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Gulf Island Fabrication (NASDAQ:GIFI)

Q3 2013 Earnings Call

October 28, 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

Kenneth Blake Hancock - Howard Weil Incorporated, Research Division

Robert F. Norfleet - BB&T Capital Markets, Research Division

Randy Bhatia - Capital One Securities, Inc., Research Division

Bradford Alan Evans - Heartland Group, Inc. - Heartland Value Plus Fund

Operator

Good morning, and welcome, ladies and gentlemen, to the Gulf Island Fabrication Inc. 2013 Third Quarter Earnings Release Conference Call. [Operator Instructions] This call is also being recorded. At this time, I would like to turn the conference over to Ms. Deborah Knoblock for opening remarks and introductions. Ma'am, please go ahead.

Deborah Kern-Knoblock

I would like to welcome everyone to Gulf Island Fabrication's 2013 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 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, everyone. I'll discuss highlights from the quarter, provide specifics on our financial performance and then we'll open up the call for your questions. Some of you may recall that we announced in March of this year that we intended to move our corporate offices to the Houston marketplace. I'm happy to let you know that earlier in October, we completed that move, and we are now in our Houston Energy Corridor office.

Now, I'll turn to our financial performance for the quarter. Revenue for the 3 months ended September 30, 2013 was $168.2 million and $141.8 million for the comparable period 2012. Gross profit was $9.1 million or 5.4% of revenue for the 3-month period ended September 30, 2013 compared to a gross loss of $13.4 million for the same period 2012.

Operating income was $5.3 million for the quarter ended September 30, 2013, compared to an operating loss of $15.4 million for the comparable period 2012. And net income for the 3-month ended September 30, 2013, was $3.3 million or $0.23 per share compared to a net loss of $13.4 million for the 3-month ended September 30, 2012.

The increase in revenue of 18.6% for the third quarter 2013 compared to the third quarter of 2012 was primarily due to continuation of work related to change orders received in the prior quarter related to a haul and topside project for our large deep-water customer. The increase in gross profit for the 3-month ended September 30, 2013 compared to the third quarter 2012 was primarily due to a combination of revenue recognized during the third quarter 2013 for a change order related to haul and topside projects for a large deep-water customer, and losses of $9.5 million recognized during the third quarter 2012 associated with the separate topside project for a different large deep-water customer.

The following represents selected balance sheet information for September 30, 2013 compared to December 31, 2012. Cash and cash equivalents were $21.8 million compared to $24.9 million. Working capital was $80.1 million versus $81.3 million. Net property, plant and equipment was $223 million compared to $229.2 million and total assets were $426.2 million and $403.5 million, respectively.

CapEx for the first 9 months of 2013 was $12.5 million, approximately $11 million of capital expenditures are planned for the remaining 3 months of 2013, including $3.6 million of maintenance CapEx, another $3.6 million for rolling equipment to replace aging rolling equipment at our Texas facility, and $1.7 million net for a replacement aircraft.

We declared and paid dividends of $0.10 per share during each of the quarters ended September 30, 2013 and 2012. Revenue backlog was $342.5 million with the labor backlog of 3.0 million hours remaining to work at September 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.

During the third quarter 2013, topside modules for a large deep-water project, in accordance with the contractual terms, were transported to an integration site for lifting and setting procedures. Shortly thereafter, we entered into discussions with the customer concerning a reduction in scope to the project, whereby remaining completion and integration work would be performed at the current project site by another integration contractor.

As a result of those ongoing discussions, we reduced our estimate of revenue and labor backlog by $25.5 million and 271,000 labor hours, respectively. Additional backlog information for September 30, 2013 compared to December 31, 2012 was as follows. Revenue backlog for deep-water projects was $222.1 million or 64.9%, compared to $393.3 million or 73.2%. Of the backlog at September 30, 2013, we expect to recognize revenue of approximately $126 million during the remaining 3 months of 2013, not including change orders, scope growth or new contracts that may be awarded. Approximately $173 million of backlog is expected to be recognized as revenue in 2014 and approximately $44 million of backlog is expected to be recognized thereafter.

We had 1,909 employees and 438 contract employees at September 30 compared to 2,180 employees and 344 contract employees as of December 31, 2012.

In the 3 months ended September 30, 2013, labor hours worked were 975,000 compared to 1.2 million for the same period 2012, and past due costs were 59.4% of revenue compared to 58.2% of revenue for the 3 months ended September 30, 2013 versus 2012.

Because we continue to have significant amounts of subcontract service hours remaining for our large deep-water haul and topside project, pass-through costs are expected to continue to remain relatively high throughout the fourth quarter 2013.

We expect labor hours to decrease somewhat during the fourth quarter as we enter into the latter stages of our deep-water haul and topside project and based on the reduction in scope on the separate deep-water topside project discussed earlier. However, we have worked hard to mitigate the impact of the project descoping and we were able to successfully redirect a portion of our labor force to other projects.

And lastly, I can tell you that we have begun to see increased interest in our assets held for sale associated with the Cheviot project and continue to believe that the ultimate disposition will net, at a minimum, our recorded value of $13.5 million.

Operator, you may now open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] First, we'll go to Blake Hancock with Howard Weil.

Kenneth Blake Hancock - Howard Weil Incorporated, Research Division

I just wanted to see regarding the deep-water project that you guys called out last quarter, that contributed about $43 million of revenue, how much did that contribute to this quarter's revenue? And potentially, how much is remaining in your backlog or is that the $25 million that you guys wrote down?

Kirk J. Meche

No, those are 2 separate projects, Blake. Most of the revenue that was generated, last quarter we spoke about, was for a separate deep-water project compared to the one that we completed during this quarter. Those are 2 separate projects.

Kenneth Blake Hancock - Howard Weil Incorporated, Research Division

Okay. And so can you quantify the nonrevenue that it contributed this quarter, then?

Kirk J. Meche

No, Blake, I'm sorry. We don't have that information in front of us in terms of specifically how much per each project we have for the quarter. I don't know anything more to add on that, but we typically don't break it down by projects, and I'm sorry we don't have that information in front of us.

Jeff Favret

Yes, but we really don't disclose that information.

Kenneth Blake Hancock - Howard Weil Incorporated, Research Division

Okay. Great. That's fine. And then just following up, can you guys talk about what you guys are seeing for other topside jacket orders, as well as where we stand for some of these deep-water tenders that are out there?

Kirk J. Meche

Sure, sure. Blake, this is Kirk. Some of the large deep-water projects, as we've been reporting last couple of quarters, we always see the tendency to post projects a little bit to the right, and I think this is no exception. There are a few of them that we're tracking, and again, they appear to be moving a little bit to the right, but nothing that's alarming us in terms of its being canceled or anything like that. There are several of them that we're chasing currently. We talked about the shelf work last quarter as well. We were successful in picking up one of the large projects for shelf work. There's some additional shelf work out there that we're currently chasing. Of course, everyone's chasing the plant work associated with some of this work that's going to happen in Louisiana. Our shipyard operations seem to be very healthy at this time in terms of the bid and backlog we have with those guys. We are seeing a little bit of a slowdown in terms of, I guess, the number of vessels we're seeing out there, it looks like they had a mass wave of vessels that were being built. It looks like it's starting to slow down a little bit now towards more normal, I guess, bidding activities going forward with our shipyard. So again, there's quite a bit of stuff out there, some unique stuff that we hadn't seen in a while, some overseas-type opportunities for us as well. And -- but unfortunately, it looks like some of these bigger platforms may be moving a little bit to the right, and maybe by a quarter or so, nothing more than that.

Kenneth Blake Hancock - Howard Weil Incorporated, Research Division

Okay. Great And then just one more, if I can, one housekeeping question. G&A was up a little bit this quarter from the norm. Is that something we should be keep going forward or will that revert back to the historical levels?

Jeff Favret

Blake, it should revert back to historical levels. There was a onetime item in there that related to a bad debt expense that we, for conservatism, put in there.

Operator

And next, we'll go to Rob Norfleet with BB&T Capital Markets.

Robert F. Norfleet - BB&T Capital Markets, Research Division

I just had a quick question on margins. I know you all called out obviously pass-through costs that could have been up the last couple of quarters, but how should we look at progression of margins over the next few quarters? I mean, I think if you look at the backlog where it is today versus past cycles. And past cycles, your margins were up around 8, 9, almost north of double digits. What do we need to see to get margins back to those levels? Is it utilization? Is it pricing? I just kind of want to understand how we should expect to see margins as we look over the next 12 months.

Kirk J. Meche

Okay, Rob. Well, certainly, we're like you. We like to see our margins increase. We've had some difficulties with some projects, some of our larger topsides, deep-water projects in the past. And I think that has helped or has contributed to the suppression on the margins. And certainly, we're conscious of that and we're out there. We're trying to bid these projects as competitively as we can, put the margins in that we can. So we are hoping like you guys are, that our margins improve as we go forward. And again, hopefully, with some of the resolution and completion of some of these big large deep-water projects we have, we'll get back to more of our conventional type projects with the shallow water, shelf type work and, again, we're hoping that our margins improve but give no guarantee there.

Robert F. Norfleet - BB&T Capital Markets, Research Division

Okay. And just quickly in terms of the competitive nature of the market. Obviously, as we're seeing more activity ramping up in the Gulf, are you seeing much competition coming from overseas from some of the foreign competitors?

Kirk J. Meche

Yes, we are. With the completion now of one of the large transportation companies has just completed, a very large vessel that will enable the overseas markets to compete with us in terms of bringing the big projects completed as one to the Gulf, where before, the topsides were being built here, it will be integrated here in the states and also being built overseas. Now that we've got this big vessel out there, I think it's going to open up to market a little bit more in terms of competition from foreign markets.

Robert F. Norfleet - BB&T Capital Markets, Research Division

Okay. That's helpful. And last question I have is, I know you all have been asked this before, but obviously we're getting ready to see a pretty significant build out of chemical and petchem activity in the Gulf Coast area. Is -- especially in the module side, is there -- what kind of opportunities do you see in terms of fabricating some of that business in your facility?

Kirk J. Meche

Yes, Rob, we see a lot of potential there. The nice thing about the modules that we're seeing is that traditionally, these modules were stick built modules in the plants, where for our scope of work, it was more of a bolted type connections and we'd cut and drill the holes and bolt it and send it on its way. In some cases, we even dismantle it. Now we're seeing more traditional or conventional type modules that would lend itself to fabrication work with cutting and welding and whatnot. So we see the concepts coming out, there's a lot of opportunities going forward. Again, I think they're changing their philosophy in terms of the amount of time they're shutting these plants down and the amount of time it takes to assemble them on-site, realizing that most opportunity that ventures they have is going to be within the fabrication yards, which will -- which gear itself right towards what we think we do.

Operator

And next, we'll go to Randy Bhatia with Capital One.

Randy Bhatia - Capital One Securities, Inc., Research Division

Just curious if you guys could give us any more color on the scope reduction that you guys took this quarter. What kind of -- what drove that and is that something that you guys were anticipating? Can we see it again on any other projects that are currently in backlog?

Kirk J. Meche

Well, first of all, for any other projects in the backlog, no, we don't have any other type of projects where we have an integration portion that happens outside our facilities with lifting and whatnot. So we don't anticipate that happening anymore. In terms of the descoping of the project with the customer, there are a lot of circumstances behind it, a lot of decisions that need to be made in terms of what was best for the project and best for the owner at the time. We are on negotiations with those guys, we'll wrap this thing up, so I prefer not to elaborate too much on it but just tell you guys that we work with the customer in that respect, and again, we think it may have been best for the project in order to keep this thing at the integration site and not bring it back to us.

Randy Bhatia - Capital One Securities, Inc., Research Division

Okay. that's helpful. Just getting back to the question on the petchem opportunity, would there be any sort of retooling or any sort of upfront CapEx required at your facilities to take on some of that module work?

Kirk J. Meche

Randy, no, I don't think so. Again, as I've said earlier, this work really lends itself to our type of construction. There may be some general maintenance CapEx that we may need in order to produce this amount of work, because it's a tremendous amount of work. So maybe some upgrades in terms of some small CapEx within each facilities in terms of our welding machines and whatnot, but it's not a big CapEx project. What the project needs is a lot of real estate. And again, so once you get past the fitting and the cutting and then welding these modules together, then it's just process at that point in time. You line these things up and put them in line. So no, it won't be a lot of CapEx associated with this type of work.

Randy Bhatia - Capital One Securities, Inc., Research Division

Okay. Great. And if you don't mind, if I could sneak one more in here just on the margin question and just kind of broader petchem opportunity in deep-water bidding environment. Is there any thoughts of whether or not the deep-water projects are as attractive to you guys as they were, say, 2 years ago? Is that becoming a less -- a relatively less attractive target market?

Kirk J. Meche

Well, no, that's a good question, Randy, and it's certainly something that we continue to monitor within our company as to what provides the best opportunities for us going forward. And it's an evaluation period we're doing, but certainly we've got our customer base out there as well. So in some respect, I think we've just got to make sure that we got the proper numbers in our bids and make sure that we man our projects where they need to be to go forward with the projects. So again, its evaluation period we do. We don't bid everything that comes in the door. We certainly look at what we're dealing, what the terms of our capabilities and from that point on, they will make decisions whether or not we want to bid a project or not. So it's something we're going to keep a close eye on and look and see what generates the best opportunities for our companies going forward.

Operator

[Operator Instructions] Next, we'll go to Brad Evans with Heartland.

Bradford Alan Evans - Heartland Group, Inc. - Heartland Value Plus Fund

Can you call up the size of that bed that reserved in the quarter?

Jeff Favret

Yes. It was just under $800,000.

Bradford Alan Evans - Heartland Group, Inc. - Heartland Value Plus Fund

Okay. Was there anything unusual to tax rate in the quarter?

Jeff Favret

No, we had a -- the only thing about tax was that there was an adjustment based on a true-up of a provision to return, that affected the rate somewhat, not dramatically.

Bradford Alan Evans - Heartland Group, Inc. - Heartland Value Plus Fund

Okay. So the bad debt reserve cost you about $0.04 in the quarter, can you amplify exactly what project that was associated with for what customer that was attributable to?

Jeff Favret

It's associated with a vessel customer. It was work that was performed over the course of a period of time. There was a final billing due, and we are pursuing collection of that final billing.

Bradford Alan Evans - Heartland Group, Inc. - Heartland Value Plus Fund

Okay. So that's about $0.04, correct?

Kirk J. Meche

That's correct.

Jeff Favret

That's about right, that's how the math looks like.

Bradford Alan Evans - Heartland Group, Inc. - Heartland Value Plus Fund

Okay, okay. What was cash flow from operations in the third quarter? Do you have that handy?

Jeff Favret

I do. It was positive. At -- it's just about $13.8 million.

Bradford Alan Evans - Heartland Group, Inc. - Heartland Value Plus Fund

$13.8 million, so that brings year-to-date cash flows from operations to roughly almost $29 million?

Jeff Favret

I'm sorry, $13.8 million is for the 9 months.

Bradford Alan Evans - Heartland Group, Inc. - Heartland Value Plus Fund

Oh, that's for the 9 months, excuse me, I'm sorry, so you're actually a little negative in the third quarter. Do you have a view as to how you think cash flows from operations might shakeout in the fourth quarter? Do you expect it to be positive?

Jeff Favret

We do. We have quite a bit of pent-up investment in contracts, if you will, that we expect to convert to cash over the course of the next quarter. So that's one element. And we think that with the kinds of work that we're seeing coming through in the fourth quarter, that the net income component of that should the strong. So we expect it to be positive.

Bradford Alan Evans - Heartland Group, Inc. - Heartland Value Plus Fund

Okay. And the timing of the Cheviot receivables or the asset disposition, is that -- how far -- what's the range of potential scenarios as to how quickly that might materialize?

Kirk J. Meche

We certainly hope that it will materialize before year end, Brad. But I think this first quarter is probably safe in that respect. Again, we've got some very strong interest in it, and we're just trying to make sure that we move forward with it. And the customer has some other opportunities they're looking at in terms of the hole itself, that they're pretty settled on the topside. So again, I think probably, hopefully, we'll announce something by year end and if not, then that's certainly first quarter.

Bradford Alan Evans - Heartland Group, Inc. - Heartland Value Plus Fund

Got it. So did you say $16 million was reserved on the balance sheet for that?

Jeff Favret

Yes. $13.5 million.

Bradford Alan Evans - Heartland Group, Inc. - Heartland Value Plus Fund

$13.5 million, excuse me. So to pay upon the timing of that plus the stronger cash flows in the fourth quarter, cash balance should be up handsomely as you look out over the next quarter or 2?

Jeff Favret

Yes, I think that's right. We clearly, we are at an early stage of interest in this project, so we can't guarantee that this will monetize over the course of the next 6 months. And certainly, we don't expect it to be next quarter. It would be thereafter.

Bradford Alan Evans - Heartland Group, Inc. - Heartland Value Plus Fund

Understood, but my point was over the next quarter or 2, cash balance should be up meaningfully from where they are today?

Kirk J. Meche

That's correct.

Jeff Favret

Yes. That's our expectations. That's right.

Bradford Alan Evans - Heartland Group, Inc. - Heartland Value Plus Fund

Okay. I'm sorry, you gave us numbers for the $3.6 million, the $3.6 million and the $1.7 million for pieces -- for allocations of the capital. Was that what you spend or is that you expect to spend in the fourth quarter?

Jeff Favret

That's what we expect to spend going forward.

Bradford Alan Evans - Heartland Group, Inc. - Heartland Value Plus Fund

Over the next -- what period of time?

Kirk J. Meche

For the next 3 months.

Bradford Alan Evans - Heartland Group, Inc. - Heartland Value Plus Fund

The next 3 months, okay. And just in terms of the backlog, I know we're all -- everyone's focused on the headline number, but I think shareholders are probably focused on more so the quality versus the quantity of backlog with respect to embedded margins, and what have you -- when do you -- it's probably a hard question, but when you think about the trajectory of the backlog, bottoming here as you believe some of these less than desirable pieces of business, when do you think we'll start to see the backlog trend toward a more high calorie, high quality backlog? When do we start to see that do you think? Is that the first half of next year?

Kirk J. Meche

Brad, I certainly hope it's a little earlier than that. Again, with this 1 project we're negotiating, will certainly have some impact on our margins. But assuming that we get all that resolved fairly quickly then, yes, I would think first quarter, second quarter of next year at the latest. We're hoping to see these margins improve. Again, as we talk more about our traditional type of work that we're doing with our shallow water components and whatnot, traditionally, those margins have been a little bit higher than we've seen in these large deep-water projects. So yes, I'm with you. I'm hoping that first quarter and certainly by second quarter, we should see some return on the margins, depending on what else happens.

Bradford Alan Evans - Heartland Group, Inc. - Heartland Value Plus Fund

So I mean, if the market continues to improve, Gulf of Mexico, the deep-water, the shallow water to your traditional work, the vessel -- the OSP market where you have a little bit of exposure, the petchem cycle starts to impact you positively, there's nothing structurally that prevents you from getting back to 8% to 10% operating margin, is there?

Kirk J. Meche

No, I wouldn't see why we couldn't obtain those margins.

Operator

And that's all the time we have for questions today. So I'd like to turn it back over to our speakers for any additional or closing remarks.

Kirk J. Meche

Again, we'd like to thank everyone for listening in our conference call for this quarter. And we'll talk again beginning part of next year. So thank you again and have a good day.

Operator

And that does conclude today's call. We thank everyone for their participation.

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