Gulf Island Fabrication, Inc.
Q4 2020 Earnings Call Transcript

Published: 29 Mar 2021

[Operator:]

Good afternoon and welcome, ladies and gentlemen, to Gulf Island's conference call to discuss fourth quarter 2020 results. This call is being recorded. At this time, I'd like to turn the conference over to Ms. Cindi Cook for opening remarks and introductions. Cindi, please go ahead.

[Cindi Cook:]

Thank you, and good afternoon. I would like to welcome everyone to our fourth 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

[Richard Heo:]

Thank you, Cindi. Good afternoon, everyone, and welcome to our fourth quarter discussion of the results, business trends and outlook. I'm happy to be here with you this afternoon, and I hope that each of you and your families are continuing to stay healthy and safe during this difficult time. On today's call, I'll first provide some overall commentary on our fiscal 2020 and fourth quarter results. I will also discuss some of the near-term actions we are taking to address these challenges and provide an update on the progress we are making on some of our key initiatives. I will then discuss the key factors that impacted the results and the current business environment, potential and new end market opportunities and several actions we are taking to enhance our customer value proposition. Wes will then discuss our fourth quarter results in greater detail as well as our backlog and liquidity position. We will then open up the call for questions and conclude with some closing remarks. This past year brought unprecedented challenges, including the effect of COVID-19 pandemic on labor availability and productivity negatively impacting our results as well as crude oil volatility, which reduced the volume of work in our traditional end markets. Adding to these challenges, there were a record level of hurricanes impacting our facilities and employees, disrupting our operations. While our fourth quarter results reflected several of these headwinds, longer term, we believe we have substantially strengthened our foundation over the past year through the consolidation of our resources and process improvements, implementing changes in certain management and functional leadership and driving initiatives to expand our end market focus to reduce our reliance on the offshore oil and gas industry. During the quarter, we completed our final 2 harbor tugs and delivered the last tug in January 2021, which allowed us to successfully close our Jennings and Lake Charles facilities, consolidating our Shipyard division operations into our Houma, Louisiana location, which will further improve our resource utilization, centralize key project resources and deliver additional cost savings. Our consolidation efforts were not limited to our Shipyard division. A year ago, we announced a combination of the Fabrication & Services business segments. And in the second half of 2020, we took additional actions to consolidate our resources and assets within the division.

[Wes Stockton:]

Thanks, Richard, and good afternoon, everyone. I will discuss our consolidated results and then provide some additional details regarding our segment results, putting in context the factors mentioned by Richard and their impact on the quarter. I will then conclude with a discussion of our backlog and liquidity. Consolidated revenue for the fourth quarter 2020 was $57.6 million compared to $54.9 million for the third quarter 2020 and $79.4 million for the fourth quarter 2019, representing a sequential increase of 5% and a year-over-year decrease of 28%. The sequential increase was due to higher revenue for our Fabrication & Services division, primarily reflecting increased offshore services activity and revenue for our offshore modules projects. The decrease from the fourth quarter 2019 was due to lower revenue for both our Fabrication & Services division and Shipyard division as a result of the completion of several projects and a lower level of overall fabrication activity. Consolidated net loss for the fourth quarter 2020 was $15.4 million compared to a net loss of $12.3 million for the third quarter 2020 and $34.3 million for the fourth quarter 2019. Adjusted EBITDA, which reflects the removal of noncash impairments, gains and losses from the sales of assets held for sale and certain nonrecurring items, was a loss of $9.2 million for the current quarter compared to an adjusted EBITDA loss of $10 million for the trailing quarter and adjusted EBITDA loss of $14.9 million for the prior year quarter. Our consolidated loss for the current quarter was attributable to project charges of $8.8 million for our Shipyard division, low volume levels for our Fabrication & Services division, the overall underutilization of our facilities and resources and noncash impairments and nonrecurring charges within both divisions. Now let me provide some additional details regarding our quarterly results by operating segment. For our Shipyard division, revenue was $37.2 million for the quarter compared to $37.1 million for the third quarter 2020 and $47.7 million for the fourth quarter 2019. The 22% decrease compared to the fourth quarter 2019 was due to lower revenue for our harbor tugs as we had fewer vessels under construction, lower construction activity on our research vessel projects due to engineering delays and the completion of our ice-breaker tug and towboat projects earlier in the year. These impacts were partially offset by increased construction and procurement activities for our towing, salvage and rescue ship projects. Operating loss for the fourth quarter 2020 was $11.5 million compared to an operating loss of $9.2 million for the third quarter 2020 and $18.6 million for the fourth quarter 2019. Adjusted EBITDA was a loss of $9 million for the current quarter compared to an adjusted EBITDA loss of $8.4 million for the trailing quarter and an adjusted EBITDA loss of $10 million for the prior year quarter. The operating loss for the fourth quarter 2020 primarily reflected project charges of $8.8 million, of which $5.8 million relates to our two 40-vehicle ferry projects; $1.5 million relates to our Texas ferry project; $1.2 million relates to our towing, salvage and rescue ship projects; and $340,000 relates to our harbor tug projects, which are now complete. The loss was also due to a backlog that is generally in a loss position, the partial underutilization of the division's facilities and resources due to the previously mentioned construction delays of our research vessel projects and charges of $1.6 million attributable to noncash impairments of assets held for sale and costs related to the closures of our Jennings and Lake Charles facilities. From a comparison perspective to our trailing quarter and prior year quarter, we incurred project charges of $6.7 million in the third quarter 2020 and $10.2 million in the fourth quarter 2019. Absent the individual project impacts for all periods, our project mix for the current quarter was comparable -- our project margin mix for the current quarter was comparable to the third quarter 2020 and lower than the fourth quarter 2019. In addition, our utilization for the fourth quarter 2020 was improved relative to the trailing period due to higher work hours resulting from increased construction activities. And our current quarter utilization was consistent with the prior year quarter as work hours were comparable between periods. With respect to general and administrative expense, the fourth quarter 2020 reflects a decrease of over 20% from the year-ago quarter, benefiting from our cost reduction initiatives. For our Fabrication & Services division, revenue was $21.2 million for the quarter compared to $18.2 million for the third quarter of 2020 and $33.2 million for the fourth quarter 2019. The 16% increase from the trailing period was primarily due to higher offshore services activity and revenue for our offshore modules project, offset partially by lower revenue for the division's jacket and deck project, which was completed prior to the fourth quarter. The 36% decrease from the fourth quarter 2019 was also due to the division's jacket and deck project and paddle road -- paddlewheel river boat project, which were both completed prior to the fourth quarter 2020, and a lower level of onshore services activity and small-scale fabrication project work typically associated with our offshore services business. The year-over-year decrease was partially offset by higher revenue for the division's marine docking structures project and offshore modules project. Operating loss for the fourth quarter 2020 was $1.8 million compared to an operating loss of $1.1 million for the third quarter 2020 and $12.7 million for the fourth quarter 2019. Adjusted EBITDA was $1.9 million for the current quarter compared to adjusted EBITDA of $225,000 for the trailing quarter and an adjusted EBITDA loss of $2.5 million for the prior year quarter. The operating loss for the fourth quarter 2020 reflected low revenue and the partial underutilization of the division's facilities and resources due to low backlog levels. It also reflected charges of $2.4 million attributable to noncash impairments of assets held for sale and certain other fixed assets associated with the relocation and consolidation of such assets to improve operational efficiency of the division's facilities and resources. In spite of the utilization challenges for the period, project margins were solid, resulting in a significantly improved adjusted EBITDA for the quarter. From a comparison perspective to our trailing quarter and the prior year quarter, we realized project improvements of $600,000 in the third quarter 2020 and incurred project charges of $3.8 million in the fourth quarter 2019. Absent the individual project impacts for all periods, our project margin mix for the current quarter was comparable to the third quarter 2020 and higher than the year-ago quarter, primarily due to our higher-margin offshore services work representing a greater percentage of our total revenue. In addition, our utilization for the fourth quarter 2020 was improved relative to the trailing period due to a 35% increase in work hours associated with higher offshore services activity. However, our current quarter utilization was lower than the prior year quarter due to a 40% decrease in work hours attributable to completion of our paddlewheel river boat and offshore jacket and deck projects and less small-scale fabrication project work. With respect to general and administrative expense, the fourth quarter 2020 reflects a decrease of almost 20% from the year-ago quarter, benefiting from the prior consolidation of our former Fabrication division and Services division and cost reduction initiatives. For our Corporate division, operating loss for the fourth quarter was $2.2 million compared to an operating loss of $1.9 million for the third quarter 2020 and an operating loss of $3.1 million for the fourth quarter 2019, with the increase relative to the trailing period due primarily to higher legal fees and the decrease relative to the year-ago quarter due primarily to lower legal fees in the prior year period, including impairments and certain nonrecurring costs. Next, I will provide a few comments regarding our quarter-end backlog and liquidity situation. At year-end, our backlog totaled $372 million, with approximately 95% attributable to our Shipyard division. This backlog represents a decrease of 15% from the year-ago backlog and 13% compared to September 2020, with the decreases due to revenue volume outpacing our new project awards for both our divisions. With respect to our liquidity, operating cash flow for the quarter was negative $11.7 million, and our capital expenditures were $1 million. These cash flow uses in the quarter were partially offset by asset sales of approximately $340,000, resulting in a year-end cash and investment balance of approximately $51 million. We also had total debt of $10 million at year-end attributable to our PPP loan. In December, our application requesting loan forgiveness of $8.9 million was approved by our lender and forwarded to the SBA. However, as of today, we have not received an approval or denial of our application from the SBA. Any portions of the loan not forgiven, along with interest, will be repaid based on the terms of our loan and applicable program guidelines. At year-end, we have reflected the loan as debt, with the debt classification based on the terms and conditions of our loan and the timing of required repayment absent any loan forgiveness. Regarding our credit facility, in March our facility was amended to rightsize our capacity to $20 million, and it is now only a letter of credit facility with cash securitization required for any outstanding letters of credit. With this amendment, all covenants and other material restrictions to our business were removed. And at year-end, we had approximately $10.7 million of outstanding letters of credit. With respect to our working capital, it totaled approximately $49 million at year-end, including $8.2 million of assets held for sale, which include 3 crawler cranes within our Fabrication & Services division and 2 dry docks within our Shipyard division that were previously located at our Lake Charles facility and were classified as held for sale in the fourth quarter 2020. As noted previously, we recorded impairments of these assets during the quarter based on our current estimates of fair value, which have been impacted by COVID-19 and related market conditions. Our working capital, excluding cash and investments, assets held for sale and the current portion of our PPP loan, was negative $4.9 million at year-end. This compares to negative working capital on the same basis at September 2020 of $7 million. We anticipate ongoing quarterly variability in our working capital requirements due to the project-oriented nature of our business and timing of project billings and collections. However, we currently expect our cash balance at the end of the first quarter 2021 to be comparable to our 2020 year-end cash balance. Further, as it relates to our capital needs, we expect our full year capital expenditures to be approximately $3 million to $5 million. However, we are focused on trying to limit our expenditures to the low end of this range. Finally, with respect to expectations regarding EBITDA for 2021, given the COVID-19 pandemic, crude oil price volatility and related market uncertainty, we will not be providing guidance at this time. This concludes our prepared remarks. Operator, you may now open the line for questions.

[Operator:]

And we'll take our first question today from Martin Malloy with Johnson Rice.

[Martin Malloy:]

Positive news on the U.S. Navy contracts there. If you could provide us with an update, what percentage of your backlog is in a loss position at the gross profit level? And how much cash do you expect to continue to go out to the door relating to your existing backlog given the charges you've taken?

[Wes Stockton:]

Yes, Marty. The lion's share of that backlog in the Shipyard is in a loss or breakeven. So at this point, it's going to contribute no incremental profitability, of course, if we execute to the current forecast. Those accrued losses and our expectations around losses, those are in our working capital numbers. So if you think about our -- I mentioned our working capital. And I oftentimes talk about it in terms of excluding cash and some of the other items to focus in on exactly what you're asking. Our negative -- our working capital is negative $4.9 million at the end of the year. That includes about $8.5 million of contract losses, accrued contract losses that we'll be required to fund over the life of these projects.

[Martin Malloy:]

Okay. I appreciate that. And then just you've mentioned modular work over the last couple of quarters and continuing to pursue that on projects. Could you maybe -- given that the Fabrication segment backlog is under $20 million, just what your outlook is for being successful on bidding on modular work?

[Richard Heo:]

Well, we're confident, Marty. As we've discussed, though, that activity has been pushed to the right just because of the challenges of COVID and crude oil price. But we are seeing some activity pick up, more specifically on LNG projects and petrochemical projects in Louisiana and Texas. And so as those pick up, one of the things that we talked about in my script was that we have multiple bites of the apple in that project life cycle. So there is one large LNG project that we're currently bidding where it's got pipe associated with some civil work. It's got modules through the prime EPC company. And then it also has specialty high kind of engineered valued process modules for a technology license provider. So even I would say 1/3 of that, if we won, would put us at capacity in the next 18 to 24 months. So I feel good about the prospects on Fabrication & Services with regard to those modules that we've discussed.

[Martin Malloy:]

Okay. And are you bidding against overseas fabrication yards on these projects?

[Richard Heo:]

On certain parts of the projects or certain scope, yes, we are. But again, I think the customers see the certainty that we can provide as it relates to our close proximity to the project locations. And so our value proposition is giving the clients certainty on not the entire scope. So there's, for example, a prime EPC contractor that's going to look at maximum modularization for these EPC projects. They're going to get a majority of the equipment overseas. But they are bidding time-sensitive, critical modules to local contractors.

[Martin Malloy:]

Okay. And then the last topic. I talked to you all, I think, offline about this before. But offshore wind in the U.S. and the potential to build towers, I don't know if you saw the Biden administration came out announcing that they're looking for about 30 gigawatts to be built through the end of 2030 and providing financial support and assistance to some of these projects. And I just want to get your thoughts. I mean given that you all did the projects offshore, Rhode Island, those 6 turbines, the support structures for those, and you all have a lot of experience in terms of rolling steel for large offshore projects, is there an opportunity there for you?

[Richard Heo:]

Yes. So there is, Marty, and I saw that report come out this week that you're talk -- or actually today that you're talking about from the Biden administration. We are looking at that market selectively. So our first entry into that market was based on a traditional jacket platform -- or I'm sorry, jacket-type foundation. The new construction going forward are monopiles that, frankly, would take us out of that play. And so as the technologies evolve and change, we are specifically looking at the opportunities where we can provide value to the growth -- to the customers and try to capture some of that growth in the market.

[Martin Malloy:]

With the monopiles, what is so different about them? Is it larger diameter? I'm trying to -- I mean given that you all have done jackets that are hundreds of -- have gone to water hundreds of feet deep, I'm trying to understand the difference between them.

[Richard Heo:]

Yes. So these monopiles have a technical kind of -- they're prefab engineering equipment that requires quite a bit of CapEx investment upfront. And so the Europeans have put in significant investment to grow into or support the growth in Europe on these wind farms. And so that's, I think, going to be the disadvantage. But as the turbines get larger and heavier, I think it will limit out some of the monopile type of technologies. And hopefully, the jackets might get introduced back in. And so we're actively involved with the technology providers and the operators to see if there's a way that we can participate in that market.

[Martin Malloy:]

And I'm sorry to keep talking about this, but it seems like from that press release coming out of the Biden administration, there was a real focus in terms of creating jobs domestically.

[Richard Heo:]

Yes. And creating jobs domestically though, unfortunately, in that same report, also said in the Northeast, right, with union labor. And so it does make it challenging for us from that perspective because we don't have the close proximity to the ports that -- where these projects are going to be based out of.

[Operator:]

Next, we'll hear from JP Geygan with Global Value Investment Corp.

[JP Geygan:]

Can you discuss the type of work that you're actively pursuing or winning today in terms of size, industry, scope, time to complete, et cetera?

[Richard Heo:]

So the work we're winning immediately today, JP, are small -- some of the -- obviously, the services work, the quick book-and-burn work that we've been talking about and some of the smaller fabricated materials not only to support the subsea markets and the offshore customers but also some of the civil contractors like rolled goods, these large pipes that we roll that's typically used to support civil work on these EPC projects. So we're winning our fair share of that book and burn. What we're struggling with the headwinds is these larger modules that obviously have the size in terms of tons and manhours that we're looking for. And that's what I was explaining that that's -- we're hoping those are going to come in the back half of this year.

[JP Geygan:]

Okay. Can you elaborate on your responses to Marty's question about your new markets that might be other than -- something other than offshore wind and what the work that you do for those markets would be? What are the characteristics of the projects, specifically the economic characteristics or margins? What does the competitive landscape look like? What is the scope of investment that would be involved, if any?

[Richard Heo:]

So I can address that. So the type of work we're going after is really engineered equipment, right? And it's fabricated, skids and modules that pertain to what we call sustainable end markets. And so you're seeing a lot of discussion around biofuels, green energy in terms of, for example, plastic recycling or hydrogen. These all technologies could be built in a modular format. And so we build modules, and the modules look the same. They just convert an input to a different product in a different manner. And so the metal and the welding are all -- the inputs are the same. And so from a capital investment standpoint, it's very low capital investment. And that's where I talk about partnering with the right folks. And if we start partnering with the right people, whether it be engineering companies who don't have the delivery model or the construction companies that want to modularize more of their construction or the plant because they want to take risk out of the equation from a field labor standpoint, we can capture more market share that way. So ultimately, we're looking to branch into not only onshore, petrochemical and LNG but also capture some of the growth in what I call the sustainable green end markets through our fabrication expertise.

[JP Geygan:]

Okay. That's very helpful. Finally, the issues you've had with skilled labor seems to have been going on for a while. Can you talk about what you're doing to mitigate those challenges?

[Richard Heo:]

Yes. So the skilled labor challenge has been a tough one because especially in 2020 during the COVID, it really manifested itself or it was exponential, I guess, because we were ramping up. And so we had all this need to ramp up craft labor, which in the shipyard tends to be what I call lower trade craft. And so they're under 5 years of experience. And so that compounded with what happened with COVID, it really just created a perfect storm of high turnover. I feel that once we get to steady state through our training and working with some of our technical universities and technical schools, welding schools, that we are developing more capable and better consistent welders. And so hopefully, as we stabilize the head count and get to a steady state position and then we invest in doing training and working collaboratively with the technical schools, that the employees -- those craft employees will be more predictable in their productivity.

[Operator:]

Our final question will come from John Deysher with Pinnacle.

[John Deysher:]

I was just curious. You did a nice job of consolidating the operations in Jennings and Lake Charles. Are there any other consolidation opportunities that are out there that you're thinking about?

[Richard Heo:]

Well, geographically, we're in one location now. We're all in Houma. And we've been trying to consolidate everything that we can into one location, which is the Houma operation. So there really isn't anything other than just looking at our landscape and having this kind of look at our pipeline and backlog. And we're committed to evaluating these prospects. Like I said, I'm committed to -- for example, I told you that in the back half of this year, we're looking to get some new awards that are substantial. If that doesn't happen, we're going to look for more cost cutting. And so we're going to be relentless with that focus of managing our cash.

[Wes Stockton:]

We are focused on our -- now that we've got our footprint in Houma, figuring out ways to make that footprint as efficient as possible. And that's what you saw this quarter in the fourth quarter where we did record some impairments associated with Fab & Services. That was a direct function of relocating and consolidating assets within the Houma footprint to make ourselves as efficient as possible.

[Richard Heo:]

That's a good point.

[John Deysher:]

Okay. That's good to hear. I just want to make sure I understand the time line for the delivery of some of the remaining vessels. The number 2 ferry, I think the 40-vehicle, did you say that was going to be delivered in the second quarter?

[Richard Heo:]

That's right, second quarter of this year.

[John Deysher:]

Okay. And the 170-vehicle ferry, I think you said by year-end. Is that fourth quarter then?

[Richard Heo:]

That's correct, fourth quarter.

[John Deysher:]

Okay. Fourth quarter. And on the Navy, for the 2 that you have remaining, when do you anticipate those being delivered?

[Richard Heo:]

Well, so the Navy's are -- we have 5 vessels with the Navy, right? And so when you say 2 remaining, can you clarify that? Are you talking about the 2 last ones?

[John Deysher:]

Sorry, I thought it was 5 total, but they're going to manufacture the other 3, the back 3, somewhere else? Or did I misunderstand that?

[Richard Heo:]

No, no, no. That's -- yes, yes. So John, what -- so we've been awarded 5 vessels, of which we're building all 5. There were 3 additional options that they had the options. It wasn't contracted -- an obligation. They had an option to give, which -- those are the 3 options that we did not take. And so of the 5 vessels, the first ones will get delivered in kind of third quarter of '22. And then the last or the fifth vessel will get delivered in the fourth quarter of '24.

[John Deysher:]

Okay. I want to make sure I've got that right. So the first 4 will be delivered in the fourth quarter of 2022?

[Richard Heo:]

No, no. The first one is the third quarter of '22. And the second one is fourth quarter of '22. They're staggered.

[John Deysher:]

Yes.

[Richard Heo:]

And then the last one I told you will get delivered in the fourth quarter of '24.

[John Deysher:]

That's the fifth one?

[Richard Heo:]

That's the fifth one, yes, sir.

[John Deysher:]

Okay. What about 3 and 4?

[Richard Heo:]

So we've got second quarter of '23 for #3. And then #4 is late second quarter of '24.

[John Deysher:]

Okay. All right. Good. That's helpful. And the proceeds you're getting from the work order of $13 million, I think you said, you're getting $7 million in Q1 or anticipate $7 million in Q1. When does the remaining $6 million hit?

[Richard Heo:]

Well, so we're getting actually majority of the $13 million -- so from a revenue standpoint or receivable standpoint, we're getting majority of that $13 million in Q1. And the remaining balance will all come as we make deliverable commitments to the customer in the back half of this year.

[John Deysher:]

Oh, so you'd be getting the majority of the $13 million in Q1, not just $7 million.

[Richard Heo:]

Yes. The $7 million to $10 million is the income that we anticipate earning from that $13 million and recognizing in the first quarter.

[Wes Stockton:]

We'll get about $9 million of that in Q1 in terms of cash receipts. And then you have to separate the revenue recognition and the cash. But the revenue recognition, we anticipate, will be between $7 million and $10 million in the first quarter.

[John Deysher:]

Okay. Good. That's helpful. And finally, when do you anticipate filing your 10-K?

[Wes Stockton:]

We will file it tonight. So hopefully, it will be on the wire and be available to you first thing in the morning.

[Operator:]

This concludes today's question-and-answer session. At this time, I'd like to turn the conference back over to Mr. Richard Heo for any additional comments.

[Richard Heo:]

Thanks, James. In closing, I want to thank our customers and shareholders for their continued support as well as recognize our employees who continue to show up every day under difficult conditions to help us deliver our commitments to our customers. While the past year has been difficult, I'm confident that the initiatives are taking effect, and I'm encouraged with the progress we've made. We'll continue to focus on managing those variables within our control with discipline and focus on managing cash, executing rigorously and bringing in well-vetted new prospects where we add value. For those on the call, thanks again for your interest. And I look forward to speaking with you on our next -- on our first quarter results conference call and updating you on the progress. Be safe and take care. Thank you.

[Operator:]

That will conclude today's conference call. Thank you for your participation. You may now disconnect.