Good day everyone, and thank you for standing by. Welcome ladies and gentlemen to today's Gulf Island Fabrication, Inc. Third Quarter 2020 earnings call. A quick reminder that all participants will be in listen-only mode for the duration of the presentation, and this call is being recorded. At this time, I'd like to turn the floor over to Ms.
Cindi Cook for opening remarks and introductions. Cindy, please go ahead..
Thank you, and good afternoon. I would like to welcome everyone to our third quarter 2020 teleconference. Our results were released this 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 after 7 P.M. this evening.
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 2019 Form 10-K and subsequent SEC filings.
Please also note that management may reference EBITDA and Backlog on this call, which are financial measures not recognized under U.S. GAAP. As required by SEC rules and regulations, these non-GAAP financial measures are reconciled to their most comparable GAAP financial measures in our press release. Today, we have Mr.
Richard Heo, President and CEO; and Mr. Wes Stockton, Executive Vice President and CFO. Mr.
Heo?.
Thank you, Cindi. Good afternoon, everyone, and welcome to our third quarter discussion of results, business trends and outlook.
I am happy to be here with you this afternoon on the eve of our presidential election, and I hope that each of you and your families are continuing to cope well with the ongoing uncertainty and associated challenges of the COVID-19 pandemic.
On today’s call, I will first provide commentary on our third quarter and the key factors that impacted results. I will also discuss some of the near-term actions we are taking to address these challenges. Then, I will provide an update on the progress we are making on some of our key initiatives in the current business environment.
Wes will then discuss our third quarter results in greater detail as well as our backlog and liquidity position. We will then open-up the call for questions and conclude with some closing remarks.
Now, moving on to the quarter which was very challenging due to the ongoing economic and operational impact of COVID-19, a record level of tropical storm and hurricane activity along the Gulf Coast, and continued oil price uncertainty which has impacted customer decision making.
The prolonged effect of the COVID-19 pandemic had a pronounced impact on our key projects in our Shipyard Division during the third quarter.
As we continue to ramp up our workforce during the quarter to support our longer-duration projects, we experienced several issues including challenges with hiring and retaining personnel, ongoing impacts of physical distancing, and increased employee absenteeism and subcontractor cost increases and delays.
Specifically, our towing, salvage and rescue ship projects had the greatest impact from the cumulative effect of the COVID-19 pandemic. In the quarter we were planning to continue to increase our craft labor workforce by a significant headcount to support our execution plan.
However, as we continue to ramp up our recruitment efforts for craft labor, we were met with hiring and retention challenges. To achieve our objectives we had to hire three craft professionals for every one that was needed due to the high turnover.
We also experienced higher expenses for onboarding the additional personnel and project delays due to the high frequency of employee turnover and absenteeism.
Deliverables from the third-party engineering firm supporting our projects have also been delayed as a result of the COVID-19 pandemic, and in turn this has affected our planned construction schedule and the release of subcontractor work.
As a result, the cumulative effect of these COVID-related matters will impact the remaining duration of the projects and result in extensions of schedule and increased forecast costs.
For example, the resequencing of construction activities will require us to perform construction activities on a concurrent basis, which is less efficient and reduces our ability to incorporate the benefits of previous experience into each follow-on vessels.
In response to these challenges, we are working closely with the Navy and will be submitting a request for equitable adjustment to extend our schedules and recoup the cost increases associated with the impact of COVID-19 on our projects. The potential benefits of any favorable resolution of the REA are not reflected in our third quarter results.
Similarly, on our Research Vessel Projects, which were originally delayed to allow the customer to complete their engineering before recommencing construction, our customer has experienced additional delays with their engineering subcontractor due to COVID-19 impacts.
This will further extend the project schedules and result in additional construction delays.
We are close to reaching agreement on the near-term impacts on schedule and cost associated with the additional engineering delays, and are working collaboratively with our customer regarding the longer-term impacts to schedule and costs, including any potential impacts to construction due to COVID-19.
Besides the impact of the COVID-19 pandemic, during the quarter we also experienced an unfortunate accident with the first of our two forty-vehicle ferries, which was damaged by an overhead crane that engaged from its tracks, landing on the hull under construction. Fortunately, no one was hurt, but the hull suffered considerable damage.
As a result, the customer has issued a rejection letter indicating that they will not accept the hull, considering the previous repairs made to the vessel as discussed in the first quarter, and the new repairs that would be required now, which the customer believes will ultimately result in a hull that is out of tolerance.
In response, we have suspended construction activities on the vessel and are working with the customer to evaluate all our options, including remediation actions that could be taken in lieu of fabricating a new hull.
We are also working with our insurer to assess the coverage that would apply to any cost increases for either a remediation action or the fabrication of a new hull.
Based on our preliminary estimates and before consideration of any potential insurance coverage, we currently believe the incremental forecast costs resulting from this accident may range from $1 million based on a repair scenario to $4 million, based on constructing a new hull.
Due to the uncertainty with respect to the ultimate course of corrective action that may be taken regarding the hull and any insurance coverage that would apply, during the third quarter, we accrued $100,000 associated with our insurance deductible, and are working through this issue with our customer and our insurer.
During the quarter, we were also faced with one of the most active storm seasons on record with the past September being the most active month on record. As a result, we have at times been forced to cease operations and prepare our facilities for the potential impact of high winds and storm surges.
Just last week at the end of October, hurricane Zeta made landfall in Southern Louisiana close to our Houma facility as a strong Category-2 storm, the strongest on record so late in the season. We were fortunate that our facility only suffered minor flooding and wind damage, which caused power outages for the surrounding counties.
We were not as fortunate with Hurricane Laura in late August, which made landfall near our Jennings and Lake Charles facilities as a high-end Category 4 hurricane, with wind speeds of 149mph, damaging our Lake Charles facilities, drydocks, and our ninth harbor tug project which was within days of being delivered.
While many of our employees in Lake Charles and Jennings suffered substantial personal property losses, thankfully no one was injured. I am grateful for the efforts of employees who have continued to deliver on our project commitments during this difficult time.
In spite of the impacts of Hurricane Laura, we completed the ninth harbor tug project in October, and are still on target for a fourth quarter delivery of the tenth harbor tug and closure of our Jennings facility.
With respect to several of the initiatives, we shared with you earlier this year our key focus areas continue to be on demonstrating more discipline in pursuing and executing projects, strengthening our management and functional leadership, enhancing our processes and procedures, and improving resource utilization and centralizing key project resources.
We remain disciplined in pursuing project opportunities and more importantly, practicing the same discipline in our execution.
As a result, absent the impacts of COVID-19 and its impact on our craft labor ramp up as well as the unfortunate crane accident in the quarter, our projects are progressing with improved project performance relative to their forecasts.
As end markets improve and the volume of opportunities increase, I am confident that we will have established a strong foundation to pursue only those opportunities where we provide value, and can differentiate and execute the projects with discipline and strong commercial management.
We are also seeing the benefits of a strengthened management team and functional leadership.
We fortified our Human Resources team earlier in the year, which enabled us to hire and onboard over 500 employees this year, or approximately 50% of our total employee headcount, to accommodate our resource needs and turnover challenges for our Shipyard Division.
In addition, due to our ongoing focus on training and field supervision, our safety incidents are at record low levels even with the high level of employee turnover.
Further, through the efforts of our strengthened human resources team, we were notified in October by the Louisiana Economic Development that we were awarded competitive incentive packages that include FastStart and Quality Jobs Programs.
These programs not only provide financial incentives if we achieve our hiring goals, but also support the recruiting and training of skilled craft positions as we work to execute our backlog.
We very much appreciate the State of Louisiana recognized our investment in the community, and chose to support our efforts to build quality jobs and drive economic investments in the communities we serve.
Our human resources team is also partnering with local technical colleges to help recruit, train and develop the future craft professionals that we have come to depend on for our success.
I am very proud of the efforts of our organization as we continue to build on our legacy of offering residents of southern Louisiana, attractive career opportunities. As we continue to improve our processes and procedures, we are seeing signs of execution and commercial improvements in our project results.
For example, in our Fabrication & Services division, process improvements are benefiting many of our fabrication projects, further building on the $1 million of project improvements we realized in the second quarter 2020.
In particular, our jacket and deck project had solid execution and was completed on an accelerated schedule in the midst of the Corona pandemic and three named storms disrupting our Houma operations. Our team did a great job of safely delivering the project and realizing project improvements relative to our previous forecast.
Similarly, we see better than forecasted performance on many of our quick book and burn projects associated with our services business.
Another process improvement that is not necessarily visible in our financial results is improved hiring and onboarding processes, which are now less manual and enabled us to hire the high volume of personnel needed to support the projects.
In the past, the process of hiring and onboarding were accomplished through paper applications, and today, we have migrated to an online electronic application process which saves us administrative costs and reduces potential errors.
With respect to our efforts to improve resource utilization and centralize key project resources, we decided well before the pandemic to close our Jennings facility. While this was a difficult decision, it positions us better in the near-term due to the impact of the COVID-19 pandemic and longer-term as our end markets recover.
We also took this initiative one step further by combining our Services Division with our Fabrication Division in the first quarter. These consolidation efforts enable us to lower costs and consolidate our best people and processes in one location, as well as help in partially mitigating the market challenges we are facing.
We continue to closely monitor the Fabrication & Services Division’s resource requirements given the challenges in the oil and gas end markets.
We have identified and implemented incremental quarterly overhead cost savings for the division of approximately $500,000 that will be realized in the fourth quarter and in future quarters, and we are continuing to evaluate other opportunities to improve the division’s operating results.
On the business development front, the bidding activity in our Shipyard Division for new build vessels continues to be selective, as our focus is on executing our backlog and increasing our higher margin maintenance and repair work.
With respect to our Fabrication & Services Division, we have seen an uptick in offshore services activity, and we expect this increase to be sustained through the fourth quarter. This quick book and burn work is being executed at attractive margins, but the volume of market activity is unfortunately below what we would like to see.
On our large onshore and offshore fabrication opportunities, the final investment decisions continue to be challenged due to COVID and oil price uncertainty. While we have not lost any meaningful opportunities we are pursuing, these larger CapEx projects continue to be delayed.
In the interim, we are actively supporting our current customer relationships and will be disciplined in focusing our resources on those opportunities, where we have confidence that the project will reach a final investment decision, and where we can differentiate ourselves from our competitors.
We are also expanding our potential market opportunities as we have begun to make the transition to green energy end markets to support our customers in their fabrication and services needs in renewable biofuel plant construction, as well as increasing opportunities in hydrogen production.
We have added the necessary business development support to help us pivot along with our customers in pursuit of this growing market opportunity. I will now turn the call over to Wes to discuss our quarterly results in greater detail..
Thanks Richard, and good afternoon, everyone. I will discuss our consolidated results and then provide some additional details regarding our segment results, putting in context the factors mentioned by Richard and their impact on the quarter. I will then conclude with a discussion of our backlog and liquidity.
Consolidated revenue for the third quarter 2020 was $54.9 million, compared to $60 million for the second quarter 2020, and $75.8 million for the third quarter 2019, representing a sequential and year-over-year decrease of approximately 9% and 28%, respectively.
The sequential decrease was due to lower revenue for our Fabrication & Services Division, offset partially by higher revenue for our Shipyard Division. The decrease from the third quarter 2019 was due to lower revenue for our Fabrication & Services Division, and to a lesser extent, our Shipyard Division.
Consolidated net loss for the third quarter 2020 was $12.3 million, compared to a net loss of $5.5 million for the second quarter 2020, and $6.8 million for the third quarter 2019.
EBITDA was a loss of $10.1 million for the current quarter, compared to a loss of $3.4 million for the trailing period, and a loss of $4.6 million for the prior year quarter.
Our consolidated loss for the current quarter was attributable to project charges of $6.7 million and a low margin backlog for our Shipyard Division, low revenue volume for our Fabrication & Services Division, and the underutilization of our facilities and resources within both divisions.
Our underutilization was due to a reduced level of work hours for Fabrication & Services, construction delays for our three research vessel projects within our Shipyard, and the impacts of Hurricanes Laura, Marco and Sally on both our divisions.
In addition, we incurred costs associated with retaining salaried and hourly craft employees to perform process improvements, special projects and facility maintenance. The quarter also includes charges of $1.2 million associated with the impact of Hurricane Laura on our Shipyard Division.
Now let me provide some additional details regarding our quarterly results by operating segment. For our Shipyard Division, revenue was $37.1 million for the quarter, compared to $33.9 million for the second quarter 2020, and $43.3 million for the third quarter 2019.
The 9% increase relative to the trailing period was due to higher procurement activities on our research vessel and seventy vehicle ferry projects.
The 14% decrease compared to the third quarter 2019 was due to lower revenue for our harbor tugs, as we had fewer vessels under construction, lower construction activity on our research vessel projects due to engineering delays and the completion of our ice-breaker tug earlier in the year.
These impacts were offset partially by increased construction and procurement activities for our towing, salvage and rescue ship projects, and increased procurement activities for our seventy vehicle ferry project.
Operating loss for the third quarter 2020 was $9.2 million, compared to an operating loss of $1.7 million for the second quarter 2020, and $3.3 million for the third quarter 2019.
EBITDA was a loss of $8.4 million for the current quarter, compared to an EBITDA loss of $922,000 for the trailing period, and an EBITDA loss of $2.4 million for the prior year quarter.
The operating loss for the third quarter 2020 was attributable to project charges of $6.7 million related to the forecast cost increases on our towing, salvage and rescue ship projects, a low margin backlog, and the partial underutilization of the division’s facilities and resources due primarily to the previously mentioned construction delays for our research vessel projects.
In addition, the winding down of our Jennings facility in connection with its anticipated fourth quarter closure, as well as temporary closures of our facilities to prepare for the Gulf Coast hurricane activity, further impacted our utilization levels.
The quarter also includes $1.2 million of charges related to damage caused by Hurricane Laura to our drydocks, warehouses and bulkheads at our Lake Charles facility and our ninth harbor tug project. The charges relate to deductibles associated with our insurance coverages and preliminary estimates of uninsurable damage to our bulkheads.
The operating loss for the quarter does not reflect the potential benefits, if any, associated with the request for equitable adjustment we are submitting to the U.S. Navy to recover the cost increases for our towing, salvage and rescue ship projects.
Our trailing and year-over-year quarters also reflected project impacts, including project charges of $600,000 in the second quarter 2020, and $2.4 million in the third quarter 2019.
Absent the individual project impacts for the current quarter and prior periods, our project margin mix for the quarter was comparable to the trailing period and lower than the year-over-year period.
In addition, our under recovered overheads were generally consistent across all periods, with the current period realizing higher utilization due to higher work hours for our towing, salvage and rescue ship projects, offset partially by the previously mentioned utilization impacts related to the wind down of the Jennings facility and Hurricane activity in the quarter.
With respect to G&A, the current quarter benefited relative to the prior periods due to our cost reduction initiatives, including a 6% decrease from the trailing period and a 30% decrease from the year ago quarter.
For our Fabrication & Services Division, revenue was $18.2 million for the quarter compared to $26.6 million for the second quarter 2020, and $32.7 million for the third quarter 2019.
The 31% decrease from the trailing period was primarily due to our offshore jacket and deck project which was completed in the current quarter, offset partially by higher offshore services activity and higher revenue for our marine docking structures project.
The 44% decrease from the third quarter 2019 was also due to the completion of our offshore jacket and deck project and lower revenue for our paddlewheel river boat and subsea components projects, which were completed in the first quarter 2020.
In addition, we experienced lower offshore and onshore services activity and had less small scale fabrication work, typically associated with our offshore services business. These decreases were partially offset by increased revenue for our marine docking structures project and offshore modules project.
Operating loss for the third quarter 2020 was $1.1 million, compared to an operating loss of $1.4 million for the second quarter 2020, and $1.3 million for the third quarter 2019. EBITDA was $153,000 for the current quarter, compared to an EBITDA loss of $206,000 for the trailing period, and an EBITDA loss of $53,000 for the prior year quarter.
The operating loss for the third quarter 2020 was attributable to low revenue due to low backlog levels and costs associated with retaining salaried and hourly craft employees to perform process improvements, special projects and facility maintenance and repairs.
In addition, the division’s facilities and resources were not fully utilized due to a reduced level of work hours and the temporary closures of our facilities to prepare for the Gulf Coast hurricane activity. These impacts were partially offset by project improvements of $600,000 for the division’s offshore jacket and deck project.
Our trailing and year-over-year quarters also reflected project impacts, including project impact of $1 million in the second quarter 2020, and project charges of $1.5 million in the third quarter 2019.
Absent the individual project impacts for the current quarter and prior periods, our project margin mix for the quarter was higher than both the trailing and year-over-year periods, primarily due to our small scale fabrication projects and offshore services representing a greater percentage of our total revenue.
In addition, our under recovered overheads were generally consistent with the trailing period, but higher relative to the year-over-year period due to lower work hours and the previously mentioned costs associated with the retention of personnel.
Specifically as it relates to utilization, our work hours for the third quarter 2020 were approximately 50% lower year-over-year, with the lower utilization primarily due to completion of our paddlewheel river boat project, lower onshore and offshore services activity, less small scale fabrication project work, and the hurricane impact in the quarter.
With respect to G&A, the current quarter benefited relative to the prior periods due to the consolidation of our former Fabrication Division and Services Division and cost reduction initiatives, including a 20% decrease from the trailing period and a 30% decrease from the year ago quarter.
For our Corporate Division, operating loss for the quarter was $1.9 million, compared to an operating loss of $2.3 million for both the second quarter 2020 and third quarter 2019, with the decrease relative to both periods due to lower incentive plan costs and our cost reduction initiatives.
In addition, the current quarter benefited relative to the trailing period from lower legal fees. Next, I will provide a few comments regarding our quarter end backlog and liquidity situation. At quarter end, our backlog totaled $429 million, representing a decrease of 7% from a year ago backlog, and 9% compared to June 2020.
The decrease from June was due to revenue volume outpacing our new project awards for both our Shipyard and Fabrication & Services Divisions in the third quarter. At quarter end, approximately 94% of our backlog was attributable to our Shipyard Division, which excludes customer options for three additional vessels for the U.S.
Navy, which if exercised, would approximate $200 million. With respect to our liquidity, operating cash flow for the quarter was negative $3.5 million and our capital expenditures were $2.4 million.
These cash flow uses were partially offset by proceeds from the sale of assets held for sale of $600,000 in the third quarter, resulting in a cash and investment balance of approximately $64 million at quarter end.
We also had total debt of $10 million at quarter end attributable to our PPP Loan, and in September we submitted our application to our lender, requesting loan forgiveness of $8.9 million. Our bank has 60 days to approve or deny our application.
Should the bank approve our application, it will be forwarded to the SBA to approve or deny the application. Any portions of the loan not forgiven, along with interest, will be repaid based on the terms of our loan and applicable program guidelines.
At quarter end, we have reflected the loan as debt, with the debt classification based on the terms and conditions of our loan, and the timing of required repayments absent any loan forgiveness.
We intend to reflect the benefit of any loan forgiveness if, and when, our loan forgiveness application is approved by the SBA, and after we have reasonable assurance from the SBA that we have met the eligibility and loan forgiveness requirements of the program.
Regarding our $40 million credit facility, at quarter end we were in compliance with all our financial covenants, with approximately $11 million of outstanding letters of credit and no borrowings on the facility.
With respect to our working capital, it totaled approximately $61 million at quarter end, including approximately $8 million of assets held for sale. Our working capital, excluding cash and investments, assets held for sale and the current portion of our PPP Loan, was negative $7 million.
This compares to breakeven working capital on the same basis at June 2020.
Due to the lumpiness of our project business and timing of project billings and collections, we anticipate ongoing quarterly variability in our working capital requirements, with an increase in our working capital in the fourth quarter 2020 of approximately $10 million to $15 million, which is consistent with our previous expectations for the year.
Also consistent with our previous expectations, we currently anticipate our capital needs, which include contractual requirements for our projects with the U.S. Navy, to be approximately $2 to $3 million for the fourth quarter 2020.
Finally, with respect to expectations regarding EBITDA for the remainder of 2020, given the COVID-19 pandemic, crude oil price volatility and related market uncertainty, we will not be providing guidance at this time. This concludes our prepared remarks. Operator, you may not open the line for questions..
Operator:.
Okay. Thank you, operator. The impact of COVID-19 and the Gulf Coast hurricanes were clearly disruptive to our operations in the third quarter and resulted in disappointing results. However, where possible we are taking actions to mitigate these challenges and strengthen the company.
First, we are in active discussions with our customers whose projects have been impacted to reach equitable resolutions. We also continue to focus on our processes and procedures and are seeing incremental signs of improved execution and commercial management.
These efforts are further supported by initiatives and opportunities in regard to strengthening our leadership team, including our human resources and project execution personnel. Ahead of the COVID-19 pandemic spread, we announced the closure of our Jennings facility and consolidated our Fabrication and Services Divisions.
We are now taking further steps to implement additional cost savings in the combined Fabrication & Services Division, which will be realized beginning in the fourth quarter, and we continue to be focused on preserving our cash by controlling costs and monetizing underutilized assets.
From a bidding perspective, we remain disciplined and focused on opportunities where we provide value and can differentiate ourselves, while executing the projects at attractive margins. We are also evaluating new market opportunities in areas such as renewable energy, including biofuel, plant construction and hydrogen production.
I am confident that we will see the benefit of all these actions as our end markets recover. In closing, despite the challenges of this year, 2020 also represents a key milestone in our history.
Gulf Island was founded in 1985 by Doc Laborde, and the company quickly established itself as a leader in the fabrication of offshore structures for the oil and gas industry.
Over the past 35 years, we have expanded our capabilities and the markets we serve, bringing together a legacy of industry leadership with an unyielding commitment to quality and safety in the fabrication of complex steel structures and marine vessels and offshore and onshore services.
In recognition of this anniversary and the past and future evolution of Gulf Island and the markets we serve, we have refreshed our logo and website.
The new logo brings to the forefront the transition that we are making to support our customers who are moving to green energy, and our continued focus on delivering steel structures to support onshore infrastructure investments, while maintaining our place as a premier provider of marine vessels, offshore structures and services.
Our rich history and evolution is only possible with great people. I want to acknowledge and thank these employees today for their contribution. For those on the call, I want to thank you for your interest in Gulf Island, and allowing us the opportunity to discuss our results.
We are doing all we can to mitigate the impact of the unprecedented challenges before us, and I look forward to speaking with you again on our fourth quarter results conference call. Be safe and take care. Thank you..
Once again, ladies and gentlemen, that does conclude our call for today. We thank you for joining us. You may now disconnect..