Gulf Island Fabrication, Inc.

I would like to welcome everyone to Gulf Island Fabrication's 2012 Third 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. 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 obligations 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 third quarter of 2012.

The press release consists of multiple pages. Page 1 is text and the last page is an income statement.

I would like to review the last page, which is the income statement, first.

The following are the results of operations for the 3 months ended September 30, 2012, compared to the 3 months ended September 30, 2011. Revenue was $141.8 million compared to $85.8 million.

The cost of revenue was $155.2 million compared to $81.8 million.

Gross loss was $13.4 million compared to gross profit of $4 million or 4.7% of revenue. The decrease in gross margin was mainly due to recognizing contract losses of $20.6 million in the 3-month period ending September 30, 2012, as compared to $1.8 million for the same period in 2011.

These contract losses resulted in an unfavorable reduction in gross margin, during such periods, of $26.8 million and $1.8 million, respectively, as required under the accounting for loss contracts under percent complete accounting. The loss recognized was mainly due to an increase in estimated man-hours to complete one of our major deepwater projects.

We believe these increased man-hours are primarily driven by revisions and delivery delays to specifications and designs by our customer in the third quarter of 2012, causing out-of-sequence work scheduled to be used while executing the project.

We have notified our customer of what we believe is our right to recover the cost of lost profits caused by these customer revisions and delays. The customer extended delivery of the first phase of the project as a result of their revisions, and we are actively negotiating the recoverable amount with our customer.

No revenues for this claim has been recorded as of September 30, 2012.

We have also excluded potential changes to what we believe are sufficient -- insufficient unit rate prices caused by drawing revisions made late in our work schedules. Any agreed-upon recoverable amounts will be recorded in revenue in the periods when such agreement is reached between us and our customers.

General and administrative expenses were $2 million, or 1.4% of revenue, compared to $1.9 million or 2.2% of revenue. Operating loss was $15.4 million compared to operating income of $2.1 million.

We had net interest income of $94,000 compared to $330,000. The net interest income for the period ended September 30, 2012, and 2011 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 September 30, 2012, represents a $54,000 gain compared to an $89,000 gain resulting from the sales of miscellaneous equipment.

Loss before taxes was $15.2 million compared to net income before taxes of $2.5 million. Income tax benefit was $4.8 million compared to income tax expense of $954,000.

The income tax rates were at 31.8% compared to 38%. The decrease in effective rates for the 2012 period was primarily related to the decrease in income at our Texas facility, which caused the decrease in our estimated federal-qualified production activities income deduction and, thus, a decrease in the income tax benefit recorded in the quarter.

Net loss was $10.4 million, compared to net income of $1.6 million. Basic and diluted loss per share was $0.72 for the 3-month period ending September 30, 2012, compared to basic and diluted earnings per share of $0.11.

Weighted average and adjusted weighted shares outstanding were $14.4 million shares for the period ending September 30, 2012, and September 30, 2011.

Depreciation expense was $6 million compared to $5.2 million.

We declared and paid cash dividends of $0.10 per share during the quarter ended September 30, 2012, compared to $0.06 per share during the quarter ended September 30, 2011.

The following are the results of operations for the 9 months ended September 30, 2012, compared to the 9 months ended September 30, 2011. Revenue was $392.1 million compared to $219.4 million.

The cost of revenue was $379 million compared to $220.1 million. Gross margin was $13.2 million or 3.4% of revenue, compared to a loss of $718,000.

The increase in man-hours worked contributed both to the increase in revenue and the increase in gross margin for the year. 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 pre-tax charge related to the impairment of an insurance claim. We incurred no asset impairments in our 2012 period.

Offsetting these 2 factors, though, was the recognition of $21.2 million of contract losses in the 9 months ended September 30, 2012, as compared to $2.4 million in the comparable period in 2011. These contract losses resulted in an unfavorable reduction in gross margin during the periods of $24.5 million and $2.4 million, respectively.

The loss for the 2012 period was driven by the same factors discussed in our 3-month results.

General and administrative expenses were $7.2 million, or 1.8% of revenue, compared to $5.8 million or 2.6% of revenue. Operating income was $6 million compared to an operating loss of $6.5 million.

We had net interest income of $403,000, compared to $447,000. The net interest income for the periods ended September 30, 2012, and 2011, were also 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 9-month period ending September 30, 2012, represents $139,000 compared to $317,000, both resulting from the sales of miscellaneous equipment.

Income before taxes was $6.6 million compared to a loss of $5.8 million. Income tax expense was $2.6 million, compared to a benefit of $2.2 million.

The income tax rate was 39% compared to 38%. The increase in effective rate for the 9-month period in 2012 was primarily related to a decrease in our estimated federal qualified production activities income deduction and an increase in the Louisiana state income tax apportionment.

Net income was $4 million compared to a net loss of $3.6 million. Basic and diluted earnings per share were $0.28 for the 9-month period ended September 30, 2012, compared to basic and diluted share of $0.25.

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

Depreciation expense was $17.4 million compared to $15.2 million.

The declared and paid cash dividends were $0.30 per share during the 9 months ended September 30, 2012, compared to $0.18 per share during the 9 months ended September 30, 2011.

Please refer to the first page of the press release for our review. We had a revenue backlog of $376.1 million with a labor backlog of 2.9 million man-hours remaining to work at September 30, 2012, as compared to a revenue backlog of $614 million (sic) [$614.5 million] with a labor backlog of 4.6 million man-hours remaining to work at December 30, 2011.

This backlog excludes $30 million related to a suspended project. We exclude suspended projects from contract backlog because the resumption of work and timing of backlog revenues are difficult to predict.

The following represents selected balance sheet information for September 30, 2012, compared to December 31, 2011. Cash and cash equivalents were $26.4 million, compared to $55.3 million.

Total current assets were $185 million compared to $177.9 million. Property, plant and equipment, net of depreciation, was $226.2 million compared to $216.7 million.

Total assets were $412.5 million compared to $395.9 million. Total current liabilities were $93.6 million, compared to $76 million.

Long-term debt was 0 for both periods. Shareholders' equity was $282.7 million compared to $282.8 million, and total liabilities and shareholders' equity was $412.5 million as compared to $395.9 million.

pass-through costs were 58.2% of revenue compared to 46.9% of revenue; man-hours were 1.2 million compared to 759,000; deepwater revenue represented 82% of revenue compared to 42% of revenue; foreign revenue represented 6% of revenue compared to 19% of revenue.

pass-through costs were 46% of revenue compared to 46.6% of revenue; man-hours worked were 3.7 million compared to 1.9 million; deepwater revenue represented 75% of revenue compared to 32% of revenue; foreign; revenue represented 13% of revenue compared to 16% of revenue.

Revenue backlog was $376.1 million compared to $614.5 million. Our September 30, 2012 backlog excludes $30 million related to the suspended project.

Once again, we exclude suspended projects from backlog because resumption of work and timing of backlog revenues are difficult to predict. Man-hour backlog was 2.9 million compared to 4.6 million.

Revenue backlog for deepwater was $297.3 million, or 79%, compared to $509.8 million or 83%.

Of the backlog at September 30, 2012, we expect to recognize revenues of approximately $149.7 million, not including any change orders, scope growth or new contracts that may be awarded during 2012.

Approximately $213.7 million of backlog is expected to be recognized as revenue in 2013, and approximately $12.7 million of backlog is expected to be recognized as revenue thereafter.

We had approximately 2,300 employees and 430 contract employees compared to 1,950 employees and 90 contracted.

CapEx for the 9 months of 2012 was $26.8 million. Approximately $12.3 million of remaining expenditures are planned for 2012, which consist of $4.3 million for the purchase of equipment and $8 million for additional yard and facility infrastructure improvements.

For the 9-month period, September 30, 2012, $9.5 million was spent to complete the construction of our coffer cell to drain to graving dock, which flooded at our Texas facility. Of the $9.5 million spent in the 9-month period, $3.1 million of the cost to build the coffer cell are included in contract costs for the Williams Gulfstar hull project.

The graving dock at our Texas facility has been drained, and we have commenced the necessary repairs on the slab. The current estimated cost to repair the graving dock slab is $7.5 million, all of which will be covered by insurance.

We expect to collect all amounts associated with the slab repair in the fourth quarter of 2012. As of September 30, 2012, we have recorded $2.7 million in other current assets for our recoverable repair expenses under this claim, net of related deductibles.

And in conclusion, other business notes for the quarter. On July 13, 2012, we received notice from our customer, Bluewater Industries, requesting both a slowdown of work on the ATP Oil & Gas, U.K.

Limited's Cheviot project ordered pursuant to a master service contract between Bluewater and us, and an amendment to the scheduled payment terms under the contract.

On August 16, 2012, we entered into a binding agreement with Bluewater, an engineering consulting firm engaged by ATP U.K. to oversee the fabrication of the Cheviot project to amend and restate the contract and suspend the project.

Among other things, the agreement outlines the revised payment terms for the contract's receivable balance and the limitation on Bluewater's ability to request an extended suspension of work.

Specifically, Bluewater must pay $200,000, on or before the last day of each calendar month until February 28, 2013, with the remaining balance due on or before March 13, 2013. In addition, if Bluewater has fully paid the balance on or before the March 31, 2013, deadline, Bluewater has the option to extend the suspension of work on the Cheviot project to June 30, 2013, after which Bluewater will have no further rights to request a suspension of work under the contract pursuant to the agreement.

If Bluewater fails to make timely payments pursuant to the revised payment plan, we receive the right to terminate the contract and we will continue to retain title to any project deliverables pursuant to the agreement.

On August 17, 2012, ATP Oil &Gas Inc., the parent company of ATP U.K., filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code. Although ATP is not our customer and ATP U.K.

is not a party to the bankruptcy, we believe ATP has historically financed the operations of its subsidiaries, including ATP U.K. We believe Bluewater's ability to continue to meet its obligations under the agreement, including payment of the outstanding balance on or before March 31, 2013, largely depends on ATP U.K.'

s ability to fund the Cheviot project.

As of September 30, 2012, $56.7 million has been billed on the Cheviot project and its outstanding contracts receivable balance was approximately $32.1 million. All installments due under the agreement have been paid to-date.

Our work under our contract is suspended and will remain suspended until the outstanding balance is paid, based on our agreement with Bluewater. Although it is too early to determine the ultimate outcome of the impact of ATP's bankruptcy on the Cheviot project, in the event Bluewater is unable to comply with its obligations under the agreement and the contract is terminated, we will retain title to all project deliverables.

Given the suspension of the project and the uncertainty around ATP's bankruptcy, events in the future could change the timing and amount of the remaining contract price we ultimately recover.

Historically, we have funded our operations and capital needs through cash generated by operating activities, and funds available under the revolver have mainly been used to issue letters of credit for jobs awarded to us. Although capacity under the revolver still allows us to issue letters of credit for any current job awards, we will likely utilize some of its capacity to fund working capital and capital expenditure needs due to contractual issues we're now experiencing.

We're also in advanced negotiations with our lenders to execute an amendment of the facility which will increase the capacity of the revolver from $60 million [indiscernible]. We will further manage our cash through timing of both capital expenditures and payments to subcontractors as we are paid by our customers.

We believe our cash generated by operating activities and funds available under the amended revolver will be sufficient to fund our capital expenditures and meet our working capital needs for the next 12 months.

We are currently operating at capacities required by the projects in our backlog. We expect our man-hour levels to decrease slightly over the next 2 quarters as we enter into the later stages of our 2 major deepwater 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 scheduled demands.

I will now like to open the call to questions from analysts.

A question on this -- the contract loss, I'm sitting here thinking about the backlog associated with that. And is it fair to assume that you guys; A, will have to continue with this project and B, it's probably a 0 margin project going forward?

Blake, we will continue with the project, needless to say. We have to finish the project.

We're not projecting to be a 0 profit. What's happened right now is that we don't have assigned change order from our customer, so we cannot recognize the revenue associated with the extra work and the project delays.

We have presented a change order to our client. And as soon as we can get this change order finally negotiated, we will recognize the revenue, and we're anticipating that hopefully this will be in the fourth quarter of this year.

Great. And then one more follow-up on that.

Any way, you guys could give some color on what percentage of backlog this contract is for you guys?

Well, let's see here. I think I would say that it was approximately 25%, 20% to 25%?

Can you maybe provide us with an update on the deepwater projects you're seeing out there? And if I recall, there were a couple floating around maybe in the fourth quarter timeframe that could be out there to bid?

That's correct, Lenny. We're looking at 3 projects for the fourth quarter.

We have 2 in-house right now that we bid on, and the third one we think will be bid on probably in the first half of 2013.

Great. So based on the potential shift in the schedule of the major deepwater project you have now, you're comfortable bidding those projects, it sounds like and I guess, would there be a gap in between the ramp down of the current one and the ramp up of those other potential projects?

That's correct, Lenny. We'll probably be reducing our labor force, more so around the first of the year and the first and second quarter, but not by really a significant amount.

And hopefully, we can pick up 1 or 2 of these deepwater projects and maintain most of our labor force going forward.

Great. One quick follow-up on that then I'll hop back into queue.

What's your sense of industry capacity of Gulf Coast Fabrication? Is there capacity out there to compete with you to get these jobs or is everyone kind of full at this point?

Well, I think everybody's going to compete for these projects, Lenny. One of our competitors is pretty full right now, but they still will compete for the projects going forward.

Following up on that last question. Can you just also provide an update on the bidding environment in Marine?

I think you guys have talked in the second quarter there was some pretty good and we're looking for some pretty good opportunities for some smaller projects to be awarded here in the second half of the year?

Yes. Marine is pretty consistent.

It's kind of like everything from brown water to offshore type of vessels. And I think we put a press release out that we did secure a project from Montco, another 335-foot leg liftboat.

So that's a pretty significant project for our Marine group, besides some other projects they are already working on. And they continue to get bids on a pretty consistent basis.

So the Marine group hasn't slowed down like the deepwater type projects. It continues to move on.

Okay, great. And just on the commentary that you said on the revolver that you guys may draw down the revolver to fund some working capital.

This depends, of course, on our ability to negotiate some change orders and get some payments in, as well as we did get some -- or will be getting some insurance money in very shortly. But it is a possibility we may have to dip into our revolver mainly because the letters of credit that we have to issue on these larger projects.

I see. And when would that take place under a scenario, say, where you do get the graving dock repair insurance claim in the fourth quarter but are unable to negotiate successfully on the loss contract in the fourth quarter.

Would it be something that you would have to do in the fourth quarter or is it something that's in 2013?

I would say it's a possibility in the fourth quarter of 2012 and the first quarter of 2013.

Could you talk about the margins that you're realizing now versus -- your margins were significantly higher when you look back to 2007 to 2009 in a number of quarters. Can you talk about, is that a change in the bidding environment?

Or what is causing that?

Well, we had some unusual events for us that took place last year, if you remember. And as well as, of course, the margin right now on these deepwater projects depends on the change orders that we can negotiate with our clients.

And hopefully, we will have some positive negotiations going forward, Marty.

Okay. And then have you seen any interest from potential customers in having your yards fabricate modules or pieces of equipment for petrochemical and chemical plants along the Gulf Coast?

Marty, most of that has dried up. We haven't seen a lot of that.

There's still talk about modules for Alaska and possible modules for Canada, but we don't see very few modules for the chemical plants and refineries in the U.S.

And then just one last question. Any update on Cape Wind?

We're still tracking it. Cape Wind, of course, has been delayed.

The claim has gone through. We have bid Cape Wind, part of the fabrication from Cape Wind, and we're just, of course, waiting for them to finalize their financing.

And that's been the biggest issue is their financing in going forward. But we are actively pursuing Cape Wind.

Just a quick follow-up on Marty's question on the margins. I guess in the second quarter, the impact was due to inefficiencies in the labor ramp.

Can you just comment on where we stand on the labor impact to the margins?

Well, of course, the changes made by our customer in the Texas facility has put obvious stress on our efficiencies, and those costs are some that we plan to recoup. And of course, going forward, with the loss position of this contract, it would have impact on gross margin.

But we're certainly negotiating with our customer to recoup a substantial portion of those inefficiencies. But it's still -- as a reminder, an incredible ramp up for -- at such a short period of time, and it's just in conditions that are a little different from what we've historically experienced.

And we were ramping up mainly for the large projects, and, of course, the drawings and specifications have been delayed by a substantial amount. And we're still getting drawings today.

And in the third quarter, we had like 6,000 drawings that came in on revisions and extra work on this major project. So this is an ongoing situation.

But we didn't -- we chose not to lay off these individuals because we would need them for this larger work to be able to meet scheduled deliveries.

Okay. I think we need to open the questions to the general public at this point in time.

Okay.

Okay. We appreciate everybody calling in at this time, and we'll be talking again next quarter.

Thank you.