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

9 Months Ended

Sep. 30, 2018

Revenue from Contract with Customer [Abstract]

Revenue for our fixed-price and unit-rate contracts is recognized using the percentage-of-completion method, computed by the significant inputs method, which measures the percentage of labor hours incurred to date as compared to estimated total labor hours for each contract. Direct materials and subcontract materials and services that represent an insignificant portion of the work to complete a contract or do not reflect an accurate measure of project completion are considered "pass-through costs." 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 hour measure of progress, plus pass-through costs incurred during the period. Accordingly, pass-through costs are included in revenue and direct costs of revenue with no impact on gross profit recognized during the period.

Revenue for our T&M contracts is recognized at contracted rates when the work is performed, the costs are incurred and collection is reasonably assured. Our 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 our performance completed at the time of invoicing. Accordingly, we have elected the “right to invoice” practical expedient under Topic 606 for the recognition of revenue for our T&M contracts. The practical expedient allows us to recognize revenue in the amount we have the right to invoice (at contracted rates when the work is performed and costs are incurred).

Revenue and gross profit for contracts can be significantly affected by variable consideration, which can be in the form of unapproved change orders, claims, incentives, penalties, and liquidated 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 and nine months ended September 30, 2018 and 2017, we had no material amounts in revenue related to unapproved change orders, claims, or incentives. However certain projects in our Shipyard Division reflect a reduction to our estimated contract price of $11.7 million for variable consideration related to liquidated damages. The reductions in contract price were recorded during the fourth quarter 2017.

Revenue and gross profit for contracts accounted for using the percentage-of-completion method can also be significantly affected by changes in estimated cost to complete such contracts. The cumulative impact of revisions in total cost estimates during the progress of work is reflected in the period in which these changes become known, including, to the extent required, the reversal of profit recognized in prior periods and the recognition of losses expected to be incurred on contracts. Due to the various estimates inherent in our contract accounting, actual results could differ from those estimates, which could result in material changes to our Consolidated Financial Statements and related disclosures.

Adoption of Topic 606

As discussed in Note 1, on January 1, 2018, we adopted ASU No. 2014-09, Topic 606 “Revenue from Contracts with Customers,” which supersedes the revenue recognition requirements in FASB ASC Topic 605, “Revenue Recognition.” Accordingly, the reported results for the three and nine months ended September 30, 2018, reflect the application of Topic 606 guidance while the comparable reported results for 2017 were prepared under the guidance of Topic 605.

Topic 606 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. Our adoption of Topic 606 included a detailed review of our significant contracts that were not substantially complete as of January 1, 2018, 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.

Based on our review, we concluded that revenue recognition for our fixed-price and unit-rate contracts using the percentage-of-completion method, computed by measuring the percentage of labor hours incurred to date as compared to estimated total labor hours for each contract, is still appropriate as it most accurately reflects our primary profit generating activity and best represents our efforts to construct the asset for our customer. However, adoption of Topic 606 did require us to include subcontract labor and certain costs from outside services within our measure of progress and determination of our percentage-of-completion. We previously treated certain of these costs as pass-through costs and excluded such costs from our measure of progress. Our review also determined that Topic 606 did not impact the timing of revenue recognition for our T&M contracts. Based on the aforementioned, we concluded that the impact of the adoption of Topic 606 as of January 1, 2018, was immaterial to our Consolidated Financial Statements and no adjustment was required.

Topic 606 requires additional and enhanced disclosures related to the disaggregation of revenue and the anticipated timing and completion of remaining performance obligations, which are included below.

Disaggregation of Revenue - The following tables summarize revenue for each of our operating segments, disaggregated by contract type and timing of revenue recognition, for the three and nine months ended September 30, 2018 and 2017 (in thousands):



		Three Months Ended September 30, 2018
		Fabrication		Shipyard		Services		EPC		Eliminations			Total
Contract Type
Fixed-price and unit-rate ⁽¹⁾		$	2,311	$	23,635	$	12,193	$	—	$	(779	)	$	37,360
T&M ⁽²⁾		—		857		10,424		—		—			11,281
Other ⁽³⁾		—		—		—		1,071		—			1,071
	Total	$	2,311	$	24,492	$	22,617	$	1,071	$	(779	)	$	49,712



		Three Months Ended September 30, 2017
		Fabrication		Shipyard		Services		EPC		Eliminations			Total
Contract Type
Fixed-price and unit-rate ⁽¹⁾		$	18,318	$	13,906	$	6,147	$	—	$	(1,159	)	$	37,212
T&M ⁽²⁾		—		1,168		11,504		—		—			12,672
Other		—		—		—		—		—			—
	Total	$	18,318	$	15,074	$	17,651	$	—	$	(1,159	)	$	49,884



		Nine Months Ended September 30, 2018
		Fabrication		Shipyard		Services		EPC		Eliminations			Total
Contract Type
Fixed-price and unit-rate ⁽¹⁾		$	28,171	$	62,116	$	35,197	$	—	$	(2,550	)	$	122,934
T&M ⁽²⁾		—		4,561		31,495		—		—			36,056
Other ⁽³⁾		—		—		—		2,026		—			2,026
	Total	$	28,171	$	66,677	$	66,692	$	2,026	$	(2,550	)	$	161,016



		Nine Months Ended September 30, 2017
		Fabrication		Shipyard		Services		EPC		Eliminations			Total
Contract Type
Fixed-price and unit-rate ⁽¹⁾		$	42,517	$	47,632	$	20,969	$	—	$	(4,328	)	$	106,790
T&M ⁽²⁾		—		4,166		22,789		—		—			26,955
Other		—		—		—		—		—			—
	Total	$	42,517	$	51,798	$	43,758	$	—	$	(4,328	)	$	133,745

____________

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

(2) Revenue is recognized at contracted rates when the work is performed and costs are incurred.

(3) Revenue primarily represents early work authorized by SeaOne and is recognized as the contract is progressed over time.

Future Performance Obligations Required Under Contracts - The following tables summarize the remaining revenue to be earned under performance obligations for the portion of contracts not yet completed as of September 30, 2018 (in thousands).



Segment	Performance Obligations at September 30, 2018
Fabrication	$	44,746
Shipyard ⁽¹⁾	282,912
Services	11,699
EPC	836
Intersegment eliminations	—
Total	$	340,193

_____________

(1) Amount excludes approximately $30.1 million in the aggregate of remaining performance obligations under dispute pursuant to a termination notice from our customer related to contracts for the construction of two MPSVs. See Note 8 for further discussion of these contracts.

We expect to recognize revenue for our remaining performance obligations in the following periods (in thousands):



Year	Total
Remainder of 2018	$	56,243
2019	199,922
2020	74,976
2021	8,405
2022	647
Total	$	340,193

Contracts Receivable and Retainage

Our customers include U.S. and, to a lesser extent, international energy producers, petrochemical, industrial, power, and marine operators, EPC companies and certain agencies of the U.S. government. Of our contracts receivable balance at September 30, 2018, $18.4 million was with two customers.

At September 30, 2018, we had an allowance for bad debt of $3.7 million within our contract receivable balance. During the three months ended September 30, 2018, we increased our allowance for bad debts by $2.8 million, which is included in general and administrative expenses on our Consolidated Statements of Operations and primarily relates to a customer within our Fabrication Division.

Contracts in Progress, Advance Billings on Contracts and Accrued Contract Losses

Revenue recognition and customer invoicing for our fixed-price and unit-rate contracts may occur at different times. Revenue recognition is based upon our estimated percentage-of-completion as discussed above; however, customer invoicing will generally depend upon predetermined billing terms which could provide for customer advance payments or invoicing based upon achievement of certain milestones or project progress. Revenue recognized in excess of amounts billed is reflected as contracts in progress on our Consolidated Balance Sheets. Amounts billed in excess of revenue recognized is reflected as advance billings on contracts on our Consolidated Balance Sheets. Contracts in progress totaled $40.2 million at September 30, 2018, with $37.1 million relating to three customers. Advance billings on contracts totaled $14.9 million at September 30, 2018, with $11.2 million relating to one customer. Accrued contract losses totaled $6.0 million and $7.6 million at September 30, 2018 and December 31, 2017, respectively.