Division | ___________
| | (1) | We exclude suspended projects from contract backlog when they are expected to be suspended more than 12 months because resumption of work and timing of revenue recognition for these projects are difficult to predict. |
| | (2) | At June 30, 2017,March 31, 2018, projects for our five largest customers in terms of revenue backlog consisted of: |
| | (i) | twoTwo large multi-purpose service vesselsMPSVs for one customer in our Shipyards division,for which commenced in the first quarterwe have received a purported notice of 2014 and will be completed during the first and second quarters of 2018;termination as discussed above; |
| | (ii) | newbuildNewbuild construction of fourfive harbor tugs for one customer within our Shipyards division;(to be completed in 2018 through 2020); |
(iii) newbuild construction of four harbor tugs for one additional customer within our Shipyards division;
| | (iii) | Newbuild construction of five harbor tugs for one customer (separate from above) (to completed in 2018 through 2020); |
| | (iv) | the fabricationNewbuild construction of four modules associated with a U.S. ethane cracker project within our Fabrication division;an offshore research vessel (to be completed in 2020); and |
(v) newbuild construction of an offshore research vessel within our Shipyards division.
| | (3)(v) | Newbuild construction of one T-ATS vessel (to be completed in 2020). This contract is currently under a bid protest. |
| | (2) | The timing of recognition of the revenue represented in our backlog is based on management’s current estimates to complete the projects. Certain factors and circumstances could cause changes in the amounts ultimately recognized and the timing of the recognition of revenue from our backlog. |
Depending on
Certain of our contracts contain options which grant the sizeright to our customer, if exercised, for the construction of the project, the termination, postponement, or reductionadditional vessels at contracted prices.We do not include options in scope of any one project could significantly reduce our backlog above. If all options under our current contracts were exercised, our backlog would increase by $626.2 million. We believe disclosing these options provides investors with useful information in order to evaluate additional potential work that we would be contractually obligated to perform under our current contracts as well as the potential significance of these options, if exercised. We have not received any commitments related to the exercise of these options from our customers, and could have a material adverse effect on revenue, net income and cash flow. Additionally, as we continue tocan provide no assurance that any or all of these options will be exercised. As we add backlog, we will begin addingadd personnel with critical project management and fabrication skills to ensure we have the resources necessary to execute our projects well and to support our project risk mitigation discipline for all new project work.projects. This may negatively impact near termnear-term results. As of June 30, 2017,March 31, 2018, we had 983 employees and 166 contract961 employees compared to 1,178 employees and 92 contract977 employees as of December 31, 2016. 2017. Labor hours worked were 1.0 million496,000 during the sixthree months ended June 30, 2017,March 31, 2018, compared to 1.6 million479,000 for the sixthree months ended June 30, 2016.March 31, 2017. The overall decreaseincrease in labor hours worked for the sixthree months ended June 30, 2017,March 31, 2018, was due to an overallimproved offshore demand within our Services Division. As of April 29, 2018, we had 870 employees. The decrease in work experiencedour workforce subsequent to March 31, 2018, is primarily within our Fabrication Division due to completion of complex modules for the construction of a new petrochemical plant with no significant future Fabrication backlog forecasted in the near-term as well as the stoppage of construction of the two MPSVs within our facilities as a result of depressed oil and gas prices and the corresponding reduction in customer demand within allShipyard Division pending resolution of our operating divisions.dispute over termination with our MPSV customer. See Note 9 of the Notes to Consolidated Financial Statements related to our MPSV contract termination dispute.
Results of Operations Three Months Ended June 30, 2017,March 31, 2018, Compared to Three Months Ended June 30, 2016 March 31, 2017 (in thousands, except for percentages): Consolidated | | | Three Months Ended June 30, | | Increase or (Decrease) | Three Months Ended March 31, | | Increase or (Decrease) | | 2017 | | 2016 | | Amount | Percent | 2018 | | 2017 | | Amount | Percent | Revenue | $ | 45,868 |
| | $ | 81,502 |
| | $ | (35,634 | ) | (43.7)% | $ | 57,290 |
| | $ | 37,993 |
| | $ | 19,297 |
| 50.8% | Cost of revenue | 57,488 |
| | 67,436 |
| | (9,948 | ) | (14.8)% | 56,611 |
| | 42,890 |
| | 13,721 |
| 32.0% | Gross profit (loss) | (11,620 | ) | | 14,066 |
| | (25,686 | ) | (182.6)% | 679 |
| | (4,897 | ) | | 5,576 |
| 113.9% | Gross profit (loss) percentage | (25.3 | )% | | 17.3 | % | | | | 1.2 | % | | (12.9 | )% | | | | General and administrative expenses | 4,640 |
| | 5,062 |
| | (422 | ) | (8.3)% | 4,709 |
| | 3,930 |
| | 779 |
| 19.8% | Asset impairment | | 750 |
| | 389 |
| | 361 |
| 92.8% | Operating income (loss) | (16,260 | ) | | 9,004 |
| | (25,264 | ) | (280.6)% | (4,780 | ) | | (9,216 | ) | | (4,436 | ) |
| Other income (expense): | | | | | | | | | | | | | Interest expense | (158 | ) | | (88 | ) | | (70 | ) | | (469 | ) | | (59 | ) | | (410 | ) | (694.9)% | Interest income | 12 |
| | 2 |
| | 10 |
| | | Other income (expense), net | (266 | ) | | 42 |
| | (308 | ) | | 12 |
| | 9 |
| | 3 |
| 33.3% | Total other income (expense) | (412 | ) | | (44 | ) | | (368 | ) | (836.4)% | (457 | ) | | (50 | ) | | (407 | ) | (814.0)% | Net income (loss) before income taxes | (16,672 | ) | | 8,960 |
| | (25,632 | ) | (286.1)% | | Net loss before income taxes | | (5,237 | ) | | (9,266 | ) | | (4,029 | ) | (43.5)% | Income tax expense (benefit) | (5,749 | ) | | 3,420 |
| | (9,169 | ) | (268.1)% | 59 |
| | (2,812 | ) | | 2,871 |
| 102.1% | Net income (loss) | $ | (10,923 | ) | | $ | 5,540 |
| | $ | (16,463 | ) | (297.2)% | | Net loss | | $ | (5,296 | ) | | $ | (6,454 | ) | | $ | 6,900 |
|
|
Revenue - Our revenue for the three months ended June 30,March 31, 2018 and 2017, and 2016, was $45.9$57.3 million and $81.5$38.0 million, respectively, representing a decreasean increase of 43.7%50.8%. The decreaseincrease is primarily attributable to an overall decrease in work experienced into:
An increase of $11.2 million within our facilities as a result of depressedServices Division from additional demand for offshore oil and gas pricesservice related projects; and An increase of $7.1 million within our Fabrication Division primarily attributable to the corresponding reduction in customer demand within allconstruction of our operating divisions. Pass-through costs asfour modules for a percentage of revenue were 53.1% and 35.1%petrochemical plant.
Gross profit (loss) - Our gross profit for the three months ended June 30, 2017 and 2016, respectively. Pass-through costs, as described in Note 3 of the Notes to Consolidated Financial Statements, are included in revenue but have no impact on the gross profit recognized on a project for a particular period.
Gross profit (loss) - Our gross loss for the three months ended June 30, 2017,March 31, 2018, was $11.6 million$679,000 compared to a gross profitloss of $14.1$4.9 million for the three months ended June 30, 2016.March 31, 2017. The decreaseincrease in gross profit was primarily due to $10.2 million of contract losses incurred byincreased revenue within our Shipyards division related to cost overruns and re-work identified on two vessel contracts assigned in the LEEVAC transaction, decreased revenueServices Division as discussed above holding costsand decreased expenses within our Fabrication Division which included $1.9 million of depreciation expense for the three months ended March 31, 2017, related to our South Texas assets of $1.2 million and lower margins on current work. This was partially offset by decreases in costs resulting from reductions in workforce as we wrapped up and completed projects at our South Texas fabrication yards and Prospect shipyard,Properties with no depreciation being recordedexpense during the three months ended March 31, 2018, for our South Texas assets and Prospect shipyard for the three months ended June 30, 2017,Properties as these assets are classified as assets held for sale and additional cost cutting measures implemented by management.sale.
General and administrative expenses - Our general and administrative expenses were $4.6$4.7 million for the three months ended June 30, 2017,March 31, 2018, compared to $5.1$3.9 million for the three months ended June 30, 2016.March 31, 2017. The decreaseincrease in general and administrative expenses for the three months ended June 30, 2017,March 31, 2018, was primarily attributable to lower bonuses accrued during 2017
Build-up of additional personnel for our newly created EPC Division; Increased legal and advisory fees related to customer disputes, strategic planning and diversification of our business; Increased employee incentive accruals of approximately $300,000 for all divisions related to our safety incentive program and higher employee profitability incentives within our Services Division as a resultwell as the addition of a combinationpersonnel as we build up our EPC Division in anticipation of a smaller workforcethe SeaOne Project; and our consolidated gross loss Higher stock compensation expense of approximately $220,000.
This was partially offset by cost reductions and continued cost cutting measuresminimization efforts implemented by management for the period.
Asset impairment - We recorded an impairment of $750,000 during the first partthree months ended March 31, 2018, related to a piece of 2016.equipment at our Texas North Yard that we intend to sell at auction. This piece of equipment was not damaged by
Other income (expense),Hurricane Harvey. The impairment was calculated as management's estimated net proceeds from the sale less its net book value. See also Note 2 of the Notes to Consolidated Financial Statements for additional information regarding our assets held for sale. During the three months ended March 31, 2017, we recorded an impairment of $389,000 related to the Shipyard Division assets held for sale.
Interest expense- OtherInterest expense was $266,000increased due to drawings under our Credit Agreement for the three months ended June 30, 2017, as compared to other income of $42,000March 31, 2018, with no such drawings under our Credit Agreement for the three months ended June 30, 2016. Other expense forMarch 31, 2017, as well as increased amortization of deferred financing costs during the period was primarily due to losses on the sale of two drydocks from our Shipyards division recorded during three months ended June 30, 2017.March 31, 2018.
Income tax expense (benefit) - Our effective income tax rate for the three months ended June 30, 2017,March 31, 2018, was 34.5%(1.1)%, compared to an effective tax rate benefit of 38.2%30.3% for the comparable period during 2016.2017. Current expense represents state taxes within our Services Division. The decrease in the effective tax rate is the result of limitations on the deductibility of executive compensation. These amount are included in the estimate ofa valuation allowance against our year-end effective rate.
Operating Segments
As discussed indeferred tax assets. See Note 81 of the Notes to Consolidated Financial Statements management reduced its allocation of corporate administrative costsregarding our NOLs and overhead expenses to its operating divisions during the three and six months ended June 30, 2017, such that a significant portion of its corporate expenses are retained in its non-operating Corporate division. In addition, it has also allocated certain personnel previously included in the operating divisions to within the Corporate division. In doing so, management believes that it has created a fourth reportable segment with each of its three operating divisions and its Corporate division each meeting the criteria of reportable segments under GAAP. During the three and six months ended June 30, 2016, we allocated substantially all of our corporate administrative costs and overhead expenses to our three operating divisions. We have recast our 2016 segment data below in order to conform to the current period presentation. Ourdeferred tax assets.
Operating Segments
The results of our threefour operating divisions and Corporate divisionDivision for the three months ended June 30,March 31, 2018 and 2017, and 2016, are presented below (in thousands, except for percentages).
| | Fabrication | | Three Months Ended June 30, | | Increase or (Decrease) | | Three Months Ended March 31, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | | 2018 | | 2017 | | Amount | | Percent | Revenue | | $ | 13,990 |
| | $ | 24,296 |
| | $ | (10,306 | ) | | (42.4)% | | $ | 17,270 |
| | $ | 10,209 |
| | $ | 7,061 |
| | 69.2% | Gross profit (loss) | | 1,931 |
| | 3,877 |
| | (1,946 | ) | | (50.2)% | | (219 | ) | | (2,966 | ) | | (2,747 | ) | | (92.6)% | Gross profit (loss) percentage | | 13.8 | % | | 16.0 | % | | | | (2.2)% | | (1.3 | )% | | (29.1 | )% | | | |
| General and administrative expenses | | 833 |
| | 1,130 |
| | (297 | ) | | (26.3)% | | 624 |
| | 821 |
| | (197 | ) | | (24.0)% | Asset impairment | | | 750 |
| | — |
| | 750 |
| | 100.0% | Operating income (loss) | | 1,098 |
| | 2,747 |
| | | | | $ | (1,593 | ) | | $ | (3,787 | ) | | $ | (2,194 | ) | |
|
Revenue - Revenue from our Fabrication division decreased $10.3Division increased $7.1 million for the three months ended June 30, 2017,March 31, 2018, compared to the three months ended June 30, 2016.March 31, 2017. The decreaseincrease is attributable to an overall decrease in work experienced in our fabrication yards asthe construction of four modules for a result ofpetrochemical plant during the three months ended March 31, 2018, and lower revenue during the three months ended March 31, 2017, resulting from depressed oil and gas prices and the corresponding reduction in customer demand for offshore fabrication projects. As discussed above, management has classified our South Texas assets as assets held for sale in response toprojects during the underutilizationperiod. This was partially offset, by decreased revenue of our Fabrication assets. As of June 30, 2017, all of our projects at our South Texas fabrication yards have been completed or transferred to our Houma fabrication yard.
Gross profit (loss) - Gross profit from our Fabrication division for the three months ended June 30, 2017, was $1.9 million compared to a gross profit of $3.9$2.4 million for the three months ended June 30, 2016. The decrease was due to lower revenue from decreased fabrication work as discussed above and approximately $1.2 million of holding costs for our South Texas assets. This was partially offset by decreases in costs resulting from reductions in workforce as we wrapped up and completed projectsMarch 31, 2018, at our South Texas fabrication yards, no depreciation being recordedProperties as these were placed for sale during the first quarter of 2017 and project work completed or transfered to our South Texas assetsHouma Fabrication Yard during 2017.
Gross profit (loss) - Gross loss from our Fabrication Division for the three months ended June 30, 2017,March 31, 2018, was $219,000 compared to a gross loss of $3.0 million for the three months ended March 31, 2017. The decrease in gross loss was due to increased revenue as discussed above and a reduction in depreciation expense of $1.9 million in depreciation expense during the three months ended March 31, 2018 for our South Texas Properties as these assets are classified as assets held for sale and additional cost cutting measures implemented by management.sale.
General and administrative expenses - General and administrative expenses for our Fabrication divisionDivision decreased $297,000$197,000 for the three months ended June 30, 2017,March 31, 2018, compared to the three months ended June 30, 2016.March 31, 2017. The decrease is primarily due to decreases in costs resulting from reductions in workforce as we wrapped up and completed projects at our South Texas fabrication yards and lower bonuses accrued during 2017Properties, decreases in corporate allocations as a resultportion of these are now allocated to our EPC Division and continued cost minimization efforts implemented by management for the period.
Asset impairment - We recorded an impairment of $750,000 during the three months ended March 31, 2018, related to a combinationpiece of a smaller workforce andequipment at our consolidated gross loss.Texas North Yard that we intend to sell at auction. This piece of equipment was not damaged by Hurricane Harvey. The impairment was calculated as management's estimated net proceeds from the sale less its net book value. See Note 2 of the Notes to Consolidated Financial Statements for additional information regarding our assets held for sale. We did not record any asset impairments during the three months ended March 31, 2017, within our Fabrication Division.
| | Shipyards | | Three Months Ended June 30, | | Increase or (Decrease) | | Shipyard | | | Three Months Ended March 31, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | | 2018 | | 2017 | | Amount | | Percent | Revenue (1) | | $ | 18,303 |
| | $ | 29,373 |
| | $ | (11,070 | ) | | (37.7)% | | $ | 18,565 |
| | $ | 18,422 |
| | $ | 143 |
| | 0.8% | Gross profit (loss) (1) | | (13,851 | ) | | 5,423 |
| | (19,274 | ) | | (355.4)% | | (1,023 | ) | | (1,704 | ) | | (681 | ) | | (40.0)% | Gross profit (loss) percentage | | (75.7 | )% | | 18.5 | % | | | | (94.2)% | | (5.5 | )% | | (9.2 | )% | | | |
| General and administrative expenses | | 983 |
| | 1,460 |
| | (477 | ) | | (32.7)% | | 796 |
| | 964 |
| | (168 | ) | | (17.4)% | Asset impairment | | | — |
| | 389 |
| | (389 | ) | | (100.0)% | Operating income (loss) (1) | | (14,834 | ) | | 3,963 |
| | | | | $ | (1,819 | ) | | $ | (3,057 | ) | | $ | (1,238 | ) | |
|
___________ | | (1) | Revenue for the three months ended June 30,March 31, 2018, and 2017, includes $390,000 and 2016, includes $335,000 and $1.5 million of non-cash amortization of deferred revenue related to the values assigned to the contracts acquired in the LEEVAC transaction, respectively. |
Revenue - Revenue from our Shipyards division decreased $11.1 million for the three months ended June 30, 2017, compared to the three months ended June 30, 2016, due to depressed oil and gas prices and the corresponding reduction in customer demand for shipbuilding and repair services supporting the oil and gas industry. During the first quarter of 2017, we completed a vessel that we assumed in the LEEVAC transaction and delivered to a customer on February 6, 2017.
Gross profit (loss) - Gross loss from our Shipyards division was $13.9 million for the three months ended June 30, 2017, compared to a gross profit of $5.4 million for the three months ended June 30, 2016. The decrease was due to:
$10.2 million in contract losses related to cost overruns and re-work that has been identified on two contracts assigned to us in the LEEVAC transaction;
holding and closing costs related to our Prospect shipyard as we wind down operations at this facility;
holding costs related to a completed vessel that was delivered on February 6, 2017; however, was refused by our customer alleging certain technical deficiencies (see also Note 9 of the Notes to Consolidated Financial Statements); and
overall decreases in work under other various contracts as discussed above.
General and administrative expenses - General and administrative expenses for our Shipyards division decreased $477,000 for the three months ended June 30, 2017, compared to the three months ended June 30, 2016, primarily due to lower bonuses accrued during 2017 as a result of a combination of a smaller workforce and our consolidated gross loss and cost cutting measures implemented by management during the first part of 2016.
| | | | | | | | | | | | | | | | Services | | Three Months Ended June 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | 15,396 |
| | $ | 28,692 |
| | $ | (13,296 | ) | | (46.3)% | Gross profit (loss) | | 390 |
| | 4,864 |
| | (4,474 | ) | | (92.0)% | Gross profit (loss) percentage | | 2.5 | % | | 17.0 | % | | | | (14.5)% | General and administrative expenses | | 647 |
| | 800 |
| | (153 | ) | | (19.1)% | Operating income (loss) | | (257 | ) | | 4,064 |
| | | | |
Revenue - Revenue from our Services division decreased $13.3 million for the three months ended June 30, 2017, compared to the three months ended June 30, 2016, due to an overall decrease in work experienced as a result of depressed oil and gas prices and the corresponding reduction in customer demand for oil and gas related service projects.
Gross profit - Gross profit from our Services division decreased $4.5 million for the three months ended June 30, 2017, compared to the three months ended June 30, 2016, due to decreased revenue discussed above and lower margins on new work performed during 2017.
General and administrative expenses - General and administrative expenses for our Services division decreased $153,000 for the three months ended June 30, 2017, compared to the three months ended June 30, 2016, due to lower bonuses accrued during 2017 as a result of a combination of a smaller workforce and our consolidated gross loss.
| | | | | | | | | | | | | | | | Corporate | | Three Months Ended June 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | — |
| | $ | — |
| | $ | — |
| | —% | Gross profit (loss) | | (90 | ) | | (98 | ) | | 8 |
| | 8.2% | Gross profit (loss) percentage | | n/a |
| | n/a |
| | | |
| General and administrative expenses | | 2,177 |
| | 1,672 |
| | 505 |
| | 30.2% | Operating income (loss) | | (2,267 | ) | | (1,770 | ) | |
|
| | |
General and administrative expenses - General and administrative expenses for our Corporate division increased primarily due to a restructuring of our corporate division with additional personnel allocated to our corporate division during 2017 as discussed above as well as for expenses incurred for advisors to assist in a strategic financial analysis project in anticipation of the proceeds to be received from the sale of our South Texas assets. This has been partially offset by lower bonuses accrued during 2017, as a result of a combination of a smaller workforce and our consolidated gross loss.
Six Months Ended June 30, 2017, Compared to Six Months Ended June 30, 2016 (in thousands, except for percentages):
Consolidated
| | | | | | | | | | | | | | | Six Months Ended June 30, | | Increase or (Decrease) | | 2017 | | 2016 | | Amount | Percent | Revenue | $ | 83,860 |
| | $ | 165,481 |
| | $ | (81,621 | ) | (49.3)% | Cost of revenue | 100,378 |
| | 145,714 |
| | (45,336 | ) | (31.1)% | Gross profit (loss) | (16,518 | ) | | 19,767 |
| | (36,285 | ) | (183.6)% | Gross profit (loss) percentage | (19.7 | )% | | 11.9 | % | | | | General and administrative expenses | 8,570 |
| | 9,547 |
| | (977 | ) | (10.2)% | Asset impairment | 389 |
| | — |
| | 389 |
| 100.0% | Operating income (loss) | (25,477 | ) | | 10,220 |
| | (35,697 | ) | (349.3)% | Other income (expense): | | | | | | | Interest expense | (217 | ) | | (138 | ) | | (79 | ) | | Interest income | 12 |
| | 8 |
| | 4 |
| | Other income (expense), net | (257 | ) | | 440 |
| | (697 | ) | | Total other income (expense) | (462 | ) | | 310 |
| | (772 | ) | (249.0)% | Net income (loss) before income taxes | (25,939 | ) | | 10,530 |
| | (36,469 | ) | (346.3)% | Income tax expense (benefit) | (8,561 | ) | | 4,001 |
| | (12,562 | ) | (314.0)% | Net income (loss) | $ | (17,378 | ) | | $ | 6,529 |
| | $ | (23,907 | ) | (366.2)% |
Revenue - Our revenue for the six months ended June 30, 2017 and 2016, was $83.9 million and $165.5 million, respectively, representing a decrease of 49.3%. The decrease is primarily attributable to an overall decrease in work experienced in our facilities as a result of depressed oil and gas prices and the corresponding reduction in customer demand within all of our operating divisions. Pass-through costs as a percentage of revenue were 41.9% and 37.6% for the six months ended June 30, 2017 and 2016, respectively. Pass-through costs, as described in Note 3 of the Notes to Consolidated Financial Statements, are included in revenue but have no impact on the gross profit recognized on a project for a particular period.
Gross profit (loss) - Our gross loss for the six months ended June 30, 2017, was $16.5 million compared to a gross profit of $19.8 million for the six months ended June 30, 2016. The decrease was primarily due to $10.6 million of losses incurred by our Shipyards division related to cost overruns and re-work identified on two vessel contracts assigned in the LEEVAC transaction, decreased revenue as discussed above, holding costs related to our South Texas assets of $2.5 million and lower margins on current work. This was partially offset by decreases in costs resulting from reductions in workforce as we wrapped up and completed projects at our South Texas fabrication yards and Prospect shipyard, suspended depreciation for our South Texas assets and Prospect shipyard during the six months ended June 30, 2017, as these assets are classified as assets held for sale and additional cost cutting measures implemented by management.
General and administrative expenses - Our general and administrative expenses were $8.6 million for the six months ended June 30, 2017, compared to $9.5 million for the six months ended June 30, 2016. The decrease in general and administrative expenses for the six months ended June 30, 2017, was primarily attributable to lower bonuses accrued during 2017 as a result of a combination of a smaller workforce and our consolidated gross loss and cost cutting measures implemented by management during the first part of 2016.
Asset Impairment - During the six months ended June 30, 2017, we recorded an impairment of $389,000 related to our assets held for sale at our Prospect Shipyard. See also Note 2 of the Notes to Consolidated Financial statements.
Other income (expense), net - Other expense was $257,000 for the six months ended June 30, 2017, compared to other income of $440,000 for the six months ended June 30, 2016. Other expense for the period was primarily due to losses on sales of two drydocks from our Shipyards division. Other income for the prior period was primarily due to gains on sales of assets from our Fabrication division recorded during the first quarter of 2016.
Income tax expense (benefit) - Our effective income tax rate for the six months ended June 30, 2017, was 33.0%, compared to an effective tax rate of 38.0% for the comparable period during 2016. The decrease in the effective tax rate is the result of limitations on the deductibility of executive compensation.
Operating Segments
As discussed above and in Note 8 of the Notes to Consolidated Financial Statements, management reduced its allocation of corporate administrative costs and overhead expenses to its operating divisions during the three and six months ended June 30, 2017. We have recast our 2016 segment data below in order to conform to the current period presentation. Our results of our three operating divisions and Corporate division for the six months ended June 30, 2017 and 2016, are presented below (in thousands, except for percentages).
| | | | | | | | | | | | | | | | Fabrication | | Six Months Ended June 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | 24,199 |
| | $ | 48,125 |
| | $ | (23,926 | ) | | (49.7)% | Gross profit (loss) | | (1,034 | ) | | 3,964 |
| | (4,998 | ) | | (126.1)% | Gross profit (loss) percentage | | (4.3 | )% | | 8.2 | % | | | | (12.5)% | General and administrative expenses | | 1,654 |
| | 1,936 |
| | (282 | ) | | (14.6)% | Operating income (loss) | | (2,688 | ) | | 2,028 |
| | | | |
Revenue - Revenue from our Fabrication division decreased $23.9 million for the six months ended June 30, 2017, compared to the six months ended June 30, 2016. The decrease is attributable to an overall decrease in work experienced in our fabrication yards as a result of depressed oil and gas prices and the corresponding reduction in customer demand for offshore fabrication projects. As discussed above, management has classified our South Texas assets as assets held for sale in response to the underutilization of our Fabrication assets. As of June 30, 2017, all of our projects at our South Texas fabrication yards have been completed or transferred to our Houma fabrication yard.
Gross profit (loss) - Gross loss from our Fabrication division for the six months ended June 30, 2017, was $1.0 million compared to a gross profit of $4.0 million for the six months ended June 30, 2016. The decrease was due to lower revenue from decreased fabrication work as discussed above and approximately $2.5 million of holding costs for our South Texas assets as we market them for sale. This was partially offset by decreases in costs resulting from reductions in workforce as we wrapped up and completed projects at our South Texas fabrication yards, reduced depreciation being recorded for our South Texas assets for the six months ended June 30, 2017, as these assets are classified as assets held for sale on February 23, 2017, and additional cost cutting measures implemented by management.
General and administrative expenses - General and administrative expenses for our Fabrication division decreased $282,000 for the six months ended June 30, 2017, compared to the six months ended June 30, 2016. The decrease is primarily due to decreases in costs resulting from reductions in workforce as we wrapped up and completed projects at our South Texas fabrication yards and lower bonuses accrued during 2017 as a result of a combination of a smaller workforce and our consolidated gross loss. This was partially offset by expenses incurred to market our South Texas assets for sale and payment of termination benefits during the first quarter of 2017 as we reduced its workforce and completed those operations.
| | | | | | | | | | | | | | | | Shipyards | | Six Months Ended June 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue (1) | | $ | 36,724 |
| | $ | 63,493 |
| | $ | (26,769 | ) | | (42.2)% | Gross profit (loss) (1) | | (15,556 | ) | | 7,797 |
| | (23,353 | ) | | (299.5)% | Gross profit (loss) percentage | | (42.4 | )% | | 12.3 | % | | | | (54.7)% | General and administrative expenses | | 1,947 |
| | 2,750 |
| | (803 | ) | | (29.2)% | Asset impairment | | 389 |
| | — |
| | 389 |
| | 100.0% | Operating income (loss) (1) | | (17,892 | ) | | 5,047 |
| | | | |
___________
| | (1) | Revenue for the six months ended June 30, 2017, and 2016, includes $1.9 million and $2.7$1.6 million of non-cash amortization of deferred revenue related to the values assigned to the contracts acquired in the LEEVAC transaction, respectively. |
Revenue - Revenue from our Shipyards division decreased $26.8 millionShipyard Division increased $143,000 for the sixthree months ended June 30, 2017,March 31, 2018, compared to the sixthree months ended June 30, 2016, dueMarch 31, 2017. During the first quarter of 2018, we were able to depressed oilmake progress on the construction of eight harbor tugs and gas pricesan offshore research vessel which were not under construction during the first quarter of 2017. This was partially offset by lower revenue from construction of our two OSV and two MPSV vessel contracts during the corresponding reduction in customer demand for shipbuilding and repair services supporting the oil and gas industry. first quarter of 2018.
During the first quarter of 2017, we completed a vessel that we assumed in the LEEVAC transactionfirst of the OSVs and deliveredtendered it for delivery on February 6, 2017, and suspended construction of the second OSV due to a customer on February 6, 2017.
Gross profit (loss) - Gross lossdispute. We recommenced construction of the second OSV during the fourth quarter of 2017 which is scheduled for completion during the second quarter of 2018. During the first quarter of 2018, we received a notice of purported termination from a customer within our Shipyards division was $15.6 million for the six months ended June 30, 2017, compared to a gross profit of $7.8 million for the six months ended June 30, 2016. The decrease was due to:
$10.6 million in contract lossesShipyard Division related to cost overrunsthe construction of two MPSVs. We dispute the purported termination and re-work thatdisagree with the customer’s reasons for same. Pending resolution of the dispute, all work has been identified on two contracts assigned to usstopped and the vessels and associated equipment and material are in the LEEVAC transaction;
holdingour care and closing costs related tocustody at our Prospect shipyard as we wind down operations at this facility;
holding costs related to a completed vessel that was delivered on February 6, 2017; however, was refused by our customer alleging certain technical deficiencies (see alsoin Houma, Louisiana. See Note 9 of the Notes to Consolidated Financial Statements);Statements for additional information relating to this customer dispute.
Gross profit (loss) - Gross loss from our Shipyard Division was $1.0 million for the three months ended March 31, 2018, compared to a gross loss of $1.7 million for the three months ended March 31, 2017. The decrease was due to improved cost management efforts and efficiencies learned from the construction of two OSV and two MPSV vessels during the three months ended March 31, 2017, and applied to the construction of eight harbor tugs during the three months ended March 31, 2018. overall decreases in work under other various contracts as discussed above.
General and administrative expenses - General and administrative expenses for our Shipyards divisionShipyard Division decreased $803,000$168,000 for the sixthree months ended June 30, 2017,March 31, 2018, compared to the sixthree months ended June 30, 2016,March 31, 2017, primarily due to lower bonuses accrued during 2017reductions in workforce, decreases in corporate allocations as a resultportion of a combination of a smaller workforcethese are now allocated to our EPC Division and our consolidated gross loss and cost cutting measures implemented by management during the first part of 2016.decreased construction activity.
Asset Impairmentimpairment - During sixthe three months ended June 30,March 31, 2017, we recorded an impairment of $389,000 related to ourthe Shipyard Division assets held for sale at our Prospect shipyard.sale. See also Note 2 of the Notes to Consolidated Financial statements.Statements for additional information relating to our assets held for sale. We did not record any asset impairment during the three months ended March 31, 2018, in our Shipyard Division.
| | Services | | Six Months Ended June 30, | | Increase or (Decrease) | | Three Months Ended March 31, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | | 2018 | | 2017 | | Amount | | Percent | Revenue | | $ | 26,107 |
| | $ | 55,251 |
| | $ | (29,144 | ) | | (52.7)% | | $ | 21,870 |
| | $ | 10,712 |
| | $ | 11,158 |
| | 104.2% | Gross profit (loss) | | 423 |
| | 8,240 |
| | (7,817 | ) | | (94.9)% | | 2,614 |
| | 33 |
| | 2,581 |
| | 7,821.2% | Gross profit (loss) percentage | | 1.6 | % | | 14.9 | % | | | | (13.3)% | | 12.0 | % | | 0.3 | % | | | |
| General and administrative expenses | | 1,313 |
| | 1,519 |
| | (206 | ) | | (13.6)% | | 734 |
| | 666 |
| | 68 |
| | 10.2% | Operating income (loss) | | (890 | ) | | 6,721 |
| | | | | $ | 1,880 |
| | $ | (633 | ) | | $ | 2,513 |
| |
|
Revenue - Revenue from our Services division decreased $29.1Division increased $11.2 million for the sixthree months ended June 30, 2017,March 31, 2018, compared to the sixthree months ended June 30, 2016,March 31, 2017, due to an overall decreaseincrease in work experienced as a result of depressed oil and gas prices and the corresponding reductiondue to increases in customer demand for offshore oil and gas related service projects.
Gross profit - Gross profit from our Services division decreased $7.8Division increased $2.6 million for the sixthree months ended June 30, 2017,March 31, 2018, compared to the sixthree months ended June 30, 2016,March 31, 2017, due to decreasedincreased revenue discussed above and lower margins on new work performed during 2017.above.
General and administrative expenses - General and administrative expenses for our Services division decreased $206,000Division increased $68,000 for the sixthree months ended June 30, 2017,March 31, 2018, compared to the sixthree months ended June 30, 2016,March 31, 2017, due to lower bonuses accrued during 2017support of increased work as well as increases in employee incentive compensation of approximately $120,000 resulting from increased operating income. This was partially offset by decreases in corporate allocations as a resultportion of a combination of a smaller workforcethese are now allocated to our EPC Division and our consolidated gross loss.continued cost minimization efforts implemented by management for the period.
| | | | | | | | | | | | | | | | Corporate | | Six Months Ended June 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | — |
| | $ | — |
| | $ | — |
| | —% | Gross profit (loss) | | (351 | ) | | (234 | ) | | (117 | ) | | (50.0)% | Gross profit (loss) percentage | | n/a |
| | n/a |
| | | |
| General and administrative expenses | | 3,656 |
| | 3,342 |
| | 314 |
| | 9.4% | Operating income (loss) | | (4,007 | ) | | (3,576 | ) | | (431 | ) | | |
| | | | | | | | | | | | | | | | EPC | | Three Months Ended March 31, | | Increase or (Decrease) | | | 2018 | | 2017 | | Amount | | Percent | Revenue | | 73 |
| | $ | — |
| | $ | 73 |
| | 100.0% | Gross profit (loss) | | (308 | ) | | — |
| | (308 | ) | | (100.0)% | Gross profit (loss) percentage | | n/a |
| | n/a |
| | | |
| General and administrative expenses | | 417 |
| | — |
| | 417 |
| | 100.0% | Operating income (loss) | | $ | (725 | ) | | $ | — |
| | $ | (725 | ) | |
|
Revenue - Our EPC Division did not exist at March 31, 2017. Revenue for the three months ended March 31, 2018 consists of early work and engineering studies authorized by SeaOne. See Note 8 of the Notes to Consolidated Financial Statements for further discussion of our EPC Division and the SeaOne Project.
Gross profit (loss) - Gross loss from our EPC Division occurred as we added personnel and overhead infrastructure related to the anticipated SeaOne project.
General and administrative expenses - General and administrative expenses for our EPC Division include the addition of personnel and allocations of corporate expenses as we invest in this new line of business. | | | | | | | | | | | | | | | | Corporate | | Three Months Ended March 31, | | Increase or (Decrease) | | | 2018 | | 2017 | | Amount | | Percent | Revenue | | $ | — |
| | $ | — |
| | $ | — |
| | —% | Gross profit (loss) | | $ | (385 | ) | | (260 | ) | | 125 |
| | 48.1% | Gross profit (loss) percentage | | n/a |
| | n/a |
| | | | | General and administrative expenses | | 2,138 |
| | 1,479 |
| | 659 |
| | 44.6% | Operating income (loss) | | $ | (2,523 | ) | | $ | (1,739 | ) | | $ | 784 |
| |
|
Gross profit (loss) - Gross loss from our Corporate divisionDivision increased primarily due to a restructuringlower allocation of our corporate division with additional personnel allocated to our corporate division during 2017expenses and as discussed above.well as increased insurance costs.
General and administrative expenses - General and administrative expenses for our Corporate divisionDivision increased primarily due to a restructuringincreased legal and advisory fees related to customer disputes, strategic planning and diversification of our corporate division with additional personnel allocated to our corporate division during 2017 as discussed above as well as for expenses incurred for advisors to assist in a strategic financial analysis project in anticipationbusiness, increased employee incentive accruals and higher stock compensation expense of the proceeds to be received from the sale of our South Texas assets. This has been partially offset by lower bonuses accrued during 2017 as a result of a combination of a smaller workforce and our consolidated gross loss.approximately $220,000.
Liquidity and Capital Resources Historically, we have fundedOur immediate liquidity remains dependent on our business activities through cash generatedon hand, anticipated proceeds from operations.the sales of assets, availability of future drawings from our Credit Agreement and collections of accounts receivable. At June 30, 2017,March 31, 2018, we had no amounts$10 million outstanding under our credit facility, $4.6Credit Agreement, $2.5 million in outstanding letters of credit, and cash and cash equivalents totaling $22.3$6.5 million compared to $51.2$9.0 million at December 31, 2016. 2017. As of May 4, 2018, our liquidity has significantly improved due to the sale of our Texas South Yard the net proceeds of which will be used to rebuild our liquidity, to support upcoming projects, continue investing in our newly created EPC Division and for other general corporate purposes. After the sale of our Texas South Yard, our cash balance was $55.0 million, and the amount outstanding under our Credit Agreement was $10 million with remaining availability under our Credit Agreement of approximately $27.5 million for total liquidity of approximately $82.5 million.
Working capital was $167.7$137.1 million and our ratio of current assets to current liabilities was 4.624.34 to 1 at June 30, 2017,March 31, 2018, compared to $78.0$130.5 million and 3.213.68 to 1, respectively, at December 31, 2016.2017. Working capital at June 30, 2017,March 31, 2018, includes $107.3$98.4 million related to assets held for sale, primarily related to our South Texas facilities. Properties which decreased after the sale of our Texas South Yards to $48.5 million. At March 31, 2018, our contracts receivable balance was $27.4 million of which we have subsequently collected $14.9 million through May 4, 2018. Our primary use of cash during the sixthree months ended June 30, 2017,March 31, 2018, is referenced in the Cash Flow Activities section below. At June 30, 2017,As discussed in our contracts receivable balance was $38.1 millionExecutive Summary, we are implementing several strategies to diversify our business, increase backlog, reduce operating expenses and monetize assets. Our South Texas Properties are held for sale. A significant portion of which we have subsequently collected $12.0 million through July 19, 2017.our near-term plan is to generate liquidity from the sale of these assets.
On April 20, 2018, we closed on the sale of our Texas South Yard for a sale price of $55 million, less selling costs of $1.5 million. We received approximately $52.7 million at closing, which was in addition to the $750,000 of earnest money previously received on January 3, 2018, related to the option to purchase the Texas South Yard. We plan to use the net proceeds to rebuild our liquidity, to support upcoming projects, continue investing in our newly created EPC Division and for other general corporate purposes. See further discussion of the sale of our Texas South Yard in Note 2 of the Notes to Consolidated Financial Statements. We currently believe that cash on hand coupled with proceeds received from the sale of our Texas South Yard and funds available under our Credit Agreement will enable the Company to meet its working capital needs, capital expenditure requirements, any debt service obligations and other funding requirements for at least the twelve months from the date of this Report.
As of the date of this Report our Texas North Yard remains held for sale. The book value of the Texas North Yard is $46.6 million at March 31, 2018. We will continue to incur costs associated with holding and maintaining our Texas North Yard. These costs include insurance, general maintenance of the properties in their current state, property taxes and retained employees which will be expensed as incurred.
We have a $40 million Credit Agreement maturing June 9, 2017, we entered into a $40.0 million credit agreement with Whitney Bank, as lender (the “New2019. The Credit Facility”). The New Credit Facility matures June 9, 2019 and may be usedAgreement allows the Company to use up to the full amount of the available borrowing base for issuing letters of credit and/orand general corporate and working capital purposes. We believe that the new facilityour Credit Agreement will provide us with additional working capital flexibility to expand operations as backlog improves, respond to market opportunities and support our ongoing operations.
Interest on drawings under the New Credit FacilityAgreement may be designated, at our option, as either Base Rate (as defined in the New Credit Facility)credit facility) or LIBOR plus 2.0%2% per annum. Our outstanding balance of $10 million at March 31, 2018, is designated as a LIBOR rate loan. Unused commitment fees on the undrawn portion of the facilityCredit Agreement are 0.4% per annum, and the letter of credit feeinterest on undrawn stated amounts under letters of credit issued by the lenders are 0.4%lender is 2% per annum and 2.0%annum. At March 31, 2018, the interest rate on our outstanding borrowings was 3.75% per annum, respectively.annum. The New Credit FacilityAgreement is secured by substantially all of our assets (other than the assetsSouth Texas Properties).
At March 31, 2018, $10 million was outstanding under the Credit Agreement and, we had letters of Gulf Marine Fabricators, L.P.,credit of $2.5 million outstanding leaving availability of $27.5 million. Subsequent to March 31, 2018, we re-issued a letter of credit for $3 million related to outstanding contractual obligations which are currently held for sale).we expect to remain outstanding until July of 2018.
We must comply with the following financial covenants each quarter during the term of the facility:Credit Agreement:
| | i. | ratioRatio of current assets to current liabilities of not less than 1.25:1.00; |
| | ii. | minimumMinimum tangible net worth requirement of at least the sum of: |
| | a) | $230.0185 million, plus |
| | b) | anAn amount equal to 50% of consolidated net income for each fiscal quarter ending after June 30, 2017, including 50% of any gain attributable to the sale of our South Texas Properties (with no deduction for a net loss in any such fiscal quarter except for any gain or loss in connection with the sale of assets by Gulf Marine Fabricators, L.P.)quarter), plus |
| | c) | 100% of all netthe proceeds of any issuance of any stock or other equity after deducting of any fees, commissions, expenses and other costs incurred in such offering; and |
| | iii. | ratioRatio of funded debt to tangible net worth of not more than 0.50:1.00. |
Concurrent with our execution of the New Credit Facility, we terminated our prior credit facility with JPMorgan Chase Bank, N.A. At the time of the termination, there was approximately $4.6 million of letters of credit outstanding, all of which was temporarily cash collateralized by us. Subsequent to June 30, 2017, we were able to reissue new letters of credit under the New Credit Facility, of which $4.6 million have been accepted by the beneficiaries, and we have been released from cash collateral requirements. Availability under our credit facility for future, additional letters of credit and borrowings is $35.4 million. As of June 30, 2017,March 31, 2018, we were in compliance with all of our financial covenants.
We will continue to monitor and preserve our cash. Our primary liquidity requirements for 2018 and beyond are for the costs associated with fabrication and shipyard projects, capital expenditures related to the creation of our EPC Division and payment of dividendsenhancements to our shareholders.shipyards. Future capital expenditures will be highly dependent upon the amount and timing of future projects. Capital expenditures for the quarter ended March 31, 2018, were $71,000. We do not anticipate significant capital expenditures for the remainder of 20172018.
If industry conditions for offshore oil and gas do not improve, we are unable to range between $2.0 millionsell our Texas North Yard or the sale is delayed, or we are unable to $5.0 million primarily forincrease our backlog, we would expect to take additional measures to preserve our cash flows until such time we are able to generate cash flows from operations. Since the following:
improvementsbeginning of 2016, we have implemented wage adjustments along with employee benefit and overall cost reductions within all of our divisions. We have reduced the level of our workforce in the past and we will continue to do so based on booked work in all of our facilities. We have reduced the compensation paid to our Jenningsdirectors and Lake Charles leased shipyards,
improvementthe salaries of our executive officers, and we have reduced our capital expenditures and placed assets that are either underutilized, under-performing or not expected to the bulkhead atprovide sufficient long-term value for sale, which include our Houma facility, and
computer system upgrades.
South Texas Properties.
On October 21, 2016, a customer of our Shipyards division announced it was in noncompliance with certain financial covenants included in the customer’s debt agreements and stated that, while it had received limited waivers from its lenders, its debt agreements would require further negotiation and amendment. This same customer rejected delivery of the first vessel that we completed and tendered for delivery on February 6, 2017, alleging certain technical deficiencies exist with respect to the vessel and is seeking recovery of all purchase price amounts previously paid by the customer under the contract. On March 10, 2017, we gave notice for arbitration with our customer in an effort to resolve this matter. We are also building a second vessel for this customer which has been suspended and included in our arbitration proceedings. We disagree with our customer concerning these alleged technical deficiencies and have put the customer in default under the terms of the contracts for both vessels. On May 17, 2017, the customer filed for protection under Chapter 11 of the United States Bankruptcy Code for reorganization under a negotiated, pre-packaged plan. The customer has petitioned the Bankruptcy Court to accept our contracts for the two vessels we are constructing for them. As of June 30, 2017, approximately $4.6 million remained due and outstanding from our customer for the first vessel. The balance due to us for the second vessel upon completion and delivery is approximately $4.9 million.
We are working with legal counsel to protect our contractual claims during the restructuring and intend to re-initiate our rights for arbitration in accordance with our contract upon our customer's emergence from Chapter 11 reorganization. We intend to take all legal action as may be necessary to protect our rights under the contracts and recover the remaining balances owed to us.
We continue to monitor our work performed in relation to our customer’s status and its ability to pay under the terms of these contracts. Because these vessels have been completed or are substantially complete, wecurrently believe that they have significant fair valuecash on hand and that we wouldfunds available under our Credit Agreement will be ablesufficient to fully recovermeet our working capital and capital expenditure requirements, any remaining amounts due to us infuture debt service and other funding requirements for at least twelve months from the event we enforcedate of this Report. Our view regarding sufficiency of cash and liquidity is primarily based on our security interest over these projects.
In anticipation of the proceeds to be received fromfinancial forecast for 2018 and early 2019, which is impacted by various assumptions regarding the sale of our South Texas assets, we engaged advisors to assist in the development of a capital deployment plan to determine the appropriate use of proceeds from this transaction to maximize long-term shareholder value. Our capital deployment plan includes a variety of investment options including investing in our operating liquidity in order to facilitate anticipated future projects, selected capital improvements to enhance and/or expandNorth Yard, our existing facilities, mergersbacklog and acquisitionsa reasonable amount of forecast, non-contractual backlog. There is no guarantee that our financial forecast will be attainable or that we will have sufficient cash, including funds available under our Credit Agreement, to expand our product and service capabilitiesmeet planned operating expenses and other optionsunforeseen cash requirements. Accordingly, we may be required to return surplus resources to shareholders either through stock buy-backs and/or special dividends. We are continuing this effort to identify and analyze specific investment opportunities we believe will enhance the long-term value of the Company and that are consistent with our strategy.
On July 27, 2017, our Board of Directors declared a dividend of $0.01 per sharefurther draw on our shares of common stock outstanding, payable August 24, 2017,Credit Agreement, obtain additional bank financing, sell additional assets or conduct equity or debt offerings at a time when it is not beneficial to shareholders of record on August 10, 2017.do so.
We believe our cash and cash equivalents generated by our future operating activities and proceeds to be received from future assets sales will be sufficient to fund our capital expenditures and meet our working capital needs for both the near and longer term to continue our operations, satisfy our contractual operations and pay dividends to our shareholders.
Cash Flow Activities
For the sixthree months ended June 30, 2017,March 31, 2018, net cash used in operating activities was $27.9$14.1 million, compared to net cash provided byused in operating activities of $11.8$15.1 million for the sixthree months ended June 30, 2016.March 31, 2017. The use of cash in operations during the period was primarily due to the following:
Operating losses for the sixthree months ended June 30, 2017,March 31, 2018, in excess of non-cash depreciation, amortization, impairment and stock compensation expense of approximately $17.9 million,$1.5 million; Payment of year-end bonuses related to 2016,
Progress on liabilities from assumed contracts in the LEEVAC transaction. While our purchase price for the acquisition of the LEEVAC assets during 2016 was $20.0 million, we received a net $3.0 million in cash from the seller for the assumption of certain net liabilities and settlement payments on ongoing shipbuilding projects of $23.0 million that were assigned to us in the transaction. We have significantly progressed these contracts, which in turn has resulted in utilization of the working capital and settlement payments received during 2016.
The suspension of two vessel projects following our customer’s refusal to accept delivery of the first vessel in February 2017, and our inability to collect $9.5 million in scheduled payments under these contracts. We have initiated arbitration proceedings during the quarter to enforce our rights under these contracts; and
Build-up of costs for contracts in progress of $9.1 million;
Build-up of retainage on projects of $1.5 million; and
Payment of property taxes related to a customer in our Shipyards division with significant milestone payments occurring in the later stagesSouth Texas Properties of the projects which are expected to occur beginning in the third quarter of 2017 through the first quarter of 2018.$2 million.
Net cash provided by investing activities for the sixthree months ended June 30, 2017,March 31, 2018, was $296,000,$2.4 million, compared to cash provided byused in investing activities of $3.8 million$391,000 for the sixthree months ended June 30, 2016.March 31, 2017. The change in cash provided byused in investing activities is primarily due to cashthe insurance proceeds received from the sale of three cranesfor hurricane damage to assets at our South Texas facility for $5.5 million and $1.6 million of cash acquired in the LEEVAC transaction during 2016.Properties.
Net cash used inprovided by financing activities for the sixthree months ended June 30,March 31, 2018, and 2017, and 2016, was $1.2$9.2 million and $441,000, respectively. The increasecompared to $1.0 million in cash used in financing activities, respectively. The increase in cash provided by financing activities is due to the cash payments made to taxing authorities on behalf of employees' for their vesting of common stock.$10 million in net borrowings under our Credit Agreement.
Contractual Obligations There have been no material changes from the information included in our 2017 Annual Report on Form 10-K for the year ended December 31, 2016.Report. For more information on our contractual obligations, refer to Part II, Item 7 of our 2017 Annual Report on Form 10-K for the year ended December 31, 2016.Report. Off-Balance Sheet Arrangements There have been no material changes from the information included in our 2017 Annual Report on Form 10-K for the year ended December 31, 2016.Report. Item 3. Quantitative and Qualitative Disclosures About Market Risk. There have been no material changes in the Company’s market risks during the quarter ended June 30, 2017.March 31, 2018. For more information on market risk, refer to Part II, Item 7A. of our Annual Report on Form 10-K for the year ended December 31, 2016.2017. Item 4. Controls and Procedures. The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and that such information is communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report.Report. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that the design and operation of our disclosure controls and procedures were effective as of the end of the period covered by this report.Report. There have been no changes during the fiscal quarter ended June 30, 2017,March 31, 2018, in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION Item 1. Legal Proceedings. The Company is subject to various routine legal proceedings in the normal conduct of its business primarily involving commercial claims, workers’ compensation claims, and claims for personal injury under general maritime laws of the United States and the Jones Act. While the outcome of these lawsuits, legal proceedings and claims cannot be predicted with certainty, management believes that the outcome of any such proceedings, even if determined adversely, would not have a material adverse effect on the financial position, results of operations or cash flows of the Company. Item 1A. Risk Factors. There have been no material changes from the information included in Item 1A “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2016.2017. Item 6. Exhibits. | | | | | Exhibit Number | | Description of Exhibit | | | 3.1 | | | 3.2 | | | 10.1 | |
| 10.2 | |
| 10.3 | | | 10.2 | | Credit Agreement dated June 9, 2017, incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed June 9, 2017.February 26, 2018. †
| 10.4 | |
| 31.1 | | | 31.2 | | | 32 | | | | | | 101 | | Attached as Exhibit 101 to this report are the following items formatted in XBRL (Extensible Business Reporting Language): | | | (i) | Consolidated Balance Sheets, | | | (ii) | Consolidated Statements of Operations, | | | (iii) | Consolidated Statement of Changes in Shareholders’ Equity, | | | (iv) | Consolidated Statements of Cash Flows, and | | | (v) | Notes to Consolidated Financial Statements. | | | | † | | Management Contract or Compensatory Plan. |
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this reportReport to be signed on its behalf by the undersigned thereunto duly authorized. | | | GULF ISLAND FABRICATION, INC. | | BY: | /s/ David S. Schorlemer | | David S. Schorlemer | | Executive Vice President, Chief Financial Officer, Secretary and Treasurer (Principal Financial and Accounting Officer) |
Date: August 1, 2017May 4, 2018
GULF ISLAND FABRICATION, INC.
EXHIBIT INDEX
| | | | | Exhibit
Number
| | Description of Exhibit | | | 3.1 | | Composite Articles of Incorporation of the Company incorporated by reference to Exhibit 3.1 of the Company’s Form 10-Q filed April 23, 2009. | 3.2 | | Amended and Restated Bylaws of the Company, incorporated by reference to Exhibit 3.1 of the Company’s Form 8-K filed November 4, 2016. | 10.1 | | Change of Control Agreement, dated March 1, 2017, between the Company and David S. Schorlemer, incorporated by reference to Exhibit 10.15 of the Company's Form 10-K for the year ended December 31, 2016 filed on March 2, 2017. | 10.2 | | Credit Agreement dated June 9, 2017, incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed June 9, 2017. | 31.1 | | CEO Certifications pursuant to Rule 13a-14 under the Securities Exchange Act of 1934. | 31.2 | | CFO Certifications pursuant to Rule 13a-14 under the Securities Exchange Act of 1934. | 32 | | Section 906 Certification furnished pursuant to 18 U.S.C. Section 1350. | | | | 101 | | Attached as Exhibit 101 to this report are the following items formatted in XBRL (Extensible Business Reporting Language): | | | | | | (i) | Consolidated Balance Sheets, | | | (ii) | Consolidated Statements of Operations, | | | (iii) | Consolidated Statement of Changes in Shareholders’ Equity, | | | (iv) | Consolidated Statements of Cash Flows and | | | (v) | Notes to Consolidated Financial Statements. |
s | Labor hours | | ___________
| | (1) | We exclude suspended projects from contract backlog when they are expected to be suspended more than 12 months because resumption of work and timing of revenue recognition for these projects are difficult to predict. |
| | (2) | At June 30, 2017,March 31, 2018, projects for our five largest customers in terms of revenue backlog consisted of: |
| | (i) | twoTwo large multi-purpose service vesselsMPSVs for one customer in our Shipyards division,for which commenced in the first quarterwe have received a purported notice of 2014 and will be completed during the first and second quarters of 2018;termination as discussed above; |
| | (ii) | newbuildNewbuild construction of fourfive harbor tugs for one customer within our Shipyards division;(to be completed in 2018 through 2020); |
(iii) newbuild construction of four harbor tugs for one additional customer within our Shipyards division;
| | (iii) | Newbuild construction of five harbor tugs for one customer (separate from above) (to completed in 2018 through 2020); |
| | (iv) | the fabricationNewbuild construction of four modules associated with a U.S. ethane cracker project within our Fabrication division;an offshore research vessel (to be completed in 2020); and |
(v) newbuild construction of an offshore research vessel within our Shipyards division.
| | (3)(v) | Newbuild construction of one T-ATS vessel (to be completed in 2020). This contract is currently under a bid protest. |
| | (2) | The timing of recognition of the revenue represented in our backlog is based on management’s current estimates to complete the projects. Certain factors and circumstances could cause changes in the amounts ultimately recognized and the timing of the recognition of revenue from our backlog. |
Depending on
Certain of our contracts contain options which grant the sizeright to our customer, if exercised, for the construction of the project, the termination, postponement, or reductionadditional vessels at contracted prices.We do not include options in scope of any one project could significantly reduce our backlog above. If all options under our current contracts were exercised, our backlog would increase by $626.2 million. We believe disclosing these options provides investors with useful information in order to evaluate additional potential work that we would be contractually obligated to perform under our current contracts as well as the potential significance of these options, if exercised. We have not received any commitments related to the exercise of these options from our customers, and could have a material adverse effect on revenue, net income and cash flow. Additionally, as we continue tocan provide no assurance that any or all of these options will be exercised. As we add backlog, we will begin addingadd personnel with critical project management and fabrication skills to ensure we have the resources necessary to execute our projects well and to support our project risk mitigation discipline for all new project work.projects. This may negatively impact near termnear-term results. As of June 30, 2017,March 31, 2018, we had 983 employees and 166 contract961 employees compared to 1,178 employees and 92 contract977 employees as of December 31, 2016. 2017. Labor hours worked were 1.0 million496,000 during the sixthree months ended June 30, 2017,March 31, 2018, compared to 1.6 million479,000 for the sixthree months ended June 30, 2016.March 31, 2017. The overall decreaseincrease in labor hours worked for the sixthree months ended June 30, 2017,March 31, 2018, was due to an overallimproved offshore demand within our Services Division. As of April 29, 2018, we had 870 employees. The decrease in work experiencedour workforce subsequent to March 31, 2018, is primarily within our Fabrication Division due to completion of complex modules for the construction of a new petrochemical plant with no significant future Fabrication backlog forecasted in the near-term as well as the stoppage of construction of the two MPSVs within our facilities as a result of depressed oil and gas prices and the corresponding reduction in customer demand within allShipyard Division pending resolution of our operating divisions.dispute over termination with our MPSV customer. See Note 9 of the Notes to Consolidated Financial Statements related to our MPSV contract termination dispute.
Results of Operations Three Months Ended June 30, 2017,March 31, 2018, Compared to Three Months Ended June 30, 2016 March 31, 2017 (in thousands, except for percentages): Consolidated | | | | | | | | | | | | | | | Three Months Ended June 30, | | Increase or (Decrease) | | 2017 | | 2016 | | Amount | Percent | Revenue | $ | 45,868 |
| | $ | 81,502 |
| | $ | (35,634 | ) | (43.7)% | Cost of revenue | 57,488 |
| | 67,436 |
| | (9,948 | ) | (14.8)% | Gross profit (loss) | (11,620 | ) | | 14,066 |
| | (25,686 | ) | (182.6)% | Gross profit (loss) percentage | (25.3 | )% | | 17.3 | % | | | | General and administrative expenses | 4,640 |
| | 5,062 |
| | (422 | ) | (8.3)% | Operating income (loss) | (16,260 | ) | | 9,004 |
| | (25,264 | ) | (280.6)% | Other income (expense): | | | | | | | Interest expense | (158 | ) | | (88 | ) | | (70 | ) | | Interest income | 12 |
| | 2 |
| | 10 |
| | Other income (expense), net | (266 | ) | | 42 |
| | (308 | ) | | Total other income (expense) | (412 | ) | | (44 | ) | | (368 | ) | (836.4)% | Net income (loss) before income taxes | (16,672 | ) | | 8,960 |
| | (25,632 | ) | (286.1)% | Income tax expense (benefit) | (5,749 | ) | | 3,420 |
| | (9,169 | ) | (268.1)% | Net income (loss) | $ | (10,923 | ) | | $ | 5,540 |
| | $ | (16,463 | ) | (297.2)% |
| | | | | | | | | | | | | | | Three Months Ended March 31, | | Increase or (Decrease) | | 2018 | | 2017 | | Amount | Percent | Revenue | $ | 57,290 |
| | $ | 37,993 |
| | $ | 19,297 |
| 50.8% | Cost of revenue | 56,611 |
| | 42,890 |
| | 13,721 |
| 32.0% | Gross profit (loss) | 679 |
| | (4,897 | ) | | 5,576 |
| 113.9% | Gross profit (loss) percentage | 1.2 | % | | (12.9 | )% | | | | General and administrative expenses | 4,709 |
| | 3,930 |
| | 779 |
| 19.8% | Asset impairment | 750 |
| | 389 |
| | 361 |
| 92.8% | Operating income (loss) | (4,780 | ) | | (9,216 | ) | | (4,436 | ) |
| Other income (expense): | | | | | | | Interest expense | (469 | ) | | (59 | ) | | (410 | ) | (694.9)% | Other income (expense), net | 12 |
| | 9 |
| | 3 |
| 33.3% | Total other income (expense) | (457 | ) | | (50 | ) | | (407 | ) | (814.0)% | Net loss before income taxes | (5,237 | ) | | (9,266 | ) | | (4,029 | ) | (43.5)% | Income tax expense (benefit) | 59 |
| | (2,812 | ) | | 2,871 |
| 102.1% | Net loss | $ | (5,296 | ) | | $ | (6,454 | ) | | $ | 6,900 |
|
|
Revenue - Our revenue for the three months ended June 30,March 31, 2018 and 2017, and 2016, was $45.9$57.3 million and $81.5$38.0 million, respectively, representing a decreasean increase of 43.7%50.8%. The decreaseincrease is primarily attributable to an overall decrease in work experienced into:
An increase of $11.2 million within our facilities as a result of depressedServices Division from additional demand for offshore oil and gas pricesservice related projects; and An increase of $7.1 million within our Fabrication Division primarily attributable to the corresponding reduction in customer demand within allconstruction of our operating divisions. Pass-through costs asfour modules for a percentage of revenue were 53.1% and 35.1%petrochemical plant.
Gross profit (loss) - Our gross profit for the three months ended June 30, 2017 and 2016, respectively. Pass-through costs, as described in Note 3 of the Notes to Consolidated Financial Statements, are included in revenue but have no impact on the gross profit recognized on a project for a particular period.
Gross profit (loss) - Our gross loss for the three months ended June 30, 2017,March 31, 2018, was $11.6 million$679,000 compared to a gross profitloss of $14.1$4.9 million for the three months ended June 30, 2016.March 31, 2017. The decreaseincrease in gross profit was primarily due to $10.2 million of contract losses incurred byincreased revenue within our Shipyards division related to cost overruns and re-work identified on two vessel contracts assigned in the LEEVAC transaction, decreased revenueServices Division as discussed above holding costsand decreased expenses within our Fabrication Division which included $1.9 million of depreciation expense for the three months ended March 31, 2017, related to our South Texas assets of $1.2 million and lower margins on current work. This was partially offset by decreases in costs resulting from reductions in workforce as we wrapped up and completed projects at our South Texas fabrication yards and Prospect shipyard,Properties with no depreciation being recordedexpense during the three months ended March 31, 2018, for our South Texas assets and Prospect shipyard for the three months ended June 30, 2017,Properties as these assets are classified as assets held for sale and additional cost cutting measures implemented by management.sale.
General and administrative expenses - Our general and administrative expenses were $4.6$4.7 million for the three months ended June 30, 2017,March 31, 2018, compared to $5.1$3.9 million for the three months ended June 30, 2016.March 31, 2017. The decreaseincrease in general and administrative expenses for the three months ended June 30, 2017,March 31, 2018, was primarily attributable to lower bonuses accrued during 2017
Build-up of additional personnel for our newly created EPC Division; Increased legal and advisory fees related to customer disputes, strategic planning and diversification of our business; Increased employee incentive accruals of approximately $300,000 for all divisions related to our safety incentive program and higher employee profitability incentives within our Services Division as a resultwell as the addition of a combinationpersonnel as we build up our EPC Division in anticipation of a smaller workforcethe SeaOne Project; and our consolidated gross loss Higher stock compensation expense of approximately $220,000.
This was partially offset by cost reductions and continued cost cutting measuresminimization efforts implemented by management for the period.
Asset impairment - We recorded an impairment of $750,000 during the first partthree months ended March 31, 2018, related to a piece of 2016.equipment at our Texas North Yard that we intend to sell at auction. This piece of equipment was not damaged by
Other income (expense),Hurricane Harvey. The impairment was calculated as management's estimated net proceeds from the sale less its net book value. See also Note 2 of the Notes to Consolidated Financial Statements for additional information regarding our assets held for sale. During the three months ended March 31, 2017, we recorded an impairment of $389,000 related to the Shipyard Division assets held for sale.
Interest expense- OtherInterest expense was $266,000increased due to drawings under our Credit Agreement for the three months ended June 30, 2017, as compared to other income of $42,000March 31, 2018, with no such drawings under our Credit Agreement for the three months ended June 30, 2016. Other expense forMarch 31, 2017, as well as increased amortization of deferred financing costs during the period was primarily due to losses on the sale of two drydocks from our Shipyards division recorded during three months ended June 30, 2017.March 31, 2018.
Income tax expense (benefit) - Our effective income tax rate for the three months ended June 30, 2017,March 31, 2018, was 34.5%(1.1)%, compared to an effective tax rate benefit of 38.2%30.3% for the comparable period during 2016.2017. Current expense represents state taxes within our Services Division. The decrease in the effective tax rate is the result of limitations on the deductibility of executive compensation. These amount are included in the estimate ofa valuation allowance against our year-end effective rate.
Operating Segments
As discussed indeferred tax assets. See Note 81 of the Notes to Consolidated Financial Statements management reduced its allocation of corporate administrative costsregarding our NOLs and overhead expenses to its operating divisions during the three and six months ended June 30, 2017, such that a significant portion of its corporate expenses are retained in its non-operating Corporate division. In addition, it has also allocated certain personnel previously included in the operating divisions to within the Corporate division. In doing so, management believes that it has created a fourth reportable segment with each of its three operating divisions and its Corporate division each meeting the criteria of reportable segments under GAAP. During the three and six months ended June 30, 2016, we allocated substantially all of our corporate administrative costs and overhead expenses to our three operating divisions. We have recast our 2016 segment data below in order to conform to the current period presentation. Ourdeferred tax assets.
Operating Segments
The results of our threefour operating divisions and Corporate divisionDivision for the three months ended June 30,March 31, 2018 and 2017, and 2016, are presented below (in thousands, except for percentages).
| | | | | | | | | | | | | | | | Fabrication | | Three Months Ended June 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | 13,990 |
| | $ | 24,296 |
| | $ | (10,306 | ) | | (42.4)% | Gross profit (loss) | | 1,931 |
| | 3,877 |
| | (1,946 | ) | | (50.2)% | Gross profit (loss) percentage | | 13.8 | % | | 16.0 | % | | | | (2.2)% | General and administrative expenses | | 833 |
| | 1,130 |
| | (297 | ) | | (26.3)% | Operating income (loss) | | 1,098 |
| | 2,747 |
| | | | |
| | | | | | | | | | | | | | | | Fabrication | | Three Months Ended March 31, | | Increase or (Decrease) | | | 2018 | | 2017 | | Amount | | Percent | Revenue | | $ | 17,270 |
| | $ | 10,209 |
| | $ | 7,061 |
| | 69.2% | Gross profit (loss) | | (219 | ) | | (2,966 | ) | | (2,747 | ) | | (92.6)% | Gross profit (loss) percentage | | (1.3 | )% | | (29.1 | )% | | | |
| General and administrative expenses | | 624 |
| | 821 |
| | (197 | ) | | (24.0)% | Asset impairment | | 750 |
| | — |
| | 750 |
| | 100.0% | Operating income (loss) | | $ | (1,593 | ) | | $ | (3,787 | ) | | $ | (2,194 | ) | |
|
Revenue - Revenue from our Fabrication division decreased $10.3Division increased $7.1 million for the three months ended June 30, 2017,March 31, 2018, compared to the three months ended June 30, 2016.March 31, 2017. The decreaseincrease is attributable to an overall decrease in work experienced in our fabrication yards asthe construction of four modules for a result ofpetrochemical plant during the three months ended March 31, 2018, and lower revenue during the three months ended March 31, 2017, resulting from depressed oil and gas prices and the corresponding reduction in customer demand for offshore fabrication projects. As discussed above, management has classified our South Texas assets as assets held for sale in response toprojects during the underutilizationperiod. This was partially offset, by decreased revenue of our Fabrication assets. As of June 30, 2017, all of our projects at our South Texas fabrication yards have been completed or transferred to our Houma fabrication yard.
Gross profit (loss) - Gross profit from our Fabrication division for the three months ended June 30, 2017, was $1.9 million compared to a gross profit of $3.9$2.4 million for the three months ended June 30, 2016. The decrease was due to lower revenue from decreased fabrication work as discussed above and approximately $1.2 million of holding costs for our South Texas assets. This was partially offset by decreases in costs resulting from reductions in workforce as we wrapped up and completed projectsMarch 31, 2018, at our South Texas fabrication yards, no depreciation being recordedProperties as these were placed for sale during the first quarter of 2017 and project work completed or transfered to our South Texas assetsHouma Fabrication Yard during 2017.
Gross profit (loss) - Gross loss from our Fabrication Division for the three months ended June 30, 2017,March 31, 2018, was $219,000 compared to a gross loss of $3.0 million for the three months ended March 31, 2017. The decrease in gross loss was due to increased revenue as discussed above and a reduction in depreciation expense of $1.9 million in depreciation expense during the three months ended March 31, 2018 for our South Texas Properties as these assets are classified as assets held for sale and additional cost cutting measures implemented by management.sale.
General and administrative expenses - General and administrative expenses for our Fabrication divisionDivision decreased $297,000$197,000 for the three months ended June 30, 2017,March 31, 2018, compared to the three months ended June 30, 2016.March 31, 2017. The decrease is primarily due to decreases in costs resulting from reductions in workforce as we wrapped up and completed projects at our South Texas fabrication yards and lower bonuses accrued during 2017Properties, decreases in corporate allocations as a resultportion of these are now allocated to our EPC Division and continued cost minimization efforts implemented by management for the period.
Asset impairment - We recorded an impairment of $750,000 during the three months ended March 31, 2018, related to a combinationpiece of a smaller workforce andequipment at our consolidated gross loss.Texas North Yard that we intend to sell at auction. This piece of equipment was not damaged by Hurricane Harvey. The impairment was calculated as management's estimated net proceeds from the sale less its net book value. See Note 2 of the Notes to Consolidated Financial Statements for additional information regarding our assets held for sale. We did not record any asset impairments during the three months ended March 31, 2017, within our Fabrication Division.
| | | | | | | | | | | | | | | | Shipyards | | Three Months Ended June 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue (1) | | $ | 18,303 |
| | $ | 29,373 |
| | $ | (11,070 | ) | | (37.7)% | Gross profit (loss) (1) | | (13,851 | ) | | 5,423 |
| | (19,274 | ) | | (355.4)% | Gross profit (loss) percentage | | (75.7 | )% | | 18.5 | % | | | | (94.2)% | General and administrative expenses | | 983 |
| | 1,460 |
| | (477 | ) | | (32.7)% | Operating income (loss) (1) | | (14,834 | ) | | 3,963 |
| | | | |
| | | | | | | | | | | | | | | | Shipyard | | Three Months Ended March 31, | | Increase or (Decrease) | | | 2018 | | 2017 | | Amount | | Percent | Revenue (1) | | $ | 18,565 |
| | $ | 18,422 |
| | $ | 143 |
| | 0.8% | Gross profit (loss) (1) | | (1,023 | ) | | (1,704 | ) | | (681 | ) | | (40.0)% | Gross profit (loss) percentage | | (5.5 | )% | | (9.2 | )% | | | |
| General and administrative expenses | | 796 |
| | 964 |
| | (168 | ) | | (17.4)% | Asset impairment | | — |
| | 389 |
| | (389 | ) | | (100.0)% | Operating income (loss) (1) | | $ | (1,819 | ) | | $ | (3,057 | ) | | $ | (1,238 | ) | |
|
___________ | | (1) | Revenue for the three months ended June 30,March 31, 2018, and 2017, includes $390,000 and 2016, includes $335,000 and $1.5 million of non-cash amortization of deferred revenue related to the values assigned to the contracts acquired in the LEEVAC transaction, respectively. |
Revenue - Revenue from our Shipyards division decreased $11.1 million for the three months ended June 30, 2017, compared to the three months ended June 30, 2016, due to depressed oil and gas prices and the corresponding reduction in customer demand for shipbuilding and repair services supporting the oil and gas industry. During the first quarter of 2017, we completed a vessel that we assumed in the LEEVAC transaction and delivered to a customer on February 6, 2017.
Gross profit (loss) - Gross loss from our Shipyards division was $13.9 million for the three months ended June 30, 2017, compared to a gross profit of $5.4 million for the three months ended June 30, 2016. The decrease was due to:
$10.2 million in contract losses related to cost overruns and re-work that has been identified on two contracts assigned to us in the LEEVAC transaction;
holding and closing costs related to our Prospect shipyard as we wind down operations at this facility;
holding costs related to a completed vessel that was delivered on February 6, 2017; however, was refused by our customer alleging certain technical deficiencies (see also Note 9 of the Notes to Consolidated Financial Statements); and
overall decreases in work under other various contracts as discussed above.
General and administrative expenses - General and administrative expenses for our Shipyards division decreased $477,000 for the three months ended June 30, 2017, compared to the three months ended June 30, 2016, primarily due to lower bonuses accrued during 2017 as a result of a combination of a smaller workforce and our consolidated gross loss and cost cutting measures implemented by management during the first part of 2016.
| | | | | | | | | | | | | | | | Services | | Three Months Ended June 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | 15,396 |
| | $ | 28,692 |
| | $ | (13,296 | ) | | (46.3)% | Gross profit (loss) | | 390 |
| | 4,864 |
| | (4,474 | ) | | (92.0)% | Gross profit (loss) percentage | | 2.5 | % | | 17.0 | % | | | | (14.5)% | General and administrative expenses | | 647 |
| | 800 |
| | (153 | ) | | (19.1)% | Operating income (loss) | | (257 | ) | | 4,064 |
| | | | |
Revenue - Revenue from our Services division decreased $13.3 million for the three months ended June 30, 2017, compared to the three months ended June 30, 2016, due to an overall decrease in work experienced as a result of depressed oil and gas prices and the corresponding reduction in customer demand for oil and gas related service projects.
Gross profit - Gross profit from our Services division decreased $4.5 million for the three months ended June 30, 2017, compared to the three months ended June 30, 2016, due to decreased revenue discussed above and lower margins on new work performed during 2017.
General and administrative expenses - General and administrative expenses for our Services division decreased $153,000 for the three months ended June 30, 2017, compared to the three months ended June 30, 2016, due to lower bonuses accrued during 2017 as a result of a combination of a smaller workforce and our consolidated gross loss.
| | | | | | | | | | | | | | | | Corporate | | Three Months Ended June 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | — |
| | $ | — |
| | $ | — |
| | —% | Gross profit (loss) | | (90 | ) | | (98 | ) | | 8 |
| | 8.2% | Gross profit (loss) percentage | | n/a |
| | n/a |
| | | |
| General and administrative expenses | | 2,177 |
| | 1,672 |
| | 505 |
| | 30.2% | Operating income (loss) | | (2,267 | ) | | (1,770 | ) | |
|
| | |
General and administrative expenses - General and administrative expenses for our Corporate division increased primarily due to a restructuring of our corporate division with additional personnel allocated to our corporate division during 2017 as discussed above as well as for expenses incurred for advisors to assist in a strategic financial analysis project in anticipation of the proceeds to be received from the sale of our South Texas assets. This has been partially offset by lower bonuses accrued during 2017, as a result of a combination of a smaller workforce and our consolidated gross loss.
Six Months Ended June 30, 2017, Compared to Six Months Ended June 30, 2016 (in thousands, except for percentages):
Consolidated
| | | | | | | | | | | | | | | Six Months Ended June 30, | | Increase or (Decrease) | | 2017 | | 2016 | | Amount | Percent | Revenue | $ | 83,860 |
| | $ | 165,481 |
| | $ | (81,621 | ) | (49.3)% | Cost of revenue | 100,378 |
| | 145,714 |
| | (45,336 | ) | (31.1)% | Gross profit (loss) | (16,518 | ) | | 19,767 |
| | (36,285 | ) | (183.6)% | Gross profit (loss) percentage | (19.7 | )% | | 11.9 | % | | | | General and administrative expenses | 8,570 |
| | 9,547 |
| | (977 | ) | (10.2)% | Asset impairment | 389 |
| | — |
| | 389 |
| 100.0% | Operating income (loss) | (25,477 | ) | | 10,220 |
| | (35,697 | ) | (349.3)% | Other income (expense): | | | | | | | Interest expense | (217 | ) | | (138 | ) | | (79 | ) | | Interest income | 12 |
| | 8 |
| | 4 |
| | Other income (expense), net | (257 | ) | | 440 |
| | (697 | ) | | Total other income (expense) | (462 | ) | | 310 |
| | (772 | ) | (249.0)% | Net income (loss) before income taxes | (25,939 | ) | | 10,530 |
| | (36,469 | ) | (346.3)% | Income tax expense (benefit) | (8,561 | ) | | 4,001 |
| | (12,562 | ) | (314.0)% | Net income (loss) | $ | (17,378 | ) | | $ | 6,529 |
| | $ | (23,907 | ) | (366.2)% |
Revenue - Our revenue for the six months ended June 30, 2017 and 2016, was $83.9 million and $165.5 million, respectively, representing a decrease of 49.3%. The decrease is primarily attributable to an overall decrease in work experienced in our facilities as a result of depressed oil and gas prices and the corresponding reduction in customer demand within all of our operating divisions. Pass-through costs as a percentage of revenue were 41.9% and 37.6% for the six months ended June 30, 2017 and 2016, respectively. Pass-through costs, as described in Note 3 of the Notes to Consolidated Financial Statements, are included in revenue but have no impact on the gross profit recognized on a project for a particular period.
Gross profit (loss) - Our gross loss for the six months ended June 30, 2017, was $16.5 million compared to a gross profit of $19.8 million for the six months ended June 30, 2016. The decrease was primarily due to $10.6 million of losses incurred by our Shipyards division related to cost overruns and re-work identified on two vessel contracts assigned in the LEEVAC transaction, decreased revenue as discussed above, holding costs related to our South Texas assets of $2.5 million and lower margins on current work. This was partially offset by decreases in costs resulting from reductions in workforce as we wrapped up and completed projects at our South Texas fabrication yards and Prospect shipyard, suspended depreciation for our South Texas assets and Prospect shipyard during the six months ended June 30, 2017, as these assets are classified as assets held for sale and additional cost cutting measures implemented by management.
General and administrative expenses - Our general and administrative expenses were $8.6 million for the six months ended June 30, 2017, compared to $9.5 million for the six months ended June 30, 2016. The decrease in general and administrative expenses for the six months ended June 30, 2017, was primarily attributable to lower bonuses accrued during 2017 as a result of a combination of a smaller workforce and our consolidated gross loss and cost cutting measures implemented by management during the first part of 2016.
Asset Impairment - During the six months ended June 30, 2017, we recorded an impairment of $389,000 related to our assets held for sale at our Prospect Shipyard. See also Note 2 of the Notes to Consolidated Financial statements.
Other income (expense), net - Other expense was $257,000 for the six months ended June 30, 2017, compared to other income of $440,000 for the six months ended June 30, 2016. Other expense for the period was primarily due to losses on sales of two drydocks from our Shipyards division. Other income for the prior period was primarily due to gains on sales of assets from our Fabrication division recorded during the first quarter of 2016.
Income tax expense (benefit) - Our effective income tax rate for the six months ended June 30, 2017, was 33.0%, compared to an effective tax rate of 38.0% for the comparable period during 2016. The decrease in the effective tax rate is the result of limitations on the deductibility of executive compensation.
Operating Segments
As discussed above and in Note 8 of the Notes to Consolidated Financial Statements, management reduced its allocation of corporate administrative costs and overhead expenses to its operating divisions during the three and six months ended June 30, 2017. We have recast our 2016 segment data below in order to conform to the current period presentation. Our results of our three operating divisions and Corporate division for the six months ended June 30, 2017 and 2016, are presented below (in thousands, except for percentages).
| | | | | | | | | | | | | | | | Fabrication | | Six Months Ended June 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | 24,199 |
| | $ | 48,125 |
| | $ | (23,926 | ) | | (49.7)% | Gross profit (loss) | | (1,034 | ) | | 3,964 |
| | (4,998 | ) | | (126.1)% | Gross profit (loss) percentage | | (4.3 | )% | | 8.2 | % | | | | (12.5)% | General and administrative expenses | | 1,654 |
| | 1,936 |
| | (282 | ) | | (14.6)% | Operating income (loss) | | (2,688 | ) | | 2,028 |
| | | | |
Revenue - Revenue from our Fabrication division decreased $23.9 million for the six months ended June 30, 2017, compared to the six months ended June 30, 2016. The decrease is attributable to an overall decrease in work experienced in our fabrication yards as a result of depressed oil and gas prices and the corresponding reduction in customer demand for offshore fabrication projects. As discussed above, management has classified our South Texas assets as assets held for sale in response to the underutilization of our Fabrication assets. As of June 30, 2017, all of our projects at our South Texas fabrication yards have been completed or transferred to our Houma fabrication yard.
Gross profit (loss) - Gross loss from our Fabrication division for the six months ended June 30, 2017, was $1.0 million compared to a gross profit of $4.0 million for the six months ended June 30, 2016. The decrease was due to lower revenue from decreased fabrication work as discussed above and approximately $2.5 million of holding costs for our South Texas assets as we market them for sale. This was partially offset by decreases in costs resulting from reductions in workforce as we wrapped up and completed projects at our South Texas fabrication yards, reduced depreciation being recorded for our South Texas assets for the six months ended June 30, 2017, as these assets are classified as assets held for sale on February 23, 2017, and additional cost cutting measures implemented by management.
General and administrative expenses - General and administrative expenses for our Fabrication division decreased $282,000 for the six months ended June 30, 2017, compared to the six months ended June 30, 2016. The decrease is primarily due to decreases in costs resulting from reductions in workforce as we wrapped up and completed projects at our South Texas fabrication yards and lower bonuses accrued during 2017 as a result of a combination of a smaller workforce and our consolidated gross loss. This was partially offset by expenses incurred to market our South Texas assets for sale and payment of termination benefits during the first quarter of 2017 as we reduced its workforce and completed those operations.
| | | | | | | | | | | | | | | | Shipyards | | Six Months Ended June 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue (1) | | $ | 36,724 |
| | $ | 63,493 |
| | $ | (26,769 | ) | | (42.2)% | Gross profit (loss) (1) | | (15,556 | ) | | 7,797 |
| | (23,353 | ) | | (299.5)% | Gross profit (loss) percentage | | (42.4 | )% | | 12.3 | % | | | | (54.7)% | General and administrative expenses | | 1,947 |
| | 2,750 |
| | (803 | ) | | (29.2)% | Asset impairment | | 389 |
| | — |
| | 389 |
| | 100.0% | Operating income (loss) (1) | | (17,892 | ) | | 5,047 |
| | | | |
___________
| | (1) | Revenue for the six months ended June 30, 2017, and 2016, includes $1.9 million and $2.7$1.6 million of non-cash amortization of deferred revenue related to the values assigned to the contracts acquired in the LEEVAC transaction, respectively. |
Revenue - Revenue from our Shipyards division decreased $26.8 millionShipyard Division increased $143,000 for the sixthree months ended June 30, 2017,March 31, 2018, compared to the sixthree months ended June 30, 2016, dueMarch 31, 2017. During the first quarter of 2018, we were able to depressed oilmake progress on the construction of eight harbor tugs and gas pricesan offshore research vessel which were not under construction during the first quarter of 2017. This was partially offset by lower revenue from construction of our two OSV and two MPSV vessel contracts during the corresponding reduction in customer demand for shipbuilding and repair services supporting the oil and gas industry. first quarter of 2018.
During the first quarter of 2017, we completed a vessel that we assumed in the LEEVAC transactionfirst of the OSVs and deliveredtendered it for delivery on February 6, 2017, and suspended construction of the second OSV due to a customer on February 6, 2017.
Gross profit (loss) - Gross lossdispute. We recommenced construction of the second OSV during the fourth quarter of 2017 which is scheduled for completion during the second quarter of 2018. During the first quarter of 2018, we received a notice of purported termination from a customer within our Shipyards division was $15.6 million for the six months ended June 30, 2017, compared to a gross profit of $7.8 million for the six months ended June 30, 2016. The decrease was due to:
$10.6 million in contract lossesShipyard Division related to cost overrunsthe construction of two MPSVs. We dispute the purported termination and re-work thatdisagree with the customer’s reasons for same. Pending resolution of the dispute, all work has been identified on two contracts assigned to usstopped and the vessels and associated equipment and material are in the LEEVAC transaction;
holdingour care and closing costs related tocustody at our Prospect shipyard as we wind down operations at this facility;
holding costs related to a completed vessel that was delivered on February 6, 2017; however, was refused by our customer alleging certain technical deficiencies (see alsoin Houma, Louisiana. See Note 9 of the Notes to Consolidated Financial Statements);Statements for additional information relating to this customer dispute.
Gross profit (loss) - Gross loss from our Shipyard Division was $1.0 million for the three months ended March 31, 2018, compared to a gross loss of $1.7 million for the three months ended March 31, 2017. The decrease was due to improved cost management efforts and efficiencies learned from the construction of two OSV and two MPSV vessels during the three months ended March 31, 2017, and applied to the construction of eight harbor tugs during the three months ended March 31, 2018. overall decreases in work under other various contracts as discussed above.
General and administrative expenses - General and administrative expenses for our Shipyards divisionShipyard Division decreased $803,000$168,000 for the sixthree months ended June 30, 2017,March 31, 2018, compared to the sixthree months ended June 30, 2016,March 31, 2017, primarily due to lower bonuses accrued during 2017reductions in workforce, decreases in corporate allocations as a resultportion of a combination of a smaller workforcethese are now allocated to our EPC Division and our consolidated gross loss and cost cutting measures implemented by management during the first part of 2016.decreased construction activity.
Asset Impairmentimpairment - During sixthe three months ended June 30,March 31, 2017, we recorded an impairment of $389,000 related to ourthe Shipyard Division assets held for sale at our Prospect shipyard.sale. See also Note 2 of the Notes to Consolidated Financial statements.Statements for additional information relating to our assets held for sale. We did not record any asset impairment during the three months ended March 31, 2018, in our Shipyard Division.
| | | | | | | | | | | | | | | | Services | | Six Months Ended June 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | 26,107 |
| | $ | 55,251 |
| | $ | (29,144 | ) | | (52.7)% | Gross profit (loss) | | 423 |
| | 8,240 |
| | (7,817 | ) | | (94.9)% | Gross profit (loss) percentage | | 1.6 | % | | 14.9 | % | | | | (13.3)% | General and administrative expenses | | 1,313 |
| | 1,519 |
| | (206 | ) | | (13.6)% | Operating income (loss) | | (890 | ) | | 6,721 |
| | | | |
| | | | | | | | | | | | | | | | Services | | Three Months Ended March 31, | | Increase or (Decrease) | | | 2018 | | 2017 | | Amount | | Percent | Revenue | | $ | 21,870 |
| | $ | 10,712 |
| | $ | 11,158 |
| | 104.2% | Gross profit (loss) | | 2,614 |
| | 33 |
| | 2,581 |
| | 7,821.2% | Gross profit (loss) percentage | | 12.0 | % | | 0.3 | % | | | |
| General and administrative expenses | | 734 |
| | 666 |
| | 68 |
| | 10.2% | Operating income (loss) | | $ | 1,880 |
| | $ | (633 | ) | | $ | 2,513 |
| |
|
Revenue - Revenue from our Services division decreased $29.1Division increased $11.2 million for the sixthree months ended June 30, 2017,March 31, 2018, compared to the sixthree months ended June 30, 2016,March 31, 2017, due to an overall decreaseincrease in work experienced as a result of depressed oil and gas prices and the corresponding reductiondue to increases in customer demand for offshore oil and gas related service projects.
Gross profit - Gross profit from our Services division decreased $7.8Division increased $2.6 million for the sixthree months ended June 30, 2017,March 31, 2018, compared to the sixthree months ended June 30, 2016,March 31, 2017, due to decreasedincreased revenue discussed above and lower margins on new work performed during 2017.above.
General and administrative expenses - General and administrative expenses for our Services division decreased $206,000Division increased $68,000 for the sixthree months ended June 30, 2017,March 31, 2018, compared to the sixthree months ended June 30, 2016,March 31, 2017, due to lower bonuses accrued during 2017support of increased work as well as increases in employee incentive compensation of approximately $120,000 resulting from increased operating income. This was partially offset by decreases in corporate allocations as a resultportion of a combination of a smaller workforcethese are now allocated to our EPC Division and our consolidated gross loss.continued cost minimization efforts implemented by management for the period.
| | | | | | | | | | | | | | | | Corporate | | Six Months Ended June 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | — |
| | $ | — |
| | $ | — |
| | —% | Gross profit (loss) | | (351 | ) | | (234 | ) | | (117 | ) | | (50.0)% | Gross profit (loss) percentage | | n/a |
| | n/a |
| | | |
| General and administrative expenses | | 3,656 |
| | 3,342 |
| | 314 |
| | 9.4% | Operating income (loss) | | (4,007 | ) | | (3,576 | ) | | (431 | ) | | |
| | | | | | | | | | | | | | | | EPC | | Three Months Ended March 31, | | Increase or (Decrease) | | | 2018 | | 2017 | | Amount | | Percent | Revenue | | 73 |
| | $ | — |
| | $ | 73 |
| | 100.0% | Gross profit (loss) | | (308 | ) | | — |
| | (308 | ) | | (100.0)% | Gross profit (loss) percentage | | n/a |
| | n/a |
| | | |
| General and administrative expenses | | 417 |
| | — |
| | 417 |
| | 100.0% | Operating income (loss) | | $ | (725 | ) | | $ | — |
| | $ | (725 | ) | |
|
Revenue - Our EPC Division did not exist at March 31, 2017. Revenue for the three months ended March 31, 2018 consists of early work and engineering studies authorized by SeaOne. See Note 8 of the Notes to Consolidated Financial Statements for further discussion of our EPC Division and the SeaOne Project.
Gross profit (loss) - Gross loss from our EPC Division occurred as we added personnel and overhead infrastructure related to the anticipated SeaOne project.
General and administrative expenses - General and administrative expenses for our EPC Division include the addition of personnel and allocations of corporate expenses as we invest in this new line of business. | | | | | | | | | | | | | | | | Corporate | | Three Months Ended March 31, | | Increase or (Decrease) | | | 2018 | | 2017 | | Amount | | Percent | Revenue | | $ | — |
| | $ | — |
| | $ | — |
| | —% | Gross profit (loss) | | $ | (385 | ) | | (260 | ) | | 125 |
| | 48.1% | Gross profit (loss) percentage | | n/a |
| | n/a |
| | | | | General and administrative expenses | | 2,138 |
| | 1,479 |
| | 659 |
| | 44.6% | Operating income (loss) | | $ | (2,523 | ) | | $ | (1,739 | ) | | $ | 784 |
| |
|
Gross profit (loss) - Gross loss from our Corporate divisionDivision increased primarily due to a restructuringlower allocation of our corporate division with additional personnel allocated to our corporate division during 2017expenses and as discussed above.well as increased insurance costs.
General and administrative expenses - General and administrative expenses for our Corporate divisionDivision increased primarily due to a restructuringincreased legal and advisory fees related to customer disputes, strategic planning and diversification of our corporate division with additional personnel allocated to our corporate division during 2017 as discussed above as well as for expenses incurred for advisors to assist in a strategic financial analysis project in anticipationbusiness, increased employee incentive accruals and higher stock compensation expense of the proceeds to be received from the sale of our South Texas assets. This has been partially offset by lower bonuses accrued during 2017 as a result of a combination of a smaller workforce and our consolidated gross loss.approximately $220,000.
Liquidity and Capital Resources Historically, we have fundedOur immediate liquidity remains dependent on our business activities through cash generatedon hand, anticipated proceeds from operations.the sales of assets, availability of future drawings from our Credit Agreement and collections of accounts receivable. At June 30, 2017,March 31, 2018, we had no amounts$10 million outstanding under our credit facility, $4.6Credit Agreement, $2.5 million in outstanding letters of credit, and cash and cash equivalents totaling $22.3$6.5 million compared to $51.2$9.0 million at December 31, 2016. 2017. As of May 4, 2018, our liquidity has significantly improved due to the sale of our Texas South Yard the net proceeds of which will be used to rebuild our liquidity, to support upcoming projects, continue investing in our newly created EPC Division and for other general corporate purposes. After the sale of our Texas South Yard, our cash balance was $55.0 million, and the amount outstanding under our Credit Agreement was $10 million with remaining availability under our Credit Agreement of approximately $27.5 million for total liquidity of approximately $82.5 million.
Working capital was $167.7$137.1 million and our ratio of current assets to current liabilities was 4.624.34 to 1 at June 30, 2017,March 31, 2018, compared to $78.0$130.5 million and 3.213.68 to 1, respectively, at December 31, 2016.2017. Working capital at June 30, 2017,March 31, 2018, includes $107.3$98.4 million related to assets held for sale, primarily related to our South Texas facilities. Properties which decreased after the sale of our Texas South Yards to $48.5 million. At March 31, 2018, our contracts receivable balance was $27.4 million of which we have subsequently collected $14.9 million through May 4, 2018. Our primary use of cash during the sixthree months ended June 30, 2017,March 31, 2018, is referenced in the Cash Flow Activities section below. At June 30, 2017,As discussed in our contracts receivable balance was $38.1 millionExecutive Summary, we are implementing several strategies to diversify our business, increase backlog, reduce operating expenses and monetize assets. Our South Texas Properties are held for sale. A significant portion of which we have subsequently collected $12.0 million through July 19, 2017.our near-term plan is to generate liquidity from the sale of these assets.
On April 20, 2018, we closed on the sale of our Texas South Yard for a sale price of $55 million, less selling costs of $1.5 million. We received approximately $52.7 million at closing, which was in addition to the $750,000 of earnest money previously received on January 3, 2018, related to the option to purchase the Texas South Yard. We plan to use the net proceeds to rebuild our liquidity, to support upcoming projects, continue investing in our newly created EPC Division and for other general corporate purposes. See further discussion of the sale of our Texas South Yard in Note 2 of the Notes to Consolidated Financial Statements. We currently believe that cash on hand coupled with proceeds received from the sale of our Texas South Yard and funds available under our Credit Agreement will enable the Company to meet its working capital needs, capital expenditure requirements, any debt service obligations and other funding requirements for at least the twelve months from the date of this Report.
As of the date of this Report our Texas North Yard remains held for sale. The book value of the Texas North Yard is $46.6 million at March 31, 2018. We will continue to incur costs associated with holding and maintaining our Texas North Yard. These costs include insurance, general maintenance of the properties in their current state, property taxes and retained employees which will be expensed as incurred.
We have a $40 million Credit Agreement maturing June 9, 2017, we entered into a $40.0 million credit agreement with Whitney Bank, as lender (the “New2019. The Credit Facility”). The New Credit Facility matures June 9, 2019 and may be usedAgreement allows the Company to use up to the full amount of the available borrowing base for issuing letters of credit and/orand general corporate and working capital purposes. We believe that the new facilityour Credit Agreement will provide us with additional working capital flexibility to expand operations as backlog improves, respond to market opportunities and support our ongoing operations.
Interest on drawings under the New Credit FacilityAgreement may be designated, at our option, as either Base Rate (as defined in the New Credit Facility)credit facility) or LIBOR plus 2.0%2% per annum. Our outstanding balance of $10 million at March 31, 2018, is designated as a LIBOR rate loan. Unused commitment fees on the undrawn portion of the facilityCredit Agreement are 0.4% per annum, and the letter of credit feeinterest on undrawn stated amounts under letters of credit issued by the lenders are 0.4%lender is 2% per annum and 2.0%annum. At March 31, 2018, the interest rate on our outstanding borrowings was 3.75% per annum, respectively.annum. The New Credit FacilityAgreement is secured by substantially all of our assets (other than the assetsSouth Texas Properties).
At March 31, 2018, $10 million was outstanding under the Credit Agreement and, we had letters of Gulf Marine Fabricators, L.P.,credit of $2.5 million outstanding leaving availability of $27.5 million. Subsequent to March 31, 2018, we re-issued a letter of credit for $3 million related to outstanding contractual obligations which are currently held for sale).we expect to remain outstanding until July of 2018.
We must comply with the following financial covenants each quarter during the term of the facility:Credit Agreement:
| | i. | ratioRatio of current assets to current liabilities of not less than 1.25:1.00; |
| | ii. | minimumMinimum tangible net worth requirement of at least the sum of: |
| | a) | $230.0185 million, plus |
| | b) | anAn amount equal to 50% of consolidated net income for each fiscal quarter ending after June 30, 2017, including 50% of any gain attributable to the sale of our South Texas Properties (with no deduction for a net loss in any such fiscal quarter except for any gain or loss in connection with the sale of assets by Gulf Marine Fabricators, L.P.)quarter), plus |
| | c) | 100% of all netthe proceeds of any issuance of any stock or other equity after deducting of any fees, commissions, expenses and other costs incurred in such offering; and |
| | iii. | ratioRatio of funded debt to tangible net worth of not more than 0.50:1.00. |
Concurrent with our execution of the New Credit Facility, we terminated our prior credit facility with JPMorgan Chase Bank, N.A. At the time of the termination, there was approximately $4.6 million of letters of credit outstanding, all of which was temporarily cash collateralized by us. Subsequent to June 30, 2017, we were able to reissue new letters of credit under the New Credit Facility, of which $4.6 million have been accepted by the beneficiaries, and we have been released from cash collateral requirements. Availability under our credit facility for future, additional letters of credit and borrowings is $35.4 million. As of June 30, 2017,March 31, 2018, we were in compliance with all of our financial covenants.
We will continue to monitor and preserve our cash. Our primary liquidity requirements for 2018 and beyond are for the costs associated with fabrication and shipyard projects, capital expenditures related to the creation of our EPC Division and payment of dividendsenhancements to our shareholders.shipyards. Future capital expenditures will be highly dependent upon the amount and timing of future projects. Capital expenditures for the quarter ended March 31, 2018, were $71,000. We do not anticipate significant capital expenditures for the remainder of 20172018.
If industry conditions for offshore oil and gas do not improve, we are unable to range between $2.0 millionsell our Texas North Yard or the sale is delayed, or we are unable to $5.0 million primarily forincrease our backlog, we would expect to take additional measures to preserve our cash flows until such time we are able to generate cash flows from operations. Since the following:
improvementsbeginning of 2016, we have implemented wage adjustments along with employee benefit and overall cost reductions within all of our divisions. We have reduced the level of our workforce in the past and we will continue to do so based on booked work in all of our facilities. We have reduced the compensation paid to our Jenningsdirectors and Lake Charles leased shipyards,
improvementthe salaries of our executive officers, and we have reduced our capital expenditures and placed assets that are either underutilized, under-performing or not expected to the bulkhead atprovide sufficient long-term value for sale, which include our Houma facility, and
computer system upgrades.
South Texas Properties.
On October 21, 2016, a customer of our Shipyards division announced it was in noncompliance with certain financial covenants included in the customer’s debt agreements and stated that, while it had received limited waivers from its lenders, its debt agreements would require further negotiation and amendment. This same customer rejected delivery of the first vessel that we completed and tendered for delivery on February 6, 2017, alleging certain technical deficiencies exist with respect to the vessel and is seeking recovery of all purchase price amounts previously paid by the customer under the contract. On March 10, 2017, we gave notice for arbitration with our customer in an effort to resolve this matter. We are also building a second vessel for this customer which has been suspended and included in our arbitration proceedings. We disagree with our customer concerning these alleged technical deficiencies and have put the customer in default under the terms of the contracts for both vessels. On May 17, 2017, the customer filed for protection under Chapter 11 of the United States Bankruptcy Code for reorganization under a negotiated, pre-packaged plan. The customer has petitioned the Bankruptcy Court to accept our contracts for the two vessels we are constructing for them. As of June 30, 2017, approximately $4.6 million remained due and outstanding from our customer for the first vessel. The balance due to us for the second vessel upon completion and delivery is approximately $4.9 million.
We are working with legal counsel to protect our contractual claims during the restructuring and intend to re-initiate our rights for arbitration in accordance with our contract upon our customer's emergence from Chapter 11 reorganization. We intend to take all legal action as may be necessary to protect our rights under the contracts and recover the remaining balances owed to us.
We continue to monitor our work performed in relation to our customer’s status and its ability to pay under the terms of these contracts. Because these vessels have been completed or are substantially complete, wecurrently believe that they have significant fair valuecash on hand and that we wouldfunds available under our Credit Agreement will be ablesufficient to fully recovermeet our working capital and capital expenditure requirements, any remaining amounts due to us infuture debt service and other funding requirements for at least twelve months from the event we enforcedate of this Report. Our view regarding sufficiency of cash and liquidity is primarily based on our security interest over these projects.
In anticipation of the proceeds to be received fromfinancial forecast for 2018 and early 2019, which is impacted by various assumptions regarding the sale of our South Texas assets, we engaged advisors to assist in the development of a capital deployment plan to determine the appropriate use of proceeds from this transaction to maximize long-term shareholder value. Our capital deployment plan includes a variety of investment options including investing in our operating liquidity in order to facilitate anticipated future projects, selected capital improvements to enhance and/or expandNorth Yard, our existing facilities, mergersbacklog and acquisitionsa reasonable amount of forecast, non-contractual backlog. There is no guarantee that our financial forecast will be attainable or that we will have sufficient cash, including funds available under our Credit Agreement, to expand our product and service capabilitiesmeet planned operating expenses and other optionsunforeseen cash requirements. Accordingly, we may be required to return surplus resources to shareholders either through stock buy-backs and/or special dividends. We are continuing this effort to identify and analyze specific investment opportunities we believe will enhance the long-term value of the Company and that are consistent with our strategy.
On July 27, 2017, our Board of Directors declared a dividend of $0.01 per sharefurther draw on our shares of common stock outstanding, payable August 24, 2017,Credit Agreement, obtain additional bank financing, sell additional assets or conduct equity or debt offerings at a time when it is not beneficial to shareholders of record on August 10, 2017.do so.
We believe our cash and cash equivalents generated by our future operating activities and proceeds to be received from future assets sales will be sufficient to fund our capital expenditures and meet our working capital needs for both the near and longer term to continue our operations, satisfy our contractual operations and pay dividends to our shareholders.
Cash Flow Activities
For the sixthree months ended June 30, 2017,March 31, 2018, net cash used in operating activities was $27.9$14.1 million, compared to net cash provided byused in operating activities of $11.8$15.1 million for the sixthree months ended June 30, 2016.March 31, 2017. The use of cash in operations during the period was primarily due to the following:
Operating losses for the sixthree months ended June 30, 2017,March 31, 2018, in excess of non-cash depreciation, amortization, impairment and stock compensation expense of approximately $17.9 million,$1.5 million; Payment of year-end bonuses related to 2016,
Progress on liabilities from assumed contracts in the LEEVAC transaction. While our purchase price for the acquisition of the LEEVAC assets during 2016 was $20.0 million, we received a net $3.0 million in cash from the seller for the assumption of certain net liabilities and settlement payments on ongoing shipbuilding projects of $23.0 million that were assigned to us in the transaction. We have significantly progressed these contracts, which in turn has resulted in utilization of the working capital and settlement payments received during 2016.
The suspension of two vessel projects following our customer’s refusal to accept delivery of the first vessel in February 2017, and our inability to collect $9.5 million in scheduled payments under these contracts. We have initiated arbitration proceedings during the quarter to enforce our rights under these contracts; and
Build-up of costs for contracts in progress of $9.1 million;
Build-up of retainage on projects of $1.5 million; and
Payment of property taxes related to a customer in our Shipyards division with significant milestone payments occurring in the later stagesSouth Texas Properties of the projects which are expected to occur beginning in the third quarter of 2017 through the first quarter of 2018.$2 million.
Net cash provided by investing activities for the sixthree months ended June 30, 2017,March 31, 2018, was $296,000,$2.4 million, compared to cash provided byused in investing activities of $3.8 million$391,000 for the sixthree months ended June 30, 2016.March 31, 2017. The change in cash provided byused in investing activities is primarily due to cashthe insurance proceeds received from the sale of three cranesfor hurricane damage to assets at our South Texas facility for $5.5 million and $1.6 million of cash acquired in the LEEVAC transaction during 2016.Properties.
Net cash used inprovided by financing activities for the sixthree months ended June 30,March 31, 2018, and 2017, and 2016, was $1.2$9.2 million and $441,000, respectively. The increasecompared to $1.0 million in cash used in financing activities, respectively. The increase in cash provided by financing activities is due to the cash payments made to taxing authorities on behalf of employees' for their vesting of common stock.$10 million in net borrowings under our Credit Agreement.
Contractual Obligations There have been no material changes from the information included in our 2017 Annual Report on Form 10-K for the year ended December 31, 2016.Report. For more information on our contractual obligations, refer to Part II, Item 7 of our 2017 Annual Report on Form 10-K for the year ended December 31, 2016.Report. Off-Balance Sheet Arrangements There have been no material changes from the information included in our 2017 Annual Report on Form 10-K for the year ended December 31, 2016.Report. Item 3. Quantitative and Qualitative Disclosures About Market Risk. There have been no material changes in the Company’s market risks during the quarter ended June 30, 2017.March 31, 2018. For more information on market risk, refer to Part II, Item 7A. of our Annual Report on Form 10-K for the year ended December 31, 2016.2017. Item 4. Controls and Procedures. The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and that such information is communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report.Report. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that the design and operation of our disclosure controls and procedures were effective as of the end of the period covered by this report.Report. There have been no changes during the fiscal quarter ended June 30, 2017,March 31, 2018, in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION Item 1. Legal Proceedings. The Company is subject to various routine legal proceedings in the normal conduct of its business primarily involving commercial claims, workers’ compensation claims, and claims for personal injury under general maritime laws of the United States and the Jones Act. While the outcome of these lawsuits, legal proceedings and claims cannot be predicted with certainty, management believes that the outcome of any such proceedings, even if determined adversely, would not have a material adverse effect on the financial position, results of operations or cash flows of the Company. Item 1A. Risk Factors. There have been no material changes from the information included in Item 1A “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2016.2017. Item 6. Exhibits. | | | | | Exhibit Number | | Description of Exhibit | | | 3.1 | | | 3.2 | | | 10.1 | |
| 10.2 | |
| 10.3 | | | 10.2 | | Credit Agreement dated June 9, 2017, incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed June 9, 2017.February 26, 2018. †
| 10.4 | |
| 31.1 | | | 31.2 | | | 32 | | | | | | 101 | | Attached as Exhibit 101 to this report are the following items formatted in XBRL (Extensible Business Reporting Language): | | | (i) | Consolidated Balance Sheets, | | | (ii) | Consolidated Statements of Operations, | | | (iii) | Consolidated Statement of Changes in Shareholders’ Equity, | | | (iv) | Consolidated Statements of Cash Flows, and | | | (v) | Notes to Consolidated Financial Statements. | | | | † | | Management Contract or Compensatory Plan. |
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this reportReport to be signed on its behalf by the undersigned thereunto duly authorized. | | | GULF ISLAND FABRICATION, INC. | | BY: | /s/ David S. Schorlemer | | David S. Schorlemer | | Executive Vice President, Chief Financial Officer, Secretary and Treasurer (Principal Financial and Accounting Officer) |
Date: August 1, 2017May 4, 2018
GULF ISLAND FABRICATION, INC.
EXHIBIT INDEX
| | | | | Exhibit
Number
| | Description of Exhibit | | | 3.1 | | Composite Articles of Incorporation of the Company incorporated by reference to Exhibit 3.1 of the Company’s Form 10-Q filed April 23, 2009. | 3.2 | | Amended and Restated Bylaws of the Company, incorporated by reference to Exhibit 3.1 of the Company’s Form 8-K filed November 4, 2016. | 10.1 | | Change of Control Agreement, dated March 1, 2017, between the Company and David S. Schorlemer, incorporated by reference to Exhibit 10.15 of the Company's Form 10-K for the year ended December 31, 2016 filed on March 2, 2017. | 10.2 | | Credit Agreement dated June 9, 2017, incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed June 9, 2017. | 31.1 | | CEO Certifications pursuant to Rule 13a-14 under the Securities Exchange Act of 1934. | 31.2 | | CFO Certifications pursuant to Rule 13a-14 under the Securities Exchange Act of 1934. | 32 | | Section 906 Certification furnished pursuant to 18 U.S.C. Section 1350. | | | | 101 | | Attached as Exhibit 101 to this report are the following items formatted in XBRL (Extensible Business Reporting Language): | | | | | | (i) | Consolidated Balance Sheets, | | | (ii) | Consolidated Statements of Operations, | | | (iii) | Consolidated Statement of Changes in Shareholders’ Equity, | | | (iv) | Consolidated Statements of Cash Flows and | | | (v) | Notes to Consolidated Financial Statements. |
s | Labor hours | | ___________
| | (1) | We exclude suspended projects from contract backlog when they are expected to be suspended more than 12 months because resumption of work and timing of revenue recognition for these projects are difficult to predict. |
| | (2) | At June 30, 2017,March 31, 2018, projects for our five largest customers in terms of revenue backlog consisted of: |
| | (i) | twoTwo large multi-purpose service vesselsMPSVs for one customer in our Shipyards division,for which commenced in the first quarterwe have received a purported notice of 2014 and will be completed during the first and second quarters of 2018;termination as discussed above; |
| | (ii) | newbuildNewbuild construction of fourfive harbor tugs for one customer within our Shipyards division;(to be completed in 2018 through 2020); |
(iii) newbuild construction of four harbor tugs for one additional customer within our Shipyards division;
| | (iii) | Newbuild construction of five harbor tugs for one customer (separate from above) (to completed in 2018 through 2020); |
| | (iv) | the fabricationNewbuild construction of four modules associated with a U.S. ethane cracker project within our Fabrication division;an offshore research vessel (to be completed in 2020); and |
(v) newbuild construction of an offshore research vessel within our Shipyards division.
| | (3)(v) | Newbuild construction of one T-ATS vessel (to be completed in 2020). This contract is currently under a bid protest. |
| | (2) | The timing of recognition of the revenue represented in our backlog is based on management’s current estimates to complete the projects. Certain factors and circumstances could cause changes in the amounts ultimately recognized and the timing of the recognition of revenue from our backlog. |
Depending on
Certain of our contracts contain options which grant the sizeright to our customer, if exercised, for the construction of the project, the termination, postponement, or reductionadditional vessels at contracted prices.We do not include options in scope of any one project could significantly reduce our backlog above. If all options under our current contracts were exercised, our backlog would increase by $626.2 million. We believe disclosing these options provides investors with useful information in order to evaluate additional potential work that we would be contractually obligated to perform under our current contracts as well as the potential significance of these options, if exercised. We have not received any commitments related to the exercise of these options from our customers, and could have a material adverse effect on revenue, net income and cash flow. Additionally, as we continue tocan provide no assurance that any or all of these options will be exercised. As we add backlog, we will begin addingadd personnel with critical project management and fabrication skills to ensure we have the resources necessary to execute our projects well and to support our project risk mitigation discipline for all new project work.projects. This may negatively impact near termnear-term results. As of June 30, 2017,March 31, 2018, we had 983 employees and 166 contract961 employees compared to 1,178 employees and 92 contract977 employees as of December 31, 2016. 2017. Labor hours worked were 1.0 million496,000 during the sixthree months ended June 30, 2017,March 31, 2018, compared to 1.6 million479,000 for the sixthree months ended June 30, 2016.March 31, 2017. The overall decreaseincrease in labor hours worked for the sixthree months ended June 30, 2017,March 31, 2018, was due to an overallimproved offshore demand within our Services Division. As of April 29, 2018, we had 870 employees. The decrease in work experiencedour workforce subsequent to March 31, 2018, is primarily within our Fabrication Division due to completion of complex modules for the construction of a new petrochemical plant with no significant future Fabrication backlog forecasted in the near-term as well as the stoppage of construction of the two MPSVs within our facilities as a result of depressed oil and gas prices and the corresponding reduction in customer demand within allShipyard Division pending resolution of our operating divisions.dispute over termination with our MPSV customer. See Note 9 of the Notes to Consolidated Financial Statements related to our MPSV contract termination dispute.
Results of Operations Three Months Ended June 30, 2017,March 31, 2018, Compared to Three Months Ended June 30, 2016 March 31, 2017 (in thousands, except for percentages): Consolidated | | | | | | | | | | | | | | | Three Months Ended June 30, | | Increase or (Decrease) | | 2017 | | 2016 | | Amount | Percent | Revenue | $ | 45,868 |
| | $ | 81,502 |
| | $ | (35,634 | ) | (43.7)% | Cost of revenue | 57,488 |
| | 67,436 |
| | (9,948 | ) | (14.8)% | Gross profit (loss) | (11,620 | ) | | 14,066 |
| | (25,686 | ) | (182.6)% | Gross profit (loss) percentage | (25.3 | )% | | 17.3 | % | | | | General and administrative expenses | 4,640 |
| | 5,062 |
| | (422 | ) | (8.3)% | Operating income (loss) | (16,260 | ) | | 9,004 |
| | (25,264 | ) | (280.6)% | Other income (expense): | | | | | | | Interest expense | (158 | ) | | (88 | ) | | (70 | ) | | Interest income | 12 |
| | 2 |
| | 10 |
| | Other income (expense), net | (266 | ) | | 42 |
| | (308 | ) | | Total other income (expense) | (412 | ) | | (44 | ) | | (368 | ) | (836.4)% | Net income (loss) before income taxes | (16,672 | ) | | 8,960 |
| | (25,632 | ) | (286.1)% | Income tax expense (benefit) | (5,749 | ) | | 3,420 |
| | (9,169 | ) | (268.1)% | Net income (loss) | $ | (10,923 | ) | | $ | 5,540 |
| | $ | (16,463 | ) | (297.2)% |
| | | | | | | | | | | | | | | Three Months Ended March 31, | | Increase or (Decrease) | | 2018 | | 2017 | | Amount | Percent | Revenue | $ | 57,290 |
| | $ | 37,993 |
| | $ | 19,297 |
| 50.8% | Cost of revenue | 56,611 |
| | 42,890 |
| | 13,721 |
| 32.0% | Gross profit (loss) | 679 |
| | (4,897 | ) | | 5,576 |
| 113.9% | Gross profit (loss) percentage | 1.2 | % | | (12.9 | )% | | | | General and administrative expenses | 4,709 |
| | 3,930 |
| | 779 |
| 19.8% | Asset impairment | 750 |
| | 389 |
| | 361 |
| 92.8% | Operating income (loss) | (4,780 | ) | | (9,216 | ) | | (4,436 | ) |
| Other income (expense): | | | | | | | Interest expense | (469 | ) | | (59 | ) | | (410 | ) | (694.9)% | Other income (expense), net | 12 |
| | 9 |
| | 3 |
| 33.3% | Total other income (expense) | (457 | ) | | (50 | ) | | (407 | ) | (814.0)% | Net loss before income taxes | (5,237 | ) | | (9,266 | ) | | (4,029 | ) | (43.5)% | Income tax expense (benefit) | 59 |
| | (2,812 | ) | | 2,871 |
| 102.1% | Net loss | $ | (5,296 | ) | | $ | (6,454 | ) | | $ | 6,900 |
|
|
Revenue - Our revenue for the three months ended June 30,March 31, 2018 and 2017, and 2016, was $45.9$57.3 million and $81.5$38.0 million, respectively, representing a decreasean increase of 43.7%50.8%. The decreaseincrease is primarily attributable to an overall decrease in work experienced into:
An increase of $11.2 million within our facilities as a result of depressedServices Division from additional demand for offshore oil and gas pricesservice related projects; and An increase of $7.1 million within our Fabrication Division primarily attributable to the corresponding reduction in customer demand within allconstruction of our operating divisions. Pass-through costs asfour modules for a percentage of revenue were 53.1% and 35.1%petrochemical plant.
Gross profit (loss) - Our gross profit for the three months ended June 30, 2017 and 2016, respectively. Pass-through costs, as described in Note 3 of the Notes to Consolidated Financial Statements, are included in revenue but have no impact on the gross profit recognized on a project for a particular period.
Gross profit (loss) - Our gross loss for the three months ended June 30, 2017,March 31, 2018, was $11.6 million$679,000 compared to a gross profitloss of $14.1$4.9 million for the three months ended June 30, 2016.March 31, 2017. The decreaseincrease in gross profit was primarily due to $10.2 million of contract losses incurred byincreased revenue within our Shipyards division related to cost overruns and re-work identified on two vessel contracts assigned in the LEEVAC transaction, decreased revenueServices Division as discussed above holding costsand decreased expenses within our Fabrication Division which included $1.9 million of depreciation expense for the three months ended March 31, 2017, related to our South Texas assets of $1.2 million and lower margins on current work. This was partially offset by decreases in costs resulting from reductions in workforce as we wrapped up and completed projects at our South Texas fabrication yards and Prospect shipyard,Properties with no depreciation being recordedexpense during the three months ended March 31, 2018, for our South Texas assets and Prospect shipyard for the three months ended June 30, 2017,Properties as these assets are classified as assets held for sale and additional cost cutting measures implemented by management.sale.
General and administrative expenses - Our general and administrative expenses were $4.6$4.7 million for the three months ended June 30, 2017,March 31, 2018, compared to $5.1$3.9 million for the three months ended June 30, 2016.March 31, 2017. The decreaseincrease in general and administrative expenses for the three months ended June 30, 2017,March 31, 2018, was primarily attributable to lower bonuses accrued during 2017
Build-up of additional personnel for our newly created EPC Division; Increased legal and advisory fees related to customer disputes, strategic planning and diversification of our business; Increased employee incentive accruals of approximately $300,000 for all divisions related to our safety incentive program and higher employee profitability incentives within our Services Division as a resultwell as the addition of a combinationpersonnel as we build up our EPC Division in anticipation of a smaller workforcethe SeaOne Project; and our consolidated gross loss Higher stock compensation expense of approximately $220,000.
This was partially offset by cost reductions and continued cost cutting measuresminimization efforts implemented by management for the period.
Asset impairment - We recorded an impairment of $750,000 during the first partthree months ended March 31, 2018, related to a piece of 2016.equipment at our Texas North Yard that we intend to sell at auction. This piece of equipment was not damaged by
Other income (expense),Hurricane Harvey. The impairment was calculated as management's estimated net proceeds from the sale less its net book value. See also Note 2 of the Notes to Consolidated Financial Statements for additional information regarding our assets held for sale. During the three months ended March 31, 2017, we recorded an impairment of $389,000 related to the Shipyard Division assets held for sale.
Interest expense- OtherInterest expense was $266,000increased due to drawings under our Credit Agreement for the three months ended June 30, 2017, as compared to other income of $42,000March 31, 2018, with no such drawings under our Credit Agreement for the three months ended June 30, 2016. Other expense forMarch 31, 2017, as well as increased amortization of deferred financing costs during the period was primarily due to losses on the sale of two drydocks from our Shipyards division recorded during three months ended June 30, 2017.March 31, 2018.
Income tax expense (benefit) - Our effective income tax rate for the three months ended June 30, 2017,March 31, 2018, was 34.5%(1.1)%, compared to an effective tax rate benefit of 38.2%30.3% for the comparable period during 2016.2017. Current expense represents state taxes within our Services Division. The decrease in the effective tax rate is the result of limitations on the deductibility of executive compensation. These amount are included in the estimate ofa valuation allowance against our year-end effective rate.
Operating Segments
As discussed indeferred tax assets. See Note 81 of the Notes to Consolidated Financial Statements management reduced its allocation of corporate administrative costsregarding our NOLs and overhead expenses to its operating divisions during the three and six months ended June 30, 2017, such that a significant portion of its corporate expenses are retained in its non-operating Corporate division. In addition, it has also allocated certain personnel previously included in the operating divisions to within the Corporate division. In doing so, management believes that it has created a fourth reportable segment with each of its three operating divisions and its Corporate division each meeting the criteria of reportable segments under GAAP. During the three and six months ended June 30, 2016, we allocated substantially all of our corporate administrative costs and overhead expenses to our three operating divisions. We have recast our 2016 segment data below in order to conform to the current period presentation. Ourdeferred tax assets.
Operating Segments
The results of our threefour operating divisions and Corporate divisionDivision for the three months ended June 30,March 31, 2018 and 2017, and 2016, are presented below (in thousands, except for percentages).
| | | | | | | | | | | | | | | | Fabrication | | Three Months Ended June 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | 13,990 |
| | $ | 24,296 |
| | $ | (10,306 | ) | | (42.4)% | Gross profit (loss) | | 1,931 |
| | 3,877 |
| | (1,946 | ) | | (50.2)% | Gross profit (loss) percentage | | 13.8 | % | | 16.0 | % | | | | (2.2)% | General and administrative expenses | | 833 |
| | 1,130 |
| | (297 | ) | | (26.3)% | Operating income (loss) | | 1,098 |
| | 2,747 |
| | | | |
| | | | | | | | | | | | | | | | Fabrication | | Three Months Ended March 31, | | Increase or (Decrease) | | | 2018 | | 2017 | | Amount | | Percent | Revenue | | $ | 17,270 |
| | $ | 10,209 |
| | $ | 7,061 |
| | 69.2% | Gross profit (loss) | | (219 | ) | | (2,966 | ) | | (2,747 | ) | | (92.6)% | Gross profit (loss) percentage | | (1.3 | )% | | (29.1 | )% | | | |
| General and administrative expenses | | 624 |
| | 821 |
| | (197 | ) | | (24.0)% | Asset impairment | | 750 |
| | — |
| | 750 |
| | 100.0% | Operating income (loss) | | $ | (1,593 | ) | | $ | (3,787 | ) | | $ | (2,194 | ) | |
|
Revenue - Revenue from our Fabrication division decreased $10.3Division increased $7.1 million for the three months ended June 30, 2017,March 31, 2018, compared to the three months ended June 30, 2016.March 31, 2017. The decreaseincrease is attributable to an overall decrease in work experienced in our fabrication yards asthe construction of four modules for a result ofpetrochemical plant during the three months ended March 31, 2018, and lower revenue during the three months ended March 31, 2017, resulting from depressed oil and gas prices and the corresponding reduction in customer demand for offshore fabrication projects. As discussed above, management has classified our South Texas assets as assets held for sale in response toprojects during the underutilizationperiod. This was partially offset, by decreased revenue of our Fabrication assets. As of June 30, 2017, all of our projects at our South Texas fabrication yards have been completed or transferred to our Houma fabrication yard.
Gross profit (loss) - Gross profit from our Fabrication division for the three months ended June 30, 2017, was $1.9 million compared to a gross profit of $3.9$2.4 million for the three months ended June 30, 2016. The decrease was due to lower revenue from decreased fabrication work as discussed above and approximately $1.2 million of holding costs for our South Texas assets. This was partially offset by decreases in costs resulting from reductions in workforce as we wrapped up and completed projectsMarch 31, 2018, at our South Texas fabrication yards, no depreciation being recordedProperties as these were placed for sale during the first quarter of 2017 and project work completed or transfered to our South Texas assetsHouma Fabrication Yard during 2017.
Gross profit (loss) - Gross loss from our Fabrication Division for the three months ended June 30, 2017,March 31, 2018, was $219,000 compared to a gross loss of $3.0 million for the three months ended March 31, 2017. The decrease in gross loss was due to increased revenue as discussed above and a reduction in depreciation expense of $1.9 million in depreciation expense during the three months ended March 31, 2018 for our South Texas Properties as these assets are classified as assets held for sale and additional cost cutting measures implemented by management.sale.
General and administrative expenses - General and administrative expenses for our Fabrication divisionDivision decreased $297,000$197,000 for the three months ended June 30, 2017,March 31, 2018, compared to the three months ended June 30, 2016.March 31, 2017. The decrease is primarily due to decreases in costs resulting from reductions in workforce as we wrapped up and completed projects at our South Texas fabrication yards and lower bonuses accrued during 2017Properties, decreases in corporate allocations as a resultportion of these are now allocated to our EPC Division and continued cost minimization efforts implemented by management for the period.
Asset impairment - We recorded an impairment of $750,000 during the three months ended March 31, 2018, related to a combinationpiece of a smaller workforce andequipment at our consolidated gross loss.Texas North Yard that we intend to sell at auction. This piece of equipment was not damaged by Hurricane Harvey. The impairment was calculated as management's estimated net proceeds from the sale less its net book value. See Note 2 of the Notes to Consolidated Financial Statements for additional information regarding our assets held for sale. We did not record any asset impairments during the three months ended March 31, 2017, within our Fabrication Division.
| | | | | | | | | | | | | | | | Shipyards | | Three Months Ended June 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue (1) | | $ | 18,303 |
| | $ | 29,373 |
| | $ | (11,070 | ) | | (37.7)% | Gross profit (loss) (1) | | (13,851 | ) | | 5,423 |
| | (19,274 | ) | | (355.4)% | Gross profit (loss) percentage | | (75.7 | )% | | 18.5 | % | | | | (94.2)% | General and administrative expenses | | 983 |
| | 1,460 |
| | (477 | ) | | (32.7)% | Operating income (loss) (1) | | (14,834 | ) | | 3,963 |
| | | | |
| | | | | | | | | | | | | | | | Shipyard | | Three Months Ended March 31, | | Increase or (Decrease) | | | 2018 | | 2017 | | Amount | | Percent | Revenue (1) | | $ | 18,565 |
| | $ | 18,422 |
| | $ | 143 |
| | 0.8% | Gross profit (loss) (1) | | (1,023 | ) | | (1,704 | ) | | (681 | ) | | (40.0)% | Gross profit (loss) percentage | | (5.5 | )% | | (9.2 | )% | | | |
| General and administrative expenses | | 796 |
| | 964 |
| | (168 | ) | | (17.4)% | Asset impairment | | — |
| | 389 |
| | (389 | ) | | (100.0)% | Operating income (loss) (1) | | $ | (1,819 | ) | | $ | (3,057 | ) | | $ | (1,238 | ) | |
|
___________ | | (1) | Revenue for the three months ended June 30,March 31, 2018, and 2017, includes $390,000 and 2016, includes $335,000 and $1.5 million of non-cash amortization of deferred revenue related to the values assigned to the contracts acquired in the LEEVAC transaction, respectively. |
Revenue - Revenue from our Shipyards division decreased $11.1 million for the three months ended June 30, 2017, compared to the three months ended June 30, 2016, due to depressed oil and gas prices and the corresponding reduction in customer demand for shipbuilding and repair services supporting the oil and gas industry. During the first quarter of 2017, we completed a vessel that we assumed in the LEEVAC transaction and delivered to a customer on February 6, 2017.
Gross profit (loss) - Gross loss from our Shipyards division was $13.9 million for the three months ended June 30, 2017, compared to a gross profit of $5.4 million for the three months ended June 30, 2016. The decrease was due to:
$10.2 million in contract losses related to cost overruns and re-work that has been identified on two contracts assigned to us in the LEEVAC transaction;
holding and closing costs related to our Prospect shipyard as we wind down operations at this facility;
holding costs related to a completed vessel that was delivered on February 6, 2017; however, was refused by our customer alleging certain technical deficiencies (see also Note 9 of the Notes to Consolidated Financial Statements); and
overall decreases in work under other various contracts as discussed above.
General and administrative expenses - General and administrative expenses for our Shipyards division decreased $477,000 for the three months ended June 30, 2017, compared to the three months ended June 30, 2016, primarily due to lower bonuses accrued during 2017 as a result of a combination of a smaller workforce and our consolidated gross loss and cost cutting measures implemented by management during the first part of 2016.
| | | | | | | | | | | | | | | | Services | | Three Months Ended June 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | 15,396 |
| | $ | 28,692 |
| | $ | (13,296 | ) | | (46.3)% | Gross profit (loss) | | 390 |
| | 4,864 |
| | (4,474 | ) | | (92.0)% | Gross profit (loss) percentage | | 2.5 | % | | 17.0 | % | | | | (14.5)% | General and administrative expenses | | 647 |
| | 800 |
| | (153 | ) | | (19.1)% | Operating income (loss) | | (257 | ) | | 4,064 |
| | | | |
Revenue - Revenue from our Services division decreased $13.3 million for the three months ended June 30, 2017, compared to the three months ended June 30, 2016, due to an overall decrease in work experienced as a result of depressed oil and gas prices and the corresponding reduction in customer demand for oil and gas related service projects.
Gross profit - Gross profit from our Services division decreased $4.5 million for the three months ended June 30, 2017, compared to the three months ended June 30, 2016, due to decreased revenue discussed above and lower margins on new work performed during 2017.
General and administrative expenses - General and administrative expenses for our Services division decreased $153,000 for the three months ended June 30, 2017, compared to the three months ended June 30, 2016, due to lower bonuses accrued during 2017 as a result of a combination of a smaller workforce and our consolidated gross loss.
| | | | | | | | | | | | | | | | Corporate | | Three Months Ended June 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | — |
| | $ | — |
| | $ | — |
| | —% | Gross profit (loss) | | (90 | ) | | (98 | ) | | 8 |
| | 8.2% | Gross profit (loss) percentage | | n/a |
| | n/a |
| | | |
| General and administrative expenses | | 2,177 |
| | 1,672 |
| | 505 |
| | 30.2% | Operating income (loss) | | (2,267 | ) | | (1,770 | ) | |
|
| | |
General and administrative expenses - General and administrative expenses for our Corporate division increased primarily due to a restructuring of our corporate division with additional personnel allocated to our corporate division during 2017 as discussed above as well as for expenses incurred for advisors to assist in a strategic financial analysis project in anticipation of the proceeds to be received from the sale of our South Texas assets. This has been partially offset by lower bonuses accrued during 2017, as a result of a combination of a smaller workforce and our consolidated gross loss.
Six Months Ended June 30, 2017, Compared to Six Months Ended June 30, 2016 (in thousands, except for percentages):
Consolidated
| | | | | | | | | | | | | | | Six Months Ended June 30, | | Increase or (Decrease) | | 2017 | | 2016 | | Amount | Percent | Revenue | $ | 83,860 |
| | $ | 165,481 |
| | $ | (81,621 | ) | (49.3)% | Cost of revenue | 100,378 |
| | 145,714 |
| | (45,336 | ) | (31.1)% | Gross profit (loss) | (16,518 | ) | | 19,767 |
| | (36,285 | ) | (183.6)% | Gross profit (loss) percentage | (19.7 | )% | | 11.9 | % | | | | General and administrative expenses | 8,570 |
| | 9,547 |
| | (977 | ) | (10.2)% | Asset impairment | 389 |
| | — |
| | 389 |
| 100.0% | Operating income (loss) | (25,477 | ) | | 10,220 |
| | (35,697 | ) | (349.3)% | Other income (expense): | | | | | | | Interest expense | (217 | ) | | (138 | ) | | (79 | ) | | Interest income | 12 |
| | 8 |
| | 4 |
| | Other income (expense), net | (257 | ) | | 440 |
| | (697 | ) | | Total other income (expense) | (462 | ) | | 310 |
| | (772 | ) | (249.0)% | Net income (loss) before income taxes | (25,939 | ) | | 10,530 |
| | (36,469 | ) | (346.3)% | Income tax expense (benefit) | (8,561 | ) | | 4,001 |
| | (12,562 | ) | (314.0)% | Net income (loss) | $ | (17,378 | ) | | $ | 6,529 |
| | $ | (23,907 | ) | (366.2)% |
Revenue - Our revenue for the six months ended June 30, 2017 and 2016, was $83.9 million and $165.5 million, respectively, representing a decrease of 49.3%. The decrease is primarily attributable to an overall decrease in work experienced in our facilities as a result of depressed oil and gas prices and the corresponding reduction in customer demand within all of our operating divisions. Pass-through costs as a percentage of revenue were 41.9% and 37.6% for the six months ended June 30, 2017 and 2016, respectively. Pass-through costs, as described in Note 3 of the Notes to Consolidated Financial Statements, are included in revenue but have no impact on the gross profit recognized on a project for a particular period.
Gross profit (loss) - Our gross loss for the six months ended June 30, 2017, was $16.5 million compared to a gross profit of $19.8 million for the six months ended June 30, 2016. The decrease was primarily due to $10.6 million of losses incurred by our Shipyards division related to cost overruns and re-work identified on two vessel contracts assigned in the LEEVAC transaction, decreased revenue as discussed above, holding costs related to our South Texas assets of $2.5 million and lower margins on current work. This was partially offset by decreases in costs resulting from reductions in workforce as we wrapped up and completed projects at our South Texas fabrication yards and Prospect shipyard, suspended depreciation for our South Texas assets and Prospect shipyard during the six months ended June 30, 2017, as these assets are classified as assets held for sale and additional cost cutting measures implemented by management.
General and administrative expenses - Our general and administrative expenses were $8.6 million for the six months ended June 30, 2017, compared to $9.5 million for the six months ended June 30, 2016. The decrease in general and administrative expenses for the six months ended June 30, 2017, was primarily attributable to lower bonuses accrued during 2017 as a result of a combination of a smaller workforce and our consolidated gross loss and cost cutting measures implemented by management during the first part of 2016.
Asset Impairment - During the six months ended June 30, 2017, we recorded an impairment of $389,000 related to our assets held for sale at our Prospect Shipyard. See also Note 2 of the Notes to Consolidated Financial statements.
Other income (expense), net - Other expense was $257,000 for the six months ended June 30, 2017, compared to other income of $440,000 for the six months ended June 30, 2016. Other expense for the period was primarily due to losses on sales of two drydocks from our Shipyards division. Other income for the prior period was primarily due to gains on sales of assets from our Fabrication division recorded during the first quarter of 2016.
Income tax expense (benefit) - Our effective income tax rate for the six months ended June 30, 2017, was 33.0%, compared to an effective tax rate of 38.0% for the comparable period during 2016. The decrease in the effective tax rate is the result of limitations on the deductibility of executive compensation.
Operating Segments
As discussed above and in Note 8 of the Notes to Consolidated Financial Statements, management reduced its allocation of corporate administrative costs and overhead expenses to its operating divisions during the three and six months ended June 30, 2017. We have recast our 2016 segment data below in order to conform to the current period presentation. Our results of our three operating divisions and Corporate division for the six months ended June 30, 2017 and 2016, are presented below (in thousands, except for percentages).
| | | | | | | | | | | | | | | | Fabrication | | Six Months Ended June 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | 24,199 |
| | $ | 48,125 |
| | $ | (23,926 | ) | | (49.7)% | Gross profit (loss) | | (1,034 | ) | | 3,964 |
| | (4,998 | ) | | (126.1)% | Gross profit (loss) percentage | | (4.3 | )% | | 8.2 | % | | | | (12.5)% | General and administrative expenses | | 1,654 |
| | 1,936 |
| | (282 | ) | | (14.6)% | Operating income (loss) | | (2,688 | ) | | 2,028 |
| | | | |
Revenue - Revenue from our Fabrication division decreased $23.9 million for the six months ended June 30, 2017, compared to the six months ended June 30, 2016. The decrease is attributable to an overall decrease in work experienced in our fabrication yards as a result of depressed oil and gas prices and the corresponding reduction in customer demand for offshore fabrication projects. As discussed above, management has classified our South Texas assets as assets held for sale in response to the underutilization of our Fabrication assets. As of June 30, 2017, all of our projects at our South Texas fabrication yards have been completed or transferred to our Houma fabrication yard.
Gross profit (loss) - Gross loss from our Fabrication division for the six months ended June 30, 2017, was $1.0 million compared to a gross profit of $4.0 million for the six months ended June 30, 2016. The decrease was due to lower revenue from decreased fabrication work as discussed above and approximately $2.5 million of holding costs for our South Texas assets as we market them for sale. This was partially offset by decreases in costs resulting from reductions in workforce as we wrapped up and completed projects at our South Texas fabrication yards, reduced depreciation being recorded for our South Texas assets for the six months ended June 30, 2017, as these assets are classified as assets held for sale on February 23, 2017, and additional cost cutting measures implemented by management.
General and administrative expenses - General and administrative expenses for our Fabrication division decreased $282,000 for the six months ended June 30, 2017, compared to the six months ended June 30, 2016. The decrease is primarily due to decreases in costs resulting from reductions in workforce as we wrapped up and completed projects at our South Texas fabrication yards and lower bonuses accrued during 2017 as a result of a combination of a smaller workforce and our consolidated gross loss. This was partially offset by expenses incurred to market our South Texas assets for sale and payment of termination benefits during the first quarter of 2017 as we reduced its workforce and completed those operations.
| | | | | | | | | | | | | | | | Shipyards | | Six Months Ended June 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue (1) | | $ | 36,724 |
| | $ | 63,493 |
| | $ | (26,769 | ) | | (42.2)% | Gross profit (loss) (1) | | (15,556 | ) | | 7,797 |
| | (23,353 | ) | | (299.5)% | Gross profit (loss) percentage | | (42.4 | )% | | 12.3 | % | | | | (54.7)% | General and administrative expenses | | 1,947 |
| | 2,750 |
| | (803 | ) | | (29.2)% | Asset impairment | | 389 |
| | — |
| | 389 |
| | 100.0% | Operating income (loss) (1) | | (17,892 | ) | | 5,047 |
| | | | |
___________
| | (1) | Revenue for the six months ended June 30, 2017, and 2016, includes $1.9 million and $2.7$1.6 million of non-cash amortization of deferred revenue related to the values assigned to the contracts acquired in the LEEVAC transaction, respectively. |
Revenue - Revenue from our Shipyards division decreased $26.8 millionShipyard Division increased $143,000 for the sixthree months ended June 30, 2017,March 31, 2018, compared to the sixthree months ended June 30, 2016, dueMarch 31, 2017. During the first quarter of 2018, we were able to depressed oilmake progress on the construction of eight harbor tugs and gas pricesan offshore research vessel which were not under construction during the first quarter of 2017. This was partially offset by lower revenue from construction of our two OSV and two MPSV vessel contracts during the corresponding reduction in customer demand for shipbuilding and repair services supporting the oil and gas industry. first quarter of 2018.
During the first quarter of 2017, we completed a vessel that we assumed in the LEEVAC transactionfirst of the OSVs and deliveredtendered it for delivery on February 6, 2017, and suspended construction of the second OSV due to a customer on February 6, 2017.
Gross profit (loss) - Gross lossdispute. We recommenced construction of the second OSV during the fourth quarter of 2017 which is scheduled for completion during the second quarter of 2018. During the first quarter of 2018, we received a notice of purported termination from a customer within our Shipyards division was $15.6 million for the six months ended June 30, 2017, compared to a gross profit of $7.8 million for the six months ended June 30, 2016. The decrease was due to:
$10.6 million in contract lossesShipyard Division related to cost overrunsthe construction of two MPSVs. We dispute the purported termination and re-work thatdisagree with the customer’s reasons for same. Pending resolution of the dispute, all work has been identified on two contracts assigned to usstopped and the vessels and associated equipment and material are in the LEEVAC transaction;
holdingour care and closing costs related tocustody at our Prospect shipyard as we wind down operations at this facility;
holding costs related to a completed vessel that was delivered on February 6, 2017; however, was refused by our customer alleging certain technical deficiencies (see alsoin Houma, Louisiana. See Note 9 of the Notes to Consolidated Financial Statements);Statements for additional information relating to this customer dispute.
Gross profit (loss) - Gross loss from our Shipyard Division was $1.0 million for the three months ended March 31, 2018, compared to a gross loss of $1.7 million for the three months ended March 31, 2017. The decrease was due to improved cost management efforts and efficiencies learned from the construction of two OSV and two MPSV vessels during the three months ended March 31, 2017, and applied to the construction of eight harbor tugs during the three months ended March 31, 2018. overall decreases in work under other various contracts as discussed above.
General and administrative expenses - General and administrative expenses for our Shipyards divisionShipyard Division decreased $803,000$168,000 for the sixthree months ended June 30, 2017,March 31, 2018, compared to the sixthree months ended June 30, 2016,March 31, 2017, primarily due to lower bonuses accrued during 2017reductions in workforce, decreases in corporate allocations as a resultportion of a combination of a smaller workforcethese are now allocated to our EPC Division and our consolidated gross loss and cost cutting measures implemented by management during the first part of 2016.decreased construction activity.
Asset Impairmentimpairment - During sixthe three months ended June 30,March 31, 2017, we recorded an impairment of $389,000 related to ourthe Shipyard Division assets held for sale at our Prospect shipyard.sale. See also Note 2 of the Notes to Consolidated Financial statements.Statements for additional information relating to our assets held for sale. We did not record any asset impairment during the three months ended March 31, 2018, in our Shipyard Division.
| | | | | | | | | | | | | | | | Services | | Six Months Ended June 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | 26,107 |
| | $ | 55,251 |
| | $ | (29,144 | ) | | (52.7)% | Gross profit (loss) | | 423 |
| | 8,240 |
| | (7,817 | ) | | (94.9)% | Gross profit (loss) percentage | | 1.6 | % | | 14.9 | % | | | | (13.3)% | General and administrative expenses | | 1,313 |
| | 1,519 |
| | (206 | ) | | (13.6)% | Operating income (loss) | | (890 | ) | | 6,721 |
| | | | |
| | | | | | | | | | | | | | | | Services | | Three Months Ended March 31, | | Increase or (Decrease) | | | 2018 | | 2017 | | Amount | | Percent | Revenue | | $ | 21,870 |
| | $ | 10,712 |
| | $ | 11,158 |
| | 104.2% | Gross profit (loss) | | 2,614 |
| | 33 |
| | 2,581 |
| | 7,821.2% | Gross profit (loss) percentage | | 12.0 | % | | 0.3 | % | | | |
| General and administrative expenses | | 734 |
| | 666 |
| | 68 |
| | 10.2% | Operating income (loss) | | $ | 1,880 |
| | $ | (633 | ) | | $ | 2,513 |
| |
|
Revenue - Revenue from our Services division decreased $29.1Division increased $11.2 million for the sixthree months ended June 30, 2017,March 31, 2018, compared to the sixthree months ended June 30, 2016,March 31, 2017, due to an overall decreaseincrease in work experienced as a result of depressed oil and gas prices and the corresponding reductiondue to increases in customer demand for offshore oil and gas related service projects.
Gross profit - Gross profit from our Services division decreased $7.8Division increased $2.6 million for the sixthree months ended June 30, 2017,March 31, 2018, compared to the sixthree months ended June 30, 2016,March 31, 2017, due to decreasedincreased revenue discussed above and lower margins on new work performed during 2017.above.
General and administrative expenses - General and administrative expenses for our Services division decreased $206,000Division increased $68,000 for the sixthree months ended June 30, 2017,March 31, 2018, compared to the sixthree months ended June 30, 2016,March 31, 2017, due to lower bonuses accrued during 2017support of increased work as well as increases in employee incentive compensation of approximately $120,000 resulting from increased operating income. This was partially offset by decreases in corporate allocations as a resultportion of a combination of a smaller workforcethese are now allocated to our EPC Division and our consolidated gross loss.continued cost minimization efforts implemented by management for the period.
| | | | | | | | | | | | | | | | Corporate | | Six Months Ended June 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | — |
| | $ | — |
| | $ | — |
| | —% | Gross profit (loss) | | (351 | ) | | (234 | ) | | (117 | ) | | (50.0)% | Gross profit (loss) percentage | | n/a |
| | n/a |
| | | |
| General and administrative expenses | | 3,656 |
| | 3,342 |
| | 314 |
| | 9.4% | Operating income (loss) | | (4,007 | ) | | (3,576 | ) | | (431 | ) | | |
| | | | | | | | | | | | | | | | EPC | | Three Months Ended March 31, | | Increase or (Decrease) | | | 2018 | | 2017 | | Amount | | Percent | Revenue | | 73 |
| | $ | — |
| | $ | 73 |
| | 100.0% | Gross profit (loss) | | (308 | ) | | — |
| | (308 | ) | | (100.0)% | Gross profit (loss) percentage | | n/a |
| | n/a |
| | | |
| General and administrative expenses | | 417 |
| | — |
| | 417 |
| | 100.0% | Operating income (loss) | | $ | (725 | ) | | $ | — |
| | $ | (725 | ) | |
|
Revenue - Our EPC Division did not exist at March 31, 2017. Revenue for the three months ended March 31, 2018 consists of early work and engineering studies authorized by SeaOne. See Note 8 of the Notes to Consolidated Financial Statements for further discussion of our EPC Division and the SeaOne Project.
Gross profit (loss) - Gross loss from our EPC Division occurred as we added personnel and overhead infrastructure related to the anticipated SeaOne project.
General and administrative expenses - General and administrative expenses for our EPC Division include the addition of personnel and allocations of corporate expenses as we invest in this new line of business. | | | | | | | | | | | | | | | | Corporate | | Three Months Ended March 31, | | Increase or (Decrease) | | | 2018 | | 2017 | | Amount | | Percent | Revenue | | $ | — |
| | $ | — |
| | $ | — |
| | —% | Gross profit (loss) | | $ | (385 | ) | | (260 | ) | | 125 |
| | 48.1% | Gross profit (loss) percentage | | n/a |
| | n/a |
| | | | | General and administrative expenses | | 2,138 |
| | 1,479 |
| | 659 |
| | 44.6% | Operating income (loss) | | $ | (2,523 | ) | | $ | (1,739 | ) | | $ | 784 |
| |
|
Gross profit (loss) - Gross loss from our Corporate divisionDivision increased primarily due to a restructuringlower allocation of our corporate division with additional personnel allocated to our corporate division during 2017expenses and as discussed above.well as increased insurance costs.
General and administrative expenses - General and administrative expenses for our Corporate divisionDivision increased primarily due to a restructuringincreased legal and advisory fees related to customer disputes, strategic planning and diversification of our corporate division with additional personnel allocated to our corporate division during 2017 as discussed above as well as for expenses incurred for advisors to assist in a strategic financial analysis project in anticipationbusiness, increased employee incentive accruals and higher stock compensation expense of the proceeds to be received from the sale of our South Texas assets. This has been partially offset by lower bonuses accrued during 2017 as a result of a combination of a smaller workforce and our consolidated gross loss.approximately $220,000.
Liquidity and Capital Resources Historically, we have fundedOur immediate liquidity remains dependent on our business activities through cash generatedon hand, anticipated proceeds from operations.the sales of assets, availability of future drawings from our Credit Agreement and collections of accounts receivable. At June 30, 2017,March 31, 2018, we had no amounts$10 million outstanding under our credit facility, $4.6Credit Agreement, $2.5 million in outstanding letters of credit, and cash and cash equivalents totaling $22.3$6.5 million compared to $51.2$9.0 million at December 31, 2016. 2017. As of May 4, 2018, our liquidity has significantly improved due to the sale of our Texas South Yard the net proceeds of which will be used to rebuild our liquidity, to support upcoming projects, continue investing in our newly created EPC Division and for other general corporate purposes. After the sale of our Texas South Yard, our cash balance was $55.0 million, and the amount outstanding under our Credit Agreement was $10 million with remaining availability under our Credit Agreement of approximately $27.5 million for total liquidity of approximately $82.5 million.
Working capital was $167.7$137.1 million and our ratio of current assets to current liabilities was 4.624.34 to 1 at June 30, 2017,March 31, 2018, compared to $78.0$130.5 million and 3.213.68 to 1, respectively, at December 31, 2016.2017. Working capital at June 30, 2017,March 31, 2018, includes $107.3$98.4 million related to assets held for sale, primarily related to our South Texas facilities. Properties which decreased after the sale of our Texas South Yards to $48.5 million. At March 31, 2018, our contracts receivable balance was $27.4 million of which we have subsequently collected $14.9 million through May 4, 2018. Our primary use of cash during the sixthree months ended June 30, 2017,March 31, 2018, is referenced in the Cash Flow Activities section below. At June 30, 2017,As discussed in our contracts receivable balance was $38.1 millionExecutive Summary, we are implementing several strategies to diversify our business, increase backlog, reduce operating expenses and monetize assets. Our South Texas Properties are held for sale. A significant portion of which we have subsequently collected $12.0 million through July 19, 2017.our near-term plan is to generate liquidity from the sale of these assets.
On April 20, 2018, we closed on the sale of our Texas South Yard for a sale price of $55 million, less selling costs of $1.5 million. We received approximately $52.7 million at closing, which was in addition to the $750,000 of earnest money previously received on January 3, 2018, related to the option to purchase the Texas South Yard. We plan to use the net proceeds to rebuild our liquidity, to support upcoming projects, continue investing in our newly created EPC Division and for other general corporate purposes. See further discussion of the sale of our Texas South Yard in Note 2 of the Notes to Consolidated Financial Statements. We currently believe that cash on hand coupled with proceeds received from the sale of our Texas South Yard and funds available under our Credit Agreement will enable the Company to meet its working capital needs, capital expenditure requirements, any debt service obligations and other funding requirements for at least the twelve months from the date of this Report.
As of the date of this Report our Texas North Yard remains held for sale. The book value of the Texas North Yard is $46.6 million at March 31, 2018. We will continue to incur costs associated with holding and maintaining our Texas North Yard. These costs include insurance, general maintenance of the properties in their current state, property taxes and retained employees which will be expensed as incurred.
We have a $40 million Credit Agreement maturing June 9, 2017, we entered into a $40.0 million credit agreement with Whitney Bank, as lender (the “New2019. The Credit Facility”). The New Credit Facility matures June 9, 2019 and may be usedAgreement allows the Company to use up to the full amount of the available borrowing base for issuing letters of credit and/orand general corporate and working capital purposes. We believe that the new facilityour Credit Agreement will provide us with additional working capital flexibility to expand operations as backlog improves, respond to market opportunities and support our ongoing operations.
Interest on drawings under the New Credit FacilityAgreement may be designated, at our option, as either Base Rate (as defined in the New Credit Facility)credit facility) or LIBOR plus 2.0%2% per annum. Our outstanding balance of $10 million at March 31, 2018, is designated as a LIBOR rate loan. Unused commitment fees on the undrawn portion of the facilityCredit Agreement are 0.4% per annum, and the letter of credit feeinterest on undrawn stated amounts under letters of credit issued by the lenders are 0.4%lender is 2% per annum and 2.0%annum. At March 31, 2018, the interest rate on our outstanding borrowings was 3.75% per annum, respectively.annum. The New Credit FacilityAgreement is secured by substantially all of our assets (other than the assetsSouth Texas Properties).
At March 31, 2018, $10 million was outstanding under the Credit Agreement and, we had letters of Gulf Marine Fabricators, L.P.,credit of $2.5 million outstanding leaving availability of $27.5 million. Subsequent to March 31, 2018, we re-issued a letter of credit for $3 million related to outstanding contractual obligations which are currently held for sale).we expect to remain outstanding until July of 2018.
We must comply with the following financial covenants each quarter during the term of the facility:Credit Agreement:
| | i. | ratioRatio of current assets to current liabilities of not less than 1.25:1.00; |
| | ii. | minimumMinimum tangible net worth requirement of at least the sum of: |
| | a) | $230.0185 million, plus |
| | b) | anAn amount equal to 50% of consolidated net income for each fiscal quarter ending after June 30, 2017, including 50% of any gain attributable to the sale of our South Texas Properties (with no deduction for a net loss in any such fiscal quarter except for any gain or loss in connection with the sale of assets by Gulf Marine Fabricators, L.P.)quarter), plus |
| | c) | 100% of all netthe proceeds of any issuance of any stock or other equity after deducting of any fees, commissions, expenses and other costs incurred in such offering; and |
| | iii. | ratioRatio of funded debt to tangible net worth of not more than 0.50:1.00. |
Concurrent with our execution of the New Credit Facility, we terminated our prior credit facility with JPMorgan Chase Bank, N.A. At the time of the termination, there was approximately $4.6 million of letters of credit outstanding, all of which was temporarily cash collateralized by us. Subsequent to June 30, 2017, we were able to reissue new letters of credit under the New Credit Facility, of which $4.6 million have been accepted by the beneficiaries, and we have been released from cash collateral requirements. Availability under our credit facility for future, additional letters of credit and borrowings is $35.4 million. As of June 30, 2017,March 31, 2018, we were in compliance with all of our financial covenants.
We will continue to monitor and preserve our cash. Our primary liquidity requirements for 2018 and beyond are for the costs associated with fabrication and shipyard projects, capital expenditures related to the creation of our EPC Division and payment of dividendsenhancements to our shareholders.shipyards. Future capital expenditures will be highly dependent upon the amount and timing of future projects. Capital expenditures for the quarter ended March 31, 2018, were $71,000. We do not anticipate significant capital expenditures for the remainder of 20172018.
If industry conditions for offshore oil and gas do not improve, we are unable to range between $2.0 millionsell our Texas North Yard or the sale is delayed, or we are unable to $5.0 million primarily forincrease our backlog, we would expect to take additional measures to preserve our cash flows until such time we are able to generate cash flows from operations. Since the following:
improvementsbeginning of 2016, we have implemented wage adjustments along with employee benefit and overall cost reductions within all of our divisions. We have reduced the level of our workforce in the past and we will continue to do so based on booked work in all of our facilities. We have reduced the compensation paid to our Jenningsdirectors and Lake Charles leased shipyards,
improvementthe salaries of our executive officers, and we have reduced our capital expenditures and placed assets that are either underutilized, under-performing or not expected to the bulkhead atprovide sufficient long-term value for sale, which include our Houma facility, and
computer system upgrades.
South Texas Properties.
On October 21, 2016, a customer of our Shipyards division announced it was in noncompliance with certain financial covenants included in the customer’s debt agreements and stated that, while it had received limited waivers from its lenders, its debt agreements would require further negotiation and amendment. This same customer rejected delivery of the first vessel that we completed and tendered for delivery on February 6, 2017, alleging certain technical deficiencies exist with respect to the vessel and is seeking recovery of all purchase price amounts previously paid by the customer under the contract. On March 10, 2017, we gave notice for arbitration with our customer in an effort to resolve this matter. We are also building a second vessel for this customer which has been suspended and included in our arbitration proceedings. We disagree with our customer concerning these alleged technical deficiencies and have put the customer in default under the terms of the contracts for both vessels. On May 17, 2017, the customer filed for protection under Chapter 11 of the United States Bankruptcy Code for reorganization under a negotiated, pre-packaged plan. The customer has petitioned the Bankruptcy Court to accept our contracts for the two vessels we are constructing for them. As of June 30, 2017, approximately $4.6 million remained due and outstanding from our customer for the first vessel. The balance due to us for the second vessel upon completion and delivery is approximately $4.9 million.
We are working with legal counsel to protect our contractual claims during the restructuring and intend to re-initiate our rights for arbitration in accordance with our contract upon our customer's emergence from Chapter 11 reorganization. We intend to take all legal action as may be necessary to protect our rights under the contracts and recover the remaining balances owed to us.
We continue to monitor our work performed in relation to our customer’s status and its ability to pay under the terms of these contracts. Because these vessels have been completed or are substantially complete, wecurrently believe that they have significant fair valuecash on hand and that we wouldfunds available under our Credit Agreement will be ablesufficient to fully recovermeet our working capital and capital expenditure requirements, any remaining amounts due to us infuture debt service and other funding requirements for at least twelve months from the event we enforcedate of this Report. Our view regarding sufficiency of cash and liquidity is primarily based on our security interest over these projects.
In anticipation of the proceeds to be received fromfinancial forecast for 2018 and early 2019, which is impacted by various assumptions regarding the sale of our South Texas assets, we engaged advisors to assist in the development of a capital deployment plan to determine the appropriate use of proceeds from this transaction to maximize long-term shareholder value. Our capital deployment plan includes a variety of investment options including investing in our operating liquidity in order to facilitate anticipated future projects, selected capital improvements to enhance and/or expandNorth Yard, our existing facilities, mergersbacklog and acquisitionsa reasonable amount of forecast, non-contractual backlog. There is no guarantee that our financial forecast will be attainable or that we will have sufficient cash, including funds available under our Credit Agreement, to expand our product and service capabilitiesmeet planned operating expenses and other optionsunforeseen cash requirements. Accordingly, we may be required to return surplus resources to shareholders either through stock buy-backs and/or special dividends. We are continuing this effort to identify and analyze specific investment opportunities we believe will enhance the long-term value of the Company and that are consistent with our strategy.
On July 27, 2017, our Board of Directors declared a dividend of $0.01 per sharefurther draw on our shares of common stock outstanding, payable August 24, 2017,Credit Agreement, obtain additional bank financing, sell additional assets or conduct equity or debt offerings at a time when it is not beneficial to shareholders of record on August 10, 2017.do so.
We believe our cash and cash equivalents generated by our future operating activities and proceeds to be received from future assets sales will be sufficient to fund our capital expenditures and meet our working capital needs for both the near and longer term to continue our operations, satisfy our contractual operations and pay dividends to our shareholders.
Cash Flow Activities
For the sixthree months ended June 30, 2017,March 31, 2018, net cash used in operating activities was $27.9$14.1 million, compared to net cash provided byused in operating activities of $11.8$15.1 million for the sixthree months ended June 30, 2016.March 31, 2017. The use of cash in operations during the period was primarily due to the following:
Operating losses for the sixthree months ended June 30, 2017,March 31, 2018, in excess of non-cash depreciation, amortization, impairment and stock compensation expense of approximately $17.9 million,$1.5 million; Payment of year-end bonuses related to 2016,
Progress on liabilities from assumed contracts in the LEEVAC transaction. While our purchase price for the acquisition of the LEEVAC assets during 2016 was $20.0 million, we received a net $3.0 million in cash from the seller for the assumption of certain net liabilities and settlement payments on ongoing shipbuilding projects of $23.0 million that were assigned to us in the transaction. We have significantly progressed these contracts, which in turn has resulted in utilization of the working capital and settlement payments received during 2016.
The suspension of two vessel projects following our customer’s refusal to accept delivery of the first vessel in February 2017, and our inability to collect $9.5 million in scheduled payments under these contracts. We have initiated arbitration proceedings during the quarter to enforce our rights under these contracts; and
Build-up of costs for contracts in progress of $9.1 million;
Build-up of retainage on projects of $1.5 million; and
Payment of property taxes related to a customer in our Shipyards division with significant milestone payments occurring in the later stagesSouth Texas Properties of the projects which are expected to occur beginning in the third quarter of 2017 through the first quarter of 2018.$2 million.
Net cash provided by investing activities for the sixthree months ended June 30, 2017,March 31, 2018, was $296,000,$2.4 million, compared to cash provided byused in investing activities of $3.8 million$391,000 for the sixthree months ended June 30, 2016.March 31, 2017. The change in cash provided byused in investing activities is primarily due to cashthe insurance proceeds received from the sale of three cranesfor hurricane damage to assets at our South Texas facility for $5.5 million and $1.6 million of cash acquired in the LEEVAC transaction during 2016.Properties.
Net cash used inprovided by financing activities for the sixthree months ended June 30,March 31, 2018, and 2017, and 2016, was $1.2$9.2 million and $441,000, respectively. The increasecompared to $1.0 million in cash used in financing activities, respectively. The increase in cash provided by financing activities is due to the cash payments made to taxing authorities on behalf of employees' for their vesting of common stock.$10 million in net borrowings under our Credit Agreement.
Contractual Obligations There have been no material changes from the information included in our 2017 Annual Report on Form 10-K for the year ended December 31, 2016.Report. For more information on our contractual obligations, refer to Part II, Item 7 of our 2017 Annual Report on Form 10-K for the year ended December 31, 2016.Report. Off-Balance Sheet Arrangements There have been no material changes from the information included in our 2017 Annual Report on Form 10-K for the year ended December 31, 2016.Report. Item 3. Quantitative and Qualitative Disclosures About Market Risk. There have been no material changes in the Company’s market risks during the quarter ended June 30, 2017.March 31, 2018. For more information on market risk, refer to Part II, Item 7A. of our Annual Report on Form 10-K for the year ended December 31, 2016.2017. Item 4. Controls and Procedures. The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and that such information is communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report.Report. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that the design and operation of our disclosure controls and procedures were effective as of the end of the period covered by this report.Report. There have been no changes during the fiscal quarter ended June 30, 2017,March 31, 2018, in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION Item 1. Legal Proceedings. The Company is subject to various routine legal proceedings in the normal conduct of its business primarily involving commercial claims, workers’ compensation claims, and claims for personal injury under general maritime laws of the United States and the Jones Act. While the outcome of these lawsuits, legal proceedings and claims cannot be predicted with certainty, management believes that the outcome of any such proceedings, even if determined adversely, would not have a material adverse effect on the financial position, results of operations or cash flows of the Company. Item 1A. Risk Factors. There have been no material changes from the information included in Item 1A “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2016.2017. Item 6. Exhibits. | | | | | Exhibit Number | | Description of Exhibit | | | 3.1 | | | 3.2 | | | 10.1 | |
| 10.2 | |
| 10.3 | | | 10.2 | | Credit Agreement dated June 9, 2017, incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed June 9, 2017.February 26, 2018. †
| 10.4 | |
| 31.1 | | | 31.2 | | | 32 | | | | | | 101 | | Attached as Exhibit 101 to this report are the following items formatted in XBRL (Extensible Business Reporting Language): | | | (i) | Consolidated Balance Sheets, | | | (ii) | Consolidated Statements of Operations, | | | (iii) | Consolidated Statement of Changes in Shareholders’ Equity, | | | (iv) | Consolidated Statements of Cash Flows, and | | | (v) | Notes to Consolidated Financial Statements. | | | | † | | Management Contract or Compensatory Plan. |
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this reportReport to be signed on its behalf by the undersigned thereunto duly authorized. | | | GULF ISLAND FABRICATION, INC. | | BY: | /s/ David S. Schorlemer | | David S. Schorlemer | | Executive Vice President, Chief Financial Officer, Secretary and Treasurer (Principal Financial and Accounting Officer) |
Date: August 1, 2017May 4, 2018
GULF ISLAND FABRICATION, INC.
EXHIBIT INDEX
| | | | | Exhibit
Number
| | Description of Exhibit | | | 3.1 | | Composite Articles of Incorporation of the Company incorporated by reference to Exhibit 3.1 of the Company’s Form 10-Q filed April 23, 2009. | 3.2 | | Amended and Restated Bylaws of the Company, incorporated by reference to Exhibit 3.1 of the Company’s Form 8-K filed November 4, 2016. | 10.1 | | Change of Control Agreement, dated March 1, 2017, between the Company and David S. Schorlemer, incorporated by reference to Exhibit 10.15 of the Company's Form 10-K for the year ended December 31, 2016 filed on March 2, 2017. | 10.2 | | Credit Agreement dated June 9, 2017, incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed June 9, 2017. | 31.1 | | CEO Certifications pursuant to Rule 13a-14 under the Securities Exchange Act of 1934. | 31.2 | | CFO Certifications pursuant to Rule 13a-14 under the Securities Exchange Act of 1934. | 32 | | Section 906 Certification furnished pursuant to 18 U.S.C. Section 1350. | | | | 101 | | Attached as Exhibit 101 to this report are the following items formatted in XBRL (Extensible Business Reporting Language): | | | | | | (i) | Consolidated Balance Sheets, | | | (ii) | Consolidated Statements of Operations, | | | (iii) | Consolidated Statement of Changes in Shareholders’ Equity, | | | (iv) | Consolidated Statements of Cash Flows and | | | (v) | Notes to Consolidated Financial Statements. |
s | Labor hours | | ___________
| | (1) | We exclude suspended projects from contract backlog when they are expected to be suspended more than 12 months because resumption of work and timing of revenue recognition for these projects are difficult to predict. |
| | (2) | At June 30, 2017,March 31, 2018, projects for our five largest customers in terms of revenue backlog consisted of: |
| | (i) | twoTwo large multi-purpose service vesselsMPSVs for one customer in our Shipyards division,for which commenced in the first quarterwe have received a purported notice of 2014 and will be completed during the first and second quarters of 2018;termination as discussed above; |
| | (ii) | newbuildNewbuild construction of fourfive harbor tugs for one customer within our Shipyards division;(to be completed in 2018 through 2020); |
(iii) newbuild construction of four harbor tugs for one additional customer within our Shipyards division;
| | (iii) | Newbuild construction of five harbor tugs for one customer (separate from above) (to completed in 2018 through 2020); |
| | (iv) | the fabricationNewbuild construction of four modules associated with a U.S. ethane cracker project within our Fabrication division;an offshore research vessel (to be completed in 2020); and |
(v) newbuild construction of an offshore research vessel within our Shipyards division.
| | (3)(v) | Newbuild construction of one T-ATS vessel (to be completed in 2020). This contract is currently under a bid protest. |
| | (2) | The timing of recognition of the revenue represented in our backlog is based on management’s current estimates to complete the projects. Certain factors and circumstances could cause changes in the amounts ultimately recognized and the timing of the recognition of revenue from our backlog. |
Depending on
Certain of our contracts contain options which grant the sizeright to our customer, if exercised, for the construction of the project, the termination, postponement, or reductionadditional vessels at contracted prices.We do not include options in scope of any one project could significantly reduce our backlog above. If all options under our current contracts were exercised, our backlog would increase by $626.2 million. We believe disclosing these options provides investors with useful information in order to evaluate additional potential work that we would be contractually obligated to perform under our current contracts as well as the potential significance of these options, if exercised. We have not received any commitments related to the exercise of these options from our customers, and could have a material adverse effect on revenue, net income and cash flow. Additionally, as we continue tocan provide no assurance that any or all of these options will be exercised. As we add backlog, we will begin addingadd personnel with critical project management and fabrication skills to ensure we have the resources necessary to execute our projects well and to support our project risk mitigation discipline for all new project work.projects. This may negatively impact near termnear-term results. As of June 30, 2017,March 31, 2018, we had 983 employees and 166 contract961 employees compared to 1,178 employees and 92 contract977 employees as of December 31, 2016. 2017. Labor hours worked were 1.0 million496,000 during the sixthree months ended June 30, 2017,March 31, 2018, compared to 1.6 million479,000 for the sixthree months ended June 30, 2016.March 31, 2017. The overall decreaseincrease in labor hours worked for the sixthree months ended June 30, 2017,March 31, 2018, was due to an overallimproved offshore demand within our Services Division. As of April 29, 2018, we had 870 employees. The decrease in work experiencedour workforce subsequent to March 31, 2018, is primarily within our Fabrication Division due to completion of complex modules for the construction of a new petrochemical plant with no significant future Fabrication backlog forecasted in the near-term as well as the stoppage of construction of the two MPSVs within our facilities as a result of depressed oil and gas prices and the corresponding reduction in customer demand within allShipyard Division pending resolution of our operating divisions.dispute over termination with our MPSV customer. See Note 9 of the Notes to Consolidated Financial Statements related to our MPSV contract termination dispute.
Results of Operations Three Months Ended June 30, 2017,March 31, 2018, Compared to Three Months Ended June 30, 2016 March 31, 2017 (in thousands, except for percentages): Consolidated | | | | | | | | | | | | | | | Three Months Ended June 30, | | Increase or (Decrease) | | 2017 | | 2016 | | Amount | Percent | Revenue | $ | 45,868 |
| | $ | 81,502 |
| | $ | (35,634 | ) | (43.7)% | Cost of revenue | 57,488 |
| | 67,436 |
| | (9,948 | ) | (14.8)% | Gross profit (loss) | (11,620 | ) | | 14,066 |
| | (25,686 | ) | (182.6)% | Gross profit (loss) percentage | (25.3 | )% | | 17.3 | % | | | | General and administrative expenses | 4,640 |
| | 5,062 |
| | (422 | ) | (8.3)% | Operating income (loss) | (16,260 | ) | | 9,004 |
| | (25,264 | ) | (280.6)% | Other income (expense): | | | | | | | Interest expense | (158 | ) | | (88 | ) | | (70 | ) | | Interest income | 12 |
| | 2 |
| | 10 |
| | Other income (expense), net | (266 | ) | | 42 |
| | (308 | ) | | Total other income (expense) | (412 | ) | | (44 | ) | | (368 | ) | (836.4)% | Net income (loss) before income taxes | (16,672 | ) | | 8,960 |
| | (25,632 | ) | (286.1)% | Income tax expense (benefit) | (5,749 | ) | | 3,420 |
| | (9,169 | ) | (268.1)% | Net income (loss) | $ | (10,923 | ) | | $ | 5,540 |
| | $ | (16,463 | ) | (297.2)% |
| | | | | | | | | | | | | | | Three Months Ended March 31, | | Increase or (Decrease) | | 2018 | | 2017 | | Amount | Percent | Revenue | $ | 57,290 |
| | $ | 37,993 |
| | $ | 19,297 |
| 50.8% | Cost of revenue | 56,611 |
| | 42,890 |
| | 13,721 |
| 32.0% | Gross profit (loss) | 679 |
| | (4,897 | ) | | 5,576 |
| 113.9% | Gross profit (loss) percentage | 1.2 | % | | (12.9 | )% | | | | General and administrative expenses | 4,709 |
| | 3,930 |
| | 779 |
| 19.8% | Asset impairment | 750 |
| | 389 |
| | 361 |
| 92.8% | Operating income (loss) | (4,780 | ) | | (9,216 | ) | | (4,436 | ) |
| Other income (expense): | | | | | | | Interest expense | (469 | ) | | (59 | ) | | (410 | ) | (694.9)% | Other income (expense), net | 12 |
| | 9 |
| | 3 |
| 33.3% | Total other income (expense) | (457 | ) | | (50 | ) | | (407 | ) | (814.0)% | Net loss before income taxes | (5,237 | ) | | (9,266 | ) | | (4,029 | ) | (43.5)% | Income tax expense (benefit) | 59 |
| | (2,812 | ) | | 2,871 |
| 102.1% | Net loss | $ | (5,296 | ) | | $ | (6,454 | ) | | $ | 6,900 |
|
|
Revenue - Our revenue for the three months ended June 30,March 31, 2018 and 2017, and 2016, was $45.9$57.3 million and $81.5$38.0 million, respectively, representing a decreasean increase of 43.7%50.8%. The decreaseincrease is primarily attributable to an overall decrease in work experienced into:
An increase of $11.2 million within our facilities as a result of depressedServices Division from additional demand for offshore oil and gas pricesservice related projects; and An increase of $7.1 million within our Fabrication Division primarily attributable to the corresponding reduction in customer demand within allconstruction of our operating divisions. Pass-through costs asfour modules for a percentage of revenue were 53.1% and 35.1%petrochemical plant.
Gross profit (loss) - Our gross profit for the three months ended June 30, 2017 and 2016, respectively. Pass-through costs, as described in Note 3 of the Notes to Consolidated Financial Statements, are included in revenue but have no impact on the gross profit recognized on a project for a particular period.
Gross profit (loss) - Our gross loss for the three months ended June 30, 2017,March 31, 2018, was $11.6 million$679,000 compared to a gross profitloss of $14.1$4.9 million for the three months ended June 30, 2016.March 31, 2017. The decreaseincrease in gross profit was primarily due to $10.2 million of contract losses incurred byincreased revenue within our Shipyards division related to cost overruns and re-work identified on two vessel contracts assigned in the LEEVAC transaction, decreased revenueServices Division as discussed above holding costsand decreased expenses within our Fabrication Division which included $1.9 million of depreciation expense for the three months ended March 31, 2017, related to our South Texas assets of $1.2 million and lower margins on current work. This was partially offset by decreases in costs resulting from reductions in workforce as we wrapped up and completed projects at our South Texas fabrication yards and Prospect shipyard,Properties with no depreciation being recordedexpense during the three months ended March 31, 2018, for our South Texas assets and Prospect shipyard for the three months ended June 30, 2017,Properties as these assets are classified as assets held for sale and additional cost cutting measures implemented by management.sale.
General and administrative expenses - Our general and administrative expenses were $4.6$4.7 million for the three months ended June 30, 2017,March 31, 2018, compared to $5.1$3.9 million for the three months ended June 30, 2016.March 31, 2017. The decreaseincrease in general and administrative expenses for the three months ended June 30, 2017,March 31, 2018, was primarily attributable to lower bonuses accrued during 2017
Build-up of additional personnel for our newly created EPC Division; Increased legal and advisory fees related to customer disputes, strategic planning and diversification of our business; Increased employee incentive accruals of approximately $300,000 for all divisions related to our safety incentive program and higher employee profitability incentives within our Services Division as a resultwell as the addition of a combinationpersonnel as we build up our EPC Division in anticipation of a smaller workforcethe SeaOne Project; and our consolidated gross loss Higher stock compensation expense of approximately $220,000.
This was partially offset by cost reductions and continued cost cutting measuresminimization efforts implemented by management for the period.
Asset impairment - We recorded an impairment of $750,000 during the first partthree months ended March 31, 2018, related to a piece of 2016.equipment at our Texas North Yard that we intend to sell at auction. This piece of equipment was not damaged by
Other income (expense),Hurricane Harvey. The impairment was calculated as management's estimated net proceeds from the sale less its net book value. See also Note 2 of the Notes to Consolidated Financial Statements for additional information regarding our assets held for sale. During the three months ended March 31, 2017, we recorded an impairment of $389,000 related to the Shipyard Division assets held for sale.
Interest expense- OtherInterest expense was $266,000increased due to drawings under our Credit Agreement for the three months ended June 30, 2017, as compared to other income of $42,000March 31, 2018, with no such drawings under our Credit Agreement for the three months ended June 30, 2016. Other expense forMarch 31, 2017, as well as increased amortization of deferred financing costs during the period was primarily due to losses on the sale of two drydocks from our Shipyards division recorded during three months ended June 30, 2017.March 31, 2018.
Income tax expense (benefit) - Our effective income tax rate for the three months ended June 30, 2017,March 31, 2018, was 34.5%(1.1)%, compared to an effective tax rate benefit of 38.2%30.3% for the comparable period during 2016.2017. Current expense represents state taxes within our Services Division. The decrease in the effective tax rate is the result of limitations on the deductibility of executive compensation. These amount are included in the estimate ofa valuation allowance against our year-end effective rate.
Operating Segments
As discussed indeferred tax assets. See Note 81 of the Notes to Consolidated Financial Statements management reduced its allocation of corporate administrative costsregarding our NOLs and overhead expenses to its operating divisions during the three and six months ended June 30, 2017, such that a significant portion of its corporate expenses are retained in its non-operating Corporate division. In addition, it has also allocated certain personnel previously included in the operating divisions to within the Corporate division. In doing so, management believes that it has created a fourth reportable segment with each of its three operating divisions and its Corporate division each meeting the criteria of reportable segments under GAAP. During the three and six months ended June 30, 2016, we allocated substantially all of our corporate administrative costs and overhead expenses to our three operating divisions. We have recast our 2016 segment data below in order to conform to the current period presentation. Ourdeferred tax assets.
Operating Segments
The results of our threefour operating divisions and Corporate divisionDivision for the three months ended June 30,March 31, 2018 and 2017, and 2016, are presented below (in thousands, except for percentages).
| | | | | | | | | | | | | | | | Fabrication | | Three Months Ended June 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | 13,990 |
| | $ | 24,296 |
| | $ | (10,306 | ) | | (42.4)% | Gross profit (loss) | | 1,931 |
| | 3,877 |
| | (1,946 | ) | | (50.2)% | Gross profit (loss) percentage | | 13.8 | % | | 16.0 | % | | | | (2.2)% | General and administrative expenses | | 833 |
| | 1,130 |
| | (297 | ) | | (26.3)% | Operating income (loss) | | 1,098 |
| | 2,747 |
| | | | |
| | | | | | | | | | | | | | | | Fabrication | | Three Months Ended March 31, | | Increase or (Decrease) | | | 2018 | | 2017 | | Amount | | Percent | Revenue | | $ | 17,270 |
| | $ | 10,209 |
| | $ | 7,061 |
| | 69.2% | Gross profit (loss) | | (219 | ) | | (2,966 | ) | | (2,747 | ) | | (92.6)% | Gross profit (loss) percentage | | (1.3 | )% | | (29.1 | )% | | | |
| General and administrative expenses | | 624 |
| | 821 |
| | (197 | ) | | (24.0)% | Asset impairment | | 750 |
| | — |
| | 750 |
| | 100.0% | Operating income (loss) | | $ | (1,593 | ) | | $ | (3,787 | ) | | $ | (2,194 | ) | |
|
Revenue - Revenue from our Fabrication division decreased $10.3Division increased $7.1 million for the three months ended June 30, 2017,March 31, 2018, compared to the three months ended June 30, 2016.March 31, 2017. The decreaseincrease is attributable to an overall decrease in work experienced in our fabrication yards asthe construction of four modules for a result ofpetrochemical plant during the three months ended March 31, 2018, and lower revenue during the three months ended March 31, 2017, resulting from depressed oil and gas prices and the corresponding reduction in customer demand for offshore fabrication projects. As discussed above, management has classified our South Texas assets as assets held for sale in response toprojects during the underutilizationperiod. This was partially offset, by decreased revenue of our Fabrication assets. As of June 30, 2017, all of our projects at our South Texas fabrication yards have been completed or transferred to our Houma fabrication yard.
Gross profit (loss) - Gross profit from our Fabrication division for the three months ended June 30, 2017, was $1.9 million compared to a gross profit of $3.9$2.4 million for the three months ended June 30, 2016. The decrease was due to lower revenue from decreased fabrication work as discussed above and approximately $1.2 million of holding costs for our South Texas assets. This was partially offset by decreases in costs resulting from reductions in workforce as we wrapped up and completed projectsMarch 31, 2018, at our South Texas fabrication yards, no depreciation being recordedProperties as these were placed for sale during the first quarter of 2017 and project work completed or transfered to our South Texas assetsHouma Fabrication Yard during 2017.
Gross profit (loss) - Gross loss from our Fabrication Division for the three months ended June 30, 2017,March 31, 2018, was $219,000 compared to a gross loss of $3.0 million for the three months ended March 31, 2017. The decrease in gross loss was due to increased revenue as discussed above and a reduction in depreciation expense of $1.9 million in depreciation expense during the three months ended March 31, 2018 for our South Texas Properties as these assets are classified as assets held for sale and additional cost cutting measures implemented by management.sale.
General and administrative expenses - General and administrative expenses for our Fabrication divisionDivision decreased $297,000$197,000 for the three months ended June 30, 2017,March 31, 2018, compared to the three months ended June 30, 2016.March 31, 2017. The decrease is primarily due to decreases in costs resulting from reductions in workforce as we wrapped up and completed projects at our South Texas fabrication yards and lower bonuses accrued during 2017Properties, decreases in corporate allocations as a resultportion of these are now allocated to our EPC Division and continued cost minimization efforts implemented by management for the period.
Asset impairment - We recorded an impairment of $750,000 during the three months ended March 31, 2018, related to a combinationpiece of a smaller workforce andequipment at our consolidated gross loss.Texas North Yard that we intend to sell at auction. This piece of equipment was not damaged by Hurricane Harvey. The impairment was calculated as management's estimated net proceeds from the sale less its net book value. See Note 2 of the Notes to Consolidated Financial Statements for additional information regarding our assets held for sale. We did not record any asset impairments during the three months ended March 31, 2017, within our Fabrication Division.
| | | | | | | | | | | | | | | | Shipyards | | Three Months Ended June 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue (1) | | $ | 18,303 |
| | $ | 29,373 |
| | $ | (11,070 | ) | | (37.7)% | Gross profit (loss) (1) | | (13,851 | ) | | 5,423 |
| | (19,274 | ) | | (355.4)% | Gross profit (loss) percentage | | (75.7 | )% | | 18.5 | % | | | | (94.2)% | General and administrative expenses | | 983 |
| | 1,460 |
| | (477 | ) | | (32.7)% | Operating income (loss) (1) | | (14,834 | ) | | 3,963 |
| | | | |
| | | | | | | | | | | | | | | | Shipyard | | Three Months Ended March 31, | | Increase or (Decrease) | | | 2018 | | 2017 | | Amount | | Percent | Revenue (1) | | $ | 18,565 |
| | $ | 18,422 |
| | $ | 143 |
| | 0.8% | Gross profit (loss) (1) | | (1,023 | ) | | (1,704 | ) | | (681 | ) | | (40.0)% | Gross profit (loss) percentage | | (5.5 | )% | | (9.2 | )% | | | |
| General and administrative expenses | | 796 |
| | 964 |
| | (168 | ) | | (17.4)% | Asset impairment | | — |
| | 389 |
| | (389 | ) | | (100.0)% | Operating income (loss) (1) | | $ | (1,819 | ) | | $ | (3,057 | ) | | $ | (1,238 | ) | |
|
___________ | | (1) | Revenue for the three months ended June 30,March 31, 2018, and 2017, includes $390,000 and 2016, includes $335,000 and $1.5 million of non-cash amortization of deferred revenue related to the values assigned to the contracts acquired in the LEEVAC transaction, respectively. |
Revenue - Revenue from our Shipyards division decreased $11.1 million for the three months ended June 30, 2017, compared to the three months ended June 30, 2016, due to depressed oil and gas prices and the corresponding reduction in customer demand for shipbuilding and repair services supporting the oil and gas industry. During the first quarter of 2017, we completed a vessel that we assumed in the LEEVAC transaction and delivered to a customer on February 6, 2017.
Gross profit (loss) - Gross loss from our Shipyards division was $13.9 million for the three months ended June 30, 2017, compared to a gross profit of $5.4 million for the three months ended June 30, 2016. The decrease was due to:
$10.2 million in contract losses related to cost overruns and re-work that has been identified on two contracts assigned to us in the LEEVAC transaction;
holding and closing costs related to our Prospect shipyard as we wind down operations at this facility;
holding costs related to a completed vessel that was delivered on February 6, 2017; however, was refused by our customer alleging certain technical deficiencies (see also Note 9 of the Notes to Consolidated Financial Statements); and
overall decreases in work under other various contracts as discussed above.
General and administrative expenses - General and administrative expenses for our Shipyards division decreased $477,000 for the three months ended June 30, 2017, compared to the three months ended June 30, 2016, primarily due to lower bonuses accrued during 2017 as a result of a combination of a smaller workforce and our consolidated gross loss and cost cutting measures implemented by management during the first part of 2016.
| | | | | | | | | | | | | | | | Services | | Three Months Ended June 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | 15,396 |
| | $ | 28,692 |
| | $ | (13,296 | ) | | (46.3)% | Gross profit (loss) | | 390 |
| | 4,864 |
| | (4,474 | ) | | (92.0)% | Gross profit (loss) percentage | | 2.5 | % | | 17.0 | % | | | | (14.5)% | General and administrative expenses | | 647 |
| | 800 |
| | (153 | ) | | (19.1)% | Operating income (loss) | | (257 | ) | | 4,064 |
| | | | |
Revenue - Revenue from our Services division decreased $13.3 million for the three months ended June 30, 2017, compared to the three months ended June 30, 2016, due to an overall decrease in work experienced as a result of depressed oil and gas prices and the corresponding reduction in customer demand for oil and gas related service projects.
Gross profit - Gross profit from our Services division decreased $4.5 million for the three months ended June 30, 2017, compared to the three months ended June 30, 2016, due to decreased revenue discussed above and lower margins on new work performed during 2017.
General and administrative expenses - General and administrative expenses for our Services division decreased $153,000 for the three months ended June 30, 2017, compared to the three months ended June 30, 2016, due to lower bonuses accrued during 2017 as a result of a combination of a smaller workforce and our consolidated gross loss.
| | | | | | | | | | | | | | | | Corporate | | Three Months Ended June 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | — |
| | $ | — |
| | $ | — |
| | —% | Gross profit (loss) | | (90 | ) | | (98 | ) | | 8 |
| | 8.2% | Gross profit (loss) percentage | | n/a |
| | n/a |
| | | |
| General and administrative expenses | | 2,177 |
| | 1,672 |
| | 505 |
| | 30.2% | Operating income (loss) | | (2,267 | ) | | (1,770 | ) | |
|
| | |
General and administrative expenses - General and administrative expenses for our Corporate division increased primarily due to a restructuring of our corporate division with additional personnel allocated to our corporate division during 2017 as discussed above as well as for expenses incurred for advisors to assist in a strategic financial analysis project in anticipation of the proceeds to be received from the sale of our South Texas assets. This has been partially offset by lower bonuses accrued during 2017, as a result of a combination of a smaller workforce and our consolidated gross loss.
Six Months Ended June 30, 2017, Compared to Six Months Ended June 30, 2016 (in thousands, except for percentages):
Consolidated
| | | | | | | | | | | | | | | Six Months Ended June 30, | | Increase or (Decrease) | | 2017 | | 2016 | | Amount | Percent | Revenue | $ | 83,860 |
| | $ | 165,481 |
| | $ | (81,621 | ) | (49.3)% | Cost of revenue | 100,378 |
| | 145,714 |
| | (45,336 | ) | (31.1)% | Gross profit (loss) | (16,518 | ) | | 19,767 |
| | (36,285 | ) | (183.6)% | Gross profit (loss) percentage | (19.7 | )% | | 11.9 | % | | | | General and administrative expenses | 8,570 |
| | 9,547 |
| | (977 | ) | (10.2)% | Asset impairment | 389 |
| | — |
| | 389 |
| 100.0% | Operating income (loss) | (25,477 | ) | | 10,220 |
| | (35,697 | ) | (349.3)% | Other income (expense): | | | | | | | Interest expense | (217 | ) | | (138 | ) | | (79 | ) | | Interest income | 12 |
| | 8 |
| | 4 |
| | Other income (expense), net | (257 | ) | | 440 |
| | (697 | ) | | Total other income (expense) | (462 | ) | | 310 |
| | (772 | ) | (249.0)% | Net income (loss) before income taxes | (25,939 | ) | | 10,530 |
| | (36,469 | ) | (346.3)% | Income tax expense (benefit) | (8,561 | ) | | 4,001 |
| | (12,562 | ) | (314.0)% | Net income (loss) | $ | (17,378 | ) | | $ | 6,529 |
| | $ | (23,907 | ) | (366.2)% |
Revenue - Our revenue for the six months ended June 30, 2017 and 2016, was $83.9 million and $165.5 million, respectively, representing a decrease of 49.3%. The decrease is primarily attributable to an overall decrease in work experienced in our facilities as a result of depressed oil and gas prices and the corresponding reduction in customer demand within all of our operating divisions. Pass-through costs as a percentage of revenue were 41.9% and 37.6% for the six months ended June 30, 2017 and 2016, respectively. Pass-through costs, as described in Note 3 of the Notes to Consolidated Financial Statements, are included in revenue but have no impact on the gross profit recognized on a project for a particular period.
Gross profit (loss) - Our gross loss for the six months ended June 30, 2017, was $16.5 million compared to a gross profit of $19.8 million for the six months ended June 30, 2016. The decrease was primarily due to $10.6 million of losses incurred by our Shipyards division related to cost overruns and re-work identified on two vessel contracts assigned in the LEEVAC transaction, decreased revenue as discussed above, holding costs related to our South Texas assets of $2.5 million and lower margins on current work. This was partially offset by decreases in costs resulting from reductions in workforce as we wrapped up and completed projects at our South Texas fabrication yards and Prospect shipyard, suspended depreciation for our South Texas assets and Prospect shipyard during the six months ended June 30, 2017, as these assets are classified as assets held for sale and additional cost cutting measures implemented by management.
General and administrative expenses - Our general and administrative expenses were $8.6 million for the six months ended June 30, 2017, compared to $9.5 million for the six months ended June 30, 2016. The decrease in general and administrative expenses for the six months ended June 30, 2017, was primarily attributable to lower bonuses accrued during 2017 as a result of a combination of a smaller workforce and our consolidated gross loss and cost cutting measures implemented by management during the first part of 2016.
Asset Impairment - During the six months ended June 30, 2017, we recorded an impairment of $389,000 related to our assets held for sale at our Prospect Shipyard. See also Note 2 of the Notes to Consolidated Financial statements.
Other income (expense), net - Other expense was $257,000 for the six months ended June 30, 2017, compared to other income of $440,000 for the six months ended June 30, 2016. Other expense for the period was primarily due to losses on sales of two drydocks from our Shipyards division. Other income for the prior period was primarily due to gains on sales of assets from our Fabrication division recorded during the first quarter of 2016.
Income tax expense (benefit) - Our effective income tax rate for the six months ended June 30, 2017, was 33.0%, compared to an effective tax rate of 38.0% for the comparable period during 2016. The decrease in the effective tax rate is the result of limitations on the deductibility of executive compensation.
Operating Segments
As discussed above and in Note 8 of the Notes to Consolidated Financial Statements, management reduced its allocation of corporate administrative costs and overhead expenses to its operating divisions during the three and six months ended June 30, 2017. We have recast our 2016 segment data below in order to conform to the current period presentation. Our results of our three operating divisions and Corporate division for the six months ended June 30, 2017 and 2016, are presented below (in thousands, except for percentages).
| | | | | | | | | | | | | | | | Fabrication | | Six Months Ended June 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | 24,199 |
| | $ | 48,125 |
| | $ | (23,926 | ) | | (49.7)% | Gross profit (loss) | | (1,034 | ) | | 3,964 |
| | (4,998 | ) | | (126.1)% | Gross profit (loss) percentage | | (4.3 | )% | | 8.2 | % | | | | (12.5)% | General and administrative expenses | | 1,654 |
| | 1,936 |
| | (282 | ) | | (14.6)% | Operating income (loss) | | (2,688 | ) | | 2,028 |
| | | | |
Revenue - Revenue from our Fabrication division decreased $23.9 million for the six months ended June 30, 2017, compared to the six months ended June 30, 2016. The decrease is attributable to an overall decrease in work experienced in our fabrication yards as a result of depressed oil and gas prices and the corresponding reduction in customer demand for offshore fabrication projects. As discussed above, management has classified our South Texas assets as assets held for sale in response to the underutilization of our Fabrication assets. As of June 30, 2017, all of our projects at our South Texas fabrication yards have been completed or transferred to our Houma fabrication yard.
Gross profit (loss) - Gross loss from our Fabrication division for the six months ended June 30, 2017, was $1.0 million compared to a gross profit of $4.0 million for the six months ended June 30, 2016. The decrease was due to lower revenue from decreased fabrication work as discussed above and approximately $2.5 million of holding costs for our South Texas assets as we market them for sale. This was partially offset by decreases in costs resulting from reductions in workforce as we wrapped up and completed projects at our South Texas fabrication yards, reduced depreciation being recorded for our South Texas assets for the six months ended June 30, 2017, as these assets are classified as assets held for sale on February 23, 2017, and additional cost cutting measures implemented by management.
General and administrative expenses - General and administrative expenses for our Fabrication division decreased $282,000 for the six months ended June 30, 2017, compared to the six months ended June 30, 2016. The decrease is primarily due to decreases in costs resulting from reductions in workforce as we wrapped up and completed projects at our South Texas fabrication yards and lower bonuses accrued during 2017 as a result of a combination of a smaller workforce and our consolidated gross loss. This was partially offset by expenses incurred to market our South Texas assets for sale and payment of termination benefits during the first quarter of 2017 as we reduced its workforce and completed those operations.
| | | | | | | | | | | | | | | | Shipyards | | Six Months Ended June 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue (1) | | $ | 36,724 |
| | $ | 63,493 |
| | $ | (26,769 | ) | | (42.2)% | Gross profit (loss) (1) | | (15,556 | ) | | 7,797 |
| | (23,353 | ) | | (299.5)% | Gross profit (loss) percentage | | (42.4 | )% | | 12.3 | % | | | | (54.7)% | General and administrative expenses | | 1,947 |
| | 2,750 |
| | (803 | ) | | (29.2)% | Asset impairment | | 389 |
| | — |
| | 389 |
| | 100.0% | Operating income (loss) (1) | | (17,892 | ) | | 5,047 |
| | | | |
___________
| | (1) | Revenue for the six months ended June 30, 2017, and 2016, includes $1.9 million and $2.7$1.6 million of non-cash amortization of deferred revenue related to the values assigned to the contracts acquired in the LEEVAC transaction, respectively. |
Revenue - Revenue from our Shipyards division decreased $26.8 millionShipyard Division increased $143,000 for the sixthree months ended June 30, 2017,March 31, 2018, compared to the sixthree months ended June 30, 2016, dueMarch 31, 2017. During the first quarter of 2018, we were able to depressed oilmake progress on the construction of eight harbor tugs and gas pricesan offshore research vessel which were not under construction during the first quarter of 2017. This was partially offset by lower revenue from construction of our two OSV and two MPSV vessel contracts during the corresponding reduction in customer demand for shipbuilding and repair services supporting the oil and gas industry. first quarter of 2018.
During the first quarter of 2017, we completed a vessel that we assumed in the LEEVAC transactionfirst of the OSVs and deliveredtendered it for delivery on February 6, 2017, and suspended construction of the second OSV due to a customer on February 6, 2017.
Gross profit (loss) - Gross lossdispute. We recommenced construction of the second OSV during the fourth quarter of 2017 which is scheduled for completion during the second quarter of 2018. During the first quarter of 2018, we received a notice of purported termination from a customer within our Shipyards division was $15.6 million for the six months ended June 30, 2017, compared to a gross profit of $7.8 million for the six months ended June 30, 2016. The decrease was due to:
$10.6 million in contract lossesShipyard Division related to cost overrunsthe construction of two MPSVs. We dispute the purported termination and re-work thatdisagree with the customer’s reasons for same. Pending resolution of the dispute, all work has been identified on two contracts assigned to usstopped and the vessels and associated equipment and material are in the LEEVAC transaction;
holdingour care and closing costs related tocustody at our Prospect shipyard as we wind down operations at this facility;
holding costs related to a completed vessel that was delivered on February 6, 2017; however, was refused by our customer alleging certain technical deficiencies (see alsoin Houma, Louisiana. See Note 9 of the Notes to Consolidated Financial Statements);Statements for additional information relating to this customer dispute.
Gross profit (loss) - Gross loss from our Shipyard Division was $1.0 million for the three months ended March 31, 2018, compared to a gross loss of $1.7 million for the three months ended March 31, 2017. The decrease was due to improved cost management efforts and efficiencies learned from the construction of two OSV and two MPSV vessels during the three months ended March 31, 2017, and applied to the construction of eight harbor tugs during the three months ended March 31, 2018. overall decreases in work under other various contracts as discussed above.
General and administrative expenses - General and administrative expenses for our Shipyards divisionShipyard Division decreased $803,000$168,000 for the sixthree months ended June 30, 2017,March 31, 2018, compared to the sixthree months ended June 30, 2016,March 31, 2017, primarily due to lower bonuses accrued during 2017reductions in workforce, decreases in corporate allocations as a resultportion of a combination of a smaller workforcethese are now allocated to our EPC Division and our consolidated gross loss and cost cutting measures implemented by management during the first part of 2016.decreased construction activity.
Asset Impairmentimpairment - During sixthe three months ended June 30,March 31, 2017, we recorded an impairment of $389,000 related to ourthe Shipyard Division assets held for sale at our Prospect shipyard.sale. See also Note 2 of the Notes to Consolidated Financial statements.Statements for additional information relating to our assets held for sale. We did not record any asset impairment during the three months ended March 31, 2018, in our Shipyard Division.
| | | | | | | | | | | | | | | | Services | | Six Months Ended June 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | 26,107 |
| | $ | 55,251 |
| | $ | (29,144 | ) | | (52.7)% | Gross profit (loss) | | 423 |
| | 8,240 |
| | (7,817 | ) | | (94.9)% | Gross profit (loss) percentage | | 1.6 | % | | 14.9 | % | | | | (13.3)% | General and administrative expenses | | 1,313 |
| | 1,519 |
| | (206 | ) | | (13.6)% | Operating income (loss) | | (890 | ) | | 6,721 |
| | | | |
| | | | | | | | | | | | | | | | Services | | Three Months Ended March 31, | | Increase or (Decrease) | | | 2018 | | 2017 | | Amount | | Percent | Revenue | | $ | 21,870 |
| | $ | 10,712 |
| | $ | 11,158 |
| | 104.2% | Gross profit (loss) | | 2,614 |
| | 33 |
| | 2,581 |
| | 7,821.2% | Gross profit (loss) percentage | | 12.0 | % | | 0.3 | % | | | |
| General and administrative expenses | | 734 |
| | 666 |
| | 68 |
| | 10.2% | Operating income (loss) | | $ | 1,880 |
| | $ | (633 | ) | | $ | 2,513 |
| |
|
Revenue - Revenue from our Services division decreased $29.1Division increased $11.2 million for the sixthree months ended June 30, 2017,March 31, 2018, compared to the sixthree months ended June 30, 2016,March 31, 2017, due to an overall decreaseincrease in work experienced as a result of depressed oil and gas prices and the corresponding reductiondue to increases in customer demand for offshore oil and gas related service projects.
Gross profit - Gross profit from our Services division decreased $7.8Division increased $2.6 million for the sixthree months ended June 30, 2017,March 31, 2018, compared to the sixthree months ended June 30, 2016,March 31, 2017, due to decreasedincreased revenue discussed above and lower margins on new work performed during 2017.above.
General and administrative expenses - General and administrative expenses for our Services division decreased $206,000Division increased $68,000 for the sixthree months ended June 30, 2017,March 31, 2018, compared to the sixthree months ended June 30, 2016,March 31, 2017, due to lower bonuses accrued during 2017support of increased work as well as increases in employee incentive compensation of approximately $120,000 resulting from increased operating income. This was partially offset by decreases in corporate allocations as a resultportion of a combination of a smaller workforcethese are now allocated to our EPC Division and our consolidated gross loss.continued cost minimization efforts implemented by management for the period.
| | | | | | | | | | | | | | | | Corporate | | Six Months Ended June 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | — |
| | $ | — |
| | $ | — |
| | —% | Gross profit (loss) | | (351 | ) | | (234 | ) | | (117 | ) | | (50.0)% | Gross profit (loss) percentage | | n/a |
| | n/a |
| | | |
| General and administrative expenses | | 3,656 |
| | 3,342 |
| | 314 |
| | 9.4% | Operating income (loss) | | (4,007 | ) | | (3,576 | ) | | (431 | ) | | |
| | | | | | | | | | | | | | | | EPC | | Three Months Ended March 31, | | Increase or (Decrease) | | | 2018 | | 2017 | | Amount | | Percent | Revenue | | 73 |
| | $ | — |
| | $ | 73 |
| | 100.0% | Gross profit (loss) | | (308 | ) | | — |
| | (308 | ) | | (100.0)% | Gross profit (loss) percentage | | n/a |
| | n/a |
| | | |
| General and administrative expenses | | 417 |
| | — |
| | 417 |
| | 100.0% | Operating income (loss) | | $ | (725 | ) | | $ | — |
| | $ | (725 | ) | |
|
Revenue - Our EPC Division did not exist at March 31, 2017. Revenue for the three months ended March 31, 2018 consists of early work and engineering studies authorized by SeaOne. See Note 8 of the Notes to Consolidated Financial Statements for further discussion of our EPC Division and the SeaOne Project.
Gross profit (loss) - Gross loss from our EPC Division occurred as we added personnel and overhead infrastructure related to the anticipated SeaOne project.
General and administrative expenses - General and administrative expenses for our EPC Division include the addition of personnel and allocations of corporate expenses as we invest in this new line of business. | | | | | | | | | | | | | | | | Corporate | | Three Months Ended March 31, | | Increase or (Decrease) | | | 2018 | | 2017 | | Amount | | Percent | Revenue | | $ | — |
| | $ | — |
| | $ | — |
| | —% | Gross profit (loss) | | $ | (385 | ) | | (260 | ) | | 125 |
| | 48.1% | Gross profit (loss) percentage | | n/a |
| | n/a |
| | | | | General and administrative expenses | | 2,138 |
| | 1,479 |
| | 659 |
| | 44.6% | Operating income (loss) | | $ | (2,523 | ) | | $ | (1,739 | ) | | $ | 784 |
| |
|
Gross profit (loss) - Gross loss from our Corporate divisionDivision increased primarily due to a restructuringlower allocation of our corporate division with additional personnel allocated to our corporate division during 2017expenses and as discussed above.well as increased insurance costs.
General and administrative expenses - General and administrative expenses for our Corporate divisionDivision increased primarily due to a restructuringincreased legal and advisory fees related to customer disputes, strategic planning and diversification of our corporate division with additional personnel allocated to our corporate division during 2017 as discussed above as well as for expenses incurred for advisors to assist in a strategic financial analysis project in anticipationbusiness, increased employee incentive accruals and higher stock compensation expense of the proceeds to be received from the sale of our South Texas assets. This has been partially offset by lower bonuses accrued during 2017 as a result of a combination of a smaller workforce and our consolidated gross loss.approximately $220,000.
Liquidity and Capital Resources Historically, we have fundedOur immediate liquidity remains dependent on our business activities through cash generatedon hand, anticipated proceeds from operations.the sales of assets, availability of future drawings from our Credit Agreement and collections of accounts receivable. At June 30, 2017,March 31, 2018, we had no amounts$10 million outstanding under our credit facility, $4.6Credit Agreement, $2.5 million in outstanding letters of credit, and cash and cash equivalents totaling $22.3$6.5 million compared to $51.2$9.0 million at December 31, 2016. 2017. As of May 4, 2018, our liquidity has significantly improved due to the sale of our Texas South Yard the net proceeds of which will be used to rebuild our liquidity, to support upcoming projects, continue investing in our newly created EPC Division and for other general corporate purposes. After the sale of our Texas South Yard, our cash balance was $55.0 million, and the amount outstanding under our Credit Agreement was $10 million with remaining availability under our Credit Agreement of approximately $27.5 million for total liquidity of approximately $82.5 million.
Working capital was $167.7$137.1 million and our ratio of current assets to current liabilities was 4.624.34 to 1 at June 30, 2017,March 31, 2018, compared to $78.0$130.5 million and 3.213.68 to 1, respectively, at December 31, 2016.2017. Working capital at June 30, 2017,March 31, 2018, includes $107.3$98.4 million related to assets held for sale, primarily related to our South Texas facilities. Properties which decreased after the sale of our Texas South Yards to $48.5 million. At March 31, 2018, our contracts receivable balance was $27.4 million of which we have subsequently collected $14.9 million through May 4, 2018. Our primary use of cash during the sixthree months ended June 30, 2017,March 31, 2018, is referenced in the Cash Flow Activities section below. At June 30, 2017,As discussed in our contracts receivable balance was $38.1 millionExecutive Summary, we are implementing several strategies to diversify our business, increase backlog, reduce operating expenses and monetize assets. Our South Texas Properties are held for sale. A significant portion of which we have subsequently collected $12.0 million through July 19, 2017.our near-term plan is to generate liquidity from the sale of these assets.
On April 20, 2018, we closed on the sale of our Texas South Yard for a sale price of $55 million, less selling costs of $1.5 million. We received approximately $52.7 million at closing, which was in addition to the $750,000 of earnest money previously received on January 3, 2018, related to the option to purchase the Texas South Yard. We plan to use the net proceeds to rebuild our liquidity, to support upcoming projects, continue investing in our newly created EPC Division and for other general corporate purposes. See further discussion of the sale of our Texas South Yard in Note 2 of the Notes to Consolidated Financial Statements. We currently believe that cash on hand coupled with proceeds received from the sale of our Texas South Yard and funds available under our Credit Agreement will enable the Company to meet its working capital needs, capital expenditure requirements, any debt service obligations and other funding requirements for at least the twelve months from the date of this Report.
As of the date of this Report our Texas North Yard remains held for sale. The book value of the Texas North Yard is $46.6 million at March 31, 2018. We will continue to incur costs associated with holding and maintaining our Texas North Yard. These costs include insurance, general maintenance of the properties in their current state, property taxes and retained employees which will be expensed as incurred.
We have a $40 million Credit Agreement maturing June 9, 2017, we entered into a $40.0 million credit agreement with Whitney Bank, as lender (the “New2019. The Credit Facility”). The New Credit Facility matures June 9, 2019 and may be usedAgreement allows the Company to use up to the full amount of the available borrowing base for issuing letters of credit and/orand general corporate and working capital purposes. We believe that the new facilityour Credit Agreement will provide us with additional working capital flexibility to expand operations as backlog improves, respond to market opportunities and support our ongoing operations.
Interest on drawings under the New Credit FacilityAgreement may be designated, at our option, as either Base Rate (as defined in the New Credit Facility)credit facility) or LIBOR plus 2.0%2% per annum. Our outstanding balance of $10 million at March 31, 2018, is designated as a LIBOR rate loan. Unused commitment fees on the undrawn portion of the facilityCredit Agreement are 0.4% per annum, and the letter of credit feeinterest on undrawn stated amounts under letters of credit issued by the lenders are 0.4%lender is 2% per annum and 2.0%annum. At March 31, 2018, the interest rate on our outstanding borrowings was 3.75% per annum, respectively.annum. The New Credit FacilityAgreement is secured by substantially all of our assets (other than the assetsSouth Texas Properties).
At March 31, 2018, $10 million was outstanding under the Credit Agreement and, we had letters of Gulf Marine Fabricators, L.P.,credit of $2.5 million outstanding leaving availability of $27.5 million. Subsequent to March 31, 2018, we re-issued a letter of credit for $3 million related to outstanding contractual obligations which are currently held for sale).we expect to remain outstanding until July of 2018.
We must comply with the following financial covenants each quarter during the term of the facility:Credit Agreement:
| | i. | ratioRatio of current assets to current liabilities of not less than 1.25:1.00; |
| | ii. | minimumMinimum tangible net worth requirement of at least the sum of: |
| | a) | $230.0185 million, plus |
| | b) | anAn amount equal to 50% of consolidated net income for each fiscal quarter ending after June 30, 2017, including 50% of any gain attributable to the sale of our South Texas Properties (with no deduction for a net loss in any such fiscal quarter except for any gain or loss in connection with the sale of assets by Gulf Marine Fabricators, L.P.)quarter), plus |
| | c) | 100% of all netthe proceeds of any issuance of any stock or other equity after deducting of any fees, commissions, expenses and other costs incurred in such offering; and |
| | iii. | ratioRatio of funded debt to tangible net worth of not more than 0.50:1.00. |
Concurrent with our execution of the New Credit Facility, we terminated our prior credit facility with JPMorgan Chase Bank, N.A. At the time of the termination, there was approximately $4.6 million of letters of credit outstanding, all of which was temporarily cash collateralized by us. Subsequent to June 30, 2017, we were able to reissue new letters of credit under the New Credit Facility, of which $4.6 million have been accepted by the beneficiaries, and we have been released from cash collateral requirements. Availability under our credit facility for future, additional letters of credit and borrowings is $35.4 million. As of June 30, 2017,March 31, 2018, we were in compliance with all of our financial covenants.
We will continue to monitor and preserve our cash. Our primary liquidity requirements for 2018 and beyond are for the costs associated with fabrication and shipyard projects, capital expenditures related to the creation of our EPC Division and payment of dividendsenhancements to our shareholders.shipyards. Future capital expenditures will be highly dependent upon the amount and timing of future projects. Capital expenditures for the quarter ended March 31, 2018, were $71,000. We do not anticipate significant capital expenditures for the remainder of 20172018.
If industry conditions for offshore oil and gas do not improve, we are unable to range between $2.0 millionsell our Texas North Yard or the sale is delayed, or we are unable to $5.0 million primarily forincrease our backlog, we would expect to take additional measures to preserve our cash flows until such time we are able to generate cash flows from operations. Since the following:
improvementsbeginning of 2016, we have implemented wage adjustments along with employee benefit and overall cost reductions within all of our divisions. We have reduced the level of our workforce in the past and we will continue to do so based on booked work in all of our facilities. We have reduced the compensation paid to our Jenningsdirectors and Lake Charles leased shipyards,
improvementthe salaries of our executive officers, and we have reduced our capital expenditures and placed assets that are either underutilized, under-performing or not expected to the bulkhead atprovide sufficient long-term value for sale, which include our Houma facility, and
computer system upgrades.
South Texas Properties.
On October 21, 2016, a customer of our Shipyards division announced it was in noncompliance with certain financial covenants included in the customer’s debt agreements and stated that, while it had received limited waivers from its lenders, its debt agreements would require further negotiation and amendment. This same customer rejected delivery of the first vessel that we completed and tendered for delivery on February 6, 2017, alleging certain technical deficiencies exist with respect to the vessel and is seeking recovery of all purchase price amounts previously paid by the customer under the contract. On March 10, 2017, we gave notice for arbitration with our customer in an effort to resolve this matter. We are also building a second vessel for this customer which has been suspended and included in our arbitration proceedings. We disagree with our customer concerning these alleged technical deficiencies and have put the customer in default under the terms of the contracts for both vessels. On May 17, 2017, the customer filed for protection under Chapter 11 of the United States Bankruptcy Code for reorganization under a negotiated, pre-packaged plan. The customer has petitioned the Bankruptcy Court to accept our contracts for the two vessels we are constructing for them. As of June 30, 2017, approximately $4.6 million remained due and outstanding from our customer for the first vessel. The balance due to us for the second vessel upon completion and delivery is approximately $4.9 million.
We are working with legal counsel to protect our contractual claims during the restructuring and intend to re-initiate our rights for arbitration in accordance with our contract upon our customer's emergence from Chapter 11 reorganization. We intend to take all legal action as may be necessary to protect our rights under the contracts and recover the remaining balances owed to us.
We continue to monitor our work performed in relation to our customer’s status and its ability to pay under the terms of these contracts. Because these vessels have been completed or are substantially complete, wecurrently believe that they have significant fair valuecash on hand and that we wouldfunds available under our Credit Agreement will be ablesufficient to fully recovermeet our working capital and capital expenditure requirements, any remaining amounts due to us infuture debt service and other funding requirements for at least twelve months from the event we enforcedate of this Report. Our view regarding sufficiency of cash and liquidity is primarily based on our security interest over these projects.
In anticipation of the proceeds to be received fromfinancial forecast for 2018 and early 2019, which is impacted by various assumptions regarding the sale of our South Texas assets, we engaged advisors to assist in the development of a capital deployment plan to determine the appropriate use of proceeds from this transaction to maximize long-term shareholder value. Our capital deployment plan includes a variety of investment options including investing in our operating liquidity in order to facilitate anticipated future projects, selected capital improvements to enhance and/or expandNorth Yard, our existing facilities, mergersbacklog and acquisitionsa reasonable amount of forecast, non-contractual backlog. There is no guarantee that our financial forecast will be attainable or that we will have sufficient cash, including funds available under our Credit Agreement, to expand our product and service capabilitiesmeet planned operating expenses and other optionsunforeseen cash requirements. Accordingly, we may be required to return surplus resources to shareholders either through stock buy-backs and/or special dividends. We are continuing this effort to identify and analyze specific investment opportunities we believe will enhance the long-term value of the Company and that are consistent with our strategy.
On July 27, 2017, our Board of Directors declared a dividend of $0.01 per sharefurther draw on our shares of common stock outstanding, payable August 24, 2017,Credit Agreement, obtain additional bank financing, sell additional assets or conduct equity or debt offerings at a time when it is not beneficial to shareholders of record on August 10, 2017.do so.
We believe our cash and cash equivalents generated by our future operating activities and proceeds to be received from future assets sales will be sufficient to fund our capital expenditures and meet our working capital needs for both the near and longer term to continue our operations, satisfy our contractual operations and pay dividends to our shareholders.
Cash Flow Activities
For the sixthree months ended June 30, 2017,March 31, 2018, net cash used in operating activities was $27.9$14.1 million, compared to net cash provided byused in operating activities of $11.8$15.1 million for the sixthree months ended June 30, 2016.March 31, 2017. The use of cash in operations during the period was primarily due to the following:
Operating losses for the sixthree months ended June 30, 2017,March 31, 2018, in excess of non-cash depreciation, amortization, impairment and stock compensation expense of approximately $17.9 million,$1.5 million; Payment of year-end bonuses related to 2016,
Progress on liabilities from assumed contracts in the LEEVAC transaction. While our purchase price for the acquisition of the LEEVAC assets during 2016 was $20.0 million, we received a net $3.0 million in cash from the seller for the assumption of certain net liabilities and settlement payments on ongoing shipbuilding projects of $23.0 million that were assigned to us in the transaction. We have significantly progressed these contracts, which in turn has resulted in utilization of the working capital and settlement payments received during 2016.
The suspension of two vessel projects following our customer’s refusal to accept delivery of the first vessel in February 2017, and our inability to collect $9.5 million in scheduled payments under these contracts. We have initiated arbitration proceedings during the quarter to enforce our rights under these contracts; and
Build-up of costs for contracts in progress of $9.1 million;
Build-up of retainage on projects of $1.5 million; and
Payment of property taxes related to a customer in our Shipyards division with significant milestone payments occurring in the later stagesSouth Texas Properties of the projects which are expected to occur beginning in the third quarter of 2017 through the first quarter of 2018.$2 million.
Net cash provided by investing activities for the sixthree months ended June 30, 2017,March 31, 2018, was $296,000,$2.4 million, compared to cash provided byused in investing activities of $3.8 million$391,000 for the sixthree months ended June 30, 2016.March 31, 2017. The change in cash provided byused in investing activities is primarily due to cashthe insurance proceeds received from the sale of three cranesfor hurricane damage to assets at our South Texas facility for $5.5 million and $1.6 million of cash acquired in the LEEVAC transaction during 2016.Properties.
Net cash used inprovided by financing activities for the sixthree months ended June 30,March 31, 2018, and 2017, and 2016, was $1.2$9.2 million and $441,000, respectively. The increasecompared to $1.0 million in cash used in financing activities, respectively. The increase in cash provided by financing activities is due to the cash payments made to taxing authorities on behalf of employees' for their vesting of common stock.$10 million in net borrowings under our Credit Agreement.
Contractual Obligations There have been no material changes from the information included in our 2017 Annual Report on Form 10-K for the year ended December 31, 2016.Report. For more information on our contractual obligations, refer to Part II, Item 7 of our 2017 Annual Report on Form 10-K for the year ended December 31, 2016.Report. Off-Balance Sheet Arrangements There have been no material changes from the information included in our 2017 Annual Report on Form 10-K for the year ended December 31, 2016.Report. Item 3. Quantitative and Qualitative Disclosures About Market Risk. There have been no material changes in the Company’s market risks during the quarter ended June 30, 2017.March 31, 2018. For more information on market risk, refer to Part II, Item 7A. of our Annual Report on Form 10-K for the year ended December 31, 2016.2017. Item 4. Controls and Procedures. The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and that such information is communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report.Report. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that the design and operation of our disclosure controls and procedures were effective as of the end of the period covered by this report.Report. There have been no changes during the fiscal quarter ended June 30, 2017,March 31, 2018, in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION Item 1. Legal Proceedings. The Company is subject to various routine legal proceedings in the normal conduct of its business primarily involving commercial claims, workers’ compensation claims, and claims for personal injury under general maritime laws of the United States and the Jones Act. While the outcome of these lawsuits, legal proceedings and claims cannot be predicted with certainty, management believes that the outcome of any such proceedings, even if determined adversely, would not have a material adverse effect on the financial position, results of operations or cash flows of the Company. Item 1A. Risk Factors. There have been no material changes from the information included in Item 1A “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2016.2017. Item 6. Exhibits. | | | | | Exhibit Number | | Description of Exhibit | | | 3.1 | | | 3.2 | | | 10.1 | |
| 10.2 | |
| 10.3 | | | 10.2 | | Credit Agreement dated June 9, 2017, incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed June 9, 2017.February 26, 2018. †
| 10.4 | |
| 31.1 | | | 31.2 | | | 32 | | | | | | 101 | | Attached as Exhibit 101 to this report are the following items formatted in XBRL (Extensible Business Reporting Language): | | | (i) | Consolidated Balance Sheets, | | | (ii) | Consolidated Statements of Operations, | | | (iii) | Consolidated Statement of Changes in Shareholders’ Equity, | | | (iv) | Consolidated Statements of Cash Flows, and | | | (v) | Notes to Consolidated Financial Statements. | | | | † | | Management Contract or Compensatory Plan. |
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this reportReport to be signed on its behalf by the undersigned thereunto duly authorized. | | | GULF ISLAND FABRICATION, INC. | | BY: | /s/ David S. Schorlemer | | David S. Schorlemer | | Executive Vice President, Chief Financial Officer, Secretary and Treasurer (Principal Financial and Accounting Officer) |
Date: August 1, 2017May 4, 2018
GULF ISLAND FABRICATION, INC.
EXHIBIT INDEX
| | | | | Exhibit
Number
| | Description of Exhibit | | | 3.1 | | Composite Articles of Incorporation of the Company incorporated by reference to Exhibit 3.1 of the Company’s Form 10-Q filed April 23, 2009. | 3.2 | | Amended and Restated Bylaws of the Company, incorporated by reference to Exhibit 3.1 of the Company’s Form 8-K filed November 4, 2016. | 10.1 | | Change of Control Agreement, dated March 1, 2017, between the Company and David S. Schorlemer, incorporated by reference to Exhibit 10.15 of the Company's Form 10-K for the year ended December 31, 2016 filed on March 2, 2017. | 10.2 | | Credit Agreement dated June 9, 2017, incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed June 9, 2017. | 31.1 | | CEO Certifications pursuant to Rule 13a-14 under the Securities Exchange Act of 1934. | 31.2 | | CFO Certifications pursuant to Rule 13a-14 under the Securities Exchange Act of 1934. | 32 | | Section 906 Certification furnished pursuant to 18 U.S.C. Section 1350. | | | | 101 | | Attached as Exhibit 101 to this report are the following items formatted in XBRL (Extensible Business Reporting Language): | | | | | | (i) | Consolidated Balance Sheets, | | | (ii) | Consolidated Statements of Operations, | | | (iii) | Consolidated Statement of Changes in Shareholders’ Equity, | | | (iv) | Consolidated Statements of Cash Flows and | | | (v) | Notes to Consolidated Financial Statements. |
s | Labor hours |
Backlog is expected to be recognized in revenue during: | ___________
| | (1) | We exclude suspended projects from contract backlog when they are expected to be suspended more than 12 months because resumption of work and timing of revenue recognition for these projects are difficult to predict. |
| | (2) | At June 30, 2017,March 31, 2018, projects for our five largest customers in terms of revenue backlog consisted of: |
| | (i) | twoTwo large multi-purpose service vesselsMPSVs for one customer in our Shipyards division,for which commenced in the first quarterwe have received a purported notice of 2014 and will be completed during the first and second quarters of 2018;termination as discussed above; |
| | (ii) | newbuildNewbuild construction of fourfive harbor tugs for one customer within our Shipyards division;(to be completed in 2018 through 2020); |
(iii) newbuild construction of four harbor tugs for one additional customer within our Shipyards division;
| | (iii) | Newbuild construction of five harbor tugs for one customer (separate from above) (to completed in 2018 through 2020); |
| | (iv) | the fabricationNewbuild construction of four modules associated with a U.S. ethane cracker project within our Fabrication division;an offshore research vessel (to be completed in 2020); and |
(v) newbuild construction of an offshore research vessel within our Shipyards division.
| | (3)(v) | Newbuild construction of one T-ATS vessel (to be completed in 2020). This contract is currently under a bid protest. |
| | (2) | The timing of recognition of the revenue represented in our backlog is based on management’s current estimates to complete the projects. Certain factors and circumstances could cause changes in the amounts ultimately recognized and the timing of the recognition of revenue from our backlog. |
Depending on
Certain of our contracts contain options which grant the sizeright to our customer, if exercised, for the construction of the project, the termination, postponement, or reductionadditional vessels at contracted prices.We do not include options in scope of any one project could significantly reduce our backlog above. If all options under our current contracts were exercised, our backlog would increase by $626.2 million. We believe disclosing these options provides investors with useful information in order to evaluate additional potential work that we would be contractually obligated to perform under our current contracts as well as the potential significance of these options, if exercised. We have not received any commitments related to the exercise of these options from our customers, and could have a material adverse effect on revenue, net income and cash flow. Additionally, as we continue tocan provide no assurance that any or all of these options will be exercised. As we add backlog, we will begin addingadd personnel with critical project management and fabrication skills to ensure we have the resources necessary to execute our projects well and to support our project risk mitigation discipline for all new project work.projects. This may negatively impact near termnear-term results. As of June 30, 2017,March 31, 2018, we had 983 employees and 166 contract961 employees compared to 1,178 employees and 92 contract977 employees as of December 31, 2016. 2017. Labor hours worked were 1.0 million496,000 during the sixthree months ended June 30, 2017,March 31, 2018, compared to 1.6 million479,000 for the sixthree months ended June 30, 2016.March 31, 2017. The overall decreaseincrease in labor hours worked for the sixthree months ended June 30, 2017,March 31, 2018, was due to an overallimproved offshore demand within our Services Division. As of April 29, 2018, we had 870 employees. The decrease in work experiencedour workforce subsequent to March 31, 2018, is primarily within our Fabrication Division due to completion of complex modules for the construction of a new petrochemical plant with no significant future Fabrication backlog forecasted in the near-term as well as the stoppage of construction of the two MPSVs within our facilities as a result of depressed oil and gas prices and the corresponding reduction in customer demand within allShipyard Division pending resolution of our operating divisions.dispute over termination with our MPSV customer. See Note 9 of the Notes to Consolidated Financial Statements related to our MPSV contract termination dispute.
Results of Operations Three Months Ended June 30, 2017,March 31, 2018, Compared to Three Months Ended June 30, 2016 March 31, 2017 (in thousands, except for percentages): Consolidated | | | | | | | | | | | | | | | Three Months Ended June 30, | | Increase or (Decrease) | | 2017 | | 2016 | | Amount | Percent | Revenue | $ | 45,868 |
| | $ | 81,502 |
| | $ | (35,634 | ) | (43.7)% | Cost of revenue | 57,488 |
| | 67,436 |
| | (9,948 | ) | (14.8)% | Gross profit (loss) | (11,620 | ) | | 14,066 |
| | (25,686 | ) | (182.6)% | Gross profit (loss) percentage | (25.3 | )% | | 17.3 | % | | | | General and administrative expenses | 4,640 |
| | 5,062 |
| | (422 | ) | (8.3)% | Operating income (loss) | (16,260 | ) | | 9,004 |
| | (25,264 | ) | (280.6)% | Other income (expense): | | | | | | | Interest expense | (158 | ) | | (88 | ) | | (70 | ) | | Interest income | 12 |
| | 2 |
| | 10 |
| | Other income (expense), net | (266 | ) | | 42 |
| | (308 | ) | | Total other income (expense) | (412 | ) | | (44 | ) | | (368 | ) | (836.4)% | Net income (loss) before income taxes | (16,672 | ) | | 8,960 |
| | (25,632 | ) | (286.1)% | Income tax expense (benefit) | (5,749 | ) | | 3,420 |
| | (9,169 | ) | (268.1)% | Net income (loss) | $ | (10,923 | ) | | $ | 5,540 |
| | $ | (16,463 | ) | (297.2)% |
| | | | | | | | | | | | | | | Three Months Ended March 31, | | Increase or (Decrease) | | 2018 | | 2017 | | Amount | Percent | Revenue | $ | 57,290 |
| | $ | 37,993 |
| | $ | 19,297 |
| 50.8% | Cost of revenue | 56,611 |
| | 42,890 |
| | 13,721 |
| 32.0% | Gross profit (loss) | 679 |
| | (4,897 | ) | | 5,576 |
| 113.9% | Gross profit (loss) percentage | 1.2 | % | | (12.9 | )% | | | | General and administrative expenses | 4,709 |
| | 3,930 |
| | 779 |
| 19.8% | Asset impairment | 750 |
| | 389 |
| | 361 |
| 92.8% | Operating income (loss) | (4,780 | ) | | (9,216 | ) | | (4,436 | ) |
| Other income (expense): | | | | | | | Interest expense | (469 | ) | | (59 | ) | | (410 | ) | (694.9)% | Other income (expense), net | 12 |
| | 9 |
| | 3 |
| 33.3% | Total other income (expense) | (457 | ) | | (50 | ) | | (407 | ) | (814.0)% | Net loss before income taxes | (5,237 | ) | | (9,266 | ) | | (4,029 | ) | (43.5)% | Income tax expense (benefit) | 59 |
| | (2,812 | ) | | 2,871 |
| 102.1% | Net loss | $ | (5,296 | ) | | $ | (6,454 | ) | | $ | 6,900 |
|
|
Revenue - Our revenue for the three months ended June 30,March 31, 2018 and 2017, and 2016, was $45.9$57.3 million and $81.5$38.0 million, respectively, representing a decreasean increase of 43.7%50.8%. The decreaseincrease is primarily attributable to an overall decrease in work experienced into:
An increase of $11.2 million within our facilities as a result of depressedServices Division from additional demand for offshore oil and gas pricesservice related projects; and An increase of $7.1 million within our Fabrication Division primarily attributable to the corresponding reduction in customer demand within allconstruction of our operating divisions. Pass-through costs asfour modules for a percentage of revenue were 53.1% and 35.1%petrochemical plant.
Gross profit (loss) - Our gross profit for the three months ended June 30, 2017 and 2016, respectively. Pass-through costs, as described in Note 3 of the Notes to Consolidated Financial Statements, are included in revenue but have no impact on the gross profit recognized on a project for a particular period.
Gross profit (loss) - Our gross loss for the three months ended June 30, 2017,March 31, 2018, was $11.6 million$679,000 compared to a gross profitloss of $14.1$4.9 million for the three months ended June 30, 2016.March 31, 2017. The decreaseincrease in gross profit was primarily due to $10.2 million of contract losses incurred byincreased revenue within our Shipyards division related to cost overruns and re-work identified on two vessel contracts assigned in the LEEVAC transaction, decreased revenueServices Division as discussed above holding costsand decreased expenses within our Fabrication Division which included $1.9 million of depreciation expense for the three months ended March 31, 2017, related to our South Texas assets of $1.2 million and lower margins on current work. This was partially offset by decreases in costs resulting from reductions in workforce as we wrapped up and completed projects at our South Texas fabrication yards and Prospect shipyard,Properties with no depreciation being recordedexpense during the three months ended March 31, 2018, for our South Texas assets and Prospect shipyard for the three months ended June 30, 2017,Properties as these assets are classified as assets held for sale and additional cost cutting measures implemented by management.sale.
General and administrative expenses - Our general and administrative expenses were $4.6$4.7 million for the three months ended June 30, 2017,March 31, 2018, compared to $5.1$3.9 million for the three months ended June 30, 2016.March 31, 2017. The decreaseincrease in general and administrative expenses for the three months ended June 30, 2017,March 31, 2018, was primarily attributable to lower bonuses accrued during 2017
Build-up of additional personnel for our newly created EPC Division; Increased legal and advisory fees related to customer disputes, strategic planning and diversification of our business; Increased employee incentive accruals of approximately $300,000 for all divisions related to our safety incentive program and higher employee profitability incentives within our Services Division as a resultwell as the addition of a combinationpersonnel as we build up our EPC Division in anticipation of a smaller workforcethe SeaOne Project; and our consolidated gross loss Higher stock compensation expense of approximately $220,000.
This was partially offset by cost reductions and continued cost cutting measuresminimization efforts implemented by management for the period.
Asset impairment - We recorded an impairment of $750,000 during the first partthree months ended March 31, 2018, related to a piece of 2016.equipment at our Texas North Yard that we intend to sell at auction. This piece of equipment was not damaged by
Other income (expense),Hurricane Harvey. The impairment was calculated as management's estimated net proceeds from the sale less its net book value. See also Note 2 of the Notes to Consolidated Financial Statements for additional information regarding our assets held for sale. During the three months ended March 31, 2017, we recorded an impairment of $389,000 related to the Shipyard Division assets held for sale.
Interest expense- OtherInterest expense was $266,000increased due to drawings under our Credit Agreement for the three months ended June 30, 2017, as compared to other income of $42,000March 31, 2018, with no such drawings under our Credit Agreement for the three months ended June 30, 2016. Other expense forMarch 31, 2017, as well as increased amortization of deferred financing costs during the period was primarily due to losses on the sale of two drydocks from our Shipyards division recorded during three months ended June 30, 2017.March 31, 2018.
Income tax expense (benefit) - Our effective income tax rate for the three months ended June 30, 2017,March 31, 2018, was 34.5%(1.1)%, compared to an effective tax rate benefit of 38.2%30.3% for the comparable period during 2016.2017. Current expense represents state taxes within our Services Division. The decrease in the effective tax rate is the result of limitations on the deductibility of executive compensation. These amount are included in the estimate ofa valuation allowance against our year-end effective rate.
Operating Segments
As discussed indeferred tax assets. See Note 81 of the Notes to Consolidated Financial Statements management reduced its allocation of corporate administrative costsregarding our NOLs and overhead expenses to its operating divisions during the three and six months ended June 30, 2017, such that a significant portion of its corporate expenses are retained in its non-operating Corporate division. In addition, it has also allocated certain personnel previously included in the operating divisions to within the Corporate division. In doing so, management believes that it has created a fourth reportable segment with each of its three operating divisions and its Corporate division each meeting the criteria of reportable segments under GAAP. During the three and six months ended June 30, 2016, we allocated substantially all of our corporate administrative costs and overhead expenses to our three operating divisions. We have recast our 2016 segment data below in order to conform to the current period presentation. Ourdeferred tax assets.
Operating Segments
The results of our threefour operating divisions and Corporate divisionDivision for the three months ended June 30,March 31, 2018 and 2017, and 2016, are presented below (in thousands, except for percentages).
| | | | | | | | | | | | | | | | Fabrication | | Three Months Ended June 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | 13,990 |
| | $ | 24,296 |
| | $ | (10,306 | ) | | (42.4)% | Gross profit (loss) | | 1,931 |
| | 3,877 |
| | (1,946 | ) | | (50.2)% | Gross profit (loss) percentage | | 13.8 | % | | 16.0 | % | | | | (2.2)% | General and administrative expenses | | 833 |
| | 1,130 |
| | (297 | ) | | (26.3)% | Operating income (loss) | | 1,098 |
| | 2,747 |
| | | | |
| | | | | | | | | | | | | | | | Fabrication | | Three Months Ended March 31, | | Increase or (Decrease) | | | 2018 | | 2017 | | Amount | | Percent | Revenue | | $ | 17,270 |
| | $ | 10,209 |
| | $ | 7,061 |
| | 69.2% | Gross profit (loss) | | (219 | ) | | (2,966 | ) | | (2,747 | ) | | (92.6)% | Gross profit (loss) percentage | | (1.3 | )% | | (29.1 | )% | | | |
| General and administrative expenses | | 624 |
| | 821 |
| | (197 | ) | | (24.0)% | Asset impairment | | 750 |
| | — |
| | 750 |
| | 100.0% | Operating income (loss) | | $ | (1,593 | ) | | $ | (3,787 | ) | | $ | (2,194 | ) | |
|
Revenue - Revenue from our Fabrication division decreased $10.3Division increased $7.1 million for the three months ended June 30, 2017,March 31, 2018, compared to the three months ended June 30, 2016.March 31, 2017. The decreaseincrease is attributable to an overall decrease in work experienced in our fabrication yards asthe construction of four modules for a result ofpetrochemical plant during the three months ended March 31, 2018, and lower revenue during the three months ended March 31, 2017, resulting from depressed oil and gas prices and the corresponding reduction in customer demand for offshore fabrication projects. As discussed above, management has classified our South Texas assets as assets held for sale in response toprojects during the underutilizationperiod. This was partially offset, by decreased revenue of our Fabrication assets. As of June 30, 2017, all of our projects at our South Texas fabrication yards have been completed or transferred to our Houma fabrication yard.
Gross profit (loss) - Gross profit from our Fabrication division for the three months ended June 30, 2017, was $1.9 million compared to a gross profit of $3.9$2.4 million for the three months ended June 30, 2016. The decrease was due to lower revenue from decreased fabrication work as discussed above and approximately $1.2 million of holding costs for our South Texas assets. This was partially offset by decreases in costs resulting from reductions in workforce as we wrapped up and completed projectsMarch 31, 2018, at our South Texas fabrication yards, no depreciation being recordedProperties as these were placed for sale during the first quarter of 2017 and project work completed or transfered to our South Texas assetsHouma Fabrication Yard during 2017.
Gross profit (loss) - Gross loss from our Fabrication Division for the three months ended June 30, 2017,March 31, 2018, was $219,000 compared to a gross loss of $3.0 million for the three months ended March 31, 2017. The decrease in gross loss was due to increased revenue as discussed above and a reduction in depreciation expense of $1.9 million in depreciation expense during the three months ended March 31, 2018 for our South Texas Properties as these assets are classified as assets held for sale and additional cost cutting measures implemented by management.sale.
General and administrative expenses - General and administrative expenses for our Fabrication divisionDivision decreased $297,000$197,000 for the three months ended June 30, 2017,March 31, 2018, compared to the three months ended June 30, 2016.March 31, 2017. The decrease is primarily due to decreases in costs resulting from reductions in workforce as we wrapped up and completed projects at our South Texas fabrication yards and lower bonuses accrued during 2017Properties, decreases in corporate allocations as a resultportion of these are now allocated to our EPC Division and continued cost minimization efforts implemented by management for the period.
Asset impairment - We recorded an impairment of $750,000 during the three months ended March 31, 2018, related to a combinationpiece of a smaller workforce andequipment at our consolidated gross loss.Texas North Yard that we intend to sell at auction. This piece of equipment was not damaged by Hurricane Harvey. The impairment was calculated as management's estimated net proceeds from the sale less its net book value. See Note 2 of the Notes to Consolidated Financial Statements for additional information regarding our assets held for sale. We did not record any asset impairments during the three months ended March 31, 2017, within our Fabrication Division.
| | | | | | | | | | | | | | | | Shipyards | | Three Months Ended June 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue (1) | | $ | 18,303 |
| | $ | 29,373 |
| | $ | (11,070 | ) | | (37.7)% | Gross profit (loss) (1) | | (13,851 | ) | | 5,423 |
| | (19,274 | ) | | (355.4)% | Gross profit (loss) percentage | | (75.7 | )% | | 18.5 | % | | | | (94.2)% | General and administrative expenses | | 983 |
| | 1,460 |
| | (477 | ) | | (32.7)% | Operating income (loss) (1) | | (14,834 | ) | | 3,963 |
| | | | |
| | | | | | | | | | | | | | | | Shipyard | | Three Months Ended March 31, | | Increase or (Decrease) | | | 2018 | | 2017 | | Amount | | Percent | Revenue (1) | | $ | 18,565 |
| | $ | 18,422 |
| | $ | 143 |
| | 0.8% | Gross profit (loss) (1) | | (1,023 | ) | | (1,704 | ) | | (681 | ) | | (40.0)% | Gross profit (loss) percentage | | (5.5 | )% | | (9.2 | )% | | | |
| General and administrative expenses | | 796 |
| | 964 |
| | (168 | ) | | (17.4)% | Asset impairment | | — |
| | 389 |
| | (389 | ) | | (100.0)% | Operating income (loss) (1) | | $ | (1,819 | ) | | $ | (3,057 | ) | | $ | (1,238 | ) | |
|
___________ | | (1) | Revenue for the three months ended June 30,March 31, 2018, and 2017, includes $390,000 and 2016, includes $335,000 and $1.5 million of non-cash amortization of deferred revenue related to the values assigned to the contracts acquired in the LEEVAC transaction, respectively. |
Revenue - Revenue from our Shipyards division decreased $11.1 million for the three months ended June 30, 2017, compared to the three months ended June 30, 2016, due to depressed oil and gas prices and the corresponding reduction in customer demand for shipbuilding and repair services supporting the oil and gas industry. During the first quarter of 2017, we completed a vessel that we assumed in the LEEVAC transaction and delivered to a customer on February 6, 2017.
Gross profit (loss) - Gross loss from our Shipyards division was $13.9 million for the three months ended June 30, 2017, compared to a gross profit of $5.4 million for the three months ended June 30, 2016. The decrease was due to:
$10.2 million in contract losses related to cost overruns and re-work that has been identified on two contracts assigned to us in the LEEVAC transaction;
holding and closing costs related to our Prospect shipyard as we wind down operations at this facility;
holding costs related to a completed vessel that was delivered on February 6, 2017; however, was refused by our customer alleging certain technical deficiencies (see also Note 9 of the Notes to Consolidated Financial Statements); and
overall decreases in work under other various contracts as discussed above.
General and administrative expenses - General and administrative expenses for our Shipyards division decreased $477,000 for the three months ended June 30, 2017, compared to the three months ended June 30, 2016, primarily due to lower bonuses accrued during 2017 as a result of a combination of a smaller workforce and our consolidated gross loss and cost cutting measures implemented by management during the first part of 2016.
| | | | | | | | | | | | | | | | Services | | Three Months Ended June 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | 15,396 |
| | $ | 28,692 |
| | $ | (13,296 | ) | | (46.3)% | Gross profit (loss) | | 390 |
| | 4,864 |
| | (4,474 | ) | | (92.0)% | Gross profit (loss) percentage | | 2.5 | % | | 17.0 | % | | | | (14.5)% | General and administrative expenses | | 647 |
| | 800 |
| | (153 | ) | | (19.1)% | Operating income (loss) | | (257 | ) | | 4,064 |
| | | | |
Revenue - Revenue from our Services division decreased $13.3 million for the three months ended June 30, 2017, compared to the three months ended June 30, 2016, due to an overall decrease in work experienced as a result of depressed oil and gas prices and the corresponding reduction in customer demand for oil and gas related service projects.
Gross profit - Gross profit from our Services division decreased $4.5 million for the three months ended June 30, 2017, compared to the three months ended June 30, 2016, due to decreased revenue discussed above and lower margins on new work performed during 2017.
General and administrative expenses - General and administrative expenses for our Services division decreased $153,000 for the three months ended June 30, 2017, compared to the three months ended June 30, 2016, due to lower bonuses accrued during 2017 as a result of a combination of a smaller workforce and our consolidated gross loss.
| | | | | | | | | | | | | | | | Corporate | | Three Months Ended June 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | — |
| | $ | — |
| | $ | — |
| | —% | Gross profit (loss) | | (90 | ) | | (98 | ) | | 8 |
| | 8.2% | Gross profit (loss) percentage | | n/a |
| | n/a |
| | | |
| General and administrative expenses | | 2,177 |
| | 1,672 |
| | 505 |
| | 30.2% | Operating income (loss) | | (2,267 | ) | | (1,770 | ) | |
|
| | |
General and administrative expenses - General and administrative expenses for our Corporate division increased primarily due to a restructuring of our corporate division with additional personnel allocated to our corporate division during 2017 as discussed above as well as for expenses incurred for advisors to assist in a strategic financial analysis project in anticipation of the proceeds to be received from the sale of our South Texas assets. This has been partially offset by lower bonuses accrued during 2017, as a result of a combination of a smaller workforce and our consolidated gross loss.
Six Months Ended June 30, 2017, Compared to Six Months Ended June 30, 2016 (in thousands, except for percentages):
Consolidated
| | | | | | | | | | | | | | | Six Months Ended June 30, | | Increase or (Decrease) | | 2017 | | 2016 | | Amount | Percent | Revenue | $ | 83,860 |
| | $ | 165,481 |
| | $ | (81,621 | ) | (49.3)% | Cost of revenue | 100,378 |
| | 145,714 |
| | (45,336 | ) | (31.1)% | Gross profit (loss) | (16,518 | ) | | 19,767 |
| | (36,285 | ) | (183.6)% | Gross profit (loss) percentage | (19.7 | )% | | 11.9 | % | | | | General and administrative expenses | 8,570 |
| | 9,547 |
| | (977 | ) | (10.2)% | Asset impairment | 389 |
| | — |
| | 389 |
| 100.0% | Operating income (loss) | (25,477 | ) | | 10,220 |
| | (35,697 | ) | (349.3)% | Other income (expense): | | | | | | | Interest expense | (217 | ) | | (138 | ) | | (79 | ) | | Interest income | 12 |
| | 8 |
| | 4 |
| | Other income (expense), net | (257 | ) | | 440 |
| | (697 | ) | | Total other income (expense) | (462 | ) | | 310 |
| | (772 | ) | (249.0)% | Net income (loss) before income taxes | (25,939 | ) | | 10,530 |
| | (36,469 | ) | (346.3)% | Income tax expense (benefit) | (8,561 | ) | | 4,001 |
| | (12,562 | ) | (314.0)% | Net income (loss) | $ | (17,378 | ) | | $ | 6,529 |
| | $ | (23,907 | ) | (366.2)% |
Revenue - Our revenue for the six months ended June 30, 2017 and 2016, was $83.9 million and $165.5 million, respectively, representing a decrease of 49.3%. The decrease is primarily attributable to an overall decrease in work experienced in our facilities as a result of depressed oil and gas prices and the corresponding reduction in customer demand within all of our operating divisions. Pass-through costs as a percentage of revenue were 41.9% and 37.6% for the six months ended June 30, 2017 and 2016, respectively. Pass-through costs, as described in Note 3 of the Notes to Consolidated Financial Statements, are included in revenue but have no impact on the gross profit recognized on a project for a particular period.
Gross profit (loss) - Our gross loss for the six months ended June 30, 2017, was $16.5 million compared to a gross profit of $19.8 million for the six months ended June 30, 2016. The decrease was primarily due to $10.6 million of losses incurred by our Shipyards division related to cost overruns and re-work identified on two vessel contracts assigned in the LEEVAC transaction, decreased revenue as discussed above, holding costs related to our South Texas assets of $2.5 million and lower margins on current work. This was partially offset by decreases in costs resulting from reductions in workforce as we wrapped up and completed projects at our South Texas fabrication yards and Prospect shipyard, suspended depreciation for our South Texas assets and Prospect shipyard during the six months ended June 30, 2017, as these assets are classified as assets held for sale and additional cost cutting measures implemented by management.
General and administrative expenses - Our general and administrative expenses were $8.6 million for the six months ended June 30, 2017, compared to $9.5 million for the six months ended June 30, 2016. The decrease in general and administrative expenses for the six months ended June 30, 2017, was primarily attributable to lower bonuses accrued during 2017 as a result of a combination of a smaller workforce and our consolidated gross loss and cost cutting measures implemented by management during the first part of 2016.
Asset Impairment - During the six months ended June 30, 2017, we recorded an impairment of $389,000 related to our assets held for sale at our Prospect Shipyard. See also Note 2 of the Notes to Consolidated Financial statements.
Other income (expense), net - Other expense was $257,000 for the six months ended June 30, 2017, compared to other income of $440,000 for the six months ended June 30, 2016. Other expense for the period was primarily due to losses on sales of two drydocks from our Shipyards division. Other income for the prior period was primarily due to gains on sales of assets from our Fabrication division recorded during the first quarter of 2016.
Income tax expense (benefit) - Our effective income tax rate for the six months ended June 30, 2017, was 33.0%, compared to an effective tax rate of 38.0% for the comparable period during 2016. The decrease in the effective tax rate is the result of limitations on the deductibility of executive compensation.
Operating Segments
As discussed above and in Note 8 of the Notes to Consolidated Financial Statements, management reduced its allocation of corporate administrative costs and overhead expenses to its operating divisions during the three and six months ended June 30, 2017. We have recast our 2016 segment data below in order to conform to the current period presentation. Our results of our three operating divisions and Corporate division for the six months ended June 30, 2017 and 2016, are presented below (in thousands, except for percentages).
| | | | | | | | | | | | | | | | Fabrication | | Six Months Ended June 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | 24,199 |
| | $ | 48,125 |
| | $ | (23,926 | ) | | (49.7)% | Gross profit (loss) | | (1,034 | ) | | 3,964 |
| | (4,998 | ) | | (126.1)% | Gross profit (loss) percentage | | (4.3 | )% | | 8.2 | % | | | | (12.5)% | General and administrative expenses | | 1,654 |
| | 1,936 |
| | (282 | ) | | (14.6)% | Operating income (loss) | | (2,688 | ) | | 2,028 |
| | | | |
Revenue - Revenue from our Fabrication division decreased $23.9 million for the six months ended June 30, 2017, compared to the six months ended June 30, 2016. The decrease is attributable to an overall decrease in work experienced in our fabrication yards as a result of depressed oil and gas prices and the corresponding reduction in customer demand for offshore fabrication projects. As discussed above, management has classified our South Texas assets as assets held for sale in response to the underutilization of our Fabrication assets. As of June 30, 2017, all of our projects at our South Texas fabrication yards have been completed or transferred to our Houma fabrication yard.
Gross profit (loss) - Gross loss from our Fabrication division for the six months ended June 30, 2017, was $1.0 million compared to a gross profit of $4.0 million for the six months ended June 30, 2016. The decrease was due to lower revenue from decreased fabrication work as discussed above and approximately $2.5 million of holding costs for our South Texas assets as we market them for sale. This was partially offset by decreases in costs resulting from reductions in workforce as we wrapped up and completed projects at our South Texas fabrication yards, reduced depreciation being recorded for our South Texas assets for the six months ended June 30, 2017, as these assets are classified as assets held for sale on February 23, 2017, and additional cost cutting measures implemented by management.
General and administrative expenses - General and administrative expenses for our Fabrication division decreased $282,000 for the six months ended June 30, 2017, compared to the six months ended June 30, 2016. The decrease is primarily due to decreases in costs resulting from reductions in workforce as we wrapped up and completed projects at our South Texas fabrication yards and lower bonuses accrued during 2017 as a result of a combination of a smaller workforce and our consolidated gross loss. This was partially offset by expenses incurred to market our South Texas assets for sale and payment of termination benefits during the first quarter of 2017 as we reduced its workforce and completed those operations.
| | | | | | | | | | | | | | | | Shipyards | | Six Months Ended June 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue (1) | | $ | 36,724 |
| | $ | 63,493 |
| | $ | (26,769 | ) | | (42.2)% | Gross profit (loss) (1) | | (15,556 | ) | | 7,797 |
| | (23,353 | ) | | (299.5)% | Gross profit (loss) percentage | | (42.4 | )% | | 12.3 | % | | | | (54.7)% | General and administrative expenses | | 1,947 |
| | 2,750 |
| | (803 | ) | | (29.2)% | Asset impairment | | 389 |
| | — |
| | 389 |
| | 100.0% | Operating income (loss) (1) | | (17,892 | ) | | 5,047 |
| | | | |
___________
| | (1) | Revenue for the six months ended June 30, 2017, and 2016, includes $1.9 million and $2.7$1.6 million of non-cash amortization of deferred revenue related to the values assigned to the contracts acquired in the LEEVAC transaction, respectively. |
Revenue - Revenue from our Shipyards division decreased $26.8 millionShipyard Division increased $143,000 for the sixthree months ended June 30, 2017,March 31, 2018, compared to the sixthree months ended June 30, 2016, dueMarch 31, 2017. During the first quarter of 2018, we were able to depressed oilmake progress on the construction of eight harbor tugs and gas pricesan offshore research vessel which were not under construction during the first quarter of 2017. This was partially offset by lower revenue from construction of our two OSV and two MPSV vessel contracts during the corresponding reduction in customer demand for shipbuilding and repair services supporting the oil and gas industry. first quarter of 2018.
During the first quarter of 2017, we completed a vessel that we assumed in the LEEVAC transactionfirst of the OSVs and deliveredtendered it for delivery on February 6, 2017, and suspended construction of the second OSV due to a customer on February 6, 2017.
Gross profit (loss) - Gross lossdispute. We recommenced construction of the second OSV during the fourth quarter of 2017 which is scheduled for completion during the second quarter of 2018. During the first quarter of 2018, we received a notice of purported termination from a customer within our Shipyards division was $15.6 million for the six months ended June 30, 2017, compared to a gross profit of $7.8 million for the six months ended June 30, 2016. The decrease was due to:
$10.6 million in contract lossesShipyard Division related to cost overrunsthe construction of two MPSVs. We dispute the purported termination and re-work thatdisagree with the customer’s reasons for same. Pending resolution of the dispute, all work has been identified on two contracts assigned to usstopped and the vessels and associated equipment and material are in the LEEVAC transaction;
holdingour care and closing costs related tocustody at our Prospect shipyard as we wind down operations at this facility;
holding costs related to a completed vessel that was delivered on February 6, 2017; however, was refused by our customer alleging certain technical deficiencies (see alsoin Houma, Louisiana. See Note 9 of the Notes to Consolidated Financial Statements);Statements for additional information relating to this customer dispute.
Gross profit (loss) - Gross loss from our Shipyard Division was $1.0 million for the three months ended March 31, 2018, compared to a gross loss of $1.7 million for the three months ended March 31, 2017. The decrease was due to improved cost management efforts and efficiencies learned from the construction of two OSV and two MPSV vessels during the three months ended March 31, 2017, and applied to the construction of eight harbor tugs during the three months ended March 31, 2018. overall decreases in work under other various contracts as discussed above.
General and administrative expenses - General and administrative expenses for our Shipyards divisionShipyard Division decreased $803,000$168,000 for the sixthree months ended June 30, 2017,March 31, 2018, compared to the sixthree months ended June 30, 2016,March 31, 2017, primarily due to lower bonuses accrued during 2017reductions in workforce, decreases in corporate allocations as a resultportion of a combination of a smaller workforcethese are now allocated to our EPC Division and our consolidated gross loss and cost cutting measures implemented by management during the first part of 2016.decreased construction activity.
Asset Impairmentimpairment - During sixthe three months ended June 30,March 31, 2017, we recorded an impairment of $389,000 related to ourthe Shipyard Division assets held for sale at our Prospect shipyard.sale. See also Note 2 of the Notes to Consolidated Financial statements.Statements for additional information relating to our assets held for sale. We did not record any asset impairment during the three months ended March 31, 2018, in our Shipyard Division.
| | | | | | | | | | | | | | | | Services | | Six Months Ended June 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | 26,107 |
| | $ | 55,251 |
| | $ | (29,144 | ) | | (52.7)% | Gross profit (loss) | | 423 |
| | 8,240 |
| | (7,817 | ) | | (94.9)% | Gross profit (loss) percentage | | 1.6 | % | | 14.9 | % | | | | (13.3)% | General and administrative expenses | | 1,313 |
| | 1,519 |
| | (206 | ) | | (13.6)% | Operating income (loss) | | (890 | ) | | 6,721 |
| | | | |
| | | | | | | | | | | | | | | | Services | | Three Months Ended March 31, | | Increase or (Decrease) | | | 2018 | | 2017 | | Amount | | Percent | Revenue | | $ | 21,870 |
| | $ | 10,712 |
| | $ | 11,158 |
| | 104.2% | Gross profit (loss) | | 2,614 |
| | 33 |
| | 2,581 |
| | 7,821.2% | Gross profit (loss) percentage | | 12.0 | % | | 0.3 | % | | | |
| General and administrative expenses | | 734 |
| | 666 |
| | 68 |
| | 10.2% | Operating income (loss) | | $ | 1,880 |
| | $ | (633 | ) | | $ | 2,513 |
| |
|
Revenue - Revenue from our Services division decreased $29.1Division increased $11.2 million for the sixthree months ended June 30, 2017,March 31, 2018, compared to the sixthree months ended June 30, 2016,March 31, 2017, due to an overall decreaseincrease in work experienced as a result of depressed oil and gas prices and the corresponding reductiondue to increases in customer demand for offshore oil and gas related service projects.
Gross profit - Gross profit from our Services division decreased $7.8Division increased $2.6 million for the sixthree months ended June 30, 2017,March 31, 2018, compared to the sixthree months ended June 30, 2016,March 31, 2017, due to decreasedincreased revenue discussed above and lower margins on new work performed during 2017.above.
General and administrative expenses - General and administrative expenses for our Services division decreased $206,000Division increased $68,000 for the sixthree months ended June 30, 2017,March 31, 2018, compared to the sixthree months ended June 30, 2016,March 31, 2017, due to lower bonuses accrued during 2017support of increased work as well as increases in employee incentive compensation of approximately $120,000 resulting from increased operating income. This was partially offset by decreases in corporate allocations as a resultportion of a combination of a smaller workforcethese are now allocated to our EPC Division and our consolidated gross loss.continued cost minimization efforts implemented by management for the period.
| | | | | | | | | | | | | | | | Corporate | | Six Months Ended June 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | — |
| | $ | — |
| | $ | — |
| | —% | Gross profit (loss) | | (351 | ) | | (234 | ) | | (117 | ) | | (50.0)% | Gross profit (loss) percentage | | n/a |
| | n/a |
| | | |
| General and administrative expenses | | 3,656 |
| | 3,342 |
| | 314 |
| | 9.4% | Operating income (loss) | | (4,007 | ) | | (3,576 | ) | | (431 | ) | | |
| | | | | | | | | | | | | | | | EPC | | Three Months Ended March 31, | | Increase or (Decrease) | | | 2018 | | 2017 | | Amount | | Percent | Revenue | | 73 |
| | $ | — |
| | $ | 73 |
| | 100.0% | Gross profit (loss) | | (308 | ) | | — |
| | (308 | ) | | (100.0)% | Gross profit (loss) percentage | | n/a |
| | n/a |
| | | |
| General and administrative expenses | | 417 |
| | — |
| | 417 |
| | 100.0% | Operating income (loss) | | $ | (725 | ) | | $ | — |
| | $ | (725 | ) | |
|
Revenue - Our EPC Division did not exist at March 31, 2017. Revenue for the three months ended March 31, 2018 consists of early work and engineering studies authorized by SeaOne. See Note 8 of the Notes to Consolidated Financial Statements for further discussion of our EPC Division and the SeaOne Project.
Gross profit (loss) - Gross loss from our EPC Division occurred as we added personnel and overhead infrastructure related to the anticipated SeaOne project.
General and administrative expenses - General and administrative expenses for our EPC Division include the addition of personnel and allocations of corporate expenses as we invest in this new line of business. | | | | | | | | | | | | | | | | Corporate | | Three Months Ended March 31, | | Increase or (Decrease) | | | 2018 | | 2017 | | Amount | | Percent | Revenue | | $ | — |
| | $ | — |
| | $ | — |
| | —% | Gross profit (loss) | | $ | (385 | ) | | (260 | ) | | 125 |
| | 48.1% | Gross profit (loss) percentage | | n/a |
| | n/a |
| | | | | General and administrative expenses | | 2,138 |
| | 1,479 |
| | 659 |
| | 44.6% | Operating income (loss) | | $ | (2,523 | ) | | $ | (1,739 | ) | | $ | 784 |
| |
|
Gross profit (loss) - Gross loss from our Corporate divisionDivision increased primarily due to a restructuringlower allocation of our corporate division with additional personnel allocated to our corporate division during 2017expenses and as discussed above.well as increased insurance costs.
General and administrative expenses - General and administrative expenses for our Corporate divisionDivision increased primarily due to a restructuringincreased legal and advisory fees related to customer disputes, strategic planning and diversification of our corporate division with additional personnel allocated to our corporate division during 2017 as discussed above as well as for expenses incurred for advisors to assist in a strategic financial analysis project in anticipationbusiness, increased employee incentive accruals and higher stock compensation expense of the proceeds to be received from the sale of our South Texas assets. This has been partially offset by lower bonuses accrued during 2017 as a result of a combination of a smaller workforce and our consolidated gross loss.approximately $220,000.
Liquidity and Capital Resources Historically, we have fundedOur immediate liquidity remains dependent on our business activities through cash generatedon hand, anticipated proceeds from operations.the sales of assets, availability of future drawings from our Credit Agreement and collections of accounts receivable. At June 30, 2017,March 31, 2018, we had no amounts$10 million outstanding under our credit facility, $4.6Credit Agreement, $2.5 million in outstanding letters of credit, and cash and cash equivalents totaling $22.3$6.5 million compared to $51.2$9.0 million at December 31, 2016. 2017. As of May 4, 2018, our liquidity has significantly improved due to the sale of our Texas South Yard the net proceeds of which will be used to rebuild our liquidity, to support upcoming projects, continue investing in our newly created EPC Division and for other general corporate purposes. After the sale of our Texas South Yard, our cash balance was $55.0 million, and the amount outstanding under our Credit Agreement was $10 million with remaining availability under our Credit Agreement of approximately $27.5 million for total liquidity of approximately $82.5 million.
Working capital was $167.7$137.1 million and our ratio of current assets to current liabilities was 4.624.34 to 1 at June 30, 2017,March 31, 2018, compared to $78.0$130.5 million and 3.213.68 to 1, respectively, at December 31, 2016.2017. Working capital at June 30, 2017,March 31, 2018, includes $107.3$98.4 million related to assets held for sale, primarily related to our South Texas facilities. Properties which decreased after the sale of our Texas South Yards to $48.5 million. At March 31, 2018, our contracts receivable balance was $27.4 million of which we have subsequently collected $14.9 million through May 4, 2018. Our primary use of cash during the sixthree months ended June 30, 2017,March 31, 2018, is referenced in the Cash Flow Activities section below. At June 30, 2017,As discussed in our contracts receivable balance was $38.1 millionExecutive Summary, we are implementing several strategies to diversify our business, increase backlog, reduce operating expenses and monetize assets. Our South Texas Properties are held for sale. A significant portion of which we have subsequently collected $12.0 million through July 19, 2017.our near-term plan is to generate liquidity from the sale of these assets.
On April 20, 2018, we closed on the sale of our Texas South Yard for a sale price of $55 million, less selling costs of $1.5 million. We received approximately $52.7 million at closing, which was in addition to the $750,000 of earnest money previously received on January 3, 2018, related to the option to purchase the Texas South Yard. We plan to use the net proceeds to rebuild our liquidity, to support upcoming projects, continue investing in our newly created EPC Division and for other general corporate purposes. See further discussion of the sale of our Texas South Yard in Note 2 of the Notes to Consolidated Financial Statements. We currently believe that cash on hand coupled with proceeds received from the sale of our Texas South Yard and funds available under our Credit Agreement will enable the Company to meet its working capital needs, capital expenditure requirements, any debt service obligations and other funding requirements for at least the twelve months from the date of this Report.
As of the date of this Report our Texas North Yard remains held for sale. The book value of the Texas North Yard is $46.6 million at March 31, 2018. We will continue to incur costs associated with holding and maintaining our Texas North Yard. These costs include insurance, general maintenance of the properties in their current state, property taxes and retained employees which will be expensed as incurred.
We have a $40 million Credit Agreement maturing June 9, 2017, we entered into a $40.0 million credit agreement with Whitney Bank, as lender (the “New2019. The Credit Facility”). The New Credit Facility matures June 9, 2019 and may be usedAgreement allows the Company to use up to the full amount of the available borrowing base for issuing letters of credit and/orand general corporate and working capital purposes. We believe that the new facilityour Credit Agreement will provide us with additional working capital flexibility to expand operations as backlog improves, respond to market opportunities and support our ongoing operations.
Interest on drawings under the New Credit FacilityAgreement may be designated, at our option, as either Base Rate (as defined in the New Credit Facility)credit facility) or LIBOR plus 2.0%2% per annum. Our outstanding balance of $10 million at March 31, 2018, is designated as a LIBOR rate loan. Unused commitment fees on the undrawn portion of the facilityCredit Agreement are 0.4% per annum, and the letter of credit feeinterest on undrawn stated amounts under letters of credit issued by the lenders are 0.4%lender is 2% per annum and 2.0%annum. At March 31, 2018, the interest rate on our outstanding borrowings was 3.75% per annum, respectively.annum. The New Credit FacilityAgreement is secured by substantially all of our assets (other than the assetsSouth Texas Properties).
At March 31, 2018, $10 million was outstanding under the Credit Agreement and, we had letters of Gulf Marine Fabricators, L.P.,credit of $2.5 million outstanding leaving availability of $27.5 million. Subsequent to March 31, 2018, we re-issued a letter of credit for $3 million related to outstanding contractual obligations which are currently held for sale).we expect to remain outstanding until July of 2018.
We must comply with the following financial covenants each quarter during the term of the facility:Credit Agreement:
| | i. | ratioRatio of current assets to current liabilities of not less than 1.25:1.00; |
| | ii. | minimumMinimum tangible net worth requirement of at least the sum of: |
| | a) | $230.0185 million, plus |
| | b) | anAn amount equal to 50% of consolidated net income for each fiscal quarter ending after June 30, 2017, including 50% of any gain attributable to the sale of our South Texas Properties (with no deduction for a net loss in any such fiscal quarter except for any gain or loss in connection with the sale of assets by Gulf Marine Fabricators, L.P.)quarter), plus |
| | c) | 100% of all netthe proceeds of any issuance of any stock or other equity after deducting of any fees, commissions, expenses and other costs incurred in such offering; and |
| | iii. | ratioRatio of funded debt to tangible net worth of not more than 0.50:1.00. |
Concurrent with our execution of the New Credit Facility, we terminated our prior credit facility with JPMorgan Chase Bank, N.A. At the time of the termination, there was approximately $4.6 million of letters of credit outstanding, all of which was temporarily cash collateralized by us. Subsequent to June 30, 2017, we were able to reissue new letters of credit under the New Credit Facility, of which $4.6 million have been accepted by the beneficiaries, and we have been released from cash collateral requirements. Availability under our credit facility for future, additional letters of credit and borrowings is $35.4 million. As of June 30, 2017,March 31, 2018, we were in compliance with all of our financial covenants.
We will continue to monitor and preserve our cash. Our primary liquidity requirements for 2018 and beyond are for the costs associated with fabrication and shipyard projects, capital expenditures related to the creation of our EPC Division and payment of dividendsenhancements to our shareholders.shipyards. Future capital expenditures will be highly dependent upon the amount and timing of future projects. Capital expenditures for the quarter ended March 31, 2018, were $71,000. We do not anticipate significant capital expenditures for the remainder of 20172018.
If industry conditions for offshore oil and gas do not improve, we are unable to range between $2.0 millionsell our Texas North Yard or the sale is delayed, or we are unable to $5.0 million primarily forincrease our backlog, we would expect to take additional measures to preserve our cash flows until such time we are able to generate cash flows from operations. Since the following:
improvementsbeginning of 2016, we have implemented wage adjustments along with employee benefit and overall cost reductions within all of our divisions. We have reduced the level of our workforce in the past and we will continue to do so based on booked work in all of our facilities. We have reduced the compensation paid to our Jenningsdirectors and Lake Charles leased shipyards,
improvementthe salaries of our executive officers, and we have reduced our capital expenditures and placed assets that are either underutilized, under-performing or not expected to the bulkhead atprovide sufficient long-term value for sale, which include our Houma facility, and
computer system upgrades.
South Texas Properties.
On October 21, 2016, a customer of our Shipyards division announced it was in noncompliance with certain financial covenants included in the customer’s debt agreements and stated that, while it had received limited waivers from its lenders, its debt agreements would require further negotiation and amendment. This same customer rejected delivery of the first vessel that we completed and tendered for delivery on February 6, 2017, alleging certain technical deficiencies exist with respect to the vessel and is seeking recovery of all purchase price amounts previously paid by the customer under the contract. On March 10, 2017, we gave notice for arbitration with our customer in an effort to resolve this matter. We are also building a second vessel for this customer which has been suspended and included in our arbitration proceedings. We disagree with our customer concerning these alleged technical deficiencies and have put the customer in default under the terms of the contracts for both vessels. On May 17, 2017, the customer filed for protection under Chapter 11 of the United States Bankruptcy Code for reorganization under a negotiated, pre-packaged plan. The customer has petitioned the Bankruptcy Court to accept our contracts for the two vessels we are constructing for them. As of June 30, 2017, approximately $4.6 million remained due and outstanding from our customer for the first vessel. The balance due to us for the second vessel upon completion and delivery is approximately $4.9 million.
We are working with legal counsel to protect our contractual claims during the restructuring and intend to re-initiate our rights for arbitration in accordance with our contract upon our customer's emergence from Chapter 11 reorganization. We intend to take all legal action as may be necessary to protect our rights under the contracts and recover the remaining balances owed to us.
We continue to monitor our work performed in relation to our customer’s status and its ability to pay under the terms of these contracts. Because these vessels have been completed or are substantially complete, wecurrently believe that they have significant fair valuecash on hand and that we wouldfunds available under our Credit Agreement will be ablesufficient to fully recovermeet our working capital and capital expenditure requirements, any remaining amounts due to us infuture debt service and other funding requirements for at least twelve months from the event we enforcedate of this Report. Our view regarding sufficiency of cash and liquidity is primarily based on our security interest over these projects.
In anticipation of the proceeds to be received fromfinancial forecast for 2018 and early 2019, which is impacted by various assumptions regarding the sale of our South Texas assets, we engaged advisors to assist in the development of a capital deployment plan to determine the appropriate use of proceeds from this transaction to maximize long-term shareholder value. Our capital deployment plan includes a variety of investment options including investing in our operating liquidity in order to facilitate anticipated future projects, selected capital improvements to enhance and/or expandNorth Yard, our existing facilities, mergersbacklog and acquisitionsa reasonable amount of forecast, non-contractual backlog. There is no guarantee that our financial forecast will be attainable or that we will have sufficient cash, including funds available under our Credit Agreement, to expand our product and service capabilitiesmeet planned operating expenses and other optionsunforeseen cash requirements. Accordingly, we may be required to return surplus resources to shareholders either through stock buy-backs and/or special dividends. We are continuing this effort to identify and analyze specific investment opportunities we believe will enhance the long-term value of the Company and that are consistent with our strategy.
On July 27, 2017, our Board of Directors declared a dividend of $0.01 per sharefurther draw on our shares of common stock outstanding, payable August 24, 2017,Credit Agreement, obtain additional bank financing, sell additional assets or conduct equity or debt offerings at a time when it is not beneficial to shareholders of record on August 10, 2017.do so.
We believe our cash and cash equivalents generated by our future operating activities and proceeds to be received from future assets sales will be sufficient to fund our capital expenditures and meet our working capital needs for both the near and longer term to continue our operations, satisfy our contractual operations and pay dividends to our shareholders.
Cash Flow Activities
For the sixthree months ended June 30, 2017,March 31, 2018, net cash used in operating activities was $27.9$14.1 million, compared to net cash provided byused in operating activities of $11.8$15.1 million for the sixthree months ended June 30, 2016.March 31, 2017. The use of cash in operations during the period was primarily due to the following:
Operating losses for the sixthree months ended June 30, 2017,March 31, 2018, in excess of non-cash depreciation, amortization, impairment and stock compensation expense of approximately $17.9 million,$1.5 million; Payment of year-end bonuses related to 2016,
Progress on liabilities from assumed contracts in the LEEVAC transaction. While our purchase price for the acquisition of the LEEVAC assets during 2016 was $20.0 million, we received a net $3.0 million in cash from the seller for the assumption of certain net liabilities and settlement payments on ongoing shipbuilding projects of $23.0 million that were assigned to us in the transaction. We have significantly progressed these contracts, which in turn has resulted in utilization of the working capital and settlement payments received during 2016.
The suspension of two vessel projects following our customer’s refusal to accept delivery of the first vessel in February 2017, and our inability to collect $9.5 million in scheduled payments under these contracts. We have initiated arbitration proceedings during the quarter to enforce our rights under these contracts; and
Build-up of costs for contracts in progress of $9.1 million;
Build-up of retainage on projects of $1.5 million; and
Payment of property taxes related to a customer in our Shipyards division with significant milestone payments occurring in the later stagesSouth Texas Properties of the projects which are expected to occur beginning in the third quarter of 2017 through the first quarter of 2018.$2 million.
Net cash provided by investing activities for the sixthree months ended June 30, 2017,March 31, 2018, was $296,000,$2.4 million, compared to cash provided byused in investing activities of $3.8 million$391,000 for the sixthree months ended June 30, 2016.March 31, 2017. The change in cash provided byused in investing activities is primarily due to cashthe insurance proceeds received from the sale of three cranesfor hurricane damage to assets at our South Texas facility for $5.5 million and $1.6 million of cash acquired in the LEEVAC transaction during 2016.Properties.
Net cash used inprovided by financing activities for the sixthree months ended June 30,March 31, 2018, and 2017, and 2016, was $1.2$9.2 million and $441,000, respectively. The increasecompared to $1.0 million in cash used in financing activities, respectively. The increase in cash provided by financing activities is due to the cash payments made to taxing authorities on behalf of employees' for their vesting of common stock.$10 million in net borrowings under our Credit Agreement.
Contractual Obligations There have been no material changes from the information included in our 2017 Annual Report on Form 10-K for the year ended December 31, 2016.Report. For more information on our contractual obligations, refer to Part II, Item 7 of our 2017 Annual Report on Form 10-K for the year ended December 31, 2016.Report. Off-Balance Sheet Arrangements There have been no material changes from the information included in our 2017 Annual Report on Form 10-K for the year ended December 31, 2016.Report. Item 3. Quantitative and Qualitative Disclosures About Market Risk. There have been no material changes in the Company’s market risks during the quarter ended June 30, 2017.March 31, 2018. For more information on market risk, refer to Part II, Item 7A. of our Annual Report on Form 10-K for the year ended December 31, 2016.2017. Item 4. Controls and Procedures. The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and that such information is communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report.Report. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that the design and operation of our disclosure controls and procedures were effective as of the end of the period covered by this report.Report. There have been no changes during the fiscal quarter ended June 30, 2017,March 31, 2018, in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION Item 1. Legal Proceedings. The Company is subject to various routine legal proceedings in the normal conduct of its business primarily involving commercial claims, workers’ compensation claims, and claims for personal injury under general maritime laws of the United States and the Jones Act. While the outcome of these lawsuits, legal proceedings and claims cannot be predicted with certainty, management believes that the outcome of any such proceedings, even if determined adversely, would not have a material adverse effect on the financial position, results of operations or cash flows of the Company. Item 1A. Risk Factors. There have been no material changes from the information included in Item 1A “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2016.2017. Item 6. Exhibits. | | | | | Exhibit Number | | Description of Exhibit | | | 3.1 | | | 3.2 | | | 10.1 | |
| 10.2 | |
| 10.3 | | | 10.2 | | Credit Agreement dated June 9, 2017, incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed June 9, 2017.February 26, 2018. †
| 10.4 | |
| 31.1 | | | 31.2 | | | 32 | | | | | | 101 | | Attached as Exhibit 101 to this report are the following items formatted in XBRL (Extensible Business Reporting Language): | | | (i) | Consolidated Balance Sheets, | | | (ii) | Consolidated Statements of Operations, | | | (iii) | Consolidated Statement of Changes in Shareholders’ Equity, | | | (iv) | Consolidated Statements of Cash Flows, and | | | (v) | Notes to Consolidated Financial Statements. | | | | † | | Management Contract or Compensatory Plan. |
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this reportReport to be signed on its behalf by the undersigned thereunto duly authorized. | | | GULF ISLAND FABRICATION, INC. | | BY: | /s/ David S. Schorlemer | | David S. Schorlemer | | Executive Vice President, Chief Financial Officer, Secretary and Treasurer (Principal Financial and Accounting Officer) |
Date: August 1, 2017May 4, 2018
GULF ISLAND FABRICATION, INC.
EXHIBIT INDEX
| | | | | Exhibit
Number
| | Description of Exhibit | | | 3.1 | | Composite Articles of Incorporation of the Company incorporated by reference to Exhibit 3.1 of the Company’s Form 10-Q filed April 23, 2009. | 3.2 | | Amended and Restated Bylaws of the Company, incorporated by reference to Exhibit 3.1 of the Company’s Form 8-K filed November 4, 2016. | 10.1 | | Change of Control Agreement, dated March 1, 2017, between the Company and David S. Schorlemer, incorporated by reference to Exhibit 10.15 of the Company's Form 10-K for the year ended December 31, 2016 filed on March 2, 2017. | 10.2 | | Credit Agreement dated June 9, 2017, incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed June 9, 2017. | 31.1 | | CEO Certifications pursuant to Rule 13a-14 under the Securities Exchange Act of 1934. | 31.2 | | CFO Certifications pursuant to Rule 13a-14 under the Securities Exchange Act of 1934. | 32 | | Section 906 Certification furnished pursuant to 18 U.S.C. Section 1350. | | | | 101 | | Attached as Exhibit 101 to this report are the following items formatted in XBRL (Extensible Business Reporting Language): | | | | | | (i) | Consolidated Balance Sheets, | | | (ii) | Consolidated Statements of Operations, | | | (iii) | Consolidated Statement of Changes in Shareholders’ Equity, | | | (iv) | Consolidated Statements of Cash Flows and | | | (v) | Notes to Consolidated Financial Statements. |
s | Percentage | | | | |
Backlog is expected to be recognized in revenue during:(2)
| | ___________
| | (1) | We exclude suspended projects from contract backlog when they are expected to be suspended more than 12 months because resumption of work and timing of revenue recognition for these projects are difficult to predict. |
| | (2) | At June 30, 2017,March 31, 2018, projects for our five largest customers in terms of revenue backlog consisted of: |
| | (i) | twoTwo large multi-purpose service vesselsMPSVs for one customer in our Shipyards division,for which commenced in the first quarterwe have received a purported notice of 2014 and will be completed during the first and second quarters of 2018;termination as discussed above; |
| | (ii) | newbuildNewbuild construction of fourfive harbor tugs for one customer within our Shipyards division;(to be completed in 2018 through 2020); |
(iii) newbuild construction of four harbor tugs for one additional customer within our Shipyards division;
| | (iii) | Newbuild construction of five harbor tugs for one customer (separate from above) (to completed in 2018 through 2020); |
| | (iv) | the fabricationNewbuild construction of four modules associated with a U.S. ethane cracker project within our Fabrication division;an offshore research vessel (to be completed in 2020); and |
(v) newbuild construction of an offshore research vessel within our Shipyards division.
| | (3)(v) | Newbuild construction of one T-ATS vessel (to be completed in 2020). This contract is currently under a bid protest. |
| | (2) | The timing of recognition of the revenue represented in our backlog is based on management’s current estimates to complete the projects. Certain factors and circumstances could cause changes in the amounts ultimately recognized and the timing of the recognition of revenue from our backlog. |
Depending on
Certain of our contracts contain options which grant the sizeright to our customer, if exercised, for the construction of the project, the termination, postponement, or reductionadditional vessels at contracted prices.We do not include options in scope of any one project could significantly reduce our backlog above. If all options under our current contracts were exercised, our backlog would increase by $626.2 million. We believe disclosing these options provides investors with useful information in order to evaluate additional potential work that we would be contractually obligated to perform under our current contracts as well as the potential significance of these options, if exercised. We have not received any commitments related to the exercise of these options from our customers, and could have a material adverse effect on revenue, net income and cash flow. Additionally, as we continue tocan provide no assurance that any or all of these options will be exercised. As we add backlog, we will begin addingadd personnel with critical project management and fabrication skills to ensure we have the resources necessary to execute our projects well and to support our project risk mitigation discipline for all new project work.projects. This may negatively impact near termnear-term results. As of June 30, 2017,March 31, 2018, we had 983 employees and 166 contract961 employees compared to 1,178 employees and 92 contract977 employees as of December 31, 2016. 2017. Labor hours worked were 1.0 million496,000 during the sixthree months ended June 30, 2017,March 31, 2018, compared to 1.6 million479,000 for the sixthree months ended June 30, 2016.March 31, 2017. The overall decreaseincrease in labor hours worked for the sixthree months ended June 30, 2017,March 31, 2018, was due to an overallimproved offshore demand within our Services Division. As of April 29, 2018, we had 870 employees. The decrease in work experiencedour workforce subsequent to March 31, 2018, is primarily within our Fabrication Division due to completion of complex modules for the construction of a new petrochemical plant with no significant future Fabrication backlog forecasted in the near-term as well as the stoppage of construction of the two MPSVs within our facilities as a result of depressed oil and gas prices and the corresponding reduction in customer demand within allShipyard Division pending resolution of our operating divisions.dispute over termination with our MPSV customer. See Note 9 of the Notes to Consolidated Financial Statements related to our MPSV contract termination dispute.
Results of Operations Three Months Ended June 30, 2017,March 31, 2018, Compared to Three Months Ended June 30, 2016 March 31, 2017 (in thousands, except for percentages): Consolidated | | | | | | | | | | | | | | | Three Months Ended June 30, | | Increase or (Decrease) | | 2017 | | 2016 | | Amount | Percent | Revenue | $ | 45,868 |
| | $ | 81,502 |
| | $ | (35,634 | ) | (43.7)% | Cost of revenue | 57,488 |
| | 67,436 |
| | (9,948 | ) | (14.8)% | Gross profit (loss) | (11,620 | ) | | 14,066 |
| | (25,686 | ) | (182.6)% | Gross profit (loss) percentage | (25.3 | )% | | 17.3 | % | | | | General and administrative expenses | 4,640 |
| | 5,062 |
| | (422 | ) | (8.3)% | Operating income (loss) | (16,260 | ) | | 9,004 |
| | (25,264 | ) | (280.6)% | Other income (expense): | | | | | | | Interest expense | (158 | ) | | (88 | ) | | (70 | ) | | Interest income | 12 |
| | 2 |
| | 10 |
| | Other income (expense), net | (266 | ) | | 42 |
| | (308 | ) | | Total other income (expense) | (412 | ) | | (44 | ) | | (368 | ) | (836.4)% | Net income (loss) before income taxes | (16,672 | ) | | 8,960 |
| | (25,632 | ) | (286.1)% | Income tax expense (benefit) | (5,749 | ) | | 3,420 |
| | (9,169 | ) | (268.1)% | Net income (loss) | $ | (10,923 | ) | | $ | 5,540 |
| | $ | (16,463 | ) | (297.2)% |
| | | | | | | | | | | | | | | Three Months Ended March 31, | | Increase or (Decrease) | | 2018 | | 2017 | | Amount | Percent | Revenue | $ | 57,290 |
| | $ | 37,993 |
| | $ | 19,297 |
| 50.8% | Cost of revenue | 56,611 |
| | 42,890 |
| | 13,721 |
| 32.0% | Gross profit (loss) | 679 |
| | (4,897 | ) | | 5,576 |
| 113.9% | Gross profit (loss) percentage | 1.2 | % | | (12.9 | )% | | | | General and administrative expenses | 4,709 |
| | 3,930 |
| | 779 |
| 19.8% | Asset impairment | 750 |
| | 389 |
| | 361 |
| 92.8% | Operating income (loss) | (4,780 | ) | | (9,216 | ) | | (4,436 | ) |
| Other income (expense): | | | | | | | Interest expense | (469 | ) | | (59 | ) | | (410 | ) | (694.9)% | Other income (expense), net | 12 |
| | 9 |
| | 3 |
| 33.3% | Total other income (expense) | (457 | ) | | (50 | ) | | (407 | ) | (814.0)% | Net loss before income taxes | (5,237 | ) | | (9,266 | ) | | (4,029 | ) | (43.5)% | Income tax expense (benefit) | 59 |
| | (2,812 | ) | | 2,871 |
| 102.1% | Net loss | $ | (5,296 | ) | | $ | (6,454 | ) | | $ | 6,900 |
|
|
Revenue - Our revenue for the three months ended June 30,March 31, 2018 and 2017, and 2016, was $45.9$57.3 million and $81.5$38.0 million, respectively, representing a decreasean increase of 43.7%50.8%. The decreaseincrease is primarily attributable to an overall decrease in work experienced into:
An increase of $11.2 million within our facilities as a result of depressedServices Division from additional demand for offshore oil and gas pricesservice related projects; and An increase of $7.1 million within our Fabrication Division primarily attributable to the corresponding reduction in customer demand within allconstruction of our operating divisions. Pass-through costs asfour modules for a percentage of revenue were 53.1% and 35.1%petrochemical plant.
Gross profit (loss) - Our gross profit for the three months ended June 30, 2017 and 2016, respectively. Pass-through costs, as described in Note 3 of the Notes to Consolidated Financial Statements, are included in revenue but have no impact on the gross profit recognized on a project for a particular period.
Gross profit (loss) - Our gross loss for the three months ended June 30, 2017,March 31, 2018, was $11.6 million$679,000 compared to a gross profitloss of $14.1$4.9 million for the three months ended June 30, 2016.March 31, 2017. The decreaseincrease in gross profit was primarily due to $10.2 million of contract losses incurred byincreased revenue within our Shipyards division related to cost overruns and re-work identified on two vessel contracts assigned in the LEEVAC transaction, decreased revenueServices Division as discussed above holding costsand decreased expenses within our Fabrication Division which included $1.9 million of depreciation expense for the three months ended March 31, 2017, related to our South Texas assets of $1.2 million and lower margins on current work. This was partially offset by decreases in costs resulting from reductions in workforce as we wrapped up and completed projects at our South Texas fabrication yards and Prospect shipyard,Properties with no depreciation being recordedexpense during the three months ended March 31, 2018, for our South Texas assets and Prospect shipyard for the three months ended June 30, 2017,Properties as these assets are classified as assets held for sale and additional cost cutting measures implemented by management.sale.
General and administrative expenses - Our general and administrative expenses were $4.6$4.7 million for the three months ended June 30, 2017,March 31, 2018, compared to $5.1$3.9 million for the three months ended June 30, 2016.March 31, 2017. The decreaseincrease in general and administrative expenses for the three months ended June 30, 2017,March 31, 2018, was primarily attributable to lower bonuses accrued during 2017
Build-up of additional personnel for our newly created EPC Division; Increased legal and advisory fees related to customer disputes, strategic planning and diversification of our business; Increased employee incentive accruals of approximately $300,000 for all divisions related to our safety incentive program and higher employee profitability incentives within our Services Division as a resultwell as the addition of a combinationpersonnel as we build up our EPC Division in anticipation of a smaller workforcethe SeaOne Project; and our consolidated gross loss Higher stock compensation expense of approximately $220,000.
This was partially offset by cost reductions and continued cost cutting measuresminimization efforts implemented by management for the period.
Asset impairment - We recorded an impairment of $750,000 during the first partthree months ended March 31, 2018, related to a piece of 2016.equipment at our Texas North Yard that we intend to sell at auction. This piece of equipment was not damaged by
Other income (expense),Hurricane Harvey. The impairment was calculated as management's estimated net proceeds from the sale less its net book value. See also Note 2 of the Notes to Consolidated Financial Statements for additional information regarding our assets held for sale. During the three months ended March 31, 2017, we recorded an impairment of $389,000 related to the Shipyard Division assets held for sale.
Interest expense- OtherInterest expense was $266,000increased due to drawings under our Credit Agreement for the three months ended June 30, 2017, as compared to other income of $42,000March 31, 2018, with no such drawings under our Credit Agreement for the three months ended June 30, 2016. Other expense forMarch 31, 2017, as well as increased amortization of deferred financing costs during the period was primarily due to losses on the sale of two drydocks from our Shipyards division recorded during three months ended June 30, 2017.March 31, 2018.
Income tax expense (benefit) - Our effective income tax rate for the three months ended June 30, 2017,March 31, 2018, was 34.5%(1.1)%, compared to an effective tax rate benefit of 38.2%30.3% for the comparable period during 2016.2017. Current expense represents state taxes within our Services Division. The decrease in the effective tax rate is the result of limitations on the deductibility of executive compensation. These amount are included in the estimate ofa valuation allowance against our year-end effective rate.
Operating Segments
As discussed indeferred tax assets. See Note 81 of the Notes to Consolidated Financial Statements management reduced its allocation of corporate administrative costsregarding our NOLs and overhead expenses to its operating divisions during the three and six months ended June 30, 2017, such that a significant portion of its corporate expenses are retained in its non-operating Corporate division. In addition, it has also allocated certain personnel previously included in the operating divisions to within the Corporate division. In doing so, management believes that it has created a fourth reportable segment with each of its three operating divisions and its Corporate division each meeting the criteria of reportable segments under GAAP. During the three and six months ended June 30, 2016, we allocated substantially all of our corporate administrative costs and overhead expenses to our three operating divisions. We have recast our 2016 segment data below in order to conform to the current period presentation. Ourdeferred tax assets.
Operating Segments
The results of our threefour operating divisions and Corporate divisionDivision for the three months ended June 30,March 31, 2018 and 2017, and 2016, are presented below (in thousands, except for percentages).
| | | | | | | | | | | | | | | | Fabrication | | Three Months Ended June 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | 13,990 |
| | $ | 24,296 |
| | $ | (10,306 | ) | | (42.4)% | Gross profit (loss) | | 1,931 |
| | 3,877 |
| | (1,946 | ) | | (50.2)% | Gross profit (loss) percentage | | 13.8 | % | | 16.0 | % | | | | (2.2)% | General and administrative expenses | | 833 |
| | 1,130 |
| | (297 | ) | | (26.3)% | Operating income (loss) | | 1,098 |
| | 2,747 |
| | | | |
| | | | | | | | | | | | | | | | Fabrication | | Three Months Ended March 31, | | Increase or (Decrease) | | | 2018 | | 2017 | | Amount | | Percent | Revenue | | $ | 17,270 |
| | $ | 10,209 |
| | $ | 7,061 |
| | 69.2% | Gross profit (loss) | | (219 | ) | | (2,966 | ) | | (2,747 | ) | | (92.6)% | Gross profit (loss) percentage | | (1.3 | )% | | (29.1 | )% | | | |
| General and administrative expenses | | 624 |
| | 821 |
| | (197 | ) | | (24.0)% | Asset impairment | | 750 |
| | — |
| | 750 |
| | 100.0% | Operating income (loss) | | $ | (1,593 | ) | | $ | (3,787 | ) | | $ | (2,194 | ) | |
|
Revenue - Revenue from our Fabrication division decreased $10.3Division increased $7.1 million for the three months ended June 30, 2017,March 31, 2018, compared to the three months ended June 30, 2016.March 31, 2017. The decreaseincrease is attributable to an overall decrease in work experienced in our fabrication yards asthe construction of four modules for a result ofpetrochemical plant during the three months ended March 31, 2018, and lower revenue during the three months ended March 31, 2017, resulting from depressed oil and gas prices and the corresponding reduction in customer demand for offshore fabrication projects. As discussed above, management has classified our South Texas assets as assets held for sale in response toprojects during the underutilizationperiod. This was partially offset, by decreased revenue of our Fabrication assets. As of June 30, 2017, all of our projects at our South Texas fabrication yards have been completed or transferred to our Houma fabrication yard.
Gross profit (loss) - Gross profit from our Fabrication division for the three months ended June 30, 2017, was $1.9 million compared to a gross profit of $3.9$2.4 million for the three months ended June 30, 2016. The decrease was due to lower revenue from decreased fabrication work as discussed above and approximately $1.2 million of holding costs for our South Texas assets. This was partially offset by decreases in costs resulting from reductions in workforce as we wrapped up and completed projectsMarch 31, 2018, at our South Texas fabrication yards, no depreciation being recordedProperties as these were placed for sale during the first quarter of 2017 and project work completed or transfered to our South Texas assetsHouma Fabrication Yard during 2017.
Gross profit (loss) - Gross loss from our Fabrication Division for the three months ended June 30, 2017,March 31, 2018, was $219,000 compared to a gross loss of $3.0 million for the three months ended March 31, 2017. The decrease in gross loss was due to increased revenue as discussed above and a reduction in depreciation expense of $1.9 million in depreciation expense during the three months ended March 31, 2018 for our South Texas Properties as these assets are classified as assets held for sale and additional cost cutting measures implemented by management.sale.
General and administrative expenses - General and administrative expenses for our Fabrication divisionDivision decreased $297,000$197,000 for the three months ended June 30, 2017,March 31, 2018, compared to the three months ended June 30, 2016.March 31, 2017. The decrease is primarily due to decreases in costs resulting from reductions in workforce as we wrapped up and completed projects at our South Texas fabrication yards and lower bonuses accrued during 2017Properties, decreases in corporate allocations as a resultportion of these are now allocated to our EPC Division and continued cost minimization efforts implemented by management for the period.
Asset impairment - We recorded an impairment of $750,000 during the three months ended March 31, 2018, related to a combinationpiece of a smaller workforce andequipment at our consolidated gross loss.Texas North Yard that we intend to sell at auction. This piece of equipment was not damaged by Hurricane Harvey. The impairment was calculated as management's estimated net proceeds from the sale less its net book value. See Note 2 of the Notes to Consolidated Financial Statements for additional information regarding our assets held for sale. We did not record any asset impairments during the three months ended March 31, 2017, within our Fabrication Division.
| | | | | | | | | | | | | | | | Shipyards | | Three Months Ended June 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue (1) | | $ | 18,303 |
| | $ | 29,373 |
| | $ | (11,070 | ) | | (37.7)% | Gross profit (loss) (1) | | (13,851 | ) | | 5,423 |
| | (19,274 | ) | | (355.4)% | Gross profit (loss) percentage | | (75.7 | )% | | 18.5 | % | | | | (94.2)% | General and administrative expenses | | 983 |
| | 1,460 |
| | (477 | ) | | (32.7)% | Operating income (loss) (1) | | (14,834 | ) | | 3,963 |
| | | | |
| | | | | | | | | | | | | | | | Shipyard | | Three Months Ended March 31, | | Increase or (Decrease) | | | 2018 | | 2017 | | Amount | | Percent | Revenue (1) | | $ | 18,565 |
| | $ | 18,422 |
| | $ | 143 |
| | 0.8% | Gross profit (loss) (1) | | (1,023 | ) | | (1,704 | ) | | (681 | ) | | (40.0)% | Gross profit (loss) percentage | | (5.5 | )% | | (9.2 | )% | | | |
| General and administrative expenses | | 796 |
| | 964 |
| | (168 | ) | | (17.4)% | Asset impairment | | — |
| | 389 |
| | (389 | ) | | (100.0)% | Operating income (loss) (1) | | $ | (1,819 | ) | | $ | (3,057 | ) | | $ | (1,238 | ) | |
|
___________ | | (1) | Revenue for the three months ended June 30,March 31, 2018, and 2017, includes $390,000 and 2016, includes $335,000 and $1.5 million of non-cash amortization of deferred revenue related to the values assigned to the contracts acquired in the LEEVAC transaction, respectively. |
Revenue - Revenue from our Shipyards division decreased $11.1 million for the three months ended June 30, 2017, compared to the three months ended June 30, 2016, due to depressed oil and gas prices and the corresponding reduction in customer demand for shipbuilding and repair services supporting the oil and gas industry. During the first quarter of 2017, we completed a vessel that we assumed in the LEEVAC transaction and delivered to a customer on February 6, 2017.
Gross profit (loss) - Gross loss from our Shipyards division was $13.9 million for the three months ended June 30, 2017, compared to a gross profit of $5.4 million for the three months ended June 30, 2016. The decrease was due to:
$10.2 million in contract losses related to cost overruns and re-work that has been identified on two contracts assigned to us in the LEEVAC transaction;
holding and closing costs related to our Prospect shipyard as we wind down operations at this facility;
holding costs related to a completed vessel that was delivered on February 6, 2017; however, was refused by our customer alleging certain technical deficiencies (see also Note 9 of the Notes to Consolidated Financial Statements); and
overall decreases in work under other various contracts as discussed above.
General and administrative expenses - General and administrative expenses for our Shipyards division decreased $477,000 for the three months ended June 30, 2017, compared to the three months ended June 30, 2016, primarily due to lower bonuses accrued during 2017 as a result of a combination of a smaller workforce and our consolidated gross loss and cost cutting measures implemented by management during the first part of 2016.
| | | | | | | | | | | | | | | | Services | | Three Months Ended June 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | 15,396 |
| | $ | 28,692 |
| | $ | (13,296 | ) | | (46.3)% | Gross profit (loss) | | 390 |
| | 4,864 |
| | (4,474 | ) | | (92.0)% | Gross profit (loss) percentage | | 2.5 | % | | 17.0 | % | | | | (14.5)% | General and administrative expenses | | 647 |
| | 800 |
| | (153 | ) | | (19.1)% | Operating income (loss) | | (257 | ) | | 4,064 |
| | | | |
Revenue - Revenue from our Services division decreased $13.3 million for the three months ended June 30, 2017, compared to the three months ended June 30, 2016, due to an overall decrease in work experienced as a result of depressed oil and gas prices and the corresponding reduction in customer demand for oil and gas related service projects.
Gross profit - Gross profit from our Services division decreased $4.5 million for the three months ended June 30, 2017, compared to the three months ended June 30, 2016, due to decreased revenue discussed above and lower margins on new work performed during 2017.
General and administrative expenses - General and administrative expenses for our Services division decreased $153,000 for the three months ended June 30, 2017, compared to the three months ended June 30, 2016, due to lower bonuses accrued during 2017 as a result of a combination of a smaller workforce and our consolidated gross loss.
| | | | | | | | | | | | | | | | Corporate | | Three Months Ended June 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | — |
| | $ | — |
| | $ | — |
| | —% | Gross profit (loss) | | (90 | ) | | (98 | ) | | 8 |
| | 8.2% | Gross profit (loss) percentage | | n/a |
| | n/a |
| | | |
| General and administrative expenses | | 2,177 |
| | 1,672 |
| | 505 |
| | 30.2% | Operating income (loss) | | (2,267 | ) | | (1,770 | ) | |
|
| | |
General and administrative expenses - General and administrative expenses for our Corporate division increased primarily due to a restructuring of our corporate division with additional personnel allocated to our corporate division during 2017 as discussed above as well as for expenses incurred for advisors to assist in a strategic financial analysis project in anticipation of the proceeds to be received from the sale of our South Texas assets. This has been partially offset by lower bonuses accrued during 2017, as a result of a combination of a smaller workforce and our consolidated gross loss.
Six Months Ended June 30, 2017, Compared to Six Months Ended June 30, 2016 (in thousands, except for percentages):
Consolidated
| | | | | | | | | | | | | | | Six Months Ended June 30, | | Increase or (Decrease) | | 2017 | | 2016 | | Amount | Percent | Revenue | $ | 83,860 |
| | $ | 165,481 |
| | $ | (81,621 | ) | (49.3)% | Cost of revenue | 100,378 |
| | 145,714 |
| | (45,336 | ) | (31.1)% | Gross profit (loss) | (16,518 | ) | | 19,767 |
| | (36,285 | ) | (183.6)% | Gross profit (loss) percentage | (19.7 | )% | | 11.9 | % | | | | General and administrative expenses | 8,570 |
| | 9,547 |
| | (977 | ) | (10.2)% | Asset impairment | 389 |
| | — |
| | 389 |
| 100.0% | Operating income (loss) | (25,477 | ) | | 10,220 |
| | (35,697 | ) | (349.3)% | Other income (expense): | | | | | | | Interest expense | (217 | ) | | (138 | ) | | (79 | ) | | Interest income | 12 |
| | 8 |
| | 4 |
| | Other income (expense), net | (257 | ) | | 440 |
| | (697 | ) | | Total other income (expense) | (462 | ) | | 310 |
| | (772 | ) | (249.0)% | Net income (loss) before income taxes | (25,939 | ) | | 10,530 |
| | (36,469 | ) | (346.3)% | Income tax expense (benefit) | (8,561 | ) | | 4,001 |
| | (12,562 | ) | (314.0)% | Net income (loss) | $ | (17,378 | ) | | $ | 6,529 |
| | $ | (23,907 | ) | (366.2)% |
Revenue - Our revenue for the six months ended June 30, 2017 and 2016, was $83.9 million and $165.5 million, respectively, representing a decrease of 49.3%. The decrease is primarily attributable to an overall decrease in work experienced in our facilities as a result of depressed oil and gas prices and the corresponding reduction in customer demand within all of our operating divisions. Pass-through costs as a percentage of revenue were 41.9% and 37.6% for the six months ended June 30, 2017 and 2016, respectively. Pass-through costs, as described in Note 3 of the Notes to Consolidated Financial Statements, are included in revenue but have no impact on the gross profit recognized on a project for a particular period.
Gross profit (loss) - Our gross loss for the six months ended June 30, 2017, was $16.5 million compared to a gross profit of $19.8 million for the six months ended June 30, 2016. The decrease was primarily due to $10.6 million of losses incurred by our Shipyards division related to cost overruns and re-work identified on two vessel contracts assigned in the LEEVAC transaction, decreased revenue as discussed above, holding costs related to our South Texas assets of $2.5 million and lower margins on current work. This was partially offset by decreases in costs resulting from reductions in workforce as we wrapped up and completed projects at our South Texas fabrication yards and Prospect shipyard, suspended depreciation for our South Texas assets and Prospect shipyard during the six months ended June 30, 2017, as these assets are classified as assets held for sale and additional cost cutting measures implemented by management.
General and administrative expenses - Our general and administrative expenses were $8.6 million for the six months ended June 30, 2017, compared to $9.5 million for the six months ended June 30, 2016. The decrease in general and administrative expenses for the six months ended June 30, 2017, was primarily attributable to lower bonuses accrued during 2017 as a result of a combination of a smaller workforce and our consolidated gross loss and cost cutting measures implemented by management during the first part of 2016.
Asset Impairment - During the six months ended June 30, 2017, we recorded an impairment of $389,000 related to our assets held for sale at our Prospect Shipyard. See also Note 2 of the Notes to Consolidated Financial statements.
Other income (expense), net - Other expense was $257,000 for the six months ended June 30, 2017, compared to other income of $440,000 for the six months ended June 30, 2016. Other expense for the period was primarily due to losses on sales of two drydocks from our Shipyards division. Other income for the prior period was primarily due to gains on sales of assets from our Fabrication division recorded during the first quarter of 2016.
Income tax expense (benefit) - Our effective income tax rate for the six months ended June 30, 2017, was 33.0%, compared to an effective tax rate of 38.0% for the comparable period during 2016. The decrease in the effective tax rate is the result of limitations on the deductibility of executive compensation.
Operating Segments
As discussed above and in Note 8 of the Notes to Consolidated Financial Statements, management reduced its allocation of corporate administrative costs and overhead expenses to its operating divisions during the three and six months ended June 30, 2017. We have recast our 2016 segment data below in order to conform to the current period presentation. Our results of our three operating divisions and Corporate division for the six months ended June 30, 2017 and 2016, are presented below (in thousands, except for percentages).
| | | | | | | | | | | | | | | | Fabrication | | Six Months Ended June 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | 24,199 |
| | $ | 48,125 |
| | $ | (23,926 | ) | | (49.7)% | Gross profit (loss) | | (1,034 | ) | | 3,964 |
| | (4,998 | ) | | (126.1)% | Gross profit (loss) percentage | | (4.3 | )% | | 8.2 | % | | | | (12.5)% | General and administrative expenses | | 1,654 |
| | 1,936 |
| | (282 | ) | | (14.6)% | Operating income (loss) | | (2,688 | ) | | 2,028 |
| | | | |
Revenue - Revenue from our Fabrication division decreased $23.9 million for the six months ended June 30, 2017, compared to the six months ended June 30, 2016. The decrease is attributable to an overall decrease in work experienced in our fabrication yards as a result of depressed oil and gas prices and the corresponding reduction in customer demand for offshore fabrication projects. As discussed above, management has classified our South Texas assets as assets held for sale in response to the underutilization of our Fabrication assets. As of June 30, 2017, all of our projects at our South Texas fabrication yards have been completed or transferred to our Houma fabrication yard.
Gross profit (loss) - Gross loss from our Fabrication division for the six months ended June 30, 2017, was $1.0 million compared to a gross profit of $4.0 million for the six months ended June 30, 2016. The decrease was due to lower revenue from decreased fabrication work as discussed above and approximately $2.5 million of holding costs for our South Texas assets as we market them for sale. This was partially offset by decreases in costs resulting from reductions in workforce as we wrapped up and completed projects at our South Texas fabrication yards, reduced depreciation being recorded for our South Texas assets for the six months ended June 30, 2017, as these assets are classified as assets held for sale on February 23, 2017, and additional cost cutting measures implemented by management.
General and administrative expenses - General and administrative expenses for our Fabrication division decreased $282,000 for the six months ended June 30, 2017, compared to the six months ended June 30, 2016. The decrease is primarily due to decreases in costs resulting from reductions in workforce as we wrapped up and completed projects at our South Texas fabrication yards and lower bonuses accrued during 2017 as a result of a combination of a smaller workforce and our consolidated gross loss. This was partially offset by expenses incurred to market our South Texas assets for sale and payment of termination benefits during the first quarter of 2017 as we reduced its workforce and completed those operations.
| | | | | | | | | | | | | | | | Shipyards | | Six Months Ended June 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue (1) | | $ | 36,724 |
| | $ | 63,493 |
| | $ | (26,769 | ) | | (42.2)% | Gross profit (loss) (1) | | (15,556 | ) | | 7,797 |
| | (23,353 | ) | | (299.5)% | Gross profit (loss) percentage | | (42.4 | )% | | 12.3 | % | | | | (54.7)% | General and administrative expenses | | 1,947 |
| | 2,750 |
| | (803 | ) | | (29.2)% | Asset impairment | | 389 |
| | — |
| | 389 |
| | 100.0% | Operating income (loss) (1) | | (17,892 | ) | | 5,047 |
| | | | |
___________
| | (1) | Revenue for the six months ended June 30, 2017, and 2016, includes $1.9 million and $2.7$1.6 million of non-cash amortization of deferred revenue related to the values assigned to the contracts acquired in the LEEVAC transaction, respectively. |
Revenue - Revenue from our Shipyards division decreased $26.8 millionShipyard Division increased $143,000 for the sixthree months ended June 30, 2017,March 31, 2018, compared to the sixthree months ended June 30, 2016, dueMarch 31, 2017. During the first quarter of 2018, we were able to depressed oilmake progress on the construction of eight harbor tugs and gas pricesan offshore research vessel which were not under construction during the first quarter of 2017. This was partially offset by lower revenue from construction of our two OSV and two MPSV vessel contracts during the corresponding reduction in customer demand for shipbuilding and repair services supporting the oil and gas industry. first quarter of 2018.
During the first quarter of 2017, we completed a vessel that we assumed in the LEEVAC transactionfirst of the OSVs and deliveredtendered it for delivery on February 6, 2017, and suspended construction of the second OSV due to a customer on February 6, 2017.
Gross profit (loss) - Gross lossdispute. We recommenced construction of the second OSV during the fourth quarter of 2017 which is scheduled for completion during the second quarter of 2018. During the first quarter of 2018, we received a notice of purported termination from a customer within our Shipyards division was $15.6 million for the six months ended June 30, 2017, compared to a gross profit of $7.8 million for the six months ended June 30, 2016. The decrease was due to:
$10.6 million in contract lossesShipyard Division related to cost overrunsthe construction of two MPSVs. We dispute the purported termination and re-work thatdisagree with the customer’s reasons for same. Pending resolution of the dispute, all work has been identified on two contracts assigned to usstopped and the vessels and associated equipment and material are in the LEEVAC transaction;
holdingour care and closing costs related tocustody at our Prospect shipyard as we wind down operations at this facility;
holding costs related to a completed vessel that was delivered on February 6, 2017; however, was refused by our customer alleging certain technical deficiencies (see alsoin Houma, Louisiana. See Note 9 of the Notes to Consolidated Financial Statements);Statements for additional information relating to this customer dispute.
Gross profit (loss) - Gross loss from our Shipyard Division was $1.0 million for the three months ended March 31, 2018, compared to a gross loss of $1.7 million for the three months ended March 31, 2017. The decrease was due to improved cost management efforts and efficiencies learned from the construction of two OSV and two MPSV vessels during the three months ended March 31, 2017, and applied to the construction of eight harbor tugs during the three months ended March 31, 2018. overall decreases in work under other various contracts as discussed above.
General and administrative expenses - General and administrative expenses for our Shipyards divisionShipyard Division decreased $803,000$168,000 for the sixthree months ended June 30, 2017,March 31, 2018, compared to the sixthree months ended June 30, 2016,March 31, 2017, primarily due to lower bonuses accrued during 2017reductions in workforce, decreases in corporate allocations as a resultportion of a combination of a smaller workforcethese are now allocated to our EPC Division and our consolidated gross loss and cost cutting measures implemented by management during the first part of 2016.decreased construction activity.
Asset Impairmentimpairment - During sixthe three months ended June 30,March 31, 2017, we recorded an impairment of $389,000 related to ourthe Shipyard Division assets held for sale at our Prospect shipyard.sale. See also Note 2 of the Notes to Consolidated Financial statements.Statements for additional information relating to our assets held for sale. We did not record any asset impairment during the three months ended March 31, 2018, in our Shipyard Division.
| | | | | | | | | | | | | | | | Services | | Six Months Ended June 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | 26,107 |
| | $ | 55,251 |
| | $ | (29,144 | ) | | (52.7)% | Gross profit (loss) | | 423 |
| | 8,240 |
| | (7,817 | ) | | (94.9)% | Gross profit (loss) percentage | | 1.6 | % | | 14.9 | % | | | | (13.3)% | General and administrative expenses | | 1,313 |
| | 1,519 |
| | (206 | ) | | (13.6)% | Operating income (loss) | | (890 | ) | | 6,721 |
| | | | |
| | | | | | | | | | | | | | | | Services | | Three Months Ended March 31, | | Increase or (Decrease) | | | 2018 | | 2017 | | Amount | | Percent | Revenue | | $ | 21,870 |
| | $ | 10,712 |
| | $ | 11,158 |
| | 104.2% | Gross profit (loss) | | 2,614 |
| | 33 |
| | 2,581 |
| | 7,821.2% | Gross profit (loss) percentage | | 12.0 | % | | 0.3 | % | | | |
| General and administrative expenses | | 734 |
| | 666 |
| | 68 |
| | 10.2% | Operating income (loss) | | $ | 1,880 |
| | $ | (633 | ) | | $ | 2,513 |
| |
|
Revenue - Revenue from our Services division decreased $29.1Division increased $11.2 million for the sixthree months ended June 30, 2017,March 31, 2018, compared to the sixthree months ended June 30, 2016,March 31, 2017, due to an overall decreaseincrease in work experienced as a result of depressed oil and gas prices and the corresponding reductiondue to increases in customer demand for offshore oil and gas related service projects.
Gross profit - Gross profit from our Services division decreased $7.8Division increased $2.6 million for the sixthree months ended June 30, 2017,March 31, 2018, compared to the sixthree months ended June 30, 2016,March 31, 2017, due to decreasedincreased revenue discussed above and lower margins on new work performed during 2017.above.
General and administrative expenses - General and administrative expenses for our Services division decreased $206,000Division increased $68,000 for the sixthree months ended June 30, 2017,March 31, 2018, compared to the sixthree months ended June 30, 2016,March 31, 2017, due to lower bonuses accrued during 2017support of increased work as well as increases in employee incentive compensation of approximately $120,000 resulting from increased operating income. This was partially offset by decreases in corporate allocations as a resultportion of a combination of a smaller workforcethese are now allocated to our EPC Division and our consolidated gross loss.continued cost minimization efforts implemented by management for the period.
| | | | | | | | | | | | | | | | Corporate | | Six Months Ended June 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | — |
| | $ | — |
| | $ | — |
| | —% | Gross profit (loss) | | (351 | ) | | (234 | ) | | (117 | ) | | (50.0)% | Gross profit (loss) percentage | | n/a |
| | n/a |
| | | |
| General and administrative expenses | | 3,656 |
| | 3,342 |
| | 314 |
| | 9.4% | Operating income (loss) | | (4,007 | ) | | (3,576 | ) | | (431 | ) | | |
| | | | | | | | | | | | | | | | EPC | | Three Months Ended March 31, | | Increase or (Decrease) | | | 2018 | | 2017 | | Amount | | Percent | Revenue | | 73 |
| | $ | — |
| | $ | 73 |
| | 100.0% | Gross profit (loss) | | (308 | ) | | — |
| | (308 | ) | | (100.0)% | Gross profit (loss) percentage | | n/a |
| | n/a |
| | | |
| General and administrative expenses | | 417 |
| | — |
| | 417 |
| | 100.0% | Operating income (loss) | | $ | (725 | ) | | $ | — |
| | $ | (725 | ) | |
|
Revenue - Our EPC Division did not exist at March 31, 2017. Revenue for the three months ended March 31, 2018 consists of early work and engineering studies authorized by SeaOne. See Note 8 of the Notes to Consolidated Financial Statements for further discussion of our EPC Division and the SeaOne Project.
Gross profit (loss) - Gross loss from our EPC Division occurred as we added personnel and overhead infrastructure related to the anticipated SeaOne project.
General and administrative expenses - General and administrative expenses for our EPC Division include the addition of personnel and allocations of corporate expenses as we invest in this new line of business. | | | | | | | | | | | | | | | | Corporate | | Three Months Ended March 31, | | Increase or (Decrease) | | | 2018 | | 2017 | | Amount | | Percent | Revenue | | $ | — |
| | $ | — |
| | $ | — |
| | —% | Gross profit (loss) | | $ | (385 | ) | | (260 | ) | | 125 |
| | 48.1% | Gross profit (loss) percentage | | n/a |
| | n/a |
| | | | | General and administrative expenses | | 2,138 |
| | 1,479 |
| | 659 |
| | 44.6% | Operating income (loss) | | $ | (2,523 | ) | | $ | (1,739 | ) | | $ | 784 |
| |
|
Gross profit (loss) - Gross loss from our Corporate divisionDivision increased primarily due to a restructuringlower allocation of our corporate division with additional personnel allocated to our corporate division during 2017expenses and as discussed above.well as increased insurance costs.
General and administrative expenses - General and administrative expenses for our Corporate divisionDivision increased primarily due to a restructuringincreased legal and advisory fees related to customer disputes, strategic planning and diversification of our corporate division with additional personnel allocated to our corporate division during 2017 as discussed above as well as for expenses incurred for advisors to assist in a strategic financial analysis project in anticipationbusiness, increased employee incentive accruals and higher stock compensation expense of the proceeds to be received from the sale of our South Texas assets. This has been partially offset by lower bonuses accrued during 2017 as a result of a combination of a smaller workforce and our consolidated gross loss.approximately $220,000.
Liquidity and Capital Resources Historically, we have fundedOur immediate liquidity remains dependent on our business activities through cash generatedon hand, anticipated proceeds from operations.the sales of assets, availability of future drawings from our Credit Agreement and collections of accounts receivable. At June 30, 2017,March 31, 2018, we had no amounts$10 million outstanding under our credit facility, $4.6Credit Agreement, $2.5 million in outstanding letters of credit, and cash and cash equivalents totaling $22.3$6.5 million compared to $51.2$9.0 million at December 31, 2016. 2017. As of May 4, 2018, our liquidity has significantly improved due to the sale of our Texas South Yard the net proceeds of which will be used to rebuild our liquidity, to support upcoming projects, continue investing in our newly created EPC Division and for other general corporate purposes. After the sale of our Texas South Yard, our cash balance was $55.0 million, and the amount outstanding under our Credit Agreement was $10 million with remaining availability under our Credit Agreement of approximately $27.5 million for total liquidity of approximately $82.5 million.
Working capital was $167.7$137.1 million and our ratio of current assets to current liabilities was 4.624.34 to 1 at June 30, 2017,March 31, 2018, compared to $78.0$130.5 million and 3.213.68 to 1, respectively, at December 31, 2016.2017. Working capital at June 30, 2017,March 31, 2018, includes $107.3$98.4 million related to assets held for sale, primarily related to our South Texas facilities. Properties which decreased after the sale of our Texas South Yards to $48.5 million. At March 31, 2018, our contracts receivable balance was $27.4 million of which we have subsequently collected $14.9 million through May 4, 2018. Our primary use of cash during the sixthree months ended June 30, 2017,March 31, 2018, is referenced in the Cash Flow Activities section below. At June 30, 2017,As discussed in our contracts receivable balance was $38.1 millionExecutive Summary, we are implementing several strategies to diversify our business, increase backlog, reduce operating expenses and monetize assets. Our South Texas Properties are held for sale. A significant portion of which we have subsequently collected $12.0 million through July 19, 2017.our near-term plan is to generate liquidity from the sale of these assets.
On April 20, 2018, we closed on the sale of our Texas South Yard for a sale price of $55 million, less selling costs of $1.5 million. We received approximately $52.7 million at closing, which was in addition to the $750,000 of earnest money previously received on January 3, 2018, related to the option to purchase the Texas South Yard. We plan to use the net proceeds to rebuild our liquidity, to support upcoming projects, continue investing in our newly created EPC Division and for other general corporate purposes. See further discussion of the sale of our Texas South Yard in Note 2 of the Notes to Consolidated Financial Statements. We currently believe that cash on hand coupled with proceeds received from the sale of our Texas South Yard and funds available under our Credit Agreement will enable the Company to meet its working capital needs, capital expenditure requirements, any debt service obligations and other funding requirements for at least the twelve months from the date of this Report.
As of the date of this Report our Texas North Yard remains held for sale. The book value of the Texas North Yard is $46.6 million at March 31, 2018. We will continue to incur costs associated with holding and maintaining our Texas North Yard. These costs include insurance, general maintenance of the properties in their current state, property taxes and retained employees which will be expensed as incurred.
We have a $40 million Credit Agreement maturing June 9, 2017, we entered into a $40.0 million credit agreement with Whitney Bank, as lender (the “New2019. The Credit Facility”). The New Credit Facility matures June 9, 2019 and may be usedAgreement allows the Company to use up to the full amount of the available borrowing base for issuing letters of credit and/orand general corporate and working capital purposes. We believe that the new facilityour Credit Agreement will provide us with additional working capital flexibility to expand operations as backlog improves, respond to market opportunities and support our ongoing operations.
Interest on drawings under the New Credit FacilityAgreement may be designated, at our option, as either Base Rate (as defined in the New Credit Facility)credit facility) or LIBOR plus 2.0%2% per annum. Our outstanding balance of $10 million at March 31, 2018, is designated as a LIBOR rate loan. Unused commitment fees on the undrawn portion of the facilityCredit Agreement are 0.4% per annum, and the letter of credit feeinterest on undrawn stated amounts under letters of credit issued by the lenders are 0.4%lender is 2% per annum and 2.0%annum. At March 31, 2018, the interest rate on our outstanding borrowings was 3.75% per annum, respectively.annum. The New Credit FacilityAgreement is secured by substantially all of our assets (other than the assetsSouth Texas Properties).
At March 31, 2018, $10 million was outstanding under the Credit Agreement and, we had letters of Gulf Marine Fabricators, L.P.,credit of $2.5 million outstanding leaving availability of $27.5 million. Subsequent to March 31, 2018, we re-issued a letter of credit for $3 million related to outstanding contractual obligations which are currently held for sale).we expect to remain outstanding until July of 2018.
We must comply with the following financial covenants each quarter during the term of the facility:Credit Agreement:
| | i. | ratioRatio of current assets to current liabilities of not less than 1.25:1.00; |
| | ii. | minimumMinimum tangible net worth requirement of at least the sum of: |
| | a) | $230.0185 million, plus |
| | b) | anAn amount equal to 50% of consolidated net income for each fiscal quarter ending after June 30, 2017, including 50% of any gain attributable to the sale of our South Texas Properties (with no deduction for a net loss in any such fiscal quarter except for any gain or loss in connection with the sale of assets by Gulf Marine Fabricators, L.P.)quarter), plus |
| | c) | 100% of all netthe proceeds of any issuance of any stock or other equity after deducting of any fees, commissions, expenses and other costs incurred in such offering; and |
| | iii. | ratioRatio of funded debt to tangible net worth of not more than 0.50:1.00. |
Concurrent with our execution of the New Credit Facility, we terminated our prior credit facility with JPMorgan Chase Bank, N.A. At the time of the termination, there was approximately $4.6 million of letters of credit outstanding, all of which was temporarily cash collateralized by us. Subsequent to June 30, 2017, we were able to reissue new letters of credit under the New Credit Facility, of which $4.6 million have been accepted by the beneficiaries, and we have been released from cash collateral requirements. Availability under our credit facility for future, additional letters of credit and borrowings is $35.4 million. As of June 30, 2017,March 31, 2018, we were in compliance with all of our financial covenants.
We will continue to monitor and preserve our cash. Our primary liquidity requirements for 2018 and beyond are for the costs associated with fabrication and shipyard projects, capital expenditures related to the creation of our EPC Division and payment of dividendsenhancements to our shareholders.shipyards. Future capital expenditures will be highly dependent upon the amount and timing of future projects. Capital expenditures for the quarter ended March 31, 2018, were $71,000. We do not anticipate significant capital expenditures for the remainder of 20172018.
If industry conditions for offshore oil and gas do not improve, we are unable to range between $2.0 millionsell our Texas North Yard or the sale is delayed, or we are unable to $5.0 million primarily forincrease our backlog, we would expect to take additional measures to preserve our cash flows until such time we are able to generate cash flows from operations. Since the following:
improvementsbeginning of 2016, we have implemented wage adjustments along with employee benefit and overall cost reductions within all of our divisions. We have reduced the level of our workforce in the past and we will continue to do so based on booked work in all of our facilities. We have reduced the compensation paid to our Jenningsdirectors and Lake Charles leased shipyards,
improvementthe salaries of our executive officers, and we have reduced our capital expenditures and placed assets that are either underutilized, under-performing or not expected to the bulkhead atprovide sufficient long-term value for sale, which include our Houma facility, and
computer system upgrades.
South Texas Properties.
On October 21, 2016, a customer of our Shipyards division announced it was in noncompliance with certain financial covenants included in the customer’s debt agreements and stated that, while it had received limited waivers from its lenders, its debt agreements would require further negotiation and amendment. This same customer rejected delivery of the first vessel that we completed and tendered for delivery on February 6, 2017, alleging certain technical deficiencies exist with respect to the vessel and is seeking recovery of all purchase price amounts previously paid by the customer under the contract. On March 10, 2017, we gave notice for arbitration with our customer in an effort to resolve this matter. We are also building a second vessel for this customer which has been suspended and included in our arbitration proceedings. We disagree with our customer concerning these alleged technical deficiencies and have put the customer in default under the terms of the contracts for both vessels. On May 17, 2017, the customer filed for protection under Chapter 11 of the United States Bankruptcy Code for reorganization under a negotiated, pre-packaged plan. The customer has petitioned the Bankruptcy Court to accept our contracts for the two vessels we are constructing for them. As of June 30, 2017, approximately $4.6 million remained due and outstanding from our customer for the first vessel. The balance due to us for the second vessel upon completion and delivery is approximately $4.9 million.
We are working with legal counsel to protect our contractual claims during the restructuring and intend to re-initiate our rights for arbitration in accordance with our contract upon our customer's emergence from Chapter 11 reorganization. We intend to take all legal action as may be necessary to protect our rights under the contracts and recover the remaining balances owed to us.
We continue to monitor our work performed in relation to our customer’s status and its ability to pay under the terms of these contracts. Because these vessels have been completed or are substantially complete, wecurrently believe that they have significant fair valuecash on hand and that we wouldfunds available under our Credit Agreement will be ablesufficient to fully recovermeet our working capital and capital expenditure requirements, any remaining amounts due to us infuture debt service and other funding requirements for at least twelve months from the event we enforcedate of this Report. Our view regarding sufficiency of cash and liquidity is primarily based on our security interest over these projects.
In anticipation of the proceeds to be received fromfinancial forecast for 2018 and early 2019, which is impacted by various assumptions regarding the sale of our South Texas assets, we engaged advisors to assist in the development of a capital deployment plan to determine the appropriate use of proceeds from this transaction to maximize long-term shareholder value. Our capital deployment plan includes a variety of investment options including investing in our operating liquidity in order to facilitate anticipated future projects, selected capital improvements to enhance and/or expandNorth Yard, our existing facilities, mergersbacklog and acquisitionsa reasonable amount of forecast, non-contractual backlog. There is no guarantee that our financial forecast will be attainable or that we will have sufficient cash, including funds available under our Credit Agreement, to expand our product and service capabilitiesmeet planned operating expenses and other optionsunforeseen cash requirements. Accordingly, we may be required to return surplus resources to shareholders either through stock buy-backs and/or special dividends. We are continuing this effort to identify and analyze specific investment opportunities we believe will enhance the long-term value of the Company and that are consistent with our strategy.
On July 27, 2017, our Board of Directors declared a dividend of $0.01 per sharefurther draw on our shares of common stock outstanding, payable August 24, 2017,Credit Agreement, obtain additional bank financing, sell additional assets or conduct equity or debt offerings at a time when it is not beneficial to shareholders of record on August 10, 2017.do so.
We believe our cash and cash equivalents generated by our future operating activities and proceeds to be received from future assets sales will be sufficient to fund our capital expenditures and meet our working capital needs for both the near and longer term to continue our operations, satisfy our contractual operations and pay dividends to our shareholders.
Cash Flow Activities
For the sixthree months ended June 30, 2017,March 31, 2018, net cash used in operating activities was $27.9$14.1 million, compared to net cash provided byused in operating activities of $11.8$15.1 million for the sixthree months ended June 30, 2016.March 31, 2017. The use of cash in operations during the period was primarily due to the following:
Operating losses for the sixthree months ended June 30, 2017,March 31, 2018, in excess of non-cash depreciation, amortization, impairment and stock compensation expense of approximately $17.9 million,$1.5 million; Payment of year-end bonuses related to 2016,
Progress on liabilities from assumed contracts in the LEEVAC transaction. While our purchase price for the acquisition of the LEEVAC assets during 2016 was $20.0 million, we received a net $3.0 million in cash from the seller for the assumption of certain net liabilities and settlement payments on ongoing shipbuilding projects of $23.0 million that were assigned to us in the transaction. We have significantly progressed these contracts, which in turn has resulted in utilization of the working capital and settlement payments received during 2016.
The suspension of two vessel projects following our customer’s refusal to accept delivery of the first vessel in February 2017, and our inability to collect $9.5 million in scheduled payments under these contracts. We have initiated arbitration proceedings during the quarter to enforce our rights under these contracts; and
Build-up of costs for contracts in progress of $9.1 million;
Build-up of retainage on projects of $1.5 million; and
Payment of property taxes related to a customer in our Shipyards division with significant milestone payments occurring in the later stagesSouth Texas Properties of the projects which are expected to occur beginning in the third quarter of 2017 through the first quarter of 2018.$2 million.
Net cash provided by investing activities for the sixthree months ended June 30, 2017,March 31, 2018, was $296,000,$2.4 million, compared to cash provided byused in investing activities of $3.8 million$391,000 for the sixthree months ended June 30, 2016.March 31, 2017. The change in cash provided byused in investing activities is primarily due to cashthe insurance proceeds received from the sale of three cranesfor hurricane damage to assets at our South Texas facility for $5.5 million and $1.6 million of cash acquired in the LEEVAC transaction during 2016.Properties.
Net cash used inprovided by financing activities for the sixthree months ended June 30,March 31, 2018, and 2017, and 2016, was $1.2$9.2 million and $441,000, respectively. The increasecompared to $1.0 million in cash used in financing activities, respectively. The increase in cash provided by financing activities is due to the cash payments made to taxing authorities on behalf of employees' for their vesting of common stock.$10 million in net borrowings under our Credit Agreement.
Contractual Obligations There have been no material changes from the information included in our 2017 Annual Report on Form 10-K for the year ended December 31, 2016.Report. For more information on our contractual obligations, refer to Part II, Item 7 of our 2017 Annual Report on Form 10-K for the year ended December 31, 2016.Report. Off-Balance Sheet Arrangements There have been no material changes from the information included in our 2017 Annual Report on Form 10-K for the year ended December 31, 2016.Report. Item 3. Quantitative and Qualitative Disclosures About Market Risk. There have been no material changes in the Company’s market risks during the quarter ended June 30, 2017.March 31, 2018. For more information on market risk, refer to Part II, Item 7A. of our Annual Report on Form 10-K for the year ended December 31, 2016.2017. Item 4. Controls and Procedures. The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and that such information is communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report.Report. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that the design and operation of our disclosure controls and procedures were effective as of the end of the period covered by this report.Report. There have been no changes during the fiscal quarter ended June 30, 2017,March 31, 2018, in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION Item 1. Legal Proceedings. The Company is subject to various routine legal proceedings in the normal conduct of its business primarily involving commercial claims, workers’ compensation claims, and claims for personal injury under general maritime laws of the United States and the Jones Act. While the outcome of these lawsuits, legal proceedings and claims cannot be predicted with certainty, management believes that the outcome of any such proceedings, even if determined adversely, would not have a material adverse effect on the financial position, results of operations or cash flows of the Company. Item 1A. Risk Factors. There have been no material changes from the information included in Item 1A “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2016.2017. Item 6. Exhibits. | | | | | Exhibit Number | | Description of Exhibit | | | 3.1 | | | 3.2 | | | 10.1 | |
| 10.2 | |
| 10.3 | | | 10.2 | | Credit Agreement dated June 9, 2017, incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed June 9, 2017.February 26, 2018. †
| 10.4 | |
| 31.1 | | | 31.2 | | | 32 | | | | | | 101 | | Attached as Exhibit 101 to this report are the following items formatted in XBRL (Extensible Business Reporting Language): | | | (i) | Consolidated Balance Sheets, | | | (ii) | Consolidated Statements of Operations, | | | (iii) | Consolidated Statement of Changes in Shareholders’ Equity, | | | (iv) | Consolidated Statements of Cash Flows, and | | | (v) | Notes to Consolidated Financial Statements. | | | | † | | Management Contract or Compensatory Plan. |
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this reportReport to be signed on its behalf by the undersigned thereunto duly authorized. | | | GULF ISLAND FABRICATION, INC. | | BY: | /s/ David S. Schorlemer | | David S. Schorlemer | | Executive Vice President, Chief Financial Officer, Secretary and Treasurer (Principal Financial and Accounting Officer) |
Date: August 1, 2017May 4, 2018
GULF ISLAND FABRICATION, INC.
EXHIBIT INDEX
| | | | | Exhibit
Number
| | Description of Exhibit | | | 3.1 | | Composite Articles of Incorporation of the Company incorporated by reference to Exhibit 3.1 of the Company’s Form 10-Q filed April 23, 2009. | 3.2 | | Amended and Restated Bylaws of the Company, incorporated by reference to Exhibit 3.1 of the Company’s Form 8-K filed November 4, 2016. | 10.1 | | Change of Control Agreement, dated March 1, 2017, between the Company and David S. Schorlemer, incorporated by reference to Exhibit 10.15 of the Company's Form 10-K for the year ended December 31, 2016 filed on March 2, 2017. | 10.2 | | Credit Agreement dated June 9, 2017, incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed June 9, 2017. | 31.1 | | CEO Certifications pursuant to Rule 13a-14 under the Securities Exchange Act of 1934. | 31.2 | | CFO Certifications pursuant to Rule 13a-14 under the Securities Exchange Act of 1934. | 32 | | Section 906 Certification furnished pursuant to 18 U.S.C. Section 1350. | | | | 101 | | Attached as Exhibit 101 to this report are the following items formatted in XBRL (Extensible Business Reporting Language): | | | | | | (i) | Consolidated Balance Sheets, | | | (ii) | Consolidated Statements of Operations, | | | (iii) | Consolidated Statement of Changes in Shareholders’ Equity, | | | (iv) | Consolidated Statements of Cash Flows and | | | (v) | Notes to Consolidated Financial Statements. |
s | Percentage | | | |