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 September 30, 2017,March 31, 2018, projects for our five largest customers in terms of revenue backlog consisted of: |
| | (i) | Two large multi-purpose service vesselsMPSVs for one customer within our Shipyards division,for which commenced in the first quarterwe have received a purported notice of 2014 and will be completed during 2018;termination as discussed above; |
| | (ii) | Newbuild construction of fourfive harbor tugs for one customer within our Shipyards division;(to be completed in 2018 through 2020); |
| | (iii) | Newbuild construction of fourfive harbor tugs for one additional customer within our Shipyards division;(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 researchone T-ATS vessel within our Shipyards division.(to be completed in 2020). This contract is currently under a bid protest. |
| | (3)(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 September 30, 2017,March 31, 2018, we had 989961 employees compared to 1,178977 employees as of December 31, 2016.2017. Labor hours worked were 1.5 million496,000 during the ninethree months ended September 30, 2017,March 31, 2018, compared to 2.3 million479,000 for the ninethree months ended September 30, 2016.March 31, 2017. The overall decreaseincrease in labor hours worked for the ninethree months ended September 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 September 30, 2017,March 31, 2018, Compared to Three Months Ended September 30, 2016March 31, 2017 (in thousands, except for percentages): Consolidated | | | Three Months Ended September 30, | | Increase or (Decrease) | Three Months Ended March 31, | | Increase or (Decrease) | | 2017 | | 2016 | | Amount | Percent | 2018 | | 2017 | | Amount | Percent | Revenue | $ | 49,884 |
| | $ | 65,384 |
| | $ | (15,500 | ) | (23.7)% | $ | 57,290 |
| | $ | 37,993 |
| | $ | 19,297 |
| 50.8% | Cost of revenue | 50,378 |
| | 60,125 |
| | (9,747 | ) | (16.2)% | 56,611 |
| | 42,890 |
| | 13,721 |
| 32.0% | Gross profit (loss) | (494 | ) | | 5,259 |
| | (5,753 | ) | (109.4)% | 679 |
| | (4,897 | ) | | 5,576 |
| 113.9% | Gross profit (loss) percentage | (1.0 | )% | | 8.0 | % | | | | 1.2 | % | | (12.9 | )% | | | | General and administrative expenses | 4,370 |
| | 5,086 |
| | (716 | ) | (14.1)% | 4,709 |
| | 3,930 |
| | 779 |
| 19.8% | Asset impairment | | 750 |
| | 389 |
| | 361 |
| 92.8% | Operating income (loss) | (4,864 | ) | | 173 |
| | (5,037 | ) | (2,911.6)% | (4,780 | ) | | (9,216 | ) | | (4,436 | ) |
| Other income (expense): | | | | | | | | | | | | | Interest expense | (45 | ) | | (110 | ) | | 65 |
| | (469 | ) | | (59 | ) | | (410 | ) | (694.9)% | Interest income | — |
| | 12 |
| | (12 | ) | | | Other income (expense), net | 38 |
| | 599 |
| | (561 | ) | | 12 |
| | 9 |
| | 3 |
| 33.3% | Total other income (expense) | (7 | ) | | 501 |
| | (508 | ) | 101.4% | (457 | ) | | (50 | ) | | (407 | ) | (814.0)% | Net income (loss) before income taxes | (4,871 | ) | | 674 |
| | (5,545 | ) | (822.7)% | | Net loss before income taxes | | (5,237 | ) | | (9,266 | ) | | (4,029 | ) | (43.5)% | Income tax expense (benefit) | (1,761 | ) | | 133 |
| | (1,894 | ) | (1,424.1)% | 59 |
| | (2,812 | ) | | 2,871 |
| 102.1% | Net income (loss) | $ | (3,110 | ) | | $ | 541 |
| | $ | (3,651 | ) | (674.9)% | | Net loss | | $ | (5,296 | ) | | $ | (6,454 | ) | | $ | 6,900 |
|
|
Revenue - Our revenue for the three months ended September 30,March 31, 2018 and 2017, and 2016, was $49.9$57.3 million and $65.4$38.0 million, respectively, representing a decreasean increase of 23.7%50.8%. The decreaseincrease is primarily attributable to an overall decrease in work experienced into:
An increase of $11.2 million within our facilities primarily 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 as a percentage of revenue were 48.4% and 33.8% for the three months ended September 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 projectfour modules for a particular period.petrochemical plant.
Gross profit (loss) - Our gross lossprofit for the three months ended September 30, 2017,March 31, 2018, was $494,000$679,000 compared to a gross profitloss of $5.3$4.9 million for the three months ended September 30, 2016.March 31, 2017. The decreaseincrease in gross profit was primarily due to $2.1 million of contract losses incurred byincreased revenue within our Shipyards division related to cost overruns and re-work identified on two newbuild vessel construction
contracts, 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 $1.1 million and lower margins on current work due to competitive pressures. 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 September 30, 2017 (asProperties as these assets are classified as assets held for sale) and continued cost minimization efforts implemented by management for the period.sale.
General and administrative expenses - Our general and administrative expenses were $4.4$4.7 million for the three months ended September 30, 2017,March 31, 2018, compared to $5.1$3.9 million for the three months ended September 30, 2016.March 31, 2017. The decreaseincrease in general and administrative expenses for the three months ended September 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 well as the addition of personnel as we build up our EPC Division in anticipation of the SeaOne Project; and Higher stock compensation expense of approximately $220,000.
This was partially offset by cost reductions 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 piece of 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- Other income was $38,000Interest expense increased due to drawings under our Credit Agreement for the three months ended September 30, 2017, as compared to other income of $599,000 for three months ended September 30, 2016. Other incomeMarch 31, 2018, with no such drawings under our Credit Agreement for the three months ended September 30,March 31, 2017, relates to insurance proceeds received from damage to a corporate automobile that was fully depreciated. Other income for foras well as increased amortization of deferred financing costs during the three months ended September 30, 2016 primarily relates to gains on sales of assets from our Fabrication division.March 31, 2018.
Income tax expense (benefit) - Our effective income tax rate for the three months ended September 30, 2017,March 31, 2018, was 36.2%(1.1)%, compared to an effective tax rate benefit of 19.7%30.3% for the comparable period during 2016.2017. Current expense represents state taxes within our Services Division. The increasedecrease in the effective tax rate is the result of changesa valuation allowance against our deferred tax assets. See Note 1 of the Notes to estimates ofConsolidated Financial Statements regarding our year-endNOLs and deferred tax provision during for the three months ended September 30, 2016.assets.
Operating Segments
As discussed 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 nine months ended September 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 nine months ended September 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. OurThe results of our threefour operating divisions and Corporate divisionDivision for the three months ended September 30,March 31, 2018 and 2017, and 2016, are presented below (in thousands, except for percentages).
| | Fabrication | | Three Months Ended September 30, | | Increase or (Decrease) | | Three Months Ended March 31, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | | 2018 | | 2017 | | Amount | | Percent | Revenue | | $ | 18,318 |
| | $ | 22,311 |
| | $ | (3,993 | ) | | (17.9)% | | $ | 17,270 |
| | $ | 10,209 |
| | $ | 7,061 |
| | 69.2% | Gross profit (loss) | | 1,250 |
| | 601 |
| | 649 |
| | 108.0% | | (219 | ) | | (2,966 | ) | | (2,747 | ) | | (92.6)% | Gross profit (loss) percentage | | 6.8 | % | | 2.7 | % | | | | 4.1% | | (1.3 | )% | | (29.1 | )% | | | |
| General and administrative expenses | | 778 |
| | 885 |
| | (107 | ) | | (12.1)% | | 624 |
| | 821 |
| | (197 | ) | | (24.0)% | Asset impairment | | | 750 |
| | — |
| | 750 |
| | 100.0% | Operating income (loss) | | 472 |
| | (284 | ) | | | | | $ | (1,593 | ) | | $ | (3,787 | ) | | $ | (2,194 | ) | |
|
Revenue - Revenue from our Fabrication division decreased $4.0Division increased $7.1 million for the three months ended September 30, 2017,March 31, 2018, compared to the three months ended September 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.projects during the period. This was partially offset, by decreased revenue of $2.4 million for the three months ended March 31, 2018, at our South Texas Properties as these were placed for sale during the first quarter of 2017 and project work completed or transfered to our Houma Fabrication Yard during 2017.
Gross profit (loss) - Gross profitloss from our Fabrication divisionDivision for the three months ended September 30, 2017,March 31, 2018, was $1.3 million$219,000 compared to a gross profitloss of $601,000$3.0 million for the three months ended September 30, 2016.March 31, 2017. The increasedecrease in gross profitloss was due to
Gains on scrap sales increased revenue as discussed above and a reduction in depreciation expense of approximately $701,000 at our South Texas facility,
Decreases$1.9 million in costs resulting from reductions in workforce as we wrapped up and completed projects at our South Texas fabrication yards,
No depreciation being recordedexpense during the three months ended March 31, 2018 for our South Texas assets for the three months ended September 30, 2017,Properties as these assets are classified as assets held for sale; and
Continued cost minimization efforts implemented by management for the period.
This was partially offset by approximately $1.1 million of holding costs for our South Texas assets.sale.
General and administrative expenses - General and administrative expenses for our Fabrication divisionDivision decreased $107,000$197,000 for the three months ended September 30, 2017,March 31, 2018, compared to the three months ended September 30, 2016.March 31, 2017. The decrease is primarily due to decreases in costs resulting from lower bonuses accrued during 2017 as a result of our consolidated operating loss, reductions in workforce at our South Texas fabrication yardsProperties, decreases in corporate allocations as a portion 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 piece of equipment at our 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 September 30, | | Increase or (Decrease) | | Shipyard | | | Three Months Ended March 31, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | | 2018 | | 2017 | | Amount | | Percent | Revenue (1) | | $ | 15,074 |
| | $ | 23,060 |
| | $ | (7,986 | ) | | (34.6)% | | $ | 18,565 |
| | $ | 18,422 |
| | $ | 143 |
| | 0.8% | Gross profit (loss) (1) | | (3,504 | ) | | 1,945 |
| | (5,449 | ) | | (280.2)% | | (1,023 | ) | | (1,704 | ) | | (681 | ) | | (40.0)% | Gross profit (loss) percentage | | (23.2 | )% | | 8.4 | % | | | | (31.6)% | | (5.5 | )% | | (9.2 | )% | | | |
| General and administrative expenses | | 888 |
| | 1,468 |
| | (580 | ) | | (39.5)% | | 796 |
| | 964 |
| | (168 | ) | | (17.4)% | Asset impairment | | | — |
| | 389 |
| | (389 | ) | | (100.0)% | Operating income (loss) (1) | | (4,392 | ) | | 477 |
| | | | | $ | (1,819 | ) | | $ | (3,057 | ) | | $ | (1,238 | ) | |
|
___________ | | (1) | Revenue for the three months ended September 30,March 31, 2018, and 2017, includes $390,000 and 2016, includes $510,000 and $1.5$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 $8.0 millionShipyard Division increased $143,000 for the three months ended September 30, 2017,March 31, 2018, compared to the three months ended September 30, 2016, dueMarch 31, 2017. During the first quarter of 2018, we were able to make progress on the corresponding reduction in customer demand for shipbuildingconstruction of eight harbor tugs and repair services supportingan offshore research vessel which were not under construction during the oilfirst quarter of 2017. This was partially offset by lower revenue from construction of our two OSV and gas industry due to depressed oiltwo MPSV vessel contracts during the first quarter of 2018.
During the first quarter of 2017, we completed the first of the OSVs and gas prices as well as the completion of a vessel that we tendered it for delivery on February 6, 2017, and was rejected by the customer alleging certain technical deficiencies. We subsequently suspended construction of work on the second vessel under contractOSV due to a customer dispute. 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 Shipyard Division related to the construction of two MPSVs. We dispute the purported termination and disagree with this customer.the customer’s reasons for same. Pending resolution of the dispute, all work has been stopped and the vessels and associated equipment and material are in our care and custody at our shipyard in Houma, Louisiana. See also Note 9 of the Notes to the Consolidated Financial Statements.Statements for additional information relating to this customer dispute.
Gross profit (loss) - Gross loss from our Shipyards divisionShipyard Division was $3.5 million for the three months ended September 30, 2017, compared to a gross profit of $1.9 million for the three months ended September 30, 2016. The decrease was due to:
$2.1 million in contract losses related to cost overruns and re-work that has been identified on two newbuild vessel construction contracts within our Shipyards division; and
Holding and closing costs related to our Prospect shipyard as we wind down operations at this facility.
General and administrative expenses - General and administrative expenses for our Shipyards division decreased $580,000 for the three months ended September 30, 2017, compared to the three months ended September 30, 2016, primarily due to reductions of administrative personnel related to consolidation of personnel duties from the LEEVAC transaction. Additionally, our Shipyards division incurred lower bonuses accrued during 2017 as a result of a combination of a smaller workforce and our consolidated operating loss and cost minimization efforts implemented by management for the period during the first part of 2016.
| | | | | | | | | | | | | | | | Services | | Three Months Ended September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | 17,651 |
| | $ | 20,928 |
| | $ | (3,277 | ) | | (15.7)% | Gross profit (loss) | | 1,912 |
| | 2,918 |
| | (1,006 | ) | | (34.5)% | Gross profit (loss) percentage | | 10.8 | % | | 13.9 | % | | | | (3.1)% | General and administrative expenses | | 695 |
| | 943 |
| | (248 | ) | | (26.3)% | Operating income (loss) | | 1,217 |
| | 1,975 |
| | | | |
Revenue - Revenue from our Services division decreased $3.3 million for the three months ended September 30, 2017, compared to the three months ended September 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 $1.0 million for the three months ended September 30, 2017,March 31, 2018, compared to a gross loss of $1.7 million for the three months ended September 30, 2016,March 31, 2017. The decrease was due to decreased revenue discussed aboveimproved cost management efforts and lower margins on new work performedefficiencies learned from the construction of two OSV and two MPSV vessels during 2017.the three months ended March 31, 2017, and applied to the construction of eight harbor tugs during the three months ended March 31, 2018.
General and administrative expenses - General and administrative expenses for our Services divisionShipyard Division decreased $248,000$168,000 for the three months ended September 30, 2017,March 31, 2018, compared to the three months ended September 30, 2016, due to lower bonuses accrued duringMarch 31, 2017, as a result of a combination of a smaller workforce and our consolidated operating loss.
| | | | | | | | | | | | | | | | Corporate | | Three Months Ended September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | — |
| | $ | — |
| | $ | — |
| | —% | Gross profit (loss) | | (152 | ) | | (205 | ) | | 53 |
| | 25.9% | Gross profit (loss) percentage | | n/a |
| | n/a |
| | | |
| General and administrative expenses | | 2,009 |
| | 1,790 |
| | 219 |
| | 12.2% | Operating income (loss) | | (2,161 | ) | | (1,995 | ) | |
|
| | |
General and administrative expenses - General and administrative expenses for our Corporate division increased primarily due to reductions in workforce, decreases in corporate allocations as a restructuringportion of our corporate division with additional personnelthese are now allocated to our corporate division during 2017 as discussed above as well as 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. Additionally, we have incurred increased legal fees as we pursue collection of claims against two customers. See also Note 9 of the Notes to the Consolidated Financial Statements. This has been partially offset by lower bonuses accrued during the quarter due to our consolidated operating loss.
Nine Months Ended September 30, 2017, Compared to Nine Months Ended September 30, 2016 (in thousands, except for percentages):
Consolidated
| | | | | | | | | | | | | | | Nine Months Ended September 30, | | Increase or (Decrease) | | 2017 | | 2016 | | Amount | Percent | Revenue | $ | 133,745 |
| | $ | 230,864 |
| | $ | (97,119 | ) | (42.1)% | Cost of revenue | 150,755 |
| | 205,839 |
| | (55,084 | ) | (26.8)% | Gross profit (loss) | (17,010 | ) | | 25,025 |
| | (42,035 | ) | (168.0)% | Gross profit (loss) percentage | (12.7 | )% | | 10.8 | % | | | | General and administrative expenses | 12,940 |
| | 14,633 |
| | (1,693 | ) | (11.6)% | Asset impairment | 389 |
| | — |
| | 389 |
| 100.0% | Operating income (loss) | (30,339 | ) | | 10,392 |
| | (40,731 | ) | (391.9)% | Other income (expense): | | | | | | | Interest expense | (262 | ) | | (248 | ) | | (14 | ) | | Interest income | 12 |
| | 20 |
| | (8 | ) | | Other income (expense), net | (221 | ) | | 1,039 |
| | (1,260 | ) | | Total other income (expense) | (471 | ) | | 811 |
| | (1,282 | ) | (158.1)% | Net income (loss) before income taxes | (30,810 | ) | | 11,203 |
| | (42,013 | ) | (375.0)% | Income tax expense (benefit) | (10,322 | ) | | 4,134 |
| | (14,456 | ) | (349.7)% | Net income (loss) | $ | (20,488 | ) | | $ | 7,069 |
| | $ | (27,557 | ) | (389.8)% |
Revenue - Our revenue for the nine months ended September 30, 2017EPC Division and 2016, was $133.7 million and $230.9 million, respectively, representing a decrease of 42.1%. 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 as well as the completion of a vessel within our Shipyards division that we tendered for delivery on February 6, 2017, and was rejected by the customer alleging certain technical deficiencies. We subsequently suspended of work on the second vessel under contract with this customer. See also Note 9 of the Notes to the Consolidated Financial Statements. Pass-
through costs as a percentage of revenue were 45.3% and 35.0% for the nine months ended September 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 nine months ended September 30, 2017, was $17.0 million compared to a gross profit of $25.0 million for the nine months ended September 30, 2016. The decrease was primarily due to $12.7 million of losses incurred by our Shipyards division related to cost overruns and re-work identified on two newbuild vesseldecreased construction contracts, decreased revenue as discussed above, holding costs related to our South Texas assets of $3.6 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 nine months ended September 30, 2017, as these assets are classified as assets held for sale and additional cost minimization efforts implemented by management for the period.
General and administrative expenses - Our general and administrative expenses were $12.9 million for the nine months ended September 30, 2017, compared to $14.6 million for the nine months ended September 30, 2016. The decrease in general and administrative expenses for the nine months ended September 30, 2017, is primarily due to decreases in costs resulting from reductions in workforce at our South Texas fabrication yards, lower bonuses accrued during 2017 as a result of our consolidated operating loss and continued cost minimization efforts implemented by management for the period.activity.
Asset Impairmentimpairment - During the ninethree months ended September 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.
Other income (expense), net - Other expense was $221,000Statements for the nine months ended September 30, 2017, comparedadditional information relating to other income of $1.0 millionour assets held for the nine months ended September 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 2016.
Income tax expense (benefit) - Our effective income tax rate for the nine months ended September 30, 2017, was 33.5%, compared to an effective tax rate of 36.9% 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 divisionssale. We did not record any asset impairment during the three and nine months ended September 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 nine months ended September 30, 2017 and 2016, are presented below (in thousands, except for percentages).
| | | | | | | | | | | | | | | | Fabrication | | Nine Months Ended September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | 42,517 |
| | $ | 70,436 |
| | $ | (27,919 | ) | | (39.6)% | Gross profit (loss) | | 216 |
| | 4,564 |
| | (4,348 | ) | | (95.3)% | Gross profit (loss) percentage | | 0.5 | % | | 6.5 | % | | | | (6.0)% | General and administrative expenses | | 2,432 |
| | 2,821 |
| | (389 | ) | | (13.8)% | Operating income (loss) | | (2,216 | ) | | 1,743 |
| | | | |
Revenue - Revenue from our Fabrication division decreased $27.9 million for the nine months ended September 30, 2017, compared to the nine months ended September 30, 2016. The decrease is attributable to an overall decrease in work experiencedMarch 31, 2018, 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 September 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 nine months ended September 30, 2017, was $216,000 compared to a gross profit of $4.6 million for the nine months ended September 30, 2016. The decrease was due to lower revenue
from decreased fabrication work as discussed above and approximately $3.6 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, gains on scrap sales as we wrapped up and completed projects at our South Texas fabrication yards, reduced depreciation being recorded for our South Texas assets for the nine months ended September 30, 2017, as these assets are classified as assets held for sale on February 23, 2017, and additional cost minimization efforts implemented by management for the period.
General and administrative expenses - General and administrative expenses for our Fabrication division decreased $389,000 for the nine months ended September 30, 2017, compared to the nine months ended September 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 operating 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.Shipyard Division.
| | | | | | | | | | | | | | | | Shipyards | | Nine Months Ended September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue (1) | | $ | 51,798 |
| | $ | 86,553 |
| | $ | (34,755 | ) | | (40.2)% | Gross profit (loss) (1) | | (19,061 | ) | | 9,742 |
| | (28,803 | ) | | (295.7)% | Gross profit (loss) percentage | | (36.8 | )% | | 11.3 | % | | | | (48.1)% | General and administrative expenses | | 2,835 |
| | 4,218 |
| | (1,383 | ) | | (32.8)% | Asset impairment | | 389 |
| | — |
| | 389 |
| | 100.0% | Operating income (loss) (1) | | (22,285 | ) | | 5,524 |
| | | | |
___________
| | (1) | Revenue for the nine months ended September 30, 2017, and 2016, includes $2.4 million and $4.1 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 $34.8 million for the nine months ended September 30, 2017, compared to the nine months ended September 30, 2016, due to the corresponding reduction in customer demand for shipbuilding and repair services supporting the oil and gas industry due to depressed oil and gas prices as well as the completion of a vessel that we tendered for delivery on February 6, 2017, and was rejected by the customer alleging certain technical deficiencies. We subsequently suspended of work on the second vessel under contract with this customer. See also Note 9 of the Notes to the Consolidated Financial Statements.
Gross profit (loss) - Gross loss from our Shipyards division was $19.1 million for the nine months ended September 30, 2017, compared to a gross profit of $9.7 million for the nine months ended September 30, 2016. The decrease was due to:
$12.7 million in contract losses related to cost overruns and re-work that has been identified on two newbuild vessel construction contracts within our Shipyards division;
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.
General and administrative expenses - General and administrative expenses for our Shipyards division decreased $1.4 million for the nine months ended September 30, 2017, compared to the nine months ended September 30, 2016, primarily due to reductions of administrative personnel related to consolidation of personnel duties from the LEEVAC transaction. Additionally, our Shipyards division incurred lower bonuses accrued during 2017 as a result of our consolidated operating loss and cost minimization efforts implemented by management for the period.
Asset Impairment - During nine months ended September 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.
| | Services | | Nine Months Ended September 30, | | Increase or (Decrease) | | Three Months Ended March 31, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | | 2018 | | 2017 | | Amount | | Percent | Revenue | | $ | 43,758 |
| | $ | 76,179 |
| | $ | (32,421 | ) | | (42.6)% | | $ | 21,870 |
| | $ | 10,712 |
| | $ | 11,158 |
| | 104.2% | Gross profit (loss) | | 2,335 |
| | 11,158 |
| | (8,823 | ) | | (79.1)% | | 2,614 |
| | 33 |
| | 2,581 |
| | 7,821.2% | Gross profit (loss) percentage | | 5.3 | % | | 14.6 | % | | | | (9.3)% | | 12.0 | % | | 0.3 | % | | | |
| General and administrative expenses | | 2,008 |
| | 2,462 |
| | (454 | ) | | (18.4)% | | 734 |
| | 666 |
| | 68 |
| | 10.2% | Operating income (loss) | | 327 |
| | 8,696 |
| | | | | $ | 1,880 |
| | $ | (633 | ) | | $ | 2,513 |
| |
|
Revenue - Revenue from our Services division decreased $32.4Division increased $11.2 million for the ninethree months ended September 30, 2017,March 31, 2018, compared to the ninethree months ended September 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 $8.8Division increased $2.6 million for the ninethree months ended September 30, 2017,March 31, 2018, compared to the ninethree months ended September 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 $0.5 millionDivision increased $68,000 for the ninethree months ended September 30, 2017,March 31, 2018, compared to the ninethree months ended September 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 operating loss.continued cost minimization efforts implemented by management for the period.
| | Corporate | | Nine Months Ended September 30, | | Increase or (Decrease) | | EPC | | | Three Months Ended March 31, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | | 2018 | | 2017 | | Amount | | Percent | Revenue | | $ | — |
| | $ | — |
| | $ | — |
| | —% | | 73 |
| | $ | — |
| | $ | 73 |
| | 100.0% | Gross profit (loss) | | (500 | ) | | (439 | ) | | (61 | ) | | (13.9)% | | (308 | ) | | — |
| | (308 | ) | | (100.0)% | Gross profit (loss) percentage | | n/a |
| | n/a |
| | | |
| | n/a |
| | n/a |
| | | |
| General and administrative expenses | | 5,665 |
| | 5,132 |
| | 533 |
| | 10.4% | | 417 |
| | — |
| | 417 |
| | 100.0% | Operating income (loss) | | (6,165 | ) | | (5,571 | ) | | (594 | ) | | | $ | (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 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. Additionally, we have incurred increased legal fees as we pursue collection of claims against two customers. See also Note 9 of the Notes to the Consolidated Financial Statements. This has been partially offset by lower bonuses accrued during 2017 as a result of a combination of a smaller workforce and our consolidated operating 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 September 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 $17.8$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 $164.0$137.1 million and our ratio of current assets to current liabilities was 4.594.34 to 1 at September 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 September 30, 2017,March 31, 2018, includes $107.0$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 ninethree months ended September 30, 2017,March 31, 2018, is referenced in the Cash Flow Activities section below. At September 30, 2017,As discussed in our contracts receivable balance was $25.5 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 $8.3 million through October 31, 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.2019. The credit facility matures June 9, 2019 and may be usedCredit Agreement 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 facility our 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 credit facilityCredit Agreement may be designated, at our option, as either Base Rate (as defined in the 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 interest on undrawn stated amounts under letters of credit issued by the lenderslender is 2.0%2% per annum. At March 31, 2018, the interest rate on our outstanding borrowings was 3.75% per annum. The credit facilityCredit Agreement is secured by substantially all of our assets (other than the assets of Gulf Marine Fabricators, L.P., the legal entity that holds our South Texas assetsProperties).
At March 31, 2018, $10 million was outstanding under the Credit Agreement and, we had letters of 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. | Ratio of current assets to current liabilities of not less than 1.25:1.00; |
| | ii. | Minimum tangible net worth requirement of at least the sum of: |
| | a) | $230.0185 million, plus |
| | b) | An 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. | Ratio of funded debt to tangible net worth of not more than 0.50:1.00. |
Concurrent with our execution of the 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 were reissued as new letters of credit under the credit facility and accepted by the beneficiaries. Availability under our credit facility for future, additional letters of credit and borrowings is $35.4 million. As of September 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 2017.2018.
On October 21,If industry conditions for offshore oil and gas do not improve, we are unable to sell our Texas North Yard or the sale is delayed, or we are unable to increase 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 beginning of 2016, a customerwe have implemented wage adjustments along with employee benefit and overall cost reductions within all of our Shipyards division announced it was in noncompliance with certain financial covenants includeddivisions. We have reduced the level of our workforce in the customer’s debt agreementspast 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 deliverywe will continue to do so based on booked work in all of our facilities. We have reduced the first vessel that we completed and tendered for delivery on February 6, 2017, alleging certain technical deficiencies exist with respectcompensation paid to the vessel. On March 10, 2017, we gave notice for arbitration with our customer in an effort to resolve this matter and subsequently suspended fabrication of the second vessel under contract with this customer, which is 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 both vessel contracts. The customer is seeking recovery of $84.8 million representing all purchase price amounts previously paid by the customer under both contracts. 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 emerged from Chapter 11 Bankruptcydirectors and the Bankruptcy Court has approved the customer's retention and acceptancesalaries of both contracts. As of September 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,executive officers, and we have re-initiated arbitration proceedings in accordance withreduced our contracts. Wecapital expenditures and placed assets that are in the process of discovery. The customer has recently named a new interim chief executive officer who has made contact with our management, and we are workingeither underutilized, under-performing or not expected to resolve our dispute in a constructive manner. We believe that will be able to recover remaining amounts due to us.
On August 25, 2017,provide sufficient long-term value for sale, which include our South Texas facilities were impacted by Hurricane Harvey, which made landfall as a category 4 hurricane. As a result, we suffered damages to our South Texas buildings and equipment. Through September 30, 2017, we have incurred approximately $265,000 in clean-up and repair related costs and we expect to incur additional future repair costs in excess of our deductible which management believes are probable of being recovered through insurance proceeds. We maintain coverage on these assets up to a maximum of $25.0 million, subject to a 3.0% deductible with a minimum deductible of $500,000. We are working diligently with our insurance agents and adjusters to finalize our estimate of the damage; however, it may be several months, or even longer, before we can finalize our assessment and receive final payment from our insurance underwriters. Our insurance underwriters have made an initial payment of $3.0 million, and we have recorded a liability for future repairs of $2.7 million which is included in accrued expenses and other liabilities on our balance sheet at September 30, 2017. Based upon our initial assessment of the damages and insurance coverage, management believes that there is no basis to record a net loss at this time and that insurance proceeds will at a minimum be sufficient to reimburse us for all damages and repair costs. Our final
assessment of the loss incurred to our South Texas assets as well as the amount of insurance proceeds we will receive could be more or less than this amount when the claim is ultimately settled and such differences could be material.
In event of one or more sales of our South Texas assets, we expect to use all or a portion of the sales proceeds to invest in our operating liquidity in order to facilitate anticipated future projects, selected capital improvements to enhance and/or expand our existing facilities, mergers and acquisitions to expand our product and service capabilities. We are continuing this effort to identify and analyze specific investment opportunities we believe will enhance the long-term value of the Company that are consistent with our strategy.
On October 26, 2017, our Board of Directors declared a dividend of $0.01 per share on our shares of common stock outstanding, payable November 24, 2017, to shareholders of record on November 10, 2017.Properties.
We currently believe ourthat cash on hand and cash equivalents generated by our future operating activities, proceeds to be received from insurance underwriters, availabilityfunds available under our line of credit and proceeds to be received from future assets salesCredit Agreement will be sufficient to fund our capital expenditures and meet our working capital needsand capital expenditure requirements, any future debt service and other funding requirements for nextat least twelve months from the date of this Report. Our view regarding sufficiency of cash and liquidity is primarily based on our financial forecast for 2018 and early 2019, which is impacted by various assumptions regarding the sale of our Texas North Yard, our existing backlog and a 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 continuemeet planned operating expenses and other unforeseen cash requirements. Accordingly, we may be required to operate, satisfyfurther draw on our contractual operations and pay dividendsCredit Agreement, obtain additional bank financing, sell additional assets or conduct equity or debt offerings at a time when it is not beneficial to our shareholders.do so.
Cash Flow Activities
For the ninethree months ended September 30, 2017,March 31, 2018, net cash used in operating activities was $29.6$14.1 million, compared to net cash provided byused in operating activities of $19.4$15.1 million for the ninethree months ended September 30, 2016.March 31, 2017. The use of cash in operations during the period was primarily due to the following:
Operating losses for the ninethree months ended September 30, 2017,March 31, 2018, in excess of non-cash depreciation, amortization, impairment and stock compensation expense of approximately $19.6 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. See also Note 9 of the Notes to the Consolidated Financial Statements; 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 later in 2017 through the first half of 2018.$2 million.
Net cash used inprovided by investing activities for the ninethree months ended September 30, 2017,March 31, 2018, was $2.4 million, compared to cash provided byused in investing activities of $2.0 million$391,000 for the ninethree months ended September 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 $5.8 million and $1.6 million of cash acquired in the LEEVAC transaction during 2016 partially offset by decreases in capital expenditures.Properties.
Net cash used inprovided by financing activities for the ninethree months ended September 30,March 31, 2018, and 2017, and 2016, was $1.4$9.2 million and $603,000, 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. During the nine months ended September 30, 2017 we received $2.0$10 million fromin net borrowings under our new line of credit which were immediately repaid.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 September 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 September 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 | |
| 10.4 | |
| 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: October 31, 2017May 4, 2018
GULF ISLAND FABRICATION, INC.
EXHIBIT INDEX
| | | | | Exhibit
Number
| | Description of Exhibit | | | 3.1 | | | 3.2 | | | 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. |
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 September 30, 2017,March 31, 2018, projects for our five largest customers in terms of revenue backlog consisted of: |
| | (i) | Two large multi-purpose service vesselsMPSVs for one customer within our Shipyards division,for which commenced in the first quarterwe have received a purported notice of 2014 and will be completed during 2018;termination as discussed above; |
| | (ii) | Newbuild construction of fourfive harbor tugs for one customer within our Shipyards division;(to be completed in 2018 through 2020); |
| | (iii) | Newbuild construction of fourfive harbor tugs for one additional customer within our Shipyards division;(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 researchone T-ATS vessel within our Shipyards division.(to be completed in 2020). This contract is currently under a bid protest. |
| | (3)(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 September 30, 2017,March 31, 2018, we had 989961 employees compared to 1,178977 employees as of December 31, 2016.2017. Labor hours worked were 1.5 million496,000 during the ninethree months ended September 30, 2017,March 31, 2018, compared to 2.3 million479,000 for the ninethree months ended September 30, 2016.March 31, 2017. The overall decreaseincrease in labor hours worked for the ninethree months ended September 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 September 30, 2017,March 31, 2018, Compared to Three Months Ended September 30, 2016March 31, 2017 (in thousands, except for percentages): Consolidated | | | | | | | | | | | | | | | Three Months Ended September 30, | | Increase or (Decrease) | | 2017 | | 2016 | | Amount | Percent | Revenue | $ | 49,884 |
| | $ | 65,384 |
| | $ | (15,500 | ) | (23.7)% | Cost of revenue | 50,378 |
| | 60,125 |
| | (9,747 | ) | (16.2)% | Gross profit (loss) | (494 | ) | | 5,259 |
| | (5,753 | ) | (109.4)% | Gross profit (loss) percentage | (1.0 | )% | | 8.0 | % | | | | General and administrative expenses | 4,370 |
| | 5,086 |
| | (716 | ) | (14.1)% | Operating income (loss) | (4,864 | ) | | 173 |
| | (5,037 | ) | (2,911.6)% | Other income (expense): | | | | | | | Interest expense | (45 | ) | | (110 | ) | | 65 |
| | Interest income | — |
| | 12 |
| | (12 | ) | | Other income (expense), net | 38 |
| | 599 |
| | (561 | ) | | Total other income (expense) | (7 | ) | | 501 |
| | (508 | ) | 101.4% | Net income (loss) before income taxes | (4,871 | ) | | 674 |
| | (5,545 | ) | (822.7)% | Income tax expense (benefit) | (1,761 | ) | | 133 |
| | (1,894 | ) | (1,424.1)% | Net income (loss) | $ | (3,110 | ) | | $ | 541 |
| | $ | (3,651 | ) | (674.9)% |
| | | | | | | | | | | | | | | 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 September 30,March 31, 2018 and 2017, and 2016, was $49.9$57.3 million and $65.4$38.0 million, respectively, representing a decreasean increase of 23.7%50.8%. The decreaseincrease is primarily attributable to an overall decrease in work experienced into:
An increase of $11.2 million within our facilities primarily 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 as a percentage of revenue were 48.4% and 33.8% for the three months ended September 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 projectfour modules for a particular period.petrochemical plant.
Gross profit (loss) - Our gross lossprofit for the three months ended September 30, 2017,March 31, 2018, was $494,000$679,000 compared to a gross profitloss of $5.3$4.9 million for the three months ended September 30, 2016.March 31, 2017. The decreaseincrease in gross profit was primarily due to $2.1 million of contract losses incurred byincreased revenue within our Shipyards division related to cost overruns and re-work identified on two newbuild vessel construction
contracts, 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 $1.1 million and lower margins on current work due to competitive pressures. 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 September 30, 2017 (asProperties as these assets are classified as assets held for sale) and continued cost minimization efforts implemented by management for the period.sale.
General and administrative expenses - Our general and administrative expenses were $4.4$4.7 million for the three months ended September 30, 2017,March 31, 2018, compared to $5.1$3.9 million for the three months ended September 30, 2016.March 31, 2017. The decreaseincrease in general and administrative expenses for the three months ended September 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 well as the addition of personnel as we build up our EPC Division in anticipation of the SeaOne Project; and Higher stock compensation expense of approximately $220,000.
This was partially offset by cost reductions 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 piece of 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- Other income was $38,000Interest expense increased due to drawings under our Credit Agreement for the three months ended September 30, 2017, as compared to other income of $599,000 for three months ended September 30, 2016. Other incomeMarch 31, 2018, with no such drawings under our Credit Agreement for the three months ended September 30,March 31, 2017, relates to insurance proceeds received from damage to a corporate automobile that was fully depreciated. Other income for foras well as increased amortization of deferred financing costs during the three months ended September 30, 2016 primarily relates to gains on sales of assets from our Fabrication division.March 31, 2018.
Income tax expense (benefit) - Our effective income tax rate for the three months ended September 30, 2017,March 31, 2018, was 36.2%(1.1)%, compared to an effective tax rate benefit of 19.7%30.3% for the comparable period during 2016.2017. Current expense represents state taxes within our Services Division. The increasedecrease in the effective tax rate is the result of changesa valuation allowance against our deferred tax assets. See Note 1 of the Notes to estimates ofConsolidated Financial Statements regarding our year-endNOLs and deferred tax provision during for the three months ended September 30, 2016.assets.
Operating Segments
As discussed 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 nine months ended September 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 nine months ended September 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. OurThe results of our threefour operating divisions and Corporate divisionDivision for the three months ended September 30,March 31, 2018 and 2017, and 2016, are presented below (in thousands, except for percentages).
| | | | | | | | | | | | | | | | Fabrication | | Three Months Ended September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | 18,318 |
| | $ | 22,311 |
| | $ | (3,993 | ) | | (17.9)% | Gross profit (loss) | | 1,250 |
| | 601 |
| | 649 |
| | 108.0% | Gross profit (loss) percentage | | 6.8 | % | | 2.7 | % | | | | 4.1% | General and administrative expenses | | 778 |
| | 885 |
| | (107 | ) | | (12.1)% | Operating income (loss) | | 472 |
| | (284 | ) | | | | |
| | | | | | | | | | | | | | | | 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 $4.0Division increased $7.1 million for the three months ended September 30, 2017,March 31, 2018, compared to the three months ended September 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.projects during the period. This was partially offset, by decreased revenue of $2.4 million for the three months ended March 31, 2018, at our South Texas Properties as these were placed for sale during the first quarter of 2017 and project work completed or transfered to our Houma Fabrication Yard during 2017.
Gross profit (loss) - Gross profitloss from our Fabrication divisionDivision for the three months ended September 30, 2017,March 31, 2018, was $1.3 million$219,000 compared to a gross profitloss of $601,000$3.0 million for the three months ended September 30, 2016.March 31, 2017. The increasedecrease in gross profitloss was due to
Gains on scrap sales increased revenue as discussed above and a reduction in depreciation expense of approximately $701,000 at our South Texas facility,
Decreases$1.9 million in costs resulting from reductions in workforce as we wrapped up and completed projects at our South Texas fabrication yards,
No depreciation being recordedexpense during the three months ended March 31, 2018 for our South Texas assets for the three months ended September 30, 2017,Properties as these assets are classified as assets held for sale; and
Continued cost minimization efforts implemented by management for the period.
This was partially offset by approximately $1.1 million of holding costs for our South Texas assets.sale.
General and administrative expenses - General and administrative expenses for our Fabrication divisionDivision decreased $107,000$197,000 for the three months ended September 30, 2017,March 31, 2018, compared to the three months ended September 30, 2016.March 31, 2017. The decrease is primarily due to decreases in costs resulting from lower bonuses accrued during 2017 as a result of our consolidated operating loss, reductions in workforce at our South Texas fabrication yardsProperties, decreases in corporate allocations as a portion 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 piece of equipment at our 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 September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue (1) | | $ | 15,074 |
| | $ | 23,060 |
| | $ | (7,986 | ) | | (34.6)% | Gross profit (loss) (1) | | (3,504 | ) | | 1,945 |
| | (5,449 | ) | | (280.2)% | Gross profit (loss) percentage | | (23.2 | )% | | 8.4 | % | | | | (31.6)% | General and administrative expenses | | 888 |
| | 1,468 |
| | (580 | ) | | (39.5)% | Operating income (loss) (1) | | (4,392 | ) | | 477 |
| | | | |
| | | | | | | | | | | | | | | | 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 September 30,March 31, 2018, and 2017, includes $390,000 and 2016, includes $510,000 and $1.5$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 $8.0 millionShipyard Division increased $143,000 for the three months ended September 30, 2017,March 31, 2018, compared to the three months ended September 30, 2016, dueMarch 31, 2017. During the first quarter of 2018, we were able to make progress on the corresponding reduction in customer demand for shipbuildingconstruction of eight harbor tugs and repair services supportingan offshore research vessel which were not under construction during the oilfirst quarter of 2017. This was partially offset by lower revenue from construction of our two OSV and gas industry due to depressed oiltwo MPSV vessel contracts during the first quarter of 2018.
During the first quarter of 2017, we completed the first of the OSVs and gas prices as well as the completion of a vessel that we tendered it for delivery on February 6, 2017, and was rejected by the customer alleging certain technical deficiencies. We subsequently suspended construction of work on the second vessel under contractOSV due to a customer dispute. 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 Shipyard Division related to the construction of two MPSVs. We dispute the purported termination and disagree with this customer.the customer’s reasons for same. Pending resolution of the dispute, all work has been stopped and the vessels and associated equipment and material are in our care and custody at our shipyard in Houma, Louisiana. See also Note 9 of the Notes to the Consolidated Financial Statements.Statements for additional information relating to this customer dispute.
Gross profit (loss) - Gross loss from our Shipyards divisionShipyard Division was $3.5 million for the three months ended September 30, 2017, compared to a gross profit of $1.9 million for the three months ended September 30, 2016. The decrease was due to:
$2.1 million in contract losses related to cost overruns and re-work that has been identified on two newbuild vessel construction contracts within our Shipyards division; and
Holding and closing costs related to our Prospect shipyard as we wind down operations at this facility.
General and administrative expenses - General and administrative expenses for our Shipyards division decreased $580,000 for the three months ended September 30, 2017, compared to the three months ended September 30, 2016, primarily due to reductions of administrative personnel related to consolidation of personnel duties from the LEEVAC transaction. Additionally, our Shipyards division incurred lower bonuses accrued during 2017 as a result of a combination of a smaller workforce and our consolidated operating loss and cost minimization efforts implemented by management for the period during the first part of 2016.
| | | | | | | | | | | | | | | | Services | | Three Months Ended September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | 17,651 |
| | $ | 20,928 |
| | $ | (3,277 | ) | | (15.7)% | Gross profit (loss) | | 1,912 |
| | 2,918 |
| | (1,006 | ) | | (34.5)% | Gross profit (loss) percentage | | 10.8 | % | | 13.9 | % | | | | (3.1)% | General and administrative expenses | | 695 |
| | 943 |
| | (248 | ) | | (26.3)% | Operating income (loss) | | 1,217 |
| | 1,975 |
| | | | |
Revenue - Revenue from our Services division decreased $3.3 million for the three months ended September 30, 2017, compared to the three months ended September 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 $1.0 million for the three months ended September 30, 2017,March 31, 2018, compared to a gross loss of $1.7 million for the three months ended September 30, 2016,March 31, 2017. The decrease was due to decreased revenue discussed aboveimproved cost management efforts and lower margins on new work performedefficiencies learned from the construction of two OSV and two MPSV vessels during 2017.the three months ended March 31, 2017, and applied to the construction of eight harbor tugs during the three months ended March 31, 2018.
General and administrative expenses - General and administrative expenses for our Services divisionShipyard Division decreased $248,000$168,000 for the three months ended September 30, 2017,March 31, 2018, compared to the three months ended September 30, 2016, due to lower bonuses accrued duringMarch 31, 2017, as a result of a combination of a smaller workforce and our consolidated operating loss.
| | | | | | | | | | | | | | | | Corporate | | Three Months Ended September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | — |
| | $ | — |
| | $ | — |
| | —% | Gross profit (loss) | | (152 | ) | | (205 | ) | | 53 |
| | 25.9% | Gross profit (loss) percentage | | n/a |
| | n/a |
| | | |
| General and administrative expenses | | 2,009 |
| | 1,790 |
| | 219 |
| | 12.2% | Operating income (loss) | | (2,161 | ) | | (1,995 | ) | |
|
| | |
General and administrative expenses - General and administrative expenses for our Corporate division increased primarily due to reductions in workforce, decreases in corporate allocations as a restructuringportion of our corporate division with additional personnelthese are now allocated to our corporate division during 2017 as discussed above as well as 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. Additionally, we have incurred increased legal fees as we pursue collection of claims against two customers. See also Note 9 of the Notes to the Consolidated Financial Statements. This has been partially offset by lower bonuses accrued during the quarter due to our consolidated operating loss.
Nine Months Ended September 30, 2017, Compared to Nine Months Ended September 30, 2016 (in thousands, except for percentages):
Consolidated
| | | | | | | | | | | | | | | Nine Months Ended September 30, | | Increase or (Decrease) | | 2017 | | 2016 | | Amount | Percent | Revenue | $ | 133,745 |
| | $ | 230,864 |
| | $ | (97,119 | ) | (42.1)% | Cost of revenue | 150,755 |
| | 205,839 |
| | (55,084 | ) | (26.8)% | Gross profit (loss) | (17,010 | ) | | 25,025 |
| | (42,035 | ) | (168.0)% | Gross profit (loss) percentage | (12.7 | )% | | 10.8 | % | | | | General and administrative expenses | 12,940 |
| | 14,633 |
| | (1,693 | ) | (11.6)% | Asset impairment | 389 |
| | — |
| | 389 |
| 100.0% | Operating income (loss) | (30,339 | ) | | 10,392 |
| | (40,731 | ) | (391.9)% | Other income (expense): | | | | | | | Interest expense | (262 | ) | | (248 | ) | | (14 | ) | | Interest income | 12 |
| | 20 |
| | (8 | ) | | Other income (expense), net | (221 | ) | | 1,039 |
| | (1,260 | ) | | Total other income (expense) | (471 | ) | | 811 |
| | (1,282 | ) | (158.1)% | Net income (loss) before income taxes | (30,810 | ) | | 11,203 |
| | (42,013 | ) | (375.0)% | Income tax expense (benefit) | (10,322 | ) | | 4,134 |
| | (14,456 | ) | (349.7)% | Net income (loss) | $ | (20,488 | ) | | $ | 7,069 |
| | $ | (27,557 | ) | (389.8)% |
Revenue - Our revenue for the nine months ended September 30, 2017EPC Division and 2016, was $133.7 million and $230.9 million, respectively, representing a decrease of 42.1%. 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 as well as the completion of a vessel within our Shipyards division that we tendered for delivery on February 6, 2017, and was rejected by the customer alleging certain technical deficiencies. We subsequently suspended of work on the second vessel under contract with this customer. See also Note 9 of the Notes to the Consolidated Financial Statements. Pass-
through costs as a percentage of revenue were 45.3% and 35.0% for the nine months ended September 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 nine months ended September 30, 2017, was $17.0 million compared to a gross profit of $25.0 million for the nine months ended September 30, 2016. The decrease was primarily due to $12.7 million of losses incurred by our Shipyards division related to cost overruns and re-work identified on two newbuild vesseldecreased construction contracts, decreased revenue as discussed above, holding costs related to our South Texas assets of $3.6 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 nine months ended September 30, 2017, as these assets are classified as assets held for sale and additional cost minimization efforts implemented by management for the period.
General and administrative expenses - Our general and administrative expenses were $12.9 million for the nine months ended September 30, 2017, compared to $14.6 million for the nine months ended September 30, 2016. The decrease in general and administrative expenses for the nine months ended September 30, 2017, is primarily due to decreases in costs resulting from reductions in workforce at our South Texas fabrication yards, lower bonuses accrued during 2017 as a result of our consolidated operating loss and continued cost minimization efforts implemented by management for the period.activity.
Asset Impairmentimpairment - During the ninethree months ended September 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.
Other income (expense), net - Other expense was $221,000Statements for the nine months ended September 30, 2017, comparedadditional information relating to other income of $1.0 millionour assets held for the nine months ended September 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 2016.
Income tax expense (benefit) - Our effective income tax rate for the nine months ended September 30, 2017, was 33.5%, compared to an effective tax rate of 36.9% 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 divisionssale. We did not record any asset impairment during the three and nine months ended September 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 nine months ended September 30, 2017 and 2016, are presented below (in thousands, except for percentages).
| | | | | | | | | | | | | | | | Fabrication | | Nine Months Ended September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | 42,517 |
| | $ | 70,436 |
| | $ | (27,919 | ) | | (39.6)% | Gross profit (loss) | | 216 |
| | 4,564 |
| | (4,348 | ) | | (95.3)% | Gross profit (loss) percentage | | 0.5 | % | | 6.5 | % | | | | (6.0)% | General and administrative expenses | | 2,432 |
| | 2,821 |
| | (389 | ) | | (13.8)% | Operating income (loss) | | (2,216 | ) | | 1,743 |
| | | | |
Revenue - Revenue from our Fabrication division decreased $27.9 million for the nine months ended September 30, 2017, compared to the nine months ended September 30, 2016. The decrease is attributable to an overall decrease in work experiencedMarch 31, 2018, 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 September 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 nine months ended September 30, 2017, was $216,000 compared to a gross profit of $4.6 million for the nine months ended September 30, 2016. The decrease was due to lower revenue
from decreased fabrication work as discussed above and approximately $3.6 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, gains on scrap sales as we wrapped up and completed projects at our South Texas fabrication yards, reduced depreciation being recorded for our South Texas assets for the nine months ended September 30, 2017, as these assets are classified as assets held for sale on February 23, 2017, and additional cost minimization efforts implemented by management for the period.
General and administrative expenses - General and administrative expenses for our Fabrication division decreased $389,000 for the nine months ended September 30, 2017, compared to the nine months ended September 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 operating 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.Shipyard Division.
| | | | | | | | | | | | | | | | Shipyards | | Nine Months Ended September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue (1) | | $ | 51,798 |
| | $ | 86,553 |
| | $ | (34,755 | ) | | (40.2)% | Gross profit (loss) (1) | | (19,061 | ) | | 9,742 |
| | (28,803 | ) | | (295.7)% | Gross profit (loss) percentage | | (36.8 | )% | | 11.3 | % | | | | (48.1)% | General and administrative expenses | | 2,835 |
| | 4,218 |
| | (1,383 | ) | | (32.8)% | Asset impairment | | 389 |
| | — |
| | 389 |
| | 100.0% | Operating income (loss) (1) | | (22,285 | ) | | 5,524 |
| | | | |
___________
| | (1) | Revenue for the nine months ended September 30, 2017, and 2016, includes $2.4 million and $4.1 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 $34.8 million for the nine months ended September 30, 2017, compared to the nine months ended September 30, 2016, due to the corresponding reduction in customer demand for shipbuilding and repair services supporting the oil and gas industry due to depressed oil and gas prices as well as the completion of a vessel that we tendered for delivery on February 6, 2017, and was rejected by the customer alleging certain technical deficiencies. We subsequently suspended of work on the second vessel under contract with this customer. See also Note 9 of the Notes to the Consolidated Financial Statements.
Gross profit (loss) - Gross loss from our Shipyards division was $19.1 million for the nine months ended September 30, 2017, compared to a gross profit of $9.7 million for the nine months ended September 30, 2016. The decrease was due to:
$12.7 million in contract losses related to cost overruns and re-work that has been identified on two newbuild vessel construction contracts within our Shipyards division;
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.
General and administrative expenses - General and administrative expenses for our Shipyards division decreased $1.4 million for the nine months ended September 30, 2017, compared to the nine months ended September 30, 2016, primarily due to reductions of administrative personnel related to consolidation of personnel duties from the LEEVAC transaction. Additionally, our Shipyards division incurred lower bonuses accrued during 2017 as a result of our consolidated operating loss and cost minimization efforts implemented by management for the period.
Asset Impairment - During nine months ended September 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.
| | | | | | | | | | | | | | | | Services | | Nine Months Ended September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | 43,758 |
| | $ | 76,179 |
| | $ | (32,421 | ) | | (42.6)% | Gross profit (loss) | | 2,335 |
| | 11,158 |
| | (8,823 | ) | | (79.1)% | Gross profit (loss) percentage | | 5.3 | % | | 14.6 | % | | | | (9.3)% | General and administrative expenses | | 2,008 |
| | 2,462 |
| | (454 | ) | | (18.4)% | Operating income (loss) | | 327 |
| | 8,696 |
| | | | |
| | | | | | | | | | | | | | | | 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 $32.4Division increased $11.2 million for the ninethree months ended September 30, 2017,March 31, 2018, compared to the ninethree months ended September 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 $8.8Division increased $2.6 million for the ninethree months ended September 30, 2017,March 31, 2018, compared to the ninethree months ended September 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 $0.5 millionDivision increased $68,000 for the ninethree months ended September 30, 2017,March 31, 2018, compared to the ninethree months ended September 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 operating loss.continued cost minimization efforts implemented by management for the period.
| | | | | | | | | | | | | | | | Corporate | | Nine Months Ended September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | — |
| | $ | — |
| | $ | — |
| | —% | Gross profit (loss) | | (500 | ) | | (439 | ) | | (61 | ) | | (13.9)% | Gross profit (loss) percentage | | n/a |
| | n/a |
| | | |
| General and administrative expenses | | 5,665 |
| | 5,132 |
| | 533 |
| | 10.4% | Operating income (loss) | | (6,165 | ) | | (5,571 | ) | | (594 | ) | | |
| | | | | | | | | | | | | | | | 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 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. Additionally, we have incurred increased legal fees as we pursue collection of claims against two customers. See also Note 9 of the Notes to the Consolidated Financial Statements. This has been partially offset by lower bonuses accrued during 2017 as a result of a combination of a smaller workforce and our consolidated operating 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 September 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 $17.8$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 $164.0$137.1 million and our ratio of current assets to current liabilities was 4.594.34 to 1 at September 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 September 30, 2017,March 31, 2018, includes $107.0$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 ninethree months ended September 30, 2017,March 31, 2018, is referenced in the Cash Flow Activities section below. At September 30, 2017,As discussed in our contracts receivable balance was $25.5 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 $8.3 million through October 31, 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.2019. The credit facility matures June 9, 2019 and may be usedCredit Agreement 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 facility our 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 credit facilityCredit Agreement may be designated, at our option, as either Base Rate (as defined in the 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 interest on undrawn stated amounts under letters of credit issued by the lenderslender is 2.0%2% per annum. At March 31, 2018, the interest rate on our outstanding borrowings was 3.75% per annum. The credit facilityCredit Agreement is secured by substantially all of our assets (other than the assets of Gulf Marine Fabricators, L.P., the legal entity that holds our South Texas assetsProperties).
At March 31, 2018, $10 million was outstanding under the Credit Agreement and, we had letters of 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. | Ratio of current assets to current liabilities of not less than 1.25:1.00; |
| | ii. | Minimum tangible net worth requirement of at least the sum of: |
| | a) | $230.0185 million, plus |
| | b) | An 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. | Ratio of funded debt to tangible net worth of not more than 0.50:1.00. |
Concurrent with our execution of the 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 were reissued as new letters of credit under the credit facility and accepted by the beneficiaries. Availability under our credit facility for future, additional letters of credit and borrowings is $35.4 million. As of September 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 2017.2018.
On October 21,If industry conditions for offshore oil and gas do not improve, we are unable to sell our Texas North Yard or the sale is delayed, or we are unable to increase 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 beginning of 2016, a customerwe have implemented wage adjustments along with employee benefit and overall cost reductions within all of our Shipyards division announced it was in noncompliance with certain financial covenants includeddivisions. We have reduced the level of our workforce in the customer’s debt agreementspast 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 deliverywe will continue to do so based on booked work in all of our facilities. We have reduced the first vessel that we completed and tendered for delivery on February 6, 2017, alleging certain technical deficiencies exist with respectcompensation paid to the vessel. On March 10, 2017, we gave notice for arbitration with our customer in an effort to resolve this matter and subsequently suspended fabrication of the second vessel under contract with this customer, which is 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 both vessel contracts. The customer is seeking recovery of $84.8 million representing all purchase price amounts previously paid by the customer under both contracts. 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 emerged from Chapter 11 Bankruptcydirectors and the Bankruptcy Court has approved the customer's retention and acceptancesalaries of both contracts. As of September 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,executive officers, and we have re-initiated arbitration proceedings in accordance withreduced our contracts. Wecapital expenditures and placed assets that are in the process of discovery. The customer has recently named a new interim chief executive officer who has made contact with our management, and we are workingeither underutilized, under-performing or not expected to resolve our dispute in a constructive manner. We believe that will be able to recover remaining amounts due to us.
On August 25, 2017,provide sufficient long-term value for sale, which include our South Texas facilities were impacted by Hurricane Harvey, which made landfall as a category 4 hurricane. As a result, we suffered damages to our South Texas buildings and equipment. Through September 30, 2017, we have incurred approximately $265,000 in clean-up and repair related costs and we expect to incur additional future repair costs in excess of our deductible which management believes are probable of being recovered through insurance proceeds. We maintain coverage on these assets up to a maximum of $25.0 million, subject to a 3.0% deductible with a minimum deductible of $500,000. We are working diligently with our insurance agents and adjusters to finalize our estimate of the damage; however, it may be several months, or even longer, before we can finalize our assessment and receive final payment from our insurance underwriters. Our insurance underwriters have made an initial payment of $3.0 million, and we have recorded a liability for future repairs of $2.7 million which is included in accrued expenses and other liabilities on our balance sheet at September 30, 2017. Based upon our initial assessment of the damages and insurance coverage, management believes that there is no basis to record a net loss at this time and that insurance proceeds will at a minimum be sufficient to reimburse us for all damages and repair costs. Our final
assessment of the loss incurred to our South Texas assets as well as the amount of insurance proceeds we will receive could be more or less than this amount when the claim is ultimately settled and such differences could be material.
In event of one or more sales of our South Texas assets, we expect to use all or a portion of the sales proceeds to invest in our operating liquidity in order to facilitate anticipated future projects, selected capital improvements to enhance and/or expand our existing facilities, mergers and acquisitions to expand our product and service capabilities. We are continuing this effort to identify and analyze specific investment opportunities we believe will enhance the long-term value of the Company that are consistent with our strategy.
On October 26, 2017, our Board of Directors declared a dividend of $0.01 per share on our shares of common stock outstanding, payable November 24, 2017, to shareholders of record on November 10, 2017.Properties.
We currently believe ourthat cash on hand and cash equivalents generated by our future operating activities, proceeds to be received from insurance underwriters, availabilityfunds available under our line of credit and proceeds to be received from future assets salesCredit Agreement will be sufficient to fund our capital expenditures and meet our working capital needsand capital expenditure requirements, any future debt service and other funding requirements for nextat least twelve months from the date of this Report. Our view regarding sufficiency of cash and liquidity is primarily based on our financial forecast for 2018 and early 2019, which is impacted by various assumptions regarding the sale of our Texas North Yard, our existing backlog and a 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 continuemeet planned operating expenses and other unforeseen cash requirements. Accordingly, we may be required to operate, satisfyfurther draw on our contractual operations and pay dividendsCredit Agreement, obtain additional bank financing, sell additional assets or conduct equity or debt offerings at a time when it is not beneficial to our shareholders.do so.
Cash Flow Activities
For the ninethree months ended September 30, 2017,March 31, 2018, net cash used in operating activities was $29.6$14.1 million, compared to net cash provided byused in operating activities of $19.4$15.1 million for the ninethree months ended September 30, 2016.March 31, 2017. The use of cash in operations during the period was primarily due to the following:
Operating losses for the ninethree months ended September 30, 2017,March 31, 2018, in excess of non-cash depreciation, amortization, impairment and stock compensation expense of approximately $19.6 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. See also Note 9 of the Notes to the Consolidated Financial Statements; 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 later in 2017 through the first half of 2018.$2 million.
Net cash used inprovided by investing activities for the ninethree months ended September 30, 2017,March 31, 2018, was $2.4 million, compared to cash provided byused in investing activities of $2.0 million$391,000 for the ninethree months ended September 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 $5.8 million and $1.6 million of cash acquired in the LEEVAC transaction during 2016 partially offset by decreases in capital expenditures.Properties.
Net cash used inprovided by financing activities for the ninethree months ended September 30,March 31, 2018, and 2017, and 2016, was $1.4$9.2 million and $603,000, 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. During the nine months ended September 30, 2017 we received $2.0$10 million fromin net borrowings under our new line of credit which were immediately repaid.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 September 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 September 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 | |
| 10.4 | |
| 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: October 31, 2017May 4, 2018
GULF ISLAND FABRICATION, INC.
EXHIBIT INDEX
| | | | | Exhibit
Number
| | Description of Exhibit | | | 3.1 | | | 3.2 | | | 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. |
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 September 30, 2017,March 31, 2018, projects for our five largest customers in terms of revenue backlog consisted of: |
| | (i) | Two large multi-purpose service vesselsMPSVs for one customer within our Shipyards division,for which commenced in the first quarterwe have received a purported notice of 2014 and will be completed during 2018;termination as discussed above; |
| | (ii) | Newbuild construction of fourfive harbor tugs for one customer within our Shipyards division;(to be completed in 2018 through 2020); |
| | (iii) | Newbuild construction of fourfive harbor tugs for one additional customer within our Shipyards division;(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 researchone T-ATS vessel within our Shipyards division.(to be completed in 2020). This contract is currently under a bid protest. |
| | (3)(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 September 30, 2017,March 31, 2018, we had 989961 employees compared to 1,178977 employees as of December 31, 2016.2017. Labor hours worked were 1.5 million496,000 during the ninethree months ended September 30, 2017,March 31, 2018, compared to 2.3 million479,000 for the ninethree months ended September 30, 2016.March 31, 2017. The overall decreaseincrease in labor hours worked for the ninethree months ended September 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 September 30, 2017,March 31, 2018, Compared to Three Months Ended September 30, 2016March 31, 2017 (in thousands, except for percentages): Consolidated | | | | | | | | | | | | | | | Three Months Ended September 30, | | Increase or (Decrease) | | 2017 | | 2016 | | Amount | Percent | Revenue | $ | 49,884 |
| | $ | 65,384 |
| | $ | (15,500 | ) | (23.7)% | Cost of revenue | 50,378 |
| | 60,125 |
| | (9,747 | ) | (16.2)% | Gross profit (loss) | (494 | ) | | 5,259 |
| | (5,753 | ) | (109.4)% | Gross profit (loss) percentage | (1.0 | )% | | 8.0 | % | | | | General and administrative expenses | 4,370 |
| | 5,086 |
| | (716 | ) | (14.1)% | Operating income (loss) | (4,864 | ) | | 173 |
| | (5,037 | ) | (2,911.6)% | Other income (expense): | | | | | | | Interest expense | (45 | ) | | (110 | ) | | 65 |
| | Interest income | — |
| | 12 |
| | (12 | ) | | Other income (expense), net | 38 |
| | 599 |
| | (561 | ) | | Total other income (expense) | (7 | ) | | 501 |
| | (508 | ) | 101.4% | Net income (loss) before income taxes | (4,871 | ) | | 674 |
| | (5,545 | ) | (822.7)% | Income tax expense (benefit) | (1,761 | ) | | 133 |
| | (1,894 | ) | (1,424.1)% | Net income (loss) | $ | (3,110 | ) | | $ | 541 |
| | $ | (3,651 | ) | (674.9)% |
| | | | | | | | | | | | | | | 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 September 30,March 31, 2018 and 2017, and 2016, was $49.9$57.3 million and $65.4$38.0 million, respectively, representing a decreasean increase of 23.7%50.8%. The decreaseincrease is primarily attributable to an overall decrease in work experienced into:
An increase of $11.2 million within our facilities primarily 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 as a percentage of revenue were 48.4% and 33.8% for the three months ended September 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 projectfour modules for a particular period.petrochemical plant.
Gross profit (loss) - Our gross lossprofit for the three months ended September 30, 2017,March 31, 2018, was $494,000$679,000 compared to a gross profitloss of $5.3$4.9 million for the three months ended September 30, 2016.March 31, 2017. The decreaseincrease in gross profit was primarily due to $2.1 million of contract losses incurred byincreased revenue within our Shipyards division related to cost overruns and re-work identified on two newbuild vessel construction
contracts, 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 $1.1 million and lower margins on current work due to competitive pressures. 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 September 30, 2017 (asProperties as these assets are classified as assets held for sale) and continued cost minimization efforts implemented by management for the period.sale.
General and administrative expenses - Our general and administrative expenses were $4.4$4.7 million for the three months ended September 30, 2017,March 31, 2018, compared to $5.1$3.9 million for the three months ended September 30, 2016.March 31, 2017. The decreaseincrease in general and administrative expenses for the three months ended September 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 well as the addition of personnel as we build up our EPC Division in anticipation of the SeaOne Project; and Higher stock compensation expense of approximately $220,000.
This was partially offset by cost reductions 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 piece of 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- Other income was $38,000Interest expense increased due to drawings under our Credit Agreement for the three months ended September 30, 2017, as compared to other income of $599,000 for three months ended September 30, 2016. Other incomeMarch 31, 2018, with no such drawings under our Credit Agreement for the three months ended September 30,March 31, 2017, relates to insurance proceeds received from damage to a corporate automobile that was fully depreciated. Other income for foras well as increased amortization of deferred financing costs during the three months ended September 30, 2016 primarily relates to gains on sales of assets from our Fabrication division.March 31, 2018.
Income tax expense (benefit) - Our effective income tax rate for the three months ended September 30, 2017,March 31, 2018, was 36.2%(1.1)%, compared to an effective tax rate benefit of 19.7%30.3% for the comparable period during 2016.2017. Current expense represents state taxes within our Services Division. The increasedecrease in the effective tax rate is the result of changesa valuation allowance against our deferred tax assets. See Note 1 of the Notes to estimates ofConsolidated Financial Statements regarding our year-endNOLs and deferred tax provision during for the three months ended September 30, 2016.assets.
Operating Segments
As discussed 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 nine months ended September 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 nine months ended September 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. OurThe results of our threefour operating divisions and Corporate divisionDivision for the three months ended September 30,March 31, 2018 and 2017, and 2016, are presented below (in thousands, except for percentages).
| | | | | | | | | | | | | | | | Fabrication | | Three Months Ended September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | 18,318 |
| | $ | 22,311 |
| | $ | (3,993 | ) | | (17.9)% | Gross profit (loss) | | 1,250 |
| | 601 |
| | 649 |
| | 108.0% | Gross profit (loss) percentage | | 6.8 | % | | 2.7 | % | | | | 4.1% | General and administrative expenses | | 778 |
| | 885 |
| | (107 | ) | | (12.1)% | Operating income (loss) | | 472 |
| | (284 | ) | | | | |
| | | | | | | | | | | | | | | | 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 $4.0Division increased $7.1 million for the three months ended September 30, 2017,March 31, 2018, compared to the three months ended September 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.projects during the period. This was partially offset, by decreased revenue of $2.4 million for the three months ended March 31, 2018, at our South Texas Properties as these were placed for sale during the first quarter of 2017 and project work completed or transfered to our Houma Fabrication Yard during 2017.
Gross profit (loss) - Gross profitloss from our Fabrication divisionDivision for the three months ended September 30, 2017,March 31, 2018, was $1.3 million$219,000 compared to a gross profitloss of $601,000$3.0 million for the three months ended September 30, 2016.March 31, 2017. The increasedecrease in gross profitloss was due to
Gains on scrap sales increased revenue as discussed above and a reduction in depreciation expense of approximately $701,000 at our South Texas facility,
Decreases$1.9 million in costs resulting from reductions in workforce as we wrapped up and completed projects at our South Texas fabrication yards,
No depreciation being recordedexpense during the three months ended March 31, 2018 for our South Texas assets for the three months ended September 30, 2017,Properties as these assets are classified as assets held for sale; and
Continued cost minimization efforts implemented by management for the period.
This was partially offset by approximately $1.1 million of holding costs for our South Texas assets.sale.
General and administrative expenses - General and administrative expenses for our Fabrication divisionDivision decreased $107,000$197,000 for the three months ended September 30, 2017,March 31, 2018, compared to the three months ended September 30, 2016.March 31, 2017. The decrease is primarily due to decreases in costs resulting from lower bonuses accrued during 2017 as a result of our consolidated operating loss, reductions in workforce at our South Texas fabrication yardsProperties, decreases in corporate allocations as a portion 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 piece of equipment at our 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 September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue (1) | | $ | 15,074 |
| | $ | 23,060 |
| | $ | (7,986 | ) | | (34.6)% | Gross profit (loss) (1) | | (3,504 | ) | | 1,945 |
| | (5,449 | ) | | (280.2)% | Gross profit (loss) percentage | | (23.2 | )% | | 8.4 | % | | | | (31.6)% | General and administrative expenses | | 888 |
| | 1,468 |
| | (580 | ) | | (39.5)% | Operating income (loss) (1) | | (4,392 | ) | | 477 |
| | | | |
| | | | | | | | | | | | | | | | 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 September 30,March 31, 2018, and 2017, includes $390,000 and 2016, includes $510,000 and $1.5$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 $8.0 millionShipyard Division increased $143,000 for the three months ended September 30, 2017,March 31, 2018, compared to the three months ended September 30, 2016, dueMarch 31, 2017. During the first quarter of 2018, we were able to make progress on the corresponding reduction in customer demand for shipbuildingconstruction of eight harbor tugs and repair services supportingan offshore research vessel which were not under construction during the oilfirst quarter of 2017. This was partially offset by lower revenue from construction of our two OSV and gas industry due to depressed oiltwo MPSV vessel contracts during the first quarter of 2018.
During the first quarter of 2017, we completed the first of the OSVs and gas prices as well as the completion of a vessel that we tendered it for delivery on February 6, 2017, and was rejected by the customer alleging certain technical deficiencies. We subsequently suspended construction of work on the second vessel under contractOSV due to a customer dispute. 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 Shipyard Division related to the construction of two MPSVs. We dispute the purported termination and disagree with this customer.the customer’s reasons for same. Pending resolution of the dispute, all work has been stopped and the vessels and associated equipment and material are in our care and custody at our shipyard in Houma, Louisiana. See also Note 9 of the Notes to the Consolidated Financial Statements.Statements for additional information relating to this customer dispute.
Gross profit (loss) - Gross loss from our Shipyards divisionShipyard Division was $3.5 million for the three months ended September 30, 2017, compared to a gross profit of $1.9 million for the three months ended September 30, 2016. The decrease was due to:
$2.1 million in contract losses related to cost overruns and re-work that has been identified on two newbuild vessel construction contracts within our Shipyards division; and
Holding and closing costs related to our Prospect shipyard as we wind down operations at this facility.
General and administrative expenses - General and administrative expenses for our Shipyards division decreased $580,000 for the three months ended September 30, 2017, compared to the three months ended September 30, 2016, primarily due to reductions of administrative personnel related to consolidation of personnel duties from the LEEVAC transaction. Additionally, our Shipyards division incurred lower bonuses accrued during 2017 as a result of a combination of a smaller workforce and our consolidated operating loss and cost minimization efforts implemented by management for the period during the first part of 2016.
| | | | | | | | | | | | | | | | Services | | Three Months Ended September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | 17,651 |
| | $ | 20,928 |
| | $ | (3,277 | ) | | (15.7)% | Gross profit (loss) | | 1,912 |
| | 2,918 |
| | (1,006 | ) | | (34.5)% | Gross profit (loss) percentage | | 10.8 | % | | 13.9 | % | | | | (3.1)% | General and administrative expenses | | 695 |
| | 943 |
| | (248 | ) | | (26.3)% | Operating income (loss) | | 1,217 |
| | 1,975 |
| | | | |
Revenue - Revenue from our Services division decreased $3.3 million for the three months ended September 30, 2017, compared to the three months ended September 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 $1.0 million for the three months ended September 30, 2017,March 31, 2018, compared to a gross loss of $1.7 million for the three months ended September 30, 2016,March 31, 2017. The decrease was due to decreased revenue discussed aboveimproved cost management efforts and lower margins on new work performedefficiencies learned from the construction of two OSV and two MPSV vessels during 2017.the three months ended March 31, 2017, and applied to the construction of eight harbor tugs during the three months ended March 31, 2018.
General and administrative expenses - General and administrative expenses for our Services divisionShipyard Division decreased $248,000$168,000 for the three months ended September 30, 2017,March 31, 2018, compared to the three months ended September 30, 2016, due to lower bonuses accrued duringMarch 31, 2017, as a result of a combination of a smaller workforce and our consolidated operating loss.
| | | | | | | | | | | | | | | | Corporate | | Three Months Ended September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | — |
| | $ | — |
| | $ | — |
| | —% | Gross profit (loss) | | (152 | ) | | (205 | ) | | 53 |
| | 25.9% | Gross profit (loss) percentage | | n/a |
| | n/a |
| | | |
| General and administrative expenses | | 2,009 |
| | 1,790 |
| | 219 |
| | 12.2% | Operating income (loss) | | (2,161 | ) | | (1,995 | ) | |
|
| | |
General and administrative expenses - General and administrative expenses for our Corporate division increased primarily due to reductions in workforce, decreases in corporate allocations as a restructuringportion of our corporate division with additional personnelthese are now allocated to our corporate division during 2017 as discussed above as well as 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. Additionally, we have incurred increased legal fees as we pursue collection of claims against two customers. See also Note 9 of the Notes to the Consolidated Financial Statements. This has been partially offset by lower bonuses accrued during the quarter due to our consolidated operating loss.
Nine Months Ended September 30, 2017, Compared to Nine Months Ended September 30, 2016 (in thousands, except for percentages):
Consolidated
| | | | | | | | | | | | | | | Nine Months Ended September 30, | | Increase or (Decrease) | | 2017 | | 2016 | | Amount | Percent | Revenue | $ | 133,745 |
| | $ | 230,864 |
| | $ | (97,119 | ) | (42.1)% | Cost of revenue | 150,755 |
| | 205,839 |
| | (55,084 | ) | (26.8)% | Gross profit (loss) | (17,010 | ) | | 25,025 |
| | (42,035 | ) | (168.0)% | Gross profit (loss) percentage | (12.7 | )% | | 10.8 | % | | | | General and administrative expenses | 12,940 |
| | 14,633 |
| | (1,693 | ) | (11.6)% | Asset impairment | 389 |
| | — |
| | 389 |
| 100.0% | Operating income (loss) | (30,339 | ) | | 10,392 |
| | (40,731 | ) | (391.9)% | Other income (expense): | | | | | | | Interest expense | (262 | ) | | (248 | ) | | (14 | ) | | Interest income | 12 |
| | 20 |
| | (8 | ) | | Other income (expense), net | (221 | ) | | 1,039 |
| | (1,260 | ) | | Total other income (expense) | (471 | ) | | 811 |
| | (1,282 | ) | (158.1)% | Net income (loss) before income taxes | (30,810 | ) | | 11,203 |
| | (42,013 | ) | (375.0)% | Income tax expense (benefit) | (10,322 | ) | | 4,134 |
| | (14,456 | ) | (349.7)% | Net income (loss) | $ | (20,488 | ) | | $ | 7,069 |
| | $ | (27,557 | ) | (389.8)% |
Revenue - Our revenue for the nine months ended September 30, 2017EPC Division and 2016, was $133.7 million and $230.9 million, respectively, representing a decrease of 42.1%. 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 as well as the completion of a vessel within our Shipyards division that we tendered for delivery on February 6, 2017, and was rejected by the customer alleging certain technical deficiencies. We subsequently suspended of work on the second vessel under contract with this customer. See also Note 9 of the Notes to the Consolidated Financial Statements. Pass-
through costs as a percentage of revenue were 45.3% and 35.0% for the nine months ended September 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 nine months ended September 30, 2017, was $17.0 million compared to a gross profit of $25.0 million for the nine months ended September 30, 2016. The decrease was primarily due to $12.7 million of losses incurred by our Shipyards division related to cost overruns and re-work identified on two newbuild vesseldecreased construction contracts, decreased revenue as discussed above, holding costs related to our South Texas assets of $3.6 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 nine months ended September 30, 2017, as these assets are classified as assets held for sale and additional cost minimization efforts implemented by management for the period.
General and administrative expenses - Our general and administrative expenses were $12.9 million for the nine months ended September 30, 2017, compared to $14.6 million for the nine months ended September 30, 2016. The decrease in general and administrative expenses for the nine months ended September 30, 2017, is primarily due to decreases in costs resulting from reductions in workforce at our South Texas fabrication yards, lower bonuses accrued during 2017 as a result of our consolidated operating loss and continued cost minimization efforts implemented by management for the period.activity.
Asset Impairmentimpairment - During the ninethree months ended September 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.
Other income (expense), net - Other expense was $221,000Statements for the nine months ended September 30, 2017, comparedadditional information relating to other income of $1.0 millionour assets held for the nine months ended September 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 2016.
Income tax expense (benefit) - Our effective income tax rate for the nine months ended September 30, 2017, was 33.5%, compared to an effective tax rate of 36.9% 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 divisionssale. We did not record any asset impairment during the three and nine months ended September 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 nine months ended September 30, 2017 and 2016, are presented below (in thousands, except for percentages).
| | | | | | | | | | | | | | | | Fabrication | | Nine Months Ended September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | 42,517 |
| | $ | 70,436 |
| | $ | (27,919 | ) | | (39.6)% | Gross profit (loss) | | 216 |
| | 4,564 |
| | (4,348 | ) | | (95.3)% | Gross profit (loss) percentage | | 0.5 | % | | 6.5 | % | | | | (6.0)% | General and administrative expenses | | 2,432 |
| | 2,821 |
| | (389 | ) | | (13.8)% | Operating income (loss) | | (2,216 | ) | | 1,743 |
| | | | |
Revenue - Revenue from our Fabrication division decreased $27.9 million for the nine months ended September 30, 2017, compared to the nine months ended September 30, 2016. The decrease is attributable to an overall decrease in work experiencedMarch 31, 2018, 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 September 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 nine months ended September 30, 2017, was $216,000 compared to a gross profit of $4.6 million for the nine months ended September 30, 2016. The decrease was due to lower revenue
from decreased fabrication work as discussed above and approximately $3.6 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, gains on scrap sales as we wrapped up and completed projects at our South Texas fabrication yards, reduced depreciation being recorded for our South Texas assets for the nine months ended September 30, 2017, as these assets are classified as assets held for sale on February 23, 2017, and additional cost minimization efforts implemented by management for the period.
General and administrative expenses - General and administrative expenses for our Fabrication division decreased $389,000 for the nine months ended September 30, 2017, compared to the nine months ended September 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 operating 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.Shipyard Division.
| | | | | | | | | | | | | | | | Shipyards | | Nine Months Ended September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue (1) | | $ | 51,798 |
| | $ | 86,553 |
| | $ | (34,755 | ) | | (40.2)% | Gross profit (loss) (1) | | (19,061 | ) | | 9,742 |
| | (28,803 | ) | | (295.7)% | Gross profit (loss) percentage | | (36.8 | )% | | 11.3 | % | | | | (48.1)% | General and administrative expenses | | 2,835 |
| | 4,218 |
| | (1,383 | ) | | (32.8)% | Asset impairment | | 389 |
| | — |
| | 389 |
| | 100.0% | Operating income (loss) (1) | | (22,285 | ) | | 5,524 |
| | | | |
___________
| | (1) | Revenue for the nine months ended September 30, 2017, and 2016, includes $2.4 million and $4.1 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 $34.8 million for the nine months ended September 30, 2017, compared to the nine months ended September 30, 2016, due to the corresponding reduction in customer demand for shipbuilding and repair services supporting the oil and gas industry due to depressed oil and gas prices as well as the completion of a vessel that we tendered for delivery on February 6, 2017, and was rejected by the customer alleging certain technical deficiencies. We subsequently suspended of work on the second vessel under contract with this customer. See also Note 9 of the Notes to the Consolidated Financial Statements.
Gross profit (loss) - Gross loss from our Shipyards division was $19.1 million for the nine months ended September 30, 2017, compared to a gross profit of $9.7 million for the nine months ended September 30, 2016. The decrease was due to:
$12.7 million in contract losses related to cost overruns and re-work that has been identified on two newbuild vessel construction contracts within our Shipyards division;
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.
General and administrative expenses - General and administrative expenses for our Shipyards division decreased $1.4 million for the nine months ended September 30, 2017, compared to the nine months ended September 30, 2016, primarily due to reductions of administrative personnel related to consolidation of personnel duties from the LEEVAC transaction. Additionally, our Shipyards division incurred lower bonuses accrued during 2017 as a result of our consolidated operating loss and cost minimization efforts implemented by management for the period.
Asset Impairment - During nine months ended September 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.
| | | | | | | | | | | | | | | | Services | | Nine Months Ended September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | 43,758 |
| | $ | 76,179 |
| | $ | (32,421 | ) | | (42.6)% | Gross profit (loss) | | 2,335 |
| | 11,158 |
| | (8,823 | ) | | (79.1)% | Gross profit (loss) percentage | | 5.3 | % | | 14.6 | % | | | | (9.3)% | General and administrative expenses | | 2,008 |
| | 2,462 |
| | (454 | ) | | (18.4)% | Operating income (loss) | | 327 |
| | 8,696 |
| | | | |
| | | | | | | | | | | | | | | | 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 $32.4Division increased $11.2 million for the ninethree months ended September 30, 2017,March 31, 2018, compared to the ninethree months ended September 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 $8.8Division increased $2.6 million for the ninethree months ended September 30, 2017,March 31, 2018, compared to the ninethree months ended September 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 $0.5 millionDivision increased $68,000 for the ninethree months ended September 30, 2017,March 31, 2018, compared to the ninethree months ended September 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 operating loss.continued cost minimization efforts implemented by management for the period.
| | | | | | | | | | | | | | | | Corporate | | Nine Months Ended September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | — |
| | $ | — |
| | $ | — |
| | —% | Gross profit (loss) | | (500 | ) | | (439 | ) | | (61 | ) | | (13.9)% | Gross profit (loss) percentage | | n/a |
| | n/a |
| | | |
| General and administrative expenses | | 5,665 |
| | 5,132 |
| | 533 |
| | 10.4% | Operating income (loss) | | (6,165 | ) | | (5,571 | ) | | (594 | ) | | |
| | | | | | | | | | | | | | | | 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 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. Additionally, we have incurred increased legal fees as we pursue collection of claims against two customers. See also Note 9 of the Notes to the Consolidated Financial Statements. This has been partially offset by lower bonuses accrued during 2017 as a result of a combination of a smaller workforce and our consolidated operating 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 September 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 $17.8$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 $164.0$137.1 million and our ratio of current assets to current liabilities was 4.594.34 to 1 at September 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 September 30, 2017,March 31, 2018, includes $107.0$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 ninethree months ended September 30, 2017,March 31, 2018, is referenced in the Cash Flow Activities section below. At September 30, 2017,As discussed in our contracts receivable balance was $25.5 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 $8.3 million through October 31, 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.2019. The credit facility matures June 9, 2019 and may be usedCredit Agreement 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 facility our 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 credit facilityCredit Agreement may be designated, at our option, as either Base Rate (as defined in the 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 interest on undrawn stated amounts under letters of credit issued by the lenderslender is 2.0%2% per annum. At March 31, 2018, the interest rate on our outstanding borrowings was 3.75% per annum. The credit facilityCredit Agreement is secured by substantially all of our assets (other than the assets of Gulf Marine Fabricators, L.P., the legal entity that holds our South Texas assetsProperties).
At March 31, 2018, $10 million was outstanding under the Credit Agreement and, we had letters of 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. | Ratio of current assets to current liabilities of not less than 1.25:1.00; |
| | ii. | Minimum tangible net worth requirement of at least the sum of: |
| | a) | $230.0185 million, plus |
| | b) | An 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. | Ratio of funded debt to tangible net worth of not more than 0.50:1.00. |
Concurrent with our execution of the 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 were reissued as new letters of credit under the credit facility and accepted by the beneficiaries. Availability under our credit facility for future, additional letters of credit and borrowings is $35.4 million. As of September 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 2017.2018.
On October 21,If industry conditions for offshore oil and gas do not improve, we are unable to sell our Texas North Yard or the sale is delayed, or we are unable to increase 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 beginning of 2016, a customerwe have implemented wage adjustments along with employee benefit and overall cost reductions within all of our Shipyards division announced it was in noncompliance with certain financial covenants includeddivisions. We have reduced the level of our workforce in the customer’s debt agreementspast 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 deliverywe will continue to do so based on booked work in all of our facilities. We have reduced the first vessel that we completed and tendered for delivery on February 6, 2017, alleging certain technical deficiencies exist with respectcompensation paid to the vessel. On March 10, 2017, we gave notice for arbitration with our customer in an effort to resolve this matter and subsequently suspended fabrication of the second vessel under contract with this customer, which is 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 both vessel contracts. The customer is seeking recovery of $84.8 million representing all purchase price amounts previously paid by the customer under both contracts. 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 emerged from Chapter 11 Bankruptcydirectors and the Bankruptcy Court has approved the customer's retention and acceptancesalaries of both contracts. As of September 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,executive officers, and we have re-initiated arbitration proceedings in accordance withreduced our contracts. Wecapital expenditures and placed assets that are in the process of discovery. The customer has recently named a new interim chief executive officer who has made contact with our management, and we are workingeither underutilized, under-performing or not expected to resolve our dispute in a constructive manner. We believe that will be able to recover remaining amounts due to us.
On August 25, 2017,provide sufficient long-term value for sale, which include our South Texas facilities were impacted by Hurricane Harvey, which made landfall as a category 4 hurricane. As a result, we suffered damages to our South Texas buildings and equipment. Through September 30, 2017, we have incurred approximately $265,000 in clean-up and repair related costs and we expect to incur additional future repair costs in excess of our deductible which management believes are probable of being recovered through insurance proceeds. We maintain coverage on these assets up to a maximum of $25.0 million, subject to a 3.0% deductible with a minimum deductible of $500,000. We are working diligently with our insurance agents and adjusters to finalize our estimate of the damage; however, it may be several months, or even longer, before we can finalize our assessment and receive final payment from our insurance underwriters. Our insurance underwriters have made an initial payment of $3.0 million, and we have recorded a liability for future repairs of $2.7 million which is included in accrued expenses and other liabilities on our balance sheet at September 30, 2017. Based upon our initial assessment of the damages and insurance coverage, management believes that there is no basis to record a net loss at this time and that insurance proceeds will at a minimum be sufficient to reimburse us for all damages and repair costs. Our final
assessment of the loss incurred to our South Texas assets as well as the amount of insurance proceeds we will receive could be more or less than this amount when the claim is ultimately settled and such differences could be material.
In event of one or more sales of our South Texas assets, we expect to use all or a portion of the sales proceeds to invest in our operating liquidity in order to facilitate anticipated future projects, selected capital improvements to enhance and/or expand our existing facilities, mergers and acquisitions to expand our product and service capabilities. We are continuing this effort to identify and analyze specific investment opportunities we believe will enhance the long-term value of the Company that are consistent with our strategy.
On October 26, 2017, our Board of Directors declared a dividend of $0.01 per share on our shares of common stock outstanding, payable November 24, 2017, to shareholders of record on November 10, 2017.Properties.
We currently believe ourthat cash on hand and cash equivalents generated by our future operating activities, proceeds to be received from insurance underwriters, availabilityfunds available under our line of credit and proceeds to be received from future assets salesCredit Agreement will be sufficient to fund our capital expenditures and meet our working capital needsand capital expenditure requirements, any future debt service and other funding requirements for nextat least twelve months from the date of this Report. Our view regarding sufficiency of cash and liquidity is primarily based on our financial forecast for 2018 and early 2019, which is impacted by various assumptions regarding the sale of our Texas North Yard, our existing backlog and a 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 continuemeet planned operating expenses and other unforeseen cash requirements. Accordingly, we may be required to operate, satisfyfurther draw on our contractual operations and pay dividendsCredit Agreement, obtain additional bank financing, sell additional assets or conduct equity or debt offerings at a time when it is not beneficial to our shareholders.do so.
Cash Flow Activities
For the ninethree months ended September 30, 2017,March 31, 2018, net cash used in operating activities was $29.6$14.1 million, compared to net cash provided byused in operating activities of $19.4$15.1 million for the ninethree months ended September 30, 2016.March 31, 2017. The use of cash in operations during the period was primarily due to the following:
Operating losses for the ninethree months ended September 30, 2017,March 31, 2018, in excess of non-cash depreciation, amortization, impairment and stock compensation expense of approximately $19.6 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. See also Note 9 of the Notes to the Consolidated Financial Statements; 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 later in 2017 through the first half of 2018.$2 million.
Net cash used inprovided by investing activities for the ninethree months ended September 30, 2017,March 31, 2018, was $2.4 million, compared to cash provided byused in investing activities of $2.0 million$391,000 for the ninethree months ended September 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 $5.8 million and $1.6 million of cash acquired in the LEEVAC transaction during 2016 partially offset by decreases in capital expenditures.Properties.
Net cash used inprovided by financing activities for the ninethree months ended September 30,March 31, 2018, and 2017, and 2016, was $1.4$9.2 million and $603,000, 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. During the nine months ended September 30, 2017 we received $2.0$10 million fromin net borrowings under our new line of credit which were immediately repaid.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 September 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 September 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 | |
| 10.4 | |
| 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: October 31, 2017May 4, 2018
GULF ISLAND FABRICATION, INC.
EXHIBIT INDEX
| | | | | Exhibit
Number
| | Description of Exhibit | | | 3.1 | | | 3.2 | | | 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. |
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 September 30, 2017,March 31, 2018, projects for our five largest customers in terms of revenue backlog consisted of: |
| | (i) | Two large multi-purpose service vesselsMPSVs for one customer within our Shipyards division,for which commenced in the first quarterwe have received a purported notice of 2014 and will be completed during 2018;termination as discussed above; |
| | (ii) | Newbuild construction of fourfive harbor tugs for one customer within our Shipyards division;(to be completed in 2018 through 2020); |
| | (iii) | Newbuild construction of fourfive harbor tugs for one additional customer within our Shipyards division;(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 researchone T-ATS vessel within our Shipyards division.(to be completed in 2020). This contract is currently under a bid protest. |
| | (3)(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 September 30, 2017,March 31, 2018, we had 989961 employees compared to 1,178977 employees as of December 31, 2016.2017. Labor hours worked were 1.5 million496,000 during the ninethree months ended September 30, 2017,March 31, 2018, compared to 2.3 million479,000 for the ninethree months ended September 30, 2016.March 31, 2017. The overall decreaseincrease in labor hours worked for the ninethree months ended September 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 September 30, 2017,March 31, 2018, Compared to Three Months Ended September 30, 2016March 31, 2017 (in thousands, except for percentages): Consolidated | | | | | | | | | | | | | | | Three Months Ended September 30, | | Increase or (Decrease) | | 2017 | | 2016 | | Amount | Percent | Revenue | $ | 49,884 |
| | $ | 65,384 |
| | $ | (15,500 | ) | (23.7)% | Cost of revenue | 50,378 |
| | 60,125 |
| | (9,747 | ) | (16.2)% | Gross profit (loss) | (494 | ) | | 5,259 |
| | (5,753 | ) | (109.4)% | Gross profit (loss) percentage | (1.0 | )% | | 8.0 | % | | | | General and administrative expenses | 4,370 |
| | 5,086 |
| | (716 | ) | (14.1)% | Operating income (loss) | (4,864 | ) | | 173 |
| | (5,037 | ) | (2,911.6)% | Other income (expense): | | | | | | | Interest expense | (45 | ) | | (110 | ) | | 65 |
| | Interest income | — |
| | 12 |
| | (12 | ) | | Other income (expense), net | 38 |
| | 599 |
| | (561 | ) | | Total other income (expense) | (7 | ) | | 501 |
| | (508 | ) | 101.4% | Net income (loss) before income taxes | (4,871 | ) | | 674 |
| | (5,545 | ) | (822.7)% | Income tax expense (benefit) | (1,761 | ) | | 133 |
| | (1,894 | ) | (1,424.1)% | Net income (loss) | $ | (3,110 | ) | | $ | 541 |
| | $ | (3,651 | ) | (674.9)% |
| | | | | | | | | | | | | | | 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 September 30,March 31, 2018 and 2017, and 2016, was $49.9$57.3 million and $65.4$38.0 million, respectively, representing a decreasean increase of 23.7%50.8%. The decreaseincrease is primarily attributable to an overall decrease in work experienced into:
An increase of $11.2 million within our facilities primarily 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 as a percentage of revenue were 48.4% and 33.8% for the three months ended September 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 projectfour modules for a particular period.petrochemical plant.
Gross profit (loss) - Our gross lossprofit for the three months ended September 30, 2017,March 31, 2018, was $494,000$679,000 compared to a gross profitloss of $5.3$4.9 million for the three months ended September 30, 2016.March 31, 2017. The decreaseincrease in gross profit was primarily due to $2.1 million of contract losses incurred byincreased revenue within our Shipyards division related to cost overruns and re-work identified on two newbuild vessel construction
contracts, 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 $1.1 million and lower margins on current work due to competitive pressures. 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 September 30, 2017 (asProperties as these assets are classified as assets held for sale) and continued cost minimization efforts implemented by management for the period.sale.
General and administrative expenses - Our general and administrative expenses were $4.4$4.7 million for the three months ended September 30, 2017,March 31, 2018, compared to $5.1$3.9 million for the three months ended September 30, 2016.March 31, 2017. The decreaseincrease in general and administrative expenses for the three months ended September 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 well as the addition of personnel as we build up our EPC Division in anticipation of the SeaOne Project; and Higher stock compensation expense of approximately $220,000.
This was partially offset by cost reductions 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 piece of 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- Other income was $38,000Interest expense increased due to drawings under our Credit Agreement for the three months ended September 30, 2017, as compared to other income of $599,000 for three months ended September 30, 2016. Other incomeMarch 31, 2018, with no such drawings under our Credit Agreement for the three months ended September 30,March 31, 2017, relates to insurance proceeds received from damage to a corporate automobile that was fully depreciated. Other income for foras well as increased amortization of deferred financing costs during the three months ended September 30, 2016 primarily relates to gains on sales of assets from our Fabrication division.March 31, 2018.
Income tax expense (benefit) - Our effective income tax rate for the three months ended September 30, 2017,March 31, 2018, was 36.2%(1.1)%, compared to an effective tax rate benefit of 19.7%30.3% for the comparable period during 2016.2017. Current expense represents state taxes within our Services Division. The increasedecrease in the effective tax rate is the result of changesa valuation allowance against our deferred tax assets. See Note 1 of the Notes to estimates ofConsolidated Financial Statements regarding our year-endNOLs and deferred tax provision during for the three months ended September 30, 2016.assets.
Operating Segments
As discussed 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 nine months ended September 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 nine months ended September 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. OurThe results of our threefour operating divisions and Corporate divisionDivision for the three months ended September 30,March 31, 2018 and 2017, and 2016, are presented below (in thousands, except for percentages).
| | | | | | | | | | | | | | | | Fabrication | | Three Months Ended September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | 18,318 |
| | $ | 22,311 |
| | $ | (3,993 | ) | | (17.9)% | Gross profit (loss) | | 1,250 |
| | 601 |
| | 649 |
| | 108.0% | Gross profit (loss) percentage | | 6.8 | % | | 2.7 | % | | | | 4.1% | General and administrative expenses | | 778 |
| | 885 |
| | (107 | ) | | (12.1)% | Operating income (loss) | | 472 |
| | (284 | ) | | | | |
| | | | | | | | | | | | | | | | 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 $4.0Division increased $7.1 million for the three months ended September 30, 2017,March 31, 2018, compared to the three months ended September 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.projects during the period. This was partially offset, by decreased revenue of $2.4 million for the three months ended March 31, 2018, at our South Texas Properties as these were placed for sale during the first quarter of 2017 and project work completed or transfered to our Houma Fabrication Yard during 2017.
Gross profit (loss) - Gross profitloss from our Fabrication divisionDivision for the three months ended September 30, 2017,March 31, 2018, was $1.3 million$219,000 compared to a gross profitloss of $601,000$3.0 million for the three months ended September 30, 2016.March 31, 2017. The increasedecrease in gross profitloss was due to
Gains on scrap sales increased revenue as discussed above and a reduction in depreciation expense of approximately $701,000 at our South Texas facility,
Decreases$1.9 million in costs resulting from reductions in workforce as we wrapped up and completed projects at our South Texas fabrication yards,
No depreciation being recordedexpense during the three months ended March 31, 2018 for our South Texas assets for the three months ended September 30, 2017,Properties as these assets are classified as assets held for sale; and
Continued cost minimization efforts implemented by management for the period.
This was partially offset by approximately $1.1 million of holding costs for our South Texas assets.sale.
General and administrative expenses - General and administrative expenses for our Fabrication divisionDivision decreased $107,000$197,000 for the three months ended September 30, 2017,March 31, 2018, compared to the three months ended September 30, 2016.March 31, 2017. The decrease is primarily due to decreases in costs resulting from lower bonuses accrued during 2017 as a result of our consolidated operating loss, reductions in workforce at our South Texas fabrication yardsProperties, decreases in corporate allocations as a portion 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 piece of equipment at our 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 September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue (1) | | $ | 15,074 |
| | $ | 23,060 |
| | $ | (7,986 | ) | | (34.6)% | Gross profit (loss) (1) | | (3,504 | ) | | 1,945 |
| | (5,449 | ) | | (280.2)% | Gross profit (loss) percentage | | (23.2 | )% | | 8.4 | % | | | | (31.6)% | General and administrative expenses | | 888 |
| | 1,468 |
| | (580 | ) | | (39.5)% | Operating income (loss) (1) | | (4,392 | ) | | 477 |
| | | | |
| | | | | | | | | | | | | | | | 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 September 30,March 31, 2018, and 2017, includes $390,000 and 2016, includes $510,000 and $1.5$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 $8.0 millionShipyard Division increased $143,000 for the three months ended September 30, 2017,March 31, 2018, compared to the three months ended September 30, 2016, dueMarch 31, 2017. During the first quarter of 2018, we were able to make progress on the corresponding reduction in customer demand for shipbuildingconstruction of eight harbor tugs and repair services supportingan offshore research vessel which were not under construction during the oilfirst quarter of 2017. This was partially offset by lower revenue from construction of our two OSV and gas industry due to depressed oiltwo MPSV vessel contracts during the first quarter of 2018.
During the first quarter of 2017, we completed the first of the OSVs and gas prices as well as the completion of a vessel that we tendered it for delivery on February 6, 2017, and was rejected by the customer alleging certain technical deficiencies. We subsequently suspended construction of work on the second vessel under contractOSV due to a customer dispute. 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 Shipyard Division related to the construction of two MPSVs. We dispute the purported termination and disagree with this customer.the customer’s reasons for same. Pending resolution of the dispute, all work has been stopped and the vessels and associated equipment and material are in our care and custody at our shipyard in Houma, Louisiana. See also Note 9 of the Notes to the Consolidated Financial Statements.Statements for additional information relating to this customer dispute.
Gross profit (loss) - Gross loss from our Shipyards divisionShipyard Division was $3.5 million for the three months ended September 30, 2017, compared to a gross profit of $1.9 million for the three months ended September 30, 2016. The decrease was due to:
$2.1 million in contract losses related to cost overruns and re-work that has been identified on two newbuild vessel construction contracts within our Shipyards division; and
Holding and closing costs related to our Prospect shipyard as we wind down operations at this facility.
General and administrative expenses - General and administrative expenses for our Shipyards division decreased $580,000 for the three months ended September 30, 2017, compared to the three months ended September 30, 2016, primarily due to reductions of administrative personnel related to consolidation of personnel duties from the LEEVAC transaction. Additionally, our Shipyards division incurred lower bonuses accrued during 2017 as a result of a combination of a smaller workforce and our consolidated operating loss and cost minimization efforts implemented by management for the period during the first part of 2016.
| | | | | | | | | | | | | | | | Services | | Three Months Ended September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | 17,651 |
| | $ | 20,928 |
| | $ | (3,277 | ) | | (15.7)% | Gross profit (loss) | | 1,912 |
| | 2,918 |
| | (1,006 | ) | | (34.5)% | Gross profit (loss) percentage | | 10.8 | % | | 13.9 | % | | | | (3.1)% | General and administrative expenses | | 695 |
| | 943 |
| | (248 | ) | | (26.3)% | Operating income (loss) | | 1,217 |
| | 1,975 |
| | | | |
Revenue - Revenue from our Services division decreased $3.3 million for the three months ended September 30, 2017, compared to the three months ended September 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 $1.0 million for the three months ended September 30, 2017,March 31, 2018, compared to a gross loss of $1.7 million for the three months ended September 30, 2016,March 31, 2017. The decrease was due to decreased revenue discussed aboveimproved cost management efforts and lower margins on new work performedefficiencies learned from the construction of two OSV and two MPSV vessels during 2017.the three months ended March 31, 2017, and applied to the construction of eight harbor tugs during the three months ended March 31, 2018.
General and administrative expenses - General and administrative expenses for our Services divisionShipyard Division decreased $248,000$168,000 for the three months ended September 30, 2017,March 31, 2018, compared to the three months ended September 30, 2016, due to lower bonuses accrued duringMarch 31, 2017, as a result of a combination of a smaller workforce and our consolidated operating loss.
| | | | | | | | | | | | | | | | Corporate | | Three Months Ended September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | — |
| | $ | — |
| | $ | — |
| | —% | Gross profit (loss) | | (152 | ) | | (205 | ) | | 53 |
| | 25.9% | Gross profit (loss) percentage | | n/a |
| | n/a |
| | | |
| General and administrative expenses | | 2,009 |
| | 1,790 |
| | 219 |
| | 12.2% | Operating income (loss) | | (2,161 | ) | | (1,995 | ) | |
|
| | |
General and administrative expenses - General and administrative expenses for our Corporate division increased primarily due to reductions in workforce, decreases in corporate allocations as a restructuringportion of our corporate division with additional personnelthese are now allocated to our corporate division during 2017 as discussed above as well as 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. Additionally, we have incurred increased legal fees as we pursue collection of claims against two customers. See also Note 9 of the Notes to the Consolidated Financial Statements. This has been partially offset by lower bonuses accrued during the quarter due to our consolidated operating loss.
Nine Months Ended September 30, 2017, Compared to Nine Months Ended September 30, 2016 (in thousands, except for percentages):
Consolidated
| | | | | | | | | | | | | | | Nine Months Ended September 30, | | Increase or (Decrease) | | 2017 | | 2016 | | Amount | Percent | Revenue | $ | 133,745 |
| | $ | 230,864 |
| | $ | (97,119 | ) | (42.1)% | Cost of revenue | 150,755 |
| | 205,839 |
| | (55,084 | ) | (26.8)% | Gross profit (loss) | (17,010 | ) | | 25,025 |
| | (42,035 | ) | (168.0)% | Gross profit (loss) percentage | (12.7 | )% | | 10.8 | % | | | | General and administrative expenses | 12,940 |
| | 14,633 |
| | (1,693 | ) | (11.6)% | Asset impairment | 389 |
| | — |
| | 389 |
| 100.0% | Operating income (loss) | (30,339 | ) | | 10,392 |
| | (40,731 | ) | (391.9)% | Other income (expense): | | | | | | | Interest expense | (262 | ) | | (248 | ) | | (14 | ) | | Interest income | 12 |
| | 20 |
| | (8 | ) | | Other income (expense), net | (221 | ) | | 1,039 |
| | (1,260 | ) | | Total other income (expense) | (471 | ) | | 811 |
| | (1,282 | ) | (158.1)% | Net income (loss) before income taxes | (30,810 | ) | | 11,203 |
| | (42,013 | ) | (375.0)% | Income tax expense (benefit) | (10,322 | ) | | 4,134 |
| | (14,456 | ) | (349.7)% | Net income (loss) | $ | (20,488 | ) | | $ | 7,069 |
| | $ | (27,557 | ) | (389.8)% |
Revenue - Our revenue for the nine months ended September 30, 2017EPC Division and 2016, was $133.7 million and $230.9 million, respectively, representing a decrease of 42.1%. 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 as well as the completion of a vessel within our Shipyards division that we tendered for delivery on February 6, 2017, and was rejected by the customer alleging certain technical deficiencies. We subsequently suspended of work on the second vessel under contract with this customer. See also Note 9 of the Notes to the Consolidated Financial Statements. Pass-
through costs as a percentage of revenue were 45.3% and 35.0% for the nine months ended September 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 nine months ended September 30, 2017, was $17.0 million compared to a gross profit of $25.0 million for the nine months ended September 30, 2016. The decrease was primarily due to $12.7 million of losses incurred by our Shipyards division related to cost overruns and re-work identified on two newbuild vesseldecreased construction contracts, decreased revenue as discussed above, holding costs related to our South Texas assets of $3.6 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 nine months ended September 30, 2017, as these assets are classified as assets held for sale and additional cost minimization efforts implemented by management for the period.
General and administrative expenses - Our general and administrative expenses were $12.9 million for the nine months ended September 30, 2017, compared to $14.6 million for the nine months ended September 30, 2016. The decrease in general and administrative expenses for the nine months ended September 30, 2017, is primarily due to decreases in costs resulting from reductions in workforce at our South Texas fabrication yards, lower bonuses accrued during 2017 as a result of our consolidated operating loss and continued cost minimization efforts implemented by management for the period.activity.
Asset Impairmentimpairment - During the ninethree months ended September 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.
Other income (expense), net - Other expense was $221,000Statements for the nine months ended September 30, 2017, comparedadditional information relating to other income of $1.0 millionour assets held for the nine months ended September 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 2016.
Income tax expense (benefit) - Our effective income tax rate for the nine months ended September 30, 2017, was 33.5%, compared to an effective tax rate of 36.9% 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 divisionssale. We did not record any asset impairment during the three and nine months ended September 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 nine months ended September 30, 2017 and 2016, are presented below (in thousands, except for percentages).
| | | | | | | | | | | | | | | | Fabrication | | Nine Months Ended September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | 42,517 |
| | $ | 70,436 |
| | $ | (27,919 | ) | | (39.6)% | Gross profit (loss) | | 216 |
| | 4,564 |
| | (4,348 | ) | | (95.3)% | Gross profit (loss) percentage | | 0.5 | % | | 6.5 | % | | | | (6.0)% | General and administrative expenses | | 2,432 |
| | 2,821 |
| | (389 | ) | | (13.8)% | Operating income (loss) | | (2,216 | ) | | 1,743 |
| | | | |
Revenue - Revenue from our Fabrication division decreased $27.9 million for the nine months ended September 30, 2017, compared to the nine months ended September 30, 2016. The decrease is attributable to an overall decrease in work experiencedMarch 31, 2018, 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 September 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 nine months ended September 30, 2017, was $216,000 compared to a gross profit of $4.6 million for the nine months ended September 30, 2016. The decrease was due to lower revenue
from decreased fabrication work as discussed above and approximately $3.6 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, gains on scrap sales as we wrapped up and completed projects at our South Texas fabrication yards, reduced depreciation being recorded for our South Texas assets for the nine months ended September 30, 2017, as these assets are classified as assets held for sale on February 23, 2017, and additional cost minimization efforts implemented by management for the period.
General and administrative expenses - General and administrative expenses for our Fabrication division decreased $389,000 for the nine months ended September 30, 2017, compared to the nine months ended September 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 operating 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.Shipyard Division.
| | | | | | | | | | | | | | | | Shipyards | | Nine Months Ended September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue (1) | | $ | 51,798 |
| | $ | 86,553 |
| | $ | (34,755 | ) | | (40.2)% | Gross profit (loss) (1) | | (19,061 | ) | | 9,742 |
| | (28,803 | ) | | (295.7)% | Gross profit (loss) percentage | | (36.8 | )% | | 11.3 | % | | | | (48.1)% | General and administrative expenses | | 2,835 |
| | 4,218 |
| | (1,383 | ) | | (32.8)% | Asset impairment | | 389 |
| | — |
| | 389 |
| | 100.0% | Operating income (loss) (1) | | (22,285 | ) | | 5,524 |
| | | | |
___________
| | (1) | Revenue for the nine months ended September 30, 2017, and 2016, includes $2.4 million and $4.1 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 $34.8 million for the nine months ended September 30, 2017, compared to the nine months ended September 30, 2016, due to the corresponding reduction in customer demand for shipbuilding and repair services supporting the oil and gas industry due to depressed oil and gas prices as well as the completion of a vessel that we tendered for delivery on February 6, 2017, and was rejected by the customer alleging certain technical deficiencies. We subsequently suspended of work on the second vessel under contract with this customer. See also Note 9 of the Notes to the Consolidated Financial Statements.
Gross profit (loss) - Gross loss from our Shipyards division was $19.1 million for the nine months ended September 30, 2017, compared to a gross profit of $9.7 million for the nine months ended September 30, 2016. The decrease was due to:
$12.7 million in contract losses related to cost overruns and re-work that has been identified on two newbuild vessel construction contracts within our Shipyards division;
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.
General and administrative expenses - General and administrative expenses for our Shipyards division decreased $1.4 million for the nine months ended September 30, 2017, compared to the nine months ended September 30, 2016, primarily due to reductions of administrative personnel related to consolidation of personnel duties from the LEEVAC transaction. Additionally, our Shipyards division incurred lower bonuses accrued during 2017 as a result of our consolidated operating loss and cost minimization efforts implemented by management for the period.
Asset Impairment - During nine months ended September 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.
| | | | | | | | | | | | | | | | Services | | Nine Months Ended September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | 43,758 |
| | $ | 76,179 |
| | $ | (32,421 | ) | | (42.6)% | Gross profit (loss) | | 2,335 |
| | 11,158 |
| | (8,823 | ) | | (79.1)% | Gross profit (loss) percentage | | 5.3 | % | | 14.6 | % | | | | (9.3)% | General and administrative expenses | | 2,008 |
| | 2,462 |
| | (454 | ) | | (18.4)% | Operating income (loss) | | 327 |
| | 8,696 |
| | | | |
| | | | | | | | | | | | | | | | 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 $32.4Division increased $11.2 million for the ninethree months ended September 30, 2017,March 31, 2018, compared to the ninethree months ended September 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 $8.8Division increased $2.6 million for the ninethree months ended September 30, 2017,March 31, 2018, compared to the ninethree months ended September 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 $0.5 millionDivision increased $68,000 for the ninethree months ended September 30, 2017,March 31, 2018, compared to the ninethree months ended September 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 operating loss.continued cost minimization efforts implemented by management for the period.
| | | | | | | | | | | | | | | | Corporate | | Nine Months Ended September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | — |
| | $ | — |
| | $ | — |
| | —% | Gross profit (loss) | | (500 | ) | | (439 | ) | | (61 | ) | | (13.9)% | Gross profit (loss) percentage | | n/a |
| | n/a |
| | | |
| General and administrative expenses | | 5,665 |
| | 5,132 |
| | 533 |
| | 10.4% | Operating income (loss) | | (6,165 | ) | | (5,571 | ) | | (594 | ) | | |
| | | | | | | | | | | | | | | | 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 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. Additionally, we have incurred increased legal fees as we pursue collection of claims against two customers. See also Note 9 of the Notes to the Consolidated Financial Statements. This has been partially offset by lower bonuses accrued during 2017 as a result of a combination of a smaller workforce and our consolidated operating 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 September 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 $17.8$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 $164.0$137.1 million and our ratio of current assets to current liabilities was 4.594.34 to 1 at September 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 September 30, 2017,March 31, 2018, includes $107.0$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 ninethree months ended September 30, 2017,March 31, 2018, is referenced in the Cash Flow Activities section below. At September 30, 2017,As discussed in our contracts receivable balance was $25.5 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 $8.3 million through October 31, 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.2019. The credit facility matures June 9, 2019 and may be usedCredit Agreement 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 facility our 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 credit facilityCredit Agreement may be designated, at our option, as either Base Rate (as defined in the 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 interest on undrawn stated amounts under letters of credit issued by the lenderslender is 2.0%2% per annum. At March 31, 2018, the interest rate on our outstanding borrowings was 3.75% per annum. The credit facilityCredit Agreement is secured by substantially all of our assets (other than the assets of Gulf Marine Fabricators, L.P., the legal entity that holds our South Texas assetsProperties).
At March 31, 2018, $10 million was outstanding under the Credit Agreement and, we had letters of 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. | Ratio of current assets to current liabilities of not less than 1.25:1.00; |
| | ii. | Minimum tangible net worth requirement of at least the sum of: |
| | a) | $230.0185 million, plus |
| | b) | An 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. | Ratio of funded debt to tangible net worth of not more than 0.50:1.00. |
Concurrent with our execution of the 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 were reissued as new letters of credit under the credit facility and accepted by the beneficiaries. Availability under our credit facility for future, additional letters of credit and borrowings is $35.4 million. As of September 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 2017.2018.
On October 21,If industry conditions for offshore oil and gas do not improve, we are unable to sell our Texas North Yard or the sale is delayed, or we are unable to increase 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 beginning of 2016, a customerwe have implemented wage adjustments along with employee benefit and overall cost reductions within all of our Shipyards division announced it was in noncompliance with certain financial covenants includeddivisions. We have reduced the level of our workforce in the customer’s debt agreementspast 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 deliverywe will continue to do so based on booked work in all of our facilities. We have reduced the first vessel that we completed and tendered for delivery on February 6, 2017, alleging certain technical deficiencies exist with respectcompensation paid to the vessel. On March 10, 2017, we gave notice for arbitration with our customer in an effort to resolve this matter and subsequently suspended fabrication of the second vessel under contract with this customer, which is 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 both vessel contracts. The customer is seeking recovery of $84.8 million representing all purchase price amounts previously paid by the customer under both contracts. 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 emerged from Chapter 11 Bankruptcydirectors and the Bankruptcy Court has approved the customer's retention and acceptancesalaries of both contracts. As of September 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,executive officers, and we have re-initiated arbitration proceedings in accordance withreduced our contracts. Wecapital expenditures and placed assets that are in the process of discovery. The customer has recently named a new interim chief executive officer who has made contact with our management, and we are workingeither underutilized, under-performing or not expected to resolve our dispute in a constructive manner. We believe that will be able to recover remaining amounts due to us.
On August 25, 2017,provide sufficient long-term value for sale, which include our South Texas facilities were impacted by Hurricane Harvey, which made landfall as a category 4 hurricane. As a result, we suffered damages to our South Texas buildings and equipment. Through September 30, 2017, we have incurred approximately $265,000 in clean-up and repair related costs and we expect to incur additional future repair costs in excess of our deductible which management believes are probable of being recovered through insurance proceeds. We maintain coverage on these assets up to a maximum of $25.0 million, subject to a 3.0% deductible with a minimum deductible of $500,000. We are working diligently with our insurance agents and adjusters to finalize our estimate of the damage; however, it may be several months, or even longer, before we can finalize our assessment and receive final payment from our insurance underwriters. Our insurance underwriters have made an initial payment of $3.0 million, and we have recorded a liability for future repairs of $2.7 million which is included in accrued expenses and other liabilities on our balance sheet at September 30, 2017. Based upon our initial assessment of the damages and insurance coverage, management believes that there is no basis to record a net loss at this time and that insurance proceeds will at a minimum be sufficient to reimburse us for all damages and repair costs. Our final
assessment of the loss incurred to our South Texas assets as well as the amount of insurance proceeds we will receive could be more or less than this amount when the claim is ultimately settled and such differences could be material.
In event of one or more sales of our South Texas assets, we expect to use all or a portion of the sales proceeds to invest in our operating liquidity in order to facilitate anticipated future projects, selected capital improvements to enhance and/or expand our existing facilities, mergers and acquisitions to expand our product and service capabilities. We are continuing this effort to identify and analyze specific investment opportunities we believe will enhance the long-term value of the Company that are consistent with our strategy.
On October 26, 2017, our Board of Directors declared a dividend of $0.01 per share on our shares of common stock outstanding, payable November 24, 2017, to shareholders of record on November 10, 2017.Properties.
We currently believe ourthat cash on hand and cash equivalents generated by our future operating activities, proceeds to be received from insurance underwriters, availabilityfunds available under our line of credit and proceeds to be received from future assets salesCredit Agreement will be sufficient to fund our capital expenditures and meet our working capital needsand capital expenditure requirements, any future debt service and other funding requirements for nextat least twelve months from the date of this Report. Our view regarding sufficiency of cash and liquidity is primarily based on our financial forecast for 2018 and early 2019, which is impacted by various assumptions regarding the sale of our Texas North Yard, our existing backlog and a 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 continuemeet planned operating expenses and other unforeseen cash requirements. Accordingly, we may be required to operate, satisfyfurther draw on our contractual operations and pay dividendsCredit Agreement, obtain additional bank financing, sell additional assets or conduct equity or debt offerings at a time when it is not beneficial to our shareholders.do so.
Cash Flow Activities
For the ninethree months ended September 30, 2017,March 31, 2018, net cash used in operating activities was $29.6$14.1 million, compared to net cash provided byused in operating activities of $19.4$15.1 million for the ninethree months ended September 30, 2016.March 31, 2017. The use of cash in operations during the period was primarily due to the following:
Operating losses for the ninethree months ended September 30, 2017,March 31, 2018, in excess of non-cash depreciation, amortization, impairment and stock compensation expense of approximately $19.6 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. See also Note 9 of the Notes to the Consolidated Financial Statements; 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 later in 2017 through the first half of 2018.$2 million.
Net cash used inprovided by investing activities for the ninethree months ended September 30, 2017,March 31, 2018, was $2.4 million, compared to cash provided byused in investing activities of $2.0 million$391,000 for the ninethree months ended September 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 $5.8 million and $1.6 million of cash acquired in the LEEVAC transaction during 2016 partially offset by decreases in capital expenditures.Properties.
Net cash used inprovided by financing activities for the ninethree months ended September 30,March 31, 2018, and 2017, and 2016, was $1.4$9.2 million and $603,000, 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. During the nine months ended September 30, 2017 we received $2.0$10 million fromin net borrowings under our new line of credit which were immediately repaid.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 September 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 September 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 | |
| 10.4 | |
| 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: October 31, 2017May 4, 2018
GULF ISLAND FABRICATION, INC.
EXHIBIT INDEX
| | | | | Exhibit
Number
| | Description of Exhibit | | | 3.1 | | | 3.2 | | | 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. |
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 September 30, 2017,March 31, 2018, projects for our five largest customers in terms of revenue backlog consisted of: |
| | (i) | Two large multi-purpose service vesselsMPSVs for one customer within our Shipyards division,for which commenced in the first quarterwe have received a purported notice of 2014 and will be completed during 2018;termination as discussed above; |
| | (ii) | Newbuild construction of fourfive harbor tugs for one customer within our Shipyards division;(to be completed in 2018 through 2020); |
| | (iii) | Newbuild construction of fourfive harbor tugs for one additional customer within our Shipyards division;(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 researchone T-ATS vessel within our Shipyards division.(to be completed in 2020). This contract is currently under a bid protest. |
| | (3)(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 September 30, 2017,March 31, 2018, we had 989961 employees compared to 1,178977 employees as of December 31, 2016.2017. Labor hours worked were 1.5 million496,000 during the ninethree months ended September 30, 2017,March 31, 2018, compared to 2.3 million479,000 for the ninethree months ended September 30, 2016.March 31, 2017. The overall decreaseincrease in labor hours worked for the ninethree months ended September 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 September 30, 2017,March 31, 2018, Compared to Three Months Ended September 30, 2016March 31, 2017 (in thousands, except for percentages): Consolidated | | | | | | | | | | | | | | | Three Months Ended September 30, | | Increase or (Decrease) | | 2017 | | 2016 | | Amount | Percent | Revenue | $ | 49,884 |
| | $ | 65,384 |
| | $ | (15,500 | ) | (23.7)% | Cost of revenue | 50,378 |
| | 60,125 |
| | (9,747 | ) | (16.2)% | Gross profit (loss) | (494 | ) | | 5,259 |
| | (5,753 | ) | (109.4)% | Gross profit (loss) percentage | (1.0 | )% | | 8.0 | % | | | | General and administrative expenses | 4,370 |
| | 5,086 |
| | (716 | ) | (14.1)% | Operating income (loss) | (4,864 | ) | | 173 |
| | (5,037 | ) | (2,911.6)% | Other income (expense): | | | | | | | Interest expense | (45 | ) | | (110 | ) | | 65 |
| | Interest income | — |
| | 12 |
| | (12 | ) | | Other income (expense), net | 38 |
| | 599 |
| | (561 | ) | | Total other income (expense) | (7 | ) | | 501 |
| | (508 | ) | 101.4% | Net income (loss) before income taxes | (4,871 | ) | | 674 |
| | (5,545 | ) | (822.7)% | Income tax expense (benefit) | (1,761 | ) | | 133 |
| | (1,894 | ) | (1,424.1)% | Net income (loss) | $ | (3,110 | ) | | $ | 541 |
| | $ | (3,651 | ) | (674.9)% |
| | | | | | | | | | | | | | | 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 September 30,March 31, 2018 and 2017, and 2016, was $49.9$57.3 million and $65.4$38.0 million, respectively, representing a decreasean increase of 23.7%50.8%. The decreaseincrease is primarily attributable to an overall decrease in work experienced into:
An increase of $11.2 million within our facilities primarily 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 as a percentage of revenue were 48.4% and 33.8% for the three months ended September 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 projectfour modules for a particular period.petrochemical plant.
Gross profit (loss) - Our gross lossprofit for the three months ended September 30, 2017,March 31, 2018, was $494,000$679,000 compared to a gross profitloss of $5.3$4.9 million for the three months ended September 30, 2016.March 31, 2017. The decreaseincrease in gross profit was primarily due to $2.1 million of contract losses incurred byincreased revenue within our Shipyards division related to cost overruns and re-work identified on two newbuild vessel construction
contracts, 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 $1.1 million and lower margins on current work due to competitive pressures. 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 September 30, 2017 (asProperties as these assets are classified as assets held for sale) and continued cost minimization efforts implemented by management for the period.sale.
General and administrative expenses - Our general and administrative expenses were $4.4$4.7 million for the three months ended September 30, 2017,March 31, 2018, compared to $5.1$3.9 million for the three months ended September 30, 2016.March 31, 2017. The decreaseincrease in general and administrative expenses for the three months ended September 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 well as the addition of personnel as we build up our EPC Division in anticipation of the SeaOne Project; and Higher stock compensation expense of approximately $220,000.
This was partially offset by cost reductions 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 piece of 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- Other income was $38,000Interest expense increased due to drawings under our Credit Agreement for the three months ended September 30, 2017, as compared to other income of $599,000 for three months ended September 30, 2016. Other incomeMarch 31, 2018, with no such drawings under our Credit Agreement for the three months ended September 30,March 31, 2017, relates to insurance proceeds received from damage to a corporate automobile that was fully depreciated. Other income for foras well as increased amortization of deferred financing costs during the three months ended September 30, 2016 primarily relates to gains on sales of assets from our Fabrication division.March 31, 2018.
Income tax expense (benefit) - Our effective income tax rate for the three months ended September 30, 2017,March 31, 2018, was 36.2%(1.1)%, compared to an effective tax rate benefit of 19.7%30.3% for the comparable period during 2016.2017. Current expense represents state taxes within our Services Division. The increasedecrease in the effective tax rate is the result of changesa valuation allowance against our deferred tax assets. See Note 1 of the Notes to estimates ofConsolidated Financial Statements regarding our year-endNOLs and deferred tax provision during for the three months ended September 30, 2016.assets.
Operating Segments
As discussed 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 nine months ended September 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 nine months ended September 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. OurThe results of our threefour operating divisions and Corporate divisionDivision for the three months ended September 30,March 31, 2018 and 2017, and 2016, are presented below (in thousands, except for percentages).
| | | | | | | | | | | | | | | | Fabrication | | Three Months Ended September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | 18,318 |
| | $ | 22,311 |
| | $ | (3,993 | ) | | (17.9)% | Gross profit (loss) | | 1,250 |
| | 601 |
| | 649 |
| | 108.0% | Gross profit (loss) percentage | | 6.8 | % | | 2.7 | % | | | | 4.1% | General and administrative expenses | | 778 |
| | 885 |
| | (107 | ) | | (12.1)% | Operating income (loss) | | 472 |
| | (284 | ) | | | | |
| | | | | | | | | | | | | | | | 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 $4.0Division increased $7.1 million for the three months ended September 30, 2017,March 31, 2018, compared to the three months ended September 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.projects during the period. This was partially offset, by decreased revenue of $2.4 million for the three months ended March 31, 2018, at our South Texas Properties as these were placed for sale during the first quarter of 2017 and project work completed or transfered to our Houma Fabrication Yard during 2017.
Gross profit (loss) - Gross profitloss from our Fabrication divisionDivision for the three months ended September 30, 2017,March 31, 2018, was $1.3 million$219,000 compared to a gross profitloss of $601,000$3.0 million for the three months ended September 30, 2016.March 31, 2017. The increasedecrease in gross profitloss was due to
Gains on scrap sales increased revenue as discussed above and a reduction in depreciation expense of approximately $701,000 at our South Texas facility,
Decreases$1.9 million in costs resulting from reductions in workforce as we wrapped up and completed projects at our South Texas fabrication yards,
No depreciation being recordedexpense during the three months ended March 31, 2018 for our South Texas assets for the three months ended September 30, 2017,Properties as these assets are classified as assets held for sale; and
Continued cost minimization efforts implemented by management for the period.
This was partially offset by approximately $1.1 million of holding costs for our South Texas assets.sale.
General and administrative expenses - General and administrative expenses for our Fabrication divisionDivision decreased $107,000$197,000 for the three months ended September 30, 2017,March 31, 2018, compared to the three months ended September 30, 2016.March 31, 2017. The decrease is primarily due to decreases in costs resulting from lower bonuses accrued during 2017 as a result of our consolidated operating loss, reductions in workforce at our South Texas fabrication yardsProperties, decreases in corporate allocations as a portion 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 piece of equipment at our 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 September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue (1) | | $ | 15,074 |
| | $ | 23,060 |
| | $ | (7,986 | ) | | (34.6)% | Gross profit (loss) (1) | | (3,504 | ) | | 1,945 |
| | (5,449 | ) | | (280.2)% | Gross profit (loss) percentage | | (23.2 | )% | | 8.4 | % | | | | (31.6)% | General and administrative expenses | | 888 |
| | 1,468 |
| | (580 | ) | | (39.5)% | Operating income (loss) (1) | | (4,392 | ) | | 477 |
| | | | |
| | | | | | | | | | | | | | | | 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 September 30,March 31, 2018, and 2017, includes $390,000 and 2016, includes $510,000 and $1.5$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 $8.0 millionShipyard Division increased $143,000 for the three months ended September 30, 2017,March 31, 2018, compared to the three months ended September 30, 2016, dueMarch 31, 2017. During the first quarter of 2018, we were able to make progress on the corresponding reduction in customer demand for shipbuildingconstruction of eight harbor tugs and repair services supportingan offshore research vessel which were not under construction during the oilfirst quarter of 2017. This was partially offset by lower revenue from construction of our two OSV and gas industry due to depressed oiltwo MPSV vessel contracts during the first quarter of 2018.
During the first quarter of 2017, we completed the first of the OSVs and gas prices as well as the completion of a vessel that we tendered it for delivery on February 6, 2017, and was rejected by the customer alleging certain technical deficiencies. We subsequently suspended construction of work on the second vessel under contractOSV due to a customer dispute. 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 Shipyard Division related to the construction of two MPSVs. We dispute the purported termination and disagree with this customer.the customer’s reasons for same. Pending resolution of the dispute, all work has been stopped and the vessels and associated equipment and material are in our care and custody at our shipyard in Houma, Louisiana. See also Note 9 of the Notes to the Consolidated Financial Statements.Statements for additional information relating to this customer dispute.
Gross profit (loss) - Gross loss from our Shipyards divisionShipyard Division was $3.5 million for the three months ended September 30, 2017, compared to a gross profit of $1.9 million for the three months ended September 30, 2016. The decrease was due to:
$2.1 million in contract losses related to cost overruns and re-work that has been identified on two newbuild vessel construction contracts within our Shipyards division; and
Holding and closing costs related to our Prospect shipyard as we wind down operations at this facility.
General and administrative expenses - General and administrative expenses for our Shipyards division decreased $580,000 for the three months ended September 30, 2017, compared to the three months ended September 30, 2016, primarily due to reductions of administrative personnel related to consolidation of personnel duties from the LEEVAC transaction. Additionally, our Shipyards division incurred lower bonuses accrued during 2017 as a result of a combination of a smaller workforce and our consolidated operating loss and cost minimization efforts implemented by management for the period during the first part of 2016.
| | | | | | | | | | | | | | | | Services | | Three Months Ended September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | 17,651 |
| | $ | 20,928 |
| | $ | (3,277 | ) | | (15.7)% | Gross profit (loss) | | 1,912 |
| | 2,918 |
| | (1,006 | ) | | (34.5)% | Gross profit (loss) percentage | | 10.8 | % | | 13.9 | % | | | | (3.1)% | General and administrative expenses | | 695 |
| | 943 |
| | (248 | ) | | (26.3)% | Operating income (loss) | | 1,217 |
| | 1,975 |
| | | | |
Revenue - Revenue from our Services division decreased $3.3 million for the three months ended September 30, 2017, compared to the three months ended September 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 $1.0 million for the three months ended September 30, 2017,March 31, 2018, compared to a gross loss of $1.7 million for the three months ended September 30, 2016,March 31, 2017. The decrease was due to decreased revenue discussed aboveimproved cost management efforts and lower margins on new work performedefficiencies learned from the construction of two OSV and two MPSV vessels during 2017.the three months ended March 31, 2017, and applied to the construction of eight harbor tugs during the three months ended March 31, 2018.
General and administrative expenses - General and administrative expenses for our Services divisionShipyard Division decreased $248,000$168,000 for the three months ended September 30, 2017,March 31, 2018, compared to the three months ended September 30, 2016, due to lower bonuses accrued duringMarch 31, 2017, as a result of a combination of a smaller workforce and our consolidated operating loss.
| | | | | | | | | | | | | | | | Corporate | | Three Months Ended September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | — |
| | $ | — |
| | $ | — |
| | —% | Gross profit (loss) | | (152 | ) | | (205 | ) | | 53 |
| | 25.9% | Gross profit (loss) percentage | | n/a |
| | n/a |
| | | |
| General and administrative expenses | | 2,009 |
| | 1,790 |
| | 219 |
| | 12.2% | Operating income (loss) | | (2,161 | ) | | (1,995 | ) | |
|
| | |
General and administrative expenses - General and administrative expenses for our Corporate division increased primarily due to reductions in workforce, decreases in corporate allocations as a restructuringportion of our corporate division with additional personnelthese are now allocated to our corporate division during 2017 as discussed above as well as 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. Additionally, we have incurred increased legal fees as we pursue collection of claims against two customers. See also Note 9 of the Notes to the Consolidated Financial Statements. This has been partially offset by lower bonuses accrued during the quarter due to our consolidated operating loss.
Nine Months Ended September 30, 2017, Compared to Nine Months Ended September 30, 2016 (in thousands, except for percentages):
Consolidated
| | | | | | | | | | | | | | | Nine Months Ended September 30, | | Increase or (Decrease) | | 2017 | | 2016 | | Amount | Percent | Revenue | $ | 133,745 |
| | $ | 230,864 |
| | $ | (97,119 | ) | (42.1)% | Cost of revenue | 150,755 |
| | 205,839 |
| | (55,084 | ) | (26.8)% | Gross profit (loss) | (17,010 | ) | | 25,025 |
| | (42,035 | ) | (168.0)% | Gross profit (loss) percentage | (12.7 | )% | | 10.8 | % | | | | General and administrative expenses | 12,940 |
| | 14,633 |
| | (1,693 | ) | (11.6)% | Asset impairment | 389 |
| | — |
| | 389 |
| 100.0% | Operating income (loss) | (30,339 | ) | | 10,392 |
| | (40,731 | ) | (391.9)% | Other income (expense): | | | | | | | Interest expense | (262 | ) | | (248 | ) | | (14 | ) | | Interest income | 12 |
| | 20 |
| | (8 | ) | | Other income (expense), net | (221 | ) | | 1,039 |
| | (1,260 | ) | | Total other income (expense) | (471 | ) | | 811 |
| | (1,282 | ) | (158.1)% | Net income (loss) before income taxes | (30,810 | ) | | 11,203 |
| | (42,013 | ) | (375.0)% | Income tax expense (benefit) | (10,322 | ) | | 4,134 |
| | (14,456 | ) | (349.7)% | Net income (loss) | $ | (20,488 | ) | | $ | 7,069 |
| | $ | (27,557 | ) | (389.8)% |
Revenue - Our revenue for the nine months ended September 30, 2017EPC Division and 2016, was $133.7 million and $230.9 million, respectively, representing a decrease of 42.1%. 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 as well as the completion of a vessel within our Shipyards division that we tendered for delivery on February 6, 2017, and was rejected by the customer alleging certain technical deficiencies. We subsequently suspended of work on the second vessel under contract with this customer. See also Note 9 of the Notes to the Consolidated Financial Statements. Pass-
through costs as a percentage of revenue were 45.3% and 35.0% for the nine months ended September 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 nine months ended September 30, 2017, was $17.0 million compared to a gross profit of $25.0 million for the nine months ended September 30, 2016. The decrease was primarily due to $12.7 million of losses incurred by our Shipyards division related to cost overruns and re-work identified on two newbuild vesseldecreased construction contracts, decreased revenue as discussed above, holding costs related to our South Texas assets of $3.6 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 nine months ended September 30, 2017, as these assets are classified as assets held for sale and additional cost minimization efforts implemented by management for the period.
General and administrative expenses - Our general and administrative expenses were $12.9 million for the nine months ended September 30, 2017, compared to $14.6 million for the nine months ended September 30, 2016. The decrease in general and administrative expenses for the nine months ended September 30, 2017, is primarily due to decreases in costs resulting from reductions in workforce at our South Texas fabrication yards, lower bonuses accrued during 2017 as a result of our consolidated operating loss and continued cost minimization efforts implemented by management for the period.activity.
Asset Impairmentimpairment - During the ninethree months ended September 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.
Other income (expense), net - Other expense was $221,000Statements for the nine months ended September 30, 2017, comparedadditional information relating to other income of $1.0 millionour assets held for the nine months ended September 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 2016.
Income tax expense (benefit) - Our effective income tax rate for the nine months ended September 30, 2017, was 33.5%, compared to an effective tax rate of 36.9% 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 divisionssale. We did not record any asset impairment during the three and nine months ended September 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 nine months ended September 30, 2017 and 2016, are presented below (in thousands, except for percentages).
| | | | | | | | | | | | | | | | Fabrication | | Nine Months Ended September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | 42,517 |
| | $ | 70,436 |
| | $ | (27,919 | ) | | (39.6)% | Gross profit (loss) | | 216 |
| | 4,564 |
| | (4,348 | ) | | (95.3)% | Gross profit (loss) percentage | | 0.5 | % | | 6.5 | % | | | | (6.0)% | General and administrative expenses | | 2,432 |
| | 2,821 |
| | (389 | ) | | (13.8)% | Operating income (loss) | | (2,216 | ) | | 1,743 |
| | | | |
Revenue - Revenue from our Fabrication division decreased $27.9 million for the nine months ended September 30, 2017, compared to the nine months ended September 30, 2016. The decrease is attributable to an overall decrease in work experiencedMarch 31, 2018, 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 September 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 nine months ended September 30, 2017, was $216,000 compared to a gross profit of $4.6 million for the nine months ended September 30, 2016. The decrease was due to lower revenue
from decreased fabrication work as discussed above and approximately $3.6 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, gains on scrap sales as we wrapped up and completed projects at our South Texas fabrication yards, reduced depreciation being recorded for our South Texas assets for the nine months ended September 30, 2017, as these assets are classified as assets held for sale on February 23, 2017, and additional cost minimization efforts implemented by management for the period.
General and administrative expenses - General and administrative expenses for our Fabrication division decreased $389,000 for the nine months ended September 30, 2017, compared to the nine months ended September 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 operating 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.Shipyard Division.
| | | | | | | | | | | | | | | | Shipyards | | Nine Months Ended September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue (1) | | $ | 51,798 |
| | $ | 86,553 |
| | $ | (34,755 | ) | | (40.2)% | Gross profit (loss) (1) | | (19,061 | ) | | 9,742 |
| | (28,803 | ) | | (295.7)% | Gross profit (loss) percentage | | (36.8 | )% | | 11.3 | % | | | | (48.1)% | General and administrative expenses | | 2,835 |
| | 4,218 |
| | (1,383 | ) | | (32.8)% | Asset impairment | | 389 |
| | — |
| | 389 |
| | 100.0% | Operating income (loss) (1) | | (22,285 | ) | | 5,524 |
| | | | |
___________
| | (1) | Revenue for the nine months ended September 30, 2017, and 2016, includes $2.4 million and $4.1 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 $34.8 million for the nine months ended September 30, 2017, compared to the nine months ended September 30, 2016, due to the corresponding reduction in customer demand for shipbuilding and repair services supporting the oil and gas industry due to depressed oil and gas prices as well as the completion of a vessel that we tendered for delivery on February 6, 2017, and was rejected by the customer alleging certain technical deficiencies. We subsequently suspended of work on the second vessel under contract with this customer. See also Note 9 of the Notes to the Consolidated Financial Statements.
Gross profit (loss) - Gross loss from our Shipyards division was $19.1 million for the nine months ended September 30, 2017, compared to a gross profit of $9.7 million for the nine months ended September 30, 2016. The decrease was due to:
$12.7 million in contract losses related to cost overruns and re-work that has been identified on two newbuild vessel construction contracts within our Shipyards division;
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.
General and administrative expenses - General and administrative expenses for our Shipyards division decreased $1.4 million for the nine months ended September 30, 2017, compared to the nine months ended September 30, 2016, primarily due to reductions of administrative personnel related to consolidation of personnel duties from the LEEVAC transaction. Additionally, our Shipyards division incurred lower bonuses accrued during 2017 as a result of our consolidated operating loss and cost minimization efforts implemented by management for the period.
Asset Impairment - During nine months ended September 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.
| | | | | | | | | | | | | | | | Services | | Nine Months Ended September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | 43,758 |
| | $ | 76,179 |
| | $ | (32,421 | ) | | (42.6)% | Gross profit (loss) | | 2,335 |
| | 11,158 |
| | (8,823 | ) | | (79.1)% | Gross profit (loss) percentage | | 5.3 | % | | 14.6 | % | | | | (9.3)% | General and administrative expenses | | 2,008 |
| | 2,462 |
| | (454 | ) | | (18.4)% | Operating income (loss) | | 327 |
| | 8,696 |
| | | | |
| | | | | | | | | | | | | | | | 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 $32.4Division increased $11.2 million for the ninethree months ended September 30, 2017,March 31, 2018, compared to the ninethree months ended September 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 $8.8Division increased $2.6 million for the ninethree months ended September 30, 2017,March 31, 2018, compared to the ninethree months ended September 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 $0.5 millionDivision increased $68,000 for the ninethree months ended September 30, 2017,March 31, 2018, compared to the ninethree months ended September 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 operating loss.continued cost minimization efforts implemented by management for the period.
| | | | | | | | | | | | | | | | Corporate | | Nine Months Ended September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | — |
| | $ | — |
| | $ | — |
| | —% | Gross profit (loss) | | (500 | ) | | (439 | ) | | (61 | ) | | (13.9)% | Gross profit (loss) percentage | | n/a |
| | n/a |
| | | |
| General and administrative expenses | | 5,665 |
| | 5,132 |
| | 533 |
| | 10.4% | Operating income (loss) | | (6,165 | ) | | (5,571 | ) | | (594 | ) | | |
| | | | | | | | | | | | | | | | 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 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. Additionally, we have incurred increased legal fees as we pursue collection of claims against two customers. See also Note 9 of the Notes to the Consolidated Financial Statements. This has been partially offset by lower bonuses accrued during 2017 as a result of a combination of a smaller workforce and our consolidated operating 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 September 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 $17.8$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 $164.0$137.1 million and our ratio of current assets to current liabilities was 4.594.34 to 1 at September 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 September 30, 2017,March 31, 2018, includes $107.0$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 ninethree months ended September 30, 2017,March 31, 2018, is referenced in the Cash Flow Activities section below. At September 30, 2017,As discussed in our contracts receivable balance was $25.5 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 $8.3 million through October 31, 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.2019. The credit facility matures June 9, 2019 and may be usedCredit Agreement 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 facility our 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 credit facilityCredit Agreement may be designated, at our option, as either Base Rate (as defined in the 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 interest on undrawn stated amounts under letters of credit issued by the lenderslender is 2.0%2% per annum. At March 31, 2018, the interest rate on our outstanding borrowings was 3.75% per annum. The credit facilityCredit Agreement is secured by substantially all of our assets (other than the assets of Gulf Marine Fabricators, L.P., the legal entity that holds our South Texas assetsProperties).
At March 31, 2018, $10 million was outstanding under the Credit Agreement and, we had letters of 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. | Ratio of current assets to current liabilities of not less than 1.25:1.00; |
| | ii. | Minimum tangible net worth requirement of at least the sum of: |
| | a) | $230.0185 million, plus |
| | b) | An 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. | Ratio of funded debt to tangible net worth of not more than 0.50:1.00. |
Concurrent with our execution of the 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 were reissued as new letters of credit under the credit facility and accepted by the beneficiaries. Availability under our credit facility for future, additional letters of credit and borrowings is $35.4 million. As of September 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 2017.2018.
On October 21,If industry conditions for offshore oil and gas do not improve, we are unable to sell our Texas North Yard or the sale is delayed, or we are unable to increase 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 beginning of 2016, a customerwe have implemented wage adjustments along with employee benefit and overall cost reductions within all of our Shipyards division announced it was in noncompliance with certain financial covenants includeddivisions. We have reduced the level of our workforce in the customer’s debt agreementspast 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 deliverywe will continue to do so based on booked work in all of our facilities. We have reduced the first vessel that we completed and tendered for delivery on February 6, 2017, alleging certain technical deficiencies exist with respectcompensation paid to the vessel. On March 10, 2017, we gave notice for arbitration with our customer in an effort to resolve this matter and subsequently suspended fabrication of the second vessel under contract with this customer, which is 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 both vessel contracts. The customer is seeking recovery of $84.8 million representing all purchase price amounts previously paid by the customer under both contracts. 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 emerged from Chapter 11 Bankruptcydirectors and the Bankruptcy Court has approved the customer's retention and acceptancesalaries of both contracts. As of September 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,executive officers, and we have re-initiated arbitration proceedings in accordance withreduced our contracts. Wecapital expenditures and placed assets that are in the process of discovery. The customer has recently named a new interim chief executive officer who has made contact with our management, and we are workingeither underutilized, under-performing or not expected to resolve our dispute in a constructive manner. We believe that will be able to recover remaining amounts due to us.
On August 25, 2017,provide sufficient long-term value for sale, which include our South Texas facilities were impacted by Hurricane Harvey, which made landfall as a category 4 hurricane. As a result, we suffered damages to our South Texas buildings and equipment. Through September 30, 2017, we have incurred approximately $265,000 in clean-up and repair related costs and we expect to incur additional future repair costs in excess of our deductible which management believes are probable of being recovered through insurance proceeds. We maintain coverage on these assets up to a maximum of $25.0 million, subject to a 3.0% deductible with a minimum deductible of $500,000. We are working diligently with our insurance agents and adjusters to finalize our estimate of the damage; however, it may be several months, or even longer, before we can finalize our assessment and receive final payment from our insurance underwriters. Our insurance underwriters have made an initial payment of $3.0 million, and we have recorded a liability for future repairs of $2.7 million which is included in accrued expenses and other liabilities on our balance sheet at September 30, 2017. Based upon our initial assessment of the damages and insurance coverage, management believes that there is no basis to record a net loss at this time and that insurance proceeds will at a minimum be sufficient to reimburse us for all damages and repair costs. Our final
assessment of the loss incurred to our South Texas assets as well as the amount of insurance proceeds we will receive could be more or less than this amount when the claim is ultimately settled and such differences could be material.
In event of one or more sales of our South Texas assets, we expect to use all or a portion of the sales proceeds to invest in our operating liquidity in order to facilitate anticipated future projects, selected capital improvements to enhance and/or expand our existing facilities, mergers and acquisitions to expand our product and service capabilities. We are continuing this effort to identify and analyze specific investment opportunities we believe will enhance the long-term value of the Company that are consistent with our strategy.
On October 26, 2017, our Board of Directors declared a dividend of $0.01 per share on our shares of common stock outstanding, payable November 24, 2017, to shareholders of record on November 10, 2017.Properties.
We currently believe ourthat cash on hand and cash equivalents generated by our future operating activities, proceeds to be received from insurance underwriters, availabilityfunds available under our line of credit and proceeds to be received from future assets salesCredit Agreement will be sufficient to fund our capital expenditures and meet our working capital needsand capital expenditure requirements, any future debt service and other funding requirements for nextat least twelve months from the date of this Report. Our view regarding sufficiency of cash and liquidity is primarily based on our financial forecast for 2018 and early 2019, which is impacted by various assumptions regarding the sale of our Texas North Yard, our existing backlog and a 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 continuemeet planned operating expenses and other unforeseen cash requirements. Accordingly, we may be required to operate, satisfyfurther draw on our contractual operations and pay dividendsCredit Agreement, obtain additional bank financing, sell additional assets or conduct equity or debt offerings at a time when it is not beneficial to our shareholders.do so.
Cash Flow Activities
For the ninethree months ended September 30, 2017,March 31, 2018, net cash used in operating activities was $29.6$14.1 million, compared to net cash provided byused in operating activities of $19.4$15.1 million for the ninethree months ended September 30, 2016.March 31, 2017. The use of cash in operations during the period was primarily due to the following:
Operating losses for the ninethree months ended September 30, 2017,March 31, 2018, in excess of non-cash depreciation, amortization, impairment and stock compensation expense of approximately $19.6 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. See also Note 9 of the Notes to the Consolidated Financial Statements; 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 later in 2017 through the first half of 2018.$2 million.
Net cash used inprovided by investing activities for the ninethree months ended September 30, 2017,March 31, 2018, was $2.4 million, compared to cash provided byused in investing activities of $2.0 million$391,000 for the ninethree months ended September 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 $5.8 million and $1.6 million of cash acquired in the LEEVAC transaction during 2016 partially offset by decreases in capital expenditures.Properties.
Net cash used inprovided by financing activities for the ninethree months ended September 30,March 31, 2018, and 2017, and 2016, was $1.4$9.2 million and $603,000, 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. During the nine months ended September 30, 2017 we received $2.0$10 million fromin net borrowings under our new line of credit which were immediately repaid.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 September 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 September 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 | |
| 10.4 | |
| 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: October 31, 2017May 4, 2018
GULF ISLAND FABRICATION, INC.
EXHIBIT INDEX
| | | | | Exhibit
Number
| | Description of Exhibit | | | 3.1 | | | 3.2 | | | 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. |
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 September 30, 2017,March 31, 2018, projects for our five largest customers in terms of revenue backlog consisted of: |
| | (i) | Two large multi-purpose service vesselsMPSVs for one customer within our Shipyards division,for which commenced in the first quarterwe have received a purported notice of 2014 and will be completed during 2018;termination as discussed above; |
| | (ii) | Newbuild construction of fourfive harbor tugs for one customer within our Shipyards division;(to be completed in 2018 through 2020); |
| | (iii) | Newbuild construction of fourfive harbor tugs for one additional customer within our Shipyards division;(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 researchone T-ATS vessel within our Shipyards division.(to be completed in 2020). This contract is currently under a bid protest. |
| | (3)(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 September 30, 2017,March 31, 2018, we had 989961 employees compared to 1,178977 employees as of December 31, 2016.2017. Labor hours worked were 1.5 million496,000 during the ninethree months ended September 30, 2017,March 31, 2018, compared to 2.3 million479,000 for the ninethree months ended September 30, 2016.March 31, 2017. The overall decreaseincrease in labor hours worked for the ninethree months ended September 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 September 30, 2017,March 31, 2018, Compared to Three Months Ended September 30, 2016March 31, 2017 (in thousands, except for percentages): Consolidated | | | | | | | | | | | | | | | Three Months Ended September 30, | | Increase or (Decrease) | | 2017 | | 2016 | | Amount | Percent | Revenue | $ | 49,884 |
| | $ | 65,384 |
| | $ | (15,500 | ) | (23.7)% | Cost of revenue | 50,378 |
| | 60,125 |
| | (9,747 | ) | (16.2)% | Gross profit (loss) | (494 | ) | | 5,259 |
| | (5,753 | ) | (109.4)% | Gross profit (loss) percentage | (1.0 | )% | | 8.0 | % | | | | General and administrative expenses | 4,370 |
| | 5,086 |
| | (716 | ) | (14.1)% | Operating income (loss) | (4,864 | ) | | 173 |
| | (5,037 | ) | (2,911.6)% | Other income (expense): | | | | | | | Interest expense | (45 | ) | | (110 | ) | | 65 |
| | Interest income | — |
| | 12 |
| | (12 | ) | | Other income (expense), net | 38 |
| | 599 |
| | (561 | ) | | Total other income (expense) | (7 | ) | | 501 |
| | (508 | ) | 101.4% | Net income (loss) before income taxes | (4,871 | ) | | 674 |
| | (5,545 | ) | (822.7)% | Income tax expense (benefit) | (1,761 | ) | | 133 |
| | (1,894 | ) | (1,424.1)% | Net income (loss) | $ | (3,110 | ) | | $ | 541 |
| | $ | (3,651 | ) | (674.9)% |
| | | | | | | | | | | | | | | 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 September 30,March 31, 2018 and 2017, and 2016, was $49.9$57.3 million and $65.4$38.0 million, respectively, representing a decreasean increase of 23.7%50.8%. The decreaseincrease is primarily attributable to an overall decrease in work experienced into:
An increase of $11.2 million within our facilities primarily 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 as a percentage of revenue were 48.4% and 33.8% for the three months ended September 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 projectfour modules for a particular period.petrochemical plant.
Gross profit (loss) - Our gross lossprofit for the three months ended September 30, 2017,March 31, 2018, was $494,000$679,000 compared to a gross profitloss of $5.3$4.9 million for the three months ended September 30, 2016.March 31, 2017. The decreaseincrease in gross profit was primarily due to $2.1 million of contract losses incurred byincreased revenue within our Shipyards division related to cost overruns and re-work identified on two newbuild vessel construction
contracts, 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 $1.1 million and lower margins on current work due to competitive pressures. 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 September 30, 2017 (asProperties as these assets are classified as assets held for sale) and continued cost minimization efforts implemented by management for the period.sale.
General and administrative expenses - Our general and administrative expenses were $4.4$4.7 million for the three months ended September 30, 2017,March 31, 2018, compared to $5.1$3.9 million for the three months ended September 30, 2016.March 31, 2017. The decreaseincrease in general and administrative expenses for the three months ended September 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 well as the addition of personnel as we build up our EPC Division in anticipation of the SeaOne Project; and Higher stock compensation expense of approximately $220,000.
This was partially offset by cost reductions 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 piece of 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- Other income was $38,000Interest expense increased due to drawings under our Credit Agreement for the three months ended September 30, 2017, as compared to other income of $599,000 for three months ended September 30, 2016. Other incomeMarch 31, 2018, with no such drawings under our Credit Agreement for the three months ended September 30,March 31, 2017, relates to insurance proceeds received from damage to a corporate automobile that was fully depreciated. Other income for foras well as increased amortization of deferred financing costs during the three months ended September 30, 2016 primarily relates to gains on sales of assets from our Fabrication division.March 31, 2018.
Income tax expense (benefit) - Our effective income tax rate for the three months ended September 30, 2017,March 31, 2018, was 36.2%(1.1)%, compared to an effective tax rate benefit of 19.7%30.3% for the comparable period during 2016.2017. Current expense represents state taxes within our Services Division. The increasedecrease in the effective tax rate is the result of changesa valuation allowance against our deferred tax assets. See Note 1 of the Notes to estimates ofConsolidated Financial Statements regarding our year-endNOLs and deferred tax provision during for the three months ended September 30, 2016.assets.
Operating Segments
As discussed 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 nine months ended September 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 nine months ended September 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. OurThe results of our threefour operating divisions and Corporate divisionDivision for the three months ended September 30,March 31, 2018 and 2017, and 2016, are presented below (in thousands, except for percentages).
| | | | | | | | | | | | | | | | Fabrication | | Three Months Ended September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | 18,318 |
| | $ | 22,311 |
| | $ | (3,993 | ) | | (17.9)% | Gross profit (loss) | | 1,250 |
| | 601 |
| | 649 |
| | 108.0% | Gross profit (loss) percentage | | 6.8 | % | | 2.7 | % | | | | 4.1% | General and administrative expenses | | 778 |
| | 885 |
| | (107 | ) | | (12.1)% | Operating income (loss) | | 472 |
| | (284 | ) | | | | |
| | | | | | | | | | | | | | | | 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 $4.0Division increased $7.1 million for the three months ended September 30, 2017,March 31, 2018, compared to the three months ended September 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.projects during the period. This was partially offset, by decreased revenue of $2.4 million for the three months ended March 31, 2018, at our South Texas Properties as these were placed for sale during the first quarter of 2017 and project work completed or transfered to our Houma Fabrication Yard during 2017.
Gross profit (loss) - Gross profitloss from our Fabrication divisionDivision for the three months ended September 30, 2017,March 31, 2018, was $1.3 million$219,000 compared to a gross profitloss of $601,000$3.0 million for the three months ended September 30, 2016.March 31, 2017. The increasedecrease in gross profitloss was due to
Gains on scrap sales increased revenue as discussed above and a reduction in depreciation expense of approximately $701,000 at our South Texas facility,
Decreases$1.9 million in costs resulting from reductions in workforce as we wrapped up and completed projects at our South Texas fabrication yards,
No depreciation being recordedexpense during the three months ended March 31, 2018 for our South Texas assets for the three months ended September 30, 2017,Properties as these assets are classified as assets held for sale; and
Continued cost minimization efforts implemented by management for the period.
This was partially offset by approximately $1.1 million of holding costs for our South Texas assets.sale.
General and administrative expenses - General and administrative expenses for our Fabrication divisionDivision decreased $107,000$197,000 for the three months ended September 30, 2017,March 31, 2018, compared to the three months ended September 30, 2016.March 31, 2017. The decrease is primarily due to decreases in costs resulting from lower bonuses accrued during 2017 as a result of our consolidated operating loss, reductions in workforce at our South Texas fabrication yardsProperties, decreases in corporate allocations as a portion 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 piece of equipment at our 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 September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue (1) | | $ | 15,074 |
| | $ | 23,060 |
| | $ | (7,986 | ) | | (34.6)% | Gross profit (loss) (1) | | (3,504 | ) | | 1,945 |
| | (5,449 | ) | | (280.2)% | Gross profit (loss) percentage | | (23.2 | )% | | 8.4 | % | | | | (31.6)% | General and administrative expenses | | 888 |
| | 1,468 |
| | (580 | ) | | (39.5)% | Operating income (loss) (1) | | (4,392 | ) | | 477 |
| | | | |
| | | | | | | | | | | | | | | | 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 September 30,March 31, 2018, and 2017, includes $390,000 and 2016, includes $510,000 and $1.5$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 $8.0 millionShipyard Division increased $143,000 for the three months ended September 30, 2017,March 31, 2018, compared to the three months ended September 30, 2016, dueMarch 31, 2017. During the first quarter of 2018, we were able to make progress on the corresponding reduction in customer demand for shipbuildingconstruction of eight harbor tugs and repair services supportingan offshore research vessel which were not under construction during the oilfirst quarter of 2017. This was partially offset by lower revenue from construction of our two OSV and gas industry due to depressed oiltwo MPSV vessel contracts during the first quarter of 2018.
During the first quarter of 2017, we completed the first of the OSVs and gas prices as well as the completion of a vessel that we tendered it for delivery on February 6, 2017, and was rejected by the customer alleging certain technical deficiencies. We subsequently suspended construction of work on the second vessel under contractOSV due to a customer dispute. 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 Shipyard Division related to the construction of two MPSVs. We dispute the purported termination and disagree with this customer.the customer’s reasons for same. Pending resolution of the dispute, all work has been stopped and the vessels and associated equipment and material are in our care and custody at our shipyard in Houma, Louisiana. See also Note 9 of the Notes to the Consolidated Financial Statements.Statements for additional information relating to this customer dispute.
Gross profit (loss) - Gross loss from our Shipyards divisionShipyard Division was $3.5 million for the three months ended September 30, 2017, compared to a gross profit of $1.9 million for the three months ended September 30, 2016. The decrease was due to:
$2.1 million in contract losses related to cost overruns and re-work that has been identified on two newbuild vessel construction contracts within our Shipyards division; and
Holding and closing costs related to our Prospect shipyard as we wind down operations at this facility.
General and administrative expenses - General and administrative expenses for our Shipyards division decreased $580,000 for the three months ended September 30, 2017, compared to the three months ended September 30, 2016, primarily due to reductions of administrative personnel related to consolidation of personnel duties from the LEEVAC transaction. Additionally, our Shipyards division incurred lower bonuses accrued during 2017 as a result of a combination of a smaller workforce and our consolidated operating loss and cost minimization efforts implemented by management for the period during the first part of 2016.
| | | | | | | | | | | | | | | | Services | | Three Months Ended September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | 17,651 |
| | $ | 20,928 |
| | $ | (3,277 | ) | | (15.7)% | Gross profit (loss) | | 1,912 |
| | 2,918 |
| | (1,006 | ) | | (34.5)% | Gross profit (loss) percentage | | 10.8 | % | | 13.9 | % | | | | (3.1)% | General and administrative expenses | | 695 |
| | 943 |
| | (248 | ) | | (26.3)% | Operating income (loss) | | 1,217 |
| | 1,975 |
| | | | |
Revenue - Revenue from our Services division decreased $3.3 million for the three months ended September 30, 2017, compared to the three months ended September 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 $1.0 million for the three months ended September 30, 2017,March 31, 2018, compared to a gross loss of $1.7 million for the three months ended September 30, 2016,March 31, 2017. The decrease was due to decreased revenue discussed aboveimproved cost management efforts and lower margins on new work performedefficiencies learned from the construction of two OSV and two MPSV vessels during 2017.the three months ended March 31, 2017, and applied to the construction of eight harbor tugs during the three months ended March 31, 2018.
General and administrative expenses - General and administrative expenses for our Services divisionShipyard Division decreased $248,000$168,000 for the three months ended September 30, 2017,March 31, 2018, compared to the three months ended September 30, 2016, due to lower bonuses accrued duringMarch 31, 2017, as a result of a combination of a smaller workforce and our consolidated operating loss.
| | | | | | | | | | | | | | | | Corporate | | Three Months Ended September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | — |
| | $ | — |
| | $ | — |
| | —% | Gross profit (loss) | | (152 | ) | | (205 | ) | | 53 |
| | 25.9% | Gross profit (loss) percentage | | n/a |
| | n/a |
| | | |
| General and administrative expenses | | 2,009 |
| | 1,790 |
| | 219 |
| | 12.2% | Operating income (loss) | | (2,161 | ) | | (1,995 | ) | |
|
| | |
General and administrative expenses - General and administrative expenses for our Corporate division increased primarily due to reductions in workforce, decreases in corporate allocations as a restructuringportion of our corporate division with additional personnelthese are now allocated to our corporate division during 2017 as discussed above as well as 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. Additionally, we have incurred increased legal fees as we pursue collection of claims against two customers. See also Note 9 of the Notes to the Consolidated Financial Statements. This has been partially offset by lower bonuses accrued during the quarter due to our consolidated operating loss.
Nine Months Ended September 30, 2017, Compared to Nine Months Ended September 30, 2016 (in thousands, except for percentages):
Consolidated
| | | | | | | | | | | | | | | Nine Months Ended September 30, | | Increase or (Decrease) | | 2017 | | 2016 | | Amount | Percent | Revenue | $ | 133,745 |
| | $ | 230,864 |
| | $ | (97,119 | ) | (42.1)% | Cost of revenue | 150,755 |
| | 205,839 |
| | (55,084 | ) | (26.8)% | Gross profit (loss) | (17,010 | ) | | 25,025 |
| | (42,035 | ) | (168.0)% | Gross profit (loss) percentage | (12.7 | )% | | 10.8 | % | | | | General and administrative expenses | 12,940 |
| | 14,633 |
| | (1,693 | ) | (11.6)% | Asset impairment | 389 |
| | — |
| | 389 |
| 100.0% | Operating income (loss) | (30,339 | ) | | 10,392 |
| | (40,731 | ) | (391.9)% | Other income (expense): | | | | | | | Interest expense | (262 | ) | | (248 | ) | | (14 | ) | | Interest income | 12 |
| | 20 |
| | (8 | ) | | Other income (expense), net | (221 | ) | | 1,039 |
| | (1,260 | ) | | Total other income (expense) | (471 | ) | | 811 |
| | (1,282 | ) | (158.1)% | Net income (loss) before income taxes | (30,810 | ) | | 11,203 |
| | (42,013 | ) | (375.0)% | Income tax expense (benefit) | (10,322 | ) | | 4,134 |
| | (14,456 | ) | (349.7)% | Net income (loss) | $ | (20,488 | ) | | $ | 7,069 |
| | $ | (27,557 | ) | (389.8)% |
Revenue - Our revenue for the nine months ended September 30, 2017EPC Division and 2016, was $133.7 million and $230.9 million, respectively, representing a decrease of 42.1%. 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 as well as the completion of a vessel within our Shipyards division that we tendered for delivery on February 6, 2017, and was rejected by the customer alleging certain technical deficiencies. We subsequently suspended of work on the second vessel under contract with this customer. See also Note 9 of the Notes to the Consolidated Financial Statements. Pass-
through costs as a percentage of revenue were 45.3% and 35.0% for the nine months ended September 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 nine months ended September 30, 2017, was $17.0 million compared to a gross profit of $25.0 million for the nine months ended September 30, 2016. The decrease was primarily due to $12.7 million of losses incurred by our Shipyards division related to cost overruns and re-work identified on two newbuild vesseldecreased construction contracts, decreased revenue as discussed above, holding costs related to our South Texas assets of $3.6 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 nine months ended September 30, 2017, as these assets are classified as assets held for sale and additional cost minimization efforts implemented by management for the period.
General and administrative expenses - Our general and administrative expenses were $12.9 million for the nine months ended September 30, 2017, compared to $14.6 million for the nine months ended September 30, 2016. The decrease in general and administrative expenses for the nine months ended September 30, 2017, is primarily due to decreases in costs resulting from reductions in workforce at our South Texas fabrication yards, lower bonuses accrued during 2017 as a result of our consolidated operating loss and continued cost minimization efforts implemented by management for the period.activity.
Asset Impairmentimpairment - During the ninethree months ended September 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.
Other income (expense), net - Other expense was $221,000Statements for the nine months ended September 30, 2017, comparedadditional information relating to other income of $1.0 millionour assets held for the nine months ended September 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 2016.
Income tax expense (benefit) - Our effective income tax rate for the nine months ended September 30, 2017, was 33.5%, compared to an effective tax rate of 36.9% 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 divisionssale. We did not record any asset impairment during the three and nine months ended September 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 nine months ended September 30, 2017 and 2016, are presented below (in thousands, except for percentages).
| | | | | | | | | | | | | | | | Fabrication | | Nine Months Ended September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | 42,517 |
| | $ | 70,436 |
| | $ | (27,919 | ) | | (39.6)% | Gross profit (loss) | | 216 |
| | 4,564 |
| | (4,348 | ) | | (95.3)% | Gross profit (loss) percentage | | 0.5 | % | | 6.5 | % | | | | (6.0)% | General and administrative expenses | | 2,432 |
| | 2,821 |
| | (389 | ) | | (13.8)% | Operating income (loss) | | (2,216 | ) | | 1,743 |
| | | | |
Revenue - Revenue from our Fabrication division decreased $27.9 million for the nine months ended September 30, 2017, compared to the nine months ended September 30, 2016. The decrease is attributable to an overall decrease in work experiencedMarch 31, 2018, 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 September 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 nine months ended September 30, 2017, was $216,000 compared to a gross profit of $4.6 million for the nine months ended September 30, 2016. The decrease was due to lower revenue
from decreased fabrication work as discussed above and approximately $3.6 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, gains on scrap sales as we wrapped up and completed projects at our South Texas fabrication yards, reduced depreciation being recorded for our South Texas assets for the nine months ended September 30, 2017, as these assets are classified as assets held for sale on February 23, 2017, and additional cost minimization efforts implemented by management for the period.
General and administrative expenses - General and administrative expenses for our Fabrication division decreased $389,000 for the nine months ended September 30, 2017, compared to the nine months ended September 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 operating 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.Shipyard Division.
| | | | | | | | | | | | | | | | Shipyards | | Nine Months Ended September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue (1) | | $ | 51,798 |
| | $ | 86,553 |
| | $ | (34,755 | ) | | (40.2)% | Gross profit (loss) (1) | | (19,061 | ) | | 9,742 |
| | (28,803 | ) | | (295.7)% | Gross profit (loss) percentage | | (36.8 | )% | | 11.3 | % | | | | (48.1)% | General and administrative expenses | | 2,835 |
| | 4,218 |
| | (1,383 | ) | | (32.8)% | Asset impairment | | 389 |
| | — |
| | 389 |
| | 100.0% | Operating income (loss) (1) | | (22,285 | ) | | 5,524 |
| | | | |
___________
| | (1) | Revenue for the nine months ended September 30, 2017, and 2016, includes $2.4 million and $4.1 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 $34.8 million for the nine months ended September 30, 2017, compared to the nine months ended September 30, 2016, due to the corresponding reduction in customer demand for shipbuilding and repair services supporting the oil and gas industry due to depressed oil and gas prices as well as the completion of a vessel that we tendered for delivery on February 6, 2017, and was rejected by the customer alleging certain technical deficiencies. We subsequently suspended of work on the second vessel under contract with this customer. See also Note 9 of the Notes to the Consolidated Financial Statements.
Gross profit (loss) - Gross loss from our Shipyards division was $19.1 million for the nine months ended September 30, 2017, compared to a gross profit of $9.7 million for the nine months ended September 30, 2016. The decrease was due to:
$12.7 million in contract losses related to cost overruns and re-work that has been identified on two newbuild vessel construction contracts within our Shipyards division;
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.
General and administrative expenses - General and administrative expenses for our Shipyards division decreased $1.4 million for the nine months ended September 30, 2017, compared to the nine months ended September 30, 2016, primarily due to reductions of administrative personnel related to consolidation of personnel duties from the LEEVAC transaction. Additionally, our Shipyards division incurred lower bonuses accrued during 2017 as a result of our consolidated operating loss and cost minimization efforts implemented by management for the period.
Asset Impairment - During nine months ended September 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.
| | | | | | | | | | | | | | | | Services | | Nine Months Ended September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | 43,758 |
| | $ | 76,179 |
| | $ | (32,421 | ) | | (42.6)% | Gross profit (loss) | | 2,335 |
| | 11,158 |
| | (8,823 | ) | | (79.1)% | Gross profit (loss) percentage | | 5.3 | % | | 14.6 | % | | | | (9.3)% | General and administrative expenses | | 2,008 |
| | 2,462 |
| | (454 | ) | | (18.4)% | Operating income (loss) | | 327 |
| | 8,696 |
| | | | |
| | | | | | | | | | | | | | | | 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 $32.4Division increased $11.2 million for the ninethree months ended September 30, 2017,March 31, 2018, compared to the ninethree months ended September 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 $8.8Division increased $2.6 million for the ninethree months ended September 30, 2017,March 31, 2018, compared to the ninethree months ended September 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 $0.5 millionDivision increased $68,000 for the ninethree months ended September 30, 2017,March 31, 2018, compared to the ninethree months ended September 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 operating loss.continued cost minimization efforts implemented by management for the period.
| | | | | | | | | | | | | | | | Corporate | | Nine Months Ended September 30, | | Increase or (Decrease) | | | 2017 | | 2016 | | Amount | | Percent | Revenue | | $ | — |
| | $ | — |
| | $ | — |
| | —% | Gross profit (loss) | | (500 | ) | | (439 | ) | | (61 | ) | | (13.9)% | Gross profit (loss) percentage | | n/a |
| | n/a |
| | | |
| General and administrative expenses | | 5,665 |
| | 5,132 |
| | 533 |
| | 10.4% | Operating income (loss) | | (6,165 | ) | | (5,571 | ) | | (594 | ) | | |
| | | | | | | | | | | | | | | | 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 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. Additionally, we have incurred increased legal fees as we pursue collection of claims against two customers. See also Note 9 of the Notes to the Consolidated Financial Statements. This has been partially offset by lower bonuses accrued during 2017 as a result of a combination of a smaller workforce and our consolidated operating 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 September 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 $17.8$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 $164.0$137.1 million and our ratio of current assets to current liabilities was 4.594.34 to 1 at September 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 September 30, 2017,March 31, 2018, includes $107.0$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 ninethree months ended September 30, 2017,March 31, 2018, is referenced in the Cash Flow Activities section below. At September 30, 2017,As discussed in our contracts receivable balance was $25.5 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 $8.3 million through October 31, 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.2019. The credit facility matures June 9, 2019 and may be usedCredit Agreement 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 facility our 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 credit facilityCredit Agreement may be designated, at our option, as either Base Rate (as defined in the 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 interest on undrawn stated amounts under letters of credit issued by the lenderslender is 2.0%2% per annum. At March 31, 2018, the interest rate on our outstanding borrowings was 3.75% per annum. The credit facilityCredit Agreement is secured by substantially all of our assets (other than the assets of Gulf Marine Fabricators, L.P., the legal entity that holds our South Texas assetsProperties).
At March 31, 2018, $10 million was outstanding under the Credit Agreement and, we had letters of 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. | Ratio of current assets to current liabilities of not less than 1.25:1.00; |
| | ii. | Minimum tangible net worth requirement of at least the sum of: |
| | a) | $230.0185 million, plus |
| | b) | An 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. | Ratio of funded debt to tangible net worth of not more than 0.50:1.00. |
Concurrent with our execution of the 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 were reissued as new letters of credit under the credit facility and accepted by the beneficiaries. Availability under our credit facility for future, additional letters of credit and borrowings is $35.4 million. As of September 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 2017.2018.
On October 21,If industry conditions for offshore oil and gas do not improve, we are unable to sell our Texas North Yard or the sale is delayed, or we are unable to increase 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 beginning of 2016, a customerwe have implemented wage adjustments along with employee benefit and overall cost reductions within all of our Shipyards division announced it was in noncompliance with certain financial covenants includeddivisions. We have reduced the level of our workforce in the customer’s debt agreementspast 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 deliverywe will continue to do so based on booked work in all of our facilities. We have reduced the first vessel that we completed and tendered for delivery on February 6, 2017, alleging certain technical deficiencies exist with respectcompensation paid to the vessel. On March 10, 2017, we gave notice for arbitration with our customer in an effort to resolve this matter and subsequently suspended fabrication of the second vessel under contract with this customer, which is 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 both vessel contracts. The customer is seeking recovery of $84.8 million representing all purchase price amounts previously paid by the customer under both contracts. 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 emerged from Chapter 11 Bankruptcydirectors and the Bankruptcy Court has approved the customer's retention and acceptancesalaries of both contracts. As of September 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,executive officers, and we have re-initiated arbitration proceedings in accordance withreduced our contracts. Wecapital expenditures and placed assets that are in the process of discovery. The customer has recently named a new interim chief executive officer who has made contact with our management, and we are workingeither underutilized, under-performing or not expected to resolve our dispute in a constructive manner. We believe that will be able to recover remaining amounts due to us.
On August 25, 2017,provide sufficient long-term value for sale, which include our South Texas facilities were impacted by Hurricane Harvey, which made landfall as a category 4 hurricane. As a result, we suffered damages to our South Texas buildings and equipment. Through September 30, 2017, we have incurred approximately $265,000 in clean-up and repair related costs and we expect to incur additional future repair costs in excess of our deductible which management believes are probable of being recovered through insurance proceeds. We maintain coverage on these assets up to a maximum of $25.0 million, subject to a 3.0% deductible with a minimum deductible of $500,000. We are working diligently with our insurance agents and adjusters to finalize our estimate of the damage; however, it may be several months, or even longer, before we can finalize our assessment and receive final payment from our insurance underwriters. Our insurance underwriters have made an initial payment of $3.0 million, and we have recorded a liability for future repairs of $2.7 million which is included in accrued expenses and other liabilities on our balance sheet at September 30, 2017. Based upon our initial assessment of the damages and insurance coverage, management believes that there is no basis to record a net loss at this time and that insurance proceeds will at a minimum be sufficient to reimburse us for all damages and repair costs. Our final
assessment of the loss incurred to our South Texas assets as well as the amount of insurance proceeds we will receive could be more or less than this amount when the claim is ultimately settled and such differences could be material.
In event of one or more sales of our South Texas assets, we expect to use all or a portion of the sales proceeds to invest in our operating liquidity in order to facilitate anticipated future projects, selected capital improvements to enhance and/or expand our existing facilities, mergers and acquisitions to expand our product and service capabilities. We are continuing this effort to identify and analyze specific investment opportunities we believe will enhance the long-term value of the Company that are consistent with our strategy.
On October 26, 2017, our Board of Directors declared a dividend of $0.01 per share on our shares of common stock outstanding, payable November 24, 2017, to shareholders of record on November 10, 2017.Properties.
We currently believe ourthat cash on hand and cash equivalents generated by our future operating activities, proceeds to be received from insurance underwriters, availabilityfunds available under our line of credit and proceeds to be received from future assets salesCredit Agreement will be sufficient to fund our capital expenditures and meet our working capital needsand capital expenditure requirements, any future debt service and other funding requirements for nextat least twelve months from the date of this Report. Our view regarding sufficiency of cash and liquidity is primarily based on our financial forecast for 2018 and early 2019, which is impacted by various assumptions regarding the sale of our Texas North Yard, our existing backlog and a 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 continuemeet planned operating expenses and other unforeseen cash requirements. Accordingly, we may be required to operate, satisfyfurther draw on our contractual operations and pay dividendsCredit Agreement, obtain additional bank financing, sell additional assets or conduct equity or debt offerings at a time when it is not beneficial to our shareholders.do so.
Cash Flow Activities
For the ninethree months ended September 30, 2017,March 31, 2018, net cash used in operating activities was $29.6$14.1 million, compared to net cash provided byused in operating activities of $19.4$15.1 million for the ninethree months ended September 30, 2016.March 31, 2017. The use of cash in operations during the period was primarily due to the following:
Operating losses for the ninethree months ended September 30, 2017,March 31, 2018, in excess of non-cash depreciation, amortization, impairment and stock compensation expense of approximately $19.6 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. See also Note 9 of the Notes to the Consolidated Financial Statements; 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 later in 2017 through the first half of 2018.$2 million.
Net cash used inprovided by investing activities for the ninethree months ended September 30, 2017,March 31, 2018, was $2.4 million, compared to cash provided byused in investing activities of $2.0 million$391,000 for the ninethree months ended September 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 $5.8 million and $1.6 million of cash acquired in the LEEVAC transaction during 2016 partially offset by decreases in capital expenditures.Properties.
Net cash used inprovided by financing activities for the ninethree months ended September 30,March 31, 2018, and 2017, and 2016, was $1.4$9.2 million and $603,000, 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. During the nine months ended September 30, 2017 we received $2.0$10 million fromin net borrowings under our new line of credit which were immediately repaid.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 September 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 September 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 | |
| 10.4 | |
| 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: October 31, 2017May 4, 2018
GULF ISLAND FABRICATION, INC.
EXHIBIT INDEX
| | | | | Exhibit
Number
| | Description of Exhibit | | | 3.1 | | | 3.2 | | | 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. |
s | Percentage | | | |