Gulf Island Fabrication, Inc.
Q2 2008 Earnings Call Transcript

Published: 25 Jul 2008

[Operator:]

Good morning and welcome, ladies and gentlemen, to the Gulf Island Fabrication Incorporated 2008 second quarter earnings release conference call. All participants are in a listen-only mode for the duration of the presentation. We will follow today’s presentation with a question-and-answer session. This call is being recorded. At this time, I would like to turn the conference over to Ms. Deborah Knoblock for opening remarks and introductions. Deborah, please go ahead.

[Deborah Knoblock:]

I would like to welcome everyone to Gulf Island Fabrication's 2008 second 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 obligation to update these forward-looking statements. Today we have Mr. Kerry Chauvin, President and CEO, and Mr. Robin Seibert, our CFO.

[Robin Seibert:]

Thank you, Deborah. I'd like to review Gulf Island's press release issued for the second 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 first. The following are the results of operations for the three months ended June 30, 2008 compared to the three months ended June 30, 2007. Revenue was $117.9 million compared to $137.6 million. The cost of revenue was $97.9 million compared to $123.4 million. Gross margin was $20.1 million or 17% of revenue, compared to $14.1 million or 10.3% of revenue. As mentioned last quarter, certain projects include costs for additions or improvements to our infrastructure that are necessary to fabricate or complete a project. So these additions or improvements provide future benefit to us. The cost to build these projects is capitalized. Thus cost removed from project cost is subsequently capitalized directly increases our estimated profit on the project. The amounts included in the project revenue that were capitalized are $2 million compared to $2.3 million. The amounts included in project revenue mentioned above that were capitalized are net of depreciation expense. General and administrative expenses were $2.6 million, or 2.2% of revenue, compared to $2.8 million or 2% of revenue. Operating income was $17.5 million compared to $11.3 million. Net interest income was $29,000 compared to $153,000. During the quarter the interest rates were down considerably. Other income/expense were gain of $5,000 and a loss of $1,000, respectively. Activity for both periods was for the sale of miscellaneous equipment. Income before taxes was $17.5 million compared to $11.5 million. Income tax expense was $5.7 million compared to $3.6 million. The income tax rates were 32.3% compared to 31.6%. 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. Finally we expect tax rate to be 33% to 34% for the remainder of the year. Net income was $11.9 million compared to $7.9 million. Basic earnings per share were $0.83 compared to $0.56. Diluted earnings per share were $0.83 compared to $0.55. The weighted average shares outstanding were 14.3 million compared to 14.2 million. Adjusted weighted average shares outstanding were 14.3 million compared to 14.3 million. Depreciation expense was $4.3 million compared to depreciation and amortization expense of $3.5 million. We declared and paid cash dividends of $0.10 a share for both quarters ended June 30, 2008 and 2007. The following are the results of operations for the six months ended June 30, 2008 compared to June 30 of 2007. Revenue was $241.7 million compared to $246.9 million. The cost of revenue was $198.4 million compared to $224.3 million. Gross margin was $43.3 million or 17.9% of revenue compared to $22.7 million or 9.2% of revenue. Capitalized costs net of depreciation included in project revenue was $4.6 million compared to $2.8 million. General and administrative expenses were $5.3 million or 2.2% of revenue compared to $5.1 million or 2.1% of revenue. Operating income was $38.0 million compared to $17.5 million. Net interest income was $132,000 compared to $261,000, again interest rates were lower. Other income expense were losses of 55,000 and 5,000 respectively. Losses for both periods were for the sale of miscellaneous equipment. Income before taxes was $38.1 million compared to $17.8 million. Income tax expense was $12.8 million compared to $5.5 million. The income tax rates were 33.5% compared to 31.0%. Net income was $25.3 million compared to $12.3 million. Basic earnings per share were $1.78 compared to $0.87. Diluted per share were $1.77 compared to $0.86. Weighted average shares outstanding were 14.2 million shares compared to 14.1 million shares. Adjusted weighted average shares outstanding were 14.3 million shares compared to 14.3 million shares. Depreciation expense was $8.4 million compared to depreciation and amortization expense of $6.9. We declared and paid cash dividends of $0.20 per share through the 6 months ended June 30 for 2008 and 2007. Please refer to page one on the press release, we had a revenue backlog of $437.7 million with a labor backlog of 4.6 million man hours remaining to work. The following represents selected by balance sheet information for June 30, 2008, compared to December 31, 2007. Cash and short-term investments were $19.8 million compared to $24.6 million. Total current assets were $128.0 million compared to $135.7 million. Property, plant and equipment was $197.7 million compared to $188.8 million. Total assets were $326.5 million compared to $325.2 million. Total current liabilities were $54.0 million compared to $78.4 million. Long-term debt was 0 for both periods. Shareholders equity was $253.2 million compared to $228.9 million. Total liabilities and shareholders equity was $326.5 million compared to $325.2 million. Other financial information for the three months ended June 30, 2008 compared to June 30, 2007 consists of – past-due [ph] cost was 39.0% of revenue compared to 60.9% of revenue. Man hours worked were 1 million compared to 900,000. Deepwater revenue represented 65% of revenue compared to 80% of revenue. Foreign revenue represented 12% of revenue compared to 34%. Other financial information for the six months ended June 30, 2008 compared to June 30, 2007 consists of – past-due cost was 39.5% of revenue compared to 58.4% of revenue. Man hours worked were 2 million compared to 1.8 million. Deepwater revenue represented 69% of revenue compared to 80% of revenue. Foreign revenue represented 19% of revenue compared to 24%. Other financial information for June 30, 2008, compared to December 31, 2007, consists of; our revenue backlog was $437.7 million compared to $330.4 million. Remaining man hours to work was 4.6 million compared to 3.7 million. Revenue backlog for deepwater was $255.2 million or 58.3% compared to $185.0 million or 56.1%. Revenue for foreign locations was $19.5 million or 4.5% compared to $62.6 million or 18.9%. Of the backlog at June 30, 2008, we expect to recognize revenues of approximately $144.9 million during the remainder of 2008, and approximately $292.8 million in 2009 and thereafter. We had approximately 2005 employees and 350 contract employees compared to 1820 employees and 550 contract employees. CapEx for the first six months of 2008 was $17.4 million. Board approved CapEx for the remainder of 2008 is approximately is $36.3 million which includes $15 million associated with a dry dock for our Houma facility. I would like now to open up the call to questions of the analysts. Gloria.

[Operator:]

(Operator instructions) Our first question comes from John Fitzgerald with Raymond James.

[John Fitzgerald:]

Good morning guys.

[Kerry Chauvin:]

Good morning John.

[John Fitzgerald:]

I think last quarter’s call you noted that you had some scheduling gaps in some of your yards for the second half of ’08, have you guys been successful kind of filling those up with new contracts?

[Kerry Chauvin:]

Well, somewhat, but it is not totally full. We are still working on it.

[John Fitzgerald:]

Okay, have you noted or have you – I guess that you guys decided to do some more of that marine work on ground water boat type work. I guess, you said you wanted to make sure the margins on that stuff was meeting your standard for the traditional fab work. Have you guys have any more insight on that?

[Kerry Chauvin:]

Well, we are about 60% complete on the first vessel and it looks like it is right on target. But, we could possibly get some more contracts but at this time we are not entertaining any more contracts until we get to follow along the sequence of these vessels. We have 9 vessels on the contract at this point in time.

[John Fitzgerald:]

Okay. And could you guys kind of describe how the bid activity is looking, I guess, by region or by deepwater, international –?

[Kerry Chauvin:]

Needless to say we are not seeing a lot of international at this point in time. There are few projects we are tracking. Deepwater, that is going to be the most active area for us and part of Gulf of Mexico specifically and we see some projects starting the FEED study right now which is the front-end engineering design. So, when you go into FEED study, possibly about 3 months later we might be seeing some bids come out. So, we are all tracking several projects. Several of them, however, have moved further out to the right, we call it, and we will be delayed several months, but there will some deepwater projects coming out, probably in the fourth quarter and first quarter of next year.

[John Fitzgerald:]

Thanks (inaudible).

[Operator:]

(Operator instructions) And we will go to Joe Agular with Johnson Rice & Company.

[Kerry Chauvin:]

Good morning, Joe.

[Joe Agular:]

Hi, good morning, Kerry and Robin. Could you maybe help us understand what the kind of the rest of this year is going to look like in terms of how that backlog works out? Is it going to be heavier in the third than the fourth, is it sort of typically as with the seasonal patterns or is it going to be fairly evenly spread out between the two quarters?

[Kerry Chauvin:]

Well, needless to say the third quarter we normally work more hours than we do in the fourth quarter. So, you will probably see a larger third quarter than what we see in the fourth quarter, as typical of what we see. Now remember, we lost 3 full days this week because of the hurricane in South Texas that was on South Texas yard. Granted in Houma we didn’t lose much time but we did have a lot of rain this week but, you know, it depends on the hurricanes and how they come about and when we have to shut down. We will determine actually our level of activity for the third quarter. But, as of now, we do have most of our production gaps full – filled up for the third quarter.

[Joe Agular:]

Okay, and you have also announced, you know, a month ago or so the second MinDOC and you know, just trying to get a feel for maybe how you think the experience of going through the first MinDOC impact the building of the second one?

[Kerry Chauvin:]

Well, we should get better, Joe. That’s what we are figuring. There are waves we can say on building the second one, on some lessons we’ve learned. But again we have to share some of that savings with our client. So we are going to all go to Gulf Island in our bottom line. But yes, we should be more efficient on the second one. And by the way, Joe, no one has asked, but we did secure our first contract on plant work and we didn’t make our press release on it because it’s under $40 million. But we have secured our first contract of first modules for our plant up in the mid section of the United States. And we should be working on that starting in the fourth quarter of this year.

[Joe Agular:]

Okay. Is that going to be in the Texas or Louisiana yard?

[Kerry Chauvin:]

That will be in the Texas yard.

[Joe Agular:]

Okay. And that is interesting, but you said it is under $40 million, so you didn’t press release it?

[Kerry Chauvin:]

That’s correct.

[Joe Agular:]

Okay. Is it more potential follow-on work with that or is that just the first of – I guess a few calls ago we used to talk frequently in terms of how much potential was out there for this type of work.

[Kerry Chauvin:]

Yes. The first one we did, we lost because the client decided to stick bill in the plant rather than build modules. So they weren’t awarded to anybody and this was the second active one that we actually feared. We are in attaining more projects of this nature. We have several yard visits that have occurred and there is more to come. So there will be more, there’s more to come.

[Joe Agular:]

Okay. And then, could you – I know we are jumping around here. Back to the MinDOC, the schedule of the first one and the second one in terms of–?

[Kerry Chauvin:]

Well, on the first one, we are sort of waiting on ATP on their schedule. I saw they have put a press release out yesterday that the first one should be more in sometimes in the first quarter of next year. The second one would be delivered in 2010, but second quarter.

[Joe Agular:]

Okay. And are you all getting any bids whatsoever for shelf work in the Gulf?

[Kerry Chauvin:]

There is a few, Joe, but it’s fairly small projects, like kind of fill in some of our gaps, nothing of any significance.

[Joe Agular:]

Right, right. Okay. That does it for me. I have one more actually. Robin, you mentioned, I missed the numbers if you wouldn’t mind repeating them, the breakdown between contract employees this quarter versus – I forgot what you gave – versus last year last quarter, but–?

[Robin Seibert:]

We had 2,005 employees compared to 1,820 employees at December.

[Joe Agular:]

Okay.

[Robin Seibert:]

And we had 350 contract employees at June versus 550 contract employees at December.

[Joe Agular:]

Okay. So I thought that caught my attention because it sounds like you all have substantially reduced the percentage of your overall employees at a contract, which I know was an issue a year ago or so in terms of the cost side. So you all seem to be making really good process on that front, Kerry?

[Kerry Chauvin:]

Well, we are trying to do even better on it, but need to say some of the work has come down in our schedule, the way we are scheduling our work and we don’t need that as many contractors, but we are actively pursuing hiring our own personnel.

[Joe Agular:]

And the difference for you all from a profitability standpoint of having somebody in-house versus having contract outside workers is significant?

[Kerry Chauvin:]

Yes, it is. Normally with contract workers you look if you get the 50% to 60% productivity out of them.

[Joe Agular:]

Right, right. Excellent. Thank you very much.

[Kerry Chauvin:]

Okay.

[Operator:]

And we’ll go next to John Fitzgerald with Raymond James.

[Kerry Chauvin:]

Hello, John.

[Robin Seibert:]

John?

[Operator:]

And John, your line is open, if you could check your mute button.

[John Fitzgerald:]

Hello.

[Kerry Chauvin:]

Hi, John.

[John Fitzgerald:]

Yes. Sorry. Quick follow-up. On the labor front, I guess you guys said you had about I think a 1,000 labor hours in the quarter. Could you guys give–?

[Kerry Chauvin:]

No, million.

[John Fitzgerald:]

Oh, sorry. Yes, million. Could you guys give kind of like a run rate that you guys think you are capable of in a 12-month time frame I guess with all seasonal factors considered?

[Kerry Chauvin:]

Yes, we average anywhere from 900,000 to 1 million man hours a quarter, multiplied it by 4.

[John Fitzgerald:]

So you guys think you would be capable of doing about 4 million, maybe a little more in the year?

[Kerry Chauvin:]

Well, we hope to, realizing that December is normally down and January because of weather and daylight.

[John Fitzgerald:]

Right. Okay, that does it for me.

[Kerry Chauvin:]

Okay.

[John Fitzgerald:]

Thanks.

[Operator:]

And there are no other questions in queue at this point. (Operator instructions) And at this point I’ll turn things back to our presenters. Oh, we do have another question in queue. We will go to Robert Kosowski [ph] with OFI Institutional.

[Robert Kosowski:]

Hello, good morning.

[Kerry Chauvin:]

Good morning.

[Robin Seibert:]

Good morning.

[Robert Kosowski:]

I was wondering if you could just kind of characterize the productivity of this past quarter kind of relative to the first quarter, which is obviously a perfect quarter for you guys?

[Robin Seibert:]

Yes, the first quarter we think went right. We had a little downtime in the second quarter because of rain and other factors, but basically it was a pretty good quarter. It was – both quarters were excellent quarters for us.

[Robert Kosowski:]

Okay. And I guess your confidence in keeping the gross margin above that 15%–?

[Kerry Chauvin:]

Well, that’s something we always hope to do, but there’s no guarantee.

[Robert Kosowski:]

Okay. Thank you very much and good luck.

[Kerry Chauvin:]

All right. Thank you.

[Operator:]

And at this point, I’ll turn things back over to our presenters for any additional comments.

[Kerry Chauvin:]

Just I want to thank everybody for calling in and we’ll talk to you all again next quarter.

[Operator:]

This does conclude today’s conference. Thank you for your participation. Today’s conference call is available for replay starting today, July 25, 2008, at 12 PM Central Time. The replay will run through August 8, 2008 12 PM Central Time. The phone number to reach this replay is 888-203-1112. That number again, 888-203-1112. Again thank you for your participation. You may now disconnect.