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Gulf Island Fabrication Inc (GIFI 1.18%)
Q3Â 2018 Earnings Conference Call
Nov. 09, 2018, 10:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good morning, and welcome, ladies and gentlemen, to the Q3 2018 Gulf Island Fabrication, Inc. Earnings Conference Call. All participants will going to be in a listen-only mode for the duration of the presentation. 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 -- Investor Relations
Thank you, Jim, and good morning. I would like to welcome everyone to Gulf Island's 2018 third quarter teleconference. Our results were released yesterday 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 later today.
Please keep in mind that the press release and certain comments on this call include forward-looking statements and actual results may differ materially. We would like to refer everyone to the cautionary language included in our press release and to the risk factors described in our 2017 Form 10-K and subsequent SEC filings.
Today, we have Mr. Kirk Meche, President, CEO and Director; Mr. Wes Stockton, our Executive Vice President and Chief Financial Officer; and Mr. Todd Ladd, our Executive Vice President and Chief Operating Officer. Mr. Meche?
Kirk J. Meche -- President, Chief Executive Officer and Director
Thank you, Cindy, and good morning to all of our listeners. I like to start off by welcoming the newest member of our management team, our new CFO, Mr. Wes Stockton. We're excited to have Wes on board as he bring significant financial leadership and EPC experience, and his functional and industry experience will serve us well as we execute our operations, evaluate and pursue our strategic alternatives, and position the Company for future growth.
Now, moving on to our results for the quarter; as noted in our press release, the quarter included many positive accomplishments. In spite of headwinds that contributed to an operating loss for the period, which Wes will address in a minute, during the quarter, we increased backlog across our divisions, including a significant award for the expansion and conversion of a paddle wheel casino vessel into a 245 person river cruise vessel. This project will be executed by our Fabrication division and puts needed backlog back into our Fabrication yard.
We also realized positive operating cash flows of almost $8 million for the quarter and entered into an agreement for the sale of our Texas North Yard and certain associated equipment for $28 million, which we expect will close in the fourth quarter of this year.
In addition, during the quarter, we once again experienced solid performance from our Services division as demand for its services remains strong. Although, I'm pleased with these accomplishments, we continue to be impacted by the underutilization of our facilities within our Fabrication division, and to a lesser extent our Shipyard division.
However, our Shipyard backlog is set to ramp up over the next several quarters. This combined with our newly awarded Fabrication backlog will continue to improve utilization of our facilities going forward.
Now, onto the matter of dispute with a customer for the construction and delivery of two MPSVs. As you know, during the quarter, we filed a lawsuit against a customer to enforce our rights under the contract. We have not received a response from the customer and we continue to work closely with the bonding company in an attempt to move this dispute along to achieve a resolution and a path forward.
The vessels and associated equipment and material continue to be in our care and custody at our Shipyard in Houma, Louisiana. At this point, we have no further details or updates on this dispute.
I will now turn the call over to Wes, who will provide details of our results and segment breakdowns. Wes?
Westley S. Stockton -- Chief Financial Officer and Executive Vice President
Thanks, Kirk, and good morning everyone. I would now like to provide a bit more detail on our results for the quarter. Consolidated revenue for the third quarter of 2018 was $49.7 million with a net loss of $10.9 million or diluted loss per share of $0.73. This compares to revenue for the third quarter of 2017 of $49.9 million and a net loss of $3.1 million or diluted loss per share of $0.21. Our revenue for the quarter reflects an increase in construction activities for our Shipyard division, offset by a decrease in revenue for our Fabrication division.
Our operating results for the quarter were primarily impacted by; the under recovery of our Fabrication overhead costs and to a lesser extent our Shipyard overhead costs, the impact of lower margin backlog within our Shipyard division due to competitive pricing, and bad debt expense of $2.8 million for an accounts receivable reserve recorded during the quarter for our Fabrication division.
These impacts were partially offset by continued strong results from our Services division. Our loss increased relative to the comparable period due to higher operating loss for our Fabrication division resulting from decreased revenue and the receivable reserve, offset partially by a decrease in operating loss for our Shipyard division on increased revenue and improved overhead recoveries, and increased operating profit for our Services division.
To provide a little bit more clarity regarding our operator results for the quarter, let me now provide additional details by operating segment. Our Shipyard division revenue was $24.5 million for the quarter versus $15.1 million for the comparable period of 2017, representing an increase of 63%.
Operating loss for the quarter was $2.5 million compared to an operating loss of $4.4 million for the same period of 2017. The increase in revenue was due to increased construction activities for our ten harbor tug vessels and our Icebreaker tug, offset partially by a decrease in revenues associated with the construction of two MPSVs during the prior period.
The operating loss for the 2018 period was due to under recovery of our overhead costs and the impact of lower margin backlog relates to previous project awards sold during a period of competitive pricing. The decrease in operating loss relative to the 2017 period was due to higher revenue, an overall reduction in our overhead costs, and the prior period including contract losses related to cost increases on the construction of the two MPSVs. We expect continued improvement in the recovery of our Shipyard overhead costs as the projects in our backlog move further into their construction phases.
For our Fabrication division, revenue was $2.3 million for the quarter versus $18.3 million for the comparable period of 2017, representing a decrease of 87%. Operating loss for the quarter was $7.7 million compared to operating income of $472,000 for the same period of 2017. The decrease in revenue was due to the completion of modules for our petrochemical facility during the second quarter 2018, but no significant projects under construction during the third quarter 2018.
The operating loss for the 2018 period was due to the under-recovery of our overhead costs including $700,000 of holding costs for our Texas North Yard, which will be non-recurring upon its sale. In addition, our results were negatively impacted by the aforementioned bad debt expense of $2.8 million for an accounts receivable reserve recorded during the quarter.
Although we continue to pursue collection of the receivable balance, during the quarter, we received indications from our customer that realizability of the receivable was no longer probable. And accordingly, the unpaid balance was reserved. We expect to see an increase in revenue and improvement in the recovery of our Fabrication overhead cost as the recently awarded projects in our backlog move into their construction phases.
For our Services division, revenue was $22.6 million for the quarter versus $17.7 million for the comparable period of 2017, representing an increase of 28%. Operating income for the quarter was $2.5 million or 11% of revenue compared to operating income of $1.2 million or 6.9% of revenue for the same period of 2017. The increase in revenue was due to an overall increase in demand for our onshore and offshore services. The increase in operating income and associated margins was due to higher revenue and improved recovery of our Services overhead costs.
For our EPC division, revenue was $1.1 million for the quarter with an operating loss of $708,000. Revenue for our EPC division continues to consist of pricing, planning and scheduling work for the SeaOne Project. Our loss for the period is due to cost incurred that are not fully recoverable under our current scope of work authorized by SeaOne and represents our ongoing investment in this potential projects and in our EPC division.
Now, let me provide a few comments regarding our income taxes and our backlog and liquidity as of quarter end. Our tax expense for the 2018 quarter reflects only state income taxes as we have not reported any federal income tax benefit for our losses due to GAAP limitations on recognizing deferred tax assets. Although we have not recorded a tax benefit in our results, we will receive a cash tax benefit on future taxable income.
Moving on to backlog, at September 30, 2018, our backlog totaled $370 million, representing an increase of almost $120 million from our year ago backlog and a 10% increase from our backlog at June 30, 2018. Our backlog by operating segment at quarter-end was; $313 million for our Shipyard division, $45 million for our Fabrication division, $12 million for our Services division; and $800,000 for our EPC division.
Please note that backlog excludes almost $30 million of new project awards received subsequent to September 30 through November 8, 2018. Backlog also excludes options on contracts within our Shipyard division which, if exercised, would increase our backlog by approximately $534 million and includes project deliveries through 2025.
With respect to our liquidity, we ended the quarter with cash and short-term investments of $54.5 million, an increase of $15 million from the second quarter 2018. Our increase in cash and investments was primarily due to cash flow from operations of $7.8 million resulting from improvements in our working capital, non-cash depreciation and amortization of $2.5 million, and non-cash bad debt expense of $2.8 million.
Our increase in cash also reflects the receipt of insurance proceeds of $7.2 million associated with Hurricane Harvey damage to our South Texas properties and proceeds of $1.3 million from asset sales. These increases were partially offset by capital expenditures during the quarter of $1.5 million.
During the quarter, we also improved our liquidity by extending the maturity date of our $40 million credit facility to June 2020 and reducing our minimum tangible net worth covenant to $180 million. At quarter-end, we had $2.5 million of outstanding letters of credit and no borrowings on our credit facility, leaving $37.5 million of availability for additional letters of credit or borrowings.
As a result of the aforementioned, our liquidity remained strong with total cash, investments, and availability under our credit facilities of $92 million at September 30, 2018. Of course, our current liquidity excludes the anticipated proceeds from the sale of our Texas North Yard and related equipment for gross proceeds of $28 million which we expect will close in the fourth quarter.
We currently anticipate sale will result in a net gain of approximately $3 million upon closing. Excluding the Texas North Yard assets and equipment, we have approximately $19 million of remaining assets held for sale.
So with that, I will now turn the call over to Todd, who will provide an update on our operations and major projects. Todd?
Todd F. Ladd -- Executive Vice President and Chief Operating Officer
Thanks, Wes, and good morning to everyone. I'll begin with our Shipyard division. Work continues on our ten harbor tug vessels being constructed in our Jennings location. Delivery of the first vessel is scheduled for the fourth quarter of 2018 and the second vessel is scheduled for the first quarter of 2019.
In our Houma location, work continues on the icebreaker tug for St. Lawrence, two river towboats, along with finalizing the engineering and early procurement for the research vessels for Oregon State. Construction activities for the first Oregon State Research vessel are scheduled to commence in the fourth quarter. With that, we held the keel laying ceremony this week on the first vessel which has been named the Research Vessel Taani.
As it relates to the Navy's T-ATS award, although construction cannot commence pending the resolution of the protests by one of the unsuccessful bidders on the project, we have been granted authorization to proceed with the design, development, planning, scheduling, and material procurement for the first vessel. We await the ruling by the US Court of Federal Claims which we hope will occur in the fourth quarter of 2018. This contract has options for seven additional vessels.
With respect to our Fabrication division, the cleaning and prepping activities for our Texas North Yard continue for the expected sale in the fourth quarter of this year. Regarding our Louisiana Fabrication facility, we were unfortunately, without significant work, in that facility during the quarter. However, as Kirk stated earlier, we were awarded a conversion project for a 240 passenger paddle wheel cruise vessel which will be performed by this division.
In addition to this award, we secured additional fabrication work subsequent to the quarter's end. Such amounts are included in the post quarter-end new award amounts, previously mentioned by Wes.
Our Services division had another solid quarter. Work associated with the offshore opportunities remains very strong. We will continue to look for opportunities within the offshore and onshore plant expansion and maintenance programs as well.
Our EPC division continues to work with SeaOne on finalizing the initial engineering design and project pricing. SeaOne schedules remain consistent with financing expected in the second quarter of 2019.
I'll now turn the call over to Kirk for final comments.
Kirk J. Meche -- President, Chief Executive Officer and Director
We remain very positive and optimistic with respect to future opportunities for all our business lines. Our Fabrication division has the most significant bidding activity that we've seen in last several years. We will continue to pursue opportunities, big and small, as we focus our efforts on various opportunities within the petrochemical, industrial and alternative energy sectors.
In the Interim, we will continue with our efforts to preserve our liquidity and remain committed to examining cost within all divisional lines while remaining focused on the needs for future growth of our Company and the resources needed to obtain of goals.
Jim, you may now open the line for questions.
Questions and Answers:
Operator
(Operator Instructions) And we'll take our first question from Martin Malloy from Johnson Rice.
Martin Malloy -- Johnson Rice -- Analyst
Good morning.
Kirk J. Meche -- President, Chief Executive Officer and Director
Hey Marty, good morning.
Martin Malloy -- Johnson Rice -- Analyst
Nice to see the cash generation during the quarter. Could you maybe talk a little bit more about how this Navy contract is going to ramp up and the timing of resolution on this protest?
Todd F. Ladd -- Executive Vice President and Chief Operating Officer
Hey Marty, this is Todd. Yes, so what we're going through right now, what we're anticipating is that this will be resolved before the end of the year. We're being told possibly here in December is when we will have the judge's opportunity to go through and give a decision on everything. When that comes through, it's an item where it won't affect anything we currently have going on because we're already under way with all of our engineering activities, planning and also procurement of materials. Those are scheduled to begin roughly in the March-April timeframe of 2019.
Martin Malloy -- Johnson Rice -- Analyst
Okay, great. And then on the SeaOne Project, not a lot to update in terms of what's available in the SeaOne website or the Port of Gulfport website, can you maybe talk about the status of that project and where it's at terms of actually moving forward?
Kirk J. Meche -- President, Chief Executive Officer and Director
Yes Marty, this is Kirk. So we really don't have much new news in that respect. As Todd had said, the news remains very consistent with what we've been told. They did go out for a capital raise program of a $165 million. They were successful in obtaining the money, so that was good news. And so as we understand it now, they're still -- the bankers are doing their due diligence, they expect to have their final approval in place come at the end of the first quarter, first quarter-second quarter, as we said.
We have been performing some work associated with the project. As you can see, there is little bit of revenue that's being generated by us. Gulfport, we did do some geotechnical work in the Gulfport facilities. I know we're looking to do some work in one of the other facilities as well, waiting for approval from SeaOne to start the process there.
So we're still working with those guys to try and move this project forward. Again, we remain still very optimistic that the project is viable, is going forward. We've had no indication from SeaOne that it's not anything other than that. But I'd say, at this point in time, at the end, they're doing their due diligence. So there's really nothing new to talk about. Again it's just -- it's consistent what they've been telling us for the last quarter.
Martin Malloy -- Johnson Rice -- Analyst
Okay. And then you mentioned that the high level bidding activity in the Fabrication segment. Could you maybe talk a little bit more about the types of projects that you're seeing potentially out there? I know you mentioned petrochemical and alternative energy, I'm assuming that's wind. Anything on the LNG side that you're seeing out there and anything else you want to highlight?
Todd F. Ladd -- Executive Vice President and Chief Operating Officer
Yes. So this is Todd again. So, yes, on the LNG side, we kind of lump that in with petrochemical. So for what we're seeing on that end -- again, it's across the board all from small pipe rack jobs that we're getting and piping that we can support these facilities with, all the way to large modules much of what we did with the CB&I projects that were given to Axiall-Lotte that you saw earlier in the year.
Again, from an alternative energy side, we're starting to see more activity there. There is a lot that's going on in regards to consolidation of the people moving forward with some of those projects, a few things happening and changing there, but again, it's very positive, seeing what's happening with the leases up on the Northeast coast and there is definitely traction and we're getting more inquiries that are coming through for us to price up what these potential jobs could ultimately cost.
And then, on the other sector, a lot of things we're seeing is associated with West Texas and some of the shale opportunity that's out there. There's a lot of companies that -- and trying to move forward with their programs over the next year to five and 10 years out that we're seeing on some of them, they are looking for a good, steady stream of where they can get fabrication handled for just consistency and what they're dealing with on projects and trying to streamline the amount of sub-contractors that they are currently dealing with.
So we're seeing a lot of that consolidation where we feel like we have an advantage, because as a large manufacturing facility, we can meet a lot of their needs, where currently some of their work that was done with smaller groups, we're stretching them pretty thin.
Martin Malloy -- Johnson Rice -- Analyst
What kind of structures or fab -- what exactly would you be fabricating for West Texas?
Todd F. Ladd -- Executive Vice President and Chief Operating Officer
A lot of that is the process module. So a lot of it becomes trucking type modules. Most of it again is from pump skids to compressor skids to production skids, things of that nature that's just locally put on the ground at the well sites to get everything to production.
Kirk J. Meche -- President, Chief Executive Officer and Director
Marty, this is Kirk. So just adding on to what Todd is saying and that's a very good point. Traditionally, when you think about Gulf Island competing in those market spaces for the one-offs, we may not be quite as competitive as some of the smaller companies out in that area. But as Todd said, as they try and streamline their business there is lot of pressure from capacity as well as labor constraints, And so with the number of units that they are looking at, this is mass manufacturing and we can start using that term little bit further as we go forward.
This is not just a one-off pump skid or something very small we are building. These opportunities come in multiple -- hundreds of quantities where again we mass produce these things through our facilities. It becomes more economical for us. It becomes economical for the owner as well. And then again, it's all about supply and demand, it's pretty -- the delivery times on this stuff is very critical to these guys with expansion that's happening now, and with the big fab yards like Gulf Island and what we can turn out in a matter of -- especially undercover with our facilities, we give them those opportunities to meet the time and schedules.
So again, we become very competitive in that market space and again with the track history behind some of these guys from offshore oil and gas, it's spilling into -- it start with West Texas market so -- it's making Gulf Island a very attractable facilities in terms of helping them meet their needs.
Martin Malloy -- Johnson Rice -- Analyst
Okay, that sounds like an exciting new opportunity for you all. I'll get back in queue. Thank you.
Kirk J. Meche -- President, Chief Executive Officer and Director
Okay Marty. Thank you.
Operator
(Operator Instructions) Moving on, we'll take our next question from Peter Delgado from Global Value Research.
Peter Delgado -- Global Value Research -- Analyst
Yes, good morning, gentlemen.
Kirk J. Meche -- President, Chief Executive Officer and Director
Good morning, Peter.
Peter Delgado -- Global Value Research -- Analyst
Hey guys, I wanted to ask, I saw -- in some recent news you guys made a change, you made an addition to the Board of Directors. I'm curious as to how that's going to help the Company? Thank you.
Todd F. Ladd -- Executive Vice President and Chief Operating Officer
Peter, we made an announcement, we have two new Directors to our Board of Directors, and we're very happy to have both of those new Directors on as we have an evolving industry. We talked about diversification within our companies. And so we're always looking for guidance in terms of expertise in some of these other markets as we evolve into them.
So, one of our Directors attended the first meeting, which was last week and our newest Director was elected at the meeting, so he has not had the ability to attend any of our Board meetings as of yet. But again, we're happy to have both of those new Directors on our Board, again, with diversification that's happened within this Company. So I hope that answers your question.
Peter Delgado -- Global Value Research -- Analyst
Yes, thank you.
Todd F. Ladd -- Executive Vice President and Chief Operating Officer
Okay. Thank you, Peter.
Operator
Moving on, we'll take our next question from Tim Curro from Value Holdings.
Timothy Curro -- Value Holdings, L.P. -- Analyst
Hi, about four years ago, you announced a cooperative agreement with Bechtel. I was wondering, did anything ever come of that?
Kirk J. Meche -- President, Chief Executive Officer and Director
Tim, this is Kirk. I will tell you, the short answer is, the project we were chasing at the time, they were not awarded the project. So the agreement, I guess at this point in time didn't have much bearing on it. But, I think as part of that agreement, we had an opportunity to really get to know the Bechtel folks and I think that is helping us, as we push forward with some bidding opportunities. We do have bids that we have turned into Bechtel. And I think the relationships we formed during that cooperation agreement will hopefully help us, as we move forward, as we now know some of the players within the Bechtel organization.
Timothy Curro -- Value Holdings, L.P. -- Analyst
Great. Thank you.
Kirk J. Meche -- President, Chief Executive Officer and Director
Okay, thank you.
Operator
(Operator Instructions) Moving on we'll take our next question from Tom Spiro from Spiro Capital.
Tom Spiro -- Spiro Capital -- Analyst
Good morning.
Kirk J. Meche -- President, Chief Executive Officer and Director
Good morning, Tom.
Tom Spiro -- Spiro Capital -- Analyst
One of the challenges for the quarter just ended, as noted in your press release, was lower than desired margins due to competitive pricing on previously awarded backlog. So your backlog, as you're reporting, it is large. I was curious, what kind of margin do you think you have in that backlog? Are you comfortable with the margins are there in the backlog?
Kirk J. Meche -- President, Chief Executive Officer and Director
So, Tom, what I will tell you, we've typically don't give any guidance, but I will tell you this, we've said this publicly that the backlog we have currently was a bit very tight, very competitive. We did diversify out of some of those markets into different markets where we feel that the margins have and will improve, but I will tell you as we've said in the past, they're traditional Shipyard type margins and so we are hopeful that the margins will yield what we believe them to yield going forward. So I guess, the answer to your question is the margins should improve as these larger scale projects come on board.
Todd F. Ladd -- Executive Vice President and Chief Operating Officer
And I would add. Maybe not as importantly or maybe as importantly, as we start to see that backlog starts to really kick in the yard, we will see improved recoveries of our overhead. That, of course, was a challenge for us in the Shipyard; to a lesser extent in the Fab yard, of course, but was an impact for the quarter. But as we get into the early part to mid part of 2019; our hope, our expectation is that overheads, as it relates to the Shipyard are no longer an issue and it's not something that we're talking about.
Tom Spiro -- Spiro Capital -- Analyst
Thanks, that's helpful. And secondly, on the issue of labor, can you tell us what you're seeing by way of cost increases and how is the availability of labor?
Kirk J. Meche -- President, Chief Executive Officer and Director
Tom, this is Kirk. The labor aspect, there certainly is a little pressure we see from our Jennings and Lake Charles facilities within our Shipyard sector. That's due to the amount of petrochemical work that's being done in Lake Charles area, so this put a little pressure in terms of; one, the quality of folks that we have; two, maintaining the guys we have at the current rates. But I think we've got that under control and to a much lesser extent from our Louisiana operation standpoint, the area is still depressed in terms of amount of work that's out there. We know some of our competitors had some major layoffs in Terrebonne, St. Mary and Lafourche Parishes.
And so, right now we have the ability to try and move some of our labor across our divisional lines. But as Todd said, as we start ramping up a little bit more in our Fab yard, we'll start pulling some folks away from the Shipyard sector and start looking to hire additional folks.
Right now, we believe that we're comfortable where we sit and we believe that there is availability within the Louisiana market, especially the South Louisiana market for the labor going forward. But we are very conscious of the pressure that maybe put on in not too distant future, if there is some recovery within oil and gas sectors.
Tom Spiro -- Spiro Capital -- Analyst
Thanks. And lastly, regarding our Lake Charles operation, as I read the papers, it seems like the trade dispute between the US and China may lead to some deferral of Chinese purchases of LNG. I wondered how that may be affecting our outlook for Lake Charles, if at all.
Kirk J. Meche -- President, Chief Executive Officer and Director
Well, if you think about it, Lake Charles is really situated for -- Lake Charles is really situated for repair work on large vessels coming in and out of port. So, it shouldn't have really any impact on the facilities. Again, it was not the market we're trying to chase. I mean Lake Charles facility; it's a very small strip land. It's not much fabrication going on in that respect in that area.
Tom Spiro -- Spiro Capital -- Analyst
Okay. Thanks much, and good luck.
Kirk J. Meche -- President, Chief Executive Officer and Director
Okay, thank you Tom.
Operator
(Operator Instruction) And at this time, that will conclude today's question and answer session. At this time, I like to turn the conference back over to our speakers for any additional comments.
Kirk J. Meche -- President, Chief Executive Officer and Director
This is Kirk. Again, thanks to everyone for joining us this morning and your interest in Gulf Island. We'd like to wish everyone happy holidays to all our listeners, and please be safe and we'll speak to everyone next quarter. Thank you.
Operator
And again, that will conclude today's conference. We do thank you for your participation. You may now disconnect.
Duration: 30 minutes
Call participants:
Cindi Cook -- Investor Relations
Kirk J. Meche -- President, Chief Executive Officer and Director
Westley S. Stockton -- Chief Financial Officer and Executive Vice President
Todd F. Ladd -- Executive Vice President and Chief Operating Officer
Martin Malloy -- Johnson Rice -- Analyst
Peter Delgado -- Global Value Research -- Analyst
Timothy Curro -- Value Holdings, L.P. -- Analyst
Tom Spiro -- Spiro Capital -- Analyst
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