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GIFI > SEC Filings for GIFI > Form 10-Q on 31-Oct-2012All Recent SEC Filings

Show all filings for GULF ISLAND FABRICATION INC

Form 10-Q for GULF ISLAND FABRICATION INC


31-Oct-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

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 contained 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 September 30, 2012, we had a revenue backlog of $376.1 million and a labor backlog of approximately 2.9 million man-hours remaining to work, including commitments received through October 30, 2012 and excluding backlog of $30.0 million relating to a suspended project, 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. We exclude suspended projects from contract backlog because resumption of work and timing of backlog revenues are difficult to predict.


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Of our backlog at September 30, 2012,

• 74.9% was for two customers as compared to 72.9% for two customers at December 31, 2011.

• $297.3 million, or 79.0%, represented projects destined for deepwater locations compared to $509.8 million, or 83.0%, at December 31, 2011.

• $474,000, or 0.1%, 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 notice from our customer, Bluewater Industries ("Bluewater"), requesting (i) a slowdown of work on ATP Oil & Gas (UK) Limited's ("ATP UK's") Cheviot project ordered pursuant to a master service contract between Bluewater and the Company (the "Contract"), and (ii) an amendment to the scheduled payment terms under the Contract. On August 16, 2012, we entered into a binding agreement (the "Agreement") with Bluewater, an engineering consulting firm engaged by ATP UK to oversee the fabrication of the Cheviot project, to amend and restate the Contract and suspend the project. Among other things, the Agreement outlines the revised payment terms for the contracts receivable balance (the "Balance") and the limitations on Bluewater's ability to request an extended suspension of work. Specifically, Bluewater must pay $200,000 on or before the last day of each calendar month until February 28, 2013, with the remaining outstanding Balance due on or before March 31, 2013. In addition, if Bluewater has fully paid the Balance on or prior to March 31, 2013, Bluewater has the option to extend the suspension of work on the Cheviot project to June 30, 2013, after which Bluewater will have no further rights to request a suspension of work. If Bluewater fails to make timely payments pursuant to the revised payment plan, we have the right to terminate the Contract, and we will continue to retain title to any project deliverables.

On August 17, 2012, ATP Oil & Gas, Inc. ("ATP"), the parent company of ATP UK, filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code. Although ATP is not our customer and ATP UK is not a party to the bankruptcy, we believe ATP has historically financed the operations of its subsidiaries, including ATP UK. We believe Bluewater's ability to continue to meet its obligations under the Agreement, including payment of the outstanding Balance on or before March 31, 2013, largely depends on ATP UK's ability to fund the Cheviot project.

As of September 30, 2012, $56.7 million has been billed on the Cheviot project and its outstanding contracts receivable balance was approximately $32.1 million. All installments due under the Agreement have been paid to-date. Our work on the Cheviot project is suspended and will remain suspended until the outstanding Balance is paid in full. This suspended project represents revenue backlog of $30.0 million and labor backlog of 308,000 man-hours, both of which are excluded from our backlog at September 30, 2012. Although it is too early to determine the ultimate outcome of the impact of ATP's bankruptcy on the Cheviot project, in the event Bluewater is unable to comply with its obligations under the Agreement and the Contract is terminated, we will retain title to all project deliverables. Given the suspension of the project and the uncertainty around ATP's bankruptcy, events in the future could change the timing and amount of the remaining contract price we ultimately recover.


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As of September 30, 2012, we expect to recognize revenues from our backlog of approximately

• $149.7 million, or 39.8%, during the remaining three months of 2012;

• $213.7 million, or 56.8% during calendar year 2013; and

• $12.7 million thereafter.

The timing of our recognition of the revenue backlog as presented above is based on management's estimates of the application of the direct labor hours to complete the projects in our backlog. 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 to be available in the last quarter of 2012 and into 2013, with awards of deepwater projects throughout 2013. Given the current level of deepwater projects, the potential to secure project awards in the near term continues to come from marine related projects, where a steady level of bidding activity remains.

Workforce

As of September 30, 2012, we had approximately 2,300 employees and approximately 430 contract employees, compared to approximately 1,950 employees and approximately 90 contract employees as of December 31, 2011.

Man-hours worked were 1.2 million during the three-month period ended September 30, 2012, compared to 759,000 for the three-month period ended September 30, 2011. Man-hours worked were 3.7 million during the nine-month period ended September 30, 2012, compared to 1.9 million for the nine-month period ended September 30, 2011. The major factor contributing to this increase in man-hours worked for both comparative periods was our ability to work on two major deepwater projects in our backlog.

Results of Operations

Our revenue for the three-month periods ended September 30, 2012 and 2011 was $141.8 million and $85.8 million, respectively, an increase of 65.3%. Our revenue for the nine-month periods ended September 30, 2012 and 2011 was $392.1 million and $219.4 million, respectively, an increase of 78.7%.

The main factor for the increase in revenue for both periods was the increase in man-hours worked as discussed in "Workforce." Also contributing to the increase in revenue in the three-month comparative period was the increase in pass-through costs.


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Pass-through costs as a percentage of revenue were 58.2% for the three-month period ended September 30, 2012 compared to 46.9% for the three-month period ended September 30, 2011. Pass-through costs were a significant portion of revenue for the three-month period ended September 30, 2012 due to the increased amounts of subcontractor services incurred for our two major deepwater projects. Pass-through costs, as described in Note 5 in the Notes to Consolidated Financial Statements, are included in revenue, but have little or no impact on our gross margin.

At September 30, 2012, we recorded revenue totaling $1.7 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 fourth quarter of 2012. At September 30, 2012, we also recorded revenue totaling $6.6 million related to re-measure units and quantities on a unit rate contract that is in progress. We are in the process of negotiating the application of contractual unit rates to these quantities and expect to finalize these measurement packages in the fourth quarter of 2012 and first quarter of 2013. At September 30, 2011, we recorded revenue totaling $1.7 million related to certain change orders on two projects which were approved as to scope but not price.

For the three-month periods ended September 30, 2012 and 2011, gross loss was $13.4 million and gross profit was $4.0 million (4.7% of revenue), respectively. The decrease in gross margin was mainly due to recognizing contract losses of $20.6 million in the three-month period ended September 30, 2012 as compared to $1.8 million for the same period in 2011, which resulted in an unfavorable reduction in gross margin during the periods of $26.8 million and $1.8 million, respectively, as required under the accounting for loss contracts under percentage of completion accounting. The loss recognized in the three-month period ending September 30, 2012 was mainly due to the increase in estimated man-hours to complete one of our major deepwater contracts. These increased man-hours were primarily driven by revisions and delivery delays to specifications and designs by our customer in the third quarter of 2012 causing out-of-sequence work schedules to be used while executing the project. We have notified our customer of what we believe is our right to recover the costs and lost profits caused by these customer revisions and delays. The customer extended delivery of the first phase of the project as a result of these revisions and we are actively negotiating the recoverable amount with our customer. Any future deliverable delays or project revisions could result in future revisions to contract estimates and may be subject to our claim. No revenues for this claim have been recorded as of September 30, 2012. Any agreed upon recoverable amounts will be recorded in revenue in the periods when such agreement is reached between us and our customer.

For the nine-month periods ended September 30, 2012 and 2011, gross profit was $13.2 million (3.4% of revenue) and gross loss was $718,000, respectively. Factors that contributed to the change in gross margin for the nine-month period ended September 30, 2012 compared to the nine-month period ended September 30, 2011 include:

• Man-hours worked increased as discussed in "Workforce." The increase in production had a favorable impact on margin due to the spread it provided to our fixed overhead as compared to the nine-month period ended September 30, 2011.


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• We recognized no asset impairments during the nine-month period ended September 30, 2012 as compared to asset impairments of $7.7 million recognized during the nine-month period ended September 30, 2011.

• Offsetting the first two factors, we recognized contract losses of $21.2 million and $2.4 million in the nine-month periods ended September 30, 2012 and 2011, respectively, which resulted in reduction to gross margin of $24.5 million and $2.4 million, respectively, due to the accounting impact of loss contracts under percentage of completion accounting which requires the reversal of previously recognized profit when a contract is identified as a loss contract. The contract losses for the nine-month period ended September 30, 2012 primarily related to increased project costs to complete one of our major deepwater projects as discussed elsewhere herein.

General and administrative expenses were $2.0 million and $7.2 million for the three-month and nine-month periods ended September 30, 2012, respectively, compared to $1.9 million and $5.8 million for the three-month and nine-month periods ended September 30, 2011, respectively. As a percentage of revenue, general and administrative expenses for the three-month and nine-month periods ended September 30, 2012 were 1.4% and 1.8%, respectively, compared to 2.2% and 2.6% for the three-month and nine-month periods ended September 30, 2011, respectively. Factors that contributed to the increase in general and administrative expenses for the nine months ended September 30, 2012 include:

• Increased professional fees as a result of our various contract issues. We anticipate these fees to be greater than normal as we work towards resolution of these issues.

• Increased bank service charges resulting from the issuance of additional letters of credit related to our two major deepwater projects.

• Increased expenses associated with setting up additional staff in our offices.

The Company had net interest income of $94,000 and $403,000 for the three-month and nine-month periods ended September 30, 2012, respectively, compared to net interest income of $330,000 and $447,000 for the three-month and nine-month periods ended September 30, 2011, respectively. The decrease in net interest income for the periods ended September 30, 2012 was primarily related to less accretion of the discount associated with the financing arrangement of a retainage balance described in Note 2 in the Notes to Consolidated Financial Statements as the final payments are made.

The Company had other income of $54,000 and $139,000 for the three-month and nine-month periods ended September 30, 2012, respectively, compared to other income of $89,000 and $317,000 for the three-month and nine-month periods ended September 30, 2011, respectively. Other income for the three-month and nine-month periods ended September 30, 2012 and 2011 represents gains on sales of miscellaneous equipment.

Our effective income tax rate for the three-month and nine-month periods ended September 30, 2012 was 31.8% and 39.0%, respectively, compared to an effective tax rate of 38.0% for the comparable periods of 2011. The increase in the effective rate for the nine-month period ended September 30, 2012 was primarily related to an increase in Louisiana state income tax apportionment and a decrease in our estimated Federal qualified production activities income deduction. The decrease in the estimated Federal qualified production activities income deduction was related to the reduction of income at our Texas facility due to the contact loss described elsewhere herein. This reduction also resulted in the effective rate being lower in the three months ended September 30, 2012 compared to income tax expense recorded for the three months ended September 30, 2011.


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Liquidity and Capital Resources

Historically, we have funded our business activities through funds generated from operations. Effective October 29, 2012, we entered into the Eleventh Amendment to the Ninth Amended and Restated Credit Agreement which, among other things, increased our revolving line of credit from $60 million to $80 million and extended the term of our revolver from December 31, 2013 to December 31, 2014. Our revolver is secured by our real estate, machinery and equipment, and fixtures. Amounts borrowed under our revolver bear interest, at our option, at the prime lending rate established by JPMorgan Chase Bank, N.A. or LIBOR plus 1.5 percent. We pay a fee on a quarterly basis of one-fourth of one percent per annum on the weighted-average unused portion of our revolver.

At October 30, 2012, no amounts were borrowed under our revolver, and we had outstanding letters of credit totaling $41.9 million, which reduced the unused portion of our revolver to $38.1 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 September 30, 2012, we were in compliance with all covenants.

At September 30, 2012, our cash and cash equivalents totaled $26.4 million, compared to $55.3 million at December 31, 2011. Working capital was $91.3 million and our ratio of current assets to current liabilities was 1.98 to 1.00 at September 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 September 30, 2012, our investment in net contract position was $68.9 million compared to $33.6 million as of December 31, 2011, representing an increase of $35.3 million. The increase is due to timing of work performed on several larger contracts compared to scheduled contractual billing terms, the revisions to the payment terms agreed to with Bluewater, and potential cost recoveries negotiated with customers. We define net contract position as contracts receivable, contract retainage, costs and estimated earnings in excess of billings on uncompleted contracts, materials and other amounts 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.

The cash balance was significantly impacted by the additional costs related to our loss contract that were recognized in the three-month period ended September 30, 2012. The contract loss was the result of an increase in estimated labor costs to complete one of our major deepwater contracts. These increased costs were primarily driven by revisions and delivery delays to customer specifications and designs by our customer in the third quarter of 2012 causing out-of-sequence work schedules used while executing the project. The customer also extended delivery of the first phase of the project as a result of these revisions. We have filed a claim with our customer under the terms of our contract and are actively negotiating the claim with the customer, but the amount and timing of payment is uncertain at this time.


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For the nine-month period ended September 30, 2012, net cash provided by operating activities was $2.3 million compared to net cash provided in operating activities of $9.0 million for the nine-month period ended September 30, 2011. The overall decrease in cash provided by operations for the nine-month period ended September 30, 2012, compared to the nine-month period ended September 30, 2011, is mainly due to the change in our net contract position as previously discussed and the additional costs incurred related to our loss contract.

On July 13, 2012, we received notice from our customer, Bluewater Industries ("Bluewater"), requesting (i) a slowdown of work on ATP Oil & Gas (UK) Limited's ("ATP UK's") Cheviot project ordered pursuant to a master service contract between Bluewater and the Company (the "Contract"), and (ii) an amendment to the scheduled payment terms under the Contract. On August 16, 2012, we entered into a binding agreement (the "Agreement") with Bluewater, an engineering consulting firm engaged by ATP UK to oversee the fabrication of the Cheviot project, to amend and restate the Contract and suspend the project. Among other things, the Agreement outlines the revised payment terms for the contracts receivable balance (the "Balance") and the limitations on Bluewater's ability to request an extended suspension of work. Specifically, Bluewater must pay $200,000 on or before the last day of each calendar month until February 28, 2013, with the remaining outstanding Balance due on or before March 31, 2013. In addition, if Bluewater has fully paid the Balance on or prior to March 31, 2013, Bluewater has the option to extend the suspension of work on the Cheviot project to June 30, 2013, after which Bluewater will have no further rights to request a suspension of work. If Bluewater fails to make timely payments pursuant to the revised payment plan, we have the right to terminate the Contract, and we will continue to retain title to any project deliverables.

On August 17, 2012, ATP Oil & Gas, Inc. ("ATP"), the parent company of ATP UK, filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code. Although ATP is not our customer and ATP UK is not a party to the bankruptcy, we believe ATP has historically financed the operations of its subsidiaries, including ATP UK. We believe Bluewater's ability to continue to meet its obligations under the Agreement, including payment of the outstanding Balance on or before March 31, 2013, largely depends on ATP UK's ability to fund the Cheviot project.

As of September 30, 2012, $56.7 million has been billed on the Cheviot project and its outstanding contracts receivable balance was approximately $32.1 million. All installments due under the Agreement have been paid to-date. Our work on the Cheviot project is suspended and will remain suspended until the outstanding Balance is paid in full. Although it is too early to determine the ultimate outcome of the impact of ATP's bankruptcy on the Cheviot project, in the event Bluewater is unable to comply with its obligations under the Agreement and the Contract is terminated, we will retain title to all project deliverables. Given the suspension of the project and the uncertainty around ATP's bankruptcy, events in the future could change the timing and amount of the remaining contract price we ultimately recover.


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Net cash used in investing activities for the nine-month period ended September 30, 2012 was $26.8 million, mainly related to capital expenditures for equipment and improvements to our production facilities, including an additional $3.9 million to extend the length of our graving dock at our Texas facility, $2.8 million for two Manitowac 18000 maxer attachments for our cranes at our Texas facility and $2.9 million for an additional M2250 Manitowoc crane for our Gulf Island facility in Houma.

Also for the nine-month period ended September 30, 2012, $9.5 million was spent to complete 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. Of the $9.5 million spent in the nine-month period ended September 30, 2012, $3.1 million of costs to build the coffer cell are included in contract costs for the Williams project. The remaining cost has been capitalized as property as part of the graving dock or as inventory for use in future improvements after its removal upon completion of the Williams project.

The graving dock at our Texas facility has been drained and we have commenced the necessary repairs. The current estimated cost to repair the graving dock slab is $7.5 million, all of which will be covered by insurance. We expect to collect all amounts associated with the slab repair in the fourth quarter of 2012. As of September 30, 2012, we have recorded $2.7 million in prepaid expenses and other current assets on the consolidated balance sheet for recoverable repair expenses under this claim, net of related deductibles.

We anticipate additional capital expenditures for 2012 to be approximately $12.3 million for the purchase of equipment and additional yard and facility infrastructure improvements, including $2.1 million for the completion of the graving dock extension at our Texas facility. Also included is $5.2 million for dredging the waterways near the bulkhead of our Texas facilities to accommodate larger vessels used in the installation of deepwater projects. Our Gulf Island facility also has $1.1 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 nine months ended September 30, 2012 was $4.3 million, compared to $2.5 million for the nine months ended September 30, 2011. This increase relates to higher per-share cash dividends paid on shares of our common stock.


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Historically, we have funded our operating and capital needs through cash generated by operating activities and funds available under the revolver have mainly been used to issue letters of credit for the jobs awarded to us. Although capacity under the revolver still allows us to issue letters of credit for our current job awards, we will likely utilize some of its capacity to fund working capital and capital expenditure needs due to contractual issues we are . . .

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