Gulf Island Fabrication, Inc. (NASDAQ:GIFI) Q1 2020 Earnings Conference Call May 6, 2020 5:00 PM ET
Cindi Cook - Executive Administrative Assistant
Richard Heo - President & Chief Executive Officer
Wes Stockton - Executive Vice President & Chief Financial Officer
Conference Call Participants
John Deysher - Pinnacle Value Fund
JP Geygan - Global Value Investment Corporation
Good day, and welcome, ladies and gentlemen, to the Gulf Island Fabrication Inc. First Quarter 2020 Earnings Conference Call. All participants will be in a listen-only mode for the duration of the presentation. This call is being recorded.
At this time, I would like to turn the conference over to Ms. Cindi Cook for opening remarks and introductions. Cindi, please go ahead.
Thank you and good afternoon. I would like to welcome everyone to Gulf Island's first quarter 2020 teleconference. Our results were released this afternoon and a copy of the press release is available on our website at gulfisland.com. A replay of today's call will be available on our website after 7:00 P.M. this evening.
Please keep in mind, that the press release and certain comments on this call include forward-looking statements and actual results may differ materially. We would like to refer everyone to the cautionary language included in our press release and to the risk factors described in our 2019 Form 10-K and subsequent SEC filings. Please also note that management may reference EBITDA, adjusted EBITDA, and backlog on this call, which are financial measures not recognized under U.S. GAAP. As required by SEC rules and regulations, these non-GAAP financial measures are reconciled to their most comparable GAAP financial measures in our press release.
Today, we have Mr. Richard Heo, President and CEO; and Mr. Wes Stockton, Executive Vice President and CFO. Mr. Heo?
Thank you, Cindy. Good afternoon, everyone, and welcome to our first quarter 2020 call to discuss our results, business highlights, and outlook. I'm happy to be here with you this afternoon, and I hope that you, and all your families have been doing well coping with the challenges of COVID-19 pandemic.
On today's call, I'd like to discuss the actions we're taking to address the impact of the COVID-19 pandemic on Gulf Island, followed by an update on the strategic initiatives we began to implement in the fourth quarter of 2019. From there, I will discuss the first quarter results and then conclude with a discussion on the current operating environment given COVID-19 and the decline in oil prices. Wes will then discuss first quarter results in greater detail as well as our liquidity position. We will then open things up for questions, and I'll wrap up with some closing remarks.
It's hard to believe that it has only been two months since our last call. In the past 60 days, we've been faced with a very challenging and an unprecedented business environment due to the COVID-19 pandemic, and significant decline in crude oil prices. In regard to our operations, we've been fortunate to operate our facilities as we were deemed an essential service by the United States Department of Homeland Security. While our utilization was impacted during the quarter by the mitigation efforts implemented to keep our employees safe and healthy, overall, our efforts in response to the impact of COVID-19, our business had been highly collaborative and well-coordinated.
Even before the onset of the Louisiana Government ordered shutdown, we proactively focused on the health and safety of our employees, subcontractors, suppliers, and customers. Early on, we initiated measures that included daily calls with our leadership team to identify and proactively address where possible the potential impact of COVID-19 on our employees and operations.
Let me highlight just a few of the actions we have taken, including monitoring employee temperatures prior to entering our facilities, employee wellness questionnaires, workplace distancing of employees, including allowing employees to work from home where appropriate, installation of hand-sanitizing stations and additional actions to sanitizer facilities, and protocols for employees returning from absences. These efforts are being complemented by more frequent leadership walkthroughs in the yards to ensure compliance and employee wellness.
I'm very proud of our team's efforts in this very challenging environment, managing not only the operations in our yards, but the supply chain challenges for our projects, including the challenges of procuring our day-to-day items such as cleaning supplies and face masks for the health and safety of our employees.
I will now provide an update on the progress we're making on some of our strategic initiatives discussed on our fourth quarter call in February. We completed the consolidation of our fabrication division and services division, which will improve efficiency and reduce our cost structure during the challenging environment. While our results were impacted by facility underutilization in the quarter, some of it related to COVID-19; the consolidation will enable us to leverage the best practices and experience of the combined division and ultimately maximize resource utilization. With respect to our Jennings facility, the closure is on schedule for the third quarter 2020 and will further add to improving the efficiency of our operations as we move into 2021.
In addition to these previously announced actions to improve our utilization and reduce our cost structure, the Gulf Island executive team has taken voluntary reduction in its base compensation, and we will reduce our board head count by three members at our May meeting in order to support our cost savings initiatives. We're complementing our consolidation efforts by also strengthening our leadership team and improving talent allocations, ultimately increasing the depth of our team's capabilities. Importantly, we have also received positive client feedback regarding the initiatives we have implemented and are focused on further strengthening our relationships with our customers and strategic partners. For example, for the two separate projects that we moved from the fabrication division to the shipyard division, our customers have positively responded to the new level of expertise and increased management communication.
Turning our attention to the first quarter results and accomplishments; our results were generally consistent with our expectations. With respect to our projects, our Paddlewheel Riverboat, and subsea components projects were completed this quarter, and delivered a gross profit of approximately $900,000 in an improvement compared to our cost forecast at year-end 2019. The improvements on the Riverboat project were largely attributable to the addition of the shipyard division's expertise in the finishing and the commissioning of the vessel. In addition, we successfully delivered the seventh and eighth harbor tugs in March and in April in line with our cost forecast, and we are on-target to deliver the ninth and tenth vessels by the third quarter.
While we've reported positive results on the previously mentioned projects during the quarter, we did experience cost increases on the first of our two 40-vehicle ferry projects associated with residual quality challenges discussed last quarter. This resulted in project charges of approximately $1.2 million in the first quarter; the quality challenges were the result of activities performed by our former fabrication division prior to transferring management and execution responsibility for the projects to our shipyard division. While this was disappointing, we are not experiencing these same quality challenges on a second vessel.
With respect to our research vessel projects, we're continuing to work collaboratively with our customer as the customer works through the engineering phase of the projects. In the interim, construction continues to be on hold until engineering reaches a satisfactory level of completion to limit construction impacts including rework. We look forward to restarting construction later in the year.
Regarding our Navy projects during the quarter, we continue to ramp up construction activities on the projects, and the capital investments discussed last quarter associated with the erection [ph] sites and warehouse are progressing as planned. Also during the quarter, we increased our shipyard backlog as a result of options exercised by the U.S. Navy for two additional towing, salvage and rescue ships. While the expected margins on these projects are consistent with the prior option exercises, these awards put our shipyard backlog at an all-time high, and will add critical man hours to our backlog that will provide a strong base of work for our Houma shipyard operations going into 2021 and 2022. In addition, the further diversification of our shipyard division's backlog away from oil and gas will help us as we navigate through this challenging low oil price environment.
Despite the progress on our initiatives, completion of key projects as forecasted and new project awards primarily from the Navy, recent events have created significant challenges to an already difficult market environment. During the first quarter, there has been historic declines in crude oil prices due to a decrease in demand resulting from the economic impact of COVID-19. This has been exasperated by a market share dispute between the world's large oil producers. As a result of the current market environment, 2020 will be a challenging year for our newly integrated fabrication and services division.
Let me provide some examples of how COVID-19 and the decline in crude oil price has impacted our business since March. A $10 million fabrication project in our backlog was suspended and we experienced an immediate decrease in our onshore maintenance and offshore services activity. Further, in regard to our sales pipeline, some of our customers have announced significant reductions in capital spending and others have announced the suspension of projects. Specifically, we had two eminent awards totaling $30 million in which we were in final negotiations that were put on hold, and we believe we will see a significant reduction in onshore maintenance and offshore services activity for the balance of the year.
While we are continuing to see bidding activity for large petrochemical and LNG projects in Texas and Louisiana, we are watching the activity closely given continued market uncertainty. Our consolidation of the former fabrication division and services division will help mitigate some of the impacts of recent events by enabling us to drive improved efficiency and reduce their cost structure. Further, we are taking actions to identify other efficiencies, and we will take proactive actions to manage our business, should the operating environment become even more challenging.
Our shipyard division will also be faced with challenges in 2020, but it's backlog while low margin does provide a base load of work. We expect our resource utilization in the second quarter will be impacted by the delay in construction activities for our research vessels and our COVID-19 mitigation efforts, including workplace distancing and headcount management. We do expect our work hours to ramp up in the second half of the year as we make progress on our Navy vessels. However, the potential ongoing impact of COVID-19 continues to be uncertain and could have utilization impacts as the year goes on.
Finally, during the quarter, we applied for and received a loan under the Payroll Protection Program, which Wes will discuss in greater detail. We are using the proceeds to retain and bring back employees who have been laid off or furloughed. And we hope to keep as many of our employees working as possible during this uncertain time. These employees are working on maintenance and small capital projects in our yards that we would not have performed or would have deferred in this current uncertain economic environment without the loan proceeds.
I will now turn the call over to Wes to discuss our quarterly results in greater detail. Wes?
Thanks, Richard, and good afternoon, everyone. Let me first provide a few key takeaways from the first quarter.
As Richard mentioned, overall, the quarter was generally in line with our expectations, with two of our fabrication and services division projects completed with improved results versus our year-end cost forecast, balanced with the impact of cost increases on the first of our two 40-vehicle ferry projects in the shipyard division, as well as the under recovery of a portion of our overhead costs due to the underutilization of our facilities. Our quarter result also benefited by $10 million from the settlement of a customer dispute for a previously completed project.
We ended the quarter with cash and investments at $69 million and realized an increase in backlog due to the option exercises by the U S Navy. Before I discuss our financial results in greater detail, let me discuss a few items driving our quarterly comparisons.
I would like to note that as a result of the consolidation of our former fabrication division and services division, our three current reportable segments are shipyard, fabrication and services, and corporate.
Accordingly, operating results for our former fabrication division and services division for the first and fourth quarters of 2019 have been combined to conform to the presentation of our reportable segments for the first quarter 2020. In addition, during the first quarter, management and project execution responsibility for our two 40-vehicle ferry project was transferred from our former fabrication division to our shipyard division. As a result, revenue and operating results for the projects was reclassified from our former fabrication division to our shipyard division to conform to the presentation of these projects for the first quarter 2020.
Also, with respect to my following discussion of quarterly operating results, I will limit my comments to comparisons of first quarter 2020 results relative to first quarter 2019 results, as comparisons to the trailing period are not meaningful due to our project charges and impairments recorded in the fourth quarter 2019. So with that understanding, let me provide some additional details of our quarterly results.
Consolidated revenue for the first quarter 2020 was $78.6 million compared to revenue for the fourth quarter 2019 of $79.4 million, and revenue for the first quarter 2019 of $67.6 million. The 16% year-over-year increase was due primarily through our three towing salvage and rescue ship projects within the shipyard division. Consolidated net income for the first quarter 2020 was $5.9 million or income per share of $0.39, compared to a consolidated net loss of $3 million or diluted loss per share of $0.20 for the first quarter 2019.
Operating income of $5.9 million in the first quarter reflected a $10 million gain associated with the settlement of a contract dispute for a project completed in 2015, which is reflected in other income and expense, net, on our statement of operations. Excluding this gain from the dispute settlement, our loss for the first quarter 2020 was due to a low margin backlog and the partial underutilization of our facilities and resources within our fabrication services division, and to a lesser extent within our shipyard division. Also, excluding this gain for the first quarter 2020, our increased loss relative to the comparable period of 2019 was due to a lower margin mix offset partially by improved overhead recoveries due to higher activity for our shipyard division.
Now, let me provide some additional details regarding our quarterly results by operating segment. For the shipyard division, revenue was $45.6 million for the quarter compared to $47.7 million for the fourth quarter 2019 and $37.4 million for the first quarter 2019. The slight decrease in revenue relative to the trailing period was attributable to lower activity for our harbor tug and icebreaker tug projects. The 22% year-over-year increase was primarily due to our towing, salvage, and rescue ship projects associated with increased construction activity and procurement progress on engineered equipment manufactured by third-parties, offset partially by lower revenue for our harbor tug projects as we had fewer vessels under construction.
Operating loss for the quarter was $1.9 million compared to an operating loss of $904,000 for the first quarter 2019. EBITDA was a loss of $1.1 million for the first quarter 2020 compared to EBITDA of $205,000 for the first quarter 2019. The operating loss and EBITDA loss for the first quarter of 2020 were primarily due to the previously mentioned charge of $1.2 million on the first of our two 40-vehicle ferry projects, a low margin backlog, and the partial under recovery of overhead costs, primarily due to the construction delays for our three research vessel projects.
As noted last quarter, construction activities for these projects have been suspended until we believe engineering has achieved a satisfactory level of completion to limit impact on construction activities. The increase in operating loss for the first quarter 2020, relative to the comparable period of 2019 was due to the previously mentioned project impact and a lower margin mix, offset partially by improved overhead recoveries due to higher activity. For the fabrication and services division, revenue was $33.4 million for the quarter compared to $33.2 million for the fourth quarter 2019 and $30.6 million for the first quarter 2019. The 9% year-over-year increase was primarily due to progress on our offshore jacket and deck project, offset partially by lower offshore services activity.
Operating income for the quarter was $10.2 million compared to an operating loss of $251,000 for the first quarter 2019. EBITDA was $11.5 million for the first quarter 2020 compared to EBITDA of $1 million for the first quarter 2019. Operating income and EBITDA for the first quarter of 2020 reflect the previously mentioned gain of $10 million associated with the contract dispute settlement and project improvements of $900,000 for our paddlewheel riverboat and subsea components projects which were completed in the quarter. These benefits were partially offset by a low margin backlog and partial under recovery of overhead costs due to the division's low level of backlog.
Excluding the gain from the dispute settlement, operating results for the first quarter of 2020 were essentially breakeven, compared to an operating loss for the first quarter of 2019. The improvement year-over-year was due to the previously mentioned project benefits as well as lower general and administrative expense related to cost reductions associated with combining the fabrication division and services division offset partially by a lower margin mix. For the corporate division, operating loss for the quarter was $2.3 million, compared to an operating loss of $2.1 million for the first quarter 2019. The increase in operating loss relative to the comparable period of 2019 was due to higher legal and advisory fees associated with customer disputes, offset partially by lower incentive plan cost and other costs savings, including headcount reductions. The impact of legal and advisory fees related to customer disputes totaled approximately $600,000 for the quarter.
Now, next I will provide a few comments regarding our quarter-end backlog and liquidity situation. Backlog totaled approximately $500 million at March 2020, representing an increase of $63 million compared to December 2019, and an increase of $166 million from March 2019. The trailing and year-over-year increases were due to the previously mentioned Navy option exercises and at quarter-end, approximately 95% of our backlog was attributable to our shipyard division. This backlog excludes customer options for three additional vessels, which if exercised, were [ph] approximately $200 million.
With respect to our liquidity, operating cash flow for the quarter was breakeven and reflected our operating income resulting from the dispute settlement offset by an increase in working capital. We ended the quarter with cash and short-term investments of approximately $69 million, and assets held for sale of $8 million; and at quarter-end our working capital, excluding cash and assets held for sale approximated negative $4 million.
Regarding our credit facility, as previously disclosed, in February, we amended the facility to adjust our financial covenants and maintain our facility maturity date of June 2021. At quarter-end, we were in compliance with all our financial covenants and had approximately $10 million of outstanding letters of credit with no borrowings on the facility, providing approximately $30 million of availability for additional letters of credit or borrowings. In addition, in April, we entered into a loan agreement and received proceeds of $10 million in connection with the Paycheck Protection Program.
I'd like to provide you with some of the liquidity considerations that went into our decision to apply for the loan. As discussed in previous quarters, given our recent losses, the size and long-term duration of our projects and the inherent risk in our business, a strong balance sheet is paramount to our success. We require strong liquidity in order to receive ongoing support from our bank and surety providers, and maintain the confidence of our customers that we can satisfy our contractual commitments. While we had cash and investments of approximately $69 million at quarter-end, we have a credit facility covenant that requires us to maintain a cash balance of $40 million. Although we are allowed to borrow under the credit facility to satisfy the cash balance covenant and for potential other liquidity needs, any borrowings on the facility will reduce our availability to issue letters of credit in support of our projects, which will significantly impair our ability to win new work and return to profitability.
Further, at quarter-end, we had over $400 million of outstanding surety bonds. This bonding support and any future bonding support is dependent on our financial strength, which requires our cash and available credit capacity.
Lastly, as discussed in our previous call and consistent with our previous expectations, we currently anticipate our capital needs, which include contractual requirements for our projects with the U.S. Navy to be approximately $10 million to $12 million for the remainder of the year, and we anticipate an increase in our working capital for the remainder of 2020 of approximately $7 million to $12 million. Given these other demands on our liquidity and the significant uncertainty in our business and industry created by the COVID-19 pandemic, and its impact on oil prices, the funds secured under the Paycheck Protection Program are necessary to support our ongoing operations and our workforce.
We will use the proceeds only to cover those costs that are permissible under the program, which are primarily payroll and benefit costs. While we intend to seek loan forgiveness to the extent available under the program, the amount of such loan that will prove to be forgivable is unknown at this time. Any portion of a loan that is not forgiven will be a term loan that bears interest at 1%, is payable monthly beginning November 2020, matures in April 2022.
Now, moving on; with respect to our expectations regarding EBITDA for the remainder of 2020. Given the COVID-19 pandemic, record low crude oil prices and related market uncertainty, we will not be providing guidance at this time.
This concludes our prepared remarks. Lauren, you may now open the line for questions.
Thank you. [Operator Instructions] We'll take our first question from Don Deysher with Pinnacle.
Hi, it's John Deysher. Hello, everyone. I hope you're doing well and staying safe.
Just one question. The project that you mentioned, the $30 million project that was suspended in the wake of the lower oil and gas prices; what kind of project was that?
John, those were two, actually two projects for $30 million, and they were fabrication projects, and they've just been suspended. We expect that once the market turns around and there is some certainty in the market, the clients will come back to either rebid or continue the negotiations that we were in pursuit of.
Okay. And what exactly were you going to fabricate?
They were components to offshore production rigs.
Offshore production rigs. Okay, so they're not drilling rigs, production rigs?
That's right, production, yes.
Okay. And you have not signed a contract with them, but you might be invited to rebid, is that correct?
That's correct. So, on both of those prospects, we were in final negotiations where we were working on agreement on the T's and C's. But you know, when this - when the combination of the COVID-19 and crude oil prices happened, they paused, and in about a week - two-week turnaround, they decided to suspend the project until they get better clarity on the market.
Okay. And it's one customer, two projects, is that right?
No. Two projects, two customers.
Two separate customers. Yes, sir. Yes.
Okay. Got it. Thank you.
We'll take our next question from JP Geygan with Global Value Investment Corporation.
Good afternoon, JP.
Good afternoon. I'm hoping you can comment on the bidding environment, and how that's developed and what you're seeing, recognizing that this is an incredibly uncertain and fluid situation given the pandemic. But how the bidding environment has changed, especially given your relationship with the government and your initiatives to pivot the business?
So the bidding environment - that's been impacted the most, as you can imagine, is on the oil and gas related business. And the jobs that are longer term, larger CapEx projects, still are moving forward. So we are seeing bidding activity continue for the large LNG and the petrochemical projects that we've been talking about. Now having said that, we are seeing some pause on the LNG projects. I hear some specific LNG projects have announced that they will be delaying their FID; financial - final investment decision. But some of the smaller jobs that what we were calling quick book-and-burns, the smaller $10 million and $20 million opportunities, those opportunities have been put on hold; and so we are seeing a pause on the activities associated with what we would call smaller book-and-burn type fabrication work.
On the services side, we talked about that the inshore - both, inshore and offshore services component, we are seeing a material degradation in not only the bidding opportunities, but as you know, a lot of that work is operated under a master services agreement so that they're pretty quick at quick book-and-burn. Though some of those contracts have not only paused but the customers have also reduced the amount of scope that they have traditionally given us.
Any comment on how your gross margin should develop given recent backlog additions or anticipated backlog additions?
JP, when you say develop, I mean, the way it's going to manifest itself is, you know, I commented last quarter that about 85% of our backlog was a matter near breakeven, and that, of course, included the projects where we had already fully accrued our losses. Because of the Navy awards, as we said here today - that number is, you know, we have about 5% of our backlog that continues to be in a loss position and about 75% that is at/or near breakeven. Unfortunately, that remaining backlog is also lower margin. So, as it relates to the backlog going forward, we're going to continue to see challenges with gross profit as that backlog burns off. In terms of the market and what we're looking at, that remains to be seen a bit; Richard can add a little bit more. But as we looked at things two months ago, on the fabrication and services side, we were looking at mid to higher single digit type gross profit for that type of work that we were chasing.
As he mentioned, a lot of that's been on - put on hold. And so we'll have to see how that goes, and some customers are asking to rebid things now; so I'm not as optimistic, I don't think we're as optimistic about those types of margins on the new awards, but that remains to be seen as the year goes on.
Richard, do you have anything to add?
No. I think you've covered it, yes.
Great. And then finally, you settled with the customer for $10 million, I presume that was with Walter Oil, but you still have the issue with Hornbeck, the two MPSVs that have not been completed or they've not taken delivery of yet. Can you comment on the status of that?
Not a whole lot. Obviously, as you may have seen publicly Hornbeck did announce their intent to file Chapter 11 - restructuring through the Chapter 11 process. They have not filed yet. We know one thing, I'll just note that we do hold the first priority security interest and liens against the vessels to secure any obligations to us, and the vessels continue to be in our possession. Absent that, we're still - we're just going through the legal process.
Great. I appreciate the additional color. Thank you.
And this concludes today's question-and-answer session. At this time, I would like to turn the conference back over to Richard for additional comments.
Thank you, Lauren. In summary, I want to thank our employees for their efforts in safely delivering on our project commitments to our customers, as well as the continued support of our customers and suppliers.
I feel that the recent obstacles that we've faced as a team have brought us closer. I'm confident that the resilience and the dedication of our employees demonstrated in this unprecedented environment will make us stronger, and help get us through a challenge - get us through the challenges ahead. I'm pleased with the progress of the initiatives we have implemented to date as we have continued to improve in our processes, people, and project execution, but we still have ways to go. I look forward to leading the team to further build on our initiatives as we weather these challenging times.
We'll continue to focus on the things that we can control and ensure that we are taking care of our employees, supporting our customers, and delivering on our commitments to our shareholders. I want to thank you for your continued interest and support of Gulf Island, and I wish you well as we all work to bring some level of normalcy back into our daily lives.
Thank you, Lauren.
Thank you. And that does conclude today's conference. We thank you for your participation. You may now disconnect.