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

Annual report pursuant to Section 13 and 15(d)

REVENUE, CONTRACT ASSETS AND LIABILITIES AND OTHER CONTRACT MATTERS

REVENUE, CONTRACT ASSETS AND LIABILITIES AND OTHER CONTRACT MATTERS

12 Months Ended

Dec. 31, 2018

Revenue from Contract with Customer [Abstract]

REVENUE, CONTRACT ASSETS AND LIABILITIES AND OTHER CONTRACT MATTERS

As discussed in Note 1, we recognize revenue for our contracts in accordance with Topic 606, which was adopted by us on January 1, 2018, and supersedes previous revenue recognition guidance, including industry-specific guidance. Summarized below are required disclosures under Topic 606 and other relevant guidance.

Disaggregation of Revenue

The following tables summarize revenue for each of our operating segments, disaggregated by contract type and timing of revenue recognition, for 2018, 2017 and 2016 (in thousands):



		2018
		Fabrication		Shipyard		Services		EPC		Eliminations			Total
Contract Type
Fixed-price and unit-rate ⁽¹⁾		$	37,943	$	88,887	$	38,612	$	2,477	$	(2,414	)	$	165,505
T&M ⁽²⁾		—		7,537		43,481		—		—			51,018
Other		—		—		6,137		—		(1,413		)	4,724
	Total	$	37,943	$	96,424	$	88,230	$	2,477	$	(3,827	)	$	221,247



		2017
		Fabrication		Shipyard		Services		EPC		Eliminations			Total
Contract Type
Fixed-price and unit-rate ⁽¹⁾		$	57,880	$	47,787	$	28,465	$	198	$	(5,096	)	$	129,234
T&M ⁽²⁾		—		4,912		35,180		—		—			40,092
Other		—		—		1,800		—		(104		)	1,696
	Total	$	57,880	$	52,699	$	65,445	$	198	$	(5,200	)	$	171,022



		2016
		Fabrication		Shipyard		Services		EPC		Eliminations			Total
Contract Type
Fixed-price and unit-rate ⁽¹⁾		$	88,683	$	95,958	$	31,191	$	—	$	(3,062	)	$	212,770
T&M ⁽²⁾				13,544		58,882		—		—			72,426
Other		—		—		1,341		—		(211		)	1,130
	Total	$	88,683	$	109,502	$	91,414	$	—	$	(3,273	)	$	286,326

____________

(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.

Our fabricated structures are used worldwide by U.S. customers operating abroad and by foreign customers. Revenue associated with fabricated structures for delivery outside the U.S. accounted 0%, 0% and 14% of our revenue for 2018, 2017 and 2016, respectively.

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 December 31, 2018 (in thousands).



Segment	Performance Obligations at December 31, 2018
Fabrication	$	63,498
Shipyard ⁽¹⁾	259,644
Services	11,046
EPC	385
Total	$	334,573

_____________

(1) Amount excludes approximately $21.9 million of remaining performance obligations related to contracts for the construction of two MPSVs that are subject to dispute pursuant to a termination notice from our customer. See Note 11 for further discussion of these contracts.

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



Year	Total
2019	$	233,987
2020	81,464
2021	19,122
Total	$	334,573

Contracts Assets and Liabilities

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 in Note 1; however, customer invoicing is generally dependent upon predetermined billing terms, which could provide for customer payments in advance of performing the work, milestone billings based on the completion of certain phases of the work, or when services are provided. Revenue recognized in excess of amounts billed is reflected as contracts assets on our Balance Sheet. Amounts billed in excess of revenue recognized, and accrued contract losses, are reflected as contract liabilities on our Balance Sheet. Information with respect to uncompleted contracts at December 31, 2018 and 2017 is as follows (in thousands):



	December 31,
	2018			2017
Costs incurred on uncompleted contracts	$	253,871		$	266,902
Estimated profit (loss) earned to date	(35,470		)	(26,954		)
Prepaid subcontractor costs	2,368			—
Sub-total	220,769			239,948
Billings to date	(190,588		)	(224,329		)
Deferred revenue⁽¹⁾	(4,592		)	—
Total	$	25,589		$	15,619

______________


(1)	Deferred revenue is included within other noncurrent assets as further discussed below.

The above amounts are included in the accompanying Balance Sheet at December 31, 2018 and 2017 under the following captions (in thousands):



	December 31,
	2018			2017
Contract assets	$	29,982		$	28,373
Contract liabilities ^{(1), (2), (3)}	(16,845		)	(12,754		)
Sub-total	13,137			15,619
Contract assets, noncurrent ⁽¹⁾	12,452			—
Total	$	25,589		$	15,619

______________

(1)

The increase in contract liabilities compared to December 31, 2017, was primarily due to advance payments for two separate projects in our Fabrication and Shipyard Divisions, offset partially by the reclassification of accrued contract losses (included within contract liabilities) to other noncurrent assets. The accrued contract losses relate to our MPSV projects that are subject to dispute. In addition to the accrued contract losses that were reclassified to other noncurrent assets, contract assets and deferred revenue for these projects were also reclassified to other noncurrent assets, resulting in a net contract asset balance of $12.5 million for these projects within other noncurrent assets on our Balance Sheet at December 31, 2018. See Note 11 for further discussion of the dispute.


(2)	Revenue recognized during 2018 related to amounts included in our contract liabilities balance at December 31, 2017, was $5.1 million.


(3)	Contract liabilities at December 31, 2018 and 2017, includes accrued contract losses of $2.4 million and $7.6 million, respectively. See "Project Changes in Estimates" below for further discussion of our accrued contract losses.

Significant Customers

We are not dependent on any one customer, and the revenue derived from each customer varies from year to year based on new project awards for each customer. However, for 2018, 2017 and 2016, certain customers individually accounted for 10% or more of our consolidated revenue as follows (in thousands):



	December 31,
Customer	2018		2017		2016
A	$	49,123	$	21,781	*
B	25,873		*		*
C	23,279		*		*
D	*		44,724		*
E	*				65,981

_____________

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

Allowance for Doubtful Accounts

Our provision for bad debts for 2018, 2017 and 2016 was $30,000, $21,000 and $0.5 million, respectively. Our allowance for doubtful accounts at December 31, 2018 and 2017, was $0.4 million and $1.9 million, respectively. Our allowance at December 31, 2018 was primarily related to storage of a vessel for a customer within our Fabrication Division, and our allowance at December 31, 2017, was primarily related to work performed for an offshore drilling platform within our Fabrication Division which was fully reserved in 2016.

Changes in Project Estimates

Significant Changes in Project Estimates - The following summarizes our significant changes in estimated margins on our projects during 2018, 2017 and 2016.

For 2018, significant changes in estimated margins on projects resulted in an increase in our operating loss of $9.1 million ($2.4 million for our petrochemical module project within our Fabrication Division and $6.7 million for our ten harbor tug projects within our Shipyard Division).


•	The changes in estimates for the petrochemical module project were the result of increased costs associated primarily with subcontracted work scopes. The project was complete as of December 31, 2018.

•

The changes in estimates for the harbor tug projects were the result of increased forecast costs associated primarily with lower than anticipated craft labor productivity related to pipe installation and testing and extensions of schedule for the projects. The revised forecasts incorporate actual results obtained from the completion of the first harbor tug in the fourth quarter 2018 and the progress achieved on the second harbor tug which is scheduled for completion in the first quarter 2019. Our forecasts anticipate improved craft labor productivity with the completion of each subsequent vessel. The harbor tug projects were in a loss position at December 31, 2018 and our reserve for estimated losses on the projects totaled $2.1 million. The nine uncompleted vessels are scheduled to be completed at various dates ranging from the first quarter 2019 through 2020. If future craft labor productivity differs from our current estimates, we are unable to achieve our progress estimates, our schedules are further extended or the projects incur schedule liquidated damages, the projects would experience further losses.

For 2017, significant changes in estimated margins on our two multi-purpose service vessel (“MPSV”) projects resulted in an increase in our operating loss of $34.5 million for our Shipyard Division. The changes in estimates were the result of increased forecast costs associated primarily with complexities related to the installation of the power and communications systems and reductions in project price of $11.2 million for liquidated damages (representing the maximum amount of liquidated damages under the contracts) which are in dispute. The projects were in a loss position at December 31, 2018 and 2017. We are currently in a dispute with the customer regarding the two MPSV projects. As a result of our dispute and uncertainty with respect to the timing of resolution, all contract assets, accrued contract losses, and deferred revenue balances associated with the projects have been reclassified to other noncurrent assets, resulting in a net contract asset balance of $12.5 million for these projects within other noncurrent assets on our Balance Sheet at December 31, 2018. See Note 11 for further discussion of the dispute.

For 2016, individual projects with significant changes in estimated margins resulted in a decrease in our income from operations of $1.8 million. The changes in estimates were related to our Fabrication and Shipyard Divisions and the projects were complete as of December 31, 2018.