Gulf Island Fabrication Inc (GIFI) 2012 Q4 法說會逐字稿

Good morning, and welcome, ladies and gentlemen, to the Gulf Island Fabrication Incorporated Q4 2012 Gulf Island Fabrication Incorporated earnings 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 remarks and introductions. Deborah, please go ahead.

I would like to welcome everyone to Gulf Island Fabrication's 2012 fourth-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 last year. The Company assumes no obligations to update these forward-looking statements.

Today, we have Mr. Kirk Meche, President and CEO, and Mr. Roy Breerwood, our CFO. Roy?

Thank you, Deborah. I would like to review Gulf Island's press release issued for the fourth quarter of 2012. The press release consists of multiple pages. The first pages are 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 December 31, 2012, compared to three months ended December 31, 2011. Revenue was $129.2 million, compared to $88.4 million. The cost of revenue was $138.6 million, compared to $83.2 million. Gross loss was $9.4 million, compared to gross profit of $5.2 million, or 5.9% of revenue. The increase in revenue for the quarter is mainly contributed to the increase in pass-through costs, mainly contracted service costs, and the increase in man-hours worked. The decrease in gross margin was mainly due to the $14.5 million reserve recorded on Bluewater's outstanding contract receivable balance as of December 31, 2012.

General and administrative expenses were $2.6 million or 2% of revenue, compared to $2.4 million or 2.7% of revenue. Operating loss was $12 million, compared to operating income of $2.9 million. We had net interest income of $30,000, compared to $455,000. The net interest income for the period ended December 31, 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 expense for the three-month period ending December 31, 2012 represents an $11,000 loss, compared to an $8,000 loss.

The loss before taxes was $12 million, compared to net income before taxes of $3.3 million. Income tax benefit was $3.9 million, compared to income tax expense of $1.5 million. The income tax rates were 32.4% benefit, compared to a 44.6% expense. The decrease in the effective rate for the 2012 period and the benefit was primarily related to the reduction of the Company's income, mainly due to the provision for loss on the Bluewater contract receivable, causing an increase in the Louisiana state income tax apportionment in the 2012 period. Net loss was $8.1 million, compared to net income of $1.8 million.

Basic and diluted loss per share were $0.56 for the three-month period ending December 31, 2012, compared to basic and diluted earnings per share of $0.12. Weighted average and adjusted weighted shares outstanding were 14.4 million shares for the period ending December 31, 2012 and December 31, 2011. Depreciation expense was $6 million, compared to $5.5 million. We declared and paid cash dividends of $0.10 per share during the quarter ended December 31, 2012, compared to $0.06 per share during the quarter ended December 31, 2011.

The following are the results of operations for the 12 months ended December 31, 2012, compared to the 12 months ended December 31, 2011. Revenue was $521.3 million, compared to $307.8 million. The cost of revenue was $517.5 million, compared to $303.3 million. Gross margin was $3.8 million or 0.7% of revenue, compared to $4.5 million or 1.5% of revenue. The increase in man-hours worked contributed to the increase in revenue. The decrease in gross margin was mainly driven by provision for loss on the Bluewater contract receivable of $14.5 million during the 12-month period ending December 31, 2012, as compared to asset impairments of $7.7 million recognized during the 12-month period ending December 31, 2011 related to the impairment of an insurance claim. We also recognized contract losses of $12.5 million during the 2012 period, compared to $3 million in 2011.

General and administrative expenses were $9.8 million or 1.9% of revenue, compared to $8.2 million or 2.7% of revenue. Operating loss was $6 million, compared to an operating loss of $3.7 million. We had net interest income of $433,000, compared to $902,000. The net interest income for the period ended December 31, 2012 and 2011 is related to the financing agreement with one of our customers regarding collection of an $11 million retainage balance on a completed contract. Other income for the 12-month period ending December 31, 2012 represents $128,000 compared to $309,000, both resulting from the sales of miscellaneous equipment.

Loss before taxes was $5.4 million, compared to a loss of $2.4 million. Income tax benefit was $1.3 million, compared to a benefit of $644,000. The income tax rate was a benefit of 24.3%, to a benefit of 26.3%. The decrease in the effective rate and benefit for the 12-month 2012 period was primarily related to the reduction of the Company's income, mainly due to the provision for loss on the Bluewater contract receivable. The reduction in income caused an increase in the Louisiana state tax apportionment in 2012 as compared to 2011, reducing the overall income tax benefit recorded.

Net loss was $4.1 million, compared to a net loss of $1.8 million. Basic and diluted loss per share was $0.29 for the 12-month period ending December 31, 2012, compared to basic and diluted loss per share of $0.13. Weighted average and adjusted weighted shares outstanding were 14.4 million shares for the period ending December 31, 2012 and December 31, 2011. Depreciation expense was $23.4 million compared to $20.7 million. We declared and paid cash dividends of $0.40 per share during the 12 months ended December 31, 2012, compared to $0.24 per share during the 12 months ended December 31, 2011.

Please refer to page 1 of the press release for a review. We had a revenue backlog of $537 million, and a labor backlog of 4.4 million man-hours remaining to work at December 31, 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 31, 2011.

The following represents selected balance sheet information for December 31, 2012, compared to December 31, 2011. Cash and cash equivalents were $24.9 million, compared to $55.3 million. Total current assets were $173.6 million, compared to $177.9 million. Property, plant and equipment, net of depreciation, was $229.2 million, compared to $216.7 million. Total assets were $403.5 million compared to $395.9 million. Total current liabilities were $92.3 million, compared to $76 million. Long-term debt was zero for both periods. Shareholders' equity was $273.5 million, compared to $282.8 million. And total liabilities in shareholders' equity was $403.5 million, compared to $395.9 million.

Other financial information for the three months ended December 31, 2012, compared to December 31, 2011, consists of -- pass-through costs were 55.4% of revenue, compared to 42% of revenue. Man-hours worked were 1.1 million, compared to 832,000. Deepwater revenue represented 73% of revenue, compared to 59% of revenue. Foreign revenue represented 0.2% of revenue, compared to 16% of revenue.

Other financial information for the 12 months ended December 31, 2012, compared to December 31, 2011, consists of -- pass-through costs were 48.3% of revenue compared to 45.3% of revenue. Man-hours worked were 4.8 million, compared to 2.7 million. Deepwater revenue represented 74% of revenue, compared to 40% of revenue. Foreign revenue represented 9% of revenue, compared to 16% of revenue.

Other financial information for December 31, 2012, compared to December 31, 2011, consists of -- revenue backlog was $537 million compared to $614.5 million. Our backlog includes commitments received through March 11, 2013, and excludes $30 million related to a suspended project. We exclude suspended projects from backlog because resumption of work and timing of backlog revenues are difficult to predict. [33.6]% of our backlog was pursuant to letters of intent received after December 31, 2012, for which the full scope of work has not been authorized, but we expect to receive. Man-hour backlog was 4.4 million, compared to 4.6 million. Revenue backlog for deepwater was $393.3 million or 73.2%, compared to $509.8 million or 83%. Of the backlog at December 31, 2012, approximately $395.8 million is expected to be recognized as revenue in 2013, and approximately $141.2 million of backlog is expected to be recognized as revenue thereafter.

We had approximately 2,200 employees and 350 contract employees at December 31, 2012, as compared to 1,950 employees and 90 contract employees at December 31, 2011. CapEx for the 12 months of 2012 was $35.9 million.

For the 12-month period ended December 31, 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 12-month period, $3.1 million of the costs to build the coffer cell are included in contract costs for the Williams Gulfstar FPS Gulfstar-1 hull project. The remaining $6.4 million has been capitalized as property, as part of the graving dock, or as inventory for use on future projects after its removal upon completion of the Williams project. The graving dock at our Texas facility has been drained, and repairs to the slab are substantially complete. The total estimated cost to repair the graving dock is $7.5 million, all of which has been recovered through insurance. Approximately $17.6 million of capital expenditures are planned for 2013, which consists of approximately $9.3 million for the purchase of equipment, and $8.3 million for additional yard and facility infrastructure improvements.

Other business notes for the quarter. On July 13, 2012, we received notice from our customer, Bluewater Industries, requesting a slowdown of work on the ATP Oil and Gas UK Limited's Cheviot project, ordered pursuant to the master service contract between Bluewater and the Company, and an amendment to scheduled payment terms under the contract.

On August 16, 2012, we entered into a binding agreement with Bluewater, and an engineering consulting firm engaged by ATP UK to oversee the fabrication of the Cheviot project, to amend and re-state the contract, and suspend the project. Among other things, the agreement outlines the revised payment terms for the contract receivable balance, and the limitations 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 through February 28, 2013, with the remaining outstanding balance due on or before March 31, 2013.

In addition, if Bluewater has fully paid the balance on or prior to March 31, 2013, 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. If Bluewater fails to make timely payments pursuant to the revised payment plan, we have the right to terminate the contract, and we will continue to retain title to any project deliverables. We also entered into a security agreement with Bluewater, pursuant to which Bluewater granted us a security interest in certain of its equipment currently located at our facilities. As of March 11, 2013, all installments under the agreement have been paid.

On August 17, 2012, ATP Oil and 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. On January 22, 2013, ATP filed an emergency motion to sell all or substantially all of its deepwater assets, including 100% of its equity ownership in ATP UK. The motion has since been approved by the court, and ATP is currently seeking qualified bidders to purchase these assets. The sale hearing is expected to take place between March 26, 2013 and April 16, 2013.

We do not know whether or not ATP will be successful in its efforts to sell these assets, or whether a purchaser of ATP UK would fund the Cheviot project. However, in the absence of a sale of ATP UK to a purchaser desiring to complete the Cheviot project or utilize the structure in another location, it does not appear that Bluewater will be able to pay the remaining balance on March 31, 2013. In the event Bluewater is unable to continue to meet its obligations under the agreement, we may attempt to recover or partially recover the unpaid balance through the disposition of project deliverables and the enforcement of our security interest.

As of December 31, 2012, $56.8 million has been billed on the Cheviot project, and the outstanding balance was approximately $31.3 million. We recorded a $14.5 million reserve on the balance as of December 31, 2012, and we believe the outstanding balance, less the $14.5 million reserve, is collectible through the disposition of project deliverables and the enforcement of our security interest, in the event of a default by Bluewater.

Also, as previously reported, we recognized estimated contract losses of $21.2 million in the nine-month period ended September 30, 2012, primarily as a result of an increase in man-hours to complete one of our major deepwater contracts. On March 7, 2013, we entered into a change order with our customer to settle our claim on this contract. Revenue for this change order earned by the Company was recorded in the quarter ended December 31, 2012. The change order also includes incentives related to key milestone date and performance metrics, which have not been recorded as of December 31, 2012, but will be recorded as revenue in future periods if and when incentive terms are met.

Estimated contract losses recognized in the year ended December 31, 2012 were $12.5 million, inclusive of the revenue recorded at December 31, 2012 from this change order. Our claim was related to increased man-hours driven by revisions and delivery delays to specifications and designs by our customer, causing out-of-sequence work schedules. The customer also extended delivery of the first phase of the project multiple times, as a result of these revisions and delays. Any future deliverable delays or project revisions could result in future revisions to the contract estimates.

At March 11, 2013, we had $10 million borrowed under our revolving line of credit, and we had outstanding letters of credit totaling $46.8 million, which reduced the unused portion of our revolving line of credit to $23.2 million. We required borrowings to fund our working capital, which has been adversely impacted by the suspension of the Cheviot project and the extended collection of the associated Bluewater receivable. Also contributing to our decreased working capital were increased contract losses incurred during 2012, primarily attributable to one of our major deepwater projects.

As previously mentioned, on March 7, 2013, we entered into a change order with our customer to settle our claim relating to this project. As a result of our entering into this change order, we expect to pay down a portion of our outstanding borrowings in the first half of 2013.

We are currently operating at capacities required by the projects in our backlog. We expect our man-hour levels to decrease slightly during the second and third quarters of the year, as we enter into the latter 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 during the first and second quarters. We continue to focus on managing the costs associated with our workforce, and meeting our scheduled demands.

I would now like to open the call to questions of the analysts.

(Operator Instructions)

Jim Rollyson, Raymond James.

Thanks for all the detailed review. Just one question, can you remind us how much or what percentage of that ATP structure is done now? And just -- and thinking forward, if somebody else does come in and buy the assets of ATP, and ultimately decide to proceed with the project or, as you said, use the structure in another project, just trying to get an understanding of is this thing largely completed to where it wouldn't make sense for them to try and start off fresh with a different structure somewhere else, because this is already largely paid for? Is that kind of fair?

Yes, Jim, this is Kirk. To give you a status of where the project is, I would say structurally we are probably in the 70% range. Piping has been spooled, the material has been received. So the total project is probably nearing 50% complete. It would probably make sense for somebody to come in and take the structure, and let us complete it going forward, as opposed to just starting from new. So, it's substantially complete. It's in the yard. Again, we've got most of the components here, as we said, on-site. So, hopefully, it will make sense for somebody to come about and try to pick that thing up and let us continue to work on it, but time will tell on that respect.

Yes, well, fingers crossed. Given the reserve you guys took in the fourth quarter, it sounds like you're not expecting Bluewater to be able to meet the March 31 deadline on payment. But since you reserved for all but what you think you can recover from what's -- you know, project deliverables, do you think charges as it relates to this deal are -- you are probably past tense, or do you think there's more noise to come in the next quarter or two?

Well, it's like anything you want to sell. Everybody has a value on it, and it really depends on the need. If there's an oil company out there that needs this in a fairly quick manner, then of course the asking price can go up a little bit on this thing. I think we've taken a very reasonable approach, when we looked at the value of it. We had independent appraisers come in on the facilities to look at it, and then we took our best guess as to what we thought the market would yield on it. So, again, there's some commodities on it that are hot that could be turned over very quickly, and we could get the majority of the money on. Then there's other items that just may sit here, because it is designed for the North Sea, so it's a very specific application it may apply to, not so much the Gulf of Mexico.

Understood. Switching gears to maybe something a little more fun to talk about. Backlog had a nice step up in the quarter, maybe a little bit of color on -- you gave the timing, but maybe some of the type of work, and just what you see for bidding right now for additional work to happen in 2013?

Okay. Yes. I like that, go to something a little positive. Our backlog, we did have an award on two projects, or award of one project and a letter of intent on another. Those are more traditional-type work that we are seeing. These are for jackets and small decks. Unlike some of the things we've had in '11 and '12, where we've had first of a kind projects hitting our facilities. Again, this is more the traditional jacket work that we are accustomed to, and again a little bit smaller decks. It's not 20,000 or 30,000 ton topside, just more in the range of 3,000 ton decks. So that's encouraging for us going forward.

Our bidding activities are fairly steady, right now. There's two major projects that we have bid on that we await an award on, or some indication where we are going to stand. Then there's about four or five different deepwater projects that are coming up for the latter part of this year that we are anticipating receiving the bids, so we can tender our bids on it. Of course, our Marine group, the bidding activity in the Marine sector is still pretty brisk. That's going fairly well for us, as well as the repairs side on -- utilizing our graving -- our dry dock.

So it should be a pretty good amount of pick up, just from the shorter-term stuff, it sounds like, and then you've obviously got a lot of lines in the water outside of that. Mentioning the jackets and decks that are a little more traditional instead of one-off type deals, do you think margins are set to be a little bit better, just because it's your bread-and-butter work?

(Laughter). Well, we certainly hope so. It's always subject to -- they were still bid pretty competitively. So our margins were still -- we had to be competitive in that respect. So it's really up to us, we've got to go out there and perform, and that's the bottom line on our companies right now, is performance. So I can't tell you that they are higher than what we expect, but we are certainly hoping that we can bring these things in at higher margins we've been seeing, especially the last couple of years.

Great. I appreciate the color. Thanks.

Martin Malloy, Johnson Rice.

When I look at your gross profit margin, even excluding the receivable provision that you took, it looks like it's about 4%. Can you comment about why that gross profit margin is tending to be lower than we -- than you historically have put up?

Marty, yes, this is Kirk again. I think part of that is dealing with -- as we said, we resolved our claim with our -- one of the deepwater projects we have, and it's a two-part component. There was one part of it that was a lump-sum portion of it that we recorded. The second part is incentives going forward, and those incentives have not been booked. The cost has been booked, but the revenue has not been booked. So I think that probably contributes to why you see about a 5%, when you add the reserve back into our margins.

And, you know, I would certainly add that such a large labor force has been challenging. The lost job does not allow recognition of a whole lot of margin, in addition to lots of labor being pushed through, and not all of it could be matched with revenue.

So would you expect the margins to trend up here as we go into '13?

I would still be very cautious about margins into '13. Like I said, lost jobs don't allow for much margin recognition during a period of time. But, as we -- as we start working on and completing these projects, these projects with these difficulties, we would expect margins to improve. Now, you know, as Kirk added, there is also that incentive component that if we perform, could certainly make all of 2013 appear a lot better.

Okay. Then, the two projects on which you are bidding, the larger projects that you mentioned, is there any help you can give us in terms of the timing of when you might hear back whether you've been awarded those?

Marty, the largest of the two is still scheduled, as we understand it, for late second quarter of this year for award, and I would say that both of them are probably in that same category.

Okay. Thank you.

(Operator Instructions)

Blake Hancock, Howard Weil.

Just one question, kind of -- one of your competitors recently talked about a lack of availability of qualified tradesmen in the Gulf, and I know you guys said you were at full capacity and probably decreasing here in the middle of the year. As you look out into late '13, early '14, and you've got two projects you've bid on and another four or five possibly to come, any hesitancy there towards maybe margin expansion as we look into '13 -- late '13 and early '14, as those awards hopefully fall your way, and you have to rebuild your workforce a little bit?

Well, Blake, that's always a challenge going forward. But, again, what we've done traditionally in the past is we typically look at all our subsidiaries to make sure that if we have any need within our subsidiaries, that we use our labor first. Right now, I think currently we have about 350 contract laborers in the facilities. Certainly what we will do with our labor is we will get rid of that contract labor first, and we will supplement that with labor from different subsidiaries coming in to maintain our workforce for the future. It's something we've done in the past. If you remember, we did it with our Marine division, in order to keep our folks here, we knew the ramp-up was coming back. So we are actively monitoring that going forward, and we do have a couple of holes within some of our facilities where we need some work. Again, we are actively pursuing that. But we try to utilize our labor back and forth between our Texas and Louisiana operations to make sure that we keep as many folks as possible for when the ramp-up comes, that we have skilled labor still on.

Okay, great. And then just one more on the ATP project. You guys -- I guess there's about $16 million that you guys think is collectible. How much of that is associated with a default with Bluewater versus a disposition, and you guys thinking, hey, we can sell the equipment for -- how much of that is -- is there a percentage of $14 million associated with -- we think $14 million of Bluewater defaults, and the rest is associated with the disposition?

We took an approach to the receivable this quarter, taking a reasonable look, especially considering at the point we stand now. And we had to look out and say, well, with a little time left, we have to assess this thing as if Bluewater -- it doesn't appear likely they will be able to deliver on their last payment and default. So the entire remaining exposure that we have on the books represents the value we feel we can get from collateral, basically.

Okay. That's great. That's it for me, guys, I appreciate it.

Martin Malloy, Johnson Rice.

Just had a few follow-up questions. Could you talk about the working capital usage of the course of this year? It sounds like you'll be able to pay down some of the revolver during the first quarter?

Well, probably beginning of the second quarter, considering when this change order was executed and just timing of the cash payout. The payout will extend through, probably, the third quarter of 2013, but we certainly anticipate that helping us manage our revolver down.

Okay. Is the Bigfoot project, is that still expected to be completed early next year?

Yes, Marty. The final integration and completion of the project should be latter part of this year, first part of '14.

And are you changing your bidding strategy on these larger projects, when -- with the outlook for labor on the Gulf Coast over the next couple of years probably becoming more and more constrained?

Yes, Marty, I guess we are looking at every aspect of the bids going in, in terms of what's out there for the future, based on how long these projects take us to construct. So certainly that's considered in our bidding process, and then of course we're looking at all avenues in terms of making sure that we protect our companies going forward with these large bids. So, yes, it's a challenge that we've tasked ourselves with and our managers, and we are all in tune as to moving the Company forward. And also, project managering the jobs, making sure we've got the right folks in the right positions, and making sure we have enough folks to handle these large projects when they come our way.

Thank you.

(Operator Instructions)

With no further questions, I would like to turn the call back to Mr. Kirk Meche for any additional or closing remarks.

Well, again, we thank everyone for listening today. We will be back with everyone on our next quarter with our earnings. Thank you and have a good day.

If you would like to listen to a recording of today's conference, it will be available starting today, March 12, at 12 PM Central time until March 19 at 12 PM Central Time. You may access it by dialing number 719-457-0820 or 1-888-203-1112, and referencing access code 2747027. Again, that is 719-457-0820 or 1-888-203-1112, and accessing reference code 27402 -- 2747027. This concludes today's conference. Thank you for your participation.