REVENUE RECOGNITION

The initial impact of the adoption of the FASB Topic Revenue from Contracts with Customers, which was recognized in a cumulative catch-up adjustment on January 1, 2018, is illustrated below:



	January 1,		December 31,
	2018		2017
	(In thousands)
Assets:
Contracts in progress	$	260,932	$	420,628
Deferred Income Taxes	$	85,193	$	86,740
Liabilities:
Accrued liabilities – other	$	66,371	$	64,738
Advance billings on contracts	$	73,390	$	246,192
Stockholders' Equity:
Retained earnings	$	1,000,578	$	990,652

Within our Nuclear Operations Group segment, we continue to recognize revenue over time and now measure progress on performance obligations using a cost-to-cost method. Historically, we utilized man-hours or a cost-to-cost method to measure progress on certain performance obligations within this segment. The performance obligations identified for recognizing revenue are similar to our historical units of account. As a result of the change to a cost-to-cost method, the timing of revenue recognition on affected contracts, in the aggregate, results in the recognition of revenue and cost of operations earlier in the process of satisfying performance obligations. This change impacted the life-to-date revenue and cost of operations recognized on performance obligations, and the adjustment to capture the impact of the new revenue recognition standard was recorded as a cumulative catch-up adjustment in Retained earnings. The new standard also resulted in a reduction in both our Contracts in progress and Advance billings on contracts account balances as a result of measuring the asset and liability at the contract level. Historically, contract assets and liabilities were measured at the unit of account, which we concluded was at a lower level than that of the contract.

The impact of the adoption of the new revenue standard on our Nuclear Power Group and Nuclear Services Group segments was not material.

Contracts and Revenue Recognition

Nuclear Operations Group

Our Nuclear Operations Group segment recognizes revenue over time for the manufacturing of naval nuclear reactor components and fuel, submarine missile launch tubes and the downblending of high-enriched uranium. Certain of our contracts contain two or more different types of components, each of which we identify as a separate performance obligation. We recognize revenue using a cost-to-cost method to measure progress as control is continually transferred to the customer as we incur costs on the performance obligations. We allocate revenue to the individual performance obligations within contracts with multiple performance obligations based on the stand-alone selling price of the individual performance obligations.

Our fixed-price incentive fee contracts include incentives that we concluded to be variable consideration. The amount of the variable consideration to which we are entitled is dependent on our actual costs incurred on the performance obligation compared to the target costs for that performance obligation and subject to incentive price revisions included within the contracts. We include these incentive fees in revenue when there is sufficient evidence to determine that the variable consideration is not constrained. The remaining contracts typically have immaterial amounts of variable consideration and have a single performance obligation. Our estimates of variable consideration and total estimated costs at completion are determined through a detailed process based on historical performance and our expertise using the most likely method. Variations from estimated contract performance could result in a material effect on our financial condition and results of operations in future periods.

Our Nuclear Operations Group segment's contracts allow for billings as costs are incurred, subject to certain retainages on our fixed-price incentive fee contracts, that require milestones to be reached for the remaining consideration to be paid.

Nuclear Services Group

Our contracts within our Nuclear Services Group segment are primarily cost-plus service contracts on which we recognize revenue over time based on a cost-to-cost method, which is consistent with the structure of the billings associated with these contracts. Ownership continuously transfers to the customer as we perform the services. The contracts within this segment do not contain significant variable consideration and contain a single performance obligation. Certain of these contracts contain assurance warranties and/or provisions for liquidated damages, which are expected to have an immaterial impact on the contracts based on our historical experience.

Nuclear Power Group

Our Nuclear Power Group segment recognizes revenue over time using a cost-to-cost method for the manufacturing of large components, non-standard parts, fuel bundles and service contracts as control continually transfers to the customers. For standard parts, revenue is recognized at the point in time control transfers to the customer, which is consistent with the transfer of ownership. This segment generates revenue primarily from firm-fixed-price contracts that do not contain variable consideration as well as time-and-materials based contracts. Certain of these contracts contain assurance warranties and/or provisions for liquidated damages, which are expected to have an immaterial impact to the contracts based on our historical experience. We are entitled to payment on the majority of our Nuclear Power Group segment contracts when we achieve certain milestones related to our progress.

Disaggregated Revenues

Revenues by geographical area and customer type are as follows:



	Three Months Ended June 30, 2018									Six Months Ended June 30, 2018
	Nuclear Operations Group		Nuclear Services Group		Nuclear Power Group		Total			Nuclear Operations Group		Nuclear Services Group		Nuclear Power Group		Total
	(In thousands)
United States:
Government	$	327,896	$	28,174	$	—	$	356,070		$	644,527	$	54,055	$	—	$	698,582
Non-Government	3,849		3,910		327		8,086			3,849		7,087		587		11,523
	$	331,745	$	32,084	$	327	$	364,156		$	648,376	$	61,142	$	587	$	710,105
Canada:
Government	$	—	$	—	$	—	$	—		$	—	$	—	$	—	$	—
Non-Government	—		510		64,743		65,253			—		1,485		147,068		148,553
	$	—	$	510	$	64,743	$	65,253		$	—	$	1,485	$	147,068	$	148,553
Other:
Government	$	—	$	—	$	—	$	—		$	—	$	—	$	—	$	—
Non-Government	395		2		10,627		11,024			395		2		40,858		41,255
	$	395	$	2	$	10,627	$	11,024		$	395	$	2	$	40,858	$	41,255
Segment Revenues	$	332,140	$	32,596	$	75,697	440,433			$	648,771	$	62,629	$	188,513	899,913
Adjustments and Eliminations							(1,512		)							(3,529		)
Revenues							$	438,921								$	896,384

Revenues by timing of transfer of goods or services are as follows:



	Three Months Ended June 30, 2018									Six Months Ended June 30, 2018
	Nuclear Operations Group		Nuclear Services Group		Nuclear Power Group		Total			Nuclear Operations Group		Nuclear Services Group		Nuclear Power Group		Total
	(In thousands)
Over-time	$	332,140	$	32,596	$	69,324	$	434,060		$	648,771	$	62,629	$	174,433	$	885,833
Point-in-time	—		—		6,373		6,373			—		—		14,080		14,080
Segment Revenues	$	332,140	$	32,596	$	75,697	440,433			$	648,771	$	62,629	$	188,513	899,913
Adjustments and Eliminations							(1,512		)							(3,529		)
Revenues							$	438,921								$	896,384

Revenues by contract type are as follows:



	Three Months Ended June 30, 2018									Six Months Ended June 30, 2018
	Nuclear Operations Group		Nuclear Services Group		Nuclear Power Group		Total			Nuclear Operations Group		Nuclear Services Group		Nuclear Power Group		Total
	(In thousands)
Fixed-Price Incentive Fee	$	258,150	$	—	$	5,589	$	263,739		$	507,390	$	—	$	9,617	$	517,007
Firm-Fixed-Price	52,472		5,632		44,302		102,406			99,530		11,042		118,584		229,156
Cost-Plus Fee	21,450		26,086		—		47,536			41,683		50,039		45		91,767
Time-and-Materials	68		878		25,806		26,752			168		1,548		60,267		61,983
Segment Revenues	$	332,140	$	32,596	$	75,697	440,433			$	648,771	$	62,629	$	188,513	899,913
Adjustments and Eliminations							(1,512		)							(3,529		)
Revenues							$	438,921								$	896,384

Performance Obligations

As we progress on our contracts and the underlying performance obligations for which we recognize revenue over time, we refine our estimates of variable consideration and total estimated costs at completion, which impact the overall profitability on our contracts and performance obligations. Changes in these estimates result in the recognition of cumulative catch-up adjustments that impact our revenue and/or costs of contracts. During the six months ended June 30, 2018, we recognized net favorable changes in estimates that resulted in increases in revenue of $14.5 million. During the three months ended June 30, 2018, we identified rework issues related to non-nuclear components being produced within our Nuclear Operations Group segment. As we work to resolve these issues, we do not expect additional costs to have a material adverse effect on our consolidated financial condition, results of operations or cash flows.

Contract Assets and Liabilities

We include revenues and related costs incurred, plus accumulated contract costs that exceed amounts invoiced to customers under the terms of the contracts, in Contracts in progress. We include in Advance billings on contracts billings that exceed accumulated contract costs and revenues and costs recognized over time. Most long-term contracts contain provisions for progress payments. Our unbilled receivables do not contain an allowance for credit losses as we expect to invoice customers and collect all amounts for unbilled revenues. Changes in Contracts in progress and Advance billings on contracts are primarily driven by differences in the timing of revenue recognition and billings to our customers. During the six months ended June 30, 2018, our unbilled receivables increased $56.2 million, primarily as a result of revenue in excess of billings on certain firm-fixed-price contracts within our Nuclear Operations Group segment and the timing of milestone billings on large components and contracts started in 2018 within our Nuclear Power Group segment. Our fixed-price incentive fee contracts for our Nuclear Operations Group segment include provisions that result in an increase in retainages on contracts during the first and third quarters of the year, with larger payments made during the second and fourth quarters. Retainages also vary as a result of timing differences between incurring costs and achieving milestones that allow us to recover these amounts. This resulted in an increase in retainages on contracts from January 1 to June 30, 2018 as shown below:



	June 30,		January 1,
	2018		2018
	(In thousands)
Included in Contracts in progress:
Unbilled receivables	$	306,535	$	250,325
Included in Accounts receivable – trade, net:
Retainages	$	96,731	$	82,801
Included in Other Assets:
Retainages	$	1,626	$	1,669
Advance billings on contracts	$	77,775	$	73,390

During the six months ended June 30, 2018, we recognized $44.7 million of revenue that was in Advance billings on contracts at January 1, 2018.

Remaining Performance Obligations

Remaining performance obligations represent the dollar amount of revenue we expect to recognize in the future from performance obligations on contracts previously awarded and in progress. Of the June 30, 2018 remaining performance obligations on our contracts with customers, we expect to recognize revenues as follows:



	2018		2019		Thereafter		Total
	(In approximate millions)
Nuclear Operations Group	$	630	$	798	$	1,258	$	2,686
Nuclear Services Group	35		3		6		44
Nuclear Power Group	141		143		599		883
Total Remaining Performance Obligations	$	806	$	944	$	1,863	$	3,613

Historical Method

Prior to the adoption of FASB Topic Revenue from Contracts with Customers, we accounted for revenue under previous GAAP. In accordance with our adoption of the new revenue recognition standard utilizing the modified retrospective approach, we are required to disclose the impact on our financial statements on a line item basis.

A comparison of certain line items in our condensed consolidated balance sheet is shown below:



	June 30, 2018
	Current Method		Historical Method
	(In thousands)
Assets:
Contracts in progress	$	317,405	$	348,762
Deferred Income Taxes	$	84,868	$	85,295
Liabilities:
Accrued liabilities – other	$	48,377	$	45,572
Advance billings on contracts	$	77,775	$	121,902
Stockholders' Equity:
Retained earnings	$	1,097,665	$	1,088,127

Differences in the amounts above are primarily the result of the initial adoption of the new revenue recognition standard. Additional differences were caused by revenue under the current method being $9.2 million lower than the historical method as discussed below.

A comparison of certain line items in our condensed consolidated statements of income is shown below:



	Three Months Ended June 30, 2018				Six Months Ended June 30, 2018
	Current Method		Historical Method		Current Method		Historical Method
	(In thousands)
Revenues	$	438,921	$	440,103	$	896,384	$	905,633
Cost of operations	$	318,209	$	319,945	$	645,573	$	654,487
Operating Income	$	71,549	$	70,995	$	151,437	$	151,772
Provision for Income Taxes	$	18,493	$	18,311	$	37,096	$	37,043
Net Income	$	60,734	$	60,362	$	127,147	$	127,535

We recognized $1.2 million and $9.2 million less revenue under the current method compared to the historical method for the three and six months ended June 30, 2018, respectively. This was primarily driven by less progress being achieved on contracts as a result of using a cost-to-cost method for measuring progress under the current method as compared to man-hours or units of output under our historical method.