NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2017
(Unaudited)
NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Gulf Island Fabrication, Inc. ("Gulf Island," and together with its subsidiaries "the Company," "we" or "our"), is a leading fabricator of complex steel structures and marine vessels used in energy extraction and production, petrochemical and industrial facilities, power generation, alternative energy projects and shipping and marine transportation operations. We also provide related installation, hookup, commissioning, repair and maintenance services with specialized crews and integrated project management capabilities. We are currently fabricating complex modules for the construction of a new petrochemical plant, completing newbuild construction of a technologically advanced offshore support and two multi-purpose service vessels and recently fabricated wind turbine pedestals for the first offshore wind power project in the United States. We also constructed one of the largest liftboats servicing the Gulf of Mexico ("GOM"), one of the deepest production jackets in the GOM and the first SPAR fabricated in the United States. Our customers include U.S. and, to a lesser extent, international energy producers, petrochemical, industrial, power and marine operators. We operate and manage our business through
three
operating divisions: Fabrication, Shipyards and Services. Our corporate headquarters is located in Houston, Texas, with fabrication facilities located in Houma, Jennings and Lake Charles, Louisiana. Our fabrication facilities in Aransas Pass and Ingleside, Texas are currently being marketed for sale.
The consolidated financial statements include the accounts of Gulf Island Fabrication, Inc. and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
For definitions of certain technical terms contained in this Form 10-Q, see the Glossary of Certain Technical Terms contained in our Annual Report on Form 10-K for the year ended
December 31, 2016
.
The accompanying unaudited, consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information, the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, the consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the
three
months ended
March 31, 2017
, are not necessarily indicative of the results that may be expected for the year ended
December 31, 2017
.
The balance sheet at
December 31, 2016
, has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by GAAP for complete financial statements. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2016
.
Reclassifications
We made the following reclassifications to our financial statements for the three months ended March 31, 2016, to conform to current period presentation:
|
|
•
|
We reclassified
$145,000
from operating activities to financing activities in the Company’s consolidated statement of cash flows for the three months ended March 31, 2016, related to tax payments made by the Company to satisfy the employees' income tax withholding obligations arising from vesting shares as a result of the adoption of Accounting Standards Update 2016-09 as discussed in "New Accounting Standards" below. This reclassification had no impact to our financial position or results of operations.
|
|
|
•
|
We reclassified corporate administrative costs and overhead expenses previously allocated to the results of operations of our three operating divisions to our Corporate division for the
three months ended March 31, 2016
, to conform to current period presentation as discussed in Note 8. These reclassifications had no impact to our consolidated financial statements.
|
New Accounting Standards
On May 28, 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, “Revenue from Contracts with Customers” (Topic 606), which supersedes the revenue recognition requirements in FASB Accounting Standard Codification (ASC) Topic 605, “Revenue Recognition.” ASU No. 2014-09 requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration
to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 will be effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early application is permitted. We use the percentage-of-completion accounting method to account for our fixed-price or unit rate contracts, 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. We understand that this method will still be allowed under the update; however, there are additional criteria to consider for the requirements to recognize revenue under the percentage-of-completion method. We are in process of reviewing our contracts to ensure that we will continue to be able to apply our revenue recognition policies, but we are evaluating whether implementation of this update will have a material effect to our results of operations. We intend to use the modified retrospective model in adopting this standard, which will require a cumulative catch up adjustment, if any, on January 1, 2018.
In September 2015, the FASB issued ASU 2015-16, “Simplifying the Accounting for Measurement-Period Adjustments,” which eliminates the requirement that an acquirer in a business combination account for measurement-period adjustments retrospectively. Instead, an acquirer will recognize a measurement-period adjustment during the period in which it determines the amount of the adjustment. ASU 2015-16 is effective for annual periods beginning after December 15, 2016. We adopted this guidance effective January 1, 2017, which did not have an impact on our financial position, results of operations and related disclosures.
In February 2016, the FASB issued ASU 2016-02, “Leases,” which requires lessees to record most leases on their balance sheets but recognize expenses in a manner similar to current guidance. ASU 2016-02 will be effective for annual periods beginning after December 15, 2018. The guidance is required to be applied using a modified retrospective approach. We are currently evaluating the effect that ASU 2016-02 will have on our financial position, results of operations and related disclosures; however, we expect to record our lease obligations on our balance sheet.
In March 2016, the FASB issued ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting,” which amends several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification within the statement of cash flows. ASU 2016-09 is effective for annual periods beginning after December 15, 2016. We adopted the requirements of ASU 2016-09 effective January 1, 2017. The provisions of ASU No. 2016-09 that are applicable to the Company and affect the Company’s consolidated financial statements include the following:
|
|
•
|
This ASU requires the recognition of the excess tax benefit or tax deficiency resulting from the difference between the deduction for tax purposes and the compensation cost recognized for financial reporting purposes created when common stock vests as an income tax benefit or expense in the Company’s statement of operations. Under previous GAAP, this difference was required to be recognized in additional paid-in capital. The expense or benefit required to be recognized is calculated separately as a discrete item each reporting period and not as part of the Company’s projected annual effective tax rate. During the
three months ended March 31, 2017
, we recorded tax expense of
$210,000
(approximate
$0.01
loss per share) related to the adoption of this ASU. We have adopted these provisions on a prospective basis and our prior period presentation has not changed. Future effects to the Company’s income tax expense (benefit) as a result of the adoption of this ASU will depend on the timing, number of shares and the closing price per share of the Company’s common stock on the dates of vesting.
|
|
|
•
|
This ASU No. 2016-09 also clarifies that cash paid by the Company to taxing authorities in order to satisfy the employees' income tax withholding obligations from vesting shares should be classified as a financing activity in the Company’s statement of cash flows. We have reported payments of
$880,000
within financing activities within our consolidated statement of cash flows for the
three months ended March 31, 2017
, as a result of adoption of this ASU. We have adopted these provisions retrospectively and reclassified
$145,000
from cash used in operating activities to cash used in financing activities for the
three months ended March 31, 2016
, to conform to the current period presentation.
|
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses - Measurement of Credit Losses on Financial Instruments,” which changes the way companies evaluate credit losses for most financial assets and certain other instruments. For trade and other receivables, held-to-maturity debt securities, loans and other instruments, entities will be required to use a new forward-looking “expected loss” model to evaluate impairment, potentially resulting in earlier recognition of allowances for losses. The new standard also requires enhanced disclosures, including the requirement to disclose the information used to track credit quality by year of origination for most financing receivables. ASU 2016-13 will be effective for annual periods beginning after December 15, 2019. Early adoption is permitted for all entities for annual periods beginning after December 15, 2018. We have not elected to early adopt this guidance. The guidance must be applied using a cumulative-effect transition method. We are currently evaluating the effect that ASU 2016-13 will have on our financial position, results of operations and related disclosures.
NOTE 2 – ASSETS HELD FOR SALE
Our South Texas Assets:
On February 23, 2017, our Board of Directors approved management's recommendation to place our South Texas facilities located in Aransas Pass and Ingleside, Texas, up for sale. Our Texas South Yard in Ingleside, Texas, is located on the northwest intersection of the U.S. Intracoastal Waterway and the Corpus Christi Ship Channel. The
45
-foot deep Corpus Christi Ship Channel provides direct and unrestricted access to the Gulf of Mexico. Our Texas North Yard in Aransas Pass, Texas, is located along the U.S. Intracoastal Waterway and is approximately three miles north of the Corpus Christi Ship Channel. These properties are currently underutilized and represent excess capacity within our Fabrication division. Our net book value of property, plant and equipment for these assets was
$105.0 million
at
March 31, 2017
. We measure and record assets held for sale at the lower of their carrying amount or fair value less cost to sell. We have compared the net book value of this asset group to the fair value less cost to sell based upon appraisals obtained which did not result in impairment.
We are working to wind down all fabrication activities at these locations and re-allocate remaining backlog and workforce to our Houma Fabrication Yard. As a result of the decision to place our South Texas facilities up for sale and the underutilization currently being experienced, we expect to incur costs associated with maintaining these facilities through their sale that will not be recoverable. These costs include insurance, general maintenance of the properties in its current state, property taxes and retained employees which will be expensed as incurred. We do not expect the sale of these assets to impact our ability to service our deepwater customers or operate our Fabrication division. Our South Texas assets held for sale do not qualify for discontinued operations presentation.
Prospect Shipyard Assets:
We lease a
35
-acre complex 26 miles from the Gulf of Mexico near Houma, Louisiana. We have notified the owner of our intention to terminate the lease on mutually beneficial terms to facilitate an orderly disposal of assets at the facility. We have classified the machinery and equipment remaining at this shipyard as assets held for sale at February 6, 2017. Our net book value of property, plant and equipment for these assets was
$5.5 million
at
March 31, 2017
. We measure and record assets held for sale at the lower of their carrying amount or fair value less cost to sell. We have compared the net book value of this asset group to estimates of fair value less cost to sell and recorded an impairment of
$389,000
for the
three months ended March 31, 2017
. We do not expect the sale of these assets to impact our ability to service our Shipyards customers. The future anticipated costs expected to be incurred prior to the termination of this lease are not significant to our consolidated financial statements. Our Prospect Shipyard assets held for sale do not qualify for discontinued operations presentation.
A summary of the significant assets included in assets held for sale at our South Texas facilities and our Prospect Shipyard is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
South Texas Fabrication Yards
|
|
Prospect Shipyard
|
|
Consolidated
|
|
Land
|
$
|
5,492
|
|
|
$
|
—
|
|
|
$
|
5,492
|
|
|
Buildings and improvements
|
117,582
|
|
|
—
|
|
|
117,582
|
|
|
Machinery and equipment
|
100,605
|
|
|
6,131
|
|
|
106,736
|
|
|
Furniture and fixtures
|
867
|
|
|
82
|
|
|
949
|
|
|
Vehicles
|
800
|
|
|
—
|
|
|
800
|
|
|
Other
|
252
|
|
|
—
|
|
|
252
|
|
|
Less: accumulated depreciation
|
(120,560
|
)
|
|
(706
|
)
|
|
(121,266
|
)
|
|
Total assets held for sale
|
$
|
105,038
|
|
|
$
|
5,507
|
|
|
$
|
110,545
|
|
|
NOTE 3 – REVENUE AND CONTRACT COSTS
The Company uses the percentage-of-completion accounting method for fabrication contracts. Revenue from fixed-price or unit rate contracts is recognized on the percentage-of-completion method, computed by the efforts-expended method using the percentage of labor hours incurred as compared to estimated total labor hours to complete each contract. This progress percentage is applied to our estimate of total anticipated 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 recognized for that period plus labor costs and pass-through costs incurred on the contract during the period. We define pass-through costs as material, freight, equipment rental, and sub-contractor services that are included in the direct costs of revenue associated with projects. Consequently, pass-through costs are
included in revenue but have no impact on the gross profit realized for that particular period. Our pass-through costs as a percentage of revenue for each period presented were as follows:
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2017
|
|
2016
|
|
Pass-through costs as a percentage of revenues
|
29.4%
|
|
40.0%
|
|
|
|
|
|
|
Contracts in progress at
March 31, 2017
, was
$30.4 million
with
$22.9
relating to
one
major customer. Advance billings on contracts at
March 31, 2017
, was
$4.8 million
and included advances of
$3.8 million
from
two
major customers.
Revenue and gross profit on contracts can be significantly affected by change orders and claims that may not be resolved until the later stages of the contract or after the contract has been completed and delivery occurs. At
March 31, 2017
, we included
no
amounts in revenue related to change orders on projects which have been approved as to scope but not price. During the
three months ended
March 31, 2016
, we recorded a loss of
$488,000
for a single customer related to revenue on change orders recognized in prior periods that were not recovered in our final settlement with the customer.
NOTE 4 – CONTRACTS RECEIVABLE AND RETAINAGE
Our customers include major and large independent oil and gas companies, petrochemical and industrial facilities, marine companies and their contractors. Of our contracts receivable balance at
March 31, 2017
,
$9.4 million
, or
44.6%
, was with
two
customers. The significant projects for these
two
customers consist of:
|
|
•
|
one
large petroleum supply vessel for a customer in our Shipyards segment that was tendered for delivery on February 6, 2017 (see also Note 9 regarding this receivable as this customer has refused delivery of the vessel); and
|
|
|
•
|
the fabrication of
four
modules associated with a U.S. ethane cracker project.
|
At
March 31, 2017
, we included an allowance for bad debt of
$1.2 million
in our contract receivable balance which primarily relates to a customer within our Fabrication division for the storage of an offshore drilling platform that was fully reserved in 2016.
NOTE 5 – FAIR VALUE MEASUREMENTS
The Company bases its fair value determinations by applying the following hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:
|
|
•
|
Level 1-inputs are based upon quoted prices for identical instruments traded in active markets.
|
|
|
•
|
Level 2-inputs are based upon quoted prices for similar instruments in active markets and model-based valuation techniques for which all significant assumptions are observable in the market.
|
|
|
•
|
Level 3-inputs are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. These include discounted cash flow models and similar valuation techniques.
|
Recurring fair value measurements and financial instruments
-
The carrying amounts that we have reported for financial instruments, including cash and cash equivalents, accounts receivables and accounts payables, approximate their fair values.
Assets held for sale
- We measure and record assets held for sale at the lower of their carrying amount or fair value less cost to sell. The determination of fair value can require the use of significant judgment and can vary on the facts and circumstances. We have classified our assets at our South Texas facilities and our Prospect Shipyard as assets held for sale at March 31, 2017. We have compared the net book value of the asset groups to estimates of fair value less cost to sell and recorded an impairment of
$389,000
for the
three months ended March 31, 2017
, related to the assets held for sale at our Prospect shipyard. See Note 2. We had no assets held for sale at December 31, 2016. We have determined that the fair values of these assets fall within Level 3 of the fair value hierarchy.
NOTE 6 – EARNINGS PER SHARE AND SHAREHOLDERS' EQUITY
Earnings per Share:
The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2017
|
|
2016
|
|
Basic and diluted:
|
|
|
|
|
Numerator:
|
|
|
|
|
Net income (loss)
|
$
|
(6,454
|
)
|
|
$
|
989
|
|
|
Less: Distributed and undistributed income (unvested restricted stock)
|
(34
|
)
|
|
9
|
|
|
Net income attributable to common shareholders
|
$
|
(6,420
|
)
|
|
$
|
980
|
|
|
Denominator:
|
|
|
|
|
Weighted-average shares
(1)
|
14,758
|
|
|
14,601
|
|
|
Basic and diluted earnings (loss) per share - common shareholders
|
$
|
(0.44
|
)
|
|
$
|
0.07
|
|
|
______________
(1) We have
no
dilutive securities.
NOTE 7 – LINE OF CREDIT
We have a credit agreement with Whitney Bank and JPMorgan Chase Bank N.A. that provides for an
$40.0 million
revolving credit facility maturing
November 29, 2018
. The credit agreement allows the Company to use up to the full amount of the available borrowing base for letters of credit and for general corporate purposes. Our obligations under the credit agreement are secured by substantially all of our assets (other than real estate). Amounts borrowed under the credit agreement bear interest, at our option, at either the prime lending rate established by JPMorgan Chase Bank, N.A. or LIBOR plus
2.0 percent
. We must comply with the following financial covenants:
|
|
(i)
|
minimum net worth requirement of not less than
$255.0 million
plus:
|
|
|
a)
|
50%
of net income earned in each quarter beginning December 31, 2016, and
|
|
|
b)
|
100%
of proceeds from any issuance of common stock;
|
|
|
c)
|
less the amount of any impairment on certain assets owned by Gulf Marine Fabricators, L.P. (our South Texas assets held for sale) up to
$30.0 million
;
|
|
|
(ii)
|
debt to EBITDA ratio not greater than
2.5
to 1.0; and
|
|
|
(iii)
|
interest coverage ratio not less than
2.0
to 1.0.
|
At
March 31, 2017
,
no
amounts were outstanding under the credit facility, and we had outstanding letters of credit totaling
$4.6 million
, reducing the unused portion of our credit facility for additional letters of credit and borrowings to
$35.4 million
. As of
March 31, 2017
, we were in compliance with all of our covenants.
We are currently in discussions with one of our financial institutions to enter into a new revolving line of credit with comparable availability, but with less restrictive financial covenants and reduced fees as compared to our current revolving credit facility. We expect to close on this new revolving credit facility and terminate our existing revolving credit facility in the second quarter of 2017.
NOTE 8 - SEGMENT DISCLOSURES
We have structured our operations with three operating divisions and a corporate non-operating division. During the
three months ended March 31, 2017
, management reduced its allocation of corporate administrative costs and overhead expenses from its corporate, non-operating division to its operating divisions in order to individually evaluate corporate administrative costs and overhead within our Corporate division as well as to not overly burden our operating divisions with costs that do not directly relate to their operations. Accordingly, a significant portion of our corporate administrative costs and overhead expenses are retained within the results of our corporate division. In addition, we have also allocated certain personnel previously included in the operating divisions to our Corporate division. In doing so, management believes that it has created a fourth reportable segment with each
of its
three
operating divisions and its Corporate division each meeting the criteria of reportable segments under GAAP. Our operating divisions and Corporate division are discussed below.
Fabrication
-
Our Fabrication division primarily fabricates structures such as offshore drilling and production platforms and other steel structures for customers in the oil and gas industries including jackets and deck sections of fixed production platforms along with pressure vessels. Our Fabrication segment also fabricates structures for alternative energy customers (such as the five jackets and piles we constructed for a shallow water wind turbine project off the coast of Rhode Island during 2015) as well as modules for an LNG facility. We have historically performed these activities out of our fabrication yards in Houma, Louisiana and formerly out of our fabrication yards in Aransas Pass and Ingleside, Texas.
Shipyards
-
Our Shipyards division primarily fabricates and repairs marine vessels including offshore supply vessels, anchor handling vessels, lift boats, tugboats and towboats. Our Shipyards division also constructs and owns dry docks to lift marine vessels out of the water in order to make repairs or modifications. Our marine repair activities include steel repair, blasting and painting services, electrical systems repair, machinery and piping system repairs and propeller, shaft and rudder reconditioning. Our Shipyards division also performs conversion projects that consist of lengthening or modifying the use of existing vessels to enhance their capacity or functionality. We perform these activities out of our facilities in Houma, Jennings and Lake Charles, Louisiana.
Services
-
Our Services division primarily provides interconnect piping services on offshore platforms and inshore structures. Interconnect piping services involve sending employee crews to offshore platforms in the Gulf of Mexico to perform welding and other activities required to connect production equipment, service modules and other equipment on a platform. We also contract with oil and gas companies that have platforms and other structures located in the inland lakes and bays throughout the Southeast for various on-site construction and maintenance activities. In addition, our Services division can fabricate packaged skid units and construct various municipal and drainage projects, such as pump stations, levee reinforcement, bulkheads and other projects for state and local governments.
Corporate
-
Our Corporate division primarily includes expenses that do not directly relate to the operations or shared services provided to our three operating divisions. Expenses for shared services, which include human resources, insurance, business development, accounting salaries, etc., are allocated to the operating divisions. Expenses that are not allocated include, but are not limited to, costs related to executive management and directors' fees, clerical and administrative salaries, costs of maintaining the corporate office and costs associated with overall governance and being a publicly traded company.
We generally evaluate the performance of, and allocate resources to, our segments based upon gross profit (loss) and operating income (loss). Segment assets are comprised of all assets attributable to each segment. Corporate administrative costs and overhead are allocated to our three operating divisions for expenses that directly relate to the operations or relate to shared services as discussed above. During 2016, we allocated substantially all of our corporate administrative costs and overhead to our three operating divisions. We have recast our 2016 segment data below in order to conform to the current period presentation. Intersegment revenues are priced at the estimated fair value of work performed. Summarized financial information concerning our segments as of and for the
three
months ended
March 31, 2017
and
2016
, is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2017
|
|
Fabrication
|
Shipyards
(1)
|
Services
|
Corporate
|
Eliminations
|
Consolidated
|
Revenue
|
$
|
10,209
|
|
$
|
18,422
|
|
$
|
10,712
|
|
$
|
—
|
|
$
|
(1,350
|
)
|
$
|
37,993
|
|
Gross profit (loss)
|
(2,966
|
)
|
(1,704
|
)
|
33
|
|
(260
|
)
|
—
|
|
(4,897
|
)
|
Operating income (loss)
|
(3,787
|
)
|
(3,057
|
)
|
(633
|
)
|
(1,739
|
)
|
—
|
|
(9,216
|
)
|
Total assets
|
197,834
|
|
88,489
|
|
95,562
|
|
349,917
|
|
(427,142
|
)
|
304,660
|
|
Depreciation and amortization expense
|
3,135
|
|
1,009
|
|
432
|
|
124
|
|
—
|
|
4,700
|
|
Capital expenditures
|
102
|
|
272
|
|
—
|
|
17
|
|
—
|
|
391
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2016
|
|
Fabrication
|
Shipyards
(1)
|
Services
|
Corporate
|
Eliminations
|
Consolidated
|
Revenue
|
$
|
23,829
|
|
$
|
34,120
|
|
$
|
26,559
|
|
$
|
—
|
|
$
|
(529
|
)
|
$
|
83,979
|
|
Gross profit (loss)
|
86
|
|
2,375
|
|
3,376
|
|
(136
|
)
|
—
|
|
5,701
|
|
Operating income (loss)
|
(709
|
)
|
1,079
|
|
2,650
|
|
(1,804
|
)
|
—
|
|
1,216
|
|
Total assets
|
293,049
|
|
85,638
|
|
93,283
|
|
347,434
|
|
(480,236
|
)
|
339,168
|
|
Depreciation and amortization expense
|
4,855
|
|
1,166
|
|
442
|
|
104
|
|
—
|
|
6,567
|
|
Capital expenditures
|
109
|
|
35
|
|
543
|
|
37
|
|
—
|
|
724
|
|
|
|
|
|
|
|
|
____________
|
|
(1)
|
Revenue for the
three
months ended
March 31, 2017
and
2016
, includes
$1.6 million
and
$1.2 million
of non-cash amortization of deferred revenue, respectively, related to the values assigned to contracts acquired in the LEEVAC transaction.
|
NOTE 9 – COMMITMENTS AND CONTINGENCIES
During the third and fourth quarters of 2015, we recorded contract losses of
$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 we delivered to our customer in November 2015. No amounts with respect to these disputed change orders are included on our consolidated balance sheet or recognized in revenue in our consolidated statement of operations as of and for the
three
months ended
March 31, 2017
and
2016
. In the second quarter of 2016, we initiated legal action to recover our costs from these disputed change orders. We can give no assurance that our actions will be successful or that we will recover all or any portion of these contract losses from our customer.
On October 21, 2016, a customer of our Shipyards division announced it was in noncompliance with certain financial covenants included in the customer’s debt agreements. This customer also stated it had received limited waivers from its lenders and noteholders, but its debt agreements will require further negotiation and amendment. On April 19, 2017, the customer stated it had allowed the waivers to expire and remains in default of its covenants.
This same customer has rejected delivery of the vessel that we tendered for delivery on February 6, 2017, alleging certain technical deficiencies exist with respect to the vessel and is seeking recovery of all purchase price amounts previously paid by the customer under the contract. We are also building a second vessel for this customer that is scheduled for delivery during the second quarter of 2017. We disagree with our customer concerning these alleged technical deficiencies and have put the customer in default under the terms of the contracts for both vessels. As of
March 31, 2017
, approximately
$4.6 million
remained due and outstanding from our customer for the first vessel. The balance due to us upon delivery for a second vessel which is expected in May of this year is approximately
$4.9 million
. On March 10, 2017, we gave notice for arbitration with our customer in an effort to resolve this matter. We intend to take all legal action as may be necessary to protect our rights under the contracts and recover the remaining balances owed to us.
We continue to monitor our work performed in relation to our customer’s status and its ability to pay under the terms of these contracts. Because these vessels have been completed or are substantially complete, we believe that they have significant fair value and that we would be able to fully recover any amounts due to us.
NOTE 10 – SUBSEQUENT EVENTS
On
April 26, 2017
, our Board of Directors declared a dividend of $
0.01
per share on our shares of common stock outstanding, payable
May 25, 2017
, to shareholders of record on
May 11, 2017
.