Gulf Island Fabrication, Inc.
Q1 2008 Earnings Call Transcript

Published: 5 May 2008

[Deborah Knoblock:]

I would like to welcome everyone to Gulf Island Fabrication's 2008 first 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 3, 2008. The 10-K was included as part of the company's 2007 Annual Report filed with the Securities and Exchange Commission earlier this year. The company assumes no obligations to update these forward-looking statements. Today we have Mr. Kerry Chauvin, President and CEO; and Mr. Robin Seibert, our CFO. Robin?

[Robin Seibert:]

Thank you, Deborah. I'd like to review Gulf Island's press release issued for the first quarter of 2008. The press release consists of two pages. Page one is text, and page two is an income statement. I'd like to review page two, which is the income statement, first. The following are the results of operations for March 31, 2008, compared to March 31, 2007. Revenue was $123.7 million, compared to $109.4 million. The cost of revenue was $100.5 million, compared to $100.9 million. Gross margin was $23.2 million, or 18.8% of revenue, compared to $8.5 million, or 7.8% of revenue. Some contracts include costs associated with specific capital projects required by the fabrication process to complete that project. If these costs provide a future benefit to the company, these costs are capitalized, thus resulting in a direct increase on profit margins on those contracts. Related capital cost on those contracts was $3.3 million, compared to $550,000. General and administrative expenses were $2.7 million, or 2.2% of revenue, compared to $2.3 million, or 2.1% of revenue. Operating income was $20.5 million, compared to $6.2 million. Net interest income was $103,000, compared to $108,000. Other income expenses were losses of $60,000 and $4,000, respectively. Losses for both periods were for the sale of miscellaneous equipment. Income before taxes was $20.5 million, compared to $6.3 million. Income tax expense was $7.1 million, compared to $1.9 million. The income tax rates were 34.5% compared to 30.0%. We currently expect our tax rates to be between 34% and 35% for the remainder of the year. The change in tax rates were related to post-2005 hurricane employment hiring credits available to the company that were phased out in the third and fourth quarters of 2007. Net income was $13.4 million, compared to $4.4 million. Basic earnings per share were $0.95, compared to $0.31. Diluted earnings per share were $0.94, compared to $0.31. Weighted average shares outstanding were 14.219 million shares, compared to 14.127 million shares. Adjusted weighted average shares outstanding were 14.27 million shares, compared to 14.258 million shares. Depreciation expense was $4.2 million, compared to depreciation and amortization expense of $3.4 million. We declared and paid cash dividends of $0.10 a share for both quarters ended March 31, 2008, and 2007. Please refer back to Page One of the press release to review. We had a revenue backlog of $440.1 million with a labor backlog of 4.5 million man-hours remaining to work. Included in the backlog was contract value and associated man-hours for the second MinDOC T3 hull. The following represents selected balance sheet information for March 31, 2008, compared to December 31, 2007. Cash and short-term investments were $5.8 million, compared to $24.6 million. Total current assets were $145.5 million, compared to $135.7 million. Property, plant, and equipment was $194.0 million, compared to $188.8 million. Total assets were $340.2 million, compared to $325.2 million. Total current liabilities were $79.5 million, compared to $78.4 million. Long-term debt was zero for both periods. Shareholders' equity was $241.3 million, compared to $228.9 million. And total liabilities and shareholders' equity was $340.2 million, compared to $325.2 million. Other financial information for March 31, 2008, compared to March 31, 2007, consists of pass-through cost was 39.9% of revenue, compared to 56.4% of revenue; man-hours worked were 967,000, compared to 878,000; deepwater revenue represented 72% of revenue, compared to 80%; foreign revenue represented 26% of revenue, compared to 12%. Other financial information for March 31, 2008, compared to December 31, 2007, consists of – our revenue backlog was $440.1 million, compared to $330.4 million; remaining man-hours to work was 4.5 million compared to 3.7 million; revenue backlog for deepwater was $292.5 million, or 66.5%, compared to $185.4 million, or 56.1%; revenue from foreign locations were $34.5 million, or 7.8%, compared to $62.6 million, or 18.9%. Of the backlog at March 31, 2008, we expect to recognize revenues of approximately $224.3 million during the remainder of 2008, and approximately $215.8 million in 2009 and thereafter. We had approximately 1,950 employees and 490 contract employees, compared to 1,820 employees and 550 contract employees, and that's at December. CapEx for the first quarter of 2008 was $9.5 million. CapEx for the remainder of 2008 is approximately $38 million, which includes $15 million on a dry dock for the Houma facilities. I would now like to open the call to questions of the analysts. Anthony?

[Operator:]

Thank you. (Operator instructions) And our first question comes from John Fitzgerald with Raymond James.

[John Fitzgerald:]

Good morning, guys.

[Kerry Chauvin:]

Good morning, John.

[Robin Seibert:]

Good morning, John.

[John Fitzgerald:]

I noticed that margins have been trending up for the last I guess over a year, it looks like now. Could you guys kind of describe what was driving the increase this quarter? Was it some of that – more of that shipyard, or was it some of your traditional fabrication work?

[Kerry Chauvin:]

John, it's more of the traditional fabrication work. If you remember, a year ago we had some legacy jobs that were bid prior to the hurricanes that extended well into last year. Our margins have gone up for several reasons. First of all, we had good weather during the first quarter. We worked significantly more man-hours in the first quarter than we typically do. And our production in the field has been exceptional. Our employees really have done a good job during the quarter, especially working on some of our larger projects. The marine side, or shipyard side, of our business is just kicking off. We are just getting into the first vessel, so it had a relatively insignificant effect on the first quarter. And as Robin mentioned, we had, with this capitalized revenue, you might call it that were – we have in our contracts certain requirements to increase our facilities to be able to do these contracts. We had about $3.3 million of revenue that we had it in there that will be capitalized and depreciated over a period of time, compared to last year during the quarter, we only had $550,000. Typically, if we need to improve our facilities to build a specifically large project, we normally would put some of that pricing, or possibly all sometimes, into the bid when we bid the project, so therefore we would have to take that out and capitalize it and depreciate it in future periods.

[John Fitzgerald:]

Okay. And I guess a second question – could you guys kind of break out, in the percentage of your backlog, what was associated with the MinDOC award like as far as man-hours and revenue?

[Kerry Chauvin:]

No, John, we don't do that. We don’t – have confidentiality statements, first of all, with all our clients, and so we can't give that information out without contacting them.

[John Fitzgerald:]

Okay, understood. Well, then could you guys kind of give some color on any other projects – larger projects out there, kind of timeframe for awards or bids, how that's looking?

[Kerry Chauvin:]

Well, the bid activity has been relatively slow, to be honest with you. There haven't been a lot of – a great deal number of bids out there, especially for deepwater at this point in time. We hope that that will change more towards the third quarter into the fourth quarter of this year. But right now there is just not a lot of bidding activity. It seems to be that some bidding activity may come about late on in the summer for the shallow water of Gulf of Mexico, and we are following that pretty close. On the chemical plants and refineries, we lost our first shots at that, but we are still optimistic and still bidding it. I guess our pricing was too low, and, again, we don't want to take projects at too low a pricing. We'd rather wait till our competitors fill up and then we'd come on the backside and hopefully make a little better margins as their facilities fill up.

[John Fitzgerald:]

All right. Thanks a lot.

[Kerry Chauvin:]

Okay, John.

[Operator:]

Our next question comes from Joe Gibney with Capital Southcoast.

[Kerry Chauvin:]

Good morning, Joe.

[Joe Gibney:]

I just wanted to follow-up on the margin question. Obviously, pretty good quarter here, overall. You mentioned some of the capitalized revenue. Robin, could you just walk through that for me? I'm just trying to get a sense of what's a reasonable run rate on margins going forward. It was, obviously, exceptionally high in 1Q, and well above historical run rates. Just trying to get a sense there. And I know in the fourth quarter you guys had a fair amount of quick turnaround work, too, that kind of bolstered the margin as well. If you could give some color on that, I appreciate it.

[Robin Seibert:]

Joe, we can't really give you any future margin run-out, but if you just do a simple mathematical computation with the $3.3 million, you'll see that the first quarter margin is in the 16.5% range.

[Joe Gibney:]

Sure. And you feel fairly confident, though, that – obviously predicated on some product mix, though – that should be able to hold in that range, predicated on weather, of course?

[Robin Seibert:]

It's going to be a combination of the factors during the quarter.

[Kerry Chauvin:]

Yeah, we're always trying to get our margins up. Typically we've been running about 12% to 13% range. And of course this quarter we went up to about 16%, and the productivity was great. Everything happened during the quarter. Even though it was the first quarter, the weather really cooperated with us and some good things happened. I mean there's no way we can predict that's going to continue in the future, but we are giving it our best shot.

[Joe Gibney:]

Sure. Okay. Pretty fair. Appreciate it. How about any work on the marine side? I know you guys had mentioned in the last quarter maybe doing some body work on some OSVs. Is that progressing? Any opportunities there?

[Kerry Chauvin:]

Well, we are actually working on some right now. We actually have ten sections we are doing for Edison Chouest right now. But we are not going to contract anymore of that until we see how we do on these first ones, as well as we – right now we are pretty well filled on our brown water boat contracts. We are not taking anymore brown water boats or anything of that nature until we get a little better history under our belt. So we could sign up as many vessels as we wanted right now, but we are not going to do that. We are going to wait, and let's see if our performance is equal to what we do on the fabrication side before we get too deep into it.

[Joe Gibney:]

Okay, that's helpful. And on the MinDOC, two, just curious – any lessons learned relative to the construction on the first one around that you feel you could be a little better prepared to push this through from an efficiency standpoint over the next year or so, couple of years?

[Kerry Chauvin:]

Well, we hope so, but our client, of course – lessons learned – we have to share that with our client. Our client's smart enough to take the lessons learned and not let us make too much money.

[Joe Gibney:]

Sure. All right, guys, great quarter. I appreciate it. I'll turn it back.

[Robin Seibert:]

Okay, Joe.

[Kerry Chauvin:]

Thank you.

[Operator:]

Our next question comes from Stephen Gengaro with Jefferies.

[Stephen Gengaro:]

Thank you. Good morning, gentlemen.

[Kerry Chauvin:]

Good morning.

[Robin Seibert:]

Good morning.

[Stephen Gengaro:]

Obviously, back to the margins, but your pass-through revenues in the quarter were a little bit sort of lower than expected, or at least lower than they were in the prior quarter. When we sort of factor that into the margin question, can you give us any sense for where that should shake out? I mean is this a better run rate going forward, or do you think it will revert to kind of a more historical norm over the next couple of quarters?

[Kerry Chauvin:]

Well, as we buy material for the larger projects, we should see it go back up. Needless to say, we weren't buying a lot of material in the first quarter of this year. Probably in the second quarter we will start to buy more material, especially for the second MinDOC. So we would possibly see it inch up in the second quarter, and the third quarter probably a little more, but it's tough to say. It's all a timing issue with the material.

[Stephen Gengaro:]

And the pass-through revenues – I mean we were talking kind of 2%, 3% range?

[Kerry Chauvin:]

No. Pass-through, we don't take any margins at all on that

[Stephen Gengaro:]

Okay, okay.

[Kerry Chauvin:]

Always the pass-through at zero mark-up. All our profits are recognized as we add value or as we add labor to the project.

[Stephen Gengaro:]

Okay. Now that's helpful. And then as far as sort of the mix in the quarter of contract labor, is that something we should be fairly constant going forward?

[Kerry Chauvin:]

We are constantly striving to reduce that, and hopefully – you see our employment levels are up slightly, and we are constantly trying to get our employment levels up and reduce the amount of contract employees. We hope to reduce that significantly sometime in the second quarter.

[Stephen Gengaro:]

And then just as a final question – you talked about your backlog and the amount of backlog, which is going to be registered for the balance of '08. Are there any overhead absorption issues we should worry about as far as margins for the balance of '08, or you think you are in pretty good shape there?

[Kerry Chauvin:]

We are in pretty good shape. No problem.

[Stephen Gengaro:]

Okay. All right. Thank you.

[Kerry Chauvin:]

Okay.

[Robin Seibert:]

Sure.

[Operator:]

(Operator instructions) Our next question comes from Joe Agular with Johnson Rice.

[Joe Agular:]

Thanks. Good morning, Kerry and Robin.

[Kerry Chauvin:]

Good morning, Joe.

[Robin Seibert:]

Good morning.

[Joe Agular:]

Kerry, could you walk us through – I guess now that you have the second MinDOC in your backlog – kind of the timing on everything? I think the first one is supposed to be completed in Q3, August or so. Is that still on track?

[Kerry Chauvin:]

Yes, September.

[Joe Agular:]

Okay.

[Kerry Chauvin:]

September for the first hull, and then probably a month or two thereafter for the topside.

[Joe Agular:]

Okay, and as far as the second one, have you all ordered steel already or–?

[Kerry Chauvin:]

Well, we have a purchase order to order a certain amount of steel at this point in time.

[Joe Agular:]

Okay, but in terms of actually where you get to the point where you are ordering materials and booking that, is that going to be a Q2 or is it going to be more in Q3?

[Kerry Chauvin:]

Probably it will start in Q2, but the bulk of it will be in Q3.

[Joe Agular:]

And then what would you expect the completion date to be on the second one?

[Kerry Chauvin:]

Well, we are still negotiating that, Joe. We don't have an exact completion date, but we would hope somewhere in 2010.

[Joe Agular:]

Okay. And I assume, then, that with the backlog where it is now and with the second award that you all – I think last quarter you probably had a little bit of concern over what the back half of '08 might look like. But this gives you some – obviously, a fair amount of confidence in the third and fourth quarters, I would assume?

[Kerry Chauvin:]

Well, it really helps us out, but we still have some holes in our production schedule that we have to fill in 2008, specifically in the third and fourth quarters.

[Joe Agular:]

Okay. I wanted to ask you also a question on the dry dock for the Houma yard.

[Kerry Chauvin:]

Yes.

[Joe Agular:]

I think you said $15 million was the cost.

[Kerry Chauvin:]

Well, that's our anticipated cost.

[Joe Agular:]

Right, right. When is that going to be in?

[Kerry Chauvin:]

Well, we are trying to figure that out, Joe. We have some bids outstanding to other yards to build a dry dock, and we are getting various delivery dates depending on pricing. So we haven't finalized that yet, but I would venture to say most of it would – it wouldn't probably be delivered until 2009 sometime.

[Joe Agular:]

Okay, and just to let us know what you expect that to do for you in terms of the kind of business that it would generate–?

[Kerry Chauvin:]

Joe, we are still working on that.

[Joe Agular:]

Okay. I mean I don't mean –

[Kerry Chauvin:]

I'm sure it gets our business, and it should give us more revenues, but I don't know exactly how much right now.

[Joe Agular:]

Well, I know it wouldn't necessarily mean from a revenue standpoint. I just mean the type of work you do there. You'd be doing –

[Kerry Chauvin:]

Yes, we'd be doing – first of all, we would use a dry dock to put our new construction projects in the water, where right now we are lifting the hulls with cranes and putting them in the water. Second of all, it would give us a repair capability that we haven't had before, and this dry dock is of the size where we'll be able to dry dock pretty much any supply boat in the Gulf of Mexico, as well as tugboats, brown water boats, barges. We actually do small derrick barges and some small jack-up vessels we could do on there also. So it's quite a bit of varied vessels that we could actually dock on this particular size dry dock.

[Joe Agular:]

Okay. And then I had a question on another thing you mentioned, which was that the shallow water – that you might expect some jobs to – or some bids at least to be – some RFPs put out there, I guess, for the second half of the year for shallow water, I think I heard.

[Kerry Chauvin:]

Yeah, but it's not going to be a tremendous number of bids, Joe.

[Joe Agular:]

Okay.

[Kerry Chauvin:]

A few coming out, needless to say, but it's nothing like we had seen five, six years ago.

[Joe Agular:]

No real big platforms?

[Kerry Chauvin:]

No. No real big ones.

[Joe Agular:]

Okay. Then, again, everybody's kind of – you all had such a tremendous quarter on the margin side. I guess we are all sort of struggling with how exactly to model you, which is always difficult. But it sounds to me like you all think that kind of the margins that you all put up in the first quarter are sustainable for at least the next two quarters when weather's not as much of an issue?

[Kerry Chauvin:]

Joe, like I said, everything was perfect in the first quarter.

[Joe Agular:]

Right.

[Kerry Chauvin:]

We anticipate some other things, and to sustain that I think would be very difficult.

[Joe Agular:]

Okay. Well, thank you all very much. Very nice quarter.

[Kerry Chauvin:]

Thanks.

[Robin Seibert:]

Thank you, Joe.

[Operator:]

And it appears we have no further questions at this time.

[Kerry Chauvin:]

Okay. If no further questions, we'll sign off.

[Operator:]

I do apologize. It looks like we have a last-minute question from Joe Gibney, Capital Southcoast.

[Joe Gibney:]

Good morning, guys. I just wanted to follow-up again. Robin, could you – I didn't catch you there on your percentage of your revenues, deepwater and international again, and how that compared with where we were at the end of last quarter. If you could just run that by me again, I appreciate it.

[Robin Seibert:]

Joe, deepwater revenue was 72% for the current quarter, and then 80% for the first quarter of '07. And foreign was 26% compared to 12%.

[Joe Gibney:]

Great. I appreciate it, guys. Thank you.

[Robin Seibert:]

Sure.

[Operator:]

And it appears we have no further questions at this time.

[Kerry Chauvin:]

Okay, Anthony. I appreciate everybody calling in, and we'll talk to you all next quarter.

[Operator:]

That does conclude today's conference call. You may now disconnect.