Q4 2023 Gulf Island Fabrication Inc Earnings Call
Participants
Cindi Cook; Executive Administrative Assistant; Gulf Island Fabrication Inc
Richard Heo; President, Chief Executive Officer, Director; Gulf Island Fabrication Inc
Wes Stockton; EVP & CFO; Gulf Island Fabrication Inc
Martin Malloy; Analyst; Johnson Rice & Company L.L.C.
Tom Spiro; Analyst; Spiro Capital
Presentation
Operator
Good afternoon, ladies and gentlemen, and welcome to Gulf Island's conference call to discuss fourth quarter and full year 2023 results. All participants will be in listen only mode for the duration of the call this call is being recorded.
At this time, I would like to turn the floor over to Ms. Cindi Cook for opening remarks and introductions. Cindy, please go ahead.
Cindi Cook
Thank you and good afternoon. I would like to welcome everyone to our fourth quarter and full year 2023 teleconference. Our results were released this afternoon and a copy of the press release is available on our website at Gulf Island.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, and we would like to refer everyone to the cautionary language included in our press release and to the risk factors described in our most recent Form 10-K and subsequent SEC filings.
Please also note that management may reference EBITDA adjusted EBITDA adjusted revenue, adjusted gross profit, 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?
Richard Heo
Thank you, Cindy, and good afternoon, everyone, and welcome to our fourth quarter results conference call. 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 sorry, during today's call, I'll provide key takeaways from the quarter a review of segment performance and end market trends and an update on the progress we have made on our strategic initiatives. West will then discuss our fourth quarter results in greater detail and provide some commentary on our outlook for 2024. We will then open up the call for questions, and we'll end with some closing remarks.
I'm extremely pleased with our fourth quarter results that capped off a remarkable year for golf Island. We made important progress on our strategic initiatives, including the settlement of our MPSV litigation and the substantial completion of our shipyard projects with these distractions behind us, we are now a focused services and fabrication company that is well positioned to take advantage of the strong demand trends in our key end markets.
Our fourth quarter revenue increased 17% from last year, reflecting the continued strength in our core Gulf Coast region. Combined with the successful execution of our strategic initiatives, we generated strong EBITDA growth in both our services and fabrication segments during the fourth quarter, and we grew our cash balance, giving us significant flexibility to pursue our growth objectives as should be evident by our strong fourth quarter and full year financial results. We have established a stable and profitable base business through the growth of our services and small-scale fabrication businesses. We generated services EBITDA of $12.9 million during fiscal 2023, up 34% from the prior year, and we expect further growth in 2024.
In fabrication, our small-scale fabrication business provides a strong base that is stable and nicely profitable and gives us a strong foundation to pursue growth. During fiscal 2023, our Fabrication Division generated gross margins of over 11% despite the partial underutilization of our facilities, owing to solid growth and execution in our small-scale fabrication business and the benefit of our large fabrication project that was canceled.
Our services and fabrication divisions combined to generate operating segment adjusted EBITDA of nearly $25 million during 2023. This success would not have been possible without the continued focus on the key pillars of our strategic transformation strategy. As a reminder, we're executing on Phase 2 of our strategic framework, which is focused on generating stable, profitable growth by pursuing new growth in markets growing and diversifying our services business, further strengthening our project execution and expanding our skilled workforce while continuing to pursue opportunities in our traditional offshore markets. I am excited by our progress, and we remain focused on continuing to execute on our transformation strategy in 2024 and beyond.
An important part of the strategy is pursuing new growth end markets, which includes the pursuit of projects outside our traditional oil and gas end markets.
In the second quarter of 2023, we announced a small-scale fabrication award from an EPC contractor to support the fabrication of structural components for NASA's mobile launcher two projects. As a result of our strong execution focused on quality and schedule improvement, we have received additional scopes of work that has more than doubled our initial estimated contract value. Our team attended a meeting last week in Washington, D.C. with other NASA contractors where we were recognized for helping the program close gaps on schedule with the construction of the Artemis mobile launcher.
This opportunity highlights the benefit of focusing on small-scale fabrication outside our traditional markets where the customer values the quality and schedule certainty that golf Island has historically delivered. We continue to be encouraged by the activity in key end markets in the Gulf Coast region, including LNG, pet cam and green energy and industry capacity remains tight. We were well positioned in these markets and we continue to pursue several attractive opportunities.
However, we have continued to see extended project decision cycles with delays in several large projects due to permitting issues and other factors that can be that can impact these large multi-billion dollar projects. The recent decision by the Biden administration to postpone the approval of all LNG projects added another layer of uncertainty. That said, we'll continue to remain disciplined and we will not chase backlog or enter into any contract that does not meet our risk return objectives. In the meantime, we remain focused on profitably growing our services and small-scale fab business and are excited by the opportunities they offer.
Now turning to our segment results. First, looking at our Services division, our fourth quarter revenue grew 13% year over year, driven primarily by the contribution of Spark safety. This quarter was yet another example of the benefit of our strategy to grow Spark safety and direct resources to higher return opportunities as our 13% revenue growth during the quarter translated to services EBITDA growth of 25%. In fact, for the year, we were able to grow our services EBITDA by 34% on 7% revenue growth with the tight labor conditions and the continued growth of Spark safety, we expect this trend to continue into 2024.
Driven by the favorable spending environment for our key oil and gas customers and more specifically those in the Gulf of Mexico, the demand trends for our services business remain encouraging as we enter into 2024. In addition, we continue to add new customers who recognize the safety advantages of our Spark safety offering. And as such, we expect to continue to gain traction in the market. Based on these factors, we expect another strong year for our services business in 2024.
Now moving on to fabrication. We generated another steady quarter for our fabrication business, once again, highlighting the stable nature of our small-scale fabrication business. We generated fourth quarter revenue of $20 million, up nearly 20% from the same period last year. Strong results were driven by growth in small-scale fab and the benefit of project improvements resulting from the approval of customer change orders for the full year. We similarly benefited from the growth in our small-scale fabrication business and the contribution of our large fabrication project that was canceled. During 2024, we expect another year of steady growth on our small-scale fabrication business and continue to be excited about our positioning in this business over the long term.
Finally, turning to our Shipyard Division, where we have substantially completed the remaining ferry projects. The Texas DOT ferry was accepted in the fourth quarter, and I will be attending the christening tomorrow and Galveston where she will be put into service with respect to our [two 40] vehicle ferry projects. The final ferry was delivered in the fourth quarter and conditional customer acceptance was received.
We completed the final customer and United States Coast Guard inspection this week, and we are awaiting the final acceptance, which should occur in the next few weeks upon final acceptance, we'll immediately pursue our lawsuit for damages due to design errors by North Carolina Department of Transportation upon final customer acceptance of the final 40 vehicle ferry, our shipyard operating activities will be complete. And the final wind-down of our shipyard operations will only be a function of the expiration of the warranty periods for the ferry projects and the outcome of the lawsuit on North Carolina.
In closing, this was an exciting year for Gulf Island, one that would not have been possible without the hard work and dedication of our employees across the organization. We're excited by the momentum in our services and small-scale fabrication business, which combine with our strong financial flexibility, positions us to drive value for shareholders.
I'm very proud of all of our accomplishments during 2023 and remain confident that 2024 will build on our strong foundation of reoccurring revenue from our base business.
I will now turn the call over to Wes to discuss our quarterly results in greater detail.
Wes Stockton
Thanks, Richard, and good afternoon, everyone. I will discuss our consolidated results and then provide some additional details regarding our segment results, putting in context, the factors mentioned by Richard and their impacts on the quarter. I will then conclude with a discussion of our liquidity and provide some commentary on the outlook for the first quarter and full year 2024.
As a reminder, please note that our full year results for 2023 reflect the impact of the resolution of our MPSV litigation, which resulted in a charge of $32.5 million for our Shipyard Division for both the third quarter and full year 2023 consisting of two separate items, which have been reflected as a reduction to revenue for the division. The first was a non-cash charge of $12.5 million associated with the write-off of a noncurrent contract asset related to the construction contracts that were subject to the litigation.
The second was a charge of $20 million associated with recording a liability resulting from a promissory note we entered into with the surety that issued the performance bonds for the contracts. Because the promissory note was entered into during the fourth quarter, the liability was reflected as a noncurrent contract liability at September 30 and was reclassified as debt as of year end. Due to the favorable terms of the note, which include a fixed interest rate of 3% and a 15-year repayment term, we estimate the present value of the debt obligation to be approximately $12.7 million, which is well below the face amount of the note.
Now turning to our quarter results. Consolidated revenue for the fourth quarter 2023 was $44.6 million, up 17% from the prior year period. The increase was driven by solid growth in both our services and fabrication segments.
Consolidated adjusted EBITDA was $6.6 million for the fourth quarter of 2023 up from $2.3 million in the prior year period. Consolidated adjusted EBITDA reflects the removal of the operating results of our Shipyard Division and insurance gains for our Fabrication Division The improvement in adjusted EBITDA reflects higher results for both services and fabrication, including the benefit of project improvements for our Fabrication Division resulting from the favorable resolution of customer change orders and strong project execution.
Specifically for the Services division, revenue for the fourth quarter 2023 was $24.5 million, an increase of over 13% compared to the prior year period. The increase was driven primarily by incremental revenue associated with our Spark safety business line services.
EBITDA for the fourth quarter 2023 was $3.2 million, up 25% compared to the prior year period, owing to a more favorable project margin mix, including strong growth in our higher-margin Spark safety business. As a result EBITDA margin was 13.2% for the fourth quarter, up 130 basis points from the prior year period.
For our Fabrication Division, revenue for the fourth quarter 2023 was $19.7 million, an increase of nearly 20% compared to the prior year period due to strong growth in our small-scale fabrication business and the favorable resolution of customer change orders.
Fabrication adjusted EBITDA for the fourth quarter 2023, which excludes a gain from the net impact of insurance recoveries and costs associated with Hurricane Ida was $5.4 million compared to $2 million for the prior year period. The improvement was driven by growth in small-scale fabrication previously mentioned resolution of customer change orders and project improvements resulting from strong project execution.
Specifically for the fourth quarter 2023 project improvements associated with the aforementioned totaled $3.8 million. However, these benefits were partially offset by an increase in the under-recovery of overhead costs associated with lower utilization of facilities and resources resulting from the cancellation of the division's large fabrication contract for our corporate division. EBITDA was a loss of $2 million for the fourth quarter 2023 compared to a loss of $2.3 million in the prior year period. And with respect to our Shipyard Division, we had no meaningful impact to our operating results in the fourth quarter 2023, which was consistent with our expectations.
Moving on to our liquidity. We ended the year with a cash and investments balance of approximately $48 million, up roughly $6 million from September 30 due to our solid operating results for the quarter. As previously discussed, at year end, our debt obligation associated with the resolution of our MPSV litigation was $20 million with annual payments of approximately $1.7 million beginning on December 31, 2024.
Our cash balance and the long duration of our debt provide a strong liquidity going into 2024. This liquidity was further bolstered in February with the sale of excess property at our home, a Louisiana facility, which generated net cash proceeds of approximately $8.5 million.
The property sale will have no impact on our ongoing operations, including our ability to execute any potential award of a large fabrication project and its sale is consistent with our strategy to monetize underutilized assets. Based on our expectation of operating results for the first quarter 2024 and proceeds from the property sale, we expect to exit the first quarter with a cash balance approaching $60 million.
With respect to our earnings outlook for 2024, we are providing indicative segment and consolidated guidance for the full year. Our outlook is based on the strength of our end markets, combined with our expectation for continued execution against our strategic initiatives for our Services segment, we expect 2024 EBITDA of approximately $14 million, driven primarily by continued growth in our Spark safety business line.
For our fabrication segment, we expect 2024 EBITDA of approximately $8 million, which includes year-over-year growth in our small-scale fabrication but excludes the potential benefit of any large project award. Our forecast also excludes an anticipated gain of approximately $2.9 million resulting from the previously mentioned property sale.
Our forecasted 2024 EBITDA for fabrication is lower than 2023 levels due to the prior year, benefiting from the contribution of our large fabrication project that was canceled during the year. And for our corporate segment, we expect a 2024 EBITDA loss of approximately $8 million, which is consistent with our recent historical experience.
With respect to our capital requirements for 2024. We anticipate capital expenditures of approximately $4.5 million to $5.5 million for the year, of which approximately $3.5 million relates to upgrades to our home of facilities and investments and more technologically advanced equipment. And the remainder reflects our more typical maintenance CapEx requirements.
Our capital expenditures for 2024 will be supplemented by insurance proceeds of $2 million received in January 2024 associated with damage previously caused to our homeowner facilities by Hurricane Ida.
Lastly, during the fourth quarter we repurchased approximately 30,000 shares of our common stock for approximately $128,000 under our share repurchase program commenced in mid-December and at December 31, we had remaining authorization to purchase approximately $4.9 million of common stock under the program.
This concludes our prepared remarks. Operator, you may now open the line for questions.
Question and Answer Session
Operator
(Operator Instructions) Martin Malloy, Johnson Rice.
Martin Malloy
Good afternoon. Congratulations on the strong quarter, also the progress you've made derisking the company, particularly over the last six months.
The first question I had was just about the bidding environment for large fabrication projects. And I appreciate you've got some kind of a baseload baseline work for small fabrication projects. But and there's still a number of chemical and energy energy projects that appear to be going forward along the Gulf Coast outside of LNG. I mean, there's still a number of LNG projects that are either under construction or they do have their their non-FTA approval. So I would think there's still some potential work there. But could you just comment maybe about the bidding environment you're seeing for the larger fabrication projects, type of projects and the activity level?
Richard Heo
Yes, Marty, your observations are spot on there are still a very, you know, good volume of projects, both in LNG and petrochemicals on the LNG projects up to speed up the projects that have gotten for frac approval and they're in the process of construction. And one of the things that we have seen in the past year year and half is just the challenges in the capital market.
These are very large projects. And so they are we are seeing a lot of projects move to the right. And then the other challenge we're seeing is that because of the budgets of the customer or and or the EPC contractors. There has been some changes in the philosophies around the scope that we're working on. So for example, we were actively chasing a project a very large project late last year.
And in that project where we felt we were the kind of the lead contractor, the customer decided to basically execute that project a module project in house as a stick-built because it was outside their budget. And so there's a lot of project activity. As you know, these large projects take a long time to go from bidding to award. However, there are some some headwinds with AGAIN capital availability and some of the things that we're seeing on the LNG side.
Martin Malloy
Okay. That's helpful. And my follow-up question is with the balance sheet that you have and the amount of cash you expect to have at the end of 1Q, could you maybe talk about potential deployment of that cash of a share repurchase type of acquisition opportunities you might be looking at the kind of flow the opportunities that you're seeing?
Richard Heo
We are actively and have been actively looking for acquisition opportunities to best utilize our capital. And I feel now is a really great time for us, especially with some of the challenges that we've had with the shipyard behind us for us to go on offense and look for adding to the base load of our business like we did with the Dynamic acquisition two years ago.
Wes Stockton
And Marty, obviously, if we come to the conclusion that we can't find something that is attractive or make sense or just kind of just the pricing just doesn't make sense at that point, we'll evaluate other alternatives to return value to the shareholders or return cash to shareholders. But at this point, what we'd like to do is grow the business and invest and those are the kind of things that Richard mentioned.
Operator
Tom Spiro, Spiro Capital.
Tom Spiro
Good afternoon. Richard, in your prepared remarks, you said that you expect the fab division to grow in 2024, and that's excluding any large awards. So that would be driven by the smaller projects. Why do you think it's going to grow? What why do you expect more of these smaller projects to be available?
Richard Heo
While we see robustness in our services customers per one in the Gulf of Mexico. And so there's a lot of pull-through opportunities where we have maintenance and construction activities with key customers in the Gulf of Mexico that we're seeing a projected opportunity for fabrication growth. And so that, along with some of the other end markets that we're chasing, we feel very good about our guidance with regard to small fab opportunities for 2024.
Tom Spiro
And in the first quarter, you had quite a nice benefit from the resolution of change orders, almost [$4 million]. Was that one particular a change or is that lots of other ones, what happened?
Richard Heo
Yes, it wasn't all a change order by the way, I would $2.5 million to $3 million of that was on change orders and it's more than one customer, but the rest was just project improvements and obviously and change order improvements of that magnitude based on our revenue volume, you wouldn't expect to see those, um, you know all the time. So that's something that will happen. But not at the same level, but project improvements, although those won't happen every quarter in our business, we will have periodic opportunities where we will realize project improvements like that as well.
Tom Spiro
I see. But just a couple of small housekeeping items. Number one, we had a $5 million receivable related to the large fab job. Did you have a collective $5 million?
Richard Heo
We did that's been fully collected -- was fully collected as of year-end.
Tom Spiro
That's great. And number two, there was a propeller issue with respect to the Texas ferry, $1.5 million\ propeller who's going to pay for it? Was that ever resolved?
Richard Heo
That's been resolved, Tom.
Tom Spiro
And would you care to tell us how well the best way to describe it?
Richard Heo
Tom, is that it's in the results. So through negotiation with the customer and determination who's going to pay for what that's been resolved with the customer is going to replace the blade going forward and the cost impact of cost impacts of that. And to what extent we're going to bear any cost impact of that is already in our results for the fourth quarter.
Tom Spiro
I see. And the CapEx in the fiscal year just ended seemed a little light seemed throughout the year you were aiming for a higher number Q4, your Enviro number never happened. Anything going on?
Wes Stockton
No, that's a really good observation. And what you see in few on you see our 2024 CapEx numbers are a bit higher than we would normally have as well. So some of that is simply carryover from 2023. We just didn't make the progress we expected to make in terms of some of those improvements I mentioned in the prepared remarks regarding investments in the facility and some equipment. So there's an element of that on that's causing the carry on the lower CapEx for 2023.
Tom Spiro
I see. And lastly, the property sale recently for about $8.5 million, what exactly did you sell?
Richard Heo
That was just our facility, the fairly fairly large facility in some of the property was actually acquired over time. And so what we sold was a piece of property or portion of property that was acquired by the company, some time ago that has been underutilized for a very long time. And it's just as we look at look ahead is not something that we think we need for our operations going forward. And I'm it's two -- gave us two benefits. One, we're able to monetize an asset that we don't think we need on. And the other was it allowed us to further consolidate our footprint, which we think will have some efficiency benefits, both from a productive activity perspective and help us reduce our ongoing operating costs.
Tom Spiro
I see. And as you review the remaining assets of the company, whether it's real estate or equipment, et cetera. Are there other significant assets that we may not need or you're now pretty lean and mean?
Richard Heo
Yes, no, I think I think the latter is where we're at at this point. None of we're happy with our with our asset base now, and we think it's what we need to run the business. So I wouldn't expect us to be selling any more significant real estate or are major equipment.
Now having said that, we'll continue to look for for opportunities to sell equipment and other things that we may not need or replace older equipment with newer equipment, et cetera. But that will just be more normal course.
Operator
Thank you. Ladies and gentlemen, if you wish to ask a question, please press star and why as there are no further questions, I would now hand the conference over to Richard Heo for his closing comments.
Richard Heo
In closing, I want to thank our customers and shareholders for their continued support as well as recognize our employees who continue to demonstrate their commitment to golf Island success for those on the call.
Thank you again for your interest, and I look forward to speaking with you on our next conference call and updating you on our progress. Be safe and take care. Thank you.
Operator
Thank you. The conference of Gulf Island has now concluded. Thank you for your participation. You may now disconnect your line.
