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

Show all filings for GULF ISLAND FABRICATION INC | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for GULF ISLAND FABRICATION INC


30-Oct-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 such forward-looking statements. 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. 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 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 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. However, management's estimates are often based on preliminary engineering and design specifications by 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.

All projects currently included in our backlog generally are subject to suspension, termination, or a reduction in scope 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, 2013, we had a revenue backlog of $342.5 million and a labor backlog of approximately 3.0 million man-hours remaining to work, including commitments received through October 11, 2013, compared to a revenue backlog of

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$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 September 30, 2013,

73.5% was for three customers compared to 66.5% for three customers at December 31, 2012.

$222.1 million, or 64.9%, represented projects destined for deepwater locations compared to $393.3 million, or 73.2%, at December 31, 2012.

$36.5 million, or 10.7%, represented projects destined for foreign locations compared to $41.9 million, or 7.8%, at December 31, 2012.

Projects for our three largest customers consist of a jacket and deck for a deepwater Gulf of Mexico project for one customer, which commenced in the second and third quarters of 2013, two 214 foot Offshore Supply Vessels (OSV) for a second customer, which commence in the first quarter of 2013, and jacket, piles, deck and piping destined for the West African continental shelf for a third customer, which commenced in the first quarter of 2013. The deepwater project is scheduled to be completed during the first quarter of 2014; the first OSV is expected to ship during the second quarter of 2014; the second OSV is expected to ship during the fourth quarter of 2014; and the West African project is scheduled for delivery during the second quarter of 2014.

Depending on the size of the project, the termination, postponement, or reduction in scope of any one project could significantly reduce our backlog, and could have a material adverse effect on revenue, net income and cash flow.

As of September 30, 2013, we expect to recognize revenue from our backlog of approximately

$126.1 million, or 36.8%, during the remaining three months of 2013,

$172.8 million, or 50.5% during calendar year 2014, and

$43.6 million, or 12.7% thereafter.

During the quarter ended September 30, 2013, we entered into discussions with a large deepwater customer concerning our customer's request for a reduction in scope to the project, whereby remaining completion and integration work would be performed at the integration site by a different integration contractor. We transferred the project deliverables to the integration contractor's site and remain in discussion with our customer regarding the terms of a change order reflecting the reduction in the scope of work and other contractual matters. At September 30, 2013, as a result of these ongoing discussions we removed from backlog estimated revenue of $25.5 million and estimated labor hours of 271,000 hours representing our previous estimate of remaining work to complete the project.

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 timing of the recognition of 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 2013 and into 2014 with a higher level of bidding activity in the second half of 2014. Bidding activity for non-traditional Gulf of Mexico ("GOM") marine related projects, GOM shallow water projects, and ancillary work associated with deepwater structures is expected to increase over the next two quarters.

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Workforce

As of September 30, 2013, we had approximately 1,909 employees and approximately 438 contract employees, compared to approximately 2,180 employees and approximately 344 contract employees as of December 31, 2012.

Man-hours worked were 975,000 during the three-month period ended September 30, 2013, compared to 1.2 million for the three-month period ended September 30, 2012. The major factors contributing to the decrease in man-hours worked for the three-month period ended September 30, 2013 was the reduction in integration work on a deepwater project requested to be performed by one of our customers and a higher utilization of subcontract work as compared to the three-month period ended September 30, 2012.

Man-hours worked were 3.1 million during the nine-month period ended September 30, 2013, compared to 3.7 million for the nine-month period ended September 30, 2012. The decrease in man-hours worked for the nine-month period ended September 30, 2013 relative to the comparable period 2012 was primarily attributable to the scheduled transport of a large deepwater project to a separate integration facility for lifting and setting procedures during the third quarter of 2013, and a higher utilization of subcontract work as compared to the nine-month period ended September 30, 2012.

Results of Operations

Our revenue for the three-month periods ended September 30, 2013 and 2012 was $168.2 million and $141.8 million, respectively, an increase of 18.6%. Our revenue for the nine-month periods ended September 30, 2013 and 2012 was $473.2 million and $392.1 million, respectively, an increase of 20.7%.

The increase in revenue for the three- and nine-month periods ended September 30, 2013 is primarily attributable to revenue recognized for change orders related to hull and topside projects for a large deepwater customer approved in the second quarter of 2013. Pass-through costs also contributed to the increase in revenue for the three- and nine-month periods ended September 30, 2013 compared to 2012. Pass-through costs as a percentage of revenue was 59.4% and 57.1%, respectively for the three- and nine-month periods ended September 30, 2013, compared to 58.2% and 46.0%, respectively for the three- and nine-month periods ending September 30, 2012. Pass-through costs increased primarily due to increased amounts of subcontractor services incurred for two major deepwater projects in 2013 including subcontractor services for a large deepwater customer for which we have entered into discussions to reduce the scope of work, as further discussed above. 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 the timing of recognition of gross margin for any given period.

For the three-month periods ended September 30, 2013 and 2012, gross profit
(loss) was $9.1 million (5.4% of revenue) and $(13.4) million, respectively. The increase in gross profit was primarily due to revenue recognized during the three months ended September 30, 2013 for change orders related to hull and topside projects for a large deepwater customer, compared to losses of $9.5 million recognized during the three months ended September 30, 2012 associated with a separate large deepwater project.

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For the nine-month periods ended September 30, 2013 and 2012, gross profit was $25.4 million (5.4% of revenue) and $13.2 million (3.4% of revenue), respectively. The increase in gross profit was primarily due to revenue recognized during the three months ended September 30, 2013 for change orders related to hull and topside projects for a large deepwater customer, as compared to losses of $9.5 million recognized during the three months ended September 30, 2012 associated with a separate large deepwater project.

Gross profit as a percentage of revenue for the three- and nine- months ended September 30, 2013 was negatively impacted by the higher level of pass-through costs, relative to the comparable periods in 2012, as further described in Note 5 in the Notes to Consolidated Financial Statements.

General and administrative expenses were $3.7 million and $9.0 million for the three- and nine-month periods ended September 30, 2013, respectively, compared to $2.0 million and $7.2 million for the three- and nine-month periods ended September 30, 2012, respectively. As a percentage of revenue, general and administrative expenses for the three- and nine-month periods ended September 30, 2013 were 2.2% and 1.9%, respectively, compared to 1.4% and 1.8% for the three- and nine-month periods ended September 30, 2012, respectively. General and administrative expenses for the third quarter 2013 included a reserve for bad debt in the amount of $0.8 million for a vessel upgrade and outfitting project and $0.4 million related to the relocation of our corporate office to Houston, Texas.

The Company had net interest expense of $41,000 and $164,000 for the three- and nine-month periods ended September 30, 2013, respectively, compared to net interest income of $94,000 and $403,000 for the three- and nine-month periods ended September 30, 2012, respectively. The increase in net interest expense for the three- and nine-month periods ended September 30, 2013 was primarily related to the recognition of interest income in the comparable 2012 periods associated with a financing arrangement with a customer for the collection of an $11.0 million retainage balance on a completed contract. In addition, interest expense increased for the nine-month period ended September 30, 2013 as a result of increased borrowings on the line of credit during the first nine months of 2013.

The Company had $15,000 and $58,000 of other expense for the three-month and nine-month periods ended September 30, 2013, respectively, compared to $54,000 and $139,000 in other income for the three- and nine-month periods ended September 30, 2012, respectively. Other income (expense) for the periods ended September 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 nine-month periods ended September 30, 2013 was 37.6% and 36.4%, compared to an effective tax rate of 31.8% and 39% for the comparable periods of 2012, respectively. The increase in the effective tax rate for the three-month period is due to 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 losses associated with one of our major deepwater projects. The decline in the effective tax rate for the nine-month period is due to a decrease in Louisiana state income tax apportionment.

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Liquidity and Capital Resources

Historically, we have funded our business activities through cash generated from operations.

The Company has a Credit Agreement (as amended, the "Credit Agreement") with Whitney Bank and JPMorgan Chase Bank, N.A. that provides the Company with an $80 million revolving credit facility. The Credit Agreement also allows the Company to use up to the full amount of the available borrowing base for letters of credit. The credit facility matures on December 31, 2014. Our revolving line of credit is secured by substantially all of our assets, other than real property located in the state of Louisiana. Amounts borrowed under our revolving line of credit bear interest, at our option, at either 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 revolving line of credit.

On September 12, 2013, we entered into the Twelfth Amendment to Ninth Amended and Restated Credit Agreement under which two new guarantors, both of which are subsidiaries of the Company, agreed to guaranty the Company's obligations under the credit facility, and grant a security interest over certain collateral to secure such obligations. The amendment also releases any liens in favor of the lenders affecting real property of the Company, and its subsidiaries located in the state of Louisiana, and grants the lenders a security interest in all of the accounts of the Company and its subsidiaries. Further, the Company agreed to cause all subsidiaries subsequently formed or acquired, subject to certain exceptions, to execute both a guaranty and a security agreement with respect to Gulf Island's obligations under the Credit Facility.

At October 30, 2013, $5.0 million was 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 $26.3 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 $246.4 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 September 30, 2013, we were in compliance with all covenants, and had no amounts outstanding under our revolver.

During the quarter ended September 30, 2013, we entered into discussions with one of our customers concerning our customer's request for a reduction in scope to a topside module deepwater project, whereby remaining completion and integration work would be performed by the third-party integration contractor at its site. As a result of these ongoing discussions, we removed our estimate of revenue and labor hours in backlog of $25.5 million and 271,000 hours, respectively. Management remains in discussion with this customer regarding the terms of a change order reflecting the reduction in work, and continues to evaluate the impact of the scope reduction. Based on our initial assessment, we have not increased our loss reserve for the quarter ended September 30, 2013; however, because of the overall complexity of the project and the fact that we are in early stages of negotiations with the customer, continuing discussions could result in further reductions to our estimate of revenue, which could impact gross profit for future periods. We anticipate the current estimated reduction in scope to have some impact on total labor hours incurred for the fourth quarter, 2013; however, we believe we have largely mitigated the potential impact of the scope reduction by effectively redirecting a portion of our labor force to other projects.

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At September 30, 2013, our cash and cash equivalents totaled $21.8 million, compared to $24.9 million at December 31, 2012. Working capital was $80.1 million and our ratio of current assets to current liabilities was 1.74 to 1.00 at September 30, 2013. Our primary use of cash during the period was related to capital expenditures. As of September 30, 2013, our investment in net contract position was $51.8 million, of which 96.6% was comprised of three major customers compared to $43.3 million as of December 31, 2012, of which 63.3% was comprised of four major customers. This change represents an increase of $8.5 million, net of a non-cash reclassification of the carrying amount of certain assets and liabilities relating to the Cheviot Project to assets held for sale, as further described in Note 3 in the Notes to Consolidated Financial Statements. 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 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 change in investment in net contract position is primarily due to delays in our ability to invoice and collect payment of amounts related to two large deepwater projects. We were able to resolve certain outstanding matters and expect to receive the remaining balance in the fourth quarter 2013 from one of these deepwater customers. We continue to negotiate revised contractual billing terms and potential cost recoveries with the other deepwater customer related to a reduction in scope of the project as further described above. We do not expect our customer to make any additional payments related to this project until a change order reflecting the reduction in scope of work is executed.

For the nine-month period ended September 30, 2013 and September 30, 2012, net cash provided by operating activities was $13.8 million and $2.3 million, respectively. The overall increase in cash provided by operations for the nine-month period ended September 30, 2013, compared to the nine-month period ended September 30, 2012, is primarily due to a successful negotiation of contract terms related to one large deepwater customer, partially offset by an inability to invoice and collect payment of amounts from one of our other deepwater customers as further discussed above. Subsequent to September 30, 2013, we collected $42.7 million of contracts receivable and we billed an additional $15.4 million of costs and estimated earnings in excess of billings.

Net cash used in investing activities for the nine-month period ended September 30, 2013 was $12.5 million, mainly related to capital expenditures for equipment and improvements to our production facilities, including the following amounts related to our Texas facility: an additional $1.1 million for ground preparation, $2.6 million for dredging activities, and $3.3 million for improvements to our graving dock.

We have additional approved capital expenditures for 2013 of approximately $26.7 million of which, $11.0 is anticipated to be expended in the fourth quarter of 2013 and the remainder in 2014. Included in anticipated expenditures for 2013 is the purchase of equipment and additional yard and facility infrastructure improvements, including $3.6 of maintenance capital expenditures, $3.6 million for rolling equipment to replace aging rolling equipment at our Texas facility and $1.7 million, net, for a replacement aircraft.

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Net cash used in financing activities for the nine-months ended September 30, 2013 and 2012 was $4.4 million and $4.3 million, respectively.

We believe our cash and cash equivalents, generated by operating activities, 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. For more information on our contractual obligations, refer to Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2012.

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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