- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
- --------------------------------------------------------------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from____________ to _____________
Commission File Number 0-22303
GULF ISLAND FABRICATION, INC.
(Exact name of registrant as specified in its charter)
LOUISIANA 72-1147390
(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification No.)
583 THOMPSON ROAD,
HOUMA, LOUISIANA 70363
(Address of principal executive offices) (Zip Code)
(504) 872-2100
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
----- -----
The number of shares of the Registrant's common stock, no par value per
share, outstanding at November 9, 1999 was 11,638,400.
GULF ISLAND FABRICATION, INC.
I N D E X
Page
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
at September 30, 1999 (unaudited) and December 31, 1998 3
Consolidated Statements of Income
for the Three and Nine Months Ended September 30, 1999
and 1998 (unaudited) 4
Consolidated Statement of Changes in Shareholders' Equity
for the Nine Months Ended September 30, 1999 (unaudited) 5
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 1999 and 1998 (unaudited) 6
Notes to Consolidated Financial Statements 7-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-11
PART II OTHER INFORMATION
Item 1. Legal Preceedings 12
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 14
EXHIBIT INDEX E-1
-2-
GULF ISLAND FABRICATION, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, December 31,
1999 1998
------------- ------------
(in thousands)
ASSETS
------
Current assets:
Cash $11,174 $ 2,808
Short-term investments 11,076 -
Contracts receivable, net 15,440 34,682
Retainage 3,062 5,837
Costs and estimated earnings in excess of
billings on uncompleted contracts 2,077 2,061
Prepaid expenses 510 878
Inventory 1,185 1,137
Recoverable income taxes - 531
Total current assets 44,524 47,934
------- -------
Property, plant and equipment, net 44,726 45,418
Excess of cost over fair value of net assets
acquired less accumulated amortization of
$484,475 and $278,825 at September 30, 1999
and December 31, 1998, respectively 3,633 3,839
Other assets 653 549
------- -------
Total assets $93,536 $97,740
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ 4,733 $ 7,151
Billings in excess of costs and estimated
earnings on uncompleted contracts 4,137 9,476
Accrued employee costs 2,131 4,085
Accrued expenses 2,640 1,983
Income taxes payable 787 -
------- -------
Total current liabilities 14,428 22,695
Deferred income taxes 3,562 2,315
Notes payable - 3,000
------- -------
Total liabilities 17,990 28,010
Shareholders' equity:
Preferred stock, no par value, 5,000,000 shares
authorized, no shares issued and outstanding - -
Common stock, no par value, 20,000,000 shares
authorized, 11,638,400 shares issued and
outstanding at September 30, 1999 and
December 31, 1998 4,162 4,162
Additional paid-in capital 35,326 35,124
Retained earnings 36,058 30,444
------- -------
Total shareholders' equity 75,546 69,730
------- -------
$93,536 $97,740
======= =======
The accompanying notes are an integral part of these statements.
-3-
GULF ISLAND FABRICATION, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -------------------
1999 1998 1999 1998
-------- -------- -------- --------
(in thousands, except per share data)
Revenue $29,034 $51,866 $87,469 $149,421
Cost of revenue 25,393 42,036 75,589 121,513
-------- -------- -------- ---------
Gross profit 3,641 9,830 11,880 27,908
General and administrative expenses 955 1,458 3,226 4,532
-------- -------- -------- ---------
Operating income 2,686 8,372 8,654 23,376
Other expense (income):
Interest expense 11 19 46 72
Interest income (203) (94) (470) (183)
Other - net 39 - 29 4
-------- -------- -------- ---------
(153) (75) (395) (107)
-------- -------- -------- ---------
Income before income taxes 2,839 8,447 9,049 23,483
Income taxes 1,105 3,135 3,435 8,787
-------- -------- -------- ---------
Net income $ 1,734 $ 5,312 $ 5,614 $ 14,696
======== ======== ======== =========
Per share data:
Basic earnings per share $ 0.15 $ 0.46 $ 0.48 $ 1.26
======== ======== ======== =========
Diluted earnings per share $ 0.15 $ 0.45 $ 0.48 $ 1.25
======== ======== ======== =========
Weighted-average shares 11,638 11,638 11,638 11,627
Effect of dilutive securities:
employee stock options 77 59 54 84
-------- -------- -------- ---------
Adjusted weighted-average shares 11,715 11,697 11,692 11,711
======== ======== ======== =========
The accompanying notes are an integral part of these statements.
-4-
GULF ISLAND FABRICATION, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
Additional Total
Common Stock Paid-In Retained Shareholders'
Shares Amount Capital Earnings Equity
----------- ----------- ------------- ----------- --------------
(in thousands, except share data)
Balance at January 1, 1999 11,638,400 $4,162 $35,124 $30,444 $69,730
Income tax benefit from the
exercise of stock options - - 202 - 202
Net income - - - 5,614 5,614
---------- ------ ------- ------- -------
Balance at September 30, 1999 11,638,400 $4,162 $35,326 $36,058 $75,546
========== ====== ======= ======= =======
The accompanying notes are an integral part of these statements.
GULF ISLAND FABRICATION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine months ended
September 30,
1999 1998
--------- ---------
(in thousands)
Cash flows from operating activities:
Net income $ 5,614 $ 14,696
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 3,475 2,880
Amortization 206 210
Deferred income taxes 1,247 (331)
Changes in operating assets and liabilities:
Contracts receivable 19,242 (3,939)
Retainage 2,775 (4,109)
Costs and estimated earnings in excess of billings
on uncompleted contracts (16) (3,541)
Prepaid expenses and other assets 368 597
Inventory (48) (371)
Accounts payable and accrued expenses (3,715) 4,456
Income taxes payable 1,520 1,335
Billings in excess of costs and estimated earnings
on uncompleted contracts (5,339) 2,006
-------- -------
Net cash provided by operating activities 25,329 13,889
Cash flows from investing activities:
Capital expenditures, net (2,783) (8,577)
Short-term investments (11,076) -
Payment for purchase of Southport, net of cash acquired - (5,922)
Other (104) (52)
-------- -------
Net cash used in investing activities (13,963) (14,551)
Cash flows from financing activities:
Borrowings against notes payable - 8,000
Principal payments on notes payable (3,000) (10,600)
Proceeds from exercise of stock options - 288
-------- -------
Net cash used in financing activities (3,000) (2,312)
-------- -------
Net increase (decrease) in cash 8,366 (2,974)
Cash at beginning of period 2,808 6,879
-------- -------
Cash at end of period $ 11,174 $ 3,905
======== =======
Supplemental cash flow information:
Interest paid $ - $ 72
======== =======
Income taxes paid $ 659 $ 7,773
======== =======
The accompanying notes are an integral part of these statements.
-6-
GULF ISLAND FABRICATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTH AND NINE MONTH
PERIODS ENDED SEPTEMBER 30, 1999 AND 1998
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING PRINCIPLES
Gulf Island Fabrication, Inc. ("Gulf Island"), together with its wholly
owned subsidiaries (collectively "the Company"), is a leading fabricator of
offshore drilling and production platforms and other specialized structures used
in the development and production of offshore oil and gas reserves. The Company,
located in Houma, Louisiana, also offers offshore interconnect pipe hook-up,
inshore marine construction, manufacture and repair of pressure vessels, steel
warehousing and sales, and the fabrication of offshore living quarters. Gulf
Island's principal markets are concentrated in the offshore regions of the Gulf
of Mexico. The consolidated financial statements include the accounts of Gulf
Island and its wholly owned subsidiaries. All significant intercompany balances
and transactions have been eliminated in consolidation.
The information presented at September 30, 1999 and for the three months
and nine months ended September 30, 1999 and 1998, is unaudited. In the opinion
of the Company's management, the accompanying unaudited financial statements
contain all adjustments (consisting of normal recurring adjustments) that the
Company considers necessary for the fair presentation of the Company's financial
position at September 30, 1999 and the results of its operations for the three
months and nine months ended September 30, 1999 and 1998, and its cash flows for
the nine months ended September 30, 1999 and 1998. The results of operations for
the three months and nine months ended September 30, 1999 are not necessarily
indicative of the results that may be expected for the year ending December 31,
1999.
In the opinion of management, the financial statements included herein have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's annual
report on Form 10-K for the year ended December 31, 1998.
NOTE 2 - SHORT-TERM INVESTMENTS
Short-term investments consist of highly-liquid debt securities with a
maturity of greater than three months, but less than twelve months. The
securities are classified as available-for-sale and the fair value of these
investments approximated their carrying value at September 30, 1999.
-7-
GULF ISLAND FABRICATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Continued)
NOTE 3 - EARNINGS PER SHARE
Basic earnings per share ("EPS") is computed by dividing net income by the
weighted-average shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if employee stock options were exercised or
converted into common stock. Quarterly per share data may not sum to the year-
to-date data reported in the Company's consolidated financial statements due to
rounding.
NOTE 4 - NOTES PAYABLE
Effective June 23, 1999, the Company's existing bank credit facility was
amended and restated in order, among other reasons, to extend the maturity date
to December 31, 2001. The credit facility provides for a revolving line of
credit (the "Revolver") of up to $20.0 million that bears interest equal to, at
the Company's option, the prime lending rate established by Bank One Corporation
or LIBOR plus 1.5%. The Company is required to maintain certain balance sheet
and cash flow ratios. The Company pays a fee quarterly of three-eighths of one
percent per annum on the weighted-average unused portion of the line of credit.
At September 30, 1999, there were no borrowings outstanding under the credit
facility.
NOTE 5 - CONTINGENCIES
The Company is one of four defendants in a lawsuit in which the plaintiff
claims that the Company improperly installed certain attachments to a jacket
that it had fabricated for the plaintiff. The plaintiff, which has recovered
most of its out-of-pocket losses from its own insurer, seeks to recover from
the four defendants the remainder of its claimed out-of-pocket losses
(approximately $1 million) and approximately $65 million for economic losses
which it alleges resulted from the delay in oil and gas production that was
caused by these events. The trial court has issued rulings and is expected to
issue additional rulings, all of which could be appealed by the plaintiff, the
effect of which would be to prevent plaintiff's recovery of any damages from
defendants, including the Company. In connection with the additional rulings of
the court, the parties are expected to enter into agreements the effect of which
would be to eliminate the possibility of plaintiff's recovery of any out-of-
pocket damages and preserve for appeal only those questions bearing on
plaintiff's recovery of its economic losses from delay in production. The
Company continues to defend the case vigorously, leaving open the possibility of
reasonable settlement. After consultation with legal counsel, the Company does
not expect that the ultimate resolution of this matter will have a material
adverse effect on the financial position or results of operations of the
Company, although no assurances can be given as to the ultimate outcome of the
claims.
-8-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
The Company's revenue for the three-month and nine-month periods ended
September 30, 1999 was $29.0 million and $87.5 million, a decrease of 44.0% and
41.5%, respectively, compared to $51.9 million and $149.4 million in revenue for
the three-month and nine-month periods ended September 30, 1998. Revenue
decreased as a result of a lower volume of direct labor hours applied to
contracts during the 1999 periods compared to the same periods ended in 1998.
The slower than expected recovery in the oil and gas industry has made fewer
fabrication projects available; consequently, in the three-month and nine-month
periods ended September 30, 1999, the Company had fewer contracts in its backlog
and thus fewer hours worked compared to the same periods in 1998.
The fewer number of projects available has also caused the competitiveness
in the bidding process to substantially reduce margins on contracts that have
been awarded. For the three-month and nine-month periods ended September 30,
1999, gross profit was $3.6 million (12.5% of revenue) and $11.9 million (13.6%
of revenue), compared to $9.8 million (19.0% of revenue) and $27.9 million
(18.7% of revenue) of gross profit for the three-month and nine-month periods
ended September 30, 1998.
The Company's general and administrative expenses were $955,000 for the
three-month period ended September 30, 1999 and $3.2 million for the nine-month
period ended September 30, 1999. This compares to $1.5 million for the three-
month period ended September 30, 1998 and $4.5 million for the nine-month period
ended September 30, 1998. These decreases of $500,000 and $1.3 million,
respectively, were primarily the result of the more efficient managing of costs
associated with public company reporting requirements and a general decrease in
costs related to reduced production levels. In an effort to further control
general and administrative costs, the Company implemented an overall 5%
reduction in hourly and salary wages effective May 31, 1999 and June 1, 1999,
respectively.
The Company had net interest income of $192,000 and $424,000 for the three-
month and nine-month periods ended September 30, 1999, respectively, compared to
$75,000 and $111,000 for the three-month and nine-month periods ended September
30, 1998. The current reduction in production levels generated more available
cash for investment purposes.
Although there have been recent increases in the price of oil and natural
gas, these increases are not being reflected in the number and dollar value of
projects in the market. Accordingly, the Company is continuously monitoring its
costs as production levels remain low in order to take appropriate actions.
LIQUIDITY AND CAPITAL RESOURCES
Historically the Company has funded its business activities through funds
generated from operations and borrowings under its bank credit facility. Net
cash provided by operations was $25.3 million for the nine months ended
September 30, 1999 with a 19.2% increase in working capital to $30.1 million.
Net cash used in investing activities for the nine months ended
-9-
September 30, 1999 was $14.0 million, of which $11.0 million related to the
purchase of short-term investments during the period. The majority of the
remaining $3.0 million consisted of capital expenditures during the period,
specifically $1.4 million for one new Manitowoc crane and approximately $1.6
million for equipment and improvements to the production facilities, which
included approximately $600,000 to complete the Company's automated painting
system.
Net cash used in financing activities was $3.0 million for the nine-month
period ended September 30, 1999. This amount was a payment to eliminate the
outstanding balance on the Company's bank credit facility.
The Company's bank credit facility currently provides for a revolving line
of credit (the "Revolver") of up to $20.0 million, which bears interest equal
to, at the Company's option, the prime lending rate established by Bank One
Corporation or LIBOR plus 1 1/2%. The Revolver matures December 31, 2001 and is
secured by a mortgage on the Company's real estate, equipment and fixtures. At
September 30, 1999, the Company had no outstanding borrowings under the credit
facility.
Capital expenditures for the remaining three months of 1999 are estimated
to be approximately $800,000, including improvements to the facilities and
various other fabrication equipment. Management believes that its available
funds, cash generated by operating activities and funds available under the
Revolver will be sufficient to fund these capital expenditures and its working
capital needs. The Company may, however, expand its operations through future
acquisitions that may require additional equity or debt financing.
YEAR 2000 ISSUES
The Problem. Year 2000 issues result from the past practice in the
computer industry of using two digits rather than four digits when coding the
year portion of a date. This practice can create breakdowns or erroneous
results when computers and processors embedded in other equipment perform
operations involving dates later than December 31, 1999.
The Company's State of Readiness. The Company has assessed the Year 2000
compliance of its information technology systems and has purchased software and
hardware that it believes will be adequate to upgrade all of these systems to
Year 2000 compliance. The Company has also surveyed its significant non-
information technology equipment for Year 2000 issues. Although the Company uses
several such items of equipment that are significant to its operations (such as
automated welding and cutting equipment), none of the automated functions of
this equipment are date sensitive and the Company believes that none of the
equipment will require replacement or modification for Year 2000 compliance.
The Company does not have any significant suppliers or customers whose
information technology systems directly interface with that of the Company;
nevertheless, as part of its assessment of its state of readiness, the Company
has surveyed a representative number of its suppliers and customers for Year
2000 compliance. To date, the Company has received replies from approximately
73% of the suppliers that it has contacted, all of which (with insignificant
exceptions) have indicated that they have taken appropriate steps to achieve
Year 2000 compliance or have plans to do so. The Company has received replies
from approximately 77% of its customers contacted, all of which have indicated
that they have taken steps to achieve Year 2000 compliance or have plans to do
so.
-10-
Costs. Because the Company's information technology systems have been
regularly upgraded and replaced as part of the Company's ongoing efforts to
maintain high-grade technology and because the Company is not heavily dependent
on non-information technology equipment that is date sensitive, the Company's
Year 2000 compliance costs are expected to be relatively low. The Company has
incurred $77,000 to purchase software and hardware to upgrade its information
technology systems and management does not believe that significant additional
costs will be required for Year 2000 compliance. There can be no guarantee,
however, that actual costs will not exceed that amount.
Risks. Although the Company believes that it has taken reasonable steps to
assess its internal systems and prepare them for Year 2000 issues, if those
steps prove inadequate the Company's ability to estimate and bid on new jobs and
its financial and other daily business procedures could be interrupted or
delayed, any of which could have a material adverse effect on the Company's
operations. The replies to the Company's survey of its suppliers and customers
indicate they have taken reasonable steps to assess their internal systems and
prepare for the Year 2000 issues, but there is no guarantee that the systems of
other companies on which the Company relies will be converted timely. It is
possible that the operations of the Company could be adversely affected to a
material extent by the non-compliance of significant suppliers or customers.
Contingency Plan. While the Company intends to continue to monitor Year
2000 issues, it does not currently have a contingency plan for dealing with the
possibility that its current systems may prove inadequate, nor does the Company
currently intend to develop such a plan.
FORWARD-LOOKING STATEMENTS
Statements under "Year 2000 Issues" as to the Company's beliefs and
expectations, statements in the last paragraph under "Results of Operations" and
other statements in this report and the exhibits hereto that are not statements
of historical fact are forward-looking statements. These statements involve
risks and uncertainties that include, among others, the timing and extent of
changes in the prices of crude oil and natural gas; the timing of new projects
and the Company's ability to obtain them; competitive factors in the heavy
marine fabrication industry; the Company's ability to successfully complete the
testing, production and marketing of the MinDOC and other deep water production
systems and to develop and provide financing for such systems that are
acceptable to its customers; and the accuracy of the Company's assessment of its
exposure to Year 2000 issues and the adequacy of the steps it has taken to
address those issues. Changes in these factors could result in changes in the
Company's performance and could cause the actual results to differ materially
from those expressed in the forward-looking statements.
-11-
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On September 10, 1999 the United States Environmental Protection Agency
(the "EPA") issued a complaint alleging that the Company had failed to report
the usage or processing of certain chemicals that are components of the steel
and paint used by the Company in its fabrication operations. The Company has
settled this matter by agreeing to pay a fine of $182,070 and to comply in the
future with applicable reporting requirements. With respect to emissions from
similar chemicals, the Louisiana Department of Environmental Quality (the
"LDEQ") has required the Company to update its reports and modify its state air
permit and has advised the Company that it is considering the assessment of a
penalty for exceeding permitted limits and inaccurate reporting. The Company
does not believe that the action of the EPA or any actions of the LDEQ in this
matter will be material to its financial position or require any changes to its
operations other than the monitoring of the content of certain purchased
materials, the cost of which is expected to be negligible.
The Company is one of four defendants in a lawsuit in which the plaintiff
claims that the Company improperly installed certain attachments to a jacket
that it had fabricated for the plaintiff. The plaintiff, which has recovered
most of its out-of-pocket losses from its own insurer, seeks to recover from the
four defendants the remainder of its claimed out-of-pocket losses (approximately
$1 million) and approximately $65 million for economic losses which it alleges
resulted from the delay in oil and gas production that was caused by these
events. The trial court has issued rulings and is expected to issue additional
rulings, all of which could be appealed by the plaintiff, the effect of which
would be to prevent plaintiff's recovery of any damages from defendants,
including the Company. In connection with the additional rulings of the court,
the parties are expected to enter into agreements the effect of which would be
to eliminate the possibility of plaintiff's recovery of any out-of-pocket
damages and preserve for appeal only those questions bearing on plaintiff's
recovery of its economic losses from delay in production. The Company continues
to defend the case vigorously, leaving open the possibility of reasonable
settlement. After consultation with legal counsel, the Company does not expect
that the ultimate resolution of this matter will have a material adverse effect
on the financial position or results of operations of the Company, although no
assurances can be given as to the ultimate outcome of the claims.
The Company is subject to other claims arising primarily in the normal conduct
of its business. While the outcome of such claims cannot be determined,
management does not expect that resolution of these matters will have a material
adverse effect on the financial position or results of operations of the
Company, although no assurances can be given as to the ultimate outcome of the
claims.
-12-
ITEM 5. OTHER INFORMATION
On October 27, 1999 the Company announced its 1999 third quarter earnings and
related matters. The press release making this announcement is attached hereto
as Exhibit 99.1.
On November 1, 1999 the Company announced its formation of a subsidiary to
develop deep-water production systems. The press release making this
announcement is attached hereto as Exhibit 99.2.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
27.1 Financial Data Schedule.
99.1 Press release issued by the Company on October 27, 1999
announcing its 1999 third quarter earnings and related matters.
99.2 Press release issued by the Company on November 1, 1999
announcing its formation of a subsidiary to develop deep-water
production systems.
(b) The Company filed no reports on Form 8-K during the quarter for which this
report is filed.
-13-
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/ Joseph P. Gallagher, III
------------------------------
Joseph P. Gallagher, III
Vice President - Finance,
Chief Financial Officer
and Treasurer
(Principal Financial Officer
and Duly Authorized Officer)
Date: November 10, 1999
-14-
GULF ISLAND FABRICATION, INC.
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
- ------- ----------------------
27.1 Financial Data Schedule.
99.1 Press release issued by the Company on October 27, 1999
announcing its 1999 third quarter earnings and related matters.
99.2 Press release issued by the Company on November 1, 1999
announcing its formation of a subsidiary to develop deep-water
production systems.
E-1