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Gulf Island Fabrication (NASDAQ:GIFI)

Q4 2013 Earnings Call

February 28, 2014 10:00 am ET

Executives

Deborah Kern-Knoblock - Corporate Secretary

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

Jeffrey M. Favret - Chief Financial Officer and Treasurer

Analysts

James M. Rollyson - Raymond James & Associates, Inc., Research Division

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

Operator

Good morning, and welcome ladies and gentlemen to the Gulf Island Fabrication Inc. Q4 2013 Earnings Conference Call. [Operator Instructions] 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.

Deborah Kern-Knoblock

I'd like to welcome everyone's to Gulf Island Fabrication's 2013 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 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. Mr. Meche?

Kirk J. Meche

Thank you, Deborah. In an effort to provide our listeners with the most useful and comprehensive information available, we'll be handling our calls in a different format from this point on. I will provide updates on existing projects, a general overview of the market and opportunities that exist for our company. The call will then be turned over to Mr. Jeff Favret, our C -- our Vice President of Finance and CFO, for a breakdown of financial information for the fourth quarter of 2013. At the conclusion of Mr. Favret's report, we will open the lines for questions.

I will begin with an update on the projects currently under contract. At our Texas facility, we successful completed and loaded out the first 4 hull ever built in United States on February 8 of this year. The final light ship weight of the hull was 15,300 tons and drafted out at 29.5 feet. On a separate project, work continues on 1,200-foot jacket destined for the Gulf of Mexico and work has commenced on its 4,000-ton topsides. Deliveries for these units are scheduled for late summer 2015. We were recently awarded the piles for this project and expect to commence work on piles later this summer. We have also commenced work on 2 tank barges for the Louisiana customer with delivery set for third quarter of 2014. At our Louisiana facilities, the 7,000-ton topsides for the SPAR hull I referenced earlier was successfully loaded out this past week. We won a process of final tiedown and cleanup of the unit, and it should sail later this week. Work continues on several jackets and topsides for shallow water destinations. Planning, scheduling and related efforts for offshore hookup integration for our large deepwater platform is gearing up and set to commence next month. We continue to work on vessels, including our lowest lift boats scheduled for delivering the latter part of the third quarter of this year, as well as 2 offshore supply vessels scheduled for delivery this summer in a latter part of this year, respectively. [indiscernible] remains active with opportunities forward going forward.

We expect this for deepwater projects to be available until 2013 with a higher level bidding activity in third quarter of 2014. Bidding activity for nontraditional Gulf of Mexico marine and related projects, overseas, shallow water projects and support work associated with deepwater structures are expected to increase from current levels over the next 3 quarters.

As discussed on our most recent earnings call, during the quarter ended September 30, 2013, we began discussions with one of our lowest deepwater customers concerning its request for reductions and scope of the project, whereby remaining completion and integration work would be performed at the lift side by different integration contractor. During the fourth quarter of 2013, we negotiated to close out, out of all of our subcontractors and are in active negotiations regarding the final close-out settlement of the contract with our customer. Based on these discussions, we recognized a loss on the contract for the fourth quarter of $18.2 million. We expect to finalize the close-out of this contract in the first quarter of 2014.

Before proceeding to the financial review, I'm happy to report that our Houston corporate office is fully operational. We believe this provides a distinct advantage by allowing us to be in close proximity to many of our customers.

As Jeff will explain in further detail, 2013 marked a company record in annual revenue. While we were encouraged by the success, we continue to look at ways to control project costs to maximize margins, maintain our focus on quality standards and enhance our fabrication capabilities while providing shareholder value.

I would now like to turn the call over to Mr. Jeff Favret. He will discuss our financial performance for fourth quarter 2013. Jeff?

Jeffrey M. Favret

Thank you, Kirk, and good morning, everyone. I'll discuss highlights from the quarter, provide specifics on our financial performance, and then we'll open the call for your questions.

Our fourth quarter proved to be a challenging one. Revenue for the 3 months ended December 31, 2013, was $135.1 million and $129.2 million for the comparable period 2012. Gross loss was $1.8 million for the 3-month period ended December 31, 2013, compared to a gross loss of $9.4 million for the same period of 2012. Our operating loss was $4.6 million for the quarter ended December 31, 2013, compared to an operating loss of $12 million for the comparable period 2012. And the net loss for the 3-month period ended December 31, 2013, was $3.1 million or $0.22 a share, compared to a net loss of $8.1 million for the 3 months ended December 31, 2012, or $0.56 a share.

The increase in revenue were 4.4% for the fourth quarter 2013, compared to the fourth quarter 2012, was primarily due to continuation of work related to change orders received in the prior quarter for a large deepwater hull and related topside project, offset by a reduction in revenue of $18.2 million in connection with the negotiations towards final settlement for descoped project with a separate large deepwater customer that Kirk referred to earlier. Despite the challenges associated with this project, we had total annual revenue of $608.3 million in 2013, representing our highest historical performance to date for Gulf Island. The decrease in our gross loss for the 3 months ended December 31, 2013, compared to the fourth quarter 2012 was due to stronger margins associated with revenue recognized during the fourth quarter 2013 for change orders related to our large deepwater hull and topside project, offset by $18.2 million loss referred to earlier.

The following represents selected balance sheet information for December 31, 2013, compared to December 31, 2012. Cash and cash equivalents were $36.6 million compared to $24.9 million. Working capital was $89.7 million versus $81.3 million. Net property, plant and equipment was $223.6 million compared to $229.2 million. And total assets were $426.2 million and $403.5 million, respectively.

CapEx for the year was $21.4 million. Approximately $17 million of capital expenditures are planned for the quarter ending March 31, 2014, primarily for the purchase of 2 660-ton capacity crawler lift cranes for our Texas facility. We declared and paid cash dividends of $0.10 per share during each of the quarters ended December 31, 2013 and 2012.

I'll now turn to our backlog information. Revenue backlog was $358.7 million with a labor backlog of 3.3 million hours remaining to work at December 31, 2013, compared to a revenue backlog of $537 million and labor backlog of 4.4 million hours remaining to work at December 31, 2012. Additional backlog information for December 31, 2013 compared to December 31, 2012, is as follows: Revenue backlog for deepwater projects was $224.5 million or 62.6% compared to $393.3 million or 73.2%. Of the backlog at December 31, 2013, we expect to recognize revenue of approximately $321 million or 89.5% during the calendar year 2014 and $37.7 million or 10.5% during the calendar year 2015, not including change orders, scope growth or new contracts that may be awarded.

We had 1,900 employees and 467 contract workers at December 31, 2013, compared to 2,180 employees and 344 contract workers as of December 31, 2012. For the 3 months ended December 31, 2013, labor hours worked were 951,000 compared to 1.1 million for the same period 2012. And pass-through costs were 63% of revenue compared to 58.5% of revenue for the 3 months ended December 31, 2013, versus 2012. We expect labor hours to decrease somewhat during the first quarter 2014, as a result of having completed the SPAR hull, as we enter into latter stages of the related topside project, in addition to poor weather conditions that we are experiencing at both our Texas and Louisiana facilities quarter-to-date.

Lastly, I can tell you that we continue to see interest in our assets up for sale, associated with the Cheviot project and have no reason to doubt that the ultimate disposition will net, at a minimum, our recorded value of $13.5 million.

So in conclusion, 2013 represented our highest revenue year-to-date. We have completed the first U.S.-built SPAR hull. And on a separate large deepwater project, we are in active negotiations concerning a final settlement to conclude the descope project. And as a result of this, we expect to see overall improved margins for the first quarter of 2014.

Operator, you may now open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] We'll take our first question from Jim Rollyson with Raymond James.

James M. Rollyson - Raymond James & Associates, Inc., Research Division

Kirk, I guess the first question just if you go through and back out the $18.2 million charge related to the project this quarter, it implies margins were crazy, good otherwise and better than they would have been in a while. I'm trying to understand if that's a fair comparison? Or if this project has been a drag on margins for a while? And you finally just took the rest of it, in order to try and get apples-and-apples understanding of how the rest of your business is doing x this charge?

Kirk J. Meche

Jim, look, that's an excellent question and yes, we appreciate you kind of pointing that out to all the listeners. Yes, the project has been a challenge for almost 2 years now. And it's been a -- as we said, it was a difficult project, contractual terms and it was difficult. So it has been dragging us down for at least 4, 5 quarters now. So yes, we've got to the point now where we finally -- we are in final negotiations, as Jeff has said, with our customer. And we expect to have improved margins going forward on the remaining projects we have. So I think that's a excellent analysis that you have done, and we thank you for pointing that out.

James M. Rollyson - Raymond James & Associates, Inc., Research Division

Does that imply beyond the weather issues you mentioned in the first quarter that you can get back up to kind of overall gross margins in the double-digit range?

Kirk J. Meche

Well, we said we won't provide any forward-looking statements or advice on that, but yes, it is our goal to increase our margins. We've had numerous meetings with our division managers and trying to emphasize the importance of getting those margins up. And yes, I would like to tell you that, that's our goal going forward, we want to return to decent margins. We want to concentrate on projects that have a lot less risk associated with them, but at same time can yield us some pretty high margins. So that's kind of our goal going forward.

James M. Rollyson - Raymond James & Associates, Inc., Research Division

That's helpful. And last one for me, let somebody else in here. Just on the deepwater projects, I think you mentioned you see a fair number of bids coming up in the second half of this year. What is that -- what are you seeing in terms of magnitude of projects out there? And is this stuff starting late '14 or more 2015?

Kirk J. Meche

Well, we know it's typical. at the year-end, we always see these projects and we have them in our radar screens. And as the year comes about, you'll see some of these projects start moving a little bit to the right. And as magnitude of project comes about and some of these all companies are looking at it in terms of total capital investment with it, I think they have tendency at times to pull back a little bit, look at all their options associated with what type of facilities they want with this, tieback or different philosophy in terms of growth on these topsides. But we see a couple of them out there. But again in the meantime, we do see a little bit of activity picking up for the shallow water items that we typically have done very well in the past. And we continue to see that growth going forward within the next 2 quarters. So our model is to try and obtain some of these projects and kind of filling the gaps and when this big projects are led. We believe that we're bidding one of them actively now. One of them has been pushed back, probably won't see any awards on these things until, probably, 2015 early.

Operator

[Operator Instructions] Next, we'll go to Martin Malloy with Johnson Rice.

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

Could you talk a little bit about the competitive environment, now that Morgan City has shut down as far as the market there for the topsides for the deepwater in the Gulf of Mexico?

Kirk J. Meche

Yes, sure, Marty. Again, certainly the facility shutdown in Morgan City is -- that's not good for our industry, quite honestly, puts lot of folks on the street, which is not anything that we are happy to say. But I think since competitive advantage of going forward with the Gulf of Mexico, we've always said, majority of our competition comes from one of our major competitors in South Texas. And the remaining competition comes from our overseas markets. I think as we begin to see some of these projects grow in size, and then we see some these large vessels coming on line with dockwise and what not. I think there's going to be more of a competitive push to try and get some of these things built in the one location where they can actually do the hulls, topsides, integrated at facilities and bring out over to gulf. So again, I think our major competitor going forward on these large topsides is going to be the one competitor down at South Texas, as well as our overseas markets.

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

Okay. And could you maybe address the opportunities out there as far as the modules for some of the pet cam [ph] and chemical facilities along the U.S. Gulf Coast and maybe also the marine market and are there opportunities to use the great [indiscernible] dock for some other projects besides the SPARs?

Kirk J. Meche

Yes, sure. First of all on the Petro market, again we all chasing one big large project in Lake Charles. We have had meetings over the last couple of weeks with the owners on this thing. They're still running a little bit of the problems with permits and whatnot. And so the new project has moved a little bit to the right. But again, nonetheless, the projects will happen and we continue to put ourselves in a position where we have the opportunity to bid on these projects and be competitive. On the marine side, again when you talk about the marine division here in Louisiana, again, I think our opportunities are very strong going forward, especially, with our graving dock and the amount of repair work coming up. A source for the graving dock itself, again we are actively pursuing additional concepts out there that may limit itself not only to the Gulf of Mexico, but overseas markets and then, of course, it's always available for vessel type prepare and whatnot. So we see quite a bit of opportunities out there coming up within probably the second quarter of this year. And again so we kind broadening our horizon a little bit in terms of what we can utilize a graving dock and we're good in it. That's kind of our marketing scheme going forward to utilize that asset we have down in South Texas.

Operator

[Operator Instructions] We will take a follow-up from Martin Malloy with Johnson Rice.

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

Could you talk maybe some about the potential uses of cash and would there be a possibility that you all would consider putting in place some type of share repurchase program?

Jeffrey M. Favret

Marty, this is Jeffrey Favret. we consider all of these things. As you know, that we are a very capital-intensive company, and we have historically have low levels of debt. And so we'd like that model. We're certainly looking at the potential of putting in a refi plan into place and have them looking at that. We're also looking at other uses of cash that might have a better value for us. We're looking at a lot of different things, including capital investments as well as maybe other uses of cash and also the potential of the a buyback. So nothing is off the table, really.

Operator

[Operator Instructions] It appears there are no further questions at this time. So I like to turn the call back over to our speakers for any additional or closing remarks.

Kirk J. Meche

Okay. Thank you, Allen. This concludes our call and we thank everyone for listening in. Our next earnings call will be late April of this year, we will discuss results for first quarter 2014. Have a good day. Thank you.

Operator

That does conclude today's conference. If you like to access the replay of today's call, you may do so starting at 12:00 Eastern time by dialing (719) 457-0820 or toll-free at 1 (888) 203-1112, reference code 6355813. We thank everyone for their participation.

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