Gulf Island Fabrication Inc (GIFI) 2012 Q2 法說會逐字稿

Good morning and welcome ladies and gentlemen to the Gulf Island Fabrication Inc. 2012 second quarter earnings release conference call. (Operator Instructions).

At this time I turn the conference over to Miss Deborah Knoblock for and opening remarks and introductions. Deborah, please go ahead.

I would like to welcome everyone to Gulf Island Fabrication's 2012 second quarter teleconference. Please keep in mind that any statements made of this conference that are not statements of historical facts are considered forward-looking statements. These statements are subject to factors that could cause actual results to differ materially from results predicted in the forward-looking statements.

These factors include 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. And other details that are described under cautionary statements concerning forward looking information and elsewhere in the Company's 10-K filed March 2nd , 2012. The 10-K was included as part of the Company's 2011 Annual Report filed with the Securities and Exchange Commission earlier this year. The Company assumes no obligations to update these forward-looking statements. Today we have Mr. Kerry Chauvin, Chairman and CEO; Mr. Kirk Meche, President and COO; and Mr. Roy Breerwood, our CFO. Roy?

Thank you, Deborah. I would like to review Gulf Island's press release, issued for the second quarter of 2012. The press release consists of two pages, page one is text and page two is an income statement. I would like to review page two, which is the income statement, first. The following are the results of operations for the three months ended June 30th , 2012, compared to the three months ended June 30th , 2011.

Revenue was $137.2 million, compared to $87.3 million. The cost of revenue was $123.3 million, compared to $82.4 million. Gross margin was $13.9 million or 10.1% of revenue, compared to $4.8 million or 5.6% of revenue. The increase in man hours worked contributed both to the increase in revenue and increase in gross margin. The increase in production, primarily related to our two major deep water projects, had a favorable impact on margin due to the spread it provided to our fixed overhead, as compared to the prior period. General and administrative expenses were $2.6 million or 1.9% of revenue, compared to $2.0 million, or 2.2% of revenue. Operating income was $11.3 million, compared to $2.9 million.

We had net interest income of $157,000, compared to $124,000. The net interest income for the period ended June 30th , 2012, is related to the financing agreement with one of our customers regarding the collection of an $11 million retainage balance on a completed contract. Other income for the three month period ended June 30th , 2012, represents a $22,000 gain compared to a $228,000 gain, resulting from sales of miscellaneous equipment. Income before taxes was $11.5 million, compared to $3.2 million.

Income tax expense was $3.9 million, compared to $1.4 million. The income tax rates were 34.0%, compared to 43.4%. The decrease in effective tax rate for the 2012 period was primarily related to the increase in income, particularly for our Texas facility; which caused an increase in our estimated federal Qualified Production Activities income deduction, and a decrease in Louisiana state income tax apportionment. Net income was $7.6 million, compared to $1.8 million. Basic and diluted earnings per share were $0.52 for the three month period ended June 30th , 2012, compared to $0.13. Weighted average and adjusted weighted average outstanding shares were $14.4 million for the period ended June 30th , 2012.

Weighted average shares outstanding were 14.3 million shares and adjusted weighted average shares outstanding were 14.4 million shares for the period ended June 30th , 2011.

Depreciation expense was $5.8 million, compared to $5.0 million. We declared and paid cash dividends of $0.10 per share during the quarter ended June 30th , 2012, compared to $0.06 per share during the quarter ended June 30th , 2011. The following are the results of operations for the six months ended June 30th , 2012, compared to the six months ended June 30th , 2011.

Revenue was $250.3 million compared to $133.6 million, the cost of revenue was $223.7 million compared to $138.3 million. Gross margin was $26.6 million, or 10.6% of revenue, compared to a loss of $4.7 million. The increase in man hours worked also contributed to both the increase in revenue and increase in gross margin for the six month period of June 30th , 2012. The increase in production, primarily related to our two large deep water projects, had a favorable impact on margin due to the spread it provided to our fixed overhead as compared to the prior period.

Included in our gross margin for the 2011 period was the $7.7 million pre-tax charge related to the impairment of an insurance claim. We incurred no asset impairments in our 2012 period. General and administrative expenses were $5.2 million or 2.1% of revenue, compared to $3.9 million or 2.9% of revenue. Operating income was $21.4 million, compared to a loss of $8.6 million.

We had a net interest income of $309,000, compared to $117,000. The net interest income for the period ended June 30th , 2012, is related to the financing agreement of one of our customers regarding the collection of $11 million retainage balance on a completed contract. Other income for the six month period ended June 30th , 2012, represents an $85,000 gain compared to a $228,000 gain, both resulting from the sales of miscellaneous equipment. Income before taxes was $21.8 million, compared to a loss of $8.3 million.

Income tax expense was $7.4 million, compared to a benefit of $3.1 million. Income tax rates were 34%, compared to 38%. Once again, the decrease in effective tax rate for the 2012 period was primarily related to the increase in income, particularly for our Texas facility; which caused an increase in our estimated federal Qualified Production Activities income deduction and a decrease in Louisiana state income tax apportionment.

Net income was $14.4 million, compared to a net loss of $5.1 million. Both basic and diluted earnings per share were $0.99 for the six months ended June 30th , 2012, compared to basic and diluted loss per share of $0.36. Weighted average and adjusted weighted shares outstanding were 14.4 million shares for the period ended June 30th , 2012.

Weighted average and adjusted weighted average shares outstanding were $14.3 million for the period ended June 30th , 2011. Depreciation expense was $11.4 million, compared to $10.1 million. We declared and paid cash dividends of $0.20 per share during the six months ended June 30th , 2012, compared to $0.12 per share during the six months ended June 30th , 2011. Please refer to page 1 of the press release for a review.

We had a revenue backlog of $474 million with a labor backlog of 2.9 million man hours remaining to work at June 30th , 2012, as compared to revenue backlog of $614.5 million, with a labor backlog of 4.6 million man hours remaining to work at December 31st, 2011. Following represents selected balance sheet information for June 30th , 2012, compared to December 31st, 2011.

Cash and cash equivalents were $30.6 million compared to $55.3 million. Total current assets were $174 million, compared $177.9 million. Property, plant and equipment net of depreciation was $222.9 million, compared to $216.7 million. Total assets were $397.5 million, compared to $395.9 million. Total current liabilities were $67.4 million, compared to $76 million.

Long term debt was zero for both periods. Shareholders' equity was $294.3 million, compared to $282.8 million and total liabilities and shareholders' equity was $397.5 million, compared to $395.9 million.

Other financial information for the three months ended June 30th , 2012, compared to June 30th , 2011, consists of pass through costs were 42.1% of revenue compared to 50.4% of revenue. Man hours worked were 1.3 million compared to 675,000. Deep water revenue represented 71% of revenue, compared to 34% of revenue. Foreign revenue represented 12% of revenue, compared to 15% of revenue.

Other financial information for the six months ended June 30th , 2012, compared to June 30th , 2011, consist of pass through costs were 39.1% of revenue, compared to 46.4% of revenue. Man hours worked were $2.5 million compared to $1.1 million. Deep water revenue represented 70% of revenue, compared to 26% of revenue. Foreign revenue represented 14% of revenue for both periods.

Other financial information for June 30th , 2012, compared to December 31st, 2011, consists of revenue backlog was $474 million compared to $614.5 million. Man hour backlog was $2.9 million compared to $4.6 million. Revenue backlog for deep water was $390.3 million or 82.3%, compared to $509.8 million or 83%. Of the backlog at June 30th , 2012, we expect to recognize revenues of approximately $278.4 million, not including any change orders, scope growth, or a new contracts that may be awarded during 2012. And approximately 195.6 million of backlog is expected to be recognized as revenue in 2013.

We had approximately 2400 employees and 350 contract employees compared to 1950 employees and 90 contract employees. CAPEX for the six months of 2012 was $17.6 million. Approximately $22.8 million of remaining expenditures are planned for 2012, which consists of approximately $6.4 million for the purchase of equipment and $16.4 million for additional yard and facility infrastructure improvements. Following comments relate to the remaining period of 2012. Construction is substantially complete on our coffer cell and our graving dock is drained.

We are determining the extent of damage to the graving dock slab and commencing necessary repairs. The estimated cost of repairs to graving dock slab is now $8 million. The estimate to repair the slab has increased from our original estimate of $1.5 million to $3 million because of additional damage to the slab, we were unable to discover until the dock was drained.

The estimated cost to repair the slab to the dock will be expensed when incurred in the third and fourth quarters of 2012. On July 13th , 2012, we received a notice from one of our customers requesting a slowdown in work on a deep water project. As of June 30th , 2012, the outstanding balance on this project for work performed and materials purchased was $21.7 million, and the remaining work on this project represented 6.6% of our revenue backlog and 10.6% of our labor backlog.

Our customer has requested a short term extension for the payment of the $21.7 million unpaid balance and contracts receivable on this contract. At the time of this request, approximately $4 million of the $21.7 million balance was past due. We have entered into preliminary discussions with this customer regarding extending the terms of payment of this outstanding balance.

So far in the third quarter, we have experienced 23 days of rain, mainly due to a low pressure system in the Gulf. We have experienced these adverse effects and are still in hurricane season during this quarter and this affect was mainly in our Houma facilities. Another note for the remaining period of 2012, is that we are currently in negotiations to obtain change orders, which will increase revenue if received, related to costs we incurred due to customer cost of deliverable delays, schedule incentive bonuses and safety incentive bonuses on both of our major deep water projects.

We have not recognized any revenue for these change orders through June 30th , 2012. And expect to favorably resolve these negotiations by the end of 2012. These change orders will also help ease some of the scheduled constraints we have, due to the slowdown and weather constraints in Houma. We are currently operating at capacity, as required by the projects in our backlog. We expect the level of production consistent with the first half of 2012 through the third and fourth quarters, as work continues on these projects.

We still have large amounts of subcontracted services to incur, which will keep pass through costs relatively high. We continue to focus on managing the costs associated with our workforce, in meeting our scheduled demands. I will now like to open the call to questions of the analysts.

(Operator Instructions). And we'll take our first question from Martin Malloy with Johnson Rice.

Good morning. Could you give us an update on deep water Gulf of Mexico potential future project awards. Are there still a few that are out there that could be awarded around the end of this year, first part of next year?

Yes, Marty, good morning. This is Kirk. Marty , we still seem consistent with what we had projected in the past. There still are some deep water projects that will be coming out for bid in the third quarter of this year, primarily fourth quarter this year. We haven't seen any of those projects move to the right. But the activity, there are a few big deep water projects that will be coming out and some shallow water projects as well. And, of course, our Marine Division right now, the bidding activity within Marine Division is strong. And, we see more potential right now in the Marine Division that gets immediate awards compared to some of our other subsidiaries.

Okay. And then regarding ATP Cheviot project, are you going to have a -- will you have a mechanics' lien on this ATP goes bankrupt?

Marty , we haven't named the project and for the sake of just talking about it, right now we are in negotiations with that particular customer that we're dealing with. And again from the business standpoint, we haven't named that customer.

Okay. My last question. The graving dock, are you going to be able to do these repairs and make -- still be on time with the hull for the Williams' project?

Yeah, Marty. The graving dock repairs are scheduled to complete the first quarter of this year. And actually, our first component goes into the dock itself next month. So the location of the repairs within a dock, at this time, are not affecting schedule for the Williams' project.

Okay. Thank you.

You're welcome.

(Operator Instructions). Next we'll go to Robert Norfleet with BB&T Capital Markets.

Hi, guys. Good morning. This is actually John Ellison on for Rob. But thanks for taking my questions.

Okay. Good morning, John. (multiple speakers).

My first question kind of is a follow on to what was just asked. But, are there any new tenders that you guys are currently tracking that you expect to go to FID in the second half of this year?

Yes. As we stated, there are several large projects, top sized projects that will be bid towards the tail end of third quarter, first part of fourth quarter this year. And again there are some shallow water projects that we're chasing that will come out for bid in the third quarter, as well as the fourth quarter this year.

Okay. I guess my next question would be, would you be able to comment a little bit on the current utilization rates and any additional capacity that you guys have at your fab yard and tie that in to your ability to take on these larger projects?

Well, I guess our capacity at our yards primarily depends on the contracts we receive. Now the last half of 2012, we're certainly booked. Even despite the slowdown that was requested by this customer. But, as we reported in our revenue outlook for 2012 and 2013, you can see, 2013 is certainly the time when capacity starts, quote unquote, capacity or man hours we could potentially work, start to open up.

Okay. All right. Well, thank you so much.

Thank you, John.

And next we'll go to Matt Tucker with KeyBanc Capital Markets.

Hi, guys. Good morning.

Good morning. (multiple speakers).

With respect to the projects that you see coming to bid in the third and fourth quarter, could you talk a little bit about the-- your competitive positioning on those projects. How well positioned do you feel you are? And then the timing of when you think those bids could turn into awards and when work on those projects would start up?

Well, Matt, as our competitive advantage goes, we're one of three major players on the Gulf as far as the fabrication work goes. And we could certainly -- we're certainly well positioned for a good,-- for a lot of activity in the deep water sector. That's expected coming up in the second half of 2012 and the second half of 2013.

I guess to just drill in on that a little bit more, Do you have a sense for what your competitors capacity currently looks like? Are they pretty full? Would that make feel better about your chances or is there anything about, the specific details of these projects that makes you feel like you have a better shot than your competitors?

Matt, this is Kirk. Certainly there's no secret in the industry right now that the three major fabricators in the business, right now, we're all busy. And, I don't know that one has any more competitive advantage over the other. We all have labor available and these projects continue on tracking like we've been told here, then certainly as our projects wind down, we'll certainly will be in a position to immediately start those projects. So, again I don't know that from the other -- I won't speak on behalf of other competitors. But they are fairly busy, just like we are at this point in time.

Got it. Thanks. I'll jump back in the queue for now.

Okay, thank you Matt.

(Operator Instructions). Next we'll go to Will Gabrielski with Lazzard.

Thanks. Good morning. (multiple speakers). Can you walk through the marine opportunities you said are maybe a better near term chance for you to book some work and what they are in size and timing?

Well, without getting too specific on it, we're seeing some opportunities for some lift boats that will be built here in the Gulf, for the Gulf of Mexico. And certainly the brown water tugs are out there. But, we're also seeing an increase in requirements or requests for quotation on some PSV's that would be operating through the Gulf of Mexico. And certainly through our repair, on our dry dock. The dry dock is staying very busy at this point in time. I can see that continuing on, as some of these boats need some repairs coming in.

You've shifted some labor from the marine business into the oil and gas business to execute the backlog you have, would that be an issue in terms of getting labor, should you be successful on a handful of these bids?

I don't think so. What we have, as Buddy had said, a number of our contractors in the yard is pretty high at this point in time. So as the marine section would start to gear back up, we start pulling that labor back from Gulf Island, LLC. We should be okay, in terms of future needs for labor within the facilities.

Okay. And on the bigger Gulf of Mexico oil and gas jobs that you're talking about, maybe being FID later this year, 2013, any sense on what, the question was asked on capacity. But is pricing a little better maybe this go around? Or is there any efficiency you can find where margins might even look better on the next round of bids or is it still too early to say?

Well, I think it's a little early to say. Again it's all about timing, when the projects come out and the availability within all the yards here in the Gulf.

Okay.

I don't think we could probably speculate on that at this time.

And if I could ask just one last one. I guess you're executing a few very big jobs right now. Those obviously move into completion at some point. And then you have another round of bids out. Are you modeling internally for a lull in activity, maybe in your deep water work, as those wind down before the next jobs ramp up, or do you think it will be pretty seamless?

Well, certainly we hope it's seamless. Again I think, at this point in time we're hoping it's seamless. But again it's out of our control, Will. It's up to the oil and gas companies as to when projects come out. Because a couple of them have been out there for some time.

Okay. Great. That's really helpful. Thank you.

You're welcome.

And I do show we have one more question in queue. (Operator Instructions). Next we'll go to Lenny Bianco, from Raymond James.

Good morning, guys. Quick clarification on the graving dock repair costs. The first $1.5 million that you had originally estimated, that has not hit the P&L yet, is that correct?

No. We haven't incurred any costs on this repair as of June 30th . Now repairs are commencing as of today. But that cost incurred was zero.

Great. Any idea at this point, obviously it's early, if that will be concentrated early in the third quarter here or maybe more so in the fourth or evenly? Any color there would be helpful.

Repairs are expected between I guess the early part of the third quarter into the early part of the fourth quarter.

Great. And, unrelated follow up. You mentioned you expect activity levels in the second half of the year, may be comparable to the first half. But we should still be thinking about some level of seasonality in the fourth quarter, I'd assume. Is that fair?

Yes. To some degree, you have your holiday weeks. But comparing the first half of the year to the second half of the year; the first quarter and fourth quarters are fairly similar as far as what productivity we can turn out.

Great. Well, appreciate you guys taking my questions.

Thank you, Lenny.

And looks like we have a follow up from Matt Tucker from KeyBanc Capital Markets.

Yes. You've been talking, last quarter and earlier about some opportunities up in Alaska, on the module side. Wondering if you could update us on the kind of timing on those opportunities, maybe the size and if there have been any major shifts in your expectations there?

Well, there hasn't been any, really there hasn't been any progress made on this at this point in time. We're still tracking the project. Again, it's some modules for Alaska, as you said. But, at this point in time, we received no inquiries for bidding on a project. We're still tracking them and again I think those are probably somewhere around the tail end of the third quarter, first part of fourth quarter this year.

Got it. Thanks. In the prepared commentary, it sounded like you may still be trying to assess what the ultimate costs of the repairs are going to be. Is there some chance that the $8 million number could continue to grow?

Well, certainly there's always that possibility. We think we've estimated, the worst case scenario, in that respect. There are a few things that will work in our favor, in terms of some damage we thought may be to underneath the slab and there was no damage there. So while there are some indications that it may come down some, again until we finish cutting the slab itself, we don't know. But we think that $8 million is a very reasonable estimate for what we expect the cost to be.

Thanks. And in terms of your insurance claim to get those costs back, any idea when that could be resolved?

Well, Matt, we're looking to resolve this there in the third quarter. Our insurance company has not indicated, one way or another, the coverage to expect. But as of now, we're still expecting some or all of these costs to be covered.

Thanks. And last question. The sequential decline in gross margins versus the first quarter, despite revenues ramping up, I apologized if I missed this in the prepared commentary. But can you provide a little color on that?

Well, it's mainly due to the ramp up in our labor. From going from about 1400 employees to roughly 2700 now, including contract labor, there were just some inefficiencies we incurred. Now certainly some of those inefficiencies was due to customer cause deliverable delays, which we're pursuing right now. Some resolution to recover some of those costs. But as of this time, we've had to incur those labor and efficiencies in our results.

Thanks a lot, guys.

Thank you, Matt.

And looks like we have another follow up from Will Gabrielski with Lazzard.

Thank you. How much did you expense in the first half of the year, related to those repairs, if any?

None. You're referring to the grave and dock slab?

I am.

None.

Okay. Just wanted to double check that. Then the $8 million in the second half of the year, any sense of, assuming $8 million is the number, the (inaudible) between Q3 and Q4?

Well, we have just started. This is the early part of the third quarter. And we expect to continue with the repairs through the early part of the fourth quarter.

Okay. That's really helpful. Thank you very much.

Yeah. I show we have no further questions. We'll pause for just a moment to see if we have any more callers. Alright. That looks like we have no further questions. I'll turn the call back over to our speakers for any additional comments or closing remarks.

Well, again, I'd like to thank everyone for tuning in today. And we'll talk to you guys next quarter. Thanks again for everything.

Thank you. Thank you. If you'd like to listen to the replay of today's call, please call 888-203-1112 and enter pass code 2122274. The replay will be available starting today, July 27 th at 12 PM Central Time and end on August 10 th , 2012. This concludes today's conference and we thank you for participating.