Gulf Island Fabrication(GIFI) - 2019 Q2 - Quarterly Report

Report Information Filing Information This report is GULF ISLAND FABRICATION, INC.'s 10-Q quarterly filing for the period ended June 30, 2019, identifying the company as an accelerated filer and smaller reporting company with 15,237,502 common shares outstanding as of August 6, 2019 - The company is an Accelerated filer and a Smaller reporting company[4] Company Basic Information | Metric | Information | | :--- | :--- | | Filing Type | 10-Q Quarterly Report | | Quarter End Date | June 30, 2019 | | Registrant Name | GULF ISLAND FABRICATION, INC. | | State or Jurisdiction | LOUISIANA | | Employer Identification Number | 72-1147390 | | Phone Number | (713) 714-6100 | | Trading Symbol | GIFI | | Registered Exchange | NASDAQ | | Common Stock Outstanding (as of August 6, 2019) | 15,237,502 | | All Required Reports Filed | Yes | | All Interactive Data Files Filed | Yes | GLOSSARY OF TERMS This section defines key abbreviations and terms used in the report, including company names, accounting standards, contract-related terms, financial instruments, asset types, and business operating locations, ensuring readers have a clear understanding of professional terminology - The glossary defines key abbreviations and terms used in the report, such as "Gulf Island", "Company", "we", "us", and "our", all referring to Gulf Island Fabrication, Inc. and its consolidated subsidiaries[9] - It covers accounting standards (ASU, GAAP, Topic 606), contract-related terms (contract assets, contract liabilities, Performance Obligation, T&M), financial instruments (Credit Agreement, LIBOR, Surety), asset types (deck, jacket, modules, piles, platform, pressure vessel, SPAR, subsea templates, TLP), and business operating locations (GOM, inland/inshore, offshore, onshore)[10][12][14] PART I FINANCIAL INFORMATION Item 1. Financial Statements This section presents the company's unaudited consolidated financial statements for the period ended June 30, 2019, including balance sheets, statements of operations, statements of changes in shareholders' equity, and cash flow statements, along with related notes, providing detailed information on the company's financial position and operating performance Consolidated Balance Sheets As of June 30, 2019, the company's total assets were $277.6 million, a 7.5% increase from December 31, 2018, with a significant decrease in cash and cash equivalents offset by substantial increases in short-term investments and contract assets Consolidated Balance Sheet Key Data (in thousands of dollars) | Metric | June 30, 2019 (Unaudited) | December 31, 2018 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $30,192 | $70,457 | | Short-term investments | $45,791 | $8,720 | | Accounts and retainage receivable, net | $23,343 | $22,505 | | Contract assets | $51,334 | $29,982 | | Inventories | $4,543 | $6,088 | | Assets held for sale | $18,737 | $18,935 | | Total current assets | $177,927 | $159,955 | | Property, plant and equipment, net | $75,862 | $79,930 | | Other noncurrent assets | $23,802 | $18,405 | | Total Assets | $277,591 | $258,290 | | Liabilities and Shareholders' Equity | | | | Accounts payable | $55,238 | $28,969 | | Contract liabilities | $13,823 | $16,845 | | Accrued expenses and other liabilities | $9,719 | $10,287 | | Total current liabilities | $78,780 | $56,101 | | Other noncurrent liabilities | $5,369 | $1,089 | | Total Liabilities | $84,149 | $57,190 | | Total shareholders' equity | $193,442 | $201,100 | | Total Liabilities and Shareholders' Equity | $277,591 | $258,290 | - As of June 30, 2019, cash and cash equivalents decreased from $70.5 million on December 31, 2018, to $30.2 million, while short-term investments increased from $8.7 million to $45.8 million[18] - Contract assets increased from $30.0 million on December 31, 2018, to $51.3 million on June 30, 2019, while contract liabilities decreased from $16.8 million to $13.8 million[18] Consolidated Statements of Operations For the three and six months ended June 30, 2019, the company reported net losses in both periods, primarily due to increased gross and operating losses, indicating a decline in profitability despite revenue growth Consolidated Statements of Operations Key Data (in thousands of dollars, except per share data) | Metric | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :--- | :--- | :--- | :--- | :--- | | Revenue | $80,456 | $54,014 | $148,061 | $111,304 | | Cost of sales | $82,054 | $54,713 | $149,106 | $111,324 | | Gross loss | $(1,598) | $(699) | $(1,045) | $(20) | | Selling, general and administrative expenses | $3,987 | $5,092 | $7,821 | $9,801 | | Impairment of assets and (gain) loss on assets held for sale, net | $0 | $(6,579) | $(70) | $(5,829) | | Other (income) expense, net | $(201) | $64 | $(130) | $375 | | Operating (loss) income | $(5,384) | $724 | $(8,666) | $(4,367) | | Interest (expense) income, net | $126 | $(92) | $388 | $(238) | | Net (loss) income before income taxes | $(5,258) | $632 | $(8,278) | $(4,605) | | Income tax (expense) benefit | $10 | $(83) | $(12) | $(142) | | Net (Loss) Income | $(5,248) | $549 | $(8,290) | $(4,747) | | Basic and diluted (loss) income per common share | $(0.34) | $0.04 | $(0.55) | $(0.32) | - For the three months ended June 30, 2019, revenue increased by 49.0% to $80.5 million year-over-year, but gross loss widened from $0.7 million to $1.6 million, and operating income turned into a $5.4 million loss from a $0.7 million income[20] - For the six months ended June 30, 2019, revenue increased by 33.0% to $148.1 million year-over-year, gross loss widened from $20 thousand to $1.0 million, and operating loss increased from $4.4 million to $8.7 million[20] Consolidated Statements of Changes in Shareholders' Equity As of June 30, 2019, the company's total shareholders' equity decreased to $193.4 million from $201.1 million on December 31, 2018, primarily due to the net loss recorded during the reporting period Consolidated Statements of Changes in Shareholders' Equity Key Data (in thousands of dollars) | Metric | December 31, 2018 | March 31, 2019 | June 30, 2019 | | :--- | :--- | :--- | :--- | | Common stock | $11,021 | $11,006 | $11,085 | | Additional paid-in capital | $102,243 | $102,104 | $102,811 | | Retained earnings | $87,836 | $84,794 | $79,546 | | Total Shareholders' Equity | $201,100 | $197,904 | $193,442 | | Net loss (as of March 31) | - | $(3,042) | - | | Net loss (as of June 30) | - | - | $(5,248) | | Restricted stock vesting | - | $(714) | - | | Stock-based compensation expense | - | $560 | $786 | - As of June 30, 2019, retained earnings decreased from $87.8 million on December 31, 2018, to $79.5 million, reflecting the net loss incurred during the reporting period[23] Consolidated Statements of Cash Flows For the six months ended June 30, 2019, the company experienced a net cash outflow of $2.9 million from operating activities, $36.6 million from investing activities, and $0.8 million from financing activities, resulting in a net decrease of $40.3 million in cash and cash equivalents Consolidated Statements of Cash Flows Key Data (in thousands of dollars) | Metric | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :--- | :--- | :--- | | Net cash from operating activities | $(2,884) | $(26,427) | | Net cash from investing activities | $(36,627) | $50,246 | | Net cash from financing activities | $(754) | $(798) | | Net increase (decrease) in cash and cash equivalents | $(40,265) | $23,021 | | Cash and cash equivalents at beginning of period | $70,457 | $8,983 | | Cash and cash equivalents at end of period | $30,192 | $32,004 | - In the first half of 2019, net cash outflow from operating activities significantly decreased from $26.4 million in the same period of 2018 to $2.9 million[26] - Cash flow from investing activities shifted from a $50.2 million inflow in the first half of 2018 to a $36.6 million outflow in the same period of 2019, primarily due to the purchase of short-term investments[26] Notes to Consolidated Financial Statements This section provides detailed notes to the consolidated financial statements, covering key information such as the company's organizational structure, significant accounting policies, revenue recognition, contract assets and liabilities, assets held for sale, credit arrangements, commitments and contingencies, earnings per share calculation, and segment disclosures 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The company is a leading fabricator of complex steel structures, modules, and marine vessels, managing its business through three operating divisions: Fabrication, Shipyard, and Services; this note details the company's business nature, basis of accounting, critical accounting estimates, revenue recognition policies, and adoption of new accounting standards - The company primarily engages in the fabrication of complex steel structures, modules, and marine vessels, also providing project management, hook-up, commissioning, repair, maintenance, and civil construction services[28] - The company manages its business through three operating divisions: Fabrication, Shipyard, and Services, along with a non-operating Corporate division; the former EPC division was merged with the Fabrication division in the first quarter of 2019[28][100] - The company is strategically shifting its focus to petrochemical and industrial facility fabrication, offshore wind opportunities, and diversifying its customer base to address the downturn in the oil and gas industry[32][112] - The company adopted ASU 2016-02 "Leases" in the first quarter of 2019, resulting in the recognition of lease assets of $6.9 million and lease liabilities of $5.1 million on the balance sheet as of June 30, 2019[61][62] 2. REVENUE, CONTRACT ASSETS AND LIABILITIES AND OTHER CONTRACT MATTERS This note details the company's revenue by contract type and operating segment, as well as changes in contract assets and liabilities; as of June 30, 2019, the company's total remaining performance obligations were $454.5 million, expected to be recognized as revenue over the next several years Revenue by Contract Type and Division (in thousands of dollars) | Division/Contract Type | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :--- | :--- | :--- | :--- | :--- | | Fabrication Division | | | | | | Fixed-price and unit-rate | $22,415 | $9,472 | $35,046 | $26,815 | | T&M | $0 | $0 | $0 | $0 | | Other | $0 | $0 | $0 | $0 | | Shipyard Division | | | | | | Fixed-price and unit-rate | $36,607 | $21,259 | $70,233 | $38,481 | | T&M | $960 | $2,361 | $3,921 | $3,704 | | Other | $0 | $0 | $0 | $0 | | Services Division | | | | | | Fixed-price and unit-rate | $12,668 | $10,576 | $18,899 | $20,866 | | T&M | $8,187 | $10,486 | $18,809 | $21,071 | | Other | $3,210 | $1,143 | $5,959 | $2,138 | | Total | $80,456 | $54,014 | $148,061 | $111,304 | Remaining Performance Obligations (in thousands of dollars) | Period | Performance Obligations | | :--- | :--- | | Remainder of 2019 | $146,150 | | 2020 | $205,651 | | 2021 | $96,481 | | Thereafter | $6,240 | | Total | $454,522 | Contract Assets and Liabilities (in thousands of dollars) | Metric | June 30, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Contract assets | $51,334 | $29,982 | | Contract liabilities | $(13,823) | $(16,845) | | Contracts in progress, net | $37,511 | $13,137 | - As of June 30, 2019, the Shipyard division's remaining performance obligations do not include approximately $21.9 million related to two MPSV construction contracts in dispute due to customer termination notices[70] - In the first half of 2019, the allowance for doubtful accounts was $0.1 million, compared to $8 thousand in the same period of 2018; as of June 30, 2019, the allowance for doubtful accounts was $0.1 million[74] - In the first half of 2019, operating loss increased by $2.0 million due to increased cost estimates for the port tug and ice-class tug projects[76][79] 3. ASSETS HELD FOR SALE As of June 30, 2019, the company held $18.7 million in assets for sale, primarily including machinery and equipment from the Fabrication division and a dry dock from the Shipyard division, with the aim of optimizing asset allocation and improving liquidity Assets Held for Sale Summary (in thousands of dollars) | Asset | Fabrication Division | Shipyard Division | Consolidated Total | | :--- | :--- | :--- | :--- | | Machinery and equipment | $25,684 | $1,222 | $26,906 | | Accumulated depreciation | $(7,871) | $(298) | $(8,169) | | Total | $17,813 | $924 | $18,737 | - The Fabrication division's assets held for sale primarily include three 660-ton crawler cranes, one deck barge, two plate bending rolls, and panel line equipment, which have been relocated to the Houma, Louisiana fabrication facility[81] - The Shipyard division's assets held for sale include a 2,500-ton dry dock[85] - In the first half of 2018, the company recognized a $3.9 million gain from the sale of its South Texas facility and a $3.6 million gain from the settlement of Hurricane Harvey insurance claims[80][86] 4. CREDIT FACILITIES The company has a $40.0 million revolving credit agreement with Hancock Whitney Bank, amended on May 1, 2019, extending the maturity date to June 9, 2021; as of June 30, 2019, the company had no outstanding borrowings and $29.3 million available under the facility - The company has a $40.0 million revolving credit agreement available for borrowings or letters of credit[86] - The credit agreement was amended on May 1, 2019, extending the maturity date to June 9, 2021, and revising financial covenants[86] Credit Agreement Financial Covenants (as of June 30, 2019) | Covenant | Requirement | | :--- | :--- | | Current assets to current liabilities ratio | Not less than 2.00:1.00 | | Minimum tangible net worth | At least $170.0 million, plus 100% of net proceeds from stock issuance or other equity | | Interest-bearing debt to tangible net worth ratio | Not more than 0.50:1.00 | - As of June 30, 2019, the company had no outstanding borrowings, $10.7 million in outstanding letters of credit, and $29.3 million available under the facility[89] - As of June 30, 2019, the company was in compliance with all financial covenants, with a tangible net worth of $191.3 million, a current assets to current liabilities ratio of 2.26:1.0, and an interest-bearing debt to tangible net worth ratio of 0.06:1.0[89] - As of June 30, 2019, the company had $375.9 million in outstanding surety bonds[90] 5. COMMITMENTS AND CONTINGENCIES The company faces various routine legal proceedings, primarily involving commercial disputes, workers' compensation, and personal injury claims; a dispute with a customer regarding the termination of two MPSV construction contracts is ongoing, and the company has filed a lawsuit to protect its rights - The company faces an ongoing customer dispute related to the termination of two MPSV construction contracts, having filed a lawsuit on October 2, 2018, with the customer filing counterclaims; the court denied the customer's request for possession of the vessels on May 28, 2019[92][118] - As of June 30, 2019, other noncurrent assets on the balance sheet included $12.5 million in net contract assets related to the MPSV project[93][119] Future Operating Lease Payments (in thousands of dollars) | Period | Payment Amount | | :--- | :--- | | Remainder of 2019 | $326 | | 2020 | $659 | | 2021 | $668 | | 2022 | $677 | | 2023 | $676 | | Thereafter | $6,173 | | Total Lease Payments | $9,179 | | Less interest | $(4,084) | | Present Value of Lease Liabilities | $5,095 | - As of June 30, 2019, the weighted-average remaining lease term was approximately 16.0 years, and the weighted-average discount rate used to calculate lease liabilities was 7.5%[97] 6. INCOME (LOSS) PER COMMON SHARE For the three and six months ended June 30, 2019, the company reported basic and diluted losses per common share of $0.34 and $0.55, respectively, compared to earnings of $0.04 and a loss of $0.32 in the corresponding periods of 2018 Income (Loss) Per Common Share Calculation (in thousands of dollars, except per share data) | Metric | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :--- | :--- | :--- | :--- | :--- | | Net (loss) income attributable to common shareholders | $(5,248) | $549 | $(8,290) | $(4,747) | | Weighted-average shares outstanding | 15,236 | 15,043 | 15,194 | 15,004 | | Basic and Diluted (Loss) Income Per Common Share | $(0.34) | $0.04 | $(0.55) | $(0.32) | - The company has no dilutive securities, thus basic and diluted earnings per share are the same[99] 7. SEGMENT DISCLOSURES The company currently manages its business through three operating divisions: Fabrication, Shipyard, and Services, along with a non-operating Corporate division; the former EPC division was merged with the Fabrication division in the first quarter of 2019, and financial information for each segment is evaluated based on revenue, gross profit (loss), and operating profit (loss) - The Fabrication division focuses on fabricating petrochemical and industrial facility modules, alternative energy foundations, and offshore oil and gas structures[100] - The Shipyard division engages in new vessel construction, including OSVs, MPSVs, research vessels, tugs, and vessel repair activities[101] - The Services division provides offshore platform and inland structure interconnect piping services, field construction and maintenance activities, as well as skid unit fabrication and municipal projects[102] Revenue and Operating (Loss) Income by Segment (in thousands of dollars) | Division | Three Months Ended June 30, 2019 Revenue | Three Months Ended June 30, 2019 Operating (Loss) Income | Six Months Ended June 30, 2019 Revenue | Six Months Ended June 30, 2019 Operating (Loss) Income | | :--- | :--- | :--- | :--- | :--- | | Fabrication | $22,415 | $(1,211) | $35,046 | $(2,751) | | Shipyard | $37,567 | $(3,564) | $74,154 | $(4,468) | | Services | $24,065 | $1,728 | $43,667 | $3,017 | | Corporate | $(3,591) | $(2,337) | $(4,806) | $(4,464) | | Consolidated Total | $80,456 | $(5,384) | $148,061 | $(8,666) | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's detailed analysis of the company's financial condition and operating performance, including cautionary statements on forward-looking information, business overview, asset divestitures, backlog growth strategies, review of alternative strategies, operating outlook, safety culture, critical accounting policies, new awards and backlog, segment operating results, and liquidity and capital resources Cautionary Statement on Forward-Looking Information This report contains forward-looking statements regarding the company's future performance, such as oil and gas prices, operating cash flow, and capital expenditures; these statements are not guarantees of future performance, and actual results may differ materially due to various factors including oil and gas industry cyclicality, competition, contract terms, weather conditions, and project terminations - Forward-looking statements include projections or expectations regarding oil and gas prices, operating cash flow, capital expenditures, liquidity, and tax rates[106] - Actual results may differ materially due to factors such as oil and gas industry cyclicality, competition, customer consolidation, timing of new contract awards, customer financial capability, contract terms, project cost overruns, weather conditions, changes in backlog estimates, and project suspensions or terminations[107] - The company does not intend to update forward-looking statements frequently, even if assumptions, business plans, or actual experience change[108] Overview The company is a leading fabricator of steel structures, modules, and marine vessels, serving the energy, petrochemical, industrial, power, alternative energy, and marine sectors; in response to the oil and gas industry downturn, the company is actively transforming its business, focusing on petrochemical and industrial facilities, offshore wind projects, and diversifying its customer base, while also improving liquidity through cost reductions and asset sales - The company is a leading fabricator of complex steel structures, modules, and marine vessels, serving the energy, petrochemical, industrial facilities, power, alternative energy, and marine industries[110] - In the first quarter of 2019, the former EPC division was merged with the Fabrication division, and the company now manages its business through three operating divisions: Fabrication, Shipyard, and Services[111] - In response to the sustained decline in oil and gas prices since late 2014, the company has implemented cost reduction measures and divested underutilized assets, strategically shifting its focus to petrochemical and industrial facilities, offshore wind opportunities, and diversifying its customer base[112] Ongoing Effort to Divest of Underutilized Assets The company continues to divest underutilized assets to improve liquidity, having completed the sale of its South Texas and North Texas facilities in 2018; as of June 30, 2019, the Fabrication division still held $17.8 million in assets for sale, and the Shipyard division had a $0.9 million dry dock for sale - In the second and fourth quarters of 2018, the company completed the sales of its South Texas and North Texas facilities, respectively[113] - As of June 30, 2019, the Fabrication division still held $17.8 million in assets for sale (Fabrication AHFS), primarily including three 660-ton crawler cranes, one deck barge, two plate bending rolls, and panel line equipment[113] - As of June 30, 2019, the Shipyard division had $0.9 million in assets held for sale (Shipyard AHFS), including a 2,500-ton dry dock[114] Ongoing Efforts to Increase Our Backlog, Diversify Our Customer Base and Resolve Customer Dispute The company is actively pursuing petrochemical and industrial fabrication and offshore wind projects, successfully partnering with Smulders to expand into the offshore wind market; concurrently, the company has increased its non-oil and gas backlog in the Shipyard and Services divisions and continues to address a customer dispute related to the termination of two MPSV construction contracts - The company continues to focus its business development efforts on petrochemical and industrial fabrication opportunities, with increasing bidding activity[115] - The company signed a cooperation agreement with Smulders, a Belgian company, to jointly pursue US offshore wind opportunities, aiming for a strategic position in this emerging market[116] - The Shipyard division's backlog increased with non-oil and gas customers, including contracts to build three Towing, Salvage, and Rescue ships for the US Navy, three Regional Class Research Vessels, and six Port Tugboats[119] - The Fabrication division's backlog increased with traditional and non-traditional fabrication work, including the construction of offshore jackets and decks, the expansion of a paddlewheel riverboat, and the construction of two ferries[119] - Demand for offshore hook-up, upgrade, and maintenance services remains strong in the Services division, with plans to pursue service opportunities in the West Texas shale basin[118] - The company is addressing a customer dispute regarding the termination of two MPSV construction contracts, having filed a lawsuit, and the court denied the customer's request for possession of the vessels on May 28, 2019[118] Review of Alternative Strategies On May 6, 2019, the company's Board of Directors formed a special committee to initiate a review of alternative strategies aimed at enhancing shareholder value; there is currently no assurance that this review will result in any transaction or other strategic changes - The company's Board of Directors has formed a special committee to explore alternative strategies aimed at enhancing shareholder value[120] Operating Outlook The company is committed to maintaining liquidity, securing new project awards and backlog, and generating operating income and cash flow in the long term; while the Fabrication division may be negatively impacted by underutilized facilities in the short term, and the Shipyard division faces similar challenges, the company expects strong performance from the Services division and an increase in the Shipyard division's backlog - The company will continue to focus on maintaining liquidity, securing meaningful new project awards and backlog in the near term, and generating operating income and cash flow in the long term[121] - The Fabrication division will be negatively impacted by underutilized facilities in the short term, and the Shipyard division will experience similar impacts until major project construction activities commence[121] - The Shipyard division's port tug project is operating at a loss and will generate revenue with no gross profit in the future[121] Safety The company is committed to the safety and health of its employees and subcontractors, ensuring a safe workplace and compliance with all applicable federal and state safety regulations through rigorous safety assurance programs, continuous safety education and training, and a zero-tolerance drug and alcohol policy - The company is committed to the safety and health of its employees and subcontractors, believing a strong safety culture is critical to success[122] - The company implements rigorous safety assurance programs, provides continuous safety education and training, and maintains a zero-tolerance policy for drug and alcohol use in the workplace[122] Critical Accounting Policies The company's financial statements are prepared in accordance with U.S. Generally Accepted Accounting Principles (GAAP), requiring management to make estimates and judgments; there have been no changes to the company's critical accounting policies since December 31, 2018 - The company's financial statements are prepared in accordance with U.S. Generally Accepted Accounting Principles (GAAP), requiring management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses, as well as related disclosures of contingent assets and liabilities[123] - There have been no changes to the company's critical accounting policies since December 31, 2018[124] New Awards and Backlog As of June 30, 2019, the company's total backlog was $476.4 million, a significant increase from December 31, 2018; the Shipyard division contributed the most to this backlog, which also includes customer options for additional vessel construction that could further increase the backlog - Backlog represents the unrecognized value of new project awards and may differ from the value of remaining performance obligations disclosed under Topic 606[125] Backlog vs. Remaining Performance Obligations (in thousands of dollars) | Metric | Fabrication Division | Shipyard Division | Services Division | Consolidated Total | | :--- | :--- | :--- | :--- | :--- | | Remaining performance obligations under Topic 606 | $53,496 | $388,239 | $12,787 | $454,522 | | Contracts in dispute | $0 | $21,888 | $0 | $21,888 | | Total Backlog | $53,496 | $410,127 | $12,787 | $476,410 | Backlog by Segment (in thousands of dollars) | Division | June 30, 2019 Amount | December 31, 2018 Amount | | :--- | :--- | :--- | | Fabrication | $53,496 | $63,883 | | Shipyard | $410,127 | $281,531 | | Services | $12,787 | $11,046 | | Total Backlog | $476,410 | $356,460 | - As of June 30, 2019, seven customers accounted for approximately 92% of the company's backlog[131] - The company's contract to build three Towing, Salvage, and Rescue ships includes customer options that, if fully exercised, would increase the backlog by approximately $333.0 million[129] Results of Operations (Consolidated) This section provides a detailed analysis of the company's consolidated operating results for the three and six months ended June 30, 2019; despite revenue growth, both gross and operating losses expanded, primarily due to increased project costs, underutilized facilities, and specific project expenses Three Months Ended June 30, 2019 and 2018 For the three months ended June 30, 2019, the company's revenue increased by 49.0% to $80.5 million year-over-year, but gross loss widened from $0.7 million to $1.6 million, operating income turned into a $5.4 million loss from a $0.7 million income, and net loss was $5.2 million Consolidated Operating Results Comparison (in thousands of dollars, percentage) | Metric | June 30, 2019 | June 30, 2018 | Change Amount | Change Percentage | | :--- | :--- | :--- | :--- | :--- | | Revenue | $80,456 | $54,014 | $26,442 | 49.0% | | Cost of sales | $82,054 | $54,713 | $(27,341) | (50.0)% | | Gross loss | $(1,598) | $(699) | $(899) | (128.6)% | | Gross loss percentage | (2.0)% | (1.3)% | | | | Selling, general and administrative expenses | $3,987 | $5,092 | $1,105 | 21.7% | | Impairment of assets and (gain) loss on assets held for sale, net | $0 | $(6,579) | $(6,579) | (100.0)% | | Other (income) expense, net | $(201) | $64 | $265 | nm | | Operating (loss) income | $(5,384) | $724 | $(6,108) | nm | | Interest (expense) income, net | $126 | $(92) | $218 | nm | | Net (loss) income before income taxes | $(5,258) | $632 | $(5,890) | nm | | Income tax (expense) benefit | $10 | $(83) | $93 | nm | | Net (Loss) Income | $(5,248) | $549 | $(5,797) | nm | - Revenue growth was primarily driven by increased revenue from the Shipyard division ($13.9 million) and Fabrication division ($12.9 million), as well as a $1.9 million increase in Services division revenue[133] - The increase in gross loss was mainly due to under-recovery of indirect costs from underutilized facilities in the Fabrication division, holding costs for MPSV vessels ($0.6 million), and increased cost estimates for the port tug project ($1.4 million) and ice-class tug project ($0.9 million)[134] - Selling, general and administrative expenses decreased by 21.7% to $4.0 million, primarily due to lower incentive plan costs, board compensation, and legal consulting fees related to customer disputes, partially offset by increased professional fees related to strategic review and business diversification[135] Six Months Ended June 30, 2019 and 2018 For the six months ended June 30, 2019, the company's revenue increased by 33.0% to $148.1 million year-over-year, gross loss widened from $20 thousand to $1.0 million, operating loss increased from $4.4 million to $8.7 million, and net loss was $8.3 million Consolidated Operating Results Comparison (in thousands of dollars, percentage) | Metric | June 30, 2019 | June 30, 2018 | Change Amount | Change Percentage | | :--- | :--- | :--- | :--- | :--- | | Revenue | $148,061 | $111,304 | $36,757 | 33.0% | | Cost of sales | $149,106 | $111,324 | $(37,782) | (33.9)% | | Gross loss | $(1,045) | $(20) | $(1,025) | nm | | Gross loss percentage | (0.7)% | 0.0% | | | | Selling, general and administrative expenses | $7,821 | $9,801 | $1,980 | 20.2% | | Impairment of assets and (gain) loss on assets held for sale, net | $(70) | $(5,829) | $(5,759) | (98.8)% | | Other (income) expense, net | $(130) | $375 | $505 | nm | | Operating loss | $(8,666) | $(4,367) | $(4,299) | (98.4)% | | Interest (expense) income, net | $388 | $(238) | $626 | nm | | Net loss before income taxes | $(8,278) | $(4,605) | $(3,673) | (79.8)% | | Income tax (expense) benefit | $(12) | $(142) | $130 | 91.5% | | Net Loss | $(8,290) | $(4,747) | $(3,543) | (74.6)% | - Revenue growth was primarily driven by increased revenue from the Shipyard division ($32.0 million) and Fabrication division ($8.2 million)[157] - The increase in gross loss was mainly due to under-recovery of indirect costs from underutilized facilities in the Fabrication division, holding costs for MPSV vessels ($0.8 million), and increased cost estimates for the port tug project ($1.2 million) and ice-class tug project ($0.8 million)[158] - Selling, general and administrative expenses decreased by 20.2% to $7.8 million, primarily due to lower incentive plan costs, board compensation, and legal consulting fees related to customer disputes, partially offset by increased professional fees related to strategic review and business diversification[159] Operating Segments This section provides a detailed analysis of the operating results for the company's Fabrication, Shipyard, Services, and Corporate divisions for the three and six months ended June 30, 2019; each division's revenue, gross profit (loss), and operating profit (loss) were significantly impacted by project progress, cost control, and market conditions Fabrication Division (Three Months) For the three months ended June 30, 2019, the Fabrication division's revenue increased by 136.6% to $22.4 million year-over-year, gross loss decreased from $1.1 million to $0.7 million, and operating loss was $1.2 million Fabrication Division Operating Results Comparison (in thousands of dollars, percentage) | Metric | June 30, 2019 | June 30, 2018 | Change Amount | Change Percentage | | :--- | :--- | :--- | :--- | :--- | | Revenue | $22,415 | $9,472 | $12,943 | 136.6% | | Gross loss | $(677) | $(1,124) | $447 | 39.8% | | Gross loss percentage | (3.0)% | (11.9)% | | | | Selling, general and administrative expenses | $742 | $1,436 | $694 | 48.3% | | Impairment of assets and (gain) loss on assets held for sale, net | $0 | $(6,579) | $(6,579) | (100.0)% | | Other (income) expense, net | $(208) | $(193) | $15 | 7.8% | | Operating (loss) income | $(1,211) | $4,212 | $(5,423) | (128.8)% | - Revenue growth was primarily driven by progress on the paddlewheel riverboat project and several smaller fabrication projects[142] - The decrease in gross loss was mainly due to increased revenue and improved indirect cost recovery, partially offset by a decline in project portfolio margins[142] - Selling, general and administrative expenses decreased by 48.3%, primarily due to lower costs from the former EPC division and reduced legal consulting fees related to customer disputes[143] Shipyard Division (Three Months) For the three months ended June 30, 2019, the Shipyard division's revenue increased by 59.0% to $37.6 million year-over-year, gross loss widened from $2.8 million to $2.9 million, and operating loss was $3.6 million Shipyard Division Operating Results Comparison (in thousands of dollars, percentage) | Metric | June 30, 2019 | June 30, 2018 | Change Amount | Change Percentage | | :--- | :--- | :--- | :--- | :--- | | Revenue | $37,567 | $23,620 | $13,947 | 59.0% | | Gross loss | $(2,912) | $(2,776) | $(136) | (4.9)% | | Gross loss percentage | (7.8)% | (11.8)% | | | | Selling, general and administrative expenses | $590 | $597 | $7 | 1.2% | | Other (income) expense, net | $62 | $4 | $(58) | nm | | Operating loss | $(3,564) | $(3,377) | $(187) | (5.5)% | - Revenue growth was primarily driven by progress on the first two Regional Class Research Vessel projects and the first Towing, Salvage, and Rescue ship project[147] - The increase in gross loss was mainly due to under-recovery of indirect costs, holding costs for MPSV vessels ($0.6 million), and increased cost estimates for the port tug project ($1.4 million) and ice-class tug project ($0.9 million)[147] Services Division (Three Months) For the three months ended June 30, 2019, the Services division's revenue increased by 8.4% to $24.1 million year-over-year, gross profit decreased from $3.6 million to $2.1 million, and operating profit was $1.7 million Services Division Operating Results Comparison (in thousands of dollars, percentage) | Metric | June 30, 2019 | June 30, 2018 | Change Amount | Change Percentage | | :--- | :--- | :--- | :--- | :--- | | Revenue | $24,065 | $22,205 | $1,860 | 8.4% | | Gross profit | $2,137 | $3,585 | $(1,448) | (40.4)% | | Gross profit percentage | 8.9% | 16.1% | | | | Selling, general and administrative expenses | $464 | $762 | $298 | 39.1% | | Other (income) expense, net | $(55) | $(12) | $43 | nm | | Operating profit | $1,728 | $2,835 | $(1,107) | (39.0)% | - Revenue growth was primarily due to the timing of new project awards and an increased proportion of materials in revenue[151] - The decrease in gross profit was mainly due to lower project portfolio margins, partly attributable to an increased proportion of materials in revenue, and reduced indirect cost recovery[152] - Selling, general and administrative expenses decreased by 39.1%, primarily due to lower incentive plan costs and other cost reductions[153] Corporate Division (Three Months) For the three months ended June 30, 2019, the Corporate division's gross loss decreased from $0.4 million to $0.1 million, and operating loss decreased from $2.9 million to $2.3 million Corporate Division Operating Results Comparison (in thousands of dollars, percentage) | Metric | June 30, 2019 | June 30, 2018 | Change Amount | Change Percentage | | :--- | :--- | :--- | :--- | :--- | | Revenue (eliminations) | $(3,591) | $(1,283) | $(2,308) | nm | | Gross loss | $(146) | $(384) | $238 | 62.0% | | Selling, general and administrative expenses | $2,191 | $2,297 | $106 | 4.6% | | Other (income) expense, net | $0 | $265 | $265 | 100.0% | | Operating loss | $(2,337) | $(2,946) | $609 | 20.7% | - The decrease in gross loss was primarily due to lower costs supporting the former EPC division[154] - Selling, general and administrative expenses decreased by 4.6%, primarily due to lower incentive plan costs and board compensation, partially offset by increased legal consulting fees related to customer disputes and professional fees related to strategic review and business diversification[155] Fabrication Division (Six Months) For the six months ended June 30, 2019, the Fabrication division's revenue increased by 30.7% to $35.0 million year-over-year, gross loss decreased from $1.7 million to $1.4 million, and operating loss was $2.8 million Fabrication Division Operating Results Comparison (in thousands of dollars, percentage) | Metric | June 30, 2019 | June 30, 2018 | Change Amount | Change Percentage | | :--- | :--- | :--- | :--- | :--- | | Revenue | $35,046 | $26,815 | $8,231 | 30.7% | | Gross loss | $(1,449) | $(1,651) | $202 | 12.2% | | Gross loss percentage | (4.1)% | (6.2)% | | | | Selling, general and administrative expenses | $1,509 | $2,477 | $968 | 39.1% | | Impairment of assets and (gain) loss on assets held for sale, net | $(70) | $(5,829) | $(5,759) | (98.8)% | | Other (income) expense, net | $(137) | $(4) | $133 | nm | | Operating (loss) income | $(2,751) | $1,705 | $(4,456) | nm | - Revenue growth was primarily driven by progress on the paddlewheel riverboat project and several smaller fabrication projects[165] - The decrease in gross loss was mainly due to increased revenue and improved indirect cost recovery, partially offset by a decline in project portfolio margins[165] - Selling, general and administrative expenses decreased by 39.1%, primarily due to lower costs from the former EPC division and reduced legal consulting fees related to customer disputes[166] Shipyard Division (Six Months) For the six months ended June 30, 2019, the Shipyard division's revenue increased by 75.8% to $74.2 million year-over-year, gross loss decreased from $3.8 million to $3.2 million, and operating loss was $4.5 million Shipyard Division Operating Results Comparison (in thousands of dollars, percentage) | Metric | June 30, 2019 | June 30, 2018 | Change Amount | Change Percentage | | :--- | :--- | :--- | :--- | :--- | | Revenue | $74,154 | $42,185 | $31,969 | 75.8% | | Gross loss | $(3,192) | $(3,799) | $607 | 16.0% | | Gross loss percentage | (4.3)% | (9.0)% | | | | Selling, general and administrative expenses | $1,214 | $1,393 | $179 | 12.8% | | Other (income) expense, net | $62 | $164 | $102 | 62.2% | | Operating loss | $(4,468) | $(5,356) | $888 | 16.6% | - Revenue growth was primarily driven by progress on the first two Regional Class Research Vessel projects and the first Towing, Salvage, and Rescue ship project[168] - The decrease in gross loss was mainly due to increased revenue and improved indirect cost recovery, as well as higher project portfolio margins, partially offset by increased MPSV project holding costs ($0.4 million) and increased project cost estimates ($2.0 million)[170] - Selling, general and administrative expenses decreased by 12.8%, primarily due to reduced legal consulting fees related to customer disputes, partially offset by increased incentive plan costs[170] Services Division (Six Months) For the six months ended June 30, 2019, the Services division's revenue slightly decreased by 0.9% to $43.7 million year-over-year, gross profit decreased from $6.2 million to $3.9 million, and operating profit was $3.0 million Services Division Operating Results Comparison (in thousands of dollars, percentage) | Metric | June 30, 2019 | June 30, 2018 | Change Amount | Change Percentage | | :--- | :--- | :--- | :--- | :--- | | Revenue | $43,667 | $44,075 | $(408) | (0.9)% | | Gross profit | $3,878 | $6,199 | $(2,321) | (37.4)% | | Gross profit percentage | 8.9% | 14.1% | | | | Selling, general and administrative expenses | $916 | $1,496 | $580 | 38.8% | | Other (income) expense, net | $(55) | $(38) | $17 | 44.7% | | Operating profit | $3,017 | $4,741 | $(1,724) | (36.4)% | - The decrease in gross profit was mainly due to lower project portfolio margins and reduced indirect cost recovery[173] - Selling, general and administrative expenses decreased by 38.8%, primarily due to lower incentive plan costs and other cost reductions[174] Corporate Division (Six Months) For the six months ended June 30, 2019, the Corporate division's gross loss decreased from $0.8 million to $0.3 million, and operating loss decreased from $5.5 million to $4.5 million Corporate Division Operating Results Comparison (in thousands of dollars, percentage) | Metric | June 30, 2019 | June 30, 2018 | Change Amount | Change Percentage | | :--- | :--- | :--- | :--- | :--- | | Revenue (eliminations) | $(4,806) | $(1,771) | $(3,035) | nm | | Gross loss | $(282) | $(769) | $487 | 63.3% | | Selling, general and administrative expenses | $4,182 | $4,435 | $253 | 5.7% | | Other (income) expense, net | $0 | $253 | $253 | 100.0% | | Operating loss | $(4,464) | $(5,457) | $993 | 18.2% | - The decrease in gross loss was primarily due to lower costs supporting the former EPC division[175] - Selling, general and administrative expenses decreased by 5.7%, primarily due to lower incentive plan costs and board compensation, partially offset by increased legal consulting fees related to customer disputes and professional fees related to strategic review and business diversification[176] Liquidity and Capital Resources The company maintains liquidity primarily through cash, short-term investments, and a revolving credit agreement; as of June 30, 2019, the company had $76.0 million in cash and short-term investments and $29.3 million available under its credit facility, and is committed to improving liquidity through cost control, asset sales, and new project acquisition Available Liquidity As of June 30, 2019, the company had $76.0 million in cash, cash equivalents, and short-term investments, along with $29.3 million available under its revolving credit agreement, totaling $105.2 million in available liquidity Available Liquidity (in thousands of dollars) | Metric | Amount | | :--- | :--- | | Cash and cash equivalents | $30,192 | | Short-term investments | $45,791 | | Total Cash, Cash Equivalents, and Short-Term Investments | $75,983 | | Total credit agreement facility | $40,000 | | Outstanding letters of credit | $(10,737) | | Available under credit agreement | $29,263 | | Total Available Liquidity | $105,246 | - Cash and cash equivalents include $13.0 million in U.S. Treasury bills with original maturities of three months or less[178] - Short-term investments include U.S. Treasury bills with original maturities greater than three months but less than six months[179] Working Capital As of June 30, 2019, the company's working capital was $99.1 million; excluding cash, short-term investments, and assets held for sale, working capital was $4.4 million, primarily composed of net contract assets, accounts receivable, and inventories, and influenced by project size and backlog mix - As of June 30, 2019, the company's working capital was $99.1 million, including $76.0 million in cash, cash equivalents, and short-term investments, and $18.7 million in assets held for sale[180] Working Capital Components (excluding cash, short-term investments, and assets held for sale) (in thousands of dollars) | Metric | June 30, 2019 | December 31, 2018 | Change | | :--- | :--- | :--- | :--- | | Contract assets | $51,334 | $29,982 | $(21,352) | | Contract liabilities | $(13,823) | $(16,845) | $(3,022) | | Contracts in progress, net | $37,511 | $13,137 | $(24,374) | | Accounts and retainage receivable, net | $23,343 | $22,505 | $(838) | | Inventories, prepaid expenses and other assets | $8,530 | $9,356 | $826 | | Accounts payable, accrued expenses and other liabilities | $(64,957) | $(39,256) | $25,701 | | Total | $4,427 | $5,742 | $1,315 | - Fluctuations in working capital are influenced by factors such as project size, timing of new project awards, and advance and milestone payments[183] Cash Flow Activity For the six months ended June 30, 2019, net cash outflow from operating activities was $2.9 million, net cash outflow from investing activities was $36.6 million, and net cash outflow from financing activities was $0.8 million, resulting in a net decrease of $40.3 million in cash and cash equivalents - In the first half of 2019, net cash outflow from operating activities was $2.9 million, a significant improvement compared to the $26.4 million outflow in the same period of 2018[184] - Operating cash outflow was primarily due to operating losses, an increase in contract assets of $21.4 million, and an increase in accounts payable, accrued expenses, and other current liabilities of $25.2 million[184][192] - In the first half of 2019, net cash outflow from investing activities was $36.6 million, primarily due to the purchase of $45.4 million in short-term investments and $1.4 million in capital expenditures, partially offset by $8.5 million in short-term investment maturities and $1.6 million in proceeds from equipment sales[186] - In the first half of 2019, net cash outflow from financing activities was $0.8 million, primarily due to tax payments for shares withheld for vested stock[187] Credit Facilities The company has a $40.0 million revolving credit agreement; as of June 30, 2019, there were no outstanding borrowings, $10.7 million in outstanding letters of credit, and $29.3 million available under the facility; the company is in compliance with all financial covenants and has $375.9 million in outstanding surety bonds - The company has a $40.0 million revolving credit agreement available for borrowings or letters of credit, which was amended on May 1, 2019, extending the maturity date to June 9, 2021[188] - As of June 30, 2019, the company had no outstanding borrowings, $10.7 million in outstanding letters of credit, and $29.3 million available under the facility[190] - As of June 30, 2019, the company was in compliance with all financial covenants, with a tangible net worth of $191.3 million, a current assets to current liabilities ratio of 2.26:1.0, and an interest-bearing debt to tangible net worth ratio of 0.06:1.0[190] - As of June 30, 2019, the company had $375.9 million in outstanding surety bonds[191] Liquidity Outlook The company expects its cash, cash equivalents, short-term investments, and available credit facility as of June 30, 2019, to be sufficient to meet operating expenses, working capital, and capital expenditure needs for at least the next twelve months; the company will continue to maintain and improve liquidity through cost reductions, asset sales, and new project acquisition - The company expects its cash, cash equivalents, short-term investments, and available credit facility as of June 30, 2019, to be sufficient to meet operating expenses, working capital, and capital expenditure needs for at least the next twelve months[196] - The company will continue to focus on maintaining liquidity, securing meaningful new project awards and backlog in the near term, and generating operating income and cash flow in the long term[192] - Key uses of future liquidity include costs associated with underutilized facilities in the Fabrication and Shipyard divisions, capital expenditures (including potential improvements to Shipyard facilities), accrued contract losses recorded as of June 30, 2019, project working capital requirements, and corporate administrative expenses and strategic initiatives[194] - The company anticipates capital expenditures for the remainder of 2019 to be between $5.0 million and $7.0 million[194] Contractual Obligations There have been no material changes to the company's contractual obligations since the disclosure in its 2018 annual report - There have been no material changes to the company's contractual obligations since the disclosure in its 2018 annual report[197] Off-Balance Sheet Arrangements There have been no material changes to the company's off-balance sheet arrangements since the disclosure in its 2018 annual report - There have been no material changes to the company's off-balance sheet arrangements since the disclosure in its 2018 annual report[198] Item 3. Quantitative and Qualitative Disclosures About Market Risk For the six months ended June 30, 2019, there were no material changes in the company's market risk; for additional information on market risk, please refer to the company's 2018 annual report - For the six months ended June 30, 2019, there were no material changes in the company's market risk[199] Item 4. Controls and Procedures The company's management assessed the effectiveness of its disclosure controls and procedures as of June 30, 2019, concluding they were effective in design and operation, with no material changes to internal controls during the quarter - The company's management assessed the effectiveness of its disclosure controls and procedures as of June 30, 2019, concluding they were effective in design and operation[200] - For the three months ended June 30, 2019, there were no material changes to the company's internal control over financial reporting[201] PART II. OTHER INFORMATION Item 1. Legal Proceedings The company faces various routine legal proceedings, including commercial disputes, workers' compensation, and personal injury claims; a lawsuit with a customer regarding the termination of two MPSV construction contracts is ongoing, and the court has denied the customer's request for possession of the vessels - The company faces various routine legal proceedings, primarily involving commercial disputes and claims, workers' compensation claims, and personal injury claims under general U.S. maritime law and the Jones Act[203] - The company filed a lawsuit against a customer on October 2, 2018, to enforce its rights and remedies under two MPSV construction contracts; the customer filed counterclaims, and the court denied the customer's request for possession of the vessels on May 28, 2019[204] Item 1A. Risk Factors There have been no material changes to the company's risk factors since the disclosure in its 2018 annual report - There have been no material changes to the company's risk factors since the disclosure in its 2018 annual report[205] Item 6. Exhibits This report includes a series of exhibits, such as the company's articles of incorporation, credit agreement amendments, CEO and CFO certifications, and financial statements in XBRL format - Exhibits include the company's articles of incorporation, the Fourth Amendment to the Credit Agreement, CEO and CFO certifications under Section 13a-14 of the Securities Exchange Act, and Section 906 certifications provided pursuant to 18 U.S.C. Section 1350[206] - The financial statements (Consolidated Balance Sheets, Consolidated Statements of Operations, Consolidated Statements of Changes in Shareholders' Equity, Consolidated Statements of Cash Flows, and Notes to Consolidated Financial Statements) are filed as Exhibit 101 in XBRL (eXtensible Business Reporting Language) format[206] Signatures This report was signed by Westley S. Stockton, Executive Vice President, Chief Financial Officer, Secretary, and Treasurer of GULF ISLAND FABRICATION, INC., on August 6, 2019 - This report was signed by Westley S. Stockton, Executive Vice President, Chief Financial Officer, Secretary, and Treasurer of GULF ISLAND FABRICATION, INC., on August 6, 2019[209][210]