Item 1A. Risk Factors
Cautionary Statement
Our business is subject to significant risks. We caution readers that the following important factors could affect our actual consolidated results and could cause our actual consolidated results in the future to differ materially from the goals and expectations expressed in the forward-looking statements contained in this report and in any other forward-looking statements made by us or on our behalf.
We are subject to the cyclical nature of the oil and gas industry.
Our business depends primarily on the level of activity by oil and gas companies in the Gulf of Mexico and along the Gulf Coast. This level of activity has traditionally been volatile as a result of fluctuations in oil and gas prices and their uncertainty in the future. The purchases of the products and services we provide are, to a substantial extent, deferrable in the event oil and gas companies reduce capital expenditures. Therefore, the willingness of our customers to make expenditures is critical to our operations. The levels of such capital expenditures are influenced by, among other things:
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oil and gas prices and industry perceptions of future prices;
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the cost of exploring for, producing and delivering oil and gas;
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the ability of oil and gas companies to generate capital;
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the sale and expiration dates of offshore leases in the United States and overseas;
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the discovery rate of new oil and gas reserves in offshore areas;
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local, federal and international political and economic conditions; and
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uncertainty regarding the United States energy policy, particularly any revision, reinterpretation or creation of environmental and tax laws and regulations that would negatively impact the industry.
Although activity levels in production and development sectors of the oil and gas industry are less immediately affected by changing prices and as a result, less volatile than the exploration sector, producers generally react to declining oil and gas prices by reducing expenditures. This has in the past and may in the future adversely affect our business. We are unable to predict future oil and gas prices or the level of oil and gas industry activity. A prolonged low level of activity in the oil and gas industry will adversely affect the demand for our products and services and our financial condition and results of operations.
We might be unable to employ a sufficient number of skilled workers.
Our ability to remain productive and profitable depends substantially on our ability to attract and retain skilled construction workers, primarily welders, fitters and equipment operators. In addition, our ability to expand our operations depends not only upon customer demand, but also on our ability to increase our labor force. The demand for such workers is high and the supply is extremely limited, especially during periods of high activity in the oil and gas industry. While we believe our relationship with our skilled labor force is good, a significant increase in the wages paid by competing employers could result in a reduction in our skilled labor force, increases in the wage rates we pay, increase in our use of contract labor, or all of these. Additionally, reductions made, from time to time, in our labor force may make it more difficult for us to increase our labor force to desirable levels during periods of increased customer demand for our services.
If any of these occurred in the near-term, the profits expected from work in progress could be reduced or eliminated and, in the long-term, to the extent wage increases could not be passed on to our customers, our production capacity could be diminished and growth potential could be impaired.
Our backlog is subject to change and may be adversely affected by the loss of or failure to secure deepwater projects.
Our backlog is based on management’s estimate of the direct labor hours required to complete, and the remaining revenue to be recognized with respect to, those projects as to which a customer has authorized us to begin work or purchase materials pursuant to written contracts, letters of intent or other forms of authorization. Often, however, management’s estimates are based on incomplete engineering and design specifications. As engineering and design plans are finalized or changes to existing plans are made, management’s estimate of the direct labor hours required to complete and price at completion is likely to change. In addition, all projects currently included in our backlog are subject to termination at the option of the customer, although the customer, in that case, is generally required to pay us for work performed and materials purchased through the date of termination and, in some instances, cancellation fees. In addition, a customer can potentially delay the execution of their project.
Deepwater projects have historically represented a significant part of our backlog. With respect to backlog at December 31, 2010, $343.4 million, or 70.6%, represented mostly two projects destined for deepwater locations. Depending on the size of the project, the termination or postponement of any one of our deepwater projects could significantly reduce our backlog, and could have a material adverse effect on revenue, net income and cash flow.
The dangers inherent in our operations and the limits on insurance coverage could expose us to potentially significant liability costs and materially interfere with the performance of our operations.
The fabrication of large steel structures involves operating hazards that can cause personal injury or loss of life, severe damage to and destruction of property and equipment and suspension of operations. The failure of such structures during and after installation can result in similar injuries and damages. In addition, our employees may engage in certain activities, including interconnect piping and other service activities conducted on offshore platforms, activities performed on the spud barges owned or chartered by us, marine vessel fabrication and repair activities performed at our facilities, and operating vessels owned by us, that are covered in either the provisions of the Jones Act or USL&H. These laws operate to make the liability limits established under state workers’ compensation laws inapplicable to these employees and, instead, permit them or their representatives to pursue actions against us for damages or job related injuries, with generally no limitations on our potential liability.
Our ownership and operation of vessels can give rise to large and varied liability risks, such as risks of collisions with other vessels or structures, sinking, fires and other marine casualties, which can result in significant claims for damages against both us and third parties for, among other things, personal injury, death, property damage, pollution and loss of business. Litigation arising from any such occurrences may result in our being named as a defendant in lawsuits asserting large claims. In addition, due to their proximity to the Gulf of Mexico, our facilities are subject to the possibility of physical damage caused by hurricanes or flooding, as occurred in 2008.
Although we believe that our insurance coverage is adequate, there can be no assurance that we will be able to maintain adequate insurance in the future at rates we consider reasonable or that our insurance coverage will be adequate to cover future claims that may arise. Successful claims for which we are not fully insured may adversely affect our working capital and profitability. In addition, changes in the insurance industry have generally led to higher insurance costs and decreased availability of coverage. The availability of insurance that covers risks we and our competitors typically insure against may decrease, and the insurance that we are able to obtain may have higher deductibles, higher premiums and more restrictive policy terms.
Our industry is highly competitive.
The offshore platform industry is highly competitive and influenced by events largely outside of our control. Contracts for our services are generally awarded on a competitive bid basis, and our customers consider many factors when awarding a job. These factors include price, the contractor’s ability to meet the customer’s delivery schedule, and to a lesser extent, the availability and capability of equipment, and the reputation, experience and safety record of the contractor. Although we believe that our reputation for safety and quality service is good, we cannot guarantee that we will be able to maintain our competitive position. We compete with both large and small companies for available jobs, and certain of our competitors have greater financial and other resources than we do.
In addition, because of subsidies, import duties and fees, taxes imposed on foreign operators and lower wage rates in foreign countries, along with fluctuations in the value of the U.S. dollar and other factors, we may not be able to remain competitive with foreign contractors for projects designed for use in international locations as well as those designed for use in the Gulf of Mexico. See “Business and Properties-Competition” for more information regarding the competitive nature of our industry.
Competitive pricing common in the marine construction industry may not provide sufficient protection from cost overruns.
As is common in the offshore platform fabrication industry, a substantial number of our projects are performed on a fixed-price basis, although some projects are performed on an alliance/partnering or cost-plus basis. Under fixed-price or unit-rate contracts, we receive the price fixed in the contract, subject to adjustment
only for change orders placed by the customer. Under a unit rate contract, material items or labor tasks are assigned unit rates of measure. The unit rates of measure will generally be an amount of dollars per ton, per foot, per square foot, per item installed, etc. A typical unit rate contract can contain hundreds to thousands of unit rates of measure that all accumulate to determine the total contract value. Profit margins are built in to the unit rates and, similar to a fixed price contract, we retain all cost savings but are also responsible for all cost overruns. Under typical alliance/partnering arrangements, the parties agree in advance to a target price that includes specified levels of labor and material costs and profit margins. If the project is completed at less cost than that targeted in the contract, the contract price is reduced by a portion of the savings. If the cost to completion is greater than target costs, the contract price is increased, but generally to the target price plus the actual incremental cost of materials and direct labor. Accordingly, under alliance/partnering arrangements, we have some protection against cost overruns but must share a portion of any cost savings with the customer. Under cost-plus arrangements, we receive a specified fee in excess of our direct labor and material cost and thus are protected against cost overruns but do not benefit directly from cost savings. Some contracts include a total or partial reimbursement to us of any costs associated with specific capital projects required by the fabrication process. If a capital project provides future benefits to us, the cost to build the capital project will be capitalized, and the revenue for the capital project will increase the estimated profit in the contract.
The revenue, costs and gross profit realized on a contract will often vary from the estimated amounts on which such contracts were originally based due to, among other things:
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changes in the availability and cost of labor and material;
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variations in productivity from the original estimates; and
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changes in estimates or bidding.
These variations and the risks inherent in our industry may result in revenue and gross profits different from those originally estimated and reduce profitability or create losses on projects. Depending on the size of a project, variations from estimated contract performance can have a significant impact on our operating results for any particular fiscal quarter or year. See “Business and Properties-Customer and Contracting.”
Our method of accounting for revenue could result in an earnings charge.
Most of our revenue is recognized on a percentage-of-completion basis based on the ratio of direct labor hours worked to the total estimated direct labor hours required for completion. Accordingly, contract price and cost estimates are reviewed monthly as the work progresses, and adjustments proportionate to the percentage of completion are reflected in revenue for the period when such estimates are revised. To the extent that these adjustments result in a reduction or elimination of previously reported profits, we are required to recognize a charge against current earnings, which may be significant depending on the size of the project or the adjustment.
We are susceptible to adverse weather conditions in our market areas.
Our operations are directly affected by the seasonal differences in weather patterns in the Gulf of Mexico, as well as daylight hours. Since most of our construction activities take place outdoors, the number of direct labor hours worked generally declines in the winter months due to an increase in rainy and cold conditions and a decrease in daylight hours. The seasonality of oil and gas industry activity as a whole in the Gulf Coast region also affects our operations. Our customers often schedule the completion of their projects during the summer months in order to take advantage of the milder weather during such months for the installation of their platforms. The rainy weather, tropical storms, hurricanes and other storms prevalent in the Gulf of Mexico and along the Gulf Coast throughout the year, such as Hurricanes Gustav and Ike in 2008, may also affect our operations. Accordingly, our operating results may vary from quarter to quarter, depending on factors outside of our control. As a result, full year results are not likely to be a direct multiple of any particular quarter or combination of quarters.
We depend on key personnel.
Our success depends to a great degree on the abilities of our key management personnel, particularly our Chief Executive Officer and other high-ranking executives. The loss of the services of one or more of these key employees could adversely affect us.
We depend on significant customers.
We derive a significant amount of our revenue from a small number of major and independent oil and gas companies, although not necessarily the same customers from year to year. Because the level of fabrication that we may provide to any particular customer depends, among other things, on the size of that customer’s capital expenditure budget devoted to platform construction plans in a particular year and our ability to meet the customer’s delivery schedule, customers that account for a significant portion of our revenue in one fiscal year may represent an immaterial portion of revenue in subsequent years. For example, our largest customers (those which individually accounted for more than 10% of revenue in a given year) accounted for 38% of revenue in 2010 (16% for Eni US Operating Co. Inc., 11% for American Electric Power Service Corporation and 11% for Versabuild, LLC ), 48% of revenue in 2009 (36% for Bluewater Industries, Inc. and 12% for Eni US Operating Co. Inc.), and 54% of revenue in 2008 (37% for Bluewater Industries, Inc. and 17% for Daewoo Shipbuilding and Marine Engineering, Ltd.). The loss of a significant customer for any reason, including a sustained decline in that customer’s capital expenditure budget or competitive factors, can result in a substantial loss of revenue and could have a material adverse effect on our operating performance.
The nature of our industry subjects us to compliance with regulatory and environmental laws.
Our operations and properties are materially affected by state and federal laws and other regulations relating to the oil and gas industry in general, and are also subject to a wide variety of foreign, federal, state and local environmental laws and regulations, including those governing discharges into the air and water, the handling and disposal of solid and hazardous wastes, the remediation of soil and groundwater contaminated by hazardous substances and the health and safety of employees. Further, compliance with many of these laws is becoming increasingly complex, stringent and expensive. Many impose “strict liability” for damages to natural resources or threats to public health and safety, rendering a party liable for the environmental damage without regard to its negligence or fault. Certain environmental laws provide for strict, joint and several liability for remediation of spills and other releases of hazardous substances, as well as damage to natural resources. In addition, we could be subject to claims alleging personal injury or property damage as a result of alleged exposure to hazardous substances. Such laws and regulations may also expose us to liability for the conduct of or conditions caused by others, or for acts that were in compliance with all applicable laws at the time such acts were performed. We believe that our present operations substantially comply with applicable federal and state pollution control and environmental protection laws and regulations. We also believe that compliance with such laws has had no material adverse effect on our operations. However, such environmental laws are changed frequently. Sanctions for noncompliance may include revocation of permits, corrective action orders, administrative or civil penalties and criminal prosecution. We are unable to predict whether environmental laws will materially adversely affect our future operations and financial results. See “Business and Properties-Government and Environmental Regulations.”
The demand for our services is also affected by changing taxes, price controls and other laws and regulations relating to the oil and gas industry generally. Offshore construction and drilling in certain areas has also been opposed by environmental groups and, in certain areas, has been restricted. To the extent laws are enacted or other governmental actions are taken that prohibit or restrict offshore construction and drilling or impose environmental protection requirements that result in increased costs to the oil and gas industry in general and the offshore construction industry in particular, our business and prospects could be adversely affected. We cannot determine to what extent future operations and earnings may be affected by new legislation, new regulations or changes in existing regulations.
Our business is highly dependent on our ability to utilize the Houma Navigational Canal.
The Houma Navigation Canal provides the only means of access from our Louisiana facilities to open waters. The Houma Navigation Canal is considered to be a navigable waterway of the United States and, as such, is protected by federal law from unauthorized obstructions that would hinder water-borne traffic. Federal law also authorizes federal maintenance of the canal by the United States Corps of Engineers. The canal requires bi-annual dredging to maintain its water depth and, while federal funding for this dredging has been provided for over 40 years, there is no assurance that Congressional appropriations sufficient for adequate dredging and other maintenance of the canal will be continued indefinitely. If sufficient funding were not appropriated for that purpose, the Houma Navigation Canal could become impassable by barges or other vessels required to transport many of our products and could result in material and adverse affects on our operations and financial position.
We may not collect all or part of $5.9 million currently receivable from our insurance provider in connection with a crane accident.
At December 31, 2010, we have recorded $5.9 million, net of advances received from our insurance provider, in “Other receivables” related to an insurance claim for costs that we have determined are recoverable under our various insurance policies. Certain costs that were deemed unrecoverable based on either our insurance coverage or our deductibles related to these insurance claims were expensed at the time incurred. The amounts of the deductibles associated with our various insurance policies are generally based on a percentage of the repair costs. Until all property is restored to pre-damaged condition, we will incur costs for repairs and record the deductibles accordingly. We have not recorded any gains related to this claim in our income statement and will not record any gains until the claim is settled.
The $5.9 million claim relates to costs incurred in connection with an accident that occurred in April 2008 at our Texas facility involving four cranes. This amount represents costs incurred by us to rent replacement cranes while our damaged cranes were repaired. In addition, we have one crane with a carrying value of approximately $2.9 million that is pending determination from the insurance carrier whether to repair or replace that crane. Our insurance provider has filed a declaratory judgment action in U.S. District Court, Eastern District of Louisiana seeking to deny insurance coverage of the costs of renting cranes to mitigate business-interruption damages that might otherwise have been incurred as a result of the accident. We are defending ourselves from the insurer’s request for a declaratory judgment that crane-rental coverage is limited to $450,000, when in fact we believe there is coverage for all amounts that have been, or will be, expended under the terms of the policy.
A hearing was held in January 2011 and we are awaiting a final ruling from that hearing with respect to our claim. We intend to continue to pursue this matter through these legal proceedings and although there can be no assurances made as to the ultimate outcome, we, in consultation with outside legal counsel, believe it is probable that all of our claim will ultimately be fully recoverable under our insurance policies. In January 2011, we deposited a $1.1 million check from our insurance provider toward the total loss of the damaged crane discussed above involved in the accident, without prejudice to our continuing to pursue full recovery.
The Deepwater Horizon incident could have a material adverse effect on our oil and gas fabrication operations.
In April 2010, the drilling rig Deepwater Horizon, which was engaged in deepwater drilling operations in the Gulf of Mexico, sank after an explosion and fire, resulting in one of the most significant oil spills in U.S. history. As a result, on May 28, 2010, the DOI imposed a six-month moratorium on offshore deepwater drilling operations, the enforcement of which was preliminarily enjoined. On July 12, 2010, the DOI imposed another similar moratorium set to expire November 30, 2010. As a result, deepwater drilling operations in the Gulf of Mexico were suspended. On October 12, 2010, the DOI lifted the moratorium on deepwater drilling. Although the moratorium has been lifted, the BOEM has issued regulations regarding safety, environmental matters and drilling and may take additional actions that could adversely affect drilling activity in the Gulf of Mexico. It is not possible to estimate whether or when drilling operations in the Gulf of Mexico will return to normal activity levels.
We believe that the Deepwater Horizon incident is likely to result in increased exploration and production costs, increased regulation of deepwater drilling operations and greater difficulty in obtaining drilling permits. Any one or more of these may cause some of our customers to decrease or eliminate drilling activities in the Gulf of Mexico, which could have a material adverse effect on our business.
Item 1B.
Item 1B. Unresolved Staff Comments
None.
Item 3.
Item 3. Legal Proceedings
We are subject to various routine legal proceedings in the normal conduct of our business primarily involving commercial claims, workers’ compensation claims, and claims for personal injury under general maritime laws of the United States and the Jones Act. See Note 6 to the Notes to the Consolidated Financial Statements for additional information concerning our outstanding proceedings. While the outcome of these lawsuits, legal proceedings and claims cannot be predicted with certainty, management believes that the outcome of any such proceedings, even if determined adversely, would not have a material adverse effect on our financial position, results of operations or cash flows.
Item 4.
Item 4. Reserved
Executive Officers of the Registrant
Listed below are the names, ages and offices held by each of our executive officers as of February 28, 2011. All officers serve at the pleasure of our Board of Directors.
Name
Age
Position
Kerry J. Chauvin
Chairman of the Board and Chief Executive Officer
Kirk J. Meche
President and Chief Operating Officer
Robin A. Seibert
Vice President-Finance, Chief Financial Officer, Chief Accounting Officer and Treasurer
William G. Blanchard
President and Chief Executive Officer of Gulf Island, L.L.C. (fabrication subsidiary)
Francis A. Smith, Jr.
President and Chief Executive Officer of Gulf Marine Fabricators, L.P. (fabrication subsidiary)
Kerry J. Chauvin has served as Chairman of the Board since April 2001. Mr. Chauvin has served as the Chief Executive Officer since January 1990 and as President from inception until January 2009. Mr. Chauvin also served as Chief Operating Officer from January 1989 to January 1990.
Kirk J. Meche became President and Chief Operating Officer in January 2009. Mr. Meche served as the Executive Vice President-Operations from 2001 to 2009. Mr. Meche was President and Chief Executive Officer of Gulf Marine Fabricators from February 2006 to October 2006. Mr. Meche served as President and Chief Executive Officer of Gulf Island from February 2001 until January 2006.
Robin A. Seibert became Vice President-Finance and Chief Financial Officer and Treasurer in October 2007. Mr. Seibert served as Controller from 1997 until 2007 and Chief Accounting Officer since 1998.
William G. “Bill” Blanchard became President and Chief Executive Officer of Gulf Island in February 2006. Mr. Blanchard was Estimating Department Manager of Gulf Island from January 2000 until January 2006.
Francis A. Smith, Jr. became President and Chief Executive Officer of Gulf Marine Fabricators in March 2009. From July 2004 to March 2009, Mr. Smith was an Independent Consultant. From 1973 to 2004, Mr. Smith held positions in various capacities with J. Ray McDermott and McDermott, Inc. including Vice-President and General Manager, Fabrication Division, except from 1991 to 1994 when he held the position of Vice President, Fabrication for OPI.
PART II
Item 5.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock is traded on the Nasdaq Global Select Market, under the symbol “GIFI.” As of February 28, 2011, we had approximately 3,100 holders of record of our common stock.
The following table sets forth the high and low sale prices per share of the common stock, as reported by The Nasdaq Stock Market LLC and the amount of cash dividends per share declared our common stock, for each fiscal quarter of the two most recent fiscal years.
Our Board of Directors declared a dividend of $0.10 per share on the shares of our common stock outstanding for the first quarter of 2009. For the remaining quarters of 2009, our Board of Directors reduced the quarterly dividend to $0.01 per share in order to preserve cash, further strengthen our balance sheet and enhance our financial flexibility. Our dividends for 2009 totaled $1.9 million. In each quarter of 2010, our Board of Directors declared a dividend of $0.01 per share on the shares of our common stock outstanding, totaling $579,000. On February 24, 2011, our Board of Directors declared a dividend of $0.06 per share on the shares of our common stock outstanding, payable March 28, 2011 to shareholders of record on March 14, 2011. Any future declaration and payment of dividends, if any, is at the discretion of our Board of Directors and will depend on our retained earnings, working capital requirements and the future operation and growth of our business and other factors deemed relevant by the Board of Directors.
Issuer Purchases of Equity Securities
The following table sets forth shares of our common stock we repurchased during the three-month period ended December 31, 2010.
a. Represents shares repurchased under our applicable stock incentive plan to satisfy tax obligations on restricted stock awards. We do not have a publicly announced share repurchase program.
Information as to the securities authorized for issuance under our equity compensation plans is incorporated herein by reference to Item 12 of this report on Form 10-K.
Stock Performance Graph
The following graph compares the cumulative total shareholder return on our common stock from December 31, 2005 to December 31, 2010, with the cumulative total return of the Standard & Poor 500 Index and the Standard & Poor 500 Oil & Gas Equipment & Services Index for the same period. The returns are based on an assumed investment of $100 on January 1, 2006 at closing prices on December 31, 2005 in our common stock and in each of the indexes and on the assumption that dividends were reinvested.
Item 6.
Item 6. Selected Financial Data
The following table sets forth selected historical financial data as of the dates and for the periods indicated. The historical financial data for each year in the five-year period ended December 31, 2010 are derived from our audited financial statements. The following information should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operation” and our financial statements and notes thereto included elsewhere in this report.
(1) Effective January 31, 2006, we acquired the facilities, machinery and equipment of Gulf Marine Fabricators located in San Patricio and Nueces Counties, Texas.
(2) On July 15, 2009, we reached an agreement with Bluewater Industries, Inc. to restructure the payment terms of the remaining $90 million owed on the MinDOC I project. We received a limited overriding royalty interest for $48 million of this amount as part of this agreement. On November 29, 2010, we sold the
overriding royalty interest. As a result of this agreement and subsequent sale of our overriding royalty interest, we recognized $4.6 million and $961,000 as interest income during the years ended December 31, 2010 and 2009, respectively.
(3) Direct labor hours are hours worked by employees directly involved in the production of our products.
(4) Our backlog is based on management’s estimate of the number of direct labor hours required to complete, and the remaining revenues to be recognized with respect to, those projects for which we have a signed contract and a customer has authorized us to begin work or purchase materials. The backlog as of each year end includes commitments received following December 31st, as described in Item 1.
Item 7.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Introduction and Outlook
Our results of operations are affected primarily by (i) the level of exploration and development activity maintained by oil and gas exploration and production companies in the Gulf of Mexico, and to a lesser extent, foreign locations throughout the world, (ii) our ability to win contracts through competitive bidding or alliance/partnering arrangements, and (iii) our ability to manage those contracts to successful completion. The level of exploration and development activity is related to several factors, including trends in oil and gas prices, expectations of future oil and gas prices, changes in technology and changes in the regulatory environment, including new permitting processes and increased regulation imposed on domestic oil and gas exploration by the Bureau of Ocean Energy, Regulation and Enforcement.
We believe the downturn in the oil and gas industry that began in late 2008 brought on by the rapid decline in oil and gas prices adversely impacted our business during 2009 and 2010, but will begin to reverse in 2011. Oil prices have continued to increase since they fell below $40 a barrel in early 2009 and are now $80 to $90 a barrel and could possibly increase further. As a result, the ability of oil and gas producers to raise capital has improved and bidding activity, particularly for deepwater projects, has increased. We believe margins will begin to improve as production volumes increase based on projects currently in our backlog. Cost reduction measures were taken during the last two years and will continue to be monitored as production levels increase. We will continue to focus on managing the increasing costs of raw materials and restoring our labor force. In the longer term, demand for our products and services will continue to depend largely upon prices for oil and gas and our customer’s cost of regulatory compliance, which at this time is difficult to predict. However, we believe current oil prices will be maintained and supported by domestic and foreign demand and as the changing domestic regulatory environment can be managed profitably by our customers.
Backlog
Our backlog is based on management’s estimate of the direct labor hours required to complete, and the remaining revenue to be recognized with respect to, those projects as to which a customer has authorized us to begin work or purchase materials pursuant to written contracts, letters of intent or other forms of authorization. Often, however, management’s estimates are based on incomplete engineering and design specifications. As engineering and design plans are finalized or changes to existing plans are made, management’s estimate of the direct labor hours required to complete and price at completion is likely to change. In addition, all projects currently included in our backlog are subject to termination at the option of the customer, although the customer, in that case, is generally required to pay us for work performed and materials purchased through the date of termination and, in some instances, cancellation fees. In addition, a customer can potentially delay the execution of their project.
As of December 31, 2010, we had a revenue backlog of $486.1 million and a labor backlog of approximately 3.8 million man-hours remaining to work, which consists of work remaining at December 31, 2010 and commitments received through February 28, 2011, compared to the revenue backlog of $136.8 million and a labor backlog of 1.5 million man-hours reported as of December 31, 2009. Our backlog as of December 31, 2010 includes amounts associated with a contract for the fabrication and integration of the topsides on a deepwater Gulf of Mexico project we received and announced on November 23, 2010. Of the backlog at December 31, 2010, 64.1% represents projects for one major global oil and gas company.
Of the backlog at December 31, 2010, $343.4 million, or 70.6%, represented projects destined for deepwater locations compared to $19.9 million, or 14.5%, of projects destined for deepwater locations included in the December 31, 2009 backlog. Depending on the size of the project, the termination or postponement of any one of our deepwater projects could significantly reduce our backlog, and could have a material adverse effect on revenue, net income and cash flow.
Of the backlog at December 31, 2010, we expect to recognize revenues of approximately $304.6 million (62.7%) during calendar year 2011, $177.5 million during calendar year 2012 and the remaining $4.0 million thereafter.
Workforce
During 2010, our workforce ranged from approximately 1,250 to 1,400. Demand for our products and services dictates our workforce needs. Although we generally try to minimize the use of contract labor, we will use contract labor when required to meet customer demand. For 2010, our use of contract labor ranged from approximately 10 to 40 contract laborers.
The workforce was reduced during 2010 as a cost reduction measure. Due to the recent award of significant contracts, we will again focus on hiring employees in 2011 to meet the increasing level of activity.
Critical Accounting Policies
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States, which require us to make estimates and assumptions. We believe that of our significant accounting policies (see Note 1 in the Notes to Consolidated Financial Statements), the following involves a higher degree of judgment and complexity:
Revenue Recognition
The majority of our revenue is recognized on a percentage-of-completion basis based on the ratio of direct labor hours actually performed to date compared to the total estimated direct labor hours required for completion. Accordingly, contract price and cost estimates are reviewed monthly as the work progresses, and adjustments proportionate to the percentage of completion are reflected in revenue for the period when such estimates are revised. If these adjustments were to result in a reduction of previously reported profits, we would have to recognize a charge against current earnings, which may be significant depending on the size of the project or the adjustment.
Some contracts include a total or partial reimbursement to us of any costs associated with specific capital projects required by the fabrication process. If a particular capital project provides future benefits to us, the cost to build the capital project will be capitalized, and the revenue for the capital project will increase the estimated profit in the contract.
Contract costs include all direct material, labor and subcontract costs and those indirect costs related to contract performance, such as indirect labor, supplies and tools. Also included in contract costs are a portion of those indirect contract costs related to plant capacity, such as depreciation, insurance and repairs and maintenance. These indirect costs are allocated to jobs based on actual direct labor hours incurred. Profit incentives are included in revenue when their realization is probable. Claims for extra work or changes in scope of work are included in revenue when the amount can be reliably estimated and collection is probable. No revenues were recorded at December 31, 2010 related to unapproved change orders. We had $468,000 of change orders, approved as to scope but not price, recorded at December 31, 2009 that were approved in the first quarter of 2010. We had $6.9 million of change orders, related to re-measure issues primarily involving one customer, recorded at December 31, 2008. These issues were settled and resulted in the recognition of an additional $400,000 of revenue in the first quarter of 2009. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. We recognized contract losses of $1.3 million, $1.4 million, and $1.2 million in the years ended December 31, 2010, 2009, and 2008, respectively.
Results of Operations
Comparison of the Years Ended December 31, 2010 and 2009
For the twelve month period ended December 31, 2010, our revenue was $248.3 million, a decrease of 20.3%, compared to $311.5 million in revenue for the twelve month period ended December 31, 2009. The following factors contributed to the decrease in revenues for the year ended December 31, 2010 compared to the year ended December 31, 2009:
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Man-hours worked have decreased from 3.2 million for the twelve-month period ended December 31, 2009 to 2.4 million during the twelve-month period ended December 31, 2010, representing a decrease of 25.0%.
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The most significant impact of the reduction in man-hours worked was to our Texas facility which is a direct result of the reduction in new job awards for deepwater projects. Since 2006, the majority of the work performed at our Texas facility was on larger deepwater projects. The MinDOC hull was the last large deepwater project fabricated in our Texas facility and it sailed in November 2009. Until November 23, 2010, the fabrication awards for the facility have been limited to large diameter tanks, multi-size modules and a 10,000 ton lifting system. Consequently, the decrease in activity at our Texas facility during 2010 contributed to the majority of the decrease in man-hours.
For the twelve month periods ended December 31, 2010 and 2009, gross profit was $23.3 million (9.4% of revenue) for 2010 and $39.5 million (12.7% of revenue) for 2009. The low level of production man-hours at our Texas facility during 2010 did not allow us to cover certain fixed costs, which contributed to the decrease in gross margin. Although we reduced costs at the facility, certain fixed costs could not be eliminated. With the recent award of the contract for the fabrication and integration of the topsides on a deepwater Gulf of Mexico project, as evidenced in backlog, in 2011 we anticipate gross margins will improve as the man-hours worked increase at our Texas facility.
Our general and administrative expenses were $7.9 million for the twelve month period ended December 31, 2010. This compares to $8.3 million for the twelve-month period ended December 31, 2009. Although the absolute dollar value was less, the percentage of revenue, general and administrative expenses were 3.2% of revenue compared to 2.7% of revenue for the twelve month periods ended December 31, 2010 and 2009, respectively. The reduction in general and administrative expenses for the twelve-month period ended December 31, 2010 compared to December 31, 2009 was primarily due to a reduction in the number of personnel and related cost (salaries, wages and benefit related costs). Also contributing to the reduction of general and administrative costs was a reduction in professional service fees.
We had net interest income of $5.0 million for the twelve month period ended December 31, 2010, compared to net interest income of $986,000 for the twelve month period ended December 31, 2009. The increase in interest income is primarily related to interest income recognized with respect to the financing arrangement with Bluewater and ATP on the fabrication of the MinDOC I project. On November 29, 2010, we sold the limited overriding royalty interest with respect to this arrangement to an undisclosed buyer. See Note 2 to in the Notes to the Consolidated Financial Statements.
We had other income of $1.0 million for the twelve months ended December 31, 2010, compared to a $55,000 loss for the twelve months ended December 31, 2009. The increase in other income is a result of the settlement of claims related to damages incurred in connection with the hurricanes that hit the Gulf Coast in 2008.
Our effective rate was 38.7% for the twelve-month period ended December 31, 2010, compared to 35.3% for the twelve-month period ended December 31, 2009. The increase relates primarily to the Federal Work Opportunity Tax Credits (WOTC) available to us in 2009, which were no longer available in 2010, a decrease in the Federal qualified production activities income deduction due to a decrease in activity at our Texas facility,
and an increase in Louisiana state income tax apportionments for 2010. We believe in 2011 our effective tax rate will decrease with the expected increase in activity at our Texas facility and, as a result, the increase in the Federal qualified production activities income deduction.
Comparison of the Years Ended December 31, 2009 and 2008
For the twelve month period ended December 31, 2009, our revenue was $311.5 million, a decrease of 25.9%, compared to $420.5 million in revenue for the twelve month period ended December 31, 2008. The following factors contributed to the decrease in revenue for the year ended December 31, 2009 compared to the year ended December 31, 2008:
•
Lack of jobs added to the backlog for several quarters.
•
Pass through cost decreased 4.6% from 41.2% of revenue for the twelve month period ended December 31, 2008 to 36.6% for the twelve month period ended December 31, 2009, see Note 12 in the Notes to the Consolidated Financial Statements.
•
The amount of man-hours worked decreased from 3.8 million for the twelve-month period ended December 31, 2008 to 3.2 million during the twelve-month period ended December 31, 2009, representing a decrease of 15.8%.
We had $468,000 of change orders, approved as to scope but not price, recorded at December 31, 2009 that were approved in the first quarter of 2010. We had $6.9 million of change orders, related to re-measure issues primarily involving one customer, recorded at December 31, 2008. These issues were settled and resulted in the recognition of an additional $400,000 of revenue in the first quarter of 2009.
For the twelve month periods ended December 31, 2009 and 2008, gross profit was $39.5 million (12.7% of revenue) for 2009 and $52.3 million (12.4% of revenue) for 2008.
The following factors contributed to the increase in gross margin percentage for the twelve months ended December 31, 2009:
•
Activity levels in 2009 allowed us to decrease our reliance on contract labor used to supplement our labor force necessary to complete the major projects in progress. Generally, contract labor employees perform less efficiently than company employees, which is normally due to the amount of training, work experience and turnover. During 2009, our weighted-average number of contract employees was 70 employees compared to 294 contract employees for 2008, a reduction of 76.2%. During the twelve months ended December 31, 2009, contract labor represented 7.6% of man-hours worked, compared to 19.0% for the twelve months ended December 31, 2008. As of December 31, 2009, the total number of contract employees in all facilities is 53.
•
Cost reduction measures, including a reduction in overhead labor costs, were undertaken since the fourth quarter of 2008 to meet the decline in economic conditions we experienced beginning in 2009.
Our general and administrative expenses were $8.3 million for the twelve month period ended December 31, 2009. This compares to $9.5 million for the twelve-month period ended December 31, 2008. As a percentage of revenue, general and administrative expenses were 2.7% of revenue compared to 2.2% of revenue for the twelve month periods ended December 31, 2009 and 2008. The reduction in general and administrative expenses for the twelve-month period ended December 31, 2009 compared to December 31, 2008 was primarily due to a reduction in the number of personnel and related cost (salaries, wages and benefit related costs). Also contributing to the reduction of general and administrative costs was a reduction in professional service fees.
We had net interest income of $986,000 for the twelve month period ended December 31, 2009, compared to net interest income of $172,000 for the twelve month period ended December 31, 2008. The increase in interest income is primarily related to the amortization of the discount associated with the financing arrangement with Bluewater and ATP on the fabrication of the MinDOC I project, see Note 2 in the Notes to the Consolidated Financial Statements.
Our effective income tax rate was 35.3% for the twelve month period ended December 31, 2009, compared to 32.4% for the twelve month period ended December 31, 2008. The increase from the previous twelve-month period is the result of the limitations on certain federal manufacturing tax credits based on our estimated tax provision for 2009, a reduction in the Federal Work Opportunity Tax Credit (WOTC) available to us in 2009 and a slight increase in state taxes related to an increase in the state taxable income apportionment.
Liquidity and Capital Resources
Historically we have funded our business activities through funds generated from operations. Effective July 15, 2010, we entered into the Ninth Amendment to the Ninth Amended and Restated Credit Agreement (the “Revolver”) which, among other things, extended the term of the $60 million Revolver from December 31, 2011 to December 31, 2012. The Revolver is secured by some of our real estate, machinery and equipment, and fixtures. Amounts borrowed under the Revolver bear interest, at our option, at the prime lending rate established by JPMorgan Chase Bank, N.A. or LIBOR plus 1.5%. We pay a fee on a quarterly basis of one-fourth of one percent per annum on the weighted-average unused portion of the Revolver.
At December 31, 2010, no amounts were borrowed under the Revolver, but we had letters of credit outstanding totaling $9.7 million. As of February 28, 2011, $8.2 million of these letters of credit outstanding expired, which increased the unused portion of the Revolver to $58.5 million. We are required to maintain certain covenants, including balance sheet and cash flow ratios. As of December 31, 2010, the Company was in compliance with these covenants.
At December 31, 2010, our cash and cash equivalents totaled $88 million. Working capital was $112.1 million at December 31, 2010. The ratio of current assets to current liabilities was 7.06 to 1 at December 31, 2010. Net cash provided by operating activities was $96.1 million for the year ended December 31, 2010, compared to $11.0 million for the year ended December 31, 2009. This increase was due to an improvement in our net contract position of $95.7 million for the twelve months ended December 31, 2010 as compared to the twelve months ended December 31, 2009. The change in net contract position primarily resulted from our collection of the remaining $75.4 million on the MinDoc project during the twelve months ended December 31, 2010. Changes to our contract position include changes in contracts receivable, contract retainage, costs and estimated earnings in excess of billings on uncompleted contracts, accounts payable, and billings in excess of costs and estimated earnings on uncompleted contracts. An overall positive increase in these contract related accounts represents more cash on hand for future working capital needs and less cash utilized by contracts in progress
Partially offsetting the change in our net contract position was our earnings decrease of $7.7 million for the twelve months ending December 31, 2010, compared to the twelve months ending December 31, 2009, due to the decrease in man-hours worked. The amount of man-hours worked was 2.4 million during the twelve-month period ending December 31, 2010 as compared to 3.2 million for the twelve-month period ending December 31, 2009.
Net cash used in investing activities for the year ended December 31, 2010, was $16.5 million, which related to capital expenditures for equipment and improvements to our production facilities. Included in capital expenditures for the twelve months ended December 31, 2010 was $6.2 million for a fabrication shop and warehouse in the west yard of our Gulf Island facility to support our increase in marine activities. Also included in capital expenditures for the period was $3.0 million representing approximately one-half of the cost of constructing a gate for the graving dock at our Gulf Marine facilities. The graving dock gate is expected to be completed in the late first quarter or early second quarter of 2011.
We anticipate capital expenditures for 2011 to be approximately $35.0 million for the purchase of equipment and additional yard and facility infrastructure improvements, including $1.4 million for the completion of the graving dock gate located in our Gulf Marine facilities. The gate will allow us to open and
close the entrance of the graving dock within a few days as opposed to a few weeks. We believe the new gate will improve our efficiency and enhance services to our customers through a shorter dock turn-around. Also included is $10.8 million for two Manitowac 18000 cranes, each with a lifting capacity of 660 tons, for our Gulf Marine facilities. These cranes were delivered in the first quarter of 2011. This additional lifting capacity creates greater efficiencies as we work on future deepwater projects. In addition, $4.0 million is included for six additional KAMAG Type 2406 modular transporters to be delivered to our Gulf Island facilities in the third quarter of 2011. These additional transporters will create more scheduling flexibility for our customers and provide additional efficiencies during project assembly and load-out.
The $354,000 of net cash used in financing activities for the year ended December 31, 2010 included $101,000 of proceeds from the exercise of stock options and $124,000 of excess tax benefits associated with the share-based payment arrangements less $579,000 in payments of dividends on common stock.
We believe that for the next twelve months, our cash on hand, our cash generated by operating activities and funds available under the Revolver will be sufficient to fund our capital expenditures and meet our working capital needs. However, job awards may require us to issue additional letters of credit further reducing the capacity available on our Revolver. We may also expand our operations through acquisitions in the future, which may require additional equity or debt financing which we believe would be available to us; however, there can be no assurance that amounts will be available on commercial terms acceptable to us.
The following table sets forth an aggregation of our contractual obligations and commitments as of December 31, 2010, (in thousands).
(1) “Purchase commitment-equipment” is a commitment related to purchase order agreements.
(2) “Purchase commitment-material and services” is a commitment related to purchase order agreements.
Off Balance Sheet Arrangements
We are not a party to any contract or other obligation not included in our balance sheet that has, or is reasonably likely to have, a current or future effect on our financial condition.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We do not have operations subject to material risk of foreign currency fluctuations, nor do we use derivative financial instruments in our operations or investment portfolio. We have a $60.0 million line of credit with our primary commercial banks. Under the terms of the Revolver, we may elect to pay interest at either a fluctuating base rate established by the bank from time to time or at a rate based on the rate established in the London inter-bank market. We do not believe that we have any material exposure to market risk associated with interest rates.
Item 8.
Item 8. Financial Statements and Supplementary Data
In this report our consolidated financial statements of and the accompanying notes appear on pages through and are incorporated herein by reference. See Index to Consolidated Financial Statements on Page 34.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None
Item 9A.
Item 9A. Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that the design and operation of our disclosure controls and procedures were effective as of such date to provide assurance that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and that such information is accumulated and communicated to management as appropriate to allow timely decisions regarding disclosure.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f). Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control-Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2010.
The effectiveness of our internal control over financial reporting as of December 31, 2010 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report which is included herein.
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Gulf Island Fabrication, Inc.
We have audited Gulf Island Fabrication, Inc.’s internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Gulf Island Fabrication, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Gulf Island Fabrication, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010, based on the COSO criteria.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the accompanying consolidated balance sheets of Gulf Island Fabrication, Inc. as of December 31, 2010 and 2009, and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2010, and our report dated February 28, 2011, expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
New Orleans, Louisiana
February 28, 2011
Item 9B.
Item 9B. Other Information
Not applicable.
PART III
Item 10.
Item 10. Directors, Executive Officers and Corporate Governance
The information regarding executive officers called for by this item may be found following Item 4 of this report on Form 10-K under the caption “Executive Officers of the Registrant” and is incorporated herein by reference.
We have adopted a Code of Ethics for the Chief Executive Officer and Senior Financial Officers (the “Code of Ethics”) and a Code of Business Conduct and Ethics, which applies to all employees and directors, including the Chief Executive Officers and Senior Financial Officers. These codes are available to the public on our website at www.gulfisland.com. Any substantive amendments to the Code of Ethics or any waivers granted under the Code of Ethics will be disclosed within five days of such event on our website.
The remaining information called for by this item may be found in our definitive Proxy Statement prepared in connection with the 2011 Annual Meeting of Shareholders and is incorporated herein by reference.
Item 11.
Item 11. Executive Compensation
Information called for by this item may be found in our definitive Proxy Statement prepared in connection with the 2011 Annual Meeting of Shareholders and is incorporated herein by reference.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information regarding security ownership of certain beneficial owners and management called for by this item may be found in our definitive Proxy Statement prepared in connection with the 2011 Annual Meeting of Shareholders and is incorporated herein by reference.
Equity Compensation Plan Information
The following table provides information about our shares of Common Stock that may be issued upon the exercise of options, warrants and rights under all of our existing equity compensation plans as of December 31, 2010.
(1) If the exercise of these outstanding options and issuance of additional common shares had occurred as of December 31, 2010, these shares would represent .70% of our then total outstanding shares.
(2) As of December 31, 2010, there were 63,357 shares remaining available for issuance under the 2002 Long-Term Incentive Plan, and 4,679 shares remaining available under the Long-Term Incentive Plan, all of which could be issued under the terms of the plans upon the exercise of stock options or stock appreciation rights, or in the form of restricted stock or other stock awards.
Item 13.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Information called for by this item may be found in our definitive Proxy Statement prepared in connection with the 2011 Annual Meeting of Shareholders and is incorporated herein by reference.
Item 14.
Item 14. Principal Accounting Fees and Services
Information called for by this item may be found in the our definitive Proxy Statement prepared in connection with the 2011 Annual Meeting of Shareholders and is incorporated herein by reference.
PART IV
Item 15.
Item 15. Exhibits, Financial Statement Schedules
The following financial statements, schedules and exhibits are filed as part of this Report:
(i) Financial Statements
(ii) Schedules
Other schedules have not been included because they are not required, not applicable, immaterial or the information required has been included elsewhere herein.
(iii) Exhibits
See Exhibit Index on page E-1. The Company will furnish to any eligible shareholder, upon written request, a copy of any exhibit listed upon payment of a reasonable fee equal to the Company’s expenses in furnishing such exhibit. Such requests should be addressed to Investor Relations, Gulf Island Fabrication, Inc., P.O. Box 310, Houma, LA 70361-0310.
GLOSSARY OF CERTAIN TECHNICAL TERMS
blasting and coating facility:
Building and equipment used to clean steel products and prepare them for coating with marine paints and other coatings.
coping machine:
A computerized machine that cuts ends of tubular pipe sections to allow for changes in weld bevel angles and fits onto other tubular pipe sections.
deck:
The component of a platform on which development drilling, production, separating, gathering, piping, compression, well support, crew quartering and other functions related to offshore oil and gas development are conducted.
direct labor hours:
Hours worked by employees directly involved in the production of the Company’s products. These hours do not include contractor labor hours and support personnel hours such as maintenance, warehousing and drafting.
dry tree system:
A system in which a platform’s well control valves and apparatus (“christmas trees”) and risers are installed and operated above water.
fixed platform:
A platform consisting of a rigid jacket which rests on tubular steel pilings driven into the seabed and which supports a deck structure above the water surface.
floating production platform:
Floating structure that supports offshore oil and gas production equipment (MinDOC, TLP, FPSO, SPAR).
FPSO:
Floating Production Storage and Offloading vessel.
graving dock:
A box shaped basin made of steel sheet pile walls and concrete floor into which a vessel may be floated into or out of by pumping out or in water. The end will be closed by earthen berms and a sheet pile wall that will be removed to float out vessels.
grit blast system:
System of preparing steel for coating by using steel grit rather than sand as a blasting medium.
hydraulic plate shear:
Machine that cuts steel by a mechanical system similar to scissors.
inshore:
Inside coastlines, typically in bays, lakes and marshy areas.
ISO 9001-2008:
International Standards of Operations 9001-2008 - Defines quality management system of procedures and goals for certified companies.
jacket:
A component of a fixed platform consisting of a tubular steel, braced structure extending from the mudline of the seabed to a point above the water surface. The jacket is supported on tubular steel pilings driven into the seabed and supports the deck structure located above the level of storm waves.
G-1
Min DOC:
Minimum Deepwater Operating Concept. Floating production platform designed for stability and dynamic response to waves consisting of three vertical columns arranged in a triangular shape connected to upper and lower pontoon sections.
modules:
Packaged equipment usually consisting of major production, utility or compression equipment with associated piping and control system.
offshore:
In unprotected waters outside coastlines.
piles:
Rigid tubular pipes that are driven into the seabed to support platforms.
plasma-arc cutting system:
Steel cutting system that uses an ionized gas cutting rather than oxy-fuel system.
platform:
A structure from which offshore oil and gas development drilling and production are conducted.
pressure vessel:
A metal container generally cylindrical or spheroid, capable of withstanding various internal pressure loadings.
skid unit:
Packaged equipment usually consisting of major production, utility or compression equipment with associated piping and control system.
SPAR:
A vessel with a circular cross-section that sits vertically in the water and is supported by buoyancy chambers (“hard tanks”) at the top and stabilized by a structure (“midsection”) hanging from the hard tanks.
specialized lifting device (SLD):
The specialized lifting device is a twin boom device with a below hook rating of 4,000 tons at a radius of 207 feet from the bulkhead. The 410 foot booms are 100 feet apart and provide a lifting height of 317 feet from the water.
spud barge:
Construction barge rigged with vertical tubular or square lengths of steel pipes that are lowered to anchor the vessel.
subsea templates:
Tubular frames which are placed on the seabed and anchored with piles. Usually a series of oil and gas wells are drilled through these underwater structures.
tension leg platform (TLP):
A platform consisting of a floating hull and deck anchored by vertical tensioned cables or pipes connected to pilings driven into the seabed. A tension leg platform is typically used in water depths exceeding 1,000 feet.
G-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Gulf Island Fabrication, Inc.
We have audited the accompanying consolidated balance sheets of Gulf Island Fabrication, Inc. as of December 31, 2010 and 2009, and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2010. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Gulf Island Fabrication, Inc. at December 31, 2010 and 2009, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2010, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Gulf Island Fabrication, Inc.’s internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 28, 2011, expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
New Orleans, Louisiana
February 28, 2011
GULF ISLAND FABRICATION, INC.
CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of these statements
GULF ISLAND FABRICATION, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
The accompanying notes are an integral part of these statements
GULF ISLAND FABRICATION, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(in thousands, except share data)
The accompanying notes are an integral part of these statements
GULF ISLAND FABRICATION, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
The accompanying notes are an integral part of these statements
GULF ISLAND FABRICATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
Gulf Island Fabrication, Inc., together with its subsidiaries (the “Company”), is a leading fabricator of offshore drilling and production platforms and other specialized structures used in the development and production of offshore oil and gas reserves. The Company’s corporate offices and three major subsidiaries are located in Houma, Louisiana, and another major subsidiary is located in San Patricio County, Texas. The Company’s principal markets are concentrated in the offshore regions and along the coast of the Gulf of Mexico. The consolidated financial statements include the accounts of Gulf Island Fabrication, Inc. and its majority owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
Structures and equipment fabricated by the Company include jackets and deck sections of fixed production platforms; hull, tendon, and/or deck sections of floating production platforms (such as TLPs, SPARs, FPSOs and MinDOCs); piles; wellhead protectors; subsea templates; various production, processing, compressor and utility modules; offshore living quarters; brown water towboats; barges; lift boats; offshore support vessels and mid-body sections for offshore supply vessels. The Company also provides services such as offshore interconnect pipe hook-up; inshore marine construction; manufacture and repair of pressure vessels; heavy lifts such as ship integration and TLP module integration; loading and offloading jack-up drilling rigs, semi-submersible drilling rigs, TLPs, SPARs or other similar cargo.; steel warehousing and sales; onshore and offshore scaffolding and piping insulation services.
Operating Cycle
The lengths of our contracts vary, but are typically longer than one year in duration. Consistent with industry practice, assets and liabilities have been classified as current under the operating cycle concept whereby all contract-related items are regarded as current regardless of whether cash will be received or paid within a twelve month period. Assets and liabilities classified as current which may not be paid or received within the next twelve months include contract retainage, costs and estimated earnings in excess of billings on uncompleted contracts, and billings in excess of costs and estimated earnings on uncompleted contracts. However, any variation from normal contract terms would cause classification of assets and liabilities as long-term. See Note 2 and 17 for further explanation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reporting period. Areas requiring significant estimates by our management include contract revenues, costs and profits and the application of percentage-of-completion (POC) method of accounting. Actual results could differ from those estimates.
Cash Equivalents
The Company considers all highly liquid investments with maturities of three months or less when purchased to be cash equivalents.
GULF ISLAND FABRICATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Concentration of Credit Risk
The principal customers of the Company include major and large independent oil and gas companies and their contractors. This concentration of customers may impact the Company’s overall exposure to credit risk, either positively or negatively, in that customers may be similarly affected by changes in economic or other conditions. Receivables are generally not collateralized. In the normal course of business, the Company extends credit to its customers on a short-term basis. The Company routinely reviews its accounts receivable balances and makes provisions for probable doubtful accounts as it deems appropriate.
Stock-Based Compensation
Awards under the Company’s stock-based compensation plans are accounted for under a fair-value based measurement method.
Inventory
Inventory consists of materials and production supplies and is stated at the lower of cost or market determined on the first-in, first-out basis.
Accrued Employee Cost-Workers Compensation Liability
The Company and its subsidiaries Gulf Island, Gulf Island Marine and Dolphin Services are self-insured for workers’ compensation liability except for losses in excess of $300,000 per occurrence for Louisiana workers’ compensation and for U.S. longshoreman and harbor workers’ coverage. Gulf Marine has insurance coverage for Texas workers’ compensation with a $300,000 deductible. The liability for workers compensation is based on claims filed and estimates of claims incurred but not reported. Our workers compensation liability balance was $1.4 million and $800,000 as of December 31, 2010 and 2009, respectively.
Property, Plant and Equipment
Property, plant and equipment are stated at cost less accumulated depreciation. Depreciation is computed on the straight-line basis over the estimated useful lives of the assets, which range from 3 to 25 years. Ordinary maintenance and repairs, which do not extend the physical or economic lives of the plant or equipment, are charged to expense as incurred.
Long-Lived Assets
The Company records impairment losses on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts of those assets. The impairment loss is determined by comparing the fair value of the assets to their carrying amounts and recording the excess of the carrying amounts of the assets over their fair value as an impairment charge. Fair value is determined based on discounted cash flows or appraised values, as appropriate.
Fair Value Measurements
The Company bases its fair value determinations of the carrying value of other financial assets and liabilities on an evaluation of their particular facts and circumstances and valuation techniques that require judgements and estimates. Valuation techniques used to measure fair value maximize the use of relevent observable inputs and
GULF ISLAND FABRICATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
minimize the use of unobservable inputs. The fair value hierarchy gives the highest priority to observable inputs such as quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The level in the fair value hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the valuation technique. As of December 31, 2010, none of our assets or liabilities require fair value determination.
Revenue Recognition
The Company uses the percentage-of-completion accounting method for construction contracts. Revenue from fixed-price or unit rate contracts is recognized on the percentage-of-completion method, computed by the efforts-expended method which measures the percentage of labor hours incurred to date as compared to estimated total labor hours for each contract. This progress percentage is applied to estimated gross profit for each contract to determine gross profit earned to date. Revenue recognized in a period for a contract is the amount of gross profit earned for that period plus the costs incurred on the contract during the period.
Under a unit rate contract, material items or labor tasks are assigned unit rates of measure. The unit rates of measure will generally be an amount of dollars per ton, per foot, per square foot, per item installed, etc. A typical unit rate contract can contain hundreds to thousands of unit rates of measure that all accumulate to determine the total contract value. Profit margins are built into the unit rates.
Some contracts include a total or partial reimbursement to us of any costs associated with specific capital projects required by the fabrication process. If a particular capital project provides future benefits to us, the cost to build the capital project will be capitalized, and the revenue for the capital project will increase the estimated profit in the contract.
Contract costs include all direct material, labor and subcontract costs and those indirect costs related to contract performance, such as indirect labor, supplies and tools. Also included in contract costs are a portion of those indirect contract costs related to plant capacity, such as depreciation, insurance and repairs and maintenance. These indirect costs are allocated to jobs based on actual direct labor hours incurred. Profit incentives are included in revenue when their realization is probable. Claims for extra work or changes in scope of work are included in revenue when the amount can be reliably estimated and collection is probable. No revenues were recorded at December 31, 2010 related to unapproved change orders. We had $468,000 of change orders, approved as to scope but not price, recorded at December 31, 2009 that were approved in the first quarter of 2010. We had $6.9 million of change orders, related to re-measure issues primarily involving one customer, recorded at December 31, 2008. These issues were settled and resulted in the recognition of an additional $400,000 of revenue in the first quarter of 2009. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. We recognized contract losses of $1.3 million, $1.4 million, and $1.2 million in the years ended December 31, 2010, 2009, and 2008, respectively.
Income Taxes
Income taxes have been provided using the liability method. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes using enacted rates expected to be in effect during the year in which the basis differences reverse.
Uncertain tax positions are recognized only when they are more likely than not to be sustained upon audit. Interest and penalties on uncertain tax positions are recorded in income tax expense. Our federal tax returns have been examined and settled through the 2007 tax year. There were no material uncertain tax positions to record for the years presented in these statements.
GULF ISLAND FABRICATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
2. BLUEWATER AGREEMENT
On July 15, 2009, we reached an agreement with Bluewater Industries, Inc. (“Bluewater”) to restructure the payment terms for the remainder of the amounts owed, estimated to be $90 million, on the MinDOC I project. Bluewater, an engineering consulting firm, contracted with ATP to oversee the fabrication of the MinDOC I hull and topsides. The amount owed to us on the project at the time of the arrangement was $64.5 million. An additional $25.5 million was billed on the project under this arrangement through completion, which occurred in stages during the fourth quarter of 2009. Additional changes in the scope of the project in excess of the $90 million were approved by Bluewater and ATP through change orders. Change orders outside of the restructured payment agreement were fully paid as of December 31, 2010. There were $8.1 million of change orders outside of the restructured payment agreement reflected in contracts receivable as of December 31, 2009. Change orders were paid in cash and were not part of our restructured payment arrangement.
Bluewater agreed to pay $42 million of the amount owed in seven equal installments of $6 million each, with the first payment due September 5, 2009 and each subsequent payment due on the 5th day of each calendar month through March 5, 2010. We received the entire $42 million in payments from Bluewater.
Bluewater agreed to pay the remaining $48 million owed to us pursuant to the assignment of all of its right, title and interest in the Conveyance of Overriding Royalty Interest between Bluewater and ATP. The interest we received from Bluewater is a limited overriding royalty interest because the amount to be received by us was set not to exceed $48 million. Upon cumulative receipt of the $48 million, the limited overriding royalty would revert back to Bluewater. As of November 29, 2010, we received $3.4 million pursuant to our limited overriding royalty interest. On November 29, 2010, we sold the limited overriding royalty interest to an undisclosed buyer for an aggregate purchase price of $39.3 million, all of which has been paid to us by December 31, 2010. As a result of the sale, the assignment of the overriding royalty interest terminated, and the royalty interest has been transferred to the buyer.
We discounted the final estimated contract price on the MinDOC 1 project by $11.0 million, applying discount rates of 10% to the $42 million installment component and 18% to the $48 million royalty interest component, which resulted in a reduction in contract revenue related to the discount to be recognized as interest income in future periods. We recognized $4.6 million and $961,000 of the discount as interest income during the years ended December 31, 2010 and 2009, respectively.
There are no amounts due from Bluewater and ATP subject to our overriding royalty interest included in contract receivables at December 31, 2010. At December 31, 2009, $38.8 million of our contracts receivable were subject to the overriding royalty interest, net of the discount, of which $12.3 million was expected to be paid after one year.
GULF ISLAND FABRICATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
3. CONTRACTS RECEIVABLE
Amounts due on contracts as of December 31 were as follows (in thousands):
4. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Information with respect to uncompleted contracts as of December 31 is as follows (in thousands):
The above amounts are included in the accompanying consolidated balance sheets at December 31 under the following captions (in thousands):
GULF ISLAND FABRICATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following at December 31 (in thousands):
The Company leases certain equipment used in the normal course of its operations under month-to-month lease agreements cancelable only by the Company. During 2010, 2009, and 2008, the Company expensed $2.7 million, $3.3 million, and $6.8 million, respectively, related to these leases. The Company’s equipment lease expense increased significantly in 2008 as a result of increased crane capacity requirements of its major projects.
6. OTHER RECEIVABLES
At December 31, 2010, we have recorded $5.9 million, net of advances received from our insurance provider, in “Other receivables” related to an insurance claim for costs that we have determined are recoverable under our various insurance policies. Certain costs that were deemed unrecoverable based on either our insurance coverage or our deductibles related to these insurance claims were expensed at the time incurred. The amounts of the deductibles associated with our various insurance policies are generally based on a percentage of the repair costs. Until all property is restored to pre-damaged condition, we will incur costs for repairs and record the deductibles accordingly. We have not recorded any gains related to this claim in our income statement and will not record any gains until the claim is settled.
The $5.9 million claim relates to costs incurred in connection with an accident that occurred in April 2008 at our Texas facility involving four cranes. This amount represents costs incurred by us to rent replacement cranes while our damaged cranes were repaired. In addition, we have one crane with a carrying value of approximately $2.9 million that is pending determination from the insurance carrier whether to repair or replace that crane. Our insurance provider has filed a declaratory judgment action in U.S. District Court, Eastern District of Louisiana seeking to deny insurance coverage of the costs of renting cranes to mitigate business-interruption damages that might otherwise have been incurred as a result of the accident. We are defending ourselves from the insurer’s request for a declaratory judgment that crane-rental coverage is limited to $450,000, when in fact we believe there is coverage for all amounts that have been, or will be, expended under the terms of the policy.
A hearing was held in January 2011 and we are awaiting a final ruling from that hearing with respect to our claim. We intend to continue to pursue this matter through these legal proceedings and although there can be no assurances made as to the ultimate outcome, we, in consultation with outside legal counsel, believe it is probable that all of our claim will ultimately be fully recoverable under our insurance policies. In January 2011, we deposited a $1.1 million check from our insurance provider toward the total loss of the damaged crane discussed above involved in the accident, without prejudice to our continuing to pursue full recovery.
GULF ISLAND FABRICATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
During 2010, we settled claims in connection with the hurricanes that hit the Gulf Coast in 2008. We recorded other income of $1.1 million for the twelve-month period ended December 31, 2010 as a result of recovering amounts under our flood and property policies in excess of our damages and related costs.
7. INCOME TAXES
Significant components of the Company’s deferred tax assets and liabilities as of December 31 were as follows (in thousands):
Significant components of income tax expense for the years ended December 31 were as follows (in thousands):
GULF ISLAND FABRICATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
A reconciliation of income taxes computed at the U.S. federal statutory tax rate to the Company’s income tax expense for the years ended December 31 is as follows (in thousands):
8. LINE OF CREDIT
Effective July 15, 2010, we entered into the Ninth Amendment to the Ninth Amended and Restated Credit Agreement (the “Revolver”) which, among other things, extended the term of the $60 million Revolver from December 31, 2011 to December 31, 2012. The Revolver is secured by some of our real estate, machinery and equipment, and fixtures. Amounts borrowed under the Revolver bear interest, at our option, at the prime lending rate established by JPMorgan Chase Bank, N.A. or LIBOR plus 1.5%. We pay a fee on a quarterly basis of one-fourth of one percent per annum on the weighted-average unused portion of the Revolver.
At December 31, 2010, no amounts were borrowed under the Revolver, but we had letters of credit outstanding totaling $9.7 million. As of February 28, 2011, $8.2 million of these letters of credit outstanding expired, which increased the unused portion of the Revolver to $58.5 million. We are required to maintain certain covenants, including balance sheet and cash flow ratios. As of December 31, 2010, the Company was in compliance with these covenants.
9. CONTINGENT LIABILITIES
The Company is subject to various routine legal proceedings in the normal conduct of its business, primarily involving commercial claims, workers’ compensation claims, and claims for personal injury under general maritime laws of the United States and the Jones Act. While the outcome of these lawsuits, legal proceedings and claims cannot be predicted with certainty, management believes that the outcome of any such proceedings, even if determined adversely, would not have a material adverse effect on the financial position, results of operations or cash flows of the Company.
In December 2004, we received notice from Louisiana Department of Environmental Quality (“LDEQ”) that the Corrective Action Plan submitted in October 2004 was not acceptable. The Corrective Action Plan was developed to provide remediation to several isolated areas located on property we sold in 2001. In mid 2005, the LDEQ approved a sampling plan with the proposed sampling to begin in September of 2005. Due to the hurricanes that struck the Louisiana coast in 2005, the scheduled sampling was cancelled. In October 2006, the sampling was completed. This sampling plan was rejected by the LDEQ in April 2008. We submitted a revised sampling plan to the LDEQ in September 2008 and it was later approved with stipulations. After sampling, we filed a report with the LDEQ in mid July 2010 and now await the agency’s review. We have recorded $450,000 of estimated cost to remediate the site which includes professional fees such as engineering and consulting costs. We have expended $117,000 of this accrual and $333,000 remains accrued at December 31, 2010 which represents costs to remediate the site once approval is received from the agency.
GULF ISLAND FABRICATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
10. SALES TO MAJOR CUSTOMERS
The Company’s customer base is primarily concentrated in the oil and gas industry. Through the Company’s marine fabrication subsidiary, its customer base is expanding into other industries that utilize marine vessels. The Company is not dependent on any one customer, and the revenue earned from each customer varies from year to year based on the contracts awarded. Sales to customers comprising 10% or more of the Company’s total revenue for the years ended December 31 are summarized as follows (in thousands):
11. INTERNATIONAL SALES
The Company’s fabricated structures are used worldwide by U.S. customers operating abroad and by foreign customers. Sales of fabricated structures for delivery outside of the United States accounted for 3%, 1%, and 20% of the Company’s revenues for the years ended December 31, 2010, 2009 and 2008, respectively.
12. CONTRACT COSTS
Pass-through costs are material and sub-contract costs associated with projects that are included as revenue of a project, but add little or no margin to the project. Pass-through costs, as a percentage of revenue, for the year ended December 31, 2010, were 36.1% compared to 36.6% and 41.2% for the years ended December 31, 2009 and 2008, respectively.
13. RETIREMENT PLAN
The Company has a defined contribution plan (the “Retirement Plan”) for all employees that are qualified under Section 401(k) of the Internal Revenue Code. Gulf Island Resources employees are not eligible for the Retirement Plan. Contributions to the Retirement Plan by the Company are based on the participants’ contributions, with an additional year-end discretionary contribution determined by the Board of Directors. For the years ended December 31, 2010, 2009, and 2008, the Company contributed a total of $2.1 million, $2.3 million, and $2.9 million, respectively.
GULF ISLAND FABRICATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
14. QUARTERLY OPERATING RESULTS (UNAUDITED)
A summary of quarterly results of operations for the years ended December 31, 2010 and 2009 were as follows (in thousands, except per share data):
As presented above, revenue was $43.0 million as compared to $70.8 million for the three month periods ended December 31, 2010 and 2009, respectively. Contributing to the decrease, man-hours worked were 443,000 hours during the three-month period ended December 31, 2010, compared to 697,000 for the comparable period ended December 31, 2009. The most significant impact of the reduction in man-hours worked was related to our Texas facility which is a direct result of the reduction in new job awards for deepwater projects. Since 2006, the majority of the work performed at our Texas facility was on larger deepwater projects. During fiscal 2010, the fabrication awards for the facility were limited to large diameter tanks, multi-size modules and a 10,000 ton lifting system, the majority of which sailed by October 2010. The MinDOC hull was the last large deepwater project fabricated in our Texas facility (sailing in November 2009) until we were awarded a contract for the fabrication and integration of the topsides on a deepwater Gulf of Mexico project we received and announced on November 23, 2010. This project will contribute to revenue significantly over the next two years.
Also presented above, gross profit was $2.2 million (5% of revenue) as compared to $8.2 million (11.5% of revenue) for the three-month periods ended December 31, 2010 and 2009, respectively. The reduction in work volume at our Texas facility contributed to the decrease.
GULF ISLAND FABRICATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
15. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share data):
GULF ISLAND FABRICATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
16. LONG-TERM INCENTIVE PLANS
On February 13, 1997, the shareholders approved the adoption of the Long-Term Incentive Plan (the “Plan”). The Plan authorizes the grant of options to purchase an aggregate of 1,000,000 (split adjusted) shares of the Company’s common stock to certain officers and key employees of the Company chosen by a committee appointed by the board of directors (the “compensation committee”) to administer such Plan. Under the Plan, all options granted have 10-year terms, and the conditions relating to the vesting and exercise of the options result in their being classified as “nonstatutory options” (options which do not afford income tax benefits to recipients, but the exercise of which may provide tax deductions for the Company). Each option will have an exercise price per share not less than the fair market value of a share of common stock on the date of grant and no individual employee may be granted options to purchase more than an aggregate of 400,000 shares of common stock.
On April 24, 2002, the shareholders approved the adoption of the 2002 Long-Term Incentive Plan, which was amended by the shareholders on April 26, 2006 (the “2002 Plan”). The 2002 Plan authorizes the grant of awards, including options, to purchase an aggregate of 500,000 shares of the Company’s common stock to certain officers, key employees, directors and consultants of the Company chosen by the compensation committee. Under the 2002 Plan, all options granted have 10-year terms, and the conditions relating to the vesting and exercise of the options result in their being classified as nonstatutory options. Each option will have an exercise price per share not less than the fair market value of a share of common stock on the date of grant and no individual employee may be granted options to purchase more than an aggregate of 200,000 shares of common stock.
At December 31, 2010, there were approximately 68,000 shares remaining available for future issuance under the Plan and the 2002 Plan (together, the “Incentive Plans”). The Company issues new shares through its transfer agent upon stock option exercises or restricted share issuances. During 2010, 2009 and 2008, the compensation committee did not grant any stock options under the Incentive Plans.
A summary of the Company’s stock option activity as of December 31, 2010, and changes during the year then ended is presented below:
The total intrinsic value of options exercised during the years ended December 31, 2010, 2009, and 2008, was $58,000, $11,000, and $1.6 million, respectively.
As of December 31, 2010, all compensation cost related to options granted under the Incentive Plans was recognized. All options granted under the Incentive Plans were vested as of December 31, 2009.
GULF ISLAND FABRICATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Under the Incentive Plans, the compensation committee may award shares of restricted stock to such eligible participants as the Committee determines pursuant to the terms of the Incentive Plans. An award of restricted stock shall be subject to such restrictions on transfer and forfeitability provisions and such other terms and conditions subject to the provisions of the Incentive Plans. At the time an award of restricted stock is made, the compensation committee shall establish a period of time during which the transfer of the shares of restricted stock shall be restricted and after which the shares of restricted stock shall be vested (the “Restricted Period”). Except for the shares of restricted stock that vest based on the attainment of performance goals, the Restricted Period shall be a minimum of three years, with incremental vesting of portions of the award over the three-year period permitted. If the vesting of the shares of restricted stock is based upon the attainment of performance goals, a minimum Restricted Period of one year is allowed, with incremental vesting of portions of the award over the one-year period permitted.
The Incentive Plans do not have any limitations on the amount of shares that can be specifically awarded as restricted stock. Restricted stock granted during 2010 vests in annual 20% increments beginning on the first anniversary of the date of the grant. The fair value of restricted stock is determined based on the closing price of the Company’s common stock on the date of the grant. On December 1, 2010 the compensation committee granted 52,100 shares of restricted stock to key employees under the Incentive Plans. The weighted-average grant-date fair value of stock granted during 2010 was $27.09. The compensation committee granted 136,700 shares of restricted stock in 2009 with a weighted-average grant date fair value of $16.66. The compensation committee did not grant any restricted stock during 2008. A summary of the status of our restricted stock awards is presented in the table below.
As of December 31, 2010, there was $2.7 million of total unrecognized compensation cost related to restricted share-based compensation arrangements granted under the Incentive Plans. That cost is expected to be recognized over a weighted-average period of 3.3 years. The total fair value of shares vested during the year ended December 31, 2010 was $716,000.
Share-based compensation cost that has been charged against income for the Incentive Plans was $825,000, $677,000 and $536,000 for 2010, 2009 and 2008, respectively. The total income tax benefit recognized in the income statement for share-based compensation arrangements was $316,000, $239,000 and $176,000 for 2010, 2009 and 2008, respectively.
Cash received from option exercises for the years ended December 31, 2010, 2009 and 2008 was $101,000, $21,000, and $959,000, respectively. The excess tax benefit realized for the tax deductions from option exercise of the share-based payment arrangements totaled $124,000, $24,000 and $542,000, respectively, for the years ended December 31, 2010, 2009 and 2008.
GULF ISLAND FABRICATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
17. SUBSEQUENT EVENTS
On January 14, 2011, we entered into an agreement with one of our customers regarding the collection of an $11.0 million retainage balance accumulated on a completed contract to receive $12.5 million, payable in twenty equal monthly installments, with the first payment due on June 30, 2011. The implied interest rate under the terms of the agreement is 9.5%.
On February 24, 2011, our Board of Directors declared a dividend of $0.06 per share on the shares of our common stock outstanding, payable March 28, 2011 to shareholders of record on March 14, 2011.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on February 28, 2011.
GULF ISLAND FABRICATION, INC.
(Registrant)
By:
/S/ KERRY J. CHAUVIN
Kerry J. Chauvin
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on February 28, 2011.
S-1
GULF ISLAND FABRICATION, INC.
EXHIBIT INDEX
E-1
 Management Contract or Compensatory Plan.
* Incorporated by reference to the Company’s Registration Statement on Form S-1 filed with the Commission on February 14, 1997 (Registration Number 333-21863).
^ SEC File Number 000-22303.
E-2