UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

The accompanying notes are an integral part of these financial statements.

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"), isWe are 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.capabilities for EPC projects. We are currently fabricatingrecently completed the fabrication of complex modules for the construction of a new petrochemical plant, and we completed the newbuild construction of a technologically-advanced OSV that we delivered after the end of our fiscal quarter on July 31, 2018. Current projects include the construction of ten harbor tug vessels and two multi-purpose serviceoffshore marine research vessels. We were recently awarded a contract for the construction of a towing, salvage and rescue ship for the U.S. Navy with options for seven additional vessels. In 2015, we 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"),GOM, one of the deepest production jackets in the GOM and the first SPAR hull 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 threefour operating divisions: Fabrication, ShipyardsShipyard, Services and Services.EPC. Our corporate headquarters is located in Houston, Texas, with fabrication facilities located in Houma, Jennings and Lake Charles, Louisiana. Our fabrication facilities in Aransas PassAs of the date of this Report, we have sold our Texas South Yard, and Ingleside,our Texas are currently being marketedNorth Yard is held 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.

The accompanying unaudited, consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”)GAAP for interim financial information,statements, 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 and six months ended June 30, 2017,2018, are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.2018.

The balance sheet at December 31, 2016,2017, 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 2017 Annual Report.

On April 20, 2018, we sold our Texas South Yard for $55.0 million, less selling costs of $1.5 million. We received approximately $52.7 million at closing, which was in addition to the $0.8 million of previously received earnest money. See further discussion of the sale of our Texas South Yard in Note 2. The net proceeds received rebuilt our liquidity, provided support for upcoming projects, our continued investment in our EPC Division and for other general corporate purposes. We continue to market our Texas North Yard and hope to have a negotiated contract for the year endedsale of our Texas North Yard in the near future.

As of December 31, 2016.2017, we had gross, federal net operating losses that are eligible for carryforward to offset future taxable income of $62.8 million, of which $4.0 million will expire on December 31, 2035. Our remaining federal net operating loss carryforwards will expire December 31, 2037. We have provided a valuation allowance to reserve for deferred tax assets if, based upon the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. As of June 30, 2018 and December 31, 2017, we had a valuation allowance of $1.4 million and $0.4 million, respectively offsetting our deferred tax assets.

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 guidanceTopic 606, as required, effective January 1, 2017, which2018. Our implementation included a detailed review of our significant contracts that were not substantially complete. We concluded that Topic 606 did not have an impact onthe timing of recognition of revenue from T&M contracts which is recognized as the work is performed and the costs are incurred at the contracted rates. Our evaluation concluded that revenue recognition from 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. Adoption of Topic 606, however, did require us to include contract labor amounts and certain costs from outside services within our measure of progress of percent complete in order to comply with Topic 606. Previously, we treated certain of these costs as "pass-through costs." Our assessment of these costs for the significant contracts in place at the time of adoption concluded that adoption of Topic 606 effective January 1, 2018, was immaterial to the consolidated financial position, resultsstatements and no cumulative adjustment was required. See Note 3 for further discussion regarding the adoption of operations and related disclosures.Topic 606.

In February 2016, the FASB issued ASU 2016-02, “Leases,” which requires lessees to record most leases on their balance sheetssheet 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 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.

On February 23, 2017,April 20, 2018, we closed the sale of 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 for a sale price of $55.0 million, less selling costs of $1.5 million. We received approximately $52.7 million at closing which was in Ingleside, Texas, is located on the northwest corner of the 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 accessaddition to the Gulf$0.8 million of Mexico. previously received earnest money. The net proceeds received rebuilt our liquidity, which provided support for projects, our ontinued investment in our EPC Division and for other general corporate purposes. We recognized a gain of approximately $3.9 million from the sale during the second quarter of 2018; however, we do not anticipate any material cash tax liability given our NOLs.

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 representrepresents excess capacity within our Fabrication division.Division. We continue to market our Texas North Yard with interested parties and hope to have a negotiated contract for the sale of our Texas North Yard in the near future.

net book value of property, plant and equipment for these assets was $104.8$1.9 million at June 30, 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.

A summary of the significant assets included in assets held for sale as of June 30, 2017, at2018, including our South Texas facilitiesNorth Yard and our Prospectthe Shipyard Division assets is as follows (in thousands):

The Company uses the percentage-of-completion accounting method for fabrication contracts. Revenueto recognize revenue from fixed-price or unit rateand 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

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 that are included in the direct costs of revenue associated with projects. Consequently, pass-throughservices. Pass-through costs are included in revenue but haveand direct costs of revenue with no impact on the gross profit realized for that particular period. Our pass-through

Revenue from T&M contracts is recognized as the work is performed, costs as a percentageare incurred at the contracted rates and when collection is reasonably assured. 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 for each period presented were as follows:

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 claimsliquidating damages that may not be resolved until the later stages of the contract or after the contract has been completed and delivery occurs. AtWe 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 six months ended June 30, 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 liquidated damages on projects which have been approved as to scope but not price. Duringin our Shipyard Division during the fourth quarter of 2017.

As discussed in Note 1, we adopted Topic 606 on January 1, 2018. The reported results for the three and six months ended June 30, 2016, we recorded2018, 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 loss of $488,000 for a single customerchange in accounting principle and requires enhanced disclosures related to the disaggregation of revenue onand 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, orders recognized in prior periodsmodify 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 were not recovered inthe significant inputs based upon labor hours most accurately reflects our final settlement withprimary profit generating activity as it best represents our efforts to construct the asset for our customer.

Our customers includeinclude: (1) major and large independent oil and gas companies, (2) petrochemical and industrial facilities, (3) marine companies and their contractors.contractors and (4) agencies of the U.S. Government. Of our contracts receivable balance at June 30, 2017, $18.02018, $12.3 million, or 47.4%38.4%, was with two customers.one customer. The significant projects for these two customersthis one customer consist of:of offshore services related to repair, installation and hook-up work within our Services Division.

As of June 30, 2017,2018, we included an allowance for bad debt of $1.3$0.9 million in our contract receivable balance which primarily relates to a customer within our Fabrication divisionDivision for the storage of an offshore drilling platform that was fully reserved in 2016.

On June 28, 2018, we agreed to a global settlement with our insurance carriers in the net bookamount of $15.4 million. In applying the settlement amounts, we allocated the claim amounts less agreed upon deductibles included in our settlement agreement to the respective groups of assets and reimbursement of costs incurred related to our storm preparation and clean-up. During the first quarter of 2018, management determined its intention was to sell the remaining Texas North Yard and related equipment and not to expend any of the insurance funds for repairs. As of June 30, 2018, we reviewed the remaining buildings and equipment at the Texas North Yard, and we impaired our Texas North Yard in total by $8.9 million, $5.1 million of which was previously recorded during the three months ended March 31, 2018, based upon our best estimate of the decline in the fair value of the asset groups to estimatesproperty and related equipment. We recorded a corresponding insurance recovery fully offsetting this amount. See further discussion of fair value less cost to sell andthe application of our Hurricane Harvey insurance recoveries in Note 2.

During the second quarter of 2018, we recorded an impairment of $389,000 for$0.6 million related to a piece of equipment that we sold during the third quarter of 2018. During the three months ended March 31, 2018, we recorded an impairment of $0.8 million related to a piece of equipment at our Texas North Yard that we intend to sell at auction. The impairments were calculated as management's estimated net proceeds from the sales less their net book values. During the six months ended June 30, 2017, we recorded an impairment of $0.4 related to the Shipyard Division assets held for sale at our Prospect shipyard. See Note 2. We had no assetssale. Our impairments represent level 3 fair value measurements.

NOTE 9 – COMMITMENTS AND CONTINGENCIES

During the third and fourth quarters of 2015, we recorded contract losses of $24.5 million relatedThe Company is subject to a decreasevarious routine legal proceedings in the contract price due to final weight re-measurementsnormal conduct of its business, primarily involving commercial claims, workers’ compensation claims, 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 andclaims for the three and six months ended June 30, 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. 

We received a notice of purported termination from a customer within our Shipyard Division related to the construction of two MPSVs. We dispute the purported termination and disagree with the customer’s reasons for reorganization under a negotiated, pre-packaged plan.same. Pending resolution of the dispute, all work has been stopped and the vessels and associated equipment and material are in our care and custody at our shipyard in Houma, Louisiana. The customer has petitionednotified our Surety of its intent to require completion of the Bankruptcy Court to accept our contracts forvessel under the two vessels we are constructing for them. As of June 30, 2017, approximately $4.6 million remained dueSurety's bond. We have notified and outstanding from our customer for the first vessel. The balance due to us for the second vessel upon completion and delivery is approximately $4.9 million.

NOTE 10 – SUBSEQUENT EVENTS

We are a leading fabricator of complex steel structures and marine vessels used in energy extraction and production, petrochemical and industrial facilities, power generation and 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 and two multi-purpose service vessels. We 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.operators and agencies of the United States Government. We operate and manage our business through four operating divisions: Fabrication, Shipyard, Services and EPC. Our corporate headquarters is located in Houston, Texas, with fabrication facilities located in Houma, Jennings and Lake Charles, Louisiana. As of the date of this Report, we have sold our Texas South Yard, and our Texas North Yard is held for sale.

OurBeginning in 2015 and through the date of this Report, we have implemented a number of initiatives to strategically reposition the Company to attract new customers, participate in the buildup of petrochemical facilities, pursue offshore wind markets, enter the EPC industry environment continuesand diversify our customers within our Shipyard Division. Additionally, we initiated efforts to be challengedrebuild liquidity, preserve cash and lower costs including reducing our workforce and, reducing the cash compensation paid to our directors and the salaries of our executive officers as lowwell as developing a plan to sell certain underutilized assets.

On April 20, 2018, we closed on the sale of our Texas South Yard for $55 million, less selling costs of $1.5 million. We received approximately $52.7 million at closing, which was in addition to the $0.8 million of previously received earnest money. The net proceeds received rebuilt our liquidity, provided support for upcoming projects, continued investment in our EPC Division and for other general corporate purposes. See Note 2 of the Notes to Consolidated Financial Statements for further discussion of the sale of our Texas South Yard. We recognized a gain on sale during the second quarter of 2018 related to this transaction of approximately $3.9 million. Completing the sale of the Texas South Yard was an important liquidity generating event and will facilitate the Company’s continued strategic repositioning from offshore oil and gas prices remain. While current oil pricesmarkets to a more diversified customer base. We continue to market our Texas North Yard and hope to have remained fairly stable,a negotiated contract for the sale of our customersTexas North Yard in the near future.

On August 25, 2017, buildings and equipment located at our South Texas Properties were damaged by Hurricane Harvey, which made landfall as a Category 4 hurricane. On June 28, 2018, we agreed to a global oilsettlement with our insurance carriers in the amount of $15.4 million. As of June 30, 2018, we had received payments totaling $8.2 million and gas industry continuethe remaining $7.2 million has been recorded as an insurance receivable on our Consolidated Balance Sheet as of June 30, 2018, which represents a non-cash change within our Consolidated Statement of Cash Flows related to limit capital spending relativeour insurance receivable. As of the date of this Report, we have received payment for the full settlement amount.

In applying the settlement, we allocated the claim amounts less agreed upon deductibles to the already reduced spending levels from 2015respective groups of assets and 2016. This has also negatively impacted the marinereimbursement of costs incurred included in our settlement agreement as follows:

Looking forward, our results of operations will be affected primarily by demand for our services and the overall number of projects in the nearmarket place. As discussed above, a significant portion of our historical customer base has been impacted by the continued level of exploration and development activity for oil and gas. We have implemented a number of initiatives to medium termstrategically reposition the Company to come fromattract new customers, participate in the buildup of petrochemical projectsfacilities, pursue offshore wind markets, enter the EPC industry and other non-upstream projects including government, passenger cruise vessels, transportationdiversify our customers within our Shipyard Division. The success of our initiatives to strategically reposition the Company and renewable energy.our future operations will be determined by:

We have seen improved bidding opportunities beginning incontinue to respond to the fourth quarter of 2016competitive forces within our industry and extending through the second quarter of 2017 primarily for our Fabrication and Shipyards divisions. Our Shipyards division has recently been awarded contracts for the construction of eight harbor tugs and one research vessel for Oregon State University, with the option for two more research vessels. We continue to actively compete for additional bidding opportunities andopportunities. We believe that we will be successful in obtaining new, additional backlog awards in 2017;2018 and 2019; however, management believes that even if we are successful in obtaining these awards there is an expected lag of several months before these awards will materialize into work at our facilities.materialize. While we have been successful in obtaining new backlog in recent months, primarily in our Shipyard and Services Divisions, these backlog awards were received during a period of competitive pricing with lowlower than desired margins. RevenueAdditionally, revenue from these awards will not be realized until later in 20172018 and into 2018.beyond.

We continueoperate in an environment that exposes our employees to respond to decreases in project activity by reducing our own discretionary spending. Since the beginningrisk of 2016, we have implemented wage adjustments along with employee benefitinjury, and overall cost reductions within all our divisions. We have reduced the level of our workforce based on booked work in all of our facilities and will continue to do so, as necessary. We have reduced our capital expenditures and continue to evaluate opportunities to rationalize assets that are either underutilized, under-performing or not expected to provide sufficient long-term value which include our South Texas assets as further discussed below.

For a discussion of critical accounting policies and estimates we use in the preparation of our Consolidated Financial Statements, refer to Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our 2017 Annual Report on Form 10-K for the year ended December 31, 2016.Report. There have been no changes in our evaluation of our critical accounting policies since December 31, 2016.2017.

Our backlog at June 30, 2017, and2018, as compared to December 31, 2016,2017, consisted of the following (in thousands, except for percentages):