Gulf Island Fabrication, Inc.
Q4 2008 Earnings Call Transcript

Published: 21 Mar 2009

[Operator:]

Good morning and welcome, ladies and gentlemen, to the Gulf Island Fabrication 2008 fourth quarter release earnings conference call. All participants will be in a listen-only mode for the duration of the presentation. This call is being recorded. At this time, I would like to turn the conference over to Ms. Deborah Knoblock for opening remarks and introductions. Deborah, please go ahead, ma'am.

[Deborah Knoblock:]

I would like to welcome everyone to Gulf Island Fabrication's 2008 fourth 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, Chairman and CEO; Mr. Kirk Meche, President and COO; and Mr. Robin Seibert, our CFO. Robin?

[Robin Seibert:]

Thank you, Deborah. I would like to review Gulf Island's press release issued for the fourth quarter of 2008. The press release consists of two pages. Page one is tax, 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 the three months ended December 31, 2008 compared to the three months ended December 31, 2007. Revenue was $86.2 million compared to $100.9 million. The cost of revenue was $83.5 million compared to $84.7 million. Gross margin was $2.7 million, or 3.1% of revenue, compared to $16.2 million, or 16.0% of revenue. As mentioned in previous quarters, certain projects include cost for additions or improvements to our infrastructure that are necessary to fabricate or complete a project. Since these additions or improvement provide future benefit 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 $63,000 compared to $3.5 million, thus more beneficial to the quarter-ended December 31, 2007. The amounts included in project revenue mentioned above were capitalized net of depreciation expense. General and administrative expenses were $2.1 million, or 2.4% of revenue, compared to $2.5 million, or 2.5% of revenue. Operating income was $621,000 compared to $13.7 million. Net interest income was $16,000 compared to $74,000. Income before taxes was $637,000 compared to $13.8 million. Income tax benefit was $237,000 compared to an expense of $4.9 million. The income tax rates were 37.2% benefit compared to 35.8% expense. The fourth quarter adjustment for the tax rate was related to the extension and retroactive application of the federal work opportunity tax credits. Basic earnings per share were $0.06 compared to $0.62. Diluted earnings per share were $0.06 compared to $0.62. 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 $4.4 million compared to depreciation expense of $3.7 million. We declared and paid cash dividends of $0.10 per share for both quarters ended December 31, 2008 and 2007. The following are the results of operations for the 12 months ended December 31, 2008 compared to December 31, 2007. Revenue was $420.5 million compared to $472.7 million. The cost of revenue was $368.2 million compared to $415.9 million. Gross margin was $52.3 million, or 12.4% of revenue, compared to $56.8 million, or 12.0% of revenue. Capitalized costs net of depreciation included in project revenue was $5.3 million compared to $8.3 million, again providing a larger benefit for the 12 months ended December 31, 2007. General and administrative expenses were at $9.5 million, or 2.2% of revenue, compared to $10.4 million, or 2.2% of revenue. Operating income was $42.8 million compared to $46.5 million. Net interest income was $172,000 compared to $384,000. Interest rates were considerably lower, accompanied with lower cash balances available for investing. Other income/expense were losses of $97,000 and $10,000 respectively. Losses for both periods were for the sale of miscellaneous equipment. Income before taxes was $42.9 million compared to $46.9 million. Income tax expense was $13.9 million compared to $15.7 million. The income tax rates were 32.4% compared to 33.5%. Net income was $29.0 million compared to $31.2 million. Basic earnings per share were $2.04 compared to $2.20. Diluted earnings per share were $2.03 compared to $2.18. 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 $17.5 million compared to depreciation and amortization expense of $14.1 million. We declared and paid cash dividends of $0.40 per share for the 12 months ended December 31, 2008 and 2007. Please refer to page one of the press release for review. We had a backlog of $360.2 million and a label backlog of 3.9 million man-hours remaining in the work. Included in our backlog is approximately $150.4 million and 1.6 million man-hours remaining on the MinDOC II project, in which our customer has announced will be postponed and be utilized at another of their locations sometime in the future. The following represents selected balance sheet information for December 31, 2008 compared to December 31, 2007. Cash and short-term investments were $13.8 million compared to $24.6 million. Total current assets were $136.4 million compared to $135.7 million. Property, plant and equipment was $204.7 million compared to $188.8 million. Total assets were $350.9 million compared to $325.2 million. Total current liabilities were $74.9 million compared to $78.4 million. Long-term debt was zero for both periods. Shareholders equity was $254.2 million compared to $228.9 million. Total liabilities and shareholders’ equity was $350.9 million compared to $325.2 million. Other financial information for the three months ended December 31, 2008 compared to December 31, 2007 consists of Past due cost was 44.1% of revenue compared to 38.7% of revenue. Man-hours worked were 903,000 compared to 896,000. Deepwater revenue represented 67% of revenue compared to 79% of revenue. Foreign revenue represented 18% of revenue compared to 25% of revenue. Other financial information for the 12 months ended December 31, 2008 compared to December 31, 2007 consist of Past through cost was 41.2% of revenue compared to 52.3% of revenue. Man-hours worked were 3.8 million compared to 3.6 million. Deepwater revenue represented 67% of revenue compared to 78% of revenue. And foreign revenue represented 20% of revenue compared to 24% of revenue. Other financial information for December 31, 2008 compared to December 31, 2007 consists of Again, a revenue backlog was $360.2 million compared to $330.4 million. Remaining man-hours to work was 3.9 million compared to 3.7 million. Revenue backlog for deepwater was $200.8 million or 55.8% compared to $185.4 million or 56.1%. Revenue for foreign locations was $1.5 million or less than 1% compared to $62.6 million or 18.9%. Other backlog at December 31, 2008, we expect to recognize revenues of approximately $153.9 million during 2009 and approximately $206.3 million in 2010 thereafter. Out of the $150.4 million associated with MinDOC II, we projected at the time, 77% would be related to 2010 and the remaining would be in 2011. We had approximately 1,835 employees and 145 contract employees compared to 1,830 employees and 530 contract employees. CapEx for 2009 is estimated to be $22.5 million, which includes the purchase of equipment and additional yard and facility infrastructure improvements. Included in the 2009 capital budget is $10.1 million for the remaining cost to complete the dry dock, and to be incurred as progress payments due in all quarters of 2009, we expect the completion of the dry dock in the fourth quarter of 2009. Also included is $1.3 million to complete the purchase and installation of equipment for a panel line system, which is expected to be completed in the second quarter of 2009. I would now like to open the call to our analysts.

[Operator:]

Thank you, sir. (Operator instructions) We'll take our first question from Jim Rollyson, Raymond James.

[Jim Rollyson:]

Hi, good morning, guys.

[Robin Siebert:]

Good morning, Jim.

[Jim Rollyson:]

Covered a lot of stuff very efficiently this morning. Questions from me would be, number one, you talked about kind of where everything stands in backlog and man-hours and that kind of stuff. Maybe talk about what happened in the fourth quarter, because it's unusual to see you guys with margins down here. Is this kind of a function still falling on with the hurricane-related stuff or just bad project, or kind of what's going on?

[Robin Siebert:]

Jim, this is Robin. In the fourth quarter, we had a couple of things that probably caused the most strain on our margins. We loaded out the Tombua Landana project, and we have some cost that was incurred that we're currently discussing with our customer. We're negotiating to trying to get reimbursement for that. We don't want to really give out any numbers on that because we are still negotiating with them. The other thing is that the – I mean, the MinDOC project, the first MinDOC project, it's the prototype for all. So we're constantly having changes to it. During the fourth quarter, because we were concentrating a lot of our efforts on getting that Tombua Landana project loaded out at our Texas facility, we really didn't make a lot of progress on the first MinDOC project. We are just kind of moving along to get things done to put us in a position where once we loaded out the other job, then we could refocus all our labor back on the first MinDOC project. And that’s really – that really affected our margins.

[Jim Rollyson:]

So I guess as we go forward into this quarter, now that the Tombua Landana project is gone, plus or minus what you might be able to recoup in costs there, you think you're going to end up being more productive on the MinDOC I and start seeing margins come and get back, improve a lot or what?

[Kerry Chauvin:]

Hi, Jim, this is Kerry. We hope so. We're working full bore on the first MinDOC. So our man-hour levels are higher. So we should be able to pick up some ground on there and get some significant increase in our percent complete.

[Jim Rollyson:]

And then, as far as the MinDOC III getting pushed off, which I guess makes sense given the current environment, kind of from your standpoint, that was something you guys have planned on working on this year, I suppose. What's your situation now? You've got $153 million or $154 million, I think, of the backlog right now that runs off in 2009, which is about two quarters maybe worth of business. What's your prospects, Kerry, for work, and how do you fill that in to replace the MinDOC II, and just kind of where do you stand?

[Kerry Chauvin:]

Okay. Jim, what we're doing is we’re moving up some of the ground water vessels, actually enhancing the schedule on those particular vessels, and we're dealing with our clients on that to move them up. Instead of delivering in 2010 and possibly 2011, we're moving some of the hulls up to fill in some of those gaps that we may have because of the MinDOC II. Granted, we probably will not be able to fill in all those gaps, but we are bidding additional marine-type work or shipyard work, which seems to be a little more readily available than the fabrication work. So I think that we will fill some of the gaps with that. I think you will see more of a strain towards the third and fourth quarter than the first and second quarter. And we're constantly looking also at our cost structure based on our work levels as they may come down. We hope they don't come down significantly, but that's always the possibility, and we are looking at our overhead cost structure to make sure that matches whatever work levels that we have coming in the future.

[Jim Rollyson:]

And if I recall, Kerry, your original take on some of the marine work was that you might start off initially with a little lower margins. But as of last quarter, if I remember, you had to kind of get through that to really feel out where those margins are. Have you made any progress on kind of understanding how that's going to work out?

[Kerry Chauvin:]

Yes, we delivered our first boat this week, and it's actually working today, hauling some barges around, even though the christening will be formally sometimes in the end of March or April. And the margins were right in line with what we anticipated. Our panel line, which we have spent about $6 million on, is operational now and should be producing panels for us on these future boats, which should help our productivity and help our profitability on these jobs. It also has given us the opportunity to bid other marine work or panels that will be used in other shipyards that don't have panel lines, where we could sub-fabricate for them, as well as help on our bidding on future work as far as the marine segment of our business. So we think that's going to be a real plus for us and help us replace some of the production that may be lost on MinDOC II. Now, MinDOC II, the second MinDOC, we don't have a lot of information from ATP other than as their cash flow allows, we may be able to bid, continue to work on it. It's not a definite, so we basically have written it out, more or less, for 2009 and considering it in 2010 and 11.

[Jim Rollyson:]

Last question. Remind us how the margins on the marine ground water boats compare to your normal fabrication?

[Kerry Chauvin:]

Well, we're bidding them in the same light as our normal fabrication. However, the first vessel, we were probably about 75% of what we would normally get as a margin. But that was by design in the bid of that particular project.

[Jim Rollyson:]

Okay.

[Kerry Chauvin:]

Rest of them were bid in accordance with our normal margins.

[Jim Rollyson:]

Great, thank you.

[Kerry Chauvin:]

Okay, Jim

[Operator:]

We’ll go next to Herb Buchbinder with Wachovia.

[Kerry Chauvin:]

Hello?

[Herb Buchbinder:]

You there?

[Kerry Chauvin:]

Yes.

[Herb Buchbinder:]

Kerry, you answered a number of my questions already, but what percent of the backlog is actually in the boats right now that you've got?

[Robin Siebert:]

Herb, the number is about $75 million in dollars.

[Herb Buchbinder:]

Okay. $75 million in the min [ph] boats, okay. And the idea is to get most of that shipped this year if you can, but as of this moment, the schedule for that $75 million would be what?

[Kerry Chauvin:]

Well, it will go into next year as per our contracts, but we have asked our clients to move some of the vessels up to fill some holes we may have in our production.

[Herb Buchbinder:]

Okay. So, if you can't get them to do that, then all of that $75 million is 2010 revenue?

[Kerry Chauvin:]

No, no, that's not correct. We are going to deliver three boats this year. We actually have four under construction right now.

[Herb Buchbinder:]

Okay. So, if you can't get them to accelerate the deliveries, roughly what kind of revenue from the boats will you have in 2009?

[Kerry Chauvin:]

That's very difficult to say because we will have to see what holes we have in our production schedule.

[Herb Buchbinder:]

Okay. I'm not sure why you are including MinDOC II in your backlog when you have very little feeling for when you're going to get the business, or even if you're going to get the contract. Shouldn’t you, from a prudent standpoint, take that out of your backlog completely?

[Kerry Chauvin:]

Well, if you noticed in our press release, we have segregated it, so if the contract is actually dissolved, which it has not been at this point in time, then yes, we've given you that indication of what it might be. At this point in time, we still have a contract for that second MinDOC. It has been suspended at this point in time waiting on our ultimate client's activity to dictate when we start up again. It's not been canceled at all.

[Herb Buchbinder:]

I think you said that the second half of the year is, I guess, the most risk for the year. The question is, do you have enough business to stay profitable? If you don't, you may not even cover the dividend in 2009. Is that a fair assumption?

[Kerry Chauvin:]

Well, if you’ve noticed, we did declare dividend yesterday. However, we also stated in our press release that we would not, at this point in time at least, we expect to suspend the quarterly dividend for the remainder of –.

[Herb Buchbinder:]

Okay, I didn't see that. So the dividend has been suspended. All right.

[Kerry Chauvin:]

We're going to pay this dividend. After this, it's going to be suspended. And that's mainly a precautionary measure.

[Herb Buchbinder:]

I can understand that.

[Kerry Chauvin:]

We feel that we should have enough cash flow to support it, but not knowing what the market is doing, not knowing what our federal government could do at this point in time, and our clients, as far as their future spending, we thought it was prudent to save cash and try and stay out of debt. That's been our goal all along. It's been pretty successful by staying out of debt until now, and we hope to continue that.

[Herb Buchbinder:]

So you don't see yourself needing any, even short-term, financing during the course of 2009?

[Kerry Chauvin:]

Well, we're shooting for that, but we never know. I mean, there may be short-term needs, but we would hope we wouldn't. Our goal is never to draw down on our revolver unless we absolutely need it.

[Herb Buchbinder:]

Okay. Okay, thanks a lot.

[Kerry Chauvin:]

Okay.

[Operator:]

(Operator instructions) We'll go next to Joe Agular with Johnson Rice.

[Kerry Chauvin:]

Good morning, Joe.

[Joe Agular:]

Hi, good morning, Kerry and Robin.

[Robin Seibert:]

Hi, Joe.

[Joe Agular:]

The question I guess is, could you kind of go over the oil and gas side of your bidding activity? You mentioned, obviously, the ship-building stuff, but – is there any business out there to bid on right now?

[Kerry Chauvin:]

Joe, there are some businesses, very small amounts. We're bidding other projects, smaller projects, needless to say. Most of the deepwater projects have been pushed to the right, waiting to see what's going to happen I guess in the economy, in the world and everything else. But none of our larger projects have been canceled. Most of them are going to be delayed to probably sometime in the summer or possibly into 2010. I think the bulk of them will be delayed until the beginning of 2010. However, there may be some that we would be looking at towards the end of the second quarter.

[Joe Agular:]

Okay, those are deepwater projects?

[Kerry Chauvin:]

That's correct.

[Joe Agular:]

Okay. And magnitude of the work? Is there any?

[Kerry Chauvin:]

Well, when you bid a deepwater, you don't know if you're going to get the hull, the topsides or what. It's kind of hard to pick out, but it could be substantial projects for us, especially the topsides. The topsides probably have the most credibility going forward. Large topsides could run anywhere from $50 million upwards of $100 million. So we really don't know the magnitude of them at this point in time because we're not privy to the drawings.

[Joe Agular:]

Just out of curiosity, has the decline in steel prices forced – or how are the oil companies interacting with the engineering companies, and then you, in terms of bidding projects with the change in steel projects? Are you going back and rebidding older projects? And what impact might that have on their decision to go forward maybe with some stuff this year while commodity prices are lower? Steel commodity – steel that is.

[Kerry Chauvin:]

I think there's a lot of pressure to go ahead and bid some of these projects and, what I call, the middle to upper level management of these companies. However, the upper management of most of these companies are not going forward on it. The pressure from the middle management is telling their bosses that the steel prices are down, costs are low, very competitive, and they'd like to go ahead with the projects. However, there is still a hold on most of them that's above and beyond their control.

[Joe Agular:]

Just another out of curiosity, you may or may not know this, what kind of oil price threshold do you think they are looking at for their decision? And also just to clarify, when you mentioned the second quarter, are those award dates or the start of the work?

[Kerry Chauvin:]

No, those are award dates.

[Joe Agular:]

Okay.

[Kerry Chauvin:]

And we really don't know – on the first part of your question, we really don't know what their thresholds are right now. I'm not sure they know.

[Joe Agular:]

Okay. If I could go back to what was mentioned earlier with regard to the fourth quarter, you mentioned that you were loading out the Tombua Landana work and incurred some costs in the fourth quarter. I understand you don't want to give an amount there, but could you maybe tell us what some of the incurred costs were related to?

[Kerry Chauvin:]

Well, the incurred costs were related to the load-out, the finalization of the project, and where we were spending a lot of overtime and additional hours getting the structure ready to load out as well as actual load-out costs. So we are presenting these claims to our clients to see if we can negotiate something.

[Joe Agular:]

Would you characterize any of these as change orders?

[Kerry Chauvin:]

Well, there are different categories of change orders, okay? And it could be a possible change order in the near future.

[Joe Agular:]

Okay. One – I guess another question, given the environment today and some of the outlook that you've mentioned in terms of businesses out there and your backlog and so forth, just kind of remind us – I mean, you all have been through this several times I guess in terms of dealing with down cycles, and you've always managed your way through them really well. Do you feel that the company today has the same sort of management information systems and the control over the cost that you had previous down cycles to work through this and stay profitable? Should this be an extended downturn?

[Kerry Chauvin:]

We think so. I mean, our management is pretty much the same. We've had some change in one of our subsidiaries. But however, it's the same philosophy we had in the past. It’s conserve cash, bid projects that we think we can make money on, control our costs. And we've been, like you said, successful since 1987 and being able to do that and have not had a losing quarter. So we've been very fortunate. I think our employees are all in line with whatever we need to do to keep costs down and keep the company profitable, as well as conserving cash. We don't want to just give our cash away. So we have cut our CapEx. We have not given pay increases for this year. We don't anticipate any pay decreases, but we stand ready to do that if necessary. So we're doing everything possible to try and keep our company in a profitable mode.

[Joe Agular:]

Okay. And you touched on – I guess must be the last question, did you all give a CapEx number? I missed it if you did.

[Robin Siebert:]

$22.5 million.

[Joe Agular:]

Okay, thanks.

[Robin Siebert:]

$10 million is associated with the drydock that's in process, that's going to be used in our Houma facility, part of our marine operation.

[Joe Agular:]

Okay, great. Thank you.

[Operator:]

(Operator instructions) We'll go next to Katherine Schmidt [ph] with Cecille Mercurier [ph].

[Kerry Chauvin:]

Hi, Katherine.

[Katherine Schmidt:]

How are you all doing?

[Kerry Chauvin:]

Good.

[Katherine Schmidt:]

A couple quick questions for you this morning. Do you first anticipate having to do any layoffs or staff reductions, either on salaried workers or contractors?

[Kerry Chauvin:]

Well, needless to say, our contract labor is down, if you listened to the first part of the call.

[Katherine Schmidt:]

I think I missed that one.

[Kerry Chauvin:]

Yes. We are considerably down in contract labor, and our goal is always never to use contract labor unless we absolutely have to. As we've always said, contract labor is not as productive as your own labor force. Plus, you have a middle man who is making the profit on the contract labor. So, our goal is not to have contract labor. So yes, we plan to get rid of contract labor wherever we can.

[Robin Siebert:]

And Katherine, the other thing too is the numbers we give on contract labor applies to all of our facilities, both Louisiana and Texas.

[Katherine Schmidt:]

Would you mind reading that number again?

[Robin Siebert:]

We had 145 contract laborers currently, and that compares to about 530 that we had at the same time last year.

[Katherine Schmidt:]

Okay.

[Kerry Chauvin:]

There are no definite plans to lay off any of our employees at this point in time. With some of the large contracts, you do have additional employment that a lot on the contract side and you would come down from that as these very large projects are loaded up and delivered.

[Katherine Schmidt:]

Drop-off in the fourth quarter, how much of that would you say was due to the load-out expenses versus just the downturn in the overall economy and the fall in the price of oil?

[Robin Siebert:]

Repeat your question.

[Katherine Schmidt:]

In terms of the drop-off that you folks saw in the fourth quarter, how much of that do you feel was the economy and how much of it was the one-time cost that you talked about earlier associated with those two different projects?

[Kerry Chauvin:]

With work in our backlog, probably very negligent amount was because of the downturn in the economy. Most of it was because of the additional costs in the load-out, a very large project.

[Katherine Schmidt:]

Okay. That's all for me.

[Kerry Chauvin:]

Okay, Katherine.

[Operator:]

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

[Kerry Chauvin:]

Okay. We'd like to thank everybody for participating and we'll close the conference now.

[Operator:]

And there will be a replay available for this conference starting today at 12