| | | September 30, 2016 | | June 30, 2016 | | March 31, 2016 | September 30, 2017 | | December 31, 2016 | |
Segment | ___________ | | 1.(1) | Backlog as of September 30, 2016 includes commitments received through October 27, 2016. We exclude suspended projects from contract backlog thatwhen they are expected to be suspended more than twelve12 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.(2) | At September 30, 2016,2017, projects for our threefive 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) | twoTwo large multi-purpose service vessels for one customer inwithin our Shipyards segment,division, which commenced in the first quarter of 2014 and will be completed during the first and second quarter of 2018; and |
(iii) the fabrication of four modules associated with a U.S. ethane cracker project.
| | 3.(ii) | Newbuild construction of four harbor tugs for one customer within our Shipyards division; |
| | (iii) | Newbuild construction of four harbor tugs for one additional customer within our Shipyards division; |
| | (iv) | The fabrication of four modules associated with a U.S. ethane cracker project within our Fabrication division; and |
| | (v) | Newbuild construction of an offshore research vessel within our Shipyards division. |
| | (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. Additionally, as we continue to add backlog, we will begin adding personnel with critical project management and fabrication skills to ensure we have the resources necessary to execute our projects well and to support our project risk mitigation discipline for all new project work. This may negatively impact near term results. As of September 30, 2016,2017, we had 1,336989 employees and 163 contract employees inclusive of 380 employees hired in the LEEVAC transaction, compared to 1,255 employees and 71 contract1,178 employees as of December 31, 2015.
2016. Labor hours worked were 2.31.5 million during the nine months ended September 30, 2016,2017, compared to 2.12.3 million for the nine months ended September 30, 2015.2016. The overall increasedecrease in labor hours worked for the threenine months ended September 30, 20162017, 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 September 30, 2017, Compared to Three Months Ended September 30, 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 September 30, | | Increase or (Decrease) | | 2017 | | 2016 | | Amount | Percent | Revenue | $ | 49,884 |
| | $ | 65,384 |
| | $ | (15,500 | ) | (23.7)% | Cost of revenue | 50,378 |
| | 60,125 |
| | (9,747 | ) | (16.2)% | Gross profit (loss) | (494 | ) | | 5,259 |
| | (5,753 | ) | (109.4)% | Gross profit (loss) percentage | (1.0 | )% | | 8.0 | % | | | | General and administrative expenses | 4,370 |
| | 5,086 |
| | (716 | ) | (14.1)% | Operating income (loss) | (4,864 | ) | | 173 |
| | (5,037 | ) | (2,911.6)% | Other income (expense): | | | | | | | Interest expense | (45 | ) | | (110 | ) | | 65 |
| | Interest income | — |
| | 12 |
| | (12 | ) | | Other income (expense), net | 38 |
| | 599 |
| | (561 | ) | | Total other income (expense) | (7 | ) | | 501 |
| | (508 | ) | 101.4% | Net income (loss) before income taxes | (4,871 | ) | | 674 |
| | (5,545 | ) | (822.7)% | Income tax expense (benefit) | (1,761 | ) | | 133 |
| | (1,894 | ) | (1,424.1)% | Net income (loss) | $ | (3,110 | ) | | $ | 541 |
| | $ | (3,651 | ) | (674.9)% |
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, 2016.2017 and 2016, was $49.9 million and $65.4 million, respectively, representing a decrease of 23.7%. The decrease is primarily attributable to an overall decrease in work experienced in our facilities primarily 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%48.4% and 45.3%33.8% for the three-monthsthree months ended September 30, 20162017 and 2015,2016, 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 20152017, was $494,000 compared to a gross profit of $5.3 million (8.0% of revenue) and $(7.8) million, respectively. Our gross profit improved compared to third quarter of 2015for the three months ended September 30, 2016. The decrease was primarily due to $2.1 million of contract losses of $14.3 million that were recorded during the third quarter of 2015 resulting fromincurred by our inabilityShipyards division related to recover certaincost overruns and re-work identified on two newbuild vessel construction
contracts, decreased revenue as discussed above, holding costs related to a deckour South Texas assets of $1.1 million and jacket for one of our deepwater projects. We had no such loss during the third quarter of 2016 and implemented cost cutting measures.lower margins on current work due to competitive pressures. This was partially offset by tighter margins within all ofdecreases in costs resulting from reductions in workforce as we wrapped up and completed projects at our segments due to a decrease in workSouth Texas fabrication yards and Prospect shipyard, no depreciation being recorded for our South Texas assets and Prospect shipyard for the three months ended September 30, 2017 (as these assets are classified as a result ofassets held for sale) and continued cost minimization efforts implemented by management for the downturn in the oil and gas industry.period.
General and administrative expenses - Our general and administrative expenses were $4.4 million for the three months ended September 30, 2017, compared to $5.1 million for the three months ended September 30, 2016, compared to $3.8 million for the three months ended September 30, 2015.2016. The increasedecrease in general
and administrative expenses for the three months ended September 30, 20162017, was primarily attributable to the operations acquired in the LEEVAC transactionlower bonuses accrued during 2017, employee reductions and bonus expense, partially offset bycontinued cost cuttingminimization efforts implemented during 2016.by management for the period.
Asset impairmentOther income (expense), net - - 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 assetsOther income 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.
Interest expense, net - The Company had net interest expense of $98,000$38,000 for the three months ended September 30, 20162017, as compared to net interest expenseother income of $31,000$599,000 for three months ended September 30, 2016. Other income for the three months ended September 30, 2015. The increase2017 relates to insurance proceeds received from damage to a corporate automobile that was primarily driven by an increase in the cost of unused credit facility fees under our credit agreement.
fully depreciated. Other income net - Other income increased $599,000 for thefor three months ended September 30, 2016. The increase was2016 primarily duerelates to gains on sales of assets from our Fabrication division.
Income taxestax expense (benefit) - Our effective income tax rate for the three months ended September 30, 20162017, was 19.7%36.2%, compared to an effective tax rate of 34.0%19.7% for the comparable period during 2015.2016. The changeincrease in ourthe effective tax rate is duethe result of changes to the decrease inestimates of our effective rateyear-end tax provision during for the year-to-date period.three months ended September 30, 2016.
Operating Segments | | | | | | | | | | | | | | | | | 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 | ) | | | | |
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 and nine months ended September 30, 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 its Corporate division each meeting the criteria of reportable segments under GAAP. During the three and nine months ended September 30, 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 September 30, 2017 and 2016, are presented below (in thousands, except for percentages).
| | | | | | | | | | | | | | | | Fabrication | | Three Months Ended September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | 18,318 |
| | $ | 22,311 |
| | $ | (3,993 | ) | | (17.9)% | Gross profit (loss) | | 1,250 |
| | 601 |
| | 649 |
| | 108.0% | Gross profit (loss) percentage | | 6.8 | % | | 2.7 | % | | | | 4.1% | General and administrative expenses | | 778 |
| | 885 |
| | (107 | ) | | (12.1)% | Operating income (loss) | | 472 |
| | (284 | ) | | | | |
Revenue - Revenue from our Fabrication division decreased $9.8$4.0 million for the three months ended September 30, 20162017, compared to the three months ended September 30, 2015.2016. 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.
Gross profit increased $14.5 million to $532,000(loss) - Gross profit from our Fabrication division for the three months ended September 30, 20162017, was $1.3 million compared to a gross lossprofit of $14.0 million$601,000 for the three months ended September 30, 20152016. The increase in gross profit was 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.
GeneralGains on scrap sales of approximately $701,000 at our South Texas facility,
Decreases in costs resulting from reductions in workforce as we wrapped up and administrative expenses decreased $657,000completed projects at our South Texas fabrication yards, No depreciation being recorded for our South Texas assets for the three months ended September 30, 20162017, as these assets are classified as assets held for sale; and Continued cost minimization efforts implemented by management for the period.
This was partially offset by approximately $1.1 million of holding costs for our South Texas assets.
General and administrative expenses - General and administrative expenses for our Fabrication division decreased $107,000 for the three months ended September 30, 2017, compared to the three months ended September 30, 20152016. The decrease is primarily due to cost cutting measures implemented during 2016 in response to decreases in workcosts resulting from lower bonuses accrued during 2017 as a result of our consolidated operating loss, reductions in workforce at our South Texas fabrication facilities.
Asset impairment - Duringyards and continued cost minimization efforts implemented by management for 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.period.
| | Shipyards | | Three Months Ended September 30, | | Increase or (Decrease) | | Three Months Ended September 30, | | Increase or (Decrease) | | | 2016 | | 2015 | | Amount | | Percent | | 2017 | | 2016 | | Amount | | Percent | Revenue (1) | | $ | 23,060 |
| | $ | 12,936 |
| | $ | 10,124 |
| | 78.3 | % | | $ | 15,074 |
| | $ | 23,060 |
| | $ | (7,986 | ) | | (34.6)% | Gross profit (1) | | $ | 1,877 |
| | $ | 1,937 |
| | $ | (60 | ) | | (3.1 | )% | | Gross profit percentage | | 8.1 | % | | 15.0 | % | | | | (6.9 | )% | | Gross profit (loss) (1) | | | (3,504 | ) | | 1,945 |
| | (5,449 | ) | | (280.2)% | Gross profit (loss) percentage | | | (23.2 | )% | | 8.4 | % | | | | (31.6)% | General and administrative expenses | | $ | 2,065 |
| | $ | 392 |
| | $ | 1,673 |
| | 426.8 | % | | 888 |
| | 1,468 |
| | (580 | ) | | (39.5)% | Operating income (loss) (1) | | $ | (188 | ) | | $ | 1,545 |
| | | | | | (4,392 | ) | | 477 |
| | | |
___________ | | (1) | Revenue for the three months ended September 30, 2017, and 2016, includes $510,000 and $1.5 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 $8.0 million for the three months ended September 30, 20162017, compared to the three months ended September 30, 20152016, due to the operations acquiredcorresponding reduction in customer demand for shipbuilding and repair services supporting the LEEVAC transaction (see LEEVAC Transaction above), which contributed $16.8oil and gas industry due to depressed oil and gas prices as well as the completion of a vessel that we tendered for delivery on February 6, 2017, and was rejected by the customer alleging certain technical deficiencies. We subsequently suspended of work on the second vessel under contract with this customer. See also Note 9 of the Notes to the Consolidated Financial Statements.
Gross profit (loss) - Gross loss from our Shipyards division was $3.5 million in revenue for the three months ended September 30, 2016.
Gross2017, compared to a gross profit decreased $60,000of $1.9 million for the three months ended September 30, 20162016. The decrease was due to:
$2.1 million in contract losses related to cost overruns and re-work that has been identified on two newbuild vessel construction contracts within our Shipyards division; and Holding and closing costs related to our Prospect shipyard as we wind down operations at this facility.
General and administrative expenses - General and administrative expenses for our Shipyards division decreased $580,000 for the three months ended September 30, 2017, compared to the three months ended September 30, 20152016, primarily due to tighter margins on new work and inefficiencies incurred on the contracts acquired inreductions of administrative personnel related to consolidation of personnel duties from the LEEVAC transaction partially offsettransaction. Additionally, our Shipyards division incurred lower bonuses accrued during 2017 as a result of a combination of a smaller workforce and our consolidated operating loss and cost minimization efforts implemented by savings realized from cost cutting measures implementedmanagement for the period during the first part of 2016.
General and administrative expenses increased $1.7 | | | | | | | | | | | | | | | | Services | | Three Months Ended September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | 17,651 |
| | $ | 20,928 |
| | $ | (3,277 | ) | | (15.7)% | Gross profit (loss) | | 1,912 |
| | 2,918 |
| | (1,006 | ) | | (34.5)% | Gross profit (loss) percentage | | 10.8 | % | | 13.9 | % | | | | (3.1)% | General and administrative expenses | | 695 |
| | 943 |
| | (248 | ) | | (26.3)% | Operating income (loss) | | 1,217 |
| | 1,975 |
| | | | |
Revenue - Revenue from our Services division decreased $3.3 million for the three months ended September 30, 20162017, compared to the three months ended September 30, 2015 primarily2016, 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 completedServices division decreased $1.0 million for the fabricationthree months ended September 30, 2017, compared to the three months ended September 30, 2016, due to decreased revenue discussed above and lower margins on new work performed during 2017.
General and administrative expenses - General and administrative expenses for our Services division decreased $248,000 for the three months ended September 30, 2017, compared to the three months ended September 30, 2016, due to lower bonuses accrued during 2017 as a result of a 1,200 foot jacket, pilescombination of a smaller workforce and an approximate 450 short ton topsideour consolidated operating loss.
| | | | | | | | | | | | | | | | Corporate | | Three Months Ended September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | — |
| | $ | — |
| | $ | — |
| | —% | Gross profit (loss) | | (152 | ) | | (205 | ) | | 53 |
| | 25.9% | Gross profit (loss) percentage | | n/a |
| | n/a |
| | | |
| General and administrative expenses | | 2,009 |
| | 1,790 |
| | 219 |
| | 12.2% | Operating income (loss) | | (2,161 | ) | | (1,995 | ) | |
|
| | |
General and administrative expenses - General and administrative expenses for our Corporate division increased primarily due to a restructuring of our corporate division with no similaradditional personnel allocated to our corporate division during 2017 as discussed above as well as expenses incurred for advisors to assist in a strategic financial analysis project in 2016. Our decrease in revenue earnedanticipation of the proceeds to be received from offshore fabrication work wasthe sale of our South Texas assets. Additionally, we have incurred increased legal fees as we pursue collection of claims against two customers. See also Note 9 of the Notes to the Consolidated Financial Statements. This has been partially offset by lower bonuses accrued during the assets and operations acquired quarter due to our consolidated operating loss.
Nine Months Ended September 30, 2017, Compared to Nine Months Ended September 30, 2016 (in the LEEVAC transaction (see LEEVAC Transaction above), which contributed $55.9 million inthousands, except for percentages): Consolidated | | | | | | | | | | | | | | | Nine Months Ended September 30, | | Increase or (Decrease) | | 2017 | | 2016 | | Amount | Percent | Revenue | $ | 133,745 |
| | $ | 230,864 |
| | $ | (97,119 | ) | (42.1)% | Cost of revenue | 150,755 |
| | 205,839 |
| | (55,084 | ) | (26.8)% | Gross profit (loss) | (17,010 | ) | | 25,025 |
| | (42,035 | ) | (168.0)% | Gross profit (loss) percentage | (12.7 | )% | | 10.8 | % | | | | General and administrative expenses | 12,940 |
| | 14,633 |
| | (1,693 | ) | (11.6)% | Asset impairment | 389 |
| | — |
| | 389 |
| 100.0% | Operating income (loss) | (30,339 | ) | | 10,392 |
| | (40,731 | ) | (391.9)% | Other income (expense): | | | | | | | Interest expense | (262 | ) | | (248 | ) | | (14 | ) | | Interest income | 12 |
| | 20 |
| | (8 | ) | | Other income (expense), net | (221 | ) | | 1,039 |
| | (1,260 | ) | | Total other income (expense) | (471 | ) | | 811 |
| | (1,282 | ) | (158.1)% | Net income (loss) before income taxes | (30,810 | ) | | 11,203 |
| | (42,013 | ) | (375.0)% | Income tax expense (benefit) | (10,322 | ) | | 4,134 |
| | (14,456 | ) | (349.7)% | Net income (loss) | $ | (20,488 | ) | | $ | 7,069 |
| | $ | (27,557 | ) | (389.8)% |
Revenue - Our revenue for the nine months ended September 30, 2016. Pass-through2017 and 2016, was $133.7 million and $230.9 million, respectively, representing a decrease of 42.1%. 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 as well as the completion of a vessel within our Shipyards division that we tendered for delivery on February 6, 2017, and was rejected by the customer alleging certain technical deficiencies. We subsequently suspended of work on the second vessel under contract with this customer. See also Note 9 of the Notes to the Consolidated Financial Statements. Pass-
through costs as a percentage of revenue were 35.0%45.3% and 43.2%35.0% for the nine months ended September 30, 20162017 and 2015,2016, 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 profitloss for the nine months ended September 30, 2016 and 20152017, was $17.0 million compared to a gross profit of $25.0 million (10.8% of revenue) and $2.4 million (1.0% of revenue), respectively. Our gross profit improved compared to 2015for the nine months ended September 30, 2016. The decrease was primarily due to the LEEVAC transaction$12.7 million of losses incurred by our Shipyards division related to cost overruns and contract losses of $14.3 million that were recorded during the third quarter of 2015 resulting from our inability to recover certainre-work identified on two newbuild vessel construction contracts, decreased revenue as discussed above, holding costs related to a deckour South Texas assets of $3.6 million and jacketlower margins on current work. This was partially offset by decreases in costs resulting from reductions in workforce as we wrapped up and completed projects at our South Texas fabrication yards and Prospect shipyard, suspended depreciation for one of our deepwater projects. We had no such lossSouth Texas assets and Prospect shipyard during the third quarter of 2016nine months ended September 30, 2017, as these assets are classified as assets held for sale and additional cost minimization efforts implemented cost cutting measures in response to decreases in work at our fabrication facilities.by management for the period.
General and administrative expenses - Our general and administrative expenses were $12.9 million for the nine months ended September 30, 2017, compared to $14.6 million for the nine months ended September 30, 2016, compared to $11.8 million for the nine months ended September 30, 2015.2016. The increasedecrease in general and administrative expenses for the nine months ended September 30, 2016 was2017, is primarily attributable to:
an increase of stock-based compensation expense of $589,000,
due to decreases in costs resulting from reductions in workforce at our South Texas fabrication yards, lower bonuses and the LEEVAC transaction; partially offset by
cost cutting efforts implementedaccrued during 2017 as a result of our consolidated operating loss and continued cost minimization efforts implemented by management for the downturn in the oil and gas industry.period.
Asset impairmentImpairment - During the nine months ended September 30, 2015,2017, we recorded an asset impairment charge of $6.6 million$389,000 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. Dueour assets held for sale at our Prospect Shipyard. See also Note 2 of the Notes to the sustained downturn in the energy sector, our ability to effectivelyConsolidated Financial Statements.
market these assetsOther income (expense), net - Other expense 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$221,000 for the nine months ended September 30, 20162017, compared to net interest expenseother income 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 income increased $1.0 million for the nine months ended September 30, 2016. The increaseOther expense for the period was primarily due to losses on sales of two drydocks from our Shipyards division. Other income for the prior period was primarily due to gains of $924,000 related to the sale of three cranes at our Texas facility as well ason sales of smaller assets byfrom our Shipyards division.Fabrication division recorded during 2016.
Income taxestax expense (benefit) - Our effective income tax rate for the nine months ended September 30, 20162017, was 36.9%33.5%, compared to an effective tax rate of 34.0%36.9% for the comparable period during 2015.2016. The increasedecrease in ourthe effective tax rate is due to the effectresult of state income taxes from income generated within Louisiana with no offsetting tax benefit from losses generated within Texas.limitations on the deductibility of executive compensation.
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 | ) | |
| |
|
As discussed above and 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 and nine months ended September 30, 2017. 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 nine months ended September 30, 2017 and 2016, are presented below (in thousands, except for percentages).
| | | | | | | | | | | | | | | | Fabrication | | Nine Months Ended September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | 42,517 |
| | $ | 70,436 |
| | $ | (27,919 | ) | | (39.6)% | Gross profit (loss) | | 216 |
| | 4,564 |
| | (4,348 | ) | | (95.3)% | Gross profit (loss) percentage | | 0.5 | % | | 6.5 | % | | | | (6.0)% | General and administrative expenses | | 2,432 |
| | 2,821 |
| | (389 | ) | | (13.8)% | Operating income (loss) | | (2,216 | ) | | 1,743 |
| | | | |
Revenue - Revenue from our Fabrication division decreased $67.0$27.9 million for the nine months ended September 30, 20162017, compared to the nine months ended September 30, 2015.2016. 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. During 2015, weAs discussed above, management has classified our South Texas assets as assets held for sale in response to the underutilization of our Fabrication assets. As of September 30, 2017, all of our projects at our South Texas fabrication yards have been completed theor transferred to our Houma fabrication of a 1,200 foot jacket, piles and an approximate 450 short ton topside with no similar project in 2016.yard.
Gross profit increased $18.5 million(loss) - Gross profit from our Fabrication division for the nine months ended September 30, 2017, was $216,000 compared to $4.4a gross profit of $4.6 million for the nine months ended September 30, 2016 compared2016. The decrease was due to a gross losslower revenue
from decreased fabrication work as discussed above and approximately $3.6 million of $14.1 millionholding costs for our South Texas assets as we market them for sale. This was partially offset by decreases in costs resulting from reductions in workforce, gains on scrap sales as we wrapped up and completed projects at our South Texas fabrication yards, reduced depreciation being recorded for our South Texas assets for the nine months ended September 30, 2015. The increase is due to contract losses of $14.3 million that were recorded during2017, as these assets are classified as assets held for sale on February 23, 2017, and additional cost minimization efforts implemented by management for 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.period.
General and administrative expenses - General and administrative expenses for our Fabrication division decreased $2.5 million$389,000 for the nine months ended September 30, 20162017, compared to the nine months ended September 30, 20152016. The decrease is primarily due to cost cutting measures implemented during 2016 in response to decreases in workcosts resulting from reductions in workforce as we wrapped up and completed projects at our South Texas fabrication facilities.
Asset impairment - During the nine months ended September 30, 2015, we recorded an asset impairment chargeyards and lower bonuses accrued during 2017 as a result of $6.6 million relateda combination of a smaller workforce and our consolidated operating loss. This was partially offset by expenses incurred to a partially constructed topside, related valves, pipingmarket our South Texas assets for sale 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 valuepayment of the assets. We had no such impairmentstermination benefits during the nine months ended September 30, 2016.first quarter of 2017 as we reduced its workforce and completed those operations.
| | Shipyards | | Nine Months Ended September 30, | | Increase or (Decrease) | | Nine Months Ended September 30, | | Increase or (Decrease) | | | 2016 | | 2015 | | Amount | | Percent | | 2017 | | 2016 | | Amount | | Percent | Revenue (1) | | $ | 86,553 |
| | $ | 47,177 |
| | $ | 39,376 |
| | 83.5 | % | | $ | 51,798 |
| | $ | 86,553 |
| | $ | (34,755 | ) | | (40.2)% | Gross profit (1) | | $ | 9,595 |
| | $ | 6,022 |
| | $ | 3,573 |
| | 59.3 | % | | Gross profit percentage | | 11.1 | % | | 12.8 | % | | | | (1.7 | )% | | Gross profit (loss) (1) | | | (19,061 | ) | | 9,742 |
| | (28,803 | ) | | (295.7)% | Gross profit (loss) percentage | | | (36.8 | )% | | 11.3 | % | | | | (48.1)% | General and administrative expenses | | $ | 5,875 |
| | $ | 1,243 |
| | $ | 4,632 |
| | 372.6 | % | | 2,835 |
| | 4,218 |
| | (1,383 | ) | | (32.8)% | Operating income (1) | | $ | 3,720 |
| | $ | 4,779 |
| | | | | | Asset impairment | | | 389 |
| | — |
| | 389 |
| | 100.0% | Operating income (loss) (1) | | | (22,285 | ) | | 5,524 |
| | | |
_______________________
| | (1) | Revenue for the nine months ended September 30, 2017, and 2016, includes $2.4 million and $4.1 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 $39.4- Revenue from our Shipyards division decreased $34.8 million for the nine months ended September 30, 20162017, compared to the nine months ended September 30, 20152016, due to the assetscorresponding reduction in customer demand for shipbuilding and operations acquired inrepair services supporting the LEEVAC transaction (see LEEVAC Transaction above), which contributed $55.9oil and gas industry due to depressed oil and gas prices as well as the completion of a vessel that we tendered for delivery on February 6, 2017, and was rejected by the customer alleging certain technical deficiencies. We subsequently suspended of work on the second vessel under contract with this customer. See also Note 9 of the Notes to the Consolidated Financial Statements.
Gross profit (loss) - Gross loss from our Shipyards division was $19.1 million in revenuefor the nine months ended September 30, 2017, compared to a gross profit of $9.7 million for the nine months ended September 30, 2016. The increasedecrease was partially offsetdue to:
$12.7 million in contract losses related to cost overruns and re-work that has been identified on two newbuild vessel construction contracts within our Shipyards division; Holding and closing costs related to our Prospect shipyard as we wind down operations at this facility; 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 due to the downturn in the oil and gas industry.under other various contracts.
Gross profit increased $3.6General and administrative expenses - General and administrative expenses for our Shipyards division decreased $1.4 million for the nine months ended September 30, 20162017, compared to the nine months ended September 30, 20152016, primarily due to reductions of administrative personnel related to consolidation of personnel duties from the LEEVAC transactiontransaction. Additionally, our Shipyards division incurred lower bonuses accrued during 2017 as well as increases in profitability estimatesa result of our consolidated operating loss and cost minimization efforts implemented by management for other jobs in progress due to cost cutting measures.the period.
General and administrative expenses increased $4.6Asset Impairment - During nine months ended September 30, 2017, we recorded an impairment of $389,000 related to our assets held for sale at our Prospect shipyard. See also Note 2 of the Notes to Consolidated Financial Statements.
| | | | | | | | | | | | | | | | Services | | Nine Months Ended September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | 43,758 |
| | $ | 76,179 |
| | $ | (32,421 | ) | | (42.6)% | Gross profit (loss) | | 2,335 |
| | 11,158 |
| | (8,823 | ) | | (79.1)% | Gross profit (loss) percentage | | 5.3 | % | | 14.6 | % | | | | (9.3)% | General and administrative expenses | | 2,008 |
| | 2,462 |
| | (454 | ) | | (18.4)% | Operating income (loss) | | 327 |
| | 8,696 |
| | | | |
Revenue - Revenue from our Services division decreased $32.4 million for the nine months ended September 30, 20162017, compared to the nine months ended September 30, 20152016, due to an overall decrease in work experienced as a result of depressed oil and gas prices and the expenses associated with the operations acquiredcorresponding reduction in the LEEVAC transactioncustomer demand for oil and bonuses.gas related service projects. | | | | | | | | | | | | | | | | | 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 $5.2Gross profit - Gross profit from our Services division decreased $8.8 million for the nine months ended September 30, 20162017, compared to the nine months ended September 30, 20152016, due to increases in the scope of two large offshore service projectsdecreased revenue discussed above and lower margins on new work performed during the first half of 2016.2017.
Gross profit increased $563,000General and administrative expenses - General and administrative expenses for our Services division decreased $0.5 million for the nine months ended September 30, 20162017, compared to the nine months ended September 30, 20152016, due to increases in revenueslower bonuses accrued during 2017 as a result of a combination of a smaller workforce and improved absorption of fixed costs resulting from an increase in labor hours worked.our consolidated operating loss.
| | | | | | | | | | | | | | | | Corporate | | Nine Months Ended September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | — |
| | $ | — |
| | $ | — |
| | —% | Gross profit (loss) | | (500 | ) | | (439 | ) | | (61 | ) | | (13.9)% | Gross profit (loss) percentage | | n/a |
| | n/a |
| | | |
| General and administrative expenses | | 5,665 |
| | 5,132 |
| | 533 |
| | 10.4% | Operating income (loss) | | (6,165 | ) | | (5,571 | ) | | (594 | ) | | |
Gross profit (loss) - Gross loss from our Corporate division increased primarily due to a restructuring of our corporate division with additional personnel allocated to our corporate division during 2017 as discussed above. General and administrative expenses - General and administrative expenses for our Corporate division increased $1.1 millionprimarily due to a restructuring of our corporate division with additional personnel allocated to our corporate division during 2017 as discussed above as well as expenses incurred for advisors to assist in a strategic financial analysis project in anticipation of the nine months ended September 30, 2016 comparedproceeds to be received from the sale of our South Texas assets. Additionally, we have incurred increased legal fees as we pursue collection of claims against two customers. See also Note 9 of the Notes to the nine months ended September 30, 2015 due to additional administrative support costs related to increases in activityConsolidated Financial Statements. This has been partially offset by lower bonuses accrued during 2017 as a result of a combination of a smaller workforce and bonuses.our consolidated operating loss. Liquidity and Capital Resources Historically, we have funded our business activities through cash generated from operations. At September 30, 20162017, 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$17.8 million compared to $34.8$51.2 million at December 31, 2015.2016. Working capital was $79.8$164.0 million and our ratio of current assets to current liabilities was 2.834.59 to 1 at September 30, 2017, compared to $78.0 million and 3.21 to 1, respectively, at December 31, 2016. Working capital at September 30, 2017, includes $107.0 million related to assets held for sale, primarily related to our South Texas facilities. Our primary sourceuse of cash forduring the nine months ended September 30, 2016, was related to2017, is referenced in the collection of accounts receivable under various customer contracts and sales of three cranes at our Texas facility for $5.8 million. Cash Flow Activities section below. At September 30, 2016,2017, our contracts receivable balance was $26.6$25.5 million of which we have subsequently collected $12.1$8.3 million through October 31, 2016.2017. On January 1, 2016,June 9, 2017, we acquired substantially all of the assets and assumed certain specified liabilities of LEEVAC. The purchase price for the acquisition was $20.0entered into a $40.0 million subject to a working capital adjustment whereby we received a dollar-for-
dollar reduction for the assumption of certain net liabilities of LEEVAC at closing and settlement payments from sureties on certain ongoing fabrication projects that were assigned to us in the transaction. After taking into account these adjustments, we received approximately $1.6 million in cash at closing. During the quarter, we presented our working capital true-up to the seller, which resulted in an additional $1.5 million due to us. Additionally, we hired 380 employees upon acquisition of the facilities representing substantially all of the former LEEVAC employees. Strategically, the transaction expands our marine fabrication and repair and maintenance presence in the Gulf South market. At the date of transaction, we acquired approximately $121.2 million of new build construction backlog inclusive of approximately $9.2 million of purchase price fair value allocated to four, new build construction projects to be delivered in 2017 and 2018 for two customers.
As of September 30, 2016, we had a credit agreement with Whitney Bank, and JPMorgan Chase Bank N.A. that provides for an $80.0 million revolvingas lender. The credit facility maturing January 2, 2017. The credit agreement allows the Company to use up to the full amount of the available borrowing basematures June 9, 2019 and may be used for issuing letters of credit and up to $20.0 million forand/or general corporate and working capital purposes. Our obligationsWe believe that
the new facility will provide us with additional working capital flexibility to expand operations as backlog improves, respond to market opportunities and support our ongoing operations.
Interest on drawings under the credit agreement are secured by substantially all offacility may be designated, at our assets, other than real property locatedoption, as either Base Rate (as defined in the state of Louisiana. On February 29, 2016, we entered into an amendment to our credit agreement. The amendment (i) extendsfacility) or LIBOR plus 2.0% per annum. Unused commitment fees on the termundrawn portion of the Credit Facility from February 29, 2016 to January 2, 2017; (ii) increases the commitment fee on undrawn amounts from 0.25% to 0.50%facility are 0.4% per annum; (iii) increases the letter of credit fee, subject to certain limited exceptions, to 2.00% per annum, and interest 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. 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 our financial covenants beginning with the quarter ending March 31, 2016 as follows:
| | (i) | minimum net worth requirement of not less than $250.0 million plus |
| | a) | 50% of net income earned in each quarter beginning March 31, 2016 and |
| | b) | 100% of proceeds from any issuance of common stock; |
| | (ii) | debt to EBITDA ratio not greater than 3.0 to 1.0; and |
| | (iii) | interest coverage ratio not less than 2.0 to 1.0. |
At September 30, 2016, no amounts were outstanding under thelenders is 2.0% per annum. The credit facility and we had outstanding letters of credit totaling $4.5 million, reducing the unused portion of our credit facility for additional letters of credit to $75.5 million. As of September 30, 2016, we were in compliance with all covenants. During the fourth quarter, we expect to enter into a two-year, $40.0 million amended and restated credit facility with our current lenders that will beis secured by substantially all of our assets (other than real property)the assets of Gulf Marine Fabricators, L.P., the legal entity that holds our South Texas assets which are currently held for sale).
We anticipatemust comply with the amendedfollowing financial covenants each quarter during the term of the facility:
| | i. | Ratio of current assets to current liabilities of not less than 1.25:1.00; |
| | ii. | Minimum tangible net worth requirement of at least the sum of: |
| | b) | An amount equal to 50% of consolidated net income for each fiscal quarter ending after June 30, 2017 (with no deduction for a net loss in any such fiscal quarter except for any gain or loss in connection with the sale of assets by Gulf Marine Fabricators, L.P.), plus |
| | c) | 100% of all net proceeds of any issuance of any stock or other equity after deducting of any fees, commissions, expenses and other costs incurred in such offering; and |
| | iii. | Ratio of funded debt to tangible net worth of not more than 0.50:1.00. |
Concurrent with our execution of the credit facility, will allow us to usewe terminated our prior credit facility with JPMorgan Chase Bank, N.A. At the full $40.0time of the termination, there was approximately $4.6 million borrowing baseof letters of credit outstanding. All were reissued as new letters of credit under the credit facility and accepted by the beneficiaries. Availability under our credit facility for bothfuture, additional letters of credit and general corporate purposes. Given the historically low levelsborrowings is $35.4 million. As of borrowings underSeptember 30, 2017, we were in compliance with all of our current facility and our cash position, we requested a reduction in the amount 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.covenants.
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 do not anticipate significant capital expenditures for the remainder of 2016 to be approximately $1.8 million primarily for the following: extension of one of our dry docks, and
improvements to our newly acquired facilities.2017.
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. The customer also announcedagreements and stated that, while it had received limited waivers from its lenders, its debt agreements willwould require further negotiation and amendment. InThis same customer rejected delivery of the eventfirst vessel that we completed and tendered for delivery on February 6, 2017, alleging certain technical deficiencies exist with respect to the vessel. On March 10, 2017, we gave notice for arbitration with our customer in an effort to resolve this matter and subsequently suspended fabrication of the second vessel under contract with this customer, which is unsuccessfulincluded in our arbitration proceedings. We disagree with our customer concerning these efforts,alleged technical deficiencies and have put the customer will consider other options including a possible reorganizationin default under the terms of both vessel contracts. The customer is seeking recovery of $84.8 million representing all purchase price amounts previously paid by the customer under both contracts. On May 17, 2017, the customer filed for protection under Chapter 11 of the Federal bankruptcy laws. AtUnited States Bankruptcy Code for reorganization under a negotiated, pre-packaged plan. The customer has emerged from Chapter 11 Bankruptcy and the Bankruptcy Court has approved the customer's retention and acceptance of both contracts. As of September 30, 2016, no contracts receivable2017, approximately $4.6 million remained due and outstanding from our customer for the first vessel. The balance due to us for the second vessel upon completion and delivery is approximately $4.9 million. We are working with legal counsel to protect our contractual claims, and we have re-initiated arbitration proceedings in accordance with our contracts. We are in the process of discovery. The customer has recently named a new interim chief executive officer who has made contact with our management, and we are working to resolve our dispute in a constructive manner. We believe that will be able to recover remaining amounts due to us.
On August 25, 2017, our South Texas facilities were outstandingimpacted by Hurricane Harvey, which made landfall as a category 4 hurricane. As a result, we suffered damages to our South Texas buildings and deferred revenue exceeded ourequipment. Through September 30, 2017, we have incurred approximately $265,000 in clean-up and repair related costs and estimated earningswe expect to incur additional future repair costs in excess of billingsour deductible which management believes are probable of being recovered through insurance proceeds. We maintain coverage on these assets up to a maximum of $25.0 million, subject to a 3.0% deductible with a minimum deductible of $500,000. We are working diligently with our insurance agents and adjusters to finalize our estimate of the damage; however, it may be several months, or even longer, before we can finalize our assessment and receive final payment from our insurance underwriters. Our insurance underwriters have made an initial payment of $3.0 million, and we have recorded a liability for future repairs of $2.7 million which is included in accrued expenses and other liabilities on our balance sheet at September 30, 2017. Based upon our initial assessment of the damages and insurance coverage, management believes that there is no basis to record a net loss at this contract. We continuetime and that insurance proceeds will at a minimum be sufficient to monitor our work performed in relationreimburse us for all damages and repair costs. Our final
assessment of the loss incurred to our customer’s statusSouth Texas assets as well as the amount of insurance proceeds we will receive could be more or less than this amount when the claim is ultimately settled and its ability to pay under the terms of its contract. Based on our evaluation to date, we do not believe that any loss on this contract is probable or estimable at this time. such differences could be material.
In February 2016,event of one or more sales of our BoardSouth Texas assets, we expect to use all or a portion of Directors approved a decreasethe sales proceeds to invest in our quarterly dividendoperating liquidity in order to $0.01 in anfacilitate anticipated future projects, selected capital improvements to enhance and/or expand our existing facilities, mergers and acquisitions to expand our product and service capabilities. We are continuing this effort to conserve cash. identify and analyze specific investment opportunities we believe will enhance the long-term value of the Company that are consistent with our strategy.
On October 27, 2016,26, 2017, our Board of Directors declared a dividend of $0.01 per share on our shares of common stock outstanding, payable November 23, 201624, 2017, to shareholders of record on November 10, 2016.2017.
We believe our cash and cash equivalents generated by our future operating activities, and funds availableproceeds to be received from insurance underwriters, availability under our line of credit facilityand proceeds 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 termnext twelve months to continue our operations,to operate, satisfy our contractual operations and pay dividends to our shareholders.
Cash Flow Activities
For the nine months ended September 30, 20162017, net cash used in operating activities was $29.6 million, compared to net cash provided by operating activities was $19.3 million, compared to $18.7of $19.4 million for the nine months ended September 30, 2015.2016. The increaseuse of cash in cash provided by operations during the period was primarily due to increased gross profit and collections of contract receivables during 2016 somewhat offset by payments requiredthe following:
Operating losses for trade payables during the nine months ended September 30, 2017, in excess of non-cash depreciation, amortization, impairment and stock compensation expense of approximately $19.6 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 as comparedwas $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 on ongoing shipbuilding projects of $23.0 million that were assigned to 2015.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. The suspension of two vessel projects following our customer’s refusal to accept delivery of the first vessel in February 2017, and our inability to collect $9.5 million in scheduled payments under these contracts. See also Note 9 of the Notes to the Consolidated Financial Statements; 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 later in 2017 through the first half of 2018.
Net cash provided byused in investing activities for the nine months ended September 30, 20162017, was $2.0$2.4 million, compared to cash used inprovided by investing activities of $5.0$2.0 million for the nine months ended September 30, 2015.2016. The increasechange in cash provided by investing activities is primarily due to cash received from the sale of three cranes at our Texas facility for $5.8 million and $1.6 million of cash acquired in the LEEVAC transaction.transaction during 2016 partially offset by decreases in capital expenditures.
Net cash used in financing activities for the nine months ended September 30, 2017 and 2016, was $1.4 million and 2015 was $440,000 and $4.4 million,$603,000, respectively. The decreaseincrease in cash used in financing activities is due to the reduction incash payments made to taxing authorities on behalf of employees for their vesting of common stock. During the cash dividend in 2016.nine months ended September 30, 2017 we received $2.0 million from borrowings under our new line of credit which were immediately repaid.
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, 2016.2017. 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, 20162017, 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 | | | 3.2 | | | 4.131.1 | | 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 | | | 31.2 | | | 32 | | | 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. |
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. MecheDavid S. Schorlemer | | Kirk J. MecheDavid S. Schorlemer | | President, Chief Executive Officer, Director and InterimVice President, Chief Financial Officer, and Treasurer and Secretary (Principal Executive Officer and Interim Principal Financial and Accounting Officer) |
Date: November 2, 2016October 31, 2017
GULF ISLAND FABRICATION, INC. EXHIBIT INDEX | | | | | Exhibit Number | | Description of Exhibit | | | 2.13.1 | | 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 | | | 4.131.1 | | Specimen Common Stock Certificate, incorporated by reference | 10.131.2 | | Form of Long-Term Performance-Based Cash Award Agreement. | 31 | | CEO and | 32 | | | 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.(1) | Backlog as of September 30, 2016 includes commitments received through October 27, 2016. We exclude suspended projects from contract backlog thatwhen they are expected to be suspended more than twelve12 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.(2) | At September 30, 2016,2017, projects for our threefive 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) | twoTwo large multi-purpose service vessels for one customer inwithin our Shipyards segment,division, which commenced in the first quarter of 2014 and will be completed during the first and second quarter of 2018; and |
(iii) the fabrication of four modules associated with a U.S. ethane cracker project.
| | 3.(ii) | Newbuild construction of four harbor tugs for one customer within our Shipyards division; |
| | (iii) | Newbuild construction of four harbor tugs for one additional customer within our Shipyards division; |
| | (iv) | The fabrication of four modules associated with a U.S. ethane cracker project within our Fabrication division; and |
| | (v) | Newbuild construction of an offshore research vessel within our Shipyards division. |
| | (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. Additionally, as we continue to add backlog, we will begin adding personnel with critical project management and fabrication skills to ensure we have the resources necessary to execute our projects well and to support our project risk mitigation discipline for all new project work. This may negatively impact near term results. As of September 30, 2016,2017, we had 1,336989 employees and 163 contract employees inclusive of 380 employees hired in the LEEVAC transaction, compared to 1,255 employees and 71 contract1,178 employees as of December 31, 2015.
2016. Labor hours worked were 2.31.5 million during the nine months ended September 30, 2016,2017, compared to 2.12.3 million for the nine months ended September 30, 2015.2016. The overall increasedecrease in labor hours worked for the threenine months ended September 30, 20162017, 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 September 30, 2017, Compared to Three Months Ended September 30, 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 September 30, | | Increase or (Decrease) | | 2017 | | 2016 | | Amount | Percent | Revenue | $ | 49,884 |
| | $ | 65,384 |
| | $ | (15,500 | ) | (23.7)% | Cost of revenue | 50,378 |
| | 60,125 |
| | (9,747 | ) | (16.2)% | Gross profit (loss) | (494 | ) | | 5,259 |
| | (5,753 | ) | (109.4)% | Gross profit (loss) percentage | (1.0 | )% | | 8.0 | % | | | | General and administrative expenses | 4,370 |
| | 5,086 |
| | (716 | ) | (14.1)% | Operating income (loss) | (4,864 | ) | | 173 |
| | (5,037 | ) | (2,911.6)% | Other income (expense): | | | | | | | Interest expense | (45 | ) | | (110 | ) | | 65 |
| | Interest income | — |
| | 12 |
| | (12 | ) | | Other income (expense), net | 38 |
| | 599 |
| | (561 | ) | | Total other income (expense) | (7 | ) | | 501 |
| | (508 | ) | 101.4% | Net income (loss) before income taxes | (4,871 | ) | | 674 |
| | (5,545 | ) | (822.7)% | Income tax expense (benefit) | (1,761 | ) | | 133 |
| | (1,894 | ) | (1,424.1)% | Net income (loss) | $ | (3,110 | ) | | $ | 541 |
| | $ | (3,651 | ) | (674.9)% |
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, 2016.2017 and 2016, was $49.9 million and $65.4 million, respectively, representing a decrease of 23.7%. The decrease is primarily attributable to an overall decrease in work experienced in our facilities primarily 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%48.4% and 45.3%33.8% for the three-monthsthree months ended September 30, 20162017 and 2015,2016, 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 20152017, was $494,000 compared to a gross profit of $5.3 million (8.0% of revenue) and $(7.8) million, respectively. Our gross profit improved compared to third quarter of 2015for the three months ended September 30, 2016. The decrease was primarily due to $2.1 million of contract losses of $14.3 million that were recorded during the third quarter of 2015 resulting fromincurred by our inabilityShipyards division related to recover certaincost overruns and re-work identified on two newbuild vessel construction
contracts, decreased revenue as discussed above, holding costs related to a deckour South Texas assets of $1.1 million and jacket for one of our deepwater projects. We had no such loss during the third quarter of 2016 and implemented cost cutting measures.lower margins on current work due to competitive pressures. This was partially offset by tighter margins within all ofdecreases in costs resulting from reductions in workforce as we wrapped up and completed projects at our segments due to a decrease in workSouth Texas fabrication yards and Prospect shipyard, no depreciation being recorded for our South Texas assets and Prospect shipyard for the three months ended September 30, 2017 (as these assets are classified as a result ofassets held for sale) and continued cost minimization efforts implemented by management for the downturn in the oil and gas industry.period.
General and administrative expenses - Our general and administrative expenses were $4.4 million for the three months ended September 30, 2017, compared to $5.1 million for the three months ended September 30, 2016, compared to $3.8 million for the three months ended September 30, 2015.2016. The increasedecrease in general
and administrative expenses for the three months ended September 30, 20162017, was primarily attributable to the operations acquired in the LEEVAC transactionlower bonuses accrued during 2017, employee reductions and bonus expense, partially offset bycontinued cost cuttingminimization efforts implemented during 2016.by management for the period.
Asset impairmentOther income (expense), net - - 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 assetsOther income 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.
Interest expense, net - The Company had net interest expense of $98,000$38,000 for the three months ended September 30, 20162017, as compared to net interest expenseother income of $31,000$599,000 for three months ended September 30, 2016. Other income for the three months ended September 30, 2015. The increase2017 relates to insurance proceeds received from damage to a corporate automobile that was primarily driven by an increase in the cost of unused credit facility fees under our credit agreement.
fully depreciated. Other income net - Other income increased $599,000 for thefor three months ended September 30, 2016. The increase was2016 primarily duerelates to gains on sales of assets from our Fabrication division.
Income taxestax expense (benefit) - Our effective income tax rate for the three months ended September 30, 20162017, was 19.7%36.2%, compared to an effective tax rate of 34.0%19.7% for the comparable period during 2015.2016. The changeincrease in ourthe effective tax rate is duethe result of changes to the decrease inestimates of our effective rateyear-end tax provision during for the year-to-date period.three months ended September 30, 2016.
Operating Segments | | | | | | | | | | | | | | | | | 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 | ) | | | | |
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 and nine months ended September 30, 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 its Corporate division each meeting the criteria of reportable segments under GAAP. During the three and nine months ended September 30, 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 September 30, 2017 and 2016, are presented below (in thousands, except for percentages).
| | | | | | | | | | | | | | | | Fabrication | | Three Months Ended September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | 18,318 |
| | $ | 22,311 |
| | $ | (3,993 | ) | | (17.9)% | Gross profit (loss) | | 1,250 |
| | 601 |
| | 649 |
| | 108.0% | Gross profit (loss) percentage | | 6.8 | % | | 2.7 | % | | | | 4.1% | General and administrative expenses | | 778 |
| | 885 |
| | (107 | ) | | (12.1)% | Operating income (loss) | | 472 |
| | (284 | ) | | | | |
Revenue - Revenue from our Fabrication division decreased $9.8$4.0 million for the three months ended September 30, 20162017, compared to the three months ended September 30, 2015.2016. 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.
Gross profit increased $14.5 million to $532,000(loss) - Gross profit from our Fabrication division for the three months ended September 30, 20162017, was $1.3 million compared to a gross lossprofit of $14.0 million$601,000 for the three months ended September 30, 20152016. The increase in gross profit was 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.
GeneralGains on scrap sales of approximately $701,000 at our South Texas facility,
Decreases in costs resulting from reductions in workforce as we wrapped up and administrative expenses decreased $657,000completed projects at our South Texas fabrication yards, No depreciation being recorded for our South Texas assets for the three months ended September 30, 20162017, as these assets are classified as assets held for sale; and Continued cost minimization efforts implemented by management for the period.
This was partially offset by approximately $1.1 million of holding costs for our South Texas assets.
General and administrative expenses - General and administrative expenses for our Fabrication division decreased $107,000 for the three months ended September 30, 2017, compared to the three months ended September 30, 20152016. The decrease is primarily due to cost cutting measures implemented during 2016 in response to decreases in workcosts resulting from lower bonuses accrued during 2017 as a result of our consolidated operating loss, reductions in workforce at our South Texas fabrication facilities.
Asset impairment - Duringyards and continued cost minimization efforts implemented by management for 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.period.
| | | | | | | | | | | | | | | | | 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 September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue (1) | | $ | 15,074 |
| | $ | 23,060 |
| | $ | (7,986 | ) | | (34.6)% | Gross profit (loss) (1) | | (3,504 | ) | | 1,945 |
| | (5,449 | ) | | (280.2)% | Gross profit (loss) percentage | | (23.2 | )% | | 8.4 | % | | | | (31.6)% | General and administrative expenses | | 888 |
| | 1,468 |
| | (580 | ) | | (39.5)% | Operating income (loss) (1) | | (4,392 | ) | | 477 |
| | | | |
___________ | | (1) | Revenue for the three months ended September 30, 2017, and 2016, includes $510,000 and $1.5 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 $8.0 million for the three months ended September 30, 20162017, compared to the three months ended September 30, 20152016, due to the operations acquiredcorresponding reduction in customer demand for shipbuilding and repair services supporting the LEEVAC transaction (see LEEVAC Transaction above), which contributed $16.8oil and gas industry due to depressed oil and gas prices as well as the completion of a vessel that we tendered for delivery on February 6, 2017, and was rejected by the customer alleging certain technical deficiencies. We subsequently suspended of work on the second vessel under contract with this customer. See also Note 9 of the Notes to the Consolidated Financial Statements.
Gross profit (loss) - Gross loss from our Shipyards division was $3.5 million in revenue for the three months ended September 30, 2016.
Gross2017, compared to a gross profit decreased $60,000of $1.9 million for the three months ended September 30, 20162016. The decrease was due to:
$2.1 million in contract losses related to cost overruns and re-work that has been identified on two newbuild vessel construction contracts within our Shipyards division; and Holding and closing costs related to our Prospect shipyard as we wind down operations at this facility.
General and administrative expenses - General and administrative expenses for our Shipyards division decreased $580,000 for the three months ended September 30, 2017, compared to the three months ended September 30, 20152016, primarily due to tighter margins on new work and inefficiencies incurred on the contracts acquired inreductions of administrative personnel related to consolidation of personnel duties from the LEEVAC transaction partially offsettransaction. Additionally, our Shipyards division incurred lower bonuses accrued during 2017 as a result of a combination of a smaller workforce and our consolidated operating loss and cost minimization efforts implemented by savings realized from cost cutting measures implementedmanagement for the period during the first part of 2016.
General and administrative expenses increased $1.7 | | | | | | | | | | | | | | | | Services | | Three Months Ended September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | 17,651 |
| | $ | 20,928 |
| | $ | (3,277 | ) | | (15.7)% | Gross profit (loss) | | 1,912 |
| | 2,918 |
| | (1,006 | ) | | (34.5)% | Gross profit (loss) percentage | | 10.8 | % | | 13.9 | % | | | | (3.1)% | General and administrative expenses | | 695 |
| | 943 |
| | (248 | ) | | (26.3)% | Operating income (loss) | | 1,217 |
| | 1,975 |
| | | | |
Revenue - Revenue from our Services division decreased $3.3 million for the three months ended September 30, 20162017, compared to the three months ended September 30, 2015 primarily2016, 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 completedServices division decreased $1.0 million for the fabricationthree months ended September 30, 2017, compared to the three months ended September 30, 2016, due to decreased revenue discussed above and lower margins on new work performed during 2017.
General and administrative expenses - General and administrative expenses for our Services division decreased $248,000 for the three months ended September 30, 2017, compared to the three months ended September 30, 2016, due to lower bonuses accrued during 2017 as a result of a 1,200 foot jacket, pilescombination of a smaller workforce and an approximate 450 short ton topsideour consolidated operating loss.
| | | | | | | | | | | | | | | | Corporate | | Three Months Ended September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | — |
| | $ | — |
| | $ | — |
| | —% | Gross profit (loss) | | (152 | ) | | (205 | ) | | 53 |
| | 25.9% | Gross profit (loss) percentage | | n/a |
| | n/a |
| | | |
| General and administrative expenses | | 2,009 |
| | 1,790 |
| | 219 |
| | 12.2% | Operating income (loss) | | (2,161 | ) | | (1,995 | ) | |
|
| | |
General and administrative expenses - General and administrative expenses for our Corporate division increased primarily due to a restructuring of our corporate division with no similaradditional personnel allocated to our corporate division during 2017 as discussed above as well as expenses incurred for advisors to assist in a strategic financial analysis project in 2016. Our decrease in revenue earnedanticipation of the proceeds to be received from offshore fabrication work wasthe sale of our South Texas assets. Additionally, we have incurred increased legal fees as we pursue collection of claims against two customers. See also Note 9 of the Notes to the Consolidated Financial Statements. This has been partially offset by lower bonuses accrued during the assets and operations acquired quarter due to our consolidated operating loss.
Nine Months Ended September 30, 2017, Compared to Nine Months Ended September 30, 2016 (in the LEEVAC transaction (see LEEVAC Transaction above), which contributed $55.9 million inthousands, except for percentages): Consolidated | | | | | | | | | | | | | | | Nine Months Ended September 30, | | Increase or (Decrease) | | 2017 | | 2016 | | Amount | Percent | Revenue | $ | 133,745 |
| | $ | 230,864 |
| | $ | (97,119 | ) | (42.1)% | Cost of revenue | 150,755 |
| | 205,839 |
| | (55,084 | ) | (26.8)% | Gross profit (loss) | (17,010 | ) | | 25,025 |
| | (42,035 | ) | (168.0)% | Gross profit (loss) percentage | (12.7 | )% | | 10.8 | % | | | | General and administrative expenses | 12,940 |
| | 14,633 |
| | (1,693 | ) | (11.6)% | Asset impairment | 389 |
| | — |
| | 389 |
| 100.0% | Operating income (loss) | (30,339 | ) | | 10,392 |
| | (40,731 | ) | (391.9)% | Other income (expense): | | | | | | | Interest expense | (262 | ) | | (248 | ) | | (14 | ) | | Interest income | 12 |
| | 20 |
| | (8 | ) | | Other income (expense), net | (221 | ) | | 1,039 |
| | (1,260 | ) | | Total other income (expense) | (471 | ) | | 811 |
| | (1,282 | ) | (158.1)% | Net income (loss) before income taxes | (30,810 | ) | | 11,203 |
| | (42,013 | ) | (375.0)% | Income tax expense (benefit) | (10,322 | ) | | 4,134 |
| | (14,456 | ) | (349.7)% | Net income (loss) | $ | (20,488 | ) | | $ | 7,069 |
| | $ | (27,557 | ) | (389.8)% |
Revenue - Our revenue for the nine months ended September 30, 2016. Pass-through2017 and 2016, was $133.7 million and $230.9 million, respectively, representing a decrease of 42.1%. 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 as well as the completion of a vessel within our Shipyards division that we tendered for delivery on February 6, 2017, and was rejected by the customer alleging certain technical deficiencies. We subsequently suspended of work on the second vessel under contract with this customer. See also Note 9 of the Notes to the Consolidated Financial Statements. Pass-
through costs as a percentage of revenue were 35.0%45.3% and 43.2%35.0% for the nine months ended September 30, 20162017 and 2015,2016, 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 profitloss for the nine months ended September 30, 2016 and 20152017, was $17.0 million compared to a gross profit of $25.0 million (10.8% of revenue) and $2.4 million (1.0% of revenue), respectively. Our gross profit improved compared to 2015for the nine months ended September 30, 2016. The decrease was primarily due to the LEEVAC transaction$12.7 million of losses incurred by our Shipyards division related to cost overruns and contract losses of $14.3 million that were recorded during the third quarter of 2015 resulting from our inability to recover certainre-work identified on two newbuild vessel construction contracts, decreased revenue as discussed above, holding costs related to a deckour South Texas assets of $3.6 million and jacketlower margins on current work. This was partially offset by decreases in costs resulting from reductions in workforce as we wrapped up and completed projects at our South Texas fabrication yards and Prospect shipyard, suspended depreciation for one of our deepwater projects. We had no such lossSouth Texas assets and Prospect shipyard during the third quarter of 2016nine months ended September 30, 2017, as these assets are classified as assets held for sale and additional cost minimization efforts implemented cost cutting measures in response to decreases in work at our fabrication facilities.by management for the period.
General and administrative expenses - Our general and administrative expenses were $12.9 million for the nine months ended September 30, 2017, compared to $14.6 million for the nine months ended September 30, 2016, compared to $11.8 million for the nine months ended September 30, 2015.2016. The increasedecrease in general and administrative expenses for the nine months ended September 30, 2016 was2017, is primarily attributable to:
an increase of stock-based compensation expense of $589,000,
due to decreases in costs resulting from reductions in workforce at our South Texas fabrication yards, lower bonuses and the LEEVAC transaction; partially offset by
cost cutting efforts implementedaccrued during 2017 as a result of our consolidated operating loss and continued cost minimization efforts implemented by management for the downturn in the oil and gas industry.period.
Asset impairmentImpairment - During the nine months ended September 30, 2015,2017, we recorded an asset impairment charge of $6.6 million$389,000 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. Dueour assets held for sale at our Prospect Shipyard. See also Note 2 of the Notes to the sustained downturn in the energy sector, our ability to effectivelyConsolidated Financial Statements.
market these assetsOther income (expense), net - Other expense 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$221,000 for the nine months ended September 30, 20162017, compared to net interest expenseother income 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 income increased $1.0 million for the nine months ended September 30, 2016. The increaseOther expense for the period was primarily due to losses on sales of two drydocks from our Shipyards division. Other income for the prior period was primarily due to gains of $924,000 related to the sale of three cranes at our Texas facility as well ason sales of smaller assets byfrom our Shipyards division.Fabrication division recorded during 2016.
Income taxestax expense (benefit) - Our effective income tax rate for the nine months ended September 30, 20162017, was 36.9%33.5%, compared to an effective tax rate of 34.0%36.9% for the comparable period during 2015.2016. The increasedecrease in ourthe effective tax rate is due to the effectresult of state income taxes from income generated within Louisiana with no offsetting tax benefit from losses generated within Texas.limitations on the deductibility of executive compensation.
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 | ) | |
| |
|
As discussed above and 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 and nine months ended September 30, 2017. 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 nine months ended September 30, 2017 and 2016, are presented below (in thousands, except for percentages).
| | | | | | | | | | | | | | | | Fabrication | | Nine Months Ended September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | 42,517 |
| | $ | 70,436 |
| | $ | (27,919 | ) | | (39.6)% | Gross profit (loss) | | 216 |
| | 4,564 |
| | (4,348 | ) | | (95.3)% | Gross profit (loss) percentage | | 0.5 | % | | 6.5 | % | | | | (6.0)% | General and administrative expenses | | 2,432 |
| | 2,821 |
| | (389 | ) | | (13.8)% | Operating income (loss) | | (2,216 | ) | | 1,743 |
| | | | |
Revenue - Revenue from our Fabrication division decreased $67.0$27.9 million for the nine months ended September 30, 20162017, compared to the nine months ended September 30, 2015.2016. 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. During 2015, weAs discussed above, management has classified our South Texas assets as assets held for sale in response to the underutilization of our Fabrication assets. As of September 30, 2017, all of our projects at our South Texas fabrication yards have been completed theor transferred to our Houma fabrication of a 1,200 foot jacket, piles and an approximate 450 short ton topside with no similar project in 2016.yard.
Gross profit increased $18.5 million(loss) - Gross profit from our Fabrication division for the nine months ended September 30, 2017, was $216,000 compared to $4.4a gross profit of $4.6 million for the nine months ended September 30, 2016 compared2016. The decrease was due to a gross losslower revenue
from decreased fabrication work as discussed above and approximately $3.6 million of $14.1 millionholding costs for our South Texas assets as we market them for sale. This was partially offset by decreases in costs resulting from reductions in workforce, gains on scrap sales as we wrapped up and completed projects at our South Texas fabrication yards, reduced depreciation being recorded for our South Texas assets for the nine months ended September 30, 2015. The increase is due to contract losses of $14.3 million that were recorded during2017, as these assets are classified as assets held for sale on February 23, 2017, and additional cost minimization efforts implemented by management for 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.period.
General and administrative expenses - General and administrative expenses for our Fabrication division decreased $2.5 million$389,000 for the nine months ended September 30, 20162017, compared to the nine months ended September 30, 20152016. The decrease is primarily due to cost cutting measures implemented during 2016 in response to decreases in workcosts resulting from reductions in workforce as we wrapped up and completed projects at our South Texas fabrication facilities.
Asset impairment - During the nine months ended September 30, 2015, we recorded an asset impairment chargeyards and lower bonuses accrued during 2017 as a result of $6.6 million relateda combination of a smaller workforce and our consolidated operating loss. This was partially offset by expenses incurred to a partially constructed topside, related valves, pipingmarket our South Texas assets for sale 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 valuepayment of the assets. We had no such impairmentstermination benefits during the nine months ended September 30, 2016.first quarter of 2017 as we reduced its workforce and completed those operations.
| | | | | | | | | | | | | | | | | 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 |
| | | | |
| | | | | | | | | | | | | | | | Shipyards | | Nine Months Ended September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue (1) | | $ | 51,798 |
| | $ | 86,553 |
| | $ | (34,755 | ) | | (40.2)% | Gross profit (loss) (1) | | (19,061 | ) | | 9,742 |
| | (28,803 | ) | | (295.7)% | Gross profit (loss) percentage | | (36.8 | )% | | 11.3 | % | | | | (48.1)% | General and administrative expenses | | 2,835 |
| | 4,218 |
| | (1,383 | ) | | (32.8)% | Asset impairment | | 389 |
| | — |
| | 389 |
| | 100.0% | Operating income (loss) (1) | | (22,285 | ) | | 5,524 |
| | | | |
_______________________
| | (1) | Revenue for the nine months ended September 30, 2017, and 2016, includes $2.4 million and $4.1 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 $39.4- Revenue from our Shipyards division decreased $34.8 million for the nine months ended September 30, 20162017, compared to the nine months ended September 30, 20152016, due to the assetscorresponding reduction in customer demand for shipbuilding and operations acquired inrepair services supporting the LEEVAC transaction (see LEEVAC Transaction above), which contributed $55.9oil and gas industry due to depressed oil and gas prices as well as the completion of a vessel that we tendered for delivery on February 6, 2017, and was rejected by the customer alleging certain technical deficiencies. We subsequently suspended of work on the second vessel under contract with this customer. See also Note 9 of the Notes to the Consolidated Financial Statements.
Gross profit (loss) - Gross loss from our Shipyards division was $19.1 million in revenuefor the nine months ended September 30, 2017, compared to a gross profit of $9.7 million for the nine months ended September 30, 2016. The increasedecrease was partially offsetdue to:
$12.7 million in contract losses related to cost overruns and re-work that has been identified on two newbuild vessel construction contracts within our Shipyards division; Holding and closing costs related to our Prospect shipyard as we wind down operations at this facility; 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 due to the downturn in the oil and gas industry.under other various contracts.
Gross profit increased $3.6General and administrative expenses - General and administrative expenses for our Shipyards division decreased $1.4 million for the nine months ended September 30, 20162017, compared to the nine months ended September 30, 20152016, primarily due to reductions of administrative personnel related to consolidation of personnel duties from the LEEVAC transactiontransaction. Additionally, our Shipyards division incurred lower bonuses accrued during 2017 as well as increases in profitability estimatesa result of our consolidated operating loss and cost minimization efforts implemented by management for other jobs in progress due to cost cutting measures.the period.
General and administrative expenses increased $4.6Asset Impairment - During nine months ended September 30, 2017, we recorded an impairment of $389,000 related to our assets held for sale at our Prospect shipyard. See also Note 2 of the Notes to Consolidated Financial Statements.
| | | | | | | | | | | | | | | | Services | | Nine Months Ended September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | 43,758 |
| | $ | 76,179 |
| | $ | (32,421 | ) | | (42.6)% | Gross profit (loss) | | 2,335 |
| | 11,158 |
| | (8,823 | ) | | (79.1)% | Gross profit (loss) percentage | | 5.3 | % | | 14.6 | % | | | | (9.3)% | General and administrative expenses | | 2,008 |
| | 2,462 |
| | (454 | ) | | (18.4)% | Operating income (loss) | | 327 |
| | 8,696 |
| | | | |
Revenue - Revenue from our Services division decreased $32.4 million for the nine months ended September 30, 20162017, compared to the nine months ended September 30, 20152016, due to an overall decrease in work experienced as a result of depressed oil and gas prices and the expenses associated with the operations acquiredcorresponding reduction in the LEEVAC transactioncustomer demand for oil and bonuses.gas related service projects. | | | | | | | | | | | | | | | | | 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 $5.2Gross profit - Gross profit from our Services division decreased $8.8 million for the nine months ended September 30, 20162017, compared to the nine months ended September 30, 20152016, due to increases in the scope of two large offshore service projectsdecreased revenue discussed above and lower margins on new work performed during the first half of 2016.2017.
Gross profit increased $563,000General and administrative expenses - General and administrative expenses for our Services division decreased $0.5 million for the nine months ended September 30, 20162017, compared to the nine months ended September 30, 20152016, due to increases in revenueslower bonuses accrued during 2017 as a result of a combination of a smaller workforce and improved absorption of fixed costs resulting from an increase in labor hours worked.our consolidated operating loss.
| | | | | | | | | | | | | | | | Corporate | | Nine Months Ended September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | — |
| | $ | — |
| | $ | — |
| | —% | Gross profit (loss) | | (500 | ) | | (439 | ) | | (61 | ) | | (13.9)% | Gross profit (loss) percentage | | n/a |
| | n/a |
| | | |
| General and administrative expenses | | 5,665 |
| | 5,132 |
| | 533 |
| | 10.4% | Operating income (loss) | | (6,165 | ) | | (5,571 | ) | | (594 | ) | | |
Gross profit (loss) - Gross loss from our Corporate division increased primarily due to a restructuring of our corporate division with additional personnel allocated to our corporate division during 2017 as discussed above. General and administrative expenses - General and administrative expenses for our Corporate division increased $1.1 millionprimarily due to a restructuring of our corporate division with additional personnel allocated to our corporate division during 2017 as discussed above as well as expenses incurred for advisors to assist in a strategic financial analysis project in anticipation of the nine months ended September 30, 2016 comparedproceeds to be received from the sale of our South Texas assets. Additionally, we have incurred increased legal fees as we pursue collection of claims against two customers. See also Note 9 of the Notes to the nine months ended September 30, 2015 due to additional administrative support costs related to increases in activityConsolidated Financial Statements. This has been partially offset by lower bonuses accrued during 2017 as a result of a combination of a smaller workforce and bonuses.our consolidated operating loss. Liquidity and Capital Resources Historically, we have funded our business activities through cash generated from operations. At September 30, 20162017, 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$17.8 million compared to $34.8$51.2 million at December 31, 2015.2016. Working capital was $79.8$164.0 million and our ratio of current assets to current liabilities was 2.834.59 to 1 at September 30, 2017, compared to $78.0 million and 3.21 to 1, respectively, at December 31, 2016. Working capital at September 30, 2017, includes $107.0 million related to assets held for sale, primarily related to our South Texas facilities. Our primary sourceuse of cash forduring the nine months ended September 30, 2016, was related to2017, is referenced in the collection of accounts receivable under various customer contracts and sales of three cranes at our Texas facility for $5.8 million. Cash Flow Activities section below. At September 30, 2016,2017, our contracts receivable balance was $26.6$25.5 million of which we have subsequently collected $12.1$8.3 million through October 31, 2016.2017. On January 1, 2016,June 9, 2017, we acquired substantially all of the assets and assumed certain specified liabilities of LEEVAC. The purchase price for the acquisition was $20.0entered into a $40.0 million subject to a working capital adjustment whereby we received a dollar-for-
dollar reduction for the assumption of certain net liabilities of LEEVAC at closing and settlement payments from sureties on certain ongoing fabrication projects that were assigned to us in the transaction. After taking into account these adjustments, we received approximately $1.6 million in cash at closing. During the quarter, we presented our working capital true-up to the seller, which resulted in an additional $1.5 million due to us. Additionally, we hired 380 employees upon acquisition of the facilities representing substantially all of the former LEEVAC employees. Strategically, the transaction expands our marine fabrication and repair and maintenance presence in the Gulf South market. At the date of transaction, we acquired approximately $121.2 million of new build construction backlog inclusive of approximately $9.2 million of purchase price fair value allocated to four, new build construction projects to be delivered in 2017 and 2018 for two customers.
As of September 30, 2016, we had a credit agreement with Whitney Bank, and JPMorgan Chase Bank N.A. that provides for an $80.0 million revolvingas lender. The credit facility maturing January 2, 2017. The credit agreement allows the Company to use up to the full amount of the available borrowing basematures June 9, 2019 and may be used for issuing letters of credit and up to $20.0 million forand/or general corporate and working capital purposes. Our obligationsWe believe that
the new facility will provide us with additional working capital flexibility to expand operations as backlog improves, respond to market opportunities and support our ongoing operations.
Interest on drawings under the credit agreement are secured by substantially all offacility may be designated, at our assets, other than real property locatedoption, as either Base Rate (as defined in the state of Louisiana. On February 29, 2016, we entered into an amendment to our credit agreement. The amendment (i) extendsfacility) or LIBOR plus 2.0% per annum. Unused commitment fees on the termundrawn portion of the Credit Facility from February 29, 2016 to January 2, 2017; (ii) increases the commitment fee on undrawn amounts from 0.25% to 0.50%facility are 0.4% per annum; (iii) increases the letter of credit fee, subject to certain limited exceptions, to 2.00% per annum, and interest 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. 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 our financial covenants beginning with the quarter ending March 31, 2016 as follows:
| | (i) | minimum net worth requirement of not less than $250.0 million plus |
| | a) | 50% of net income earned in each quarter beginning March 31, 2016 and |
| | b) | 100% of proceeds from any issuance of common stock; |
| | (ii) | debt to EBITDA ratio not greater than 3.0 to 1.0; and |
| | (iii) | interest coverage ratio not less than 2.0 to 1.0. |
At September 30, 2016, no amounts were outstanding under thelenders is 2.0% per annum. The credit facility and we had outstanding letters of credit totaling $4.5 million, reducing the unused portion of our credit facility for additional letters of credit to $75.5 million. As of September 30, 2016, we were in compliance with all covenants. During the fourth quarter, we expect to enter into a two-year, $40.0 million amended and restated credit facility with our current lenders that will beis secured by substantially all of our assets (other than real property)the assets of Gulf Marine Fabricators, L.P., the legal entity that holds our South Texas assets which are currently held for sale).
We anticipatemust comply with the amendedfollowing financial covenants each quarter during the term of the facility:
| | i. | Ratio of current assets to current liabilities of not less than 1.25:1.00; |
| | ii. | Minimum tangible net worth requirement of at least the sum of: |
| | b) | An amount equal to 50% of consolidated net income for each fiscal quarter ending after June 30, 2017 (with no deduction for a net loss in any such fiscal quarter except for any gain or loss in connection with the sale of assets by Gulf Marine Fabricators, L.P.), plus |
| | c) | 100% of all net proceeds of any issuance of any stock or other equity after deducting of any fees, commissions, expenses and other costs incurred in such offering; and |
| | iii. | Ratio of funded debt to tangible net worth of not more than 0.50:1.00. |
Concurrent with our execution of the credit facility, will allow us to usewe terminated our prior credit facility with JPMorgan Chase Bank, N.A. At the full $40.0time of the termination, there was approximately $4.6 million borrowing baseof letters of credit outstanding. All were reissued as new letters of credit under the credit facility and accepted by the beneficiaries. Availability under our credit facility for bothfuture, additional letters of credit and general corporate purposes. Given the historically low levelsborrowings is $35.4 million. As of borrowings underSeptember 30, 2017, we were in compliance with all of our current facility and our cash position, we requested a reduction in the amount 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.covenants.
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 do not anticipate significant capital expenditures for the remainder of 2016 to be approximately $1.8 million primarily for the following: extension of one of our dry docks, and
improvements to our newly acquired facilities.2017.
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. The customer also announcedagreements and stated that, while it had received limited waivers from its lenders, its debt agreements willwould require further negotiation and amendment. InThis same customer rejected delivery of the eventfirst vessel that we completed and tendered for delivery on February 6, 2017, alleging certain technical deficiencies exist with respect to the vessel. On March 10, 2017, we gave notice for arbitration with our customer in an effort to resolve this matter and subsequently suspended fabrication of the second vessel under contract with this customer, which is unsuccessfulincluded in our arbitration proceedings. We disagree with our customer concerning these efforts,alleged technical deficiencies and have put the customer will consider other options including a possible reorganizationin default under the terms of both vessel contracts. The customer is seeking recovery of $84.8 million representing all purchase price amounts previously paid by the customer under both contracts. On May 17, 2017, the customer filed for protection under Chapter 11 of the Federal bankruptcy laws. AtUnited States Bankruptcy Code for reorganization under a negotiated, pre-packaged plan. The customer has emerged from Chapter 11 Bankruptcy and the Bankruptcy Court has approved the customer's retention and acceptance of both contracts. As of September 30, 2016, no contracts receivable2017, approximately $4.6 million remained due and outstanding from our customer for the first vessel. The balance due to us for the second vessel upon completion and delivery is approximately $4.9 million. We are working with legal counsel to protect our contractual claims, and we have re-initiated arbitration proceedings in accordance with our contracts. We are in the process of discovery. The customer has recently named a new interim chief executive officer who has made contact with our management, and we are working to resolve our dispute in a constructive manner. We believe that will be able to recover remaining amounts due to us.
On August 25, 2017, our South Texas facilities were outstandingimpacted by Hurricane Harvey, which made landfall as a category 4 hurricane. As a result, we suffered damages to our South Texas buildings and deferred revenue exceeded ourequipment. Through September 30, 2017, we have incurred approximately $265,000 in clean-up and repair related costs and estimated earningswe expect to incur additional future repair costs in excess of billingsour deductible which management believes are probable of being recovered through insurance proceeds. We maintain coverage on these assets up to a maximum of $25.0 million, subject to a 3.0% deductible with a minimum deductible of $500,000. We are working diligently with our insurance agents and adjusters to finalize our estimate of the damage; however, it may be several months, or even longer, before we can finalize our assessment and receive final payment from our insurance underwriters. Our insurance underwriters have made an initial payment of $3.0 million, and we have recorded a liability for future repairs of $2.7 million which is included in accrued expenses and other liabilities on our balance sheet at September 30, 2017. Based upon our initial assessment of the damages and insurance coverage, management believes that there is no basis to record a net loss at this contract. We continuetime and that insurance proceeds will at a minimum be sufficient to monitor our work performed in relationreimburse us for all damages and repair costs. Our final
assessment of the loss incurred to our customer’s statusSouth Texas assets as well as the amount of insurance proceeds we will receive could be more or less than this amount when the claim is ultimately settled and its ability to pay under the terms of its contract. Based on our evaluation to date, we do not believe that any loss on this contract is probable or estimable at this time. such differences could be material.
In February 2016,event of one or more sales of our BoardSouth Texas assets, we expect to use all or a portion of Directors approved a decreasethe sales proceeds to invest in our quarterly dividendoperating liquidity in order to $0.01 in anfacilitate anticipated future projects, selected capital improvements to enhance and/or expand our existing facilities, mergers and acquisitions to expand our product and service capabilities. We are continuing this effort to conserve cash. identify and analyze specific investment opportunities we believe will enhance the long-term value of the Company that are consistent with our strategy.
On October 27, 2016,26, 2017, our Board of Directors declared a dividend of $0.01 per share on our shares of common stock outstanding, payable November 23, 201624, 2017, to shareholders of record on November 10, 2016.2017.
We believe our cash and cash equivalents generated by our future operating activities, and funds availableproceeds to be received from insurance underwriters, availability under our line of credit facilityand proceeds 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 termnext twelve months to continue our operations,to operate, satisfy our contractual operations and pay dividends to our shareholders.
Cash Flow Activities
For the nine months ended September 30, 20162017, net cash used in operating activities was $29.6 million, compared to net cash provided by operating activities was $19.3 million, compared to $18.7of $19.4 million for the nine months ended September 30, 2015.2016. The increaseuse of cash in cash provided by operations during the period was primarily due to increased gross profit and collections of contract receivables during 2016 somewhat offset by payments requiredthe following:
Operating losses for trade payables during the nine months ended September 30, 2017, in excess of non-cash depreciation, amortization, impairment and stock compensation expense of approximately $19.6 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 as comparedwas $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 on ongoing shipbuilding projects of $23.0 million that were assigned to 2015.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. The suspension of two vessel projects following our customer’s refusal to accept delivery of the first vessel in February 2017, and our inability to collect $9.5 million in scheduled payments under these contracts. See also Note 9 of the Notes to the Consolidated Financial Statements; 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 later in 2017 through the first half of 2018.
Net cash provided byused in investing activities for the nine months ended September 30, 20162017, was $2.0$2.4 million, compared to cash used inprovided by investing activities of $5.0$2.0 million for the nine months ended September 30, 2015.2016. The increasechange in cash provided by investing activities is primarily due to cash received from the sale of three cranes at our Texas facility for $5.8 million and $1.6 million of cash acquired in the LEEVAC transaction.transaction during 2016 partially offset by decreases in capital expenditures.
Net cash used in financing activities for the nine months ended September 30, 2017 and 2016, was $1.4 million and 2015 was $440,000 and $4.4 million,$603,000, respectively. The decreaseincrease in cash used in financing activities is due to the reduction incash payments made to taxing authorities on behalf of employees for their vesting of common stock. During the cash dividend in 2016.nine months ended September 30, 2017 we received $2.0 million from borrowings under our new line of credit which were immediately repaid.
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, 2016.2017. 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, 20162017, 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 | | | 3.2 | | | 4.131.1 | | 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 | | | 31.2 | | | 32 | | | 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. |
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. MecheDavid S. Schorlemer | | Kirk J. MecheDavid S. Schorlemer | | President, Chief Executive Officer, Director and InterimVice President, Chief Financial Officer, and Treasurer and Secretary (Principal Executive Officer and Interim Principal Financial and Accounting Officer) |
Date: November 2, 2016October 31, 2017
GULF ISLAND FABRICATION, INC. EXHIBIT INDEX | | | | | Exhibit Number | | Description of Exhibit | | | 2.13.1 | | 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 | | | 4.131.1 | | Specimen Common Stock Certificate, incorporated by reference | 10.131.2 | | Form of Long-Term Performance-Based Cash Award Agreement. | 31 | | CEO and | 32 | | | 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.(1) | Backlog as of September 30, 2016 includes commitments received through October 27, 2016. We exclude suspended projects from contract backlog thatwhen they are expected to be suspended more than twelve12 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.(2) | At September 30, 2016,2017, projects for our threefive 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) | twoTwo large multi-purpose service vessels for one customer inwithin our Shipyards segment,division, which commenced in the first quarter of 2014 and will be completed during the first and second quarter of 2018; and |
(iii) the fabrication of four modules associated with a U.S. ethane cracker project.
| | 3.(ii) | Newbuild construction of four harbor tugs for one customer within our Shipyards division; |
| | (iii) | Newbuild construction of four harbor tugs for one additional customer within our Shipyards division; |
| | (iv) | The fabrication of four modules associated with a U.S. ethane cracker project within our Fabrication division; and |
| | (v) | Newbuild construction of an offshore research vessel within our Shipyards division. |
| | (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. Additionally, as we continue to add backlog, we will begin adding personnel with critical project management and fabrication skills to ensure we have the resources necessary to execute our projects well and to support our project risk mitigation discipline for all new project work. This may negatively impact near term results. As of September 30, 2016,2017, we had 1,336989 employees and 163 contract employees inclusive of 380 employees hired in the LEEVAC transaction, compared to 1,255 employees and 71 contract1,178 employees as of December 31, 2015.
2016. Labor hours worked were 2.31.5 million during the nine months ended September 30, 2016,2017, compared to 2.12.3 million for the nine months ended September 30, 2015.2016. The overall increasedecrease in labor hours worked for the threenine months ended September 30, 20162017, 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 September 30, 2017, Compared to Three Months Ended September 30, 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 September 30, | | Increase or (Decrease) | | 2017 | | 2016 | | Amount | Percent | Revenue | $ | 49,884 |
| | $ | 65,384 |
| | $ | (15,500 | ) | (23.7)% | Cost of revenue | 50,378 |
| | 60,125 |
| | (9,747 | ) | (16.2)% | Gross profit (loss) | (494 | ) | | 5,259 |
| | (5,753 | ) | (109.4)% | Gross profit (loss) percentage | (1.0 | )% | | 8.0 | % | | | | General and administrative expenses | 4,370 |
| | 5,086 |
| | (716 | ) | (14.1)% | Operating income (loss) | (4,864 | ) | | 173 |
| | (5,037 | ) | (2,911.6)% | Other income (expense): | | | | | | | Interest expense | (45 | ) | | (110 | ) | | 65 |
| | Interest income | — |
| | 12 |
| | (12 | ) | | Other income (expense), net | 38 |
| | 599 |
| | (561 | ) | | Total other income (expense) | (7 | ) | | 501 |
| | (508 | ) | 101.4% | Net income (loss) before income taxes | (4,871 | ) | | 674 |
| | (5,545 | ) | (822.7)% | Income tax expense (benefit) | (1,761 | ) | | 133 |
| | (1,894 | ) | (1,424.1)% | Net income (loss) | $ | (3,110 | ) | | $ | 541 |
| | $ | (3,651 | ) | (674.9)% |
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, 2016.2017 and 2016, was $49.9 million and $65.4 million, respectively, representing a decrease of 23.7%. The decrease is primarily attributable to an overall decrease in work experienced in our facilities primarily 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%48.4% and 45.3%33.8% for the three-monthsthree months ended September 30, 20162017 and 2015,2016, 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 20152017, was $494,000 compared to a gross profit of $5.3 million (8.0% of revenue) and $(7.8) million, respectively. Our gross profit improved compared to third quarter of 2015for the three months ended September 30, 2016. The decrease was primarily due to $2.1 million of contract losses of $14.3 million that were recorded during the third quarter of 2015 resulting fromincurred by our inabilityShipyards division related to recover certaincost overruns and re-work identified on two newbuild vessel construction
contracts, decreased revenue as discussed above, holding costs related to a deckour South Texas assets of $1.1 million and jacket for one of our deepwater projects. We had no such loss during the third quarter of 2016 and implemented cost cutting measures.lower margins on current work due to competitive pressures. This was partially offset by tighter margins within all ofdecreases in costs resulting from reductions in workforce as we wrapped up and completed projects at our segments due to a decrease in workSouth Texas fabrication yards and Prospect shipyard, no depreciation being recorded for our South Texas assets and Prospect shipyard for the three months ended September 30, 2017 (as these assets are classified as a result ofassets held for sale) and continued cost minimization efforts implemented by management for the downturn in the oil and gas industry.period.
General and administrative expenses - Our general and administrative expenses were $4.4 million for the three months ended September 30, 2017, compared to $5.1 million for the three months ended September 30, 2016, compared to $3.8 million for the three months ended September 30, 2015.2016. The increasedecrease in general
and administrative expenses for the three months ended September 30, 20162017, was primarily attributable to the operations acquired in the LEEVAC transactionlower bonuses accrued during 2017, employee reductions and bonus expense, partially offset bycontinued cost cuttingminimization efforts implemented during 2016.by management for the period.
Asset impairmentOther income (expense), net - - 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 assetsOther income 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.
Interest expense, net - The Company had net interest expense of $98,000$38,000 for the three months ended September 30, 20162017, as compared to net interest expenseother income of $31,000$599,000 for three months ended September 30, 2016. Other income for the three months ended September 30, 2015. The increase2017 relates to insurance proceeds received from damage to a corporate automobile that was primarily driven by an increase in the cost of unused credit facility fees under our credit agreement.
fully depreciated. Other income net - Other income increased $599,000 for thefor three months ended September 30, 2016. The increase was2016 primarily duerelates to gains on sales of assets from our Fabrication division.
Income taxestax expense (benefit) - Our effective income tax rate for the three months ended September 30, 20162017, was 19.7%36.2%, compared to an effective tax rate of 34.0%19.7% for the comparable period during 2015.2016. The changeincrease in ourthe effective tax rate is duethe result of changes to the decrease inestimates of our effective rateyear-end tax provision during for the year-to-date period.three months ended September 30, 2016.
Operating Segments | | | | | | | | | | | | | | | | | 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 | ) | | | | |
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 and nine months ended September 30, 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 its Corporate division each meeting the criteria of reportable segments under GAAP. During the three and nine months ended September 30, 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 September 30, 2017 and 2016, are presented below (in thousands, except for percentages).
| | | | | | | | | | | | | | | | Fabrication | | Three Months Ended September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | 18,318 |
| | $ | 22,311 |
| | $ | (3,993 | ) | | (17.9)% | Gross profit (loss) | | 1,250 |
| | 601 |
| | 649 |
| | 108.0% | Gross profit (loss) percentage | | 6.8 | % | | 2.7 | % | | | | 4.1% | General and administrative expenses | | 778 |
| | 885 |
| | (107 | ) | | (12.1)% | Operating income (loss) | | 472 |
| | (284 | ) | | | | |
Revenue - Revenue from our Fabrication division decreased $9.8$4.0 million for the three months ended September 30, 20162017, compared to the three months ended September 30, 2015.2016. 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.
Gross profit increased $14.5 million to $532,000(loss) - Gross profit from our Fabrication division for the three months ended September 30, 20162017, was $1.3 million compared to a gross lossprofit of $14.0 million$601,000 for the three months ended September 30, 20152016. The increase in gross profit was 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.
GeneralGains on scrap sales of approximately $701,000 at our South Texas facility,
Decreases in costs resulting from reductions in workforce as we wrapped up and administrative expenses decreased $657,000completed projects at our South Texas fabrication yards, No depreciation being recorded for our South Texas assets for the three months ended September 30, 20162017, as these assets are classified as assets held for sale; and Continued cost minimization efforts implemented by management for the period.
This was partially offset by approximately $1.1 million of holding costs for our South Texas assets.
General and administrative expenses - General and administrative expenses for our Fabrication division decreased $107,000 for the three months ended September 30, 2017, compared to the three months ended September 30, 20152016. The decrease is primarily due to cost cutting measures implemented during 2016 in response to decreases in workcosts resulting from lower bonuses accrued during 2017 as a result of our consolidated operating loss, reductions in workforce at our South Texas fabrication facilities.
Asset impairment - Duringyards and continued cost minimization efforts implemented by management for 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.period.
| | | | | | | | | | | | | | | | | 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 September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue (1) | | $ | 15,074 |
| | $ | 23,060 |
| | $ | (7,986 | ) | | (34.6)% | Gross profit (loss) (1) | | (3,504 | ) | | 1,945 |
| | (5,449 | ) | | (280.2)% | Gross profit (loss) percentage | | (23.2 | )% | | 8.4 | % | | | | (31.6)% | General and administrative expenses | | 888 |
| | 1,468 |
| | (580 | ) | | (39.5)% | Operating income (loss) (1) | | (4,392 | ) | | 477 |
| | | | |
___________ | | (1) | Revenue for the three months ended September 30, 2017, and 2016, includes $510,000 and $1.5 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 $8.0 million for the three months ended September 30, 20162017, compared to the three months ended September 30, 20152016, due to the operations acquiredcorresponding reduction in customer demand for shipbuilding and repair services supporting the LEEVAC transaction (see LEEVAC Transaction above), which contributed $16.8oil and gas industry due to depressed oil and gas prices as well as the completion of a vessel that we tendered for delivery on February 6, 2017, and was rejected by the customer alleging certain technical deficiencies. We subsequently suspended of work on the second vessel under contract with this customer. See also Note 9 of the Notes to the Consolidated Financial Statements.
Gross profit (loss) - Gross loss from our Shipyards division was $3.5 million in revenue for the three months ended September 30, 2016.
Gross2017, compared to a gross profit decreased $60,000of $1.9 million for the three months ended September 30, 20162016. The decrease was due to:
$2.1 million in contract losses related to cost overruns and re-work that has been identified on two newbuild vessel construction contracts within our Shipyards division; and Holding and closing costs related to our Prospect shipyard as we wind down operations at this facility.
General and administrative expenses - General and administrative expenses for our Shipyards division decreased $580,000 for the three months ended September 30, 2017, compared to the three months ended September 30, 20152016, primarily due to tighter margins on new work and inefficiencies incurred on the contracts acquired inreductions of administrative personnel related to consolidation of personnel duties from the LEEVAC transaction partially offsettransaction. Additionally, our Shipyards division incurred lower bonuses accrued during 2017 as a result of a combination of a smaller workforce and our consolidated operating loss and cost minimization efforts implemented by savings realized from cost cutting measures implementedmanagement for the period during the first part of 2016.
General and administrative expenses increased $1.7 | | | | | | | | | | | | | | | | Services | | Three Months Ended September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | 17,651 |
| | $ | 20,928 |
| | $ | (3,277 | ) | | (15.7)% | Gross profit (loss) | | 1,912 |
| | 2,918 |
| | (1,006 | ) | | (34.5)% | Gross profit (loss) percentage | | 10.8 | % | | 13.9 | % | | | | (3.1)% | General and administrative expenses | | 695 |
| | 943 |
| | (248 | ) | | (26.3)% | Operating income (loss) | | 1,217 |
| | 1,975 |
| | | | |
Revenue - Revenue from our Services division decreased $3.3 million for the three months ended September 30, 20162017, compared to the three months ended September 30, 2015 primarily2016, 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 completedServices division decreased $1.0 million for the fabricationthree months ended September 30, 2017, compared to the three months ended September 30, 2016, due to decreased revenue discussed above and lower margins on new work performed during 2017.
General and administrative expenses - General and administrative expenses for our Services division decreased $248,000 for the three months ended September 30, 2017, compared to the three months ended September 30, 2016, due to lower bonuses accrued during 2017 as a result of a 1,200 foot jacket, pilescombination of a smaller workforce and an approximate 450 short ton topsideour consolidated operating loss.
| | | | | | | | | | | | | | | | Corporate | | Three Months Ended September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | — |
| | $ | — |
| | $ | — |
| | —% | Gross profit (loss) | | (152 | ) | | (205 | ) | | 53 |
| | 25.9% | Gross profit (loss) percentage | | n/a |
| | n/a |
| | | |
| General and administrative expenses | | 2,009 |
| | 1,790 |
| | 219 |
| | 12.2% | Operating income (loss) | | (2,161 | ) | | (1,995 | ) | |
|
| | |
General and administrative expenses - General and administrative expenses for our Corporate division increased primarily due to a restructuring of our corporate division with no similaradditional personnel allocated to our corporate division during 2017 as discussed above as well as expenses incurred for advisors to assist in a strategic financial analysis project in 2016. Our decrease in revenue earnedanticipation of the proceeds to be received from offshore fabrication work wasthe sale of our South Texas assets. Additionally, we have incurred increased legal fees as we pursue collection of claims against two customers. See also Note 9 of the Notes to the Consolidated Financial Statements. This has been partially offset by lower bonuses accrued during the assets and operations acquired quarter due to our consolidated operating loss.
Nine Months Ended September 30, 2017, Compared to Nine Months Ended September 30, 2016 (in the LEEVAC transaction (see LEEVAC Transaction above), which contributed $55.9 million inthousands, except for percentages): Consolidated | | | | | | | | | | | | | | | Nine Months Ended September 30, | | Increase or (Decrease) | | 2017 | | 2016 | | Amount | Percent | Revenue | $ | 133,745 |
| | $ | 230,864 |
| | $ | (97,119 | ) | (42.1)% | Cost of revenue | 150,755 |
| | 205,839 |
| | (55,084 | ) | (26.8)% | Gross profit (loss) | (17,010 | ) | | 25,025 |
| | (42,035 | ) | (168.0)% | Gross profit (loss) percentage | (12.7 | )% | | 10.8 | % | | | | General and administrative expenses | 12,940 |
| | 14,633 |
| | (1,693 | ) | (11.6)% | Asset impairment | 389 |
| | — |
| | 389 |
| 100.0% | Operating income (loss) | (30,339 | ) | | 10,392 |
| | (40,731 | ) | (391.9)% | Other income (expense): | | | | | | | Interest expense | (262 | ) | | (248 | ) | | (14 | ) | | Interest income | 12 |
| | 20 |
| | (8 | ) | | Other income (expense), net | (221 | ) | | 1,039 |
| | (1,260 | ) | | Total other income (expense) | (471 | ) | | 811 |
| | (1,282 | ) | (158.1)% | Net income (loss) before income taxes | (30,810 | ) | | 11,203 |
| | (42,013 | ) | (375.0)% | Income tax expense (benefit) | (10,322 | ) | | 4,134 |
| | (14,456 | ) | (349.7)% | Net income (loss) | $ | (20,488 | ) | | $ | 7,069 |
| | $ | (27,557 | ) | (389.8)% |
Revenue - Our revenue for the nine months ended September 30, 2016. Pass-through2017 and 2016, was $133.7 million and $230.9 million, respectively, representing a decrease of 42.1%. 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 as well as the completion of a vessel within our Shipyards division that we tendered for delivery on February 6, 2017, and was rejected by the customer alleging certain technical deficiencies. We subsequently suspended of work on the second vessel under contract with this customer. See also Note 9 of the Notes to the Consolidated Financial Statements. Pass-
through costs as a percentage of revenue were 35.0%45.3% and 43.2%35.0% for the nine months ended September 30, 20162017 and 2015,2016, 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 profitloss for the nine months ended September 30, 2016 and 20152017, was $17.0 million compared to a gross profit of $25.0 million (10.8% of revenue) and $2.4 million (1.0% of revenue), respectively. Our gross profit improved compared to 2015for the nine months ended September 30, 2016. The decrease was primarily due to the LEEVAC transaction$12.7 million of losses incurred by our Shipyards division related to cost overruns and contract losses of $14.3 million that were recorded during the third quarter of 2015 resulting from our inability to recover certainre-work identified on two newbuild vessel construction contracts, decreased revenue as discussed above, holding costs related to a deckour South Texas assets of $3.6 million and jacketlower margins on current work. This was partially offset by decreases in costs resulting from reductions in workforce as we wrapped up and completed projects at our South Texas fabrication yards and Prospect shipyard, suspended depreciation for one of our deepwater projects. We had no such lossSouth Texas assets and Prospect shipyard during the third quarter of 2016nine months ended September 30, 2017, as these assets are classified as assets held for sale and additional cost minimization efforts implemented cost cutting measures in response to decreases in work at our fabrication facilities.by management for the period.
General and administrative expenses - Our general and administrative expenses were $12.9 million for the nine months ended September 30, 2017, compared to $14.6 million for the nine months ended September 30, 2016, compared to $11.8 million for the nine months ended September 30, 2015.2016. The increasedecrease in general and administrative expenses for the nine months ended September 30, 2016 was2017, is primarily attributable to:
an increase of stock-based compensation expense of $589,000,
due to decreases in costs resulting from reductions in workforce at our South Texas fabrication yards, lower bonuses and the LEEVAC transaction; partially offset by
cost cutting efforts implementedaccrued during 2017 as a result of our consolidated operating loss and continued cost minimization efforts implemented by management for the downturn in the oil and gas industry.period.
Asset impairmentImpairment - During the nine months ended September 30, 2015,2017, we recorded an asset impairment charge of $6.6 million$389,000 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. Dueour assets held for sale at our Prospect Shipyard. See also Note 2 of the Notes to the sustained downturn in the energy sector, our ability to effectivelyConsolidated Financial Statements.
market these assetsOther income (expense), net - Other expense 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$221,000 for the nine months ended September 30, 20162017, compared to net interest expenseother income 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 income increased $1.0 million for the nine months ended September 30, 2016. The increaseOther expense for the period was primarily due to losses on sales of two drydocks from our Shipyards division. Other income for the prior period was primarily due to gains of $924,000 related to the sale of three cranes at our Texas facility as well ason sales of smaller assets byfrom our Shipyards division.Fabrication division recorded during 2016.
Income taxestax expense (benefit) - Our effective income tax rate for the nine months ended September 30, 20162017, was 36.9%33.5%, compared to an effective tax rate of 34.0%36.9% for the comparable period during 2015.2016. The increasedecrease in ourthe effective tax rate is due to the effectresult of state income taxes from income generated within Louisiana with no offsetting tax benefit from losses generated within Texas.limitations on the deductibility of executive compensation.
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 | ) | |
| |
|
As discussed above and 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 and nine months ended September 30, 2017. 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 nine months ended September 30, 2017 and 2016, are presented below (in thousands, except for percentages).
| | | | | | | | | | | | | | | | Fabrication | | Nine Months Ended September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | 42,517 |
| | $ | 70,436 |
| | $ | (27,919 | ) | | (39.6)% | Gross profit (loss) | | 216 |
| | 4,564 |
| | (4,348 | ) | | (95.3)% | Gross profit (loss) percentage | | 0.5 | % | | 6.5 | % | | | | (6.0)% | General and administrative expenses | | 2,432 |
| | 2,821 |
| | (389 | ) | | (13.8)% | Operating income (loss) | | (2,216 | ) | | 1,743 |
| | | | |
Revenue - Revenue from our Fabrication division decreased $67.0$27.9 million for the nine months ended September 30, 20162017, compared to the nine months ended September 30, 2015.2016. 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. During 2015, weAs discussed above, management has classified our South Texas assets as assets held for sale in response to the underutilization of our Fabrication assets. As of September 30, 2017, all of our projects at our South Texas fabrication yards have been completed theor transferred to our Houma fabrication of a 1,200 foot jacket, piles and an approximate 450 short ton topside with no similar project in 2016.yard.
Gross profit increased $18.5 million(loss) - Gross profit from our Fabrication division for the nine months ended September 30, 2017, was $216,000 compared to $4.4a gross profit of $4.6 million for the nine months ended September 30, 2016 compared2016. The decrease was due to a gross losslower revenue
from decreased fabrication work as discussed above and approximately $3.6 million of $14.1 millionholding costs for our South Texas assets as we market them for sale. This was partially offset by decreases in costs resulting from reductions in workforce, gains on scrap sales as we wrapped up and completed projects at our South Texas fabrication yards, reduced depreciation being recorded for our South Texas assets for the nine months ended September 30, 2015. The increase is due to contract losses of $14.3 million that were recorded during2017, as these assets are classified as assets held for sale on February 23, 2017, and additional cost minimization efforts implemented by management for 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.period.
General and administrative expenses - General and administrative expenses for our Fabrication division decreased $2.5 million$389,000 for the nine months ended September 30, 20162017, compared to the nine months ended September 30, 20152016. The decrease is primarily due to cost cutting measures implemented during 2016 in response to decreases in workcosts resulting from reductions in workforce as we wrapped up and completed projects at our South Texas fabrication facilities.
Asset impairment - During the nine months ended September 30, 2015, we recorded an asset impairment chargeyards and lower bonuses accrued during 2017 as a result of $6.6 million relateda combination of a smaller workforce and our consolidated operating loss. This was partially offset by expenses incurred to a partially constructed topside, related valves, pipingmarket our South Texas assets for sale 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 valuepayment of the assets. We had no such impairmentstermination benefits during the nine months ended September 30, 2016.first quarter of 2017 as we reduced its workforce and completed those operations.
| | | | | | | | | | | | | | | | | 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 |
| | | | |
| | | | | | | | | | | | | | | | Shipyards | | Nine Months Ended September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue (1) | | $ | 51,798 |
| | $ | 86,553 |
| | $ | (34,755 | ) | | (40.2)% | Gross profit (loss) (1) | | (19,061 | ) | | 9,742 |
| | (28,803 | ) | | (295.7)% | Gross profit (loss) percentage | | (36.8 | )% | | 11.3 | % | | | | (48.1)% | General and administrative expenses | | 2,835 |
| | 4,218 |
| | (1,383 | ) | | (32.8)% | Asset impairment | | 389 |
| | — |
| | 389 |
| | 100.0% | Operating income (loss) (1) | | (22,285 | ) | | 5,524 |
| | | | |
_______________________
| | (1) | Revenue for the nine months ended September 30, 2017, and 2016, includes $2.4 million and $4.1 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 $39.4- Revenue from our Shipyards division decreased $34.8 million for the nine months ended September 30, 20162017, compared to the nine months ended September 30, 20152016, due to the assetscorresponding reduction in customer demand for shipbuilding and operations acquired inrepair services supporting the LEEVAC transaction (see LEEVAC Transaction above), which contributed $55.9oil and gas industry due to depressed oil and gas prices as well as the completion of a vessel that we tendered for delivery on February 6, 2017, and was rejected by the customer alleging certain technical deficiencies. We subsequently suspended of work on the second vessel under contract with this customer. See also Note 9 of the Notes to the Consolidated Financial Statements.
Gross profit (loss) - Gross loss from our Shipyards division was $19.1 million in revenuefor the nine months ended September 30, 2017, compared to a gross profit of $9.7 million for the nine months ended September 30, 2016. The increasedecrease was partially offsetdue to:
$12.7 million in contract losses related to cost overruns and re-work that has been identified on two newbuild vessel construction contracts within our Shipyards division; Holding and closing costs related to our Prospect shipyard as we wind down operations at this facility; 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 due to the downturn in the oil and gas industry.under other various contracts.
Gross profit increased $3.6General and administrative expenses - General and administrative expenses for our Shipyards division decreased $1.4 million for the nine months ended September 30, 20162017, compared to the nine months ended September 30, 20152016, primarily due to reductions of administrative personnel related to consolidation of personnel duties from the LEEVAC transactiontransaction. Additionally, our Shipyards division incurred lower bonuses accrued during 2017 as well as increases in profitability estimatesa result of our consolidated operating loss and cost minimization efforts implemented by management for other jobs in progress due to cost cutting measures.the period.
General and administrative expenses increased $4.6Asset Impairment - During nine months ended September 30, 2017, we recorded an impairment of $389,000 related to our assets held for sale at our Prospect shipyard. See also Note 2 of the Notes to Consolidated Financial Statements.
| | | | | | | | | | | | | | | | Services | | Nine Months Ended September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | 43,758 |
| | $ | 76,179 |
| | $ | (32,421 | ) | | (42.6)% | Gross profit (loss) | | 2,335 |
| | 11,158 |
| | (8,823 | ) | | (79.1)% | Gross profit (loss) percentage | | 5.3 | % | | 14.6 | % | | | | (9.3)% | General and administrative expenses | | 2,008 |
| | 2,462 |
| | (454 | ) | | (18.4)% | Operating income (loss) | | 327 |
| | 8,696 |
| | | | |
Revenue - Revenue from our Services division decreased $32.4 million for the nine months ended September 30, 20162017, compared to the nine months ended September 30, 20152016, due to an overall decrease in work experienced as a result of depressed oil and gas prices and the expenses associated with the operations acquiredcorresponding reduction in the LEEVAC transactioncustomer demand for oil and bonuses.gas related service projects. | | | | | | | | | | | | | | | | | 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 $5.2Gross profit - Gross profit from our Services division decreased $8.8 million for the nine months ended September 30, 20162017, compared to the nine months ended September 30, 20152016, due to increases in the scope of two large offshore service projectsdecreased revenue discussed above and lower margins on new work performed during the first half of 2016.2017.
Gross profit increased $563,000General and administrative expenses - General and administrative expenses for our Services division decreased $0.5 million for the nine months ended September 30, 20162017, compared to the nine months ended September 30, 20152016, due to increases in revenueslower bonuses accrued during 2017 as a result of a combination of a smaller workforce and improved absorption of fixed costs resulting from an increase in labor hours worked.our consolidated operating loss.
| | | | | | | | | | | | | | | | Corporate | | Nine Months Ended September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | — |
| | $ | — |
| | $ | — |
| | —% | Gross profit (loss) | | (500 | ) | | (439 | ) | | (61 | ) | | (13.9)% | Gross profit (loss) percentage | | n/a |
| | n/a |
| | | |
| General and administrative expenses | | 5,665 |
| | 5,132 |
| | 533 |
| | 10.4% | Operating income (loss) | | (6,165 | ) | | (5,571 | ) | | (594 | ) | | |
Gross profit (loss) - Gross loss from our Corporate division increased primarily due to a restructuring of our corporate division with additional personnel allocated to our corporate division during 2017 as discussed above. General and administrative expenses - General and administrative expenses for our Corporate division increased $1.1 millionprimarily due to a restructuring of our corporate division with additional personnel allocated to our corporate division during 2017 as discussed above as well as expenses incurred for advisors to assist in a strategic financial analysis project in anticipation of the nine months ended September 30, 2016 comparedproceeds to be received from the sale of our South Texas assets. Additionally, we have incurred increased legal fees as we pursue collection of claims against two customers. See also Note 9 of the Notes to the nine months ended September 30, 2015 due to additional administrative support costs related to increases in activityConsolidated Financial Statements. This has been partially offset by lower bonuses accrued during 2017 as a result of a combination of a smaller workforce and bonuses.our consolidated operating loss. Liquidity and Capital Resources Historically, we have funded our business activities through cash generated from operations. At September 30, 20162017, 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$17.8 million compared to $34.8$51.2 million at December 31, 2015.2016. Working capital was $79.8$164.0 million and our ratio of current assets to current liabilities was 2.834.59 to 1 at September 30, 2017, compared to $78.0 million and 3.21 to 1, respectively, at December 31, 2016. Working capital at September 30, 2017, includes $107.0 million related to assets held for sale, primarily related to our South Texas facilities. Our primary sourceuse of cash forduring the nine months ended September 30, 2016, was related to2017, is referenced in the collection of accounts receivable under various customer contracts and sales of three cranes at our Texas facility for $5.8 million. Cash Flow Activities section below. At September 30, 2016,2017, our contracts receivable balance was $26.6$25.5 million of which we have subsequently collected $12.1$8.3 million through October 31, 2016.2017. On January 1, 2016,June 9, 2017, we acquired substantially all of the assets and assumed certain specified liabilities of LEEVAC. The purchase price for the acquisition was $20.0entered into a $40.0 million subject to a working capital adjustment whereby we received a dollar-for-
dollar reduction for the assumption of certain net liabilities of LEEVAC at closing and settlement payments from sureties on certain ongoing fabrication projects that were assigned to us in the transaction. After taking into account these adjustments, we received approximately $1.6 million in cash at closing. During the quarter, we presented our working capital true-up to the seller, which resulted in an additional $1.5 million due to us. Additionally, we hired 380 employees upon acquisition of the facilities representing substantially all of the former LEEVAC employees. Strategically, the transaction expands our marine fabrication and repair and maintenance presence in the Gulf South market. At the date of transaction, we acquired approximately $121.2 million of new build construction backlog inclusive of approximately $9.2 million of purchase price fair value allocated to four, new build construction projects to be delivered in 2017 and 2018 for two customers.
As of September 30, 2016, we had a credit agreement with Whitney Bank, and JPMorgan Chase Bank N.A. that provides for an $80.0 million revolvingas lender. The credit facility maturing January 2, 2017. The credit agreement allows the Company to use up to the full amount of the available borrowing basematures June 9, 2019 and may be used for issuing letters of credit and up to $20.0 million forand/or general corporate and working capital purposes. Our obligationsWe believe that
the new facility will provide us with additional working capital flexibility to expand operations as backlog improves, respond to market opportunities and support our ongoing operations.
Interest on drawings under the credit agreement are secured by substantially all offacility may be designated, at our assets, other than real property locatedoption, as either Base Rate (as defined in the state of Louisiana. On February 29, 2016, we entered into an amendment to our credit agreement. The amendment (i) extendsfacility) or LIBOR plus 2.0% per annum. Unused commitment fees on the termundrawn portion of the Credit Facility from February 29, 2016 to January 2, 2017; (ii) increases the commitment fee on undrawn amounts from 0.25% to 0.50%facility are 0.4% per annum; (iii) increases the letter of credit fee, subject to certain limited exceptions, to 2.00% per annum, and interest 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. 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 our financial covenants beginning with the quarter ending March 31, 2016 as follows:
| | (i) | minimum net worth requirement of not less than $250.0 million plus |
| | a) | 50% of net income earned in each quarter beginning March 31, 2016 and |
| | b) | 100% of proceeds from any issuance of common stock; |
| | (ii) | debt to EBITDA ratio not greater than 3.0 to 1.0; and |
| | (iii) | interest coverage ratio not less than 2.0 to 1.0. |
At September 30, 2016, no amounts were outstanding under thelenders is 2.0% per annum. The credit facility and we had outstanding letters of credit totaling $4.5 million, reducing the unused portion of our credit facility for additional letters of credit to $75.5 million. As of September 30, 2016, we were in compliance with all covenants. During the fourth quarter, we expect to enter into a two-year, $40.0 million amended and restated credit facility with our current lenders that will beis secured by substantially all of our assets (other than real property)the assets of Gulf Marine Fabricators, L.P., the legal entity that holds our South Texas assets which are currently held for sale).
We anticipatemust comply with the amendedfollowing financial covenants each quarter during the term of the facility:
| | i. | Ratio of current assets to current liabilities of not less than 1.25:1.00; |
| | ii. | Minimum tangible net worth requirement of at least the sum of: |
| | b) | An amount equal to 50% of consolidated net income for each fiscal quarter ending after June 30, 2017 (with no deduction for a net loss in any such fiscal quarter except for any gain or loss in connection with the sale of assets by Gulf Marine Fabricators, L.P.), plus |
| | c) | 100% of all net proceeds of any issuance of any stock or other equity after deducting of any fees, commissions, expenses and other costs incurred in such offering; and |
| | iii. | Ratio of funded debt to tangible net worth of not more than 0.50:1.00. |
Concurrent with our execution of the credit facility, will allow us to usewe terminated our prior credit facility with JPMorgan Chase Bank, N.A. At the full $40.0time of the termination, there was approximately $4.6 million borrowing baseof letters of credit outstanding. All were reissued as new letters of credit under the credit facility and accepted by the beneficiaries. Availability under our credit facility for bothfuture, additional letters of credit and general corporate purposes. Given the historically low levelsborrowings is $35.4 million. As of borrowings underSeptember 30, 2017, we were in compliance with all of our current facility and our cash position, we requested a reduction in the amount 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.covenants.
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 do not anticipate significant capital expenditures for the remainder of 2016 to be approximately $1.8 million primarily for the following: extension of one of our dry docks, and
improvements to our newly acquired facilities.2017.
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. The customer also announcedagreements and stated that, while it had received limited waivers from its lenders, its debt agreements willwould require further negotiation and amendment. InThis same customer rejected delivery of the eventfirst vessel that we completed and tendered for delivery on February 6, 2017, alleging certain technical deficiencies exist with respect to the vessel. On March 10, 2017, we gave notice for arbitration with our customer in an effort to resolve this matter and subsequently suspended fabrication of the second vessel under contract with this customer, which is unsuccessfulincluded in our arbitration proceedings. We disagree with our customer concerning these efforts,alleged technical deficiencies and have put the customer will consider other options including a possible reorganizationin default under the terms of both vessel contracts. The customer is seeking recovery of $84.8 million representing all purchase price amounts previously paid by the customer under both contracts. On May 17, 2017, the customer filed for protection under Chapter 11 of the Federal bankruptcy laws. AtUnited States Bankruptcy Code for reorganization under a negotiated, pre-packaged plan. The customer has emerged from Chapter 11 Bankruptcy and the Bankruptcy Court has approved the customer's retention and acceptance of both contracts. As of September 30, 2016, no contracts receivable2017, approximately $4.6 million remained due and outstanding from our customer for the first vessel. The balance due to us for the second vessel upon completion and delivery is approximately $4.9 million. We are working with legal counsel to protect our contractual claims, and we have re-initiated arbitration proceedings in accordance with our contracts. We are in the process of discovery. The customer has recently named a new interim chief executive officer who has made contact with our management, and we are working to resolve our dispute in a constructive manner. We believe that will be able to recover remaining amounts due to us.
On August 25, 2017, our South Texas facilities were outstandingimpacted by Hurricane Harvey, which made landfall as a category 4 hurricane. As a result, we suffered damages to our South Texas buildings and deferred revenue exceeded ourequipment. Through September 30, 2017, we have incurred approximately $265,000 in clean-up and repair related costs and estimated earningswe expect to incur additional future repair costs in excess of billingsour deductible which management believes are probable of being recovered through insurance proceeds. We maintain coverage on these assets up to a maximum of $25.0 million, subject to a 3.0% deductible with a minimum deductible of $500,000. We are working diligently with our insurance agents and adjusters to finalize our estimate of the damage; however, it may be several months, or even longer, before we can finalize our assessment and receive final payment from our insurance underwriters. Our insurance underwriters have made an initial payment of $3.0 million, and we have recorded a liability for future repairs of $2.7 million which is included in accrued expenses and other liabilities on our balance sheet at September 30, 2017. Based upon our initial assessment of the damages and insurance coverage, management believes that there is no basis to record a net loss at this contract. We continuetime and that insurance proceeds will at a minimum be sufficient to monitor our work performed in relationreimburse us for all damages and repair costs. Our final
assessment of the loss incurred to our customer’s statusSouth Texas assets as well as the amount of insurance proceeds we will receive could be more or less than this amount when the claim is ultimately settled and its ability to pay under the terms of its contract. Based on our evaluation to date, we do not believe that any loss on this contract is probable or estimable at this time. such differences could be material.
In February 2016,event of one or more sales of our BoardSouth Texas assets, we expect to use all or a portion of Directors approved a decreasethe sales proceeds to invest in our quarterly dividendoperating liquidity in order to $0.01 in anfacilitate anticipated future projects, selected capital improvements to enhance and/or expand our existing facilities, mergers and acquisitions to expand our product and service capabilities. We are continuing this effort to conserve cash. identify and analyze specific investment opportunities we believe will enhance the long-term value of the Company that are consistent with our strategy.
On October 27, 2016,26, 2017, our Board of Directors declared a dividend of $0.01 per share on our shares of common stock outstanding, payable November 23, 201624, 2017, to shareholders of record on November 10, 2016.2017.
We believe our cash and cash equivalents generated by our future operating activities, and funds availableproceeds to be received from insurance underwriters, availability under our line of credit facilityand proceeds 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 termnext twelve months to continue our operations,to operate, satisfy our contractual operations and pay dividends to our shareholders.
Cash Flow Activities
For the nine months ended September 30, 20162017, net cash used in operating activities was $29.6 million, compared to net cash provided by operating activities was $19.3 million, compared to $18.7of $19.4 million for the nine months ended September 30, 2015.2016. The increaseuse of cash in cash provided by operations during the period was primarily due to increased gross profit and collections of contract receivables during 2016 somewhat offset by payments requiredthe following:
Operating losses for trade payables during the nine months ended September 30, 2017, in excess of non-cash depreciation, amortization, impairment and stock compensation expense of approximately $19.6 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 as comparedwas $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 on ongoing shipbuilding projects of $23.0 million that were assigned to 2015.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. The suspension of two vessel projects following our customer’s refusal to accept delivery of the first vessel in February 2017, and our inability to collect $9.5 million in scheduled payments under these contracts. See also Note 9 of the Notes to the Consolidated Financial Statements; 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 later in 2017 through the first half of 2018.
Net cash provided byused in investing activities for the nine months ended September 30, 20162017, was $2.0$2.4 million, compared to cash used inprovided by investing activities of $5.0$2.0 million for the nine months ended September 30, 2015.2016. The increasechange in cash provided by investing activities is primarily due to cash received from the sale of three cranes at our Texas facility for $5.8 million and $1.6 million of cash acquired in the LEEVAC transaction.transaction during 2016 partially offset by decreases in capital expenditures.
Net cash used in financing activities for the nine months ended September 30, 2017 and 2016, was $1.4 million and 2015 was $440,000 and $4.4 million,$603,000, respectively. The decreaseincrease in cash used in financing activities is due to the reduction incash payments made to taxing authorities on behalf of employees for their vesting of common stock. During the cash dividend in 2016.nine months ended September 30, 2017 we received $2.0 million from borrowings under our new line of credit which were immediately repaid.
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, 2016.2017. 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, 20162017, 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 | | | 3.2 | | | 4.131.1 | | 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 | | | 31.2 | | | 32 | | | 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. |
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. MecheDavid S. Schorlemer | | Kirk J. MecheDavid S. Schorlemer | | President, Chief Executive Officer, Director and InterimVice President, Chief Financial Officer, and Treasurer and Secretary (Principal Executive Officer and Interim Principal Financial and Accounting Officer) |
Date: November 2, 2016October 31, 2017
GULF ISLAND FABRICATION, INC. EXHIBIT INDEX | | | | | Exhibit Number | | Description of Exhibit | | | 2.13.1 | | 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 | | | 4.131.1 | | Specimen Common Stock Certificate, incorporated by reference | 10.131.2 | | Form of Long-Term Performance-Based Cash Award Agreement. | 31 | | CEO and | 32 | | | 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 | |
Division | | ___________ | | 1.(1) | Backlog as of September 30, 2016 includes commitments received through October 27, 2016. We exclude suspended projects from contract backlog thatwhen they are expected to be suspended more than twelve12 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.(2) | At September 30, 2016,2017, projects for our threefive 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) | twoTwo large multi-purpose service vessels for one customer inwithin our Shipyards segment,division, which commenced in the first quarter of 2014 and will be completed during the first and second quarter of 2018; and |
(iii) the fabrication of four modules associated with a U.S. ethane cracker project.
| | 3.(ii) | Newbuild construction of four harbor tugs for one customer within our Shipyards division; |
| | (iii) | Newbuild construction of four harbor tugs for one additional customer within our Shipyards division; |
| | (iv) | The fabrication of four modules associated with a U.S. ethane cracker project within our Fabrication division; and |
| | (v) | Newbuild construction of an offshore research vessel within our Shipyards division. |
| | (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. Additionally, as we continue to add backlog, we will begin adding personnel with critical project management and fabrication skills to ensure we have the resources necessary to execute our projects well and to support our project risk mitigation discipline for all new project work. This may negatively impact near term results. As of September 30, 2016,2017, we had 1,336989 employees and 163 contract employees inclusive of 380 employees hired in the LEEVAC transaction, compared to 1,255 employees and 71 contract1,178 employees as of December 31, 2015.
2016. Labor hours worked were 2.31.5 million during the nine months ended September 30, 2016,2017, compared to 2.12.3 million for the nine months ended September 30, 2015.2016. The overall increasedecrease in labor hours worked for the threenine months ended September 30, 20162017, 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 September 30, 2017, Compared to Three Months Ended September 30, 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 September 30, | | Increase or (Decrease) | | 2017 | | 2016 | | Amount | Percent | Revenue | $ | 49,884 |
| | $ | 65,384 |
| | $ | (15,500 | ) | (23.7)% | Cost of revenue | 50,378 |
| | 60,125 |
| | (9,747 | ) | (16.2)% | Gross profit (loss) | (494 | ) | | 5,259 |
| | (5,753 | ) | (109.4)% | Gross profit (loss) percentage | (1.0 | )% | | 8.0 | % | | | | General and administrative expenses | 4,370 |
| | 5,086 |
| | (716 | ) | (14.1)% | Operating income (loss) | (4,864 | ) | | 173 |
| | (5,037 | ) | (2,911.6)% | Other income (expense): | | | | | | | Interest expense | (45 | ) | | (110 | ) | | 65 |
| | Interest income | — |
| | 12 |
| | (12 | ) | | Other income (expense), net | 38 |
| | 599 |
| | (561 | ) | | Total other income (expense) | (7 | ) | | 501 |
| | (508 | ) | 101.4% | Net income (loss) before income taxes | (4,871 | ) | | 674 |
| | (5,545 | ) | (822.7)% | Income tax expense (benefit) | (1,761 | ) | | 133 |
| | (1,894 | ) | (1,424.1)% | Net income (loss) | $ | (3,110 | ) | | $ | 541 |
| | $ | (3,651 | ) | (674.9)% |
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, 2016.2017 and 2016, was $49.9 million and $65.4 million, respectively, representing a decrease of 23.7%. The decrease is primarily attributable to an overall decrease in work experienced in our facilities primarily 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%48.4% and 45.3%33.8% for the three-monthsthree months ended September 30, 20162017 and 2015,2016, 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 20152017, was $494,000 compared to a gross profit of $5.3 million (8.0% of revenue) and $(7.8) million, respectively. Our gross profit improved compared to third quarter of 2015for the three months ended September 30, 2016. The decrease was primarily due to $2.1 million of contract losses of $14.3 million that were recorded during the third quarter of 2015 resulting fromincurred by our inabilityShipyards division related to recover certaincost overruns and re-work identified on two newbuild vessel construction
contracts, decreased revenue as discussed above, holding costs related to a deckour South Texas assets of $1.1 million and jacket for one of our deepwater projects. We had no such loss during the third quarter of 2016 and implemented cost cutting measures.lower margins on current work due to competitive pressures. This was partially offset by tighter margins within all ofdecreases in costs resulting from reductions in workforce as we wrapped up and completed projects at our segments due to a decrease in workSouth Texas fabrication yards and Prospect shipyard, no depreciation being recorded for our South Texas assets and Prospect shipyard for the three months ended September 30, 2017 (as these assets are classified as a result ofassets held for sale) and continued cost minimization efforts implemented by management for the downturn in the oil and gas industry.period.
General and administrative expenses - Our general and administrative expenses were $4.4 million for the three months ended September 30, 2017, compared to $5.1 million for the three months ended September 30, 2016, compared to $3.8 million for the three months ended September 30, 2015.2016. The increasedecrease in general
and administrative expenses for the three months ended September 30, 20162017, was primarily attributable to the operations acquired in the LEEVAC transactionlower bonuses accrued during 2017, employee reductions and bonus expense, partially offset bycontinued cost cuttingminimization efforts implemented during 2016.by management for the period.
Asset impairmentOther income (expense), net - - 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 assetsOther income 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.
Interest expense, net - The Company had net interest expense of $98,000$38,000 for the three months ended September 30, 20162017, as compared to net interest expenseother income of $31,000$599,000 for three months ended September 30, 2016. Other income for the three months ended September 30, 2015. The increase2017 relates to insurance proceeds received from damage to a corporate automobile that was primarily driven by an increase in the cost of unused credit facility fees under our credit agreement.
fully depreciated. Other income net - Other income increased $599,000 for thefor three months ended September 30, 2016. The increase was2016 primarily duerelates to gains on sales of assets from our Fabrication division.
Income taxestax expense (benefit) - Our effective income tax rate for the three months ended September 30, 20162017, was 19.7%36.2%, compared to an effective tax rate of 34.0%19.7% for the comparable period during 2015.2016. The changeincrease in ourthe effective tax rate is duethe result of changes to the decrease inestimates of our effective rateyear-end tax provision during for the year-to-date period.three months ended September 30, 2016.
Operating Segments | | | | | | | | | | | | | | | | | 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 | ) | | | | |
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 and nine months ended September 30, 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 its Corporate division each meeting the criteria of reportable segments under GAAP. During the three and nine months ended September 30, 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 September 30, 2017 and 2016, are presented below (in thousands, except for percentages).
| | | | | | | | | | | | | | | | Fabrication | | Three Months Ended September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | 18,318 |
| | $ | 22,311 |
| | $ | (3,993 | ) | | (17.9)% | Gross profit (loss) | | 1,250 |
| | 601 |
| | 649 |
| | 108.0% | Gross profit (loss) percentage | | 6.8 | % | | 2.7 | % | | | | 4.1% | General and administrative expenses | | 778 |
| | 885 |
| | (107 | ) | | (12.1)% | Operating income (loss) | | 472 |
| | (284 | ) | | | | |
Revenue - Revenue from our Fabrication division decreased $9.8$4.0 million for the three months ended September 30, 20162017, compared to the three months ended September 30, 2015.2016. 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.
Gross profit increased $14.5 million to $532,000(loss) - Gross profit from our Fabrication division for the three months ended September 30, 20162017, was $1.3 million compared to a gross lossprofit of $14.0 million$601,000 for the three months ended September 30, 20152016. The increase in gross profit was 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.
GeneralGains on scrap sales of approximately $701,000 at our South Texas facility,
Decreases in costs resulting from reductions in workforce as we wrapped up and administrative expenses decreased $657,000completed projects at our South Texas fabrication yards, No depreciation being recorded for our South Texas assets for the three months ended September 30, 20162017, as these assets are classified as assets held for sale; and Continued cost minimization efforts implemented by management for the period.
This was partially offset by approximately $1.1 million of holding costs for our South Texas assets.
General and administrative expenses - General and administrative expenses for our Fabrication division decreased $107,000 for the three months ended September 30, 2017, compared to the three months ended September 30, 20152016. The decrease is primarily due to cost cutting measures implemented during 2016 in response to decreases in workcosts resulting from lower bonuses accrued during 2017 as a result of our consolidated operating loss, reductions in workforce at our South Texas fabrication facilities.
Asset impairment - Duringyards and continued cost minimization efforts implemented by management for 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.period.
| | | | | | | | | | | | | | | | | 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 September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue (1) | | $ | 15,074 |
| | $ | 23,060 |
| | $ | (7,986 | ) | | (34.6)% | Gross profit (loss) (1) | | (3,504 | ) | | 1,945 |
| | (5,449 | ) | | (280.2)% | Gross profit (loss) percentage | | (23.2 | )% | | 8.4 | % | | | | (31.6)% | General and administrative expenses | | 888 |
| | 1,468 |
| | (580 | ) | | (39.5)% | Operating income (loss) (1) | | (4,392 | ) | | 477 |
| | | | |
___________ | | (1) | Revenue for the three months ended September 30, 2017, and 2016, includes $510,000 and $1.5 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 $8.0 million for the three months ended September 30, 20162017, compared to the three months ended September 30, 20152016, due to the operations acquiredcorresponding reduction in customer demand for shipbuilding and repair services supporting the LEEVAC transaction (see LEEVAC Transaction above), which contributed $16.8oil and gas industry due to depressed oil and gas prices as well as the completion of a vessel that we tendered for delivery on February 6, 2017, and was rejected by the customer alleging certain technical deficiencies. We subsequently suspended of work on the second vessel under contract with this customer. See also Note 9 of the Notes to the Consolidated Financial Statements.
Gross profit (loss) - Gross loss from our Shipyards division was $3.5 million in revenue for the three months ended September 30, 2016.
Gross2017, compared to a gross profit decreased $60,000of $1.9 million for the three months ended September 30, 20162016. The decrease was due to:
$2.1 million in contract losses related to cost overruns and re-work that has been identified on two newbuild vessel construction contracts within our Shipyards division; and Holding and closing costs related to our Prospect shipyard as we wind down operations at this facility.
General and administrative expenses - General and administrative expenses for our Shipyards division decreased $580,000 for the three months ended September 30, 2017, compared to the three months ended September 30, 20152016, primarily due to tighter margins on new work and inefficiencies incurred on the contracts acquired inreductions of administrative personnel related to consolidation of personnel duties from the LEEVAC transaction partially offsettransaction. Additionally, our Shipyards division incurred lower bonuses accrued during 2017 as a result of a combination of a smaller workforce and our consolidated operating loss and cost minimization efforts implemented by savings realized from cost cutting measures implementedmanagement for the period during the first part of 2016.
General and administrative expenses increased $1.7 | | | | | | | | | | | | | | | | Services | | Three Months Ended September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | 17,651 |
| | $ | 20,928 |
| | $ | (3,277 | ) | | (15.7)% | Gross profit (loss) | | 1,912 |
| | 2,918 |
| | (1,006 | ) | | (34.5)% | Gross profit (loss) percentage | | 10.8 | % | | 13.9 | % | | | | (3.1)% | General and administrative expenses | | 695 |
| | 943 |
| | (248 | ) | | (26.3)% | Operating income (loss) | | 1,217 |
| | 1,975 |
| | | | |
Revenue - Revenue from our Services division decreased $3.3 million for the three months ended September 30, 20162017, compared to the three months ended September 30, 2015 primarily2016, 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 completedServices division decreased $1.0 million for the fabricationthree months ended September 30, 2017, compared to the three months ended September 30, 2016, due to decreased revenue discussed above and lower margins on new work performed during 2017.
General and administrative expenses - General and administrative expenses for our Services division decreased $248,000 for the three months ended September 30, 2017, compared to the three months ended September 30, 2016, due to lower bonuses accrued during 2017 as a result of a 1,200 foot jacket, pilescombination of a smaller workforce and an approximate 450 short ton topsideour consolidated operating loss.
| | | | | | | | | | | | | | | | Corporate | | Three Months Ended September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | — |
| | $ | — |
| | $ | — |
| | —% | Gross profit (loss) | | (152 | ) | | (205 | ) | | 53 |
| | 25.9% | Gross profit (loss) percentage | | n/a |
| | n/a |
| | | |
| General and administrative expenses | | 2,009 |
| | 1,790 |
| | 219 |
| | 12.2% | Operating income (loss) | | (2,161 | ) | | (1,995 | ) | |
|
| | |
General and administrative expenses - General and administrative expenses for our Corporate division increased primarily due to a restructuring of our corporate division with no similaradditional personnel allocated to our corporate division during 2017 as discussed above as well as expenses incurred for advisors to assist in a strategic financial analysis project in 2016. Our decrease in revenue earnedanticipation of the proceeds to be received from offshore fabrication work wasthe sale of our South Texas assets. Additionally, we have incurred increased legal fees as we pursue collection of claims against two customers. See also Note 9 of the Notes to the Consolidated Financial Statements. This has been partially offset by lower bonuses accrued during the assets and operations acquired quarter due to our consolidated operating loss.
Nine Months Ended September 30, 2017, Compared to Nine Months Ended September 30, 2016 (in the LEEVAC transaction (see LEEVAC Transaction above), which contributed $55.9 million inthousands, except for percentages): Consolidated | | | | | | | | | | | | | | | Nine Months Ended September 30, | | Increase or (Decrease) | | 2017 | | 2016 | | Amount | Percent | Revenue | $ | 133,745 |
| | $ | 230,864 |
| | $ | (97,119 | ) | (42.1)% | Cost of revenue | 150,755 |
| | 205,839 |
| | (55,084 | ) | (26.8)% | Gross profit (loss) | (17,010 | ) | | 25,025 |
| | (42,035 | ) | (168.0)% | Gross profit (loss) percentage | (12.7 | )% | | 10.8 | % | | | | General and administrative expenses | 12,940 |
| | 14,633 |
| | (1,693 | ) | (11.6)% | Asset impairment | 389 |
| | — |
| | 389 |
| 100.0% | Operating income (loss) | (30,339 | ) | | 10,392 |
| | (40,731 | ) | (391.9)% | Other income (expense): | | | | | | | Interest expense | (262 | ) | | (248 | ) | | (14 | ) | | Interest income | 12 |
| | 20 |
| | (8 | ) | | Other income (expense), net | (221 | ) | | 1,039 |
| | (1,260 | ) | | Total other income (expense) | (471 | ) | | 811 |
| | (1,282 | ) | (158.1)% | Net income (loss) before income taxes | (30,810 | ) | | 11,203 |
| | (42,013 | ) | (375.0)% | Income tax expense (benefit) | (10,322 | ) | | 4,134 |
| | (14,456 | ) | (349.7)% | Net income (loss) | $ | (20,488 | ) | | $ | 7,069 |
| | $ | (27,557 | ) | (389.8)% |
Revenue - Our revenue for the nine months ended September 30, 2016. Pass-through2017 and 2016, was $133.7 million and $230.9 million, respectively, representing a decrease of 42.1%. 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 as well as the completion of a vessel within our Shipyards division that we tendered for delivery on February 6, 2017, and was rejected by the customer alleging certain technical deficiencies. We subsequently suspended of work on the second vessel under contract with this customer. See also Note 9 of the Notes to the Consolidated Financial Statements. Pass-
through costs as a percentage of revenue were 35.0%45.3% and 43.2%35.0% for the nine months ended September 30, 20162017 and 2015,2016, 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 profitloss for the nine months ended September 30, 2016 and 20152017, was $17.0 million compared to a gross profit of $25.0 million (10.8% of revenue) and $2.4 million (1.0% of revenue), respectively. Our gross profit improved compared to 2015for the nine months ended September 30, 2016. The decrease was primarily due to the LEEVAC transaction$12.7 million of losses incurred by our Shipyards division related to cost overruns and contract losses of $14.3 million that were recorded during the third quarter of 2015 resulting from our inability to recover certainre-work identified on two newbuild vessel construction contracts, decreased revenue as discussed above, holding costs related to a deckour South Texas assets of $3.6 million and jacketlower margins on current work. This was partially offset by decreases in costs resulting from reductions in workforce as we wrapped up and completed projects at our South Texas fabrication yards and Prospect shipyard, suspended depreciation for one of our deepwater projects. We had no such lossSouth Texas assets and Prospect shipyard during the third quarter of 2016nine months ended September 30, 2017, as these assets are classified as assets held for sale and additional cost minimization efforts implemented cost cutting measures in response to decreases in work at our fabrication facilities.by management for the period.
General and administrative expenses - Our general and administrative expenses were $12.9 million for the nine months ended September 30, 2017, compared to $14.6 million for the nine months ended September 30, 2016, compared to $11.8 million for the nine months ended September 30, 2015.2016. The increasedecrease in general and administrative expenses for the nine months ended September 30, 2016 was2017, is primarily attributable to:
an increase of stock-based compensation expense of $589,000,
due to decreases in costs resulting from reductions in workforce at our South Texas fabrication yards, lower bonuses and the LEEVAC transaction; partially offset by
cost cutting efforts implementedaccrued during 2017 as a result of our consolidated operating loss and continued cost minimization efforts implemented by management for the downturn in the oil and gas industry.period.
Asset impairmentImpairment - During the nine months ended September 30, 2015,2017, we recorded an asset impairment charge of $6.6 million$389,000 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. Dueour assets held for sale at our Prospect Shipyard. See also Note 2 of the Notes to the sustained downturn in the energy sector, our ability to effectivelyConsolidated Financial Statements.
market these assetsOther income (expense), net - Other expense 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$221,000 for the nine months ended September 30, 20162017, compared to net interest expenseother income 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 income increased $1.0 million for the nine months ended September 30, 2016. The increaseOther expense for the period was primarily due to losses on sales of two drydocks from our Shipyards division. Other income for the prior period was primarily due to gains of $924,000 related to the sale of three cranes at our Texas facility as well ason sales of smaller assets byfrom our Shipyards division.Fabrication division recorded during 2016.
Income taxestax expense (benefit) - Our effective income tax rate for the nine months ended September 30, 20162017, was 36.9%33.5%, compared to an effective tax rate of 34.0%36.9% for the comparable period during 2015.2016. The increasedecrease in ourthe effective tax rate is due to the effectresult of state income taxes from income generated within Louisiana with no offsetting tax benefit from losses generated within Texas.limitations on the deductibility of executive compensation.
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 | ) | |
| |
|
As discussed above and 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 and nine months ended September 30, 2017. 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 nine months ended September 30, 2017 and 2016, are presented below (in thousands, except for percentages).
| | | | | | | | | | | | | | | | Fabrication | | Nine Months Ended September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | 42,517 |
| | $ | 70,436 |
| | $ | (27,919 | ) | | (39.6)% | Gross profit (loss) | | 216 |
| | 4,564 |
| | (4,348 | ) | | (95.3)% | Gross profit (loss) percentage | | 0.5 | % | | 6.5 | % | | | | (6.0)% | General and administrative expenses | | 2,432 |
| | 2,821 |
| | (389 | ) | | (13.8)% | Operating income (loss) | | (2,216 | ) | | 1,743 |
| | | | |
Revenue - Revenue from our Fabrication division decreased $67.0$27.9 million for the nine months ended September 30, 20162017, compared to the nine months ended September 30, 2015.2016. 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. During 2015, weAs discussed above, management has classified our South Texas assets as assets held for sale in response to the underutilization of our Fabrication assets. As of September 30, 2017, all of our projects at our South Texas fabrication yards have been completed theor transferred to our Houma fabrication of a 1,200 foot jacket, piles and an approximate 450 short ton topside with no similar project in 2016.yard.
Gross profit increased $18.5 million(loss) - Gross profit from our Fabrication division for the nine months ended September 30, 2017, was $216,000 compared to $4.4a gross profit of $4.6 million for the nine months ended September 30, 2016 compared2016. The decrease was due to a gross losslower revenue
from decreased fabrication work as discussed above and approximately $3.6 million of $14.1 millionholding costs for our South Texas assets as we market them for sale. This was partially offset by decreases in costs resulting from reductions in workforce, gains on scrap sales as we wrapped up and completed projects at our South Texas fabrication yards, reduced depreciation being recorded for our South Texas assets for the nine months ended September 30, 2015. The increase is due to contract losses of $14.3 million that were recorded during2017, as these assets are classified as assets held for sale on February 23, 2017, and additional cost minimization efforts implemented by management for 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.period.
General and administrative expenses - General and administrative expenses for our Fabrication division decreased $2.5 million$389,000 for the nine months ended September 30, 20162017, compared to the nine months ended September 30, 20152016. The decrease is primarily due to cost cutting measures implemented during 2016 in response to decreases in workcosts resulting from reductions in workforce as we wrapped up and completed projects at our South Texas fabrication facilities.
Asset impairment - During the nine months ended September 30, 2015, we recorded an asset impairment chargeyards and lower bonuses accrued during 2017 as a result of $6.6 million relateda combination of a smaller workforce and our consolidated operating loss. This was partially offset by expenses incurred to a partially constructed topside, related valves, pipingmarket our South Texas assets for sale 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 valuepayment of the assets. We had no such impairmentstermination benefits during the nine months ended September 30, 2016.first quarter of 2017 as we reduced its workforce and completed those operations.
| | | | | | | | | | | | | | | | | 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 |
| | | | |
| | | | | | | | | | | | | | | | Shipyards | | Nine Months Ended September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue (1) | | $ | 51,798 |
| | $ | 86,553 |
| | $ | (34,755 | ) | | (40.2)% | Gross profit (loss) (1) | | (19,061 | ) | | 9,742 |
| | (28,803 | ) | | (295.7)% | Gross profit (loss) percentage | | (36.8 | )% | | 11.3 | % | | | | (48.1)% | General and administrative expenses | | 2,835 |
| | 4,218 |
| | (1,383 | ) | | (32.8)% | Asset impairment | | 389 |
| | — |
| | 389 |
| | 100.0% | Operating income (loss) (1) | | (22,285 | ) | | 5,524 |
| | | | |
_______________________
| | (1) | Revenue for the nine months ended September 30, 2017, and 2016, includes $2.4 million and $4.1 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 $39.4- Revenue from our Shipyards division decreased $34.8 million for the nine months ended September 30, 20162017, compared to the nine months ended September 30, 20152016, due to the assetscorresponding reduction in customer demand for shipbuilding and operations acquired inrepair services supporting the LEEVAC transaction (see LEEVAC Transaction above), which contributed $55.9oil and gas industry due to depressed oil and gas prices as well as the completion of a vessel that we tendered for delivery on February 6, 2017, and was rejected by the customer alleging certain technical deficiencies. We subsequently suspended of work on the second vessel under contract with this customer. See also Note 9 of the Notes to the Consolidated Financial Statements.
Gross profit (loss) - Gross loss from our Shipyards division was $19.1 million in revenuefor the nine months ended September 30, 2017, compared to a gross profit of $9.7 million for the nine months ended September 30, 2016. The increasedecrease was partially offsetdue to:
$12.7 million in contract losses related to cost overruns and re-work that has been identified on two newbuild vessel construction contracts within our Shipyards division; Holding and closing costs related to our Prospect shipyard as we wind down operations at this facility; 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 due to the downturn in the oil and gas industry.under other various contracts.
Gross profit increased $3.6General and administrative expenses - General and administrative expenses for our Shipyards division decreased $1.4 million for the nine months ended September 30, 20162017, compared to the nine months ended September 30, 20152016, primarily due to reductions of administrative personnel related to consolidation of personnel duties from the LEEVAC transactiontransaction. Additionally, our Shipyards division incurred lower bonuses accrued during 2017 as well as increases in profitability estimatesa result of our consolidated operating loss and cost minimization efforts implemented by management for other jobs in progress due to cost cutting measures.the period.
General and administrative expenses increased $4.6Asset Impairment - During nine months ended September 30, 2017, we recorded an impairment of $389,000 related to our assets held for sale at our Prospect shipyard. See also Note 2 of the Notes to Consolidated Financial Statements.
| | | | | | | | | | | | | | | | Services | | Nine Months Ended September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | 43,758 |
| | $ | 76,179 |
| | $ | (32,421 | ) | | (42.6)% | Gross profit (loss) | | 2,335 |
| | 11,158 |
| | (8,823 | ) | | (79.1)% | Gross profit (loss) percentage | | 5.3 | % | | 14.6 | % | | | | (9.3)% | General and administrative expenses | | 2,008 |
| | 2,462 |
| | (454 | ) | | (18.4)% | Operating income (loss) | | 327 |
| | 8,696 |
| | | | |
Revenue - Revenue from our Services division decreased $32.4 million for the nine months ended September 30, 20162017, compared to the nine months ended September 30, 20152016, due to an overall decrease in work experienced as a result of depressed oil and gas prices and the expenses associated with the operations acquiredcorresponding reduction in the LEEVAC transactioncustomer demand for oil and bonuses.gas related service projects. | | | | | | | | | | | | | | | | | 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 $5.2Gross profit - Gross profit from our Services division decreased $8.8 million for the nine months ended September 30, 20162017, compared to the nine months ended September 30, 20152016, due to increases in the scope of two large offshore service projectsdecreased revenue discussed above and lower margins on new work performed during the first half of 2016.2017.
Gross profit increased $563,000General and administrative expenses - General and administrative expenses for our Services division decreased $0.5 million for the nine months ended September 30, 20162017, compared to the nine months ended September 30, 20152016, due to increases in revenueslower bonuses accrued during 2017 as a result of a combination of a smaller workforce and improved absorption of fixed costs resulting from an increase in labor hours worked.our consolidated operating loss.
| | | | | | | | | | | | | | | | Corporate | | Nine Months Ended September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | — |
| | $ | — |
| | $ | — |
| | —% | Gross profit (loss) | | (500 | ) | | (439 | ) | | (61 | ) | | (13.9)% | Gross profit (loss) percentage | | n/a |
| | n/a |
| | | |
| General and administrative expenses | | 5,665 |
| | 5,132 |
| | 533 |
| | 10.4% | Operating income (loss) | | (6,165 | ) | | (5,571 | ) | | (594 | ) | | |
Gross profit (loss) - Gross loss from our Corporate division increased primarily due to a restructuring of our corporate division with additional personnel allocated to our corporate division during 2017 as discussed above. General and administrative expenses - General and administrative expenses for our Corporate division increased $1.1 millionprimarily due to a restructuring of our corporate division with additional personnel allocated to our corporate division during 2017 as discussed above as well as expenses incurred for advisors to assist in a strategic financial analysis project in anticipation of the nine months ended September 30, 2016 comparedproceeds to be received from the sale of our South Texas assets. Additionally, we have incurred increased legal fees as we pursue collection of claims against two customers. See also Note 9 of the Notes to the nine months ended September 30, 2015 due to additional administrative support costs related to increases in activityConsolidated Financial Statements. This has been partially offset by lower bonuses accrued during 2017 as a result of a combination of a smaller workforce and bonuses.our consolidated operating loss. Liquidity and Capital Resources Historically, we have funded our business activities through cash generated from operations. At September 30, 20162017, 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$17.8 million compared to $34.8$51.2 million at December 31, 2015.2016. Working capital was $79.8$164.0 million and our ratio of current assets to current liabilities was 2.834.59 to 1 at September 30, 2017, compared to $78.0 million and 3.21 to 1, respectively, at December 31, 2016. Working capital at September 30, 2017, includes $107.0 million related to assets held for sale, primarily related to our South Texas facilities. Our primary sourceuse of cash forduring the nine months ended September 30, 2016, was related to2017, is referenced in the collection of accounts receivable under various customer contracts and sales of three cranes at our Texas facility for $5.8 million. Cash Flow Activities section below. At September 30, 2016,2017, our contracts receivable balance was $26.6$25.5 million of which we have subsequently collected $12.1$8.3 million through October 31, 2016.2017. On January 1, 2016,June 9, 2017, we acquired substantially all of the assets and assumed certain specified liabilities of LEEVAC. The purchase price for the acquisition was $20.0entered into a $40.0 million subject to a working capital adjustment whereby we received a dollar-for-
dollar reduction for the assumption of certain net liabilities of LEEVAC at closing and settlement payments from sureties on certain ongoing fabrication projects that were assigned to us in the transaction. After taking into account these adjustments, we received approximately $1.6 million in cash at closing. During the quarter, we presented our working capital true-up to the seller, which resulted in an additional $1.5 million due to us. Additionally, we hired 380 employees upon acquisition of the facilities representing substantially all of the former LEEVAC employees. Strategically, the transaction expands our marine fabrication and repair and maintenance presence in the Gulf South market. At the date of transaction, we acquired approximately $121.2 million of new build construction backlog inclusive of approximately $9.2 million of purchase price fair value allocated to four, new build construction projects to be delivered in 2017 and 2018 for two customers.
As of September 30, 2016, we had a credit agreement with Whitney Bank, and JPMorgan Chase Bank N.A. that provides for an $80.0 million revolvingas lender. The credit facility maturing January 2, 2017. The credit agreement allows the Company to use up to the full amount of the available borrowing basematures June 9, 2019 and may be used for issuing letters of credit and up to $20.0 million forand/or general corporate and working capital purposes. Our obligationsWe believe that
the new facility will provide us with additional working capital flexibility to expand operations as backlog improves, respond to market opportunities and support our ongoing operations.
Interest on drawings under the credit agreement are secured by substantially all offacility may be designated, at our assets, other than real property locatedoption, as either Base Rate (as defined in the state of Louisiana. On February 29, 2016, we entered into an amendment to our credit agreement. The amendment (i) extendsfacility) or LIBOR plus 2.0% per annum. Unused commitment fees on the termundrawn portion of the Credit Facility from February 29, 2016 to January 2, 2017; (ii) increases the commitment fee on undrawn amounts from 0.25% to 0.50%facility are 0.4% per annum; (iii) increases the letter of credit fee, subject to certain limited exceptions, to 2.00% per annum, and interest 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. 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 our financial covenants beginning with the quarter ending March 31, 2016 as follows:
| | (i) | minimum net worth requirement of not less than $250.0 million plus |
| | a) | 50% of net income earned in each quarter beginning March 31, 2016 and |
| | b) | 100% of proceeds from any issuance of common stock; |
| | (ii) | debt to EBITDA ratio not greater than 3.0 to 1.0; and |
| | (iii) | interest coverage ratio not less than 2.0 to 1.0. |
At September 30, 2016, no amounts were outstanding under thelenders is 2.0% per annum. The credit facility and we had outstanding letters of credit totaling $4.5 million, reducing the unused portion of our credit facility for additional letters of credit to $75.5 million. As of September 30, 2016, we were in compliance with all covenants. During the fourth quarter, we expect to enter into a two-year, $40.0 million amended and restated credit facility with our current lenders that will beis secured by substantially all of our assets (other than real property)the assets of Gulf Marine Fabricators, L.P., the legal entity that holds our South Texas assets which are currently held for sale).
We anticipatemust comply with the amendedfollowing financial covenants each quarter during the term of the facility:
| | i. | Ratio of current assets to current liabilities of not less than 1.25:1.00; |
| | ii. | Minimum tangible net worth requirement of at least the sum of: |
| | b) | An amount equal to 50% of consolidated net income for each fiscal quarter ending after June 30, 2017 (with no deduction for a net loss in any such fiscal quarter except for any gain or loss in connection with the sale of assets by Gulf Marine Fabricators, L.P.), plus |
| | c) | 100% of all net proceeds of any issuance of any stock or other equity after deducting of any fees, commissions, expenses and other costs incurred in such offering; and |
| | iii. | Ratio of funded debt to tangible net worth of not more than 0.50:1.00. |
Concurrent with our execution of the credit facility, will allow us to usewe terminated our prior credit facility with JPMorgan Chase Bank, N.A. At the full $40.0time of the termination, there was approximately $4.6 million borrowing baseof letters of credit outstanding. All were reissued as new letters of credit under the credit facility and accepted by the beneficiaries. Availability under our credit facility for bothfuture, additional letters of credit and general corporate purposes. Given the historically low levelsborrowings is $35.4 million. As of borrowings underSeptember 30, 2017, we were in compliance with all of our current facility and our cash position, we requested a reduction in the amount 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.covenants.
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 do not anticipate significant capital expenditures for the remainder of 2016 to be approximately $1.8 million primarily for the following: extension of one of our dry docks, and
improvements to our newly acquired facilities.2017.
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. The customer also announcedagreements and stated that, while it had received limited waivers from its lenders, its debt agreements willwould require further negotiation and amendment. InThis same customer rejected delivery of the eventfirst vessel that we completed and tendered for delivery on February 6, 2017, alleging certain technical deficiencies exist with respect to the vessel. On March 10, 2017, we gave notice for arbitration with our customer in an effort to resolve this matter and subsequently suspended fabrication of the second vessel under contract with this customer, which is unsuccessfulincluded in our arbitration proceedings. We disagree with our customer concerning these efforts,alleged technical deficiencies and have put the customer will consider other options including a possible reorganizationin default under the terms of both vessel contracts. The customer is seeking recovery of $84.8 million representing all purchase price amounts previously paid by the customer under both contracts. On May 17, 2017, the customer filed for protection under Chapter 11 of the Federal bankruptcy laws. AtUnited States Bankruptcy Code for reorganization under a negotiated, pre-packaged plan. The customer has emerged from Chapter 11 Bankruptcy and the Bankruptcy Court has approved the customer's retention and acceptance of both contracts. As of September 30, 2016, no contracts receivable2017, approximately $4.6 million remained due and outstanding from our customer for the first vessel. The balance due to us for the second vessel upon completion and delivery is approximately $4.9 million. We are working with legal counsel to protect our contractual claims, and we have re-initiated arbitration proceedings in accordance with our contracts. We are in the process of discovery. The customer has recently named a new interim chief executive officer who has made contact with our management, and we are working to resolve our dispute in a constructive manner. We believe that will be able to recover remaining amounts due to us.
On August 25, 2017, our South Texas facilities were outstandingimpacted by Hurricane Harvey, which made landfall as a category 4 hurricane. As a result, we suffered damages to our South Texas buildings and deferred revenue exceeded ourequipment. Through September 30, 2017, we have incurred approximately $265,000 in clean-up and repair related costs and estimated earningswe expect to incur additional future repair costs in excess of billingsour deductible which management believes are probable of being recovered through insurance proceeds. We maintain coverage on these assets up to a maximum of $25.0 million, subject to a 3.0% deductible with a minimum deductible of $500,000. We are working diligently with our insurance agents and adjusters to finalize our estimate of the damage; however, it may be several months, or even longer, before we can finalize our assessment and receive final payment from our insurance underwriters. Our insurance underwriters have made an initial payment of $3.0 million, and we have recorded a liability for future repairs of $2.7 million which is included in accrued expenses and other liabilities on our balance sheet at September 30, 2017. Based upon our initial assessment of the damages and insurance coverage, management believes that there is no basis to record a net loss at this contract. We continuetime and that insurance proceeds will at a minimum be sufficient to monitor our work performed in relationreimburse us for all damages and repair costs. Our final
assessment of the loss incurred to our customer’s statusSouth Texas assets as well as the amount of insurance proceeds we will receive could be more or less than this amount when the claim is ultimately settled and its ability to pay under the terms of its contract. Based on our evaluation to date, we do not believe that any loss on this contract is probable or estimable at this time. such differences could be material.
In February 2016,event of one or more sales of our BoardSouth Texas assets, we expect to use all or a portion of Directors approved a decreasethe sales proceeds to invest in our quarterly dividendoperating liquidity in order to $0.01 in anfacilitate anticipated future projects, selected capital improvements to enhance and/or expand our existing facilities, mergers and acquisitions to expand our product and service capabilities. We are continuing this effort to conserve cash. identify and analyze specific investment opportunities we believe will enhance the long-term value of the Company that are consistent with our strategy.
On October 27, 2016,26, 2017, our Board of Directors declared a dividend of $0.01 per share on our shares of common stock outstanding, payable November 23, 201624, 2017, to shareholders of record on November 10, 2016.2017.
We believe our cash and cash equivalents generated by our future operating activities, and funds availableproceeds to be received from insurance underwriters, availability under our line of credit facilityand proceeds 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 termnext twelve months to continue our operations,to operate, satisfy our contractual operations and pay dividends to our shareholders.
Cash Flow Activities
For the nine months ended September 30, 20162017, net cash used in operating activities was $29.6 million, compared to net cash provided by operating activities was $19.3 million, compared to $18.7of $19.4 million for the nine months ended September 30, 2015.2016. The increaseuse of cash in cash provided by operations during the period was primarily due to increased gross profit and collections of contract receivables during 2016 somewhat offset by payments requiredthe following:
Operating losses for trade payables during the nine months ended September 30, 2017, in excess of non-cash depreciation, amortization, impairment and stock compensation expense of approximately $19.6 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 as comparedwas $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 on ongoing shipbuilding projects of $23.0 million that were assigned to 2015.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. The suspension of two vessel projects following our customer’s refusal to accept delivery of the first vessel in February 2017, and our inability to collect $9.5 million in scheduled payments under these contracts. See also Note 9 of the Notes to the Consolidated Financial Statements; 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 later in 2017 through the first half of 2018.
Net cash provided byused in investing activities for the nine months ended September 30, 20162017, was $2.0$2.4 million, compared to cash used inprovided by investing activities of $5.0$2.0 million for the nine months ended September 30, 2015.2016. The increasechange in cash provided by investing activities is primarily due to cash received from the sale of three cranes at our Texas facility for $5.8 million and $1.6 million of cash acquired in the LEEVAC transaction.transaction during 2016 partially offset by decreases in capital expenditures.
Net cash used in financing activities for the nine months ended September 30, 2017 and 2016, was $1.4 million and 2015 was $440,000 and $4.4 million,$603,000, respectively. The decreaseincrease in cash used in financing activities is due to the reduction incash payments made to taxing authorities on behalf of employees for their vesting of common stock. During the cash dividend in 2016.nine months ended September 30, 2017 we received $2.0 million from borrowings under our new line of credit which were immediately repaid.
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, 2016.2017. 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, 20162017, 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 | | | 3.2 | | | 4.131.1 | | 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 | | | 31.2 | | | 32 | | | 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. |
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. MecheDavid S. Schorlemer | | Kirk J. MecheDavid S. Schorlemer | | President, Chief Executive Officer, Director and InterimVice President, Chief Financial Officer, and Treasurer and Secretary (Principal Executive Officer and Interim Principal Financial and Accounting Officer) |
Date: November 2, 2016October 31, 2017
GULF ISLAND FABRICATION, INC. EXHIBIT INDEX | | | | | Exhibit Number | | Description of Exhibit | | | 2.13.1 | | 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 | | | 4.131.1 | | Specimen Common Stock Certificate, incorporated by reference | 10.131.2 | | Form of Long-Term Performance-Based Cash Award Agreement. | 31 | | CEO and | 32 | | | 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.(1) | Backlog as of September 30, 2016 includes commitments received through October 27, 2016. We exclude suspended projects from contract backlog thatwhen they are expected to be suspended more than twelve12 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.(2) | At September 30, 2016,2017, projects for our threefive 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) | twoTwo large multi-purpose service vessels for one customer inwithin our Shipyards segment,division, which commenced in the first quarter of 2014 and will be completed during the first and second quarter of 2018; and |
(iii) the fabrication of four modules associated with a U.S. ethane cracker project.
| | 3.(ii) | Newbuild construction of four harbor tugs for one customer within our Shipyards division; |
| | (iii) | Newbuild construction of four harbor tugs for one additional customer within our Shipyards division; |
| | (iv) | The fabrication of four modules associated with a U.S. ethane cracker project within our Fabrication division; and |
| | (v) | Newbuild construction of an offshore research vessel within our Shipyards division. |
| | (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. Additionally, as we continue to add backlog, we will begin adding personnel with critical project management and fabrication skills to ensure we have the resources necessary to execute our projects well and to support our project risk mitigation discipline for all new project work. This may negatively impact near term results. As of September 30, 2016,2017, we had 1,336989 employees and 163 contract employees inclusive of 380 employees hired in the LEEVAC transaction, compared to 1,255 employees and 71 contract1,178 employees as of December 31, 2015.
2016. Labor hours worked were 2.31.5 million during the nine months ended September 30, 2016,2017, compared to 2.12.3 million for the nine months ended September 30, 2015.2016. The overall increasedecrease in labor hours worked for the threenine months ended September 30, 20162017, 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 September 30, 2017, Compared to Three Months Ended September 30, 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 September 30, | | Increase or (Decrease) | | 2017 | | 2016 | | Amount | Percent | Revenue | $ | 49,884 |
| | $ | 65,384 |
| | $ | (15,500 | ) | (23.7)% | Cost of revenue | 50,378 |
| | 60,125 |
| | (9,747 | ) | (16.2)% | Gross profit (loss) | (494 | ) | | 5,259 |
| | (5,753 | ) | (109.4)% | Gross profit (loss) percentage | (1.0 | )% | | 8.0 | % | | | | General and administrative expenses | 4,370 |
| | 5,086 |
| | (716 | ) | (14.1)% | Operating income (loss) | (4,864 | ) | | 173 |
| | (5,037 | ) | (2,911.6)% | Other income (expense): | | | | | | | Interest expense | (45 | ) | | (110 | ) | | 65 |
| | Interest income | — |
| | 12 |
| | (12 | ) | | Other income (expense), net | 38 |
| | 599 |
| | (561 | ) | | Total other income (expense) | (7 | ) | | 501 |
| | (508 | ) | 101.4% | Net income (loss) before income taxes | (4,871 | ) | | 674 |
| | (5,545 | ) | (822.7)% | Income tax expense (benefit) | (1,761 | ) | | 133 |
| | (1,894 | ) | (1,424.1)% | Net income (loss) | $ | (3,110 | ) | | $ | 541 |
| | $ | (3,651 | ) | (674.9)% |
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, 2016.2017 and 2016, was $49.9 million and $65.4 million, respectively, representing a decrease of 23.7%. The decrease is primarily attributable to an overall decrease in work experienced in our facilities primarily 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%48.4% and 45.3%33.8% for the three-monthsthree months ended September 30, 20162017 and 2015,2016, 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 20152017, was $494,000 compared to a gross profit of $5.3 million (8.0% of revenue) and $(7.8) million, respectively. Our gross profit improved compared to third quarter of 2015for the three months ended September 30, 2016. The decrease was primarily due to $2.1 million of contract losses of $14.3 million that were recorded during the third quarter of 2015 resulting fromincurred by our inabilityShipyards division related to recover certaincost overruns and re-work identified on two newbuild vessel construction
contracts, decreased revenue as discussed above, holding costs related to a deckour South Texas assets of $1.1 million and jacket for one of our deepwater projects. We had no such loss during the third quarter of 2016 and implemented cost cutting measures.lower margins on current work due to competitive pressures. This was partially offset by tighter margins within all ofdecreases in costs resulting from reductions in workforce as we wrapped up and completed projects at our segments due to a decrease in workSouth Texas fabrication yards and Prospect shipyard, no depreciation being recorded for our South Texas assets and Prospect shipyard for the three months ended September 30, 2017 (as these assets are classified as a result ofassets held for sale) and continued cost minimization efforts implemented by management for the downturn in the oil and gas industry.period.
General and administrative expenses - Our general and administrative expenses were $4.4 million for the three months ended September 30, 2017, compared to $5.1 million for the three months ended September 30, 2016, compared to $3.8 million for the three months ended September 30, 2015.2016. The increasedecrease in general
and administrative expenses for the three months ended September 30, 20162017, was primarily attributable to the operations acquired in the LEEVAC transactionlower bonuses accrued during 2017, employee reductions and bonus expense, partially offset bycontinued cost cuttingminimization efforts implemented during 2016.by management for the period.
Asset impairmentOther income (expense), net - - 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 assetsOther income 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.
Interest expense, net - The Company had net interest expense of $98,000$38,000 for the three months ended September 30, 20162017, as compared to net interest expenseother income of $31,000$599,000 for three months ended September 30, 2016. Other income for the three months ended September 30, 2015. The increase2017 relates to insurance proceeds received from damage to a corporate automobile that was primarily driven by an increase in the cost of unused credit facility fees under our credit agreement.
fully depreciated. Other income net - Other income increased $599,000 for thefor three months ended September 30, 2016. The increase was2016 primarily duerelates to gains on sales of assets from our Fabrication division.
Income taxestax expense (benefit) - Our effective income tax rate for the three months ended September 30, 20162017, was 19.7%36.2%, compared to an effective tax rate of 34.0%19.7% for the comparable period during 2015.2016. The changeincrease in ourthe effective tax rate is duethe result of changes to the decrease inestimates of our effective rateyear-end tax provision during for the year-to-date period.three months ended September 30, 2016.
Operating Segments | | | | | | | | | | | | | | | | | 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 | ) | | | | |
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 and nine months ended September 30, 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 its Corporate division each meeting the criteria of reportable segments under GAAP. During the three and nine months ended September 30, 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 September 30, 2017 and 2016, are presented below (in thousands, except for percentages).
| | | | | | | | | | | | | | | | Fabrication | | Three Months Ended September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | 18,318 |
| | $ | 22,311 |
| | $ | (3,993 | ) | | (17.9)% | Gross profit (loss) | | 1,250 |
| | 601 |
| | 649 |
| | 108.0% | Gross profit (loss) percentage | | 6.8 | % | | 2.7 | % | | | | 4.1% | General and administrative expenses | | 778 |
| | 885 |
| | (107 | ) | | (12.1)% | Operating income (loss) | | 472 |
| | (284 | ) | | | | |
Revenue - Revenue from our Fabrication division decreased $9.8$4.0 million for the three months ended September 30, 20162017, compared to the three months ended September 30, 2015.2016. 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.
Gross profit increased $14.5 million to $532,000(loss) - Gross profit from our Fabrication division for the three months ended September 30, 20162017, was $1.3 million compared to a gross lossprofit of $14.0 million$601,000 for the three months ended September 30, 20152016. The increase in gross profit was 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.
GeneralGains on scrap sales of approximately $701,000 at our South Texas facility,
Decreases in costs resulting from reductions in workforce as we wrapped up and administrative expenses decreased $657,000completed projects at our South Texas fabrication yards, No depreciation being recorded for our South Texas assets for the three months ended September 30, 20162017, as these assets are classified as assets held for sale; and Continued cost minimization efforts implemented by management for the period.
This was partially offset by approximately $1.1 million of holding costs for our South Texas assets.
General and administrative expenses - General and administrative expenses for our Fabrication division decreased $107,000 for the three months ended September 30, 2017, compared to the three months ended September 30, 20152016. The decrease is primarily due to cost cutting measures implemented during 2016 in response to decreases in workcosts resulting from lower bonuses accrued during 2017 as a result of our consolidated operating loss, reductions in workforce at our South Texas fabrication facilities.
Asset impairment - Duringyards and continued cost minimization efforts implemented by management for 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.period.
| | | | | | | | | | | | | | | | | 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 September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue (1) | | $ | 15,074 |
| | $ | 23,060 |
| | $ | (7,986 | ) | | (34.6)% | Gross profit (loss) (1) | | (3,504 | ) | | 1,945 |
| | (5,449 | ) | | (280.2)% | Gross profit (loss) percentage | | (23.2 | )% | | 8.4 | % | | | | (31.6)% | General and administrative expenses | | 888 |
| | 1,468 |
| | (580 | ) | | (39.5)% | Operating income (loss) (1) | | (4,392 | ) | | 477 |
| | | | |
___________ | | (1) | Revenue for the three months ended September 30, 2017, and 2016, includes $510,000 and $1.5 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 $8.0 million for the three months ended September 30, 20162017, compared to the three months ended September 30, 20152016, due to the operations acquiredcorresponding reduction in customer demand for shipbuilding and repair services supporting the LEEVAC transaction (see LEEVAC Transaction above), which contributed $16.8oil and gas industry due to depressed oil and gas prices as well as the completion of a vessel that we tendered for delivery on February 6, 2017, and was rejected by the customer alleging certain technical deficiencies. We subsequently suspended of work on the second vessel under contract with this customer. See also Note 9 of the Notes to the Consolidated Financial Statements.
Gross profit (loss) - Gross loss from our Shipyards division was $3.5 million in revenue for the three months ended September 30, 2016.
Gross2017, compared to a gross profit decreased $60,000of $1.9 million for the three months ended September 30, 20162016. The decrease was due to:
$2.1 million in contract losses related to cost overruns and re-work that has been identified on two newbuild vessel construction contracts within our Shipyards division; and Holding and closing costs related to our Prospect shipyard as we wind down operations at this facility.
General and administrative expenses - General and administrative expenses for our Shipyards division decreased $580,000 for the three months ended September 30, 2017, compared to the three months ended September 30, 20152016, primarily due to tighter margins on new work and inefficiencies incurred on the contracts acquired inreductions of administrative personnel related to consolidation of personnel duties from the LEEVAC transaction partially offsettransaction. Additionally, our Shipyards division incurred lower bonuses accrued during 2017 as a result of a combination of a smaller workforce and our consolidated operating loss and cost minimization efforts implemented by savings realized from cost cutting measures implementedmanagement for the period during the first part of 2016.
General and administrative expenses increased $1.7 | | | | | | | | | | | | | | | | Services | | Three Months Ended September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | 17,651 |
| | $ | 20,928 |
| | $ | (3,277 | ) | | (15.7)% | Gross profit (loss) | | 1,912 |
| | 2,918 |
| | (1,006 | ) | | (34.5)% | Gross profit (loss) percentage | | 10.8 | % | | 13.9 | % | | | | (3.1)% | General and administrative expenses | | 695 |
| | 943 |
| | (248 | ) | | (26.3)% | Operating income (loss) | | 1,217 |
| | 1,975 |
| | | | |
Revenue - Revenue from our Services division decreased $3.3 million for the three months ended September 30, 20162017, compared to the three months ended September 30, 2015 primarily2016, 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 completedServices division decreased $1.0 million for the fabricationthree months ended September 30, 2017, compared to the three months ended September 30, 2016, due to decreased revenue discussed above and lower margins on new work performed during 2017.
General and administrative expenses - General and administrative expenses for our Services division decreased $248,000 for the three months ended September 30, 2017, compared to the three months ended September 30, 2016, due to lower bonuses accrued during 2017 as a result of a 1,200 foot jacket, pilescombination of a smaller workforce and an approximate 450 short ton topsideour consolidated operating loss.
| | | | | | | | | | | | | | | | Corporate | | Three Months Ended September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | — |
| | $ | — |
| | $ | — |
| | —% | Gross profit (loss) | | (152 | ) | | (205 | ) | | 53 |
| | 25.9% | Gross profit (loss) percentage | | n/a |
| | n/a |
| | | |
| General and administrative expenses | | 2,009 |
| | 1,790 |
| | 219 |
| | 12.2% | Operating income (loss) | | (2,161 | ) | | (1,995 | ) | |
|
| | |
General and administrative expenses - General and administrative expenses for our Corporate division increased primarily due to a restructuring of our corporate division with no similaradditional personnel allocated to our corporate division during 2017 as discussed above as well as expenses incurred for advisors to assist in a strategic financial analysis project in 2016. Our decrease in revenue earnedanticipation of the proceeds to be received from offshore fabrication work wasthe sale of our South Texas assets. Additionally, we have incurred increased legal fees as we pursue collection of claims against two customers. See also Note 9 of the Notes to the Consolidated Financial Statements. This has been partially offset by lower bonuses accrued during the assets and operations acquired quarter due to our consolidated operating loss.
Nine Months Ended September 30, 2017, Compared to Nine Months Ended September 30, 2016 (in the LEEVAC transaction (see LEEVAC Transaction above), which contributed $55.9 million inthousands, except for percentages): Consolidated | | | | | | | | | | | | | | | Nine Months Ended September 30, | | Increase or (Decrease) | | 2017 | | 2016 | | Amount | Percent | Revenue | $ | 133,745 |
| | $ | 230,864 |
| | $ | (97,119 | ) | (42.1)% | Cost of revenue | 150,755 |
| | 205,839 |
| | (55,084 | ) | (26.8)% | Gross profit (loss) | (17,010 | ) | | 25,025 |
| | (42,035 | ) | (168.0)% | Gross profit (loss) percentage | (12.7 | )% | | 10.8 | % | | | | General and administrative expenses | 12,940 |
| | 14,633 |
| | (1,693 | ) | (11.6)% | Asset impairment | 389 |
| | — |
| | 389 |
| 100.0% | Operating income (loss) | (30,339 | ) | | 10,392 |
| | (40,731 | ) | (391.9)% | Other income (expense): | | | | | | | Interest expense | (262 | ) | | (248 | ) | | (14 | ) | | Interest income | 12 |
| | 20 |
| | (8 | ) | | Other income (expense), net | (221 | ) | | 1,039 |
| | (1,260 | ) | | Total other income (expense) | (471 | ) | | 811 |
| | (1,282 | ) | (158.1)% | Net income (loss) before income taxes | (30,810 | ) | | 11,203 |
| | (42,013 | ) | (375.0)% | Income tax expense (benefit) | (10,322 | ) | | 4,134 |
| | (14,456 | ) | (349.7)% | Net income (loss) | $ | (20,488 | ) | | $ | 7,069 |
| | $ | (27,557 | ) | (389.8)% |
Revenue - Our revenue for the nine months ended September 30, 2016. Pass-through2017 and 2016, was $133.7 million and $230.9 million, respectively, representing a decrease of 42.1%. 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 as well as the completion of a vessel within our Shipyards division that we tendered for delivery on February 6, 2017, and was rejected by the customer alleging certain technical deficiencies. We subsequently suspended of work on the second vessel under contract with this customer. See also Note 9 of the Notes to the Consolidated Financial Statements. Pass-
through costs as a percentage of revenue were 35.0%45.3% and 43.2%35.0% for the nine months ended September 30, 20162017 and 2015,2016, 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 profitloss for the nine months ended September 30, 2016 and 20152017, was $17.0 million compared to a gross profit of $25.0 million (10.8% of revenue) and $2.4 million (1.0% of revenue), respectively. Our gross profit improved compared to 2015for the nine months ended September 30, 2016. The decrease was primarily due to the LEEVAC transaction$12.7 million of losses incurred by our Shipyards division related to cost overruns and contract losses of $14.3 million that were recorded during the third quarter of 2015 resulting from our inability to recover certainre-work identified on two newbuild vessel construction contracts, decreased revenue as discussed above, holding costs related to a deckour South Texas assets of $3.6 million and jacketlower margins on current work. This was partially offset by decreases in costs resulting from reductions in workforce as we wrapped up and completed projects at our South Texas fabrication yards and Prospect shipyard, suspended depreciation for one of our deepwater projects. We had no such lossSouth Texas assets and Prospect shipyard during the third quarter of 2016nine months ended September 30, 2017, as these assets are classified as assets held for sale and additional cost minimization efforts implemented cost cutting measures in response to decreases in work at our fabrication facilities.by management for the period.
General and administrative expenses - Our general and administrative expenses were $12.9 million for the nine months ended September 30, 2017, compared to $14.6 million for the nine months ended September 30, 2016, compared to $11.8 million for the nine months ended September 30, 2015.2016. The increasedecrease in general and administrative expenses for the nine months ended September 30, 2016 was2017, is primarily attributable to:
an increase of stock-based compensation expense of $589,000,
due to decreases in costs resulting from reductions in workforce at our South Texas fabrication yards, lower bonuses and the LEEVAC transaction; partially offset by
cost cutting efforts implementedaccrued during 2017 as a result of our consolidated operating loss and continued cost minimization efforts implemented by management for the downturn in the oil and gas industry.period.
Asset impairmentImpairment - During the nine months ended September 30, 2015,2017, we recorded an asset impairment charge of $6.6 million$389,000 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. Dueour assets held for sale at our Prospect Shipyard. See also Note 2 of the Notes to the sustained downturn in the energy sector, our ability to effectivelyConsolidated Financial Statements.
market these assetsOther income (expense), net - Other expense 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$221,000 for the nine months ended September 30, 20162017, compared to net interest expenseother income 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 income increased $1.0 million for the nine months ended September 30, 2016. The increaseOther expense for the period was primarily due to losses on sales of two drydocks from our Shipyards division. Other income for the prior period was primarily due to gains of $924,000 related to the sale of three cranes at our Texas facility as well ason sales of smaller assets byfrom our Shipyards division.Fabrication division recorded during 2016.
Income taxestax expense (benefit) - Our effective income tax rate for the nine months ended September 30, 20162017, was 36.9%33.5%, compared to an effective tax rate of 34.0%36.9% for the comparable period during 2015.2016. The increasedecrease in ourthe effective tax rate is due to the effectresult of state income taxes from income generated within Louisiana with no offsetting tax benefit from losses generated within Texas.limitations on the deductibility of executive compensation.
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 | ) | |
| |
|
As discussed above and 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 and nine months ended September 30, 2017. 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 nine months ended September 30, 2017 and 2016, are presented below (in thousands, except for percentages).
| | | | | | | | | | | | | | | | Fabrication | | Nine Months Ended September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | 42,517 |
| | $ | 70,436 |
| | $ | (27,919 | ) | | (39.6)% | Gross profit (loss) | | 216 |
| | 4,564 |
| | (4,348 | ) | | (95.3)% | Gross profit (loss) percentage | | 0.5 | % | | 6.5 | % | | | | (6.0)% | General and administrative expenses | | 2,432 |
| | 2,821 |
| | (389 | ) | | (13.8)% | Operating income (loss) | | (2,216 | ) | | 1,743 |
| | | | |
Revenue - Revenue from our Fabrication division decreased $67.0$27.9 million for the nine months ended September 30, 20162017, compared to the nine months ended September 30, 2015.2016. 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. During 2015, weAs discussed above, management has classified our South Texas assets as assets held for sale in response to the underutilization of our Fabrication assets. As of September 30, 2017, all of our projects at our South Texas fabrication yards have been completed theor transferred to our Houma fabrication of a 1,200 foot jacket, piles and an approximate 450 short ton topside with no similar project in 2016.yard.
Gross profit increased $18.5 million(loss) - Gross profit from our Fabrication division for the nine months ended September 30, 2017, was $216,000 compared to $4.4a gross profit of $4.6 million for the nine months ended September 30, 2016 compared2016. The decrease was due to a gross losslower revenue
from decreased fabrication work as discussed above and approximately $3.6 million of $14.1 millionholding costs for our South Texas assets as we market them for sale. This was partially offset by decreases in costs resulting from reductions in workforce, gains on scrap sales as we wrapped up and completed projects at our South Texas fabrication yards, reduced depreciation being recorded for our South Texas assets for the nine months ended September 30, 2015. The increase is due to contract losses of $14.3 million that were recorded during2017, as these assets are classified as assets held for sale on February 23, 2017, and additional cost minimization efforts implemented by management for 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.period.
General and administrative expenses - General and administrative expenses for our Fabrication division decreased $2.5 million$389,000 for the nine months ended September 30, 20162017, compared to the nine months ended September 30, 20152016. The decrease is primarily due to cost cutting measures implemented during 2016 in response to decreases in workcosts resulting from reductions in workforce as we wrapped up and completed projects at our South Texas fabrication facilities.
Asset impairment - During the nine months ended September 30, 2015, we recorded an asset impairment chargeyards and lower bonuses accrued during 2017 as a result of $6.6 million relateda combination of a smaller workforce and our consolidated operating loss. This was partially offset by expenses incurred to a partially constructed topside, related valves, pipingmarket our South Texas assets for sale 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 valuepayment of the assets. We had no such impairmentstermination benefits during the nine months ended September 30, 2016.first quarter of 2017 as we reduced its workforce and completed those operations.
| | | | | | | | | | | | | | | | | 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 |
| | | | |
| | | | | | | | | | | | | | | | Shipyards | | Nine Months Ended September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue (1) | | $ | 51,798 |
| | $ | 86,553 |
| | $ | (34,755 | ) | | (40.2)% | Gross profit (loss) (1) | | (19,061 | ) | | 9,742 |
| | (28,803 | ) | | (295.7)% | Gross profit (loss) percentage | | (36.8 | )% | | 11.3 | % | | | | (48.1)% | General and administrative expenses | | 2,835 |
| | 4,218 |
| | (1,383 | ) | | (32.8)% | Asset impairment | | 389 |
| | — |
| | 389 |
| | 100.0% | Operating income (loss) (1) | | (22,285 | ) | | 5,524 |
| | | | |
_______________________
| | (1) | Revenue for the nine months ended September 30, 2017, and 2016, includes $2.4 million and $4.1 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 $39.4- Revenue from our Shipyards division decreased $34.8 million for the nine months ended September 30, 20162017, compared to the nine months ended September 30, 20152016, due to the assetscorresponding reduction in customer demand for shipbuilding and operations acquired inrepair services supporting the LEEVAC transaction (see LEEVAC Transaction above), which contributed $55.9oil and gas industry due to depressed oil and gas prices as well as the completion of a vessel that we tendered for delivery on February 6, 2017, and was rejected by the customer alleging certain technical deficiencies. We subsequently suspended of work on the second vessel under contract with this customer. See also Note 9 of the Notes to the Consolidated Financial Statements.
Gross profit (loss) - Gross loss from our Shipyards division was $19.1 million in revenuefor the nine months ended September 30, 2017, compared to a gross profit of $9.7 million for the nine months ended September 30, 2016. The increasedecrease was partially offsetdue to:
$12.7 million in contract losses related to cost overruns and re-work that has been identified on two newbuild vessel construction contracts within our Shipyards division; Holding and closing costs related to our Prospect shipyard as we wind down operations at this facility; 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 due to the downturn in the oil and gas industry.under other various contracts.
Gross profit increased $3.6General and administrative expenses - General and administrative expenses for our Shipyards division decreased $1.4 million for the nine months ended September 30, 20162017, compared to the nine months ended September 30, 20152016, primarily due to reductions of administrative personnel related to consolidation of personnel duties from the LEEVAC transactiontransaction. Additionally, our Shipyards division incurred lower bonuses accrued during 2017 as well as increases in profitability estimatesa result of our consolidated operating loss and cost minimization efforts implemented by management for other jobs in progress due to cost cutting measures.the period.
General and administrative expenses increased $4.6Asset Impairment - During nine months ended September 30, 2017, we recorded an impairment of $389,000 related to our assets held for sale at our Prospect shipyard. See also Note 2 of the Notes to Consolidated Financial Statements.
| | | | | | | | | | | | | | | | Services | | Nine Months Ended September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | 43,758 |
| | $ | 76,179 |
| | $ | (32,421 | ) | | (42.6)% | Gross profit (loss) | | 2,335 |
| | 11,158 |
| | (8,823 | ) | | (79.1)% | Gross profit (loss) percentage | | 5.3 | % | | 14.6 | % | | | | (9.3)% | General and administrative expenses | | 2,008 |
| | 2,462 |
| | (454 | ) | | (18.4)% | Operating income (loss) | | 327 |
| | 8,696 |
| | | | |
Revenue - Revenue from our Services division decreased $32.4 million for the nine months ended September 30, 20162017, compared to the nine months ended September 30, 20152016, due to an overall decrease in work experienced as a result of depressed oil and gas prices and the expenses associated with the operations acquiredcorresponding reduction in the LEEVAC transactioncustomer demand for oil and bonuses.gas related service projects. | | | | | | | | | | | | | | | | | 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 $5.2Gross profit - Gross profit from our Services division decreased $8.8 million for the nine months ended September 30, 20162017, compared to the nine months ended September 30, 20152016, due to increases in the scope of two large offshore service projectsdecreased revenue discussed above and lower margins on new work performed during the first half of 2016.2017.
Gross profit increased $563,000General and administrative expenses - General and administrative expenses for our Services division decreased $0.5 million for the nine months ended September 30, 20162017, compared to the nine months ended September 30, 20152016, due to increases in revenueslower bonuses accrued during 2017 as a result of a combination of a smaller workforce and improved absorption of fixed costs resulting from an increase in labor hours worked.our consolidated operating loss.
| | | | | | | | | | | | | | | | Corporate | | Nine Months Ended September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | — |
| | $ | — |
| | $ | — |
| | —% | Gross profit (loss) | | (500 | ) | | (439 | ) | | (61 | ) | | (13.9)% | Gross profit (loss) percentage | | n/a |
| | n/a |
| | | |
| General and administrative expenses | | 5,665 |
| | 5,132 |
| | 533 |
| | 10.4% | Operating income (loss) | | (6,165 | ) | | (5,571 | ) | | (594 | ) | | |
Gross profit (loss) - Gross loss from our Corporate division increased primarily due to a restructuring of our corporate division with additional personnel allocated to our corporate division during 2017 as discussed above. General and administrative expenses - General and administrative expenses for our Corporate division increased $1.1 millionprimarily due to a restructuring of our corporate division with additional personnel allocated to our corporate division during 2017 as discussed above as well as expenses incurred for advisors to assist in a strategic financial analysis project in anticipation of the nine months ended September 30, 2016 comparedproceeds to be received from the sale of our South Texas assets. Additionally, we have incurred increased legal fees as we pursue collection of claims against two customers. See also Note 9 of the Notes to the nine months ended September 30, 2015 due to additional administrative support costs related to increases in activityConsolidated Financial Statements. This has been partially offset by lower bonuses accrued during 2017 as a result of a combination of a smaller workforce and bonuses.our consolidated operating loss. Liquidity and Capital Resources Historically, we have funded our business activities through cash generated from operations. At September 30, 20162017, 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$17.8 million compared to $34.8$51.2 million at December 31, 2015.2016. Working capital was $79.8$164.0 million and our ratio of current assets to current liabilities was 2.834.59 to 1 at September 30, 2017, compared to $78.0 million and 3.21 to 1, respectively, at December 31, 2016. Working capital at September 30, 2017, includes $107.0 million related to assets held for sale, primarily related to our South Texas facilities. Our primary sourceuse of cash forduring the nine months ended September 30, 2016, was related to2017, is referenced in the collection of accounts receivable under various customer contracts and sales of three cranes at our Texas facility for $5.8 million. Cash Flow Activities section below. At September 30, 2016,2017, our contracts receivable balance was $26.6$25.5 million of which we have subsequently collected $12.1$8.3 million through October 31, 2016.2017. On January 1, 2016,June 9, 2017, we acquired substantially all of the assets and assumed certain specified liabilities of LEEVAC. The purchase price for the acquisition was $20.0entered into a $40.0 million subject to a working capital adjustment whereby we received a dollar-for-
dollar reduction for the assumption of certain net liabilities of LEEVAC at closing and settlement payments from sureties on certain ongoing fabrication projects that were assigned to us in the transaction. After taking into account these adjustments, we received approximately $1.6 million in cash at closing. During the quarter, we presented our working capital true-up to the seller, which resulted in an additional $1.5 million due to us. Additionally, we hired 380 employees upon acquisition of the facilities representing substantially all of the former LEEVAC employees. Strategically, the transaction expands our marine fabrication and repair and maintenance presence in the Gulf South market. At the date of transaction, we acquired approximately $121.2 million of new build construction backlog inclusive of approximately $9.2 million of purchase price fair value allocated to four, new build construction projects to be delivered in 2017 and 2018 for two customers.
As of September 30, 2016, we had a credit agreement with Whitney Bank, and JPMorgan Chase Bank N.A. that provides for an $80.0 million revolvingas lender. The credit facility maturing January 2, 2017. The credit agreement allows the Company to use up to the full amount of the available borrowing basematures June 9, 2019 and may be used for issuing letters of credit and up to $20.0 million forand/or general corporate and working capital purposes. Our obligationsWe believe that
the new facility will provide us with additional working capital flexibility to expand operations as backlog improves, respond to market opportunities and support our ongoing operations.
Interest on drawings under the credit agreement are secured by substantially all offacility may be designated, at our assets, other than real property locatedoption, as either Base Rate (as defined in the state of Louisiana. On February 29, 2016, we entered into an amendment to our credit agreement. The amendment (i) extendsfacility) or LIBOR plus 2.0% per annum. Unused commitment fees on the termundrawn portion of the Credit Facility from February 29, 2016 to January 2, 2017; (ii) increases the commitment fee on undrawn amounts from 0.25% to 0.50%facility are 0.4% per annum; (iii) increases the letter of credit fee, subject to certain limited exceptions, to 2.00% per annum, and interest 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. 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 our financial covenants beginning with the quarter ending March 31, 2016 as follows:
| | (i) | minimum net worth requirement of not less than $250.0 million plus |
| | a) | 50% of net income earned in each quarter beginning March 31, 2016 and |
| | b) | 100% of proceeds from any issuance of common stock; |
| | (ii) | debt to EBITDA ratio not greater than 3.0 to 1.0; and |
| | (iii) | interest coverage ratio not less than 2.0 to 1.0. |
At September 30, 2016, no amounts were outstanding under thelenders is 2.0% per annum. The credit facility and we had outstanding letters of credit totaling $4.5 million, reducing the unused portion of our credit facility for additional letters of credit to $75.5 million. As of September 30, 2016, we were in compliance with all covenants. During the fourth quarter, we expect to enter into a two-year, $40.0 million amended and restated credit facility with our current lenders that will beis secured by substantially all of our assets (other than real property)the assets of Gulf Marine Fabricators, L.P., the legal entity that holds our South Texas assets which are currently held for sale).
We anticipatemust comply with the amendedfollowing financial covenants each quarter during the term of the facility:
| | i. | Ratio of current assets to current liabilities of not less than 1.25:1.00; |
| | ii. | Minimum tangible net worth requirement of at least the sum of: |
| | b) | An amount equal to 50% of consolidated net income for each fiscal quarter ending after June 30, 2017 (with no deduction for a net loss in any such fiscal quarter except for any gain or loss in connection with the sale of assets by Gulf Marine Fabricators, L.P.), plus |
| | c) | 100% of all net proceeds of any issuance of any stock or other equity after deducting of any fees, commissions, expenses and other costs incurred in such offering; and |
| | iii. | Ratio of funded debt to tangible net worth of not more than 0.50:1.00. |
Concurrent with our execution of the credit facility, will allow us to usewe terminated our prior credit facility with JPMorgan Chase Bank, N.A. At the full $40.0time of the termination, there was approximately $4.6 million borrowing baseof letters of credit outstanding. All were reissued as new letters of credit under the credit facility and accepted by the beneficiaries. Availability under our credit facility for bothfuture, additional letters of credit and general corporate purposes. Given the historically low levelsborrowings is $35.4 million. As of borrowings underSeptember 30, 2017, we were in compliance with all of our current facility and our cash position, we requested a reduction in the amount 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.covenants.
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 do not anticipate significant capital expenditures for the remainder of 2016 to be approximately $1.8 million primarily for the following: extension of one of our dry docks, and
improvements to our newly acquired facilities.2017.
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. The customer also announcedagreements and stated that, while it had received limited waivers from its lenders, its debt agreements willwould require further negotiation and amendment. InThis same customer rejected delivery of the eventfirst vessel that we completed and tendered for delivery on February 6, 2017, alleging certain technical deficiencies exist with respect to the vessel. On March 10, 2017, we gave notice for arbitration with our customer in an effort to resolve this matter and subsequently suspended fabrication of the second vessel under contract with this customer, which is unsuccessfulincluded in our arbitration proceedings. We disagree with our customer concerning these efforts,alleged technical deficiencies and have put the customer will consider other options including a possible reorganizationin default under the terms of both vessel contracts. The customer is seeking recovery of $84.8 million representing all purchase price amounts previously paid by the customer under both contracts. On May 17, 2017, the customer filed for protection under Chapter 11 of the Federal bankruptcy laws. AtUnited States Bankruptcy Code for reorganization under a negotiated, pre-packaged plan. The customer has emerged from Chapter 11 Bankruptcy and the Bankruptcy Court has approved the customer's retention and acceptance of both contracts. As of September 30, 2016, no contracts receivable2017, approximately $4.6 million remained due and outstanding from our customer for the first vessel. The balance due to us for the second vessel upon completion and delivery is approximately $4.9 million. We are working with legal counsel to protect our contractual claims, and we have re-initiated arbitration proceedings in accordance with our contracts. We are in the process of discovery. The customer has recently named a new interim chief executive officer who has made contact with our management, and we are working to resolve our dispute in a constructive manner. We believe that will be able to recover remaining amounts due to us.
On August 25, 2017, our South Texas facilities were outstandingimpacted by Hurricane Harvey, which made landfall as a category 4 hurricane. As a result, we suffered damages to our South Texas buildings and deferred revenue exceeded ourequipment. Through September 30, 2017, we have incurred approximately $265,000 in clean-up and repair related costs and estimated earningswe expect to incur additional future repair costs in excess of billingsour deductible which management believes are probable of being recovered through insurance proceeds. We maintain coverage on these assets up to a maximum of $25.0 million, subject to a 3.0% deductible with a minimum deductible of $500,000. We are working diligently with our insurance agents and adjusters to finalize our estimate of the damage; however, it may be several months, or even longer, before we can finalize our assessment and receive final payment from our insurance underwriters. Our insurance underwriters have made an initial payment of $3.0 million, and we have recorded a liability for future repairs of $2.7 million which is included in accrued expenses and other liabilities on our balance sheet at September 30, 2017. Based upon our initial assessment of the damages and insurance coverage, management believes that there is no basis to record a net loss at this contract. We continuetime and that insurance proceeds will at a minimum be sufficient to monitor our work performed in relationreimburse us for all damages and repair costs. Our final
assessment of the loss incurred to our customer’s statusSouth Texas assets as well as the amount of insurance proceeds we will receive could be more or less than this amount when the claim is ultimately settled and its ability to pay under the terms of its contract. Based on our evaluation to date, we do not believe that any loss on this contract is probable or estimable at this time. such differences could be material.
In February 2016,event of one or more sales of our BoardSouth Texas assets, we expect to use all or a portion of Directors approved a decreasethe sales proceeds to invest in our quarterly dividendoperating liquidity in order to $0.01 in anfacilitate anticipated future projects, selected capital improvements to enhance and/or expand our existing facilities, mergers and acquisitions to expand our product and service capabilities. We are continuing this effort to conserve cash. identify and analyze specific investment opportunities we believe will enhance the long-term value of the Company that are consistent with our strategy.
On October 27, 2016,26, 2017, our Board of Directors declared a dividend of $0.01 per share on our shares of common stock outstanding, payable November 23, 201624, 2017, to shareholders of record on November 10, 2016.2017.
We believe our cash and cash equivalents generated by our future operating activities, and funds availableproceeds to be received from insurance underwriters, availability under our line of credit facilityand proceeds 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 termnext twelve months to continue our operations,to operate, satisfy our contractual operations and pay dividends to our shareholders.
Cash Flow Activities
For the nine months ended September 30, 20162017, net cash used in operating activities was $29.6 million, compared to net cash provided by operating activities was $19.3 million, compared to $18.7of $19.4 million for the nine months ended September 30, 2015.2016. The increaseuse of cash in cash provided by operations during the period was primarily due to increased gross profit and collections of contract receivables during 2016 somewhat offset by payments requiredthe following:
Operating losses for trade payables during the nine months ended September 30, 2017, in excess of non-cash depreciation, amortization, impairment and stock compensation expense of approximately $19.6 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 as comparedwas $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 on ongoing shipbuilding projects of $23.0 million that were assigned to 2015.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. The suspension of two vessel projects following our customer’s refusal to accept delivery of the first vessel in February 2017, and our inability to collect $9.5 million in scheduled payments under these contracts. See also Note 9 of the Notes to the Consolidated Financial Statements; 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 later in 2017 through the first half of 2018.
Net cash provided byused in investing activities for the nine months ended September 30, 20162017, was $2.0$2.4 million, compared to cash used inprovided by investing activities of $5.0$2.0 million for the nine months ended September 30, 2015.2016. The increasechange in cash provided by investing activities is primarily due to cash received from the sale of three cranes at our Texas facility for $5.8 million and $1.6 million of cash acquired in the LEEVAC transaction.transaction during 2016 partially offset by decreases in capital expenditures.
Net cash used in financing activities for the nine months ended September 30, 2017 and 2016, was $1.4 million and 2015 was $440,000 and $4.4 million,$603,000, respectively. The decreaseincrease in cash used in financing activities is due to the reduction incash payments made to taxing authorities on behalf of employees for their vesting of common stock. During the cash dividend in 2016.nine months ended September 30, 2017 we received $2.0 million from borrowings under our new line of credit which were immediately repaid.
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, 2016.2017. 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, 20162017, 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 | | | 3.2 | | | 4.131.1 | | 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 | | | 31.2 | | | 32 | | | 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. |
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. MecheDavid S. Schorlemer | | Kirk J. MecheDavid S. Schorlemer | | President, Chief Executive Officer, Director and InterimVice President, Chief Financial Officer, and Treasurer and Secretary (Principal Executive Officer and Interim Principal Financial and Accounting Officer) |
Date: November 2, 2016October 31, 2017
GULF ISLAND FABRICATION, INC. EXHIBIT INDEX | | | | | Exhibit Number | | Description of Exhibit | | | 2.13.1 | | 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 | | | 4.131.1 | | Specimen Common Stock Certificate, incorporated by reference | 10.131.2 | | Form of Long-Term Performance-Based Cash Award Agreement. | 31 | | CEO and | 32 | | | 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 | |
Fabrication | 84,940 |
| 841 |
| | $ | 41,126 |
| 431 |
| | $ | 48,828 |
| 524 |
| $ | 29,554 |
| 254 | | $ | 65,444 |
| 707 | |
Shipyards | 78,886 |
| 582 |
| | 93,912 |
| 629 |
| | 119,984 |
| 843 |
| 200,909 |
| 1,045 | | 59,771 |
| 457 | |
Services | 17,386 |
| 163 |
| | 22,540 |
| 209 |
| | 28,316 |
| 308 |
| 21,918 |
| 265 | | 7,757 |
| 101 | |
Intersegment eliminations | — |
| — |
| | (41 | ) | — |
| | (60 | ) | — |
| (649 | ) | — | | — |
| — | |
Total backlog (1) | $ | 181,212 |
| 1,586 |
| | $ | 157,537 |
| 1,269 |
| | $ | 197,068 |
| 1,675 |
| $ | 251,732 |
| 1,564 | | $ | 132,972 |
| 1,265 | |
| | | | | | | | | | | | |
| Number | Percentage | | Number | Percentage | | Number | Percentage | Number | Percentage | | Number | Percentage | |
Major customers (2) | three | 75.3 | % | | two | 57.4% | | three | 70.0% | five | 82.7% | | two | 80.5% | |
| | | | | | | | | | | | |
| ___________ | | 1.(1) | Backlog as of September 30, 2016 includes commitments received through October 27, 2016. We exclude suspended projects from contract backlog thatwhen they are expected to be suspended more than twelve12 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.(2) | At September 30, 2016,2017, projects for our threefive 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) | twoTwo large multi-purpose service vessels for one customer inwithin our Shipyards segment,division, which commenced in the first quarter of 2014 and will be completed during the first and second quarter of 2018; and |
(iii) the fabrication of four modules associated with a U.S. ethane cracker project.
| | 3.(ii) | Newbuild construction of four harbor tugs for one customer within our Shipyards division; |
| | (iii) | Newbuild construction of four harbor tugs for one additional customer within our Shipyards division; |
| | (iv) | The fabrication of four modules associated with a U.S. ethane cracker project within our Fabrication division; and |
| | (v) | Newbuild construction of an offshore research vessel within our Shipyards division. |
| | (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. Additionally, as we continue to add backlog, we will begin adding personnel with critical project management and fabrication skills to ensure we have the resources necessary to execute our projects well and to support our project risk mitigation discipline for all new project work. This may negatively impact near term results. As of September 30, 2016,2017, we had 1,336989 employees and 163 contract employees inclusive of 380 employees hired in the LEEVAC transaction, compared to 1,255 employees and 71 contract1,178 employees as of December 31, 2015.
2016. Labor hours worked were 2.31.5 million during the nine months ended September 30, 2016,2017, compared to 2.12.3 million for the nine months ended September 30, 2015.2016. The overall increasedecrease in labor hours worked for the threenine months ended September 30, 20162017, 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 September 30, 2017, Compared to Three Months Ended September 30, 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 September 30, | | Increase or (Decrease) | | 2017 | | 2016 | | Amount | Percent | Revenue | $ | 49,884 |
| | $ | 65,384 |
| | $ | (15,500 | ) | (23.7)% | Cost of revenue | 50,378 |
| | 60,125 |
| | (9,747 | ) | (16.2)% | Gross profit (loss) | (494 | ) | | 5,259 |
| | (5,753 | ) | (109.4)% | Gross profit (loss) percentage | (1.0 | )% | | 8.0 | % | | | | General and administrative expenses | 4,370 |
| | 5,086 |
| | (716 | ) | (14.1)% | Operating income (loss) | (4,864 | ) | | 173 |
| | (5,037 | ) | (2,911.6)% | Other income (expense): | | | | | | | Interest expense | (45 | ) | | (110 | ) | | 65 |
| | Interest income | — |
| | 12 |
| | (12 | ) | | Other income (expense), net | 38 |
| | 599 |
| | (561 | ) | | Total other income (expense) | (7 | ) | | 501 |
| | (508 | ) | 101.4% | Net income (loss) before income taxes | (4,871 | ) | | 674 |
| | (5,545 | ) | (822.7)% | Income tax expense (benefit) | (1,761 | ) | | 133 |
| | (1,894 | ) | (1,424.1)% | Net income (loss) | $ | (3,110 | ) | | $ | 541 |
| | $ | (3,651 | ) | (674.9)% |
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, 2016.2017 and 2016, was $49.9 million and $65.4 million, respectively, representing a decrease of 23.7%. The decrease is primarily attributable to an overall decrease in work experienced in our facilities primarily 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%48.4% and 45.3%33.8% for the three-monthsthree months ended September 30, 20162017 and 2015,2016, 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 20152017, was $494,000 compared to a gross profit of $5.3 million (8.0% of revenue) and $(7.8) million, respectively. Our gross profit improved compared to third quarter of 2015for the three months ended September 30, 2016. The decrease was primarily due to $2.1 million of contract losses of $14.3 million that were recorded during the third quarter of 2015 resulting fromincurred by our inabilityShipyards division related to recover certaincost overruns and re-work identified on two newbuild vessel construction
contracts, decreased revenue as discussed above, holding costs related to a deckour South Texas assets of $1.1 million and jacket for one of our deepwater projects. We had no such loss during the third quarter of 2016 and implemented cost cutting measures.lower margins on current work due to competitive pressures. This was partially offset by tighter margins within all ofdecreases in costs resulting from reductions in workforce as we wrapped up and completed projects at our segments due to a decrease in workSouth Texas fabrication yards and Prospect shipyard, no depreciation being recorded for our South Texas assets and Prospect shipyard for the three months ended September 30, 2017 (as these assets are classified as a result ofassets held for sale) and continued cost minimization efforts implemented by management for the downturn in the oil and gas industry.period.
General and administrative expenses - Our general and administrative expenses were $4.4 million for the three months ended September 30, 2017, compared to $5.1 million for the three months ended September 30, 2016, compared to $3.8 million for the three months ended September 30, 2015.2016. The increasedecrease in general
and administrative expenses for the three months ended September 30, 20162017, was primarily attributable to the operations acquired in the LEEVAC transactionlower bonuses accrued during 2017, employee reductions and bonus expense, partially offset bycontinued cost cuttingminimization efforts implemented during 2016.by management for the period.
Asset impairmentOther income (expense), net - - 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 assetsOther income 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.
Interest expense, net - The Company had net interest expense of $98,000$38,000 for the three months ended September 30, 20162017, as compared to net interest expenseother income of $31,000$599,000 for three months ended September 30, 2016. Other income for the three months ended September 30, 2015. The increase2017 relates to insurance proceeds received from damage to a corporate automobile that was primarily driven by an increase in the cost of unused credit facility fees under our credit agreement.
fully depreciated. Other income net - Other income increased $599,000 for thefor three months ended September 30, 2016. The increase was2016 primarily duerelates to gains on sales of assets from our Fabrication division.
Income taxestax expense (benefit) - Our effective income tax rate for the three months ended September 30, 20162017, was 19.7%36.2%, compared to an effective tax rate of 34.0%19.7% for the comparable period during 2015.2016. The changeincrease in ourthe effective tax rate is duethe result of changes to the decrease inestimates of our effective rateyear-end tax provision during for the year-to-date period.three months ended September 30, 2016.
Operating Segments | | | | | | | | | | | | | | | | | 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 | ) | | | | |
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 and nine months ended September 30, 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 its Corporate division each meeting the criteria of reportable segments under GAAP. During the three and nine months ended September 30, 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 September 30, 2017 and 2016, are presented below (in thousands, except for percentages).
| | | | | | | | | | | | | | | | Fabrication | | Three Months Ended September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | 18,318 |
| | $ | 22,311 |
| | $ | (3,993 | ) | | (17.9)% | Gross profit (loss) | | 1,250 |
| | 601 |
| | 649 |
| | 108.0% | Gross profit (loss) percentage | | 6.8 | % | | 2.7 | % | | | | 4.1% | General and administrative expenses | | 778 |
| | 885 |
| | (107 | ) | | (12.1)% | Operating income (loss) | | 472 |
| | (284 | ) | | | | |
Revenue - Revenue from our Fabrication division decreased $9.8$4.0 million for the three months ended September 30, 20162017, compared to the three months ended September 30, 2015.2016. 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.
Gross profit increased $14.5 million to $532,000(loss) - Gross profit from our Fabrication division for the three months ended September 30, 20162017, was $1.3 million compared to a gross lossprofit of $14.0 million$601,000 for the three months ended September 30, 20152016. The increase in gross profit was 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.
GeneralGains on scrap sales of approximately $701,000 at our South Texas facility,
Decreases in costs resulting from reductions in workforce as we wrapped up and administrative expenses decreased $657,000completed projects at our South Texas fabrication yards, No depreciation being recorded for our South Texas assets for the three months ended September 30, 20162017, as these assets are classified as assets held for sale; and Continued cost minimization efforts implemented by management for the period.
This was partially offset by approximately $1.1 million of holding costs for our South Texas assets.
General and administrative expenses - General and administrative expenses for our Fabrication division decreased $107,000 for the three months ended September 30, 2017, compared to the three months ended September 30, 20152016. The decrease is primarily due to cost cutting measures implemented during 2016 in response to decreases in workcosts resulting from lower bonuses accrued during 2017 as a result of our consolidated operating loss, reductions in workforce at our South Texas fabrication facilities.
Asset impairment - Duringyards and continued cost minimization efforts implemented by management for 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.period.
| | | | | | | | | | | | | | | | | 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 September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue (1) | | $ | 15,074 |
| | $ | 23,060 |
| | $ | (7,986 | ) | | (34.6)% | Gross profit (loss) (1) | | (3,504 | ) | | 1,945 |
| | (5,449 | ) | | (280.2)% | Gross profit (loss) percentage | | (23.2 | )% | | 8.4 | % | | | | (31.6)% | General and administrative expenses | | 888 |
| | 1,468 |
| | (580 | ) | | (39.5)% | Operating income (loss) (1) | | (4,392 | ) | | 477 |
| | | | |
___________ | | (1) | Revenue for the three months ended September 30, 2017, and 2016, includes $510,000 and $1.5 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 $8.0 million for the three months ended September 30, 20162017, compared to the three months ended September 30, 20152016, due to the operations acquiredcorresponding reduction in customer demand for shipbuilding and repair services supporting the LEEVAC transaction (see LEEVAC Transaction above), which contributed $16.8oil and gas industry due to depressed oil and gas prices as well as the completion of a vessel that we tendered for delivery on February 6, 2017, and was rejected by the customer alleging certain technical deficiencies. We subsequently suspended of work on the second vessel under contract with this customer. See also Note 9 of the Notes to the Consolidated Financial Statements.
Gross profit (loss) - Gross loss from our Shipyards division was $3.5 million in revenue for the three months ended September 30, 2016.
Gross2017, compared to a gross profit decreased $60,000of $1.9 million for the three months ended September 30, 20162016. The decrease was due to:
$2.1 million in contract losses related to cost overruns and re-work that has been identified on two newbuild vessel construction contracts within our Shipyards division; and Holding and closing costs related to our Prospect shipyard as we wind down operations at this facility.
General and administrative expenses - General and administrative expenses for our Shipyards division decreased $580,000 for the three months ended September 30, 2017, compared to the three months ended September 30, 20152016, primarily due to tighter margins on new work and inefficiencies incurred on the contracts acquired inreductions of administrative personnel related to consolidation of personnel duties from the LEEVAC transaction partially offsettransaction. Additionally, our Shipyards division incurred lower bonuses accrued during 2017 as a result of a combination of a smaller workforce and our consolidated operating loss and cost minimization efforts implemented by savings realized from cost cutting measures implementedmanagement for the period during the first part of 2016.
General and administrative expenses increased $1.7 | | | | | | | | | | | | | | | | Services | | Three Months Ended September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | 17,651 |
| | $ | 20,928 |
| | $ | (3,277 | ) | | (15.7)% | Gross profit (loss) | | 1,912 |
| | 2,918 |
| | (1,006 | ) | | (34.5)% | Gross profit (loss) percentage | | 10.8 | % | | 13.9 | % | | | | (3.1)% | General and administrative expenses | | 695 |
| | 943 |
| | (248 | ) | | (26.3)% | Operating income (loss) | | 1,217 |
| | 1,975 |
| | | | |
Revenue - Revenue from our Services division decreased $3.3 million for the three months ended September 30, 20162017, compared to the three months ended September 30, 2015 primarily2016, 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 completedServices division decreased $1.0 million for the fabricationthree months ended September 30, 2017, compared to the three months ended September 30, 2016, due to decreased revenue discussed above and lower margins on new work performed during 2017.
General and administrative expenses - General and administrative expenses for our Services division decreased $248,000 for the three months ended September 30, 2017, compared to the three months ended September 30, 2016, due to lower bonuses accrued during 2017 as a result of a 1,200 foot jacket, pilescombination of a smaller workforce and an approximate 450 short ton topsideour consolidated operating loss.
| | | | | | | | | | | | | | | | Corporate | | Three Months Ended September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | — |
| | $ | — |
| | $ | — |
| | —% | Gross profit (loss) | | (152 | ) | | (205 | ) | | 53 |
| | 25.9% | Gross profit (loss) percentage | | n/a |
| | n/a |
| | | |
| General and administrative expenses | | 2,009 |
| | 1,790 |
| | 219 |
| | 12.2% | Operating income (loss) | | (2,161 | ) | | (1,995 | ) | |
|
| | |
General and administrative expenses - General and administrative expenses for our Corporate division increased primarily due to a restructuring of our corporate division with no similaradditional personnel allocated to our corporate division during 2017 as discussed above as well as expenses incurred for advisors to assist in a strategic financial analysis project in 2016. Our decrease in revenue earnedanticipation of the proceeds to be received from offshore fabrication work wasthe sale of our South Texas assets. Additionally, we have incurred increased legal fees as we pursue collection of claims against two customers. See also Note 9 of the Notes to the Consolidated Financial Statements. This has been partially offset by lower bonuses accrued during the assets and operations acquired quarter due to our consolidated operating loss.
Nine Months Ended September 30, 2017, Compared to Nine Months Ended September 30, 2016 (in the LEEVAC transaction (see LEEVAC Transaction above), which contributed $55.9 million inthousands, except for percentages): Consolidated | | | | | | | | | | | | | | | Nine Months Ended September 30, | | Increase or (Decrease) | | 2017 | | 2016 | | Amount | Percent | Revenue | $ | 133,745 |
| | $ | 230,864 |
| | $ | (97,119 | ) | (42.1)% | Cost of revenue | 150,755 |
| | 205,839 |
| | (55,084 | ) | (26.8)% | Gross profit (loss) | (17,010 | ) | | 25,025 |
| | (42,035 | ) | (168.0)% | Gross profit (loss) percentage | (12.7 | )% | | 10.8 | % | | | | General and administrative expenses | 12,940 |
| | 14,633 |
| | (1,693 | ) | (11.6)% | Asset impairment | 389 |
| | — |
| | 389 |
| 100.0% | Operating income (loss) | (30,339 | ) | | 10,392 |
| | (40,731 | ) | (391.9)% | Other income (expense): | | | | | | | Interest expense | (262 | ) | | (248 | ) | | (14 | ) | | Interest income | 12 |
| | 20 |
| | (8 | ) | | Other income (expense), net | (221 | ) | | 1,039 |
| | (1,260 | ) | | Total other income (expense) | (471 | ) | | 811 |
| | (1,282 | ) | (158.1)% | Net income (loss) before income taxes | (30,810 | ) | | 11,203 |
| | (42,013 | ) | (375.0)% | Income tax expense (benefit) | (10,322 | ) | | 4,134 |
| | (14,456 | ) | (349.7)% | Net income (loss) | $ | (20,488 | ) | | $ | 7,069 |
| | $ | (27,557 | ) | (389.8)% |
Revenue - Our revenue for the nine months ended September 30, 2016. Pass-through2017 and 2016, was $133.7 million and $230.9 million, respectively, representing a decrease of 42.1%. 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 as well as the completion of a vessel within our Shipyards division that we tendered for delivery on February 6, 2017, and was rejected by the customer alleging certain technical deficiencies. We subsequently suspended of work on the second vessel under contract with this customer. See also Note 9 of the Notes to the Consolidated Financial Statements. Pass-
through costs as a percentage of revenue were 35.0%45.3% and 43.2%35.0% for the nine months ended September 30, 20162017 and 2015,2016, 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 profitloss for the nine months ended September 30, 2016 and 20152017, was $17.0 million compared to a gross profit of $25.0 million (10.8% of revenue) and $2.4 million (1.0% of revenue), respectively. Our gross profit improved compared to 2015for the nine months ended September 30, 2016. The decrease was primarily due to the LEEVAC transaction$12.7 million of losses incurred by our Shipyards division related to cost overruns and contract losses of $14.3 million that were recorded during the third quarter of 2015 resulting from our inability to recover certainre-work identified on two newbuild vessel construction contracts, decreased revenue as discussed above, holding costs related to a deckour South Texas assets of $3.6 million and jacketlower margins on current work. This was partially offset by decreases in costs resulting from reductions in workforce as we wrapped up and completed projects at our South Texas fabrication yards and Prospect shipyard, suspended depreciation for one of our deepwater projects. We had no such lossSouth Texas assets and Prospect shipyard during the third quarter of 2016nine months ended September 30, 2017, as these assets are classified as assets held for sale and additional cost minimization efforts implemented cost cutting measures in response to decreases in work at our fabrication facilities.by management for the period.
General and administrative expenses - Our general and administrative expenses were $12.9 million for the nine months ended September 30, 2017, compared to $14.6 million for the nine months ended September 30, 2016, compared to $11.8 million for the nine months ended September 30, 2015.2016. The increasedecrease in general and administrative expenses for the nine months ended September 30, 2016 was2017, is primarily attributable to:
an increase of stock-based compensation expense of $589,000,
due to decreases in costs resulting from reductions in workforce at our South Texas fabrication yards, lower bonuses and the LEEVAC transaction; partially offset by
cost cutting efforts implementedaccrued during 2017 as a result of our consolidated operating loss and continued cost minimization efforts implemented by management for the downturn in the oil and gas industry.period.
Asset impairmentImpairment - During the nine months ended September 30, 2015,2017, we recorded an asset impairment charge of $6.6 million$389,000 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. Dueour assets held for sale at our Prospect Shipyard. See also Note 2 of the Notes to the sustained downturn in the energy sector, our ability to effectivelyConsolidated Financial Statements.
market these assetsOther income (expense), net - Other expense 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$221,000 for the nine months ended September 30, 20162017, compared to net interest expenseother income 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 income increased $1.0 million for the nine months ended September 30, 2016. The increaseOther expense for the period was primarily due to losses on sales of two drydocks from our Shipyards division. Other income for the prior period was primarily due to gains of $924,000 related to the sale of three cranes at our Texas facility as well ason sales of smaller assets byfrom our Shipyards division.Fabrication division recorded during 2016.
Income taxestax expense (benefit) - Our effective income tax rate for the nine months ended September 30, 20162017, was 36.9%33.5%, compared to an effective tax rate of 34.0%36.9% for the comparable period during 2015.2016. The increasedecrease in ourthe effective tax rate is due to the effectresult of state income taxes from income generated within Louisiana with no offsetting tax benefit from losses generated within Texas.limitations on the deductibility of executive compensation.
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 | ) | |
| |
|
As discussed above and 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 and nine months ended September 30, 2017. 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 nine months ended September 30, 2017 and 2016, are presented below (in thousands, except for percentages).
| | | | | | | | | | | | | | | | Fabrication | | Nine Months Ended September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | 42,517 |
| | $ | 70,436 |
| | $ | (27,919 | ) | | (39.6)% | Gross profit (loss) | | 216 |
| | 4,564 |
| | (4,348 | ) | | (95.3)% | Gross profit (loss) percentage | | 0.5 | % | | 6.5 | % | | | | (6.0)% | General and administrative expenses | | 2,432 |
| | 2,821 |
| | (389 | ) | | (13.8)% | Operating income (loss) | | (2,216 | ) | | 1,743 |
| | | | |
Revenue - Revenue from our Fabrication division decreased $67.0$27.9 million for the nine months ended September 30, 20162017, compared to the nine months ended September 30, 2015.2016. 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. During 2015, weAs discussed above, management has classified our South Texas assets as assets held for sale in response to the underutilization of our Fabrication assets. As of September 30, 2017, all of our projects at our South Texas fabrication yards have been completed theor transferred to our Houma fabrication of a 1,200 foot jacket, piles and an approximate 450 short ton topside with no similar project in 2016.yard.
Gross profit increased $18.5 million(loss) - Gross profit from our Fabrication division for the nine months ended September 30, 2017, was $216,000 compared to $4.4a gross profit of $4.6 million for the nine months ended September 30, 2016 compared2016. The decrease was due to a gross losslower revenue
from decreased fabrication work as discussed above and approximately $3.6 million of $14.1 millionholding costs for our South Texas assets as we market them for sale. This was partially offset by decreases in costs resulting from reductions in workforce, gains on scrap sales as we wrapped up and completed projects at our South Texas fabrication yards, reduced depreciation being recorded for our South Texas assets for the nine months ended September 30, 2015. The increase is due to contract losses of $14.3 million that were recorded during2017, as these assets are classified as assets held for sale on February 23, 2017, and additional cost minimization efforts implemented by management for 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.period.
General and administrative expenses - General and administrative expenses for our Fabrication division decreased $2.5 million$389,000 for the nine months ended September 30, 20162017, compared to the nine months ended September 30, 20152016. The decrease is primarily due to cost cutting measures implemented during 2016 in response to decreases in workcosts resulting from reductions in workforce as we wrapped up and completed projects at our South Texas fabrication facilities.
Asset impairment - During the nine months ended September 30, 2015, we recorded an asset impairment chargeyards and lower bonuses accrued during 2017 as a result of $6.6 million relateda combination of a smaller workforce and our consolidated operating loss. This was partially offset by expenses incurred to a partially constructed topside, related valves, pipingmarket our South Texas assets for sale 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 valuepayment of the assets. We had no such impairmentstermination benefits during the nine months ended September 30, 2016.first quarter of 2017 as we reduced its workforce and completed those operations.
| | | | | | | | | | | | | | | | | 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 |
| | | | |
| | | | | | | | | | | | | | | | Shipyards | | Nine Months Ended September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue (1) | | $ | 51,798 |
| | $ | 86,553 |
| | $ | (34,755 | ) | | (40.2)% | Gross profit (loss) (1) | | (19,061 | ) | | 9,742 |
| | (28,803 | ) | | (295.7)% | Gross profit (loss) percentage | | (36.8 | )% | | 11.3 | % | | | | (48.1)% | General and administrative expenses | | 2,835 |
| | 4,218 |
| | (1,383 | ) | | (32.8)% | Asset impairment | | 389 |
| | — |
| | 389 |
| | 100.0% | Operating income (loss) (1) | | (22,285 | ) | | 5,524 |
| | | | |
_______________________
| | (1) | Revenue for the nine months ended September 30, 2017, and 2016, includes $2.4 million and $4.1 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 $39.4- Revenue from our Shipyards division decreased $34.8 million for the nine months ended September 30, 20162017, compared to the nine months ended September 30, 20152016, due to the assetscorresponding reduction in customer demand for shipbuilding and operations acquired inrepair services supporting the LEEVAC transaction (see LEEVAC Transaction above), which contributed $55.9oil and gas industry due to depressed oil and gas prices as well as the completion of a vessel that we tendered for delivery on February 6, 2017, and was rejected by the customer alleging certain technical deficiencies. We subsequently suspended of work on the second vessel under contract with this customer. See also Note 9 of the Notes to the Consolidated Financial Statements.
Gross profit (loss) - Gross loss from our Shipyards division was $19.1 million in revenuefor the nine months ended September 30, 2017, compared to a gross profit of $9.7 million for the nine months ended September 30, 2016. The increasedecrease was partially offsetdue to:
$12.7 million in contract losses related to cost overruns and re-work that has been identified on two newbuild vessel construction contracts within our Shipyards division; Holding and closing costs related to our Prospect shipyard as we wind down operations at this facility; 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 due to the downturn in the oil and gas industry.under other various contracts.
Gross profit increased $3.6General and administrative expenses - General and administrative expenses for our Shipyards division decreased $1.4 million for the nine months ended September 30, 20162017, compared to the nine months ended September 30, 20152016, primarily due to reductions of administrative personnel related to consolidation of personnel duties from the LEEVAC transactiontransaction. Additionally, our Shipyards division incurred lower bonuses accrued during 2017 as well as increases in profitability estimatesa result of our consolidated operating loss and cost minimization efforts implemented by management for other jobs in progress due to cost cutting measures.the period.
General and administrative expenses increased $4.6Asset Impairment - During nine months ended September 30, 2017, we recorded an impairment of $389,000 related to our assets held for sale at our Prospect shipyard. See also Note 2 of the Notes to Consolidated Financial Statements.
| | | | | | | | | | | | | | | | Services | | Nine Months Ended September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | 43,758 |
| | $ | 76,179 |
| | $ | (32,421 | ) | | (42.6)% | Gross profit (loss) | | 2,335 |
| | 11,158 |
| | (8,823 | ) | | (79.1)% | Gross profit (loss) percentage | | 5.3 | % | | 14.6 | % | | | | (9.3)% | General and administrative expenses | | 2,008 |
| | 2,462 |
| | (454 | ) | | (18.4)% | Operating income (loss) | | 327 |
| | 8,696 |
| | | | |
Revenue - Revenue from our Services division decreased $32.4 million for the nine months ended September 30, 20162017, compared to the nine months ended September 30, 20152016, due to an overall decrease in work experienced as a result of depressed oil and gas prices and the expenses associated with the operations acquiredcorresponding reduction in the LEEVAC transactioncustomer demand for oil and bonuses.gas related service projects. | | | | | | | | | | | | | | | | | 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 $5.2Gross profit - Gross profit from our Services division decreased $8.8 million for the nine months ended September 30, 20162017, compared to the nine months ended September 30, 20152016, due to increases in the scope of two large offshore service projectsdecreased revenue discussed above and lower margins on new work performed during the first half of 2016.2017.
Gross profit increased $563,000General and administrative expenses - General and administrative expenses for our Services division decreased $0.5 million for the nine months ended September 30, 20162017, compared to the nine months ended September 30, 20152016, due to increases in revenueslower bonuses accrued during 2017 as a result of a combination of a smaller workforce and improved absorption of fixed costs resulting from an increase in labor hours worked.our consolidated operating loss.
| | | | | | | | | | | | | | | | Corporate | | Nine Months Ended September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | — |
| | $ | — |
| | $ | — |
| | —% | Gross profit (loss) | | (500 | ) | | (439 | ) | | (61 | ) | | (13.9)% | Gross profit (loss) percentage | | n/a |
| | n/a |
| | | |
| General and administrative expenses | | 5,665 |
| | 5,132 |
| | 533 |
| | 10.4% | Operating income (loss) | | (6,165 | ) | | (5,571 | ) | | (594 | ) | | |
Gross profit (loss) - Gross loss from our Corporate division increased primarily due to a restructuring of our corporate division with additional personnel allocated to our corporate division during 2017 as discussed above. General and administrative expenses - General and administrative expenses for our Corporate division increased $1.1 millionprimarily due to a restructuring of our corporate division with additional personnel allocated to our corporate division during 2017 as discussed above as well as expenses incurred for advisors to assist in a strategic financial analysis project in anticipation of the nine months ended September 30, 2016 comparedproceeds to be received from the sale of our South Texas assets. Additionally, we have incurred increased legal fees as we pursue collection of claims against two customers. See also Note 9 of the Notes to the nine months ended September 30, 2015 due to additional administrative support costs related to increases in activityConsolidated Financial Statements. This has been partially offset by lower bonuses accrued during 2017 as a result of a combination of a smaller workforce and bonuses.our consolidated operating loss. Liquidity and Capital Resources Historically, we have funded our business activities through cash generated from operations. At September 30, 20162017, 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$17.8 million compared to $34.8$51.2 million at December 31, 2015.2016. Working capital was $79.8$164.0 million and our ratio of current assets to current liabilities was 2.834.59 to 1 at September 30, 2017, compared to $78.0 million and 3.21 to 1, respectively, at December 31, 2016. Working capital at September 30, 2017, includes $107.0 million related to assets held for sale, primarily related to our South Texas facilities. Our primary sourceuse of cash forduring the nine months ended September 30, 2016, was related to2017, is referenced in the collection of accounts receivable under various customer contracts and sales of three cranes at our Texas facility for $5.8 million. Cash Flow Activities section below. At September 30, 2016,2017, our contracts receivable balance was $26.6$25.5 million of which we have subsequently collected $12.1$8.3 million through October 31, 2016.2017. On January 1, 2016,June 9, 2017, we acquired substantially all of the assets and assumed certain specified liabilities of LEEVAC. The purchase price for the acquisition was $20.0entered into a $40.0 million subject to a working capital adjustment whereby we received a dollar-for-
dollar reduction for the assumption of certain net liabilities of LEEVAC at closing and settlement payments from sureties on certain ongoing fabrication projects that were assigned to us in the transaction. After taking into account these adjustments, we received approximately $1.6 million in cash at closing. During the quarter, we presented our working capital true-up to the seller, which resulted in an additional $1.5 million due to us. Additionally, we hired 380 employees upon acquisition of the facilities representing substantially all of the former LEEVAC employees. Strategically, the transaction expands our marine fabrication and repair and maintenance presence in the Gulf South market. At the date of transaction, we acquired approximately $121.2 million of new build construction backlog inclusive of approximately $9.2 million of purchase price fair value allocated to four, new build construction projects to be delivered in 2017 and 2018 for two customers.
As of September 30, 2016, we had a credit agreement with Whitney Bank, and JPMorgan Chase Bank N.A. that provides for an $80.0 million revolvingas lender. The credit facility maturing January 2, 2017. The credit agreement allows the Company to use up to the full amount of the available borrowing basematures June 9, 2019 and may be used for issuing letters of credit and up to $20.0 million forand/or general corporate and working capital purposes. Our obligationsWe believe that
the new facility will provide us with additional working capital flexibility to expand operations as backlog improves, respond to market opportunities and support our ongoing operations.
Interest on drawings under the credit agreement are secured by substantially all offacility may be designated, at our assets, other than real property locatedoption, as either Base Rate (as defined in the state of Louisiana. On February 29, 2016, we entered into an amendment to our credit agreement. The amendment (i) extendsfacility) or LIBOR plus 2.0% per annum. Unused commitment fees on the termundrawn portion of the Credit Facility from February 29, 2016 to January 2, 2017; (ii) increases the commitment fee on undrawn amounts from 0.25% to 0.50%facility are 0.4% per annum; (iii) increases the letter of credit fee, subject to certain limited exceptions, to 2.00% per annum, and interest 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. 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 our financial covenants beginning with the quarter ending March 31, 2016 as follows:
| | (i) | minimum net worth requirement of not less than $250.0 million plus |
| | a) | 50% of net income earned in each quarter beginning March 31, 2016 and |
| | b) | 100% of proceeds from any issuance of common stock; |
| | (ii) | debt to EBITDA ratio not greater than 3.0 to 1.0; and |
| | (iii) | interest coverage ratio not less than 2.0 to 1.0. |
At September 30, 2016, no amounts were outstanding under thelenders is 2.0% per annum. The credit facility and we had outstanding letters of credit totaling $4.5 million, reducing the unused portion of our credit facility for additional letters of credit to $75.5 million. As of September 30, 2016, we were in compliance with all covenants. During the fourth quarter, we expect to enter into a two-year, $40.0 million amended and restated credit facility with our current lenders that will beis secured by substantially all of our assets (other than real property)the assets of Gulf Marine Fabricators, L.P., the legal entity that holds our South Texas assets which are currently held for sale).
We anticipatemust comply with the amendedfollowing financial covenants each quarter during the term of the facility:
| | i. | Ratio of current assets to current liabilities of not less than 1.25:1.00; |
| | ii. | Minimum tangible net worth requirement of at least the sum of: |
| | b) | An amount equal to 50% of consolidated net income for each fiscal quarter ending after June 30, 2017 (with no deduction for a net loss in any such fiscal quarter except for any gain or loss in connection with the sale of assets by Gulf Marine Fabricators, L.P.), plus |
| | c) | 100% of all net proceeds of any issuance of any stock or other equity after deducting of any fees, commissions, expenses and other costs incurred in such offering; and |
| | iii. | Ratio of funded debt to tangible net worth of not more than 0.50:1.00. |
Concurrent with our execution of the credit facility, will allow us to usewe terminated our prior credit facility with JPMorgan Chase Bank, N.A. At the full $40.0time of the termination, there was approximately $4.6 million borrowing baseof letters of credit outstanding. All were reissued as new letters of credit under the credit facility and accepted by the beneficiaries. Availability under our credit facility for bothfuture, additional letters of credit and general corporate purposes. Given the historically low levelsborrowings is $35.4 million. As of borrowings underSeptember 30, 2017, we were in compliance with all of our current facility and our cash position, we requested a reduction in the amount 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.covenants.
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 do not anticipate significant capital expenditures for the remainder of 2016 to be approximately $1.8 million primarily for the following: extension of one of our dry docks, and
improvements to our newly acquired facilities.2017.
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. The customer also announcedagreements and stated that, while it had received limited waivers from its lenders, its debt agreements willwould require further negotiation and amendment. InThis same customer rejected delivery of the eventfirst vessel that we completed and tendered for delivery on February 6, 2017, alleging certain technical deficiencies exist with respect to the vessel. On March 10, 2017, we gave notice for arbitration with our customer in an effort to resolve this matter and subsequently suspended fabrication of the second vessel under contract with this customer, which is unsuccessfulincluded in our arbitration proceedings. We disagree with our customer concerning these efforts,alleged technical deficiencies and have put the customer will consider other options including a possible reorganizationin default under the terms of both vessel contracts. The customer is seeking recovery of $84.8 million representing all purchase price amounts previously paid by the customer under both contracts. On May 17, 2017, the customer filed for protection under Chapter 11 of the Federal bankruptcy laws. AtUnited States Bankruptcy Code for reorganization under a negotiated, pre-packaged plan. The customer has emerged from Chapter 11 Bankruptcy and the Bankruptcy Court has approved the customer's retention and acceptance of both contracts. As of September 30, 2016, no contracts receivable2017, approximately $4.6 million remained due and outstanding from our customer for the first vessel. The balance due to us for the second vessel upon completion and delivery is approximately $4.9 million. We are working with legal counsel to protect our contractual claims, and we have re-initiated arbitration proceedings in accordance with our contracts. We are in the process of discovery. The customer has recently named a new interim chief executive officer who has made contact with our management, and we are working to resolve our dispute in a constructive manner. We believe that will be able to recover remaining amounts due to us.
On August 25, 2017, our South Texas facilities were outstandingimpacted by Hurricane Harvey, which made landfall as a category 4 hurricane. As a result, we suffered damages to our South Texas buildings and deferred revenue exceeded ourequipment. Through September 30, 2017, we have incurred approximately $265,000 in clean-up and repair related costs and estimated earningswe expect to incur additional future repair costs in excess of billingsour deductible which management believes are probable of being recovered through insurance proceeds. We maintain coverage on these assets up to a maximum of $25.0 million, subject to a 3.0% deductible with a minimum deductible of $500,000. We are working diligently with our insurance agents and adjusters to finalize our estimate of the damage; however, it may be several months, or even longer, before we can finalize our assessment and receive final payment from our insurance underwriters. Our insurance underwriters have made an initial payment of $3.0 million, and we have recorded a liability for future repairs of $2.7 million which is included in accrued expenses and other liabilities on our balance sheet at September 30, 2017. Based upon our initial assessment of the damages and insurance coverage, management believes that there is no basis to record a net loss at this contract. We continuetime and that insurance proceeds will at a minimum be sufficient to monitor our work performed in relationreimburse us for all damages and repair costs. Our final
assessment of the loss incurred to our customer’s statusSouth Texas assets as well as the amount of insurance proceeds we will receive could be more or less than this amount when the claim is ultimately settled and its ability to pay under the terms of its contract. Based on our evaluation to date, we do not believe that any loss on this contract is probable or estimable at this time. such differences could be material.
In February 2016,event of one or more sales of our BoardSouth Texas assets, we expect to use all or a portion of Directors approved a decreasethe sales proceeds to invest in our quarterly dividendoperating liquidity in order to $0.01 in anfacilitate anticipated future projects, selected capital improvements to enhance and/or expand our existing facilities, mergers and acquisitions to expand our product and service capabilities. We are continuing this effort to conserve cash. identify and analyze specific investment opportunities we believe will enhance the long-term value of the Company that are consistent with our strategy.
On October 27, 2016,26, 2017, our Board of Directors declared a dividend of $0.01 per share on our shares of common stock outstanding, payable November 23, 201624, 2017, to shareholders of record on November 10, 2016.2017.
We believe our cash and cash equivalents generated by our future operating activities, and funds availableproceeds to be received from insurance underwriters, availability under our line of credit facilityand proceeds 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 termnext twelve months to continue our operations,to operate, satisfy our contractual operations and pay dividends to our shareholders.
Cash Flow Activities
For the nine months ended September 30, 20162017, net cash used in operating activities was $29.6 million, compared to net cash provided by operating activities was $19.3 million, compared to $18.7of $19.4 million for the nine months ended September 30, 2015.2016. The increaseuse of cash in cash provided by operations during the period was primarily due to increased gross profit and collections of contract receivables during 2016 somewhat offset by payments requiredthe following:
Operating losses for trade payables during the nine months ended September 30, 2017, in excess of non-cash depreciation, amortization, impairment and stock compensation expense of approximately $19.6 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 as comparedwas $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 on ongoing shipbuilding projects of $23.0 million that were assigned to 2015.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. The suspension of two vessel projects following our customer’s refusal to accept delivery of the first vessel in February 2017, and our inability to collect $9.5 million in scheduled payments under these contracts. See also Note 9 of the Notes to the Consolidated Financial Statements; 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 later in 2017 through the first half of 2018.
Net cash provided byused in investing activities for the nine months ended September 30, 20162017, was $2.0$2.4 million, compared to cash used inprovided by investing activities of $5.0$2.0 million for the nine months ended September 30, 2015.2016. The increasechange in cash provided by investing activities is primarily due to cash received from the sale of three cranes at our Texas facility for $5.8 million and $1.6 million of cash acquired in the LEEVAC transaction.transaction during 2016 partially offset by decreases in capital expenditures.
Net cash used in financing activities for the nine months ended September 30, 2017 and 2016, was $1.4 million and 2015 was $440,000 and $4.4 million,$603,000, respectively. The decreaseincrease in cash used in financing activities is due to the reduction incash payments made to taxing authorities on behalf of employees for their vesting of common stock. During the cash dividend in 2016.nine months ended September 30, 2017 we received $2.0 million from borrowings under our new line of credit which were immediately repaid.
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, 2016.2017. 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, 20162017, 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 | | | 3.2 | | | 4.131.1 | | 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 | | | 31.2 | | | 32 | | | 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. |
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. MecheDavid S. Schorlemer | | Kirk J. MecheDavid S. Schorlemer | | President, Chief Executive Officer, Director and InterimVice President, Chief Financial Officer, and Treasurer and Secretary (Principal Executive Officer and Interim Principal Financial and Accounting Officer) |
Date: November 2, 2016October 31, 2017
GULF ISLAND FABRICATION, INC. EXHIBIT INDEX | | | | | Exhibit Number | | Description of Exhibit | | | 2.13.1 | | 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 | | | 4.131.1 | | Specimen Common Stock Certificate, incorporated by reference | 10.131.2 | | Form of Long-Term Performance-Based Cash Award Agreement. | 31 | | CEO and | 32 | | | 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.(1) | Backlog as of September 30, 2016 includes commitments received through October 27, 2016. We exclude suspended projects from contract backlog thatwhen they are expected to be suspended more than twelve12 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.(2) | At September 30, 2016,2017, projects for our threefive 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) | twoTwo large multi-purpose service vessels for one customer inwithin our Shipyards segment,division, which commenced in the first quarter of 2014 and will be completed during the first and second quarter of 2018; and |
(iii) the fabrication of four modules associated with a U.S. ethane cracker project.
| | 3.(ii) | Newbuild construction of four harbor tugs for one customer within our Shipyards division; |
| | (iii) | Newbuild construction of four harbor tugs for one additional customer within our Shipyards division; |
| | (iv) | The fabrication of four modules associated with a U.S. ethane cracker project within our Fabrication division; and |
| | (v) | Newbuild construction of an offshore research vessel within our Shipyards division. |
| | (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. Additionally, as we continue to add backlog, we will begin adding personnel with critical project management and fabrication skills to ensure we have the resources necessary to execute our projects well and to support our project risk mitigation discipline for all new project work. This may negatively impact near term results. As of September 30, 2016,2017, we had 1,336989 employees and 163 contract employees inclusive of 380 employees hired in the LEEVAC transaction, compared to 1,255 employees and 71 contract1,178 employees as of December 31, 2015.
2016. Labor hours worked were 2.31.5 million during the nine months ended September 30, 2016,2017, compared to 2.12.3 million for the nine months ended September 30, 2015.2016. The overall increasedecrease in labor hours worked for the threenine months ended September 30, 20162017, 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 September 30, 2017, Compared to Three Months Ended September 30, 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 September 30, | | Increase or (Decrease) | | 2017 | | 2016 | | Amount | Percent | Revenue | $ | 49,884 |
| | $ | 65,384 |
| | $ | (15,500 | ) | (23.7)% | Cost of revenue | 50,378 |
| | 60,125 |
| | (9,747 | ) | (16.2)% | Gross profit (loss) | (494 | ) | | 5,259 |
| | (5,753 | ) | (109.4)% | Gross profit (loss) percentage | (1.0 | )% | | 8.0 | % | | | | General and administrative expenses | 4,370 |
| | 5,086 |
| | (716 | ) | (14.1)% | Operating income (loss) | (4,864 | ) | | 173 |
| | (5,037 | ) | (2,911.6)% | Other income (expense): | | | | | | | Interest expense | (45 | ) | | (110 | ) | | 65 |
| | Interest income | — |
| | 12 |
| | (12 | ) | | Other income (expense), net | 38 |
| | 599 |
| | (561 | ) | | Total other income (expense) | (7 | ) | | 501 |
| | (508 | ) | 101.4% | Net income (loss) before income taxes | (4,871 | ) | | 674 |
| | (5,545 | ) | (822.7)% | Income tax expense (benefit) | (1,761 | ) | | 133 |
| | (1,894 | ) | (1,424.1)% | Net income (loss) | $ | (3,110 | ) | | $ | 541 |
| | $ | (3,651 | ) | (674.9)% |
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, 2016.2017 and 2016, was $49.9 million and $65.4 million, respectively, representing a decrease of 23.7%. The decrease is primarily attributable to an overall decrease in work experienced in our facilities primarily 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%48.4% and 45.3%33.8% for the three-monthsthree months ended September 30, 20162017 and 2015,2016, 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 20152017, was $494,000 compared to a gross profit of $5.3 million (8.0% of revenue) and $(7.8) million, respectively. Our gross profit improved compared to third quarter of 2015for the three months ended September 30, 2016. The decrease was primarily due to $2.1 million of contract losses of $14.3 million that were recorded during the third quarter of 2015 resulting fromincurred by our inabilityShipyards division related to recover certaincost overruns and re-work identified on two newbuild vessel construction
contracts, decreased revenue as discussed above, holding costs related to a deckour South Texas assets of $1.1 million and jacket for one of our deepwater projects. We had no such loss during the third quarter of 2016 and implemented cost cutting measures.lower margins on current work due to competitive pressures. This was partially offset by tighter margins within all ofdecreases in costs resulting from reductions in workforce as we wrapped up and completed projects at our segments due to a decrease in workSouth Texas fabrication yards and Prospect shipyard, no depreciation being recorded for our South Texas assets and Prospect shipyard for the three months ended September 30, 2017 (as these assets are classified as a result ofassets held for sale) and continued cost minimization efforts implemented by management for the downturn in the oil and gas industry.period.
General and administrative expenses - Our general and administrative expenses were $4.4 million for the three months ended September 30, 2017, compared to $5.1 million for the three months ended September 30, 2016, compared to $3.8 million for the three months ended September 30, 2015.2016. The increasedecrease in general
and administrative expenses for the three months ended September 30, 20162017, was primarily attributable to the operations acquired in the LEEVAC transactionlower bonuses accrued during 2017, employee reductions and bonus expense, partially offset bycontinued cost cuttingminimization efforts implemented during 2016.by management for the period.
Asset impairmentOther income (expense), net - - 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 assetsOther income 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.
Interest expense, net - The Company had net interest expense of $98,000$38,000 for the three months ended September 30, 20162017, as compared to net interest expenseother income of $31,000$599,000 for three months ended September 30, 2016. Other income for the three months ended September 30, 2015. The increase2017 relates to insurance proceeds received from damage to a corporate automobile that was primarily driven by an increase in the cost of unused credit facility fees under our credit agreement.
fully depreciated. Other income net - Other income increased $599,000 for thefor three months ended September 30, 2016. The increase was2016 primarily duerelates to gains on sales of assets from our Fabrication division.
Income taxestax expense (benefit) - Our effective income tax rate for the three months ended September 30, 20162017, was 19.7%36.2%, compared to an effective tax rate of 34.0%19.7% for the comparable period during 2015.2016. The changeincrease in ourthe effective tax rate is duethe result of changes to the decrease inestimates of our effective rateyear-end tax provision during for the year-to-date period.three months ended September 30, 2016.
Operating Segments | | | | | | | | | | | | | | | | | 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 | ) | | | | |
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 and nine months ended September 30, 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 its Corporate division each meeting the criteria of reportable segments under GAAP. During the three and nine months ended September 30, 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 September 30, 2017 and 2016, are presented below (in thousands, except for percentages).
| | | | | | | | | | | | | | | | Fabrication | | Three Months Ended September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | 18,318 |
| | $ | 22,311 |
| | $ | (3,993 | ) | | (17.9)% | Gross profit (loss) | | 1,250 |
| | 601 |
| | 649 |
| | 108.0% | Gross profit (loss) percentage | | 6.8 | % | | 2.7 | % | | | | 4.1% | General and administrative expenses | | 778 |
| | 885 |
| | (107 | ) | | (12.1)% | Operating income (loss) | | 472 |
| | (284 | ) | | | | |
Revenue - Revenue from our Fabrication division decreased $9.8$4.0 million for the three months ended September 30, 20162017, compared to the three months ended September 30, 2015.2016. 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.
Gross profit increased $14.5 million to $532,000(loss) - Gross profit from our Fabrication division for the three months ended September 30, 20162017, was $1.3 million compared to a gross lossprofit of $14.0 million$601,000 for the three months ended September 30, 20152016. The increase in gross profit was 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.
GeneralGains on scrap sales of approximately $701,000 at our South Texas facility,
Decreases in costs resulting from reductions in workforce as we wrapped up and administrative expenses decreased $657,000completed projects at our South Texas fabrication yards, No depreciation being recorded for our South Texas assets for the three months ended September 30, 20162017, as these assets are classified as assets held for sale; and Continued cost minimization efforts implemented by management for the period.
This was partially offset by approximately $1.1 million of holding costs for our South Texas assets.
General and administrative expenses - General and administrative expenses for our Fabrication division decreased $107,000 for the three months ended September 30, 2017, compared to the three months ended September 30, 20152016. The decrease is primarily due to cost cutting measures implemented during 2016 in response to decreases in workcosts resulting from lower bonuses accrued during 2017 as a result of our consolidated operating loss, reductions in workforce at our South Texas fabrication facilities.
Asset impairment - Duringyards and continued cost minimization efforts implemented by management for 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.period.
| | | | | | | | | | | | | | | | | 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 September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue (1) | | $ | 15,074 |
| | $ | 23,060 |
| | $ | (7,986 | ) | | (34.6)% | Gross profit (loss) (1) | | (3,504 | ) | | 1,945 |
| | (5,449 | ) | | (280.2)% | Gross profit (loss) percentage | | (23.2 | )% | | 8.4 | % | | | | (31.6)% | General and administrative expenses | | 888 |
| | 1,468 |
| | (580 | ) | | (39.5)% | Operating income (loss) (1) | | (4,392 | ) | | 477 |
| | | | |
___________ | | (1) | Revenue for the three months ended September 30, 2017, and 2016, includes $510,000 and $1.5 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 $8.0 million for the three months ended September 30, 20162017, compared to the three months ended September 30, 20152016, due to the operations acquiredcorresponding reduction in customer demand for shipbuilding and repair services supporting the LEEVAC transaction (see LEEVAC Transaction above), which contributed $16.8oil and gas industry due to depressed oil and gas prices as well as the completion of a vessel that we tendered for delivery on February 6, 2017, and was rejected by the customer alleging certain technical deficiencies. We subsequently suspended of work on the second vessel under contract with this customer. See also Note 9 of the Notes to the Consolidated Financial Statements.
Gross profit (loss) - Gross loss from our Shipyards division was $3.5 million in revenue for the three months ended September 30, 2016.
Gross2017, compared to a gross profit decreased $60,000of $1.9 million for the three months ended September 30, 20162016. The decrease was due to:
$2.1 million in contract losses related to cost overruns and re-work that has been identified on two newbuild vessel construction contracts within our Shipyards division; and Holding and closing costs related to our Prospect shipyard as we wind down operations at this facility.
General and administrative expenses - General and administrative expenses for our Shipyards division decreased $580,000 for the three months ended September 30, 2017, compared to the three months ended September 30, 20152016, primarily due to tighter margins on new work and inefficiencies incurred on the contracts acquired inreductions of administrative personnel related to consolidation of personnel duties from the LEEVAC transaction partially offsettransaction. Additionally, our Shipyards division incurred lower bonuses accrued during 2017 as a result of a combination of a smaller workforce and our consolidated operating loss and cost minimization efforts implemented by savings realized from cost cutting measures implementedmanagement for the period during the first part of 2016.
General and administrative expenses increased $1.7 | | | | | | | | | | | | | | | | Services | | Three Months Ended September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | 17,651 |
| | $ | 20,928 |
| | $ | (3,277 | ) | | (15.7)% | Gross profit (loss) | | 1,912 |
| | 2,918 |
| | (1,006 | ) | | (34.5)% | Gross profit (loss) percentage | | 10.8 | % | | 13.9 | % | | | | (3.1)% | General and administrative expenses | | 695 |
| | 943 |
| | (248 | ) | | (26.3)% | Operating income (loss) | | 1,217 |
| | 1,975 |
| | | | |
Revenue - Revenue from our Services division decreased $3.3 million for the three months ended September 30, 20162017, compared to the three months ended September 30, 2015 primarily2016, 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 completedServices division decreased $1.0 million for the fabricationthree months ended September 30, 2017, compared to the three months ended September 30, 2016, due to decreased revenue discussed above and lower margins on new work performed during 2017.
General and administrative expenses - General and administrative expenses for our Services division decreased $248,000 for the three months ended September 30, 2017, compared to the three months ended September 30, 2016, due to lower bonuses accrued during 2017 as a result of a 1,200 foot jacket, pilescombination of a smaller workforce and an approximate 450 short ton topsideour consolidated operating loss.
| | | | | | | | | | | | | | | | Corporate | | Three Months Ended September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | — |
| | $ | — |
| | $ | — |
| | —% | Gross profit (loss) | | (152 | ) | | (205 | ) | | 53 |
| | 25.9% | Gross profit (loss) percentage | | n/a |
| | n/a |
| | | |
| General and administrative expenses | | 2,009 |
| | 1,790 |
| | 219 |
| | 12.2% | Operating income (loss) | | (2,161 | ) | | (1,995 | ) | |
|
| | |
General and administrative expenses - General and administrative expenses for our Corporate division increased primarily due to a restructuring of our corporate division with no similaradditional personnel allocated to our corporate division during 2017 as discussed above as well as expenses incurred for advisors to assist in a strategic financial analysis project in 2016. Our decrease in revenue earnedanticipation of the proceeds to be received from offshore fabrication work wasthe sale of our South Texas assets. Additionally, we have incurred increased legal fees as we pursue collection of claims against two customers. See also Note 9 of the Notes to the Consolidated Financial Statements. This has been partially offset by lower bonuses accrued during the assets and operations acquired quarter due to our consolidated operating loss.
Nine Months Ended September 30, 2017, Compared to Nine Months Ended September 30, 2016 (in the LEEVAC transaction (see LEEVAC Transaction above), which contributed $55.9 million inthousands, except for percentages): Consolidated | | | | | | | | | | | | | | | Nine Months Ended September 30, | | Increase or (Decrease) | | 2017 | | 2016 | | Amount | Percent | Revenue | $ | 133,745 |
| | $ | 230,864 |
| | $ | (97,119 | ) | (42.1)% | Cost of revenue | 150,755 |
| | 205,839 |
| | (55,084 | ) | (26.8)% | Gross profit (loss) | (17,010 | ) | | 25,025 |
| | (42,035 | ) | (168.0)% | Gross profit (loss) percentage | (12.7 | )% | | 10.8 | % | | | | General and administrative expenses | 12,940 |
| | 14,633 |
| | (1,693 | ) | (11.6)% | Asset impairment | 389 |
| | — |
| | 389 |
| 100.0% | Operating income (loss) | (30,339 | ) | | 10,392 |
| | (40,731 | ) | (391.9)% | Other income (expense): | | | | | | | Interest expense | (262 | ) | | (248 | ) | | (14 | ) | | Interest income | 12 |
| | 20 |
| | (8 | ) | | Other income (expense), net | (221 | ) | | 1,039 |
| | (1,260 | ) | | Total other income (expense) | (471 | ) | | 811 |
| | (1,282 | ) | (158.1)% | Net income (loss) before income taxes | (30,810 | ) | | 11,203 |
| | (42,013 | ) | (375.0)% | Income tax expense (benefit) | (10,322 | ) | | 4,134 |
| | (14,456 | ) | (349.7)% | Net income (loss) | $ | (20,488 | ) | | $ | 7,069 |
| | $ | (27,557 | ) | (389.8)% |
Revenue - Our revenue for the nine months ended September 30, 2016. Pass-through2017 and 2016, was $133.7 million and $230.9 million, respectively, representing a decrease of 42.1%. 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 as well as the completion of a vessel within our Shipyards division that we tendered for delivery on February 6, 2017, and was rejected by the customer alleging certain technical deficiencies. We subsequently suspended of work on the second vessel under contract with this customer. See also Note 9 of the Notes to the Consolidated Financial Statements. Pass-
through costs as a percentage of revenue were 35.0%45.3% and 43.2%35.0% for the nine months ended September 30, 20162017 and 2015,2016, 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 profitloss for the nine months ended September 30, 2016 and 20152017, was $17.0 million compared to a gross profit of $25.0 million (10.8% of revenue) and $2.4 million (1.0% of revenue), respectively. Our gross profit improved compared to 2015for the nine months ended September 30, 2016. The decrease was primarily due to the LEEVAC transaction$12.7 million of losses incurred by our Shipyards division related to cost overruns and contract losses of $14.3 million that were recorded during the third quarter of 2015 resulting from our inability to recover certainre-work identified on two newbuild vessel construction contracts, decreased revenue as discussed above, holding costs related to a deckour South Texas assets of $3.6 million and jacketlower margins on current work. This was partially offset by decreases in costs resulting from reductions in workforce as we wrapped up and completed projects at our South Texas fabrication yards and Prospect shipyard, suspended depreciation for one of our deepwater projects. We had no such lossSouth Texas assets and Prospect shipyard during the third quarter of 2016nine months ended September 30, 2017, as these assets are classified as assets held for sale and additional cost minimization efforts implemented cost cutting measures in response to decreases in work at our fabrication facilities.by management for the period.
General and administrative expenses - Our general and administrative expenses were $12.9 million for the nine months ended September 30, 2017, compared to $14.6 million for the nine months ended September 30, 2016, compared to $11.8 million for the nine months ended September 30, 2015.2016. The increasedecrease in general and administrative expenses for the nine months ended September 30, 2016 was2017, is primarily attributable to:
an increase of stock-based compensation expense of $589,000,
due to decreases in costs resulting from reductions in workforce at our South Texas fabrication yards, lower bonuses and the LEEVAC transaction; partially offset by
cost cutting efforts implementedaccrued during 2017 as a result of our consolidated operating loss and continued cost minimization efforts implemented by management for the downturn in the oil and gas industry.period.
Asset impairmentImpairment - During the nine months ended September 30, 2015,2017, we recorded an asset impairment charge of $6.6 million$389,000 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. Dueour assets held for sale at our Prospect Shipyard. See also Note 2 of the Notes to the sustained downturn in the energy sector, our ability to effectivelyConsolidated Financial Statements.
market these assetsOther income (expense), net - Other expense 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$221,000 for the nine months ended September 30, 20162017, compared to net interest expenseother income 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 income increased $1.0 million for the nine months ended September 30, 2016. The increaseOther expense for the period was primarily due to losses on sales of two drydocks from our Shipyards division. Other income for the prior period was primarily due to gains of $924,000 related to the sale of three cranes at our Texas facility as well ason sales of smaller assets byfrom our Shipyards division.Fabrication division recorded during 2016.
Income taxestax expense (benefit) - Our effective income tax rate for the nine months ended September 30, 20162017, was 36.9%33.5%, compared to an effective tax rate of 34.0%36.9% for the comparable period during 2015.2016. The increasedecrease in ourthe effective tax rate is due to the effectresult of state income taxes from income generated within Louisiana with no offsetting tax benefit from losses generated within Texas.limitations on the deductibility of executive compensation.
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 | ) | |
| |
|
As discussed above and 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 and nine months ended September 30, 2017. 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 nine months ended September 30, 2017 and 2016, are presented below (in thousands, except for percentages).
| | | | | | | | | | | | | | | | Fabrication | | Nine Months Ended September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | 42,517 |
| | $ | 70,436 |
| | $ | (27,919 | ) | | (39.6)% | Gross profit (loss) | | 216 |
| | 4,564 |
| | (4,348 | ) | | (95.3)% | Gross profit (loss) percentage | | 0.5 | % | | 6.5 | % | | | | (6.0)% | General and administrative expenses | | 2,432 |
| | 2,821 |
| | (389 | ) | | (13.8)% | Operating income (loss) | | (2,216 | ) | | 1,743 |
| | | | |
Revenue - Revenue from our Fabrication division decreased $67.0$27.9 million for the nine months ended September 30, 20162017, compared to the nine months ended September 30, 2015.2016. 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. During 2015, weAs discussed above, management has classified our South Texas assets as assets held for sale in response to the underutilization of our Fabrication assets. As of September 30, 2017, all of our projects at our South Texas fabrication yards have been completed theor transferred to our Houma fabrication of a 1,200 foot jacket, piles and an approximate 450 short ton topside with no similar project in 2016.yard.
Gross profit increased $18.5 million(loss) - Gross profit from our Fabrication division for the nine months ended September 30, 2017, was $216,000 compared to $4.4a gross profit of $4.6 million for the nine months ended September 30, 2016 compared2016. The decrease was due to a gross losslower revenue
from decreased fabrication work as discussed above and approximately $3.6 million of $14.1 millionholding costs for our South Texas assets as we market them for sale. This was partially offset by decreases in costs resulting from reductions in workforce, gains on scrap sales as we wrapped up and completed projects at our South Texas fabrication yards, reduced depreciation being recorded for our South Texas assets for the nine months ended September 30, 2015. The increase is due to contract losses of $14.3 million that were recorded during2017, as these assets are classified as assets held for sale on February 23, 2017, and additional cost minimization efforts implemented by management for 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.period.
General and administrative expenses - General and administrative expenses for our Fabrication division decreased $2.5 million$389,000 for the nine months ended September 30, 20162017, compared to the nine months ended September 30, 20152016. The decrease is primarily due to cost cutting measures implemented during 2016 in response to decreases in workcosts resulting from reductions in workforce as we wrapped up and completed projects at our South Texas fabrication facilities.
Asset impairment - During the nine months ended September 30, 2015, we recorded an asset impairment chargeyards and lower bonuses accrued during 2017 as a result of $6.6 million relateda combination of a smaller workforce and our consolidated operating loss. This was partially offset by expenses incurred to a partially constructed topside, related valves, pipingmarket our South Texas assets for sale 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 valuepayment of the assets. We had no such impairmentstermination benefits during the nine months ended September 30, 2016.first quarter of 2017 as we reduced its workforce and completed those operations.
| | | | | | | | | | | | | | | | | 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 |
| | | | |
| | | | | | | | | | | | | | | | Shipyards | | Nine Months Ended September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue (1) | | $ | 51,798 |
| | $ | 86,553 |
| | $ | (34,755 | ) | | (40.2)% | Gross profit (loss) (1) | | (19,061 | ) | | 9,742 |
| | (28,803 | ) | | (295.7)% | Gross profit (loss) percentage | | (36.8 | )% | | 11.3 | % | | | | (48.1)% | General and administrative expenses | | 2,835 |
| | 4,218 |
| | (1,383 | ) | | (32.8)% | Asset impairment | | 389 |
| | — |
| | 389 |
| | 100.0% | Operating income (loss) (1) | | (22,285 | ) | | 5,524 |
| | | | |
_______________________
| | (1) | Revenue for the nine months ended September 30, 2017, and 2016, includes $2.4 million and $4.1 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 $39.4- Revenue from our Shipyards division decreased $34.8 million for the nine months ended September 30, 20162017, compared to the nine months ended September 30, 20152016, due to the assetscorresponding reduction in customer demand for shipbuilding and operations acquired inrepair services supporting the LEEVAC transaction (see LEEVAC Transaction above), which contributed $55.9oil and gas industry due to depressed oil and gas prices as well as the completion of a vessel that we tendered for delivery on February 6, 2017, and was rejected by the customer alleging certain technical deficiencies. We subsequently suspended of work on the second vessel under contract with this customer. See also Note 9 of the Notes to the Consolidated Financial Statements.
Gross profit (loss) - Gross loss from our Shipyards division was $19.1 million in revenuefor the nine months ended September 30, 2017, compared to a gross profit of $9.7 million for the nine months ended September 30, 2016. The increasedecrease was partially offsetdue to:
$12.7 million in contract losses related to cost overruns and re-work that has been identified on two newbuild vessel construction contracts within our Shipyards division; Holding and closing costs related to our Prospect shipyard as we wind down operations at this facility; 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 due to the downturn in the oil and gas industry.under other various contracts.
Gross profit increased $3.6General and administrative expenses - General and administrative expenses for our Shipyards division decreased $1.4 million for the nine months ended September 30, 20162017, compared to the nine months ended September 30, 20152016, primarily due to reductions of administrative personnel related to consolidation of personnel duties from the LEEVAC transactiontransaction. Additionally, our Shipyards division incurred lower bonuses accrued during 2017 as well as increases in profitability estimatesa result of our consolidated operating loss and cost minimization efforts implemented by management for other jobs in progress due to cost cutting measures.the period.
General and administrative expenses increased $4.6Asset Impairment - During nine months ended September 30, 2017, we recorded an impairment of $389,000 related to our assets held for sale at our Prospect shipyard. See also Note 2 of the Notes to Consolidated Financial Statements.
| | | | | | | | | | | | | | | | Services | | Nine Months Ended September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | 43,758 |
| | $ | 76,179 |
| | $ | (32,421 | ) | | (42.6)% | Gross profit (loss) | | 2,335 |
| | 11,158 |
| | (8,823 | ) | | (79.1)% | Gross profit (loss) percentage | | 5.3 | % | | 14.6 | % | | | | (9.3)% | General and administrative expenses | | 2,008 |
| | 2,462 |
| | (454 | ) | | (18.4)% | Operating income (loss) | | 327 |
| | 8,696 |
| | | | |
Revenue - Revenue from our Services division decreased $32.4 million for the nine months ended September 30, 20162017, compared to the nine months ended September 30, 20152016, due to an overall decrease in work experienced as a result of depressed oil and gas prices and the expenses associated with the operations acquiredcorresponding reduction in the LEEVAC transactioncustomer demand for oil and bonuses.gas related service projects. | | | | | | | | | | | | | | | | | 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 $5.2Gross profit - Gross profit from our Services division decreased $8.8 million for the nine months ended September 30, 20162017, compared to the nine months ended September 30, 20152016, due to increases in the scope of two large offshore service projectsdecreased revenue discussed above and lower margins on new work performed during the first half of 2016.2017.
Gross profit increased $563,000General and administrative expenses - General and administrative expenses for our Services division decreased $0.5 million for the nine months ended September 30, 20162017, compared to the nine months ended September 30, 20152016, due to increases in revenueslower bonuses accrued during 2017 as a result of a combination of a smaller workforce and improved absorption of fixed costs resulting from an increase in labor hours worked.our consolidated operating loss.
| | | | | | | | | | | | | | | | Corporate | | Nine Months Ended September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | — |
| | $ | — |
| | $ | — |
| | —% | Gross profit (loss) | | (500 | ) | | (439 | ) | | (61 | ) | | (13.9)% | Gross profit (loss) percentage | | n/a |
| | n/a |
| | | |
| General and administrative expenses | | 5,665 |
| | 5,132 |
| | 533 |
| | 10.4% | Operating income (loss) | | (6,165 | ) | | (5,571 | ) | | (594 | ) | | |
Gross profit (loss) - Gross loss from our Corporate division increased primarily due to a restructuring of our corporate division with additional personnel allocated to our corporate division during 2017 as discussed above. General and administrative expenses - General and administrative expenses for our Corporate division increased $1.1 millionprimarily due to a restructuring of our corporate division with additional personnel allocated to our corporate division during 2017 as discussed above as well as expenses incurred for advisors to assist in a strategic financial analysis project in anticipation of the nine months ended September 30, 2016 comparedproceeds to be received from the sale of our South Texas assets. Additionally, we have incurred increased legal fees as we pursue collection of claims against two customers. See also Note 9 of the Notes to the nine months ended September 30, 2015 due to additional administrative support costs related to increases in activityConsolidated Financial Statements. This has been partially offset by lower bonuses accrued during 2017 as a result of a combination of a smaller workforce and bonuses.our consolidated operating loss. Liquidity and Capital Resources Historically, we have funded our business activities through cash generated from operations. At September 30, 20162017, 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$17.8 million compared to $34.8$51.2 million at December 31, 2015.2016. Working capital was $79.8$164.0 million and our ratio of current assets to current liabilities was 2.834.59 to 1 at September 30, 2017, compared to $78.0 million and 3.21 to 1, respectively, at December 31, 2016. Working capital at September 30, 2017, includes $107.0 million related to assets held for sale, primarily related to our South Texas facilities. Our primary sourceuse of cash forduring the nine months ended September 30, 2016, was related to2017, is referenced in the collection of accounts receivable under various customer contracts and sales of three cranes at our Texas facility for $5.8 million. Cash Flow Activities section below. At September 30, 2016,2017, our contracts receivable balance was $26.6$25.5 million of which we have subsequently collected $12.1$8.3 million through October 31, 2016.2017. On January 1, 2016,June 9, 2017, we acquired substantially all of the assets and assumed certain specified liabilities of LEEVAC. The purchase price for the acquisition was $20.0entered into a $40.0 million subject to a working capital adjustment whereby we received a dollar-for-
dollar reduction for the assumption of certain net liabilities of LEEVAC at closing and settlement payments from sureties on certain ongoing fabrication projects that were assigned to us in the transaction. After taking into account these adjustments, we received approximately $1.6 million in cash at closing. During the quarter, we presented our working capital true-up to the seller, which resulted in an additional $1.5 million due to us. Additionally, we hired 380 employees upon acquisition of the facilities representing substantially all of the former LEEVAC employees. Strategically, the transaction expands our marine fabrication and repair and maintenance presence in the Gulf South market. At the date of transaction, we acquired approximately $121.2 million of new build construction backlog inclusive of approximately $9.2 million of purchase price fair value allocated to four, new build construction projects to be delivered in 2017 and 2018 for two customers.
As of September 30, 2016, we had a credit agreement with Whitney Bank, and JPMorgan Chase Bank N.A. that provides for an $80.0 million revolvingas lender. The credit facility maturing January 2, 2017. The credit agreement allows the Company to use up to the full amount of the available borrowing basematures June 9, 2019 and may be used for issuing letters of credit and up to $20.0 million forand/or general corporate and working capital purposes. Our obligationsWe believe that
the new facility will provide us with additional working capital flexibility to expand operations as backlog improves, respond to market opportunities and support our ongoing operations.
Interest on drawings under the credit agreement are secured by substantially all offacility may be designated, at our assets, other than real property locatedoption, as either Base Rate (as defined in the state of Louisiana. On February 29, 2016, we entered into an amendment to our credit agreement. The amendment (i) extendsfacility) or LIBOR plus 2.0% per annum. Unused commitment fees on the termundrawn portion of the Credit Facility from February 29, 2016 to January 2, 2017; (ii) increases the commitment fee on undrawn amounts from 0.25% to 0.50%facility are 0.4% per annum; (iii) increases the letter of credit fee, subject to certain limited exceptions, to 2.00% per annum, and interest 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. 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 our financial covenants beginning with the quarter ending March 31, 2016 as follows:
| | (i) | minimum net worth requirement of not less than $250.0 million plus |
| | a) | 50% of net income earned in each quarter beginning March 31, 2016 and |
| | b) | 100% of proceeds from any issuance of common stock; |
| | (ii) | debt to EBITDA ratio not greater than 3.0 to 1.0; and |
| | (iii) | interest coverage ratio not less than 2.0 to 1.0. |
At September 30, 2016, no amounts were outstanding under thelenders is 2.0% per annum. The credit facility and we had outstanding letters of credit totaling $4.5 million, reducing the unused portion of our credit facility for additional letters of credit to $75.5 million. As of September 30, 2016, we were in compliance with all covenants. During the fourth quarter, we expect to enter into a two-year, $40.0 million amended and restated credit facility with our current lenders that will beis secured by substantially all of our assets (other than real property)the assets of Gulf Marine Fabricators, L.P., the legal entity that holds our South Texas assets which are currently held for sale).
We anticipatemust comply with the amendedfollowing financial covenants each quarter during the term of the facility:
| | i. | Ratio of current assets to current liabilities of not less than 1.25:1.00; |
| | ii. | Minimum tangible net worth requirement of at least the sum of: |
| | b) | An amount equal to 50% of consolidated net income for each fiscal quarter ending after June 30, 2017 (with no deduction for a net loss in any such fiscal quarter except for any gain or loss in connection with the sale of assets by Gulf Marine Fabricators, L.P.), plus |
| | c) | 100% of all net proceeds of any issuance of any stock or other equity after deducting of any fees, commissions, expenses and other costs incurred in such offering; and |
| | iii. | Ratio of funded debt to tangible net worth of not more than 0.50:1.00. |
Concurrent with our execution of the credit facility, will allow us to usewe terminated our prior credit facility with JPMorgan Chase Bank, N.A. At the full $40.0time of the termination, there was approximately $4.6 million borrowing baseof letters of credit outstanding. All were reissued as new letters of credit under the credit facility and accepted by the beneficiaries. Availability under our credit facility for bothfuture, additional letters of credit and general corporate purposes. Given the historically low levelsborrowings is $35.4 million. As of borrowings underSeptember 30, 2017, we were in compliance with all of our current facility and our cash position, we requested a reduction in the amount 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.covenants.
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 do not anticipate significant capital expenditures for the remainder of 2016 to be approximately $1.8 million primarily for the following: extension of one of our dry docks, and
improvements to our newly acquired facilities.2017.
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. The customer also announcedagreements and stated that, while it had received limited waivers from its lenders, its debt agreements willwould require further negotiation and amendment. InThis same customer rejected delivery of the eventfirst vessel that we completed and tendered for delivery on February 6, 2017, alleging certain technical deficiencies exist with respect to the vessel. On March 10, 2017, we gave notice for arbitration with our customer in an effort to resolve this matter and subsequently suspended fabrication of the second vessel under contract with this customer, which is unsuccessfulincluded in our arbitration proceedings. We disagree with our customer concerning these efforts,alleged technical deficiencies and have put the customer will consider other options including a possible reorganizationin default under the terms of both vessel contracts. The customer is seeking recovery of $84.8 million representing all purchase price amounts previously paid by the customer under both contracts. On May 17, 2017, the customer filed for protection under Chapter 11 of the Federal bankruptcy laws. AtUnited States Bankruptcy Code for reorganization under a negotiated, pre-packaged plan. The customer has emerged from Chapter 11 Bankruptcy and the Bankruptcy Court has approved the customer's retention and acceptance of both contracts. As of September 30, 2016, no contracts receivable2017, approximately $4.6 million remained due and outstanding from our customer for the first vessel. The balance due to us for the second vessel upon completion and delivery is approximately $4.9 million. We are working with legal counsel to protect our contractual claims, and we have re-initiated arbitration proceedings in accordance with our contracts. We are in the process of discovery. The customer has recently named a new interim chief executive officer who has made contact with our management, and we are working to resolve our dispute in a constructive manner. We believe that will be able to recover remaining amounts due to us.
On August 25, 2017, our South Texas facilities were outstandingimpacted by Hurricane Harvey, which made landfall as a category 4 hurricane. As a result, we suffered damages to our South Texas buildings and deferred revenue exceeded ourequipment. Through September 30, 2017, we have incurred approximately $265,000 in clean-up and repair related costs and estimated earningswe expect to incur additional future repair costs in excess of billingsour deductible which management believes are probable of being recovered through insurance proceeds. We maintain coverage on these assets up to a maximum of $25.0 million, subject to a 3.0% deductible with a minimum deductible of $500,000. We are working diligently with our insurance agents and adjusters to finalize our estimate of the damage; however, it may be several months, or even longer, before we can finalize our assessment and receive final payment from our insurance underwriters. Our insurance underwriters have made an initial payment of $3.0 million, and we have recorded a liability for future repairs of $2.7 million which is included in accrued expenses and other liabilities on our balance sheet at September 30, 2017. Based upon our initial assessment of the damages and insurance coverage, management believes that there is no basis to record a net loss at this contract. We continuetime and that insurance proceeds will at a minimum be sufficient to monitor our work performed in relationreimburse us for all damages and repair costs. Our final
assessment of the loss incurred to our customer’s statusSouth Texas assets as well as the amount of insurance proceeds we will receive could be more or less than this amount when the claim is ultimately settled and its ability to pay under the terms of its contract. Based on our evaluation to date, we do not believe that any loss on this contract is probable or estimable at this time. such differences could be material.
In February 2016,event of one or more sales of our BoardSouth Texas assets, we expect to use all or a portion of Directors approved a decreasethe sales proceeds to invest in our quarterly dividendoperating liquidity in order to $0.01 in anfacilitate anticipated future projects, selected capital improvements to enhance and/or expand our existing facilities, mergers and acquisitions to expand our product and service capabilities. We are continuing this effort to conserve cash. identify and analyze specific investment opportunities we believe will enhance the long-term value of the Company that are consistent with our strategy.
On October 27, 2016,26, 2017, our Board of Directors declared a dividend of $0.01 per share on our shares of common stock outstanding, payable November 23, 201624, 2017, to shareholders of record on November 10, 2016.2017.
We believe our cash and cash equivalents generated by our future operating activities, and funds availableproceeds to be received from insurance underwriters, availability under our line of credit facilityand proceeds 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 termnext twelve months to continue our operations,to operate, satisfy our contractual operations and pay dividends to our shareholders.
Cash Flow Activities
For the nine months ended September 30, 20162017, net cash used in operating activities was $29.6 million, compared to net cash provided by operating activities was $19.3 million, compared to $18.7of $19.4 million for the nine months ended September 30, 2015.2016. The increaseuse of cash in cash provided by operations during the period was primarily due to increased gross profit and collections of contract receivables during 2016 somewhat offset by payments requiredthe following:
Operating losses for trade payables during the nine months ended September 30, 2017, in excess of non-cash depreciation, amortization, impairment and stock compensation expense of approximately $19.6 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 as comparedwas $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 on ongoing shipbuilding projects of $23.0 million that were assigned to 2015.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. The suspension of two vessel projects following our customer’s refusal to accept delivery of the first vessel in February 2017, and our inability to collect $9.5 million in scheduled payments under these contracts. See also Note 9 of the Notes to the Consolidated Financial Statements; 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 later in 2017 through the first half of 2018.
Net cash provided byused in investing activities for the nine months ended September 30, 20162017, was $2.0$2.4 million, compared to cash used inprovided by investing activities of $5.0$2.0 million for the nine months ended September 30, 2015.2016. The increasechange in cash provided by investing activities is primarily due to cash received from the sale of three cranes at our Texas facility for $5.8 million and $1.6 million of cash acquired in the LEEVAC transaction.transaction during 2016 partially offset by decreases in capital expenditures.
Net cash used in financing activities for the nine months ended September 30, 2017 and 2016, was $1.4 million and 2015 was $440,000 and $4.4 million,$603,000, respectively. The decreaseincrease in cash used in financing activities is due to the reduction incash payments made to taxing authorities on behalf of employees for their vesting of common stock. During the cash dividend in 2016.nine months ended September 30, 2017 we received $2.0 million from borrowings under our new line of credit which were immediately repaid.
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, 2016.2017. 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, 20162017, 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 | | | 3.2 | | | 4.131.1 | | 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 | | | 31.2 | | | 32 | | | 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. |
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. MecheDavid S. Schorlemer | | Kirk J. MecheDavid S. Schorlemer | | President, Chief Executive Officer, Director and InterimVice President, Chief Financial Officer, and Treasurer and Secretary (Principal Executive Officer and Interim Principal Financial and Accounting Officer) |
Date: November 2, 2016October 31, 2017
GULF ISLAND FABRICATION, INC. EXHIBIT INDEX | | | | | Exhibit Number | | Description of Exhibit | | | 2.13.1 | | 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 | | | 4.131.1 | | Specimen Common Stock Certificate, incorporated by reference | 10.131.2 | | Form of Long-Term Performance-Based Cash Award Agreement. | 31 | | CEO and | 32 | | | 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.(1) | Backlog as of September 30, 2016 includes commitments received through October 27, 2016. We exclude suspended projects from contract backlog thatwhen they are expected to be suspended more than twelve12 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.(2) | At September 30, 2016,2017, projects for our threefive 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) | twoTwo large multi-purpose service vessels for one customer inwithin our Shipyards segment,division, which commenced in the first quarter of 2014 and will be completed during the first and second quarter of 2018; and |
(iii) the fabrication of four modules associated with a U.S. ethane cracker project.
| | 3.(ii) | Newbuild construction of four harbor tugs for one customer within our Shipyards division; |
| | (iii) | Newbuild construction of four harbor tugs for one additional customer within our Shipyards division; |
| | (iv) | The fabrication of four modules associated with a U.S. ethane cracker project within our Fabrication division; and |
| | (v) | Newbuild construction of an offshore research vessel within our Shipyards division. |
| | (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. Additionally, as we continue to add backlog, we will begin adding personnel with critical project management and fabrication skills to ensure we have the resources necessary to execute our projects well and to support our project risk mitigation discipline for all new project work. This may negatively impact near term results. As of September 30, 2016,2017, we had 1,336989 employees and 163 contract employees inclusive of 380 employees hired in the LEEVAC transaction, compared to 1,255 employees and 71 contract1,178 employees as of December 31, 2015.
2016. Labor hours worked were 2.31.5 million during the nine months ended September 30, 2016,2017, compared to 2.12.3 million for the nine months ended September 30, 2015.2016. The overall increasedecrease in labor hours worked for the threenine months ended September 30, 20162017, 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 September 30, 2017, Compared to Three Months Ended September 30, 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 September 30, | | Increase or (Decrease) | | 2017 | | 2016 | | Amount | Percent | Revenue | $ | 49,884 |
| | $ | 65,384 |
| | $ | (15,500 | ) | (23.7)% | Cost of revenue | 50,378 |
| | 60,125 |
| | (9,747 | ) | (16.2)% | Gross profit (loss) | (494 | ) | | 5,259 |
| | (5,753 | ) | (109.4)% | Gross profit (loss) percentage | (1.0 | )% | | 8.0 | % | | | | General and administrative expenses | 4,370 |
| | 5,086 |
| | (716 | ) | (14.1)% | Operating income (loss) | (4,864 | ) | | 173 |
| | (5,037 | ) | (2,911.6)% | Other income (expense): | | | | | | | Interest expense | (45 | ) | | (110 | ) | | 65 |
| | Interest income | — |
| | 12 |
| | (12 | ) | | Other income (expense), net | 38 |
| | 599 |
| | (561 | ) | | Total other income (expense) | (7 | ) | | 501 |
| | (508 | ) | 101.4% | Net income (loss) before income taxes | (4,871 | ) | | 674 |
| | (5,545 | ) | (822.7)% | Income tax expense (benefit) | (1,761 | ) | | 133 |
| | (1,894 | ) | (1,424.1)% | Net income (loss) | $ | (3,110 | ) | | $ | 541 |
| | $ | (3,651 | ) | (674.9)% |
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, 2016.2017 and 2016, was $49.9 million and $65.4 million, respectively, representing a decrease of 23.7%. The decrease is primarily attributable to an overall decrease in work experienced in our facilities primarily 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%48.4% and 45.3%33.8% for the three-monthsthree months ended September 30, 20162017 and 2015,2016, 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 20152017, was $494,000 compared to a gross profit of $5.3 million (8.0% of revenue) and $(7.8) million, respectively. Our gross profit improved compared to third quarter of 2015for the three months ended September 30, 2016. The decrease was primarily due to $2.1 million of contract losses of $14.3 million that were recorded during the third quarter of 2015 resulting fromincurred by our inabilityShipyards division related to recover certaincost overruns and re-work identified on two newbuild vessel construction
contracts, decreased revenue as discussed above, holding costs related to a deckour South Texas assets of $1.1 million and jacket for one of our deepwater projects. We had no such loss during the third quarter of 2016 and implemented cost cutting measures.lower margins on current work due to competitive pressures. This was partially offset by tighter margins within all ofdecreases in costs resulting from reductions in workforce as we wrapped up and completed projects at our segments due to a decrease in workSouth Texas fabrication yards and Prospect shipyard, no depreciation being recorded for our South Texas assets and Prospect shipyard for the three months ended September 30, 2017 (as these assets are classified as a result ofassets held for sale) and continued cost minimization efforts implemented by management for the downturn in the oil and gas industry.period.
General and administrative expenses - Our general and administrative expenses were $4.4 million for the three months ended September 30, 2017, compared to $5.1 million for the three months ended September 30, 2016, compared to $3.8 million for the three months ended September 30, 2015.2016. The increasedecrease in general
and administrative expenses for the three months ended September 30, 20162017, was primarily attributable to the operations acquired in the LEEVAC transactionlower bonuses accrued during 2017, employee reductions and bonus expense, partially offset bycontinued cost cuttingminimization efforts implemented during 2016.by management for the period.
Asset impairmentOther income (expense), net - - 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 assetsOther income 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.
Interest expense, net - The Company had net interest expense of $98,000$38,000 for the three months ended September 30, 20162017, as compared to net interest expenseother income of $31,000$599,000 for three months ended September 30, 2016. Other income for the three months ended September 30, 2015. The increase2017 relates to insurance proceeds received from damage to a corporate automobile that was primarily driven by an increase in the cost of unused credit facility fees under our credit agreement.
fully depreciated. Other income net - Other income increased $599,000 for thefor three months ended September 30, 2016. The increase was2016 primarily duerelates to gains on sales of assets from our Fabrication division.
Income taxestax expense (benefit) - Our effective income tax rate for the three months ended September 30, 20162017, was 19.7%36.2%, compared to an effective tax rate of 34.0%19.7% for the comparable period during 2015.2016. The changeincrease in ourthe effective tax rate is duethe result of changes to the decrease inestimates of our effective rateyear-end tax provision during for the year-to-date period.three months ended September 30, 2016.
Operating Segments | | | | | | | | | | | | | | | | | 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 | ) | | | | |
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 and nine months ended September 30, 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 its Corporate division each meeting the criteria of reportable segments under GAAP. During the three and nine months ended September 30, 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 September 30, 2017 and 2016, are presented below (in thousands, except for percentages).
| | | | | | | | | | | | | | | | Fabrication | | Three Months Ended September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | 18,318 |
| | $ | 22,311 |
| | $ | (3,993 | ) | | (17.9)% | Gross profit (loss) | | 1,250 |
| | 601 |
| | 649 |
| | 108.0% | Gross profit (loss) percentage | | 6.8 | % | | 2.7 | % | | | | 4.1% | General and administrative expenses | | 778 |
| | 885 |
| | (107 | ) | | (12.1)% | Operating income (loss) | | 472 |
| | (284 | ) | | | | |
Revenue - Revenue from our Fabrication division decreased $9.8$4.0 million for the three months ended September 30, 20162017, compared to the three months ended September 30, 2015.2016. 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.
Gross profit increased $14.5 million to $532,000(loss) - Gross profit from our Fabrication division for the three months ended September 30, 20162017, was $1.3 million compared to a gross lossprofit of $14.0 million$601,000 for the three months ended September 30, 20152016. The increase in gross profit was 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.
GeneralGains on scrap sales of approximately $701,000 at our South Texas facility,
Decreases in costs resulting from reductions in workforce as we wrapped up and administrative expenses decreased $657,000completed projects at our South Texas fabrication yards, No depreciation being recorded for our South Texas assets for the three months ended September 30, 20162017, as these assets are classified as assets held for sale; and Continued cost minimization efforts implemented by management for the period.
This was partially offset by approximately $1.1 million of holding costs for our South Texas assets.
General and administrative expenses - General and administrative expenses for our Fabrication division decreased $107,000 for the three months ended September 30, 2017, compared to the three months ended September 30, 20152016. The decrease is primarily due to cost cutting measures implemented during 2016 in response to decreases in workcosts resulting from lower bonuses accrued during 2017 as a result of our consolidated operating loss, reductions in workforce at our South Texas fabrication facilities.
Asset impairment - Duringyards and continued cost minimization efforts implemented by management for 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.period.
| | | | | | | | | | | | | | | | | 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 September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue (1) | | $ | 15,074 |
| | $ | 23,060 |
| | $ | (7,986 | ) | | (34.6)% | Gross profit (loss) (1) | | (3,504 | ) | | 1,945 |
| | (5,449 | ) | | (280.2)% | Gross profit (loss) percentage | | (23.2 | )% | | 8.4 | % | | | | (31.6)% | General and administrative expenses | | 888 |
| | 1,468 |
| | (580 | ) | | (39.5)% | Operating income (loss) (1) | | (4,392 | ) | | 477 |
| | | | |
___________ | | (1) | Revenue for the three months ended September 30, 2017, and 2016, includes $510,000 and $1.5 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 $8.0 million for the three months ended September 30, 20162017, compared to the three months ended September 30, 20152016, due to the operations acquiredcorresponding reduction in customer demand for shipbuilding and repair services supporting the LEEVAC transaction (see LEEVAC Transaction above), which contributed $16.8oil and gas industry due to depressed oil and gas prices as well as the completion of a vessel that we tendered for delivery on February 6, 2017, and was rejected by the customer alleging certain technical deficiencies. We subsequently suspended of work on the second vessel under contract with this customer. See also Note 9 of the Notes to the Consolidated Financial Statements.
Gross profit (loss) - Gross loss from our Shipyards division was $3.5 million in revenue for the three months ended September 30, 2016.
Gross2017, compared to a gross profit decreased $60,000of $1.9 million for the three months ended September 30, 20162016. The decrease was due to:
$2.1 million in contract losses related to cost overruns and re-work that has been identified on two newbuild vessel construction contracts within our Shipyards division; and Holding and closing costs related to our Prospect shipyard as we wind down operations at this facility.
General and administrative expenses - General and administrative expenses for our Shipyards division decreased $580,000 for the three months ended September 30, 2017, compared to the three months ended September 30, 20152016, primarily due to tighter margins on new work and inefficiencies incurred on the contracts acquired inreductions of administrative personnel related to consolidation of personnel duties from the LEEVAC transaction partially offsettransaction. Additionally, our Shipyards division incurred lower bonuses accrued during 2017 as a result of a combination of a smaller workforce and our consolidated operating loss and cost minimization efforts implemented by savings realized from cost cutting measures implementedmanagement for the period during the first part of 2016.
General and administrative expenses increased $1.7 | | | | | | | | | | | | | | | | Services | | Three Months Ended September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | 17,651 |
| | $ | 20,928 |
| | $ | (3,277 | ) | | (15.7)% | Gross profit (loss) | | 1,912 |
| | 2,918 |
| | (1,006 | ) | | (34.5)% | Gross profit (loss) percentage | | 10.8 | % | | 13.9 | % | | | | (3.1)% | General and administrative expenses | | 695 |
| | 943 |
| | (248 | ) | | (26.3)% | Operating income (loss) | | 1,217 |
| | 1,975 |
| | | | |
Revenue - Revenue from our Services division decreased $3.3 million for the three months ended September 30, 20162017, compared to the three months ended September 30, 2015 primarily2016, 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 completedServices division decreased $1.0 million for the fabricationthree months ended September 30, 2017, compared to the three months ended September 30, 2016, due to decreased revenue discussed above and lower margins on new work performed during 2017.
General and administrative expenses - General and administrative expenses for our Services division decreased $248,000 for the three months ended September 30, 2017, compared to the three months ended September 30, 2016, due to lower bonuses accrued during 2017 as a result of a 1,200 foot jacket, pilescombination of a smaller workforce and an approximate 450 short ton topsideour consolidated operating loss.
| | | | | | | | | | | | | | | | Corporate | | Three Months Ended September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | — |
| | $ | — |
| | $ | — |
| | —% | Gross profit (loss) | | (152 | ) | | (205 | ) | | 53 |
| | 25.9% | Gross profit (loss) percentage | | n/a |
| | n/a |
| | | |
| General and administrative expenses | | 2,009 |
| | 1,790 |
| | 219 |
| | 12.2% | Operating income (loss) | | (2,161 | ) | | (1,995 | ) | |
|
| | |
General and administrative expenses - General and administrative expenses for our Corporate division increased primarily due to a restructuring of our corporate division with no similaradditional personnel allocated to our corporate division during 2017 as discussed above as well as expenses incurred for advisors to assist in a strategic financial analysis project in 2016. Our decrease in revenue earnedanticipation of the proceeds to be received from offshore fabrication work wasthe sale of our South Texas assets. Additionally, we have incurred increased legal fees as we pursue collection of claims against two customers. See also Note 9 of the Notes to the Consolidated Financial Statements. This has been partially offset by lower bonuses accrued during the assets and operations acquired quarter due to our consolidated operating loss.
Nine Months Ended September 30, 2017, Compared to Nine Months Ended September 30, 2016 (in the LEEVAC transaction (see LEEVAC Transaction above), which contributed $55.9 million inthousands, except for percentages): Consolidated | | | | | | | | | | | | | | | Nine Months Ended September 30, | | Increase or (Decrease) | | 2017 | | 2016 | | Amount | Percent | Revenue | $ | 133,745 |
| | $ | 230,864 |
| | $ | (97,119 | ) | (42.1)% | Cost of revenue | 150,755 |
| | 205,839 |
| | (55,084 | ) | (26.8)% | Gross profit (loss) | (17,010 | ) | | 25,025 |
| | (42,035 | ) | (168.0)% | Gross profit (loss) percentage | (12.7 | )% | | 10.8 | % | | | | General and administrative expenses | 12,940 |
| | 14,633 |
| | (1,693 | ) | (11.6)% | Asset impairment | 389 |
| | — |
| | 389 |
| 100.0% | Operating income (loss) | (30,339 | ) | | 10,392 |
| | (40,731 | ) | (391.9)% | Other income (expense): | | | | | | | Interest expense | (262 | ) | | (248 | ) | | (14 | ) | | Interest income | 12 |
| | 20 |
| | (8 | ) | | Other income (expense), net | (221 | ) | | 1,039 |
| | (1,260 | ) | | Total other income (expense) | (471 | ) | | 811 |
| | (1,282 | ) | (158.1)% | Net income (loss) before income taxes | (30,810 | ) | | 11,203 |
| | (42,013 | ) | (375.0)% | Income tax expense (benefit) | (10,322 | ) | | 4,134 |
| | (14,456 | ) | (349.7)% | Net income (loss) | $ | (20,488 | ) | | $ | 7,069 |
| | $ | (27,557 | ) | (389.8)% |
Revenue - Our revenue for the nine months ended September 30, 2016. Pass-through2017 and 2016, was $133.7 million and $230.9 million, respectively, representing a decrease of 42.1%. 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 as well as the completion of a vessel within our Shipyards division that we tendered for delivery on February 6, 2017, and was rejected by the customer alleging certain technical deficiencies. We subsequently suspended of work on the second vessel under contract with this customer. See also Note 9 of the Notes to the Consolidated Financial Statements. Pass-
through costs as a percentage of revenue were 35.0%45.3% and 43.2%35.0% for the nine months ended September 30, 20162017 and 2015,2016, 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 profitloss for the nine months ended September 30, 2016 and 20152017, was $17.0 million compared to a gross profit of $25.0 million (10.8% of revenue) and $2.4 million (1.0% of revenue), respectively. Our gross profit improved compared to 2015for the nine months ended September 30, 2016. The decrease was primarily due to the LEEVAC transaction$12.7 million of losses incurred by our Shipyards division related to cost overruns and contract losses of $14.3 million that were recorded during the third quarter of 2015 resulting from our inability to recover certainre-work identified on two newbuild vessel construction contracts, decreased revenue as discussed above, holding costs related to a deckour South Texas assets of $3.6 million and jacketlower margins on current work. This was partially offset by decreases in costs resulting from reductions in workforce as we wrapped up and completed projects at our South Texas fabrication yards and Prospect shipyard, suspended depreciation for one of our deepwater projects. We had no such lossSouth Texas assets and Prospect shipyard during the third quarter of 2016nine months ended September 30, 2017, as these assets are classified as assets held for sale and additional cost minimization efforts implemented cost cutting measures in response to decreases in work at our fabrication facilities.by management for the period.
General and administrative expenses - Our general and administrative expenses were $12.9 million for the nine months ended September 30, 2017, compared to $14.6 million for the nine months ended September 30, 2016, compared to $11.8 million for the nine months ended September 30, 2015.2016. The increasedecrease in general and administrative expenses for the nine months ended September 30, 2016 was2017, is primarily attributable to:
an increase of stock-based compensation expense of $589,000,
due to decreases in costs resulting from reductions in workforce at our South Texas fabrication yards, lower bonuses and the LEEVAC transaction; partially offset by
cost cutting efforts implementedaccrued during 2017 as a result of our consolidated operating loss and continued cost minimization efforts implemented by management for the downturn in the oil and gas industry.period.
Asset impairmentImpairment - During the nine months ended September 30, 2015,2017, we recorded an asset impairment charge of $6.6 million$389,000 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. Dueour assets held for sale at our Prospect Shipyard. See also Note 2 of the Notes to the sustained downturn in the energy sector, our ability to effectivelyConsolidated Financial Statements.
market these assetsOther income (expense), net - Other expense 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$221,000 for the nine months ended September 30, 20162017, compared to net interest expenseother income 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 income increased $1.0 million for the nine months ended September 30, 2016. The increaseOther expense for the period was primarily due to losses on sales of two drydocks from our Shipyards division. Other income for the prior period was primarily due to gains of $924,000 related to the sale of three cranes at our Texas facility as well ason sales of smaller assets byfrom our Shipyards division.Fabrication division recorded during 2016.
Income taxestax expense (benefit) - Our effective income tax rate for the nine months ended September 30, 20162017, was 36.9%33.5%, compared to an effective tax rate of 34.0%36.9% for the comparable period during 2015.2016. The increasedecrease in ourthe effective tax rate is due to the effectresult of state income taxes from income generated within Louisiana with no offsetting tax benefit from losses generated within Texas.limitations on the deductibility of executive compensation.
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 | ) | |
| |
|
As discussed above and 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 and nine months ended September 30, 2017. 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 nine months ended September 30, 2017 and 2016, are presented below (in thousands, except for percentages).
| | | | | | | | | | | | | | | | Fabrication | | Nine Months Ended September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | 42,517 |
| | $ | 70,436 |
| | $ | (27,919 | ) | | (39.6)% | Gross profit (loss) | | 216 |
| | 4,564 |
| | (4,348 | ) | | (95.3)% | Gross profit (loss) percentage | | 0.5 | % | | 6.5 | % | | | | (6.0)% | General and administrative expenses | | 2,432 |
| | 2,821 |
| | (389 | ) | | (13.8)% | Operating income (loss) | | (2,216 | ) | | 1,743 |
| | | | |
Revenue - Revenue from our Fabrication division decreased $67.0$27.9 million for the nine months ended September 30, 20162017, compared to the nine months ended September 30, 2015.2016. 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. During 2015, weAs discussed above, management has classified our South Texas assets as assets held for sale in response to the underutilization of our Fabrication assets. As of September 30, 2017, all of our projects at our South Texas fabrication yards have been completed theor transferred to our Houma fabrication of a 1,200 foot jacket, piles and an approximate 450 short ton topside with no similar project in 2016.yard.
Gross profit increased $18.5 million(loss) - Gross profit from our Fabrication division for the nine months ended September 30, 2017, was $216,000 compared to $4.4a gross profit of $4.6 million for the nine months ended September 30, 2016 compared2016. The decrease was due to a gross losslower revenue
from decreased fabrication work as discussed above and approximately $3.6 million of $14.1 millionholding costs for our South Texas assets as we market them for sale. This was partially offset by decreases in costs resulting from reductions in workforce, gains on scrap sales as we wrapped up and completed projects at our South Texas fabrication yards, reduced depreciation being recorded for our South Texas assets for the nine months ended September 30, 2015. The increase is due to contract losses of $14.3 million that were recorded during2017, as these assets are classified as assets held for sale on February 23, 2017, and additional cost minimization efforts implemented by management for 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.period.
General and administrative expenses - General and administrative expenses for our Fabrication division decreased $2.5 million$389,000 for the nine months ended September 30, 20162017, compared to the nine months ended September 30, 20152016. The decrease is primarily due to cost cutting measures implemented during 2016 in response to decreases in workcosts resulting from reductions in workforce as we wrapped up and completed projects at our South Texas fabrication facilities.
Asset impairment - During the nine months ended September 30, 2015, we recorded an asset impairment chargeyards and lower bonuses accrued during 2017 as a result of $6.6 million relateda combination of a smaller workforce and our consolidated operating loss. This was partially offset by expenses incurred to a partially constructed topside, related valves, pipingmarket our South Texas assets for sale 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 valuepayment of the assets. We had no such impairmentstermination benefits during the nine months ended September 30, 2016.first quarter of 2017 as we reduced its workforce and completed those operations.
| | | | | | | | | | | | | | | | | 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 |
| | | | |
| | | | | | | | | | | | | | | | Shipyards | | Nine Months Ended September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue (1) | | $ | 51,798 |
| | $ | 86,553 |
| | $ | (34,755 | ) | | (40.2)% | Gross profit (loss) (1) | | (19,061 | ) | | 9,742 |
| | (28,803 | ) | | (295.7)% | Gross profit (loss) percentage | | (36.8 | )% | | 11.3 | % | | | | (48.1)% | General and administrative expenses | | 2,835 |
| | 4,218 |
| | (1,383 | ) | | (32.8)% | Asset impairment | | 389 |
| | — |
| | 389 |
| | 100.0% | Operating income (loss) (1) | | (22,285 | ) | | 5,524 |
| | | | |
_______________________
| | (1) | Revenue for the nine months ended September 30, 2017, and 2016, includes $2.4 million and $4.1 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 $39.4- Revenue from our Shipyards division decreased $34.8 million for the nine months ended September 30, 20162017, compared to the nine months ended September 30, 20152016, due to the assetscorresponding reduction in customer demand for shipbuilding and operations acquired inrepair services supporting the LEEVAC transaction (see LEEVAC Transaction above), which contributed $55.9oil and gas industry due to depressed oil and gas prices as well as the completion of a vessel that we tendered for delivery on February 6, 2017, and was rejected by the customer alleging certain technical deficiencies. We subsequently suspended of work on the second vessel under contract with this customer. See also Note 9 of the Notes to the Consolidated Financial Statements.
Gross profit (loss) - Gross loss from our Shipyards division was $19.1 million in revenuefor the nine months ended September 30, 2017, compared to a gross profit of $9.7 million for the nine months ended September 30, 2016. The increasedecrease was partially offsetdue to:
$12.7 million in contract losses related to cost overruns and re-work that has been identified on two newbuild vessel construction contracts within our Shipyards division; Holding and closing costs related to our Prospect shipyard as we wind down operations at this facility; 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 due to the downturn in the oil and gas industry.under other various contracts.
Gross profit increased $3.6General and administrative expenses - General and administrative expenses for our Shipyards division decreased $1.4 million for the nine months ended September 30, 20162017, compared to the nine months ended September 30, 20152016, primarily due to reductions of administrative personnel related to consolidation of personnel duties from the LEEVAC transactiontransaction. Additionally, our Shipyards division incurred lower bonuses accrued during 2017 as well as increases in profitability estimatesa result of our consolidated operating loss and cost minimization efforts implemented by management for other jobs in progress due to cost cutting measures.the period.
General and administrative expenses increased $4.6Asset Impairment - During nine months ended September 30, 2017, we recorded an impairment of $389,000 related to our assets held for sale at our Prospect shipyard. See also Note 2 of the Notes to Consolidated Financial Statements.
| | | | | | | | | | | | | | | | Services | | Nine Months Ended September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | 43,758 |
| | $ | 76,179 |
| | $ | (32,421 | ) | | (42.6)% | Gross profit (loss) | | 2,335 |
| | 11,158 |
| | (8,823 | ) | | (79.1)% | Gross profit (loss) percentage | | 5.3 | % | | 14.6 | % | | | | (9.3)% | General and administrative expenses | | 2,008 |
| | 2,462 |
| | (454 | ) | | (18.4)% | Operating income (loss) | | 327 |
| | 8,696 |
| | | | |
Revenue - Revenue from our Services division decreased $32.4 million for the nine months ended September 30, 20162017, compared to the nine months ended September 30, 20152016, due to an overall decrease in work experienced as a result of depressed oil and gas prices and the expenses associated with the operations acquiredcorresponding reduction in the LEEVAC transactioncustomer demand for oil and bonuses.gas related service projects. | | | | | | | | | | | | | | | | | 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 $5.2Gross profit - Gross profit from our Services division decreased $8.8 million for the nine months ended September 30, 20162017, compared to the nine months ended September 30, 20152016, due to increases in the scope of two large offshore service projectsdecreased revenue discussed above and lower margins on new work performed during the first half of 2016.2017.
Gross profit increased $563,000General and administrative expenses - General and administrative expenses for our Services division decreased $0.5 million for the nine months ended September 30, 20162017, compared to the nine months ended September 30, 20152016, due to increases in revenueslower bonuses accrued during 2017 as a result of a combination of a smaller workforce and improved absorption of fixed costs resulting from an increase in labor hours worked.our consolidated operating loss.
| | | | | | | | | | | | | | | | Corporate | | Nine Months Ended September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | — |
| | $ | — |
| | $ | — |
| | —% | Gross profit (loss) | | (500 | ) | | (439 | ) | | (61 | ) | | (13.9)% | Gross profit (loss) percentage | | n/a |
| | n/a |
| | | |
| General and administrative expenses | | 5,665 |
| | 5,132 |
| | 533 |
| | 10.4% | Operating income (loss) | | (6,165 | ) | | (5,571 | ) | | (594 | ) | | |
Gross profit (loss) - Gross loss from our Corporate division increased primarily due to a restructuring of our corporate division with additional personnel allocated to our corporate division during 2017 as discussed above. General and administrative expenses - General and administrative expenses for our Corporate division increased $1.1 millionprimarily due to a restructuring of our corporate division with additional personnel allocated to our corporate division during 2017 as discussed above as well as expenses incurred for advisors to assist in a strategic financial analysis project in anticipation of the nine months ended September 30, 2016 comparedproceeds to be received from the sale of our South Texas assets. Additionally, we have incurred increased legal fees as we pursue collection of claims against two customers. See also Note 9 of the Notes to the nine months ended September 30, 2015 due to additional administrative support costs related to increases in activityConsolidated Financial Statements. This has been partially offset by lower bonuses accrued during 2017 as a result of a combination of a smaller workforce and bonuses.our consolidated operating loss. Liquidity and Capital Resources Historically, we have funded our business activities through cash generated from operations. At September 30, 20162017, 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$17.8 million compared to $34.8$51.2 million at December 31, 2015.2016. Working capital was $79.8$164.0 million and our ratio of current assets to current liabilities was 2.834.59 to 1 at September 30, 2017, compared to $78.0 million and 3.21 to 1, respectively, at December 31, 2016. Working capital at September 30, 2017, includes $107.0 million related to assets held for sale, primarily related to our South Texas facilities. Our primary sourceuse of cash forduring the nine months ended September 30, 2016, was related to2017, is referenced in the collection of accounts receivable under various customer contracts and sales of three cranes at our Texas facility for $5.8 million. Cash Flow Activities section below. At September 30, 2016,2017, our contracts receivable balance was $26.6$25.5 million of which we have subsequently collected $12.1$8.3 million through October 31, 2016.2017. On January 1, 2016,June 9, 2017, we acquired substantially all of the assets and assumed certain specified liabilities of LEEVAC. The purchase price for the acquisition was $20.0entered into a $40.0 million subject to a working capital adjustment whereby we received a dollar-for-
dollar reduction for the assumption of certain net liabilities of LEEVAC at closing and settlement payments from sureties on certain ongoing fabrication projects that were assigned to us in the transaction. After taking into account these adjustments, we received approximately $1.6 million in cash at closing. During the quarter, we presented our working capital true-up to the seller, which resulted in an additional $1.5 million due to us. Additionally, we hired 380 employees upon acquisition of the facilities representing substantially all of the former LEEVAC employees. Strategically, the transaction expands our marine fabrication and repair and maintenance presence in the Gulf South market. At the date of transaction, we acquired approximately $121.2 million of new build construction backlog inclusive of approximately $9.2 million of purchase price fair value allocated to four, new build construction projects to be delivered in 2017 and 2018 for two customers.
As of September 30, 2016, we had a credit agreement with Whitney Bank, and JPMorgan Chase Bank N.A. that provides for an $80.0 million revolvingas lender. The credit facility maturing January 2, 2017. The credit agreement allows the Company to use up to the full amount of the available borrowing basematures June 9, 2019 and may be used for issuing letters of credit and up to $20.0 million forand/or general corporate and working capital purposes. Our obligationsWe believe that
the new facility will provide us with additional working capital flexibility to expand operations as backlog improves, respond to market opportunities and support our ongoing operations.
Interest on drawings under the credit agreement are secured by substantially all offacility may be designated, at our assets, other than real property locatedoption, as either Base Rate (as defined in the state of Louisiana. On February 29, 2016, we entered into an amendment to our credit agreement. The amendment (i) extendsfacility) or LIBOR plus 2.0% per annum. Unused commitment fees on the termundrawn portion of the Credit Facility from February 29, 2016 to January 2, 2017; (ii) increases the commitment fee on undrawn amounts from 0.25% to 0.50%facility are 0.4% per annum; (iii) increases the letter of credit fee, subject to certain limited exceptions, to 2.00% per annum, and interest 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. 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 our financial covenants beginning with the quarter ending March 31, 2016 as follows:
| | (i) | minimum net worth requirement of not less than $250.0 million plus |
| | a) | 50% of net income earned in each quarter beginning March 31, 2016 and |
| | b) | 100% of proceeds from any issuance of common stock; |
| | (ii) | debt to EBITDA ratio not greater than 3.0 to 1.0; and |
| | (iii) | interest coverage ratio not less than 2.0 to 1.0. |
At September 30, 2016, no amounts were outstanding under thelenders is 2.0% per annum. The credit facility and we had outstanding letters of credit totaling $4.5 million, reducing the unused portion of our credit facility for additional letters of credit to $75.5 million. As of September 30, 2016, we were in compliance with all covenants. During the fourth quarter, we expect to enter into a two-year, $40.0 million amended and restated credit facility with our current lenders that will beis secured by substantially all of our assets (other than real property)the assets of Gulf Marine Fabricators, L.P., the legal entity that holds our South Texas assets which are currently held for sale).
We anticipatemust comply with the amendedfollowing financial covenants each quarter during the term of the facility:
| | i. | Ratio of current assets to current liabilities of not less than 1.25:1.00; |
| | ii. | Minimum tangible net worth requirement of at least the sum of: |
| | b) | An amount equal to 50% of consolidated net income for each fiscal quarter ending after June 30, 2017 (with no deduction for a net loss in any such fiscal quarter except for any gain or loss in connection with the sale of assets by Gulf Marine Fabricators, L.P.), plus |
| | c) | 100% of all net proceeds of any issuance of any stock or other equity after deducting of any fees, commissions, expenses and other costs incurred in such offering; and |
| | iii. | Ratio of funded debt to tangible net worth of not more than 0.50:1.00. |
Concurrent with our execution of the credit facility, will allow us to usewe terminated our prior credit facility with JPMorgan Chase Bank, N.A. At the full $40.0time of the termination, there was approximately $4.6 million borrowing baseof letters of credit outstanding. All were reissued as new letters of credit under the credit facility and accepted by the beneficiaries. Availability under our credit facility for bothfuture, additional letters of credit and general corporate purposes. Given the historically low levelsborrowings is $35.4 million. As of borrowings underSeptember 30, 2017, we were in compliance with all of our current facility and our cash position, we requested a reduction in the amount 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.covenants.
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 do not anticipate significant capital expenditures for the remainder of 2016 to be approximately $1.8 million primarily for the following: extension of one of our dry docks, and
improvements to our newly acquired facilities.2017.
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. The customer also announcedagreements and stated that, while it had received limited waivers from its lenders, its debt agreements willwould require further negotiation and amendment. InThis same customer rejected delivery of the eventfirst vessel that we completed and tendered for delivery on February 6, 2017, alleging certain technical deficiencies exist with respect to the vessel. On March 10, 2017, we gave notice for arbitration with our customer in an effort to resolve this matter and subsequently suspended fabrication of the second vessel under contract with this customer, which is unsuccessfulincluded in our arbitration proceedings. We disagree with our customer concerning these efforts,alleged technical deficiencies and have put the customer will consider other options including a possible reorganizationin default under the terms of both vessel contracts. The customer is seeking recovery of $84.8 million representing all purchase price amounts previously paid by the customer under both contracts. On May 17, 2017, the customer filed for protection under Chapter 11 of the Federal bankruptcy laws. AtUnited States Bankruptcy Code for reorganization under a negotiated, pre-packaged plan. The customer has emerged from Chapter 11 Bankruptcy and the Bankruptcy Court has approved the customer's retention and acceptance of both contracts. As of September 30, 2016, no contracts receivable2017, approximately $4.6 million remained due and outstanding from our customer for the first vessel. The balance due to us for the second vessel upon completion and delivery is approximately $4.9 million. We are working with legal counsel to protect our contractual claims, and we have re-initiated arbitration proceedings in accordance with our contracts. We are in the process of discovery. The customer has recently named a new interim chief executive officer who has made contact with our management, and we are working to resolve our dispute in a constructive manner. We believe that will be able to recover remaining amounts due to us.
On August 25, 2017, our South Texas facilities were outstandingimpacted by Hurricane Harvey, which made landfall as a category 4 hurricane. As a result, we suffered damages to our South Texas buildings and deferred revenue exceeded ourequipment. Through September 30, 2017, we have incurred approximately $265,000 in clean-up and repair related costs and estimated earningswe expect to incur additional future repair costs in excess of billingsour deductible which management believes are probable of being recovered through insurance proceeds. We maintain coverage on these assets up to a maximum of $25.0 million, subject to a 3.0% deductible with a minimum deductible of $500,000. We are working diligently with our insurance agents and adjusters to finalize our estimate of the damage; however, it may be several months, or even longer, before we can finalize our assessment and receive final payment from our insurance underwriters. Our insurance underwriters have made an initial payment of $3.0 million, and we have recorded a liability for future repairs of $2.7 million which is included in accrued expenses and other liabilities on our balance sheet at September 30, 2017. Based upon our initial assessment of the damages and insurance coverage, management believes that there is no basis to record a net loss at this contract. We continuetime and that insurance proceeds will at a minimum be sufficient to monitor our work performed in relationreimburse us for all damages and repair costs. Our final
assessment of the loss incurred to our customer’s statusSouth Texas assets as well as the amount of insurance proceeds we will receive could be more or less than this amount when the claim is ultimately settled and its ability to pay under the terms of its contract. Based on our evaluation to date, we do not believe that any loss on this contract is probable or estimable at this time. such differences could be material.
In February 2016,event of one or more sales of our BoardSouth Texas assets, we expect to use all or a portion of Directors approved a decreasethe sales proceeds to invest in our quarterly dividendoperating liquidity in order to $0.01 in anfacilitate anticipated future projects, selected capital improvements to enhance and/or expand our existing facilities, mergers and acquisitions to expand our product and service capabilities. We are continuing this effort to conserve cash. identify and analyze specific investment opportunities we believe will enhance the long-term value of the Company that are consistent with our strategy.
On October 27, 2016,26, 2017, our Board of Directors declared a dividend of $0.01 per share on our shares of common stock outstanding, payable November 23, 201624, 2017, to shareholders of record on November 10, 2016.2017.
We believe our cash and cash equivalents generated by our future operating activities, and funds availableproceeds to be received from insurance underwriters, availability under our line of credit facilityand proceeds 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 termnext twelve months to continue our operations,to operate, satisfy our contractual operations and pay dividends to our shareholders.
Cash Flow Activities
For the nine months ended September 30, 20162017, net cash used in operating activities was $29.6 million, compared to net cash provided by operating activities was $19.3 million, compared to $18.7of $19.4 million for the nine months ended September 30, 2015.2016. The increaseuse of cash in cash provided by operations during the period was primarily due to increased gross profit and collections of contract receivables during 2016 somewhat offset by payments requiredthe following:
Operating losses for trade payables during the nine months ended September 30, 2017, in excess of non-cash depreciation, amortization, impairment and stock compensation expense of approximately $19.6 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 as comparedwas $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 on ongoing shipbuilding projects of $23.0 million that were assigned to 2015.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. The suspension of two vessel projects following our customer’s refusal to accept delivery of the first vessel in February 2017, and our inability to collect $9.5 million in scheduled payments under these contracts. See also Note 9 of the Notes to the Consolidated Financial Statements; 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 later in 2017 through the first half of 2018.
Net cash provided byused in investing activities for the nine months ended September 30, 20162017, was $2.0$2.4 million, compared to cash used inprovided by investing activities of $5.0$2.0 million for the nine months ended September 30, 2015.2016. The increasechange in cash provided by investing activities is primarily due to cash received from the sale of three cranes at our Texas facility for $5.8 million and $1.6 million of cash acquired in the LEEVAC transaction.transaction during 2016 partially offset by decreases in capital expenditures.
Net cash used in financing activities for the nine months ended September 30, 2017 and 2016, was $1.4 million and 2015 was $440,000 and $4.4 million,$603,000, respectively. The decreaseincrease in cash used in financing activities is due to the reduction incash payments made to taxing authorities on behalf of employees for their vesting of common stock. During the cash dividend in 2016.nine months ended September 30, 2017 we received $2.0 million from borrowings under our new line of credit which were immediately repaid.
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, 2016.2017. 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, 20162017, 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 | | | 3.2 | | | 4.131.1 | | 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 | | | 31.2 | | | 32 | | | 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. |
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. MecheDavid S. Schorlemer | | Kirk J. MecheDavid S. Schorlemer | | President, Chief Executive Officer, Director and InterimVice President, Chief Financial Officer, and Treasurer and Secretary (Principal Executive Officer and Interim Principal Financial and Accounting Officer) |
Date: November 2, 2016October 31, 2017
GULF ISLAND FABRICATION, INC. EXHIBIT INDEX | | | | | Exhibit Number | | Description of Exhibit | | | 2.13.1 | | 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 | | | 4.131.1 | | Specimen Common Stock Certificate, incorporated by reference | 10.131.2 | | Form of Long-Term Performance-Based Cash Award Agreement. | 31 | | CEO and | 32 | | | 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 | |
Deepwater locations | 15,775 |
| 8.7 | % | | $ | 31,272 |
| 19.9% | | $ | 41,269 |
| 20.9% | |
Foreign locations | 13,519 |
| 7.5 | % | | $ | 15,917 |
| 10.1% | | $ | 16,984 |
| 8.6% | |
| | | | | | | | | |
Backlog is expected to be recognized in revenue during: | ___________ | | 1.(1) | Backlog as of September 30, 2016 includes commitments received through October 27, 2016. We exclude suspended projects from contract backlog thatwhen they are expected to be suspended more than twelve12 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.(2) | At September 30, 2016,2017, projects for our threefive 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) | twoTwo large multi-purpose service vessels for one customer inwithin our Shipyards segment,division, which commenced in the first quarter of 2014 and will be completed during the first and second quarter of 2018; and |
(iii) the fabrication of four modules associated with a U.S. ethane cracker project.
| | 3.(ii) | Newbuild construction of four harbor tugs for one customer within our Shipyards division; |
| | (iii) | Newbuild construction of four harbor tugs for one additional customer within our Shipyards division; |
| | (iv) | The fabrication of four modules associated with a U.S. ethane cracker project within our Fabrication division; and |
| | (v) | Newbuild construction of an offshore research vessel within our Shipyards division. |
| | (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. Additionally, as we continue to add backlog, we will begin adding personnel with critical project management and fabrication skills to ensure we have the resources necessary to execute our projects well and to support our project risk mitigation discipline for all new project work. This may negatively impact near term results. As of September 30, 2016,2017, we had 1,336989 employees and 163 contract employees inclusive of 380 employees hired in the LEEVAC transaction, compared to 1,255 employees and 71 contract1,178 employees as of December 31, 2015.
2016. Labor hours worked were 2.31.5 million during the nine months ended September 30, 2016,2017, compared to 2.12.3 million for the nine months ended September 30, 2015.2016. The overall increasedecrease in labor hours worked for the threenine months ended September 30, 20162017, 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 September 30, 2017, Compared to Three Months Ended September 30, 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 September 30, | | Increase or (Decrease) | | 2017 | | 2016 | | Amount | Percent | Revenue | $ | 49,884 |
| | $ | 65,384 |
| | $ | (15,500 | ) | (23.7)% | Cost of revenue | 50,378 |
| | 60,125 |
| | (9,747 | ) | (16.2)% | Gross profit (loss) | (494 | ) | | 5,259 |
| | (5,753 | ) | (109.4)% | Gross profit (loss) percentage | (1.0 | )% | | 8.0 | % | | | | General and administrative expenses | 4,370 |
| | 5,086 |
| | (716 | ) | (14.1)% | Operating income (loss) | (4,864 | ) | | 173 |
| | (5,037 | ) | (2,911.6)% | Other income (expense): | | | | | | | Interest expense | (45 | ) | | (110 | ) | | 65 |
| | Interest income | — |
| | 12 |
| | (12 | ) | | Other income (expense), net | 38 |
| | 599 |
| | (561 | ) | | Total other income (expense) | (7 | ) | | 501 |
| | (508 | ) | 101.4% | Net income (loss) before income taxes | (4,871 | ) | | 674 |
| | (5,545 | ) | (822.7)% | Income tax expense (benefit) | (1,761 | ) | | 133 |
| | (1,894 | ) | (1,424.1)% | Net income (loss) | $ | (3,110 | ) | | $ | 541 |
| | $ | (3,651 | ) | (674.9)% |
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, 2016.2017 and 2016, was $49.9 million and $65.4 million, respectively, representing a decrease of 23.7%. The decrease is primarily attributable to an overall decrease in work experienced in our facilities primarily 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%48.4% and 45.3%33.8% for the three-monthsthree months ended September 30, 20162017 and 2015,2016, 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 20152017, was $494,000 compared to a gross profit of $5.3 million (8.0% of revenue) and $(7.8) million, respectively. Our gross profit improved compared to third quarter of 2015for the three months ended September 30, 2016. The decrease was primarily due to $2.1 million of contract losses of $14.3 million that were recorded during the third quarter of 2015 resulting fromincurred by our inabilityShipyards division related to recover certaincost overruns and re-work identified on two newbuild vessel construction
contracts, decreased revenue as discussed above, holding costs related to a deckour South Texas assets of $1.1 million and jacket for one of our deepwater projects. We had no such loss during the third quarter of 2016 and implemented cost cutting measures.lower margins on current work due to competitive pressures. This was partially offset by tighter margins within all ofdecreases in costs resulting from reductions in workforce as we wrapped up and completed projects at our segments due to a decrease in workSouth Texas fabrication yards and Prospect shipyard, no depreciation being recorded for our South Texas assets and Prospect shipyard for the three months ended September 30, 2017 (as these assets are classified as a result ofassets held for sale) and continued cost minimization efforts implemented by management for the downturn in the oil and gas industry.period.
General and administrative expenses - Our general and administrative expenses were $4.4 million for the three months ended September 30, 2017, compared to $5.1 million for the three months ended September 30, 2016, compared to $3.8 million for the three months ended September 30, 2015.2016. The increasedecrease in general
and administrative expenses for the three months ended September 30, 20162017, was primarily attributable to the operations acquired in the LEEVAC transactionlower bonuses accrued during 2017, employee reductions and bonus expense, partially offset bycontinued cost cuttingminimization efforts implemented during 2016.by management for the period.
Asset impairmentOther income (expense), net - - 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 assetsOther income 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.
Interest expense, net - The Company had net interest expense of $98,000$38,000 for the three months ended September 30, 20162017, as compared to net interest expenseother income of $31,000$599,000 for three months ended September 30, 2016. Other income for the three months ended September 30, 2015. The increase2017 relates to insurance proceeds received from damage to a corporate automobile that was primarily driven by an increase in the cost of unused credit facility fees under our credit agreement.
fully depreciated. Other income net - Other income increased $599,000 for thefor three months ended September 30, 2016. The increase was2016 primarily duerelates to gains on sales of assets from our Fabrication division.
Income taxestax expense (benefit) - Our effective income tax rate for the three months ended September 30, 20162017, was 19.7%36.2%, compared to an effective tax rate of 34.0%19.7% for the comparable period during 2015.2016. The changeincrease in ourthe effective tax rate is duethe result of changes to the decrease inestimates of our effective rateyear-end tax provision during for the year-to-date period.three months ended September 30, 2016.
Operating Segments | | | | | | | | | | | | | | | | | 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 | ) | | | | |
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 and nine months ended September 30, 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 its Corporate division each meeting the criteria of reportable segments under GAAP. During the three and nine months ended September 30, 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 September 30, 2017 and 2016, are presented below (in thousands, except for percentages).
| | | | | | | | | | | | | | | | Fabrication | | Three Months Ended September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | 18,318 |
| | $ | 22,311 |
| | $ | (3,993 | ) | | (17.9)% | Gross profit (loss) | | 1,250 |
| | 601 |
| | 649 |
| | 108.0% | Gross profit (loss) percentage | | 6.8 | % | | 2.7 | % | | | | 4.1% | General and administrative expenses | | 778 |
| | 885 |
| | (107 | ) | | (12.1)% | Operating income (loss) | | 472 |
| | (284 | ) | | | | |
Revenue - Revenue from our Fabrication division decreased $9.8$4.0 million for the three months ended September 30, 20162017, compared to the three months ended September 30, 2015.2016. 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.
Gross profit increased $14.5 million to $532,000(loss) - Gross profit from our Fabrication division for the three months ended September 30, 20162017, was $1.3 million compared to a gross lossprofit of $14.0 million$601,000 for the three months ended September 30, 20152016. The increase in gross profit was 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.
GeneralGains on scrap sales of approximately $701,000 at our South Texas facility,
Decreases in costs resulting from reductions in workforce as we wrapped up and administrative expenses decreased $657,000completed projects at our South Texas fabrication yards, No depreciation being recorded for our South Texas assets for the three months ended September 30, 20162017, as these assets are classified as assets held for sale; and Continued cost minimization efforts implemented by management for the period.
This was partially offset by approximately $1.1 million of holding costs for our South Texas assets.
General and administrative expenses - General and administrative expenses for our Fabrication division decreased $107,000 for the three months ended September 30, 2017, compared to the three months ended September 30, 20152016. The decrease is primarily due to cost cutting measures implemented during 2016 in response to decreases in workcosts resulting from lower bonuses accrued during 2017 as a result of our consolidated operating loss, reductions in workforce at our South Texas fabrication facilities.
Asset impairment - Duringyards and continued cost minimization efforts implemented by management for 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.period.
| | | | | | | | | | | | | | | | | 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 September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue (1) | | $ | 15,074 |
| | $ | 23,060 |
| | $ | (7,986 | ) | | (34.6)% | Gross profit (loss) (1) | | (3,504 | ) | | 1,945 |
| | (5,449 | ) | | (280.2)% | Gross profit (loss) percentage | | (23.2 | )% | | 8.4 | % | | | | (31.6)% | General and administrative expenses | | 888 |
| | 1,468 |
| | (580 | ) | | (39.5)% | Operating income (loss) (1) | | (4,392 | ) | | 477 |
| | | | |
___________ | | (1) | Revenue for the three months ended September 30, 2017, and 2016, includes $510,000 and $1.5 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 $8.0 million for the three months ended September 30, 20162017, compared to the three months ended September 30, 20152016, due to the operations acquiredcorresponding reduction in customer demand for shipbuilding and repair services supporting the LEEVAC transaction (see LEEVAC Transaction above), which contributed $16.8oil and gas industry due to depressed oil and gas prices as well as the completion of a vessel that we tendered for delivery on February 6, 2017, and was rejected by the customer alleging certain technical deficiencies. We subsequently suspended of work on the second vessel under contract with this customer. See also Note 9 of the Notes to the Consolidated Financial Statements.
Gross profit (loss) - Gross loss from our Shipyards division was $3.5 million in revenue for the three months ended September 30, 2016.
Gross2017, compared to a gross profit decreased $60,000of $1.9 million for the three months ended September 30, 20162016. The decrease was due to:
$2.1 million in contract losses related to cost overruns and re-work that has been identified on two newbuild vessel construction contracts within our Shipyards division; and Holding and closing costs related to our Prospect shipyard as we wind down operations at this facility.
General and administrative expenses - General and administrative expenses for our Shipyards division decreased $580,000 for the three months ended September 30, 2017, compared to the three months ended September 30, 20152016, primarily due to tighter margins on new work and inefficiencies incurred on the contracts acquired inreductions of administrative personnel related to consolidation of personnel duties from the LEEVAC transaction partially offsettransaction. Additionally, our Shipyards division incurred lower bonuses accrued during 2017 as a result of a combination of a smaller workforce and our consolidated operating loss and cost minimization efforts implemented by savings realized from cost cutting measures implementedmanagement for the period during the first part of 2016.
General and administrative expenses increased $1.7 | | | | | | | | | | | | | | | | Services | | Three Months Ended September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | 17,651 |
| | $ | 20,928 |
| | $ | (3,277 | ) | | (15.7)% | Gross profit (loss) | | 1,912 |
| | 2,918 |
| | (1,006 | ) | | (34.5)% | Gross profit (loss) percentage | | 10.8 | % | | 13.9 | % | | | | (3.1)% | General and administrative expenses | | 695 |
| | 943 |
| | (248 | ) | | (26.3)% | Operating income (loss) | | 1,217 |
| | 1,975 |
| | | | |
Revenue - Revenue from our Services division decreased $3.3 million for the three months ended September 30, 20162017, compared to the three months ended September 30, 2015 primarily2016, 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 completedServices division decreased $1.0 million for the fabricationthree months ended September 30, 2017, compared to the three months ended September 30, 2016, due to decreased revenue discussed above and lower margins on new work performed during 2017.
General and administrative expenses - General and administrative expenses for our Services division decreased $248,000 for the three months ended September 30, 2017, compared to the three months ended September 30, 2016, due to lower bonuses accrued during 2017 as a result of a 1,200 foot jacket, pilescombination of a smaller workforce and an approximate 450 short ton topsideour consolidated operating loss.
| | | | | | | | | | | | | | | | Corporate | | Three Months Ended September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | — |
| | $ | — |
| | $ | — |
| | —% | Gross profit (loss) | | (152 | ) | | (205 | ) | | 53 |
| | 25.9% | Gross profit (loss) percentage | | n/a |
| | n/a |
| | | |
| General and administrative expenses | | 2,009 |
| | 1,790 |
| | 219 |
| | 12.2% | Operating income (loss) | | (2,161 | ) | | (1,995 | ) | |
|
| | |
General and administrative expenses - General and administrative expenses for our Corporate division increased primarily due to a restructuring of our corporate division with no similaradditional personnel allocated to our corporate division during 2017 as discussed above as well as expenses incurred for advisors to assist in a strategic financial analysis project in 2016. Our decrease in revenue earnedanticipation of the proceeds to be received from offshore fabrication work wasthe sale of our South Texas assets. Additionally, we have incurred increased legal fees as we pursue collection of claims against two customers. See also Note 9 of the Notes to the Consolidated Financial Statements. This has been partially offset by lower bonuses accrued during the assets and operations acquired quarter due to our consolidated operating loss.
Nine Months Ended September 30, 2017, Compared to Nine Months Ended September 30, 2016 (in the LEEVAC transaction (see LEEVAC Transaction above), which contributed $55.9 million inthousands, except for percentages): Consolidated | | | | | | | | | | | | | | | Nine Months Ended September 30, | | Increase or (Decrease) | | 2017 | | 2016 | | Amount | Percent | Revenue | $ | 133,745 |
| | $ | 230,864 |
| | $ | (97,119 | ) | (42.1)% | Cost of revenue | 150,755 |
| | 205,839 |
| | (55,084 | ) | (26.8)% | Gross profit (loss) | (17,010 | ) | | 25,025 |
| | (42,035 | ) | (168.0)% | Gross profit (loss) percentage | (12.7 | )% | | 10.8 | % | | | | General and administrative expenses | 12,940 |
| | 14,633 |
| | (1,693 | ) | (11.6)% | Asset impairment | 389 |
| | — |
| | 389 |
| 100.0% | Operating income (loss) | (30,339 | ) | | 10,392 |
| | (40,731 | ) | (391.9)% | Other income (expense): | | | | | | | Interest expense | (262 | ) | | (248 | ) | | (14 | ) | | Interest income | 12 |
| | 20 |
| | (8 | ) | | Other income (expense), net | (221 | ) | | 1,039 |
| | (1,260 | ) | | Total other income (expense) | (471 | ) | | 811 |
| | (1,282 | ) | (158.1)% | Net income (loss) before income taxes | (30,810 | ) | | 11,203 |
| | (42,013 | ) | (375.0)% | Income tax expense (benefit) | (10,322 | ) | | 4,134 |
| | (14,456 | ) | (349.7)% | Net income (loss) | $ | (20,488 | ) | | $ | 7,069 |
| | $ | (27,557 | ) | (389.8)% |
Revenue - Our revenue for the nine months ended September 30, 2016. Pass-through2017 and 2016, was $133.7 million and $230.9 million, respectively, representing a decrease of 42.1%. 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 as well as the completion of a vessel within our Shipyards division that we tendered for delivery on February 6, 2017, and was rejected by the customer alleging certain technical deficiencies. We subsequently suspended of work on the second vessel under contract with this customer. See also Note 9 of the Notes to the Consolidated Financial Statements. Pass-
through costs as a percentage of revenue were 35.0%45.3% and 43.2%35.0% for the nine months ended September 30, 20162017 and 2015,2016, 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 profitloss for the nine months ended September 30, 2016 and 20152017, was $17.0 million compared to a gross profit of $25.0 million (10.8% of revenue) and $2.4 million (1.0% of revenue), respectively. Our gross profit improved compared to 2015for the nine months ended September 30, 2016. The decrease was primarily due to the LEEVAC transaction$12.7 million of losses incurred by our Shipyards division related to cost overruns and contract losses of $14.3 million that were recorded during the third quarter of 2015 resulting from our inability to recover certainre-work identified on two newbuild vessel construction contracts, decreased revenue as discussed above, holding costs related to a deckour South Texas assets of $3.6 million and jacketlower margins on current work. This was partially offset by decreases in costs resulting from reductions in workforce as we wrapped up and completed projects at our South Texas fabrication yards and Prospect shipyard, suspended depreciation for one of our deepwater projects. We had no such lossSouth Texas assets and Prospect shipyard during the third quarter of 2016nine months ended September 30, 2017, as these assets are classified as assets held for sale and additional cost minimization efforts implemented cost cutting measures in response to decreases in work at our fabrication facilities.by management for the period.
General and administrative expenses - Our general and administrative expenses were $12.9 million for the nine months ended September 30, 2017, compared to $14.6 million for the nine months ended September 30, 2016, compared to $11.8 million for the nine months ended September 30, 2015.2016. The increasedecrease in general and administrative expenses for the nine months ended September 30, 2016 was2017, is primarily attributable to:
an increase of stock-based compensation expense of $589,000,
due to decreases in costs resulting from reductions in workforce at our South Texas fabrication yards, lower bonuses and the LEEVAC transaction; partially offset by
cost cutting efforts implementedaccrued during 2017 as a result of our consolidated operating loss and continued cost minimization efforts implemented by management for the downturn in the oil and gas industry.period.
Asset impairmentImpairment - During the nine months ended September 30, 2015,2017, we recorded an asset impairment charge of $6.6 million$389,000 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. Dueour assets held for sale at our Prospect Shipyard. See also Note 2 of the Notes to the sustained downturn in the energy sector, our ability to effectivelyConsolidated Financial Statements.
market these assetsOther income (expense), net - Other expense 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$221,000 for the nine months ended September 30, 20162017, compared to net interest expenseother income 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 income increased $1.0 million for the nine months ended September 30, 2016. The increaseOther expense for the period was primarily due to losses on sales of two drydocks from our Shipyards division. Other income for the prior period was primarily due to gains of $924,000 related to the sale of three cranes at our Texas facility as well ason sales of smaller assets byfrom our Shipyards division.Fabrication division recorded during 2016.
Income taxestax expense (benefit) - Our effective income tax rate for the nine months ended September 30, 20162017, was 36.9%33.5%, compared to an effective tax rate of 34.0%36.9% for the comparable period during 2015.2016. The increasedecrease in ourthe effective tax rate is due to the effectresult of state income taxes from income generated within Louisiana with no offsetting tax benefit from losses generated within Texas.limitations on the deductibility of executive compensation.
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 | ) | |
| |
|
As discussed above and 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 and nine months ended September 30, 2017. 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 nine months ended September 30, 2017 and 2016, are presented below (in thousands, except for percentages).
| | | | | | | | | | | | | | | | Fabrication | | Nine Months Ended September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | 42,517 |
| | $ | 70,436 |
| | $ | (27,919 | ) | | (39.6)% | Gross profit (loss) | | 216 |
| | 4,564 |
| | (4,348 | ) | | (95.3)% | Gross profit (loss) percentage | | 0.5 | % | | 6.5 | % | | | | (6.0)% | General and administrative expenses | | 2,432 |
| | 2,821 |
| | (389 | ) | | (13.8)% | Operating income (loss) | | (2,216 | ) | | 1,743 |
| | | | |
Revenue - Revenue from our Fabrication division decreased $67.0$27.9 million for the nine months ended September 30, 20162017, compared to the nine months ended September 30, 2015.2016. 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. During 2015, weAs discussed above, management has classified our South Texas assets as assets held for sale in response to the underutilization of our Fabrication assets. As of September 30, 2017, all of our projects at our South Texas fabrication yards have been completed theor transferred to our Houma fabrication of a 1,200 foot jacket, piles and an approximate 450 short ton topside with no similar project in 2016.yard.
Gross profit increased $18.5 million(loss) - Gross profit from our Fabrication division for the nine months ended September 30, 2017, was $216,000 compared to $4.4a gross profit of $4.6 million for the nine months ended September 30, 2016 compared2016. The decrease was due to a gross losslower revenue
from decreased fabrication work as discussed above and approximately $3.6 million of $14.1 millionholding costs for our South Texas assets as we market them for sale. This was partially offset by decreases in costs resulting from reductions in workforce, gains on scrap sales as we wrapped up and completed projects at our South Texas fabrication yards, reduced depreciation being recorded for our South Texas assets for the nine months ended September 30, 2015. The increase is due to contract losses of $14.3 million that were recorded during2017, as these assets are classified as assets held for sale on February 23, 2017, and additional cost minimization efforts implemented by management for 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.period.
General and administrative expenses - General and administrative expenses for our Fabrication division decreased $2.5 million$389,000 for the nine months ended September 30, 20162017, compared to the nine months ended September 30, 20152016. The decrease is primarily due to cost cutting measures implemented during 2016 in response to decreases in workcosts resulting from reductions in workforce as we wrapped up and completed projects at our South Texas fabrication facilities.
Asset impairment - During the nine months ended September 30, 2015, we recorded an asset impairment chargeyards and lower bonuses accrued during 2017 as a result of $6.6 million relateda combination of a smaller workforce and our consolidated operating loss. This was partially offset by expenses incurred to a partially constructed topside, related valves, pipingmarket our South Texas assets for sale 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 valuepayment of the assets. We had no such impairmentstermination benefits during the nine months ended September 30, 2016.first quarter of 2017 as we reduced its workforce and completed those operations.
| | | | | | | | | | | | | | | | | 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 |
| | | | |
| | | | | | | | | | | | | | | | Shipyards | | Nine Months Ended September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue (1) | | $ | 51,798 |
| | $ | 86,553 |
| | $ | (34,755 | ) | | (40.2)% | Gross profit (loss) (1) | | (19,061 | ) | | 9,742 |
| | (28,803 | ) | | (295.7)% | Gross profit (loss) percentage | | (36.8 | )% | | 11.3 | % | | | | (48.1)% | General and administrative expenses | | 2,835 |
| | 4,218 |
| | (1,383 | ) | | (32.8)% | Asset impairment | | 389 |
| | — |
| | 389 |
| | 100.0% | Operating income (loss) (1) | | (22,285 | ) | | 5,524 |
| | | | |
_______________________
| | (1) | Revenue for the nine months ended September 30, 2017, and 2016, includes $2.4 million and $4.1 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 $39.4- Revenue from our Shipyards division decreased $34.8 million for the nine months ended September 30, 20162017, compared to the nine months ended September 30, 20152016, due to the assetscorresponding reduction in customer demand for shipbuilding and operations acquired inrepair services supporting the LEEVAC transaction (see LEEVAC Transaction above), which contributed $55.9oil and gas industry due to depressed oil and gas prices as well as the completion of a vessel that we tendered for delivery on February 6, 2017, and was rejected by the customer alleging certain technical deficiencies. We subsequently suspended of work on the second vessel under contract with this customer. See also Note 9 of the Notes to the Consolidated Financial Statements.
Gross profit (loss) - Gross loss from our Shipyards division was $19.1 million in revenuefor the nine months ended September 30, 2017, compared to a gross profit of $9.7 million for the nine months ended September 30, 2016. The increasedecrease was partially offsetdue to:
$12.7 million in contract losses related to cost overruns and re-work that has been identified on two newbuild vessel construction contracts within our Shipyards division; Holding and closing costs related to our Prospect shipyard as we wind down operations at this facility; 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 due to the downturn in the oil and gas industry.under other various contracts.
Gross profit increased $3.6General and administrative expenses - General and administrative expenses for our Shipyards division decreased $1.4 million for the nine months ended September 30, 20162017, compared to the nine months ended September 30, 20152016, primarily due to reductions of administrative personnel related to consolidation of personnel duties from the LEEVAC transactiontransaction. Additionally, our Shipyards division incurred lower bonuses accrued during 2017 as well as increases in profitability estimatesa result of our consolidated operating loss and cost minimization efforts implemented by management for other jobs in progress due to cost cutting measures.the period.
General and administrative expenses increased $4.6Asset Impairment - During nine months ended September 30, 2017, we recorded an impairment of $389,000 related to our assets held for sale at our Prospect shipyard. See also Note 2 of the Notes to Consolidated Financial Statements.
| | | | | | | | | | | | | | | | Services | | Nine Months Ended September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | 43,758 |
| | $ | 76,179 |
| | $ | (32,421 | ) | | (42.6)% | Gross profit (loss) | | 2,335 |
| | 11,158 |
| | (8,823 | ) | | (79.1)% | Gross profit (loss) percentage | | 5.3 | % | | 14.6 | % | | | | (9.3)% | General and administrative expenses | | 2,008 |
| | 2,462 |
| | (454 | ) | | (18.4)% | Operating income (loss) | | 327 |
| | 8,696 |
| | | | |
Revenue - Revenue from our Services division decreased $32.4 million for the nine months ended September 30, 20162017, compared to the nine months ended September 30, 20152016, due to an overall decrease in work experienced as a result of depressed oil and gas prices and the expenses associated with the operations acquiredcorresponding reduction in the LEEVAC transactioncustomer demand for oil and bonuses.gas related service projects. | | | | | | | | | | | | | | | | | 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 $5.2Gross profit - Gross profit from our Services division decreased $8.8 million for the nine months ended September 30, 20162017, compared to the nine months ended September 30, 20152016, due to increases in the scope of two large offshore service projectsdecreased revenue discussed above and lower margins on new work performed during the first half of 2016.2017.
Gross profit increased $563,000General and administrative expenses - General and administrative expenses for our Services division decreased $0.5 million for the nine months ended September 30, 20162017, compared to the nine months ended September 30, 20152016, due to increases in revenueslower bonuses accrued during 2017 as a result of a combination of a smaller workforce and improved absorption of fixed costs resulting from an increase in labor hours worked.our consolidated operating loss.
| | | | | | | | | | | | | | | | Corporate | | Nine Months Ended September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | — |
| | $ | — |
| | $ | — |
| | —% | Gross profit (loss) | | (500 | ) | | (439 | ) | | (61 | ) | | (13.9)% | Gross profit (loss) percentage | | n/a |
| | n/a |
| | | |
| General and administrative expenses | | 5,665 |
| | 5,132 |
| | 533 |
| | 10.4% | Operating income (loss) | | (6,165 | ) | | (5,571 | ) | | (594 | ) | | |
Gross profit (loss) - Gross loss from our Corporate division increased primarily due to a restructuring of our corporate division with additional personnel allocated to our corporate division during 2017 as discussed above. General and administrative expenses - General and administrative expenses for our Corporate division increased $1.1 millionprimarily due to a restructuring of our corporate division with additional personnel allocated to our corporate division during 2017 as discussed above as well as expenses incurred for advisors to assist in a strategic financial analysis project in anticipation of the nine months ended September 30, 2016 comparedproceeds to be received from the sale of our South Texas assets. Additionally, we have incurred increased legal fees as we pursue collection of claims against two customers. See also Note 9 of the Notes to the nine months ended September 30, 2015 due to additional administrative support costs related to increases in activityConsolidated Financial Statements. This has been partially offset by lower bonuses accrued during 2017 as a result of a combination of a smaller workforce and bonuses.our consolidated operating loss. Liquidity and Capital Resources Historically, we have funded our business activities through cash generated from operations. At September 30, 20162017, 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$17.8 million compared to $34.8$51.2 million at December 31, 2015.2016. Working capital was $79.8$164.0 million and our ratio of current assets to current liabilities was 2.834.59 to 1 at September 30, 2017, compared to $78.0 million and 3.21 to 1, respectively, at December 31, 2016. Working capital at September 30, 2017, includes $107.0 million related to assets held for sale, primarily related to our South Texas facilities. Our primary sourceuse of cash forduring the nine months ended September 30, 2016, was related to2017, is referenced in the collection of accounts receivable under various customer contracts and sales of three cranes at our Texas facility for $5.8 million. Cash Flow Activities section below. At September 30, 2016,2017, our contracts receivable balance was $26.6$25.5 million of which we have subsequently collected $12.1$8.3 million through October 31, 2016.2017. On January 1, 2016,June 9, 2017, we acquired substantially all of the assets and assumed certain specified liabilities of LEEVAC. The purchase price for the acquisition was $20.0entered into a $40.0 million subject to a working capital adjustment whereby we received a dollar-for-
dollar reduction for the assumption of certain net liabilities of LEEVAC at closing and settlement payments from sureties on certain ongoing fabrication projects that were assigned to us in the transaction. After taking into account these adjustments, we received approximately $1.6 million in cash at closing. During the quarter, we presented our working capital true-up to the seller, which resulted in an additional $1.5 million due to us. Additionally, we hired 380 employees upon acquisition of the facilities representing substantially all of the former LEEVAC employees. Strategically, the transaction expands our marine fabrication and repair and maintenance presence in the Gulf South market. At the date of transaction, we acquired approximately $121.2 million of new build construction backlog inclusive of approximately $9.2 million of purchase price fair value allocated to four, new build construction projects to be delivered in 2017 and 2018 for two customers.
As of September 30, 2016, we had a credit agreement with Whitney Bank, and JPMorgan Chase Bank N.A. that provides for an $80.0 million revolvingas lender. The credit facility maturing January 2, 2017. The credit agreement allows the Company to use up to the full amount of the available borrowing basematures June 9, 2019 and may be used for issuing letters of credit and up to $20.0 million forand/or general corporate and working capital purposes. Our obligationsWe believe that
the new facility will provide us with additional working capital flexibility to expand operations as backlog improves, respond to market opportunities and support our ongoing operations.
Interest on drawings under the credit agreement are secured by substantially all offacility may be designated, at our assets, other than real property locatedoption, as either Base Rate (as defined in the state of Louisiana. On February 29, 2016, we entered into an amendment to our credit agreement. The amendment (i) extendsfacility) or LIBOR plus 2.0% per annum. Unused commitment fees on the termundrawn portion of the Credit Facility from February 29, 2016 to January 2, 2017; (ii) increases the commitment fee on undrawn amounts from 0.25% to 0.50%facility are 0.4% per annum; (iii) increases the letter of credit fee, subject to certain limited exceptions, to 2.00% per annum, and interest 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. 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 our financial covenants beginning with the quarter ending March 31, 2016 as follows:
| | (i) | minimum net worth requirement of not less than $250.0 million plus |
| | a) | 50% of net income earned in each quarter beginning March 31, 2016 and |
| | b) | 100% of proceeds from any issuance of common stock; |
| | (ii) | debt to EBITDA ratio not greater than 3.0 to 1.0; and |
| | (iii) | interest coverage ratio not less than 2.0 to 1.0. |
At September 30, 2016, no amounts were outstanding under thelenders is 2.0% per annum. The credit facility and we had outstanding letters of credit totaling $4.5 million, reducing the unused portion of our credit facility for additional letters of credit to $75.5 million. As of September 30, 2016, we were in compliance with all covenants. During the fourth quarter, we expect to enter into a two-year, $40.0 million amended and restated credit facility with our current lenders that will beis secured by substantially all of our assets (other than real property)the assets of Gulf Marine Fabricators, L.P., the legal entity that holds our South Texas assets which are currently held for sale).
We anticipatemust comply with the amendedfollowing financial covenants each quarter during the term of the facility:
| | i. | Ratio of current assets to current liabilities of not less than 1.25:1.00; |
| | ii. | Minimum tangible net worth requirement of at least the sum of: |
| | b) | An amount equal to 50% of consolidated net income for each fiscal quarter ending after June 30, 2017 (with no deduction for a net loss in any such fiscal quarter except for any gain or loss in connection with the sale of assets by Gulf Marine Fabricators, L.P.), plus |
| | c) | 100% of all net proceeds of any issuance of any stock or other equity after deducting of any fees, commissions, expenses and other costs incurred in such offering; and |
| | iii. | Ratio of funded debt to tangible net worth of not more than 0.50:1.00. |
Concurrent with our execution of the credit facility, will allow us to usewe terminated our prior credit facility with JPMorgan Chase Bank, N.A. At the full $40.0time of the termination, there was approximately $4.6 million borrowing baseof letters of credit outstanding. All were reissued as new letters of credit under the credit facility and accepted by the beneficiaries. Availability under our credit facility for bothfuture, additional letters of credit and general corporate purposes. Given the historically low levelsborrowings is $35.4 million. As of borrowings underSeptember 30, 2017, we were in compliance with all of our current facility and our cash position, we requested a reduction in the amount 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.covenants.
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 do not anticipate significant capital expenditures for the remainder of 2016 to be approximately $1.8 million primarily for the following: extension of one of our dry docks, and
improvements to our newly acquired facilities.2017.
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. The customer also announcedagreements and stated that, while it had received limited waivers from its lenders, its debt agreements willwould require further negotiation and amendment. InThis same customer rejected delivery of the eventfirst vessel that we completed and tendered for delivery on February 6, 2017, alleging certain technical deficiencies exist with respect to the vessel. On March 10, 2017, we gave notice for arbitration with our customer in an effort to resolve this matter and subsequently suspended fabrication of the second vessel under contract with this customer, which is unsuccessfulincluded in our arbitration proceedings. We disagree with our customer concerning these efforts,alleged technical deficiencies and have put the customer will consider other options including a possible reorganizationin default under the terms of both vessel contracts. The customer is seeking recovery of $84.8 million representing all purchase price amounts previously paid by the customer under both contracts. On May 17, 2017, the customer filed for protection under Chapter 11 of the Federal bankruptcy laws. AtUnited States Bankruptcy Code for reorganization under a negotiated, pre-packaged plan. The customer has emerged from Chapter 11 Bankruptcy and the Bankruptcy Court has approved the customer's retention and acceptance of both contracts. As of September 30, 2016, no contracts receivable2017, approximately $4.6 million remained due and outstanding from our customer for the first vessel. The balance due to us for the second vessel upon completion and delivery is approximately $4.9 million. We are working with legal counsel to protect our contractual claims, and we have re-initiated arbitration proceedings in accordance with our contracts. We are in the process of discovery. The customer has recently named a new interim chief executive officer who has made contact with our management, and we are working to resolve our dispute in a constructive manner. We believe that will be able to recover remaining amounts due to us.
On August 25, 2017, our South Texas facilities were outstandingimpacted by Hurricane Harvey, which made landfall as a category 4 hurricane. As a result, we suffered damages to our South Texas buildings and deferred revenue exceeded ourequipment. Through September 30, 2017, we have incurred approximately $265,000 in clean-up and repair related costs and estimated earningswe expect to incur additional future repair costs in excess of billingsour deductible which management believes are probable of being recovered through insurance proceeds. We maintain coverage on these assets up to a maximum of $25.0 million, subject to a 3.0% deductible with a minimum deductible of $500,000. We are working diligently with our insurance agents and adjusters to finalize our estimate of the damage; however, it may be several months, or even longer, before we can finalize our assessment and receive final payment from our insurance underwriters. Our insurance underwriters have made an initial payment of $3.0 million, and we have recorded a liability for future repairs of $2.7 million which is included in accrued expenses and other liabilities on our balance sheet at September 30, 2017. Based upon our initial assessment of the damages and insurance coverage, management believes that there is no basis to record a net loss at this contract. We continuetime and that insurance proceeds will at a minimum be sufficient to monitor our work performed in relationreimburse us for all damages and repair costs. Our final
assessment of the loss incurred to our customer’s statusSouth Texas assets as well as the amount of insurance proceeds we will receive could be more or less than this amount when the claim is ultimately settled and its ability to pay under the terms of its contract. Based on our evaluation to date, we do not believe that any loss on this contract is probable or estimable at this time. such differences could be material.
In February 2016,event of one or more sales of our BoardSouth Texas assets, we expect to use all or a portion of Directors approved a decreasethe sales proceeds to invest in our quarterly dividendoperating liquidity in order to $0.01 in anfacilitate anticipated future projects, selected capital improvements to enhance and/or expand our existing facilities, mergers and acquisitions to expand our product and service capabilities. We are continuing this effort to conserve cash. identify and analyze specific investment opportunities we believe will enhance the long-term value of the Company that are consistent with our strategy.
On October 27, 2016,26, 2017, our Board of Directors declared a dividend of $0.01 per share on our shares of common stock outstanding, payable November 23, 201624, 2017, to shareholders of record on November 10, 2016.2017.
We believe our cash and cash equivalents generated by our future operating activities, and funds availableproceeds to be received from insurance underwriters, availability under our line of credit facilityand proceeds 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 termnext twelve months to continue our operations,to operate, satisfy our contractual operations and pay dividends to our shareholders.
Cash Flow Activities
For the nine months ended September 30, 20162017, net cash used in operating activities was $29.6 million, compared to net cash provided by operating activities was $19.3 million, compared to $18.7of $19.4 million for the nine months ended September 30, 2015.2016. The increaseuse of cash in cash provided by operations during the period was primarily due to increased gross profit and collections of contract receivables during 2016 somewhat offset by payments requiredthe following:
Operating losses for trade payables during the nine months ended September 30, 2017, in excess of non-cash depreciation, amortization, impairment and stock compensation expense of approximately $19.6 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 as comparedwas $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 on ongoing shipbuilding projects of $23.0 million that were assigned to 2015.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. The suspension of two vessel projects following our customer’s refusal to accept delivery of the first vessel in February 2017, and our inability to collect $9.5 million in scheduled payments under these contracts. See also Note 9 of the Notes to the Consolidated Financial Statements; 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 later in 2017 through the first half of 2018.
Net cash provided byused in investing activities for the nine months ended September 30, 20162017, was $2.0$2.4 million, compared to cash used inprovided by investing activities of $5.0$2.0 million for the nine months ended September 30, 2015.2016. The increasechange in cash provided by investing activities is primarily due to cash received from the sale of three cranes at our Texas facility for $5.8 million and $1.6 million of cash acquired in the LEEVAC transaction.transaction during 2016 partially offset by decreases in capital expenditures.
Net cash used in financing activities for the nine months ended September 30, 2017 and 2016, was $1.4 million and 2015 was $440,000 and $4.4 million,$603,000, respectively. The decreaseincrease in cash used in financing activities is due to the reduction incash payments made to taxing authorities on behalf of employees for their vesting of common stock. During the cash dividend in 2016.nine months ended September 30, 2017 we received $2.0 million from borrowings under our new line of credit which were immediately repaid.
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, 2016.2017. 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, 20162017, 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 | | | 3.2 | | | 4.131.1 | | 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 | | | 31.2 | | | 32 | | | 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. |
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. MecheDavid S. Schorlemer | | Kirk J. MecheDavid S. Schorlemer | | President, Chief Executive Officer, Director and InterimVice President, Chief Financial Officer, and Treasurer and Secretary (Principal Executive Officer and Interim Principal Financial and Accounting Officer) |
Date: November 2, 2016October 31, 2017
GULF ISLAND FABRICATION, INC. EXHIBIT INDEX | | | | | Exhibit Number | | Description of Exhibit | | | 2.13.1 | | 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 | | | 4.131.1 | | Specimen Common Stock Certificate, incorporated by reference | 10.131.2 | | Form of Long-Term Performance-Based Cash Award Agreement. | 31 | | CEO and | 32 | | | 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.(1) | Backlog as of September 30, 2016 includes commitments received through October 27, 2016. We exclude suspended projects from contract backlog thatwhen they are expected to be suspended more than twelve12 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.(2) | At September 30, 2016,2017, projects for our threefive 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) | twoTwo large multi-purpose service vessels for one customer inwithin our Shipyards segment,division, which commenced in the first quarter of 2014 and will be completed during the first and second quarter of 2018; and |
(iii) the fabrication of four modules associated with a U.S. ethane cracker project.
| | 3.(ii) | Newbuild construction of four harbor tugs for one customer within our Shipyards division; |
| | (iii) | Newbuild construction of four harbor tugs for one additional customer within our Shipyards division; |
| | (iv) | The fabrication of four modules associated with a U.S. ethane cracker project within our Fabrication division; and |
| | (v) | Newbuild construction of an offshore research vessel within our Shipyards division. |
| | (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. Additionally, as we continue to add backlog, we will begin adding personnel with critical project management and fabrication skills to ensure we have the resources necessary to execute our projects well and to support our project risk mitigation discipline for all new project work. This may negatively impact near term results. As of September 30, 2016,2017, we had 1,336989 employees and 163 contract employees inclusive of 380 employees hired in the LEEVAC transaction, compared to 1,255 employees and 71 contract1,178 employees as of December 31, 2015.
2016. Labor hours worked were 2.31.5 million during the nine months ended September 30, 2016,2017, compared to 2.12.3 million for the nine months ended September 30, 2015.2016. The overall increasedecrease in labor hours worked for the threenine months ended September 30, 20162017, 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 September 30, 2017, Compared to Three Months Ended September 30, 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 September 30, | | Increase or (Decrease) | | 2017 | | 2016 | | Amount | Percent | Revenue | $ | 49,884 |
| | $ | 65,384 |
| | $ | (15,500 | ) | (23.7)% | Cost of revenue | 50,378 |
| | 60,125 |
| | (9,747 | ) | (16.2)% | Gross profit (loss) | (494 | ) | | 5,259 |
| | (5,753 | ) | (109.4)% | Gross profit (loss) percentage | (1.0 | )% | | 8.0 | % | | | | General and administrative expenses | 4,370 |
| | 5,086 |
| | (716 | ) | (14.1)% | Operating income (loss) | (4,864 | ) | | 173 |
| | (5,037 | ) | (2,911.6)% | Other income (expense): | | | | | | | Interest expense | (45 | ) | | (110 | ) | | 65 |
| | Interest income | — |
| | 12 |
| | (12 | ) | | Other income (expense), net | 38 |
| | 599 |
| | (561 | ) | | Total other income (expense) | (7 | ) | | 501 |
| | (508 | ) | 101.4% | Net income (loss) before income taxes | (4,871 | ) | | 674 |
| | (5,545 | ) | (822.7)% | Income tax expense (benefit) | (1,761 | ) | | 133 |
| | (1,894 | ) | (1,424.1)% | Net income (loss) | $ | (3,110 | ) | | $ | 541 |
| | $ | (3,651 | ) | (674.9)% |
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, 2016.2017 and 2016, was $49.9 million and $65.4 million, respectively, representing a decrease of 23.7%. The decrease is primarily attributable to an overall decrease in work experienced in our facilities primarily 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%48.4% and 45.3%33.8% for the three-monthsthree months ended September 30, 20162017 and 2015,2016, 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 20152017, was $494,000 compared to a gross profit of $5.3 million (8.0% of revenue) and $(7.8) million, respectively. Our gross profit improved compared to third quarter of 2015for the three months ended September 30, 2016. The decrease was primarily due to $2.1 million of contract losses of $14.3 million that were recorded during the third quarter of 2015 resulting fromincurred by our inabilityShipyards division related to recover certaincost overruns and re-work identified on two newbuild vessel construction
contracts, decreased revenue as discussed above, holding costs related to a deckour South Texas assets of $1.1 million and jacket for one of our deepwater projects. We had no such loss during the third quarter of 2016 and implemented cost cutting measures.lower margins on current work due to competitive pressures. This was partially offset by tighter margins within all ofdecreases in costs resulting from reductions in workforce as we wrapped up and completed projects at our segments due to a decrease in workSouth Texas fabrication yards and Prospect shipyard, no depreciation being recorded for our South Texas assets and Prospect shipyard for the three months ended September 30, 2017 (as these assets are classified as a result ofassets held for sale) and continued cost minimization efforts implemented by management for the downturn in the oil and gas industry.period.
General and administrative expenses - Our general and administrative expenses were $4.4 million for the three months ended September 30, 2017, compared to $5.1 million for the three months ended September 30, 2016, compared to $3.8 million for the three months ended September 30, 2015.2016. The increasedecrease in general
and administrative expenses for the three months ended September 30, 20162017, was primarily attributable to the operations acquired in the LEEVAC transactionlower bonuses accrued during 2017, employee reductions and bonus expense, partially offset bycontinued cost cuttingminimization efforts implemented during 2016.by management for the period.
Asset impairmentOther income (expense), net - - 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 assetsOther income 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.
Interest expense, net - The Company had net interest expense of $98,000$38,000 for the three months ended September 30, 20162017, as compared to net interest expenseother income of $31,000$599,000 for three months ended September 30, 2016. Other income for the three months ended September 30, 2015. The increase2017 relates to insurance proceeds received from damage to a corporate automobile that was primarily driven by an increase in the cost of unused credit facility fees under our credit agreement.
fully depreciated. Other income net - Other income increased $599,000 for thefor three months ended September 30, 2016. The increase was2016 primarily duerelates to gains on sales of assets from our Fabrication division.
Income taxestax expense (benefit) - Our effective income tax rate for the three months ended September 30, 20162017, was 19.7%36.2%, compared to an effective tax rate of 34.0%19.7% for the comparable period during 2015.2016. The changeincrease in ourthe effective tax rate is duethe result of changes to the decrease inestimates of our effective rateyear-end tax provision during for the year-to-date period.three months ended September 30, 2016.
Operating Segments | | | | | | | | | | | | | | | | | 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 | ) | | | | |
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 and nine months ended September 30, 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 its Corporate division each meeting the criteria of reportable segments under GAAP. During the three and nine months ended September 30, 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 September 30, 2017 and 2016, are presented below (in thousands, except for percentages).
| | | | | | | | | | | | | | | | Fabrication | | Three Months Ended September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | 18,318 |
| | $ | 22,311 |
| | $ | (3,993 | ) | | (17.9)% | Gross profit (loss) | | 1,250 |
| | 601 |
| | 649 |
| | 108.0% | Gross profit (loss) percentage | | 6.8 | % | | 2.7 | % | | | | 4.1% | General and administrative expenses | | 778 |
| | 885 |
| | (107 | ) | | (12.1)% | Operating income (loss) | | 472 |
| | (284 | ) | | | | |
Revenue - Revenue from our Fabrication division decreased $9.8$4.0 million for the three months ended September 30, 20162017, compared to the three months ended September 30, 2015.2016. 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.
Gross profit increased $14.5 million to $532,000(loss) - Gross profit from our Fabrication division for the three months ended September 30, 20162017, was $1.3 million compared to a gross lossprofit of $14.0 million$601,000 for the three months ended September 30, 20152016. The increase in gross profit was 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.
GeneralGains on scrap sales of approximately $701,000 at our South Texas facility,
Decreases in costs resulting from reductions in workforce as we wrapped up and administrative expenses decreased $657,000completed projects at our South Texas fabrication yards, No depreciation being recorded for our South Texas assets for the three months ended September 30, 20162017, as these assets are classified as assets held for sale; and Continued cost minimization efforts implemented by management for the period.
This was partially offset by approximately $1.1 million of holding costs for our South Texas assets.
General and administrative expenses - General and administrative expenses for our Fabrication division decreased $107,000 for the three months ended September 30, 2017, compared to the three months ended September 30, 20152016. The decrease is primarily due to cost cutting measures implemented during 2016 in response to decreases in workcosts resulting from lower bonuses accrued during 2017 as a result of our consolidated operating loss, reductions in workforce at our South Texas fabrication facilities.
Asset impairment - Duringyards and continued cost minimization efforts implemented by management for 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.period.
| | | | | | | | | | | | | | | | | 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 September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue (1) | | $ | 15,074 |
| | $ | 23,060 |
| | $ | (7,986 | ) | | (34.6)% | Gross profit (loss) (1) | | (3,504 | ) | | 1,945 |
| | (5,449 | ) | | (280.2)% | Gross profit (loss) percentage | | (23.2 | )% | | 8.4 | % | | | | (31.6)% | General and administrative expenses | | 888 |
| | 1,468 |
| | (580 | ) | | (39.5)% | Operating income (loss) (1) | | (4,392 | ) | | 477 |
| | | | |
___________ | | (1) | Revenue for the three months ended September 30, 2017, and 2016, includes $510,000 and $1.5 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 $8.0 million for the three months ended September 30, 20162017, compared to the three months ended September 30, 20152016, due to the operations acquiredcorresponding reduction in customer demand for shipbuilding and repair services supporting the LEEVAC transaction (see LEEVAC Transaction above), which contributed $16.8oil and gas industry due to depressed oil and gas prices as well as the completion of a vessel that we tendered for delivery on February 6, 2017, and was rejected by the customer alleging certain technical deficiencies. We subsequently suspended of work on the second vessel under contract with this customer. See also Note 9 of the Notes to the Consolidated Financial Statements.
Gross profit (loss) - Gross loss from our Shipyards division was $3.5 million in revenue for the three months ended September 30, 2016.
Gross2017, compared to a gross profit decreased $60,000of $1.9 million for the three months ended September 30, 20162016. The decrease was due to:
$2.1 million in contract losses related to cost overruns and re-work that has been identified on two newbuild vessel construction contracts within our Shipyards division; and Holding and closing costs related to our Prospect shipyard as we wind down operations at this facility.
General and administrative expenses - General and administrative expenses for our Shipyards division decreased $580,000 for the three months ended September 30, 2017, compared to the three months ended September 30, 20152016, primarily due to tighter margins on new work and inefficiencies incurred on the contracts acquired inreductions of administrative personnel related to consolidation of personnel duties from the LEEVAC transaction partially offsettransaction. Additionally, our Shipyards division incurred lower bonuses accrued during 2017 as a result of a combination of a smaller workforce and our consolidated operating loss and cost minimization efforts implemented by savings realized from cost cutting measures implementedmanagement for the period during the first part of 2016.
General and administrative expenses increased $1.7 | | | | | | | | | | | | | | | | Services | | Three Months Ended September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | 17,651 |
| | $ | 20,928 |
| | $ | (3,277 | ) | | (15.7)% | Gross profit (loss) | | 1,912 |
| | 2,918 |
| | (1,006 | ) | | (34.5)% | Gross profit (loss) percentage | | 10.8 | % | | 13.9 | % | | | | (3.1)% | General and administrative expenses | | 695 |
| | 943 |
| | (248 | ) | | (26.3)% | Operating income (loss) | | 1,217 |
| | 1,975 |
| | | | |
Revenue - Revenue from our Services division decreased $3.3 million for the three months ended September 30, 20162017, compared to the three months ended September 30, 2015 primarily2016, 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 completedServices division decreased $1.0 million for the fabricationthree months ended September 30, 2017, compared to the three months ended September 30, 2016, due to decreased revenue discussed above and lower margins on new work performed during 2017.
General and administrative expenses - General and administrative expenses for our Services division decreased $248,000 for the three months ended September 30, 2017, compared to the three months ended September 30, 2016, due to lower bonuses accrued during 2017 as a result of a 1,200 foot jacket, pilescombination of a smaller workforce and an approximate 450 short ton topsideour consolidated operating loss.
| | | | | | | | | | | | | | | | Corporate | | Three Months Ended September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | — |
| | $ | — |
| | $ | — |
| | —% | Gross profit (loss) | | (152 | ) | | (205 | ) | | 53 |
| | 25.9% | Gross profit (loss) percentage | | n/a |
| | n/a |
| | | |
| General and administrative expenses | | 2,009 |
| | 1,790 |
| | 219 |
| | 12.2% | Operating income (loss) | | (2,161 | ) | | (1,995 | ) | |
|
| | |
General and administrative expenses - General and administrative expenses for our Corporate division increased primarily due to a restructuring of our corporate division with no similaradditional personnel allocated to our corporate division during 2017 as discussed above as well as expenses incurred for advisors to assist in a strategic financial analysis project in 2016. Our decrease in revenue earnedanticipation of the proceeds to be received from offshore fabrication work wasthe sale of our South Texas assets. Additionally, we have incurred increased legal fees as we pursue collection of claims against two customers. See also Note 9 of the Notes to the Consolidated Financial Statements. This has been partially offset by lower bonuses accrued during the assets and operations acquired quarter due to our consolidated operating loss.
Nine Months Ended September 30, 2017, Compared to Nine Months Ended September 30, 2016 (in the LEEVAC transaction (see LEEVAC Transaction above), which contributed $55.9 million inthousands, except for percentages): Consolidated | | | | | | | | | | | | | | | Nine Months Ended September 30, | | Increase or (Decrease) | | 2017 | | 2016 | | Amount | Percent | Revenue | $ | 133,745 |
| | $ | 230,864 |
| | $ | (97,119 | ) | (42.1)% | Cost of revenue | 150,755 |
| | 205,839 |
| | (55,084 | ) | (26.8)% | Gross profit (loss) | (17,010 | ) | | 25,025 |
| | (42,035 | ) | (168.0)% | Gross profit (loss) percentage | (12.7 | )% | | 10.8 | % | | | | General and administrative expenses | 12,940 |
| | 14,633 |
| | (1,693 | ) | (11.6)% | Asset impairment | 389 |
| | — |
| | 389 |
| 100.0% | Operating income (loss) | (30,339 | ) | | 10,392 |
| | (40,731 | ) | (391.9)% | Other income (expense): | | | | | | | Interest expense | (262 | ) | | (248 | ) | | (14 | ) | | Interest income | 12 |
| | 20 |
| | (8 | ) | | Other income (expense), net | (221 | ) | | 1,039 |
| | (1,260 | ) | | Total other income (expense) | (471 | ) | | 811 |
| | (1,282 | ) | (158.1)% | Net income (loss) before income taxes | (30,810 | ) | | 11,203 |
| | (42,013 | ) | (375.0)% | Income tax expense (benefit) | (10,322 | ) | | 4,134 |
| | (14,456 | ) | (349.7)% | Net income (loss) | $ | (20,488 | ) | | $ | 7,069 |
| | $ | (27,557 | ) | (389.8)% |
Revenue - Our revenue for the nine months ended September 30, 2016. Pass-through2017 and 2016, was $133.7 million and $230.9 million, respectively, representing a decrease of 42.1%. 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 as well as the completion of a vessel within our Shipyards division that we tendered for delivery on February 6, 2017, and was rejected by the customer alleging certain technical deficiencies. We subsequently suspended of work on the second vessel under contract with this customer. See also Note 9 of the Notes to the Consolidated Financial Statements. Pass-
through costs as a percentage of revenue were 35.0%45.3% and 43.2%35.0% for the nine months ended September 30, 20162017 and 2015,2016, 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 profitloss for the nine months ended September 30, 2016 and 20152017, was $17.0 million compared to a gross profit of $25.0 million (10.8% of revenue) and $2.4 million (1.0% of revenue), respectively. Our gross profit improved compared to 2015for the nine months ended September 30, 2016. The decrease was primarily due to the LEEVAC transaction$12.7 million of losses incurred by our Shipyards division related to cost overruns and contract losses of $14.3 million that were recorded during the third quarter of 2015 resulting from our inability to recover certainre-work identified on two newbuild vessel construction contracts, decreased revenue as discussed above, holding costs related to a deckour South Texas assets of $3.6 million and jacketlower margins on current work. This was partially offset by decreases in costs resulting from reductions in workforce as we wrapped up and completed projects at our South Texas fabrication yards and Prospect shipyard, suspended depreciation for one of our deepwater projects. We had no such lossSouth Texas assets and Prospect shipyard during the third quarter of 2016nine months ended September 30, 2017, as these assets are classified as assets held for sale and additional cost minimization efforts implemented cost cutting measures in response to decreases in work at our fabrication facilities.by management for the period.
General and administrative expenses - Our general and administrative expenses were $12.9 million for the nine months ended September 30, 2017, compared to $14.6 million for the nine months ended September 30, 2016, compared to $11.8 million for the nine months ended September 30, 2015.2016. The increasedecrease in general and administrative expenses for the nine months ended September 30, 2016 was2017, is primarily attributable to:
an increase of stock-based compensation expense of $589,000,
due to decreases in costs resulting from reductions in workforce at our South Texas fabrication yards, lower bonuses and the LEEVAC transaction; partially offset by
cost cutting efforts implementedaccrued during 2017 as a result of our consolidated operating loss and continued cost minimization efforts implemented by management for the downturn in the oil and gas industry.period.
Asset impairmentImpairment - During the nine months ended September 30, 2015,2017, we recorded an asset impairment charge of $6.6 million$389,000 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. Dueour assets held for sale at our Prospect Shipyard. See also Note 2 of the Notes to the sustained downturn in the energy sector, our ability to effectivelyConsolidated Financial Statements.
market these assetsOther income (expense), net - Other expense 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$221,000 for the nine months ended September 30, 20162017, compared to net interest expenseother income 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 income increased $1.0 million for the nine months ended September 30, 2016. The increaseOther expense for the period was primarily due to losses on sales of two drydocks from our Shipyards division. Other income for the prior period was primarily due to gains of $924,000 related to the sale of three cranes at our Texas facility as well ason sales of smaller assets byfrom our Shipyards division.Fabrication division recorded during 2016.
Income taxestax expense (benefit) - Our effective income tax rate for the nine months ended September 30, 20162017, was 36.9%33.5%, compared to an effective tax rate of 34.0%36.9% for the comparable period during 2015.2016. The increasedecrease in ourthe effective tax rate is due to the effectresult of state income taxes from income generated within Louisiana with no offsetting tax benefit from losses generated within Texas.limitations on the deductibility of executive compensation.
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 | ) | |
| |
|
As discussed above and 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 and nine months ended September 30, 2017. 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 nine months ended September 30, 2017 and 2016, are presented below (in thousands, except for percentages).
| | | | | | | | | | | | | | | | Fabrication | | Nine Months Ended September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | 42,517 |
| | $ | 70,436 |
| | $ | (27,919 | ) | | (39.6)% | Gross profit (loss) | | 216 |
| | 4,564 |
| | (4,348 | ) | | (95.3)% | Gross profit (loss) percentage | | 0.5 | % | | 6.5 | % | | | | (6.0)% | General and administrative expenses | | 2,432 |
| | 2,821 |
| | (389 | ) | | (13.8)% | Operating income (loss) | | (2,216 | ) | | 1,743 |
| | | | |
Revenue - Revenue from our Fabrication division decreased $67.0$27.9 million for the nine months ended September 30, 20162017, compared to the nine months ended September 30, 2015.2016. 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. During 2015, weAs discussed above, management has classified our South Texas assets as assets held for sale in response to the underutilization of our Fabrication assets. As of September 30, 2017, all of our projects at our South Texas fabrication yards have been completed theor transferred to our Houma fabrication of a 1,200 foot jacket, piles and an approximate 450 short ton topside with no similar project in 2016.yard.
Gross profit increased $18.5 million(loss) - Gross profit from our Fabrication division for the nine months ended September 30, 2017, was $216,000 compared to $4.4a gross profit of $4.6 million for the nine months ended September 30, 2016 compared2016. The decrease was due to a gross losslower revenue
from decreased fabrication work as discussed above and approximately $3.6 million of $14.1 millionholding costs for our South Texas assets as we market them for sale. This was partially offset by decreases in costs resulting from reductions in workforce, gains on scrap sales as we wrapped up and completed projects at our South Texas fabrication yards, reduced depreciation being recorded for our South Texas assets for the nine months ended September 30, 2015. The increase is due to contract losses of $14.3 million that were recorded during2017, as these assets are classified as assets held for sale on February 23, 2017, and additional cost minimization efforts implemented by management for 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.period.
General and administrative expenses - General and administrative expenses for our Fabrication division decreased $2.5 million$389,000 for the nine months ended September 30, 20162017, compared to the nine months ended September 30, 20152016. The decrease is primarily due to cost cutting measures implemented during 2016 in response to decreases in workcosts resulting from reductions in workforce as we wrapped up and completed projects at our South Texas fabrication facilities.
Asset impairment - During the nine months ended September 30, 2015, we recorded an asset impairment chargeyards and lower bonuses accrued during 2017 as a result of $6.6 million relateda combination of a smaller workforce and our consolidated operating loss. This was partially offset by expenses incurred to a partially constructed topside, related valves, pipingmarket our South Texas assets for sale 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 valuepayment of the assets. We had no such impairmentstermination benefits during the nine months ended September 30, 2016.first quarter of 2017 as we reduced its workforce and completed those operations.
| | | | | | | | | | | | | | | | | 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 |
| | | | |
| | | | | | | | | | | | | | | | Shipyards | | Nine Months Ended September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue (1) | | $ | 51,798 |
| | $ | 86,553 |
| | $ | (34,755 | ) | | (40.2)% | Gross profit (loss) (1) | | (19,061 | ) | | 9,742 |
| | (28,803 | ) | | (295.7)% | Gross profit (loss) percentage | | (36.8 | )% | | 11.3 | % | | | | (48.1)% | General and administrative expenses | | 2,835 |
| | 4,218 |
| | (1,383 | ) | | (32.8)% | Asset impairment | | 389 |
| | — |
| | 389 |
| | 100.0% | Operating income (loss) (1) | | (22,285 | ) | | 5,524 |
| | | | |
_______________________
| | (1) | Revenue for the nine months ended September 30, 2017, and 2016, includes $2.4 million and $4.1 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 $39.4- Revenue from our Shipyards division decreased $34.8 million for the nine months ended September 30, 20162017, compared to the nine months ended September 30, 20152016, due to the assetscorresponding reduction in customer demand for shipbuilding and operations acquired inrepair services supporting the LEEVAC transaction (see LEEVAC Transaction above), which contributed $55.9oil and gas industry due to depressed oil and gas prices as well as the completion of a vessel that we tendered for delivery on February 6, 2017, and was rejected by the customer alleging certain technical deficiencies. We subsequently suspended of work on the second vessel under contract with this customer. See also Note 9 of the Notes to the Consolidated Financial Statements.
Gross profit (loss) - Gross loss from our Shipyards division was $19.1 million in revenuefor the nine months ended September 30, 2017, compared to a gross profit of $9.7 million for the nine months ended September 30, 2016. The increasedecrease was partially offsetdue to:
$12.7 million in contract losses related to cost overruns and re-work that has been identified on two newbuild vessel construction contracts within our Shipyards division; Holding and closing costs related to our Prospect shipyard as we wind down operations at this facility; 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 due to the downturn in the oil and gas industry.under other various contracts.
Gross profit increased $3.6General and administrative expenses - General and administrative expenses for our Shipyards division decreased $1.4 million for the nine months ended September 30, 20162017, compared to the nine months ended September 30, 20152016, primarily due to reductions of administrative personnel related to consolidation of personnel duties from the LEEVAC transactiontransaction. Additionally, our Shipyards division incurred lower bonuses accrued during 2017 as well as increases in profitability estimatesa result of our consolidated operating loss and cost minimization efforts implemented by management for other jobs in progress due to cost cutting measures.the period.
General and administrative expenses increased $4.6Asset Impairment - During nine months ended September 30, 2017, we recorded an impairment of $389,000 related to our assets held for sale at our Prospect shipyard. See also Note 2 of the Notes to Consolidated Financial Statements.
| | | | | | | | | | | | | | | | Services | | Nine Months Ended September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | 43,758 |
| | $ | 76,179 |
| | $ | (32,421 | ) | | (42.6)% | Gross profit (loss) | | 2,335 |
| | 11,158 |
| | (8,823 | ) | | (79.1)% | Gross profit (loss) percentage | | 5.3 | % | | 14.6 | % | | | | (9.3)% | General and administrative expenses | | 2,008 |
| | 2,462 |
| | (454 | ) | | (18.4)% | Operating income (loss) | | 327 |
| | 8,696 |
| | | | |
Revenue - Revenue from our Services division decreased $32.4 million for the nine months ended September 30, 20162017, compared to the nine months ended September 30, 20152016, due to an overall decrease in work experienced as a result of depressed oil and gas prices and the expenses associated with the operations acquiredcorresponding reduction in the LEEVAC transactioncustomer demand for oil and bonuses.gas related service projects. | | | | | | | | | | | | | | | | | 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 $5.2Gross profit - Gross profit from our Services division decreased $8.8 million for the nine months ended September 30, 20162017, compared to the nine months ended September 30, 20152016, due to increases in the scope of two large offshore service projectsdecreased revenue discussed above and lower margins on new work performed during the first half of 2016.2017.
Gross profit increased $563,000General and administrative expenses - General and administrative expenses for our Services division decreased $0.5 million for the nine months ended September 30, 20162017, compared to the nine months ended September 30, 20152016, due to increases in revenueslower bonuses accrued during 2017 as a result of a combination of a smaller workforce and improved absorption of fixed costs resulting from an increase in labor hours worked.our consolidated operating loss.
| | | | | | | | | | | | | | | | Corporate | | Nine Months Ended September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | — |
| | $ | — |
| | $ | — |
| | —% | Gross profit (loss) | | (500 | ) | | (439 | ) | | (61 | ) | | (13.9)% | Gross profit (loss) percentage | | n/a |
| | n/a |
| | | |
| General and administrative expenses | | 5,665 |
| | 5,132 |
| | 533 |
| | 10.4% | Operating income (loss) | | (6,165 | ) | | (5,571 | ) | | (594 | ) | | |
Gross profit (loss) - Gross loss from our Corporate division increased primarily due to a restructuring of our corporate division with additional personnel allocated to our corporate division during 2017 as discussed above. General and administrative expenses - General and administrative expenses for our Corporate division increased $1.1 millionprimarily due to a restructuring of our corporate division with additional personnel allocated to our corporate division during 2017 as discussed above as well as expenses incurred for advisors to assist in a strategic financial analysis project in anticipation of the nine months ended September 30, 2016 comparedproceeds to be received from the sale of our South Texas assets. Additionally, we have incurred increased legal fees as we pursue collection of claims against two customers. See also Note 9 of the Notes to the nine months ended September 30, 2015 due to additional administrative support costs related to increases in activityConsolidated Financial Statements. This has been partially offset by lower bonuses accrued during 2017 as a result of a combination of a smaller workforce and bonuses.our consolidated operating loss. Liquidity and Capital Resources Historically, we have funded our business activities through cash generated from operations. At September 30, 20162017, 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$17.8 million compared to $34.8$51.2 million at December 31, 2015.2016. Working capital was $79.8$164.0 million and our ratio of current assets to current liabilities was 2.834.59 to 1 at September 30, 2017, compared to $78.0 million and 3.21 to 1, respectively, at December 31, 2016. Working capital at September 30, 2017, includes $107.0 million related to assets held for sale, primarily related to our South Texas facilities. Our primary sourceuse of cash forduring the nine months ended September 30, 2016, was related to2017, is referenced in the collection of accounts receivable under various customer contracts and sales of three cranes at our Texas facility for $5.8 million. Cash Flow Activities section below. At September 30, 2016,2017, our contracts receivable balance was $26.6$25.5 million of which we have subsequently collected $12.1$8.3 million through October 31, 2016.2017. On January 1, 2016,June 9, 2017, we acquired substantially all of the assets and assumed certain specified liabilities of LEEVAC. The purchase price for the acquisition was $20.0entered into a $40.0 million subject to a working capital adjustment whereby we received a dollar-for-
dollar reduction for the assumption of certain net liabilities of LEEVAC at closing and settlement payments from sureties on certain ongoing fabrication projects that were assigned to us in the transaction. After taking into account these adjustments, we received approximately $1.6 million in cash at closing. During the quarter, we presented our working capital true-up to the seller, which resulted in an additional $1.5 million due to us. Additionally, we hired 380 employees upon acquisition of the facilities representing substantially all of the former LEEVAC employees. Strategically, the transaction expands our marine fabrication and repair and maintenance presence in the Gulf South market. At the date of transaction, we acquired approximately $121.2 million of new build construction backlog inclusive of approximately $9.2 million of purchase price fair value allocated to four, new build construction projects to be delivered in 2017 and 2018 for two customers.
As of September 30, 2016, we had a credit agreement with Whitney Bank, and JPMorgan Chase Bank N.A. that provides for an $80.0 million revolvingas lender. The credit facility maturing January 2, 2017. The credit agreement allows the Company to use up to the full amount of the available borrowing basematures June 9, 2019 and may be used for issuing letters of credit and up to $20.0 million forand/or general corporate and working capital purposes. Our obligationsWe believe that
the new facility will provide us with additional working capital flexibility to expand operations as backlog improves, respond to market opportunities and support our ongoing operations.
Interest on drawings under the credit agreement are secured by substantially all offacility may be designated, at our assets, other than real property locatedoption, as either Base Rate (as defined in the state of Louisiana. On February 29, 2016, we entered into an amendment to our credit agreement. The amendment (i) extendsfacility) or LIBOR plus 2.0% per annum. Unused commitment fees on the termundrawn portion of the Credit Facility from February 29, 2016 to January 2, 2017; (ii) increases the commitment fee on undrawn amounts from 0.25% to 0.50%facility are 0.4% per annum; (iii) increases the letter of credit fee, subject to certain limited exceptions, to 2.00% per annum, and interest 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. 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 our financial covenants beginning with the quarter ending March 31, 2016 as follows:
| | (i) | minimum net worth requirement of not less than $250.0 million plus |
| | a) | 50% of net income earned in each quarter beginning March 31, 2016 and |
| | b) | 100% of proceeds from any issuance of common stock; |
| | (ii) | debt to EBITDA ratio not greater than 3.0 to 1.0; and |
| | (iii) | interest coverage ratio not less than 2.0 to 1.0. |
At September 30, 2016, no amounts were outstanding under thelenders is 2.0% per annum. The credit facility and we had outstanding letters of credit totaling $4.5 million, reducing the unused portion of our credit facility for additional letters of credit to $75.5 million. As of September 30, 2016, we were in compliance with all covenants. During the fourth quarter, we expect to enter into a two-year, $40.0 million amended and restated credit facility with our current lenders that will beis secured by substantially all of our assets (other than real property)the assets of Gulf Marine Fabricators, L.P., the legal entity that holds our South Texas assets which are currently held for sale).
We anticipatemust comply with the amendedfollowing financial covenants each quarter during the term of the facility:
| | i. | Ratio of current assets to current liabilities of not less than 1.25:1.00; |
| | ii. | Minimum tangible net worth requirement of at least the sum of: |
| | b) | An amount equal to 50% of consolidated net income for each fiscal quarter ending after June 30, 2017 (with no deduction for a net loss in any such fiscal quarter except for any gain or loss in connection with the sale of assets by Gulf Marine Fabricators, L.P.), plus |
| | c) | 100% of all net proceeds of any issuance of any stock or other equity after deducting of any fees, commissions, expenses and other costs incurred in such offering; and |
| | iii. | Ratio of funded debt to tangible net worth of not more than 0.50:1.00. |
Concurrent with our execution of the credit facility, will allow us to usewe terminated our prior credit facility with JPMorgan Chase Bank, N.A. At the full $40.0time of the termination, there was approximately $4.6 million borrowing baseof letters of credit outstanding. All were reissued as new letters of credit under the credit facility and accepted by the beneficiaries. Availability under our credit facility for bothfuture, additional letters of credit and general corporate purposes. Given the historically low levelsborrowings is $35.4 million. As of borrowings underSeptember 30, 2017, we were in compliance with all of our current facility and our cash position, we requested a reduction in the amount 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.covenants.
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 do not anticipate significant capital expenditures for the remainder of 2016 to be approximately $1.8 million primarily for the following: extension of one of our dry docks, and
improvements to our newly acquired facilities.2017.
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. The customer also announcedagreements and stated that, while it had received limited waivers from its lenders, its debt agreements willwould require further negotiation and amendment. InThis same customer rejected delivery of the eventfirst vessel that we completed and tendered for delivery on February 6, 2017, alleging certain technical deficiencies exist with respect to the vessel. On March 10, 2017, we gave notice for arbitration with our customer in an effort to resolve this matter and subsequently suspended fabrication of the second vessel under contract with this customer, which is unsuccessfulincluded in our arbitration proceedings. We disagree with our customer concerning these efforts,alleged technical deficiencies and have put the customer will consider other options including a possible reorganizationin default under the terms of both vessel contracts. The customer is seeking recovery of $84.8 million representing all purchase price amounts previously paid by the customer under both contracts. On May 17, 2017, the customer filed for protection under Chapter 11 of the Federal bankruptcy laws. AtUnited States Bankruptcy Code for reorganization under a negotiated, pre-packaged plan. The customer has emerged from Chapter 11 Bankruptcy and the Bankruptcy Court has approved the customer's retention and acceptance of both contracts. As of September 30, 2016, no contracts receivable2017, approximately $4.6 million remained due and outstanding from our customer for the first vessel. The balance due to us for the second vessel upon completion and delivery is approximately $4.9 million. We are working with legal counsel to protect our contractual claims, and we have re-initiated arbitration proceedings in accordance with our contracts. We are in the process of discovery. The customer has recently named a new interim chief executive officer who has made contact with our management, and we are working to resolve our dispute in a constructive manner. We believe that will be able to recover remaining amounts due to us.
On August 25, 2017, our South Texas facilities were outstandingimpacted by Hurricane Harvey, which made landfall as a category 4 hurricane. As a result, we suffered damages to our South Texas buildings and deferred revenue exceeded ourequipment. Through September 30, 2017, we have incurred approximately $265,000 in clean-up and repair related costs and estimated earningswe expect to incur additional future repair costs in excess of billingsour deductible which management believes are probable of being recovered through insurance proceeds. We maintain coverage on these assets up to a maximum of $25.0 million, subject to a 3.0% deductible with a minimum deductible of $500,000. We are working diligently with our insurance agents and adjusters to finalize our estimate of the damage; however, it may be several months, or even longer, before we can finalize our assessment and receive final payment from our insurance underwriters. Our insurance underwriters have made an initial payment of $3.0 million, and we have recorded a liability for future repairs of $2.7 million which is included in accrued expenses and other liabilities on our balance sheet at September 30, 2017. Based upon our initial assessment of the damages and insurance coverage, management believes that there is no basis to record a net loss at this contract. We continuetime and that insurance proceeds will at a minimum be sufficient to monitor our work performed in relationreimburse us for all damages and repair costs. Our final
assessment of the loss incurred to our customer’s statusSouth Texas assets as well as the amount of insurance proceeds we will receive could be more or less than this amount when the claim is ultimately settled and its ability to pay under the terms of its contract. Based on our evaluation to date, we do not believe that any loss on this contract is probable or estimable at this time. such differences could be material.
In February 2016,event of one or more sales of our BoardSouth Texas assets, we expect to use all or a portion of Directors approved a decreasethe sales proceeds to invest in our quarterly dividendoperating liquidity in order to $0.01 in anfacilitate anticipated future projects, selected capital improvements to enhance and/or expand our existing facilities, mergers and acquisitions to expand our product and service capabilities. We are continuing this effort to conserve cash. identify and analyze specific investment opportunities we believe will enhance the long-term value of the Company that are consistent with our strategy.
On October 27, 2016,26, 2017, our Board of Directors declared a dividend of $0.01 per share on our shares of common stock outstanding, payable November 23, 201624, 2017, to shareholders of record on November 10, 2016.2017.
We believe our cash and cash equivalents generated by our future operating activities, and funds availableproceeds to be received from insurance underwriters, availability under our line of credit facilityand proceeds 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 termnext twelve months to continue our operations,to operate, satisfy our contractual operations and pay dividends to our shareholders.
Cash Flow Activities
For the nine months ended September 30, 20162017, net cash used in operating activities was $29.6 million, compared to net cash provided by operating activities was $19.3 million, compared to $18.7of $19.4 million for the nine months ended September 30, 2015.2016. The increaseuse of cash in cash provided by operations during the period was primarily due to increased gross profit and collections of contract receivables during 2016 somewhat offset by payments requiredthe following:
Operating losses for trade payables during the nine months ended September 30, 2017, in excess of non-cash depreciation, amortization, impairment and stock compensation expense of approximately $19.6 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 as comparedwas $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 on ongoing shipbuilding projects of $23.0 million that were assigned to 2015.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. The suspension of two vessel projects following our customer’s refusal to accept delivery of the first vessel in February 2017, and our inability to collect $9.5 million in scheduled payments under these contracts. See also Note 9 of the Notes to the Consolidated Financial Statements; 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 later in 2017 through the first half of 2018.
Net cash provided byused in investing activities for the nine months ended September 30, 20162017, was $2.0$2.4 million, compared to cash used inprovided by investing activities of $5.0$2.0 million for the nine months ended September 30, 2015.2016. The increasechange in cash provided by investing activities is primarily due to cash received from the sale of three cranes at our Texas facility for $5.8 million and $1.6 million of cash acquired in the LEEVAC transaction.transaction during 2016 partially offset by decreases in capital expenditures.
Net cash used in financing activities for the nine months ended September 30, 2017 and 2016, was $1.4 million and 2015 was $440,000 and $4.4 million,$603,000, respectively. The decreaseincrease in cash used in financing activities is due to the reduction incash payments made to taxing authorities on behalf of employees for their vesting of common stock. During the cash dividend in 2016.nine months ended September 30, 2017 we received $2.0 million from borrowings under our new line of credit which were immediately repaid.
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, 2016.2017. 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, 20162017, 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 | | | 3.2 | | | 4.131.1 | | 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 | | | 31.2 | | | 32 | | | 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. |
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. MecheDavid S. Schorlemer | | Kirk J. MecheDavid S. Schorlemer | | President, Chief Executive Officer, Director and InterimVice President, Chief Financial Officer, and Treasurer and Secretary (Principal Executive Officer and Interim Principal Financial and Accounting Officer) |
Date: November 2, 2016October 31, 2017
GULF ISLAND FABRICATION, INC. EXHIBIT INDEX | | | | | Exhibit Number | | Description of Exhibit | | | 2.13.1 | | 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 | | | 4.131.1 | | Specimen Common Stock Certificate, incorporated by reference | 10.131.2 | | Form of Long-Term Performance-Based Cash Award Agreement. | 31 | | CEO and | 32 | | | 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 | | | |
2016 (3) | 71,841 |
| 39.6 | % | | | | | | | |
2017 (3) | 87,255 |
| 48.2 | % | | | | | | | $ | 40,352 |
| 16.0% | | | |
2018 (3) | 22,116 |
| 12.2 | % | | | | | | | 139,529 |
| 55.4% | | | |
2019 (3) | | 63,451 |
| 25.2% | | | |
2020 (3) | | 8,400 |
| 3.4% | | | |
| $ | 181,212 |
|
|
| |
|
| | | | | $ | 251,732 |
| 100.0% | |
|
| |
| | | | | | | | | | | | |