Segment | ___________ | | 1.(1) | Backlog as of March 31, 2017, includes commitments received through April 26, 2017. We exclude suspended projects from contract backlog when 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. |
| | 2.(2) | At March 31,September 30, 2017, projects for our twofive largest customers in terms of revenue backlog consisted of: |
| | (i) | 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 quarters2018; |
| | (ii) | Newbuild construction of 2018; andfour harbor tugs for one customer within our Shipyards division; |
| | (ii)(iii) | theNewbuild 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.project within our Fabrication division; and |
| | 3.(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 March 31,September 30, 2017, we had 922 employees and 133 contract989 employees compared to 1,178 employees and 92 contract employees as of December 31, 2016. Labor hours worked were 479,0001.5 million during the threenine months ended March 31,September 30, 2017, compared to 695,0002.3 million for the threenine months ended March 31,September 30, 2016. The overall decrease in labor hours worked for the threenine months ended March 31,September 30, 2017, was due 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.
Results of Operations Three Months Ended March 31,September 30, 2017, Compared to Three Months Ended March 31,September 30, 2016 (in thousands, except for percentages): Consolidated | | | Three Months Ended March 31, | | Increase or (Decrease) | Three Months Ended September 30, | | Increase or (Decrease) | | 2017 | | 2016 | | Amount | Percent | 2017 | | 2016 | | Amount | Percent | Revenue | $ | 37,993 |
| | $ | 83,979 |
| | $ | (45,986 | ) | (54.8)% | $ | 49,884 |
| | $ | 65,384 |
| | $ | (15,500 | ) | (23.7)% | Cost of revenue | 42,890 |
| | 78,278 |
| | (35,388 | ) | (45.2)% | 50,378 |
| | 60,125 |
| | (9,747 | ) | (16.2)% | Gross profit (loss) | (4,897 | ) | | 5,701 |
| | (10,598 | ) | 185.9% | (494 | ) | | 5,259 |
| | (5,753 | ) | (109.4)% | Gross profit (loss) percentage | (12.9)% | | 6.8% | | | | (1.0 | )% | | 8.0 | % | | | | General and administrative expenses | 3,930 |
| | 4,485 |
| | (555 | ) | (12.4)% | 4,370 |
| | 5,086 |
| | (716 | ) | (14.1)% | Asset impairment | 389 |
| | — |
| | 389 |
| 100.0% | | Operating income (loss) | (9,216 | ) | | 1,216 |
| | (10,432 | ) | (857.9)% | (4,864 | ) | | 173 |
| | (5,037 | ) | (2,911.6)% | Other income (expense): | | | | | | | | | | | | | Interest expense | (59 | ) | | (50 | ) | | (9 | ) | | (45 | ) | | (110 | ) | | 65 |
| | Interest income | — |
| | 6 |
| | (6 | ) | | — |
| | 12 |
| | (12 | ) | | Other income, net | 9 |
| | 398 |
| | (389 | ) | | | Other income (expense), net | | 38 |
| | 599 |
| | (561 | ) | | Total other income (expense) | (50 | ) | | 354 |
| | (404 | ) | (114.1)% | (7 | ) | | 501 |
| | (508 | ) | 101.4% | Net income (loss) before income taxes | (9,266 | ) | | 1,570 |
| | (10,836 | ) | (690.2)% | (4,871 | ) | | 674 |
| | (5,545 | ) | (822.7)% | Income taxes | (2,812 | ) | | 581 |
| | (3,393 | ) | (584.0)% | | Income tax expense (benefit) | | (1,761 | ) | | 133 |
| | (1,894 | ) | (1,424.1)% | Net income (loss) | $ | (6,454 | ) | | $ | 989 |
| | $ | (7,443 | ) | (752.6)% | $ | (3,110 | ) | | $ | 541 |
| | $ | (3,651 | ) | (674.9)% |
Revenue - Our revenue for the three months ended March 31,September 30, 2017 and 2016, was $38.0$49.9 million and $84.0$65.4 million, respectively, representing a decrease of 54.8%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 29.4%48.4% and 40.0%33.8% for the three-monthsthree months ended March 31,September 30, 2017 and 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 loss for the three months ended March 31,September 30, 2017, was $4.9 million$494,000 compared to a gross profit of $5.7$5.3 million for the three months ended March 31,September 30, 2016. The decrease was primarily due to $2.1 million of contract losses incurred by our Shipyards division related to cost overruns and re-work identified on two newbuild vessel construction
contracts, decreased revenue as discussed above, holding costs related to our South Texas assets of $1.1 million and tighterlower margins on current work due to competitive pressures. This was partially offset by decreases in costs resulting from additionalreductions in workforce as we wrapped up and completed projects at our South 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 assets held for sale) and continued cost cutting measuresminimization efforts implemented by management.management for the period.
General and administrative expenses - Our general and administrative expenses were $3.9$4.4 million for the three months ended March 31,September 30, 2017, compared to $4.5$5.1 million for the three months ended March 31,September 30, 2016. The decrease in general and administrative expenses for the three months ended March 31,September 30, 2017, was primarily attributable to cost cutting measures implemented by management during the first part of 2016 as well as lower bonuses accrued during 2017, as a result of a combination of a smaller workforceemployee reductions and our consolidated gross loss.continued cost minimization efforts implemented by management for the period.
Asset Impairment - During three months ended March 31, 2017, we recorded an impairment of $389 related to our assets held for sale at our Prospect Shipyard. See also Note 2 of the Notes to Consolidated Financial statements.
Other income (expense), net - Other income decreased $389,000was $38,000 for the three months ended March 31, 2017. The decreaseSeptember 30, 2017, as compared to other income of $599,000 for three months ended September 30, 2016. Other income for the three months ended September 30, 2017 relates to insurance proceeds received from damage to a corporate automobile that was fully depreciated. Other income for for three months ended September 30, 2016 primarily duerelates to gains on sales of assets from our Fabrication division recorded during three months ended March 31, 2016.division.
Income taxestax expense (benefit) - Our effective income tax rate for the three months ended March 31,September 30, 2017, was 30.3%36.2%, compared to an effective tax rate of 37.0%19.7% for the comparable period during 2016. The decreaseincrease in the effective tax rate is the result of limitations on the deductibilitychanges to estimates of executive compensation and $210,000 inour year-end tax expense recognizedprovision during for the three months ended March 31, 2017, for the tax effect of the difference between the actual tax deduction allowed upon vesting of common stock and the compensation cost recognized for financial reporting purposes resulting from the adoption of Accounting Standards Update 2016-09 as further discussed in Note 1 of the Notes to the Consolidated Financial Statements.September 30, 2016.
Operating Segments
As discussed in Note 8 of the Notes to Consolidated Financial Statements, management reduced its allocation of corporate administrative costs and overhead expenses to its operating divisions during the three and nine months ended March 31,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 it'sits Corporate division each meeting the criteria of reportable segments under GAAP. During the three and nine months ended March 31,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 March 31,September 30, 2017 and 2016, are presented below (in thousands, except for percentages).
| | Fabrication | | Three Months Ended March 31, | | Increase or (Decrease) | | Three Months Ended September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | 10,209 |
| | $ | 23,829 |
| | $ | (13,620 | ) | | (57.2)% | | $ | 18,318 |
| | $ | 22,311 |
| | $ | (3,993 | ) | | (17.9)% | Gross profit (loss) | | (2,966 | ) | | 86 |
| | (3,052 | ) | | (3,548.8)% | | 1,250 |
| | 601 |
| | 649 |
| | 108.0% | Gross profit (loss) percentage | | (29.1 | )% | | 0.4 | % | | | | (29.5)% | | 6.8 | % | | 2.7 | % | | | | 4.1% | General and administrative expenses | | 821 |
| | 795 |
| | 26 |
| | 3.3% | | 778 |
| | 885 |
| | (107 | ) | | (12.1)% | Operating income (loss) | | (3,787 | ) | | (709 | ) | | | | | 472 |
| | (284 | ) | | | |
Revenue - Revenue from our Fabrication division decreased $13.6$4.0 million for the three months ended March 31,September 30, 2017, compared to the three months ended March 31,September 30, 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 (loss) - Gross profit from our Fabrication division for the three months ended September 30, 2017, was $1.3 million compared to a gross profit of $601,000 for the three months ended September 30, 2016. The increase in gross profit was due to
Gains 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 completed projects at our South Texas fabrication yards, No depreciation being recorded for our South Texas assets for the three months ended September 30, 2017, 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, 2016. The decrease is primarily due to decreases in costs resulting from lower bonuses accrued during 2017 as a result of our consolidated operating loss, reductions in workforce at our South Texas fabrication yards and continued cost minimization efforts implemented by management for the period.
| | | | | | | | | | | | | | | | 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, respectively. |
Revenue - Revenue from our Shipyards division decreased $8.0 million for the three months ended September 30, 2017, compared to the three months ended September 30, 2016, due to the corresponding reduction in customer demand for shipbuilding and repair services supporting the oil 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 for the three months ended September 30, 2017, compared to a gross profit of $1.9 million for the three months ended September 30, 2016. 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, 2016, primarily due to reductions of administrative personnel related to consolidation of personnel duties from the LEEVAC transaction. 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 management for the period during the first part of 2016.
| | | | | | | | | | | | | | | | 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, 2017, compared to the three months ended September 30, 2016, due to an overall decrease in work experienced as a result of depressed oil and gas prices and the corresponding reduction in customer demand for oil and gas related service projects.
Gross profit - Gross profit from our Services division decreased $1.0 million for the three 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 combination of a smaller workforce and our 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 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 proceeds 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 Consolidated Financial Statements. This has been partially offset by lower bonuses accrued during the quarter due to our consolidated operating loss.
Nine Months Ended September 30, 2017, Compared to Nine Months Ended September 30, 2016 (in thousands, 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, 2017 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 45.3% and 35.0% for the nine months ended September 30, 2017 and 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 loss for the nine months ended September 30, 2017, was $17.0 million compared to a gross profit of $25.0 million for the nine months ended September 30, 2016. The decrease was primarily due to $12.7 million of losses incurred by our Shipyards division related to cost overruns and re-work identified on two newbuild vessel construction contracts, decreased revenue as discussed above, holding costs related to our South Texas assets of $3.6 million and lower 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 our South Texas assets and Prospect shipyard during the nine months ended September 30, 2017, as these assets are classified as assets held for sale and additional cost minimization efforts implemented 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. The decrease in general and administrative expenses for the nine months ended September 30, 2017, is primarily due to decreases in costs resulting from reductions in workforce at our South Texas fabrication yards, lower bonuses accrued during 2017 as a result of our consolidated operating loss and continued cost minimization efforts implemented by management for the period.
Asset Impairment - During the 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.
Other income (expense), net - Other expense was $221,000 for the nine months ended September 30, 2017, compared to other income of $1.0 million for the nine months ended September 30, 2016. Other 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 on sales of assets from our Fabrication division recorded during 2016.
Income tax expense (benefit) - Our effective income tax rate for the nine months ended September 30, 2017, was 33.5%, compared to an effective tax rate of 36.9% for the comparable period during 2016. The decrease in the effective tax rate is the result of limitations on the deductibility of executive compensation.
Operating Segments
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 $27.9 million for the nine months ended September 30, 2017, compared to the nine months ended September 30, 2016. The decrease is attributable to an overall decrease in work experienced in our fabrication yards as a result of depressed oil and gas prices and the corresponding reduction in customer demand for offshore fabrication projects. As discussed above, management has classified our South Texas assets as assets held for sale in response to the underutilization of our Fabrication assets. As of September 30, 2017, all of our projects at our South Texas fabrication yards have been completed or transferred to our Houma fabrication yard.
Gross profit (loss) - Gross lossprofit from our Fabrication division for the threenine months ended March 31,September 30, 2017, was $3.0 million$216,000 compared to a gross profit of $86,000$4.6 million for the threenine months ended March 31,September 30, 2016. The decrease was due to lower revenue
from decreased fabrication work as discussed above paymentand approximately $3.6 million of termination benefits as we reduce our South Texas workforce and depreciation expense of $1.9 million related toholding costs for our South Texas assets prior to their classification as assets heldwe 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, 2017, as these assets are classified as assets held for sale on February 23, 2017, and additional cost cutting measuresminimization efforts implemented by management.management for the period.
General and administrative expenses - General and administrative expenses for our Fabrication division increased $26,000decreased $389,000 for the threenine months ended March 31,September 30, 2017, compared to the threenine months ended March 31,September 30, 2016. The increasedecrease is primarily due to decreases in costs resulting from reductions in workforce as we wrapped up and completed projects at our South Texas fabrication yards and lower bonuses accrued during 2017 as a result of a combination of a smaller workforce and our consolidated operating loss. This was partially offset by expenses incurred to market our South Texas assets for sale and payment of termination benefits during the first quarter of 2017 as we reducereduced its workforce and completecompleted those operations.
| | Shipyards | | Three Months Ended March 31, | | Increase or (Decrease) | | Nine Months Ended September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | | 2017 | | 2016 | | Amount | | Percent | Revenue (1) | | $ | 18,422 |
| | $ | 34,120 |
| | $ | (15,698 | ) | | (46.0)% | | $ | 51,798 |
| | $ | 86,553 |
| | $ | (34,755 | ) | | (40.2)% | Gross profit (loss)(1) | | (1,704 | ) | | 2,375 |
| | (4,079 | ) | | (171.7)% | | (19,061 | ) | | 9,742 |
| | (28,803 | ) | | (295.7)% | Gross profit (loss) percentage | | (9.2 | )% | | 7.0 | % | | | | (16.2)% | | (36.8 | )% | | 11.3 | % | | | | (48.1)% | General and administrative expenses | | 964 |
| | 1,296 |
| | (332 | ) | | (25.6)% | | 2,835 |
| | 4,218 |
| | (1,383 | ) | | (32.8)% | Asset impairment | | 389 |
| | — |
| | 389 |
| | 100.0% | | 389 |
| | — |
| | 389 |
| | 100.0% | Operating income (loss) (1) | | (3,057 | ) | | 1,079 |
| | | | | (22,285 | ) | | 5,524 |
| | | |
___________ | | (1) | Revenue for the threenine months ended March 31,September 30, 2017, and 2016, includes $1.6$2.4 million and $1.2$4.1 million of non-cash amortization of deferred revenue related to the values assigned to the contracts acquired in the LEEVAC transaction, respectively. |
Revenue - Revenue from our Shipyards division decreased $15.7$34.8 million for the threenine months ended March 31,September 30, 2017, compared to the threenine months ended March 31,September 30, 2016, due to overall decreases in work as we complete work under our contracts
including completion of a vessel that we assumed in the LEEVAC transaction and delivered to a customer on February 6, 2017, with less new, replacement work starting during the period as compared to the three months ended March 31, 2016. The decrease in new, replacement work is due to depressed oil and gas prices and the corresponding reduction in customer demand for shipbuilding and repair services supporting the oil and gas industry.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 $1.7$19.1 million for the threenine months ended March 31,September 30, 2017, compared to a gross profit of $2.4$9.7 million for the threenine months ended March 31,September 30, 2016. The decrease was due to:
continued$12.7 million in contract losses related to cost overruns and re-work that has been identified on two newbuild vessel construction contracts that were assignedwithin our Shipyards division;
Holding and closing costs related to us in the LEEVAC transaction;our Prospect shipyard as we wind down operations at this facility; holdingHolding 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
overallOverall decreases in work under other various contracts as discussed above;contracts.
partially offset by savings realized from cost cutting measures implemented by management during 2016.
General and administrative expenses - General and administrative expenses for our Shipyards division decreased $332,000$1.4 million for the threenine months ended March 31,September 30, 2017, compared to the threenine months ended March 31,September 30, 2016, primarily due to cost cutting measures implemented by management during 2016 as well asreductions of administrative personnel related to consolidation of personnel duties from the LEEVAC transaction. Additionally, our Shipyards division incurred lower bonuses accrued during 2017 as a result of a combination of a smaller workforce and our consolidated gross loss.operating loss and cost minimization efforts implemented by management for the period.
Asset Impairment - During threenine months ended March 31,September 30, 2017, we recorded an impairment of $389$389,000 related to our assets held for sale at our Prospect Shipyard.shipyard. See also Note 2 of the Notes to Consolidated Financial statements.Statements.
| | Services | | Three Months Ended March 31, | | Increase or (Decrease) | | Nine Months Ended September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | 10,712 |
| | $ | 26,559 |
| | $ | (15,847 | ) | | (59.7)% | | $ | 43,758 |
| | $ | 76,179 |
| | $ | (32,421 | ) | | (42.6)% | Gross profit | | 33 |
| | 3,376 |
| | (3,343 | ) | | (99.0)% | | Gross profit (loss) | | | 2,335 |
| | 11,158 |
| | (8,823 | ) | | (79.1)% | Gross profit (loss) percentage | | 0.3 | % | | 12.7 | % | | | | (12.4)% | | 5.3 | % | | 14.6 | % | | | | (9.3)% | General and administrative expenses | | 666 |
| | 726 |
| | (60 | ) | | (8.3)% | | 2,008 |
| | 2,462 |
| | (454 | ) | | (18.4)% | Operating income (loss) | | (633 | ) | | 2,650 |
| | | | | 327 |
| | 8,696 |
| | | |
Revenue - Revenue from our Services division decreased $15.8$32.4 million for the threenine months ended March 31,September 30, 2017, compared to the threenine months ended March 31,September 30, 2016, due to an overall decrease in work experienced as a result of depressed oil and gas prices and the corresponding reduction in customer demand for oil and gas related service projects.
Gross profit - Gross profit from our Services division decreased $3.3$8.8 million for the threenine months ended March 31,September 30, 2017, compared to the threenine months ended March 31,September 30, 2016, due to decreased revenue discussed above and tighterlower margins on new work performed during 2017.
General and administrative expenses - General and administrative expenses for our Services division decreased $60,000$0.5 million for the threenine months ended March 31,September 30, 2017, compared to the threenine months ended March 31,September 30, 2016, due to lower bonuses accrued during 2017 as a result of a combination of a smaller workforce and the reduction in gross profit.our consolidated operating loss.
| | Corporate | | Three Months Ended March 31, | | Increase or (Decrease) | | Nine Months Ended September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | — |
| | $ | — |
| | $ | — |
| | —% | | $ | — |
| | $ | — |
| | $ | — |
| | —% | Gross loss | | (260 | ) | | (136 | ) | | (124 | ) | | (91.2)% | | Gross profit (loss) | | | (500 | ) | | (439 | ) | | (61 | ) | | (13.9)% | Gross profit (loss) percentage | | n/a |
| | n/a |
| | | |
| | n/a |
| | n/a |
| | | |
| General and administrative expenses | | 1,479 |
| | 1,668 |
| | (189 | ) | | (11.3)% | | 5,665 |
| | 5,132 |
| | 533 |
| | 10.4% | Operating loss | | (1,739 | ) | | (1,804 | ) | | 65 |
| | | Operating income (loss) | | | (6,165 | ) | | (5,571 | ) | | (594 | ) | |
Gross lossprofit (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 decreasedincreased primarily due to decreased bonuses as a resultrestructuring of our consolidated gross loss, partially offset bycorporate division with additional personnel allocated to our corporate division during 2017.2017 as discussed above as well as expenses incurred for advisors to assist in a strategic financial analysis project in anticipation of the proceeds 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 Consolidated Financial Statements. This has been partially offset by lower bonuses accrued during 2017 as a result of a combination of a smaller workforce and our consolidated operating loss.
Liquidity and Capital Resources Historically, we have funded our business activities through cash generated from operations. At March 31,September 30, 2017, we had no amounts outstanding under our credit facility, $4.6 million in outstanding letters of credit, and cash and cash equivalents totaling $34.7$17.8 million compared to $51.2 million at December 31, 2016. Working capital was $182.9$164.0 million and our ratio of current assets to current liabilities was 7.564.59 to 1 at March 31,September 30, 2017, compared to $78.0 million and 3.23.21 to 1, respectively, at December 31, 2016. Working capital at March 31,September 30, 2017, includes $110.5$107.0 million related to assets held for sale, primarily related to our South Texas facilities. Our primary use of cash during the threenine months ended September 30, 2017, is referenced in the Cash Flow Activities section below. At September 30, 2017, our contracts receivable balance was $25.5 million of which we have subsequently collected $8.3 million through October 31, 2017. On June 9, 2017, we entered into a $40.0 million credit agreement with Whitney Bank, as lender. The credit facility matures June 9, 2019 and may be used for issuing letters of credit and/or general corporate and working capital purposes. We 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 facility may be designated, at our option, as either Base Rate (as defined in the credit facility) or LIBOR plus 2.0% per annum. Unused commitment fees on the undrawn portion of the facility are 0.4% per annum, and interest on undrawn stated amounts under letters of credit issued by the lenders is 2.0% per annum. The credit facility is secured by substantially all of our assets (other than the assets of Gulf Marine Fabricators, L.P., the legal entity that holds our South Texas assets which are currently held for sale).
We must comply with the following 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, we terminated our prior credit facility with JPMorgan Chase Bank, N.A. At the time of the termination, there was approximately $4.6 million of 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 future, additional letters of credit and borrowings is $35.4 million. As of September 30, 2017, we were in compliance with all of our covenants.
Our primary liquidity requirements are for the costs associated with fabrication projects, capital expenditures and payment of dividends to our shareholders. We do not anticipate significant capital expenditures for the remainder of 2017.
On October 21, 2016, a customer of our Shipyards division announced it was in noncompliance with certain financial covenants included in the customer’s debt agreements and stated that, while it had received limited waivers from its lenders, its debt agreements would require further negotiation and amendment. This same customer rejected delivery of the first vessel that we completed and tendered for delivery on February 6, 2017, alleging certain technical deficiencies exist with respect to the vessel. On March 31,10, 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 included in our arbitration proceedings. We disagree with our customer concerning these alleged technical deficiencies and have put the customer in 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 United 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, 2017, 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 impacted by Hurricane Harvey, which made landfall as a category 4 hurricane. As a result, we suffered damages to our South Texas buildings and equipment. Through September 30, 2017, we have incurred approximately $265,000 in clean-up and repair related costs and we expect to incur additional future repair costs in excess of our 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 time and that insurance proceeds will at a minimum be sufficient to reimburse us for all damages and repair costs. Our final
assessment of the loss incurred to our South 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 such differences could be material.
In event of one or more sales of our South Texas assets, we expect to use all or a portion of the sales proceeds to invest in our operating liquidity in order to facilitate 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 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 26, 2017, our Board of Directors declared a dividend of $0.01 per share on our shares of common stock outstanding, payable November 24, 2017, to shareholders of record on November 10, 2017.
We believe our cash and cash equivalents generated by our future operating activities, proceeds to be received from insurance underwriters, availability under our line of credit and proceeds to be received from future assets sales will be sufficient to fund our capital expenditures and meet our working capital needs for next twelve months to continue to operate, satisfy our contractual operations and pay dividends to our shareholders.
Cash Flow Activities
For the nine months ended September 30, 2017, net cash used in operating activities was $29.6 million, compared to net cash provided by operating activities of $19.4 million for the nine months ended September 30, 2016. The use of cash in operations during the period was primarily due to:to the following:
Operating losses for the quarter exclusivenine months ended September 30, 2017, in excess of non-cash depreciation, amortization, impairment and stock compensation expense of approximately $3.7$19.6 million, Payment of year-end bonuses related to 2016, Progress on liabilities from assumed contracts in the LEEVAC transaction.Whiletransaction. While our purchase price for the acquisition of the LEEVAC assets during 2016 was $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 us in the transaction. We have significantly progressed these contracts, which in turn has resulted in utilization of the working capital and settlement payments received during 2016. Fewer receipts from accounts receivable, primarily $4.6 million from one customer that refusedThe suspension of two vessel projects following our customer’s refusal to accept delivery of athe first vessel onin February 6, 2017, and has not paid. We have initiated arbitration proceedings duringour inability to collect $9.5 million in scheduled payments under these contracts. See also Note 9 of the quarterNotes to enforce our rights under our construction contract,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 beginninglater in the third quarter of 2017 through the first quarterhalf of 2018. At March 31, 2017, our contracts receivable balance was $21.1 million of which we have subsequently collected $4.1 million through April 21, 2017.
As of March 31, 2017, we had a credit agreement with Whitney Bank and JPMorgan Chase Bank N.A. that provides for a $40.0 million revolving credit facility maturing November 29, 2018. The credit agreement allows the Company to use up to the full amount of the available borrowing base for letters of credit and for general corporate purposes. Our obligations under the credit agreement are secured by substantially all of our assets (other than real estate). Commitment fees on undrawn amounts are 0.5% per annum and letter of credit fees, subject to certain limited exceptions, are 2.0% per annum on undrawn stated amounts under letters of credit issued by the lenders. Amounts borrowed under 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. Our financial covenants at March 31, 2017, are as follows:
| | (i) | minimum net worth requirement of not less than 255.0 million plus |
| | a) | 50% of net income earned in each quarter beginning December 31, 2016, and |
| | b) | 100% of proceeds from any issuance of common stock; |
| | c) | less the amount of any impairment on certain assets owned by Gulf Marine Fabricators, L.P. (our South Texas assets held for sale) up to $30.0 million; |
| | (ii) | debt to EBITDA ratio not greater than 2.5 to 1.0; and |
| | (iii) | interest coverage ratio not less than 2.0 to 1.0. |
At March 31, 2017, no amounts were outstanding under the credit facility, and we had outstanding letters of credit totaling $4.6 million, reducing the unused portion of our credit facility for additional letters of credit and borrowings to $35.4 million. As of March 31, 2017, we were in compliance with all covenants.
We are currently in discussions with one of our financial institutions to enter into a new revolving line of credit with comparable availability, but with less restrictive financial covenants and reduced fees as compared to our current revolving credit facility. We expect to close on this new revolving credit facility and terminate our existing revolving credit facility in the second quarter of 2017.
Our primary liquidity requirements are for the costs associated with fabrication projects, capital expenditures and payment of dividends to our shareholders. We anticipate capital expenditures for the remainder of 2017 to range between $6.0 million to $8.0 million primarily for the following:
improvements to our Jennings and Lake Charles leased shipyards,
improvement to the bulkhead at our Houma facility, and
computer system upgrades.
On October 21, 2016, a customer of our Shipyards division announced it was in noncompliance with certain financial covenants included in the customer’s debt agreements. This customer also stated it had received limited waivers from its lenders and noteholders, but its debt agreements will require further negotiation and amendment. On April 19, 2017, the customer stated it had allowed the waivers to expire and remains in default of its covenants.
This same customer has rejected delivery of the vessel that we tendered for delivery on February 6, 2017, alleging certain technical deficiencies exist with respect to the vessel and is seeking recovery of all purchase price amounts previously paid by the customer under the contract. We are also building a second vessel for this customer that is scheduled for delivery during the second quarter of 2017. We disagree with our customer concerning these alleged technical deficiencies and have put the customer in default under the terms of the contracts for both vessels. As of March 31, 2017, approximately $4.6 million remained due and outstanding from our customer for the first vessel. The balance due to us upon delivery for a second vessel which is expected in May of this year, is approximately $4.9 million. On March 10, 2017, we gave notice for arbitration with our customer in an effort to resolve this matter. We intend to take all legal action as may be necessary to protect our rights under the contracts and recover the remaining balances owed to us.
We continue to monitor our work performed in relation to our customer’s status and its ability to pay under the terms of these contracts. Because these vessels have been completed or are substantially complete, we believe that they have significant fair value, and that we would be able to fully recover any amounts due to us.
In anticipation of the proceeds to be received from the sale of our South Texas assets, we have engaged in a strategic financial analysis project with advisors to determine the appropriate use of proceeds from this transaction. We will be evaluating a mix of options including tactical capital improvement projects, strategic growth investment opportunities that support our business plan, stock buy-backs and/or dividends and working capital reinvestment.
On April 26, 2017, our Board of Directors declared a dividend of $0.01 per share on our shares of common stock outstanding, payable May 25, 2017, to shareholders of record on May 11, 2017.
We believe our cash and cash equivalents generated by our operating activities and proceeds to be received from future assets sales will be sufficient to fund our capital expenditures and meet our working capital needs for both the near and longer term to continue our operations, satisfy our contractual operations and pay dividends to our shareholders. Additionally, we expect to close on a new revolving line of credit during the second quarter of 2017 as discussed above. We believe that the new facility will provide us with additional working capital flexibility to ramp up our operations quickly in times of rapid increasing demand, to continue to issue future letters of credit and to quickly take advantage of market opportunities.
Cash Flow Activities
For the three months ended March 31, 2017, net cash used in operating activities was $15.1 million, compared to $1.6 million for the three months ended March 31, 2016. The increase in cash used in operations was primarily due to the following:
Operating losses for the quarter in excess of non-cash depreciation, amortization, impairment and stock compensation expense of approximately $3.7 million,
Payment of year-end bonuses related to 2016,
Progress on liabilities from assumed contracts in the LEEVAC transaction.While our purchase price for the acquisition of the LEEVAC assets during 2016 was $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 us in the transaction. We have significantly progressed these contracts which in turn, has resulted in utilization of the working capital and settlement payments received during 2016.
Fewer receipts from accounts receivable, primarily $4.6 million from one customer that refused delivery of a vessel on February 6, 2017, and has not paid. We have initiated arbitration proceedings during the quarter to enforce our rights under our construction contract, and
Build-up of costs for contracts in progress related to a customer in our Shipyards division with significant milestone payments occurring in the later stages of the projects which are expected to occur beginning in the third quarter of 2017 through the first quarter of 2018.
Net cash used in investing activities for the threenine months ended March 31,September 30, 2017, was $391,000,$2.4 million, compared to cash provided by investing activities of $6.2$2.0 million for the threenine months ended March 31,September 30, 2016. The change in cash used in/provided by investing activities is primarily due to cash received from the sale of three cranes at our Texas facility for $5.4$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 threenine months ended March 31,September 30, 2017 and 2016, was $1.0$1.4 million and $291,000,$603,000, respectively. The increase in cash used in financing activities is due to the cash payments made to taxing authorities on behalf of employees'employees for their vesting of common stock. During the 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, 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, 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, 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 March 31,September 30, 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, 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 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 Chief Financial Officer, have 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 Chief Financial Officer have 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 March 31,September 30, 2017, in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION Item 1. Legal Proceedings. The Company is subject to various routine legal proceedings in the normal conduct of its business primarily involving commercial claims, workers’ compensation claims, and claims for personal injury under general maritime laws of the United States and the Jones Act. While the outcome of these lawsuits, legal proceedings and claims cannot be predicted with certainty, management believes that the outcome of any such proceedings, even if determined adversely, would not have a material adverse effect on the financial position, results of operations or cash flows of the Company. Item 1A. Risk Factors. There have been no material changes from the information included in Item 1A “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2016. | | | | | Exhibit Number | | Description of Exhibit | | | 3.1 | | | 3.2 | | | 10.1 | | Change of Control Agreement, dated March 1, 2017, between the Company and David S. Schorlemer, incorporated by reference to Exhibit 10.15 of the Company's Form 10-K for the year ended December 31, 2016 filed on March 2, 2017. | 31.1 | | | 31.2 | | | 32 | | | | | | 101 | | Attached as Exhibit 101 to this report are the following items formatted in XBRL (Extensible Business Reporting Language): | | | (i) | Consolidated Balance Sheets, | | | (ii) | Consolidated Statements of Operations, | | | (iii) | Consolidated Statement of Changes in Shareholders’ Equity, | | | (iv) | Consolidated Statements of Cash Flows and | | | (v) | Notes to Consolidated Financial Statements. |
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. | | | GULF ISLAND FABRICATION, INC. | | BY: | /s/ David S. Schorlemer | | David S. Schorlemer | | Executive Vice President, Chief Financial Officer, and Treasurer (Principal Financial and Accounting Officer) |
Date: May 2,October 31, 2017
GULF ISLAND FABRICATION, INC. EXHIBIT INDEX | | | | | Exhibit Number | | Description of Exhibit | | | 3.1 | | | 3.2 | | | 10.1 | | Change of Control Agreement, dated March 1, 2017, between the Company and David S. Schorlemer, incorporated by reference to Exhibit 10.15 of the Company's Form 10-K for the year ended December 31, 2016 filed on March 2, 2017. | 31.1 | | | 31.2 | | | 32 | | | | | | 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 March 31, 2017, includes commitments received through April 26, 2017. We exclude suspended projects from contract backlog when 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. |
| | 2.(2) | At March 31,September 30, 2017, projects for our twofive largest customers in terms of revenue backlog consisted of: |
| | (i) | 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 quarters2018; |
| | (ii) | Newbuild construction of 2018; andfour harbor tugs for one customer within our Shipyards division; |
| | (ii)(iii) | theNewbuild 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.project within our Fabrication division; and |
| | 3.(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 March 31,September 30, 2017, we had 922 employees and 133 contract989 employees compared to 1,178 employees and 92 contract employees as of December 31, 2016. Labor hours worked were 479,0001.5 million during the threenine months ended March 31,September 30, 2017, compared to 695,0002.3 million for the threenine months ended March 31,September 30, 2016. The overall decrease in labor hours worked for the threenine months ended March 31,September 30, 2017, was due 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.
Results of Operations Three Months Ended March 31,September 30, 2017, Compared to Three Months Ended March 31,September 30, 2016 (in thousands, except for percentages): Consolidated | | | | | | | | | | | | | | | Three Months Ended March 31, | | Increase or (Decrease) | | 2017 | | 2016 | | Amount | Percent | Revenue | $ | 37,993 |
| | $ | 83,979 |
| | $ | (45,986 | ) | (54.8)% | Cost of revenue | 42,890 |
| | 78,278 |
| | (35,388 | ) | (45.2)% | Gross profit (loss) | (4,897 | ) | | 5,701 |
| | (10,598 | ) | 185.9% | Gross profit (loss) percentage | (12.9)% | | 6.8% | | | | General and administrative expenses | 3,930 |
| | 4,485 |
| | (555 | ) | (12.4)% | Asset impairment | 389 |
| | — |
| | 389 |
| 100.0% | Operating income (loss) | (9,216 | ) | | 1,216 |
| | (10,432 | ) | (857.9)% | Other income (expense): | | | | | | | Interest expense | (59 | ) | | (50 | ) | | (9 | ) | | Interest income | — |
| | 6 |
| | (6 | ) | | Other income, net | 9 |
| | 398 |
| | (389 | ) | | Total other income (expense) | (50 | ) | | 354 |
| | (404 | ) | (114.1)% | Net income (loss) before income taxes | (9,266 | ) | | 1,570 |
| | (10,836 | ) | (690.2)% | Income taxes | (2,812 | ) | | 581 |
| | (3,393 | ) | (584.0)% | Net income (loss) | $ | (6,454 | ) | | $ | 989 |
| | $ | (7,443 | ) | (752.6)% |
| | | | | | | | | | | | | | | 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 revenue for the three months ended March 31,September 30, 2017 and 2016, was $38.0$49.9 million and $84.0$65.4 million, respectively, representing a decrease of 54.8%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 29.4%48.4% and 40.0%33.8% for the three-monthsthree months ended March 31,September 30, 2017 and 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 loss for the three months ended March 31,September 30, 2017, was $4.9 million$494,000 compared to a gross profit of $5.7$5.3 million for the three months ended March 31,September 30, 2016. The decrease was primarily due to $2.1 million of contract losses incurred by our Shipyards division related to cost overruns and re-work identified on two newbuild vessel construction
contracts, decreased revenue as discussed above, holding costs related to our South Texas assets of $1.1 million and tighterlower margins on current work due to competitive pressures. This was partially offset by decreases in costs resulting from additionalreductions in workforce as we wrapped up and completed projects at our South 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 assets held for sale) and continued cost cutting measuresminimization efforts implemented by management.management for the period.
General and administrative expenses - Our general and administrative expenses were $3.9$4.4 million for the three months ended March 31,September 30, 2017, compared to $4.5$5.1 million for the three months ended March 31,September 30, 2016. The decrease in general and administrative expenses for the three months ended March 31,September 30, 2017, was primarily attributable to cost cutting measures implemented by management during the first part of 2016 as well as lower bonuses accrued during 2017, as a result of a combination of a smaller workforceemployee reductions and our consolidated gross loss.continued cost minimization efforts implemented by management for the period.
Asset Impairment - During three months ended March 31, 2017, we recorded an impairment of $389 related to our assets held for sale at our Prospect Shipyard. See also Note 2 of the Notes to Consolidated Financial statements.
Other income (expense), net - Other income decreased $389,000was $38,000 for the three months ended March 31, 2017. The decreaseSeptember 30, 2017, as compared to other income of $599,000 for three months ended September 30, 2016. Other income for the three months ended September 30, 2017 relates to insurance proceeds received from damage to a corporate automobile that was fully depreciated. Other income for for three months ended September 30, 2016 primarily duerelates to gains on sales of assets from our Fabrication division recorded during three months ended March 31, 2016.division.
Income taxestax expense (benefit) - Our effective income tax rate for the three months ended March 31,September 30, 2017, was 30.3%36.2%, compared to an effective tax rate of 37.0%19.7% for the comparable period during 2016. The decreaseincrease in the effective tax rate is the result of limitations on the deductibilitychanges to estimates of executive compensation and $210,000 inour year-end tax expense recognizedprovision during for the three months ended March 31, 2017, for the tax effect of the difference between the actual tax deduction allowed upon vesting of common stock and the compensation cost recognized for financial reporting purposes resulting from the adoption of Accounting Standards Update 2016-09 as further discussed in Note 1 of the Notes to the Consolidated Financial Statements.September 30, 2016.
Operating Segments
As discussed in Note 8 of the Notes to Consolidated Financial Statements, management reduced its allocation of corporate administrative costs and overhead expenses to its operating divisions during the three and nine months ended March 31,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 it'sits Corporate division each meeting the criteria of reportable segments under GAAP. During the three and nine months ended March 31,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 March 31,September 30, 2017 and 2016, are presented below (in thousands, except for percentages).
| | | | | | | | | | | | | | | | Fabrication | | Three Months Ended March 31, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | 10,209 |
| | $ | 23,829 |
| | $ | (13,620 | ) | | (57.2)% | Gross profit (loss) | | (2,966 | ) | | 86 |
| | (3,052 | ) | | (3,548.8)% | Gross profit (loss) percentage | | (29.1 | )% | | 0.4 | % | | | | (29.5)% | General and administrative expenses | | 821 |
| | 795 |
| | 26 |
| | 3.3% | Operating income (loss) | | (3,787 | ) | | (709 | ) | | | | |
| | | | | | | | | | | | | | | | 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 $13.6$4.0 million for the three months ended March 31,September 30, 2017, compared to the three months ended March 31,September 30, 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 (loss) - Gross profit from our Fabrication division for the three months ended September 30, 2017, was $1.3 million compared to a gross profit of $601,000 for the three months ended September 30, 2016. The increase in gross profit was due to
Gains 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 completed projects at our South Texas fabrication yards, No depreciation being recorded for our South Texas assets for the three months ended September 30, 2017, 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, 2016. The decrease is primarily due to decreases in costs resulting from lower bonuses accrued during 2017 as a result of our consolidated operating loss, reductions in workforce at our South Texas fabrication yards and continued cost minimization efforts implemented by management for the period.
| | | | | | | | | | | | | | | | 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, respectively. |
Revenue - Revenue from our Shipyards division decreased $8.0 million for the three months ended September 30, 2017, compared to the three months ended September 30, 2016, due to the corresponding reduction in customer demand for shipbuilding and repair services supporting the oil 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 for the three months ended September 30, 2017, compared to a gross profit of $1.9 million for the three months ended September 30, 2016. 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, 2016, primarily due to reductions of administrative personnel related to consolidation of personnel duties from the LEEVAC transaction. 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 management for the period during the first part of 2016.
| | | | | | | | | | | | | | | | 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, 2017, compared to the three months ended September 30, 2016, due to an overall decrease in work experienced as a result of depressed oil and gas prices and the corresponding reduction in customer demand for oil and gas related service projects.
Gross profit - Gross profit from our Services division decreased $1.0 million for the three 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 combination of a smaller workforce and our 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 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 proceeds 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 Consolidated Financial Statements. This has been partially offset by lower bonuses accrued during the quarter due to our consolidated operating loss.
Nine Months Ended September 30, 2017, Compared to Nine Months Ended September 30, 2016 (in thousands, 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, 2017 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 45.3% and 35.0% for the nine months ended September 30, 2017 and 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 loss for the nine months ended September 30, 2017, was $17.0 million compared to a gross profit of $25.0 million for the nine months ended September 30, 2016. The decrease was primarily due to $12.7 million of losses incurred by our Shipyards division related to cost overruns and re-work identified on two newbuild vessel construction contracts, decreased revenue as discussed above, holding costs related to our South Texas assets of $3.6 million and lower 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 our South Texas assets and Prospect shipyard during the nine months ended September 30, 2017, as these assets are classified as assets held for sale and additional cost minimization efforts implemented 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. The decrease in general and administrative expenses for the nine months ended September 30, 2017, is primarily due to decreases in costs resulting from reductions in workforce at our South Texas fabrication yards, lower bonuses accrued during 2017 as a result of our consolidated operating loss and continued cost minimization efforts implemented by management for the period.
Asset Impairment - During the 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.
Other income (expense), net - Other expense was $221,000 for the nine months ended September 30, 2017, compared to other income of $1.0 million for the nine months ended September 30, 2016. Other 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 on sales of assets from our Fabrication division recorded during 2016.
Income tax expense (benefit) - Our effective income tax rate for the nine months ended September 30, 2017, was 33.5%, compared to an effective tax rate of 36.9% for the comparable period during 2016. The decrease in the effective tax rate is the result of limitations on the deductibility of executive compensation.
Operating Segments
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 $27.9 million for the nine months ended September 30, 2017, compared to the nine months ended September 30, 2016. The decrease is attributable to an overall decrease in work experienced in our fabrication yards as a result of depressed oil and gas prices and the corresponding reduction in customer demand for offshore fabrication projects. As discussed above, management has classified our South Texas assets as assets held for sale in response to the underutilization of our Fabrication assets. As of September 30, 2017, all of our projects at our South Texas fabrication yards have been completed or transferred to our Houma fabrication yard.
Gross profit (loss) - Gross lossprofit from our Fabrication division for the threenine months ended March 31,September 30, 2017, was $3.0 million$216,000 compared to a gross profit of $86,000$4.6 million for the threenine months ended March 31,September 30, 2016. The decrease was due to lower revenue
from decreased fabrication work as discussed above paymentand approximately $3.6 million of termination benefits as we reduce our South Texas workforce and depreciation expense of $1.9 million related toholding costs for our South Texas assets prior to their classification as assets heldwe 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, 2017, as these assets are classified as assets held for sale on February 23, 2017, and additional cost cutting measuresminimization efforts implemented by management.management for the period.
General and administrative expenses - General and administrative expenses for our Fabrication division increased $26,000decreased $389,000 for the threenine months ended March 31,September 30, 2017, compared to the threenine months ended March 31,September 30, 2016. The increasedecrease is primarily due to decreases in costs resulting from reductions in workforce as we wrapped up and completed projects at our South Texas fabrication yards and lower bonuses accrued during 2017 as a result of a combination of a smaller workforce and our consolidated operating loss. This was partially offset by expenses incurred to market our South Texas assets for sale and payment of termination benefits during the first quarter of 2017 as we reducereduced its workforce and completecompleted those operations.
| | | | | | | | | | | | | | | | Shipyards | | Three Months Ended March 31, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue (1) | | $ | 18,422 |
| | $ | 34,120 |
| | $ | (15,698 | ) | | (46.0)% | Gross profit (loss)(1) | | (1,704 | ) | | 2,375 |
| | (4,079 | ) | | (171.7)% | Gross profit (loss) percentage | | (9.2 | )% | | 7.0 | % | | | | (16.2)% | General and administrative expenses | | 964 |
| | 1,296 |
| | (332 | ) | | (25.6)% | Asset impairment | | 389 |
| | — |
| | 389 |
| | 100.0% | Operating income (loss) (1) | | (3,057 | ) | | 1,079 |
| | | | |
| | | | | | | | | | | | | | | | 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 threenine months ended March 31,September 30, 2017, and 2016, includes $1.6$2.4 million and $1.2$4.1 million of non-cash amortization of deferred revenue related to the values assigned to the contracts acquired in the LEEVAC transaction, respectively. |
Revenue - Revenue from our Shipyards division decreased $15.7$34.8 million for the threenine months ended March 31,September 30, 2017, compared to the threenine months ended March 31,September 30, 2016, due to overall decreases in work as we complete work under our contracts
including completion of a vessel that we assumed in the LEEVAC transaction and delivered to a customer on February 6, 2017, with less new, replacement work starting during the period as compared to the three months ended March 31, 2016. The decrease in new, replacement work is due to depressed oil and gas prices and the corresponding reduction in customer demand for shipbuilding and repair services supporting the oil and gas industry.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 $1.7$19.1 million for the threenine months ended March 31,September 30, 2017, compared to a gross profit of $2.4$9.7 million for the threenine months ended March 31,September 30, 2016. The decrease was due to:
continued$12.7 million in contract losses related to cost overruns and re-work that has been identified on two newbuild vessel construction contracts that were assignedwithin our Shipyards division;
Holding and closing costs related to us in the LEEVAC transaction;our Prospect shipyard as we wind down operations at this facility; holdingHolding 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
overallOverall decreases in work under other various contracts as discussed above;contracts.
partially offset by savings realized from cost cutting measures implemented by management during 2016.
General and administrative expenses - General and administrative expenses for our Shipyards division decreased $332,000$1.4 million for the threenine months ended March 31,September 30, 2017, compared to the threenine months ended March 31,September 30, 2016, primarily due to cost cutting measures implemented by management during 2016 as well asreductions of administrative personnel related to consolidation of personnel duties from the LEEVAC transaction. Additionally, our Shipyards division incurred lower bonuses accrued during 2017 as a result of a combination of a smaller workforce and our consolidated gross loss.operating loss and cost minimization efforts implemented by management for the period.
Asset Impairment - During threenine months ended March 31,September 30, 2017, we recorded an impairment of $389$389,000 related to our assets held for sale at our Prospect Shipyard.shipyard. See also Note 2 of the Notes to Consolidated Financial statements.Statements.
| | | | | | | | | | | | | | | | Services | | Three Months Ended March 31, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | 10,712 |
| | $ | 26,559 |
| | $ | (15,847 | ) | | (59.7)% | Gross profit | | 33 |
| | 3,376 |
| | (3,343 | ) | | (99.0)% | Gross profit (loss) percentage | | 0.3 | % | | 12.7 | % | | | | (12.4)% | General and administrative expenses | | 666 |
| | 726 |
| | (60 | ) | | (8.3)% | Operating income (loss) | | (633 | ) | | 2,650 |
| | | | |
| | | | | | | | | | | | | | | | 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 $15.8$32.4 million for the threenine months ended March 31,September 30, 2017, compared to the threenine months ended March 31,September 30, 2016, due to an overall decrease in work experienced as a result of depressed oil and gas prices and the corresponding reduction in customer demand for oil and gas related service projects.
Gross profit - Gross profit from our Services division decreased $3.3$8.8 million for the threenine months ended March 31,September 30, 2017, compared to the threenine months ended March 31,September 30, 2016, due to decreased revenue discussed above and tighterlower margins on new work performed during 2017.
General and administrative expenses - General and administrative expenses for our Services division decreased $60,000$0.5 million for the threenine months ended March 31,September 30, 2017, compared to the threenine months ended March 31,September 30, 2016, due to lower bonuses accrued during 2017 as a result of a combination of a smaller workforce and the reduction in gross profit.our consolidated operating loss.
| | | | | | | | | | | | | | | | Corporate | | Three Months Ended March 31, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | — |
| | $ | — |
| | $ | — |
| | —% | Gross loss | | (260 | ) | | (136 | ) | | (124 | ) | | (91.2)% | Gross profit (loss) percentage | | n/a |
| | n/a |
| | | |
| General and administrative expenses | | 1,479 |
| | 1,668 |
| | (189 | ) | | (11.3)% | Operating loss | | (1,739 | ) | | (1,804 | ) | | 65 |
| | |
| | | | | | | | | | | | | | | | 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 lossprofit (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 decreasedincreased primarily due to decreased bonuses as a resultrestructuring of our consolidated gross loss, partially offset bycorporate division with additional personnel allocated to our corporate division during 2017.2017 as discussed above as well as expenses incurred for advisors to assist in a strategic financial analysis project in anticipation of the proceeds 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 Consolidated Financial Statements. This has been partially offset by lower bonuses accrued during 2017 as a result of a combination of a smaller workforce and our consolidated operating loss.
Liquidity and Capital Resources Historically, we have funded our business activities through cash generated from operations. At March 31,September 30, 2017, we had no amounts outstanding under our credit facility, $4.6 million in outstanding letters of credit, and cash and cash equivalents totaling $34.7$17.8 million compared to $51.2 million at December 31, 2016. Working capital was $182.9$164.0 million and our ratio of current assets to current liabilities was 7.564.59 to 1 at March 31,September 30, 2017, compared to $78.0 million and 3.23.21 to 1, respectively, at December 31, 2016. Working capital at March 31,September 30, 2017, includes $110.5$107.0 million related to assets held for sale, primarily related to our South Texas facilities. Our primary use of cash during the threenine months ended September 30, 2017, is referenced in the Cash Flow Activities section below. At September 30, 2017, our contracts receivable balance was $25.5 million of which we have subsequently collected $8.3 million through October 31, 2017. On June 9, 2017, we entered into a $40.0 million credit agreement with Whitney Bank, as lender. The credit facility matures June 9, 2019 and may be used for issuing letters of credit and/or general corporate and working capital purposes. We 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 facility may be designated, at our option, as either Base Rate (as defined in the credit facility) or LIBOR plus 2.0% per annum. Unused commitment fees on the undrawn portion of the facility are 0.4% per annum, and interest on undrawn stated amounts under letters of credit issued by the lenders is 2.0% per annum. The credit facility is secured by substantially all of our assets (other than the assets of Gulf Marine Fabricators, L.P., the legal entity that holds our South Texas assets which are currently held for sale).
We must comply with the following 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, we terminated our prior credit facility with JPMorgan Chase Bank, N.A. At the time of the termination, there was approximately $4.6 million of 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 future, additional letters of credit and borrowings is $35.4 million. As of September 30, 2017, we were in compliance with all of our covenants.
Our primary liquidity requirements are for the costs associated with fabrication projects, capital expenditures and payment of dividends to our shareholders. We do not anticipate significant capital expenditures for the remainder of 2017.
On October 21, 2016, a customer of our Shipyards division announced it was in noncompliance with certain financial covenants included in the customer’s debt agreements and stated that, while it had received limited waivers from its lenders, its debt agreements would require further negotiation and amendment. This same customer rejected delivery of the first vessel that we completed and tendered for delivery on February 6, 2017, alleging certain technical deficiencies exist with respect to the vessel. On March 31,10, 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 included in our arbitration proceedings. We disagree with our customer concerning these alleged technical deficiencies and have put the customer in 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 United 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, 2017, 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 impacted by Hurricane Harvey, which made landfall as a category 4 hurricane. As a result, we suffered damages to our South Texas buildings and equipment. Through September 30, 2017, we have incurred approximately $265,000 in clean-up and repair related costs and we expect to incur additional future repair costs in excess of our 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 time and that insurance proceeds will at a minimum be sufficient to reimburse us for all damages and repair costs. Our final
assessment of the loss incurred to our South 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 such differences could be material.
In event of one or more sales of our South Texas assets, we expect to use all or a portion of the sales proceeds to invest in our operating liquidity in order to facilitate 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 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 26, 2017, our Board of Directors declared a dividend of $0.01 per share on our shares of common stock outstanding, payable November 24, 2017, to shareholders of record on November 10, 2017.
We believe our cash and cash equivalents generated by our future operating activities, proceeds to be received from insurance underwriters, availability under our line of credit and proceeds to be received from future assets sales will be sufficient to fund our capital expenditures and meet our working capital needs for next twelve months to continue to operate, satisfy our contractual operations and pay dividends to our shareholders.
Cash Flow Activities
For the nine months ended September 30, 2017, net cash used in operating activities was $29.6 million, compared to net cash provided by operating activities of $19.4 million for the nine months ended September 30, 2016. The use of cash in operations during the period was primarily due to:to the following:
Operating losses for the quarter exclusivenine months ended September 30, 2017, in excess of non-cash depreciation, amortization, impairment and stock compensation expense of approximately $3.7$19.6 million, Payment of year-end bonuses related to 2016, Progress on liabilities from assumed contracts in the LEEVAC transaction.Whiletransaction. While our purchase price for the acquisition of the LEEVAC assets during 2016 was $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 us in the transaction. We have significantly progressed these contracts, which in turn has resulted in utilization of the working capital and settlement payments received during 2016. Fewer receipts from accounts receivable, primarily $4.6 million from one customer that refusedThe suspension of two vessel projects following our customer’s refusal to accept delivery of athe first vessel onin February 6, 2017, and has not paid. We have initiated arbitration proceedings duringour inability to collect $9.5 million in scheduled payments under these contracts. See also Note 9 of the quarterNotes to enforce our rights under our construction contract,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 beginninglater in the third quarter of 2017 through the first quarterhalf of 2018. At March 31, 2017, our contracts receivable balance was $21.1 million of which we have subsequently collected $4.1 million through April 21, 2017.
As of March 31, 2017, we had a credit agreement with Whitney Bank and JPMorgan Chase Bank N.A. that provides for a $40.0 million revolving credit facility maturing November 29, 2018. The credit agreement allows the Company to use up to the full amount of the available borrowing base for letters of credit and for general corporate purposes. Our obligations under the credit agreement are secured by substantially all of our assets (other than real estate). Commitment fees on undrawn amounts are 0.5% per annum and letter of credit fees, subject to certain limited exceptions, are 2.0% per annum on undrawn stated amounts under letters of credit issued by the lenders. Amounts borrowed under 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. Our financial covenants at March 31, 2017, are as follows:
| | (i) | minimum net worth requirement of not less than 255.0 million plus |
| | a) | 50% of net income earned in each quarter beginning December 31, 2016, and |
| | b) | 100% of proceeds from any issuance of common stock; |
| | c) | less the amount of any impairment on certain assets owned by Gulf Marine Fabricators, L.P. (our South Texas assets held for sale) up to $30.0 million; |
| | (ii) | debt to EBITDA ratio not greater than 2.5 to 1.0; and |
| | (iii) | interest coverage ratio not less than 2.0 to 1.0. |
At March 31, 2017, no amounts were outstanding under the credit facility, and we had outstanding letters of credit totaling $4.6 million, reducing the unused portion of our credit facility for additional letters of credit and borrowings to $35.4 million. As of March 31, 2017, we were in compliance with all covenants.
We are currently in discussions with one of our financial institutions to enter into a new revolving line of credit with comparable availability, but with less restrictive financial covenants and reduced fees as compared to our current revolving credit facility. We expect to close on this new revolving credit facility and terminate our existing revolving credit facility in the second quarter of 2017.
Our primary liquidity requirements are for the costs associated with fabrication projects, capital expenditures and payment of dividends to our shareholders. We anticipate capital expenditures for the remainder of 2017 to range between $6.0 million to $8.0 million primarily for the following:
improvements to our Jennings and Lake Charles leased shipyards,
improvement to the bulkhead at our Houma facility, and
computer system upgrades.
On October 21, 2016, a customer of our Shipyards division announced it was in noncompliance with certain financial covenants included in the customer’s debt agreements. This customer also stated it had received limited waivers from its lenders and noteholders, but its debt agreements will require further negotiation and amendment. On April 19, 2017, the customer stated it had allowed the waivers to expire and remains in default of its covenants.
This same customer has rejected delivery of the vessel that we tendered for delivery on February 6, 2017, alleging certain technical deficiencies exist with respect to the vessel and is seeking recovery of all purchase price amounts previously paid by the customer under the contract. We are also building a second vessel for this customer that is scheduled for delivery during the second quarter of 2017. We disagree with our customer concerning these alleged technical deficiencies and have put the customer in default under the terms of the contracts for both vessels. As of March 31, 2017, approximately $4.6 million remained due and outstanding from our customer for the first vessel. The balance due to us upon delivery for a second vessel which is expected in May of this year, is approximately $4.9 million. On March 10, 2017, we gave notice for arbitration with our customer in an effort to resolve this matter. We intend to take all legal action as may be necessary to protect our rights under the contracts and recover the remaining balances owed to us.
We continue to monitor our work performed in relation to our customer’s status and its ability to pay under the terms of these contracts. Because these vessels have been completed or are substantially complete, we believe that they have significant fair value, and that we would be able to fully recover any amounts due to us.
In anticipation of the proceeds to be received from the sale of our South Texas assets, we have engaged in a strategic financial analysis project with advisors to determine the appropriate use of proceeds from this transaction. We will be evaluating a mix of options including tactical capital improvement projects, strategic growth investment opportunities that support our business plan, stock buy-backs and/or dividends and working capital reinvestment.
On April 26, 2017, our Board of Directors declared a dividend of $0.01 per share on our shares of common stock outstanding, payable May 25, 2017, to shareholders of record on May 11, 2017.
We believe our cash and cash equivalents generated by our operating activities and proceeds to be received from future assets sales will be sufficient to fund our capital expenditures and meet our working capital needs for both the near and longer term to continue our operations, satisfy our contractual operations and pay dividends to our shareholders. Additionally, we expect to close on a new revolving line of credit during the second quarter of 2017 as discussed above. We believe that the new facility will provide us with additional working capital flexibility to ramp up our operations quickly in times of rapid increasing demand, to continue to issue future letters of credit and to quickly take advantage of market opportunities.
Cash Flow Activities
For the three months ended March 31, 2017, net cash used in operating activities was $15.1 million, compared to $1.6 million for the three months ended March 31, 2016. The increase in cash used in operations was primarily due to the following:
Operating losses for the quarter in excess of non-cash depreciation, amortization, impairment and stock compensation expense of approximately $3.7 million,
Payment of year-end bonuses related to 2016,
Progress on liabilities from assumed contracts in the LEEVAC transaction.While our purchase price for the acquisition of the LEEVAC assets during 2016 was $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 us in the transaction. We have significantly progressed these contracts which in turn, has resulted in utilization of the working capital and settlement payments received during 2016.
Fewer receipts from accounts receivable, primarily $4.6 million from one customer that refused delivery of a vessel on February 6, 2017, and has not paid. We have initiated arbitration proceedings during the quarter to enforce our rights under our construction contract, and
Build-up of costs for contracts in progress related to a customer in our Shipyards division with significant milestone payments occurring in the later stages of the projects which are expected to occur beginning in the third quarter of 2017 through the first quarter of 2018.
Net cash used in investing activities for the threenine months ended March 31,September 30, 2017, was $391,000,$2.4 million, compared to cash provided by investing activities of $6.2$2.0 million for the threenine months ended March 31,September 30, 2016. The change in cash used in/provided by investing activities is primarily due to cash received from the sale of three cranes at our Texas facility for $5.4$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 threenine months ended March 31,September 30, 2017 and 2016, was $1.0$1.4 million and $291,000,$603,000, respectively. The increase in cash used in financing activities is due to the cash payments made to taxing authorities on behalf of employees'employees for their vesting of common stock. During the 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, 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, 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, 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 March 31,September 30, 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, 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 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 Chief Financial Officer, have 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 Chief Financial Officer have 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 March 31,September 30, 2017, in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION Item 1. Legal Proceedings. The Company is subject to various routine legal proceedings in the normal conduct of its business primarily involving commercial claims, workers’ compensation claims, and claims for personal injury under general maritime laws of the United States and the Jones Act. While the outcome of these lawsuits, legal proceedings and claims cannot be predicted with certainty, management believes that the outcome of any such proceedings, even if determined adversely, would not have a material adverse effect on the financial position, results of operations or cash flows of the Company. Item 1A. Risk Factors. There have been no material changes from the information included in Item 1A “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2016. | | | | | Exhibit Number | | Description of Exhibit | | | 3.1 | | | 3.2 | | | 10.1 | | Change of Control Agreement, dated March 1, 2017, between the Company and David S. Schorlemer, incorporated by reference to Exhibit 10.15 of the Company's Form 10-K for the year ended December 31, 2016 filed on March 2, 2017. | 31.1 | | | 31.2 | | | 32 | | | | | | 101 | | Attached as Exhibit 101 to this report are the following items formatted in XBRL (Extensible Business Reporting Language): | | | (i) | Consolidated Balance Sheets, | | | (ii) | Consolidated Statements of Operations, | | | (iii) | Consolidated Statement of Changes in Shareholders’ Equity, | | | (iv) | Consolidated Statements of Cash Flows and | | | (v) | Notes to Consolidated Financial Statements. |
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. | | | GULF ISLAND FABRICATION, INC. | | BY: | /s/ David S. Schorlemer | | David S. Schorlemer | | Executive Vice President, Chief Financial Officer, and Treasurer (Principal Financial and Accounting Officer) |
Date: May 2,October 31, 2017
GULF ISLAND FABRICATION, INC. EXHIBIT INDEX | | | | | Exhibit Number | | Description of Exhibit | | | 3.1 | | | 3.2 | | | 10.1 | | Change of Control Agreement, dated March 1, 2017, between the Company and David S. Schorlemer, incorporated by reference to Exhibit 10.15 of the Company's Form 10-K for the year ended December 31, 2016 filed on March 2, 2017. | 31.1 | | | 31.2 | | | 32 | | | | | | 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 March 31, 2017, includes commitments received through April 26, 2017. We exclude suspended projects from contract backlog when 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. |
| | 2.(2) | At March 31,September 30, 2017, projects for our twofive largest customers in terms of revenue backlog consisted of: |
| | (i) | 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 quarters2018; |
| | (ii) | Newbuild construction of 2018; andfour harbor tugs for one customer within our Shipyards division; |
| | (ii)(iii) | theNewbuild 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.project within our Fabrication division; and |
| | 3.(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 March 31,September 30, 2017, we had 922 employees and 133 contract989 employees compared to 1,178 employees and 92 contract employees as of December 31, 2016. Labor hours worked were 479,0001.5 million during the threenine months ended March 31,September 30, 2017, compared to 695,0002.3 million for the threenine months ended March 31,September 30, 2016. The overall decrease in labor hours worked for the threenine months ended March 31,September 30, 2017, was due 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.
Results of Operations Three Months Ended March 31,September 30, 2017, Compared to Three Months Ended March 31,September 30, 2016 (in thousands, except for percentages): Consolidated | | | | | | | | | | | | | | | Three Months Ended March 31, | | Increase or (Decrease) | | 2017 | | 2016 | | Amount | Percent | Revenue | $ | 37,993 |
| | $ | 83,979 |
| | $ | (45,986 | ) | (54.8)% | Cost of revenue | 42,890 |
| | 78,278 |
| | (35,388 | ) | (45.2)% | Gross profit (loss) | (4,897 | ) | | 5,701 |
| | (10,598 | ) | 185.9% | Gross profit (loss) percentage | (12.9)% | | 6.8% | | | | General and administrative expenses | 3,930 |
| | 4,485 |
| | (555 | ) | (12.4)% | Asset impairment | 389 |
| | — |
| | 389 |
| 100.0% | Operating income (loss) | (9,216 | ) | | 1,216 |
| | (10,432 | ) | (857.9)% | Other income (expense): | | | | | | | Interest expense | (59 | ) | | (50 | ) | | (9 | ) | | Interest income | — |
| | 6 |
| | (6 | ) | | Other income, net | 9 |
| | 398 |
| | (389 | ) | | Total other income (expense) | (50 | ) | | 354 |
| | (404 | ) | (114.1)% | Net income (loss) before income taxes | (9,266 | ) | | 1,570 |
| | (10,836 | ) | (690.2)% | Income taxes | (2,812 | ) | | 581 |
| | (3,393 | ) | (584.0)% | Net income (loss) | $ | (6,454 | ) | | $ | 989 |
| | $ | (7,443 | ) | (752.6)% |
| | | | | | | | | | | | | | | 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 revenue for the three months ended March 31,September 30, 2017 and 2016, was $38.0$49.9 million and $84.0$65.4 million, respectively, representing a decrease of 54.8%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 29.4%48.4% and 40.0%33.8% for the three-monthsthree months ended March 31,September 30, 2017 and 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 loss for the three months ended March 31,September 30, 2017, was $4.9 million$494,000 compared to a gross profit of $5.7$5.3 million for the three months ended March 31,September 30, 2016. The decrease was primarily due to $2.1 million of contract losses incurred by our Shipyards division related to cost overruns and re-work identified on two newbuild vessel construction
contracts, decreased revenue as discussed above, holding costs related to our South Texas assets of $1.1 million and tighterlower margins on current work due to competitive pressures. This was partially offset by decreases in costs resulting from additionalreductions in workforce as we wrapped up and completed projects at our South 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 assets held for sale) and continued cost cutting measuresminimization efforts implemented by management.management for the period.
General and administrative expenses - Our general and administrative expenses were $3.9$4.4 million for the three months ended March 31,September 30, 2017, compared to $4.5$5.1 million for the three months ended March 31,September 30, 2016. The decrease in general and administrative expenses for the three months ended March 31,September 30, 2017, was primarily attributable to cost cutting measures implemented by management during the first part of 2016 as well as lower bonuses accrued during 2017, as a result of a combination of a smaller workforceemployee reductions and our consolidated gross loss.continued cost minimization efforts implemented by management for the period.
Asset Impairment - During three months ended March 31, 2017, we recorded an impairment of $389 related to our assets held for sale at our Prospect Shipyard. See also Note 2 of the Notes to Consolidated Financial statements.
Other income (expense), net - Other income decreased $389,000was $38,000 for the three months ended March 31, 2017. The decreaseSeptember 30, 2017, as compared to other income of $599,000 for three months ended September 30, 2016. Other income for the three months ended September 30, 2017 relates to insurance proceeds received from damage to a corporate automobile that was fully depreciated. Other income for for three months ended September 30, 2016 primarily duerelates to gains on sales of assets from our Fabrication division recorded during three months ended March 31, 2016.division.
Income taxestax expense (benefit) - Our effective income tax rate for the three months ended March 31,September 30, 2017, was 30.3%36.2%, compared to an effective tax rate of 37.0%19.7% for the comparable period during 2016. The decreaseincrease in the effective tax rate is the result of limitations on the deductibilitychanges to estimates of executive compensation and $210,000 inour year-end tax expense recognizedprovision during for the three months ended March 31, 2017, for the tax effect of the difference between the actual tax deduction allowed upon vesting of common stock and the compensation cost recognized for financial reporting purposes resulting from the adoption of Accounting Standards Update 2016-09 as further discussed in Note 1 of the Notes to the Consolidated Financial Statements.September 30, 2016.
Operating Segments
As discussed in Note 8 of the Notes to Consolidated Financial Statements, management reduced its allocation of corporate administrative costs and overhead expenses to its operating divisions during the three and nine months ended March 31,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 it'sits Corporate division each meeting the criteria of reportable segments under GAAP. During the three and nine months ended March 31,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 March 31,September 30, 2017 and 2016, are presented below (in thousands, except for percentages).
| | | | | | | | | | | | | | | | Fabrication | | Three Months Ended March 31, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | 10,209 |
| | $ | 23,829 |
| | $ | (13,620 | ) | | (57.2)% | Gross profit (loss) | | (2,966 | ) | | 86 |
| | (3,052 | ) | | (3,548.8)% | Gross profit (loss) percentage | | (29.1 | )% | | 0.4 | % | | | | (29.5)% | General and administrative expenses | | 821 |
| | 795 |
| | 26 |
| | 3.3% | Operating income (loss) | | (3,787 | ) | | (709 | ) | | | | |
| | | | | | | | | | | | | | | | 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 $13.6$4.0 million for the three months ended March 31,September 30, 2017, compared to the three months ended March 31,September 30, 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 (loss) - Gross profit from our Fabrication division for the three months ended September 30, 2017, was $1.3 million compared to a gross profit of $601,000 for the three months ended September 30, 2016. The increase in gross profit was due to
Gains 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 completed projects at our South Texas fabrication yards, No depreciation being recorded for our South Texas assets for the three months ended September 30, 2017, 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, 2016. The decrease is primarily due to decreases in costs resulting from lower bonuses accrued during 2017 as a result of our consolidated operating loss, reductions in workforce at our South Texas fabrication yards and continued cost minimization efforts implemented by management for the period.
| | | | | | | | | | | | | | | | 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, respectively. |
Revenue - Revenue from our Shipyards division decreased $8.0 million for the three months ended September 30, 2017, compared to the three months ended September 30, 2016, due to the corresponding reduction in customer demand for shipbuilding and repair services supporting the oil 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 for the three months ended September 30, 2017, compared to a gross profit of $1.9 million for the three months ended September 30, 2016. 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, 2016, primarily due to reductions of administrative personnel related to consolidation of personnel duties from the LEEVAC transaction. 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 management for the period during the first part of 2016.
| | | | | | | | | | | | | | | | 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, 2017, compared to the three months ended September 30, 2016, due to an overall decrease in work experienced as a result of depressed oil and gas prices and the corresponding reduction in customer demand for oil and gas related service projects.
Gross profit - Gross profit from our Services division decreased $1.0 million for the three 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 combination of a smaller workforce and our 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 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 proceeds 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 Consolidated Financial Statements. This has been partially offset by lower bonuses accrued during the quarter due to our consolidated operating loss.
Nine Months Ended September 30, 2017, Compared to Nine Months Ended September 30, 2016 (in thousands, 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, 2017 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 45.3% and 35.0% for the nine months ended September 30, 2017 and 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 loss for the nine months ended September 30, 2017, was $17.0 million compared to a gross profit of $25.0 million for the nine months ended September 30, 2016. The decrease was primarily due to $12.7 million of losses incurred by our Shipyards division related to cost overruns and re-work identified on two newbuild vessel construction contracts, decreased revenue as discussed above, holding costs related to our South Texas assets of $3.6 million and lower 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 our South Texas assets and Prospect shipyard during the nine months ended September 30, 2017, as these assets are classified as assets held for sale and additional cost minimization efforts implemented 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. The decrease in general and administrative expenses for the nine months ended September 30, 2017, is primarily due to decreases in costs resulting from reductions in workforce at our South Texas fabrication yards, lower bonuses accrued during 2017 as a result of our consolidated operating loss and continued cost minimization efforts implemented by management for the period.
Asset Impairment - During the 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.
Other income (expense), net - Other expense was $221,000 for the nine months ended September 30, 2017, compared to other income of $1.0 million for the nine months ended September 30, 2016. Other 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 on sales of assets from our Fabrication division recorded during 2016.
Income tax expense (benefit) - Our effective income tax rate for the nine months ended September 30, 2017, was 33.5%, compared to an effective tax rate of 36.9% for the comparable period during 2016. The decrease in the effective tax rate is the result of limitations on the deductibility of executive compensation.
Operating Segments
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 $27.9 million for the nine months ended September 30, 2017, compared to the nine months ended September 30, 2016. The decrease is attributable to an overall decrease in work experienced in our fabrication yards as a result of depressed oil and gas prices and the corresponding reduction in customer demand for offshore fabrication projects. As discussed above, management has classified our South Texas assets as assets held for sale in response to the underutilization of our Fabrication assets. As of September 30, 2017, all of our projects at our South Texas fabrication yards have been completed or transferred to our Houma fabrication yard.
Gross profit (loss) - Gross lossprofit from our Fabrication division for the threenine months ended March 31,September 30, 2017, was $3.0 million$216,000 compared to a gross profit of $86,000$4.6 million for the threenine months ended March 31,September 30, 2016. The decrease was due to lower revenue
from decreased fabrication work as discussed above paymentand approximately $3.6 million of termination benefits as we reduce our South Texas workforce and depreciation expense of $1.9 million related toholding costs for our South Texas assets prior to their classification as assets heldwe 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, 2017, as these assets are classified as assets held for sale on February 23, 2017, and additional cost cutting measuresminimization efforts implemented by management.management for the period.
General and administrative expenses - General and administrative expenses for our Fabrication division increased $26,000decreased $389,000 for the threenine months ended March 31,September 30, 2017, compared to the threenine months ended March 31,September 30, 2016. The increasedecrease is primarily due to decreases in costs resulting from reductions in workforce as we wrapped up and completed projects at our South Texas fabrication yards and lower bonuses accrued during 2017 as a result of a combination of a smaller workforce and our consolidated operating loss. This was partially offset by expenses incurred to market our South Texas assets for sale and payment of termination benefits during the first quarter of 2017 as we reducereduced its workforce and completecompleted those operations.
| | | | | | | | | | | | | | | | Shipyards | | Three Months Ended March 31, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue (1) | | $ | 18,422 |
| | $ | 34,120 |
| | $ | (15,698 | ) | | (46.0)% | Gross profit (loss)(1) | | (1,704 | ) | | 2,375 |
| | (4,079 | ) | | (171.7)% | Gross profit (loss) percentage | | (9.2 | )% | | 7.0 | % | | | | (16.2)% | General and administrative expenses | | 964 |
| | 1,296 |
| | (332 | ) | | (25.6)% | Asset impairment | | 389 |
| | — |
| | 389 |
| | 100.0% | Operating income (loss) (1) | | (3,057 | ) | | 1,079 |
| | | | |
| | | | | | | | | | | | | | | | 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 threenine months ended March 31,September 30, 2017, and 2016, includes $1.6$2.4 million and $1.2$4.1 million of non-cash amortization of deferred revenue related to the values assigned to the contracts acquired in the LEEVAC transaction, respectively. |
Revenue - Revenue from our Shipyards division decreased $15.7$34.8 million for the threenine months ended March 31,September 30, 2017, compared to the threenine months ended March 31,September 30, 2016, due to overall decreases in work as we complete work under our contracts
including completion of a vessel that we assumed in the LEEVAC transaction and delivered to a customer on February 6, 2017, with less new, replacement work starting during the period as compared to the three months ended March 31, 2016. The decrease in new, replacement work is due to depressed oil and gas prices and the corresponding reduction in customer demand for shipbuilding and repair services supporting the oil and gas industry.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 $1.7$19.1 million for the threenine months ended March 31,September 30, 2017, compared to a gross profit of $2.4$9.7 million for the threenine months ended March 31,September 30, 2016. The decrease was due to:
continued$12.7 million in contract losses related to cost overruns and re-work that has been identified on two newbuild vessel construction contracts that were assignedwithin our Shipyards division;
Holding and closing costs related to us in the LEEVAC transaction;our Prospect shipyard as we wind down operations at this facility; holdingHolding 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
overallOverall decreases in work under other various contracts as discussed above;contracts.
partially offset by savings realized from cost cutting measures implemented by management during 2016.
General and administrative expenses - General and administrative expenses for our Shipyards division decreased $332,000$1.4 million for the threenine months ended March 31,September 30, 2017, compared to the threenine months ended March 31,September 30, 2016, primarily due to cost cutting measures implemented by management during 2016 as well asreductions of administrative personnel related to consolidation of personnel duties from the LEEVAC transaction. Additionally, our Shipyards division incurred lower bonuses accrued during 2017 as a result of a combination of a smaller workforce and our consolidated gross loss.operating loss and cost minimization efforts implemented by management for the period.
Asset Impairment - During threenine months ended March 31,September 30, 2017, we recorded an impairment of $389$389,000 related to our assets held for sale at our Prospect Shipyard.shipyard. See also Note 2 of the Notes to Consolidated Financial statements.Statements.
| | | | | | | | | | | | | | | | Services | | Three Months Ended March 31, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | 10,712 |
| | $ | 26,559 |
| | $ | (15,847 | ) | | (59.7)% | Gross profit | | 33 |
| | 3,376 |
| | (3,343 | ) | | (99.0)% | Gross profit (loss) percentage | | 0.3 | % | | 12.7 | % | | | | (12.4)% | General and administrative expenses | | 666 |
| | 726 |
| | (60 | ) | | (8.3)% | Operating income (loss) | | (633 | ) | | 2,650 |
| | | | |
| | | | | | | | | | | | | | | | 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 $15.8$32.4 million for the threenine months ended March 31,September 30, 2017, compared to the threenine months ended March 31,September 30, 2016, due to an overall decrease in work experienced as a result of depressed oil and gas prices and the corresponding reduction in customer demand for oil and gas related service projects.
Gross profit - Gross profit from our Services division decreased $3.3$8.8 million for the threenine months ended March 31,September 30, 2017, compared to the threenine months ended March 31,September 30, 2016, due to decreased revenue discussed above and tighterlower margins on new work performed during 2017.
General and administrative expenses - General and administrative expenses for our Services division decreased $60,000$0.5 million for the threenine months ended March 31,September 30, 2017, compared to the threenine months ended March 31,September 30, 2016, due to lower bonuses accrued during 2017 as a result of a combination of a smaller workforce and the reduction in gross profit.our consolidated operating loss.
| | | | | | | | | | | | | | | | Corporate | | Three Months Ended March 31, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | — |
| | $ | — |
| | $ | — |
| | —% | Gross loss | | (260 | ) | | (136 | ) | | (124 | ) | | (91.2)% | Gross profit (loss) percentage | | n/a |
| | n/a |
| | | |
| General and administrative expenses | | 1,479 |
| | 1,668 |
| | (189 | ) | | (11.3)% | Operating loss | | (1,739 | ) | | (1,804 | ) | | 65 |
| | |
| | | | | | | | | | | | | | | | 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 lossprofit (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 decreasedincreased primarily due to decreased bonuses as a resultrestructuring of our consolidated gross loss, partially offset bycorporate division with additional personnel allocated to our corporate division during 2017.2017 as discussed above as well as expenses incurred for advisors to assist in a strategic financial analysis project in anticipation of the proceeds 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 Consolidated Financial Statements. This has been partially offset by lower bonuses accrued during 2017 as a result of a combination of a smaller workforce and our consolidated operating loss.
Liquidity and Capital Resources Historically, we have funded our business activities through cash generated from operations. At March 31,September 30, 2017, we had no amounts outstanding under our credit facility, $4.6 million in outstanding letters of credit, and cash and cash equivalents totaling $34.7$17.8 million compared to $51.2 million at December 31, 2016. Working capital was $182.9$164.0 million and our ratio of current assets to current liabilities was 7.564.59 to 1 at March 31,September 30, 2017, compared to $78.0 million and 3.23.21 to 1, respectively, at December 31, 2016. Working capital at March 31,September 30, 2017, includes $110.5$107.0 million related to assets held for sale, primarily related to our South Texas facilities. Our primary use of cash during the threenine months ended September 30, 2017, is referenced in the Cash Flow Activities section below. At September 30, 2017, our contracts receivable balance was $25.5 million of which we have subsequently collected $8.3 million through October 31, 2017. On June 9, 2017, we entered into a $40.0 million credit agreement with Whitney Bank, as lender. The credit facility matures June 9, 2019 and may be used for issuing letters of credit and/or general corporate and working capital purposes. We 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 facility may be designated, at our option, as either Base Rate (as defined in the credit facility) or LIBOR plus 2.0% per annum. Unused commitment fees on the undrawn portion of the facility are 0.4% per annum, and interest on undrawn stated amounts under letters of credit issued by the lenders is 2.0% per annum. The credit facility is secured by substantially all of our assets (other than the assets of Gulf Marine Fabricators, L.P., the legal entity that holds our South Texas assets which are currently held for sale).
We must comply with the following 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, we terminated our prior credit facility with JPMorgan Chase Bank, N.A. At the time of the termination, there was approximately $4.6 million of 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 future, additional letters of credit and borrowings is $35.4 million. As of September 30, 2017, we were in compliance with all of our covenants.
Our primary liquidity requirements are for the costs associated with fabrication projects, capital expenditures and payment of dividends to our shareholders. We do not anticipate significant capital expenditures for the remainder of 2017.
On October 21, 2016, a customer of our Shipyards division announced it was in noncompliance with certain financial covenants included in the customer’s debt agreements and stated that, while it had received limited waivers from its lenders, its debt agreements would require further negotiation and amendment. This same customer rejected delivery of the first vessel that we completed and tendered for delivery on February 6, 2017, alleging certain technical deficiencies exist with respect to the vessel. On March 31,10, 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 included in our arbitration proceedings. We disagree with our customer concerning these alleged technical deficiencies and have put the customer in 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 United 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, 2017, 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 impacted by Hurricane Harvey, which made landfall as a category 4 hurricane. As a result, we suffered damages to our South Texas buildings and equipment. Through September 30, 2017, we have incurred approximately $265,000 in clean-up and repair related costs and we expect to incur additional future repair costs in excess of our 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 time and that insurance proceeds will at a minimum be sufficient to reimburse us for all damages and repair costs. Our final
assessment of the loss incurred to our South 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 such differences could be material.
In event of one or more sales of our South Texas assets, we expect to use all or a portion of the sales proceeds to invest in our operating liquidity in order to facilitate 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 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 26, 2017, our Board of Directors declared a dividend of $0.01 per share on our shares of common stock outstanding, payable November 24, 2017, to shareholders of record on November 10, 2017.
We believe our cash and cash equivalents generated by our future operating activities, proceeds to be received from insurance underwriters, availability under our line of credit and proceeds to be received from future assets sales will be sufficient to fund our capital expenditures and meet our working capital needs for next twelve months to continue to operate, satisfy our contractual operations and pay dividends to our shareholders.
Cash Flow Activities
For the nine months ended September 30, 2017, net cash used in operating activities was $29.6 million, compared to net cash provided by operating activities of $19.4 million for the nine months ended September 30, 2016. The use of cash in operations during the period was primarily due to:to the following:
Operating losses for the quarter exclusivenine months ended September 30, 2017, in excess of non-cash depreciation, amortization, impairment and stock compensation expense of approximately $3.7$19.6 million, Payment of year-end bonuses related to 2016, Progress on liabilities from assumed contracts in the LEEVAC transaction.Whiletransaction. While our purchase price for the acquisition of the LEEVAC assets during 2016 was $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 us in the transaction. We have significantly progressed these contracts, which in turn has resulted in utilization of the working capital and settlement payments received during 2016. Fewer receipts from accounts receivable, primarily $4.6 million from one customer that refusedThe suspension of two vessel projects following our customer’s refusal to accept delivery of athe first vessel onin February 6, 2017, and has not paid. We have initiated arbitration proceedings duringour inability to collect $9.5 million in scheduled payments under these contracts. See also Note 9 of the quarterNotes to enforce our rights under our construction contract,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 beginninglater in the third quarter of 2017 through the first quarterhalf of 2018. At March 31, 2017, our contracts receivable balance was $21.1 million of which we have subsequently collected $4.1 million through April 21, 2017.
As of March 31, 2017, we had a credit agreement with Whitney Bank and JPMorgan Chase Bank N.A. that provides for a $40.0 million revolving credit facility maturing November 29, 2018. The credit agreement allows the Company to use up to the full amount of the available borrowing base for letters of credit and for general corporate purposes. Our obligations under the credit agreement are secured by substantially all of our assets (other than real estate). Commitment fees on undrawn amounts are 0.5% per annum and letter of credit fees, subject to certain limited exceptions, are 2.0% per annum on undrawn stated amounts under letters of credit issued by the lenders. Amounts borrowed under 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. Our financial covenants at March 31, 2017, are as follows:
| | (i) | minimum net worth requirement of not less than 255.0 million plus |
| | a) | 50% of net income earned in each quarter beginning December 31, 2016, and |
| | b) | 100% of proceeds from any issuance of common stock; |
| | c) | less the amount of any impairment on certain assets owned by Gulf Marine Fabricators, L.P. (our South Texas assets held for sale) up to $30.0 million; |
| | (ii) | debt to EBITDA ratio not greater than 2.5 to 1.0; and |
| | (iii) | interest coverage ratio not less than 2.0 to 1.0. |
At March 31, 2017, no amounts were outstanding under the credit facility, and we had outstanding letters of credit totaling $4.6 million, reducing the unused portion of our credit facility for additional letters of credit and borrowings to $35.4 million. As of March 31, 2017, we were in compliance with all covenants.
We are currently in discussions with one of our financial institutions to enter into a new revolving line of credit with comparable availability, but with less restrictive financial covenants and reduced fees as compared to our current revolving credit facility. We expect to close on this new revolving credit facility and terminate our existing revolving credit facility in the second quarter of 2017.
Our primary liquidity requirements are for the costs associated with fabrication projects, capital expenditures and payment of dividends to our shareholders. We anticipate capital expenditures for the remainder of 2017 to range between $6.0 million to $8.0 million primarily for the following:
improvements to our Jennings and Lake Charles leased shipyards,
improvement to the bulkhead at our Houma facility, and
computer system upgrades.
On October 21, 2016, a customer of our Shipyards division announced it was in noncompliance with certain financial covenants included in the customer’s debt agreements. This customer also stated it had received limited waivers from its lenders and noteholders, but its debt agreements will require further negotiation and amendment. On April 19, 2017, the customer stated it had allowed the waivers to expire and remains in default of its covenants.
This same customer has rejected delivery of the vessel that we tendered for delivery on February 6, 2017, alleging certain technical deficiencies exist with respect to the vessel and is seeking recovery of all purchase price amounts previously paid by the customer under the contract. We are also building a second vessel for this customer that is scheduled for delivery during the second quarter of 2017. We disagree with our customer concerning these alleged technical deficiencies and have put the customer in default under the terms of the contracts for both vessels. As of March 31, 2017, approximately $4.6 million remained due and outstanding from our customer for the first vessel. The balance due to us upon delivery for a second vessel which is expected in May of this year, is approximately $4.9 million. On March 10, 2017, we gave notice for arbitration with our customer in an effort to resolve this matter. We intend to take all legal action as may be necessary to protect our rights under the contracts and recover the remaining balances owed to us.
We continue to monitor our work performed in relation to our customer’s status and its ability to pay under the terms of these contracts. Because these vessels have been completed or are substantially complete, we believe that they have significant fair value, and that we would be able to fully recover any amounts due to us.
In anticipation of the proceeds to be received from the sale of our South Texas assets, we have engaged in a strategic financial analysis project with advisors to determine the appropriate use of proceeds from this transaction. We will be evaluating a mix of options including tactical capital improvement projects, strategic growth investment opportunities that support our business plan, stock buy-backs and/or dividends and working capital reinvestment.
On April 26, 2017, our Board of Directors declared a dividend of $0.01 per share on our shares of common stock outstanding, payable May 25, 2017, to shareholders of record on May 11, 2017.
We believe our cash and cash equivalents generated by our operating activities and proceeds to be received from future assets sales will be sufficient to fund our capital expenditures and meet our working capital needs for both the near and longer term to continue our operations, satisfy our contractual operations and pay dividends to our shareholders. Additionally, we expect to close on a new revolving line of credit during the second quarter of 2017 as discussed above. We believe that the new facility will provide us with additional working capital flexibility to ramp up our operations quickly in times of rapid increasing demand, to continue to issue future letters of credit and to quickly take advantage of market opportunities.
Cash Flow Activities
For the three months ended March 31, 2017, net cash used in operating activities was $15.1 million, compared to $1.6 million for the three months ended March 31, 2016. The increase in cash used in operations was primarily due to the following:
Operating losses for the quarter in excess of non-cash depreciation, amortization, impairment and stock compensation expense of approximately $3.7 million,
Payment of year-end bonuses related to 2016,
Progress on liabilities from assumed contracts in the LEEVAC transaction.While our purchase price for the acquisition of the LEEVAC assets during 2016 was $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 us in the transaction. We have significantly progressed these contracts which in turn, has resulted in utilization of the working capital and settlement payments received during 2016.
Fewer receipts from accounts receivable, primarily $4.6 million from one customer that refused delivery of a vessel on February 6, 2017, and has not paid. We have initiated arbitration proceedings during the quarter to enforce our rights under our construction contract, and
Build-up of costs for contracts in progress related to a customer in our Shipyards division with significant milestone payments occurring in the later stages of the projects which are expected to occur beginning in the third quarter of 2017 through the first quarter of 2018.
Net cash used in investing activities for the threenine months ended March 31,September 30, 2017, was $391,000,$2.4 million, compared to cash provided by investing activities of $6.2$2.0 million for the threenine months ended March 31,September 30, 2016. The change in cash used in/provided by investing activities is primarily due to cash received from the sale of three cranes at our Texas facility for $5.4$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 threenine months ended March 31,September 30, 2017 and 2016, was $1.0$1.4 million and $291,000,$603,000, respectively. The increase in cash used in financing activities is due to the cash payments made to taxing authorities on behalf of employees'employees for their vesting of common stock. During the 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, 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, 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, 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 March 31,September 30, 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, 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 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 Chief Financial Officer, have 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 Chief Financial Officer have 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 March 31,September 30, 2017, in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION Item 1. Legal Proceedings. The Company is subject to various routine legal proceedings in the normal conduct of its business primarily involving commercial claims, workers’ compensation claims, and claims for personal injury under general maritime laws of the United States and the Jones Act. While the outcome of these lawsuits, legal proceedings and claims cannot be predicted with certainty, management believes that the outcome of any such proceedings, even if determined adversely, would not have a material adverse effect on the financial position, results of operations or cash flows of the Company. Item 1A. Risk Factors. There have been no material changes from the information included in Item 1A “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2016. | | | | | Exhibit Number | | Description of Exhibit | | | 3.1 | | | 3.2 | | | 10.1 | | Change of Control Agreement, dated March 1, 2017, between the Company and David S. Schorlemer, incorporated by reference to Exhibit 10.15 of the Company's Form 10-K for the year ended December 31, 2016 filed on March 2, 2017. | 31.1 | | | 31.2 | | | 32 | | | | | | 101 | | Attached as Exhibit 101 to this report are the following items formatted in XBRL (Extensible Business Reporting Language): | | | (i) | Consolidated Balance Sheets, | | | (ii) | Consolidated Statements of Operations, | | | (iii) | Consolidated Statement of Changes in Shareholders’ Equity, | | | (iv) | Consolidated Statements of Cash Flows and | | | (v) | Notes to Consolidated Financial Statements. |
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. | | | GULF ISLAND FABRICATION, INC. | | BY: | /s/ David S. Schorlemer | | David S. Schorlemer | | Executive Vice President, Chief Financial Officer, and Treasurer (Principal Financial and Accounting Officer) |
Date: May 2,October 31, 2017
GULF ISLAND FABRICATION, INC. EXHIBIT INDEX | | | | | Exhibit Number | | Description of Exhibit | | | 3.1 | | | 3.2 | | | 10.1 | | Change of Control Agreement, dated March 1, 2017, between the Company and David S. Schorlemer, incorporated by reference to Exhibit 10.15 of the Company's Form 10-K for the year ended December 31, 2016 filed on March 2, 2017. | 31.1 | | | 31.2 | | | 32 | | | | | | 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 March 31, 2017, includes commitments received through April 26, 2017. We exclude suspended projects from contract backlog when 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. |
| | 2.(2) | At March 31,September 30, 2017, projects for our twofive largest customers in terms of revenue backlog consisted of: |
| | (i) | 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 quarters2018; |
| | (ii) | Newbuild construction of 2018; andfour harbor tugs for one customer within our Shipyards division; |
| | (ii)(iii) | theNewbuild 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.project within our Fabrication division; and |
| | 3.(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 March 31,September 30, 2017, we had 922 employees and 133 contract989 employees compared to 1,178 employees and 92 contract employees as of December 31, 2016. Labor hours worked were 479,0001.5 million during the threenine months ended March 31,September 30, 2017, compared to 695,0002.3 million for the threenine months ended March 31,September 30, 2016. The overall decrease in labor hours worked for the threenine months ended March 31,September 30, 2017, was due 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.
Results of Operations Three Months Ended March 31,September 30, 2017, Compared to Three Months Ended March 31,September 30, 2016 (in thousands, except for percentages): Consolidated | | | | | | | | | | | | | | | Three Months Ended March 31, | | Increase or (Decrease) | | 2017 | | 2016 | | Amount | Percent | Revenue | $ | 37,993 |
| | $ | 83,979 |
| | $ | (45,986 | ) | (54.8)% | Cost of revenue | 42,890 |
| | 78,278 |
| | (35,388 | ) | (45.2)% | Gross profit (loss) | (4,897 | ) | | 5,701 |
| | (10,598 | ) | 185.9% | Gross profit (loss) percentage | (12.9)% | | 6.8% | | | | General and administrative expenses | 3,930 |
| | 4,485 |
| | (555 | ) | (12.4)% | Asset impairment | 389 |
| | — |
| | 389 |
| 100.0% | Operating income (loss) | (9,216 | ) | | 1,216 |
| | (10,432 | ) | (857.9)% | Other income (expense): | | | | | | | Interest expense | (59 | ) | | (50 | ) | | (9 | ) | | Interest income | — |
| | 6 |
| | (6 | ) | | Other income, net | 9 |
| | 398 |
| | (389 | ) | | Total other income (expense) | (50 | ) | | 354 |
| | (404 | ) | (114.1)% | Net income (loss) before income taxes | (9,266 | ) | | 1,570 |
| | (10,836 | ) | (690.2)% | Income taxes | (2,812 | ) | | 581 |
| | (3,393 | ) | (584.0)% | Net income (loss) | $ | (6,454 | ) | | $ | 989 |
| | $ | (7,443 | ) | (752.6)% |
| | | | | | | | | | | | | | | 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 revenue for the three months ended March 31,September 30, 2017 and 2016, was $38.0$49.9 million and $84.0$65.4 million, respectively, representing a decrease of 54.8%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 29.4%48.4% and 40.0%33.8% for the three-monthsthree months ended March 31,September 30, 2017 and 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 loss for the three months ended March 31,September 30, 2017, was $4.9 million$494,000 compared to a gross profit of $5.7$5.3 million for the three months ended March 31,September 30, 2016. The decrease was primarily due to $2.1 million of contract losses incurred by our Shipyards division related to cost overruns and re-work identified on two newbuild vessel construction
contracts, decreased revenue as discussed above, holding costs related to our South Texas assets of $1.1 million and tighterlower margins on current work due to competitive pressures. This was partially offset by decreases in costs resulting from additionalreductions in workforce as we wrapped up and completed projects at our South 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 assets held for sale) and continued cost cutting measuresminimization efforts implemented by management.management for the period.
General and administrative expenses - Our general and administrative expenses were $3.9$4.4 million for the three months ended March 31,September 30, 2017, compared to $4.5$5.1 million for the three months ended March 31,September 30, 2016. The decrease in general and administrative expenses for the three months ended March 31,September 30, 2017, was primarily attributable to cost cutting measures implemented by management during the first part of 2016 as well as lower bonuses accrued during 2017, as a result of a combination of a smaller workforceemployee reductions and our consolidated gross loss.continued cost minimization efforts implemented by management for the period.
Asset Impairment - During three months ended March 31, 2017, we recorded an impairment of $389 related to our assets held for sale at our Prospect Shipyard. See also Note 2 of the Notes to Consolidated Financial statements.
Other income (expense), net - Other income decreased $389,000was $38,000 for the three months ended March 31, 2017. The decreaseSeptember 30, 2017, as compared to other income of $599,000 for three months ended September 30, 2016. Other income for the three months ended September 30, 2017 relates to insurance proceeds received from damage to a corporate automobile that was fully depreciated. Other income for for three months ended September 30, 2016 primarily duerelates to gains on sales of assets from our Fabrication division recorded during three months ended March 31, 2016.division.
Income taxestax expense (benefit) - Our effective income tax rate for the three months ended March 31,September 30, 2017, was 30.3%36.2%, compared to an effective tax rate of 37.0%19.7% for the comparable period during 2016. The decreaseincrease in the effective tax rate is the result of limitations on the deductibilitychanges to estimates of executive compensation and $210,000 inour year-end tax expense recognizedprovision during for the three months ended March 31, 2017, for the tax effect of the difference between the actual tax deduction allowed upon vesting of common stock and the compensation cost recognized for financial reporting purposes resulting from the adoption of Accounting Standards Update 2016-09 as further discussed in Note 1 of the Notes to the Consolidated Financial Statements.September 30, 2016.
Operating Segments
As discussed in Note 8 of the Notes to Consolidated Financial Statements, management reduced its allocation of corporate administrative costs and overhead expenses to its operating divisions during the three and nine months ended March 31,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 it'sits Corporate division each meeting the criteria of reportable segments under GAAP. During the three and nine months ended March 31,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 March 31,September 30, 2017 and 2016, are presented below (in thousands, except for percentages).
| | | | | | | | | | | | | | | | Fabrication | | Three Months Ended March 31, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | 10,209 |
| | $ | 23,829 |
| | $ | (13,620 | ) | | (57.2)% | Gross profit (loss) | | (2,966 | ) | | 86 |
| | (3,052 | ) | | (3,548.8)% | Gross profit (loss) percentage | | (29.1 | )% | | 0.4 | % | | | | (29.5)% | General and administrative expenses | | 821 |
| | 795 |
| | 26 |
| | 3.3% | Operating income (loss) | | (3,787 | ) | | (709 | ) | | | | |
| | | | | | | | | | | | | | | | 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 $13.6$4.0 million for the three months ended March 31,September 30, 2017, compared to the three months ended March 31,September 30, 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 (loss) - Gross profit from our Fabrication division for the three months ended September 30, 2017, was $1.3 million compared to a gross profit of $601,000 for the three months ended September 30, 2016. The increase in gross profit was due to
Gains 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 completed projects at our South Texas fabrication yards, No depreciation being recorded for our South Texas assets for the three months ended September 30, 2017, 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, 2016. The decrease is primarily due to decreases in costs resulting from lower bonuses accrued during 2017 as a result of our consolidated operating loss, reductions in workforce at our South Texas fabrication yards and continued cost minimization efforts implemented by management for the period.
| | | | | | | | | | | | | | | | 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, respectively. |
Revenue - Revenue from our Shipyards division decreased $8.0 million for the three months ended September 30, 2017, compared to the three months ended September 30, 2016, due to the corresponding reduction in customer demand for shipbuilding and repair services supporting the oil 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 for the three months ended September 30, 2017, compared to a gross profit of $1.9 million for the three months ended September 30, 2016. 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, 2016, primarily due to reductions of administrative personnel related to consolidation of personnel duties from the LEEVAC transaction. 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 management for the period during the first part of 2016.
| | | | | | | | | | | | | | | | 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, 2017, compared to the three months ended September 30, 2016, due to an overall decrease in work experienced as a result of depressed oil and gas prices and the corresponding reduction in customer demand for oil and gas related service projects.
Gross profit - Gross profit from our Services division decreased $1.0 million for the three 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 combination of a smaller workforce and our 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 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 proceeds 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 Consolidated Financial Statements. This has been partially offset by lower bonuses accrued during the quarter due to our consolidated operating loss.
Nine Months Ended September 30, 2017, Compared to Nine Months Ended September 30, 2016 (in thousands, 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, 2017 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 45.3% and 35.0% for the nine months ended September 30, 2017 and 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 loss for the nine months ended September 30, 2017, was $17.0 million compared to a gross profit of $25.0 million for the nine months ended September 30, 2016. The decrease was primarily due to $12.7 million of losses incurred by our Shipyards division related to cost overruns and re-work identified on two newbuild vessel construction contracts, decreased revenue as discussed above, holding costs related to our South Texas assets of $3.6 million and lower 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 our South Texas assets and Prospect shipyard during the nine months ended September 30, 2017, as these assets are classified as assets held for sale and additional cost minimization efforts implemented 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. The decrease in general and administrative expenses for the nine months ended September 30, 2017, is primarily due to decreases in costs resulting from reductions in workforce at our South Texas fabrication yards, lower bonuses accrued during 2017 as a result of our consolidated operating loss and continued cost minimization efforts implemented by management for the period.
Asset Impairment - During the 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.
Other income (expense), net - Other expense was $221,000 for the nine months ended September 30, 2017, compared to other income of $1.0 million for the nine months ended September 30, 2016. Other 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 on sales of assets from our Fabrication division recorded during 2016.
Income tax expense (benefit) - Our effective income tax rate for the nine months ended September 30, 2017, was 33.5%, compared to an effective tax rate of 36.9% for the comparable period during 2016. The decrease in the effective tax rate is the result of limitations on the deductibility of executive compensation.
Operating Segments
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 $27.9 million for the nine months ended September 30, 2017, compared to the nine months ended September 30, 2016. The decrease is attributable to an overall decrease in work experienced in our fabrication yards as a result of depressed oil and gas prices and the corresponding reduction in customer demand for offshore fabrication projects. As discussed above, management has classified our South Texas assets as assets held for sale in response to the underutilization of our Fabrication assets. As of September 30, 2017, all of our projects at our South Texas fabrication yards have been completed or transferred to our Houma fabrication yard.
Gross profit (loss) - Gross lossprofit from our Fabrication division for the threenine months ended March 31,September 30, 2017, was $3.0 million$216,000 compared to a gross profit of $86,000$4.6 million for the threenine months ended March 31,September 30, 2016. The decrease was due to lower revenue
from decreased fabrication work as discussed above paymentand approximately $3.6 million of termination benefits as we reduce our South Texas workforce and depreciation expense of $1.9 million related toholding costs for our South Texas assets prior to their classification as assets heldwe 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, 2017, as these assets are classified as assets held for sale on February 23, 2017, and additional cost cutting measuresminimization efforts implemented by management.management for the period.
General and administrative expenses - General and administrative expenses for our Fabrication division increased $26,000decreased $389,000 for the threenine months ended March 31,September 30, 2017, compared to the threenine months ended March 31,September 30, 2016. The increasedecrease is primarily due to decreases in costs resulting from reductions in workforce as we wrapped up and completed projects at our South Texas fabrication yards and lower bonuses accrued during 2017 as a result of a combination of a smaller workforce and our consolidated operating loss. This was partially offset by expenses incurred to market our South Texas assets for sale and payment of termination benefits during the first quarter of 2017 as we reducereduced its workforce and completecompleted those operations.
| | | | | | | | | | | | | | | | Shipyards | | Three Months Ended March 31, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue (1) | | $ | 18,422 |
| | $ | 34,120 |
| | $ | (15,698 | ) | | (46.0)% | Gross profit (loss)(1) | | (1,704 | ) | | 2,375 |
| | (4,079 | ) | | (171.7)% | Gross profit (loss) percentage | | (9.2 | )% | | 7.0 | % | | | | (16.2)% | General and administrative expenses | | 964 |
| | 1,296 |
| | (332 | ) | | (25.6)% | Asset impairment | | 389 |
| | — |
| | 389 |
| | 100.0% | Operating income (loss) (1) | | (3,057 | ) | | 1,079 |
| | | | |
| | | | | | | | | | | | | | | | 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 threenine months ended March 31,September 30, 2017, and 2016, includes $1.6$2.4 million and $1.2$4.1 million of non-cash amortization of deferred revenue related to the values assigned to the contracts acquired in the LEEVAC transaction, respectively. |
Revenue - Revenue from our Shipyards division decreased $15.7$34.8 million for the threenine months ended March 31,September 30, 2017, compared to the threenine months ended March 31,September 30, 2016, due to overall decreases in work as we complete work under our contracts
including completion of a vessel that we assumed in the LEEVAC transaction and delivered to a customer on February 6, 2017, with less new, replacement work starting during the period as compared to the three months ended March 31, 2016. The decrease in new, replacement work is due to depressed oil and gas prices and the corresponding reduction in customer demand for shipbuilding and repair services supporting the oil and gas industry.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 $1.7$19.1 million for the threenine months ended March 31,September 30, 2017, compared to a gross profit of $2.4$9.7 million for the threenine months ended March 31,September 30, 2016. The decrease was due to:
continued$12.7 million in contract losses related to cost overruns and re-work that has been identified on two newbuild vessel construction contracts that were assignedwithin our Shipyards division;
Holding and closing costs related to us in the LEEVAC transaction;our Prospect shipyard as we wind down operations at this facility; holdingHolding 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
overallOverall decreases in work under other various contracts as discussed above;contracts.
partially offset by savings realized from cost cutting measures implemented by management during 2016.
General and administrative expenses - General and administrative expenses for our Shipyards division decreased $332,000$1.4 million for the threenine months ended March 31,September 30, 2017, compared to the threenine months ended March 31,September 30, 2016, primarily due to cost cutting measures implemented by management during 2016 as well asreductions of administrative personnel related to consolidation of personnel duties from the LEEVAC transaction. Additionally, our Shipyards division incurred lower bonuses accrued during 2017 as a result of a combination of a smaller workforce and our consolidated gross loss.operating loss and cost minimization efforts implemented by management for the period.
Asset Impairment - During threenine months ended March 31,September 30, 2017, we recorded an impairment of $389$389,000 related to our assets held for sale at our Prospect Shipyard.shipyard. See also Note 2 of the Notes to Consolidated Financial statements.Statements.
| | | | | | | | | | | | | | | | Services | | Three Months Ended March 31, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | 10,712 |
| | $ | 26,559 |
| | $ | (15,847 | ) | | (59.7)% | Gross profit | | 33 |
| | 3,376 |
| | (3,343 | ) | | (99.0)% | Gross profit (loss) percentage | | 0.3 | % | | 12.7 | % | | | | (12.4)% | General and administrative expenses | | 666 |
| | 726 |
| | (60 | ) | | (8.3)% | Operating income (loss) | | (633 | ) | | 2,650 |
| | | | |
| | | | | | | | | | | | | | | | 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 $15.8$32.4 million for the threenine months ended March 31,September 30, 2017, compared to the threenine months ended March 31,September 30, 2016, due to an overall decrease in work experienced as a result of depressed oil and gas prices and the corresponding reduction in customer demand for oil and gas related service projects.
Gross profit - Gross profit from our Services division decreased $3.3$8.8 million for the threenine months ended March 31,September 30, 2017, compared to the threenine months ended March 31,September 30, 2016, due to decreased revenue discussed above and tighterlower margins on new work performed during 2017.
General and administrative expenses - General and administrative expenses for our Services division decreased $60,000$0.5 million for the threenine months ended March 31,September 30, 2017, compared to the threenine months ended March 31,September 30, 2016, due to lower bonuses accrued during 2017 as a result of a combination of a smaller workforce and the reduction in gross profit.our consolidated operating loss.
| | | | | | | | | | | | | | | | Corporate | | Three Months Ended March 31, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | — |
| | $ | — |
| | $ | — |
| | —% | Gross loss | | (260 | ) | | (136 | ) | | (124 | ) | | (91.2)% | Gross profit (loss) percentage | | n/a |
| | n/a |
| | | |
| General and administrative expenses | | 1,479 |
| | 1,668 |
| | (189 | ) | | (11.3)% | Operating loss | | (1,739 | ) | | (1,804 | ) | | 65 |
| | |
| | | | | | | | | | | | | | | | 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 lossprofit (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 decreasedincreased primarily due to decreased bonuses as a resultrestructuring of our consolidated gross loss, partially offset bycorporate division with additional personnel allocated to our corporate division during 2017.2017 as discussed above as well as expenses incurred for advisors to assist in a strategic financial analysis project in anticipation of the proceeds 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 Consolidated Financial Statements. This has been partially offset by lower bonuses accrued during 2017 as a result of a combination of a smaller workforce and our consolidated operating loss.
Liquidity and Capital Resources Historically, we have funded our business activities through cash generated from operations. At March 31,September 30, 2017, we had no amounts outstanding under our credit facility, $4.6 million in outstanding letters of credit, and cash and cash equivalents totaling $34.7$17.8 million compared to $51.2 million at December 31, 2016. Working capital was $182.9$164.0 million and our ratio of current assets to current liabilities was 7.564.59 to 1 at March 31,September 30, 2017, compared to $78.0 million and 3.23.21 to 1, respectively, at December 31, 2016. Working capital at March 31,September 30, 2017, includes $110.5$107.0 million related to assets held for sale, primarily related to our South Texas facilities. Our primary use of cash during the threenine months ended September 30, 2017, is referenced in the Cash Flow Activities section below. At September 30, 2017, our contracts receivable balance was $25.5 million of which we have subsequently collected $8.3 million through October 31, 2017. On June 9, 2017, we entered into a $40.0 million credit agreement with Whitney Bank, as lender. The credit facility matures June 9, 2019 and may be used for issuing letters of credit and/or general corporate and working capital purposes. We 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 facility may be designated, at our option, as either Base Rate (as defined in the credit facility) or LIBOR plus 2.0% per annum. Unused commitment fees on the undrawn portion of the facility are 0.4% per annum, and interest on undrawn stated amounts under letters of credit issued by the lenders is 2.0% per annum. The credit facility is secured by substantially all of our assets (other than the assets of Gulf Marine Fabricators, L.P., the legal entity that holds our South Texas assets which are currently held for sale).
We must comply with the following 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, we terminated our prior credit facility with JPMorgan Chase Bank, N.A. At the time of the termination, there was approximately $4.6 million of 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 future, additional letters of credit and borrowings is $35.4 million. As of September 30, 2017, we were in compliance with all of our covenants.
Our primary liquidity requirements are for the costs associated with fabrication projects, capital expenditures and payment of dividends to our shareholders. We do not anticipate significant capital expenditures for the remainder of 2017.
On October 21, 2016, a customer of our Shipyards division announced it was in noncompliance with certain financial covenants included in the customer’s debt agreements and stated that, while it had received limited waivers from its lenders, its debt agreements would require further negotiation and amendment. This same customer rejected delivery of the first vessel that we completed and tendered for delivery on February 6, 2017, alleging certain technical deficiencies exist with respect to the vessel. On March 31,10, 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 included in our arbitration proceedings. We disagree with our customer concerning these alleged technical deficiencies and have put the customer in 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 United 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, 2017, 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 impacted by Hurricane Harvey, which made landfall as a category 4 hurricane. As a result, we suffered damages to our South Texas buildings and equipment. Through September 30, 2017, we have incurred approximately $265,000 in clean-up and repair related costs and we expect to incur additional future repair costs in excess of our 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 time and that insurance proceeds will at a minimum be sufficient to reimburse us for all damages and repair costs. Our final
assessment of the loss incurred to our South 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 such differences could be material.
In event of one or more sales of our South Texas assets, we expect to use all or a portion of the sales proceeds to invest in our operating liquidity in order to facilitate 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 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 26, 2017, our Board of Directors declared a dividend of $0.01 per share on our shares of common stock outstanding, payable November 24, 2017, to shareholders of record on November 10, 2017.
We believe our cash and cash equivalents generated by our future operating activities, proceeds to be received from insurance underwriters, availability under our line of credit and proceeds to be received from future assets sales will be sufficient to fund our capital expenditures and meet our working capital needs for next twelve months to continue to operate, satisfy our contractual operations and pay dividends to our shareholders.
Cash Flow Activities
For the nine months ended September 30, 2017, net cash used in operating activities was $29.6 million, compared to net cash provided by operating activities of $19.4 million for the nine months ended September 30, 2016. The use of cash in operations during the period was primarily due to:to the following:
Operating losses for the quarter exclusivenine months ended September 30, 2017, in excess of non-cash depreciation, amortization, impairment and stock compensation expense of approximately $3.7$19.6 million, Payment of year-end bonuses related to 2016, Progress on liabilities from assumed contracts in the LEEVAC transaction.Whiletransaction. While our purchase price for the acquisition of the LEEVAC assets during 2016 was $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 us in the transaction. We have significantly progressed these contracts, which in turn has resulted in utilization of the working capital and settlement payments received during 2016. Fewer receipts from accounts receivable, primarily $4.6 million from one customer that refusedThe suspension of two vessel projects following our customer’s refusal to accept delivery of athe first vessel onin February 6, 2017, and has not paid. We have initiated arbitration proceedings duringour inability to collect $9.5 million in scheduled payments under these contracts. See also Note 9 of the quarterNotes to enforce our rights under our construction contract,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 beginninglater in the third quarter of 2017 through the first quarterhalf of 2018. At March 31, 2017, our contracts receivable balance was $21.1 million of which we have subsequently collected $4.1 million through April 21, 2017.
As of March 31, 2017, we had a credit agreement with Whitney Bank and JPMorgan Chase Bank N.A. that provides for a $40.0 million revolving credit facility maturing November 29, 2018. The credit agreement allows the Company to use up to the full amount of the available borrowing base for letters of credit and for general corporate purposes. Our obligations under the credit agreement are secured by substantially all of our assets (other than real estate). Commitment fees on undrawn amounts are 0.5% per annum and letter of credit fees, subject to certain limited exceptions, are 2.0% per annum on undrawn stated amounts under letters of credit issued by the lenders. Amounts borrowed under 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. Our financial covenants at March 31, 2017, are as follows:
| | (i) | minimum net worth requirement of not less than 255.0 million plus |
| | a) | 50% of net income earned in each quarter beginning December 31, 2016, and |
| | b) | 100% of proceeds from any issuance of common stock; |
| | c) | less the amount of any impairment on certain assets owned by Gulf Marine Fabricators, L.P. (our South Texas assets held for sale) up to $30.0 million; |
| | (ii) | debt to EBITDA ratio not greater than 2.5 to 1.0; and |
| | (iii) | interest coverage ratio not less than 2.0 to 1.0. |
At March 31, 2017, no amounts were outstanding under the credit facility, and we had outstanding letters of credit totaling $4.6 million, reducing the unused portion of our credit facility for additional letters of credit and borrowings to $35.4 million. As of March 31, 2017, we were in compliance with all covenants.
We are currently in discussions with one of our financial institutions to enter into a new revolving line of credit with comparable availability, but with less restrictive financial covenants and reduced fees as compared to our current revolving credit facility. We expect to close on this new revolving credit facility and terminate our existing revolving credit facility in the second quarter of 2017.
Our primary liquidity requirements are for the costs associated with fabrication projects, capital expenditures and payment of dividends to our shareholders. We anticipate capital expenditures for the remainder of 2017 to range between $6.0 million to $8.0 million primarily for the following:
improvements to our Jennings and Lake Charles leased shipyards,
improvement to the bulkhead at our Houma facility, and
computer system upgrades.
On October 21, 2016, a customer of our Shipyards division announced it was in noncompliance with certain financial covenants included in the customer’s debt agreements. This customer also stated it had received limited waivers from its lenders and noteholders, but its debt agreements will require further negotiation and amendment. On April 19, 2017, the customer stated it had allowed the waivers to expire and remains in default of its covenants.
This same customer has rejected delivery of the vessel that we tendered for delivery on February 6, 2017, alleging certain technical deficiencies exist with respect to the vessel and is seeking recovery of all purchase price amounts previously paid by the customer under the contract. We are also building a second vessel for this customer that is scheduled for delivery during the second quarter of 2017. We disagree with our customer concerning these alleged technical deficiencies and have put the customer in default under the terms of the contracts for both vessels. As of March 31, 2017, approximately $4.6 million remained due and outstanding from our customer for the first vessel. The balance due to us upon delivery for a second vessel which is expected in May of this year, is approximately $4.9 million. On March 10, 2017, we gave notice for arbitration with our customer in an effort to resolve this matter. We intend to take all legal action as may be necessary to protect our rights under the contracts and recover the remaining balances owed to us.
We continue to monitor our work performed in relation to our customer’s status and its ability to pay under the terms of these contracts. Because these vessels have been completed or are substantially complete, we believe that they have significant fair value, and that we would be able to fully recover any amounts due to us.
In anticipation of the proceeds to be received from the sale of our South Texas assets, we have engaged in a strategic financial analysis project with advisors to determine the appropriate use of proceeds from this transaction. We will be evaluating a mix of options including tactical capital improvement projects, strategic growth investment opportunities that support our business plan, stock buy-backs and/or dividends and working capital reinvestment.
On April 26, 2017, our Board of Directors declared a dividend of $0.01 per share on our shares of common stock outstanding, payable May 25, 2017, to shareholders of record on May 11, 2017.
We believe our cash and cash equivalents generated by our operating activities and proceeds to be received from future assets sales will be sufficient to fund our capital expenditures and meet our working capital needs for both the near and longer term to continue our operations, satisfy our contractual operations and pay dividends to our shareholders. Additionally, we expect to close on a new revolving line of credit during the second quarter of 2017 as discussed above. We believe that the new facility will provide us with additional working capital flexibility to ramp up our operations quickly in times of rapid increasing demand, to continue to issue future letters of credit and to quickly take advantage of market opportunities.
Cash Flow Activities
For the three months ended March 31, 2017, net cash used in operating activities was $15.1 million, compared to $1.6 million for the three months ended March 31, 2016. The increase in cash used in operations was primarily due to the following:
Operating losses for the quarter in excess of non-cash depreciation, amortization, impairment and stock compensation expense of approximately $3.7 million,
Payment of year-end bonuses related to 2016,
Progress on liabilities from assumed contracts in the LEEVAC transaction.While our purchase price for the acquisition of the LEEVAC assets during 2016 was $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 us in the transaction. We have significantly progressed these contracts which in turn, has resulted in utilization of the working capital and settlement payments received during 2016.
Fewer receipts from accounts receivable, primarily $4.6 million from one customer that refused delivery of a vessel on February 6, 2017, and has not paid. We have initiated arbitration proceedings during the quarter to enforce our rights under our construction contract, and
Build-up of costs for contracts in progress related to a customer in our Shipyards division with significant milestone payments occurring in the later stages of the projects which are expected to occur beginning in the third quarter of 2017 through the first quarter of 2018.
Net cash used in investing activities for the threenine months ended March 31,September 30, 2017, was $391,000,$2.4 million, compared to cash provided by investing activities of $6.2$2.0 million for the threenine months ended March 31,September 30, 2016. The change in cash used in/provided by investing activities is primarily due to cash received from the sale of three cranes at our Texas facility for $5.4$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 threenine months ended March 31,September 30, 2017 and 2016, was $1.0$1.4 million and $291,000,$603,000, respectively. The increase in cash used in financing activities is due to the cash payments made to taxing authorities on behalf of employees'employees for their vesting of common stock. During the 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, 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, 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, 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 March 31,September 30, 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, 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 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 Chief Financial Officer, have 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 Chief Financial Officer have 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 March 31,September 30, 2017, in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION Item 1. Legal Proceedings. The Company is subject to various routine legal proceedings in the normal conduct of its business primarily involving commercial claims, workers’ compensation claims, and claims for personal injury under general maritime laws of the United States and the Jones Act. While the outcome of these lawsuits, legal proceedings and claims cannot be predicted with certainty, management believes that the outcome of any such proceedings, even if determined adversely, would not have a material adverse effect on the financial position, results of operations or cash flows of the Company. Item 1A. Risk Factors. There have been no material changes from the information included in Item 1A “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2016. | | | | | Exhibit Number | | Description of Exhibit | | | 3.1 | | | 3.2 | | | 10.1 | | Change of Control Agreement, dated March 1, 2017, between the Company and David S. Schorlemer, incorporated by reference to Exhibit 10.15 of the Company's Form 10-K for the year ended December 31, 2016 filed on March 2, 2017. | 31.1 | | | 31.2 | | | 32 | | | | | | 101 | | Attached as Exhibit 101 to this report are the following items formatted in XBRL (Extensible Business Reporting Language): | | | (i) | Consolidated Balance Sheets, | | | (ii) | Consolidated Statements of Operations, | | | (iii) | Consolidated Statement of Changes in Shareholders’ Equity, | | | (iv) | Consolidated Statements of Cash Flows and | | | (v) | Notes to Consolidated Financial Statements. |
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. | | | GULF ISLAND FABRICATION, INC. | | BY: | /s/ David S. Schorlemer | | David S. Schorlemer | | Executive Vice President, Chief Financial Officer, and Treasurer (Principal Financial and Accounting Officer) |
Date: May 2,October 31, 2017
GULF ISLAND FABRICATION, INC. EXHIBIT INDEX | | | | | Exhibit Number | | Description of Exhibit | | | 3.1 | | | 3.2 | | | 10.1 | | Change of Control Agreement, dated March 1, 2017, between the Company and David S. Schorlemer, incorporated by reference to Exhibit 10.15 of the Company's Form 10-K for the year ended December 31, 2016 filed on March 2, 2017. | 31.1 | | | 31.2 | | | 32 | | | | | | 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 | |
Backlog is expected to be recognized in revenue during: | ___________ | | 1.(1) | Backlog as of March 31, 2017, includes commitments received through April 26, 2017. We exclude suspended projects from contract backlog when 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. |
| | 2.(2) | At March 31,September 30, 2017, projects for our twofive largest customers in terms of revenue backlog consisted of: |
| | (i) | 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 quarters2018; |
| | (ii) | Newbuild construction of 2018; andfour harbor tugs for one customer within our Shipyards division; |
| | (ii)(iii) | theNewbuild 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.project within our Fabrication division; and |
| | 3.(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 March 31,September 30, 2017, we had 922 employees and 133 contract989 employees compared to 1,178 employees and 92 contract employees as of December 31, 2016. Labor hours worked were 479,0001.5 million during the threenine months ended March 31,September 30, 2017, compared to 695,0002.3 million for the threenine months ended March 31,September 30, 2016. The overall decrease in labor hours worked for the threenine months ended March 31,September 30, 2017, was due 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.
Results of Operations Three Months Ended March 31,September 30, 2017, Compared to Three Months Ended March 31,September 30, 2016 (in thousands, except for percentages): Consolidated | | | | | | | | | | | | | | | Three Months Ended March 31, | | Increase or (Decrease) | | 2017 | | 2016 | | Amount | Percent | Revenue | $ | 37,993 |
| | $ | 83,979 |
| | $ | (45,986 | ) | (54.8)% | Cost of revenue | 42,890 |
| | 78,278 |
| | (35,388 | ) | (45.2)% | Gross profit (loss) | (4,897 | ) | | 5,701 |
| | (10,598 | ) | 185.9% | Gross profit (loss) percentage | (12.9)% | | 6.8% | | | | General and administrative expenses | 3,930 |
| | 4,485 |
| | (555 | ) | (12.4)% | Asset impairment | 389 |
| | — |
| | 389 |
| 100.0% | Operating income (loss) | (9,216 | ) | | 1,216 |
| | (10,432 | ) | (857.9)% | Other income (expense): | | | | | | | Interest expense | (59 | ) | | (50 | ) | | (9 | ) | | Interest income | — |
| | 6 |
| | (6 | ) | | Other income, net | 9 |
| | 398 |
| | (389 | ) | | Total other income (expense) | (50 | ) | | 354 |
| | (404 | ) | (114.1)% | Net income (loss) before income taxes | (9,266 | ) | | 1,570 |
| | (10,836 | ) | (690.2)% | Income taxes | (2,812 | ) | | 581 |
| | (3,393 | ) | (584.0)% | Net income (loss) | $ | (6,454 | ) | | $ | 989 |
| | $ | (7,443 | ) | (752.6)% |
| | | | | | | | | | | | | | | 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 revenue for the three months ended March 31,September 30, 2017 and 2016, was $38.0$49.9 million and $84.0$65.4 million, respectively, representing a decrease of 54.8%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 29.4%48.4% and 40.0%33.8% for the three-monthsthree months ended March 31,September 30, 2017 and 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 loss for the three months ended March 31,September 30, 2017, was $4.9 million$494,000 compared to a gross profit of $5.7$5.3 million for the three months ended March 31,September 30, 2016. The decrease was primarily due to $2.1 million of contract losses incurred by our Shipyards division related to cost overruns and re-work identified on two newbuild vessel construction
contracts, decreased revenue as discussed above, holding costs related to our South Texas assets of $1.1 million and tighterlower margins on current work due to competitive pressures. This was partially offset by decreases in costs resulting from additionalreductions in workforce as we wrapped up and completed projects at our South 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 assets held for sale) and continued cost cutting measuresminimization efforts implemented by management.management for the period.
General and administrative expenses - Our general and administrative expenses were $3.9$4.4 million for the three months ended March 31,September 30, 2017, compared to $4.5$5.1 million for the three months ended March 31,September 30, 2016. The decrease in general and administrative expenses for the three months ended March 31,September 30, 2017, was primarily attributable to cost cutting measures implemented by management during the first part of 2016 as well as lower bonuses accrued during 2017, as a result of a combination of a smaller workforceemployee reductions and our consolidated gross loss.continued cost minimization efforts implemented by management for the period.
Asset Impairment - During three months ended March 31, 2017, we recorded an impairment of $389 related to our assets held for sale at our Prospect Shipyard. See also Note 2 of the Notes to Consolidated Financial statements.
Other income (expense), net - Other income decreased $389,000was $38,000 for the three months ended March 31, 2017. The decreaseSeptember 30, 2017, as compared to other income of $599,000 for three months ended September 30, 2016. Other income for the three months ended September 30, 2017 relates to insurance proceeds received from damage to a corporate automobile that was fully depreciated. Other income for for three months ended September 30, 2016 primarily duerelates to gains on sales of assets from our Fabrication division recorded during three months ended March 31, 2016.division.
Income taxestax expense (benefit) - Our effective income tax rate for the three months ended March 31,September 30, 2017, was 30.3%36.2%, compared to an effective tax rate of 37.0%19.7% for the comparable period during 2016. The decreaseincrease in the effective tax rate is the result of limitations on the deductibilitychanges to estimates of executive compensation and $210,000 inour year-end tax expense recognizedprovision during for the three months ended March 31, 2017, for the tax effect of the difference between the actual tax deduction allowed upon vesting of common stock and the compensation cost recognized for financial reporting purposes resulting from the adoption of Accounting Standards Update 2016-09 as further discussed in Note 1 of the Notes to the Consolidated Financial Statements.September 30, 2016.
Operating Segments
As discussed in Note 8 of the Notes to Consolidated Financial Statements, management reduced its allocation of corporate administrative costs and overhead expenses to its operating divisions during the three and nine months ended March 31,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 it'sits Corporate division each meeting the criteria of reportable segments under GAAP. During the three and nine months ended March 31,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 March 31,September 30, 2017 and 2016, are presented below (in thousands, except for percentages).
| | | | | | | | | | | | | | | | Fabrication | | Three Months Ended March 31, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | 10,209 |
| | $ | 23,829 |
| | $ | (13,620 | ) | | (57.2)% | Gross profit (loss) | | (2,966 | ) | | 86 |
| | (3,052 | ) | | (3,548.8)% | Gross profit (loss) percentage | | (29.1 | )% | | 0.4 | % | | | | (29.5)% | General and administrative expenses | | 821 |
| | 795 |
| | 26 |
| | 3.3% | Operating income (loss) | | (3,787 | ) | | (709 | ) | | | | |
| | | | | | | | | | | | | | | | 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 $13.6$4.0 million for the three months ended March 31,September 30, 2017, compared to the three months ended March 31,September 30, 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 (loss) - Gross profit from our Fabrication division for the three months ended September 30, 2017, was $1.3 million compared to a gross profit of $601,000 for the three months ended September 30, 2016. The increase in gross profit was due to
Gains 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 completed projects at our South Texas fabrication yards, No depreciation being recorded for our South Texas assets for the three months ended September 30, 2017, 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, 2016. The decrease is primarily due to decreases in costs resulting from lower bonuses accrued during 2017 as a result of our consolidated operating loss, reductions in workforce at our South Texas fabrication yards and continued cost minimization efforts implemented by management for the period.
| | | | | | | | | | | | | | | | 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, respectively. |
Revenue - Revenue from our Shipyards division decreased $8.0 million for the three months ended September 30, 2017, compared to the three months ended September 30, 2016, due to the corresponding reduction in customer demand for shipbuilding and repair services supporting the oil 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 for the three months ended September 30, 2017, compared to a gross profit of $1.9 million for the three months ended September 30, 2016. 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, 2016, primarily due to reductions of administrative personnel related to consolidation of personnel duties from the LEEVAC transaction. 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 management for the period during the first part of 2016.
| | | | | | | | | | | | | | | | 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, 2017, compared to the three months ended September 30, 2016, due to an overall decrease in work experienced as a result of depressed oil and gas prices and the corresponding reduction in customer demand for oil and gas related service projects.
Gross profit - Gross profit from our Services division decreased $1.0 million for the three 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 combination of a smaller workforce and our 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 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 proceeds 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 Consolidated Financial Statements. This has been partially offset by lower bonuses accrued during the quarter due to our consolidated operating loss.
Nine Months Ended September 30, 2017, Compared to Nine Months Ended September 30, 2016 (in thousands, 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, 2017 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 45.3% and 35.0% for the nine months ended September 30, 2017 and 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 loss for the nine months ended September 30, 2017, was $17.0 million compared to a gross profit of $25.0 million for the nine months ended September 30, 2016. The decrease was primarily due to $12.7 million of losses incurred by our Shipyards division related to cost overruns and re-work identified on two newbuild vessel construction contracts, decreased revenue as discussed above, holding costs related to our South Texas assets of $3.6 million and lower 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 our South Texas assets and Prospect shipyard during the nine months ended September 30, 2017, as these assets are classified as assets held for sale and additional cost minimization efforts implemented 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. The decrease in general and administrative expenses for the nine months ended September 30, 2017, is primarily due to decreases in costs resulting from reductions in workforce at our South Texas fabrication yards, lower bonuses accrued during 2017 as a result of our consolidated operating loss and continued cost minimization efforts implemented by management for the period.
Asset Impairment - During the 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.
Other income (expense), net - Other expense was $221,000 for the nine months ended September 30, 2017, compared to other income of $1.0 million for the nine months ended September 30, 2016. Other 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 on sales of assets from our Fabrication division recorded during 2016.
Income tax expense (benefit) - Our effective income tax rate for the nine months ended September 30, 2017, was 33.5%, compared to an effective tax rate of 36.9% for the comparable period during 2016. The decrease in the effective tax rate is the result of limitations on the deductibility of executive compensation.
Operating Segments
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 $27.9 million for the nine months ended September 30, 2017, compared to the nine months ended September 30, 2016. The decrease is attributable to an overall decrease in work experienced in our fabrication yards as a result of depressed oil and gas prices and the corresponding reduction in customer demand for offshore fabrication projects. As discussed above, management has classified our South Texas assets as assets held for sale in response to the underutilization of our Fabrication assets. As of September 30, 2017, all of our projects at our South Texas fabrication yards have been completed or transferred to our Houma fabrication yard.
Gross profit (loss) - Gross lossprofit from our Fabrication division for the threenine months ended March 31,September 30, 2017, was $3.0 million$216,000 compared to a gross profit of $86,000$4.6 million for the threenine months ended March 31,September 30, 2016. The decrease was due to lower revenue
from decreased fabrication work as discussed above paymentand approximately $3.6 million of termination benefits as we reduce our South Texas workforce and depreciation expense of $1.9 million related toholding costs for our South Texas assets prior to their classification as assets heldwe 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, 2017, as these assets are classified as assets held for sale on February 23, 2017, and additional cost cutting measuresminimization efforts implemented by management.management for the period.
General and administrative expenses - General and administrative expenses for our Fabrication division increased $26,000decreased $389,000 for the threenine months ended March 31,September 30, 2017, compared to the threenine months ended March 31,September 30, 2016. The increasedecrease is primarily due to decreases in costs resulting from reductions in workforce as we wrapped up and completed projects at our South Texas fabrication yards and lower bonuses accrued during 2017 as a result of a combination of a smaller workforce and our consolidated operating loss. This was partially offset by expenses incurred to market our South Texas assets for sale and payment of termination benefits during the first quarter of 2017 as we reducereduced its workforce and completecompleted those operations.
| | | | | | | | | | | | | | | | Shipyards | | Three Months Ended March 31, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue (1) | | $ | 18,422 |
| | $ | 34,120 |
| | $ | (15,698 | ) | | (46.0)% | Gross profit (loss)(1) | | (1,704 | ) | | 2,375 |
| | (4,079 | ) | | (171.7)% | Gross profit (loss) percentage | | (9.2 | )% | | 7.0 | % | | | | (16.2)% | General and administrative expenses | | 964 |
| | 1,296 |
| | (332 | ) | | (25.6)% | Asset impairment | | 389 |
| | — |
| | 389 |
| | 100.0% | Operating income (loss) (1) | | (3,057 | ) | | 1,079 |
| | | | |
| | | | | | | | | | | | | | | | 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 threenine months ended March 31,September 30, 2017, and 2016, includes $1.6$2.4 million and $1.2$4.1 million of non-cash amortization of deferred revenue related to the values assigned to the contracts acquired in the LEEVAC transaction, respectively. |
Revenue - Revenue from our Shipyards division decreased $15.7$34.8 million for the threenine months ended March 31,September 30, 2017, compared to the threenine months ended March 31,September 30, 2016, due to overall decreases in work as we complete work under our contracts
including completion of a vessel that we assumed in the LEEVAC transaction and delivered to a customer on February 6, 2017, with less new, replacement work starting during the period as compared to the three months ended March 31, 2016. The decrease in new, replacement work is due to depressed oil and gas prices and the corresponding reduction in customer demand for shipbuilding and repair services supporting the oil and gas industry.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 $1.7$19.1 million for the threenine months ended March 31,September 30, 2017, compared to a gross profit of $2.4$9.7 million for the threenine months ended March 31,September 30, 2016. The decrease was due to:
continued$12.7 million in contract losses related to cost overruns and re-work that has been identified on two newbuild vessel construction contracts that were assignedwithin our Shipyards division;
Holding and closing costs related to us in the LEEVAC transaction;our Prospect shipyard as we wind down operations at this facility; holdingHolding 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
overallOverall decreases in work under other various contracts as discussed above;contracts.
partially offset by savings realized from cost cutting measures implemented by management during 2016.
General and administrative expenses - General and administrative expenses for our Shipyards division decreased $332,000$1.4 million for the threenine months ended March 31,September 30, 2017, compared to the threenine months ended March 31,September 30, 2016, primarily due to cost cutting measures implemented by management during 2016 as well asreductions of administrative personnel related to consolidation of personnel duties from the LEEVAC transaction. Additionally, our Shipyards division incurred lower bonuses accrued during 2017 as a result of a combination of a smaller workforce and our consolidated gross loss.operating loss and cost minimization efforts implemented by management for the period.
Asset Impairment - During threenine months ended March 31,September 30, 2017, we recorded an impairment of $389$389,000 related to our assets held for sale at our Prospect Shipyard.shipyard. See also Note 2 of the Notes to Consolidated Financial statements.Statements.
| | | | | | | | | | | | | | | | Services | | Three Months Ended March 31, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | 10,712 |
| | $ | 26,559 |
| | $ | (15,847 | ) | | (59.7)% | Gross profit | | 33 |
| | 3,376 |
| | (3,343 | ) | | (99.0)% | Gross profit (loss) percentage | | 0.3 | % | | 12.7 | % | | | | (12.4)% | General and administrative expenses | | 666 |
| | 726 |
| | (60 | ) | | (8.3)% | Operating income (loss) | | (633 | ) | | 2,650 |
| | | | |
| | | | | | | | | | | | | | | | 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 $15.8$32.4 million for the threenine months ended March 31,September 30, 2017, compared to the threenine months ended March 31,September 30, 2016, due to an overall decrease in work experienced as a result of depressed oil and gas prices and the corresponding reduction in customer demand for oil and gas related service projects.
Gross profit - Gross profit from our Services division decreased $3.3$8.8 million for the threenine months ended March 31,September 30, 2017, compared to the threenine months ended March 31,September 30, 2016, due to decreased revenue discussed above and tighterlower margins on new work performed during 2017.
General and administrative expenses - General and administrative expenses for our Services division decreased $60,000$0.5 million for the threenine months ended March 31,September 30, 2017, compared to the threenine months ended March 31,September 30, 2016, due to lower bonuses accrued during 2017 as a result of a combination of a smaller workforce and the reduction in gross profit.our consolidated operating loss.
| | | | | | | | | | | | | | | | Corporate | | Three Months Ended March 31, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | — |
| | $ | — |
| | $ | — |
| | —% | Gross loss | | (260 | ) | | (136 | ) | | (124 | ) | | (91.2)% | Gross profit (loss) percentage | | n/a |
| | n/a |
| | | |
| General and administrative expenses | | 1,479 |
| | 1,668 |
| | (189 | ) | | (11.3)% | Operating loss | | (1,739 | ) | | (1,804 | ) | | 65 |
| | |
| | | | | | | | | | | | | | | | 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 lossprofit (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 decreasedincreased primarily due to decreased bonuses as a resultrestructuring of our consolidated gross loss, partially offset bycorporate division with additional personnel allocated to our corporate division during 2017.2017 as discussed above as well as expenses incurred for advisors to assist in a strategic financial analysis project in anticipation of the proceeds 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 Consolidated Financial Statements. This has been partially offset by lower bonuses accrued during 2017 as a result of a combination of a smaller workforce and our consolidated operating loss.
Liquidity and Capital Resources Historically, we have funded our business activities through cash generated from operations. At March 31,September 30, 2017, we had no amounts outstanding under our credit facility, $4.6 million in outstanding letters of credit, and cash and cash equivalents totaling $34.7$17.8 million compared to $51.2 million at December 31, 2016. Working capital was $182.9$164.0 million and our ratio of current assets to current liabilities was 7.564.59 to 1 at March 31,September 30, 2017, compared to $78.0 million and 3.23.21 to 1, respectively, at December 31, 2016. Working capital at March 31,September 30, 2017, includes $110.5$107.0 million related to assets held for sale, primarily related to our South Texas facilities. Our primary use of cash during the threenine months ended September 30, 2017, is referenced in the Cash Flow Activities section below. At September 30, 2017, our contracts receivable balance was $25.5 million of which we have subsequently collected $8.3 million through October 31, 2017. On June 9, 2017, we entered into a $40.0 million credit agreement with Whitney Bank, as lender. The credit facility matures June 9, 2019 and may be used for issuing letters of credit and/or general corporate and working capital purposes. We 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 facility may be designated, at our option, as either Base Rate (as defined in the credit facility) or LIBOR plus 2.0% per annum. Unused commitment fees on the undrawn portion of the facility are 0.4% per annum, and interest on undrawn stated amounts under letters of credit issued by the lenders is 2.0% per annum. The credit facility is secured by substantially all of our assets (other than the assets of Gulf Marine Fabricators, L.P., the legal entity that holds our South Texas assets which are currently held for sale).
We must comply with the following 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, we terminated our prior credit facility with JPMorgan Chase Bank, N.A. At the time of the termination, there was approximately $4.6 million of 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 future, additional letters of credit and borrowings is $35.4 million. As of September 30, 2017, we were in compliance with all of our covenants.
Our primary liquidity requirements are for the costs associated with fabrication projects, capital expenditures and payment of dividends to our shareholders. We do not anticipate significant capital expenditures for the remainder of 2017.
On October 21, 2016, a customer of our Shipyards division announced it was in noncompliance with certain financial covenants included in the customer’s debt agreements and stated that, while it had received limited waivers from its lenders, its debt agreements would require further negotiation and amendment. This same customer rejected delivery of the first vessel that we completed and tendered for delivery on February 6, 2017, alleging certain technical deficiencies exist with respect to the vessel. On March 31,10, 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 included in our arbitration proceedings. We disagree with our customer concerning these alleged technical deficiencies and have put the customer in 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 United 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, 2017, 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 impacted by Hurricane Harvey, which made landfall as a category 4 hurricane. As a result, we suffered damages to our South Texas buildings and equipment. Through September 30, 2017, we have incurred approximately $265,000 in clean-up and repair related costs and we expect to incur additional future repair costs in excess of our 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 time and that insurance proceeds will at a minimum be sufficient to reimburse us for all damages and repair costs. Our final
assessment of the loss incurred to our South 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 such differences could be material.
In event of one or more sales of our South Texas assets, we expect to use all or a portion of the sales proceeds to invest in our operating liquidity in order to facilitate 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 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 26, 2017, our Board of Directors declared a dividend of $0.01 per share on our shares of common stock outstanding, payable November 24, 2017, to shareholders of record on November 10, 2017.
We believe our cash and cash equivalents generated by our future operating activities, proceeds to be received from insurance underwriters, availability under our line of credit and proceeds to be received from future assets sales will be sufficient to fund our capital expenditures and meet our working capital needs for next twelve months to continue to operate, satisfy our contractual operations and pay dividends to our shareholders.
Cash Flow Activities
For the nine months ended September 30, 2017, net cash used in operating activities was $29.6 million, compared to net cash provided by operating activities of $19.4 million for the nine months ended September 30, 2016. The use of cash in operations during the period was primarily due to:to the following:
Operating losses for the quarter exclusivenine months ended September 30, 2017, in excess of non-cash depreciation, amortization, impairment and stock compensation expense of approximately $3.7$19.6 million, Payment of year-end bonuses related to 2016, Progress on liabilities from assumed contracts in the LEEVAC transaction.Whiletransaction. While our purchase price for the acquisition of the LEEVAC assets during 2016 was $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 us in the transaction. We have significantly progressed these contracts, which in turn has resulted in utilization of the working capital and settlement payments received during 2016. Fewer receipts from accounts receivable, primarily $4.6 million from one customer that refusedThe suspension of two vessel projects following our customer’s refusal to accept delivery of athe first vessel onin February 6, 2017, and has not paid. We have initiated arbitration proceedings duringour inability to collect $9.5 million in scheduled payments under these contracts. See also Note 9 of the quarterNotes to enforce our rights under our construction contract,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 beginninglater in the third quarter of 2017 through the first quarterhalf of 2018. At March 31, 2017, our contracts receivable balance was $21.1 million of which we have subsequently collected $4.1 million through April 21, 2017.
As of March 31, 2017, we had a credit agreement with Whitney Bank and JPMorgan Chase Bank N.A. that provides for a $40.0 million revolving credit facility maturing November 29, 2018. The credit agreement allows the Company to use up to the full amount of the available borrowing base for letters of credit and for general corporate purposes. Our obligations under the credit agreement are secured by substantially all of our assets (other than real estate). Commitment fees on undrawn amounts are 0.5% per annum and letter of credit fees, subject to certain limited exceptions, are 2.0% per annum on undrawn stated amounts under letters of credit issued by the lenders. Amounts borrowed under 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. Our financial covenants at March 31, 2017, are as follows:
| | (i) | minimum net worth requirement of not less than 255.0 million plus |
| | a) | 50% of net income earned in each quarter beginning December 31, 2016, and |
| | b) | 100% of proceeds from any issuance of common stock; |
| | c) | less the amount of any impairment on certain assets owned by Gulf Marine Fabricators, L.P. (our South Texas assets held for sale) up to $30.0 million; |
| | (ii) | debt to EBITDA ratio not greater than 2.5 to 1.0; and |
| | (iii) | interest coverage ratio not less than 2.0 to 1.0. |
At March 31, 2017, no amounts were outstanding under the credit facility, and we had outstanding letters of credit totaling $4.6 million, reducing the unused portion of our credit facility for additional letters of credit and borrowings to $35.4 million. As of March 31, 2017, we were in compliance with all covenants.
We are currently in discussions with one of our financial institutions to enter into a new revolving line of credit with comparable availability, but with less restrictive financial covenants and reduced fees as compared to our current revolving credit facility. We expect to close on this new revolving credit facility and terminate our existing revolving credit facility in the second quarter of 2017.
Our primary liquidity requirements are for the costs associated with fabrication projects, capital expenditures and payment of dividends to our shareholders. We anticipate capital expenditures for the remainder of 2017 to range between $6.0 million to $8.0 million primarily for the following:
improvements to our Jennings and Lake Charles leased shipyards,
improvement to the bulkhead at our Houma facility, and
computer system upgrades.
On October 21, 2016, a customer of our Shipyards division announced it was in noncompliance with certain financial covenants included in the customer’s debt agreements. This customer also stated it had received limited waivers from its lenders and noteholders, but its debt agreements will require further negotiation and amendment. On April 19, 2017, the customer stated it had allowed the waivers to expire and remains in default of its covenants.
This same customer has rejected delivery of the vessel that we tendered for delivery on February 6, 2017, alleging certain technical deficiencies exist with respect to the vessel and is seeking recovery of all purchase price amounts previously paid by the customer under the contract. We are also building a second vessel for this customer that is scheduled for delivery during the second quarter of 2017. We disagree with our customer concerning these alleged technical deficiencies and have put the customer in default under the terms of the contracts for both vessels. As of March 31, 2017, approximately $4.6 million remained due and outstanding from our customer for the first vessel. The balance due to us upon delivery for a second vessel which is expected in May of this year, is approximately $4.9 million. On March 10, 2017, we gave notice for arbitration with our customer in an effort to resolve this matter. We intend to take all legal action as may be necessary to protect our rights under the contracts and recover the remaining balances owed to us.
We continue to monitor our work performed in relation to our customer’s status and its ability to pay under the terms of these contracts. Because these vessels have been completed or are substantially complete, we believe that they have significant fair value, and that we would be able to fully recover any amounts due to us.
In anticipation of the proceeds to be received from the sale of our South Texas assets, we have engaged in a strategic financial analysis project with advisors to determine the appropriate use of proceeds from this transaction. We will be evaluating a mix of options including tactical capital improvement projects, strategic growth investment opportunities that support our business plan, stock buy-backs and/or dividends and working capital reinvestment.
On April 26, 2017, our Board of Directors declared a dividend of $0.01 per share on our shares of common stock outstanding, payable May 25, 2017, to shareholders of record on May 11, 2017.
We believe our cash and cash equivalents generated by our operating activities and proceeds to be received from future assets sales will be sufficient to fund our capital expenditures and meet our working capital needs for both the near and longer term to continue our operations, satisfy our contractual operations and pay dividends to our shareholders. Additionally, we expect to close on a new revolving line of credit during the second quarter of 2017 as discussed above. We believe that the new facility will provide us with additional working capital flexibility to ramp up our operations quickly in times of rapid increasing demand, to continue to issue future letters of credit and to quickly take advantage of market opportunities.
Cash Flow Activities
For the three months ended March 31, 2017, net cash used in operating activities was $15.1 million, compared to $1.6 million for the three months ended March 31, 2016. The increase in cash used in operations was primarily due to the following:
Operating losses for the quarter in excess of non-cash depreciation, amortization, impairment and stock compensation expense of approximately $3.7 million,
Payment of year-end bonuses related to 2016,
Progress on liabilities from assumed contracts in the LEEVAC transaction.While our purchase price for the acquisition of the LEEVAC assets during 2016 was $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 us in the transaction. We have significantly progressed these contracts which in turn, has resulted in utilization of the working capital and settlement payments received during 2016.
Fewer receipts from accounts receivable, primarily $4.6 million from one customer that refused delivery of a vessel on February 6, 2017, and has not paid. We have initiated arbitration proceedings during the quarter to enforce our rights under our construction contract, and
Build-up of costs for contracts in progress related to a customer in our Shipyards division with significant milestone payments occurring in the later stages of the projects which are expected to occur beginning in the third quarter of 2017 through the first quarter of 2018.
Net cash used in investing activities for the threenine months ended March 31,September 30, 2017, was $391,000,$2.4 million, compared to cash provided by investing activities of $6.2$2.0 million for the threenine months ended March 31,September 30, 2016. The change in cash used in/provided by investing activities is primarily due to cash received from the sale of three cranes at our Texas facility for $5.4$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 threenine months ended March 31,September 30, 2017 and 2016, was $1.0$1.4 million and $291,000,$603,000, respectively. The increase in cash used in financing activities is due to the cash payments made to taxing authorities on behalf of employees'employees for their vesting of common stock. During the 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, 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, 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, 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 March 31,September 30, 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, 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 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 Chief Financial Officer, have 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 Chief Financial Officer have 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 March 31,September 30, 2017, in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION Item 1. Legal Proceedings. The Company is subject to various routine legal proceedings in the normal conduct of its business primarily involving commercial claims, workers’ compensation claims, and claims for personal injury under general maritime laws of the United States and the Jones Act. While the outcome of these lawsuits, legal proceedings and claims cannot be predicted with certainty, management believes that the outcome of any such proceedings, even if determined adversely, would not have a material adverse effect on the financial position, results of operations or cash flows of the Company. Item 1A. Risk Factors. There have been no material changes from the information included in Item 1A “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2016. | | | | | Exhibit Number | | Description of Exhibit | | | 3.1 | | | 3.2 | | | 10.1 | | Change of Control Agreement, dated March 1, 2017, between the Company and David S. Schorlemer, incorporated by reference to Exhibit 10.15 of the Company's Form 10-K for the year ended December 31, 2016 filed on March 2, 2017. | 31.1 | | | 31.2 | | | 32 | | | | | | 101 | | Attached as Exhibit 101 to this report are the following items formatted in XBRL (Extensible Business Reporting Language): | | | (i) | Consolidated Balance Sheets, | | | (ii) | Consolidated Statements of Operations, | | | (iii) | Consolidated Statement of Changes in Shareholders’ Equity, | | | (iv) | Consolidated Statements of Cash Flows and | | | (v) | Notes to Consolidated Financial Statements. |
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. | | | GULF ISLAND FABRICATION, INC. | | BY: | /s/ David S. Schorlemer | | David S. Schorlemer | | Executive Vice President, Chief Financial Officer, and Treasurer (Principal Financial and Accounting Officer) |
Date: May 2,October 31, 2017
GULF ISLAND FABRICATION, INC. EXHIBIT INDEX | | | | | Exhibit Number | | Description of Exhibit | | | 3.1 | | | 3.2 | | | 10.1 | | Change of Control Agreement, dated March 1, 2017, between the Company and David S. Schorlemer, incorporated by reference to Exhibit 10.15 of the Company's Form 10-K for the year ended December 31, 2016 filed on March 2, 2017. | 31.1 | | | 31.2 | | | 32 | | | | | | 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 March 31, 2017, includes commitments received through April 26, 2017. We exclude suspended projects from contract backlog when 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. |
| | 2.(2) | At March 31,September 30, 2017, projects for our twofive largest customers in terms of revenue backlog consisted of: |
| | (i) | 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 quarters2018; |
| | (ii) | Newbuild construction of 2018; andfour harbor tugs for one customer within our Shipyards division; |
| | (ii)(iii) | theNewbuild 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.project within our Fabrication division; and |
| | 3.(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 March 31,September 30, 2017, we had 922 employees and 133 contract989 employees compared to 1,178 employees and 92 contract employees as of December 31, 2016. Labor hours worked were 479,0001.5 million during the threenine months ended March 31,September 30, 2017, compared to 695,0002.3 million for the threenine months ended March 31,September 30, 2016. The overall decrease in labor hours worked for the threenine months ended March 31,September 30, 2017, was due 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.
Results of Operations Three Months Ended March 31,September 30, 2017, Compared to Three Months Ended March 31,September 30, 2016 (in thousands, except for percentages): Consolidated | | | | | | | | | | | | | | | Three Months Ended March 31, | | Increase or (Decrease) | | 2017 | | 2016 | | Amount | Percent | Revenue | $ | 37,993 |
| | $ | 83,979 |
| | $ | (45,986 | ) | (54.8)% | Cost of revenue | 42,890 |
| | 78,278 |
| | (35,388 | ) | (45.2)% | Gross profit (loss) | (4,897 | ) | | 5,701 |
| | (10,598 | ) | 185.9% | Gross profit (loss) percentage | (12.9)% | | 6.8% | | | | General and administrative expenses | 3,930 |
| | 4,485 |
| | (555 | ) | (12.4)% | Asset impairment | 389 |
| | — |
| | 389 |
| 100.0% | Operating income (loss) | (9,216 | ) | | 1,216 |
| | (10,432 | ) | (857.9)% | Other income (expense): | | | | | | | Interest expense | (59 | ) | | (50 | ) | | (9 | ) | | Interest income | — |
| | 6 |
| | (6 | ) | | Other income, net | 9 |
| | 398 |
| | (389 | ) | | Total other income (expense) | (50 | ) | | 354 |
| | (404 | ) | (114.1)% | Net income (loss) before income taxes | (9,266 | ) | | 1,570 |
| | (10,836 | ) | (690.2)% | Income taxes | (2,812 | ) | | 581 |
| | (3,393 | ) | (584.0)% | Net income (loss) | $ | (6,454 | ) | | $ | 989 |
| | $ | (7,443 | ) | (752.6)% |
| | | | | | | | | | | | | | | 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 revenue for the three months ended March 31,September 30, 2017 and 2016, was $38.0$49.9 million and $84.0$65.4 million, respectively, representing a decrease of 54.8%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 29.4%48.4% and 40.0%33.8% for the three-monthsthree months ended March 31,September 30, 2017 and 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 loss for the three months ended March 31,September 30, 2017, was $4.9 million$494,000 compared to a gross profit of $5.7$5.3 million for the three months ended March 31,September 30, 2016. The decrease was primarily due to $2.1 million of contract losses incurred by our Shipyards division related to cost overruns and re-work identified on two newbuild vessel construction
contracts, decreased revenue as discussed above, holding costs related to our South Texas assets of $1.1 million and tighterlower margins on current work due to competitive pressures. This was partially offset by decreases in costs resulting from additionalreductions in workforce as we wrapped up and completed projects at our South 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 assets held for sale) and continued cost cutting measuresminimization efforts implemented by management.management for the period.
General and administrative expenses - Our general and administrative expenses were $3.9$4.4 million for the three months ended March 31,September 30, 2017, compared to $4.5$5.1 million for the three months ended March 31,September 30, 2016. The decrease in general and administrative expenses for the three months ended March 31,September 30, 2017, was primarily attributable to cost cutting measures implemented by management during the first part of 2016 as well as lower bonuses accrued during 2017, as a result of a combination of a smaller workforceemployee reductions and our consolidated gross loss.continued cost minimization efforts implemented by management for the period.
Asset Impairment - During three months ended March 31, 2017, we recorded an impairment of $389 related to our assets held for sale at our Prospect Shipyard. See also Note 2 of the Notes to Consolidated Financial statements.
Other income (expense), net - Other income decreased $389,000was $38,000 for the three months ended March 31, 2017. The decreaseSeptember 30, 2017, as compared to other income of $599,000 for three months ended September 30, 2016. Other income for the three months ended September 30, 2017 relates to insurance proceeds received from damage to a corporate automobile that was fully depreciated. Other income for for three months ended September 30, 2016 primarily duerelates to gains on sales of assets from our Fabrication division recorded during three months ended March 31, 2016.division.
Income taxestax expense (benefit) - Our effective income tax rate for the three months ended March 31,September 30, 2017, was 30.3%36.2%, compared to an effective tax rate of 37.0%19.7% for the comparable period during 2016. The decreaseincrease in the effective tax rate is the result of limitations on the deductibilitychanges to estimates of executive compensation and $210,000 inour year-end tax expense recognizedprovision during for the three months ended March 31, 2017, for the tax effect of the difference between the actual tax deduction allowed upon vesting of common stock and the compensation cost recognized for financial reporting purposes resulting from the adoption of Accounting Standards Update 2016-09 as further discussed in Note 1 of the Notes to the Consolidated Financial Statements.September 30, 2016.
Operating Segments
As discussed in Note 8 of the Notes to Consolidated Financial Statements, management reduced its allocation of corporate administrative costs and overhead expenses to its operating divisions during the three and nine months ended March 31,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 it'sits Corporate division each meeting the criteria of reportable segments under GAAP. During the three and nine months ended March 31,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 March 31,September 30, 2017 and 2016, are presented below (in thousands, except for percentages).
| | | | | | | | | | | | | | | | Fabrication | | Three Months Ended March 31, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | 10,209 |
| | $ | 23,829 |
| | $ | (13,620 | ) | | (57.2)% | Gross profit (loss) | | (2,966 | ) | | 86 |
| | (3,052 | ) | | (3,548.8)% | Gross profit (loss) percentage | | (29.1 | )% | | 0.4 | % | | | | (29.5)% | General and administrative expenses | | 821 |
| | 795 |
| | 26 |
| | 3.3% | Operating income (loss) | | (3,787 | ) | | (709 | ) | | | | |
| | | | | | | | | | | | | | | | 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 $13.6$4.0 million for the three months ended March 31,September 30, 2017, compared to the three months ended March 31,September 30, 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 (loss) - Gross profit from our Fabrication division for the three months ended September 30, 2017, was $1.3 million compared to a gross profit of $601,000 for the three months ended September 30, 2016. The increase in gross profit was due to
Gains 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 completed projects at our South Texas fabrication yards, No depreciation being recorded for our South Texas assets for the three months ended September 30, 2017, 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, 2016. The decrease is primarily due to decreases in costs resulting from lower bonuses accrued during 2017 as a result of our consolidated operating loss, reductions in workforce at our South Texas fabrication yards and continued cost minimization efforts implemented by management for the period.
| | | | | | | | | | | | | | | | 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, respectively. |
Revenue - Revenue from our Shipyards division decreased $8.0 million for the three months ended September 30, 2017, compared to the three months ended September 30, 2016, due to the corresponding reduction in customer demand for shipbuilding and repair services supporting the oil 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 for the three months ended September 30, 2017, compared to a gross profit of $1.9 million for the three months ended September 30, 2016. 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, 2016, primarily due to reductions of administrative personnel related to consolidation of personnel duties from the LEEVAC transaction. 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 management for the period during the first part of 2016.
| | | | | | | | | | | | | | | | 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, 2017, compared to the three months ended September 30, 2016, due to an overall decrease in work experienced as a result of depressed oil and gas prices and the corresponding reduction in customer demand for oil and gas related service projects.
Gross profit - Gross profit from our Services division decreased $1.0 million for the three 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 combination of a smaller workforce and our 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 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 proceeds 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 Consolidated Financial Statements. This has been partially offset by lower bonuses accrued during the quarter due to our consolidated operating loss.
Nine Months Ended September 30, 2017, Compared to Nine Months Ended September 30, 2016 (in thousands, 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, 2017 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 45.3% and 35.0% for the nine months ended September 30, 2017 and 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 loss for the nine months ended September 30, 2017, was $17.0 million compared to a gross profit of $25.0 million for the nine months ended September 30, 2016. The decrease was primarily due to $12.7 million of losses incurred by our Shipyards division related to cost overruns and re-work identified on two newbuild vessel construction contracts, decreased revenue as discussed above, holding costs related to our South Texas assets of $3.6 million and lower 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 our South Texas assets and Prospect shipyard during the nine months ended September 30, 2017, as these assets are classified as assets held for sale and additional cost minimization efforts implemented 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. The decrease in general and administrative expenses for the nine months ended September 30, 2017, is primarily due to decreases in costs resulting from reductions in workforce at our South Texas fabrication yards, lower bonuses accrued during 2017 as a result of our consolidated operating loss and continued cost minimization efforts implemented by management for the period.
Asset Impairment - During the 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.
Other income (expense), net - Other expense was $221,000 for the nine months ended September 30, 2017, compared to other income of $1.0 million for the nine months ended September 30, 2016. Other 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 on sales of assets from our Fabrication division recorded during 2016.
Income tax expense (benefit) - Our effective income tax rate for the nine months ended September 30, 2017, was 33.5%, compared to an effective tax rate of 36.9% for the comparable period during 2016. The decrease in the effective tax rate is the result of limitations on the deductibility of executive compensation.
Operating Segments
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 $27.9 million for the nine months ended September 30, 2017, compared to the nine months ended September 30, 2016. The decrease is attributable to an overall decrease in work experienced in our fabrication yards as a result of depressed oil and gas prices and the corresponding reduction in customer demand for offshore fabrication projects. As discussed above, management has classified our South Texas assets as assets held for sale in response to the underutilization of our Fabrication assets. As of September 30, 2017, all of our projects at our South Texas fabrication yards have been completed or transferred to our Houma fabrication yard.
Gross profit (loss) - Gross lossprofit from our Fabrication division for the threenine months ended March 31,September 30, 2017, was $3.0 million$216,000 compared to a gross profit of $86,000$4.6 million for the threenine months ended March 31,September 30, 2016. The decrease was due to lower revenue
from decreased fabrication work as discussed above paymentand approximately $3.6 million of termination benefits as we reduce our South Texas workforce and depreciation expense of $1.9 million related toholding costs for our South Texas assets prior to their classification as assets heldwe 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, 2017, as these assets are classified as assets held for sale on February 23, 2017, and additional cost cutting measuresminimization efforts implemented by management.management for the period.
General and administrative expenses - General and administrative expenses for our Fabrication division increased $26,000decreased $389,000 for the threenine months ended March 31,September 30, 2017, compared to the threenine months ended March 31,September 30, 2016. The increasedecrease is primarily due to decreases in costs resulting from reductions in workforce as we wrapped up and completed projects at our South Texas fabrication yards and lower bonuses accrued during 2017 as a result of a combination of a smaller workforce and our consolidated operating loss. This was partially offset by expenses incurred to market our South Texas assets for sale and payment of termination benefits during the first quarter of 2017 as we reducereduced its workforce and completecompleted those operations.
| | | | | | | | | | | | | | | | Shipyards | | Three Months Ended March 31, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue (1) | | $ | 18,422 |
| | $ | 34,120 |
| | $ | (15,698 | ) | | (46.0)% | Gross profit (loss)(1) | | (1,704 | ) | | 2,375 |
| | (4,079 | ) | | (171.7)% | Gross profit (loss) percentage | | (9.2 | )% | | 7.0 | % | | | | (16.2)% | General and administrative expenses | | 964 |
| | 1,296 |
| | (332 | ) | | (25.6)% | Asset impairment | | 389 |
| | — |
| | 389 |
| | 100.0% | Operating income (loss) (1) | | (3,057 | ) | | 1,079 |
| | | | |
| | | | | | | | | | | | | | | | 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 threenine months ended March 31,September 30, 2017, and 2016, includes $1.6$2.4 million and $1.2$4.1 million of non-cash amortization of deferred revenue related to the values assigned to the contracts acquired in the LEEVAC transaction, respectively. |
Revenue - Revenue from our Shipyards division decreased $15.7$34.8 million for the threenine months ended March 31,September 30, 2017, compared to the threenine months ended March 31,September 30, 2016, due to overall decreases in work as we complete work under our contracts
including completion of a vessel that we assumed in the LEEVAC transaction and delivered to a customer on February 6, 2017, with less new, replacement work starting during the period as compared to the three months ended March 31, 2016. The decrease in new, replacement work is due to depressed oil and gas prices and the corresponding reduction in customer demand for shipbuilding and repair services supporting the oil and gas industry.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 $1.7$19.1 million for the threenine months ended March 31,September 30, 2017, compared to a gross profit of $2.4$9.7 million for the threenine months ended March 31,September 30, 2016. The decrease was due to:
continued$12.7 million in contract losses related to cost overruns and re-work that has been identified on two newbuild vessel construction contracts that were assignedwithin our Shipyards division;
Holding and closing costs related to us in the LEEVAC transaction;our Prospect shipyard as we wind down operations at this facility; holdingHolding 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
overallOverall decreases in work under other various contracts as discussed above;contracts.
partially offset by savings realized from cost cutting measures implemented by management during 2016.
General and administrative expenses - General and administrative expenses for our Shipyards division decreased $332,000$1.4 million for the threenine months ended March 31,September 30, 2017, compared to the threenine months ended March 31,September 30, 2016, primarily due to cost cutting measures implemented by management during 2016 as well asreductions of administrative personnel related to consolidation of personnel duties from the LEEVAC transaction. Additionally, our Shipyards division incurred lower bonuses accrued during 2017 as a result of a combination of a smaller workforce and our consolidated gross loss.operating loss and cost minimization efforts implemented by management for the period.
Asset Impairment - During threenine months ended March 31,September 30, 2017, we recorded an impairment of $389$389,000 related to our assets held for sale at our Prospect Shipyard.shipyard. See also Note 2 of the Notes to Consolidated Financial statements.Statements.
| | | | | | | | | | | | | | | | Services | | Three Months Ended March 31, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | 10,712 |
| | $ | 26,559 |
| | $ | (15,847 | ) | | (59.7)% | Gross profit | | 33 |
| | 3,376 |
| | (3,343 | ) | | (99.0)% | Gross profit (loss) percentage | | 0.3 | % | | 12.7 | % | | | | (12.4)% | General and administrative expenses | | 666 |
| | 726 |
| | (60 | ) | | (8.3)% | Operating income (loss) | | (633 | ) | | 2,650 |
| | | | |
| | | | | | | | | | | | | | | | 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 $15.8$32.4 million for the threenine months ended March 31,September 30, 2017, compared to the threenine months ended March 31,September 30, 2016, due to an overall decrease in work experienced as a result of depressed oil and gas prices and the corresponding reduction in customer demand for oil and gas related service projects.
Gross profit - Gross profit from our Services division decreased $3.3$8.8 million for the threenine months ended March 31,September 30, 2017, compared to the threenine months ended March 31,September 30, 2016, due to decreased revenue discussed above and tighterlower margins on new work performed during 2017.
General and administrative expenses - General and administrative expenses for our Services division decreased $60,000$0.5 million for the threenine months ended March 31,September 30, 2017, compared to the threenine months ended March 31,September 30, 2016, due to lower bonuses accrued during 2017 as a result of a combination of a smaller workforce and the reduction in gross profit.our consolidated operating loss.
| | | | | | | | | | | | | | | | Corporate | | Three Months Ended March 31, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | — |
| | $ | — |
| | $ | — |
| | —% | Gross loss | | (260 | ) | | (136 | ) | | (124 | ) | | (91.2)% | Gross profit (loss) percentage | | n/a |
| | n/a |
| | | |
| General and administrative expenses | | 1,479 |
| | 1,668 |
| | (189 | ) | | (11.3)% | Operating loss | | (1,739 | ) | | (1,804 | ) | | 65 |
| | |
| | | | | | | | | | | | | | | | 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 lossprofit (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 decreasedincreased primarily due to decreased bonuses as a resultrestructuring of our consolidated gross loss, partially offset bycorporate division with additional personnel allocated to our corporate division during 2017.2017 as discussed above as well as expenses incurred for advisors to assist in a strategic financial analysis project in anticipation of the proceeds 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 Consolidated Financial Statements. This has been partially offset by lower bonuses accrued during 2017 as a result of a combination of a smaller workforce and our consolidated operating loss.
Liquidity and Capital Resources Historically, we have funded our business activities through cash generated from operations. At March 31,September 30, 2017, we had no amounts outstanding under our credit facility, $4.6 million in outstanding letters of credit, and cash and cash equivalents totaling $34.7$17.8 million compared to $51.2 million at December 31, 2016. Working capital was $182.9$164.0 million and our ratio of current assets to current liabilities was 7.564.59 to 1 at March 31,September 30, 2017, compared to $78.0 million and 3.23.21 to 1, respectively, at December 31, 2016. Working capital at March 31,September 30, 2017, includes $110.5$107.0 million related to assets held for sale, primarily related to our South Texas facilities. Our primary use of cash during the threenine months ended September 30, 2017, is referenced in the Cash Flow Activities section below. At September 30, 2017, our contracts receivable balance was $25.5 million of which we have subsequently collected $8.3 million through October 31, 2017. On June 9, 2017, we entered into a $40.0 million credit agreement with Whitney Bank, as lender. The credit facility matures June 9, 2019 and may be used for issuing letters of credit and/or general corporate and working capital purposes. We 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 facility may be designated, at our option, as either Base Rate (as defined in the credit facility) or LIBOR plus 2.0% per annum. Unused commitment fees on the undrawn portion of the facility are 0.4% per annum, and interest on undrawn stated amounts under letters of credit issued by the lenders is 2.0% per annum. The credit facility is secured by substantially all of our assets (other than the assets of Gulf Marine Fabricators, L.P., the legal entity that holds our South Texas assets which are currently held for sale).
We must comply with the following 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, we terminated our prior credit facility with JPMorgan Chase Bank, N.A. At the time of the termination, there was approximately $4.6 million of 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 future, additional letters of credit and borrowings is $35.4 million. As of September 30, 2017, we were in compliance with all of our covenants.
Our primary liquidity requirements are for the costs associated with fabrication projects, capital expenditures and payment of dividends to our shareholders. We do not anticipate significant capital expenditures for the remainder of 2017.
On October 21, 2016, a customer of our Shipyards division announced it was in noncompliance with certain financial covenants included in the customer’s debt agreements and stated that, while it had received limited waivers from its lenders, its debt agreements would require further negotiation and amendment. This same customer rejected delivery of the first vessel that we completed and tendered for delivery on February 6, 2017, alleging certain technical deficiencies exist with respect to the vessel. On March 31,10, 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 included in our arbitration proceedings. We disagree with our customer concerning these alleged technical deficiencies and have put the customer in 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 United 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, 2017, 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 impacted by Hurricane Harvey, which made landfall as a category 4 hurricane. As a result, we suffered damages to our South Texas buildings and equipment. Through September 30, 2017, we have incurred approximately $265,000 in clean-up and repair related costs and we expect to incur additional future repair costs in excess of our 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 time and that insurance proceeds will at a minimum be sufficient to reimburse us for all damages and repair costs. Our final
assessment of the loss incurred to our South 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 such differences could be material.
In event of one or more sales of our South Texas assets, we expect to use all or a portion of the sales proceeds to invest in our operating liquidity in order to facilitate 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 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 26, 2017, our Board of Directors declared a dividend of $0.01 per share on our shares of common stock outstanding, payable November 24, 2017, to shareholders of record on November 10, 2017.
We believe our cash and cash equivalents generated by our future operating activities, proceeds to be received from insurance underwriters, availability under our line of credit and proceeds to be received from future assets sales will be sufficient to fund our capital expenditures and meet our working capital needs for next twelve months to continue to operate, satisfy our contractual operations and pay dividends to our shareholders.
Cash Flow Activities
For the nine months ended September 30, 2017, net cash used in operating activities was $29.6 million, compared to net cash provided by operating activities of $19.4 million for the nine months ended September 30, 2016. The use of cash in operations during the period was primarily due to:to the following:
Operating losses for the quarter exclusivenine months ended September 30, 2017, in excess of non-cash depreciation, amortization, impairment and stock compensation expense of approximately $3.7$19.6 million, Payment of year-end bonuses related to 2016, Progress on liabilities from assumed contracts in the LEEVAC transaction.Whiletransaction. While our purchase price for the acquisition of the LEEVAC assets during 2016 was $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 us in the transaction. We have significantly progressed these contracts, which in turn has resulted in utilization of the working capital and settlement payments received during 2016. Fewer receipts from accounts receivable, primarily $4.6 million from one customer that refusedThe suspension of two vessel projects following our customer’s refusal to accept delivery of athe first vessel onin February 6, 2017, and has not paid. We have initiated arbitration proceedings duringour inability to collect $9.5 million in scheduled payments under these contracts. See also Note 9 of the quarterNotes to enforce our rights under our construction contract,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 beginninglater in the third quarter of 2017 through the first quarterhalf of 2018. At March 31, 2017, our contracts receivable balance was $21.1 million of which we have subsequently collected $4.1 million through April 21, 2017.
As of March 31, 2017, we had a credit agreement with Whitney Bank and JPMorgan Chase Bank N.A. that provides for a $40.0 million revolving credit facility maturing November 29, 2018. The credit agreement allows the Company to use up to the full amount of the available borrowing base for letters of credit and for general corporate purposes. Our obligations under the credit agreement are secured by substantially all of our assets (other than real estate). Commitment fees on undrawn amounts are 0.5% per annum and letter of credit fees, subject to certain limited exceptions, are 2.0% per annum on undrawn stated amounts under letters of credit issued by the lenders. Amounts borrowed under 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. Our financial covenants at March 31, 2017, are as follows:
| | (i) | minimum net worth requirement of not less than 255.0 million plus |
| | a) | 50% of net income earned in each quarter beginning December 31, 2016, and |
| | b) | 100% of proceeds from any issuance of common stock; |
| | c) | less the amount of any impairment on certain assets owned by Gulf Marine Fabricators, L.P. (our South Texas assets held for sale) up to $30.0 million; |
| | (ii) | debt to EBITDA ratio not greater than 2.5 to 1.0; and |
| | (iii) | interest coverage ratio not less than 2.0 to 1.0. |
At March 31, 2017, no amounts were outstanding under the credit facility, and we had outstanding letters of credit totaling $4.6 million, reducing the unused portion of our credit facility for additional letters of credit and borrowings to $35.4 million. As of March 31, 2017, we were in compliance with all covenants.
We are currently in discussions with one of our financial institutions to enter into a new revolving line of credit with comparable availability, but with less restrictive financial covenants and reduced fees as compared to our current revolving credit facility. We expect to close on this new revolving credit facility and terminate our existing revolving credit facility in the second quarter of 2017.
Our primary liquidity requirements are for the costs associated with fabrication projects, capital expenditures and payment of dividends to our shareholders. We anticipate capital expenditures for the remainder of 2017 to range between $6.0 million to $8.0 million primarily for the following:
improvements to our Jennings and Lake Charles leased shipyards,
improvement to the bulkhead at our Houma facility, and
computer system upgrades.
On October 21, 2016, a customer of our Shipyards division announced it was in noncompliance with certain financial covenants included in the customer’s debt agreements. This customer also stated it had received limited waivers from its lenders and noteholders, but its debt agreements will require further negotiation and amendment. On April 19, 2017, the customer stated it had allowed the waivers to expire and remains in default of its covenants.
This same customer has rejected delivery of the vessel that we tendered for delivery on February 6, 2017, alleging certain technical deficiencies exist with respect to the vessel and is seeking recovery of all purchase price amounts previously paid by the customer under the contract. We are also building a second vessel for this customer that is scheduled for delivery during the second quarter of 2017. We disagree with our customer concerning these alleged technical deficiencies and have put the customer in default under the terms of the contracts for both vessels. As of March 31, 2017, approximately $4.6 million remained due and outstanding from our customer for the first vessel. The balance due to us upon delivery for a second vessel which is expected in May of this year, is approximately $4.9 million. On March 10, 2017, we gave notice for arbitration with our customer in an effort to resolve this matter. We intend to take all legal action as may be necessary to protect our rights under the contracts and recover the remaining balances owed to us.
We continue to monitor our work performed in relation to our customer’s status and its ability to pay under the terms of these contracts. Because these vessels have been completed or are substantially complete, we believe that they have significant fair value, and that we would be able to fully recover any amounts due to us.
In anticipation of the proceeds to be received from the sale of our South Texas assets, we have engaged in a strategic financial analysis project with advisors to determine the appropriate use of proceeds from this transaction. We will be evaluating a mix of options including tactical capital improvement projects, strategic growth investment opportunities that support our business plan, stock buy-backs and/or dividends and working capital reinvestment.
On April 26, 2017, our Board of Directors declared a dividend of $0.01 per share on our shares of common stock outstanding, payable May 25, 2017, to shareholders of record on May 11, 2017.
We believe our cash and cash equivalents generated by our operating activities and proceeds to be received from future assets sales will be sufficient to fund our capital expenditures and meet our working capital needs for both the near and longer term to continue our operations, satisfy our contractual operations and pay dividends to our shareholders. Additionally, we expect to close on a new revolving line of credit during the second quarter of 2017 as discussed above. We believe that the new facility will provide us with additional working capital flexibility to ramp up our operations quickly in times of rapid increasing demand, to continue to issue future letters of credit and to quickly take advantage of market opportunities.
Cash Flow Activities
For the three months ended March 31, 2017, net cash used in operating activities was $15.1 million, compared to $1.6 million for the three months ended March 31, 2016. The increase in cash used in operations was primarily due to the following:
Operating losses for the quarter in excess of non-cash depreciation, amortization, impairment and stock compensation expense of approximately $3.7 million,
Payment of year-end bonuses related to 2016,
Progress on liabilities from assumed contracts in the LEEVAC transaction.While our purchase price for the acquisition of the LEEVAC assets during 2016 was $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 us in the transaction. We have significantly progressed these contracts which in turn, has resulted in utilization of the working capital and settlement payments received during 2016.
Fewer receipts from accounts receivable, primarily $4.6 million from one customer that refused delivery of a vessel on February 6, 2017, and has not paid. We have initiated arbitration proceedings during the quarter to enforce our rights under our construction contract, and
Build-up of costs for contracts in progress related to a customer in our Shipyards division with significant milestone payments occurring in the later stages of the projects which are expected to occur beginning in the third quarter of 2017 through the first quarter of 2018.
Net cash used in investing activities for the threenine months ended March 31,September 30, 2017, was $391,000,$2.4 million, compared to cash provided by investing activities of $6.2$2.0 million for the threenine months ended March 31,September 30, 2016. The change in cash used in/provided by investing activities is primarily due to cash received from the sale of three cranes at our Texas facility for $5.4$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 threenine months ended March 31,September 30, 2017 and 2016, was $1.0$1.4 million and $291,000,$603,000, respectively. The increase in cash used in financing activities is due to the cash payments made to taxing authorities on behalf of employees'employees for their vesting of common stock. During the 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, 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, 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, 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 March 31,September 30, 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, 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 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 Chief Financial Officer, have 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 Chief Financial Officer have 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 March 31,September 30, 2017, in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION Item 1. Legal Proceedings. The Company is subject to various routine legal proceedings in the normal conduct of its business primarily involving commercial claims, workers’ compensation claims, and claims for personal injury under general maritime laws of the United States and the Jones Act. While the outcome of these lawsuits, legal proceedings and claims cannot be predicted with certainty, management believes that the outcome of any such proceedings, even if determined adversely, would not have a material adverse effect on the financial position, results of operations or cash flows of the Company. Item 1A. Risk Factors. There have been no material changes from the information included in Item 1A “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2016. | | | | | Exhibit Number | | Description of Exhibit | | | 3.1 | | | 3.2 | | | 10.1 | | Change of Control Agreement, dated March 1, 2017, between the Company and David S. Schorlemer, incorporated by reference to Exhibit 10.15 of the Company's Form 10-K for the year ended December 31, 2016 filed on March 2, 2017. | 31.1 | | | 31.2 | | | 32 | | | | | | 101 | | Attached as Exhibit 101 to this report are the following items formatted in XBRL (Extensible Business Reporting Language): | | | (i) | Consolidated Balance Sheets, | | | (ii) | Consolidated Statements of Operations, | | | (iii) | Consolidated Statement of Changes in Shareholders’ Equity, | | | (iv) | Consolidated Statements of Cash Flows and | | | (v) | Notes to Consolidated Financial Statements. |
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. | | | GULF ISLAND FABRICATION, INC. | | BY: | /s/ David S. Schorlemer | | David S. Schorlemer | | Executive Vice President, Chief Financial Officer, and Treasurer (Principal Financial and Accounting Officer) |
Date: May 2,October 31, 2017
GULF ISLAND FABRICATION, INC. EXHIBIT INDEX | | | | | Exhibit Number | | Description of Exhibit | | | 3.1 | | | 3.2 | | | 10.1 | | Change of Control Agreement, dated March 1, 2017, between the Company and David S. Schorlemer, incorporated by reference to Exhibit 10.15 of the Company's Form 10-K for the year ended December 31, 2016 filed on March 2, 2017. | 31.1 | | | 31.2 | | | 32 | | | | | | 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 | | | |