Richard Heo - President & Chief Executive Officer Westley Stockton - Executive Vice President & Chief Financial Officer Cindi Cook - Executive Assistant to CEO.
Good afternoon, ladies and gentlemen. And welcome to the Gulf Island's Conference Call to discuss the Second Quarter 2021 results. All participants will be in listen-only mode for the duration of the call. This call is being recorded. And at this time, I'd like to turn the floor over to Ms. Cindi Cook for opening remarks and instructions.
Cindi, please go ahead..
Thank you, and good afternoon. I would like to welcome everyone to our second quarter 2021 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 PM 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 2020 Form 10-K and subsequent SEC filings.
Please also note that management may reference adjusted net income, EBITDA, adjusted EBITDA, new project awards and backlog on this call which are financial measures not recognized under US GAAP.
As required by SEC rules and regulations to the extent used, 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 second quarter discussion of our strategic priorities, financial results and business trends. I'm happy to be here with you this afternoon. And I hope that each of you and your families are continuing to stay healthy and safe.
During today's call I'll provide an update on the progress we've made on our strategic priorities including an overview of the next phase of our business transformation, the status of our key projects and wind down of the shipyard business and the current business environment and in market opportunities.
Wes will then discuss the financial impact of the Shipyard Transaction which closed in April and review our quarter results in greater detail. We will than open up the call for questions and conclude with some closing remarks. First, as announced last week the SBA approved our request for forgive $8.9 million of our PPP loan.
The loan and the subsequent forgiveness was critical for our turnaround through a very uncertain and challenging period for everyone. It allowed us to retain employees and have the liquidity necessary to execute our initiatives to place the company on a path to profitability.
Moving on to the quarter overall we're encouraged by the second quarter results, while we're not seeing the full benefit in our financial results just yet we're making significant progress on our strategic priorities which will continue to help improve our financial results.
We continue to see improved project performance and we're optimistic about the end market trends and our positioning to take advantage of an improving bidding environment.
With the successful completion of the Shipyard Transaction we are now strategically positioned as a focused fabrication and services business and we're excited about the opportunities that lay ahead.
Last year we highlighted a plan that was focused on improving our financial strength and business execution in order to establish a stronger foundation to pursue profitable growth. Over the last 18 months we have made significant progress on the strategic initiatives underlying this plan and we are ready to move to the next phase of our plan.
However, before highlighting the next phase I'll provide an update on the progress we have achieved on the initial phases of our plan. One of our initiatives was to improve our risk profile.
The successful completion of the Shipyard Transaction was critical to this initiative as we were able to divest our higher risk long-term construction contracts with durations through 2024. These contracts represented 90% of our backlog and we're generally breakeven or in a loss position.
In addition the previous closures of our other Shipyard facilities and ultimate wind down of our Shipyard operations will further reduce our risk profile.
Another focal point was to strengthen our liquidity as a result of the shift our transaction cost reduction measures and the sale of our underutilized assets we were able to exit the quarter with nearly $75 million in cash. In addition the Shipyard Transaction significantly reduced our bonding and letters of credit requirements.
A third initiative was to improve our resource utilization and project execution through the rationalization and integration of our facilities, personnel enhancements and implementation of improved processes we have reduced our overall cost structure and improved our fabrication and services project execution which has resulted in four consecutive quarters of positive EBITDA.
Importantly, we have been able to generate this positive EBITDA and improve margins despite lower revenues. And lastly, we have been focused on reducing our reliance on the offshore oil and gas market.
We have focused our fabrication business development efforts on onshore growth in markets with an emphasis on projects associated with the LNG and petrochemical build out along the Gulf Coast.
Within services we're broadening our services capabilities to target customers outside of our core offshore energy customers, while growing with our existing customer base. I'm very proud of the accomplishments based so far and feel that we have come a long way during a very challenging time.
We'll continue to build on these initiatives but with the significant progress we've made to this point we're now shifting our focus to the next phase of our strategic plan which is centered on generating predictable and profitable growth.
We'll accomplish this goal by focusing on the following additional initiatives, pursuing new growth and markets, diversifying and growing our services business, further strengthening project execution and expanding our skilled labor workforce.
I'll provide a brief overview of each aspect of our plan and we will provide more details and updates in the coming quarters. First, is pursuing new growth in markets. Our team is focusing its near-term business development efforts on higher growth end markets such as LNG and petrochemical.
Given our capabilities and geographic location we are well-positioned to pursue these market opportunities along the Gulf Coast and have begun bidding on such opportunities. Over the longer term we'll expand our core fabrication capabilities to include sustainable energy end markets as well.
Second, we'll look to diversify and expand our services business. With recent new master service agreements in place we have already started expanding our customer base for our existing offshore services business. The next step will be to broaden our offshore services offerings as well as expand our services capabilities to target onshore customers.
An example of an exciting near-term opportunity is to expand our services offerings by building relationships with the OEMs of specialized equipment used by our customers.
As our customers continue to evaluate ways to consolidate their contractor base our relationship with the key OEMs will allow us to cross-sell and provide additional value to our customers.
Third, will further strengthen our execution while we have made significant progress in our project execution, we are focused on further strengthening our project management, process and procedures which will drive higher margins and improve new award win rates.
Finally, we'll expand our skilled labor force, we continue to focus on ways to enhance and add to our strong base of loyal and high-quality craft personnel as a strong labor force will be a key differentiator in pursuing and executing on new project awards given the scarcity of available skilled labor.
Moving onto a review of the project performance of our backlog our 70s vehicle ferry project for the Texas Department of Transportation was impacted by an extension of schedule due to the client directed changes, higher forecast costs to launch the vessel and lower than anticipated progress on the project due in part to COVID impacts.
This resulted in forecasted liquidated damages and increased duration related costs including project supervision and subcontracted services. We submitted a claim to our customer to extend the project schedule and recover the increased forecast costs associated with client directed changes and COVID impacts.
But this initial claim was not accepted and we continue to work collaboratively in an attempt to reach an equitable contract adjustment associated with these impacts. The ferry is currently on track to be completed in the second quarter of 2022. With respect to our 240 vehicle ferry projects our teams continue to make progress.
The second ferry is in the water going through the commissioning process. However, due to additional design challenges which are resulting in problems with certain equipment performance delivery has been pushed back modestly. We are working with the customer and equipment manufacturers to remedy the issues, are targeting delivery in the third quarter.
On the first ferry we have commenced the rebuild as a whole and continue to work with the customer on the challenges and construction from the deficiencies in their design. We remain on track with the rebuild and currently expect the first vessel to be completed in the second quarter of 2022.
We have filed a lawsuit in North Carolina for a breach of contract based on the deficiencies in design and to recover the increased costs and extensions of schedule resulting from the design related impacts. While the challenges experienced on the remaining Shipyard projects are disappointing, they are at a manageable scale.
We're evaluating all possibilities to ensure we safely deliver a quality product to the customer and minimize the financial impact to Gulf Island. Now turning to our fabrication and services division.
We are encouraged by the improving bidding activity but the highlight of the quarter was another period of strong project execution by the fabrication and services team.
This is exciting as improving execution was a key component of our strategic initiatives and we're extremely pleased with the progress that has been made and we expect the improvements to continue.
As previously stated, the strong project execution allowed the segment to deliver positive EBITDA for the fourth consecutive quarter and accomplishment, we are very proud of given the depressed levels of revenues we're currently experiencing.
We think it is important to highlight that the improved project execution and reduced overhead cost structure positions us to generate solid operating performance as volumes recover.
The strong execution was consistent across the broader fabrication services business with project delivering results better than as told estimates and most projects generating double-digit project gross margins.
The business recorded $1.9 million of project improvements in the quarter from our offshore module, material supply and subsidy structures contracts, which demonstrates our capabilities executing against our plan and outperforming our initial project estimates.
The strong project execution in recent quarters highlights the strategic benefits of our key resources including our large lay down and covered facilities, which helps us ensure projects stay on schedule and deliver financial performance consistent with our expectations.
Given we are beginning to transition our focus to generating profitable growth we're very pleased to see our improved project performance coincide with a pickup in bidding activity in many of our key markets.
Specifically, our business development efforts in the fabrication business are focused on expanding into adjacent end markets and given our geographic location key resources in our home and yard and our skilled craft labor force. We believe we are well-positioned to win these markets.
The LNG market represents our most attractive opportunity in the near-term as most of you are probably aware there are a number of large LNG projects in Texas and Louisiana that could provide attractive opportunities provide attractive opportunities for the company and we're beginning to bid on some of these projects.
As we've discussed in the past, there can potentially be multiple opportunities for success on each of these projects depending on the facility and project we're often bidding on numerous scopes to different contractors for the entire complex.
The scale of opportunity will allow us flexibility and multiple potential awards on the larger capital projects. We're excited about the prospects for the LNG market and are hopeful we'll have some good news to share in the near quarters.
With respect to our services business we're pleased with the early progress we have made in growing this business, which is a key part of our growth strategy.
Given the more stable and predictable nature of the business we have begun to see an increase in activity from our existing offshore customer base and are also seeing some opportunities for new customers.
However the biggest hurdle for success may be the availability of craft labor, which is a similar challenge to what many industrial firms are facing.
We are working with the local trade schools to ensure that we have a quality pipeline of the next generation of craft professionals along with investigating opportunities to tap into other geographic markets to recruit seasoned craft professionals looking to capitalize on the anticipated near-term growth.
As we've highlighted last quarter, we also strengthened our selling efforts for our services business by hiring a dedicated business development professional to supplement our current staff. This individual has been tasked with expanding our services offering by working with OEMs especially equipment to become their preferred service provider.
We have made nice progress on this initiative which provides us an attractive opportunity to cross-sell these services to our existing customer base and attract new customers who need the specialized service necessary for the specialty equipment.
This initiative will help us improve our value proposition which is important as our customers look to consolidate the contractor base. We're still in the very early stages of our strategic growth plan but we are encouraged by the improving market trends and the initial progress we have made on our initiatives.
Our second quarter fabrication and services and new awards were up sequentially and represented the highest quarter of awards in the last year. We're also posting record levels of site inspection visits for our customers which support the volume of work we anticipate in the next 6 to 24 months.
Before turning the call over to Wes I'd like to provide an update on our MTSV dispute discovery in connection with the lawsuit is ongoing and in June a scheduling conference was held with the judge with a preliminary trial date scheduled for March 2023. I will now turn the call over to Wes to discuss our quarterly results in greater detail..
Thanks, Richard, and good afternoon everyone. Prior to getting into the details of our quarterly results, I would like to discuss the impacts to our financial reporting resulting from the Shipyard Transaction that closed in April.
We determined that the operations attributable to the Shipyard Transaction and the former operations associated with our Lake Charles and Jenning's facilities which were closed in the fourth quarter 2020 met the accounting criteria for discontinued operations.
Accordingly we have presented these operations and their associated assets and liabilities as discontinued operations in our financial statements for the quarter and have recast all comparable periods to present such information on the same basis.
From a balance sheet perspective the assets and liabilities of the discontinued operations are presented as individual line items separate from our continuing operations. In addition, the operating results are discontinued operations are presented as a single line item on our statement of operations rather than being presented on a gross basis.
Supplemental disclosure of the components of our discontinued operations have been made in our press release and will be provided in our 10-Q. The remaining assets liabilities and operations that were excluded from the Shipyard Transaction continue to be classified within continuing operations and represent our remaining Shipyard segment.
As a reminder the ongoing operations excluded from the Shipyard Transaction are limited to our MPSV contracts which are subject to dispute and our free ferry contracts. We also retained certain net liabilities associated with the devastated Shipyard contracts in remaining Shipyard operations.
I will address the future cash impacts of these net liabilities when I discuss our liquidity. So with that backdrop I will discuss our results for the quarter in more detail. Please note that unless otherwise specified all financial information reference relates only to our continuing operation.
Consolidated revenue for the second quarter 2021 was $24.3 million, a 2% sequential increase compared to the first quarter 2021 and a 24% decline from the second quarter 2020 with a year-over-year decrease primarily attributable to our Fabrication & Services division.
Consolidated operating loss for the second quarter was $1.6 million and EBITDA was a loss of $527,000 representing a positive contribution from our fabrication and services division despite low revenue volume. However our consolidated results for the quarter were negatively impacted by losses attributable to our retained Shipyard operations.
Specifically for the Fabrication & Services division revenue for the second quarter 2021 was $21.2 million a decrease of $5.4 million compared to the second quarter 2020.
The decrease was primarily due to the completion of several large projects partially offset by higher revenue from the divisions marine docking structures project and higher small-scale fabrication and offshore services activity.
Fabrication & Services EBITDA for the second quarter was $2.7 million up $3 million from the prior year period despite the revenue decline. EBITDA benefited from a more favorable margin mix relative to 2020 and strong project performance including project improvements of $1.9 million on three projects that are now complete.
While project execution for the division was solid these benefits were partially offset by low volume levels and the underutilization of the division's facilities and resources.
While the divisions overall utilization for the second quarter 2021 was comparable to the sequential and prior year quarter the utilization did vary between our fabrication business and services business. More specifically our fabrication utilization was lower sequentially and year-over-year.
But this impact was offset by a comparable increase in offshore services activity. We anticipate similar utilization levels in the third quarter 2021. Although the divisions overall utilization continues to be challenged.
Our cost reduction initiatives and consolidation efforts have enabled us to partially mitigate the impact of the low utilization rates allowing us to generate year-over-year margin improvement despite lower revenue volumes.
We are continuing to look for additional opportunities to improve execution and reduce overhead costs to improve our operating leverage as volumes recover. Now turning to our Shipyard division revenue was $3.1 million for the second quarter and relates entirely to our three ferry projects.
Operating loss for the quarter was $1.1 million and included a project charge of approximately $900,000 on our 70-vehicle ferry project and vessel holding costs and legal fees of approximately $400,000 associated with our MPSV contract dispute.
For our corporate division, operating laws for the second quarter was $2.1 million and was impacted by cost pursue initiatives to diversify and enhance our business and the temporary underutilization of our resources as we evaluate our resource requirements to support future operations.
Moving on to our discontinued operations, operating loss for the second quarter was $1.2 million. And consistent with our expectations, we recorded a charge of $1.9 million during the quarter related to additional transaction and other costs associated with the Shipyard transaction.
Partially offsetting this chart was a gain of approximately $600,000 from insurance recoveries associate with damage previously caused by Hurricane Laura to a dry dock that was sold in connection with the Shipyard transaction.
With respect to our liquidity, the net cash proceeds received in the second quarter from the Shipyard transaction were $31.7 million, which included $7.8 million of proceeds attributable to the finalization of our working capital throughout for changes in working capital on the divested contracts during 2021 through the closing date of the transaction.
These changes in working capital are reflected as a use of cash within our operating cash flows for the first half of 2021. During the second quarter, we also received net proceeds of $4.4 million from the sale of two cranes that were held for sale.
The Shipyard transaction and crane proceeds contributed to a quarter in cash balance of approximately $75 million. At quarter end, we continue to have approximately $12 million of net liabilities attributable to our Shipyard operations.
We expect to satisfy most of these liabilities over the next 9 months to 12 months as we wind down our Shipyard operations.
Partially offsetting this anticipated use of cash for the Shipyard line down will be an additional $2.2 million of transaction consideration, new from Bollinger upon its achievement of certain billing milestones for the divested contracts which is expected to for the divested contracts which is expected to occur by the first quarter 2022.
The $2.2 million in deferred transaction consideration has been reflected within other current assets on our balance sheet and was factored into our loss on the Shipyard Transaction for the second quarter. At quarter-end we had total debt of $10 million attributable to our PPP loan.
However as noted by Richard in July our application requesting loan forgiveness of $8.9 million plus accrued interest was approved and the remaining $1.1 million debt balance was subsequently repaid.
Accordingly our debt classification of the loan as of June 30 is based on the actual amounts repaid and forgiven in July with the amount repaid classified as current debt and the forgiven amount classified as long-term debt.
Finally, turning to our outlook for the remainder of 2021 we are encouraged by the progress of our strategic initiatives and are optimistic about new award opportunities given the improved bidding environment.
However given our current low backlog and the uncertainty around the timing of new awards we are assuming sequential lower second half revenues which combined with the continued near-term underutilization of our facilities and resources will result in operating losses for the back half of the year.
Despite these challenges we are well-positioned to pursue our growth strategy as we expect to exit the year for the cash balance of approximately $60 million which includes the impact of the ongoing wind down of the Shipyard operations and represents an increase in our net cash balance of approximately $20 million from the beginning of the year.
This concludes our prepared remarks. Operator, you may now open the line for questions..
Thank you. [Operator Instructions] Thank you. We'll now take the first question from Marty Malloy at Johnson Rice. Please go ahead..
Good afternoon..
Good afternoon, Marty..
I was wondering if maybe you could talk a little bit more about the opportunities on the LNG side. I know there's a number of projects in Louisiana and Texas. Are there any - maybe you could talk about the scope or size potentially of Gulf Island, just ranges would be fine if there are going to be multiple packages.
And are there any offshore liquefaction opportunities as well?.
Yes. I'll take that question, Marty. No, we're really excited about the capital build out more specifically in LNG and Louisiana and Texas, as you mentioned. There are a handful of key projects we're chasing that have been - some of them have been publicly announced.
I mean, these projects, as we've stated in the past, the fact that we're positioned geographically our location, but more importantly, just our past history of building not only for the infrastructure build-out, but also process units and when I say process units, we're talking about highly specialized modules, the range of packages could be anywhere from 3 to 5 packages for each large LNG job.
And these packages range from anywhere from $10 million to over $50 million. And as I've stated in prior earnings calls and discussions individually with shareholders, there's just - we don't have to win many of these for us to be in a sold-out position in 2021 - I'm sorry, 2022. And so what we're really excited about these opportunities.
We're bullish on a couple of key prospects that we're actively chasing. We've got RFPs that we've responded to, and we're in that active stage of reviewing the technical clarifications with our customer....
[Operator Instructions] We'll now take the next question from [ph] Tony Christ at Odyssey Investments. Please go ahead..
Yeah. Thank you. Hi. Hi gentlemen. How are you? Let me - just to get a little bit more color on the second half of the year, I understand we're expecting operating losses.
We didn't give any guidance on revenue nor do we really know what the backlog is at this point in time, but will revenue be about the same, less or more in the next two quarters? Or what are the conditional things that might cause one of those three outcomes..
Tony, this is Wes. As we said here today, we do expect revenue to be down over the next couple of quarters. But clearly, the biggest factor that would influence that would be how quickly we can win some of this quicker book and burn work.
The projects - the big projects that were mentioned by Richard could have some contribution if we had success there towards the very back of the year, but more likely that's 2022. So the biggest - the best way for us to kind of sustain current levels of revenue like we just did in the second quarter would be to get some quicker book and burn work.
But practically speaking, as we sit here today, we think we'll have a sequential decrease from what we just experienced in the second quarter..
You don't have any visibility at this to the degree of the decrease is 10% or 30% or 40%....
It's an appropriate question, Tony. I appreciate the ask and why you clearly want to know. At this point, because of where we are in the year and because any single award can have such a significant input impact on revenue given the levels at which we're at right now and where our backlog sets at hovering around $10 million.
We're just not in a position to provide what that number is going to look like. I will tell you that from a utilization perspective, at least for the third quarter, we do anticipate that we'll have comparable utilization levels in the third quarter versus the second quarter..
Okay. And to that question, referring to Martin's question. Well, two parts. Do we have any anything we can talk about regarding the state of the bids? In other words, is any bid complete yet and we're waiting for an outcome or at what state are the bids in? Or are we just - you mentioned the one bid that we're in review on it.
So I assume we have not made a final bid on it. And is there - I know the coming quarters is fairly general what Richard commented on for one of the near-term coming quarters.
But is there any way you can give a little bit more color to timing on it? Is there any urgency of the contractors on the projects or anything?.
Yes. No, that's a great question, a fair question.
So when I said we're in technical clarifications, so the bids have been submitted, and we're going through the technical clarifications where the contractor or the EPC contractor is essentially evaluating the bids and trying to see who's technically qualified, right? And then they go move on to the commercial phase of that discussion.
So I'm anticipating something to be announced, hopefully, in this coming quarter on this particular prospect that I'm talking about..
Good. Very good job, gentleman, Keep it up..
Thanks, Tony..
That concludes today's question-and-answer session. Mr. Richard Heo. At this time, I'd like to turn the conference back to you for any additional or closing remarks..
Thank you. I'm extremely proud of the progress we've achieved over the last 18 months despite some of the extremely challenging and unpredictable circumstances. It is a testament to the hard work and the dedication of our very talented team of employees and leaders.
I believe we're well positioned to succeed as we shift our focus to profitability and growth, and I'm excited about what lies ahead for Gulf Island. Thanks again for your interest, and I look forward to speaking with you on our third quarter results conference call and updating you on our progress. Be safe and take care..
That concludes today's call. Thank you for your participation. You may now disconnect..