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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 2002
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)
(985) 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 12, 2002 was 11,740,114.
GULF ISLAND FABRICATION, INC.
INDEX
PAGE
----
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
at June 30, 2002 (unaudited) and December 31, 2001 3
Consolidated Statements of Income
for the Three and Six Months Ended June 30, 2002
and 2001 (unaudited) 4
Consolidated Statement of Changes in Shareholders' Equity
for the Six Months Ended June 30, 2002 (unaudited) 5
Consolidated Statements of Cash Flows
for the Six Months Ended June 30, 2002
and 2001 (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 1. Legal Proceedings 12
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,
2002 2001
------------- -------------
(in thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 6,055 $ 11,274
Short-term investments 24,026 23,758
Contracts receivable, net 31,069 14,231
Contract retainage 787 1,736
Costs and estimated earnings in excess of billings
on uncompleted contracts 1,500 1,961
Prepaid expenses 532 1,170
Inventory 1,581 1,331
------------- -------------
Total current assets 65,550 55,461
Property, plant and equipment, net 46,177 41,666
Excess of cost over fair value of net assets acquired, net -- 4,765
Other assets 648 646
------------- -------------
Total assets $ 112,375 $ 102,538
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,674 $ 1,660
Billings in excess of costs and estimated
earnings on uncompleted contracts 9,417 2,891
Accrued employee costs 2,189 2,012
Accrued expenses 2,611 1,929
Income taxes payable 814 368
------------- -------------
Total current liabilities 19,705 8,860
Deferred income taxes 5,004 4,773
------------- -------------
Total liabilities 24,709 13,633
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, 11,740,114 and 11,706,864 shares issued and
outstanding at June 30, 2002 and December 31, 2001, respectively 4,258 4,227
Additional paid-in capital 36,482 36,101
Retained earnings 46,926 48,577
------------- -------------
Total shareholders' equity 87,666 88,905
------------- -------------
Total liabilities and shareholders' equity $ 112,375 $ 102,538
============= =============
The accompanying notes are an integral part of these statements.
-3-
GULF ISLAND FABRICATION, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(in thousands, except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
2002 2001 2002 2001
--------- --------- --------- ---------
Revenue $ 33,053 $ 34,267 $ 60,299 $ 61,825
Cost of revenue 29,573 28,630 54,021 53,905
--------- --------- --------- ---------
Gross profit 3,480 5,637 6,278 7,920
General and administrative expenses 1,018 1,202 1,926 2,343
--------- --------- --------- ---------
Operating income 2,462 4,435 4,352 5,577
Other income (expense):
Interest expense (9) (9) (18) (18)
Interest income 168 265 328 579
Other -- (102) 57 (109)
--------- --------- --------- ---------
159 154 367 452
--------- --------- --------- ---------
Income before income taxes 2,621 4,589 4,719 6,029
Income taxes 892 1,649 1,605 2,171
--------- --------- --------- ---------
Net income before cumulative effect of
change in accounting principle 1,729 2,940 3,114 3,858
Cumulative effect of change in accounting principle (Note 2) -- -- (4,765) --
--------- --------- --------- ---------
Net income (loss) $ 1,729 $ 2,940 $ (1,651) $ 3,858
========= ========= ========= =========
Per share data:
Basic earnings (loss) per share:
Net income before cumulative effect of
change in accounting principle $ 0.15 $ 0.25 $ 0.27 $ 0.33
Cumulative effect of change in accounting principle -- -- (0.41) --
--------- --------- --------- ---------
Basic earnings (loss) per share $ 0.15 $ 0.25 $ (0.14) $ 0.33
========= ========= ========= =========
Diluted income (loss) per share:
Net income before cumulative effect of
change in accounting principle $ 0.15 $ 0.25 $ 0.26 $ 0.33
Cumulative effect of change in accounting principle -- -- (0.40) --
--------- --------- --------- ---------
Diluted earnings (loss) per share $ 0.15 $ 0.25 $ (0.14) $ 0.33
========= ========= ========= =========
Weighted-average shares 11,728 11,705 11,718 11,701
Effect of dilutive securities: employee stock options 126 97 96 123
--------- --------- --------- ---------
Adjusted weighted-average shares 11,854 11,802 11,814 11,824
========= ========= ========= =========
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, 2002 11,706,864 $ 4,227 $ 36,101 $ 48,577 $ 88,905
Exercise of stock options 33,250 31 284 -- 315
Income tax benefit from
exercise of stock options -- -- 97 -- 97
Net income (loss) -- -- -- (1,651) (1,651)
------------- ------------- ------------- ------------- -------------
Balance at June 30, 2002 11,740,114 $ 4,258 $ 36,482 $ 46,926 $ 87,666
============= ============= ============= ============= =============
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,
2002 2001
----------- -----------
(in thousands)
Cash flows from operating activities:
Net income (loss) $ (1,651) $ 3,858
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation 2,289 2,188
Amortization -- 217
Cumulative effect of change in accounting principle 4,765 --
Deferred income taxes 231 83
Changes in operating assets and liabilities:
Contracts receivable (16,838) (14,631)
Contract retainage 949 (984)
Costs and estimated earnings in excess of billings
on uncompleted contracts 461 (1,167)
Prepaid expenses, inventory and other assets 388 501
Accounts payable 3,014 1,930
Billings in excess of costs and estimated earnings
on uncompleted contracts 6,526 1,132
Accrued employee costs 682 386
Accrued expenses 177 386
Income taxes payable 543 1,041
----------- -----------
Net cash provided by (used in) operating activities 1,536 (5,060)
Cash flows from investing activities:
Capital expenditures, net (6,900) (2,558)
Proceeds on the sale of equipment 100 2,100
Purchase of short-term investments (268) (396)
Other (2) 3
----------- -----------
Net cash used in investing activities (7,070) (851)
Cash flows from financing activities:
Proceeds from exercise of stock options 315 371
----------- -----------
Net cash provided by financing activities 315 371
----------- -----------
Net decrease in cash and cash equivalents (5,219) (5,540)
Cash and cash equivalents at beginning of period 11,274 10,079
----------- -----------
Cash and cash equivalents at end of period $ 6,055 $ 4,539
=========== ===========
Supplemental cash flow information:
Interest paid $ 26 $ 18
=========== ===========
Income taxes paid $ 903 $ 810
=========== ===========
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, 2002 AND 2001
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING PRINCIPLES
Gulf Island Fabrication, Inc. (the "Company"), together with its
subsidiaries, 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. Structures and equipment fabricated
by the Company include jackets and deck sections of fixed production platforms;
hull and/or deck sections of floating production platforms (such as TLP's,
SPAR's and FPSO's); piles; wellhead protectors; subsea templates; various
production, compressor and utility modules; and offshore living quarters. The
Company, located in Houma, Louisiana, also provides services such as offshore
interconnect pipe hook-up; inshore marine construction; manufacture and repair
of pressure vessels; and steel warehousing and sales. The Company's principal
markets are concentrated in the offshore regions of the Gulf of Mexico. The
consolidated financial statements include the accounts of the Company and its
subsidiaries. All significant intercompany balances and transactions have been
eliminated in consolidation.
The information presented at June 30, 2002, and for the three months
and six months ended June 30, 2002 and 2001, 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, 2002, and the results of its operations for the three
months and six months ended June 30, 2002 and 2001, and its cash flows for the
six months ended June 30, 2002 and 2001. The results of operations for the three
months and six months ended June 30, 2002 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2002.
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 accounting principles generally accepted
in the United States 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, 2001.
NOTE 2 - NEW ACCOUNTING STANDARD
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No.142 ("SFAS No. 142"), "Goodwill
and Other Intangible Assets", which established a new method of testing goodwill
for impairment using a fair-value-based approach and eliminated the amortization
of goodwill as previously required by Accounting Principles Board ("APB")
Opinion 17, "Intangibles". An impairment loss would be recorded if the recorded
goodwill exceeds its implied fair value. At December 31, 2001, the Company had
goodwill of $4.8 million (net of accumulated amortization of $1.3 million)
related to the acquisition of Southport, Inc. ("Southport"). The Company adopted
SFAS No. 142 effective January 1, 2002, and completed the required transitional
impairment test during the quarter ended March 31, 2002. As a result of the
transitional impairment test, the Company
-7-
calculated an impairment charge of $4.8 million. The impairment charge was
calculated based on fair value using an expected cash flow approach. The Company
considered in its expected cash flow projections the continued decline in the
demand for, the highly competitive nature of, and the recent bid activity
related to the fabrication of living quarters. The transitional impairment
charge is reflected as a cumulative effect of change in accounting principle as
of January 1, 2002, in the accompanying financial statements.
A reconciliation of reported net income before cumulative effect of
change in accounting principle and related earnings per share to the adjusted
net income and earnings per share to exclude the prior amortization expense of
goodwill is as follows (in thousands, except per share data):
Six Months Ended
June 30,
2002 2001
------------ ------------
Reported net income before cumulative
effect of change in accounting principle $ 3,114 $ 3,858
Add back: Goodwill amortization -- 217
------------ ------------
Adjusted net income before cumulative
effect of change in accounting principle $ 3,114 $ 4,075
============ ============
Basic earnings-per-share
Reported net income before cumulative
effect of change in accounting principle $ 0.27 $ 0.33
Add back: Goodwill amortization -- 0.02
------------ ------------
Adjusted net income before cumulative
effect of change in accounting principle $ 0.27 $ 0.35
============ ============
Diluted earnings-per-share
Reported net income before cumulative
effect of change in accounting principle $ 0.26 $ 0.33
Add back: Goodwill amortization -- 0.02
------------ ------------
Adjusted net income before cumulative
effect of change in accounting principle $ 0.26 $ 0.35
============ ============
NOTE 3 - INCOME TAX PROVISION
The effective tax rate was 34% for the three-month and six-month
periods ended June 30, 2002, compared to the effective rate of 36% for
three-month and six-month periods ended June 30, 2001. This reduction in the
effective rate was the result of anticipated tax benefits arising from an
increase in net income attributable to foreign contracts.
-8-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Goodwill Impairment-Southport Acquisition
In assessing the recoverability of the Company's excess of cost over
fair value of the net assets acquired (goodwill) from the Southport acquisition,
the Company made assumptions regarding estimated future cash flows and other
factors to determine the fair value of the respective assets. Pursuant to SFAS
No. 142 the Company adopted the new rules for accounting for goodwill effective
January 1, 2002, and completed the required transitional impairment test during
the first quarter ended March 31, 2002. As a result of the transitional
impairment test, the Company calculated an impairment charge of $4.8 million.
The impairment charge was calculated based on fair value using an expected cash
flow approach. The Company considered in its expected cash flow projections the
continued decline in the demand for, the highly competitive nature of, and the
recent bid activity related to the fabrication of living quarters. The
transitional impairment charge is reflected as a cumulative effect of change in
accounting principle as of January 1, 2002, in the accompanying financial
statements.
RESULTS OF OPERATIONS
The Company's revenue for the three-month and six-month periods ended
June 30, 2002 was $33.1 million and $60.3 million, a decrease of 3.5% and 2.5%,
respectively, compared to $34.3 million and $61.8 million in revenue for the
three-month and six-month periods ended June 30, 2001. Although the volume of
direct labor hours applied to contracts in progress increased slightly for the
three months and remained relatively stable for the six months, the lower
pricing of projects available in the market resulted in a decrease in revenue
when comparing the three-month and the six-month periods ended June 30, 2002 to
the same periods of 2001.
The reduction in project prices combined with less favorable weather
conditions and fewer discounts from major suppliers of material and services
resulted in decreased profit margins. Gross profit decreased $2.2 million or
38.3% and $1.6 million or 20.7% when comparing the three-month and six-month
periods ended June 30, 2002 to the comparative periods in 2001. For the
three-month and six-month periods ended June 30, 2002, gross profit was $3.5
million (10.5% of revenue) and $6.3 million (10.4% of revenue), compared to $5.6
million (16.5% of revenue) and $7.9 million (12.8% of revenue) of gross profit
for the three-month and six-month periods ended June 30, 2001.
The Company's general and administrative expenses were $1.0 million for
the three-month period ended June 30, 2002 and $1.9 million for the six-month
period ended June 30, 2002. This compares to $1.2 million for the three-month
period ended June 30, 2001 and $2.3 million for the six-month period ended June
30, 2001. As a percentage of revenue, general and administrative expenses
decreased to 3.1% from 3.5% of revenue for the three-month periods ended June
30, 2002 and 2001, respectively, and decreased to 3.2% from 3.8% of revenue for
-9-
the comparative six-month periods. The decreases were the result of the
elimination of the goodwill amortization ($108,000 per quarter), which was
effective January 1, 2002. Also contributing to the decrease in general and
administrative expenses was a reduction of approximately $50,000, in the second
quarter 2002 compared to 2001, and a reimbursement of approximately $70,000,
during the first quarter 2002, of legal expenses related to a lawsuit that was
settled in 2001.
The Company had net interest income of $159,000 and $310,000 for the
three-month and six-month periods ended June 30, 2002, respectively, compared to
$256,000 and $561,000 for the three-month and six-month periods ended June 30,
2001. The reduction in interest income was the result of cash utilization
associated with the increase in capital expenditure levels for the three-month
and six-month periods ended June 30, 2002 compared to those periods ended June
30, 2001. Also, income generated from investments decreased substantially during
the three-month and six-month periods ended June 30, 2002, compared to the
three-month and six-month periods ended June 30, 2001, due to the sharp decline
in interest rates (approximately 38% and 45%, respectively) on short-term
investments.
For the three-month period ended June 30, 2002, the Company did not
have any Other income or expense. For the six-month period ended June 30, 2002,
Other income was $57,000, which was related to the sale of miscellaneous
equipment. For the three-month and six-month periods ended June 30, 2001, other
expense ($102,000 and $109,000, respectively) consisted primarily of the
Company's share of the MinDOC, L.L.C. activities to design and market the MinDOC
floating platform concept for deepwater drilling and production. Prior to
October 1, 2001, the Company's investment in MinDOC, L.L.C. was accounted for
under the equity method of accounting for investments with its share of
operating results included in other as an expense in the statements of income.
Effective October 1, 2001, the Company's investment in MinDOC, L.L.C. and its
operating results were consolidated within the consolidated financial statements
of Gulf Island Fabrication, Inc.
LIQUIDITY AND CAPITAL RESOURCES
Historically the Company has funded its business activities primarily
through funds generated from operations. The Company also maintains a revolving
line of credit ("the Revolver") with a commercial bank but has not drawn on it
since December 1998. Net cash provided by operating activities was $1.5 million
for the six-months ended June 30, 2002, and working capital was $45.8 million,
resulting in a current ratio of 3.3 to 1. Net cash used in investing activities
for the six months ended June 30, 2002 was $7.1 million, which included $100,000
of proceeds on the sale of equipment, $6.9 million for capital expenditures, and
$268,000 for the purchase of short-term investments. The majority of the capital
expenditures for the first six months of 2002 were related to the construction
of the new fabrication building scheduled to be completed in the fourth quarter
of 2002.
The Company's Revolver currently provides for a revolving line of
credit 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
1.5%. The Revolver matures December 31, 2003, and is secured by a mortgage on
the Company's real estate, machinery and equipment, and fixtures. The Company
pays a fee on a quarterly basis, of three-sixteenths of one percent per annum on
the weighted-average unused portion of the Revolver. At June 30, 2002, there
were no borrowings outstanding under the Revolver, but the Company did have
-10-
letters of credit outstanding totaling $5.0 million which reduces the unused
portion of the Revolver. The Company is required to maintain certain covenants,
including balance sheet and cash flow ratios. At June 30, 2002, the Company was
in compliance with these covenants.
Capital expenditures for the remaining six months of 2002 are estimated
to be approximately $5.4 million, including improvements to the facilities and
the purchase of various other fabrication machinery and 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.
FORWARD-LOOKING STATEMENTS
Statements under "Results of Operations" and "Liquidity and Capital
Resources" 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 Company's ability to
successfully complete the testing, production and marketing of the MinDOC and
other deep water production systems and to develop and provide financing for
them; and the Company's ability to attract and retain qualified production
employees at acceptable compensation rates. 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 1. LEGAL PROCEEDING.
For a description of legal proceedings, see Item 3 of Part I of the
Company's Annual Report on Form 10-K for the year ended December 31, 2001.
ITEM 5. OTHER INFORMATION.
On July 10, 2002, the Company announced the scheduled time for the
release of its 2002 second quarter earnings and its quarterly conference call.
The press release making this announcement is attached hereto as Exhibit 99.1.
On July 24, 2002, the Company announced its 2002 second quarter
earnings and related matters. The press release making this announcement is
attached hereto as Exhibit 99.2.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
99.1 Press release issued by the Company on July 10, 2002,
announcing the scheduled time for the release of its 2002
second quarter earnings and its quarterly conference call.
99.2 Press release issued by the Company on July 24, 2002,
announcing its 2002 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 12, 2002
-13-
GULF ISLAND FABRICATION, INC.
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
99.1 Press release issued by the Company on July 10, 2002,
announcing the scheduled time for the release of its 2002
second quarter earnings and its quarterly conference call.
99.2 Press release issued by the Company on July 24, 2002,
announcing its 2002 second quarter earnings and related
matters.
E-1