Gulf Island Fabrication, Inc.

I would like to welcome everyone to Gulf Island Fabrication's 2012 second quarter teleconference. Please keep in mind that any statements made in this conference that are not statements of historical fact are considered forward-looking statements.

These statements are subject to factors that could cause actual results to differ materially from the results predicted in the forward-looking statements.

[Technical Difficulty]

These factors include the timing and extent of changes in the prices of crude oil and natural gas, the timing of new projects and the company's ability to obtain them, and other details that are described under cautionary statement concerning forward-looking information, and elsewhere in the company's 10-K filed March 2, 2012.

The 10-K was included as part of the company's 2011 annual report filed with the Securities and Exchange Commission earlier this year. The company assumes no obligation to update these forward-looking statements.

Today, we have Mr. Kerry Chauvin, Chairman and CEO; Mr.

Kirk Meche, President and COO; and Mr. Roy Breerwood, our CFO.

Roy?

Thank you, Deborah. I would like to review Gulf Island's press release issued for the second quarter of 2012.

The press release consists of 2 pages. Page 1 is text and Page 2 is an income statement.

I would like to review Page 2, which is the income statement first.

The following are the results of operations for the 3 months ended June 30, 2012, compared to the 3 months ended June 30, 2011.

Revenue was $137.2 million compared to $87.3 million. The cost of revenue was $123.3 million compared to $82.4 million.

Gross margin was $13.9 million or 10.1% of revenue compared to $4.8 million or 5.6% of revenue. The increase in man-hours worked contributed both to the increase in revenue and the increase in gross margin.

The increase in production, primarily related to our 2 major deepwater projects, had a favorable impact on margin due to the spread it provided to our fixed overhead as compared to the prior period.

General and administrative expenses were $2.6 million or 1.9% of revenue compared to $2.0 million or 2.2% of revenue.

Operating income was $11.3 million compared to $2.9 million. We had a net interest income of $157,000 compared to $124,000.

The net interest income for the period ended June 30, 2012, is related to the financing agreement with one of our customers regarding the collection of an $11 million retainage balance on a completed contract.

Other income for the 3-month period ended June 30, 2012, represents a $22,000 gain compared to a $228,000 gain, resulting from sales of miscellaneous equipment.

Income before taxes was $11.5 million, compared to $3.2 million. Income tax expense was $3.9 million compared to $1.4 million.

The income tax rates were 34.0% compared to 43.4%. The decrease in effective tax rate for the 2012 period was primarily related to the increase in income, particularly for our Texas facility, which caused an increase in our estimated federal qualified production activities income deduction and a decrease in Louisiana state income tax apportionment.

Net income was $7.6 million compared to $1.8 million. Basic and diluted earnings per share were $0.52 for the 3-month period ended June 30, 2012, compared to $0.13.

Weighted average and adjusted weighted average outstanding shares were 14.4 million for the period ended June 30, 2012. Weighted average shares outstanding were 14.3 million and adjusted weighted average shares outstanding were 14.4 million shares for the period ended June 30, 2011.

Depreciation expense was $5.8 million compared to $5.0 million. We declared and paid cash dividends of $0.10 per share during the quarter ended June 30, 2012, compared to $0.06 per share during the quarter ended June 30, 2011.

The following are the results of operations for the 6 months ended June 30, 2012, compared to the 6 months ended June 30, 2011. Revenue was $250.3 million compared to $133.6 million.

The cost of revenue was $223.7 million compared to $138.3 million. Gross margin was $26.6 million or 10.6% of revenue compared to a loss of $4.7 million.

The increase in man-hours worked also contributed to both the increase in revenue and increase in gross margin for the 6-month period of June 30, 2012.

The increase in production, primarily related to our 2 large deepwater projects had a favorable impact on margin due to the spread it provided to our fixed overhead as compared to the prior period.

Included in our gross margin for the 2011 period was the $7.7 million pretax charge related to the impairment of an insurance claim. We incurred no asset impairments in our 2012 period.

General and administrative expenses were $5.2 million or 2.1% of revenues compared to $3.9 million or 2.9% of revenue. Operating income was $21.4 million compared to a loss of $8.6 million.

We had a net interest income of $309,000 compared to $117,000.

The net interest income for the period ended June 30, 2012, is related to the financing agreement of one of our customers regarding the collection of $11 million retainage balance on a completed contract.

Other income for the 6-month period ended June 30, 2012, represents an $85,000 gain compared to a $228,000 gain, both resulting from the sales of miscellaneous equipment.

Income before taxes was $21.8 million compared to a loss of $8.3 million. Income tax expense was $7.4 million compared to a benefit of $3.1 million.

Income tax rates were 34% compared to 38%. Once again, the decrease in effective tax rate for the 2012 period was primarily related to the increase in income particularly for our Texas facility which caused an increase in our estimated federal qualified production activities income deduction and a decrease in Louisiana state income tax apportionment.

Net income was $14.4 million compared to a net loss of $5.1 million. Both basic and diluted earnings per share were $0.99 for the 6 months ended June 30, 2012 compared to basic and diluted loss per share of $0.36.

Weighted average and adjusted weighted shares outstanding were 14.4 million shares for the period ended June 30, 2012. Weighted average and adjusted weighted average shares outstanding were 14.3 million for the period ended June 30, 2011.

Depreciation expense was $11.4 million compared to $10.1 million. We declared and paid cash dividends of $0.20 per share during the 6 months ended June 30, 2012 compared to $0.12 per share during the 6 months ended June 30, 2011.

Please refer to Page 1 of the press release for our review.

We had a revenue backlog of $474 million with a labor backlog of 2.9 million man-hours remaining to work at June 30, 2012, as compared to revenue backlog of $614.5 million with a labor backlog of 4.6 million man-hours remaining to work at December 31, 2011.

The following represent selected balance sheet information for June 30, 2012, compared to December 31, 2011. Cash and cash equivalents were $30.6 million compared to $55.3 million.

Total current assets were $174 million compared to $177.9 million. Property, plant and equipment, net of depreciation was $222.9 million compared to $216.7 million.

Total assets were $397.5 million compared to $395.9 million. Total current liabilities were $67.4 million compared to $76 million.

Long-term debt was 0 for both periods. Shareholders' equity was $294.3 million compared to $282.8 million.

And total liabilities and shareholders equity was $397.5 million compared to $395.9 million.

pass-through costs were 42.1% of revenue compared to 50.4% of revenue. Man-hours worked were 1.3 million compared to 675,000.

Deepwater revenue represented 71% of revenue compared to 34% of revenue. Foreign revenue represented 12% of revenue compared to 15% of revenue.

pass-through costs were 39.1% of revenue compared to 46.4% of revenue. Man-hours worked were 2.5 million compared to 1.1 million.

Deepwater revenue represented 70% of revenue compared to 26% of revenue. Foreign revenue represented 14% of revenue for both periods.

revenue backlog was $474 million compared to $614.5 million. Man-hour backlog was 2.9 million compared to 4.6 million.

Revenue backlog for deepwater was $390.3 million or 82.3% compared to $509.8 million or 83%. Of the backlog at June 30, 2012, we expect to recognize revenues of approximately $278.4 million, not including any change orders, scope growth, or new contracts that may be awarded during 2012.

And approximately $195.6 million of backlog is expected to be recognized as revenue in 2013. We had approximately 2,400 employees and 350 contract employees compared to 1,950 employees and 90 contract employees.

CapEx for the 6 months of 2012 was $17.6 million. Approximately $22.8 million of remaining expenditures are planned for 2012, which consist of approximately $6.4 million for the purchase of equipment and $16.4 million for additional yard and facility infrastructure improvements.

Following comments relate to the remaining period of 2012. Construction is substantially complete on our coffer cell and our graving dock is drained.

We are determining the extent of damage to the graving dock slab and commencing necessary repairs. This May [ph] , the cost of repair to graving dock slab is now $8 million.

The estimates to repair the slab has increased from our original estimate of $1.5 million to $3 million because of additional damage to the slab, we were unable to discover until the dock was drained. The estimated cost to repair the slab to the dock will be expensed when incurred in the third and fourth quarters of 2012.

On July 13, 2012, we received a notice from one of our customers requesting a slowdown in work on a deepwater project. As of June 30, 2012, the outstanding balance on this project for work performed and materials purchased was $21.7 million and the remaining work on this project represented 6.6% of our revenue backlog and 10.6% of our labor backlog.

Our customer has requested a short-term extension for the payment of the $21.7 million unpaid balance and contracts receivable on this contract. At the time of this request, approximately $4 million of the $21.7 million balance was past due.

We have entered into preliminary discussions with this customer regarding extended -- extending the terms of payment of this outstanding balance.

So far, in the third quarter, we have experienced 23 days of rain, mainly due to a low pressure system in the Gulf. We have experienced these adverse effects and are still in hurricane season during this quarter and this effect was mainly in our Houma facilities.

Another note for the remaining period of 2012 is that we are currently in negotiations to obtain change orders which will increase revenue, if received, related to costs we incur due to customer-caused deliverable delays, schedule incentive bonuses and safety incentive bonuses on both of our major deepwater projects. We have not recognized any revenue for these change orders through June 30, 2012, and expect to favorably resolve these negotiations by the end of 2012.

These change orders will also help ease some of the schedule constraints we had due to the slowdown and weather constraints in Houma.

We are currently operating at capacities required by the projects in our backlog. We expect the level of production consistent with the first half of 2012 through the third and fourth quarters as work continues on these projects.

We still have large amounts of subcontracted services to incur which will keep pass-through costs relatively high. We continue to focus on managing the costs associated with our workforce and meeting our schedule demands.

I would now like to open the call to questions of the analysts.

Could you give us an update on Deepwater Gulf of Mexico potential future project awards? Are there are still a few that are out there that could be awarded around the end of this year, first part of next year?

Yes, Marty, this is Kirk. Marty, we're still seeing consistent, with what we've projected in the past.

There still are some deepwater projects that will be coming out for bid in the third quarter of this year, primarily fourth quarter of this year. We haven't seen any of those projects move through right.

But that activity, there are a few big deepwater projects that will be coming out and some shallow water projects as well. And of course, our marine division right now is -- the bidding activity within marine division is strong and we see more potential right now in the marine division that gets immediate awards compared to some of our other subsidiaries.

Okay. And then regarding ATP Cheviot project, are you going to have -- will you have a mechanics lien on this if ATPG goes bankrupt?

Marty, we haven't named the project. And for the sake of just talking about it -- right now, we are in negotiations with that particular customer that we're dealing with.

And again, from a business standpoint, we haven't named that customer.

Okay. The graving -- my last question, the graving dock.

Are you going to be able to do these repairs and make -- still be on time with the hull for the Williams project?

Yes, Yes, Marty. The graving dock repairs were scheduled to complete first quarter of this year and actually, our first [indiscernible] goes in the dock itself next month.

So the location of the repairs within the dock at this time are not affecting schedule for the Williams project.

This is actually John Ellison on for Rob. My first question, kind of, is a follow-on to what was just asked, but are there any new tenders that you guys are currently tracking that you expect to go to bid in the next -- second half of this year?

Yes. As we stated, there are several large projects, topsize projects that we will bid towards the tail end of the third quarter, first part of fourth quarter this year.

And again, there are some shallow water projects that we are chasing that will come up for bid in the third quarter as well as fourth quarter this year.

Okay. And I guess my next question would be, would you be able to comment a little on your current utilization rates and the additional capacity that you guys have at your fab yard and tied it into your ability to take on these larger projects?

Well, yes, I guess our capacity at our yards primarily depend on the contracts we receive. Now the last half of 2012, we're certainly booked even despite the slowdown that was requested by this customer.

But as we reported in our revenue outlook for 2012 and 2013, you can see 2013 is certainly the time when capacity starts, "capacity" or man-hours we can potentially work, start to open up.

With respect to the projects that you see coming to bid in the third and fourth quarter, can you talk a little bit about the -- your competitive positioning on those projects? How well-positioned do you feel you are?

And then, kind of, the timing of when you think those bids could turn into awards and when work on those projects could start up.

Well, Matt, as our competitive advantage goes, we're 1 of 3 major players on the gulf as far as fabrication work goes. And we could certainly -- we're certainly well-positioned for a good -- for a lot of activity in the deepwater sector.

That's expected, coming up in the second half of 2012 and the second half of 2013.

I guess, to just drill in on that a little bit more, I mean, do you have a sense for what your competitors' capacity currently looks like? Are they pretty full?

Would that make you feel better about your chances? Or is there anything about the details of these projects that makes you feel like you have a better shot than your competitors?

Matt, this is Kirk. Certainly, there's no secret in the industry right now that the 3 major fabricators in the business right now, we're all busy.

And I don't know that one has anymore competitive advantage than the other. We all have labor available and know these projects continue on tracking, like we've been told here.

And certainly, as our projects wind down, we'll certainly be in a position to immediately start those projects. So again, I don't know that from the other -- I won't speak on behalf of other competitors, but they are fairly busy just like we are at this point in time.

Can you walk through the marine opportunities? You said there are maybe a better near-term chance for you to book some work and what they are, size and timing?

Without getting too specific on it, we're seeing some opportunities for some lift boats that will be built here in the Gulf, for the Gulf of Mexico. And certainly the brown water tugs are out there.

But we're also seeing an increase in requirements or requests for quotation on some PSVs that will be operated through the Gulf of Mexico. And certainly through our repair on our dry dock, the dry dock is staying very busy at this point in time.

And again I can see that continuing on as some of these boats need some repairs coming in.

Okay. And I guess, you've shifted some labor from the Marine business into the oil and gas business to execute the backlog you have.

Would that be an issue in terms of getting labor, should you be successful in a handful of these bids?

I don't think so. What we have, as Buddy has said, a number of our contractors in the order [ph] is pretty high at this point in time.

So as the marine section would start to gear back up, we start pulling that labor back from Gulf Island LLC. So we should be okay in terms of future needs for labor within the facilities.

Okay. And on the bigger Gulf of Mexico oil and gas jobs that you're talking about, maybe being FID later this year in '13, any sense on what -- the question was asked about capacity, but is pricing a little better maybe this go-around?

Or is there any efficiency you could find where margins might even look better on the next round of bids, or is it still too early to say?

Will, I think it's a little early to say. Again, it's all about timing, when the projects come out and the availability within all the yards here in the Gulf.

So I don't think we could probably speculate on that at this time.

And if I could just ask one last one. I guess you're executing a few very big jobs right now.

Those obviously moving to completion at some point, and then you have another round of bids out. Are you, I guess, modeling internally for a lull in activity maybe in your deepwater work?

As those wind down before the next jobs ramp up? Or do you think it will be pretty seamless?

Well, certainly we hope it's seamless. Again, I think at this point in time, we're hoping it's seamless.

But again, it's out of our control, Will. It's up to oil and gas companies as to when these projects come out.

Because a couple of them have been out there for some time.

Quick clarification on the graving dock repair cost. The first $1.5 million that you had originally estimated, that has not hit the P&L yet.

Is that correct?

No, we haven't incurred any cost on this repair as of June 30. Now repairs are commencing as of today, but that cost incurred was 0.

Great. So any idea at this point, obviously it's early, if that will be concentrated maybe in the third quarter here or maybe more so in the fourth or evenly?

Or any color there would be helpful.

Well, repairs are expected between, I guess, the early part of the third quarter into the early part of the fourth quarter.

Great. And an unrelated follow-up I guess, you mentioned -- do you expect activity levels in the second half of the year maybe comparable to the first half.

But we should still be thinking about some level of seasonality in the fourth quarter, I would assume. Is that fair?

Yes, to some degree. You have your holiday weeks but comparing the first 2 -- the first half of the year to the second half of the year, the first quarter and fourth quarters are fairly similar as far as what productivity we can turn out.

Yes, you've been talking in the last quarter and earlier about some opportunities up in Alaska on the modules sides. Just wondering if you could update us on, kind of, timing on those opportunities, maybe the size.

And if there have been any major shifts in your expectations there?

Well, there hasn't been any. Really, there hasn't been any progress made on that at this point in time.

We're still tracking the project. Again, it's some modules for Alaska, as you said.

But at this point in time, we see no inquiries for bidding on the projects. We're still tracking them and again, I think those are probably somewhere around tail end of third quarter, first part of fourth quarter this year.

Got it. And in the prepared commentary, it sounded like you may still be trying to assess what the ultimate cost of the repairs are going to be.

Is there some chance that the $8 million number could continue to grow?

Well certainly, there's always that possibility. We think we've estimated the, I guess, worst-case scenario in that respect.

There are a few things that are working in our favor in terms of some damage we thought maybe to -- underneath the slab, and there was no damage there. So while there are some indications that it may come down some, again, until we finish cutting the slab itself, we don't know.

But we think that $8 million is a very reasonable estimate for what we expect the cost to be.

And in terms of your insurance claim, to get some of the -- to get those costs back? Any idea when that could be resolved?

Well, Matt, we're looking to resolve this in the third quarter. Our insurance company has not indicated one way or another the coverage to expect.

But as of now, we are still expecting the -- some, or all of these costs, to be covered.

And last question, just the sequential decline in gross margins versus the first quarter, despite revenues ramping up -- pardon me if I missed this in the prepared commentary, but could you provide a little color on that?

Well, it's mainly due to the ramp-up in our labor from going from about 1,400 employees to roughly 2,700 now including contract labor. There were just some inefficiencies we incurred.

Now certainly some of those inefficiencies was due to customer-caused deliverable delays which we're pursuing right now, some resolution to recovering some of those costs. But as of this time, we've had to incur those labor inefficiencies in our results.

How much did you expense in the first half of the year related to those repairs, if any?

None. Are you referring to the graving dock slab?

I am.

None.

Okay, just wanted to double check that. And then the $8 million in the second half of the year.

Any sense of, assuming $8 million is the number, the book break between Q3 and Q4?

Will, we have just started -- this is the early part of the third quarter, and we expect to continue with the repairs through the early part of the fourth quarter.

Well, again we would like to thank everyone for tuning in today and we'll talk to you guys next quarter. Thanks again for everything.