Deep Down's (DPDW) CEO Ronald Smith on Q4 2015 Results - Earnings Call Transcript

| About: Deep Down, (DPDW)

Deep Down, Inc. (OTCQX:DPDW) Q4 2015 Earnings Conference Call March 31, 2016 4:30 PM ET

Executives

Ronald E. Smith - President, CEO and Director

Eugene L. Butler - Executive Chairman and CFO

Analysts

Walter Schenker - MAZ Partners

Laura Engel - Stonegate Capital Partners

Neal Goldman - Goldman Capital Management

Gregg Hillman - First Wilshire Securities

Rich O'Leary - Lacuna

Operator

Good day, ladies and gentlemen, and welcome to the Deep Down, Inc. Fourth Quarter and Year-End Financial Results Conference Call and Webcast. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. [Operator Instructions] As a reminder, today's program is being recorded.

I would now like to introduce your host for today's program, Ron Smith, President and CEO. Please go ahead.

Ronald E. Smith

Thanks Jonathan. What I'd like to do today is let Gene talk about our financials. Then I will talk about our current operations. We'll open up the floor for Q&A and we'll then conclude the call. So, Gene, would you tell us about our financials?

Eugene L. Butler

Right. Thanks, Ron. A detailed disclaimer related to our forward-looking statements is included in our press release, which has been filed with SEC. It is also available on our Web-site at deepdowninc.com upon request. A reconciliation of excluded items and non-GAAP financial measures is also included in our press release and on our Web-site.

Our year-end results for 2015 were revenues of $24,848,000, resulting in a net loss of $1,841,000. This compares to 2014 year-end revenues of $28,630,000 and a net loss of $5,803,000. The decrease in revenues of $3,782,000 was due primarily to the delays by our customers on certain projects. These delays were due to significantly lower oil price causing our customers to slow down certain projects.

Even with revenues lower by 13%, we were able to maintain a gross margin over 30%, which was comparable to last year. SG&A was also lower by $327,000. Our modified EBITDA for 2015 was $662,000, which was $1,351,000 less than last year. This reduction in EBITDA was essentially due to the lower revenues caused by the customer delays on certain projects.

Revenues for the fourth quarter of 2015 were $6,331,000, resulting in a net income of $129,000. This compares to the fourth quarter of 2014 revenues of $8,158,000 and a net loss of $6,174,000. The 2014 net loss included an adjustment of $4,916,000 for impairment of goodwill and a $663,000 net loss adjustment to complete the fabrication of a carousel.

Our gross margin in the fourth quarter of 2015 was 38%. Modified EBITDA in the fourth quarter of 2015 was $766,000 compared to an EBITDA loss of $631,000 for the fourth quarter of 2014. This represents an improvement of $1,397,000.

We continue to have a very strong balance sheet. Our cash position at year-end was $4.3 million, which is less by $1 million compared to year-end 2014. However, total debt is less by $2.9 million compared to last year. Our net book value at 12/31/2015 was $23.5 million equivalent to $1.52 per share. Our market capitalization is a little more than half the net book value at about $12.4 million.

We also announced on March 16, 2016 that we had completed the sale of our Channelview property. We used $2.5 million of the proceeds to retire our debt. We will also report approximately $1.1 million gain on sale of property in the first quarter financial results. This transaction has contributed to strengthening our balance sheet and substantially improving our liquidity.

I know Ron wants to talk about the outlook for 2016, so I'll turn it back to him now. Thank you.

Ronald E. Smith

Thanks, Gene, for the explanation of the financials for 2015 year-end. I will discuss some of the operational aspects of this fourth quarter and the year end and some of the current work. Using the 'sales by customer report for the 2015 year-end, we had 203 CTRs or projects build in 2015. By recognized revenue for the year 2015, operators had 55% of those projects, the OEMs had 30%, the installers had 15%. What I mean by the projects, I mean by the revenue for those projects. What is interesting is this is the highest percentage of operator revenue in the history of the Company for an entire year.

Regarding profitability for Q4 and the year, we were profitable in Q4. As we have already discussed earlier, the negative impact with the completion of the carousel resulted in a loss for the year. What I'm saying is that if we took the carousel out, we would have been profitable for the year. We have just recently announced another large order, which I am pleased to say, from Shell. Our backlog remained stronger than ever before. Our balance sheet has never looked so good.

As Gene said, we have just closed on the sale of our property at Channelview, with today as our last day on the property. So as of today, we have $7 million in the bank, zero on our line of credit, both loans to property and the carousel are paid off. We have an AR of over $4 million excluding any reserves, and AP less than $500,000. Regarding our cost-reduction program, the consolidation of our facilities will have a very positive benefit. Considering the low oil prices and strain on the overall industry, we are as strong as I think we can be given all the circumstances.

That's all I have for now, and I'd like to now open it up for Q&A. Are there any questions?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Walter Schenker from MAZ Partners. Your question please?

Walter Schenker

A few questions. First to Gene, given that you had to restate the first nine months, it would be inaccurate to look at the third quarter Q and subtract that from the year and come up with the fourth quarter. Therefore, could you just give us a rough idea of what the fourth quarter actually looked like if you went to the last footnote in the 10-K and subtracted that out, so we get a better picture of the revenues and profits in the fourth quarter?

Eugene L. Butler

Is that a question, Walter?

Walter Schenker

Yes, could you give us the approximate revenues and profits in the fourth quarter against what actually [indiscernible] in the fourth quarter?

Eugene L. Butler

I just gave it a second ago.

Walter Schenker

Okay, then I missed it, I apologize. Go through it again then.

Eugene L. Butler

We had $6,331,000 of revenues and our gross margin was approximately 38%, and we had a net income of $129,000.

Walter Schenker

Okay. For Ron, you have now because of the restatement an issue with a customer both as to the changes and extra expenditures [indiscernible] as well as the rental income from a [indiscernible] how that claim is going to play out over time?

Ronald E. Smith

Walter, I appreciate and I can't talk about this a whole lot, but what I can say is that based on the contract, all disputes are to be handed by arbitration. So we have filed for arbitration and the arbitration will include the rental of our other carousel which they have not paid, and that's [indiscernible] that got reserved, and for change orders for the carousel that we built.

So the amount of those receivables were reserved and came off in 2015. If we are successful in the arbitration in the next few months, that will go right on to 2016 revenue without any cost basis associated to it. So we are very hopeful that we'll have a positive arbitration. Now, the arbitration process is, it is only lengthy in setting up of the arbitration date, but once the arbitration is commenced, it will be very swift. So we are encouraged but we can't talk a whole lot about it.

Walter Schenker

Okay. I have about two more. Historically, Ron, we've had some issues with taking on projects which weren't normal for us, be it the very large carousel or various other projects over time, could you just give us a sense of the quality of the backlog and to what extent there are things in the backlog which aren't either time and materials where we are almost guaranteed to make money or things like umbilicals and flying leads where hopefully we have done enough of them that we want to have good margins on them?

Ronald E. Smith

I'm glad you asked that, Walter. Every dollar of our backlog are in the base bread-and-butter business, it is all in flying leads, most of it is in P&M work, and we have no carousels in the backlog, no large, no containment boxes, no big lump-sum projects, it's all our standard business.

And going back to the carousels, as a part of this arbitration, we are going to show that our old carousel that we built there in Mobile, Alabama, we built it for much less than the value, than it's worth I mean. The carousel we built in Mobile for Aker, that cost was less than what we sold it for. The carousel that we built for EMAS that we bought back, our cost was less than the value of that carousel.

So this is the only carousel that has this upside down nature of the cost being so high, which we attribute to the client. But to answer your question, none of the backlog has anything like that in it. So that's very encouraging.

Walter Schenker

Okay, good. Two more questions, I'll put them both on the table, and I'll let someone else ask questions, first of which is, could you give us, since it's been a number of years now, what our prospects might be in either renting or selling one or both of the carousels which are now fully paid for and have no debt against them, which are sitting idle; and secondly, might you consider now that we are debt-free and have a lot of cash and the stock including the gain which will be booked in the quarter if selling at approximately half of the book value, might you consider the Board buying back some stock at half the book value? Thank you.

Ronald E. Smith

I will answer the first question and let Gene answer the second question. On the first question, I hate to answer the question because I just got back from Subsea Tieback and at Subsea Tieback I had a group of people coming to me and the people that we have already talked about before that they had put two clients – two of them together and they want to buy the carousel that's in Mobile, Alabama for the price that we are asking.

And back to the same question, the carousel that we have in our lot, the people I have been talking to down south, who has now been transferred to another location, are in pretty fierce discussions with us right now about including that carousel into their operation.

So both carousels are in play and even a major umbilical manufacturer is looking at also buying either the Blue one or the one in Mobile. So we've got three people interested in two carousels. When it sells? I'm not sure, but at least they are actively being talked about.

Walter Schenker

And they reach multiple millions of dollars, whatever the number happens to be negotiated, if they get sold?

Ronald E. Smith

The nice thing is the sale price on both of them are $5 million each. That's $10 million in sales. We've got $3.2 million on the Blue one and I think [indiscernible] on the other. It will be $10 million of cash in our bank account and $5 million plus in profit.

Eugene L. Butler

Ron, why don't you comment on how the performance of that one that they didn't pay the rent for?

Ronald E. Smith

The carousel, this was a pretty one with very interesting design, we built a carousel that could be lifted 1,500 tons full of product. They lifted 900 tons of product onto the vessel, sailed to Malaysia for Chevron, got lifted and put on to the installation vessel, and they said it performed, this is Chevron saying, it performed, and actually the technique people, performed better than any carousel they've ever seen. So the good thing is the reputation in the industry for the performance of the carousel is very good.

Eugene L. Butler

Okay, Walter's question about are we going to consider buying our stock back at the book price? The answer is, we are going to consider it. The directors are going to talk about it, but we don't know what we're going to do yet. But anyway, it is under serious consideration right now.

Operator

Our next question comes from the line of Laura Engel from Stonegate Capital Partners. Your question please?

Laura Engel

So you talked about some project delays with customers. Can you tell us if there have been product cancellations as well, and if so, how that affects the pipeline going forward as far as maybe the size of those projects being canceled?

Ronald E. Smith

I think I can answer that, Gene.

Eugene L. Butler

Yes, go ahead.

Ronald E. Smith

We have not had any projects canceled to us. Thinking about one of the big jobs has been delayed a little bit, when I say the big jobs, it's a super-major that is aligning the jobs that they've got or when they want them done, nothing has been cancelled, it's just when they're being done.

At the same time, we have another super-major that has, we are in discussions right now, this is not on the backlog because we don't have the purchase order yet of basically filling in the ones that have been delayed a little bit. And so, the good thing is, our backlog is still strong and it's not decreasing and in fact the work is looking like it's increasing, not decreasing.

Eugene L. Butler

We still have a couple of big projects out there that we should know something about in two or three months.

Laura Engel

Okay. And then can you give us an idea of what cost savings you might see in this upcoming year with the closing of the Channelview location?

Ronald E. Smith

We are looking at the numbers on the generous side of it and the absolute realistic side and we are looking at a potential savings of something like $20,000 to $25,000 a month in reduction of overhead with the consolidation.

Laura Engel

Okay. And then my last one is based on some previous responses. Are the current levels of gross margins sustainable do you think going forward?

Ronald E. Smith

I believe that they are increasing, because as we've been working on our quality systems, our project management systems and through the consolidation, all the efforts that we are doing is about increasing the margin, so they should be increasing.

Eugene L. Butler

Yes, but let me comment. Also our margins have been a blend with some fabrication and our fabrication or manufacturing of those big projects margins were never the same. So we're now really on what I would call our core business products and those are all fairly high-margin. And as I said, the fourth quarter was [indiscernible]. I see no reason that we can't maintain that or get higher. I'm sure there is some pressure to the lower pricing but I don't think Ron is going to do that at all because high technical stuff.

Ronald E. Smith

Actually we've been approached by many of our clients with that full round of will you decrease the prices. We've been asked to decrease prices on jobs we already have purchase orders on. And the answer has been 'no' each time because we said, not only are we not going to lower the price, we haven't increased the price in several years. So instead of agreeing to lower, we agreed not to raise the prices. And those answers have been pretty well-received, and I was actually surprised by that.

Eugene L. Butler

Are you getting any of your majors maybe taking out some of the equipment that we make out of installers' hands?

Ronald E. Smith

Actually, yes.

Eugene L. Butler

That says it [indiscernible].

Ronald E. Smith

And we're looking at expanding our stores and refurbishment side of it because other people are looking at duplicating that service. But – I'll just leave it at that.

Laura Engel

Okay, I appreciate the information. I will get back in the queue. Thank you.

Operator

Our next question comes from the line of Neal Goldman from Goldman Capital Management. Your question please?

Neal Goldman

What's your CapEx for 2016 and your depreciation and amortization schedule?

Ronald E. Smith

On the CapEx side, we're looking at only a couple of pieces of equipment that will be putting it around $500,000. The depreciation schedule, I'll let Gene answer that.

Eugene L. Butler

Our depreciation will probably go down slightly because we sold the Channelview facility. I have to look at the EBITDA real quick to see what it was, but it really hasn't changed dramatically here.

Ronald E. Smith

Neal, while he is looking that up, I'm using 1 million as a total number for CapEx. Like I said, I have one piece of equipment looking at about $500,000 and the others is something services that's actually necessary.

Eugene L. Butler

For 2015, depreciation before G&A and operations plus a little amortization was $1.7 million. I don't think that's going to change dramatically. There is a possibility that we might have to put the one carousel into property, plant, equipment depreciation but we'll do that over 30 years, so that wouldn't be material. Ron, it's possible if you have to do something with your NHUs abroad, you might spend a little more money, right?

Ronald E. Smith

Right. We're letting people know that based on the conditions of the oil industry that it would be best to build them here and not worry so much about their local content requirements that they need to get a mulligan for the year and we do it here. Every one of them said okay to that. So there's no CapEx [indiscernible] of it.

Neal Goldman

Okay, so there will be a net swing of $0.5 million to $700,000 between CapEx and depreciation and amortization. In terms of the tax loss carryforward as it exists today, how big is that now?

Eugene L. Butler

The loss carryforward?

Neal Goldman

Yes.

Eugene L. Butler

It's a little over $15 million.

Neal Goldman

Okay. So if you sell the carousels and had a gain of $5 million, it would be no tax liability against that?

Ronald E. Smith

Yes, very little tax, [if at all] [ph].

Neal Goldman

Okay, very good guys. Thank you.

Operator

Our next question comes from the line of Gregg Hillman from First Wilshire Securities. Your question please?

Gregg Hillman

Ron, can you talk about your effort in the non-helical umbilicals to basically at higher functioning umbilicals and how is that effort unfolding first of all?

Ronald E. Smith

Can't remember. This contract that we've got pending with this oil company overseas, [that's been] [ph] announced, [indiscernible] I'm not going to [indiscernible] right now, sorry. We have an order, so I just don't remember what we have released pending, that will be a significant order with our umbilical process. We have just got through building another one for Shell which was successful and they are very pleased with the outcome, and we've got several quoted.

One of the talked about projects being delayed was a very simple umbilical that was really long that have been about what, 1,200 tons altogether of umbilical built in four pieces, and that project is still pending. So the NHU process is looking good.

Eugene L. Butler

[Indiscernible] on the cost savings, this is a good opportunity for us to show them some cost savings.

Ronald E. Smith

There are still some ramblings about if they are not getting the kind of support they want to get from the Mozambique project of those potentially slipping in and doing a whole bunch of that, but right now we are kind of focusing all these providing the umbilicals for these RIV projects, but right now we've had five short umbilicals that [we built] [ph] and it looks like we're going to make more. So I'm just looking forward to that order that is longer. The one that we are hopefully going to get, hopefully ultimately, is that I just mentioned is about 10,000 feet long. So it's all well within our wheelhouse. We're just waiting for those purchase orders.

Gregg Hillman

Could you just remind me the value per foot, it's like $500 a foot or something like that you get for them?

Ronald E. Smith

I wish. I think we can just – the size that we are dealing with are probably $100 a foot, $150 a foot. The nice thing is they need to have a yellow box on one end and that yellow box is somewhere between $0.5 million and $1 million. And we released that order, announced that order not too long ago for another SAM, another subsea accumulator module, and that's close to $1 million and that's all within our bread and butter. So we're thinking that as we get more of those orders, we'll get more umbilicals, we get more umbilicals we'll get more of the yellow boxes.

Gregg Hillman

Okay. And Ron, the whole thing about the portable and non-helical umbilical plant, I think you just built one of those for Shell and that's in Houston, that's in Texas right now, is that correct?

Ronald E. Smith

That's right. So the portable plant is parked in Houston but it could go elsewhere. I just got back from Trinidad. It's still a little bit ahead of the game, but Shell has bought BG in Trinidad and with a thought that they've got a lot more to do there, that that might be a good place to park the plant. They have a lot of umbilicals to do there and in Venezuela. It will be a good lodging place for West Africa. And when I was getting on the plane, there was a news article there in Trinidad that said, Shell looks to sell all its BG assets in Trinidad to Tobago. I got e-mails from everybody I visited saying, oops. So we don't know what's going to happen there.

Gregg Hillman

And then, Ron, could you just comment on the other, I know it's the big four that make umbilicals, I think one is Cameron, one is FMC. There used to be like a shortage of capacity. What's the current situation in capacity or overcapacity in the industry and how does that affect you?

Ronald E. Smith

Let me refresh the big four because some of the other listeners, they are also very interested in umbilicals. So, one of the biggest ones is Nexans in Norway; and the second one is Aker in Mobile; and the third one is Technip Umbilical, we call DUCO in Houston; and the fourth one is Oceaneering in Panama City.

So these four, BP, I don't know if you remember me talking about the reasons why our carousel was not used as much after Macondo, but BP is shifting back to the understanding that umbilicals ought to go on carousels and not individually. So we're going to be doing a job for Nexans next month terminating an existing spare umbilical. So the good thing is our relationship is still strong with Nexans, so we'll be doing some work there. And Oceaneering, they are wishing they had more business along with DUCO and Aker.

So of that, there are still, according to Quest Offshore, that $22 billion of umbilicals I told you about that have to be built in the next five years, and the statements I made about all those above manufacturers can't make enough of them, but the problem is that some of the operators have delayed their actual pull of the trigger on some of those orders.

So I don't think the build is not going to really start again until oil prices go up. So I'm thinking that instead of us getting the overflow, we're going to be getting these brownfield developments that people need, the shorter 5,000, 10,000 foot umbilicals, quicker than these guys can ramp up to deliver. So I think that's going to be our niche.

Gregg Hillman

But is that going to take oil price to go up for that to happen or can that happen at current oil prices?

Ronald E. Smith

I think our best opportunity is they are still operating. So barring the low oil prices, when they have failures and just [indiscernible] we are going to be doing more fixing it than do stuff. So we are the ones that are going to have new stuff, they are going to be short stuff out, so not be looking for the big projects.

Gregg Hillman

Okay. But the market is still good, you could still, if it unfolds and then oil price maybe gets to I don't know $40 to $50 a barrel, then you're still small relative to the size of the industry, you could still go north of $50 million company in the next five years if that unfolds?

Ronald E. Smith

100%.

Gregg Hillman

Okay, I'll get back in queue. Thank you.

Operator

Our next question comes from the line of Rich O'Leary from Lacuna. Your question please?

Rich O'Leary

Actually my questions have been answered. Thanks, guys. I didn't know how to get out of the queue, sorry.

Ronald E. Smith

Since you're online, do you want to ask anything else? He's already gone.

Operator

Thank you. And this does conclude the question-and-answer session. I'd like to hand the program back to Ron Smith for any further remarks.

Ronald E. Smith

I have enjoyed this call today and I thank you all for participating. We've got quite a few, 26 people on our screen here. So I think that's really good. I want to thank you all for attending this call. I pledge to you we're going to work very hard to do all that we can do this year. So thank you for attending. I look forward to seeing you next quarter. Okay, thanks everybody.

Operator

Thank you. And thank you ladies and gentlemen for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.

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