Gulf Island Fabrication, Inc. Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

REVENUE RECOGNITION

REVENUE RECOGNITION

3 Months Ended

Mar. 31, 2018

Revenue Recognition and Deferred Revenue [Abstract]

The Company uses the percentage-of-completion accounting method to recognize revenue from fixed-price and unit-rate contracts computed using the percentage of labor hours incurred as compared to estimated total labor hours to complete each contract. Revenue recognized in a period for a contract is the pro rata portion of the contract value (excluding pass-through costs) based upon the labor hours incurred to the total labor hours estimated to complete the contract plus pass-through costs incurred during the period.

Materials and subcontractor services that represent an insignificant portion of the work to complete the project do not reflect an accurate measure of project completion are considered pass-through costs. Prior to the adoption of Topic 606, we defined pass-through costs as material, freight, equipment rental, and sub-contractor services when they are not significant to the progress of the project. Pass-through costs are included in revenue and direct costs of revenue with no impact on the gross profit realized for that particular period.

Revenue from T&M contracts is recognized as the work is performed, costs are incurred at the contracted rates and when collection is reasonably assured.

Revenue and gross profit on contracts can be significantly affected by variable consideration, which can be in the form of unpriced change orders, claims, incentives, penalties, and liquidating damages that may not be resolved until the later stages of the contract or after the contract has been completed and delivery occurs. We estimate variable consideration based on the most likely amount to which we expect to be entitled and include estimated amounts in the transaction price to the extent it is probable that a significant future reversal of cumulative revenue recognized will not occur or when we conclude that any significant uncertainty associated with the variable consideration is resolved. For the three months ended March 31, 2018 and 2017, we included no amounts in revenue related to unpriced change orders, claims, or incentives. As disclosed in our 2017 Annual Report, we recorded a reduction to our estimated contract price of $11.7 million of variable consideration related to liquidating damages on projects in our Shipyard Division.

Adoption of Topic 606

As discussed in Note 1, we adopted Topic 606 on January 1, 2018. The reported results for the three months ended March 31, 2018, reflect the application of Topic 606 guidance while the reported results for 2017 were prepared under the guidance of Topic 605. Topic 606 represents a change in accounting principle and also requires enhanced disclosures related to the disaggregation of revenue and the anticipated timing and completion of remaining performance obligations.

Our adoption of Topic 606 required us to review our fixed-price and unit-rate contracts to assess if revenue should be recognized "over time" (as the work is performed) or "at a point in time" (upon completion of the work). We determined that ownership and control of the work related to our fixed-price and unit-rate contracts transfer to our customers as the work progresses. Additionally, our customers retain the right and ability to change, modify or discontinue further fabrication or construction at any stage of the project. In the event our customers discontinue work, they are required to compensate us for the work performed to date. We determined that the significant inputs based upon labor hours most accurately reflects our primary profit generating activity as it best represents our efforts to construct the asset for our customer.

The Company's T&M contracts provide for labor and materials to be billed at rates specified within the contract. The consideration from the customer directly corresponds to the value of the Company’s performance completed at the time of invoicing. Accordingly, the Company has elected to adopt the “right to invoice” practical expedient for T&M contracts. The adoption of this practical expedient allows the Company to recognize revenue in the amount it has the right to invoice (as the work is performed and costs are incurred at the contracted rates). Our adoption of this practical expedient determined that the impact of the adoption of Topic 606 to our revenue for the three months ended March 31, 2018, was immaterial and that it will not have an impact on future financial results.

Disaggregation of Revenue

The following tables detail our revenue within each division disaggregated by contract type and timing of revenue recognition for the three months ended March 31, 2018 and 2017 (in thousands).



	Three Months Ended March 31, 2018
	Fabrication Division		Shipyard Division		Services Division		EPC Division		Eliminations			Total
Contract Type
Lump sum and fixed-price construction ⁽¹⁾	$	17,270	$	17,222	$	11,285	$	—	$	(488	)	$	45,289
Service contract revenue ⁽²⁾	—		1,343		10,585		—		—			11,928
Other ⁽³⁾	—		—		—		73		—			73
Total	$	17,270	$	18,565	$	21,870	$	73	$	(488	)	$	57,290



	Three Months Ended March 31, 2017
	Fabrication Division		Shipyard Division		Services Division		EPC Division		Eliminations			Total
Contract Type
Lump sum and fixed-price construction ⁽¹⁾	$	10,209	$	16,707	$	5,721	$	—	$	(1,350	)	$	31,287
Service contract revenue ⁽²⁾	—		1,715		4,991		—		—			6,706
Other ⁽³⁾	—		—		—		—		—			—
Total	$	10,209	$	18,422	$	10,712	$	—	$	(1,350	)	$	37,993

_____________

(1) Revenue is recognized as the contract is progressed over time.

(2) Amounts are T&M. Revenue is recognized as the work is performed and costs are incurred at the contracted rates.

(3) Other revenue is primarily from our EPC Division and represents early work authorized by SeaOne. Revenue is recognized as the contract is progressed over time.

Future Performance Required Under Fixed-Price Contracts

Topic 606 requires companies to disclose the remaining revenue to be earned under performance obligations for the portion of our contracts yet to be completed as of March 31, 2018 (in thousands).



By Segment	Performance Obligations as of March 31, 2018
Fabrication Division	$	6,706
Shipyard Division ⁽¹⁾	149,590
Services Division	11,858
EPC Division	—
Intersegment eliminations	(990		)
Total	$	167,164

_____________

(1) Amounts exclude approximately $94 million in remaining performance obligations that are disputed under a termination notice or are under a bid protest by a competing shipyard.

We expect to recognize our remaining performance obligations in revenue in the following periods as follows:



Year	$'s
Remainder of 2018	$	88,573
2019	59,231
2020	19,360
Total	$	167,164

Contracts in Progress and Advance Billings on Contracts

Revenue recognition and customer invoicing may occur at different times. Revenue recognition is based upon our calculation of percent complete; however, customer invoicing will generally depend upon a predetermined billing schedule as stated in the contract which could allow for customer advance payments or invoicing based upon achievement of certain milestones. Revenue earned but not yet invoiced is reflected as contracts in progress and included in current assets on our consolidated balance sheet. Billings made to our customers in advance of revenue being earned are reflected as advance billings on contracts and included in current liabilities on our balance sheet. Contracts in progress at March 31, 2018, totaled $37.5 million with $27 million relating to two major customers. Advance billings on contracts at March 31, 2018, was $4.3 million and included advances of $2.8 million from three major customers. Accrued contract losses were $6.3 million and $7.6 million as of March 31, 2018, and December 31, 2017, respectively.