REVENUE

The majority of our revenue is from long-term contracts associated with designing and manufacturing products and systems and providing services to customers involved in exploration and production of crude oil and natural gas. On January 1, 2018, we adopted ASC Topic 606 of GAAP using the modified retrospective method applied to those contracts that were not completed as of January 1, 2018 resulting in a $91.5 million reduction to retained earnings. Results for reporting periods beginning after January 1, 2018 are presented under ASC Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under Topic 605.

Significant Revenue Recognition Criteria Explained

Allocation of transaction price to performance obligations - A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue, when, or as, the performance obligation is satisfied. To determine the proper revenue recognition method, we evaluate whether two or more contracts should be combined and accounted for as one single contract and whether the combined or single contract should be accounted for as more than one performance obligation. This evaluation requires significant judgment; some of our contracts have a single performance obligation as the promise to transfer the individual goods or services is not separately identifiable from other promises in the contracts and, therefore, not distinct. For contracts with multiple performance obligations, we allocate the contract’s transaction price to each performance obligation using our best estimate of the standalone selling price of each distinct good or service in the contract.

Variable consideration - Due to the nature of the work required to be performed on many of our performance obligations, the estimation of total revenue and cost at completion is complex, subject to many variables and requires significant judgment. It is common for our long-term contracts to contain variable considerations that can either increase or decrease the transaction price. Variability in the transaction price arises primarily due to liquidated damages. The Company considers its experience with similar transactions and expectations regarding the contract in estimating the amount of variable consideration to which it will be entitled, and determining whether the estimated variable consideration should be constrained. We include estimated amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. Our estimates of variable consideration are based largely on an assessment of our anticipated performance and all information (historical, current and forecasted) that is reasonably available to us.

Payment terms - Progress billings are generally issued upon completion of certain phases of the work as stipulated in the contract. Payment terms may either be fixed, lump-sum or driven by time and materials (e.g., daily or hourly rates, plus materials). Because typically the customer retains a small portion of the contract price until completion of the contract, our contracts generally result in revenue recognized in excess of billings which we present as contract assets on the balance sheet. Amounts billed and due from our customers are classified as receivables on the balance sheet. The portion of the payments retained by the customer until final contract settlement is not considered a significant financing component because the intent is to protect the customer. For some contracts, we may be entitled to receive an advance payment. We recognize a liability for these advance payments in excess of revenue recognized and present it as contract liabilities on the balance sheet. The advance payment typically is not considered a significant financing component because it is used to meet working capital demands that can be higher in the early stages of a contract and to protect us from the other party failing to adequately complete some or all of its obligations under the contract.

Warranty - Certain contracts include an assurance-type warranty clause, typically between 18 to 36 months, to guarantee that the products comply with agreed specifications. A service-type warranty may also be provided to the customer; in such a case, management allocates a portion of the transaction price to the warranty based on the estimated stand-alone selling price of the service-type warranty.

Revenue recognized over time - Our performance obligations are satisfied over time as work progresses or at a point in time. Revenue from products and services transferred to customers over time accounted for approximately 83.3% and 83.1% of our revenue for the three and nine months ended September 30, 2018, respectively. Typically, revenue is recognized over time using an input measure (e.g., costs incurred to date relative to total estimated costs at completion) to measure progress.

Cost-to-cost method - For our long-term contracts, because of control transferring over time, revenue is recognized based on the extent of progress towards completion of the performance obligation. Upon adoption of the new standard we generally use the cost-to-cost measure of progress for our contracts because it best depicts the transfer of control to the customer which occurs as we incur costs on our contracts. Under the cost-to-cost measure of progress, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation. Revenues, including estimated fees or profits, are recorded proportionally as costs are incurred. Any expected losses on construction-type contracts in progress are charged to earnings, in total, in the period the losses are identified.

Right to invoice practical expedient - The right-to-invoice practical expedient can be applied to a performance obligation satisfied over time if we have a right to invoice the customer for an amount that corresponds directly with the value transferred to the customer for our performance completed to date. When this practical expedient is used, we do not estimate variable consideration at the inception of the contract to determine the transaction price or for disclosure purposes. We have contracts which have payment terms dictated by daily or hourly rates where some contracts may have mixed pricing terms which include a fixed fee portion. For contracts in which we charge the customer a fixed rate based on the time or materials spent during the project that correspond to the value transferred to the customer, we recognize revenue in the amount to which we have the right to invoice.

Contract modifications - Contracts are often modified to account for changes in contract specifications and requirements. We consider contract modifications to exist when the modification either creates new, or changes the existing, enforceable rights and obligations. Most of our contract modifications are for goods or services that are not distinct from the existing contract due to the significant integration service provided in the context of the contract and are accounted for as if they were part of that existing contract. The effect of a contract modification on the transaction price and our measure of progress for the performance obligation to which it relates is recognized as an adjustment to revenue (either as an increase in or a reduction of revenue) on a cumulative catch-up basis.

Revenue Recognition by Segment

The following is a description of principal activities separated by reportable segments from which the Company generates its revenue. See Note 5 to our condensed consolidated financial statements of this Quarterly Report for more detailed information about reportable segments.


a.	Subsea

Our Subsea segment manufactures and designs products and systems, performs engineering, procurement and project management and provides services used by oil and gas companies involved in offshore exploration and production of crude oil and natural gas. Systems and services may be sold separately or as combined integrated systems and services offered within one contract. Many of the systems and products the Company supplies for subsea applications are highly engineered to meet the unique demands of our customers’ field properties and are typically ordered one to two years prior to installation. We often receive advance payments and progress billings from our customers in order to fund initial development and working capital requirements.

Under Subsea engineering, procurement, construction and installation contracts, revenue is principally generated from long-term contracts with customers. We have determined these contracts generally have one performance obligation as the delivered product is highly customized to customer and field specifications. We generally recognize revenue over time for such contracts as the customized products do not have an alternative use for the Company and we have an enforceable right to payment plus a reasonable profit for performance completed to date.

Our Subsea segment also performs an array of subsea services including (i) installation services, (ii) asset management services (iii) product optimization, (iv) inspection, maintenance and repair services, and (v) well access and intervention services, where revenue is generally earned through the execution of either installation-type or maintenance-type contracts. For either contract-type, management has determined that the performance of the service generally represents one single performance obligation. We have determined that revenue from these contracts is recognized over time as the customer simultaneously receives and consumes the benefit of the services.


b.	Onshore/Offshore

Our Onshore/Offshore segment designs and builds onshore facilities related to the production, treatment, transformation and transportation of oil and gas; and designs, manufactures and installs fixed and floating platforms for the offshore production and processing of oil and gas reserves.

Our onshore business combines the design, engineering, procurement, construction and project management of the entire range of onshore facilities. Our onshore activity covers all types of onshore facilities related to the production, treatment and transportation of oil and gas, as well as transformation with petrochemicals such as ethylene, polymers and fertilizers. Some of the onshore activities include the development of onshore fields, refining, natural gas treatment and liquefaction, and design and construction of hydrogen and synthesis gas production units.

Many of these contracts provide a combination of engineering, procurement, construction, project management and installation services, which may last several years. We have determined that contracts of this nature have generally one performance obligation. In these contracts, the final product is highly customized to the specifications of the field and the customer’s requirements. Therefore, the customer obtains control of the asset over time, and thus revenue is recognized over time.

Our offshore business combines the design, engineering, procurement, construction and project management within the entire range of fixed and floating offshore oil and gas facilities, many of which were the first of their kind, including the development of floating liquefied natural gas (“FLNG”) facilities. Similar to onshore contracts, contracts grouped under this segment provide a combination of services, which may last several years.

We have determined that contracts of this nature have one performance obligation. In these contracts, the final product is highly customized to the specifications of the field and the customer’s requirements. We have determined that the customer obtains control of the asset over time, and thus revenue is recognized over time as the customized products do not have an alternative use for us and we have an enforceable right to payment plus reasonable profit for performance completed to date.


c.	Surface Technologies

Our Surface Technologies segment designs, manufactures and supplies technologically advanced wellhead systems and high pressure valves and pumps used in stimulation activities for oilfield service companies and provides installation, flowback and other services for exploration and production companies.

We provide a full range of drilling, completion and production wellhead systems for both standard and custom-engineered applications. Under pressure control product contracts, we design and manufacture flowline products, under the Weco®/Chiksan® trademarks, articulating frac arm manifold trailers, well service pumps, compact valves and reciprocating pumps used in well completion and stimulation activities by major oilfield service companies. Performance obligations within these systems are satisfied either through delivery of a standardized product or equipment or the delivery of a customized product or equipment.

For contracts with a standardized product or equipment performance obligation, management has determined that because there is limited customization to products sold within such contracts and the asset delivered can be resold to another customer, revenue should be recognized as of a point in time, upon transfer of control to the customer and after the customer acceptance provisions have been met.

For contracts with a customized product or equipment performance obligation, the revenue is recognized over time, as the manufacturing of our product does not create an asset with an alternative use for us.

This segment also designs, manufactures and services measurement products globally. Contract-types include standard product or equipment and maintenance-type services where we have determined that each contract under this product line represents one performance obligation.

Revenue from standard measurement equipment contracts is recognized at a point in time, while maintenance-type contracts are typically priced at a daily or hourly rate. We have determined that revenue for these contracts is recognized over time because the customer simultaneously receives and consumes the benefit of the services.

Disaggregation of Revenue

The Company disaggregates revenue by geographic location and contract types. The tables also include a reconciliation of the disaggregated revenue with the reportable segments.

The following tables present products and services revenue by geography for each reportable segment for the three and nine months ended September 30, 2018:



	Reportable Segments
	Three Months Ended						Nine Months Ended
	September 30, 2018						September 30, 2018
(In millions)	Subsea		Onshore/Offshore		Surface Technologies		Subsea		Onshore/Offshore		Surface Technologies
Europe, Russia, Central Asia	$	421.4	$	831.5	$	66.0	$	1,136.3	$	2,537.9	$	172.5
America	437.4		89.4		208.3		1,219.3		253.0		653.3
Asia Pacific	118.2		300.6		34.1		368.1		906.5		85.9
Africa	162.5		54.8		16.3		703.9		202.3		43.4
Middle East	38.8		256.2		47.6		89.1		548.6		146.4
Total products and services revenue	$	1,178.3	$	1,532.5	$	372.3	$	3,516.7	$	4,448.3	$	1,101.5

The following tables represent revenue by contract type for each reportable segment for the three and nine months ended September 30, 2018:



	Reportable Segments
	Three Months Ended						Nine Months Ended
	September 30, 2018						September 30, 2018
(In millions)	Subsea		Onshore/Offshore		Surface Technologies		Subsea		Onshore/Offshore		Surface Technologies
Services	$	885.2	$	1,532.5	$	70.2	$	2,525.9	$	4,448.3	$	185.0
Products	293.1		—		302.1		990.8		—		916.5
Total products and services revenue	1,178.3		1,532.5		372.3		3,516.7		4,448.3		1,101.5
Lease and other^(a)	30.8		—		29.9		90.0		—		73.4
Total revenue	$	1,209.1	$	1,532.5	$	402.2	$	3,606.7	$	4,448.3	$	1,174.9


(a)	Represents revenue not subject to ASC Topic 606.

Contract Balances

The timing of revenue recognition, billings and cash collections results in billed accounts receivable, costs and estimated earnings in excess of billings on uncompleted contracts (contract assets), and billings in excess of costs and estimated earnings on uncompleted contracts (contract liabilities) on the consolidated balance sheets.

Contract Assets - Contract Assets, previously disclosed as costs and estimated earnings in excess of billings on uncompleted contracts, include unbilled amounts typically resulting from sales under long-term contracts when revenue is recognized over time and revenue recognized exceeds the amount billed to the customer, and right to payment is not just subject to the passage of time. Amounts may not exceed their net realizable value. Costs and estimated earnings in excess of billings on uncompleted contracts are generally classified as current.

Contract Liabilities - We sometimes receive advances or deposits from our customers, before revenue is recognized, resulting in contract liabilities. We classify contract liabilities as current or noncurrent based on the timing of when we expect to recognize revenue.

The following table provides information about net contract assets (liabilities) as of September 30, 2018 and December 31, 2017:



(In millions)	September 30, 2018			December 31, 2017			$ change			% change
Contract assets	$	1,286.9		$	1,755.5		$	(468.6	)	(26.7	)
Contract (liabilities)	(3,711.9		)	(3,314.2		)	(397.7		)	(12.0	)
Net contract assets (liabilities)	$	(2,425.0	)	$	(1,558.7	)	$	(866.3	)	(55.6	)

The majority of the change in net contract assets (liabilities) was due to the adoption of ASC Topic 606. The adoption resulted in a net reclassification from net contract assets (liabilities) to trade receivables. A difference exists in the presentation of trade receivables, contract assets and contract liabilities. Upon adoption of ASC Topic 606, we recognize trade receivables when we have the unconditional right to payment. Previously, we reported certain billed amounts on a net basis within contract assets and contract liabilities when the legal right of offset was present within the contract; therefore certain amounts that were previously reported in contract assets and contract liabilities have been reclassified to trade receivables as of September 30, 2018.

The remaining decrease not related to the adoption of ASC Topic 606 in our contract assets from December 31, 2017 to September 30, 2018 was primarily due to the timing of milestone payments, partially offset by an increase of $5.7 million in contract assets due to acquisitions.

The remaining increase not related to the adoption of ASC Topic 606 in our contract liabilities was primarily due to cash received, excluding amounts recognized as revenue during the period.

In order to determine revenue recognized in the period from contract liabilities, we first allocate revenue to the individual contract liability balance outstanding at the beginning of the period until the revenue exceeds that balance. Revenue recognized for the three and nine months ended September 30, 2018 that were included in the contract liabilities balance at December 31, 2017 was $678.1 million and $2,115.8 million, respectively.

In addition, net revenue recognized for the three and nine months ended September 30, 2018 from our performance obligations satisfied in previous periods has unfavorable impact of $66.4 million and favorable impact of $0.4 million, respectively. This primarily relates to the changes in the estimate of the stage of completion that impacted revenue.

Transaction Price Allocated to the Remaining Unsatisfied Performance Obligations

Remaining unsatisfied performance obligations (“RUPO” or “order backlog”) represent the transaction price for products and services for which we have a material right but work has not been performed. Transaction price of the RUPO includes the base transaction price, variable consideration and changes in transaction price. The RUPO table does not include contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed. The transaction price of RUPO related to unfilled, confirmed customer orders is estimated at each reporting date. As of September 30, 2018, the aggregate amount of the transaction price allocated to RUPO was $15,178.0 million. The Company expects to recognize revenue on approximately 66.9% of the RUPO through 2019 and 33.1% thereafter.

The following table details the RUPO for each business segment as of September 30, 2018:



(In millions)	2018		2019		Thereafter
Subsea	$	1,102.7	$	2,798.2	$	2,442.5
Onshore/Offshore	1,602.0		4,194.7		2,582.1
Surface Technologies	352.5		103.3		—
Total remaining unsatisfied performance obligations	$	3,057.2	$	7,096.2	$	5,024.6

Impact on Primary Financial Statements

The impact to revenues for the three and nine months ended September 30, 2018 was a decrease of $6.0 million and $16.9 million, respectively, as a result of applying ASC Topic 606. A difference between revenue recognized under ASC Topic 606 as compared to ASC Topic 605 exists for certain contracts in which physical progress was used as the measure of progress for which the cost-to-cost method best depicts the transfer of control to the customer.

Consolidated Statements of Income for the three and nine months ended September 30, 2018:



	Three Months Ended									Nine Months Ended
	September 30, 2018									September 30, 2018
(In millions, except per share data)	As reported			Effect of ASC Topic 606			Under ASC Topic 605			As reported			Effect of ASC Topic 606			Under ASC Topic 605
Revenue
Service revenue	$	2,487.9		$	5.4		$	2,493.3		$	7,159.2		$	19.0		$	7,178.2
Product revenue	595.2			0.6			595.8			1,907.3			(2.1		)	1,905.2
Lease and other revenue	60.7			—			60.7			163.4			—			163.4
Total revenue	3,143.8			6.0			3,149.8			9,229.9			16.9			9,246.8

Costs and expenses
Cost of service revenue	2,046.6			(2.4		)	2,044.2			5,846.0			(21.1		)	5,824.9
Cost of product revenue	481.0			1.3			482.3			1,559.9			0.4			1,560.3
Cost of lease and other revenue	30.9			—			30.9			99.4			—			99.4
Selling, general and administrative expense	250.6			—			250.6			835.1			—			835.1
Research and development expense	38.6			—			38.6			133.3			—			133.3
Impairment, restructuring and other expenses (Note 14)	9.7			—			9.7			32.6			—			32.6
Merger transaction and integration costs (Note 2)	6.3			—			6.3			20.9			—			20.9
Total costs and expenses	2,863.7			(1.1		)	2,862.6			8,527.2			(20.7		)	8,506.5

Other income (expense), net	10.4			—			10.4			(12.6		)	—			(12.6		)
Income from equity affiliates	16.4			—			16.4			70.6			—			70.6
Income before net interest expense and income taxes	306.9			7.1			314.0			760.7			37.6			798.3
Net interest expense	(106.0		)	—			(106.0		)	(244.3		)	—			(244.3		)
Income before income taxes	200.9			7.1			208.0			516.4			37.6			554.0
Provision for income taxes (Note 16)	66.7			(18.5		)	48.2			180.7			(5.3		)	175.4
Net income	134.2			25.6			159.8			335.7			42.9			378.6
Net loss attributable to noncontrolling interests	2.7			0.1			2.8			2.0			(0.4		)	1.6
Net income attributable to TechnipFMC plc	$	136.9		$	25.7		$	162.6		$	337.7		$	42.5		$	380.2

Consolidated Balance Sheets as of September 30, 2018:



	September 30, 2018
(In millions, except par value data)	As reported			Effect of ASC Topic 606			Under ASC Topic 605
Assets
Cash and cash equivalents	$	5,553.3		$	—		$	5,553.3
Trade receivables, net	2,079.3			(1,153.2		)	926.1
Contract assets	1,286.9			519.5			1,806.4
Inventories, net (Note 7)	1,171.0			23.4			1,194.4
Derivative financial instruments (Note 17)	97.0			—			97.0
Income taxes receivable	333.3			—			333.3
Advances paid to suppliers	211.5			—			211.5
Other current assets (Note 8)	830.9			—			830.9
Total current assets	11,563.2			(610.3		)	10,952.9
Investments in equity affiliates	360.3			—			360.3
Property, plant and equipment, net of accumulated depreciation	3,670.5			—			3,670.5
Goodwill	9,003.4			—			9,003.4
Intangible assets, net of accumulated amortization	1,223.1			—			1,223.1
Deferred income taxes	426.8			(13.9		)	412.9
Derivative financial instruments (Note 17)	80.0			—			80.0
Other assets	332.7			0.8			333.5
Total assets	$	26,660.0		$	(623.4	)	$	26,036.6

Liabilities and equity
Short-term debt and current portion of long-term debt (Note 11)	$	78.4		$	—		$	78.4
Accounts payable, trade	2,800.9			31.5			2,832.4
Contract liabilities	3,711.9			(757.3		)	2,954.6
Accrued payroll	375.5			—			375.5
Derivative financial instruments (Note 17)	92.1			—			92.1
Income taxes payable	208.2			4.9			213.1
Other current liabilities (Note 8)	1,435.8			(32.8		)	1,403.0
Total current liabilities	8,702.8			(753.7		)	7,949.1
Long-term debt, less current portion (Note 11)	4,017.1			—			4,017.1
Accrued pension and other post-retirement benefits, less current portion	230.1			—			230.1
Derivative financial instruments (Note 17)	81.2			—			81.2
Deferred income taxes	351.8			(4.0		)	347.8
Other liabilities	413.0			—			413.0
Total liabilities	13,796.0			(757.7		)	13,038.3
Commitments and contingent liabilities (Note 15)
Mezzanine equity
Redeemable noncontrolling interest	39.7			—			39.7
Stockholders’ equity (Note 12)
Ordinary shares	452.9			—			452.9
Ordinary shares held in employee benefit trust	(2.4		)	—			(2.4		)
Capital in excess of par value of ordinary shares	10,247.1			—			10,247.1
Retained earnings	3,421.1			134.0			3,555.1
Accumulated other comprehensive loss	(1,313.9		)	—			(1,313.9		)
Total TechnipFMC plc stockholders’ equity	12,804.8			134.0			12,938.8
Noncontrolling interests	19.5			0.3			19.8
Total equity	12,824.3			134.3			12,958.6
Total liabilities and equity	$	26,660.0		$	(623.4	)	$	26,036.6