Gulf Island Fabrication Management Discusses Q1 2013 Results - Earnings Call Transcript

Apr.26.13 | About: Gulf Island (GIFI)

Gulf Island Fabrication (NASDAQ:GIFI)

Q1 2013 Earnings Call

April 26, 2013 10:00 am ET

Executives

Deborah Kern-Knoblock - Secretary

Kirk J. Meche - Chief Executive Officer, President, Interim Chief Financial Officer, Treasurer and Director

Analysts

Martin W. Malloy - Johnson Rice & Company, L.L.C., Research Division

John A. Allison - BB&T Corporation

Operator

Good morning, and welcome, ladies and gentlemen, to the Gulf Island Fabrication Inc. 2013 First Quarter Earnings Release Conference Call. [Operator Instructions] This call is being recorded.

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

Deborah Kern-Knoblock

Thank you, Tiffany. I would like to welcome everyone to Gulf Island Fabrication's 2013 First 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 13, 2013. The 10-K was included as part of the company's 2012 annual report filed with the Securities and Exchange Commission earlier this year. The company assumes no obligation to update these forward-looking statements.

Today, we have Mr. Kirk Meche, President, CEO and Interim CFO; Mrs. Carol Berger [ph], our Financial Controller; and Mr. CJ Gas [ph], our Operational Controller. Mr. Meche?

Kirk J. Meche

Thank you, Deborah, and good morning to everyone. I'd like to review Gulf Island's press release issued for the first quarter of 2013. The press release consists of 2 pages: Page 1 is text, and Page 2 is an income statement. I would like to review Page 2, which is the income statement, first.

The following are the results of operations for the 3 months ended March 31, 2013, compared to the 3 months ended March 31, 2012. Revenue was $150.4 million compared to $113.1 million. The cost of revenue was $143.7 million compared to $100.4 million. Gross margin was $6.7 million, or 4.5% of revenue, compared to a gross margin of $12.7 million. The decrease in gross profit was due to $84.7 million in revenue recognized from pass-through costs and an additional $28 million in revenue recognized from 2 large deepwater projects which have little to no gross profit recognized during the quarter. These 2 large deepwater projects are scheduled for delivery in the third and fourth quarters of 2013. Additionally, $2.9 million of gross profit earned during the quarter was for a management fee on a project that is on a full pass-through of cost. This project is scheduled for delivery in the second quarter of 2013.

General and administrative expenses were $2.3 million, or 1.6% of revenue, compared to $2.6 million, or 2.3% of revenue. Operating income was $4.3 million compared to income of $10.1 million.

We had net interest expense of $63,000 compared to net interest income of $152,000 (sic) [$215,000]. The decrease in net interest income for the period ended March 31, 2013, was primarily related to the discounted accretion of a discount associated with the financing arrangement of a retainer's balance that was paid in full on January 30, 2013. In addition, interest expense increased for the 3-month period ended March 31, 2013, as a result of borrowing from a revolving line of credit. There was no other income for the period ended March 31, 2013. Other income for the period ended March 31, 2012, represented a $63,000 gain resulting from the sales of miscellaneous equipment.

Income before taxes was $4.3 million compared to income of $10.3 million. Income tax expense was $1.5 million compared to a tax of $3.5 million. The income tax rates were 35% compared to 34%. Net income was $2.8 million compared to a net income of $6.8 million.

Basic and diluted earnings per share were $0.19 for the period ended March 31, 2013, and $0.47 for the period ended March 31, 2012.

Weighted average and adjusted weighted shares outstanding were 14.5 million shares for the period ending March 31, 2013. Weighted average and adjusted weighted shares outstanding were 14.4 million shares for the period ended March 31, 2012. We declared and paid cash dividends of $0.10 per share during this quarter ended March 31, 2013, and March 31, 2012.

Please refer to Page 1 of the press release for a review.

We had a revenue backlog of $453.2 million, with a labor backlog of 3.5 million man-hours remaining to work at March 31, 2013, as compared to revenue backlog of $537 million, with a labor backlog of 4.4 million man-hours remaining to work at December 31, 2012, including projects totaling 220 -- $230 million and 2 million man-hours awarded in 2013 through March 13, 2013.

The following represents selected balance sheet information for March 31, 2013, compared to December 31, 2012.

Cash and cash equivalents were $12.3 million compared to $24.9 million. Total current assets were $229.4 million compared to $173.6 million. Property, plant and equipment, net of depreciation, was $227.3 million compared to $229.2 million. Total assets were $457.4 million compared to $403.5 million.

Total current liabilities were $134.5 million compared to $92.3 million. Long-term debt was $10 million compared to 0. Shareholders' equity was $275 million compared to $273.5 million, and total liabilities and shareholders' equity was $457.4 million compared to $403.5 million.

Other financial information for the 3 months ended March 31, 2013, compared to March 31, 2012, consist of: Pass-through costs were 56.3% of revenue compared to 35.4% of revenue. Man-hours worked, 1 million compared to 1.2 million. Deepwater revenue represented 78% of revenue compared to 69% of revenue. There was no foreign revenue for the first quarter of 2013 compared to 16% of revenue for the first quarter of 2012.

Backlog information for March 31, 2013, compared to December 31, 2012, consists of: Revenue backlog was $453.2 million compared to $537 million. Remaining man-hours to work was 3.5 million compared to 4.4 million. Revenue backlog for deepwater was $364.6 million, or 80.4%, compared to $393.3 million, or 73.2%. Of the backlog at March 31, 2013, we expect to recognize revenues of approximately $311.8 million, not including any change orders, scope growth or new contracts that may be awarded in -- during 2013. Approximately $135.7 million of backlog is expected to be recognized as revenue in 2014, and approximately $5.7 million of backlog is expected to be recognized thereafter. We had approximately 2,080 employees and 408 contract employees compared to 2,180 employees and 344 contract employees.

CapEx for the 3 months of 2013 was $14.2 million. Approximately $13.4 million of remaining expenditures are planned for 2013, including $1.4 million for dredging purposes for one of our projects at our Texas facilities and $4.5 million for rolling equipment to replace aging rolling equipment at our Texas facility.

We are currently operating close to capacity, as required by 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 2 major deepwater projects. We still have large amounts of subcontracted services to incur, which will keep pass-through costs relatively high during the second and thirds quarters. We continue to focus on managing the costs associated with our workforce and meeting our schedule of demands.

I'd now like to open the call to questions of the analysts.

Question-and-Answer Session

Operator

[Operator Instructions] We will take our first question from Martin Malloy with Johnson Rice.

Martin W. Malloy - Johnson Rice & Company, L.L.C., Research Division

You mentioned no gross profit on 2 large deepwater projects. I'm assuming that's the Gulfstar and Big Foot projects. Is there opportunity to reach milestones in future quarters that would allow positive gross profit as you work off those projects?

Kirk J. Meche

Well, there are, Marty. As part of our agreements with one of the majors, there are some opportunities to gain some additional revenue based on percent complete. But as we'd said in previous calls, a lot of that depends in our subcontractors more than it does on our own workers. So we're working hard and we're pushing hard to get these projects complete to try and earn some additional moneys going forward. But again, there's no guarantee on them. And certainly, with other projects, there were some change orders we're trying to negotiate going forward, again with no guarantee on those going forward, as well.

Martin W. Malloy - Johnson Rice & Company, L.L.C., Research Division

Okay. Could you provide us with an update as far as the bidding opportunities for deepwater Gulf of Mexico topsides?

Kirk J. Meche

Well, the -- we still have opportunities out there, Marty. It seems right now that the majority of our opportunities are coming with, again, our shipyard marine division. We're seeing quite a bit of activity in that respect. On the oil and gas side, there are some major projects that we have bid, and one of them has been delayed. We've been notified by our customer that the project is going to be delayed due to some economics of the size of the project going forward. But we still anticipate receiving some opportunities to bid on some projects in the third and fourth quarter of this year.

Operator

We'll take our next question from John Allison with BB&T Capital Markets.

John A. Allison - BB&T Corporation

One thing that we've been hearing a lot about is wage rate inflation in the Gulf Coast area. And I know that you guys operate on a fixed-cost basis, and I wanted to know what your outlook is for the impact on Gulf Island going forward. And should we see this as a problem in 2013 and '14?

Kirk J. Meche

Well, we've been fortunate as of lately. We really haven't gotten into any pricing wars with competitors, especially in the Louisiana market. But it's not to say that as the marine business continues to grow, there's a lot of shipyards in the Houma area, that we may be at some position at some point in time to look at our wages we're paying our employees and have a possibility to try and get those wages up. We try and put provisions within our contracts. Not all the contracts have provisions for labor increases. Again, we have to try and study the projects and look at the duration of the project itself and try and factor in wage increases or not to put them in to make sure we remain competitive. But right now, it hasn't been a problem going forward. But again, as that market begins to tighten up a little bit, it may be some opportunities for us to try and look at our labor rates in the third and fourth quarter this year.

John A. Allison - BB&T Corporation

Okay. And to that note, are you seeing any shift in contract structures? And is there becoming more of a variable or cost reimbursable piece that's being added in there to account for growing costs in the Gulf area? And are you able to, I guess, increase pricing on project bids to, I guess, better cushion for these increases?

Kirk J. Meche

Well, unfortunately, a lot of times, what we've been seeing lately is that there's no provision in there for escalating costs. You have to factor that as part of your lump-sum bids, going forward. Again, we've seen a lot smaller bids coming in. So the duration of those bids, there's a lot less risk associated with it. But certainly, some of these bigger contracts, when you start talking about 2 and 2.5 years of construction time, we are trying to factor that in. Again, we have not gotten to the point yet where we are in contract negotiations with any of those big contracts, but it's certainly something we're looking at and trying to make sure we try and incorporate it into our numbers.

Operator

And there are no other analysts in the queue at this time -- I'm sorry, we have one now, Martin Malloy, again, with Johnson Rice.

Martin W. Malloy - Johnson Rice & Company, L.L.C., Research Division

Could you talk about the working capital usage, as you expect it to progress through the rest of this year?

Kirk J. Meche

Well, we always look at our capital expenditures going forward, Marty. And certainly as we've said, we've got some aging equipment and whatnot that we're looking at trying to replace as we go forward with it. And we look at these big projects coming up and realize that we do have to just try and spend some of the capital improvement going forward. As we said, rolling mills was one of them we're doing at our Texas facilities. I don't doubt that, at some point in time, we're going to look at some of our cranes and some of our rolling equipment down at Houma as well. That's the possibility of looking at this as far as the future CapEx within our companies.

Martin W. Malloy - Johnson Rice & Company, L.L.C., Research Division

Okay. And any update on the Cheviot project?

Kirk J. Meche

Okay, well, just a little bit of an update. As you know, on -- March 31 -- or April 1, they did not pay their remaining balance. So they are technically in default. We are in the process of marketing the equipment, as per our security interest we have with Bluewater. And we seem to have some interest in the equipment going forward. So at this time, we're out there marketing the equipment and trying to sell it and trying to make sure we get our money back.

Martin W. Malloy - Johnson Rice & Company, L.L.C., Research Division

Do you expect the sale of the equipment to cover the receivable?

Kirk J. Meche

Well, it's what we had said in one of our -- I think it was in the 10-K. We said that, the remaining balance, we felt that it was achievable to get that amount of money. And again, Marty, really, the -- it's timing, as you know, and it's supply-demand. You've got some piece of equipment in there that are pretty hot commodities due to some delivery times on equipment that's very similar in nature to it. Those can demand a little bit higher price. But again, until we get a full grasp of and put this thing out in the market, I don't know that we're going to fully know what the full effect of this is going to be going forward.

Operator

And we have a question from John Allison with BB&T Capital Markets.

John A. Allison - BB&T Corporation

I just had one more question relating to capacity. I remember -- I think I remember correctly from last quarter's call that you mentioned that you were getting pretty close to being at the high end of your capacity range. And I wanted to know if that was still consistent at this juncture and seeing a healthy award environment going into -- throughout the rest of '13 and '14. How much additional work can you really fit into your operations?

Kirk J. Meche

Well, John, as you said, we did mention it in the K. And in this quarter, we also mentioned it as well. What we see, though, of course, is that as these 2 big projects start ramping down on us in the third and fourth quarter of this year, we're out there actively trying to pursue additional work. Some of the other projects, we've got secured. It's all about timing and make sure that we don't have any lulls with our labor. So we're trying to pick up some miscellaneous work as we go forward. But again, as we said, right now, we're pretty full, but as the projects start winding down, as we starting making deliveries on these projects, we're going to start seeing some increased ability within our companies.

John A. Allison - BB&T Corporation

Okay. And just to get a better grasp with it for a timeline-wise -- and I'm sorry if I missed it earlier, but do you have an idea of when these projects should, I guess, materially start rolling off?

Kirk J. Meche

Yes. We'll start seeing them towards the end of the second quarter and as they start delivering within the third and fourth quarter. We talked about the pass-through costs getting higher as the quarters go on. Our subcontractors are in a position now where they're trying to wrap these projects up. The majority of what we've had to do is to get them to wrap up in the second quarter, first quarter, third quarter.

Operator

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

Kirk J. Meche

Then we'd like to thank everyone for calling in today. And we'll see you next quarter. Thank you very much.

Operator

That does conclude today's conference call. If you would like to hear a replay of this conference, please dial 1 (719) 457-0820. The replay will be available from April 26, 2013, to May 2, 2013. Thank you for your participation.

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Gulf Island Fabrication (GIFI): Q1 EPS of $0.19 misses by $0.01. Revenue of $150.4M beats by $25.M. (PR)