________________________________________________________________________________ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ________________________________________________________________________________ FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended JUNE 30, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from____________ to _____________ Commission File Number 0-22303 GULF ISLAND FABRICATION, INC. (Exact name of registrant as specified in its charter) LOUISIANA 72-1147390 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 583 THOMPSON ROAD, HOUMA, LOUISIANA 70363 (Address of principal executive offices) (Zip Code) (504) 872-2100 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO______ ------- The number of shares of the Registrant's common stock, no par value per share, outstanding at August 10, 1999 was 11,638,400. GULF ISLAND FABRICATION, INC. INDEX Page ---- PART I FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets at June 30, 1999 (unaudited) and December 31, 1998 3 Consolidated Statements of Income for the Three and Six Months Ended June 30, 1999 and 1998 (unaudited) 4 Consolidated Statement of Changes in Shareholders' Equity for the Six Months Ended June 30, 1999 (unaudited) 5 Consolidated Statements of Cash Flows for the Six Months Ended June 30, 1999 and 1998 (unaudited) 6 Notes to Consolidated Financial Statements 7-8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9-11 PART II OTHER INFORMATION Item 5. Other Information 12 Item 6. Exhibits and Reports on Form 8-K 12 SIGNATURES 13 EXHIBIT INDEX E-1 -2- GULF ISLAND FABRICATION, INC. CONSOLIDATED BALANCE SHEETS
(Unaudited) June 30, December 31, 1999 1998 -------------- -------------- (in thousands) ASSETS ------ Current assets: Cash $ 12,832 $ 2,808 Short-term investments 6,000 - Contracts receivable, net 19,250 34,682 Retainage 1,364 5,837 Costs and estimated earnings in excess of billings on uncompleted contracts 2,103 2,061 Prepaid expenses 400 878 Inventory 1,198 1,137 Recoverable income taxes - 531 -------------- -------------- Total current assets 43,147 47,934 Property, plant and equipment, net 45,019 45,418 Excess of cost over fair value of net assets acquired less accumulated amortization of $ 415,125 and $ 278,825 at June 30, 1999 and December 31, 1998, respectively 3,702 3,839 Other assets 793 549 -------------- -------------- Total assets $ 92,661 $ 97,740 ============== ============== LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ Current liabilities: Accounts payable $ 3,532 $ 7,151 Billings in excess of costs and estimated earnings on uncompleted contracts 5,921 9,476 Accrued employee costs 2,748 4,085 Accrued expenses 2,744 1,983 Income taxes payable 994 - -------------- -------------- Total current liabilities 15,939 22,695 Deferred income taxes 3,112 2,315 Notes payable - 3,000 -------------- -------------- Total liabilities 19,051 28,010 Shareholders' equity: Preferred stock, no par value, 5,000,000 shares authorized, no shares issued and outstanding - - Common stock, no par value, 20,000,000 shares authorized, 11,638,400 shares issued and outstanding at June 30, 1999 and December 31, 1998 4,162 4,162 Additional paid-in capital 35,124 35,124 Retained earnings 34,324 30,444 -------------- -------------- Total shareholders' equity 73,610 69,730 -------------- -------------- $ 92,661 $ 97,740 ============== ==============
The accompanying notes are an integral part of these statements. -3- GULF ISLAND FABRICATION, INC. CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended June 30, Six Months Ended June 30, 1999 1998 1999 1998 ------------ ------------- ----------- ------------ (in thousands, except per share data) Revenue $ 28,106 $ 50,641 $ 58,435 $ 97,555 Cost of revenue 24,093 40,874 50,196 79,477 ------------ ------------- ----------- ------------ Gross profit 4,013 9,767 8,239 18,078 General and administrative expenses 989 1,460 2,271 3,074 ------------ ------------- ----------- ------------ Operating income 3,024 8,307 5,968 15,004 Other expense (income): Interest expense 14 11 35 53 Interest income (166) (22) (267) (89) Other - net 39 4 (10) 4 ------------ ------------- ----------- ------------ (113) (7) (242) (32) ------------ ------------- ----------- ------------ Income before income taxes 3,137 8,314 6,210 15,036 Income taxes 1,182 3,163 2,330 5,652 ------------ ------------- ----------- ------------ Net income $ 1,955 $ 5,151 $ 3,880 $ 9,384 ============ ============= =========== ============ Per share data: Basic earnings per share $ 0.17 $ 0.44 $ 0.33 $ 0.81 ============ ============= =========== ============ Diluted earnings per share $ 0.17 $ 0.44 $ 0.33 $ 0.80 ============ ============= =========== ============ Weighted-average shares 11,638 11,632 11,638 11,622 Effect of dilutive securities: employee stock options 69 89 43 97 ------------ ------------- ----------- ------------ Adjusted weighted-average shares 11,707 11,721 11,681 11,719 ============ ============= =========== ============
The accompanying notes are an integral part of these statements. -4- GULF ISLAND FABRICATION, INC. CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
Additional Total Common Stock Paid-In Retained Shareholders' Shares Amount Capital Earnings Equity ---------- -------- ------------ ---------- --------------- (in thousands, except share data) Balance at January 1, 1999 11,638,400 $ 4,162 $35,124 $30,444 $ 69,730 Net income - - - 3,880 3,880 ---------- -------- ------------ ---------- --------------- Balance at June 30, 1999 11,638,400 $ 4,162 $35,124 $34,324 $ 73,610 ========== ======== ============ ========== ===============
The accompanying notes are an integral part of these statements. -5- GULF ISLAND FABRICATION, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six months ended June 30, 1999 1998 -------------- -------------- (in thousands) Cash flows from operating activities: Net income $ 3,880 $ 9,384 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 2,315 1,889 Amortization 137 141 Deferred income taxes 797 (168) Changes in operating assets and liabilities: Contracts receivable 15,432 (3,085) Retainage 4,473 (2,376) Costs and estimated earnings in excess of billings on uncompleted contracts (42) (1,653) Prepaid expenses and other assets 478 586 Inventory (61) (159) Accounts payable and accrued expenses (4,195) 2,728 Income taxes payable 1,525 959 Billings in excess of costs and estimated earnings on uncompleted contracts (3,555) 2,385 -------- --------- Net cash provided by operating activities 21,184 10,631 Cash flows from investing activities: Capital expenditures, net (1,916) (5,601) Short-term investments (6,000) - Payment for purchase of Southport, net of cash acquired - (5,922) Other (244) (52) -------- --------- Net cash used in investing activities (8,160) (11,575) Cash flows from financing activities: Borrowings against notes payable - 8,000 Principal payments on notes payable (3,000) (10,600) Proceeds from exercise of stock options - 288 -------- --------- Net cash used in financing activities (3,000) (2,312) -------- --------- Net increase (decrease) in cash 10,024 (3,256) Cash at beginning of period 2,808 6,879 -------- --------- Cash at end of period $ 12,832 $ 3,623 ======== ========= Supplemental cash flow information: Interest paid $ 54 $ 38 ======== ========= Income taxes paid $ 55 $ 4,827 ======== =========
The accompanying notes are an integral part of these statements. -6- GULF ISLAND FABRICATION, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTH AND SIX MONTH PERIODS ENDED JUNE 30, 1999 AND 1998 NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING PRINCIPLES Gulf Island Fabrication, Inc. ("Gulf Island"), together with its wholly owned subsidiaries (collectively "the Company"), is a leading fabricator of offshore drilling and production platforms and other specialized structures used in the development and production of offshore oil and gas reserves. The Company, located in Houma, Louisiana, also offers offshore interconnect pipe hook-up, inshore marine construction, manufacture and repair of pressure vessels, steel warehousing and sales, and the fabrication of offshore living quarters. Gulf Island's principal markets are concentrated in the offshore regions of the Gulf of Mexico. The consolidated financial statements include the accounts of Gulf Island and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. The information presented at June 30, 1999 and for the three months and six months ended June 30, 1999 and 1998, is unaudited. In the opinion of the Company's management, the accompanying unaudited financial statements contain all adjustments (consisting of normal recurring adjustments) that the Company considers necessary for the fair presentation of the Company's financial position at June 30, 1999 and the results of its operations for the three months and six months ended June 30, 1999 and 1998, and its cash flows for the six months ended June 30, 1999 and 1998. The results of operations for the three months and six months ended June 30, 1999 are not necessarily indicative of the results that may be expected for the year ending December 31, 1999. In the opinion of management, the financial statements included herein have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 1998. NOTE 2 - SHORT-TERM INVESTMENTS Short-term investments consist of highly-liquid debt securities with a maturity of greater than three months, but less than twelve months. The securities are classified as available-for-sale and the fair value of these investments approximated their carrying value at June 30, 1999. -7- GULF ISLAND FABRICATION, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued) NOTE 3 - EARNINGS PER SHARE Basic earnings per share ("EPS") is computed by dividing net income by the weighted-average shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if employee stock options were exercised or converted into common stock. Quarterly per share data may not sum to the year- to-date data reported in the Company's consolidated financial statements due to rounding. NOTE 4 - NOTES PAYABLE Effective June 23, 1999, the Company's existing bank credit facility was amended and restated in order, among other reasons, to extend the maturity date to December 31, 2001. The credit facility provides for a revolving line of credit (the "Revolver") of up to $20.0 million that bears interest equal to, at the Company's option, the prime lending rate established by Bank One Corporation or LIBOR plus 1.5%. The Company is required to maintain certain balance sheet and cash flow ratios. The Company pays a fee quarterly of three-eighths of one percent per annum on the weighted-average unused portion of the line of credit. At June 30, 1999, there were no borrowings outstanding under the credit facility. NOTE 5 - CONTINGENCIES The Company is one of four defendants in a lawsuit in which the plaintiff claims that the Company improperly installed certain attachments to a jacket that it had fabricated for the plaintiff. The plaintiff, which has recovered most of its out-of-pocket losses from its insurer, seeks to recover the remainder of its claimed out-of-pocket losses (approximately $1 million) and approximately $65 million from the four defendants for economic losses that it alleges resulted from the delay in oil and gas production that was caused by these events. The trial court has issued rulings, the effect of which is to limit the damage recoverable from all four defendants to a maximum of $15 million. The trial court has issued this and other rulings that have been favorable to the defendants, all of which are subject to appeal by the plaintiff at the conclusion of the trial. Management is vigorously defending this case and, after consultation with legal counsel, does not expect that the ultimate resolution of this matter will have a material adverse effect on the financial position or results of operations of the Company, although no assurances can be given as to the ultimate outcome of the claims. The Company is subject to other claims arising primarily in the normal conduct of its business. While the outcome of such claims cannot be determined, management does not expect that resolution of these matters will have a material adverse effect on the financial position or results of operations of the Company, although no assurances can be given as to the ultimate outcome of the claims. -8- Item 2. Management's Discussion and Analysis of Financial Condition And Results of Operations. Results of Operations The Company's revenue for the three-month and six-month periods ended June 30, 1999 was $28.1 million and $58.4 million, a decrease of 44.5% and 40.2%, respectively, compared to $50.6 million and $97.6 million in revenue for the three-month and six-month periods ended June 30, 1998. Revenue decreased as a result of a lower volume of direct labor hours applied to contracts during the 1999 periods compared to the same periods ended in 1998. The slower than expected recovery in the oil and gas industry has made fewer fabrication projects available; consequently, in the three-month and six-month periods ended June 30, 1999, the Company had fewer contracts in its backlog and thus fewer hours worked compared to the same periods in 1998. The fewer number of projects available has also caused the competitiveness in the bidding process to substantially reduce margins on contracts that have been awarded. For the three-month and six-month periods ended June 30, 1999, gross profit was $4.0 million (14.3% of revenue) and $8.2 million (14.1% of revenue), compared to $9.8 million (19.3% of revenue) and $18.1 million (18.5% of revenue) of gross profit for the three-month and six-month periods ended June 30, 1998. The Company's general and administrative expenses were $989,000 for the three- month period ended June 30, 1999 and $2.3 million for the six-month period ended June 30, 1999. This compares to $1.5 million for the three-month period ended June 30, 1998 and $3.1 million for the six-month period ended June 30, 1998. These decreases of $471,000 and $803,000, respectively, were primarily the result of the more efficient managing of costs associated with public company reporting requirements and a general decrease in costs related to reduced production levels. In an effort to further control general and administrative costs, the Company implemented an overall 5% reduction in hourly and salary wages effective May 31, 1999 and June 1, 1999, respectively. The Company had net interest income of $113,000 and $242,000 for the three- month and six-month periods ended June 30, 1999, respectively, compared to $7,000 and $32,000 for the three-month and six-month periods ended June 30, 1998. The current reduction in production levels generated more available cash for investment purposes. Although there have been recent increases in the price of oil and natural gas, these increases are not being reflected in the number and dollar value of projects in the market. Accordingly, the Company is continuously monitoring its costs as production levels decline in order to take appropriate actions. Liquidity and Capital Resources Historically the Company has funded its business activities through funds generated from operations and borrowings under its bank credit facility. Net cash provided by operations was $21.2 million for the six months ended June 30, 1999 with an eight percent increase in working capital to $27.2 million. Net cash used in investing activities for the six months ended -9- June 30, 1999 was $8.2 million, of which $6.0 million related to the purchase of short-term investments during the period. The majority of the remaining $2.2 million consisted of capital expenditures during the period, specifically $1.4 million for one new Manitowoc crane and approximately $600,000 for equipment and improvements to the production facilities. Net cash used in financing activities was $3.0 million for the six-month period ended June 30, 1999. This amount was a payment to eliminate the outstanding balance on the Company's bank credit facility. The Company's bank credit facility currently provides for a revolving line of credit (the "Revolver") of up to $20.0 million, which bears interest equal to, at the Company's option, the prime lending rate established by Bank One Corporation or LIBOR plus 1 1/2%. The Revolver matures December 31, 2001 and is secured by a mortgage on the Company's real estate, equipment and fixtures. At June 30, 1999, the Company had no outstanding borrowings under the credit facility. Capital expenditures for the remaining six months of 1999 are estimated to be approximately $4.1 million, including improvements to the facilities and various other fabrication equipment. Management believes that its available funds, cash generated by operating activities and funds available under the Revolver will be sufficient to fund these capital expenditures and its working capital needs. The Company may, however, expand its operations through future acquisitions that may require additional equity or debt financing. Year 2000 Issues The Problem. Year 2000 issues result from the past practice in the computer industry of using two digits rather than four digits when coding the year portion of a date. This practice can create breakdowns or erroneous results when computers and processors embedded in other equipment perform operations involving dates later than December 31, 1999. The Company's State of Readiness. The Company has assessed the Year 2000 compliance of its information technology systems and has purchased software and hardware that it believes will be adequate to upgrade all of these systems to Year 2000 compliance. The Company has also surveyed its significant non- information technology equipment for Year 2000 issues. Although the Company uses several such items of equipment that are significant to its operations (such as automated welding and cutting equipment), none of the automated functions of this equipment are date sensitive and the Company believes that none of the equipment will require replacement or modification for Year 2000 compliance. The Company does not have any significant suppliers or customers whose information technology systems directly interface with that of the Company; nevertheless, as part of its assessment of its state of readiness, the Company has surveyed a representative number of its suppliers and customers for Year 2000 compliance. To date, the Company has received replies from approximately 73% of the suppliers that it has contacted, all of which (with insignificant exceptions) have indicated that they have taken appropriate steps to achieve Year 2000 compliance or have plans to do so. The Company has received replies from approximately 77% of its customers contacted, all of which have indicated that they have taken steps to achieve Year 2000 compliance or have plans to do so. -10- Costs. Because the Company's information technology systems have been regularly upgraded and replaced as part of the Company's ongoing efforts to maintain high-grade technology and because the Company is not heavily dependent on non-information technology equipment that is date sensitive, the Company's Year 2000 compliance costs are expected to be relatively low. The Company has incurred $77,000 to purchase software and hardware to upgrade its information technology systems and management does not believe that significant additional costs will be required for Year 2000 compliance. There can be no guarantee, however, that actual costs will not exceed that amount. Risks. Although the Company believes that it has taken reasonable steps to assess its internal systems and prepare them for Year 2000 issues, if those steps prove inadequate the Company's ability to estimate and bid on new jobs and its financial and other daily business procedures could be interrupted or delayed, any of which could have a material adverse effect on the Company's operations. Because the replies to the Company's survey of its suppliers and customers is not complete, the Company is not in a position to evaluate the risk of their non-compliance. It is possible that the operations of the Company could be adversely affected to a material extent by the non-compliance of significant suppliers or customers. Contingency Plan. While the Company intends to continue to monitor Year 2000 issues, it does not currently have a contingency plan for dealing with the possibility that its current systems may prove inadequate, nor does the Company currently intend to develop such a plan. Forward-Looking Statements Statements under "Year 2000 Issues" as to the Company's beliefs and expectations, statements in the last paragraph under "Results of Operations" and other statements in this report and the exhibits hereto that are not statements of historical fact are forward-looking statements. These statements involve risks and uncertainties that include, among others, the timing and extent of changes in the prices of crude oil and natural gas, the timing of new projects and the Company's ability to obtain them, competitive factors in the heavy marine fabrication industry, the accuracy of the Company's assessment of its exposure to Year 2000 issues and the adequacy of the steps it has taken to address those issues. Changes in these factors could result in changes in the Company's performance and could cause the actual results to differ materially from those expressed in the forward-looking statements. -11- PART II. OTHER INFORMATION Item 5. Other Information On July 22, 1999 the Company announced its 1999 second quarter earnings and related matters. The press release making this announcement is attached hereto as Exhibit 99.1. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits. 10.1 First Amendment to the Seventh Amended and Restated Revolving Credit Agreement among the Company and Bank One, Louisiana, N.A. and Whitney National Bank, dated June 23, 1999. 27.1 Financial Data Schedule. 99.1 Press release issued by the Company on July 22, 1999 announcing its 1999 second quarter earnings and related matters. (b) The Company filed no reports on Form 8-K during the quarter for which this report is filed. -12- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. GULF ISLAND FABRICATION, INC. By: /s/ Joseph P. Gallagher, III --------------------------------- Joseph P. Gallagher, III Vice President - Finance, Chief Financial Officer and Treasurer (Principal Financial Officer and Duly Authorized Officer) Date: August 11, 1999 -13- GULF ISLAND FABRICATION, INC. EXHIBIT INDEX Exhibit Number Description of Exhibit - ------ ---------------------- 10.1 First Amendment to the Seventh Amended and Restated Revolving Credit Agreement among the Company and Bank One, Louisiana, N.A. and Whitney National Bank, dated June 23, 1999. 27.1 Financial Data Schedule. 99.1 Press release issued by the Company on July 22, 1999 announcing its 1999 second quarter earnings and related matters. E-1