Gulf Island Fabrication, Inc.
Q3 2008 Earnings Call Transcript

Published: 24 Oct 2008

[Operator:]

Good morning everyone and welcome to the Gulf Island Fabrication Inc. 2008 third quarter earnings release conference call. All participants will be in a listen-only mode for the duration of the presentation and we will have a question-and-answer session. This call is being recorded. At this time I'd 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 2008 third quarter teleconference. Please keep in mind that any statements made in this conference that are not statements of historical facts are considered forward-looking statements. These statements are subject to factors that could cause actual results to differ materially from the results presented in the forward-looking statements. These statements include the timing and extent of changes and 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. Robert Seibert, our CFO; Robin.

[Robin Seibert:]

Thank you, Deborah. I’d like to review Gulf Island’s press release issued for the third quarter of 2008. The press release consists of two pages; page one is tax and page two is the income statement. I’d like to review page two, which is the income statement first. The following are the results of operations for the three months ended September 30, 2008, compared to the three months ended September 30, 2007. Revenue was $92.7 million compared to $124.9 million. The cost of revenue was $86.3 million compared to $106.9 million. Gross margin was $6.3 million or 6.8% of revenue, compared to $18.0 million or 14.4% of revenue. As mentioned in previous quarters, certain projects include costs for additions or improvements for our infrastructure that are necessary to fabricate and complete the project. Since additions or improvements provide future benefits to us, the cost to build these projects is capitalized. Thus costs removed from project costs and subsequently capitalized directly increases the estimated profit on the project. Amounts included in project revenue that were capitalized are $207,000 compared to $1.9 million. Thus more benefit was received by the quarter ended September 30, 2007 opposed to 2008. The amounts included in project revenue mentioned above, capitalize net of depreciation expense. General and administrative expenses were $2.1 million or 2.2% of revenue compared to $2.8 million or 2.2% of revenue. Operating income was $4.2 million compared to $15.2 million. Net interest income was $24,000 compared to $49,000. Other income expense was a loss of $42,000 and a loss of $5000 respectively. For both periods the losses were related to sales of miscellaneous equipment. Income before taxes was $4.2 million compared to $15.3 million. Income tax expense was $1.4 million compared to $5.3 million. The income tax rates were 32.8% compared to 34.2%. Net income was $2.8 million compared to $10.0 million. Basic earnings per share were $0.20 compared to $0.71. Diluted earnings per share were $0.20 compared to $0.70. Weighted average shares outstanding were $14.3 million shares compared to $14.2 million shares. Adjusted weighted average shares outstanding were $14.3 million shares compared to $14.3 million shares. Depreciation expense was $4.6 million compared to depreciation and amortization expense of $3.5 million. We declared and paid cash dividends of $0.10 for both quarters ended September 30, 2008 and 2007. The following are the results of operations for the nine months ended September 30, 2008 compared to September 30, 2007. Revenue was $334.3 million compared to $371.8 million. The cost of revenue was $284.7 million compared to $331.2 million. Gross margin was $49.6 million or 14.8% of revenue, compared to $40.6 million or 10.9% of revenue. Capitalized costs net of depreciation included in project revenue was $5.3 million compared to $4.8 million, given the larger benefit for the nine months ended September 30, 2008. General and administrative expenses were $7.3 million or 2.2% of revenue compared to $7.9 million or 2.1% of revenue. Operating income was $42.2 million compared to $32.8 million. Net interest income was $156,000 compared to $310,000. Interest rates were considerably lower accompanied with lower cash balances available for investing. Other income expenses were losses of $97,000 and $10,000 respectively. Again, those losses for both periods were related to the sales of miscellaneous equipment. Income before taxes was $42.3 million compared to $33.1 million. Income tax expense was $14.1 million compared to $10.7 million. The income tax rates were 33.4% compared to 32.5%. We currently expect tax rates to be 33% to 34% for the remainder of the year. Net income was $28.1 million compared to $22.3 million. Basic earnings per share were $1.98 compared to $1.58. Diluted earnings per share were $1.97 compared to $1.56. Weighted average shares outstanding were $14.2 million compared to $14.2 million. Adjusted weighted average shares for both periods were $14.3 million. Depreciation expense was $13 million compared to depreciation and amortization expense of $10.5 million. We declared and paid cash dividends of $0.30 per share for the nine-month periods ended September 30, 2008 and 2007. Please refer back to page 1 of the press release for a review. We had a revenue backlog of $422.4 million with a labor backlog of 4.6 million man-hours remaining to work. The following represents selected balance sheet information for September 30, 2008 as it compares to December 31, 2007. Cash and short-term investments were $5.6 million compared to $24.6 million. Total current assets were $127.0 million compared to $135.7 million. Property plant and equipment was $204.2 million compared to $188.8 million. Total assets were $331.7 million compared to $325.2 million. Total current liabilities were $57.2 million compared to $78.4 million. Long-term debt was zero for both periods. Shareholders equity was $254.8 million compared to $228.9 million. Total liabilities in shareholders equity was $331.7 million compared to $325.2 million. All the financial information for the three months ended September 30, 2008 compared to September 30, 2007 consists of

[Operator:]

(Operator Instructions) Your first question comes from Jim Rollyson - Raymond James.

[Jim Rollyson:]

Obviously hurricane interference seemed to be a big part. I presume you didn’t talk about it much this morning, but based on your press releases and obviously what’s been going on, can you maybe spend a couple of minutes just detailing how much of the margin dip and revenue dip this quarter was tied into hurricanes; how things kind of stand today and just kind of walk through that logical little bit?

[Kerry Chauvin:]

Jim, this is Kerry. The hurricanes really shut us down for almost a month down in Houma. As soon as we packed up and left for the first hurricane, we came back, got everything running again, which was considerable expense; the second hurricane came so we lost production. Also our crews offshore were not able to work during that time frame because of the destruction offshore. So, it was a very significant event for us, even more so than other hurricanes, Katrina and Rita, because the parish and the officials make us shut down somewhat earlier than we did in the past and they won’t allow people back in the parish until a later date than what we’ve seen in the past. Also our power or electricity was down in the Houma area for a considerable amount of time before we could get geared back up. In Texas we lost five business days in Texas because of the same situation, there was a mandatory evacuation. Needless to say, the Hurricane Ike did not come to Texas as predicted, but with mandatory evacuations, everyone had to leave the area and were not allowed back in until about five or six days. So it did hurt us and we also shut down for Dolly too which was another hurricane down in South Texas. So we had quite a bit of effect in south Texas. But hurricanes aren’t the only reasons are margins are down; there are several other reasons. We spent more man-hours and I think when you get out 10-Q you’ll see it. We spent more man-hours in loading out the Tombua Landana project. Somewhat related to the hurricanes and that once we got back, there was a schedule we had to maintain. We’re trying to get some relief from our client, but we haven't been able to negotiate some change orders with our client based on the additional cost associated with the hurricanes on loading out a significant project and we are in the process of doing that. The cost is already in our financials, but we don't have the revenue to help offset that cost. So there were several reasons other than the hurricanes, but I think our productivity was not also as good as we would have liked to have seen in the third quarter compared to third quarter last year and other quarters.

[Jim Rollyson:]

And as it sits today, everything’s back up and running to pretty much normal?

[Kerry Chauvin:]

Pretty much so. We have a few electric motors we still are drying out and installing, but by and large everything is up to normal. We should also have our cranes that were in an accident back in the early spring; they should be back in operations in December.

[Jim Rollyson:]

So it sounds like things should come and margins should drift back towards normal, all else being equal and from what I’m gathering, you might get some coverage from your customer on the one project, so would that show up in the fourth quarter if they kind of help cover that?

[Kerry Chauvin:]

It would be the fourth or early first quarter.

[Jim Rollyson:]

Okay. Can you talk about just maybe bidding activity Kerry; kind of what you’re seeing. Maybe spend a minute as well on kind of how this credit situation going on reflects into your customers. You tend to work some international, national oil companies, certainly some of the bigger guys and maybe just kind of spend a minute how that looks.

[Kerry Chauvin:]

Okay, bidding activity seems to be picking up to be honest with you on the deep water. There are some deep water projects that we are looking at now and I think we will see at least two projects and possibly three being bid well probably in the fourth quarter and early first quarter, but as far as the shallow water, we still don't see very much shallow water type activity and I’m speaking mainly for the Gulf of Mexico and that’s going to be our primary market in the near future. There are some international projects we are tracing, but I don’t think we will see those come out for bids until first, second quarter of 2009, but considering the credit market, I think the larger international-type oil and gas companies are going to be where the bidding activity is going to come from for the next couple of quarters, because I think these clients still have cash and they have projects that need to go and need to get done because they are going to lose their lease if they don’t go ahead and develop these particular projects. So I think we'll still see the deep water projects continue. The credit crunch, we’re keeping a close eye on it right now with our clients and we haven’t had any negative impacts as of now, because most of these projects were long-term projects and designed to be completed in the long run and not just the short run, let’s get it done and start producing. So, we still could have a lot of fallout from the credit crunch, but we haven't had that indication yet, but it may well come.

[Jim Rollyson:]

The last question; are you getting any pickup in work in the shallow water just related to some of the hurricane damage?

[Kerry Chauvin:]

Our oil subsidiary dolphin has picked up some hurricane damage work by going offshore actually and doing some of the cleanup offshore. We think that this storm is somewhat different than what we saw with Rita. Ike and Gustav did more damage to what I call platforms that were not designated to be removed ultimately and plug and abandoned. So we think there will be some platforms that should be replaced out of the 40 something that were damaged. There will be some that will be plug and abandoned, however it will generate some shallow water business probably we’ll see the bids more in the first quarter and second quarter of 2009. How many come about? We’re still trying to evaluate the damage and what they’re going to do. Needless to say, if they can move the production to another platform, they’ll probably do that, but there are some shallow water hubs that probably will have to be replaced and we are looking for that probably towards the second quarter of 2009.

[Operator:]

(Operator Instructions) Your next question comes from Joe Aguilar - Johnson Rice.

[Joe Aguilar:]

I was just wondering, if you look at the hours that you worked in the quarter, actually they were okay; it seemed like 931,000.

[Kerry Chauvin:]

Well, Joe, a lot of that was inefficiencies on the projects that we didn’t get our full value or we couldn’t get revenue for, so we actually overran the man hours in trying to get specifically one project loaded out and in the 10-Q that’s coming out later on, you will see that we also were not able to work as much as we’d like to have done on the MinDOC project for the third quarter, so we were not able to take a lot of the revenues on the MinDOC project. In the 10-Q, which we hope comes out later on this afternoon, there’ll be more specifics on it.

[Joe Aguilar:]

Maybe this may not be a fair question, but is there a way to quantify the man-hours that you lost in the quarter or when you have these interruptions, do you pay people and keep them on the payroll and count their hours?

[Kerry Chauvin:]

Well, we did both, but even for the storms, our employees basically didn’t have a very good paychecks for three weeks, so for one of the weeks we actually made sure everybody was paid for 40 hours payroll. So we made everybody whole for that one particular week, plus the other two weeks we did pay payroll for shutting down and also getting back in operations. So there was a tremendous amount of lost motion in that and I don’t have that quantified at this point in time.

[Robin Seibert:]

Joe, this is Robin. It would be very difficult for us to quantify that because, we know we lost man hours because we had people that didn’t work, but under say more perfect conditions, we would have had additional man hours, but dependent upon what we would have did with projects they would have worked on, it just makes it tough to quantify that in numbers as well as dollars. Then again dependent upon if they were working on projects, like MinDOC we didn’t work that much on; we didn’t have much progress during the quarter. Tombua Landana we were trying to load out, so we were doing things to get that done and a lot of things that happened during the load-out, you actually go ahead and do what you can do to get the job load-out to satisfy your customer and then you negotiate after the fact on what you think was done outside the scope which hasn’t been done yet.

[Joe Aguilar:]

Right. This time I guess if you could give us an update on your outside contract workers -- I know in the past that was an issue, but it seems like you all have been steadily decreasing that outside percentage.

[Kerry Chauvin:]

That's correct, Joe. We hope to get most of the contractors off the payroll in the fourth quarter, but we have reduced it to where now it’s basically employees and we had 194 contract employees at the end of the quarter. That is down to about 150 contract workers at this point in time and within the next month or two we hope to get that down to zero, that way we only work our employees.

[Joe Aguilar:]

Okay and one last thing. Kerry your comment earlier with respect to Jim’s question on the bidding activity; I think you said deep water was picking up. Did you mean deep water Gulf primarily or --?

[Kerry Chauvin:]

Yes, deep water Gulf. There’s a few projects in deep water Gulf that are circulating right now and a couple of them, they are preliminary, I guess bid questionnaires that have been circulating.

[Joe Aguilar:]

And any sense on timing?

[Kerry Chauvin:]

Hopefully they will be bid no later than the first quarter of 2009.

[Operator:]

Your next question comes from David Wishnow - Capital One.

[Joe Gibney:]

This is Joe Gibney. I just wanted to follow up relative to the scenario where if we do have a little bit of a push to the right on deep water, curious Kerry on your mind set relative to the incremental modular work, are you more inclined to try to book some of this work as you get toward the end of this year and into 2009 given the credit crisis and kind of where we are against the broader back drop of ordering?

[Kerry Chauvin:]

Well, we are going after the modules. We are continuing to do that and we think there will be some modules coming out probably early 2009. We have booked some modular work for actually under $40 million, so we didn’t release a press release on it, but we do have modules we are working on right now for a refinery up in I think Illinois and we also have done some modules that are going up to Alaska, that should be leaving our facility in the spring, but we will continue to seek out that type of work when it becomes available. I think though we may see a slowdown in that work probably in sometimes in 2009 because I think right now the economic conditions, the refineries have excess capacity at this point in time and they may tend to delay spending on future expansions.

[Joe Gibney:]

But on the tow boat side you’re still materially positive in term of the amount of work that’s possible for you guys there?

[Kerry Chauvin:]

That's correct. We could sign several more boats if we wanted to, but we are actually evaluating our performance at this point in time and it looks like our performance on those vessels are pretty much well within what we predicted, so probably we’ll seek some other contracts in the near future.

[Joe Gibney:]

And just following up on the status of backlog, any concerns of incremental projects that are in backlog now relative to MinDOC 2; any update there? Any status from ATPG given that they’ve cut some of their CapEx. I know you guys have been working on some of the steelwork down in Aransas, but where do we stand on MinDOC 2 or what are you hearing on that front?

[Kerry Chauvin:]

On MinDOC 2, we don’t have any formal delays or anything at this point in time, but we constantly evaluate that with our client to see what his schedule is and we are working with them as best as we can and at this point in time we just don’t have any changes in the direction we are going.

[Joe Gibney:]

Okay and last one, Robin if you could just in terms comprising your backlog here at the end of the quarter, the big ticker items; now that Tombua is out the door, we’re sitting on the tow boat side and the remaining portions on MinDOC 1 and MinDOC 2 to just give an update of the backlog at the end of the quarter, the big ticket items that are there now.

[Robin Seibert:]

The big-ticket items are going to be the second MinDOC hull and the second MinDOC top sides. We do have a substantial amount of tow boat work left in there, probably still in the $80 million range, because we have three boats in progress. The first boat is probably about 70% to 75% complete, but the delivery schedule on those is spread out over probably about six quarters. I guess we have some modules that we’re working on that’s going to Alaska, that probably represents a decent portion, but besides that the rest of it’s just a big collage of basically fill-in type work, just normal routine things that we do at Gulf Island.

[Joe Gibney:]

And we’re still at January, February time frame for MinDOC 1 getting out the door; is that right?

[Kerry Chauvin:]

That’s correct.

[Operator:]

Your next question comes from Herb Bookbinder - Wachovia Securities.

[Herb Bookbinder:]

Kerry, just a quick question. In looking at your backlog, what quarters do you think have the most or least visibility at this point through ‘09?

[Kerry Chauvin:]

Well, it’s hard to say. Whatever we have going forward, I think we told you about what our revenues would be for 2009. We probably have some holes in our schedule that we need to fill, but we feel that we’ll get some work and fill some of those holes. Right now, the first, second quarter is pretty much booked up and we’ll be looking for more work around the third quarter.

[Operator:]

(Operator Instructions) Your final question comes from Robert Kosowsky - OFI Institutional.

[Robert Kosowsky:]

I just had a question about I guess the margin profile for the different types of work you guys do. So if you look a maybe a $4 million man hour year, could we have materially different earnings depending on the mix of products that are going through there and kind of what are the types of work we’re going to have, like the most sensitivity, I guess.

[Kerry Chauvin:]

Well, we try and maintain and our margin is the same on all types of projects, so we don’t bid let’s say tow boats less than deep water-type structures. So we try and maintain margins as best as we can across the board and keep it fairly consistent.

[Robert Kosowsky:]

So if you guys have like a really good 1 million man-hour quarter, then that’s kind of representative of what you guys could do in an optimal environment?

[Kerry Chauvin:]

Pretty much so, yes.

[Robert Kosowsky:]

Okay, then quickly the two to three contracts that are in bid for Q1 or Q4 or Q1 ’09; are those somewhat big ticket items?

[Kerry Chauvin:]

Yes, deep-water projects are normally big-ticket items.

[Robert Kosowsky:]

And then finally the decrease in contractors that you guys are using right now, just because of I guess less of a labor shortage in the Gulf region or is it something that you guys have done, kind of concerted effort by Gulf Island?

[Kerry Chauvin:]

It’s a concerted effort by Gulf Island. When we had some very large projects that needed additional labor to meet the delivery schedules we had to add contract labor. We are trying to get the contract labor off the payroll at this time and that’s by design, not because it’s not contract labor.

[Robert Kosowsky:]

And is there a labor shortage right now in the Gulf region still?

[Kerry Chauvin:]

It's about the same as it always was and it hasn't changed very much. We can always use additional labor. We’d like to hire some additional people ourselves and we are constantly looking at that situation, but it’s still a tough labor market, but we are managing to wade our way through it.

[Operator:]

(Operator Instructions) And gentlemen it appears we have no further questions. I’ll turn the call back to you for any additional or closing remarks.

[Robin Seibert:]

We don’t have any, so there’s no more; Dana.

[Operator:]

Thank you, sir. That will conclude today’s conference call. A replay will be available starting at 12