Gulf Island Fabrication, Inc. (GIFI) Management Discusses Q2 2013 Results - Earnings Call Transcript

Jul.26.13 | About: Gulf Island (GIFI)

Gulf Island Fabrication, Inc. (NASDAQ:GIFI)

Q2 2013 Earnings Call

July 26, 2013 10:00 am ET

Executives

Deborah Kern-Knoblock - Secretary

Jeff Favret - Chief Financial Officer

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

Analysts

John A. Allison - BB&T Corporation

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

Operator

Good morning, and welcome, ladies and gentlemen, to the Gulf Island Fabrication Second Quarter 2013 Earnings 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

I would like to welcome everyone to Gulf Island Fabrication's 2013 second 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 and CEO; and Mr. Jeffrey Favret, our CFO. Jeffrey?

Jeff Favret

Thank you, Deborah. Good morning, and welcome to our second quarter 2013 conference call. I'll discuss highlights from the quarter, provide specifics on our financial performance and then we'll open up the call for your questions. Revenue for the 3 months ended June 30, 2013, was $154.6 million compared to $137.2 million for the 3 months ended June 30, 2012. Cost of revenue was $144.9 million for the 3 months ended June 30, 2013 compared to $123.3 million for the 3 months ended June 30, 2012. Gross profit was $9.7 million or 6.3% of revenue for the 3-month period ended June 30, 2013 compared to gross profit of $13.9 million or 10.1% of revenue for the 3 months ended June 30, 2012.

The following are the results of operations for the 6 months ended June 30, 2013 compared to the 6 months ended June 30, 2012. Revenue was $305 million compared to $250.3 million. The cost of revenue was $288.6 million compared to $223.7 million. Gross profit was -- I'm sorry, gross profit was $16.4 million or 5.4% of revenue compared to gross profit of $26.6 million or 10.6% of revenue. The decrease in gross profit for the 3 months ended June 30, 2013 compared to the 3 months ended June 30, 2012 was due to the 2 factors. $55.3 million in revenue was recognized from pass-through costs, excluding pass-through costs for a large deepwater project. Pass-through costs have little or no impact to gross profit. Furthermore, an additional $43.4 million of revenue was recognized from a large deepwater project, which had an adverse impact on gross profit recognized during the quarter. This project is scheduled for delivery in the first quarter of 2014.

For the 6 months ended June 30, 2013 and June 30, 2012, gross profit was $16.4 million or 5.4% of revenue and $26.6 million or 10.6% of revenue, respectively.

Similar to the 3-month comparison, the decrease in gross profit for the first 6 months 2013 compared to the first 6 months 2012 was due to 2 factors. $110.8 million in revenue was recognized from pass-through costs excluding pass-through costs for a large deepwater project. An additional $88.8 million of revenue was recognized from the large deepwater projects, which had a negative impact on our gross profit recognized for the 6-month period ended June 30, 2013.

General and administrative expense were $2.9 million and $5.2 million for the 3-month and 6-month periods ending June 30, 2013, respectively, compared to $2.6 million and $5.2 million for the 3-month and 6-month periods ended June 30, 2012, respectively. As a percentage of revenue, general and administrative expenses for the 3-month and 6-month periods ending June 30, 2013 were 1.8% and 1.7%, respectively, compared to 1.9% and 2.1% for the 3-month and 6-month periods ended June 30, 2012, respectively. For the 3-month period ended June 30, 2013 and June 30, 2012, operating income was $6.8 million compared to $11.3 million. For the 6-month period ended June 30, 2013 and June 30, 2012, operating income was $11.2 million compared to $21.4 million, respectively.

The company had net interest expense of $60,000 and $123,000 for the 3-month and 6-month periods ended June 30, 2013, respectively, compared to net interest income of $157,000 and $309,000 for the 3-month and 6-month periods ended June 30, 2012, respectively. The increase in net income expense for the 3- and 6-month periods ended June 30, 2013 was primarily due to the company's higher level of cash available for temporary investments for the comparable period in 2012 relative to 2013.

In addition, interest expense increased for the 6-month period ended June 30, 2013 as a result of increased borrowings on the line of credit during the 6 months ended 2013. The company had $43,000 of other expense for the 3-month and 6-month periods ended June 30, 2013 compared to $22,000 and $85,000 in other income for the 3-month and 6-month period ended June 30, 2012, respectively.

Other income expense for the period ended June 30, 2013 and 2012 primarily represented gains or losses on sales of property plant and equipment. Income before taxes was $6.7 million compared to income before taxes of $11.5 million for the 3-month period ended June 30, 2013 and June 30, 2012, respectively. Income before taxes was $11 million compared to pre-tax income of $21.8 million for the 6-month period ended June 30, 2013 and June 30, 2012, respectively. For the 3-month period ending June 30, 2013 and June 30, 2012, income expense was $2.4 million compared to $3.9 million. For the 6-month periods ended June 30, 2013 and June 30, 2012, income tax expense was $3.9 million compared to $7.4 million.

Our effective income tax rate for the 3-month and 6-month period ended June 30, 2013 was 36.3% and 35.8%, respectively, compared to an effective tax rate of 34% for the comparable periods of 2012.

Net income for the 3-month period ended June 30, 2013 was $4.3 million compared to net income of $7.6 million for the 3 months ended June 30, 2012. Net income for the 6-month period ended June 30, 2013 was $7.1 million compared to a net income of $14.4 million for the 6 months ended June 30, 2012.

Basic and diluted earnings per share were $0.30 for the 3-month period ended June 30, 2013 and $0.52 for the 3-month period ended June 30, 2012. Basic and diluted earnings per share were $0.49 for the 6-month period ended June 30, 2013 and $0.99 for the 6-month period ended June 30, 2012.

We declared and paid cash dividends of $0.10 per share during each of the quarters ended June 30, 2013 and June 30, 2012. Revenue backlog was $433.8 million with a labor backlog of 3.6 million hours remaining to work at June 30, 2013 compared to a revenue backlog of $537 million and labor backlog of 4.4 million hours remaining to work at December 31, 2012.

The following represents selected balance sheet information for June 30, 2013 compared to December 31, 2012. Cash and cash equivalents were $29.7 million compared to $24.9 million. Total current assets were $198.3 million compared to $173.6 million. Net property plant and equipment was $224.3 million compared to $229.2 million. Total assets were $436.8 million and $403.5 million, respectively, and total current liabilities were $122.4 million and $92.3 million at June 30, 2013, and December 31, 2012, respectively.

Other financial information for the 3 months ended June 30, 2013, compared to June 30, 2012 were as follows: Pass-through costs were 53.1% of revenue compared to 42.1% of revenue. Labor hours worked were 1.1 million compared to 1.3 million.

Other financial information for the 6 months ended June 30, 2013 compared to June 30, 2012 were as follows: Pass-through costs were $54.7 million of revenue compared to 39.1% of revenue. Labor hours worked were 2.1 million compared to 2.5 million. Backlog information for June 30, 2013 compared to December 31, 2012 was as follows: Revenue backlog was $433.8 million, compared to $537 million. Remaining labor hours to work was 3.6 million compared to 4.4 million. Revenue backlog for deepwater projects was $358.7 million or 82.7% compared to $393.3 million or 73.2%. Of the backlog at June 30, 2013, we expect to recognize revenues of approximately $267 million during the remaining 6 months of 2013, not including change orders, scope growth or new contracts that may be awarded.

Approximately $125 million of backlog is expected to be recognized as revenue in 2014 and approximately $42 million of backlog is expected to be recognized thereafter. We had 2,034 employees and 548 contract employees at June 30, 2013 compared to 2,180 employees and 344 contract employees as of December 31, 2012.

CapEx for the first 6 months of 2013 was $7.4 million. Approximately $11 million of CapEx is planned for the remaining 6 months of 2013, including $5.8 million of maintenance capital expenditures, $3.6 million of rolling equipment to replace aging rolling equipment at our Texas facility, and $1 million for improvements to the grading dock at our Texas facility. We are currently operating at our new capacity for the projects in our backlog. We expect labor hours to decrease slightly during the third and fourth third quarters of the year as enter into the latter stages of our 2 major deepwater projects. We do, however, have significant amount of subcontractors service hours remaining for these projects, therefore pass-through costs are expected to continue to remain relatively high for the third and fourth quarters 2013. Our continuing focus over the next several quarters will be the management of cost associated with our workforce and meeting schedule demands. Operator, you may now open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And we'll go to our first question from John Allison with BB&T Capital Markets.

John A. Allison - BB&T Corporation

I wanted to know if you could give a little commentary on your market outlook for project activity in the Gulf, do you expect to see a good amount of opportunities in the second half of 2013 and early 2014 or should we expect to see, I guess, a slower progression in bidding activity?

Kirk J. Meche

This is Kirk. There are a few projects out there from a deepwater's side that we are tracking. Again, we anticipate one of those big deepwater projects to bid in the latter part of the third quarter, with remaining projects scheduled for fourth quarter and early of first quarter 2014. What we're seeing is a little bit of an uptick in terms of some of the shallow water projects that we're chasing. Typical jackets and decks that may range in water depth from 150 to 400 foot in water depth, and topsides on those platforms it may range from 500 to 4,000 tons. So there is a little bit of an increase in our bidding activity associated with the shallow water portion for the U.S. Gulf, as well as overseas. The bigger projects do have a tendency and looks like they pushed a little bit further to the right. But there's one in particular that we're chasing now and hoping to have the big opportunity a little bit later in the third quarter of this year.

John A. Allison - BB&T Corporation

Okay, great. And I guess of my follow-up would be, last quarter we talked a little bit about your capacity and how that you might be actually bumping up against it, but there were 2 larger projects that were rolling off. I kind of wanted to get an update on that and how do you view your capacity in regards to these new projects especially the larger ones and if you win a couple of these over the next few quarters, are you still within a comfortable range for your operations?

Kirk J. Meche

Yes, John certainly. Again, we are coming down on the fourth quarter this year with delivery of these 2 major projects we have. So certainly, there's some opportunities there for continuing to pick up some additional work by our workforce. But looking forward on a work that's out there, certainly have the capacity and capabilities 'to complete' these projects and we will continue to monitor them as the projects are coming out. So right now, I think from the capacity standpoint, all our facilities are currently busy. Right now, we have ample workforce to meet the needs of the projects going forward, but again, fourth quarter, we're going to start looking for some additional work going forward.

Operator

We'll go to our next question from Martin Malloy with Johnson Rice.

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

Could you talk about, I think with the change order that you signed on a large deepwater project in March that there was a potential for some incentive payments as milestones are reached, could you talk about that and what needs to happen to reach those?

Kirk J. Meche

Well, Marty, I think we have discussed that in the first quarter. There are some opportunities on several of our big projects, both big projects for deepwater. Certainly, the one that you're referencing, there are some opportunities, but again, those modules are being completed as we speak and we have not earned those incentives as of yet. We have to do our final negotiations of course, with our customers and what not. But again, there's always a potential that those incentives will not be met, but we are working hard towards them and none of those incentives have been booked in this quarter.

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

Okay. And then looking out over the next couple of years, do you see opportunities on the module side related to build out of chemical and petchem facilities along the Gulf Coast?

Kirk J. Meche

Yes. Marty, I think there was an analyst question last time, they were asking what we get excited about looking at the long-term future for the Oil & Gas industry and certainly this big project that's been announced now through the Lake Charles facilities and other locations as well here in Louisiana, as well as the state, is certainly something that we intend to. We are speaking to these individuals. We're doing our presentations to him , but again, we're not sure exactly when these things will come out for bid or when they'll be awarded, but it looks like sometimes in mid-to-later part of 2014 and we certainly want to position ourselves for that type of work.

Operator

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

John A. Allison - BB&T Corporation

Just a couple more questions. First one is in regards to the labor cost inflation issues down the Gulf region, I know they've been an issue for several players down there. I wanted to see if you could give me a little color on how this is impacting your profitability now and if you expect it to subside I guess going forward?

Kirk J. Meche

Well, John, we think you're right. I mean, as the Gulf Coast continues to book up with work, we all fight for the same labor pool and labor is always an issue in terms of our cost going forward our projects and certainly we try and put some type of contingencies in our numbers and certainly we're not always correct on the total numbers we put there, but I think it is easing off somewhat. I think as the remaining fabricators are getting a little bit of a slowdown because some of these big deepwater projects a little bit to the right. I think that we may have a little bit of relaxation in terms of some of the pressure that's being put on from the cost standpoint from our perspective. John?

Operator

And we will go ahead and take our next question. Martin Malloy with Johnson Rice.

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

Two more questions I had. One, could you talk about what you're seeing on the marine side and the demand there?

Kirk J. Meche

Sure, Marty. And by the way, I think we may have lost the last part of John. I just hope John is still in the queue. But Marty, to answer your question about the marine side of our business, we still see the marine side of the business very strong. We still have plenty of opportunities out there for bidding opportunities with new construction, as well as our repair side of the business is doing very well. Our dry dock utilization remains high and we see that continuing through the third and fourth quarter of this year. So that's one area right now that looks very good for us going forward, with the remaining part of this year.

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

Okay. And then, is there any update you can provide us on the Cheviot project and I think you were trying to sell some of the equipment previously?

Jeff Favret

Yes, this is Jeff. Let me just start with letting you know that during the quarter, I think we've said in prior disclosures that we entered into a particular contract with Bluewater and they were making installment payments and there was a lump sum due at the end of that. Upon that default, which was April 1, ownership of the project assets then reverted to Gulf Island. And so, that triggered some accounting treatment where we then moved the net investment in contracts to assets held for sale. And those are also moved to assets held for sale long term. So if you look at working capital, it's a noncash amount of $13.5 million that would impact that working capital. So I'll let Kirk maybe talk to you about what's currently going on with regard to marketing activities and that sort of thing, but I just want to make sure that you understood that part.

Kirk J. Meche

Yes, Marty. Again, this is Kirk. Just to let you know, we are out there, we're always listening. The equipment, not only the equipment but also the raw material we have. We've identified several independent operators that have an interest in some or parts of this thing. We will continue that through the third quarter. Again, we've got a pretty good marketing effort pushing this thing forward for Q3, as well as Q4. And again, there's a lot of interest in the stuff we have. Right now, I think it's just a matter of time and hopefully we'll see some of that material start to move within the latter part of third quarter, probably first part of fourth quarter this year.

Operator

And John Allison has come back into the queue.

John A. Allison - BB&T Corporation

Sorry about that. I had some technical difficulties on my end and Marty just asked about the Cheviot project, which I'm glad he asked about. That was some good color there. My last question would be, and this is relating to a little speculation on the continued operations of one of your competitor's large fab yards down the Gulf. This fab yard was to close, would you expect there to be a beneficial impact to the Gulf Island's project prospects going forward, or could this also lead to some labor costs subsiding?

Kirk J. Meche

Well, on 2 objectives. First of all, on a labor side, we would anticipate that it will lessen some of the need for the labor we have in the facilities here, and we are pursuing that avenue as we go forward. From the bidding aspect, it's very difficult -- our competitive basis remains not only in Louisiana but Texas and then now, of course, the overseas market. So one, we think that possibly it may put Gulf Island in a better position, but I'm not sure that we fully agree with that position going forward. Again, there's always competitors out there and as one goes away, there's another one that's trying to pop up and take its place. So from the competitive side of our business, we just need to remain competitive, keep our operating cost down so we can remain competitive going forward in these projects.

Operator

And that was the last question from our at analysts today.

Kirk J. Meche

Okay. Well, we certainly appreciate everyone listening to our conference call, and we look forward to speaking to everyone again in our third conference call this year. Thank you for joining the conference.

Operator

And that concludes today's conference call. Thank you for your participation.

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Gulf Island Fabrication (GIFI): Q2 EPS of $0.30 beats by $0.11. Revenue of $154.6M beats by $27.15M. (PR)