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| GIFI > SEC Filings for GIFI > Form 10-Q on 30-Jul-2012 | All Recent SEC Filings |
30-Jul-2012
Quarterly Report
Forward-Looking Statements
Statements under "Backlog," "Results of Operations" and "Liquidity and Capital Resources" and other statements in this report and the exhibits hereto that are not statements of historical fact are forward-looking statements. These statements are subject to certain risks and uncertainties that could cause actual results and outcomes to differ materially from the results and outcomes predicted in the forward-looking statements and investors are cautioned not to place undue reliance upon such forward-looking statements. Important factors that may cause our actual results to differ materially from expectations or projections include those described in Item 1A. Risk Factors included in our Annual Report on Form 10-K for the year ended December 31, 2011 and Item 1A. Risk Factors included in this Quarterly Report on Form 10-Q. Such factors include, among others, the cyclical nature of the oil and gas industry; the timing of new projects, including deepwater projects, and our ability to obtain them; our ability to attract and retain skilled employees at acceptable compensation rates; the dangers inherent in our operations and the limits on insurance coverage; and competitive factors in the marine fabrication and construction industry.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles, which require us to make estimates and assumptions (see Note 1 to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2011). We believe that our accounting policy on revenue recognition involves a high degree of judgment and complexity. Critical accounting policies are discussed more fully in our Annual Report on Form 10-K for the year ended December 31, 2011. There have been no changes in our evaluation of our critical accounting policies since December 31, 2011.
Backlog
Our backlog is based on management's estimate of the direct labor hours required to complete, and the remaining revenue to be recognized with respect to those projects a customer has authorized us to begin work or purchase materials pursuant to written contracts, letters of intent or other forms of authorization. Often, however, management's estimates are based on preliminary engineering and design specifications by the customer and are refined together with the customer. As engineering and design plans are finalized or changes to existing plans are made, management's estimate of the direct labor hours required to complete a project and the price of a project at completion is likely to change. In addition, all projects currently included in our backlog generally are subject to suspension or termination at the option of the customer, although the customer is generally required to pay us for work performed and materials purchased through the date of termination and, in some instances, cancellation fees. In addition, customers have the ability to delay the execution of projects.
As of June 30, 2012, we had a revenue backlog of $474.0 million and a labor backlog of approximately 2.9 million man-hours remaining to work, including commitments received through July 26, 2012, compared to a revenue backlog of $614.5 million and a labor backlog of 4.6 million man-hours reported as of December 31, 2011.
• 77.0% was for two customers as compared to 72.9% for two customers at December 31, 2011.
• $390.3 million, or 82.3%, represented projects destined for deepwater locations compared to $509.8 million, or 83.0%, at December 31, 2011.
• $34.6 million, or 7.3%, represented projects destined for foreign locations compared to $47.0 million, or 7.7%, at December 31, 2011.
Depending on the size of the project, the termination or postponement of any one project could significantly reduce our backlog, and could have a material adverse effect on revenue, net income and cash flow.
On July 13, 2012, we received a notice from one of our customers requesting a slowdown in work on a project. Specifically, the notice requested we reduce work to an operational minimum, ensuring that the existing work is protected and available for a full scale resumption of work in the future. As of June 30, 2012, the outstanding contracts receivable balance on this project was $21.7 million and the remaining work on this project represented 6.6% of our revenue backlog and 10.6% of our labor backlog. For additional information, see Item 1A- Risk Factors of Part II of this Quarterly Report on Form 10-Q.
As of June 30, 2012, we expect to recognize revenues from our backlog of approximately
• $278.4 million, or 58.7%, during the remaining six months of 2012; and
• $195.6 million during calendar year 2013.
Recognition of revenue of the backlog as presented above is based on management estimates of the application of the direct labor hours of the backlog during the current projected timelines to complete the projects. Certain factors and circumstances, as mentioned above, could cause changes in when we actually recognize revenue from our backlog as well as the ultimate amounts recorded.
Based on the activity of the major oil and gas companies and certain engineering companies, we expect bids for deepwater projects will be available in the second half of 2012 and second half of 2013, and we believe that there could be awards of deepwater projects throughout 2013. Given the current level of deepwater projects, the potential to increase the backlog in the near term continues to come from marine related projects, where a steady level of bidding activity remains.
Workforce
As of June 30, 2012, we had approximately 2,400 employees and approximately 350 contract employees, compared to approximately 1,950 employees and approximately 90 contract employees as of December 31, 2011.
Man-hours worked were 1.3 million during the three-month period ended June 30, 2012, compared to 675,000 for the three-month period ended June 30, 2011. Man-hours worked were 2.5 million during the six-month period ended June 30, 2012, compared to 1.1 million for the six-month period ended June 30, 2011. The major factor contributing to this increase in man-hours worked for both periods was our ability to work on two major deepwater projects in our backlog during the three-months and six-month periods ended June 30, 2012 as compared to the three-month and six-months periods ended June 30, 2011.
Our revenue for the three-month periods ended June 30, 2012 and 2011 was $137.2 million and $87.3 million, respectively, an increase of 57.2%. Our revenue for the six-month periods ended June 30, 2012 and 2011 was $250.3 million and $133.6 million, respectively, an increase of 87.4%.
The main factor for the increase in revenue for both periods was the increase in man-hours worked as discussed in "Workforce." Partially offsetting this factor was the decrease in pass-through costs for both periods. Pass-through costs as a percentage of revenue were 42.1% and 50.4% for the three-month periods ended June 30, 2012 and 2011, respectively. Pass-through costs included in revenue were 39.1% and 46.4% for the six-month periods ended June 30, 2012 and 2011, respectively. Although pass-through costs remain a significant portion of revenue for both periods due to the two major deepwater projects in our backlog, they have not increased at the same rate as our man-hours. Pass-through costs, as described in Note 4 in the Notes to Consolidated Financial Statements, are included in revenue, but have little or no impact on our gross margin.
At June 30, 2012, we recorded revenue totaling $2.1 million related to certain change orders on two projects which have been approved as to scope but not price. We expect to resolve these change orders in the third quarter of 2012. At June 30, 2011, we recorded revenue totaling $784,000 related to certain change orders on two projects which were approved as to scope but not price.
We are currently in negotiations to obtain change orders on our two major deepwater projects related to costs we incurred due to customer caused deliverable delays, schedule incentive bonuses and safety incentive bonuses. We have not recognized revenue for these change orders through June 30, 2012 and expect to resolve these negotiations by the end of 2012. Revenue will be recognized if and when these change orders are received and any incentive terms have been met.
For the three-month periods ended June 30, 2012 and 2011, gross profit was $13.9 million (10.1% of revenue) and $4.8 million (5.6% of revenue), respectively. The increase in gross margin for the three-month period ended June 30, 2012 compared to the three-month period ended June 30, 2011 was mainly due to the increase in man-hours as discussed in "Workforce." The increase in production, primarily related to our two major deepwater projects, had a favorable impact on gross margin due to the spread it provided to our fixed overhead as compared to the second quarter of 2011.
For the six-month periods ended June 30, 2012 and 2011, gross profit (loss) was $26.6 million (10.6% of revenue) and ($4.7 million), respectively. Factors that contributed to the increase in gross margin for the six-month period ended June 30, 2012 compared to the six-month period ended June 30, 2011 include:
• Man-hours worked increased as discussed in "Workforce." The increase in production, primarily related to our two major deepwater projects, had a favorable impact on margin due to the spread it provided to our fixed overhead as compared to the six-month period ended June 30, 2011.
General and administrative expenses were $2.6 million and $5.2 million for the three-month and six-month periods ended June 30, 2012, respectively, compared to $2.0 million and $3.9 million for the three-month and six-month periods ended June 30, 2011, respectively. As a percentage of revenue, general and administrative expenses for the three-month and six-month periods ended June 30, 2012 were 1.9% and 2.1%, respectively, compared to 2.2% and 2.9% for the three-month and six-month periods ended June 30, 2011, respectively. Factors that contributed to the increase in general and administrative expense include:
• Incentive compensation increased due to the increase in man-hours worked discussed above.
• Bank service charges increased because of the issuance of additional letters of credit related to our two major deepwater projects.
• Expenses associated with setting up additional staff in our offices increased as a result of our increased activity.
The Company had net interest income of $157,000 and $309,000 for the three-month and six-month periods ended June 30, 2012, respectively, compared to net interest income of $124,000 and $117,000 for the three-month and six-month periods ended June 30, 2011, respectively. The increase in net interest income for the periods ended June 30, 2012 was primarily related to the accretion of the discount associated with the financing arrangement described in Note 2 in the Notes to Consolidated Financial Statements.
The Company had other income of $22,000 and $85,000 for the three-month and six-month periods ended June 30, 2012, respectively, compared to other income of $228,000 for the three-month and six-month periods ended June 30, 2011, respectively. Other income for the three-month and six-month periods ended June 30, 2012 and 2011 represents gains on sales of miscellaneous equipment.
Our effective income tax rate for both the three-month and six-month periods ended June 30, 2012 was 34.0%, compared to an effective tax rate of 43.4% and 38.0%, respectively, for the comparable periods of 2011. The decrease in the effective rate for the periods ended June 30, 2012 was primarily related to the increase in income, particularly for our Texas facility, which caused an increase in our estimated Federal qualified production activities income deduction and a decrease in Louisiana state income tax apportionment.
Liquidity and Capital Resources
Historically, we have funded our business activities through funds generated from operations. Effective May 31, 2011, we extended the term of our $60 million revolving credit facility from December 31, 2012 to December 31, 2013. All other terms of our revolver remain unchanged. Our revolver is secured by our real estate, machinery and equipment, and fixtures. Amounts borrowed under the revolver bear
At June 30, 2012, no amounts were borrowed under the revolver, and we had outstanding letters of credit totaling $35.9 million, which reduced the unused portion of the revolver to $24.1 million. We are required to maintain certain financial covenants, including a minimum current ratio of 1.25 to 1.0, a minimum net worth requirement, debt to net worth ratio of 0.5 to 1.0, and an earnings before interest, taxes, depreciation and amortization (EBITDA) to interest expense ratio of 4.0 to 1.0. As of June 30, 2012, we were in compliance with all covenants.
At June 30, 2012, our cash and cash equivalents totaled $30.6 million, compared to $55.3 million at December 31, 2011. Working capital was $106.6 million and our ratio of current assets to current liabilities was 2.58 to 1 at June 30, 2012. Our primary uses of cash during the period were related to capital expenditures and an increase in our net contract position. As of June 30, 2012, our investment in net contract position was $74.5 million compared to $33.6 million as of December 31, 2011 for an increase of $40.9 million. The increase is due to timing of work performed on several larger contracts compared to scheduled contractual billing terms. We define net contract position as contracts receivable, contract retainage, costs and estimated earnings in excess of billings on uncompleted contracts, materials prepaid to subcontractors, accounts payable, and billings in excess of costs and estimated earnings on uncompleted contracts. An overall increase in these contract related accounts represents a relative decrease in cash on hand for working capital needs and an increase in cash utilized by contracts in progress.
For the six-month period ended June 30, 2012, net cash used by operating activities was $4.2 million compared to net cash used in operating activities of $32.0 million for the six-month period ended June 30, 2011. The overall decrease in cash used by operations for the six-month period ended June 30, 2012, compared to the six-month period ended June 30, 2011, is mainly due to our increase in profitability from operations.
On July 13, 2012, we received a notice from one of our customers requesting a slowdown in work on a deepwater project. Specifically, the notice requested we reduce work to an operational minimum, ensuring that the existing work is protected and available for a full scale resumption of work in the future. As of June 30, 2012, the outstanding contracts receivable balance on this project was $21.7 million and the remaining work on this project represented 6.6% of our revenue backlog and 10.6% of our labor backlog. In connection with its instruction, our customer also requested a short term extension for the payment of its $21.7 million outstanding contracts receivable balance. At the time of this request, approximately $4.0 million of the outstanding balance was past due. We have entered into preliminary discussions with this customer regarding extending the terms of payment of the outstanding balance.
While we believe work on this project will resume in the future, we have no guarantees as to the timing of when or if such full scale resumption will occur. We plan to reallocate our resources to other projects in our backlog in order to mitigate any potential impact the slowdown may have on revenue for future periods. Additionally, the failure by this customer to pay the outstanding balance on this contract in full, whether in accordance with the original contract or an amended payment schedule, may result in a charge to earnings in one or more future periods. For additional information, see Item 1A. Risk Factors included in this Quarterly Report on Form 10-Q.
Net cash used in investing activities for the six-month period ended June 30, 2012, was $17.6 million, mainly related to capital expenditures for equipment and improvements to our production facilities, including an additional $2.0 million on a project in progress to extend the length of our graving dock at our Texas facility and $2.9 million for an additional M2250 Manitowoc crane for our Gulf Island facility in Houma.
Also for the six-month period ended June 30, 2012, $7.8 million was spent on the construction of a coffer cell to drain the graving dock at our Texas facility. During the fourth quarter of 2011, the graving dock flooded unexpectedly when soil washed out from under the graving dock floor, which allowed water from the Gulf Intracoastal Waterway to enter the dock through the floor and caused damage to a portion of the graving dock slab. To prevent further flooding, the Company designed and constructed a coffer cell to drain the dock and complete repairs to the slab so that it can be utilized during the fabrication stage of the Williams Gulfstar FPS™ GS-1 hull project. The estimated cost to construct the coffer cell is approximately $9.6 million, and construction is substantially complete. Of the $7.8 million spent in the six-month period ended June 30, 2012, $2.6 million of costs to build the coffer cell is included as pass-through costs in the Williams project, with another $600,000 of pass-through costs estimated through the project's completion.
We have insurance coverage available and have filed a claim for what we believe to be allowable costs under the terms of these insurance policies. We have not received formal commitment or acknowledgement of coverage from our insurance companies, and recoveries under these policies will be recognized in the period we have determined collection from the carriers is probable, which may be different than the periods when the costs are expended. However, there can be no assurance any amounts will be recovered.
We anticipate additional capital expenditures for 2012 to be approximately $22.8 million for the purchase of equipment and additional yard and facility infrastructure improvements, including $3.9 million for the completion of the graving dock extension at our Texas facility. Also included is $5.7 million for dredging the waterways near the bulkhead of our Texas facilities to accommodate larger vessels used in the installation of deepwater projects. Also included is $2.8 million for two Manitowoc 18000 maxer attachments for our cranes at out Texas facility. Our Gulf Island facility also has $1.2 million remaining for the completion of a new, 30,000 square foot warehouse for its east yard.
Net cash used in financing activities for the six months ended June 30, 2012 was $2.9 million relating to cash used to pay dividends on shares of our common stock.
While current job awards will, and future job awards may, require us to issue additional letters of credit further reducing the capacity available on our revolver, we believe our cash generated by operating activities and funds available under the revolver will be sufficient to fund our capital expenditures and meet our working capital needs for the next twelve months. We may expand our operations through acquisitions in the future, which may require additional equity or debt financing; however, there can be no assurance the terms of such funds will be acceptable to us or even available at such time.
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, 2011.
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, 2011.
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