exhibit 2.1 of the Company's Form 8-K filed on December 23, 2015.
| 3.1 | | Composite Articles of Incorporation of the Company, incorporated by reference to Exhibit 3.1 of the Company’s Form 10-Q filed April 23, 2009. | 3.2 | | Bylaws of the Company, as amended and restated through April 26, 2012, incorporated by reference to Exhibit 3.1 of the Company’s Form 8-K filed on April 30, 2012. | 4.1 | | Specimen Common Stock Certificate, incorporated by reference to the Company’s Form S-1/A filed March 19, 1997 (Registration No. 333-21863). | 10.1 | | Form of Long-Term Performance-Based Cash Award Agreement. | 31 | | CEO and CFO Certifications pursuant to Rule 13a-14 under the Securities Exchange Act of 1934. | 32 | | Section 906 Certification furnished pursuant to 18 U.S.C. Section 1350. | 99.1 | | Press release issued by the Company on October 27, 2016, incorporated by reference to Exhibit 99.1 of the Company’s Form 8-K filed on October 27, 2016. | 101 | | Attached as Exhibit 101 to this report are the following items formatted in XBRL (Extensible Business Reporting Language): | | | | | | (i) | Consolidated Balance Sheets, | | | (ii) | Consolidated Statements of Operations, | | | (iii) | Consolidated Statement of Changes in Shareholders’ Equity, | | | (iv) | Consolidated Statements of Cash Flows and | | | (v) | Notes to Consolidated Financial Statements. |
s | Percentage | | ___________ | | 1. | Backlog as of September 30, 2016March 31, 2017, includes commitments received through October 27, 2016.April 26, 2017. We exclude suspended projects from contract backlog thatwhen they are expected to be suspended more than twelve months because resumption of work and timing of revenue recognition for these projects are difficult to predict. Our backlog also includes the new build construction that was acquired in the LEEVAC transaction on January 1, 2016. Included in our backlog at September 30, 2016, is $5.1 million of non-cash revenue related to purchase price fair value of contracts acquired in the LEEVAC transaction and included in deferred revenue in our consolidated Balance sheet at September 30, 2016. |
| | 2. | At September 30, 2016,March 31, 2017, projects for our threetwo largest customers in terms of revenue backlog consisted of: |
| | (i) | two large petroleum supply vessels for one customer in our Shipyards segment, which commenced in the second quarter of 2013 and will be completed during the first and second quarter of 2017; |
| | (ii) | two large multi-purpose service vessels for one customer in our Shipyards segment, which commenced in the first quarter of 2014 and will be completed during the first and second quarterquarters of 2018; and |
(iii) the fabrication of four modules associated with a U.S. ethane cracker project.
| | (ii) | the fabrication of four modules associated with a U.S. ethane cracker project. |
| | 3. | The timing of recognition of the revenue represented in our backlog is based on management’s current estimates to complete the projects. Certain factors and circumstances could cause changes in the amounts ultimately recognized and the timing of the recognition of revenue from our backlog. |
Depending on the size of the project, the termination, postponement, or reduction in scope of any one project could significantly reduce our backlog and could have a material adverse effect on revenue, net income and cash flow. As of September 30, 2016,March 31, 2017, we had 1,336922 employees and 163133 contract employees inclusive of 380 employees hired in the LEEVAC transaction, compared to 1,2551,178 employees and 7192 contract employees as of December 31, 2015. 2016.
Labor hours worked were 2.3 million479,000 during the ninethree months ended September 30, 2016,March 31, 2017, compared to 2.1 million695,000 for the ninethree months ended September 30, 2015.March 31, 2016. The overall increasedecrease in labor hours worked for the three months ended September 30, 2016March 31, 2017, was due to 636,000 labor hours worked from projects acquired in the LEEVAC transaction partially offset by a reduction in fabrication activity due primarily to the downturn in the oil and gas industry.
Results of Operations
Our results of operations are affected primarily by our ability to effectively manage contracts to a successful completion along with producing maximum efficiencies as it relates to manhours.
Three Months Ended September 30, 2016 Compared to Three Months Ended September 30, 2015 (in thousands, except for percentages):
Consolidated
| | | | | | | | | | | | | | | | Three Months Ended September 30, | | Increase or (Decrease) | | 2016 | | 2015 | | Amount | Percent | Revenue | $ | 65,384 |
| | $ | 67,531 |
| | $ | (2,147 | ) | (3.2 | )% | Cost of revenue | 60,125 |
| | 75,368 |
| | (15,243 | ) | (20.2 | )% | Gross profit (loss) | 5,259 |
| | (7,837 | ) | | 13,096 |
| 167.1 | % | Gross profit percentage | 8.0% | | (11.6)% | | | | General and administrative expenses | 5,086 |
| | 3,798 |
| | 1,288 |
| 33.9 | % | Asset impairment | — |
| | 6,600 |
| | (6,600 | ) | n/a |
| Operating income | 173 |
| | (18,235 | ) | | 18,408 |
| 100.9 | % | Other income (expense): | | | | | | | Interest expense | (110 | ) | | (39 | ) | | (71 | ) |
|
| Interest income | 12 |
| | 8 |
| | 4 |
|
|
| Other income, net | 599 |
| | — |
| | 599 |
|
|
| | 501 |
| | (31 | ) | | 532 |
| 1,716.1 | % | Net income (loss) before income taxes | 674 |
| | (18,266 | ) | | 18,940 |
| 103.7 | % | Income taxes | 133 |
| | (6,129 | ) | | 6,262 |
| 102.2 | % | Net income (loss) | $ | 541 |
| | $ | (12,137 | ) | | $ | 12,678 |
| 104.5 | % |
Revenue - Our revenue for the three months ended September 30, 2016 and 2015 was $65.4 million and $67.5 million, respectively, representing a decrease of 3.2%. The decrease is primarily attributable to an overall decrease in work experienced in our fabrication yardsfacilities as a result of depressed oil and gas prices and the corresponding reduction in customer demand within all of our operating divisions.
Results of Operations Three Months Ended March 31, 2017 Compared to Three Months Ended March 31, 2016 (in thousands, except for offshore projects in our Fabrication segment. During 2015, we completed the fabrication of a 1,200 foot jacket, piles and an approximate 450 short ton topside with no similar project in 2016.percentages): Consolidated | | | | | | | | | | | | | | | Three Months Ended March 31, | | Increase or (Decrease) | | 2017 | | 2016 | | Amount | Percent | Revenue | $ | 37,993 |
| | $ | 83,979 |
| | $ | (45,986 | ) | (54.8)% | Cost of revenue | 42,890 |
| | 78,278 |
| | (35,388 | ) | (45.2)% | Gross profit (loss) | (4,897 | ) | | 5,701 |
| | (10,598 | ) | 185.9% | Gross profit (loss) percentage | (12.9)% | | 6.8% | | | | General and administrative expenses | 3,930 |
| | 4,485 |
| | (555 | ) | (12.4)% | Asset impairment | 389 |
| | — |
| | 389 |
| 100.0% | Operating income (loss) | (9,216 | ) | | 1,216 |
| | (10,432 | ) | (857.9)% | Other income (expense): | | | | | | | Interest expense | (59 | ) | | (50 | ) | | (9 | ) | | Interest income | — |
| | 6 |
| | (6 | ) | | Other income, net | 9 |
| | 398 |
| | (389 | ) | | Total other income (expense) | (50 | ) | | 354 |
| | (404 | ) | (114.1)% | Net income (loss) before income taxes | (9,266 | ) | | 1,570 |
| | (10,836 | ) | (690.2)% | Income taxes | (2,812 | ) | | 581 |
| | (3,393 | ) | (584.0)% | Net income (loss) | $ | (6,454 | ) | | $ | 989 |
| | $ | (7,443 | ) | (752.6)% |
Revenue - Our decrease in revenue earned from offshore fabrication work was partially offset by the results of the assets and operations acquired in the LEEVAC transaction (see LEEVAC Transaction above), which contributed $16.8 million in revenue for the three months ended September 30, 2016.March 31, 2017 and 2016, was $38.0 million and $84.0 million, respectively, representing a decrease of 54.8%. The decrease is primarily attributable to an overall decrease in work experienced in our facilities as a result of depressed oil and gas prices and the corresponding reduction in customer demand within all of our operating divisions. Pass-through costs as a percentage of revenue were 33.8%29.4% and 45.3%40.0% for the three-months ended September 30,March 31, 2017 and 2016, and 2015, respectively. Pass-through costs, as described in Note 3 of the Notes to Consolidated Financial Statements, are included in revenue but have no impact on the gross profit recognized on a project for a particular period.
Gross profit (loss)- Our gross profit (loss)loss for the three months ended September 30, 2016 and 2015March 31, 2017, was $5.3$4.9 million (8.0% of revenue) and $(7.8) million, respectively. Ourcompared to a gross profit improved compared to third quarter of 2015$5.7 million for the three months ended March 31, 2016. The decrease was primarily due to contract losses of $14.3 million that were recorded during the third quarter of 2015 resulting from our inability to recover certain costs related to a deckdecreased revenue as discussed above and jacket for one of our deepwater projects. We had no such loss during the third quarter of 2016 and implemented cost cutting measures. This wastighter margins on current work partially offset by tighter margins within all of our segments due to a decreasedecreases in work as a result of the downturn in the oil and gas industry.costs resulting from additional cost cutting measures implemented by management.
General and administrative expenses - Our general and administrative expenses were $5.1$3.9 million for the three months ended September 30, 2016,March 31, 2017, compared to $3.8$4.5 million for the three months ended September 30, 2015.March 31, 2016. The increasedecrease in general
and administrative expenses for the three months ended September 30, 2016March 31, 2017, was primarily attributable to the operations acquired in the LEEVAC transaction and bonus expense, partially offset by cost cutting effortsmeasures implemented by management during 2016.the first part of 2016 as well as lower bonuses accrued during 2017 as a result of a combination of a smaller workforce and our consolidated gross loss.
Asset impairmentImpairment - During the three months ended September 30, 2015,March 31, 2017, we recorded an asset impairment charge of $6.6 million$389 related to a partially constructed topside, related valves, piping and equipment that we acquired from a customer following its default under a contract in 2012. Due to the sustained downturn in the energy sector, our ability to effectively market these assets was significantly limited, and we reassessed the asset’s net realizable value based on the estimated scrap valueheld for sale at our Prospect Shipyard. See also Note 2 of the assets. We had no such impairments during the three months ended September 30, 2016.Notes to Consolidated Financial statements. Interest expense,
Other income, net - The Company had net interest expense of $98,000Other income decreased $389,000 for the three months ended September 30, 2016 compared to net interest expense of $31,000 for the three months ended September 30, 2015.March 31, 2017. The increase was primarily driven by an increase in the cost of unused credit facility fees under our credit agreement. Other income, net - Other income increased $599,000 for the three months ended September 30, 2016. The increasedecrease was primarily due to gains on sales of assets from our Fabrication division.division recorded during three months ended March 31, 2016.
Income taxes - Our effective income tax rate for the three months ended September 30, 2016March 31, 2017, was 19.7%30.3%, compared to an effective tax rate of 34.0%37.0% for the comparable period during 2015.2016. The changedecrease in ourthe effective tax rate is duethe result of limitations on the deductibility of executive compensation and $210,000 in tax expense recognized during the three months ended March 31, 2017, for the tax effect of the difference between the actual tax deduction allowed upon vesting of common stock and the compensation cost recognized for financial reporting purposes resulting from the adoption of Accounting Standards Update 2016-09 as further discussed in Note 1 of the Notes to the decrease in our effective rate for the year-to-date period.Consolidated Financial Statements.
Operating Segments
As discussed in Note 8 of the Notes to Consolidated Financial Statements, management reduced its allocation of corporate administrative costs and overhead expenses to its operating divisions during the three months ended March 31, 2017, such that a significant portion of its corporate expenses are retained in its non-operating Corporate division. In addition, it has also allocated certain personnel previously included in the operating divisions to within the Corporate division. In doing so, management believes that it has created a fourth reportable segment with each of its three operating divisions and it's Corporate division each meeting the criteria of reportable segments under GAAP. During the three months ended March 31, 2016, we allocated substantially all of our corporate administrative costs and overhead expenses to our three operating divisions. We have recast our 2016 segment data below in order to conform to the current period presentation. Our results of our three operating divisions and Corporate division for the three months ended March 31, 2017 and 2016, are presented below (in thousands, except for percentages).
| | | | | | | | | | | | | | | | | Fabrication | | Three Months Ended September 30, | | Increase or (Decrease) | | | 2016 | | 2015 | | Amount | | Percent | Revenue | | $ | 22,311 |
| | $ | 32,133 |
| | $ | (9,822 | ) | | (30.6 | )% | Gross profit (loss) | | $ | 532 |
| | $ | (14,009 | ) | | $ | 14,541 |
| | 103.8 | % | Gross profit percentage | | 2.4 | % | | (43.6 | )% | | | | 46.0 | % | General and administrative expenses | | $ | 1,481 |
| | $ | 2,138 |
| | $ | (657 | ) | | (30.7 | )% | Asset impairment | | $ | — |
| | $ | 6,600 |
| | $ | (6,600 | ) | | n/a |
| Operating income (loss) | | $ | (949 | ) | | $ | (22,747 | ) | | | | |
| | | | | | | | | | | | | | | | Fabrication | | Three Months Ended March 31, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | 10,209 |
| | $ | 23,829 |
| | $ | (13,620 | ) | | (57.2)% | Gross profit (loss) | | (2,966 | ) | | 86 |
| | (3,052 | ) | | (3,548.8)% | Gross profit (loss) percentage | | (29.1 | )% | | 0.4 | % | | | | (29.5)% | General and administrative expenses | | 821 |
| | 795 |
| | 26 |
| | 3.3% | Operating income (loss) | | (3,787 | ) | | (709 | ) | | | | |
Revenue - Revenue from our Fabrication division decreased $9.8$13.6 million for the three months ended September 30, 2016March 31, 2017, compared to the three months ended September 30, 2015.March 31, 2016. The decrease is attributable to an overall decrease in work experienced in our fabrication yards as a result of depressed oil and gas prices and the corresponding reduction in customer demand for offshore fabrication projects. As discussed above, management has classified our South Texas assets as assets held for sale in response to the underutilization of our Fabrication assets.
Gross profit increased $14.5 million to $532,000(loss) - Gross loss from our Fabrication division for the three months ended September 30, 2016March 31, 2017, was $3.0 million compared to a gross lossprofit of $14.0 million$86,000 for the three months ended September 30, 2015March 31, 2016. The decrease was due to contract losseslower revenue as discussed above, payment of $14.3termination benefits as we reduce our South Texas workforce and depreciation expense of $1.9 million that were recorded during the third quarter of 2015related to our South Texas assets prior to their classification as assets held for sale. This was partially offset by decreases in costs resulting from our inability to recover certain costs related to a deck and jacket for one of our deepwater projects. We had no such loss during the third quarter of 2016 and implementedadditional cost cutting measures in response to decreases in work at our fabrication facilities.implemented by management.
General and administrative expenses - General and administrative expenses decreased $657,000for our Fabrication division increased $26,000 for the three months ended September 30, 2016March 31, 2017, compared to the three months ended September 30, 2015March 31, 2016. The increase is primarily due to cost cutting measures implemented during 2016 in responseexpenses incurred to decreases in work atmarket our fabrication facilities.South Texas assets for sale and payment of termination benefits as we reduce its workforce and complete those operations.
Asset impairment - During the three months ended September 30, 2015, we recorded an asset impairment charge of $6.6 million related to a partially constructed topside, related valves, piping and equipment that we acquired from a customer following its default under a contract in 2012. Due to the sustained downturn in the energy sector, our ability to effectively market these assets was significantly limited, and we reassessed the asset’s net realizable value based on the estimated scrap value of the assets. We had no such impairments during the three months ended September 30, 2016.
| | | | | | | | | | | | | | | | | Shipyards | | Three Months Ended September 30, | | Increase or (Decrease) | | | 2016 | | 2015 | | Amount | | Percent | Revenue (1) | | $ | 23,060 |
| | $ | 12,936 |
| | $ | 10,124 |
| | 78.3 | % | Gross profit (1) | | $ | 1,877 |
| | $ | 1,937 |
| | $ | (60 | ) | | (3.1 | )% | Gross profit percentage | | 8.1 | % | | 15.0 | % | | | | (6.9 | )% | General and administrative expenses | | $ | 2,065 |
| | $ | 392 |
| | $ | 1,673 |
| | 426.8 | % | Operating income (loss) (1) | | $ | (188 | ) | | $ | 1,545 |
| | | | |
| | | | | | | | | | | | | | | | Shipyards | | Three Months Ended March 31, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue (1) | | $ | 18,422 |
| | $ | 34,120 |
| | $ | (15,698 | ) | | (46.0)% | Gross profit (loss)(1) | | (1,704 | ) | | 2,375 |
| | (4,079 | ) | | (171.7)% | Gross profit (loss) percentage | | (9.2 | )% | | 7.0 | % | | | | (16.2)% | General and administrative expenses | | 964 |
| | 1,296 |
| | (332 | ) | | (25.6)% | Asset impairment | | 389 |
| | — |
| | 389 |
| | 100.0% | Operating income (loss) (1) | | (3,057 | ) | | 1,079 |
| | | | |
___________ | | (1) | Revenue for the three months ended September 30,March 31, 2017, and 2016, includes $1.5$1.6 million and $1.2 million of non-cash amortization of deferred revenue related to the values assigned to the contracts acquired in the LEEVAC transaction.transaction, respectively. |
Revenue increased $10.1- Revenue from our Shipyards division decreased $15.7 million for the three months ended September 30, 2016March 31, 2017, compared to the three months ended September 30, 2015March 31, 2016, due to the operations acquiredoverall decreases in work as we complete work under our contracts
including completion of a vessel that we assumed in the LEEVAC transaction (see LEEVAC Transaction above), which contributed $16.8 million in revenue forand delivered to a customer on February 6, 2017, with less new, replacement work starting during the three months ended September 30, 2016.
Gross profit decreased $60,000 for the three months ended September 30, 2016period as compared to the three months ended September 30, 2015March 31, 2016. The decrease in new, replacement work is due to tighter marginsdepressed oil and gas prices and the corresponding reduction in customer demand for shipbuilding and repair services supporting the oil and gas industry.
Gross profit (loss) - Gross loss from our Shipyards division was $1.7 million for the three months ended March 31, 2017, compared to a gross profit of $2.4 million for the three months ended March 31, 2016. The decrease was due to:
continued cost overruns on new work and inefficiencies incurred on the contracts acquiredthat were assigned to us in the LEEVAC transaction transaction; holding costs related to a completed vessel that was delivered on February 6, 2017; however, was refused by our customer alleging certain technical deficiencies (see also Note 9 of the Notes to Consolidated Financial Statements); and overall decreases in work under other various contracts as discussed above; partially offset by savings realized from cost cutting measures implemented by management during 2016.
General and administrative expenses - General and administrative expenses increased $1.7for our Shipyards division decreased $332,000 for the three months ended March 31, 2017, compared to the three months ended March 31, 2016, primarily due to cost cutting measures implemented by management during 2016 as well as lower bonuses accrued during 2017 as a result of a combination of a smaller workforce and our consolidated gross loss.
Asset Impairment - During three months ended March 31, 2017, we recorded an impairment of $389 related to our assets held for sale at our Prospect Shipyard. See also Note 2 of the Notes to Consolidated Financial statements.
| | | | | | | | | | | | | | | | Services | | Three Months Ended March 31, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | 10,712 |
| | $ | 26,559 |
| | $ | (15,847 | ) | | (59.7)% | Gross profit | | 33 |
| | 3,376 |
| | (3,343 | ) | | (99.0)% | Gross profit (loss) percentage | | 0.3 | % | | 12.7 | % | | | | (12.4)% | General and administrative expenses | | 666 |
| | 726 |
| | (60 | ) | | (8.3)% | Operating income (loss) | | (633 | ) | | 2,650 |
| | | | |
Revenue - Revenue from our Services division decreased $15.8 million for the three months ended September 30, 2016March 31, 2017, compared to the three months ended September 30, 2015 primarilyMarch 31, 2016, due to the expenses associated with the operations acquired in the LEEVAC transaction and bonus expense. | | | | | | | | | | | | | | | | | Services | | Three Months Ended September 30, | | Increase or (Decrease) | | | 2016 | | 2015 | | Amount | | Percent | Revenue | | $ | 20,928 |
| | $ | 23,487 |
| | $ | (2,559 | ) | | (10.9 | )% | Gross profit | | $ | 2,850 |
| | $ | 4,235 |
| | $ | (1,385 | ) | | (32.7 | )% | Gross profit percentage | | 13.6 | % | | 18.0 | % | | | | (4.4 | )% | General and administrative expenses | | $ | 1,540 |
| | $ | 994 |
| | $ | 546 |
| | 54.9 | % | Operating income | | $ | 1,310 |
| | $ | 3,241 |
| | | | | | | | | | | | | |
Revenue decreased $2.6 million for the three months ended September 30, 2016 compared to the three months ended September 30, 2015 due to the winding down of two large offshore service projects from the first half of 2016 and the downturn in the oil and gas industry.
Gross profit decreased $1.4 million for the three months ended September 30, 2016 compared to the three months ended September 30, 2015 due to decreases in revenues and tighter margins on new work.
General and administrative expenses increased $546,000 for the three months ended September 30, 2016 compared to the three months ended September 30, 2015 due to bonuses and additional administrative support added during the first half of 2016.
Nine Months Ended September 30, 2016 Compared to Nine Months Ended September 30, 2015 (in thousands, except for percentages):
Consolidated
| | | | | | | | | | | | | | | | Nine Months Ended September 30, | | Increase or (Decrease) | | 2016 | | 2015 | | Amount | Percent | Revenue | $ | 230,864 |
| | $ | 251,102 |
| | $ | (20,238 | ) | (8.1 | )% | Cost of revenue | 205,839 |
| | 248,686 |
| | (42,847 | ) | (17.2 | )% | Gross profit | 25,025 |
| | 2,416 |
| | 22,609 |
| 935.8 | % | Gross profit percentage | 10.8% | | 1.0% | | | | General and administrative expenses | 14,633 |
| | 11,817 |
| | 2,816 |
| 23.8 | % | Asset impairment | — |
| | 6,600 |
| | (6,600 | ) | n/a |
| Operating income (loss) | 10,392 |
| | (16,001 | ) | | 26,393 |
| 164.9 | % | Other income (expense): | | | | | | | Interest expense | (248 | ) | | (126 | ) | | (122 | ) |
|
| Interest income | 20 |
| | 21 |
| | (1 | ) |
|
| Other income, net | 1,039 |
| | 20 |
| | 1,019 |
|
|
| | 811 |
| | (85 | ) | | 896 |
| 1,054.1 | % | Net income (loss) before income taxes | 11,203 |
| | (16,086 | ) | | 27,289 |
| 169.6 | % | Income taxes | 4,134 |
| | (5,389 | ) | | 9,523 |
| 176.7 | % | Net income (loss) | $ | 7,069 |
| | $ | (10,697 | ) | | $ | 17,766 |
| 166.1 | % |
Revenue - Our revenue for the nine months ended September 30, 2016 and 2015 was $230.9 million and $251.1 million, respectively, representing a decrease of 8.1%. The decrease is primarily attributable to an overall decrease in work experienced in our fabrication yards primarily as a result of depressed oil and gas prices and the corresponding reduction in customer demand for offshore projects inoil and gas related service projects.
Gross profit - Gross profit from our Fabrication segment. During 2015, we completed the fabrication of a 1,200 foot jacket, piles and an approximate 450 short ton topside with no similar project in 2016. Our decrease in revenue earned from offshore fabrication work was partially offset by the assets and operations acquired in the LEEVAC transaction (see LEEVAC Transaction above), which contributed $55.9Services division decreased $3.3 million in revenue for the ninethree months ended September 30, 2016. Pass-through costs as a percentage of revenue were 35.0% and 43.2% forMarch 31, 2017, compared to the ninethree months ended September 30,March 31, 2016, and 2015, respectively. Pass-through costs, as described in Note 3 of the Notes to Consolidated Financial Statements, are included in revenue but have no impact on the gross profit recognized on a project for a particular period. Gross profit - Our gross profit for the nine months ended September 30, 2016 and 2015 was $25.0 million (10.8% of revenue) and $2.4 million (1.0% of revenue), respectively. Our gross profit improved compared to 2015 primarily due to the LEEVAC transactiondecreased revenue discussed above and contract losses of $14.3 million that were recordedtighter margins on new work performed during the third quarter of 2015 resulting from our inability to recover certain costs related to a deck and jacket for one of our deepwater projects. We had no such loss during the third quarter of 2016 and implemented cost cutting measures in response to decreases in work at our fabrication facilities.2017.
General and administrative expenses - Our general and administrative expenses were $14.6 million for the nine months ended September 30, 2016, compared to $11.8 million for the nine months ended September 30, 2015. The increase in generalGeneral and administrative expenses for our Services division decreased $60,000 for the ninethree months ended September 30,March 31, 2017, compared to the three months ended March 31, 2016, was primarily attributable to:
an increase of stock-based compensation expense of $589,000,
due to lower bonuses and the LEEVAC transaction; partially offset by
cost cutting efforts implementedaccrued during 2017, as a result of a combination of a smaller workforce and the downturnreduction in the oil and gas industry.gross profit.
Asset impairment
| | | | | | | | | | | | | | | | Corporate | | Three Months Ended March 31, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | — |
| | $ | — |
| | $ | — |
| | —% | Gross loss | | (260 | ) | | (136 | ) | | (124 | ) | | (91.2)% | Gross profit (loss) percentage | | n/a |
| | n/a |
| | | |
| General and administrative expenses | | 1,479 |
| | 1,668 |
| | (189 | ) | | (11.3)% | Operating loss | | (1,739 | ) | | (1,804 | ) | | 65 |
| | |
Gross loss - During the nine months ended September 30, 2015, we recorded an asset impairment charge of $6.6 million related to a partially constructed topside, related valves, piping and equipment that we acquiredGross loss from a customer following its default under a contract in 2012. Due to the sustained downturn in the energy sector, our ability to effectively
market these assets was significantly limited, and we reassessed the asset’s net realizable value based on the estimated scrap value of the assets. We had no such impairments during the nine months ended September 30, 2016.
Interest expense, net - The Company had net interest expense of $228,000 for the nine months ended September 30, 2016 compared to net interest expense of $105,000 for the nine months ended September 30, 2015. The increase in net interest expense for the nine months ended September 30, 2016 was primarily driven by an increase in the cost of unused credit facility fees under our credit agreement.
Other income, net - Other incomeCorporate division increased $1.0 million for the nine months ended September 30, 2016. The increase was primarily due to gainsa restructuring of $924,000 relatedour corporate division with additional personnel allocated to the sale of three cranes at our Texas facilitycorporate division during 2017 as well as sales of smaller assets bydiscussed above.
General and administrative expenses - General and administrative expenses for our Shipyards division. Income taxes - Our effective income tax rate for the nine months ended September 30, 2016 was 36.9%, compared to an effective tax rate of 34.0% for the comparable period during 2015. The increase in our effective rate isCorporate division decreased primarily due to the effect of state income taxes from income generated within Louisiana with no offsetting tax benefit from losses generated within Texas.
Operating Segments
| | | | | | | | | | | | | | | | | Fabrication | | Nine Months Ended September 30, | | Increase or (Decrease) | | | 2016 | | 2015 | | Amount | | Percent | Revenue | | $ | 70,436 |
| | $ | 137,431 |
| | $ | (66,995 | ) | | (48.7 | )% | Gross profit (loss) | | $ | 4,418 |
| | $ | (14,055 | ) | | $ | 18,473 |
| | 131.4 | % | Gross profit (loss) percentage | | 6.3 | % | | (10.2 | )% | | | | 16.5 | % | General and administrative expenses | | $ | 4,479 |
| | $ | 7,026 |
| | $ | (2,547 | ) | | (36.3 | )% | Asset impairment | | $ | — |
| | $ | 6,600 |
| | $ | (6,600 | ) | | n/a |
| Operating income (loss) | | $ | (61 | ) | | $ | (27,681 | ) | |
| |
|
Revenue decreased $67.0 million for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015. The decrease is attributable to an overall decrease in work experienced in our fabrication yardsbonuses as a result of depressed oil and gas prices and the corresponding reduction in customer demand for offshore fabrication projects. During 2015, we completed the fabrication of a 1,200 foot jacket, piles and an approximate 450 short ton topside with no similar project in 2016.
Gross profit increased $18.5 million to $4.4 million for the nine months ended September 30, 2016 compared to aour consolidated gross loss, of $14.1 million for the nine months ended September 30, 2015. The increase is due to contract losses of $14.3 million that were recorded during the third quarter of 2015 resulting from our inability to recover certain costs related to a deck and jacket for one of our deepwater projects. We had no such loss during the third quarter of 2016 and implemented cost cutting measures in response to decreases in work at our fabrication facilities.
General and administrative expenses decreased $2.5 million for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015 due to cost cutting measures implemented during 2016 in response to decreases in work at our fabrication facilities.
Asset impairment - During the nine months ended September 30, 2015, we recorded an asset impairment charge of $6.6 million related to a partially constructed topside, related valves, piping and equipment that we acquired from a customer following its default under a contract in 2012. Due to the sustained downturn in the energy sector, our ability to effectively market these assets was significantly limited, and we reassessed the asset’s net realizable value based on the estimated scrap value of the assets. We had no such impairments during the nine months ended September 30, 2016.
| | | | | | | | | | | | | | | | | Shipyards | | Nine Months Ended September 30, | | Increase or (Decrease) | | | 2016 | | 2015 | | Amount | | Percent | Revenue (1) | | $ | 86,553 |
| | $ | 47,177 |
| | $ | 39,376 |
| | 83.5 | % | Gross profit (1) | | $ | 9,595 |
| | $ | 6,022 |
| | $ | 3,573 |
| | 59.3 | % | Gross profit percentage | | 11.1 | % | | 12.8 | % | | | | (1.7 | )% | General and administrative expenses | | $ | 5,875 |
| | $ | 1,243 |
| | $ | 4,632 |
| | 372.6 | % | Operating income (1) | | $ | 3,720 |
| | $ | 4,779 |
| | | | |
____________
| | (1) | Revenue for the nine months ended September 30, 2016, includes $4.1 million of non-cash amortization of deferred revenue related to the values assigned to the contracts acquired in the LEEVAC transaction. |
Revenue increased $39.4 million for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015 due to the assets and operations acquired in the LEEVAC transaction (see LEEVAC Transaction above), which contributed $55.9 million in revenue for the nine months ended September 30, 2016. The increase was partially offset by decreases in work dueadditional personnel allocated to the downturn in the oil and gas industry.
Gross profit increased $3.6 million for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015 due to the LEEVAC transaction as well as increases in profitability estimates for other jobs in progress due to cost cutting measures.
General and administrative expenses increased $4.6 million for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015 due to the expenses associated with the operations acquired in the LEEVAC transaction and bonuses.
| | | | | | | | | | | | | | | | | Services | | Nine Months Ended September 30, | | Increase or (Decrease) | | | 2016 | | 2015 | | Amount | | Percent | Revenue | | $ | 76,179 |
| | $ | 70,987 |
| | $ | 5,192 |
| | 7.3 | % | Gross profit | | $ | 11,012 |
| | $ | 10,449 |
| | $ | 563 |
| | 5.4 | % | Gross profit percentage | | 14.5 | % | | 14.7 | % | | | | (0.2 | )% | General and administrative expenses | | $ | 4,119 |
| | $ | 3,008 |
| | $ | 1,111 |
| | 36.9 | % | Operating income | | $ | 6,893 |
| | $ | 7,441 |
| | | | | | | | | | | | | |
Revenue increased $5.2 million for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015 due to increases in the scope of two large offshore service projectsour corporate division during the first half of 2016.
Gross profit increased $563,000 for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015 due to increases in revenues and improved absorption of fixed costs resulting from an increase in labor hours worked.
General and administrative expenses increased $1.1 million for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015 due to additional administrative support costs related to increases in activity and bonuses.2017.
Liquidity and Capital Resources Historically, we have funded our business activities through cash generated from operations. At September 30, 2016March 31, 2017, we had no amounts outstanding under our credit facility, $4.5$4.6 million in outstanding letters of credit, and cash and cash equivalents totaling $55.6$34.7 million, compared to $34.8$51.2 million at December 31, 2015.2016. Working capital was $79.8$182.9 million and our ratio of current assets to current liabilities was 2.837.56 to 1 at September 30,March 31, 2017, compared to $78.0 million and 3.2 to 1, respectively, at December 31, 2016. Working capital at March 31, 2017, includes $110.5 million related to assets held for sale, primarily related to our South Texas facilities. Our primary sourceuse of cash during the three months ended March 31, 2017, was due to: Operating losses for the nine months ended September 30, 2016, wasquarter exclusive of non-cash depreciation, amortization, impairment and stock compensation expense of approximately $3.7 million, Payment of year-end bonuses related to 2016, Progress on liabilities from assumed contracts in the collection of accounts receivable under various customer contracts and sales of three cranes atLEEVAC transaction.While our Texas facility for $5.8 million. At September 30, 2016, our contracts receivable balance was $26.6 million of which we have subsequently collected $12.1 million through October 31, 2016. On January 1, 2016, we acquired substantially all of the assets and assumed certain specified liabilities of LEEVAC. The purchase price for the acquisition of the LEEVAC assets during 2016 was $20.0 million, subject to a working capital adjustment whereby we received a dollar-for-
dollar reductionnet $3.0 million in cash from the seller for the assumption of certain net liabilities of LEEVAC at closing and settlement payments from sureties on certain ongoing fabricationshipbuilding projects of $23.0 million that were assigned to us in the transaction. After taking into accountWe have significantly progressed these adjustments, wecontracts which in turn, has resulted in utilization of the working capital and settlement payments received approximately $1.6during 2016.
Fewer receipts from accounts receivable, primarily $4.6 million in cash at closing. Duringfrom one customer that refused delivery of a vessel on February 6, 2017, and has not paid. We have initiated arbitration proceedings during the quarter we presentedto enforce our working capital true-uprights under our construction contract, and Build-up of costs for contracts in progress related to a customer in our Shipyards division with significant milestone payments occurring in the seller, which resulted in an additional $1.5 million due to us. Additionally, we hired 380 employees upon acquisitionlater stages of the facilities representing substantially all of the former LEEVAC employees. Strategically, the transaction expands our marine fabrication and repair and maintenance presenceprojects which are expected to occur beginning in the Gulf South market. third quarter of 2017 through the first quarter of 2018. At the date of transaction, we acquired approximately $121.2March 31, 2017, our contracts receivable balance was $21.1 million of new build construction backlog inclusive of approximately $9.2which we have subsequently collected $4.1 million of purchase price fair value allocated to four, new build construction projects to be delivered in 2017 and 2018 for two customers. through April 21, 2017.
As of September 30, 2016,March 31, 2017, we had a credit agreement with Whitney Bank and JPMorgan Chase Bank N.A. that provides for an $80.0a $40.0 million revolving credit facility maturing January 2, 2017.November 29, 2018. The credit agreement allows the Company to use up to the full amount of the available borrowing base for letters of credit and up to $20.0 million for general corporate purposes. Our obligations under the credit agreement are secured by substantially all of our assets other(other than real property located in the state of Louisiana. On February 29, 2016, we entered into an amendment to our credit agreement. The amendment (i) extends the term of the Credit Facility from February 29, 2016 to January 2, 2017; (ii) increases the commitment feeestate). Commitment fees on undrawn amounts from 0.25% to 0.50%are 0.5% per annum; (iii) increases theannum and letter of credit fee,fees, subject to certain limited exceptions, to 2.00%are 2.0% per annum on undrawn stated amounts under letters of credit issued by the lenders; and (iv) limits the maximum amount of loans outstanding at any time for general corporate purposes to $20.0 million.lenders. Amounts borrowed under our the credit agreement bear interest, at our option, at either the prime lending rate established by JPMorgan Chase Bank, N.A. or LIBOR plus 2.0 percent. Under the amendment ourOur financial covenants beginning with the quarter endingat March 31, 20162017, are as follows:
| | (i) | minimum net worth requirement of not less than $250.0255.0 million plus |
| | a) | 50% of net income earned in each quarter beginning MarchDecember 31, 2016, and |
| | b) | 100% of proceeds from any issuance of common stock; |
| | c) | less the amount of any impairment on certain assets owned by Gulf Marine Fabricators, L.P. (our South Texas assets held for sale) up to $30.0 million; |
| | (ii) | debt to EBITDA ratio not greater than 3.02.5 to 1.0; and |
| | (iii) | interest coverage ratio not less than 2.0 to 1.0. |
At September 30, 2016,March 31, 2017, no amounts were outstanding under the credit facility, and we had outstanding letters of credit totaling $4.5$4.6 million, reducing the unused portion of our credit facility for additional letters of credit and borrowings to $75.5$35.4 million. As of September 30, 2016,March 31, 2017, we were in compliance with all covenants. During the fourth quarter, we expect
We are currently in discussions with one of our financial institutions to enter into a two-year, $40.0 million amendednew revolving line of credit with comparable availability, but with less restrictive financial covenants and restatedreduced fees as compared to our current revolving credit facility. We expect to close on this new revolving credit facility withand terminate our current lenders that will be secured by substantially all of our assets (other than real property). We anticipate the amendedexisting revolving credit facility will allow us to use the full $40.0 million borrowing base for both letters of credit and general corporate purposes. Given the historically low levels of borrowings under our current facility and our cash position, we requested a reduction in the amountsecond quarter of available credit under our revolver from $80.0 million to $40.0 million to decrease the commitment fees payable to our lenders for the undrawn portion of the facility.2017.
Our primary liquidity requirements are for the costs associated with servicingfabrication projects, and capital expenditures inand payment of dividends to our Fabrication and Shipyards segments. In particular, as further discussed in Note 2 in our Notes to Consolidated Financial Statements, in connection with the LEEVAC transaction, we received at closing a net cash amount that included consideration for billings in excess of costs and estimated earnings on uncompleted contracts and other payments from sureties representing pre-payment on the partially constructed vessels totaling $21.9 million as adjusted for the working capital true-up. Consequently, there will be required cash outflows for costs associated with the prepaid amounts without corresponding milestone billings.shareholders. We anticipate capital expenditures for the remainder of 20162017 to be approximately $1.8range between $6.0 million to $8.0 million primarily for the following: extension of one of our dry docks, and
improvements to our newly acquired facilities.Jennings and Lake Charles leased shipyards, improvement to the bulkhead at our Houma facility, and
computer system upgrades.
On October 21, 2016, a customer of our Shipyards’ segmentShipyards division announced it had received limited waivers from its lenders and noteholders through November 11, 2016 with respect towas in noncompliance with certain financial covenants included in the customer’s debt agreements. TheThis customer also announcedstated it had received limited waivers from its lenders and noteholders, but its debt agreements will require further negotiation and amendment. InOn April 19, 2017, the eventcustomer stated it had allowed the waivers to expire and remains in default of its covenants.
This same customer has rejected delivery of the vessel that we tendered for delivery on February 6, 2017, alleging certain technical deficiencies exist with respect to the vessel and is seeking recovery of all purchase price amounts previously paid by the customer under the contract. We are also building a second vessel for this customer that is scheduled for delivery during the second quarter of 2017. We disagree with our customer is unsuccessful inconcerning these efforts,alleged technical deficiencies and have put the customer will consider other options including a possible reorganizationin default under Chapter 11the terms of the Federal bankruptcy laws. At September 30, 2016, no contracts receivable werefor both vessels. As of March 31, 2017, approximately $4.6 million remained due and outstanding from our customer for the first vessel. The balance due to us upon delivery for a second vessel which is expected in May of this year, is approximately $4.9 million. On March 10, 2017, we gave notice for arbitration with our customer in an effort to resolve this matter. We intend to take all legal action as may be necessary to protect our rights under the contracts and deferred revenue exceeded our costs and estimated earnings in excess of billings on this contract. recover the remaining balances owed to us.
We continue to monitor our work performed in relation to our customer’s status and its ability to pay under the terms of its contract. Based on our evaluation to date,these contracts. Because these vessels have been completed or are substantially complete, we do not believe that they have significant fair value, and that we would be able to fully recover any loss on this contract is probable or estimable at this time.amounts due to us.
In February 2016,anticipation of the proceeds to be received from the sale of our BoardSouth Texas assets, we have engaged in a strategic financial analysis project with advisors to determine the appropriate use of Directors approvedproceeds from this transaction. We will be evaluating a decrease inmix of options including tactical capital improvement projects, strategic growth investment opportunities that support our quarterly dividend to $0.01 in an effort to conserve cash. business plan, stock buy-backs and/or dividends and working capital reinvestment.
On October 27, 2016,April 26, 2017, our Board of Directors declared a dividend of $0.01 per share on our shares of common stock outstanding, payable November 23, 2016May 25, 2017, to shareholders of record on November 10, 2016.May 11, 2017.
We believe our cash and cash equivalents generated by our operating activities and funds available under our credit facilityproceeds to be received from future assets sales will be sufficient to fund our capital expenditures issue future letters of credit and meet our working capital needs for both the near and longer term to continue our operations, satisfy our contractual operations and pay dividends to our shareholders. Additionally, we expect to close on a new revolving line of credit during the second quarter of 2017 as discussed above. We believe that the new facility will provide us with additional working capital flexibility to ramp up our operations quickly in times of rapid increasing demand, to continue to issue future letters of credit and to quickly take advantage of market opportunities.
Cash Flow Activities
For the ninethree months ended September 30, 2016March 31, 2017, net cash provided byused in operating activities was $19.3$15.1 million, compared to $18.7$1.6 million for the ninethree months ended September 30, 2015.March 31, 2016. The increase in cash provided byused in operations was primarily due to increased gross profitthe following:
Operating losses for the quarter in excess of non-cash depreciation, amortization, impairment and collectionsstock compensation expense of contract receivablesapproximately $3.7 million, Payment of year-end bonuses related to 2016, Progress on liabilities from assumed contracts in the LEEVAC transaction.While our purchase price for the acquisition of the LEEVAC assets during 2016 somewhat offset bywas $20.0 million, we received a net $3.0 million in cash from the seller for the assumption of certain net liabilities and settlement payments required for trade payableson ongoing shipbuilding projects of $23.0 million that were assigned to us in the transaction. We have significantly progressed these contracts which in turn, has resulted in utilization of the working capital and settlement payments received during 2016. Fewer receipts from accounts receivable, primarily $4.6 million from one customer that refused delivery of a vessel on February 6, 2017, and has not paid. We have initiated arbitration proceedings during the ninequarter to enforce our rights under our construction contract, and
Build-up of costs for contracts in progress related to a customer in our Shipyards division with significant milestone payments occurring in the later stages of the projects which are expected to occur beginning in the third quarter of 2017 through the first quarter of 2018.
Net cash used in investing activities for the three months ended September 30, 2016 asMarch 31, 2017, was $391,000, compared to 2015. Net cash provided by investing activities for the nine months ended September 30, 2016 was $2.0 million, compared to cash used in investing activities of $5.0$6.2 million for the ninethree months ended September 30, 2015.March 31, 2016. The increasechange in cash used in/provided by investing activities is primarily due to cash received from the sale of three cranes at our Texas facility for $5.8$5.4 million and $1.6 million of cash acquired in the LEEVAC transaction.
Net cash used in financing activities for the ninethree months ended September 30,March 31, 2017 and 2016, was $1.0 million and 2015 was $440,000 and $4.4 million,$291,000, respectively. The decreaseincrease in cash used in financing activities is due to the reduction in the cash dividend in 2016.payments made to taxing authorities on behalf of employees' for their vesting of common stock.
Contractual Obligations There have been no material changes from the information included in our Annual Report on Form 10-K for the year ended December 31, 2015.2016. For more information on our contractual obligations, refer to Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2015.2016. Off-Balance Sheet Arrangements There have been no material changes from the information included in our Annual Report on Form 10-K for the year ended December 31, 2015.2016. Item 3. Quantitative and Qualitative Disclosures About Market Risk. There have been no material changes in the Company’s market risks during the quarter ended September 30, 2016.March 31, 2017. For more information on market risk, refer to Part II, Item 7A. of our Annual Report on Form 10-K for the year ended December 31, 2015.2016. Item 4. Controls and Procedures. The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and that such information is communicated to the Company’s management, including its Chief Executive Officer and Interim Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. The Company’s management, with the participation of the Company’s Chief Executive Officer and Interim Chief Financial Officer, hashave evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based on this evaluation, our Chief Executive Officer and Interim Chief Financial Officer hashave concluded that the design and operation of our disclosure controls and procedures were effective as of the end of the period covered by this report. There have been no changes during the fiscal quarter ended September 30, 2016March 31, 2017, in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. PART II. OTHER INFORMATION Item 1. Legal Proceedings. The Company is subject to various routine legal proceedings in the normal conduct of its business primarily involving commercial claims, workers’ compensation claims, and claims for personal injury under general maritime laws of the United
States and the Jones Act. While the outcome of these lawsuits, legal proceedings and claims cannot be predicted with certainty, management believes that the outcome of any such proceedings, even if determined adversely, would not have a material adverse effect on the financial position, results of operations or cash flows of the Company. Item 1A. Risk Factors. There have been no material changes from the information included in Item 1A “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2015.2016. | | | | | 2.1Exhibit Number | | Asset Purchase Agreement, dated December 23, 2015 by and among Gulf Island Shipyards, LLC, LEEVAC Shipyards, LLC and certain related affiliates, incorporated by reference toDescription of Exhibit 2.1 of the Company's Form 8-K filed on December 23, 2015. | | | 3.1 | | Composite Articles of Incorporation of the Company incorporated by reference to Exhibit 3.1 of the Company’s Form 10-Q filed April 23, 2009. | 3.2 | | Amended and Restated Bylaws of the Company, as amended and restated through April 26, 2012, incorporated by reference to Exhibit 3.1 of the Company’s Form 8-K filed on April 30, 2012. | 4.1 | | Specimen Common Stock Certificate, incorporated by reference to the Company’s Form S-1/A filed March 19, 1997 (Registration No. 333-21863).November 4, 2016. | 10.1 | | Change of Control Agreement, dated March 1, 2017, between the Company and David S. Schorlemer, incorporated by reference to Exhibit 10.15 of the Company's Form of Long-Term Performance-Based Cash Award Agreement.10-K for the year ended December 31, 2016 filed on March 2, 2017. | 3131.1 | | CEO and Certifications pursuant to Rule 13a-14 under the Securities Exchange Act of 1934. | 31.2 | | CFO CertificationCertifications pursuant to Rule 13a-14 under the Securities Exchange Act of 1934. | 32 | | Section 906 Certification furnished pursuant to 18 U.S.C. Section 1350. | 99.1 | | Press release issued by | 101 | | Attached as Exhibit 101 to this report are the following items formatted in XBRL (Extensible Business Reporting Language): | | | (i) | Consolidated Balance Sheets, | | | (ii) | Consolidated Statements of Operations, | | | (iii) | Consolidated Statement of Changes in Shareholders’ Equity, | | | (iv) | Consolidated Statements of Cash Flows and | | | (v) | Notes to Consolidated Financial Statements. |
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. | | | GULF ISLAND FABRICATION, INC. | | BY: | /s/ David S. Schorlemer | | David S. Schorlemer | | Executive Vice President, Chief Financial Officer, and Treasurer (Principal Financial and Accounting Officer) |
Date: May 2, 2017
GULF ISLAND FABRICATION, INC. EXHIBIT INDEX | | | | | Exhibit Number | | Description of Exhibit | | | 3.1 | | Composite Articles of Incorporation of the Company on October 27, 2016, incorporated by reference to Exhibit 99.13.1 of the Company’s Form 10-Q filed April 23, 2009. | 3.2 | | Amended and Restated Bylaws of the Company, incorporated by reference to Exhibit 3.1 of the Company’s Form 8-K filed November 4, 2016. | 10.1 | | Change of Control Agreement, dated March 1, 2017, between the Company and David S. Schorlemer, incorporated by reference to Exhibit 10.15 of the Company's Form 10-K for the year ended December 31, 2016 filed on October 27, 2016.March 2, 2017. | 31.1 | | CEO Certifications pursuant to Rule 13a-14 under the Securities Exchange Act of 1934. | 31.2 | | CFO Certifications pursuant to Rule 13a-14 under the Securities Exchange Act of 1934. | 32 | | Section 906 Certification furnished pursuant to 18 U.S.C. Section 1350. | | | | 101 | | Attached as Exhibit 101 to this report are the following items formatted in XBRL (Extensible Business Reporting Language): | | | | | | (i) | Consolidated Balance Sheets, | | | (ii) | Consolidated Statements of Operations, | | | (iii) | Consolidated Statement of Changes in Shareholders’ Equity, | | | (iv) | Consolidated Statements of Cash Flows and | | | (v) | Notes to Consolidated Financial Statements. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | GULF ISLAND FABRICATION, INC. | | BY: | /s/ Kirk J. Meche | | Kirk J. Meche | | President, Chief Executive Officer, Director and Interim Chief Financial Officer, Treasurer and Secretary (Principal Executive Officer and Interim Principal Financial and Accounting Officer) |
Date: November 2, 2016
GULF ISLAND FABRICATION, INC.
EXHIBIT INDEX
| | | | | Exhibit
Number
| | Description of Exhibit | | | 2.1 | | Asset Purchase Agreement, dated December 23, 2015 by and among Gulf Island Shipyards, LLC, LEEVAC Shipyards, LLC and certain related affiliates, incorporated by reference to Exhibit 2.1 of the Company's Form 8-K filed on December 23, 2015.
| 3.1 | | Composite Articles of Incorporation of the Company, incorporated by reference to Exhibit 3.1 of the Company’s Form 10-Q filed April 23, 2009. | 3.2 | | Bylaws of the Company, as amended and restated through April 26, 2012, incorporated by reference to Exhibit 3.1 of the Company’s Form 8-K filed on April 30, 2012. | 4.1 | | Specimen Common Stock Certificate, incorporated by reference to the Company’s Form S-1/A filed March 19, 1997 (Registration No. 333-21863). | 10.1 | | Form of Long-Term Performance-Based Cash Award Agreement. | 31 | | CEO and CFO Certifications pursuant to Rule 13a-14 under the Securities Exchange Act of 1934. | 32 | | Section 906 Certification furnished pursuant to 18 U.S.C. Section 1350. | 99.1 | | Press release issued by the Company on October 27, 2016, incorporated by reference to Exhibit 99.1 of the Company’s Form 8-K filed on October 27, 2016. | 101 | | Attached as Exhibit 101 to this report are the following items formatted in XBRL (Extensible Business Reporting Language): | | | | | | (i) | Consolidated Balance Sheets, | | | (ii) | Consolidated Statements of Operations, | | | (iii) | Consolidated Statement of Changes in Shareholders’ Equity, | | | (iv) | Consolidated Statements of Cash Flows and | | | (v) | Notes to Consolidated Financial Statements. |
s | Percentage | | ___________ | | 1. | Backlog as of September 30, 2016March 31, 2017, includes commitments received through October 27, 2016.April 26, 2017. We exclude suspended projects from contract backlog thatwhen they are expected to be suspended more than twelve months because resumption of work and timing of revenue recognition for these projects are difficult to predict. Our backlog also includes the new build construction that was acquired in the LEEVAC transaction on January 1, 2016. Included in our backlog at September 30, 2016, is $5.1 million of non-cash revenue related to purchase price fair value of contracts acquired in the LEEVAC transaction and included in deferred revenue in our consolidated Balance sheet at September 30, 2016. |
| | 2. | At September 30, 2016,March 31, 2017, projects for our threetwo largest customers in terms of revenue backlog consisted of: |
| | (i) | two large petroleum supply vessels for one customer in our Shipyards segment, which commenced in the second quarter of 2013 and will be completed during the first and second quarter of 2017; |
| | (ii) | two large multi-purpose service vessels for one customer in our Shipyards segment, which commenced in the first quarter of 2014 and will be completed during the first and second quarterquarters of 2018; and |
(iii) the fabrication of four modules associated with a U.S. ethane cracker project.
| | (ii) | the fabrication of four modules associated with a U.S. ethane cracker project. |
| | 3. | The timing of recognition of the revenue represented in our backlog is based on management’s current estimates to complete the projects. Certain factors and circumstances could cause changes in the amounts ultimately recognized and the timing of the recognition of revenue from our backlog. |
Depending on the size of the project, the termination, postponement, or reduction in scope of any one project could significantly reduce our backlog and could have a material adverse effect on revenue, net income and cash flow. As of September 30, 2016,March 31, 2017, we had 1,336922 employees and 163133 contract employees inclusive of 380 employees hired in the LEEVAC transaction, compared to 1,2551,178 employees and 7192 contract employees as of December 31, 2015. 2016.
Labor hours worked were 2.3 million479,000 during the ninethree months ended September 30, 2016,March 31, 2017, compared to 2.1 million695,000 for the ninethree months ended September 30, 2015.March 31, 2016. The overall increasedecrease in labor hours worked for the three months ended September 30, 2016March 31, 2017, was due to 636,000 labor hours worked from projects acquired in the LEEVAC transaction partially offset by a reduction in fabrication activity due primarily to the downturn in the oil and gas industry.
Results of Operations
Our results of operations are affected primarily by our ability to effectively manage contracts to a successful completion along with producing maximum efficiencies as it relates to manhours.
Three Months Ended September 30, 2016 Compared to Three Months Ended September 30, 2015 (in thousands, except for percentages):
Consolidated
| | | | | | | | | | | | | | | | Three Months Ended September 30, | | Increase or (Decrease) | | 2016 | | 2015 | | Amount | Percent | Revenue | $ | 65,384 |
| | $ | 67,531 |
| | $ | (2,147 | ) | (3.2 | )% | Cost of revenue | 60,125 |
| | 75,368 |
| | (15,243 | ) | (20.2 | )% | Gross profit (loss) | 5,259 |
| | (7,837 | ) | | 13,096 |
| 167.1 | % | Gross profit percentage | 8.0% | | (11.6)% | | | | General and administrative expenses | 5,086 |
| | 3,798 |
| | 1,288 |
| 33.9 | % | Asset impairment | — |
| | 6,600 |
| | (6,600 | ) | n/a |
| Operating income | 173 |
| | (18,235 | ) | | 18,408 |
| 100.9 | % | Other income (expense): | | | | | | | Interest expense | (110 | ) | | (39 | ) | | (71 | ) |
|
| Interest income | 12 |
| | 8 |
| | 4 |
|
|
| Other income, net | 599 |
| | — |
| | 599 |
|
|
| | 501 |
| | (31 | ) | | 532 |
| 1,716.1 | % | Net income (loss) before income taxes | 674 |
| | (18,266 | ) | | 18,940 |
| 103.7 | % | Income taxes | 133 |
| | (6,129 | ) | | 6,262 |
| 102.2 | % | Net income (loss) | $ | 541 |
| | $ | (12,137 | ) | | $ | 12,678 |
| 104.5 | % |
Revenue - Our revenue for the three months ended September 30, 2016 and 2015 was $65.4 million and $67.5 million, respectively, representing a decrease of 3.2%. The decrease is primarily attributable to an overall decrease in work experienced in our fabrication yardsfacilities as a result of depressed oil and gas prices and the corresponding reduction in customer demand within all of our operating divisions.
Results of Operations Three Months Ended March 31, 2017 Compared to Three Months Ended March 31, 2016 (in thousands, except for offshore projects in our Fabrication segment. During 2015, we completed the fabrication of a 1,200 foot jacket, piles and an approximate 450 short ton topside with no similar project in 2016.percentages): Consolidated | | | | | | | | | | | | | | | Three Months Ended March 31, | | Increase or (Decrease) | | 2017 | | 2016 | | Amount | Percent | Revenue | $ | 37,993 |
| | $ | 83,979 |
| | $ | (45,986 | ) | (54.8)% | Cost of revenue | 42,890 |
| | 78,278 |
| | (35,388 | ) | (45.2)% | Gross profit (loss) | (4,897 | ) | | 5,701 |
| | (10,598 | ) | 185.9% | Gross profit (loss) percentage | (12.9)% | | 6.8% | | | | General and administrative expenses | 3,930 |
| | 4,485 |
| | (555 | ) | (12.4)% | Asset impairment | 389 |
| | — |
| | 389 |
| 100.0% | Operating income (loss) | (9,216 | ) | | 1,216 |
| | (10,432 | ) | (857.9)% | Other income (expense): | | | | | | | Interest expense | (59 | ) | | (50 | ) | | (9 | ) | | Interest income | — |
| | 6 |
| | (6 | ) | | Other income, net | 9 |
| | 398 |
| | (389 | ) | | Total other income (expense) | (50 | ) | | 354 |
| | (404 | ) | (114.1)% | Net income (loss) before income taxes | (9,266 | ) | | 1,570 |
| | (10,836 | ) | (690.2)% | Income taxes | (2,812 | ) | | 581 |
| | (3,393 | ) | (584.0)% | Net income (loss) | $ | (6,454 | ) | | $ | 989 |
| | $ | (7,443 | ) | (752.6)% |
Revenue - Our decrease in revenue earned from offshore fabrication work was partially offset by the results of the assets and operations acquired in the LEEVAC transaction (see LEEVAC Transaction above), which contributed $16.8 million in revenue for the three months ended September 30, 2016.March 31, 2017 and 2016, was $38.0 million and $84.0 million, respectively, representing a decrease of 54.8%. The decrease is primarily attributable to an overall decrease in work experienced in our facilities as a result of depressed oil and gas prices and the corresponding reduction in customer demand within all of our operating divisions. Pass-through costs as a percentage of revenue were 33.8%29.4% and 45.3%40.0% for the three-months ended September 30,March 31, 2017 and 2016, and 2015, respectively. Pass-through costs, as described in Note 3 of the Notes to Consolidated Financial Statements, are included in revenue but have no impact on the gross profit recognized on a project for a particular period.
Gross profit (loss)- Our gross profit (loss)loss for the three months ended September 30, 2016 and 2015March 31, 2017, was $5.3$4.9 million (8.0% of revenue) and $(7.8) million, respectively. Ourcompared to a gross profit improved compared to third quarter of 2015$5.7 million for the three months ended March 31, 2016. The decrease was primarily due to contract losses of $14.3 million that were recorded during the third quarter of 2015 resulting from our inability to recover certain costs related to a deckdecreased revenue as discussed above and jacket for one of our deepwater projects. We had no such loss during the third quarter of 2016 and implemented cost cutting measures. This wastighter margins on current work partially offset by tighter margins within all of our segments due to a decreasedecreases in work as a result of the downturn in the oil and gas industry.costs resulting from additional cost cutting measures implemented by management.
General and administrative expenses - Our general and administrative expenses were $5.1$3.9 million for the three months ended September 30, 2016,March 31, 2017, compared to $3.8$4.5 million for the three months ended September 30, 2015.March 31, 2016. The increasedecrease in general
and administrative expenses for the three months ended September 30, 2016March 31, 2017, was primarily attributable to the operations acquired in the LEEVAC transaction and bonus expense, partially offset by cost cutting effortsmeasures implemented by management during 2016.the first part of 2016 as well as lower bonuses accrued during 2017 as a result of a combination of a smaller workforce and our consolidated gross loss.
Asset impairmentImpairment - During the three months ended September 30, 2015,March 31, 2017, we recorded an asset impairment charge of $6.6 million$389 related to a partially constructed topside, related valves, piping and equipment that we acquired from a customer following its default under a contract in 2012. Due to the sustained downturn in the energy sector, our ability to effectively market these assets was significantly limited, and we reassessed the asset’s net realizable value based on the estimated scrap valueheld for sale at our Prospect Shipyard. See also Note 2 of the assets. We had no such impairments during the three months ended September 30, 2016.Notes to Consolidated Financial statements. Interest expense,
Other income, net - The Company had net interest expense of $98,000Other income decreased $389,000 for the three months ended September 30, 2016 compared to net interest expense of $31,000 for the three months ended September 30, 2015.March 31, 2017. The increase was primarily driven by an increase in the cost of unused credit facility fees under our credit agreement. Other income, net - Other income increased $599,000 for the three months ended September 30, 2016. The increasedecrease was primarily due to gains on sales of assets from our Fabrication division.division recorded during three months ended March 31, 2016.
Income taxes - Our effective income tax rate for the three months ended September 30, 2016March 31, 2017, was 19.7%30.3%, compared to an effective tax rate of 34.0%37.0% for the comparable period during 2015.2016. The changedecrease in ourthe effective tax rate is duethe result of limitations on the deductibility of executive compensation and $210,000 in tax expense recognized during the three months ended March 31, 2017, for the tax effect of the difference between the actual tax deduction allowed upon vesting of common stock and the compensation cost recognized for financial reporting purposes resulting from the adoption of Accounting Standards Update 2016-09 as further discussed in Note 1 of the Notes to the decrease in our effective rate for the year-to-date period.Consolidated Financial Statements.
Operating Segments
As discussed in Note 8 of the Notes to Consolidated Financial Statements, management reduced its allocation of corporate administrative costs and overhead expenses to its operating divisions during the three months ended March 31, 2017, such that a significant portion of its corporate expenses are retained in its non-operating Corporate division. In addition, it has also allocated certain personnel previously included in the operating divisions to within the Corporate division. In doing so, management believes that it has created a fourth reportable segment with each of its three operating divisions and it's Corporate division each meeting the criteria of reportable segments under GAAP. During the three months ended March 31, 2016, we allocated substantially all of our corporate administrative costs and overhead expenses to our three operating divisions. We have recast our 2016 segment data below in order to conform to the current period presentation. Our results of our three operating divisions and Corporate division for the three months ended March 31, 2017 and 2016, are presented below (in thousands, except for percentages).
| | | | | | | | | | | | | | | | | Fabrication | | Three Months Ended September 30, | | Increase or (Decrease) | | | 2016 | | 2015 | | Amount | | Percent | Revenue | | $ | 22,311 |
| | $ | 32,133 |
| | $ | (9,822 | ) | | (30.6 | )% | Gross profit (loss) | | $ | 532 |
| | $ | (14,009 | ) | | $ | 14,541 |
| | 103.8 | % | Gross profit percentage | | 2.4 | % | | (43.6 | )% | | | | 46.0 | % | General and administrative expenses | | $ | 1,481 |
| | $ | 2,138 |
| | $ | (657 | ) | | (30.7 | )% | Asset impairment | | $ | — |
| | $ | 6,600 |
| | $ | (6,600 | ) | | n/a |
| Operating income (loss) | | $ | (949 | ) | | $ | (22,747 | ) | | | | |
| | | | | | | | | | | | | | | | Fabrication | | Three Months Ended March 31, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | 10,209 |
| | $ | 23,829 |
| | $ | (13,620 | ) | | (57.2)% | Gross profit (loss) | | (2,966 | ) | | 86 |
| | (3,052 | ) | | (3,548.8)% | Gross profit (loss) percentage | | (29.1 | )% | | 0.4 | % | | | | (29.5)% | General and administrative expenses | | 821 |
| | 795 |
| | 26 |
| | 3.3% | Operating income (loss) | | (3,787 | ) | | (709 | ) | | | | |
Revenue - Revenue from our Fabrication division decreased $9.8$13.6 million for the three months ended September 30, 2016March 31, 2017, compared to the three months ended September 30, 2015.March 31, 2016. The decrease is attributable to an overall decrease in work experienced in our fabrication yards as a result of depressed oil and gas prices and the corresponding reduction in customer demand for offshore fabrication projects. As discussed above, management has classified our South Texas assets as assets held for sale in response to the underutilization of our Fabrication assets.
Gross profit increased $14.5 million to $532,000(loss) - Gross loss from our Fabrication division for the three months ended September 30, 2016March 31, 2017, was $3.0 million compared to a gross lossprofit of $14.0 million$86,000 for the three months ended September 30, 2015March 31, 2016. The decrease was due to contract losseslower revenue as discussed above, payment of $14.3termination benefits as we reduce our South Texas workforce and depreciation expense of $1.9 million that were recorded during the third quarter of 2015related to our South Texas assets prior to their classification as assets held for sale. This was partially offset by decreases in costs resulting from our inability to recover certain costs related to a deck and jacket for one of our deepwater projects. We had no such loss during the third quarter of 2016 and implementedadditional cost cutting measures in response to decreases in work at our fabrication facilities.implemented by management.
General and administrative expenses - General and administrative expenses decreased $657,000for our Fabrication division increased $26,000 for the three months ended September 30, 2016March 31, 2017, compared to the three months ended September 30, 2015March 31, 2016. The increase is primarily due to cost cutting measures implemented during 2016 in responseexpenses incurred to decreases in work atmarket our fabrication facilities.South Texas assets for sale and payment of termination benefits as we reduce its workforce and complete those operations.
Asset impairment - During the three months ended September 30, 2015, we recorded an asset impairment charge of $6.6 million related to a partially constructed topside, related valves, piping and equipment that we acquired from a customer following its default under a contract in 2012. Due to the sustained downturn in the energy sector, our ability to effectively market these assets was significantly limited, and we reassessed the asset’s net realizable value based on the estimated scrap value of the assets. We had no such impairments during the three months ended September 30, 2016.
| | | | | | | | | | | | | | | | | Shipyards | | Three Months Ended September 30, | | Increase or (Decrease) | | | 2016 | | 2015 | | Amount | | Percent | Revenue (1) | | $ | 23,060 |
| | $ | 12,936 |
| | $ | 10,124 |
| | 78.3 | % | Gross profit (1) | | $ | 1,877 |
| | $ | 1,937 |
| | $ | (60 | ) | | (3.1 | )% | Gross profit percentage | | 8.1 | % | | 15.0 | % | | | | (6.9 | )% | General and administrative expenses | | $ | 2,065 |
| | $ | 392 |
| | $ | 1,673 |
| | 426.8 | % | Operating income (loss) (1) | | $ | (188 | ) | | $ | 1,545 |
| | | | |
| | | | | | | | | | | | | | | | Shipyards | | Three Months Ended March 31, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue (1) | | $ | 18,422 |
| | $ | 34,120 |
| | $ | (15,698 | ) | | (46.0)% | Gross profit (loss)(1) | | (1,704 | ) | | 2,375 |
| | (4,079 | ) | | (171.7)% | Gross profit (loss) percentage | | (9.2 | )% | | 7.0 | % | | | | (16.2)% | General and administrative expenses | | 964 |
| | 1,296 |
| | (332 | ) | | (25.6)% | Asset impairment | | 389 |
| | — |
| | 389 |
| | 100.0% | Operating income (loss) (1) | | (3,057 | ) | | 1,079 |
| | | | |
___________ | | (1) | Revenue for the three months ended September 30,March 31, 2017, and 2016, includes $1.5$1.6 million and $1.2 million of non-cash amortization of deferred revenue related to the values assigned to the contracts acquired in the LEEVAC transaction.transaction, respectively. |
Revenue increased $10.1- Revenue from our Shipyards division decreased $15.7 million for the three months ended September 30, 2016March 31, 2017, compared to the three months ended September 30, 2015March 31, 2016, due to the operations acquiredoverall decreases in work as we complete work under our contracts
including completion of a vessel that we assumed in the LEEVAC transaction (see LEEVAC Transaction above), which contributed $16.8 million in revenue forand delivered to a customer on February 6, 2017, with less new, replacement work starting during the three months ended September 30, 2016.
Gross profit decreased $60,000 for the three months ended September 30, 2016period as compared to the three months ended September 30, 2015March 31, 2016. The decrease in new, replacement work is due to tighter marginsdepressed oil and gas prices and the corresponding reduction in customer demand for shipbuilding and repair services supporting the oil and gas industry.
Gross profit (loss) - Gross loss from our Shipyards division was $1.7 million for the three months ended March 31, 2017, compared to a gross profit of $2.4 million for the three months ended March 31, 2016. The decrease was due to:
continued cost overruns on new work and inefficiencies incurred on the contracts acquiredthat were assigned to us in the LEEVAC transaction transaction; holding costs related to a completed vessel that was delivered on February 6, 2017; however, was refused by our customer alleging certain technical deficiencies (see also Note 9 of the Notes to Consolidated Financial Statements); and overall decreases in work under other various contracts as discussed above; partially offset by savings realized from cost cutting measures implemented by management during 2016.
General and administrative expenses - General and administrative expenses increased $1.7for our Shipyards division decreased $332,000 for the three months ended March 31, 2017, compared to the three months ended March 31, 2016, primarily due to cost cutting measures implemented by management during 2016 as well as lower bonuses accrued during 2017 as a result of a combination of a smaller workforce and our consolidated gross loss.
Asset Impairment - During three months ended March 31, 2017, we recorded an impairment of $389 related to our assets held for sale at our Prospect Shipyard. See also Note 2 of the Notes to Consolidated Financial statements.
| | | | | | | | | | | | | | | | Services | | Three Months Ended March 31, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | 10,712 |
| | $ | 26,559 |
| | $ | (15,847 | ) | | (59.7)% | Gross profit | | 33 |
| | 3,376 |
| | (3,343 | ) | | (99.0)% | Gross profit (loss) percentage | | 0.3 | % | | 12.7 | % | | | | (12.4)% | General and administrative expenses | | 666 |
| | 726 |
| | (60 | ) | | (8.3)% | Operating income (loss) | | (633 | ) | | 2,650 |
| | | | |
Revenue - Revenue from our Services division decreased $15.8 million for the three months ended September 30, 2016March 31, 2017, compared to the three months ended September 30, 2015 primarilyMarch 31, 2016, due to the expenses associated with the operations acquired in the LEEVAC transaction and bonus expense. | | | | | | | | | | | | | | | | | Services | | Three Months Ended September 30, | | Increase or (Decrease) | | | 2016 | | 2015 | | Amount | | Percent | Revenue | | $ | 20,928 |
| | $ | 23,487 |
| | $ | (2,559 | ) | | (10.9 | )% | Gross profit | | $ | 2,850 |
| | $ | 4,235 |
| | $ | (1,385 | ) | | (32.7 | )% | Gross profit percentage | | 13.6 | % | | 18.0 | % | | | | (4.4 | )% | General and administrative expenses | | $ | 1,540 |
| | $ | 994 |
| | $ | 546 |
| | 54.9 | % | Operating income | | $ | 1,310 |
| | $ | 3,241 |
| | | | | | | | | | | | | |
Revenue decreased $2.6 million for the three months ended September 30, 2016 compared to the three months ended September 30, 2015 due to the winding down of two large offshore service projects from the first half of 2016 and the downturn in the oil and gas industry.
Gross profit decreased $1.4 million for the three months ended September 30, 2016 compared to the three months ended September 30, 2015 due to decreases in revenues and tighter margins on new work.
General and administrative expenses increased $546,000 for the three months ended September 30, 2016 compared to the three months ended September 30, 2015 due to bonuses and additional administrative support added during the first half of 2016.
Nine Months Ended September 30, 2016 Compared to Nine Months Ended September 30, 2015 (in thousands, except for percentages):
Consolidated
| | | | | | | | | | | | | | | | Nine Months Ended September 30, | | Increase or (Decrease) | | 2016 | | 2015 | | Amount | Percent | Revenue | $ | 230,864 |
| | $ | 251,102 |
| | $ | (20,238 | ) | (8.1 | )% | Cost of revenue | 205,839 |
| | 248,686 |
| | (42,847 | ) | (17.2 | )% | Gross profit | 25,025 |
| | 2,416 |
| | 22,609 |
| 935.8 | % | Gross profit percentage | 10.8% | | 1.0% | | | | General and administrative expenses | 14,633 |
| | 11,817 |
| | 2,816 |
| 23.8 | % | Asset impairment | — |
| | 6,600 |
| | (6,600 | ) | n/a |
| Operating income (loss) | 10,392 |
| | (16,001 | ) | | 26,393 |
| 164.9 | % | Other income (expense): | | | | | | | Interest expense | (248 | ) | | (126 | ) | | (122 | ) |
|
| Interest income | 20 |
| | 21 |
| | (1 | ) |
|
| Other income, net | 1,039 |
| | 20 |
| | 1,019 |
|
|
| | 811 |
| | (85 | ) | | 896 |
| 1,054.1 | % | Net income (loss) before income taxes | 11,203 |
| | (16,086 | ) | | 27,289 |
| 169.6 | % | Income taxes | 4,134 |
| | (5,389 | ) | | 9,523 |
| 176.7 | % | Net income (loss) | $ | 7,069 |
| | $ | (10,697 | ) | | $ | 17,766 |
| 166.1 | % |
Revenue - Our revenue for the nine months ended September 30, 2016 and 2015 was $230.9 million and $251.1 million, respectively, representing a decrease of 8.1%. The decrease is primarily attributable to an overall decrease in work experienced in our fabrication yards primarily as a result of depressed oil and gas prices and the corresponding reduction in customer demand for offshore projects inoil and gas related service projects.
Gross profit - Gross profit from our Fabrication segment. During 2015, we completed the fabrication of a 1,200 foot jacket, piles and an approximate 450 short ton topside with no similar project in 2016. Our decrease in revenue earned from offshore fabrication work was partially offset by the assets and operations acquired in the LEEVAC transaction (see LEEVAC Transaction above), which contributed $55.9Services division decreased $3.3 million in revenue for the ninethree months ended September 30, 2016. Pass-through costs as a percentage of revenue were 35.0% and 43.2% forMarch 31, 2017, compared to the ninethree months ended September 30,March 31, 2016, and 2015, respectively. Pass-through costs, as described in Note 3 of the Notes to Consolidated Financial Statements, are included in revenue but have no impact on the gross profit recognized on a project for a particular period. Gross profit - Our gross profit for the nine months ended September 30, 2016 and 2015 was $25.0 million (10.8% of revenue) and $2.4 million (1.0% of revenue), respectively. Our gross profit improved compared to 2015 primarily due to the LEEVAC transactiondecreased revenue discussed above and contract losses of $14.3 million that were recordedtighter margins on new work performed during the third quarter of 2015 resulting from our inability to recover certain costs related to a deck and jacket for one of our deepwater projects. We had no such loss during the third quarter of 2016 and implemented cost cutting measures in response to decreases in work at our fabrication facilities.2017.
General and administrative expenses - Our general and administrative expenses were $14.6 million for the nine months ended September 30, 2016, compared to $11.8 million for the nine months ended September 30, 2015. The increase in generalGeneral and administrative expenses for our Services division decreased $60,000 for the ninethree months ended September 30,March 31, 2017, compared to the three months ended March 31, 2016, was primarily attributable to:
an increase of stock-based compensation expense of $589,000,
due to lower bonuses and the LEEVAC transaction; partially offset by
cost cutting efforts implementedaccrued during 2017, as a result of a combination of a smaller workforce and the downturnreduction in the oil and gas industry.gross profit.
Asset impairment
| | | | | | | | | | | | | | | | Corporate | | Three Months Ended March 31, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | — |
| | $ | — |
| | $ | — |
| | —% | Gross loss | | (260 | ) | | (136 | ) | | (124 | ) | | (91.2)% | Gross profit (loss) percentage | | n/a |
| | n/a |
| | | |
| General and administrative expenses | | 1,479 |
| | 1,668 |
| | (189 | ) | | (11.3)% | Operating loss | | (1,739 | ) | | (1,804 | ) | | 65 |
| | |
Gross loss - During the nine months ended September 30, 2015, we recorded an asset impairment charge of $6.6 million related to a partially constructed topside, related valves, piping and equipment that we acquiredGross loss from a customer following its default under a contract in 2012. Due to the sustained downturn in the energy sector, our ability to effectively
market these assets was significantly limited, and we reassessed the asset’s net realizable value based on the estimated scrap value of the assets. We had no such impairments during the nine months ended September 30, 2016.
Interest expense, net - The Company had net interest expense of $228,000 for the nine months ended September 30, 2016 compared to net interest expense of $105,000 for the nine months ended September 30, 2015. The increase in net interest expense for the nine months ended September 30, 2016 was primarily driven by an increase in the cost of unused credit facility fees under our credit agreement.
Other income, net - Other incomeCorporate division increased $1.0 million for the nine months ended September 30, 2016. The increase was primarily due to gainsa restructuring of $924,000 relatedour corporate division with additional personnel allocated to the sale of three cranes at our Texas facilitycorporate division during 2017 as well as sales of smaller assets bydiscussed above.
General and administrative expenses - General and administrative expenses for our Shipyards division. Income taxes - Our effective income tax rate for the nine months ended September 30, 2016 was 36.9%, compared to an effective tax rate of 34.0% for the comparable period during 2015. The increase in our effective rate isCorporate division decreased primarily due to the effect of state income taxes from income generated within Louisiana with no offsetting tax benefit from losses generated within Texas.
Operating Segments
| | | | | | | | | | | | | | | | | Fabrication | | Nine Months Ended September 30, | | Increase or (Decrease) | | | 2016 | | 2015 | | Amount | | Percent | Revenue | | $ | 70,436 |
| | $ | 137,431 |
| | $ | (66,995 | ) | | (48.7 | )% | Gross profit (loss) | | $ | 4,418 |
| | $ | (14,055 | ) | | $ | 18,473 |
| | 131.4 | % | Gross profit (loss) percentage | | 6.3 | % | | (10.2 | )% | | | | 16.5 | % | General and administrative expenses | | $ | 4,479 |
| | $ | 7,026 |
| | $ | (2,547 | ) | | (36.3 | )% | Asset impairment | | $ | — |
| | $ | 6,600 |
| | $ | (6,600 | ) | | n/a |
| Operating income (loss) | | $ | (61 | ) | | $ | (27,681 | ) | |
| |
|
Revenue decreased $67.0 million for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015. The decrease is attributable to an overall decrease in work experienced in our fabrication yardsbonuses as a result of depressed oil and gas prices and the corresponding reduction in customer demand for offshore fabrication projects. During 2015, we completed the fabrication of a 1,200 foot jacket, piles and an approximate 450 short ton topside with no similar project in 2016.
Gross profit increased $18.5 million to $4.4 million for the nine months ended September 30, 2016 compared to aour consolidated gross loss, of $14.1 million for the nine months ended September 30, 2015. The increase is due to contract losses of $14.3 million that were recorded during the third quarter of 2015 resulting from our inability to recover certain costs related to a deck and jacket for one of our deepwater projects. We had no such loss during the third quarter of 2016 and implemented cost cutting measures in response to decreases in work at our fabrication facilities.
General and administrative expenses decreased $2.5 million for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015 due to cost cutting measures implemented during 2016 in response to decreases in work at our fabrication facilities.
Asset impairment - During the nine months ended September 30, 2015, we recorded an asset impairment charge of $6.6 million related to a partially constructed topside, related valves, piping and equipment that we acquired from a customer following its default under a contract in 2012. Due to the sustained downturn in the energy sector, our ability to effectively market these assets was significantly limited, and we reassessed the asset’s net realizable value based on the estimated scrap value of the assets. We had no such impairments during the nine months ended September 30, 2016.
| | | | | | | | | | | | | | | | | Shipyards | | Nine Months Ended September 30, | | Increase or (Decrease) | | | 2016 | | 2015 | | Amount | | Percent | Revenue (1) | | $ | 86,553 |
| | $ | 47,177 |
| | $ | 39,376 |
| | 83.5 | % | Gross profit (1) | | $ | 9,595 |
| | $ | 6,022 |
| | $ | 3,573 |
| | 59.3 | % | Gross profit percentage | | 11.1 | % | | 12.8 | % | | | | (1.7 | )% | General and administrative expenses | | $ | 5,875 |
| | $ | 1,243 |
| | $ | 4,632 |
| | 372.6 | % | Operating income (1) | | $ | 3,720 |
| | $ | 4,779 |
| | | | |
____________
| | (1) | Revenue for the nine months ended September 30, 2016, includes $4.1 million of non-cash amortization of deferred revenue related to the values assigned to the contracts acquired in the LEEVAC transaction. |
Revenue increased $39.4 million for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015 due to the assets and operations acquired in the LEEVAC transaction (see LEEVAC Transaction above), which contributed $55.9 million in revenue for the nine months ended September 30, 2016. The increase was partially offset by decreases in work dueadditional personnel allocated to the downturn in the oil and gas industry.
Gross profit increased $3.6 million for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015 due to the LEEVAC transaction as well as increases in profitability estimates for other jobs in progress due to cost cutting measures.
General and administrative expenses increased $4.6 million for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015 due to the expenses associated with the operations acquired in the LEEVAC transaction and bonuses.
| | | | | | | | | | | | | | | | | Services | | Nine Months Ended September 30, | | Increase or (Decrease) | | | 2016 | | 2015 | | Amount | | Percent | Revenue | | $ | 76,179 |
| | $ | 70,987 |
| | $ | 5,192 |
| | 7.3 | % | Gross profit | | $ | 11,012 |
| | $ | 10,449 |
| | $ | 563 |
| | 5.4 | % | Gross profit percentage | | 14.5 | % | | 14.7 | % | | | | (0.2 | )% | General and administrative expenses | | $ | 4,119 |
| | $ | 3,008 |
| | $ | 1,111 |
| | 36.9 | % | Operating income | | $ | 6,893 |
| | $ | 7,441 |
| | | | | | | | | | | | | |
Revenue increased $5.2 million for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015 due to increases in the scope of two large offshore service projectsour corporate division during the first half of 2016.
Gross profit increased $563,000 for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015 due to increases in revenues and improved absorption of fixed costs resulting from an increase in labor hours worked.
General and administrative expenses increased $1.1 million for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015 due to additional administrative support costs related to increases in activity and bonuses.2017.
Liquidity and Capital Resources Historically, we have funded our business activities through cash generated from operations. At September 30, 2016March 31, 2017, we had no amounts outstanding under our credit facility, $4.5$4.6 million in outstanding letters of credit, and cash and cash equivalents totaling $55.6$34.7 million, compared to $34.8$51.2 million at December 31, 2015.2016. Working capital was $79.8$182.9 million and our ratio of current assets to current liabilities was 2.837.56 to 1 at September 30,March 31, 2017, compared to $78.0 million and 3.2 to 1, respectively, at December 31, 2016. Working capital at March 31, 2017, includes $110.5 million related to assets held for sale, primarily related to our South Texas facilities. Our primary sourceuse of cash during the three months ended March 31, 2017, was due to: Operating losses for the nine months ended September 30, 2016, wasquarter exclusive of non-cash depreciation, amortization, impairment and stock compensation expense of approximately $3.7 million, Payment of year-end bonuses related to 2016, Progress on liabilities from assumed contracts in the collection of accounts receivable under various customer contracts and sales of three cranes atLEEVAC transaction.While our Texas facility for $5.8 million. At September 30, 2016, our contracts receivable balance was $26.6 million of which we have subsequently collected $12.1 million through October 31, 2016. On January 1, 2016, we acquired substantially all of the assets and assumed certain specified liabilities of LEEVAC. The purchase price for the acquisition of the LEEVAC assets during 2016 was $20.0 million, subject to a working capital adjustment whereby we received a dollar-for-
dollar reductionnet $3.0 million in cash from the seller for the assumption of certain net liabilities of LEEVAC at closing and settlement payments from sureties on certain ongoing fabricationshipbuilding projects of $23.0 million that were assigned to us in the transaction. After taking into accountWe have significantly progressed these adjustments, wecontracts which in turn, has resulted in utilization of the working capital and settlement payments received approximately $1.6during 2016.
Fewer receipts from accounts receivable, primarily $4.6 million in cash at closing. Duringfrom one customer that refused delivery of a vessel on February 6, 2017, and has not paid. We have initiated arbitration proceedings during the quarter we presentedto enforce our working capital true-uprights under our construction contract, and Build-up of costs for contracts in progress related to a customer in our Shipyards division with significant milestone payments occurring in the seller, which resulted in an additional $1.5 million due to us. Additionally, we hired 380 employees upon acquisitionlater stages of the facilities representing substantially all of the former LEEVAC employees. Strategically, the transaction expands our marine fabrication and repair and maintenance presenceprojects which are expected to occur beginning in the Gulf South market. third quarter of 2017 through the first quarter of 2018. At the date of transaction, we acquired approximately $121.2March 31, 2017, our contracts receivable balance was $21.1 million of new build construction backlog inclusive of approximately $9.2which we have subsequently collected $4.1 million of purchase price fair value allocated to four, new build construction projects to be delivered in 2017 and 2018 for two customers. through April 21, 2017.
As of September 30, 2016,March 31, 2017, we had a credit agreement with Whitney Bank and JPMorgan Chase Bank N.A. that provides for an $80.0a $40.0 million revolving credit facility maturing January 2, 2017.November 29, 2018. The credit agreement allows the Company to use up to the full amount of the available borrowing base for letters of credit and up to $20.0 million for general corporate purposes. Our obligations under the credit agreement are secured by substantially all of our assets other(other than real property located in the state of Louisiana. On February 29, 2016, we entered into an amendment to our credit agreement. The amendment (i) extends the term of the Credit Facility from February 29, 2016 to January 2, 2017; (ii) increases the commitment feeestate). Commitment fees on undrawn amounts from 0.25% to 0.50%are 0.5% per annum; (iii) increases theannum and letter of credit fee,fees, subject to certain limited exceptions, to 2.00%are 2.0% per annum on undrawn stated amounts under letters of credit issued by the lenders; and (iv) limits the maximum amount of loans outstanding at any time for general corporate purposes to $20.0 million.lenders. Amounts borrowed under our the credit agreement bear interest, at our option, at either the prime lending rate established by JPMorgan Chase Bank, N.A. or LIBOR plus 2.0 percent. Under the amendment ourOur financial covenants beginning with the quarter endingat March 31, 20162017, are as follows:
| | (i) | minimum net worth requirement of not less than $250.0255.0 million plus |
| | a) | 50% of net income earned in each quarter beginning MarchDecember 31, 2016, and |
| | b) | 100% of proceeds from any issuance of common stock; |
| | c) | less the amount of any impairment on certain assets owned by Gulf Marine Fabricators, L.P. (our South Texas assets held for sale) up to $30.0 million; |
| | (ii) | debt to EBITDA ratio not greater than 3.02.5 to 1.0; and |
| | (iii) | interest coverage ratio not less than 2.0 to 1.0. |
At September 30, 2016,March 31, 2017, no amounts were outstanding under the credit facility, and we had outstanding letters of credit totaling $4.5$4.6 million, reducing the unused portion of our credit facility for additional letters of credit and borrowings to $75.5$35.4 million. As of September 30, 2016,March 31, 2017, we were in compliance with all covenants. During the fourth quarter, we expect
We are currently in discussions with one of our financial institutions to enter into a two-year, $40.0 million amendednew revolving line of credit with comparable availability, but with less restrictive financial covenants and restatedreduced fees as compared to our current revolving credit facility. We expect to close on this new revolving credit facility withand terminate our current lenders that will be secured by substantially all of our assets (other than real property). We anticipate the amendedexisting revolving credit facility will allow us to use the full $40.0 million borrowing base for both letters of credit and general corporate purposes. Given the historically low levels of borrowings under our current facility and our cash position, we requested a reduction in the amountsecond quarter of available credit under our revolver from $80.0 million to $40.0 million to decrease the commitment fees payable to our lenders for the undrawn portion of the facility.2017.
Our primary liquidity requirements are for the costs associated with servicingfabrication projects, and capital expenditures inand payment of dividends to our Fabrication and Shipyards segments. In particular, as further discussed in Note 2 in our Notes to Consolidated Financial Statements, in connection with the LEEVAC transaction, we received at closing a net cash amount that included consideration for billings in excess of costs and estimated earnings on uncompleted contracts and other payments from sureties representing pre-payment on the partially constructed vessels totaling $21.9 million as adjusted for the working capital true-up. Consequently, there will be required cash outflows for costs associated with the prepaid amounts without corresponding milestone billings.shareholders. We anticipate capital expenditures for the remainder of 20162017 to be approximately $1.8range between $6.0 million to $8.0 million primarily for the following: extension of one of our dry docks, and
improvements to our newly acquired facilities.Jennings and Lake Charles leased shipyards, improvement to the bulkhead at our Houma facility, and
computer system upgrades.
On October 21, 2016, a customer of our Shipyards’ segmentShipyards division announced it had received limited waivers from its lenders and noteholders through November 11, 2016 with respect towas in noncompliance with certain financial covenants included in the customer’s debt agreements. TheThis customer also announcedstated it had received limited waivers from its lenders and noteholders, but its debt agreements will require further negotiation and amendment. InOn April 19, 2017, the eventcustomer stated it had allowed the waivers to expire and remains in default of its covenants.
This same customer has rejected delivery of the vessel that we tendered for delivery on February 6, 2017, alleging certain technical deficiencies exist with respect to the vessel and is seeking recovery of all purchase price amounts previously paid by the customer under the contract. We are also building a second vessel for this customer that is scheduled for delivery during the second quarter of 2017. We disagree with our customer is unsuccessful inconcerning these efforts,alleged technical deficiencies and have put the customer will consider other options including a possible reorganizationin default under Chapter 11the terms of the Federal bankruptcy laws. At September 30, 2016, no contracts receivable werefor both vessels. As of March 31, 2017, approximately $4.6 million remained due and outstanding from our customer for the first vessel. The balance due to us upon delivery for a second vessel which is expected in May of this year, is approximately $4.9 million. On March 10, 2017, we gave notice for arbitration with our customer in an effort to resolve this matter. We intend to take all legal action as may be necessary to protect our rights under the contracts and deferred revenue exceeded our costs and estimated earnings in excess of billings on this contract. recover the remaining balances owed to us.
We continue to monitor our work performed in relation to our customer’s status and its ability to pay under the terms of its contract. Based on our evaluation to date,these contracts. Because these vessels have been completed or are substantially complete, we do not believe that they have significant fair value, and that we would be able to fully recover any loss on this contract is probable or estimable at this time.amounts due to us.
In February 2016,anticipation of the proceeds to be received from the sale of our BoardSouth Texas assets, we have engaged in a strategic financial analysis project with advisors to determine the appropriate use of Directors approvedproceeds from this transaction. We will be evaluating a decrease inmix of options including tactical capital improvement projects, strategic growth investment opportunities that support our quarterly dividend to $0.01 in an effort to conserve cash. business plan, stock buy-backs and/or dividends and working capital reinvestment.
On October 27, 2016,April 26, 2017, our Board of Directors declared a dividend of $0.01 per share on our shares of common stock outstanding, payable November 23, 2016May 25, 2017, to shareholders of record on November 10, 2016.May 11, 2017.
We believe our cash and cash equivalents generated by our operating activities and funds available under our credit facilityproceeds to be received from future assets sales will be sufficient to fund our capital expenditures issue future letters of credit and meet our working capital needs for both the near and longer term to continue our operations, satisfy our contractual operations and pay dividends to our shareholders. Additionally, we expect to close on a new revolving line of credit during the second quarter of 2017 as discussed above. We believe that the new facility will provide us with additional working capital flexibility to ramp up our operations quickly in times of rapid increasing demand, to continue to issue future letters of credit and to quickly take advantage of market opportunities.
Cash Flow Activities
For the ninethree months ended September 30, 2016March 31, 2017, net cash provided byused in operating activities was $19.3$15.1 million, compared to $18.7$1.6 million for the ninethree months ended September 30, 2015.March 31, 2016. The increase in cash provided byused in operations was primarily due to increased gross profitthe following:
Operating losses for the quarter in excess of non-cash depreciation, amortization, impairment and collectionsstock compensation expense of contract receivablesapproximately $3.7 million, Payment of year-end bonuses related to 2016, Progress on liabilities from assumed contracts in the LEEVAC transaction.While our purchase price for the acquisition of the LEEVAC assets during 2016 somewhat offset bywas $20.0 million, we received a net $3.0 million in cash from the seller for the assumption of certain net liabilities and settlement payments required for trade payableson ongoing shipbuilding projects of $23.0 million that were assigned to us in the transaction. We have significantly progressed these contracts which in turn, has resulted in utilization of the working capital and settlement payments received during 2016. Fewer receipts from accounts receivable, primarily $4.6 million from one customer that refused delivery of a vessel on February 6, 2017, and has not paid. We have initiated arbitration proceedings during the ninequarter to enforce our rights under our construction contract, and
Build-up of costs for contracts in progress related to a customer in our Shipyards division with significant milestone payments occurring in the later stages of the projects which are expected to occur beginning in the third quarter of 2017 through the first quarter of 2018.
Net cash used in investing activities for the three months ended September 30, 2016 asMarch 31, 2017, was $391,000, compared to 2015. Net cash provided by investing activities for the nine months ended September 30, 2016 was $2.0 million, compared to cash used in investing activities of $5.0$6.2 million for the ninethree months ended September 30, 2015.March 31, 2016. The increasechange in cash used in/provided by investing activities is primarily due to cash received from the sale of three cranes at our Texas facility for $5.8$5.4 million and $1.6 million of cash acquired in the LEEVAC transaction.
Net cash used in financing activities for the ninethree months ended September 30,March 31, 2017 and 2016, was $1.0 million and 2015 was $440,000 and $4.4 million,$291,000, respectively. The decreaseincrease in cash used in financing activities is due to the reduction in the cash dividend in 2016.payments made to taxing authorities on behalf of employees' for their vesting of common stock.
Contractual Obligations There have been no material changes from the information included in our Annual Report on Form 10-K for the year ended December 31, 2015.2016. For more information on our contractual obligations, refer to Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2015.2016. Off-Balance Sheet Arrangements There have been no material changes from the information included in our Annual Report on Form 10-K for the year ended December 31, 2015.2016. Item 3. Quantitative and Qualitative Disclosures About Market Risk. There have been no material changes in the Company’s market risks during the quarter ended September 30, 2016.March 31, 2017. For more information on market risk, refer to Part II, Item 7A. of our Annual Report on Form 10-K for the year ended December 31, 2015.2016. Item 4. Controls and Procedures. The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and that such information is communicated to the Company’s management, including its Chief Executive Officer and Interim Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. The Company’s management, with the participation of the Company’s Chief Executive Officer and Interim Chief Financial Officer, hashave evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based on this evaluation, our Chief Executive Officer and Interim Chief Financial Officer hashave concluded that the design and operation of our disclosure controls and procedures were effective as of the end of the period covered by this report. There have been no changes during the fiscal quarter ended September 30, 2016March 31, 2017, in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. PART II. OTHER INFORMATION Item 1. Legal Proceedings. The Company is subject to various routine legal proceedings in the normal conduct of its business primarily involving commercial claims, workers’ compensation claims, and claims for personal injury under general maritime laws of the United
States and the Jones Act. While the outcome of these lawsuits, legal proceedings and claims cannot be predicted with certainty, management believes that the outcome of any such proceedings, even if determined adversely, would not have a material adverse effect on the financial position, results of operations or cash flows of the Company. Item 1A. Risk Factors. There have been no material changes from the information included in Item 1A “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2015.2016. | | | | | 2.1Exhibit Number | | Asset Purchase Agreement, dated December 23, 2015 by and among Gulf Island Shipyards, LLC, LEEVAC Shipyards, LLC and certain related affiliates, incorporated by reference toDescription of Exhibit 2.1 of the Company's Form 8-K filed on December 23, 2015. | | | 3.1 | | Composite Articles of Incorporation of the Company incorporated by reference to Exhibit 3.1 of the Company’s Form 10-Q filed April 23, 2009. | 3.2 | | Amended and Restated Bylaws of the Company, as amended and restated through April 26, 2012, incorporated by reference to Exhibit 3.1 of the Company’s Form 8-K filed on April 30, 2012. | 4.1 | | Specimen Common Stock Certificate, incorporated by reference to the Company’s Form S-1/A filed March 19, 1997 (Registration No. 333-21863).November 4, 2016. | 10.1 | | Change of Control Agreement, dated March 1, 2017, between the Company and David S. Schorlemer, incorporated by reference to Exhibit 10.15 of the Company's Form of Long-Term Performance-Based Cash Award Agreement.10-K for the year ended December 31, 2016 filed on March 2, 2017. | 3131.1 | | CEO and Certifications pursuant to Rule 13a-14 under the Securities Exchange Act of 1934. | 31.2 | | CFO CertificationCertifications pursuant to Rule 13a-14 under the Securities Exchange Act of 1934. | 32 | | Section 906 Certification furnished pursuant to 18 U.S.C. Section 1350. | 99.1 | | Press release issued by | 101 | | Attached as Exhibit 101 to this report are the following items formatted in XBRL (Extensible Business Reporting Language): | | | (i) | Consolidated Balance Sheets, | | | (ii) | Consolidated Statements of Operations, | | | (iii) | Consolidated Statement of Changes in Shareholders’ Equity, | | | (iv) | Consolidated Statements of Cash Flows and | | | (v) | Notes to Consolidated Financial Statements. |
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. | | | GULF ISLAND FABRICATION, INC. | | BY: | /s/ David S. Schorlemer | | David S. Schorlemer | | Executive Vice President, Chief Financial Officer, and Treasurer (Principal Financial and Accounting Officer) |
Date: May 2, 2017
GULF ISLAND FABRICATION, INC. EXHIBIT INDEX | | | | | Exhibit Number | | Description of Exhibit | | | 3.1 | | Composite Articles of Incorporation of the Company on October 27, 2016, incorporated by reference to Exhibit 99.13.1 of the Company’s Form 10-Q filed April 23, 2009. | 3.2 | | Amended and Restated Bylaws of the Company, incorporated by reference to Exhibit 3.1 of the Company’s Form 8-K filed November 4, 2016. | 10.1 | | Change of Control Agreement, dated March 1, 2017, between the Company and David S. Schorlemer, incorporated by reference to Exhibit 10.15 of the Company's Form 10-K for the year ended December 31, 2016 filed on October 27, 2016.March 2, 2017. | 31.1 | | CEO Certifications pursuant to Rule 13a-14 under the Securities Exchange Act of 1934. | 31.2 | | CFO Certifications pursuant to Rule 13a-14 under the Securities Exchange Act of 1934. | 32 | | Section 906 Certification furnished pursuant to 18 U.S.C. Section 1350. | | | | 101 | | Attached as Exhibit 101 to this report are the following items formatted in XBRL (Extensible Business Reporting Language): | | | | | | (i) | Consolidated Balance Sheets, | | | (ii) | Consolidated Statements of Operations, | | | (iii) | Consolidated Statement of Changes in Shareholders’ Equity, | | | (iv) | Consolidated Statements of Cash Flows and | | | (v) | Notes to Consolidated Financial Statements. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | GULF ISLAND FABRICATION, INC. | | BY: | /s/ Kirk J. Meche | | Kirk J. Meche | | President, Chief Executive Officer, Director and Interim Chief Financial Officer, Treasurer and Secretary (Principal Executive Officer and Interim Principal Financial and Accounting Officer) |
Date: November 2, 2016
GULF ISLAND FABRICATION, INC.
EXHIBIT INDEX
| | | | | Exhibit
Number
| | Description of Exhibit | | | 2.1 | | Asset Purchase Agreement, dated December 23, 2015 by and among Gulf Island Shipyards, LLC, LEEVAC Shipyards, LLC and certain related affiliates, incorporated by reference to Exhibit 2.1 of the Company's Form 8-K filed on December 23, 2015.
| 3.1 | | Composite Articles of Incorporation of the Company, incorporated by reference to Exhibit 3.1 of the Company’s Form 10-Q filed April 23, 2009. | 3.2 | | Bylaws of the Company, as amended and restated through April 26, 2012, incorporated by reference to Exhibit 3.1 of the Company’s Form 8-K filed on April 30, 2012. | 4.1 | | Specimen Common Stock Certificate, incorporated by reference to the Company’s Form S-1/A filed March 19, 1997 (Registration No. 333-21863). | 10.1 | | Form of Long-Term Performance-Based Cash Award Agreement. | 31 | | CEO and CFO Certifications pursuant to Rule 13a-14 under the Securities Exchange Act of 1934. | 32 | | Section 906 Certification furnished pursuant to 18 U.S.C. Section 1350. | 99.1 | | Press release issued by the Company on October 27, 2016, incorporated by reference to Exhibit 99.1 of the Company’s Form 8-K filed on October 27, 2016. | 101 | | Attached as Exhibit 101 to this report are the following items formatted in XBRL (Extensible Business Reporting Language): | | | | | | (i) | Consolidated Balance Sheets, | | | (ii) | Consolidated Statements of Operations, | | | (iii) | Consolidated Statement of Changes in Shareholders’ Equity, | | | (iv) | Consolidated Statements of Cash Flows and | | | (v) | Notes to Consolidated Financial Statements. |
s | Percentage | |
Backlog is expected to be recognized in revenue during: | ___________ | | 1. | Backlog as of September 30, 2016March 31, 2017, includes commitments received through October 27, 2016.April 26, 2017. We exclude suspended projects from contract backlog thatwhen they are expected to be suspended more than twelve months because resumption of work and timing of revenue recognition for these projects are difficult to predict. Our backlog also includes the new build construction that was acquired in the LEEVAC transaction on January 1, 2016. Included in our backlog at September 30, 2016, is $5.1 million of non-cash revenue related to purchase price fair value of contracts acquired in the LEEVAC transaction and included in deferred revenue in our consolidated Balance sheet at September 30, 2016. |
| | 2. | At September 30, 2016,March 31, 2017, projects for our threetwo largest customers in terms of revenue backlog consisted of: |
| | (i) | two large petroleum supply vessels for one customer in our Shipyards segment, which commenced in the second quarter of 2013 and will be completed during the first and second quarter of 2017; |
| | (ii) | two large multi-purpose service vessels for one customer in our Shipyards segment, which commenced in the first quarter of 2014 and will be completed during the first and second quarterquarters of 2018; and |
(iii) the fabrication of four modules associated with a U.S. ethane cracker project.
| | (ii) | the fabrication of four modules associated with a U.S. ethane cracker project. |
| | 3. | The timing of recognition of the revenue represented in our backlog is based on management’s current estimates to complete the projects. Certain factors and circumstances could cause changes in the amounts ultimately recognized and the timing of the recognition of revenue from our backlog. |
Depending on the size of the project, the termination, postponement, or reduction in scope of any one project could significantly reduce our backlog and could have a material adverse effect on revenue, net income and cash flow. As of September 30, 2016,March 31, 2017, we had 1,336922 employees and 163133 contract employees inclusive of 380 employees hired in the LEEVAC transaction, compared to 1,2551,178 employees and 7192 contract employees as of December 31, 2015. 2016.
Labor hours worked were 2.3 million479,000 during the ninethree months ended September 30, 2016,March 31, 2017, compared to 2.1 million695,000 for the ninethree months ended September 30, 2015.March 31, 2016. The overall increasedecrease in labor hours worked for the three months ended September 30, 2016March 31, 2017, was due to 636,000 labor hours worked from projects acquired in the LEEVAC transaction partially offset by a reduction in fabrication activity due primarily to the downturn in the oil and gas industry.
Results of Operations
Our results of operations are affected primarily by our ability to effectively manage contracts to a successful completion along with producing maximum efficiencies as it relates to manhours.
Three Months Ended September 30, 2016 Compared to Three Months Ended September 30, 2015 (in thousands, except for percentages):
Consolidated
| | | | | | | | | | | | | | | | Three Months Ended September 30, | | Increase or (Decrease) | | 2016 | | 2015 | | Amount | Percent | Revenue | $ | 65,384 |
| | $ | 67,531 |
| | $ | (2,147 | ) | (3.2 | )% | Cost of revenue | 60,125 |
| | 75,368 |
| | (15,243 | ) | (20.2 | )% | Gross profit (loss) | 5,259 |
| | (7,837 | ) | | 13,096 |
| 167.1 | % | Gross profit percentage | 8.0% | | (11.6)% | | | | General and administrative expenses | 5,086 |
| | 3,798 |
| | 1,288 |
| 33.9 | % | Asset impairment | — |
| | 6,600 |
| | (6,600 | ) | n/a |
| Operating income | 173 |
| | (18,235 | ) | | 18,408 |
| 100.9 | % | Other income (expense): | | | | | | | Interest expense | (110 | ) | | (39 | ) | | (71 | ) |
|
| Interest income | 12 |
| | 8 |
| | 4 |
|
|
| Other income, net | 599 |
| | — |
| | 599 |
|
|
| | 501 |
| | (31 | ) | | 532 |
| 1,716.1 | % | Net income (loss) before income taxes | 674 |
| | (18,266 | ) | | 18,940 |
| 103.7 | % | Income taxes | 133 |
| | (6,129 | ) | | 6,262 |
| 102.2 | % | Net income (loss) | $ | 541 |
| | $ | (12,137 | ) | | $ | 12,678 |
| 104.5 | % |
Revenue - Our revenue for the three months ended September 30, 2016 and 2015 was $65.4 million and $67.5 million, respectively, representing a decrease of 3.2%. The decrease is primarily attributable to an overall decrease in work experienced in our fabrication yardsfacilities as a result of depressed oil and gas prices and the corresponding reduction in customer demand within all of our operating divisions.
Results of Operations Three Months Ended March 31, 2017 Compared to Three Months Ended March 31, 2016 (in thousands, except for offshore projects in our Fabrication segment. During 2015, we completed the fabrication of a 1,200 foot jacket, piles and an approximate 450 short ton topside with no similar project in 2016.percentages): Consolidated | | | | | | | | | | | | | | | Three Months Ended March 31, | | Increase or (Decrease) | | 2017 | | 2016 | | Amount | Percent | Revenue | $ | 37,993 |
| | $ | 83,979 |
| | $ | (45,986 | ) | (54.8)% | Cost of revenue | 42,890 |
| | 78,278 |
| | (35,388 | ) | (45.2)% | Gross profit (loss) | (4,897 | ) | | 5,701 |
| | (10,598 | ) | 185.9% | Gross profit (loss) percentage | (12.9)% | | 6.8% | | | | General and administrative expenses | 3,930 |
| | 4,485 |
| | (555 | ) | (12.4)% | Asset impairment | 389 |
| | — |
| | 389 |
| 100.0% | Operating income (loss) | (9,216 | ) | | 1,216 |
| | (10,432 | ) | (857.9)% | Other income (expense): | | | | | | | Interest expense | (59 | ) | | (50 | ) | | (9 | ) | | Interest income | — |
| | 6 |
| | (6 | ) | | Other income, net | 9 |
| | 398 |
| | (389 | ) | | Total other income (expense) | (50 | ) | | 354 |
| | (404 | ) | (114.1)% | Net income (loss) before income taxes | (9,266 | ) | | 1,570 |
| | (10,836 | ) | (690.2)% | Income taxes | (2,812 | ) | | 581 |
| | (3,393 | ) | (584.0)% | Net income (loss) | $ | (6,454 | ) | | $ | 989 |
| | $ | (7,443 | ) | (752.6)% |
Revenue - Our decrease in revenue earned from offshore fabrication work was partially offset by the results of the assets and operations acquired in the LEEVAC transaction (see LEEVAC Transaction above), which contributed $16.8 million in revenue for the three months ended September 30, 2016.March 31, 2017 and 2016, was $38.0 million and $84.0 million, respectively, representing a decrease of 54.8%. The decrease is primarily attributable to an overall decrease in work experienced in our facilities as a result of depressed oil and gas prices and the corresponding reduction in customer demand within all of our operating divisions. Pass-through costs as a percentage of revenue were 33.8%29.4% and 45.3%40.0% for the three-months ended September 30,March 31, 2017 and 2016, and 2015, respectively. Pass-through costs, as described in Note 3 of the Notes to Consolidated Financial Statements, are included in revenue but have no impact on the gross profit recognized on a project for a particular period.
Gross profit (loss)- Our gross profit (loss)loss for the three months ended September 30, 2016 and 2015March 31, 2017, was $5.3$4.9 million (8.0% of revenue) and $(7.8) million, respectively. Ourcompared to a gross profit improved compared to third quarter of 2015$5.7 million for the three months ended March 31, 2016. The decrease was primarily due to contract losses of $14.3 million that were recorded during the third quarter of 2015 resulting from our inability to recover certain costs related to a deckdecreased revenue as discussed above and jacket for one of our deepwater projects. We had no such loss during the third quarter of 2016 and implemented cost cutting measures. This wastighter margins on current work partially offset by tighter margins within all of our segments due to a decreasedecreases in work as a result of the downturn in the oil and gas industry.costs resulting from additional cost cutting measures implemented by management.
General and administrative expenses - Our general and administrative expenses were $5.1$3.9 million for the three months ended September 30, 2016,March 31, 2017, compared to $3.8$4.5 million for the three months ended September 30, 2015.March 31, 2016. The increasedecrease in general
and administrative expenses for the three months ended September 30, 2016March 31, 2017, was primarily attributable to the operations acquired in the LEEVAC transaction and bonus expense, partially offset by cost cutting effortsmeasures implemented by management during 2016.the first part of 2016 as well as lower bonuses accrued during 2017 as a result of a combination of a smaller workforce and our consolidated gross loss.
Asset impairmentImpairment - During the three months ended September 30, 2015,March 31, 2017, we recorded an asset impairment charge of $6.6 million$389 related to a partially constructed topside, related valves, piping and equipment that we acquired from a customer following its default under a contract in 2012. Due to the sustained downturn in the energy sector, our ability to effectively market these assets was significantly limited, and we reassessed the asset’s net realizable value based on the estimated scrap valueheld for sale at our Prospect Shipyard. See also Note 2 of the assets. We had no such impairments during the three months ended September 30, 2016.Notes to Consolidated Financial statements. Interest expense,
Other income, net - The Company had net interest expense of $98,000Other income decreased $389,000 for the three months ended September 30, 2016 compared to net interest expense of $31,000 for the three months ended September 30, 2015.March 31, 2017. The increase was primarily driven by an increase in the cost of unused credit facility fees under our credit agreement. Other income, net - Other income increased $599,000 for the three months ended September 30, 2016. The increasedecrease was primarily due to gains on sales of assets from our Fabrication division.division recorded during three months ended March 31, 2016.
Income taxes - Our effective income tax rate for the three months ended September 30, 2016March 31, 2017, was 19.7%30.3%, compared to an effective tax rate of 34.0%37.0% for the comparable period during 2015.2016. The changedecrease in ourthe effective tax rate is duethe result of limitations on the deductibility of executive compensation and $210,000 in tax expense recognized during the three months ended March 31, 2017, for the tax effect of the difference between the actual tax deduction allowed upon vesting of common stock and the compensation cost recognized for financial reporting purposes resulting from the adoption of Accounting Standards Update 2016-09 as further discussed in Note 1 of the Notes to the decrease in our effective rate for the year-to-date period.Consolidated Financial Statements.
Operating Segments
As discussed in Note 8 of the Notes to Consolidated Financial Statements, management reduced its allocation of corporate administrative costs and overhead expenses to its operating divisions during the three months ended March 31, 2017, such that a significant portion of its corporate expenses are retained in its non-operating Corporate division. In addition, it has also allocated certain personnel previously included in the operating divisions to within the Corporate division. In doing so, management believes that it has created a fourth reportable segment with each of its three operating divisions and it's Corporate division each meeting the criteria of reportable segments under GAAP. During the three months ended March 31, 2016, we allocated substantially all of our corporate administrative costs and overhead expenses to our three operating divisions. We have recast our 2016 segment data below in order to conform to the current period presentation. Our results of our three operating divisions and Corporate division for the three months ended March 31, 2017 and 2016, are presented below (in thousands, except for percentages).
| | | | | | | | | | | | | | | | | Fabrication | | Three Months Ended September 30, | | Increase or (Decrease) | | | 2016 | | 2015 | | Amount | | Percent | Revenue | | $ | 22,311 |
| | $ | 32,133 |
| | $ | (9,822 | ) | | (30.6 | )% | Gross profit (loss) | | $ | 532 |
| | $ | (14,009 | ) | | $ | 14,541 |
| | 103.8 | % | Gross profit percentage | | 2.4 | % | | (43.6 | )% | | | | 46.0 | % | General and administrative expenses | | $ | 1,481 |
| | $ | 2,138 |
| | $ | (657 | ) | | (30.7 | )% | Asset impairment | | $ | — |
| | $ | 6,600 |
| | $ | (6,600 | ) | | n/a |
| Operating income (loss) | | $ | (949 | ) | | $ | (22,747 | ) | | | | |
| | | | | | | | | | | | | | | | Fabrication | | Three Months Ended March 31, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | 10,209 |
| | $ | 23,829 |
| | $ | (13,620 | ) | | (57.2)% | Gross profit (loss) | | (2,966 | ) | | 86 |
| | (3,052 | ) | | (3,548.8)% | Gross profit (loss) percentage | | (29.1 | )% | | 0.4 | % | | | | (29.5)% | General and administrative expenses | | 821 |
| | 795 |
| | 26 |
| | 3.3% | Operating income (loss) | | (3,787 | ) | | (709 | ) | | | | |
Revenue - Revenue from our Fabrication division decreased $9.8$13.6 million for the three months ended September 30, 2016March 31, 2017, compared to the three months ended September 30, 2015.March 31, 2016. The decrease is attributable to an overall decrease in work experienced in our fabrication yards as a result of depressed oil and gas prices and the corresponding reduction in customer demand for offshore fabrication projects. As discussed above, management has classified our South Texas assets as assets held for sale in response to the underutilization of our Fabrication assets.
Gross profit increased $14.5 million to $532,000(loss) - Gross loss from our Fabrication division for the three months ended September 30, 2016March 31, 2017, was $3.0 million compared to a gross lossprofit of $14.0 million$86,000 for the three months ended September 30, 2015March 31, 2016. The decrease was due to contract losseslower revenue as discussed above, payment of $14.3termination benefits as we reduce our South Texas workforce and depreciation expense of $1.9 million that were recorded during the third quarter of 2015related to our South Texas assets prior to their classification as assets held for sale. This was partially offset by decreases in costs resulting from our inability to recover certain costs related to a deck and jacket for one of our deepwater projects. We had no such loss during the third quarter of 2016 and implementedadditional cost cutting measures in response to decreases in work at our fabrication facilities.implemented by management.
General and administrative expenses - General and administrative expenses decreased $657,000for our Fabrication division increased $26,000 for the three months ended September 30, 2016March 31, 2017, compared to the three months ended September 30, 2015March 31, 2016. The increase is primarily due to cost cutting measures implemented during 2016 in responseexpenses incurred to decreases in work atmarket our fabrication facilities.South Texas assets for sale and payment of termination benefits as we reduce its workforce and complete those operations.
Asset impairment - During the three months ended September 30, 2015, we recorded an asset impairment charge of $6.6 million related to a partially constructed topside, related valves, piping and equipment that we acquired from a customer following its default under a contract in 2012. Due to the sustained downturn in the energy sector, our ability to effectively market these assets was significantly limited, and we reassessed the asset’s net realizable value based on the estimated scrap value of the assets. We had no such impairments during the three months ended September 30, 2016.
| | | | | | | | | | | | | | | | | Shipyards | | Three Months Ended September 30, | | Increase or (Decrease) | | | 2016 | | 2015 | | Amount | | Percent | Revenue (1) | | $ | 23,060 |
| | $ | 12,936 |
| | $ | 10,124 |
| | 78.3 | % | Gross profit (1) | | $ | 1,877 |
| | $ | 1,937 |
| | $ | (60 | ) | | (3.1 | )% | Gross profit percentage | | 8.1 | % | | 15.0 | % | | | | (6.9 | )% | General and administrative expenses | | $ | 2,065 |
| | $ | 392 |
| | $ | 1,673 |
| | 426.8 | % | Operating income (loss) (1) | | $ | (188 | ) | | $ | 1,545 |
| | | | |
| | | | | | | | | | | | | | | | Shipyards | | Three Months Ended March 31, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue (1) | | $ | 18,422 |
| | $ | 34,120 |
| | $ | (15,698 | ) | | (46.0)% | Gross profit (loss)(1) | | (1,704 | ) | | 2,375 |
| | (4,079 | ) | | (171.7)% | Gross profit (loss) percentage | | (9.2 | )% | | 7.0 | % | | | | (16.2)% | General and administrative expenses | | 964 |
| | 1,296 |
| | (332 | ) | | (25.6)% | Asset impairment | | 389 |
| | — |
| | 389 |
| | 100.0% | Operating income (loss) (1) | | (3,057 | ) | | 1,079 |
| | | | |
___________ | | (1) | Revenue for the three months ended September 30,March 31, 2017, and 2016, includes $1.5$1.6 million and $1.2 million of non-cash amortization of deferred revenue related to the values assigned to the contracts acquired in the LEEVAC transaction.transaction, respectively. |
Revenue increased $10.1- Revenue from our Shipyards division decreased $15.7 million for the three months ended September 30, 2016March 31, 2017, compared to the three months ended September 30, 2015March 31, 2016, due to the operations acquiredoverall decreases in work as we complete work under our contracts
including completion of a vessel that we assumed in the LEEVAC transaction (see LEEVAC Transaction above), which contributed $16.8 million in revenue forand delivered to a customer on February 6, 2017, with less new, replacement work starting during the three months ended September 30, 2016.
Gross profit decreased $60,000 for the three months ended September 30, 2016period as compared to the three months ended September 30, 2015March 31, 2016. The decrease in new, replacement work is due to tighter marginsdepressed oil and gas prices and the corresponding reduction in customer demand for shipbuilding and repair services supporting the oil and gas industry.
Gross profit (loss) - Gross loss from our Shipyards division was $1.7 million for the three months ended March 31, 2017, compared to a gross profit of $2.4 million for the three months ended March 31, 2016. The decrease was due to:
continued cost overruns on new work and inefficiencies incurred on the contracts acquiredthat were assigned to us in the LEEVAC transaction transaction; holding costs related to a completed vessel that was delivered on February 6, 2017; however, was refused by our customer alleging certain technical deficiencies (see also Note 9 of the Notes to Consolidated Financial Statements); and overall decreases in work under other various contracts as discussed above; partially offset by savings realized from cost cutting measures implemented by management during 2016.
General and administrative expenses - General and administrative expenses increased $1.7for our Shipyards division decreased $332,000 for the three months ended March 31, 2017, compared to the three months ended March 31, 2016, primarily due to cost cutting measures implemented by management during 2016 as well as lower bonuses accrued during 2017 as a result of a combination of a smaller workforce and our consolidated gross loss.
Asset Impairment - During three months ended March 31, 2017, we recorded an impairment of $389 related to our assets held for sale at our Prospect Shipyard. See also Note 2 of the Notes to Consolidated Financial statements.
| | | | | | | | | | | | | | | | Services | | Three Months Ended March 31, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | 10,712 |
| | $ | 26,559 |
| | $ | (15,847 | ) | | (59.7)% | Gross profit | | 33 |
| | 3,376 |
| | (3,343 | ) | | (99.0)% | Gross profit (loss) percentage | | 0.3 | % | | 12.7 | % | | | | (12.4)% | General and administrative expenses | | 666 |
| | 726 |
| | (60 | ) | | (8.3)% | Operating income (loss) | | (633 | ) | | 2,650 |
| | | | |
Revenue - Revenue from our Services division decreased $15.8 million for the three months ended September 30, 2016March 31, 2017, compared to the three months ended September 30, 2015 primarilyMarch 31, 2016, due to the expenses associated with the operations acquired in the LEEVAC transaction and bonus expense. | | | | | | | | | | | | | | | | | Services | | Three Months Ended September 30, | | Increase or (Decrease) | | | 2016 | | 2015 | | Amount | | Percent | Revenue | | $ | 20,928 |
| | $ | 23,487 |
| | $ | (2,559 | ) | | (10.9 | )% | Gross profit | | $ | 2,850 |
| | $ | 4,235 |
| | $ | (1,385 | ) | | (32.7 | )% | Gross profit percentage | | 13.6 | % | | 18.0 | % | | | | (4.4 | )% | General and administrative expenses | | $ | 1,540 |
| | $ | 994 |
| | $ | 546 |
| | 54.9 | % | Operating income | | $ | 1,310 |
| | $ | 3,241 |
| | | | | | | | | | | | | |
Revenue decreased $2.6 million for the three months ended September 30, 2016 compared to the three months ended September 30, 2015 due to the winding down of two large offshore service projects from the first half of 2016 and the downturn in the oil and gas industry.
Gross profit decreased $1.4 million for the three months ended September 30, 2016 compared to the three months ended September 30, 2015 due to decreases in revenues and tighter margins on new work.
General and administrative expenses increased $546,000 for the three months ended September 30, 2016 compared to the three months ended September 30, 2015 due to bonuses and additional administrative support added during the first half of 2016.
Nine Months Ended September 30, 2016 Compared to Nine Months Ended September 30, 2015 (in thousands, except for percentages):
Consolidated
| | | | | | | | | | | | | | | | Nine Months Ended September 30, | | Increase or (Decrease) | | 2016 | | 2015 | | Amount | Percent | Revenue | $ | 230,864 |
| | $ | 251,102 |
| | $ | (20,238 | ) | (8.1 | )% | Cost of revenue | 205,839 |
| | 248,686 |
| | (42,847 | ) | (17.2 | )% | Gross profit | 25,025 |
| | 2,416 |
| | 22,609 |
| 935.8 | % | Gross profit percentage | 10.8% | | 1.0% | | | | General and administrative expenses | 14,633 |
| | 11,817 |
| | 2,816 |
| 23.8 | % | Asset impairment | — |
| | 6,600 |
| | (6,600 | ) | n/a |
| Operating income (loss) | 10,392 |
| | (16,001 | ) | | 26,393 |
| 164.9 | % | Other income (expense): | | | | | | | Interest expense | (248 | ) | | (126 | ) | | (122 | ) |
|
| Interest income | 20 |
| | 21 |
| | (1 | ) |
|
| Other income, net | 1,039 |
| | 20 |
| | 1,019 |
|
|
| | 811 |
| | (85 | ) | | 896 |
| 1,054.1 | % | Net income (loss) before income taxes | 11,203 |
| | (16,086 | ) | | 27,289 |
| 169.6 | % | Income taxes | 4,134 |
| | (5,389 | ) | | 9,523 |
| 176.7 | % | Net income (loss) | $ | 7,069 |
| | $ | (10,697 | ) | | $ | 17,766 |
| 166.1 | % |
Revenue - Our revenue for the nine months ended September 30, 2016 and 2015 was $230.9 million and $251.1 million, respectively, representing a decrease of 8.1%. The decrease is primarily attributable to an overall decrease in work experienced in our fabrication yards primarily as a result of depressed oil and gas prices and the corresponding reduction in customer demand for offshore projects inoil and gas related service projects.
Gross profit - Gross profit from our Fabrication segment. During 2015, we completed the fabrication of a 1,200 foot jacket, piles and an approximate 450 short ton topside with no similar project in 2016. Our decrease in revenue earned from offshore fabrication work was partially offset by the assets and operations acquired in the LEEVAC transaction (see LEEVAC Transaction above), which contributed $55.9Services division decreased $3.3 million in revenue for the ninethree months ended September 30, 2016. Pass-through costs as a percentage of revenue were 35.0% and 43.2% forMarch 31, 2017, compared to the ninethree months ended September 30,March 31, 2016, and 2015, respectively. Pass-through costs, as described in Note 3 of the Notes to Consolidated Financial Statements, are included in revenue but have no impact on the gross profit recognized on a project for a particular period. Gross profit - Our gross profit for the nine months ended September 30, 2016 and 2015 was $25.0 million (10.8% of revenue) and $2.4 million (1.0% of revenue), respectively. Our gross profit improved compared to 2015 primarily due to the LEEVAC transactiondecreased revenue discussed above and contract losses of $14.3 million that were recordedtighter margins on new work performed during the third quarter of 2015 resulting from our inability to recover certain costs related to a deck and jacket for one of our deepwater projects. We had no such loss during the third quarter of 2016 and implemented cost cutting measures in response to decreases in work at our fabrication facilities.2017.
General and administrative expenses - Our general and administrative expenses were $14.6 million for the nine months ended September 30, 2016, compared to $11.8 million for the nine months ended September 30, 2015. The increase in generalGeneral and administrative expenses for our Services division decreased $60,000 for the ninethree months ended September 30,March 31, 2017, compared to the three months ended March 31, 2016, was primarily attributable to:
an increase of stock-based compensation expense of $589,000,
due to lower bonuses and the LEEVAC transaction; partially offset by
cost cutting efforts implementedaccrued during 2017, as a result of a combination of a smaller workforce and the downturnreduction in the oil and gas industry.gross profit.
Asset impairment
| | | | | | | | | | | | | | | | Corporate | | Three Months Ended March 31, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | — |
| | $ | — |
| | $ | — |
| | —% | Gross loss | | (260 | ) | | (136 | ) | | (124 | ) | | (91.2)% | Gross profit (loss) percentage | | n/a |
| | n/a |
| | | |
| General and administrative expenses | | 1,479 |
| | 1,668 |
| | (189 | ) | | (11.3)% | Operating loss | | (1,739 | ) | | (1,804 | ) | | 65 |
| | |
Gross loss - During the nine months ended September 30, 2015, we recorded an asset impairment charge of $6.6 million related to a partially constructed topside, related valves, piping and equipment that we acquiredGross loss from a customer following its default under a contract in 2012. Due to the sustained downturn in the energy sector, our ability to effectively
market these assets was significantly limited, and we reassessed the asset’s net realizable value based on the estimated scrap value of the assets. We had no such impairments during the nine months ended September 30, 2016.
Interest expense, net - The Company had net interest expense of $228,000 for the nine months ended September 30, 2016 compared to net interest expense of $105,000 for the nine months ended September 30, 2015. The increase in net interest expense for the nine months ended September 30, 2016 was primarily driven by an increase in the cost of unused credit facility fees under our credit agreement.
Other income, net - Other incomeCorporate division increased $1.0 million for the nine months ended September 30, 2016. The increase was primarily due to gainsa restructuring of $924,000 relatedour corporate division with additional personnel allocated to the sale of three cranes at our Texas facilitycorporate division during 2017 as well as sales of smaller assets bydiscussed above.
General and administrative expenses - General and administrative expenses for our Shipyards division. Income taxes - Our effective income tax rate for the nine months ended September 30, 2016 was 36.9%, compared to an effective tax rate of 34.0% for the comparable period during 2015. The increase in our effective rate isCorporate division decreased primarily due to the effect of state income taxes from income generated within Louisiana with no offsetting tax benefit from losses generated within Texas.
Operating Segments
| | | | | | | | | | | | | | | | | Fabrication | | Nine Months Ended September 30, | | Increase or (Decrease) | | | 2016 | | 2015 | | Amount | | Percent | Revenue | | $ | 70,436 |
| | $ | 137,431 |
| | $ | (66,995 | ) | | (48.7 | )% | Gross profit (loss) | | $ | 4,418 |
| | $ | (14,055 | ) | | $ | 18,473 |
| | 131.4 | % | Gross profit (loss) percentage | | 6.3 | % | | (10.2 | )% | | | | 16.5 | % | General and administrative expenses | | $ | 4,479 |
| | $ | 7,026 |
| | $ | (2,547 | ) | | (36.3 | )% | Asset impairment | | $ | — |
| | $ | 6,600 |
| | $ | (6,600 | ) | | n/a |
| Operating income (loss) | | $ | (61 | ) | | $ | (27,681 | ) | |
| |
|
Revenue decreased $67.0 million for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015. The decrease is attributable to an overall decrease in work experienced in our fabrication yardsbonuses as a result of depressed oil and gas prices and the corresponding reduction in customer demand for offshore fabrication projects. During 2015, we completed the fabrication of a 1,200 foot jacket, piles and an approximate 450 short ton topside with no similar project in 2016.
Gross profit increased $18.5 million to $4.4 million for the nine months ended September 30, 2016 compared to aour consolidated gross loss, of $14.1 million for the nine months ended September 30, 2015. The increase is due to contract losses of $14.3 million that were recorded during the third quarter of 2015 resulting from our inability to recover certain costs related to a deck and jacket for one of our deepwater projects. We had no such loss during the third quarter of 2016 and implemented cost cutting measures in response to decreases in work at our fabrication facilities.
General and administrative expenses decreased $2.5 million for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015 due to cost cutting measures implemented during 2016 in response to decreases in work at our fabrication facilities.
Asset impairment - During the nine months ended September 30, 2015, we recorded an asset impairment charge of $6.6 million related to a partially constructed topside, related valves, piping and equipment that we acquired from a customer following its default under a contract in 2012. Due to the sustained downturn in the energy sector, our ability to effectively market these assets was significantly limited, and we reassessed the asset’s net realizable value based on the estimated scrap value of the assets. We had no such impairments during the nine months ended September 30, 2016.
| | | | | | | | | | | | | | | | | Shipyards | | Nine Months Ended September 30, | | Increase or (Decrease) | | | 2016 | | 2015 | | Amount | | Percent | Revenue (1) | | $ | 86,553 |
| | $ | 47,177 |
| | $ | 39,376 |
| | 83.5 | % | Gross profit (1) | | $ | 9,595 |
| | $ | 6,022 |
| | $ | 3,573 |
| | 59.3 | % | Gross profit percentage | | 11.1 | % | | 12.8 | % | | | | (1.7 | )% | General and administrative expenses | | $ | 5,875 |
| | $ | 1,243 |
| | $ | 4,632 |
| | 372.6 | % | Operating income (1) | | $ | 3,720 |
| | $ | 4,779 |
| | | | |
____________
| | (1) | Revenue for the nine months ended September 30, 2016, includes $4.1 million of non-cash amortization of deferred revenue related to the values assigned to the contracts acquired in the LEEVAC transaction. |
Revenue increased $39.4 million for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015 due to the assets and operations acquired in the LEEVAC transaction (see LEEVAC Transaction above), which contributed $55.9 million in revenue for the nine months ended September 30, 2016. The increase was partially offset by decreases in work dueadditional personnel allocated to the downturn in the oil and gas industry.
Gross profit increased $3.6 million for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015 due to the LEEVAC transaction as well as increases in profitability estimates for other jobs in progress due to cost cutting measures.
General and administrative expenses increased $4.6 million for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015 due to the expenses associated with the operations acquired in the LEEVAC transaction and bonuses.
| | | | | | | | | | | | | | | | | Services | | Nine Months Ended September 30, | | Increase or (Decrease) | | | 2016 | | 2015 | | Amount | | Percent | Revenue | | $ | 76,179 |
| | $ | 70,987 |
| | $ | 5,192 |
| | 7.3 | % | Gross profit | | $ | 11,012 |
| | $ | 10,449 |
| | $ | 563 |
| | 5.4 | % | Gross profit percentage | | 14.5 | % | | 14.7 | % | | | | (0.2 | )% | General and administrative expenses | | $ | 4,119 |
| | $ | 3,008 |
| | $ | 1,111 |
| | 36.9 | % | Operating income | | $ | 6,893 |
| | $ | 7,441 |
| | | | | | | | | | | | | |
Revenue increased $5.2 million for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015 due to increases in the scope of two large offshore service projectsour corporate division during the first half of 2016.
Gross profit increased $563,000 for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015 due to increases in revenues and improved absorption of fixed costs resulting from an increase in labor hours worked.
General and administrative expenses increased $1.1 million for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015 due to additional administrative support costs related to increases in activity and bonuses.2017.
Liquidity and Capital Resources Historically, we have funded our business activities through cash generated from operations. At September 30, 2016March 31, 2017, we had no amounts outstanding under our credit facility, $4.5$4.6 million in outstanding letters of credit, and cash and cash equivalents totaling $55.6$34.7 million, compared to $34.8$51.2 million at December 31, 2015.2016. Working capital was $79.8$182.9 million and our ratio of current assets to current liabilities was 2.837.56 to 1 at September 30,March 31, 2017, compared to $78.0 million and 3.2 to 1, respectively, at December 31, 2016. Working capital at March 31, 2017, includes $110.5 million related to assets held for sale, primarily related to our South Texas facilities. Our primary sourceuse of cash during the three months ended March 31, 2017, was due to: Operating losses for the nine months ended September 30, 2016, wasquarter exclusive of non-cash depreciation, amortization, impairment and stock compensation expense of approximately $3.7 million, Payment of year-end bonuses related to 2016, Progress on liabilities from assumed contracts in the collection of accounts receivable under various customer contracts and sales of three cranes atLEEVAC transaction.While our Texas facility for $5.8 million. At September 30, 2016, our contracts receivable balance was $26.6 million of which we have subsequently collected $12.1 million through October 31, 2016. On January 1, 2016, we acquired substantially all of the assets and assumed certain specified liabilities of LEEVAC. The purchase price for the acquisition of the LEEVAC assets during 2016 was $20.0 million, subject to a working capital adjustment whereby we received a dollar-for-
dollar reductionnet $3.0 million in cash from the seller for the assumption of certain net liabilities of LEEVAC at closing and settlement payments from sureties on certain ongoing fabricationshipbuilding projects of $23.0 million that were assigned to us in the transaction. After taking into accountWe have significantly progressed these adjustments, wecontracts which in turn, has resulted in utilization of the working capital and settlement payments received approximately $1.6during 2016.
Fewer receipts from accounts receivable, primarily $4.6 million in cash at closing. Duringfrom one customer that refused delivery of a vessel on February 6, 2017, and has not paid. We have initiated arbitration proceedings during the quarter we presentedto enforce our working capital true-uprights under our construction contract, and Build-up of costs for contracts in progress related to a customer in our Shipyards division with significant milestone payments occurring in the seller, which resulted in an additional $1.5 million due to us. Additionally, we hired 380 employees upon acquisitionlater stages of the facilities representing substantially all of the former LEEVAC employees. Strategically, the transaction expands our marine fabrication and repair and maintenance presenceprojects which are expected to occur beginning in the Gulf South market. third quarter of 2017 through the first quarter of 2018. At the date of transaction, we acquired approximately $121.2March 31, 2017, our contracts receivable balance was $21.1 million of new build construction backlog inclusive of approximately $9.2which we have subsequently collected $4.1 million of purchase price fair value allocated to four, new build construction projects to be delivered in 2017 and 2018 for two customers. through April 21, 2017.
As of September 30, 2016,March 31, 2017, we had a credit agreement with Whitney Bank and JPMorgan Chase Bank N.A. that provides for an $80.0a $40.0 million revolving credit facility maturing January 2, 2017.November 29, 2018. The credit agreement allows the Company to use up to the full amount of the available borrowing base for letters of credit and up to $20.0 million for general corporate purposes. Our obligations under the credit agreement are secured by substantially all of our assets other(other than real property located in the state of Louisiana. On February 29, 2016, we entered into an amendment to our credit agreement. The amendment (i) extends the term of the Credit Facility from February 29, 2016 to January 2, 2017; (ii) increases the commitment feeestate). Commitment fees on undrawn amounts from 0.25% to 0.50%are 0.5% per annum; (iii) increases theannum and letter of credit fee,fees, subject to certain limited exceptions, to 2.00%are 2.0% per annum on undrawn stated amounts under letters of credit issued by the lenders; and (iv) limits the maximum amount of loans outstanding at any time for general corporate purposes to $20.0 million.lenders. Amounts borrowed under our the credit agreement bear interest, at our option, at either the prime lending rate established by JPMorgan Chase Bank, N.A. or LIBOR plus 2.0 percent. Under the amendment ourOur financial covenants beginning with the quarter endingat March 31, 20162017, are as follows:
| | (i) | minimum net worth requirement of not less than $250.0255.0 million plus |
| | a) | 50% of net income earned in each quarter beginning MarchDecember 31, 2016, and |
| | b) | 100% of proceeds from any issuance of common stock; |
| | c) | less the amount of any impairment on certain assets owned by Gulf Marine Fabricators, L.P. (our South Texas assets held for sale) up to $30.0 million; |
| | (ii) | debt to EBITDA ratio not greater than 3.02.5 to 1.0; and |
| | (iii) | interest coverage ratio not less than 2.0 to 1.0. |
At September 30, 2016,March 31, 2017, no amounts were outstanding under the credit facility, and we had outstanding letters of credit totaling $4.5$4.6 million, reducing the unused portion of our credit facility for additional letters of credit and borrowings to $75.5$35.4 million. As of September 30, 2016,March 31, 2017, we were in compliance with all covenants. During the fourth quarter, we expect
We are currently in discussions with one of our financial institutions to enter into a two-year, $40.0 million amendednew revolving line of credit with comparable availability, but with less restrictive financial covenants and restatedreduced fees as compared to our current revolving credit facility. We expect to close on this new revolving credit facility withand terminate our current lenders that will be secured by substantially all of our assets (other than real property). We anticipate the amendedexisting revolving credit facility will allow us to use the full $40.0 million borrowing base for both letters of credit and general corporate purposes. Given the historically low levels of borrowings under our current facility and our cash position, we requested a reduction in the amountsecond quarter of available credit under our revolver from $80.0 million to $40.0 million to decrease the commitment fees payable to our lenders for the undrawn portion of the facility.2017.
Our primary liquidity requirements are for the costs associated with servicingfabrication projects, and capital expenditures inand payment of dividends to our Fabrication and Shipyards segments. In particular, as further discussed in Note 2 in our Notes to Consolidated Financial Statements, in connection with the LEEVAC transaction, we received at closing a net cash amount that included consideration for billings in excess of costs and estimated earnings on uncompleted contracts and other payments from sureties representing pre-payment on the partially constructed vessels totaling $21.9 million as adjusted for the working capital true-up. Consequently, there will be required cash outflows for costs associated with the prepaid amounts without corresponding milestone billings.shareholders. We anticipate capital expenditures for the remainder of 20162017 to be approximately $1.8range between $6.0 million to $8.0 million primarily for the following: extension of one of our dry docks, and
improvements to our newly acquired facilities.Jennings and Lake Charles leased shipyards, improvement to the bulkhead at our Houma facility, and
computer system upgrades.
On October 21, 2016, a customer of our Shipyards’ segmentShipyards division announced it had received limited waivers from its lenders and noteholders through November 11, 2016 with respect towas in noncompliance with certain financial covenants included in the customer’s debt agreements. TheThis customer also announcedstated it had received limited waivers from its lenders and noteholders, but its debt agreements will require further negotiation and amendment. InOn April 19, 2017, the eventcustomer stated it had allowed the waivers to expire and remains in default of its covenants.
This same customer has rejected delivery of the vessel that we tendered for delivery on February 6, 2017, alleging certain technical deficiencies exist with respect to the vessel and is seeking recovery of all purchase price amounts previously paid by the customer under the contract. We are also building a second vessel for this customer that is scheduled for delivery during the second quarter of 2017. We disagree with our customer is unsuccessful inconcerning these efforts,alleged technical deficiencies and have put the customer will consider other options including a possible reorganizationin default under Chapter 11the terms of the Federal bankruptcy laws. At September 30, 2016, no contracts receivable werefor both vessels. As of March 31, 2017, approximately $4.6 million remained due and outstanding from our customer for the first vessel. The balance due to us upon delivery for a second vessel which is expected in May of this year, is approximately $4.9 million. On March 10, 2017, we gave notice for arbitration with our customer in an effort to resolve this matter. We intend to take all legal action as may be necessary to protect our rights under the contracts and deferred revenue exceeded our costs and estimated earnings in excess of billings on this contract. recover the remaining balances owed to us.
We continue to monitor our work performed in relation to our customer’s status and its ability to pay under the terms of its contract. Based on our evaluation to date,these contracts. Because these vessels have been completed or are substantially complete, we do not believe that they have significant fair value, and that we would be able to fully recover any loss on this contract is probable or estimable at this time.amounts due to us.
In February 2016,anticipation of the proceeds to be received from the sale of our BoardSouth Texas assets, we have engaged in a strategic financial analysis project with advisors to determine the appropriate use of Directors approvedproceeds from this transaction. We will be evaluating a decrease inmix of options including tactical capital improvement projects, strategic growth investment opportunities that support our quarterly dividend to $0.01 in an effort to conserve cash. business plan, stock buy-backs and/or dividends and working capital reinvestment.
On October 27, 2016,April 26, 2017, our Board of Directors declared a dividend of $0.01 per share on our shares of common stock outstanding, payable November 23, 2016May 25, 2017, to shareholders of record on November 10, 2016.May 11, 2017.
We believe our cash and cash equivalents generated by our operating activities and funds available under our credit facilityproceeds to be received from future assets sales will be sufficient to fund our capital expenditures issue future letters of credit and meet our working capital needs for both the near and longer term to continue our operations, satisfy our contractual operations and pay dividends to our shareholders. Additionally, we expect to close on a new revolving line of credit during the second quarter of 2017 as discussed above. We believe that the new facility will provide us with additional working capital flexibility to ramp up our operations quickly in times of rapid increasing demand, to continue to issue future letters of credit and to quickly take advantage of market opportunities.
Cash Flow Activities
For the ninethree months ended September 30, 2016March 31, 2017, net cash provided byused in operating activities was $19.3$15.1 million, compared to $18.7$1.6 million for the ninethree months ended September 30, 2015.March 31, 2016. The increase in cash provided byused in operations was primarily due to increased gross profitthe following:
Operating losses for the quarter in excess of non-cash depreciation, amortization, impairment and collectionsstock compensation expense of contract receivablesapproximately $3.7 million, Payment of year-end bonuses related to 2016, Progress on liabilities from assumed contracts in the LEEVAC transaction.While our purchase price for the acquisition of the LEEVAC assets during 2016 somewhat offset bywas $20.0 million, we received a net $3.0 million in cash from the seller for the assumption of certain net liabilities and settlement payments required for trade payableson ongoing shipbuilding projects of $23.0 million that were assigned to us in the transaction. We have significantly progressed these contracts which in turn, has resulted in utilization of the working capital and settlement payments received during 2016. Fewer receipts from accounts receivable, primarily $4.6 million from one customer that refused delivery of a vessel on February 6, 2017, and has not paid. We have initiated arbitration proceedings during the ninequarter to enforce our rights under our construction contract, and
Build-up of costs for contracts in progress related to a customer in our Shipyards division with significant milestone payments occurring in the later stages of the projects which are expected to occur beginning in the third quarter of 2017 through the first quarter of 2018.
Net cash used in investing activities for the three months ended September 30, 2016 asMarch 31, 2017, was $391,000, compared to 2015. Net cash provided by investing activities for the nine months ended September 30, 2016 was $2.0 million, compared to cash used in investing activities of $5.0$6.2 million for the ninethree months ended September 30, 2015.March 31, 2016. The increasechange in cash used in/provided by investing activities is primarily due to cash received from the sale of three cranes at our Texas facility for $5.8$5.4 million and $1.6 million of cash acquired in the LEEVAC transaction.
Net cash used in financing activities for the ninethree months ended September 30,March 31, 2017 and 2016, was $1.0 million and 2015 was $440,000 and $4.4 million,$291,000, respectively. The decreaseincrease in cash used in financing activities is due to the reduction in the cash dividend in 2016.payments made to taxing authorities on behalf of employees' for their vesting of common stock.
Contractual Obligations There have been no material changes from the information included in our Annual Report on Form 10-K for the year ended December 31, 2015.2016. For more information on our contractual obligations, refer to Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2015.2016. Off-Balance Sheet Arrangements There have been no material changes from the information included in our Annual Report on Form 10-K for the year ended December 31, 2015.2016. Item 3. Quantitative and Qualitative Disclosures About Market Risk. There have been no material changes in the Company’s market risks during the quarter ended September 30, 2016.March 31, 2017. For more information on market risk, refer to Part II, Item 7A. of our Annual Report on Form 10-K for the year ended December 31, 2015.2016. Item 4. Controls and Procedures. The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and that such information is communicated to the Company’s management, including its Chief Executive Officer and Interim Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. The Company’s management, with the participation of the Company’s Chief Executive Officer and Interim Chief Financial Officer, hashave evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based on this evaluation, our Chief Executive Officer and Interim Chief Financial Officer hashave concluded that the design and operation of our disclosure controls and procedures were effective as of the end of the period covered by this report. There have been no changes during the fiscal quarter ended September 30, 2016March 31, 2017, in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. PART II. OTHER INFORMATION Item 1. Legal Proceedings. The Company is subject to various routine legal proceedings in the normal conduct of its business primarily involving commercial claims, workers’ compensation claims, and claims for personal injury under general maritime laws of the United
States and the Jones Act. While the outcome of these lawsuits, legal proceedings and claims cannot be predicted with certainty, management believes that the outcome of any such proceedings, even if determined adversely, would not have a material adverse effect on the financial position, results of operations or cash flows of the Company. Item 1A. Risk Factors. There have been no material changes from the information included in Item 1A “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2015.2016. | | | | | 2.1Exhibit Number | | Asset Purchase Agreement, dated December 23, 2015 by and among Gulf Island Shipyards, LLC, LEEVAC Shipyards, LLC and certain related affiliates, incorporated by reference toDescription of Exhibit 2.1 of the Company's Form 8-K filed on December 23, 2015. | | | 3.1 | | Composite Articles of Incorporation of the Company incorporated by reference to Exhibit 3.1 of the Company’s Form 10-Q filed April 23, 2009. | 3.2 | | Amended and Restated Bylaws of the Company, as amended and restated through April 26, 2012, incorporated by reference to Exhibit 3.1 of the Company’s Form 8-K filed on April 30, 2012. | 4.1 | | Specimen Common Stock Certificate, incorporated by reference to the Company’s Form S-1/A filed March 19, 1997 (Registration No. 333-21863).November 4, 2016. | 10.1 | | Change of Control Agreement, dated March 1, 2017, between the Company and David S. Schorlemer, incorporated by reference to Exhibit 10.15 of the Company's Form of Long-Term Performance-Based Cash Award Agreement.10-K for the year ended December 31, 2016 filed on March 2, 2017. | 3131.1 | | CEO and Certifications pursuant to Rule 13a-14 under the Securities Exchange Act of 1934. | 31.2 | | CFO CertificationCertifications pursuant to Rule 13a-14 under the Securities Exchange Act of 1934. | 32 | | Section 906 Certification furnished pursuant to 18 U.S.C. Section 1350. | 99.1 | | Press release issued by | 101 | | Attached as Exhibit 101 to this report are the following items formatted in XBRL (Extensible Business Reporting Language): | | | (i) | Consolidated Balance Sheets, | | | (ii) | Consolidated Statements of Operations, | | | (iii) | Consolidated Statement of Changes in Shareholders’ Equity, | | | (iv) | Consolidated Statements of Cash Flows and | | | (v) | Notes to Consolidated Financial Statements. |
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. | | | GULF ISLAND FABRICATION, INC. | | BY: | /s/ David S. Schorlemer | | David S. Schorlemer | | Executive Vice President, Chief Financial Officer, and Treasurer (Principal Financial and Accounting Officer) |
Date: May 2, 2017
GULF ISLAND FABRICATION, INC. EXHIBIT INDEX | | | | | Exhibit Number | | Description of Exhibit | | | 3.1 | | Composite Articles of Incorporation of the Company on October 27, 2016, incorporated by reference to Exhibit 99.13.1 of the Company’s Form 10-Q filed April 23, 2009. | 3.2 | | Amended and Restated Bylaws of the Company, incorporated by reference to Exhibit 3.1 of the Company’s Form 8-K filed November 4, 2016. | 10.1 | | Change of Control Agreement, dated March 1, 2017, between the Company and David S. Schorlemer, incorporated by reference to Exhibit 10.15 of the Company's Form 10-K for the year ended December 31, 2016 filed on October 27, 2016.March 2, 2017. | 31.1 | | CEO Certifications pursuant to Rule 13a-14 under the Securities Exchange Act of 1934. | 31.2 | | CFO Certifications pursuant to Rule 13a-14 under the Securities Exchange Act of 1934. | 32 | | Section 906 Certification furnished pursuant to 18 U.S.C. Section 1350. | | | | 101 | | Attached as Exhibit 101 to this report are the following items formatted in XBRL (Extensible Business Reporting Language): | | | | | | (i) | Consolidated Balance Sheets, | | | (ii) | Consolidated Statements of Operations, | | | (iii) | Consolidated Statement of Changes in Shareholders’ Equity, | | | (iv) | Consolidated Statements of Cash Flows and | | | (v) | Notes to Consolidated Financial Statements. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | GULF ISLAND FABRICATION, INC. | | BY: | /s/ Kirk J. Meche | | Kirk J. Meche | | President, Chief Executive Officer, Director and Interim Chief Financial Officer, Treasurer and Secretary (Principal Executive Officer and Interim Principal Financial and Accounting Officer) |
Date: November 2, 2016
GULF ISLAND FABRICATION, INC.
EXHIBIT INDEX
| | | | | Exhibit
Number
| | Description of Exhibit | | | 2.1 | | Asset Purchase Agreement, dated December 23, 2015 by and among Gulf Island Shipyards, LLC, LEEVAC Shipyards, LLC and certain related affiliates, incorporated by reference to Exhibit 2.1 of the Company's Form 8-K filed on December 23, 2015.
| 3.1 | | Composite Articles of Incorporation of the Company, incorporated by reference to Exhibit 3.1 of the Company’s Form 10-Q filed April 23, 2009. | 3.2 | | Bylaws of the Company, as amended and restated through April 26, 2012, incorporated by reference to Exhibit 3.1 of the Company’s Form 8-K filed on April 30, 2012. | 4.1 | | Specimen Common Stock Certificate, incorporated by reference to the Company’s Form S-1/A filed March 19, 1997 (Registration No. 333-21863). | 10.1 | | Form of Long-Term Performance-Based Cash Award Agreement. | 31 | | CEO and CFO Certifications pursuant to Rule 13a-14 under the Securities Exchange Act of 1934. | 32 | | Section 906 Certification furnished pursuant to 18 U.S.C. Section 1350. | 99.1 | | Press release issued by the Company on October 27, 2016, incorporated by reference to Exhibit 99.1 of the Company’s Form 8-K filed on October 27, 2016. | 101 | | Attached as Exhibit 101 to this report are the following items formatted in XBRL (Extensible Business Reporting Language): | | | | | | (i) | Consolidated Balance Sheets, | | | (ii) | Consolidated Statements of Operations, | | | (iii) | Consolidated Statement of Changes in Shareholders’ Equity, | | | (iv) | Consolidated Statements of Cash Flows and | | | (v) | Notes to Consolidated Financial Statements. |
s | Percentage | | | | | | | ___________ | | 1. | Backlog as of September 30, 2016March 31, 2017, includes commitments received through October 27, 2016.April 26, 2017. We exclude suspended projects from contract backlog thatwhen they are expected to be suspended more than twelve months because resumption of work and timing of revenue recognition for these projects are difficult to predict. Our backlog also includes the new build construction that was acquired in the LEEVAC transaction on January 1, 2016. Included in our backlog at September 30, 2016, is $5.1 million of non-cash revenue related to purchase price fair value of contracts acquired in the LEEVAC transaction and included in deferred revenue in our consolidated Balance sheet at September 30, 2016. |
| | 2. | At September 30, 2016,March 31, 2017, projects for our threetwo largest customers in terms of revenue backlog consisted of: |
| | (i) | two large petroleum supply vessels for one customer in our Shipyards segment, which commenced in the second quarter of 2013 and will be completed during the first and second quarter of 2017; |
| | (ii) | two large multi-purpose service vessels for one customer in our Shipyards segment, which commenced in the first quarter of 2014 and will be completed during the first and second quarterquarters of 2018; and |
(iii) the fabrication of four modules associated with a U.S. ethane cracker project.
| | (ii) | the fabrication of four modules associated with a U.S. ethane cracker project. |
| | 3. | The timing of recognition of the revenue represented in our backlog is based on management’s current estimates to complete the projects. Certain factors and circumstances could cause changes in the amounts ultimately recognized and the timing of the recognition of revenue from our backlog. |
Depending on the size of the project, the termination, postponement, or reduction in scope of any one project could significantly reduce our backlog and could have a material adverse effect on revenue, net income and cash flow. As of September 30, 2016,March 31, 2017, we had 1,336922 employees and 163133 contract employees inclusive of 380 employees hired in the LEEVAC transaction, compared to 1,2551,178 employees and 7192 contract employees as of December 31, 2015. 2016.
Labor hours worked were 2.3 million479,000 during the ninethree months ended September 30, 2016,March 31, 2017, compared to 2.1 million695,000 for the ninethree months ended September 30, 2015.March 31, 2016. The overall increasedecrease in labor hours worked for the three months ended September 30, 2016March 31, 2017, was due to 636,000 labor hours worked from projects acquired in the LEEVAC transaction partially offset by a reduction in fabrication activity due primarily to the downturn in the oil and gas industry.
Results of Operations
Our results of operations are affected primarily by our ability to effectively manage contracts to a successful completion along with producing maximum efficiencies as it relates to manhours.
Three Months Ended September 30, 2016 Compared to Three Months Ended September 30, 2015 (in thousands, except for percentages):
Consolidated
| | | | | | | | | | | | | | | | Three Months Ended September 30, | | Increase or (Decrease) | | 2016 | | 2015 | | Amount | Percent | Revenue | $ | 65,384 |
| | $ | 67,531 |
| | $ | (2,147 | ) | (3.2 | )% | Cost of revenue | 60,125 |
| | 75,368 |
| | (15,243 | ) | (20.2 | )% | Gross profit (loss) | 5,259 |
| | (7,837 | ) | | 13,096 |
| 167.1 | % | Gross profit percentage | 8.0% | | (11.6)% | | | | General and administrative expenses | 5,086 |
| | 3,798 |
| | 1,288 |
| 33.9 | % | Asset impairment | — |
| | 6,600 |
| | (6,600 | ) | n/a |
| Operating income | 173 |
| | (18,235 | ) | | 18,408 |
| 100.9 | % | Other income (expense): | | | | | | | Interest expense | (110 | ) | | (39 | ) | | (71 | ) |
|
| Interest income | 12 |
| | 8 |
| | 4 |
|
|
| Other income, net | 599 |
| | — |
| | 599 |
|
|
| | 501 |
| | (31 | ) | | 532 |
| 1,716.1 | % | Net income (loss) before income taxes | 674 |
| | (18,266 | ) | | 18,940 |
| 103.7 | % | Income taxes | 133 |
| | (6,129 | ) | | 6,262 |
| 102.2 | % | Net income (loss) | $ | 541 |
| | $ | (12,137 | ) | | $ | 12,678 |
| 104.5 | % |
Revenue - Our revenue for the three months ended September 30, 2016 and 2015 was $65.4 million and $67.5 million, respectively, representing a decrease of 3.2%. The decrease is primarily attributable to an overall decrease in work experienced in our fabrication yardsfacilities as a result of depressed oil and gas prices and the corresponding reduction in customer demand within all of our operating divisions.
Results of Operations Three Months Ended March 31, 2017 Compared to Three Months Ended March 31, 2016 (in thousands, except for offshore projects in our Fabrication segment. During 2015, we completed the fabrication of a 1,200 foot jacket, piles and an approximate 450 short ton topside with no similar project in 2016.percentages): Consolidated | | | | | | | | | | | | | | | Three Months Ended March 31, | | Increase or (Decrease) | | 2017 | | 2016 | | Amount | Percent | Revenue | $ | 37,993 |
| | $ | 83,979 |
| | $ | (45,986 | ) | (54.8)% | Cost of revenue | 42,890 |
| | 78,278 |
| | (35,388 | ) | (45.2)% | Gross profit (loss) | (4,897 | ) | | 5,701 |
| | (10,598 | ) | 185.9% | Gross profit (loss) percentage | (12.9)% | | 6.8% | | | | General and administrative expenses | 3,930 |
| | 4,485 |
| | (555 | ) | (12.4)% | Asset impairment | 389 |
| | — |
| | 389 |
| 100.0% | Operating income (loss) | (9,216 | ) | | 1,216 |
| | (10,432 | ) | (857.9)% | Other income (expense): | | | | | | | Interest expense | (59 | ) | | (50 | ) | | (9 | ) | | Interest income | — |
| | 6 |
| | (6 | ) | | Other income, net | 9 |
| | 398 |
| | (389 | ) | | Total other income (expense) | (50 | ) | | 354 |
| | (404 | ) | (114.1)% | Net income (loss) before income taxes | (9,266 | ) | | 1,570 |
| | (10,836 | ) | (690.2)% | Income taxes | (2,812 | ) | | 581 |
| | (3,393 | ) | (584.0)% | Net income (loss) | $ | (6,454 | ) | | $ | 989 |
| | $ | (7,443 | ) | (752.6)% |
Revenue - Our decrease in revenue earned from offshore fabrication work was partially offset by the results of the assets and operations acquired in the LEEVAC transaction (see LEEVAC Transaction above), which contributed $16.8 million in revenue for the three months ended September 30, 2016.March 31, 2017 and 2016, was $38.0 million and $84.0 million, respectively, representing a decrease of 54.8%. The decrease is primarily attributable to an overall decrease in work experienced in our facilities as a result of depressed oil and gas prices and the corresponding reduction in customer demand within all of our operating divisions. Pass-through costs as a percentage of revenue were 33.8%29.4% and 45.3%40.0% for the three-months ended September 30,March 31, 2017 and 2016, and 2015, respectively. Pass-through costs, as described in Note 3 of the Notes to Consolidated Financial Statements, are included in revenue but have no impact on the gross profit recognized on a project for a particular period.
Gross profit (loss)- Our gross profit (loss)loss for the three months ended September 30, 2016 and 2015March 31, 2017, was $5.3$4.9 million (8.0% of revenue) and $(7.8) million, respectively. Ourcompared to a gross profit improved compared to third quarter of 2015$5.7 million for the three months ended March 31, 2016. The decrease was primarily due to contract losses of $14.3 million that were recorded during the third quarter of 2015 resulting from our inability to recover certain costs related to a deckdecreased revenue as discussed above and jacket for one of our deepwater projects. We had no such loss during the third quarter of 2016 and implemented cost cutting measures. This wastighter margins on current work partially offset by tighter margins within all of our segments due to a decreasedecreases in work as a result of the downturn in the oil and gas industry.costs resulting from additional cost cutting measures implemented by management.
General and administrative expenses - Our general and administrative expenses were $5.1$3.9 million for the three months ended September 30, 2016,March 31, 2017, compared to $3.8$4.5 million for the three months ended September 30, 2015.March 31, 2016. The increasedecrease in general
and administrative expenses for the three months ended September 30, 2016March 31, 2017, was primarily attributable to the operations acquired in the LEEVAC transaction and bonus expense, partially offset by cost cutting effortsmeasures implemented by management during 2016.the first part of 2016 as well as lower bonuses accrued during 2017 as a result of a combination of a smaller workforce and our consolidated gross loss.
Asset impairmentImpairment - During the three months ended September 30, 2015,March 31, 2017, we recorded an asset impairment charge of $6.6 million$389 related to a partially constructed topside, related valves, piping and equipment that we acquired from a customer following its default under a contract in 2012. Due to the sustained downturn in the energy sector, our ability to effectively market these assets was significantly limited, and we reassessed the asset’s net realizable value based on the estimated scrap valueheld for sale at our Prospect Shipyard. See also Note 2 of the assets. We had no such impairments during the three months ended September 30, 2016.Notes to Consolidated Financial statements. Interest expense,
Other income, net - The Company had net interest expense of $98,000Other income decreased $389,000 for the three months ended September 30, 2016 compared to net interest expense of $31,000 for the three months ended September 30, 2015.March 31, 2017. The increase was primarily driven by an increase in the cost of unused credit facility fees under our credit agreement. Other income, net - Other income increased $599,000 for the three months ended September 30, 2016. The increasedecrease was primarily due to gains on sales of assets from our Fabrication division.division recorded during three months ended March 31, 2016.
Income taxes - Our effective income tax rate for the three months ended September 30, 2016March 31, 2017, was 19.7%30.3%, compared to an effective tax rate of 34.0%37.0% for the comparable period during 2015.2016. The changedecrease in ourthe effective tax rate is duethe result of limitations on the deductibility of executive compensation and $210,000 in tax expense recognized during the three months ended March 31, 2017, for the tax effect of the difference between the actual tax deduction allowed upon vesting of common stock and the compensation cost recognized for financial reporting purposes resulting from the adoption of Accounting Standards Update 2016-09 as further discussed in Note 1 of the Notes to the decrease in our effective rate for the year-to-date period.Consolidated Financial Statements.
Operating Segments
As discussed in Note 8 of the Notes to Consolidated Financial Statements, management reduced its allocation of corporate administrative costs and overhead expenses to its operating divisions during the three months ended March 31, 2017, such that a significant portion of its corporate expenses are retained in its non-operating Corporate division. In addition, it has also allocated certain personnel previously included in the operating divisions to within the Corporate division. In doing so, management believes that it has created a fourth reportable segment with each of its three operating divisions and it's Corporate division each meeting the criteria of reportable segments under GAAP. During the three months ended March 31, 2016, we allocated substantially all of our corporate administrative costs and overhead expenses to our three operating divisions. We have recast our 2016 segment data below in order to conform to the current period presentation. Our results of our three operating divisions and Corporate division for the three months ended March 31, 2017 and 2016, are presented below (in thousands, except for percentages).
| | | | | | | | | | | | | | | | | Fabrication | | Three Months Ended September 30, | | Increase or (Decrease) | | | 2016 | | 2015 | | Amount | | Percent | Revenue | | $ | 22,311 |
| | $ | 32,133 |
| | $ | (9,822 | ) | | (30.6 | )% | Gross profit (loss) | | $ | 532 |
| | $ | (14,009 | ) | | $ | 14,541 |
| | 103.8 | % | Gross profit percentage | | 2.4 | % | | (43.6 | )% | | | | 46.0 | % | General and administrative expenses | | $ | 1,481 |
| | $ | 2,138 |
| | $ | (657 | ) | | (30.7 | )% | Asset impairment | | $ | — |
| | $ | 6,600 |
| | $ | (6,600 | ) | | n/a |
| Operating income (loss) | | $ | (949 | ) | | $ | (22,747 | ) | | | | |
| | | | | | | | | | | | | | | | Fabrication | | Three Months Ended March 31, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | 10,209 |
| | $ | 23,829 |
| | $ | (13,620 | ) | | (57.2)% | Gross profit (loss) | | (2,966 | ) | | 86 |
| | (3,052 | ) | | (3,548.8)% | Gross profit (loss) percentage | | (29.1 | )% | | 0.4 | % | | | | (29.5)% | General and administrative expenses | | 821 |
| | 795 |
| | 26 |
| | 3.3% | Operating income (loss) | | (3,787 | ) | | (709 | ) | | | | |
Revenue - Revenue from our Fabrication division decreased $9.8$13.6 million for the three months ended September 30, 2016March 31, 2017, compared to the three months ended September 30, 2015.March 31, 2016. The decrease is attributable to an overall decrease in work experienced in our fabrication yards as a result of depressed oil and gas prices and the corresponding reduction in customer demand for offshore fabrication projects. As discussed above, management has classified our South Texas assets as assets held for sale in response to the underutilization of our Fabrication assets.
Gross profit increased $14.5 million to $532,000(loss) - Gross loss from our Fabrication division for the three months ended September 30, 2016March 31, 2017, was $3.0 million compared to a gross lossprofit of $14.0 million$86,000 for the three months ended September 30, 2015March 31, 2016. The decrease was due to contract losseslower revenue as discussed above, payment of $14.3termination benefits as we reduce our South Texas workforce and depreciation expense of $1.9 million that were recorded during the third quarter of 2015related to our South Texas assets prior to their classification as assets held for sale. This was partially offset by decreases in costs resulting from our inability to recover certain costs related to a deck and jacket for one of our deepwater projects. We had no such loss during the third quarter of 2016 and implementedadditional cost cutting measures in response to decreases in work at our fabrication facilities.implemented by management.
General and administrative expenses - General and administrative expenses decreased $657,000for our Fabrication division increased $26,000 for the three months ended September 30, 2016March 31, 2017, compared to the three months ended September 30, 2015March 31, 2016. The increase is primarily due to cost cutting measures implemented during 2016 in responseexpenses incurred to decreases in work atmarket our fabrication facilities.South Texas assets for sale and payment of termination benefits as we reduce its workforce and complete those operations.
Asset impairment - During the three months ended September 30, 2015, we recorded an asset impairment charge of $6.6 million related to a partially constructed topside, related valves, piping and equipment that we acquired from a customer following its default under a contract in 2012. Due to the sustained downturn in the energy sector, our ability to effectively market these assets was significantly limited, and we reassessed the asset’s net realizable value based on the estimated scrap value of the assets. We had no such impairments during the three months ended September 30, 2016.
| | | | | | | | | | | | | | | | | Shipyards | | Three Months Ended September 30, | | Increase or (Decrease) | | | 2016 | | 2015 | | Amount | | Percent | Revenue (1) | | $ | 23,060 |
| | $ | 12,936 |
| | $ | 10,124 |
| | 78.3 | % | Gross profit (1) | | $ | 1,877 |
| | $ | 1,937 |
| | $ | (60 | ) | | (3.1 | )% | Gross profit percentage | | 8.1 | % | | 15.0 | % | | | | (6.9 | )% | General and administrative expenses | | $ | 2,065 |
| | $ | 392 |
| | $ | 1,673 |
| | 426.8 | % | Operating income (loss) (1) | | $ | (188 | ) | | $ | 1,545 |
| | | | |
| | | | | | | | | | | | | | | | Shipyards | | Three Months Ended March 31, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue (1) | | $ | 18,422 |
| | $ | 34,120 |
| | $ | (15,698 | ) | | (46.0)% | Gross profit (loss)(1) | | (1,704 | ) | | 2,375 |
| | (4,079 | ) | | (171.7)% | Gross profit (loss) percentage | | (9.2 | )% | | 7.0 | % | | | | (16.2)% | General and administrative expenses | | 964 |
| | 1,296 |
| | (332 | ) | | (25.6)% | Asset impairment | | 389 |
| | — |
| | 389 |
| | 100.0% | Operating income (loss) (1) | | (3,057 | ) | | 1,079 |
| | | | |
___________ | | (1) | Revenue for the three months ended September 30,March 31, 2017, and 2016, includes $1.5$1.6 million and $1.2 million of non-cash amortization of deferred revenue related to the values assigned to the contracts acquired in the LEEVAC transaction.transaction, respectively. |
Revenue increased $10.1- Revenue from our Shipyards division decreased $15.7 million for the three months ended September 30, 2016March 31, 2017, compared to the three months ended September 30, 2015March 31, 2016, due to the operations acquiredoverall decreases in work as we complete work under our contracts
including completion of a vessel that we assumed in the LEEVAC transaction (see LEEVAC Transaction above), which contributed $16.8 million in revenue forand delivered to a customer on February 6, 2017, with less new, replacement work starting during the three months ended September 30, 2016.
Gross profit decreased $60,000 for the three months ended September 30, 2016period as compared to the three months ended September 30, 2015March 31, 2016. The decrease in new, replacement work is due to tighter marginsdepressed oil and gas prices and the corresponding reduction in customer demand for shipbuilding and repair services supporting the oil and gas industry.
Gross profit (loss) - Gross loss from our Shipyards division was $1.7 million for the three months ended March 31, 2017, compared to a gross profit of $2.4 million for the three months ended March 31, 2016. The decrease was due to:
continued cost overruns on new work and inefficiencies incurred on the contracts acquiredthat were assigned to us in the LEEVAC transaction transaction; holding costs related to a completed vessel that was delivered on February 6, 2017; however, was refused by our customer alleging certain technical deficiencies (see also Note 9 of the Notes to Consolidated Financial Statements); and overall decreases in work under other various contracts as discussed above; partially offset by savings realized from cost cutting measures implemented by management during 2016.
General and administrative expenses - General and administrative expenses increased $1.7for our Shipyards division decreased $332,000 for the three months ended March 31, 2017, compared to the three months ended March 31, 2016, primarily due to cost cutting measures implemented by management during 2016 as well as lower bonuses accrued during 2017 as a result of a combination of a smaller workforce and our consolidated gross loss.
Asset Impairment - During three months ended March 31, 2017, we recorded an impairment of $389 related to our assets held for sale at our Prospect Shipyard. See also Note 2 of the Notes to Consolidated Financial statements.
| | | | | | | | | | | | | | | | Services | | Three Months Ended March 31, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | 10,712 |
| | $ | 26,559 |
| | $ | (15,847 | ) | | (59.7)% | Gross profit | | 33 |
| | 3,376 |
| | (3,343 | ) | | (99.0)% | Gross profit (loss) percentage | | 0.3 | % | | 12.7 | % | | | | (12.4)% | General and administrative expenses | | 666 |
| | 726 |
| | (60 | ) | | (8.3)% | Operating income (loss) | | (633 | ) | | 2,650 |
| | | | |
Revenue - Revenue from our Services division decreased $15.8 million for the three months ended September 30, 2016March 31, 2017, compared to the three months ended September 30, 2015 primarilyMarch 31, 2016, due to the expenses associated with the operations acquired in the LEEVAC transaction and bonus expense. | | | | | | | | | | | | | | | | | Services | | Three Months Ended September 30, | | Increase or (Decrease) | | | 2016 | | 2015 | | Amount | | Percent | Revenue | | $ | 20,928 |
| | $ | 23,487 |
| | $ | (2,559 | ) | | (10.9 | )% | Gross profit | | $ | 2,850 |
| | $ | 4,235 |
| | $ | (1,385 | ) | | (32.7 | )% | Gross profit percentage | | 13.6 | % | | 18.0 | % | | | | (4.4 | )% | General and administrative expenses | | $ | 1,540 |
| | $ | 994 |
| | $ | 546 |
| | 54.9 | % | Operating income | | $ | 1,310 |
| | $ | 3,241 |
| | | | | | | | | | | | | |
Revenue decreased $2.6 million for the three months ended September 30, 2016 compared to the three months ended September 30, 2015 due to the winding down of two large offshore service projects from the first half of 2016 and the downturn in the oil and gas industry.
Gross profit decreased $1.4 million for the three months ended September 30, 2016 compared to the three months ended September 30, 2015 due to decreases in revenues and tighter margins on new work.
General and administrative expenses increased $546,000 for the three months ended September 30, 2016 compared to the three months ended September 30, 2015 due to bonuses and additional administrative support added during the first half of 2016.
Nine Months Ended September 30, 2016 Compared to Nine Months Ended September 30, 2015 (in thousands, except for percentages):
Consolidated
| | | | | | | | | | | | | | | | Nine Months Ended September 30, | | Increase or (Decrease) | | 2016 | | 2015 | | Amount | Percent | Revenue | $ | 230,864 |
| | $ | 251,102 |
| | $ | (20,238 | ) | (8.1 | )% | Cost of revenue | 205,839 |
| | 248,686 |
| | (42,847 | ) | (17.2 | )% | Gross profit | 25,025 |
| | 2,416 |
| | 22,609 |
| 935.8 | % | Gross profit percentage | 10.8% | | 1.0% | | | | General and administrative expenses | 14,633 |
| | 11,817 |
| | 2,816 |
| 23.8 | % | Asset impairment | — |
| | 6,600 |
| | (6,600 | ) | n/a |
| Operating income (loss) | 10,392 |
| | (16,001 | ) | | 26,393 |
| 164.9 | % | Other income (expense): | | | | | | | Interest expense | (248 | ) | | (126 | ) | | (122 | ) |
|
| Interest income | 20 |
| | 21 |
| | (1 | ) |
|
| Other income, net | 1,039 |
| | 20 |
| | 1,019 |
|
|
| | 811 |
| | (85 | ) | | 896 |
| 1,054.1 | % | Net income (loss) before income taxes | 11,203 |
| | (16,086 | ) | | 27,289 |
| 169.6 | % | Income taxes | 4,134 |
| | (5,389 | ) | | 9,523 |
| 176.7 | % | Net income (loss) | $ | 7,069 |
| | $ | (10,697 | ) | | $ | 17,766 |
| 166.1 | % |
Revenue - Our revenue for the nine months ended September 30, 2016 and 2015 was $230.9 million and $251.1 million, respectively, representing a decrease of 8.1%. The decrease is primarily attributable to an overall decrease in work experienced in our fabrication yards primarily as a result of depressed oil and gas prices and the corresponding reduction in customer demand for offshore projects inoil and gas related service projects.
Gross profit - Gross profit from our Fabrication segment. During 2015, we completed the fabrication of a 1,200 foot jacket, piles and an approximate 450 short ton topside with no similar project in 2016. Our decrease in revenue earned from offshore fabrication work was partially offset by the assets and operations acquired in the LEEVAC transaction (see LEEVAC Transaction above), which contributed $55.9Services division decreased $3.3 million in revenue for the ninethree months ended September 30, 2016. Pass-through costs as a percentage of revenue were 35.0% and 43.2% forMarch 31, 2017, compared to the ninethree months ended September 30,March 31, 2016, and 2015, respectively. Pass-through costs, as described in Note 3 of the Notes to Consolidated Financial Statements, are included in revenue but have no impact on the gross profit recognized on a project for a particular period. Gross profit - Our gross profit for the nine months ended September 30, 2016 and 2015 was $25.0 million (10.8% of revenue) and $2.4 million (1.0% of revenue), respectively. Our gross profit improved compared to 2015 primarily due to the LEEVAC transactiondecreased revenue discussed above and contract losses of $14.3 million that were recordedtighter margins on new work performed during the third quarter of 2015 resulting from our inability to recover certain costs related to a deck and jacket for one of our deepwater projects. We had no such loss during the third quarter of 2016 and implemented cost cutting measures in response to decreases in work at our fabrication facilities.2017.
General and administrative expenses - Our general and administrative expenses were $14.6 million for the nine months ended September 30, 2016, compared to $11.8 million for the nine months ended September 30, 2015. The increase in generalGeneral and administrative expenses for our Services division decreased $60,000 for the ninethree months ended September 30,March 31, 2017, compared to the three months ended March 31, 2016, was primarily attributable to:
an increase of stock-based compensation expense of $589,000,
due to lower bonuses and the LEEVAC transaction; partially offset by
cost cutting efforts implementedaccrued during 2017, as a result of a combination of a smaller workforce and the downturnreduction in the oil and gas industry.gross profit.
Asset impairment
| | | | | | | | | | | | | | | | Corporate | | Three Months Ended March 31, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | — |
| | $ | — |
| | $ | — |
| | —% | Gross loss | | (260 | ) | | (136 | ) | | (124 | ) | | (91.2)% | Gross profit (loss) percentage | | n/a |
| | n/a |
| | | |
| General and administrative expenses | | 1,479 |
| | 1,668 |
| | (189 | ) | | (11.3)% | Operating loss | | (1,739 | ) | | (1,804 | ) | | 65 |
| | |
Gross loss - During the nine months ended September 30, 2015, we recorded an asset impairment charge of $6.6 million related to a partially constructed topside, related valves, piping and equipment that we acquiredGross loss from a customer following its default under a contract in 2012. Due to the sustained downturn in the energy sector, our ability to effectively
market these assets was significantly limited, and we reassessed the asset’s net realizable value based on the estimated scrap value of the assets. We had no such impairments during the nine months ended September 30, 2016.
Interest expense, net - The Company had net interest expense of $228,000 for the nine months ended September 30, 2016 compared to net interest expense of $105,000 for the nine months ended September 30, 2015. The increase in net interest expense for the nine months ended September 30, 2016 was primarily driven by an increase in the cost of unused credit facility fees under our credit agreement.
Other income, net - Other incomeCorporate division increased $1.0 million for the nine months ended September 30, 2016. The increase was primarily due to gainsa restructuring of $924,000 relatedour corporate division with additional personnel allocated to the sale of three cranes at our Texas facilitycorporate division during 2017 as well as sales of smaller assets bydiscussed above.
General and administrative expenses - General and administrative expenses for our Shipyards division. Income taxes - Our effective income tax rate for the nine months ended September 30, 2016 was 36.9%, compared to an effective tax rate of 34.0% for the comparable period during 2015. The increase in our effective rate isCorporate division decreased primarily due to the effect of state income taxes from income generated within Louisiana with no offsetting tax benefit from losses generated within Texas.
Operating Segments
| | | | | | | | | | | | | | | | | Fabrication | | Nine Months Ended September 30, | | Increase or (Decrease) | | | 2016 | | 2015 | | Amount | | Percent | Revenue | | $ | 70,436 |
| | $ | 137,431 |
| | $ | (66,995 | ) | | (48.7 | )% | Gross profit (loss) | | $ | 4,418 |
| | $ | (14,055 | ) | | $ | 18,473 |
| | 131.4 | % | Gross profit (loss) percentage | | 6.3 | % | | (10.2 | )% | | | | 16.5 | % | General and administrative expenses | | $ | 4,479 |
| | $ | 7,026 |
| | $ | (2,547 | ) | | (36.3 | )% | Asset impairment | | $ | — |
| | $ | 6,600 |
| | $ | (6,600 | ) | | n/a |
| Operating income (loss) | | $ | (61 | ) | | $ | (27,681 | ) | |
| |
|
Revenue decreased $67.0 million for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015. The decrease is attributable to an overall decrease in work experienced in our fabrication yardsbonuses as a result of depressed oil and gas prices and the corresponding reduction in customer demand for offshore fabrication projects. During 2015, we completed the fabrication of a 1,200 foot jacket, piles and an approximate 450 short ton topside with no similar project in 2016.
Gross profit increased $18.5 million to $4.4 million for the nine months ended September 30, 2016 compared to aour consolidated gross loss, of $14.1 million for the nine months ended September 30, 2015. The increase is due to contract losses of $14.3 million that were recorded during the third quarter of 2015 resulting from our inability to recover certain costs related to a deck and jacket for one of our deepwater projects. We had no such loss during the third quarter of 2016 and implemented cost cutting measures in response to decreases in work at our fabrication facilities.
General and administrative expenses decreased $2.5 million for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015 due to cost cutting measures implemented during 2016 in response to decreases in work at our fabrication facilities.
Asset impairment - During the nine months ended September 30, 2015, we recorded an asset impairment charge of $6.6 million related to a partially constructed topside, related valves, piping and equipment that we acquired from a customer following its default under a contract in 2012. Due to the sustained downturn in the energy sector, our ability to effectively market these assets was significantly limited, and we reassessed the asset’s net realizable value based on the estimated scrap value of the assets. We had no such impairments during the nine months ended September 30, 2016.
| | | | | | | | | | | | | | | | | Shipyards | | Nine Months Ended September 30, | | Increase or (Decrease) | | | 2016 | | 2015 | | Amount | | Percent | Revenue (1) | | $ | 86,553 |
| | $ | 47,177 |
| | $ | 39,376 |
| | 83.5 | % | Gross profit (1) | | $ | 9,595 |
| | $ | 6,022 |
| | $ | 3,573 |
| | 59.3 | % | Gross profit percentage | | 11.1 | % | | 12.8 | % | | | | (1.7 | )% | General and administrative expenses | | $ | 5,875 |
| | $ | 1,243 |
| | $ | 4,632 |
| | 372.6 | % | Operating income (1) | | $ | 3,720 |
| | $ | 4,779 |
| | | | |
____________
| | (1) | Revenue for the nine months ended September 30, 2016, includes $4.1 million of non-cash amortization of deferred revenue related to the values assigned to the contracts acquired in the LEEVAC transaction. |
Revenue increased $39.4 million for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015 due to the assets and operations acquired in the LEEVAC transaction (see LEEVAC Transaction above), which contributed $55.9 million in revenue for the nine months ended September 30, 2016. The increase was partially offset by decreases in work dueadditional personnel allocated to the downturn in the oil and gas industry.
Gross profit increased $3.6 million for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015 due to the LEEVAC transaction as well as increases in profitability estimates for other jobs in progress due to cost cutting measures.
General and administrative expenses increased $4.6 million for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015 due to the expenses associated with the operations acquired in the LEEVAC transaction and bonuses.
| | | | | | | | | | | | | | | | | Services | | Nine Months Ended September 30, | | Increase or (Decrease) | | | 2016 | | 2015 | | Amount | | Percent | Revenue | | $ | 76,179 |
| | $ | 70,987 |
| | $ | 5,192 |
| | 7.3 | % | Gross profit | | $ | 11,012 |
| | $ | 10,449 |
| | $ | 563 |
| | 5.4 | % | Gross profit percentage | | 14.5 | % | | 14.7 | % | | | | (0.2 | )% | General and administrative expenses | | $ | 4,119 |
| | $ | 3,008 |
| | $ | 1,111 |
| | 36.9 | % | Operating income | | $ | 6,893 |
| | $ | 7,441 |
| | | | | | | | | | | | | |
Revenue increased $5.2 million for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015 due to increases in the scope of two large offshore service projectsour corporate division during the first half of 2016.
Gross profit increased $563,000 for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015 due to increases in revenues and improved absorption of fixed costs resulting from an increase in labor hours worked.
General and administrative expenses increased $1.1 million for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015 due to additional administrative support costs related to increases in activity and bonuses.2017.
Liquidity and Capital Resources Historically, we have funded our business activities through cash generated from operations. At September 30, 2016March 31, 2017, we had no amounts outstanding under our credit facility, $4.5$4.6 million in outstanding letters of credit, and cash and cash equivalents totaling $55.6$34.7 million, compared to $34.8$51.2 million at December 31, 2015.2016. Working capital was $79.8$182.9 million and our ratio of current assets to current liabilities was 2.837.56 to 1 at September 30,March 31, 2017, compared to $78.0 million and 3.2 to 1, respectively, at December 31, 2016. Working capital at March 31, 2017, includes $110.5 million related to assets held for sale, primarily related to our South Texas facilities. Our primary sourceuse of cash during the three months ended March 31, 2017, was due to: Operating losses for the nine months ended September 30, 2016, wasquarter exclusive of non-cash depreciation, amortization, impairment and stock compensation expense of approximately $3.7 million, Payment of year-end bonuses related to 2016, Progress on liabilities from assumed contracts in the collection of accounts receivable under various customer contracts and sales of three cranes atLEEVAC transaction.While our Texas facility for $5.8 million. At September 30, 2016, our contracts receivable balance was $26.6 million of which we have subsequently collected $12.1 million through October 31, 2016. On January 1, 2016, we acquired substantially all of the assets and assumed certain specified liabilities of LEEVAC. The purchase price for the acquisition of the LEEVAC assets during 2016 was $20.0 million, subject to a working capital adjustment whereby we received a dollar-for-
dollar reductionnet $3.0 million in cash from the seller for the assumption of certain net liabilities of LEEVAC at closing and settlement payments from sureties on certain ongoing fabricationshipbuilding projects of $23.0 million that were assigned to us in the transaction. After taking into accountWe have significantly progressed these adjustments, wecontracts which in turn, has resulted in utilization of the working capital and settlement payments received approximately $1.6during 2016.
Fewer receipts from accounts receivable, primarily $4.6 million in cash at closing. Duringfrom one customer that refused delivery of a vessel on February 6, 2017, and has not paid. We have initiated arbitration proceedings during the quarter we presentedto enforce our working capital true-uprights under our construction contract, and Build-up of costs for contracts in progress related to a customer in our Shipyards division with significant milestone payments occurring in the seller, which resulted in an additional $1.5 million due to us. Additionally, we hired 380 employees upon acquisitionlater stages of the facilities representing substantially all of the former LEEVAC employees. Strategically, the transaction expands our marine fabrication and repair and maintenance presenceprojects which are expected to occur beginning in the Gulf South market. third quarter of 2017 through the first quarter of 2018. At the date of transaction, we acquired approximately $121.2March 31, 2017, our contracts receivable balance was $21.1 million of new build construction backlog inclusive of approximately $9.2which we have subsequently collected $4.1 million of purchase price fair value allocated to four, new build construction projects to be delivered in 2017 and 2018 for two customers. through April 21, 2017.
As of September 30, 2016,March 31, 2017, we had a credit agreement with Whitney Bank and JPMorgan Chase Bank N.A. that provides for an $80.0a $40.0 million revolving credit facility maturing January 2, 2017.November 29, 2018. The credit agreement allows the Company to use up to the full amount of the available borrowing base for letters of credit and up to $20.0 million for general corporate purposes. Our obligations under the credit agreement are secured by substantially all of our assets other(other than real property located in the state of Louisiana. On February 29, 2016, we entered into an amendment to our credit agreement. The amendment (i) extends the term of the Credit Facility from February 29, 2016 to January 2, 2017; (ii) increases the commitment feeestate). Commitment fees on undrawn amounts from 0.25% to 0.50%are 0.5% per annum; (iii) increases theannum and letter of credit fee,fees, subject to certain limited exceptions, to 2.00%are 2.0% per annum on undrawn stated amounts under letters of credit issued by the lenders; and (iv) limits the maximum amount of loans outstanding at any time for general corporate purposes to $20.0 million.lenders. Amounts borrowed under our the credit agreement bear interest, at our option, at either the prime lending rate established by JPMorgan Chase Bank, N.A. or LIBOR plus 2.0 percent. Under the amendment ourOur financial covenants beginning with the quarter endingat March 31, 20162017, are as follows:
| | (i) | minimum net worth requirement of not less than $250.0255.0 million plus |
| | a) | 50% of net income earned in each quarter beginning MarchDecember 31, 2016, and |
| | b) | 100% of proceeds from any issuance of common stock; |
| | c) | less the amount of any impairment on certain assets owned by Gulf Marine Fabricators, L.P. (our South Texas assets held for sale) up to $30.0 million; |
| | (ii) | debt to EBITDA ratio not greater than 3.02.5 to 1.0; and |
| | (iii) | interest coverage ratio not less than 2.0 to 1.0. |
At September 30, 2016,March 31, 2017, no amounts were outstanding under the credit facility, and we had outstanding letters of credit totaling $4.5$4.6 million, reducing the unused portion of our credit facility for additional letters of credit and borrowings to $75.5$35.4 million. As of September 30, 2016,March 31, 2017, we were in compliance with all covenants. During the fourth quarter, we expect
We are currently in discussions with one of our financial institutions to enter into a two-year, $40.0 million amendednew revolving line of credit with comparable availability, but with less restrictive financial covenants and restatedreduced fees as compared to our current revolving credit facility. We expect to close on this new revolving credit facility withand terminate our current lenders that will be secured by substantially all of our assets (other than real property). We anticipate the amendedexisting revolving credit facility will allow us to use the full $40.0 million borrowing base for both letters of credit and general corporate purposes. Given the historically low levels of borrowings under our current facility and our cash position, we requested a reduction in the amountsecond quarter of available credit under our revolver from $80.0 million to $40.0 million to decrease the commitment fees payable to our lenders for the undrawn portion of the facility.2017.
Our primary liquidity requirements are for the costs associated with servicingfabrication projects, and capital expenditures inand payment of dividends to our Fabrication and Shipyards segments. In particular, as further discussed in Note 2 in our Notes to Consolidated Financial Statements, in connection with the LEEVAC transaction, we received at closing a net cash amount that included consideration for billings in excess of costs and estimated earnings on uncompleted contracts and other payments from sureties representing pre-payment on the partially constructed vessels totaling $21.9 million as adjusted for the working capital true-up. Consequently, there will be required cash outflows for costs associated with the prepaid amounts without corresponding milestone billings.shareholders. We anticipate capital expenditures for the remainder of 20162017 to be approximately $1.8range between $6.0 million to $8.0 million primarily for the following: extension of one of our dry docks, and
improvements to our newly acquired facilities.Jennings and Lake Charles leased shipyards, improvement to the bulkhead at our Houma facility, and
computer system upgrades.
On October 21, 2016, a customer of our Shipyards’ segmentShipyards division announced it had received limited waivers from its lenders and noteholders through November 11, 2016 with respect towas in noncompliance with certain financial covenants included in the customer’s debt agreements. TheThis customer also announcedstated it had received limited waivers from its lenders and noteholders, but its debt agreements will require further negotiation and amendment. InOn April 19, 2017, the eventcustomer stated it had allowed the waivers to expire and remains in default of its covenants.
This same customer has rejected delivery of the vessel that we tendered for delivery on February 6, 2017, alleging certain technical deficiencies exist with respect to the vessel and is seeking recovery of all purchase price amounts previously paid by the customer under the contract. We are also building a second vessel for this customer that is scheduled for delivery during the second quarter of 2017. We disagree with our customer is unsuccessful inconcerning these efforts,alleged technical deficiencies and have put the customer will consider other options including a possible reorganizationin default under Chapter 11the terms of the Federal bankruptcy laws. At September 30, 2016, no contracts receivable werefor both vessels. As of March 31, 2017, approximately $4.6 million remained due and outstanding from our customer for the first vessel. The balance due to us upon delivery for a second vessel which is expected in May of this year, is approximately $4.9 million. On March 10, 2017, we gave notice for arbitration with our customer in an effort to resolve this matter. We intend to take all legal action as may be necessary to protect our rights under the contracts and deferred revenue exceeded our costs and estimated earnings in excess of billings on this contract. recover the remaining balances owed to us.
We continue to monitor our work performed in relation to our customer’s status and its ability to pay under the terms of its contract. Based on our evaluation to date,these contracts. Because these vessels have been completed or are substantially complete, we do not believe that they have significant fair value, and that we would be able to fully recover any loss on this contract is probable or estimable at this time.amounts due to us.
In February 2016,anticipation of the proceeds to be received from the sale of our BoardSouth Texas assets, we have engaged in a strategic financial analysis project with advisors to determine the appropriate use of Directors approvedproceeds from this transaction. We will be evaluating a decrease inmix of options including tactical capital improvement projects, strategic growth investment opportunities that support our quarterly dividend to $0.01 in an effort to conserve cash. business plan, stock buy-backs and/or dividends and working capital reinvestment.
On October 27, 2016,April 26, 2017, our Board of Directors declared a dividend of $0.01 per share on our shares of common stock outstanding, payable November 23, 2016May 25, 2017, to shareholders of record on November 10, 2016.May 11, 2017.
We believe our cash and cash equivalents generated by our operating activities and funds available under our credit facilityproceeds to be received from future assets sales will be sufficient to fund our capital expenditures issue future letters of credit and meet our working capital needs for both the near and longer term to continue our operations, satisfy our contractual operations and pay dividends to our shareholders. Additionally, we expect to close on a new revolving line of credit during the second quarter of 2017 as discussed above. We believe that the new facility will provide us with additional working capital flexibility to ramp up our operations quickly in times of rapid increasing demand, to continue to issue future letters of credit and to quickly take advantage of market opportunities.
Cash Flow Activities
For the ninethree months ended September 30, 2016March 31, 2017, net cash provided byused in operating activities was $19.3$15.1 million, compared to $18.7$1.6 million for the ninethree months ended September 30, 2015.March 31, 2016. The increase in cash provided byused in operations was primarily due to increased gross profitthe following:
Operating losses for the quarter in excess of non-cash depreciation, amortization, impairment and collectionsstock compensation expense of contract receivablesapproximately $3.7 million, Payment of year-end bonuses related to 2016, Progress on liabilities from assumed contracts in the LEEVAC transaction.While our purchase price for the acquisition of the LEEVAC assets during 2016 somewhat offset bywas $20.0 million, we received a net $3.0 million in cash from the seller for the assumption of certain net liabilities and settlement payments required for trade payableson ongoing shipbuilding projects of $23.0 million that were assigned to us in the transaction. We have significantly progressed these contracts which in turn, has resulted in utilization of the working capital and settlement payments received during 2016. Fewer receipts from accounts receivable, primarily $4.6 million from one customer that refused delivery of a vessel on February 6, 2017, and has not paid. We have initiated arbitration proceedings during the ninequarter to enforce our rights under our construction contract, and
Build-up of costs for contracts in progress related to a customer in our Shipyards division with significant milestone payments occurring in the later stages of the projects which are expected to occur beginning in the third quarter of 2017 through the first quarter of 2018.
Net cash used in investing activities for the three months ended September 30, 2016 asMarch 31, 2017, was $391,000, compared to 2015. Net cash provided by investing activities for the nine months ended September 30, 2016 was $2.0 million, compared to cash used in investing activities of $5.0$6.2 million for the ninethree months ended September 30, 2015.March 31, 2016. The increasechange in cash used in/provided by investing activities is primarily due to cash received from the sale of three cranes at our Texas facility for $5.8$5.4 million and $1.6 million of cash acquired in the LEEVAC transaction.
Net cash used in financing activities for the ninethree months ended September 30,March 31, 2017 and 2016, was $1.0 million and 2015 was $440,000 and $4.4 million,$291,000, respectively. The decreaseincrease in cash used in financing activities is due to the reduction in the cash dividend in 2016.payments made to taxing authorities on behalf of employees' for their vesting of common stock.
Contractual Obligations There have been no material changes from the information included in our Annual Report on Form 10-K for the year ended December 31, 2015.2016. For more information on our contractual obligations, refer to Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2015.2016. Off-Balance Sheet Arrangements There have been no material changes from the information included in our Annual Report on Form 10-K for the year ended December 31, 2015.2016. Item 3. Quantitative and Qualitative Disclosures About Market Risk. There have been no material changes in the Company’s market risks during the quarter ended September 30, 2016.March 31, 2017. For more information on market risk, refer to Part II, Item 7A. of our Annual Report on Form 10-K for the year ended December 31, 2015.2016. Item 4. Controls and Procedures. The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and that such information is communicated to the Company’s management, including its Chief Executive Officer and Interim Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. The Company’s management, with the participation of the Company’s Chief Executive Officer and Interim Chief Financial Officer, hashave evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based on this evaluation, our Chief Executive Officer and Interim Chief Financial Officer hashave concluded that the design and operation of our disclosure controls and procedures were effective as of the end of the period covered by this report. There have been no changes during the fiscal quarter ended September 30, 2016March 31, 2017, in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. PART II. OTHER INFORMATION Item 1. Legal Proceedings. The Company is subject to various routine legal proceedings in the normal conduct of its business primarily involving commercial claims, workers’ compensation claims, and claims for personal injury under general maritime laws of the United
States and the Jones Act. While the outcome of these lawsuits, legal proceedings and claims cannot be predicted with certainty, management believes that the outcome of any such proceedings, even if determined adversely, would not have a material adverse effect on the financial position, results of operations or cash flows of the Company. Item 1A. Risk Factors. There have been no material changes from the information included in Item 1A “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2015.2016. | | | | | 2.1Exhibit Number | | Asset Purchase Agreement, dated December 23, 2015 by and among Gulf Island Shipyards, LLC, LEEVAC Shipyards, LLC and certain related affiliates, incorporated by reference toDescription of Exhibit 2.1 of the Company's Form 8-K filed on December 23, 2015. | | | 3.1 | | Composite Articles of Incorporation of the Company incorporated by reference to Exhibit 3.1 of the Company’s Form 10-Q filed April 23, 2009. | 3.2 | | Amended and Restated Bylaws of the Company, as amended and restated through April 26, 2012, incorporated by reference to Exhibit 3.1 of the Company’s Form 8-K filed on April 30, 2012. | 4.1 | | Specimen Common Stock Certificate, incorporated by reference to the Company’s Form S-1/A filed March 19, 1997 (Registration No. 333-21863).November 4, 2016. | 10.1 | | Change of Control Agreement, dated March 1, 2017, between the Company and David S. Schorlemer, incorporated by reference to Exhibit 10.15 of the Company's Form of Long-Term Performance-Based Cash Award Agreement.10-K for the year ended December 31, 2016 filed on March 2, 2017. | 3131.1 | | CEO and Certifications pursuant to Rule 13a-14 under the Securities Exchange Act of 1934. | 31.2 | | CFO CertificationCertifications pursuant to Rule 13a-14 under the Securities Exchange Act of 1934. | 32 | | Section 906 Certification furnished pursuant to 18 U.S.C. Section 1350. | 99.1 | | Press release issued by | 101 | | Attached as Exhibit 101 to this report are the following items formatted in XBRL (Extensible Business Reporting Language): | | | (i) | Consolidated Balance Sheets, | | | (ii) | Consolidated Statements of Operations, | | | (iii) | Consolidated Statement of Changes in Shareholders’ Equity, | | | (iv) | Consolidated Statements of Cash Flows and | | | (v) | Notes to Consolidated Financial Statements. |
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. | | | GULF ISLAND FABRICATION, INC. | | BY: | /s/ David S. Schorlemer | | David S. Schorlemer | | Executive Vice President, Chief Financial Officer, and Treasurer (Principal Financial and Accounting Officer) |
Date: May 2, 2017
GULF ISLAND FABRICATION, INC. EXHIBIT INDEX | | | | | Exhibit Number | | Description of Exhibit | | | 3.1 | | Composite Articles of Incorporation of the Company on October 27, 2016, incorporated by reference to Exhibit 99.13.1 of the Company’s Form 10-Q filed April 23, 2009. | 3.2 | | Amended and Restated Bylaws of the Company, incorporated by reference to Exhibit 3.1 of the Company’s Form 8-K filed November 4, 2016. | 10.1 | | Change of Control Agreement, dated March 1, 2017, between the Company and David S. Schorlemer, incorporated by reference to Exhibit 10.15 of the Company's Form 10-K for the year ended December 31, 2016 filed on October 27, 2016.March 2, 2017. | 31.1 | | CEO Certifications pursuant to Rule 13a-14 under the Securities Exchange Act of 1934. | 31.2 | | CFO Certifications pursuant to Rule 13a-14 under the Securities Exchange Act of 1934. | 32 | | Section 906 Certification furnished pursuant to 18 U.S.C. Section 1350. | | | | 101 | | Attached as Exhibit 101 to this report are the following items formatted in XBRL (Extensible Business Reporting Language): | | | | | | (i) | Consolidated Balance Sheets, | | | (ii) | Consolidated Statements of Operations, | | | (iii) | Consolidated Statement of Changes in Shareholders’ Equity, | | | (iv) | Consolidated Statements of Cash Flows and | | | (v) | Notes to Consolidated Financial Statements. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | GULF ISLAND FABRICATION, INC. | | BY: | /s/ Kirk J. Meche | | Kirk J. Meche | | President, Chief Executive Officer, Director and Interim Chief Financial Officer, Treasurer and Secretary (Principal Executive Officer and Interim Principal Financial and Accounting Officer) |
Date: November 2, 2016
GULF ISLAND FABRICATION, INC.
EXHIBIT INDEX
| | | | | Exhibit
Number
| | Description of Exhibit | | | 2.1 | | Asset Purchase Agreement, dated December 23, 2015 by and among Gulf Island Shipyards, LLC, LEEVAC Shipyards, LLC and certain related affiliates, incorporated by reference to Exhibit 2.1 of the Company's Form 8-K filed on December 23, 2015.
| 3.1 | | Composite Articles of Incorporation of the Company, incorporated by reference to Exhibit 3.1 of the Company’s Form 10-Q filed April 23, 2009. | 3.2 | | Bylaws of the Company, as amended and restated through April 26, 2012, incorporated by reference to Exhibit 3.1 of the Company’s Form 8-K filed on April 30, 2012. | 4.1 | | Specimen Common Stock Certificate, incorporated by reference to the Company’s Form S-1/A filed March 19, 1997 (Registration No. 333-21863). | 10.1 | | Form of Long-Term Performance-Based Cash Award Agreement. | 31 | | CEO and CFO Certifications pursuant to Rule 13a-14 under the Securities Exchange Act of 1934. | 32 | | Section 906 Certification furnished pursuant to 18 U.S.C. Section 1350. | 99.1 | | Press release issued by the Company on October 27, 2016, incorporated by reference to Exhibit 99.1 of the Company’s Form 8-K filed on October 27, 2016. | 101 | | Attached as Exhibit 101 to this report are the following items formatted in XBRL (Extensible Business Reporting Language): | | | | | | (i) | Consolidated Balance Sheets, | | | (ii) | Consolidated Statements of Operations, | | | (iii) | Consolidated Statement of Changes in Shareholders’ Equity, | | | (iv) | Consolidated Statements of Cash Flows and | | | (v) | Notes to Consolidated Financial Statements. |
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