Quarterly report pursuant to Section 13 or 15(d)

Revenue

v3.10.0.1
Revenue
 3 Months Ended
Sep. 30, 2018
Revenue from Contract with Customer [Abstract]  
REVENUE
NOTE 2 – REVENUE
New Revenue Accounting Standard
Method and Impact of Adoption
The Company adopted ASC 606 on July 1, 2018 using the modified retrospective transition approach for all contracts completed and not completed as of the date of adoption. Under the modified retrospective transition approach, periods prior to the adoption date were not adjusted and continue to be reported in accordance with ASC 605. A cumulative effect of applying ASC 606 was recorded to beginning retained earnings to reflect the impact of all existing arrangements under ASC 606.
The net decrease to retained earnings of $21.0 million as of July 1, 2018 due to the adoption of ASC 606 was primarily related to the following items:
•
A decrease of approximately $97.0 million in retained earnings related to the deferral of estimated fair value of the warranty services provided with the Company’s products for which revenue will be recognized in future periods under ASC 606. Further, upon adoption of ASC 606, the Company will recognize the standard warranty for a majority of products as a separate performance obligation, while in prior periods, the Company accounted for the estimated warranty cost as a charge to costs of sales when revenue was recognized. This was partially offset by an increase in retained earnings of approximately $37.0 million related to reversal of standard warranty expense, which was charged to cost of revenues in prior periods.
•
An increase in retained earnings of approximately $26.0 million as a result of a change in the timing of transfer of control over products to the customers. Revenue under ASC 606 is expected to be recognized earlier than it would have been under legacy guidance primarily due to the Company’s assessment of timing of transfer of control.
The following table summarizes the effects of adopting ASC 606 on the Company’s condensed consolidated balance sheet as of September 30, 2018:
September 30, 2018 (In thousands)
As reported under
ASC 606
 
Prior to
adoption of
ASC 606
 
Effect of changes
ASSETS
 
 
 
 
 
Accounts receivable, net
$
602,210

 
$
614,476

 
$
(12,266
)
Other current assets
144,999

 
115,863

 
29,136

Deferred income taxes
222,107

 
199,326

 
22,781

LIABILITIES
 
 
 
 
 
Deferred system revenue
$
216,427

 
$
—

 
$
216,427

Deferred service revenue
166,254

 
58,984

 
107,270

Deferred system profit
—

 
330,622

 
(330,622
)
Other current liabilities
773,319

 
820,159

 
(46,840
)
Deferred service revenue, non-current
80,936

 
73,741

 
7,195

STOCKHOLDERS’ EQUITY
 
 
 
 
 
Retained earnings
$
1,027,370

 
$
941,162

 
$
86,208

Accumulated other comprehensive income (loss)
(56,167
)
 
(56,182
)
 
15



The following table summarizes the effects of adopting ASC 606 on the Company’s condensed consolidated statements of operations for the three months ended September 30, 2018:
Three months ended September 30, 2018 (In thousands, except per share amounts)
As reported under
ASC 606
 
Prior to
adoption of
ASC 606
 
Effect of changes
Revenues:
 
 
 
 
 
Product
$
829,227

 
$
700,673

 
$
128,554

Service
264,033

 
229,960

 
34,073

Costs and expenses:
 
 
 
 
 
Costs of revenues
381,387

 
341,874

 
39,513

Other expense (income), net
(10,025
)
—

(10,026
)
 
1

Provision for income taxes
31,624

 
15,934

 
15,690

Net income
$
395,944

 
$
288,521

 
$
107,423

Net income per share:
 
 
 
 
 
Basic
$
2.55

 
$
1.86

 
$
0.69

Diluted
$
2.54

 
$
1.85

 
$
0.69



Revenue recognized under ASC 606 is higher than it would have been under legacy guidance. This is primarily driven by the changes related to the accounting of standard warranty and our assessment of transfer of control.
Under ASC 606, revenue is recognized earlier than it would have been recognized under legacy guidance primarily due to the Company's assessment of timing of transfer of control. Additionally, the Company renders standard warranty coverage on its products for 12 months, providing labor and parts necessary to repair and maintain the products during the warranty period. Prior to adoption of ASC 606, the Company accounted for the estimated warranty cost as a charge to costs of sales when revenue was recognized. Upon adoption of ASC 606, the standard warranty for the majority of products is recognized as a separate performance obligation.

Contract Balances
 
As of
 
As of
 
 
 
 
(In thousands, except for percentage)
September 30, 2018
 
July 1, 2018
 
$ Change
 
% Change
Accounts receivable, net
$
602,210

 
$
635,878

 
$
(33,668
)
 
(5.29
)%
Contract assets
$
15,373

 
$
14,727

 
$
646

 
4.39
 %
Contract liabilities
$
463,617

 
$
556,691

 
$
(93,074
)
 
(16.72
)%

The Company’s payment terms and conditions vary by contract type, although terms generally include a requirement of payment of 70% to 90% of total contract consideration within 30 to 60 days of shipment, with the remainder payable within 30 days of acceptance. In instances where the timing of revenue recognition differs from the timing of invoicing, the Company has determined that its contracts generally do not include a significant financing component.
The change in contract assets during the three months ended September 30, 2018 is mainly due to $13.7 million of revenue recognized in excess of the amounts billed to the customers, partially offset by $13.0 million of contract assets reclassified to accounts receivable as the Company’s right to consideration for these contract assets became unconditional. Contract assets are included in Other current assets on the Company's condensed consolidated balance sheet.
During the three months ended September 30, 2018, the Company recognized revenue of $279.0 million that was included in contract liabilities as of July 1, 2018. This was partially offset by the value of products and services billed to customers for which control of the products and service has not transferred to the customers. Contract liabilities are included in current and non-current liabilities on the Company's condensed consolidated balance sheets.

Remaining Performance Obligations
As of September 30, 2018, the Company had $1.41 billion of remaining performance obligations, which represents the Company’s obligation to deliver products and services, and consists primarily of sales orders where written customer requests have been received. The Company expects to recognize approximately 5% to 15% of these performance obligations as revenue beyond the next twelve months, subject to risk of delays, pushouts, and cancellation by the customer, usually with limited or no penalties.
Refer to Note 17 “Segment Reporting and Geographic Information” for further information, including revenue by geographic region as well as significant product and service offering.
Practical expedient
The Company applies the following practical expedients:
•
The Company accounts for shipping and handling costs as activities to fulfill the promise to transfer the goods, instead of a promised service to its customer.
•
The Company has elected to not adjust the promised amount of consideration for the effects of a significant financing component as the Company expects, at contract inception, that the period between when the entity transfers a promised good or service to a customer and when the customer pays for that good or service will generally be one year or less.
•
The Company has elected to adopt the practical expedient for contract costs, specifically in relation to incremental costs of obtaining a contract. Costs to obtain a contract are not material, and the Company generally expenses such costs as incurred because the amortization period is one year or less.
•
The Company has elected to adopt the practical expedient for contract modifications, specifically to reflect the aggregate effect of all modifications that occur before July 1, 2018 in determining the transaction price, identifying the satisfied and unsatisfied performance obligations, and allocating the transaction price to the performance obligations.