GULF ISLAND FABRICATION INC - 10-K - Management's Discussion and Analysis of Financial Condition and Results
of Operations
Executive Overview and Summary
Our Business
We are a leading fabricator of offshore drilling and production platforms and
other steel structures for customers in the oil and gas and marine industries,
including jackets and deck sections of fixed production platforms, hull, tendon,
and/or deck sections of floating production platforms (such as TLPs, Spars,
FPSOs and MinDOCs), piles, wellhead protectors, subsea templates, and various
production, compressor, and utility modules. In addition. we also perform
onshore and offshore construction services as well the repair, fabrication and
construction of marine vessels. We use modern welding and fabrication
technology, and all of our projects are manufactured in accordance with industry
standards, specifications and regulations, including those published by the
American Petroleum Institute, the American Welding Society, the American Society
of Mechanical Engineers, the American Bureau of Shipping and the United States
Coast Guard. The quality management systems of our operating subsidiaries are
certified as ISO 9001-2008 quality assurance programs.
Operational achievements during the year include:
• We fabricated a 1,200 foot jacket, piles, and an approximate 4,500 short
ton topside for a deepwater Gulf of Mexico project, which commenced in the
second quarter of 2013 and was successfully completed and delivered on
time to our customer during the fourth quarter of 2015.
• We completed five jackets and piles for a shallow water wind turbine
project located off the coast of
Rhode Island
, that commenced in the
fourth quarter of 2014 and were completed and delivered on time to our
customer during the second and third quarters of 2015.
• We completed one of three tow boats for an inland towing customer that
commenced in the third quarter of 2014. The first tow boat was completed
during the fourth quarter of 2015. The second tow boat is expected to be
completed during the first quarter of 2016, and the third tow boat is
expected to be completed during the third quarter of 2016.
Known Trends and Uncertainties
Our results of operations are affected primarily by (i) the level of exploration
and development activity maintained by oil and gas exploration and production
companies in the Gulf of Mexico, and to a lesser extent, overseas locations,
(ii) our ability to win contracts through competitive bidding or
alliance/partnering arrangements, and (iii) our ability to effectively manage
contracts to successful completion. The level of exploration and development
activity throughout the energy industry is related to several factors, including
trends in oil and gas prices, expectations of future oil and gas prices, changes
in technology and changes in the regulatory environment.
The slowdown in our industry as a result of crude oil price volatility has
created significant uncertainty in global equity prices and overall market
fundamentals within the energy industry in general. This uncertainty is the
result of several factors including a global supply/demand imbalance for oil and
an oversupply of natural gas in
the United States
; robust non-OPEC supply growth
led by expanding unconventional production in
the United States
; weakening
growth in emerging markets; and the decision by OPEC to maintain its current
production ceiling. The downturn in oil and gas prices presents challenges in
the near term, particularly as it relates to shallow water activity. The further
reductions in capital spending by our customers in the global oil and gas
industry, relative to the already reduced spending levels in the prior year for
exploration and production, introduces additional uncertainty to short- and
long-term demand in offshore oil and gas project activity. The result of these
actions have had an adverse effect on our overall backlog levels and has created
challenges with respect to our ability to operate our fabrication facilities at
desired utilization levels. We anticipate that crude oil prices will increase in
the future, as continued growth in demand and a slowing in supply growth should
bring global markets into balance; however, the timing of any such increase is
unknown.
We continue to respond to expected near-term decreases in capital spending by
our customers by reducing our own discretionary and capital spending. We have
adjusted the level of our workforce, based on expected near-term work in our
facilities. As we work through existing backlog, depending on the duration of
the downturn, we may need to make additional reductions in labor commensurate
with the level of fabrication activity. We have recently undertaken additional
efforts to reduce our overall cost structure and will continue to pursue
opportunities to eliminate unnecessary spending. We continually evaluate
opportunities to dispose of assets that are not expected to provide sufficient
long-term value. In addition, our recent acquisition of LEEVAC, as further
discussed below, has provided assets and operations that are complementary to
our existing marine fabrication business, at an attractive value. The
transaction provides us with more diversified product offerings and adds
approximately $112.0 million in additional backlog.
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From a marketing perspective, we are increasing our focus on obtaining marine
fabrication and repair work, certain petrochemical plant work, alternative
energy fabrication projects, and other projects that are less susceptible to
fluctuations in oil prices.
We believe that our strong balance sheet, levels of cash, and access to capital provides us with the strength to persevere throughout this cycle.
LEEVAC Acquisition
On January 1, 2016, we acquired substantially all of the assets and assumed
certain specified liabilities of LEEVAC Shipyards, L.L.C. and its affiliates
("LEEVAC"). The purchase price for the acquisition was $20.0 million, subject to
a working capital adjustment whereby we received at closing a dollar for dollar
reduction for the assumption of certain net liabilities of LEEVAC and settlement
payments from sureties on certain ongoing fabrication projects that were
assigned to us in the acquisition. After taking into account these adjustments,
we received approximately $1.6 million in cash at closing and added
approximately $112.0 million of incremental contract backlog primarily for four
new build construction projects to be delivered in 2016 and 2017. Strategically,
the acquisition expands our marine fabrication and repair and maintenance
presence in the Gulf South market and further diversifies our fabrication
capabilities.
Backlog
Our backlog is based on management's estimate of the direct labor hours required
to complete, and the remaining revenue to be recognized with respect to those
projects a customer has authorized us to begin work or purchase materials or
services pursuant to written contracts, letters of intent or other forms of
authorization. As engineering and design plans are finalized or changes to
existing plans are made, management's estimate of the direct labor hours
required to complete a project and the price of a project at completion is
likely to change.
All projects currently included in our backlog generally are subject to
suspension, termination, or a reduction in scope at the option of the customer,
although the customer is generally required to pay us for work performed and
materials purchased through the date of termination, suspension, or reduction in
scope. In addition, customers have the ability to delay the execution of
projects.
A comparison of our backlog as of December 31, 2015, September 30, 2015 and as
of December 31, 2014 is as follows (amounts in thousands, except for
percentages):
As of December 31, 2015 (1) As of September, 2015
As of December 31, 2014
$'s Labor hours $'s Labor hours $'s Labor hours
Backlog $232,411 1,914 $135,149 1,287 $184,667 1,654
Number Percentage Number Percentage Number Percentage
Major customers five 76.1% (2) five 66.5%
three 64.2%
$'s Percentage $'s Percentage $'s Percentage
Deepwater locations $47,077 20.3% $63,854 47.2% $70,088 38.0%
Foreign locations $26,184 11.3% $33,287 24.6%
$5,324 2.9%
Backlog that is expected to be recognized in revenue during:
$'s Percentage
2016 $207,852 89.4% (3)
2017 $24,559 10.6% (3)
$232,411
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1) Backlog as of December 31, 2015 includes commitments received through
February 19, 2016. We exclude suspended projects from contract backlog that are
expected to be suspended more than twelve months because resumption of work and
timing of revenue recognition for these projects are difficult to predict. Our
backlog also includes approximately $112.0 million of new build construction
that was acquired in the LEEVAC acquisition on January 1, 2016. Our amount of
backlog that was acquired in the LEEVAC acquisition does not include any
adjustments that could arise from purchase price accounting which has not been
finalized. Because purchase price accounting could result in different market
values of the backlog acquired, the value assigned to the LEEVAC backlog
acquired in the LEEVAC acquisition could potentially impact future margin,
however, it is not expected to impact future cash flow.
2) Projects for our five largest customers consist of the following:
(i) tendon support buoys for a deepwater Gulf of Mexico project for one
customer, which commenced in the fourth quarter of 2015 and will be completed
during the fourth quarter of 2016;
(ii) two large multi-purpose service vessels for one customer, which commenced
in the first quarter of 2014 and will be completed during the first quarter of
2017;
(iii) two large petroleum supply vessels for one customer, which commenced in
the second quarter of 2013 and will be completed during the first quarter of
2017;
(iv) one jacket and piles for a foreign customer, which commenced in the third
quarter of 2015 and will be completed during the fourth quarter of 2016; and
(v) offshore support and construction services related to a deepwater Gulf of
Mexico project which commenced in the fourth quarter of 2015 and will be
completed in the fourth quarter of 2016.
3) The timing of our recognition of the revenue backlog as presented above is
based on management estimates of the application of the direct labor hours
during the current projected timelines to complete the projects in our backlog.
Certain factors and circumstances, as mentioned above, could cause changes in
the period when the backlog is recognized as revenue.
Depending on the size of the project, the termination, postponement, or
reduction in scope of any one project could significantly reduce our backlog,
and could have a material adverse effect on revenue, net income and cash flow.
For additional information, see Note 1 in the Notes to Consolidated Financial
Statements "Assets held for sale" and Item 1A. Risk Factors - "Our backlog is
subject to change as a result of changes to management's estimates, suspension
or termination of projects currently in our backlog or our failure to secure
additional projects. Our revenue, net income and cash flow could be adversely
affected as a result of changes to our backlog."
Workforce
Our workforce varies based on the level of ongoing fabrication activity at any
particular time. During 2015 we made reductions in our workforce at our
Houma, LA
and
Ingleside, TX
facilities in response to decreases in the amount of
fabrication work. As of December 31, 2015 and 2014, we had approximately1,255
and 1,700 employees, respectively. On January 1, 2016, we hired 380 employees
with the LEEVAC acquisition representing substantially all of the former LEEVAC
employees.
We use contract labor when required to meet customer demand. The number of
contract laborers we used decreased to 71 in 2015 as compared to 247 in 2014.
None of our employees are employed pursuant to a collective bargaining
agreement, and we believe our relationship with our employees is good. In an
effort to maintain our current workforce and attract new employees in period of
high activity, we have enhanced several incentive programs and expanded our
training facility.
Labor hours worked were 2.7 million, 3.6 million and 4.1 million for the years
ending December 31, 2015, 2014 and 2013 respectively. The decrease in labor
hours worked in 2015 relative to 2014 was primarily attributable to overall
decreased levels of activity as a result of a decline in our oil and gas
fabrication activity due to the steep decline in oil and gas prices as well as
the completion of a jacket, piles, and topsides for a deepwater Gulf of Mexico
project, and the completion of five jackets and piles for a shallow water wind
turbine project located off the coast of
Rhode Island
, that commenced in the
fourth quarter of 2014.
Critical Accounting Policies
Our consolidated financial statements are prepared in accordance with accounting
principles generally accepted in
the United States
, which require us to make
estimates and assumptions. We believe that of our significant accounting
policies (see Note 1 in the Notes to Consolidated Financial Statements), the
following involves a higher degree of judgment and complexity:
Revenue Recognition
The majority of our revenue is recognized on a percentage-of-completion basis
based on the ratio of direct labor hours actually performed to date compared to
the total estimated direct labor hours required for completion. Accordingly,
contract price and cost estimates are reviewed monthly as the work progresses,
and adjustments proportionate to the percentage of
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completion are reflected in revenue for the period when such estimates are
revised. If these adjustments were to result in a reduction of previously
reported profits, we would recognize a charge against current earnings, which
may be significant depending on the size of the project or the adjustment.
Profit incentives are included in revenue when their realization is probable.
Claims for extra work or changes in scope of work are included in revenue when
the amount can be reliably estimated and collection is probable. Changes in job
performance, job conditions, and estimated profitability, including those
arising from contract penalty provisions, and final contract settlements may
result in revisions to costs and income and are recognized in the period in
which the revisions are determined. For the years ended December 31, 2015, 2014
and 2013, there was no significant revenue related to unapproved change orders
or claims.
Contract costs include all direct material, labor and subcontract costs and
those indirect costs related to contract performance, such as indirect labor,
supplies and tools. Also included in contract costs are a portion of those
indirect contract costs related to plant capacity, such as depreciation,
insurance and repairs and maintenance. These indirect costs are allocated to
jobs based on actual direct labor hours worked.
Some contracts include a total or partial reimbursement to us of any costs
associated with specific capital projects required by the fabrication process.
If a particular capital project provides future benefits to us, the cost to
build the capital project will be capitalized, and the revenue for the capital
project will increase the estimated profit in the contract.
Provisions for estimated losses on uncompleted contracts are made in the period
in which such losses are determined. We recognized contract losses of $33.9
million, $6.6 million, and $30.8 million for the years ended December 31, 2015,
2014, and 2013, respectively. Contract losses for the year ended December 31,
2015 were primarily related to $24.5 million related to a decrease in the
contract price due to final weight re-measurements and our inability to recover
certain costs on disputed change orders related to a large deepwater project
which was recently delivered. In addition we accrued contract losses of
approximately $9.4 million resulting from increases in our projected unit labor
rates of our fabrication facilities. Our increases in unit labor rates were
driven by our inability to absorb fixed costs due to decreases in expected oil
and gas fabrication activity.
Contract losses for the year ended December 31, 2014 of $6.6 million were
primarily related to two tank barge projects for a marine transportation
company, platform supply vessels for an offshore marine company and a production
platform jacket for a deepwater customer. Contract losses in 2013 of $30.8
million were primarily due to our inability to recover certain costs and the
de-scoping of one of our major deepwater project, whereby remaining completion
and integration work was performed at the integration site by a different
integration contractor.
Allowance for Doubtful Accounts
We routinely review individual contracts receivable balances and make provisions
for probable doubtful accounts as we deem appropriate. Among the factors
considered during the review are the financial condition of our customers and
their access to financing, underlying disputes on the account, age and amount of
the account and overall economic conditions. Accounts are written off only when
all reasonable collection efforts are exhausted.
Our principal customers include major and large independent oil and gas
companies and their contractors and marine vessel operators and their
contractors. This concentration of customers may impact our overall exposure to
credit risk, either positively or negatively, in that customers may be similarly
affected by changes in economic or other conditions. Receivables are generally
not collateralized; however, in certain instances we obtain collateral to reduce
our credit exposure. In the normal course of business, we extend credit to our
customers on a short-term basis.
During 2015 allowances for bad debts were approximately $44,000. During the
fourth quarter of 2014, the Company included an allowance for bad debt in the
amount of $3.6 million in connection with negotiations of an outstanding
contract receivable balance with a deepwater offshore customer related to a
deepwater hull project that was completed during the first quarter of 2014.
Fair Value Measurements: Impairments of Long-Lived Assets and Assets Held for
Sale
The determination of fair value can require the use of significant judgment and
can vary based on the facts and circumstances.
We evaluate impairment losses on long-lived assets or asset groups used in
operations when events and circumstances indicate that the assets or asset
groups might not be recoverable. If events and circumstance indicate that the
assets or asset groups might not be recoverable, the expected future
undiscounted cash flows from the assets or asset groups are estimated and
compared with the carrying amount of the assets or asset groups. If the sum of
the estimated undiscounted cash flows is less than the carrying amount of the
assets or asset groups, an impairment loss is recorded.
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An impairment loss is measured by comparing the fair value of the asset or asset
group to its carrying amount and recording the excess of the carrying amount of
the asset or asset group over its fair value as an impairment charge. An asset
group constitutes the minimum level for which identifiable cash flows are
principally independent of the cash flows of other asset or liability groups.
Fair value is determined based on discounted cash flows or appraised values, as
appropriate. Due to the slow down in our industry as a result of the downturn in
oil prices, we identified indicators of impairment at our
Texas
facility.
Management performed an undiscounted cash flow analysis for the
Texas
facility
which did not result in impairment.
We measure and record assets held for sale at the lower of their carrying amount
or fair value less cost to sell. Assets held for sale at December 31, 2015
consist of equipment that was subsequently sold during the first quarter of
2016. We estimated the fair value as the actual cash proceeds received less
costs incurred to sell. We recorded an impairment of $0.6 million related to
this equipment during the fourth quarter of 2015.
Assets held for sale at December 31, 2014 consist of a partially constructed
topside, related valves, piping and equipment that we acquired from a customer
following its default under a contract for a deepwater project in 2012. We
previously determined a fair value $10.3 million for these assets with the
assistance of third party valuation specialists, relying primarily on the cost
approach and applied the market approach where comparable sales transaction
information was readily available. The cost approach is based on current
replacement or reproduction costs of the subject assets less depreciation
attributable to physical, functional, and economic factors. The market approach
involves gathering data on sales and offerings of similar assets in order to
value the subject assets. This approach also includes an assumption for the
measurement of the loss in value from physical, functional, and economic
factors.
To date, we have not sold, licensed, or leased any of this equipment. While we
have not discontinued our programs to identify buyers for our assets held for
sale, our ability to effectively market these assets held for sale has been
significantly limited due to the sustained downturn in the energy sector. In
addition, during the third quarter, we learned that a potential buyer is no
longer expressing interest in the assets. As a result, we reassessed our
estimate of fair value and recorded an impairment of $6.6 million, and
reclassified the asset's net realizable value of $3.7 million to inventory based
on the estimated scrap value of these materials during the third quarter of
2015. We intend to use this inventory on future construction projects at our
various fabrication facilities. Inventory consists of materials and production
supplies and is stated at the lower of cost or market.
Results of Operations
Loss provision - During the year ended December 31, 2015, we incurred contract
losses of $24.5 million related to a decrease in the contract price due to final
weight re-measurements and our inability to recover certain costs on disputed
change orders related to a large deepwater project which was recently delivered.
We are currently in negotiations with this customer concerning change orders
with respect to the adjusted amounts due under this contract which are not
included in contract revenues at December 31, 2015. Our intention is to resolve
the disputed cost amounts and finalize the change orders with our customer as
quickly as possible; however, we can give no assurance that these negotiations
will conclude or that the change orders will be finalized in the near term.
In addition, we accrued contract losses of approximately $9.4 million resulting
from increases in our projected unit labor rates of our fabrication facilities.
Our increases in unit labor rates were driven by our inability to absorb fixed
costs due to decreases in expected oil and gas fabrication activity.
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Comparison of the years ended December 31, 2015 and 2014 (in thousands, except for percentages):
Twelve Months Ended December 31,
Increase or (Decrease)
2015 2014 Amount Percent
Revenue $ 306,120 $ 506,639 $ (200,519 ) (39.6 )%
Cost of revenue 321,276 462,083 $ (140,807 ) (30.5 )%
Gross (loss) profit (15,156 ) 44,556 (59,712 ) (134.0 )%
Gross profit percentage (5.0 )% 8.8 %
General and administrative
expenses 16,256 17,409 (1,153 ) (6.6 )%
Asset impairment 7,202 3,200 4,002 125.1 %
Operating (loss) income (38,614 ) 23,947 (62,561 ) (261.2 )%
Other income (expense):
Interest expense (165 ) (37 ) (128 )
Interest income 26 13 13
Other income (expense) 20 (99 ) 119
(119 ) (123 ) 4 3.3 %
(Loss) income before income
taxes (38,733 ) 23,824 (62,557 ) (262.6 )%
Income taxes (13,369 ) 8,504 (21,873 ) (257.2 )%
Net (loss) income $ (25,364 ) $ 15,320 $ (40,684 ) (265.6 )%
Revenues - Our revenues for years ended December 31, 2015 and 2014 were $306.1
million and $506.6 million, respectively, representing a decrease of 39.6%. The
decrease is primarily attributable to an overall decrease in work experienced in
our fabrication yards as a result of depressed oil and gas prices and the
corresponding reduction in activity in the Gulf of Mexico. In addition, we also:
• incurred contract losses of $24.5 million during 2015 related to a deck
and jacket for one of our large deepwater projects as further described
above;
• accrued contract losses of $9.4 million during 2015 due to projected
increases in our unit labor rates as referred to above;
• recognized higher revenue primarily as a result of work performed for a
large deepwater project during 2014 and, to a lesser extent, experienced a
decrease of pass through costs due to lesser amounts of subcontractor
services and direct materials in 2015 as compared to 2014.
Pass-through costs, as described in Note 2 in 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. Pass-through costs as a
percentage of revenue were 44.4% and 48.2% for the years ended December 31, 2015
and 2014, respectively.
Gross (loss) profit - Our gross (loss) profit for the years ended December 31,
2015 and 2014 was $(15.2) million ((5.0)% of revenue) and $44.6 million (8.8% of
revenue), respectively. The decrease in gross profit was primarily due to:
• contract losses of $24.5 million recorded during the third and fourth
quarters of 2015, as referred to above;
• $9.4 million of contract losses due to projected increases in our unit
labor rates as referred to above;
• lower project activity during the period as compared to the same period in
2014; and
• less offshore commissioning and hook-up activity performed on a time and
material basis during 2015 as compared to 2014.
General and administrative expenses - Our general and administrative expenses
were $16.3 million for the year ended December 31, 2015, compared to $17.4
million for the year ended December 31, 2014. The decrease in general and
administrative expenses was primarily attributable to bad debt expense of $3.6
million recorded during the fourth quarter of 2014 related to a contract
receivable balance with a customer for a deepwater hull project as well as
reductions in discretionary spending in response to reductions in our oil and
gas fabrication activity. These decreases were partially offset by $721,000 in
acquisition and due diligence expenditures related to the LEEVAC acquisition and
an increase in stock-based compensation expense of $1.6 million during 2015 as
compared to 2014.
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Asset impairment - We recorded an asset impairment charges of $7.2 million
during the year ended December 31, 2015 related to our assets held for sale as
further discussed above and in Note 5 of the Notes to Consolidated Financial
Statements as compared to asset impairment charges of $3.2 million for the year
ended December 31, 2014.
Interest expense - The Company had net interest expense of $139,000 for the year
ended December 31, 2015 compared to net interest expense of $24,000 for 2014.
The increase in net interest expense was primarily driven by interest expense
associated with increases to letters of credit during 2015.
Other income (expense) - Other income for the year ended December 31, 2015 was
$20,000 of other income compared to other expense $99,000 for 2014. Other income
for the year ended December 31, 2015 primarily represents gains on sales of
property, plant, and equipment as compared to other expense in 2014, which
primarily related to losses on sales of property, plant, and equipment during
2014.
Income taxes - Our effective income tax rate for 2015 was 34.5% compared to an
effective tax rate of 35.7% for 2014. The decrease in the effective tax rate is
primarily due to the impact of state income taxes for our operations in
Louisiana
.
Comparison of the years ended December 31, 2014 and 2013 (in thousands, except
for percentages):
2014 2013 Amount Percent
Revenue $ 506,639 $ 608,326 $ (101,687 ) (16.7 )%
Cost of revenue 462,083 584,665 (122,582 ) (21.0 )%
Gross profit 44,556 23,661 20,895 88.3 %
Gross profit percentage 8.8 % 3.9 %
General and administrative expenses 17,409 11,555 5,854
50.7 %
Asset impairment 3,200 - 3,200 100.0 %
Operating (loss) income 23,947 12,106 11,841 97.8 %
Other income (expense):
Interest expense (37 ) (237 ) 200
Interest income 13 3 10
Other income (expense) (99 ) (337 ) 238
(123 ) (571 ) 448 78.5 %
(Loss) income before income taxes 23,824 11,535 12,289 106.5 %
Income taxes 8,504 4,303 4,201 97.6 %
Net (loss) income $ 15,320 $ 7,232 $ 8,088 111.8 %
Revenues - For the twelve-month period ended December 31, 2014, our revenue was
$506.6 million compared to $608.3 million for the twelve-month period ended
December 31, 2013, a decrease of 16.7%. The following factors contributed to the
decrease in revenues for the year ended December 31, 2014 compared to the year
ended December 31, 2013:
• pass-through costs, as a percentage of revenue, for the twelve-month
period ended December 31, 2014 were 48.2% compared to 58.5% for the
twelve-month period ended December 31, 2013; and
• overall decreased levels of activity as a result of the completion of
topsides for two large deepwater customers in 2013, and a Spar Hull for a
large deepwater customer in the first quarter of 2014.
• a decrease in pass-through costs for the twelve months ended December 31,
2014 primarily relates to higher levels of sub-contracted service costs on
our major deepwater projects in 2013. Pass-through costs, as described in
Note 2 in the Notes to Consolidated Financial Statements, are included in
revenue, but have no impact on the gross profit recognized for that
particular period.
• The decrease in revenue was offset by lower estimated contract losses of
$6.6 million for December 31, 2014 compared to $30.8 million for
December 31, 2013.
Gross Profit - For the twelve-month periods ended December 31, 2014 and 2013,
gross profit was $44.6 million (8.8% of revenue) and $23.7 million (3.9% of
revenue), respectively. Factors contributing to the overall increase in gross
profit for the twelve-month period ended December 31, 2014 compared to the
twelve-month period ended December 31, 2013 include:
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• lower contract losses of $6.6 million during the twelve month period ended
December 31, 2014 compared to $30.8 million during the twelve-month period
ended December 31, 2013;
• a return to traditional jacket and smaller topside shallow water projects
during 2014 as compared to 2013; and
• a higher level of offshore commissioning and hook-up activity performed on
a time and material basis.
Both the offshore connection and hook-up work and execution of the 2014 shallow
water projects garnered higher profit margins as compared to our mix of projects
performed during 2013, primarily due to (i) certain project improvement
initiatives undertaken in 2014, and (ii) the fact that we historically have been
able to more effectively control costs associated with these projects as
compared to larger, more complex deepwater projects.
General and administrative expenses - Our general and administrative expenses
were $17.4 million for the twelve-month period ended December 31, 2014 compared
to $11.6 million for the twelve-month period ended December 31, 2013. Factors
that contributed to the increase in general and administrative expenses for the
twelve months ended December 31, 2014 include:
• a net increase of $2.7 million in bad debt expense; Bad debt expense for
2014 included a $3.6 million increase in the fourth quarter related to
negotiations of an outstanding contract receivable balance with a customer
for a deepwater hull project completed during the first quarter of 2014.
At December 31, 2013, the Company included an allowance for bad debt in
the amount of $0.9 million in connection with a vessel upgrade and
outfitting project.
• increases in expenses related to the relocation of our corporate
headquarters to
Houston, Texas
and hiring of additional corporate staff
members to support operations;
• the addition of three consultants to assist with the marketing efforts for
assets held for sale and potential FLNG opportunities; and
• increases in expenses associated with an increase in the numbers of
directors serving on our board.
Asset impairment - As further discussed in "Assets held for sale," under
Critical Accounting Policies above, as of December 31, 2014, management
determined that its previous estimate of $13.5 million for the fair value of
assets held for sale had declined to $10.3 million. As a result, we included in
general and administrative expenses in our income statement for the year ended
December 31, 2014 an impairment charge of $3.2 million.
Interest expenses - We had net interest expense of $24,000 for the twelve-month
period ended December 31, 2014 compared to net interest expense of $234,000 for
the twelve-month period ended December 31, 2013. Net interest expense for the
period ended December 31, 2014 was lower as a result of decreased borrowings on
the line of credit.
Other expenses - We had other expenses of $99,000 for the twelve-month period
ended December 31, 2014, compared to other expenses of $337,000 for the
twelve-month period ended December 31, 2013. Other expenses for both periods
primarily represent losses on sales of miscellaneous equipment.
Income taxes - Our effective income tax rate was 35.7% for the twelve-month
period ended December 31, 2014, compared to 37.3% for the twelve-month period
ended December 31, 2013. The decrease in the effective rate for the period ended
December 31, 2014 is a result of (a) lower effective state income tax rate; and
(b) the fact that we were able to fully utilized net operating losses in 2014,
allowing the Company to take the Qualified Production Activities Income
Deduction (Section 199) for taxable earnings in excess of net operating losses
for the year ended December 31, 2014.
Liquidity and Capital Resources
Historically, we have funded our business activities through cash generated from
operations. At December 31, 2015 cash and cash equivalents totaled $34.8
million, compared to $36.1 million at December 31, 2014 with no borrowings
outstanding under our credit facility. Working capital was $78.0 million and our
ratio of current assets to current liabilities was 3.1 to 1 at December 31,
2015. Our primary source of cash for the year ended December 31, 2015, was the
collection of accounts receivable along with a reduction in costs associated
with lower activity levels. At December 31, 2015, our contracts receivable
balance was $47.0 million. We have subsequently collected $28.4 million through
February 19, 2016.
During 2015, we recorded contract losses of $24.5 million related to a decrease
in the contract price due to final weight re-measurements and our inability to
recover certain costs on disputed change orders related to a large deepwater
project which was recently delivered. We are currently in negotiations with this
customer concerning disputed change orders and no amounts with respect to these
disputed change orders are included in contract revenues at December 31, 2015.
Our intention is to resolve the disputed cost amounts and finalize the change
orders with our customer as quickly as possible; however, we can give no
assurance that these negotiations will conclude in the near term or at all or
that we will recover any of these contract
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losses from our customer. In addition, we accrued contract losses of
approximately $9.4 million resulting from increases in our projected unit labor
rates of our fabrication facilities. Our increases in unit labor rates were
driven by our inability to absorb fixed costs due to decreases in expected oil
and gas fabrication activity.
On January 1, 2016, we acquired substantially all of the assets and assumed
certain specified liabilities of LEEVAC Shipyards, L.L.C. and its affiliates
("LEEVAC"). The purchase price for the acquisition was $20.0 million, subject to
a working capital adjustment whereby we received at closing a dollar for dollar
reduction for the assumption of certain net liabilities of LEEVAC and settlement
payments from sureties on certain ongoing fabrication projects that were
assigned to us in the acquisition. After taking into account these adjustments,
we received approximately $1.6 million in cash at closing and added
approximately $112.0 million of incremental contract backlog primarily for four
new build construction projects to be delivered in 2016 and 2017. Strategically,
the acquisition expands our marine fabrication and repair and maintenance
presence in the Gulf South market and further diversifies our fabrication
capabilities.
We have a credit agreement with Whitney Bank and JPMorgan Chase Bank N.A. that
provides for an $80.0 million revolving credit facility. Our obligations under
the credit agreement are secured by substantially all of our assets, other than
real property located in the state of
Louisiana
. On February 29, 2016, we
entered into an amendment to our credit agreement. The amendment restates our
financial covenants beginning with the quarter ending March 31, 2016 as follows:
(i) minimum net worth not less than $250.0 million plus
(a) 50% of net income earned in each quarter beginning March 31, 2016 and (b) 100% of proceeds from any issuance of common stock; (ii) debt to EBITDA ratio not greater than 3.0 to 1.0; and
(iii) interest coverage ratio of not less than 2.0 to 1.0.
The amendment also (i) extends the term of the Credit Facility from February 29,
2016 to January 2, 2017; (ii) increases the commitment fee on undrawn amounts
from 0.25% to 0.50% per annum; (iii) increases the letter of credit fee, subject
to certain limited exceptions, to 2.0% per annum on undrawn stated amounts under
letters of credit issued by the lenders; and (iv) limits the maximum amount of
loans outstanding at any time for general corporate purposes to $20.0 million.
At December 31, 2015 we had no outstanding borrowings under the credit
agreement, and we had outstanding letters of credit totaling $20.5 million.
After consideration of outstanding letters of credit, the availability of the
unused portion of the revolving credit agreement (as amended) for additional
letters of credit and for general corporate purposes was $59.5 million and $20.0
million, respectively. Amounts borrowed under our the credit agreement bear
interest, at our option, at either the prime lending rate established by
JPMorgan Chase Bank, N.A. or LIBOR plus 2.0 percent.
Our primary liquidity requirements are for the costs associated with fabrication
projects, capital expenditures and payment of dividends to our shareholders. We
experienced a significant decline in our fabrication work from our oil and gas
customers during 2015 resulting from a steep decline in oil and gas prices.
We anticipate capital expenditures for 2016 to be approximately $4.0 million primarily for the following:
• computer system upgrades,
• improvement of bulkhead at our
Houma
facility, and
• improvements to our newly acquired facilities
On February 25, 2016, our Board of Directors declared a dividend of $0.01 per
share on our shares of common stock outstanding, payable March 24, 2016 to
shareholders of record on March 10, 2016. A decrease in our historical quarterly
dividend from $0.10 per share to $0.01 was recommended by management and
approved by our board of directors in an effort to conserve cash due to the
severity of the industry downturn.
On July 30, 2015, our Board of Directors authorized the Company to repurchase up
to $10.0 million in shares of our common stock under a share repurchase program
that remains in effect through July 30, 2017. Repurchases may be effected
through open market purchases or in privately negotiated transactions at such
times and in such amounts as management deems appropriate, depending on market
conditions and other factors. The repurchase program does not obligate the
Company to acquire any particular amount of common stock and may be modified,
suspended or discontinued at any time. To date, we have made no repurchases of
our common stock. Due to the severity of the industry downturn, management has
recommended and our board of directors has approved a temporary suspension of
our stock repurchase program in an effort to conserve cash.
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We believe our cash and cash equivalents generated by operating activities and
funds available under our credit facility will be sufficient to fund our capital
expenditures, issue future letters of credit and meet our working capital needs
for the next twelve months to continue our operations, satisfy our contractual
operations and pay dividends to our shareholders.
Cash Flows for the Years Ended December 31, 2015, 2014 and 2013 (in thousands):
2015 2014 2013
Operating activities $ 10,615 $ 32,110 $ 38,003 Investing activities $ (6,007 ) $ (26,729 ) $ (20,802 ) Financing activities $ (5,865 ) $ (5,865 ) $ (5,520 )
Operating activities: • The decrease in cash flows provided by operating activities for 2015 as
compared to 2014 is primarily due to net losses incurred during 2015 as
compared to net income during 2014.
• The decrease in cash flows provided by operating activities for 2014 as
compared to 2013 is primarily due to the increase in project costs in
2014, primarily in connection with the start-up of our large traditional
jacket deepwater project, partially offset by stronger operating
performance in 2014, specifically related to increased gross profit and
lower contract losses.
Investing activities:
• The decrease in cash flows used in investing activities for 2015 as
compared to 2014 is primarily due to reduced capital expenditures as a
result of management's concerted effort to reduce our discretionary and
capital spending to match the decrease in oil and gas fabrication work as
a result of decreases in oil and gas prices.
• The increase in cash flows used in investing activities for 2014 as
compared to 2013 is primarily due to increased capital expenditures for
equipment and improvements to our production facilities, including $15.4
million for two cranes at our
Texas
facility.
Financing activities:
• Cash flows used in financing activities for each of the years ended
December 31, 2015, 2014 and 2013 primarily related to the payment of
dividends.
Contractual Obligations and Commitments
The following table sets forth an aggregation of our contractual obligations and
commitments as of December 31, 2015, (in thousands).
Payments Due by Period
Less Than 1 to 3 3 to 5
Total 1 Year Years Years Thereafter
Purchase commitment -
material and services ¹ 3,862 3,862 - - -
Operating leases ² 911 217 446 248 -
$ 4,773 $ 4,079 $ 446 $ 248 $ -
(1) "Purchase commitment - material and services" is a commitment related to
purchase order agreements.
(2) Operating leases are commitments for office space.
Off-Balance Sheet Arrangements
We are not a party to any contract or other obligation not included on our
balance sheet that has, or is reasonably likely to have, a current or future
effect on our financial condition, changes in financial condition, revenues or
expenses, results of operations, liquidity, capital expenditures or capital
resources.
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Other Matters
During the first quarter of 2016, our Chief Financial Officer received a notice
from the SEC indicating that it had made a preliminary determination to
recommend that the SEC Division of Enforcement file a civil enforcement action
against him relating to his alleged responsibility for two accounting issues
that occurred during his tenure as controller of FMC Technologies, Inc.'s Energy
Infrastructure business segment from May 2012 to May 2013, a position he held
immediately prior to joining the Company. Our Chief Financial Officer has
advised the Company that he (i) has fully responded to all of the SEC's requests
for information, (ii) has cooperated and engaged in discussions with the SEC,
(iii) has discussed these matters with our Audit Committee, and (iv) intends to
vigorously defend any claims that may be brought.
As disclosed in its Form 10-K for the year ended December 31, 2015, FMC
Technologies, Inc. also received a notice indicating that the SEC had made a
preliminary determination to recommend that the SEC Division of Enforcement file
a civil enforcement action against FMC for alleged violations of the reporting,
books-and-records and internal control provisions of
U.S.
securities laws.
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