Gulf Island Fabrication Inc (GIFI) 2012 Q3 法說會逐字稿

Good morning, and welcome, ladies and gentlemen, to the Gulf Island Fabrication, Inc., third quarter 2012 results of operations release conference call. All participants will be in a listen-only mode for the duration of the presentation. This call is being recorded.

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

I would like to welcome everyone to Gulf Island Fabrication's 2012 third-quarter teleconference.

Please keep in mind that any statements made in this conference that are not statements of historical fact are considered forward-looking statements. These statements are subject to factors that could cause actual results to differ materially from the 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 2, 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 third quarter of 2012. The press release consists of multiple pages. Page 1 is text, and the last page is an income statement. I would like to review the last page, which is the income statement, first.

The following are the results of operations for the three months ended September 30, 2012, compared to the three months ended September 30, 2011. Revenue was $141.8 million, compared to $85.8 million. The cost of revenue was $155.2 million, compared to $81.8 million. Gross loss was $13.4 million, compared to gross profit of $4 million, or 4.7% of revenue.

The decrease in gross margin was mainly due to recognizing contract losses of $20.6 million in the three-month period ending September 30, 2012, as compared to $1.8 million for the same period in 2011. These contract losses resulted in an unfavorable reduction in gross margin during such periods, of $26.8 million and $1.8 million, respectively, as required under the accounting for lost contracts under percent of complete accounting. The loss recognized was mainly due to an increase in estimated man-hours to complete one of our major deepwater projects.

We believe these increased man-hours are primarily driven by revisions and delivery delays to specifications and designs by our customer in the third quarter of 2012, causing out-of-sequence work schedules to be used while executing the project. We have notified our customer of what we believe is our right to recover the costs and lost profits caused by these customer revisions and delays. The customer extended delivery of the first phase of the project as a result of their revisions, and we are actively negotiating the recoverable amount with our customer. No revenues for this claim have been recorded as of September 30, 2012. We have also excluded potential changes to what we believe are insufficient unit rate prices caused by drawing revisions made late in our work schedules. Any agreed-upon recoverable amounts will be recorded in revenue in the periods when such agreement is reached between us and our customer.

General and administrative expenses were $2 million or 1.4% of revenue, compared to $1.9 million or 2.2% of revenue. Operating loss was $15.4 million, compared to operating income of $2.1 million. We had net interest income of $94,000, compared to $330,000. The net interest income for the period ended September 30, 2012, and 2011, 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 September 30, 2012 represents a $54,000 gain, compared to an $89,000 gain, resulting from the sales of miscellaneous equipment. Loss before taxes was $15.2 million, compared to net income before taxes of $2.5 million. Income tax benefit was $4.8 million, compared to income tax expense of $954,000. The income tax rates were 31.8%, compared to 38%. The decrease in effective rate for the 2012 period was primarily related to the decrease in income at our Texas facility, which caused a decrease in our estimated Federal-qualified production activities income deduction, and thus a decrease in the income tax benefit recorded in the quarter.

Net loss was $10.4 million, compared to net income of $1.6 million. Basic and diluted loss per share was $0.72 for the three-month period ending September 30, 2012, compared to basic and diluted earnings per share of $0.11. Weighted average and adjusted weighted shares outstanding were 14.4 million shares for the period ending September 30, 2012 and September 30, 2011. Depreciation expense was $6 million, compared to $5.2 million. We declared and paid cash dividends of $0.10 per share during the quarter ended September 30, 2012, compared to $0.06 per share during the quarter ended September 30, 2011.

The following are the results of operations for the nine months ended September 30, 2012, compared to the nine months ended September 30, 2011. Revenue was $392.1 million, compared to $219.4 million. The cost of revenue was $379 million, compared to $220.1 million. Gross margin was $13.2 million or 3.4% of revenue, compared to a loss of $718,000. The increase in man-hours worked contributed both to the increase in revenue and the increase in gross margin for the year. The increase in production, primarily related to our two large deepwater 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 pretax charge related to the impairment of an insurance claim. We incurred no asset impairments in our 2012 period. Offsetting these two factors, though, was the recognition of $21.2 million of contract losses in the nine months ended September 30, 2012, as compared to $2.4 million in the comparable period in 2011. These contract losses resulted in an unfavorable reduction in gross margin during the periods of $24.5 million and $2.4 million, respectively. The loss for the 2012 period was driven by the same factors discussed in our three-month results.

General and administrative expenses were $7.2 million or 1.8% of revenue, compared to $5.8 million or 2.6% of revenue. Operating income was $6 million, compared to an operating loss of $6.5 million. We had net interest income of $403,000, compared to $447,000. The net interest income for the periods ended September 30, 2012, and 2011, were also 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 nine-month period ending September 30, 2012 represents $139,000, compared to $317,000, both resulting from the sales of miscellaneous equipment.

Income before taxes was $6.6 million, compared to a loss of $5.8 million. Income tax expense was $2.6 million, compared to a benefit of $2.2 million. The income tax rate was 39%, compared to 38%. The increase in effective rate for the nine-month period in 2012 was primarily related to a decrease in our estimated Federal-qualified production activities income deduction, and an increase in the Louisiana State income tax apportionment. Net income was $4 million, compared to a net loss of $3.6 million.

Basic and diluted earnings per share were $0.28 for the nine-month period ended September 30, 2012, compared to basic and diluted (inaudible) share of $0.25. Weighted average and adjusted weighted average shares outstanding were 14.4 million shares for the period ended September 30, 2012. Weighted average and adjusted weighted average shares outstanding were 14.3 million for the period ended September 30, 2011. Depreciation expense was $17.4 million, compared to $15.2 million. We declared and paid cash dividends of $0.30 per share during the nine months ended September 30, 2012, compared to $0.18 per share during the nine months ended September 30, 2011.

Please refer to the first page of the press release for review. We had a revenue backlog of $376.1 million, with a labor backlog of 2.9 million man-hours remaining to work at September 30, 2012, as compared to a revenue backlog of $614 million, with a labor backlog of 4.6 million man-hours remaining to work at [December] 30, 2011. This backlog excludes $30.0 million relating to a suspended project. We exclude suspended projects from contract backlog because resumption of work and timing of backlog revenues are difficult to predict.

The following represents selected balance sheet information for September 30, 2012, compared to December 31, 2011. Cash and cash equivalents were $26.4 million, compared to $55.3 million. Total current assets were $185 million, compared to $177.9 million. Property, plant and equipment, net of depreciation, was $226.2 million, compared to $216.7 million. Total assets were $412.5 million, compared to $395.9 million. Total current liabilities were $93.6 million, compared to $76 million. Long-term debt was zero for both periods. Shareholders' equity was $282.7 million, compared to $282.8 million, and total liabilities and shareholders' equity was $412.5 million, compared to $395.9 million.

Other financial information for the three months ended September 30, 2012, compared to September 30, 2011, consists of -- pass-through costs were 58.2% of revenue, compared to 46.9% of revenue. Man-hours were 1.2 million, compared to 759,000. Deepwater revenue represented 82% of revenue, compared to 42% of revenue. Foreign revenue represented 6% of revenue, compared to 19% of revenue.

Other financial information for the nine months ended September 30, 2012, compared to September 30, 2011 consists of -- pass-through costs were 46% of revenue, compared to 46.6% of revenue. Man-hours worked were 3.7 million, compared to 1.9 million. Deepwater revenue represented 75% of revenue, compared to 32% of revenue. Foreign revenue represented 13% of revenue, compared to 16% of revenue.

Other financial information for September 30, 2012, compared to December 31, 2011 (sic) consists of -- revenue backlog was $376.1 million, compared to $614.5 million. Our September 30, 2012 backlog excludes $30 million related to a suspended project. Once again, we exclude suspended projects from backlog because resumption of work and timing of backlog revenues are difficult to predict. Man-hour backlog was 2.9 million, compared to 4.6 million. Revenue backlog for deepwater was $297.3 million or 79%, compared to $509.8 million or 83%. Of the backlog at September 30, 2012, we expect to recognize revenues of approximately $149.7 million, not including any change orders, (inaudible) growth, or new contracts that may be awarded during 2012. Approximately $213.7 million of backlog is expected to be recognized as revenue in 2013, and approximately $12.7 million of backlog is expected to be recognized as revenue thereafter.

We had approximately 2,300 employees and 430 contract employees, compared to 1,950 employees and 90 contract employees. CapEx for the nine months of 2012 was $26.8 million. Approximately $12.3 million of remaining expenditures are planned for 2012, which consists of $4.3 million for the purchase of equipment and $8 million for additional yard and facility infrastructure improvements.

For the nine-month period of September 30, 2012, $9.5 million was spent to complete the construction of a coffer cell to drain the graving dock which flooded at our Texas facility. Of the $9.5 million spent in the nine-month period, $3.1 million of the cost to build the coffer cell are included in contract costs for the Williams Gulfstar hull project. The graving dock at our Texas facility has been drained, and we have commenced necessary repairs on the slab. The current estimated cost to repair the graving dock slab is $7.5 million, all of which will be covered by insurance. We expect to collect all amounts associated with the slab repair in the fourth quarter of 2012. As of September 30, 2012 we have recorded $2.7 million in other current assets for recoverable repair expenses under this claim, net of related deductibles.

And in conclusion, other business notes for the quarter. On July 13, 2012 we received notice from our customer, Bluewater Industries, requesting both a slowdown of work on the ATP Oil & Gas (UK) Limited's Cheviot project, ordered pursuant to a master service contract between Bluewater and us; and an amendment to the scheduled payment terms under the contract. On August 16, 2012, we entered into a binding agreement with Bluewater, an engineering consulting firm engaged by ATP (UK) to oversee the fabrication of the Cheviot project, to amend and restate the contract, and suspend the project.

Among other things, the agreement outlines the revised payment terms for the contracts receivable balance, and the limitation on Bluewater's ability to request an extended suspension of work. Specifically, Bluewater must pay $200,000 on or before the last day of each calendar month until February 28, 2013, with the remaining balance due on or before March 13, 2013 (sic). In addition, if Bluewater has fully paid the balance on or before the March 31, 2013 deadline, Bluewater has the option to extend the suspension of work on the Cheviot project to June 30, 2013, after which Bluewater will have no further rights to request a suspension of work under the contract pursuant to the agreement. If Bluewater fails to make timely payments pursuant to the revised payment plan, we receive the right to terminate the contract, and we will continue to retain title to any project deliverables pursuant to the agreement.

On August 17, 2012, ATP Oil & Gas Inc., the parent company of ATP (UK), filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code. Although ATP is not our customer, and ATP (UK) is not a party to the bankruptcy, we believe ATP has historically financed operations of its subsidiaries, including ATP (UK). We believe Bluewater's ability to continue to meet its obligations under the agreement, including payment of the outstanding balance on or before March 31, 2013, largely depends on ATP (UK)'s ability to fund the Cheviot project. As of September 30, 2012, $56.7 million has been billed on the Cheviot project, and its outstanding contracts receivable balance was approximately $32.1 million. All installments due under the agreement have been paid to date. Our work under our contract is suspended, and will remain suspended until the outstanding balance is paid, based on our agreement with Bluewater.

Although it is too early to determine the ultimate outcome of the impact of ATP's bankruptcy on the Cheviot project, in the event Bluewater is unable to comply with its obligations under the agreement, and the contract is terminated, we will retain title to all project deliverables. Given the suspension of the project, and the uncertainty around ATP's bankruptcy, events in the future could change the timing and amount of the remaining contract price we ultimately recover.

Historically, we have funded our operations and capital needs through cash generated by operating activities, and funds available under the revolver have mainly been used to issue letters of credit for jobs awarded to us. Although capacity under the revolver still allows us to issue letters of credit for any current job awards, we will likely utilize some of its capacity to fund working capital and capital expenditure needs due to contractual issues we are now experiencing. We are also in advanced negotiations with our lenders to execute an amendment to the facility which will increase the capacity of the revolver from $60 million to (inaudible) million. We will further manage our cash through timing of both capital expenditures and payments to subcontractors, as we are paid by our customers. We believe our cash generated by operating activities and funds available under the amended revolver will be sufficient to fund our capital expenditures, and meet our working capital needs for the next 12 months.

We are currently operating at capacities required by the projects in our backlog. We expect our man-hour levels to decrease slightly over the next two quarters, as we enter into the later stages of our two major deepwater 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, and meeting our scheduled demands.

I will now like to open the call to questions from analysts.

(Operator Instructions)

We'll take our first question from Blake Hutchinson (sic) with Howard Weil.

Good morning, guys.

Good morning, Blake.

A question on this -- the contract loss. I'm sitting here thinking about the backlog associated with that, and is it fair to assume that you guys, A, will have to continue with this project, and, B, it's probably a zero margin project going forward?

Blake, we will continue with the project. Needless to say, we have to finish the project. We are not projecting to be a zero profit. What has happened right now is we don't have a signed change order from our customer, so we cannot recognize the revenue associated with the extra work and the project delays. We have presented a change order to our client, and as soon as we can get this change order finally negotiated, we will recognize the revenue, and we are anticipating that hopefully this will be in the fourth quarter of this year.

Great, and then one more follow-up on that. Any way you guys can give some color on what percentage of backlog this contract is for you guys?

Well, let's see here, I think you would say it is approximately 25 -- 20% to 25%.

Perfect. That's it for me, guys. I appreciate it.

Okay, Blake.

We will go next to Lenny Bianco with Raymond James.

Good morning, guys.

Good morning, Lenny.

Could you maybe provide us with an update on the deepwater projects you're seeing out there, and if I recall, there were a couple floating around maybe in the fourth quarter timeframe that could be out there to bid?

That's correct, Lenny. We're looking at three projects for the fourth quarter. We have two in-house right now to be bid on, and the third one we think will be bid on probably in the first half of 2013.

Great, and so based on the potential shift in the schedule with the major deepwater project you have now, you are comfortable bidding those projects, it sounds like? And, you know, I guess would there be a gap in-between the ramp-down of the current one and the ramp-up of those other potential projects?

That's correct, Lenny. We will probably be reducing our labor force more so around the first of the year, and the first and second quarter, but not by a really significant amount, and hopefully we can pick up one or two of these deepwater projects and maintain most of our labor force going forward.

Great. One quick follow-up on that, and then I'll hop back in the queue. What is your sense of industry capacity, Gulf Coast fabrication? Is there capacity out there to compete with you to get these jobs, or is everyone kind of full at this point?

Well, I think everybody is going to compete for these projects, Lenny. One of our competitors is pretty full right now, but they still will compete for the projects going forward.

Thanks. I will turn it back.

Okay, Lenny.

We'll go next to Randy Bhatia with Capital One Southcoast.

Good morning, guys. Thanks for taking my questions. Following up on that last question, can you just also provide an update on the bidding environment in Marine? I think you guys had talked in the second quarter that it was pretty good, and we were looking for some pretty good opportunities for some smaller projects to be awarded here in the second half of the year.

Yes. Marine is pretty consistent. It is kind of like everything from groundwater to offshore-type vessels, and I think we put a press release out that we did secure a project from Montco, another 335-foot leg liftboat. So that's a pretty significant project for the Marine group, besides some other projects that they are already working on. They continue to get bids on a pretty consistent basis, so the Marine group hasn't slowed down like the deepwater-type projects. It continues to move on.

Okay, great. Thanks. And just on the commentary that you said on the revolver, that you guys may draw down on the revolver to fund some working capital --

This depends, of course, on our ability to negotiate some change orders and get some payments in. As well as we did get some -- or we will be getting some insurance money in very shortly, but it is a possibility we may have to dip into our revolver, mainly because of the letters of credit that we have to issue on these larger projects.

I see. And when would that take place under a scenario, say, where you do get the graving dock repair insurance claim in the fourth quarter, but aren't able to negotiate successfully with -- on the loss contract in the fourth quarter? Would it be something that you would have to do in the fourth quarter or is it something that is 2013?

I would say it's a possibility in the fourth quarter of 2012, and the first quarter of 2013.

Okay, great. That's very much guys, I will hop back.

(Operator Instructions)

We will go next to Martin Malloy with Johnson Rice.

Good morning.

Good morning, Martin.

Could you talk about the margins that you are realizing now versus -- your margins were significantly higher when you look back at 2007 to 2009, in a number of quarters. Can you talk about it? Is that a change in the bidding environment, or what is causing that?

Well, we had some unusual events for us that took place last year, if you remember, and as well as of course the margin right now on these deepwater projects depends on the change orders that we can negotiate with our clients, and hopefully we will have some positive negotiations going forward, Martin.

Okay. And then have you seen any interest from potential customers in having your yards fabricate modules or pieces of equipment for petrochemical and chemical plants along the Gulf Coast?

Martin, most of that has dried up. We haven't seen a lot of that. There is still talk about modules for Alaska and possible modules for Canada, but we don't see -- very few modules for the chemical plants and refineries in the US.

Okay. And then just one last question. Any update on Cape Wind?

We're still tracking it. Cape Wind, of course, has been delayed. The claim has gone through. We have bid Cape Wind, part of the fabrication from Cape Wind, and we are just of course waiting for them to finalize their financing, and that's been the biggest issue, is their financing and going forward. But we are actively pursuing Cape Wind.

Okay. Thank you very much.

Okay, Martin.

We'll go next to Randy Bhatia with Capital One Southcoast.

Hey guys, just a quick follow-up on Martin's question on the margins. I guess in the second quarter the impact was due to inefficiencies in the labor ramp. Can you just comment on where we stand on the labor impact to the margins?

Well, of course, the changes made by our customer in the Texas facility has put obvious stress on our efficiencies, and those costs are something that we plan to recoup. And, of course, going forward, with the loss position of this contract, it would have impact on gross margin. But we are certainly negotiating with our customer to recoup a substantial portion of those inefficiencies. But it is still, as a reminder, an incredible ramp-up for -- in such a short period of time, and it's just conditions that are a little different from what we've historically experienced.

Okay.

And we were ramping up mainly for the large projects and, of course, the drawings and specifications have been delayed by a substantial amount, and we're still getting drawings today, and in the third quarter we had like 6,000 drawings that came in on revisions and extra work on this major project. So this is an ongoing situation, but we didn't -- we chose not to lay off these individuals, because we would need them for this larger work to be able to meet scheduled deliveries.

Understood. Okay, guys. Thanks very much for the color, I appreciate it.

Okay.

At this time, there are no further questions.

Okay, I think we need to open the questions to the general public at this point in time.

(Operator Instructions)

And at this time, there are no questions in queue.

Okay, we appreciate everybody calling in at this time, and we will be talking again in next quarter. Thank you.

This does conclude today's conference call. We thank you for your participation.