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GIFI > SEC Filings for GIFI > Form 10-Q on 30-Jul-2013All Recent SEC Filings

Show all filings for GULF ISLAND FABRICATION INC

Form 10-Q for GULF ISLAND FABRICATION INC


30-Jul-2013

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, 2012 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, 2012). 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, 2012. There have been no changes in our evaluation of our critical accounting policies since December 31, 2012.

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 for which 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.

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As of June 30, 2013, we had a revenue backlog of $433.8 million and a labor backlog of approximately 3.6 million man-hours remaining to work, including commitments received through July 17, 2013, compared to a revenue backlog of $537.0 million and a labor backlog of 4.4 million man-hours reported as of December 31, 2012, including commitments received through March 13, 2013.

Of our backlog at June 30, 2013,

70.7% was for three customers as compared to 66.5% for three customers at December 31, 2012.

$358.7 million, or 82.7%, represented projects destined for deepwater locations compared to $393.3 million, or 73.2%, at December 31, 2012.

$31.9 million, or 7.4%, represented projects destined for foreign locations compared to $41.9 million, or 7.8%, at December 31, 2012.

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.

As of June 30, 2013, we expect to recognize revenues from our backlog of approximately

$267.4 million, or 61.6%, during the remaining six months of 2013,

$124.6 million, or 28.7% during calendar year 2014, and

$41.8 million, or 9.7% 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 second half of 2013 and into 2014. Bidding activity for marine related projects continues to remain steady.

Workforce

As of June 30, 2013, we had approximately 2,034 employees and approximately 548 contract employees, compared to approximately 2,180 employees and approximately 344 contract employees as of December 31, 2012.

Man-hours worked were 1.1 million during the three-month period ended June 30, 2013, compared to 1.3 million for the three-month period ended June 30, 2012. The major factor contributing to the decrease in man-hours worked for the three-month period ended June 30, 2013 was a higher utilization of subcontract work as compared to the three-month period ended June 30, 2012.

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Man-hours worked were 2.1 million during the six-month period ended June 30, 2013, compared to 2.5 million for the six-month period ended June 30, 2012. The major factor contributing to the decrease in man-hours worked for the six-month period ended June 30, 2013 was the reduction in work requested to be performed on one of our larger deepwater projects and a higher utilization of subcontract work as compared to the six-month period ended June 30, 2012.

Results of Operations

Our revenue for the three-month periods ended June 30, 2013 and 2012 was $154.6 million and $137.2 million, respectively, an increase of 14.4%. Our revenue for the six-month periods ended June 30, 2013 and 2012 was $305.0 million and $250.3 million, respectively, an increase of 21.8%.

The increase in revenue for the three and six-month periods ended June 30, 2013 is primarily attributable to change orders that were approved during the quarter and included in contract revenue, and to a lesser degree an increase in pass-through costs for the respective periods. Pass-through costs as a percentage of revenue were 53.1% for the three-month period ended June 30, 2013, compared to 42.1% for the three-month period ended June 30, 2012. Pass-through costs as a percentage of revenue were 54.7% for the six-month period ended June 30, 2013, compared to 39.1% for the six-month period ended June 30, 2012. Pass-through costs were a significant portion of revenue for the three-month and six-month period ended June 30, 2013 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 generally little or no impact on our gross margin.

For the three-month periods ended June 30, 2013 and 2012, gross profit was $9.7 million (6.3% of revenue) and $13.9 million (10.1% of revenue), respectively. The decrease in gross profit was primarily due to losses of $11.0 million recognized during the three months ended June 30, 2013, associated with a large deepwater project, scheduled for delivery in the first quarter of 2014. To a lesser extent, gross profit was impacted by the higher level of pass-through costs for the three-month period ended June 30, 2013, relative to the comparable period in 2012. For the three months ended June 30, 2013, we recognized $82.1 million in revenue from pass-through costs, compared to $57.8 million for the three months ended June 30, 2012.

For the six-month periods ended June 30, 2013 and 2012, gross profit was $16.4 million (5.4% of revenue) and $26.6 million (10.6% of revenue), respectively. The decrease in gross profit was primarily due to losses associated with a large deepwater project, as described above, and to a lesser extent, the higher level of pass-through costs for the six-month period ended June 30, 2013, relative to the comparable period in 2012. For the six-months ended June 30, 2013, we recognized $166.9 million in revenue from pass-through costs, compared to $97.9 million for the six months ended June 30, 2012.

General and administrative expenses were $2.9 million and $5.2 million for the three-month and six-month periods ended June 30, 2013, respectively, compared to $2.6 million and $5.2 million for the three-month and six-month periods ended June 30, 2012, respectively. As a percentage of revenue, general and administrative expenses for the three-month and six-month periods ended June 30, 2013 were 1.8% and 1.7%, respectively, compared to 1.9% and 2.1% for the three-month and six-month periods ended June 30, 2012, respectively.

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The Company had net interest expense of $60,000 and $123,000 for the three-month and six-month periods ended June 30, 2013, respectively, compared to net interest income of $157,000 and $309,000 for the three-month and six-month periods ended June 30, 2012, respectively. The increase in net interest expense for the three- and six-month periods ended June 30, 2013 was primarily related to the Company's higher level of cash available for temporary investment for the comparable periods in 2012 relative to 2013. In addition, interest expense increased for the six-month period ended June 30, 2013 as a result of increased borrowings on the line of credit during the first six months of 2013.

The Company had $43,000 of other expense for the three-month and six-month periods ended June 30, 2013, compared to $22,000 and $85,000 in other income for the three-month and six-month periods ended June 30, 2012, respectively. Other income (expense) for the periods ended June 30, 2013 and 2012 primarily represents gains or losses on sales of property, plant, and equipment.

Our effective income tax rate for the three-month and six-month periods ended June 30, 2013 was 36.3% and 35.8%, respectively, compared to an effective tax rate of 34.0% for the comparable periods of 2012.

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 revolving line of credit is secured by substantially all our assets. Amounts borrowed under our revolving line of credit 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 July 30, 2013, no amounts were borrowed under our revolving line of credit, and we had outstanding letters of credit totaling $48.7 million, which reduced the unused portion of our revolver to $31.3 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 of $244.8 million, debt to net worth ratio of 0.5 to 1.0, and earnings before interest, taxes, depreciation and amortization (EBITDA) to interest expense ratio of 4.0 to 1.0. As of June 30, 2013, we were in compliance with all covenants. For information on the amount borrowed on the revolver at June 30, 2013 see Note 4 in the Notes to Consolidated Financial Statements.

At June 30, 2013, our cash and cash equivalents totaled $29.7 million, compared to $24.9 million at December 31, 2012. Working capital was $76.0 million and our ratio of current assets to current liabilities was 1.62 to 1.00 at June 30, 2013. Our primary use of cash during the period was related to capital expenditures. As of June 30, 2013, our investment in net contract position was $38.7 million compared to $43.3 million as of December 31, 2012, representing a decrease of $4.6 million, net of a non-cash

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reclassification of $13.5 million to assets held for sale, as further described in Note 3 in the Notes to Consolidated Financial Statements. The change is due to timing of work performed on several larger contracts compared to scheduled contractual billing terms, 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, accrued contract losses, and billings in excess of costs and estimated earnings on uncompleted contracts. An overall decrease in these contract related accounts represents a relative increase in cash on hand for working capital needs and a decrease in cash utilized by contracts in progress.

For the six-month period ended June 30, 2013, net cash provided by operating activities was $15.2 million compared to net cash used in operating activities of $4.2 million for the six-month period ended June 30, 2012. The overall increase in cash provided by operations for the six-month period ended June 30, 2013, compared to the six-month period ended June 30, 2012, is primarily due to the change in our net contract position, including the non-cash reclassification referred to above.

Net cash used in investing activities for the six-month period ended June 30, 2013 was $7.4 million, mainly related to capital expenditures for equipment and improvements to our production facilities, including an additional $1.1 million on ground preparation at our Texas facility and $1.2 million for dredging purposes for one of our projects at our Texas facility.

We anticipate additional capital expenditures for 2013 to be approximately $11.0 million for the purchase of equipment and additional yard and facility infrastructure improvements, including $5.8 of maintenance capital expenditures, $3.6 million for rolling equipment to replace aging rolling equipment at our Texas facility and $1.0 million for improvements to the graving dock at our Texas facility.

Net cash used in financing activities for the six-months ended June 30, 2013 and 2012 was $2.9 million, respectively.

We believe our cash and cash equivalents, generated by operating activities, reduction in our investment in net contract position, as previously discussed, 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. However, job awards may require us to issue additional letters of credit further reducing the capacity available on our revolving line of credit.

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, 2012.

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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, 2012.

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