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Revenue from Contracts with Customers | 3 Months Ended
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Mar. 31, 2018
Revenue from Contract with Customer [Abstract] |
Revenue from Contracts with Customers | Revenue from Contracts with Customers Accounting Policy On January 1, 2018, the Company adopted Accounting Standards Codification Topic 606 (ASC 606), Revenue from Contracts with Customers. This new guidance provides a five-step analysis of transactions to determine when and how revenue is recognized, and requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The following is the Company’s accounting policy as it relates to the new five-step analysis for revenue recognition:
1. | Identify the contract: The Company has determined that the contract with the customer is established when the customer purchase order is accepted or acknowledged. Long-term agreements (LTAs) are used by the Company and certain of its customers for its specialty materials, in the form of mill products, powders, parts and components, to reduce their supply uncertainty, which typically extend multiple years. While these LTAs generally define commercial terms including pricing, termination clauses and other contractual requirements, they do not represent the contract with the customer.
2. | Identify the performance obligation in the contract: When the Company accepts or acknowledges the customer purchase order, the type of good or service is defined on a line by line basis. Individual performance obligations are established by virtue of the individual line items identified on the sales order acknowledgment at the time of issuance. Generally, the Company’s revenue relates to the sale of goods and contains a single performance obligation for each distinct good. Conversion services that transform customer-owned inventory to a different dimension, product form, and/or changed mechanical properties are classified as “goods”.
3. | Determine the transaction price: Pricing is also defined on a sales order acknowledgment on a line item basis and includes an estimate of variable consideration when required by the terms of the individual customer contract. Variable consideration is when the selling price of the good is not known, or is subject to adjustment under certain conditions. Types of variable consideration that the Company typically has include volume discounts, customer rebates and surcharges. ATI also provides assurances that goods or services will meet the product specifications contained within the acknowledged customer contract. As such, returns and refunds reserves are estimated based upon past product line history or, at certain locations, on a claim by claim basis.
4. | Allocate the transaction price to the performance obligation: Since a customer contract generally contains only one performance obligation, this step of the analysis is generally not applicable to the Company.
5. | Recognize revenue when or as the performance obligation is satisfied: Performance obligations generally occur at a point in time and are satisfied when control passes to the customer. For most transactions, control passes at the time of shipment in accordance with agreed upon delivery terms. On occasion, shipping and handling charges occur after the customer obtains control of the good. When this occurs, the shipping and handling services are considered activities to fulfill the promise to transfer the good. This approach is consistent with our revenue recognition approach in prior years.
The Company has several customer agreements involving production of parts and components in the High Performance Materials and Components segment that require revenue to be recognized over time in accordance with the new guidance due to there being no alternative use for the product without significant economic loss and an enforceable right to payment including a normal profit margin from the customer in the event of contract termination. Over-time recognition was a change from the accounting for these products, which was point-in-time, prior to the adoption of the new standard. The Company uses an input method for determining the amount of revenue, and associated standard cost, to recognize over-time revenue, cost and gross margin for these customer agreements. The input methods used for these agreements include costs incurred and labor hours expended, both of which give an accurate representation of the progress made toward complete satisfaction of that particular performance obligation. Contract assets are recognized when ATI’s conditional right to consideration for goods or services have transferred to the customer. A conditional right indicates that additional performance obligations associated with the contract are yet to be satisfied. Contract assets are assessed separately for impairment purposes. If ATI’s right to consideration from the customer is unconditional, this asset is accounted for as a receivable and presented separately from other contract assets. A right is unconditional if nothing other than the passage of time is required before payment of that consideration is due. Performance obligations that are recognized as revenue at a point-in-time and are billed to the customer are recognized as accounts receivable. Payment terms vary from customer to customer depending upon credit worthiness, prior payment history and other credit considerations. Contract costs are the incremental costs of obtaining and fulfilling a contract (i.e., costs that would not have been incurred if the contract had not been obtained) to provide goods and services to customers. Contract costs for ATI largely consist of design and development costs for molds, dies and other tools that ATI will own and that will be used in producing the products under the supply arrangement. Contract costs are classified as non-current assets and amortized to expense on a systematic and rational basis over a period consistent with the transfer to the customer of the goods or services to which the asset relates. Contract liabilities are recognized when ATI has received consideration from a customer to transfer goods or services at a future point in time when the Company performs under the contract. Elements of variable consideration discussed above may be recorded as contract liabilities. In addition, progress billings and advance payments from customers for costs incurred to date are also reported as contract liabilities. Adoption Method and Impact The Company applied ASC 606 to all contracts not completed at January 1, 2018 and adopted the accounting standard using the modified retrospective method, with the cumulative effect of initially applying ASC 606 recognized at the beginning of the 2018 fiscal year. Comparative information has not been adjusted and continues to be reported under the previous accounting guidance. The Company recognized a $15.5 million increase to retained earnings at the beginning of the 2018 fiscal year for the cumulative effect of adoption of this standard, representing the favorable impact to prior results had the over-time revenue recognition for several customer agreements, as discussed above, been applied. Contract assets of $49.7 million were recorded, along with a $34.2 million reduction to work-in-process inventory as a result of the ASC 606 adoption using the modified retrospective method. A portion of the cumulative effect impact of over-time revenue recognition related to inventory that is valued utilizing the last-in, first-out (LIFO) costing methodology. As such, an $11.8 million adjustment to the LIFO inventory valuation balance was required, with an equal and offsetting adjustment to net realizable value (NRV) inventory reserves, resulting in no net cumulative effect retained earnings impact for LIFO using the modified retrospective adoption method. See Note 3 for further information on inventory. In addition, as a result of this over-time recognition of these customer agreements, first quarter 2018 sales and cost of sales on the consolidated statement of income were $0.8 million higher and $1.0 million lower, respectively, as compared to what those amounts would have been under the previous revenue recognition guidance. On the consolidated balance sheet, inventories, net, were $1.0 million higher at March 31, 2018 as compared to what this amount would have been under the previous guidance. Also, $50.5 million of contract assets were recognized on the consolidated balance sheet at March 31, 2018 ($34.4 million in short-term contract assets and $16.1 million in long-term contract assets) related to this over-time revenue recognition. Also, as of January 1, 2018, amounts related largely to cash in advance from customers and progress billings were reclassified on the consolidated balance sheet to contract assets and liabilities in accordance with the new accounting guidance. Such reclassification resulted in a $3.9 million increase in accounts receivable, $28.8 million increase in inventories, net, $44.8 million decrease in accrued liabilities, and $10.7 million decrease in other-long term liabilities on January 1, 2018, with an offsetting increase in contract assets and liabilities ($3.7 million in short-term contracts assets, $69.7 million in short-term contract liabilities and $22.2 million in other long-term liabilities). There was no impact to cash flow from operating activities on the consolidated statement of cash flows as a result of this accounting standard adoption. As of March 31, 2018, accounts receivable were higher by $4.3 million, inventories were higher by $23.5 million, accrued liabilities were lower by $43.6 million, and other long-term liabilities were lower by $10.3 million due to these reclassifications to contract assets and liabilities ($4.2 million in short-term contract assets, $66.2 million short-term contract liabilities and $19.7 million in long-term contract liabilities). Disaggregation of Revenue The Company operates in two business segments; High Performance Materials & Components (HPMC) and Flat Rolled Products (FRP). Revenue is disaggregated within these two business segments by diversified global markets, primary geographical markets, and diversified products. Comparative information of the Company’s overall revenues (in millions) by global and geographical markets for the quarters ended March 31, 2018 and 2017 were as follows:
(in millions) |  | First quarter ended
|  | March 31, 2018 |  | March 31, 2017
|  | HPMC | FRP | Total |  | HPMC | FRP | Total
Diversified Global Markets: |  |  |  |  |  |  |  |
Aerospace & Defense |  | $ | 426.7 |  | $ | 35.7 |  | $ | 462.4 |  |  | $ | 381.4 |  | $ | 35.8 |  | $ | 417.2 |
Oil & Gas |  | 15.2 |  | 137.5 |  | 152.7 |  |  | 16.5 |  | 76.3 |  | 92.8 |
Automotive |  | 2.6 |  | 76.5 |  | 79.1 |  |  | 2.0 |  | 73.9 |  | 75.9 |
Electrical Energy |  | 30.8 |  | 21.4 |  | 52.2 |  |  | 29.6 |  | 22.0 |  | 51.6 |
Medical |  | 41.2 |  | 3.7 |  | 44.9 |  |  | 47.1 |  | 3.1 |  | 50.2 |
Total Key Markets |  | 516.5 |  | 274.8 |  | 791.3 |  |  | 476.6 |  | 211.1 |  | 687.7 |
Food Equipment & Appliances |  | 0.1 |  | 58.8 |  | 58.9 |  |  | 0.3 |  | 58.7 |  | 59.0 |
Construction/Mining |  | 17.6 |  | 38.0 |  | 55.6 |  |  | 11.5 |  | 38.5 |  | 50.0 |
Electronics/Computers/Communications |  | 1.5 |  | 31.4 |  | 32.9 |  |  | 1.2 |  | 33.3 |  | 34.5 |
Other |  | 25.0 |  | 15.3 |  | 40.3 |  |  | 20.8 |  | 13.9 |  | 34.7 |
Total |  | $ | 560.7 |  | $ | 418.3 |  | $ | 979.0 |  |  | $ | 510.4 |  | $ | 355.5 |  | $ | 865.9 |
(in millions) |  | First quarter ended
|  | March 31, 2018 |  | March 31, 2017
|  | HPMC | FRP | Total |  | HPMC | FRP | Total
Primary Geographical Market: |  |  |  |  |  |  |  |
United States |  | $ | 289.8 |  | $ | 264.5 |  | $ | 554.3 |  |  | $ | 275.2 |  | $ | 249.8 |  | $ | 525.0 |
Europe |  | 197.0 |  | 28.5 |  | 225.5 |  |  | 161.0 |  | 25.4 |  | 186.4 |
Asia |  | 48.3 |  | 102.5 |  | 150.8 |  |  | 42.1 |  | 60.6 |  | 102.7 |
Canada |  | 16.6 |  | 10.6 |  | 27.2 |  |  | 17.1 |  | 6.8 |  | 23.9 |
South America, Middle East and other |  | 9.0 |  | 12.2 |  | 21.2 |  |  | 15.0 |  | 12.9 |  | 27.9 |
Total |  | $ | 560.7 |  | $ | 418.3 |  | $ | 979.0 |  |  | $ | 510.4 |  | $ | 355.5 |  | $ | 865.9 |
Comparative information of the Company’s major high-value and standard products based on their percentages of total sales is as follows:
|  | First quarter ended
|  | March 31, 2018 |  | March 31, 2017
|  | HPMC | FRP | Total |  | HPMC | FRP | Total
Diversified Products and Services: |  |  |  |  |  |  |  |
High-Value Products |  |  |  |  |  |  |  |
Nickel-based alloys and specialty alloys |  | 29 | % | 31 | % | 29 | % |  | 30 | % | 20 | % | 26 | %
Precision forgings, castings and components |  | 38 | % | — | % | 21 | % |  | 31 | % | — | % | 18 | %
Titanium and titanium-based alloys |  | 24 | % | 5 | % | 16 | % |  | 28 | % | 4 | % | 18 | %
Precision and engineered strip |  | — | % | 31 | % | 13 | % |  | — | % | 35 | % | 14 | %
Zirconium and related alloys |  | 9 | % | — | % | 5 | % |  | 11 | % | — | % | 6 | %
Total High-Value Products |  | 100 | % | 67 | % | 84 | % |  | 100 | % | 59 | % | 82 | %
Standard Products |  |  |  |  |  |  |  |
Stainless steel sheet |  | — | % | 20 | % | 9 | % |  | — | % | 24 | % | 10 | %
Specialty stainless sheet |  | — | % | 9 | % | 4 | % |  | — | % | 12 | % | 5 | %
Stainless steel plate and other |  | — | % | 4 | % | 3 | % |  | — | % | 5 | % | 3 | %
Total Standard Products |  | — | % | 33 | % | 16 | % |  | — | % | 41 | % | 18 | %
Total |  | 100 | % | 100 | % | 100 | % |  | 100 | % | 100 | % | 100 | %
The Company maintains a backlog of confirmed orders totaling $2.05 billion and $1.84 billion at March 31, 2018 and 2017, respectively. Due to the structure of the Company’s LTAs, 77% of this backlog represents booked orders with performance obligations that will be satisfied within the next twelve months. The backlog does not reflect any elements of variable consideration. Contract balances As of March 31, 2018 and December 31, 2017, accounts receivable with customers were $611.6 million and $550.9 million, respectively. The following represents the rollforward of accounts receivable - reserve for doubtful accounts and contract assets and liabilities for the first quarter ended March 31, 2018:
(in millions)
Accounts Receivable - Reserve for Doubtful Accounts
Balance as of January 1, 2018 | $ | 5.9 |
Expense to increase the reserve | (0.3 | )
Write-off of uncollectible accounts | 0.3 |
Balance as of March 31, 2018 | $ | 5.9 |
(in millions)
Contract Assets
Short-term
Balance as of January 1, 2018 | $ | 36.5 |
Recognized in current year | 23.4 |
Reclassified to accounts receivable | (22.1 | )
Impairment | — |
Reclassification to/from long-term | 0.8 |
Balance as of March 31, 2018 | $ | 38.6 |
Long-term
Balance as of January 1, 2018 | $ | 16.9 |
Recognized in current year | — |
Reclassified to accounts receivable | — |
Impairment | — |
Reclassification to/from short-term | (0.8 | )
Balance as of March 31, 2018 | $ | 16.1 |
(in millions)
Contract Liabilities
Short-term
Balance as of January 1, 2018 | $ | 69.7 |
Recognized in current year | 8.4 |
Amounts in beginning balance reclassified to revenue | (14.1 | )
Current year amounts reclassified to revenue | (0.3 | )
Other | — |
Reclassification to/from long-term | 2.5 |
Balance as of March 31, 2018 | $ | 66.2 |
Long-term
Balance as of January 1, 2018 | $ | 22.2 |
Recognized in current year | 0.2 |
Amounts in beginning balance reclassified to revenue | (0.2 | )
Current year amounts reclassified to revenue | — |
Other | — |
Reclassification to/from short-term | (2.5 | )
Balance as of March 31, 2018 | $ | 19.7 |
Contract costs for obtaining and fulfilling a contract were $5.4 million as of March 31, 2018, which are reported in other long-term assets on the consolidated balance sheet. Amortization expense for the first quarter ended March 31, 2018 of these contract costs was $0.3 million.

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- Definition The entire disclosure of revenue from contract with customer to transfer good or service and to transfer nonfinancial asset. Includes, but is not limited to, disaggregation of revenue, credit loss recognized from contract with customer, judgment and change in judgment related to contract with customer, and asset recognized from cost incurred to obtain or fulfill contract with customer. Excludes insurance and lease contracts. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 235 -URI http://asc.fasb.org/topic&trid=2122369 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 606 -URI http://asc.fasb.org/topic&trid=49130388 + Details
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