Revenues | 3. Revenues As discussed in Note 2, the Company adopted ASC 606 as of January 1, 2018 using the modified retrospective method. The cumulative adjustment made to the January 1, 2018 consolidated balance sheet for the adoption of ASC 606 was to increase Retained earnings by $4.2 million, increase Total assets by $7.9 million and increase Total liabilities by $3.7 million. For the three months ended March 31, 2018, the effect of the changes in all financial statement line items impacted by ASC 606 was immaterial from the amount that would have been reported under the previous guidance. Updated disclosure of the Company’s significant accounting policy regarding revenue recognition is included in Part I, Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations of this Quarterly Report on Form 10-Q. Revenue is derived from products and services. The Company’s products are marketed and sold worldwide through two operating groups: EIG and EMG. EIG manufactures advanced instruments for the process, power and industrial, and aerospace markets. It provides process and analytical instruments for the oil and gas, petrochemical, pharmaceutical, semiconductor, automation, and food and beverage industries. EIG also provides instruments to the laboratory equipment, ultraprecision manufacturing, medical, and test and measurement markets. It makes power quality monitoring and metering devices, uninterruptible power supplies, programmable power equipment, electromagnetic compatibility test equipment and gas turbines sensors. EIG also provides dashboard instruments for heavy trucks and other vehicles, as well as instrumentation and controls for the food and beverage industries. It supplies the aerospace industry with aircraft and engine sensors, monitoring systems, power supplies, fuel and fluid measurement systems, and data acquisition systems. EMG is a differentiated supplier of automation solutions, thermal management systems, specialty metals and electrical interconnects. It manufactures highly engineered electrical connectors and electronic packaging used to protect sensitive electronic devices. EMG also makes precision motion control products for data storage, medical devices, business equipment, automation and other applications. It supplies high-purity powdered metals, strip and foil, specialty clad metals and metal matrix composites. EMG also manufactures motors used in commercial appliances, fitness equipment, food and beverage machines, hydraulic pumps and industrial blowers. It produces motor-blower systems and heat exchangers used in thermal management and other applications on a variety of military and commercial aircraft and military ground vehicles. EMG also operates a global network of aviation maintenance, repair and overhaul facilities. The majority of the Company’s revenues on product sales are recognized at a point in time when the customer obtains control of the product. The transfer in control of the product to the customer is typically evidenced by one or more of the following: the customer having legal title to the product, the Company’s present right to payment, the customer’s physical possession of the product, the customer accepting the product, or the customer has benefit of ownership or risk of loss. Legal title changes to the customer in accordance with the delivery terms of the order, usually upon shipment. For a small percentage of sales where title and risk of loss transfers at the point of delivery, the Company recognizes revenue upon delivery to the customer, assuming all other criteria for revenue recognition are met. Under ASC 606, the Company determined that revenues from certain of its customer contracts met the criteria of satisfying its performance obligations over time, primarily in the areas of the manufacture of custom-made equipment and for service repairs of customer-owned equipment. Prior to the adoption of the new standard, these revenues were recorded upon shipment or, in the case of those sales where title and risk of loss passes at the point of delivery, the Company recognized revenue upon delivery to the customer. Recognizing revenue over time for custom-manufactured equipment is based on the Company’s judgment that, in certain contracts, the product does not have an alternative use and the Company has an enforceable right to payment for performance completed to date. This change in revenue recognition accelerated the revenue recognition and costs on the impacted contracts. Applying the practical expedient available under ASC 606, the Company recognizes incremental cost of obtaining contracts as an expense when incurred if the amortization period of the assets that the Company would have otherwise recognized is one year or less. These costs are included in Selling, general and administrative expenses in the consolidated statement of income. Revenues associated with repairs of customer-owned assets were previously recorded upon completion and shipment of the repaired equipment to the customer. Under ASC 606, if the Company’s performance enhances an asset that the customer controls as the asset is enhanced, revenue must be recognized over time. The revenue associated with the repair of a customer-owned asset meets this criterion. The determination of the revenue to be recognized in a given period for performance obligations over time is based on the input method. The Company recognizes revenue over time as it performs on these contracts because the transfer of control to the customer occurs over time, revenue is recognized based on the extent of progress towards completion of the performance obligation. The Company generally uses the total cost-to-cost cost-to-cost Performance obligations also include service contracts, installation and training. Service contracts are recognized over the contract life. Installation and training revenues are recognized over the period the service is provided. Warranty terms in customer contracts can also be considered separate performance obligations if the warranty provides services beyond assurance that a product complies with agreed-upon specification or if a warranty can be purchased separately. The Company does not incur significant obligations for customer returns and refunds. Payment terms generally begin upon shipment of the product. The Company does have contracts with multiple billing terms that are all due within one year from when the product is delivered. As such, no significant financing component exists. Payment terms are generally 30-60 days The outstanding contract asset and (liability) accounts were as follows: March 31, 2018 Unbilled Revenues Customer Advanced Payments (In thousands) Balance at March 31, 2018 $ 41,722 $ (142,016 ) Revenues recognized during the period from: Amounts in Customer advanced payments 70,040 Performance obligations satisfied 31,282 Transferred to Receivables from contract assets at the beginning of the period (22,233 ) Increase due to cash received (95,294 ) Unbilled revenues at March 31, 2018 included approximately $14 million that was previously reported in current assets at December 31, 2017. Customer advanced payments at March 31, 2018 included amounts that were previously reported in accounts payable of approximately $76 million, accrued liabilities of approximately $26 million and other of approximately $12 million at December 31, 2017. Customer advanced payments includes $6.6 million, which is included in Other long-term liabilities. The aggregate amount of the expected future revenues allocated to performance obligations that are unsatisfied (“backlog”) as of March 31, 2018 was $1,568.3 million, of which approximately 90% is expected to be recognized as revenue within the next twelve months. The Company has certain contracts with variable consideration in the form of volume discounts, rebates and early payment options, which may affect the transaction price used as the basis for revenue recognition. In these contracts, the amount of the variable consideration is not considered constrained and is allocated among the various performance obligations in the customer contract based on the relative standalone selling price of each performance obligation to the total standalone value of all the performance obligations. Product Warranties The Company provides limited warranties in connection with the sale of its products. The warranty periods for products sold vary among the Company’s operations, but generally do not exceed one year. The Company calculates its warranty expense provision based on its historical warranty experience and adjustments are made periodically to reflect actual warranty expenses. Changes in the accrued product warranty obligation were as follows: Three Months Ended March 31, 2018 2017 (In thousands) Balance at the beginning of the period $ 22,872 $ 22,007 Accruals for warranties issued during the period 3,191 3,505 Settlements made during the period (3,710 ) (3,210 ) Warranty accruals related to acquired businesses and other during the period 233 1,470 Balance at the end of the period $ 22,586 $ 23,772 Product warranty obligations are reported as current liabilities in the consolidated balance sheet. Geographic Areas Information about the Company’s operations in different geographic areas is shown below. Net sales were attributed to geographic areas based on the location of the customer. Three Months Ended March 31, 2018 EIG EMG Total (In thousands) United States $ 329,076 $ 230,864 $ 559,940 International: United Kingdom 13,740 35,383 49,123 European Union countries 92,302 107,814 200,116 Asia 191,485 51,063 242,548 Other foreign countries 89,823 31,097 120,920 Total international 387,350 225,357 612,707 Consolidated net sales $ 716,426 $ 456,221 $ 1,172,647 Major Products and Services The Company’s major products and services in the reportable segments were as follows: Three Months Ended March 31, 2018 EIG EMG Total (In thousands) Process and analytical instrumentation $ 499,637 $ — $ 499,637 Aerospace and Power 216,789 108,657 325,446 Electromechanical devices — 347,564 347,564 Consolidated net sales $ 716,426 $ 456,221 $ 1,172,647 Timing of Revenue Recognition The Company’s timing of revenue recognition was as follows: Three Months Ended March 31, 2018 EIG EMG Total (In thousands) Goods transferred at a point in time $ 625,422 $ 429,082 $ 1,054,504 Products and services transferred over time 91,004 27,139 118,143 Consolidated net sales $ 716,426 $ 456,221 $ 1,172,647 Reportable Segments The Company’s EIG and EMG operating segments are identified based on the existence of segment managers. Certain of the Company’s operating segments have been aggregated for segment reporting purposes primarily on the basis of product type, production processes, distribution methods and similarity of economic characteristics. At March 31, 2018, there were no significant changes in identifiable assets of reportable segments from the amounts disclosed at December 31, 2017, other than those described in the acquisitions footnote (Note 9), nor were there any significant changes in the basis of segmentation or in the measurement of segment operating results. Operating information relating to the Company’s reportable segments for the three months ended March 31, 2018 and 2017 can be found in the table included in Part I, Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations of this Quarterly Report on Form 10-Q. |