Gulf Island Fabrication, Inc. Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

CONTRACT REVENUE AND PERCENTAGE-OF-COMPLETION METHOD

CONTRACT REVENUE AND PERCENTAGE-OF-COMPLETION METHOD

12 Months Ended

Dec. 31, 2016

CONTRACT REVENUE AND PERCENTAGE-OF-COMPLETION METHOD

Information with respect to uncompleted contracts as of December 31, is as follows (in thousands):



	2016		2015
Costs incurred on uncompleted contracts	$	246,424	$	437,658
Estimated profit earned to date	21,363		7,777
Sub-total	267,787		445,435
Less billings to date	244,935		439,694
Total	$	22,852	$	5,741

The above amounts are included in the accompanying consolidated balance sheets at December 31, under the following captions (in thousands):



	2016			2015
Contracts in progress	$	26,829		$	12,822
Advance billings on contracts	(3,977		)	(7,081		)
Total	$	22,852		$	5,741

Provision for estimated losses

Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. We recognized contract losses of $1.8 million, $33.9 million, and $6.6 million in the years ended December 31, 2016, 2015, and 2014, respectively. Contract losses for the year ended December 31, 2016 were primarily attributable to decreasing margins on fabrication work due to continued depressed oil and gas prices within our Fabrication division and the movement of vessels in progress from our leased Prospect Shipyard to our owned Houma Shipyard within our Shipyards division. Contract losses for the year ended December 31, 2015 were primarily due to $24.5 million related to a decrease in the contract price due to final weight re-measurements and our inability to recover certain costs on disputed change orders related to a large deepwater project which was delivered in 2015. In addition, we increased accrued contract losses associated with our remaining contracts by approximately $9.4 million during 2015 due to increases in our projected unit labor rates of our fabrication facilities. Our increases in unit labor rates were driven by our inability to absorb fixed costs due to decreases in expected oil and gas fabrication activity. Contract losses for the year ended December 31, 2014 were primarily related to two tank barge projects for a marine transportation company, platform supply vessels for an offshore marine company and a production platform jacket for a deepwater customer.

Revenues from Major Customers

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; however, the Company is highly dependent on a few large customers in each year, particularly customers for our major deepwater projects, as shown below. Revenues from customers comprising 10% or more of the Company’s total revenue for the years ended December 31, 2016, 2015 and 2014, respectively, are summarized as follows (in thousands):



Customer	2016		2015		2014
A	$	65,981	*		*
B	*		$	55,775	$	160,173
C	*		$	36,320	*
D	*		*		$	98,644



*	The customer revenue was less than 10% of the total revenue for the year.

International Revenues

The Company’s fabricated structures are used worldwide by U.S. customers operating abroad and by foreign customers. Revenues related to fabricated structures for delivery outside of the United States accounted for 14%, 6%, and 10% of the Company’s revenues for the years ended December 31, 2016, 2015 and 2014, respectively, and are summarized as follows (in thousands):



	2016		2015		2014
Location:
United States	$	245,039	$	287,892	$	456,839
International	41,287		18,228		49,800
Total	$	286,326	$	306,120	$	506,639

Contract Costs

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.

We define pass-through costs as material, freight, equipment rental, and sub-contractor services included in the direct costs of revenue associated with projects. Pass-through costs have no impact in the determination of gross margin recognized for the related project for a particular period. Pass-through costs as a percentage of revenue were 36.5%, 44.4% and 48.2% for the years ended December 31, 2016, 2015 and 2014, respectively.

Some of our contracts contain provisions that require us to pay liquidated damages if we are responsible for the failure to meet specified contractual milestone dates and the applicable customer asserts a claim under those provisions. Those contracts define the conditions under which our customers may make claims against us for liquidated damages. In 2014, we had one asserted liquidated damages claim in the amount of $0.3 million that was fully settled, related to the fabrication of an offshore supply vessel. Other than the aforementioned claim, as of March 2, 2017, we were not aware of any asserted or unasserted liquidated damage claims by any of our customers.