Gulf Island Fabrication, Inc. (GIFI) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to Gulf Island's conference call to discuss the sale of the company's shipyard facilities and long-term construction contracts. [Operator Instructions] This call is being recorded. A copy of the press release announcing the shipyard transaction is available on the company's website at gulfisland.com, and a replay of today's call will be available on the company's website later this morning. 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 the company's press release and to the risk factors described in its 2020 Form 10-K and subsequent SEC filings. Please note that the management may reference pro forma information and other financial measures, such as EBITDA and adjusted EBITDA, which are not recognized under the U.S. GAAP. As required by SEC rules and regulations, these financial measures are reconciled to their most comparable GAAP financial measures in the company's 8-K. Today, we have Mr. Richard Heo, President and CEO; and Mr. Wes Stockton, Executive Vice President and CFO. Mr. Heo, please go ahead, sir.

Thank you, Michelle. Good morning, everyone, and thank you for joining us. Yesterday, we announced the completion of the sale of our Shipyard Division assets and certain long-term vessel construction contracts to Bollinger Shipyards. I'll provide a little more clarity around the transaction, and then Wes will go through financial details of the transaction, including cash implications and provide details of our remaining bonding and letters of credit requirements. But first, I'd like to discuss why this is such an important milestone in Gulf Island and why we're so excited about our future. This is a transformational transaction for Gulf Island. By divesting of the assets and long-term contracts and ultimately winding down the Shipyard Division, we are significantly derisking the business. We are strengthening and providing more visibility around the financial position of the company, and we are better positioning Gulf Island for profitable growth. The transaction will enable us to be a more focused specialty fabrication and services company serving the broader industrial and energy end markets. We are excited about the opportunities ahead as we are well positioned given the strategic initiatives we have implemented over the past year. We are seeing improved momentum in the business, and we continue to focus on diversifying our customer base. We believe the remaining business should be -- should have a more stable growth profile with attractive margins and strong free cash flow conversion as our end markets improve. Importantly, this transaction also significantly reduces the risk profile of the company. With the long-term contracts that are included in the sale, which I will detail in a minute, we have effectively removed potential future risks associated with 90% of our backlog. This removes a significant overhang for the company. And as a result, we now have a clear view around the financial position of the company. Today marks an important step into our future as we continue to focus on our strategic priorities of improving our financial strength and positioning the company for profitable growth. Now I will provide some additional details around the transaction and why I believe our risk profile will be improved. Including -- included in the Shipyard transaction are the Shipyard Division's real property, inventory and equipment in Houma, Louisiana, contracts and related obligations for the construction of our 3 research vessels for Oregon State University, and our 5 towing, salvage and rescue ships for the U.S. Navy, certain contract retentions, contract assets, contract liabilities and certain accounts payable associated with the divested contracts and 4 dry docks. Bollinger has also agreed to offer employment to most of the employees of our Shipyard Division associated with the acquired Shipyard contracts. Excluded from the Shipyard transaction are the Shipyard Division's contracts and related obligations for the construction of our 2 40-vehicle ferry for North Carolina Department of Transportation, 70-vehicle ferry for the Texas Department of Transportation; and 2 MPSVs for Hornbeck Offshore that are subject to dispute, the Lake Charles and Jennings yards, which were closed in fourth quarter 2020 and accounts receivable, certain accounts payable and other accrued liabilities associated with the divested contracts and remaining assets and liabilities of the Shipyard Division. The transaction excludes our Texas Department of Transportation ferry project because our customer was unable to approve the innovation of or assignment of such contract, which was necessary to relieve us of our ongoing legal and contractual obligations. We also retained the ferry projects for North Carolina Department of Transportation as these contracts are in dispute, and we have submitted a claim for the engineering deficiencies and design, which is causing some of the challenges we have experienced in construction. Accordingly, we retain the associated personnel and will complete these projects within our Fabrication & Services yard. It is important to note that these projects were already physically located in our Fabrication & Services yard with execution and oversight being provided by the Shipyard personnel. Because we will retain personnel with the requisite shipbuilding experience and because the contracts are located within our Fabrication & Services yard, we do not expect the execution to be impacted by the transaction. Our first ferry for the North Carolina Department of Transportation has been launched and is anticipated to be delivered in the second quarter 2021, and the second ferry is anticipated to be completed in mid-2022. We anticipate completing our ferry for the Texas Department of Transportation in the first quarter of 2022, and the finalization of these projects will complete the wind down of our Shipyard Division operations. Also excluded for the transaction are contracts with Hornbeck Offshore's, for the construction of 2 MPSVs, which are subject to dispute. For obvious reasons, Bollinger did not assume these contracts, and we'll continue to pursue our litigation for damages associated with the wrongful termination of contracts. As you know, we continued to face challenges executing our Shipyard backlog. The divested long-term contracts were bid several years ago and carried ongoing risks given the fixed price nature of these long-duration projects. These challenges were exasperated by engineering and design complexities as the projects progressed as well as lack of availability of labor, high turnover and associated poor productivity. Unfortunately, contract limitations for the projects do not enable us to fully mitigate the impacts of such items. Divesting of these long-term contracts that have schedules, which extend through 2024, remove the potential risks inherent in these projects. Further, as we have discussed previously, the ongoing risk/reward proposition in the Shipyard business is uncertain, given the low-margin nature of the Shipyard business, competitive landscape, significant bonding requirements and negative impacts on cash flow during times of underutilization of facilities and resources. During the past year, I committed to improving our processes and people and consolidating our assets and businesses to improve our sustainability. I believe the divestiture of our long-term contracts and wind down of our Shipyard operations accelerates our strategic initiatives and positions us to pursue new, higher-margin opportunities with our Fabrication & Services division. I'm excited about our future and look forward to sharing more on our future calls. I will now turn the call over to Wes to discuss the financial impacts of the transaction.

Thanks, Richard, and good morning, everyone. Before getting into the details of the transaction, I just want to highlight a few key items. There are a lot of moving pieces, but fundamentally, the end result is we're removing potential risk from the business and a transaction that is expected to ultimately be cash neutral for the company after the completion of the retained contracts and wind down of the Shipyard operations. We will also retain the $8.8 million Navy payment received in the first quarter and move forward with the strength in liquidity and financial position by significantly reducing our bonding, letters of credit and working capital requirements and lessening our quarterly working capital fluctuations. Now I'd like to provide some additional details about the transaction. In connection with the sale, we anticipate receiving gross proceeds of $28.6 million and net proceeds of $26.1 million after transaction and other costs, of which $26.4 million of the gross transaction price was received at closing and $2.2 million will be received upon Bollinger's collection of certain milestone payments associated with the divested contracts, which we anticipate in the back half of 2021. In connection with the transaction, we agreed to retaining certain net working capital liability amounts and deliver to Bollinger certain net working capital asset amounts associated with the divested contracts based on balances as of December 31, 2020. Further, the parties agreed to a working capital true-up mechanism such that any increase in working capital from year-end through the closing date for the divested contracts would result in an additional payment to us for such increase and any decrease in working capital from year-end through the closing date for the divested contracts would result in a payment to Bollinger for such decrease. Accordingly, to the extent we have an impact to our operating cash flows during the period from year-end through the closing date associated with movements in working capital for the divested contracts, the impacts are intended to be offset by the working capital true-up mechanism. So there is no net incremental increase or decrease to our cash flow resulting from post year-end working capital movements on the projects. At closing, we received $8 million as an estimate of such changes in working capital, and the amount will be adjusted post-closing to reflect actual changes in working capital. We would expect to determine and finalize the post-closing true-up with Bollinger during the second quarter. So with these details as a backdrop, I'll try to summarize the overall anticipated cash impact of the transaction relative to our year-end cash position of approximately $51 million. First, due to the net working capital liabilities we agreed to retain associated with the divested contracts, which totaled approximately $11 million at December 31, 2020, we anticipate realizing net proceeds of approximately $15 million directly attributable to the transaction. Second, with respect to working capital movements after year-end through the closing date for the divested contracts, while we will have operating cash flow impacts from working capital fluctuations, these are intended to be offset by the working capital true-up mechanism resulting in no material incremental cash inflow or outflow relative to our year-end cash balance associated with the divested contracts. As a result, the net proceeds from the transaction of $15 million will provide a temporary increase to our cash position. However, this amount will largely be used to fund net working capital liabilities associated with the retained contracts and other Shipyard Division liabilities and the wind down of the Shipyard operations, which is expected to occur by mid-2022. At December 31, 2020, net working capital liabilities associated with the retained contracts and operations to be wound down totaled approximately $13 million. So the transaction is expected to ultimately be about cash neutral after completion of the retained contracts and wind down of the Shipyard operations. Separate and apart from the transaction proceeds and working capital true-up mechanism, we received an $8.8 million payment in the first quarter associated with the previously announced amendment to the U.S. Navy contracts. This payment is excluded from the transaction and will be retained by us, resulting in improvement to our year-end cash position. From a P&L perspective, the transaction is anticipated to result in a pretax loss of approximately $26 million to $28 million, representing our estimate of the carrying value of the net assets sold at closing over the transaction price, inclusive of the previously mentioned working capital true-ups. In addition, with respect to our bonding and letters of credit obligations, approximately $120 million of outstanding bonds associated with the OSU and Navy contracts were assumed by Bollinger at closing. And our outstanding letters of credit, which currently total approximately $10 million were reduced by $7 million by the third quarter of 2021 as a result of the transaction. In order to secure consent from our surety provider for the assignment of the OSU contract bonds and as a result of the sureties outstanding bonds for the North Carolina DOT contracts and disputed Hornbeck contracts, we entered into a restrictive covenant, which precludes us from paying dividends or repurchasing stock until the sureties liabilities associated with these outstanding bonds are discharged. In addition, to secure any potential obligations related to the Hornbeck contracts, we entered into a mortgage agreement that gives the surety priority rights to our real property to a maximum of $50 million, which is the value of the sureties outstanding bonds. These rights can only be exercised in very limited circumstances, including our inability to satisfy our indemnity obligations in the event of a final non-appealable judgment against us in connection with the Hornbeck litigation or other final non-appealable judgment against us associated with our indemnity agreement. In conclusion, this transaction is expected to improve our overall liquidity, reduce our current and ongoing bonding and letter of credit requirements and lessen the working capital volatility caused by our Shipyard operations. For more details about the transaction, including the pro forma impacts to our historical results, please refer to our 8-K, which was filed in connection with our announcement yesterday. This concludes our prepared remarks. Operator, may now open the line for questions.

[Operator Instructions] And our first question will hear from Martin Malloy with Johnson Rice.

Congratulations on the transaction. The first question was the outlook for the Fabrication & Services division going forward. I think on the fourth quarter earnings call, you had spoken about LNG and petrochemical process modules possibly being awarded during second half of this year and you spoke about new opportunities in the press release. I'm just curious if maybe you could spend some time going over your outlook for that segment.

Yes. Marty, we're really excited about the outlook of Fabrication & Services. We see a turnaround. We're seeing a heightened activity in terms of the bid activity for not only the petrochemical but the LNG projects in Texas and Louisiana, where, as you're aware, there is a lot more modularization at play, and we feel like just our strategic location and our competency and capability uniquely positions us for a big share of that market space. And so these projects are, though, however, very large, and we're just waiting on them to get FID in the back half of this year and for us to win our fair share.

Okay. And then just on the Hornbeck vessels. And I went and refreshed my memory in the 10-K, it looks like, from what I read, the mediation has ended. And it's been winding its way through the courts for a while now. Are there any milestones or any important dates or hearings we should look out for coming up?

Yes. Marty, those are being said, as we speak, a combination of the Hornbeck bankruptcy, which slowed the processes down and stayed the litigation for a while, slowed that down. And then COVID has put it behind about a year. So we're now going through the process of setting dates, and we'll provide some updated information on that on our next call to the extent we have it. But at this point, we're now just moving through -- going to move forward and pursue the litigation through the court system.

Okay. Next, let move to Tony Crest with Capitol Securities Management.

Can you hear me?

We can.

Can you hear me? Okay. I wanted to ask -- Martin actually asked my question. But you had mentioned [indiscernible] possibly 3 large contracts existed in the second half of the year. Can you take a little bit more time and talk more specifically about this and our chances of winning one?

Tony, I think you were asking about the back end prospects, and we've shared with you more specifically and all the shareholders here. We specifically have talked about a large LNG project where we have an opportunity to bid to 3 different contractors for different scope. They all represent very large pieces of work from -- more in kind of the offloading structural support civil work that goes into a large LNG facility to the EPC contractor who will have pipe rack modules and process modules, all the way to proprietary gas scrubbing, large high technology gas scrubbing IP-related process modules. So those represent 3 large scopes of work for one large project that ultimately will have an equal opportunity to bid on, and we think we have a good opportunity just because of our strategic location, and again, our history of delivering quality projects on schedule, where we feel we're poised in a strong position to win one if not more than one of those awards.

Next, we'll move to John Deysher with Pinnacle.

Good news on the deal, congratulations.

Thanks, John.

Just curious if there's anything in this transaction or your relationship with the surety people that prevents you from nailing down a more permanent credit agreement. I think the prior loan was set to expire sometime soon. But are you working on that at this point so we have some more permanent working capital going forward?

Yes. Right now, John, as we look ahead, our primary needs for working capital around letters of credit. And those -- in the Fab & Services business typically represent a fraction of the total contract value anywhere from 5% to 15%. So that's -- we don't really need it from a borrowing perspective. We just need it from an LC perspective. And we do have a facility that extends now out to several years that is cash secured and we would -- obviously, we would prefer to remove that cash security requirement. And as we look ahead, I think the primary driver behind getting that cash security requirement dropped and improving our LC facility is just going to be performance and improving our operating results, and that's going to be the way that happens. And with that and the security arrangement we have on the underlying real property wouldn't necessarily impact that. But we do have a good relationship with the surety. And as we look ahead, if we saw an opportunity to improve our overall liquidity position and the surety felt like it also -- they were sufficiently protected, I think we could work something out, but we'll wait until we get to that point.

Okay. That's helpful. Logistically, how do you physically separate the assets that are going to Bollinger versus the assets that are going to be retained to complete the Hornbeck and the ferry projects?

Yes. We were lucky in that thing because we have -- the Houma Navigation Canal separates our 2 yards. So the asset that's going is on one side of the water and the asset where we're retaining is on the other side of the water. So it's actually a pretty simple split and we'll retain -- the 2 ferries that we're retaining are on the retained asset. And so the split is pretty easy.

Okay. And next, I'll move to Jeff Geygan with Global Value Investment Corporation.

First of all, can you talk a little bit about the business on a pro forma basis in terms of just the Fab & Services? Specifically, what does the breakeven profile look like on this?

We are evaluating that more holistically because it's not just fab and services, obviously, the broader enterprise. And we'd expect to provide some more details as we move ahead. That business, as we think about capacity, current state, that's a couple of hundred million dollar a year business. And so you can model that out depending on certain gross profit percentages, et cetera. We need to get -- we need to double our volume. Where we've been recently, we would need to about double our volume to get to kind of a full utilization, which would get us to that kind of breakeven perspective from a utilization perspective.

I see. That's helpful. It looks like your Fab & Services on a TTM basis are about $100 million. Is that right?

That's right. From a trailing perspective, that's correct.

Apropos to your previous comments, you've told us that you need to get to about $200 million to have a viable business?

Well, it's really about underlying man hours. Sometimes that revenue line can be a little bit deceptive and that it has -- it's not just man hours. Included in our revenue line can be materials and other equipment. So it's really about current volumes in terms of throughput, people, man hours. So where we set -- where we've been setting over the last couple of quarters, those man hours to get to kind of breakeven, we need to get about -- we feel like to fully recover our costs, we want to get about twice those man hours, twice that throughput.

Yes. So let me clarify that, Jeff. So as you know, we have a man hours type of business, but then we also have a lot of materials. And so depending on the mix of the man hours versus materials that revenue top line will vary. But if we look at it just strictly on a man hours type of basis, about $125 million, $150 million will get us to a breakeven. And so that's probably the better way to look at it.

Yes. Great. Then talking about your pipeline or the outlook, you mentioned petrochem and energy. Can you qualify the pipeline of opportunities and what that looks like in terms of size and probability of wins and over what type of time frame you anticipate that?

Yes. Really, our business is on the services side on essentially what we call the man hours driven side of the business, those are more predictable, right? They're the underpinning work that's a couple of hundred thousand dollars to a couple of million dollars. And those are -- that type of work is more steady state. That's why I call it underpinning. The larger volume that's got materials in it could be in the excess of $20 million, $30 million to potentially even $100 million contracts, okay? The type of work in terms of what we see in the near horizon. So when I say see, what we're seeing -- we're talking about proposals or RFQs that we have submitted to the customer. And the customers are evaluating and we're waiting for FID, final investment decision, to be triggered. I would say in our that opportunity profile, we have over $600 million of prospects that are very real going forward into -- that are essentially going to be awarded in the next 9 to 12 months.

Yes, Great, that's perfect information. This is a seminal event for you, congratulations. We look forward to seeing positive things in the future.

Thanks, Jeff.

And this concludes the question-and-answer session. At this time, I would like to turn the conference back over to Mr. Richard Heo a for any additional comments.

In closing, I'd like to thank our Shipyard team for their relentless commitment to quality and safety while delivering on our obligations to our customers. I believe this transaction will strengthen the regional shipyard industry, creating a new and long-term opportunities for a vast majority of our former Shipyard employees. I'm excited about Gulf Island's future as this transformational transaction accelerates our strategic plan to further position us as a stronger, more specialized fabricator focused on supporting higher-margin industrial and energy end markets. As the markets continue to improve, I'm confident that we'll capture our fair share of the market and bring the company back to sustainable profitability and growth. For those on the call, thanks again for your interest, and I look forward to speaking with you on our first quarter results conference call and updating you on our progress. Be safe and take care. Thank you.

And that will conclude today's call. We thank you for your participation.