NOTE 4 — REVENUE RECOGNITION

Impact of the Adoption of the New Accounting Standard

ASC Topic 606 outlines a single comprehensive model for entities to use in accounting for revenues arising from contracts with customers. The new standard supersedes most previous revenue recognition guidance, including industry-specific guidance.

Central to the new framework is a five-step revenue recognition model that requires reporting entities to:

Identify the contract,

Identify the performance obligations of the contract,

Determine the transaction price of the contract,

Allocate the transaction price to the performance obligations, and

Recognize revenue.

The new guidance focuses on the transfer of the contractor’s control of the goods and/or services to the customer, as opposed to the transfer of risk and rewards, and it also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenues and cash flows from contracts with customers. Major provisions cover the determination of which goods and services are distinct and represent separate performance obligations, the appropriate treatments for variable consideration (which may include change orders, claims, performance incentives and liquidated damages), and the evaluation of whether revenues should be recognized at a point in time or over time. Where a performance obligation is satisfied over time, the related revenues are also recognized over time.

The effect of the adoption of ASC Topic 606 on retained earnings as of February 1, 2018 was a net tax-effected increase of less than $0.1 million. The differences between the Company’s reported operating results for the three months ended April 30, 2018, which reflect the application of the new standard on the Company’s contracts, and the results that would have been reported if the accounting was performed pursuant to the accounting standards previously in effect, were not material.

In accordance with ASC Topic 606, the Company has reported balances for contract assets and contract liabilities in its condensed consolidated balance sheets as of April 30 and January 31, 2018. Contract assets are defined in the new standard to include amounts that represent the rights to receive payment for goods or services that have been transferred to the project owner, with the rights conditional upon something other than the passage of time. Contract liabilities are defined in the new standard to include the amounts that reflect obligations to provide goods or services for which payment has been received. Contract assets and liabilities related to rights and obligations in a contract are interdependent and are recorded net on a contract by contract basis. Accordingly, the amounts presented in prior condensed consolidated balance sheets that were identified as “costs and estimated earnings in excess of billings” and “billings in excess of costs and estimated earnings” are now reflected in the line items entitled “contract assets” and “contract liabilities,” respectively.

In addition, accounts receivable have been redefined to represent unconditional rights to receive payments which only require the passage of time. Accordingly, amounts retained by project owners that have been historically included in accounts receivable are now reflected in contract assets or contract liabilities depending on the net contract position of the particular contract. Amounts retained by project owners under construction contracts at April 30 and January 31, 2018 were $73.6 million and $69.7 million, respectively.

Further, the proper accounting for certain costs that may be incurred to obtain contracts or that may be incurred on contracts but not representing actual progress, has been altered. For example, significant costs that are typically incurred during the initial phases of a contract may no longer be charged to contract costs when incurred; such costs, identified as contract fulfillment costs, should be capitalized and amortized to contract costs over the contract performance period. The net balances for capitalized project costs as of April 30 and January 31, 2018 that are being charged to active contracts on an amortization basis were $1.2 million and $1.7 million, respectively. Costs incurred by the Company to obtain contracts have not been material historically.

Balances as of January 31, 2018 for the accounts identified below were recast in order to conform to the presentation as of April 30, 2018.

	Balances		Impact of the			Classification
	Reported Previously		Adoption of ASC Topic 606			Under ASC Topic 606

Accounts receivable, net	$	94,440	$	(69,684	)	$	24,756
Costs and estimated earnings in excess of billings	4,887		(4,887		)	—
Contract assets	—		13,847			13,847
Billings in excess of costs and estimated earnings	108,388		(108,388		)	—
Contract liabilities	—		47,613			47,613
Deferred taxes	1,279		13			1,293
Retained earnings	211,112		38			211,150

The change in contracts in progress, net, for the three months ended April 30, 2018 in the amount of $53.9 million represented primarily a decline of $47.1 million in the net amount of billings in excess of costs and estimated earnings during the period and an increase in customer retainages in the amount of $3.9 million. Regarding the presentation of net cash provided by operating activities for the three months ended April 30, 2017, the change in contracts in progress, net, represented the growth of $23.9 million in the net amount of billings in excess of costs and estimated earnings during the period, offset partially by an increase in customer retainages in the amount of $11.4 million. The changes in contract fulfillment costs during the periods were not material.

Update to Significant Accounting Policies

Upon adoption of ASC Topic 606, the Company revised its accounting policy on revenue recognition from the policy provided in the Notes to Consolidated Financial Statements included in the Company’s Form 10-K for the year ended January 31, 2018. The revised accounting policy for revenue recognition is provided below.

Revenues are recognized primarily under various types of long-term construction contracts, including those for which revenues are based on either a fixed price, time and materials or cost-plus-fee basis, and primarily over time as performance obligations are satisfied due to the continuous transfer of control to the project owner or other customer. Contracts typically have durations of three months to three years. Revenues from fixed price contracts, including a portion of estimated profit, are recognized as services are provided, based on costs incurred and estimated total contract costs using the percentage of completion method. However, costs incurred on a particular contract, related to materials or equipment items over which the corresponding project owner has yet to obtain control, shall be excluded from the measurement of progress toward the satisfaction of the corresponding performance obligation determined as of the report date. Revenues from time and materials contracts are recognized when the related services are provided to the customer. Revenues from cost-plus-fee construction contracts are recognized on the basis of costs incurred during the period plus the fee earned, measured using the cost-to-cost method.

Most of the Company’s long-term 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. Under previous revenue recognition guidance, the Company generally accounted for its long-term contracts as single units of account (i.e., a single performance obligation).

Historically, the Company has recognized adjustments in revenues and profits on contracts, including those associated with contract modifications and estimated cost changes, using a cumulative catch-up method as now required by the new standard. Under this method, the impact of the adjustment on revenues recorded to date is recognized in the period the adjustment is identified. Revenues and profits in future periods of contract performance are recognized using the adjusted estimate. As required by both prior and new guidance, if at any time the estimate of contract profitability indicates an anticipated loss on a contract, the Company will recognize the total loss in the quarter it is identified. For the three months ended April 30, 2018, the net impact on revenues of changes that the Company made to transaction prices (primarily the recognition of change orders) and to its estimates of the costs-to-complete active contracts was a reduction of approximately $4.6 million.

The timing of when the Company bills its customers is generally dependent upon advance billing terms, the achievement of certain contract milestones, the completion of certain other phases of the work, or when services are provided or products are shipped. Projects with performance obligations satisfied over time will typically have costs incurred and estimated earnings recognized to date in amounts different from the amounts of cumulative billings. As the rights and obligations in a contract are interdependent, the differences for each contract are combined with certain other asset and liability amounts related to each contract in order to determine the net contract asset or net contract liability amounts, on a contract-by-contract basis. These amounts are totaled at the report date and presented in the corresponding consolidated balance sheet as contract assets and contract liabilities.

Customer retainage amounts represent funds withheld by project owners until a defined phase of a contract or project has been completed and accepted by the project owner. Retention amounts and the length of retention periods may vary. Most of the amount outstanding as of April 30, 2018, related to active projects that will be collected during the fiscal year ending January 31, 2019. Retainage amounts related to active contracts are considered current assets regardless of the term of the applicable contract; such amounts are generally collected by the completion of the applicable contract. Costs charged to contracts include amounts billed to the Company for delivered goods and services where payments have been retained from subcontractors and suppliers. Retained amounts as of April 30 and January 31, 2018, which were included in the Company’s balance of accounts payable as of those dates, totaled $39.5 million and $38.7 million, respectively. Generally, such amounts are expected to be paid prior to the completion of the applicable project.

The transaction price for a contract represents the value of the corresponding contract used to determine the amount of revenues recognized as of the balance sheet date and may reflect amounts of variable consideration, which could include increases or decreases to the transaction price made from time-to-time during the period of contract performance due to changes in circumstances related to such items as approved and unapproved change orders, claims and incentives, and liquidated damages.

The Company estimates variable consideration at the most likely amount to which the Company expects to be entitled and includes variable consideration in the estimated transaction price to the extent it is probable that a significant reversal of cumulative revenues recognized on the particular contract will not occur when the uncertainty associated with the variable consideration is resolved. The Company’s determination of the amount of variable consideration to include in a transaction price is based largely on an assessment of the Company’s anticipated performance and all information (historical, current and forecasted) that is reasonably available. The amounts of any incentive fees based on the Company’s achievement of certain cost, performance or schedule objectives are included in transaction prices when the Company believes it is probable that such amounts will be earned. The effects of changes to transaction prices, due to the addition or reduction of variable consideration, on the amounts of previously recognized revenue amounts are recognized currently as adjustments to revenues on a cumulative catch-up basis. To the extent unpriced change orders reflected in transaction price are not resolved in the Company’s favor, or to the extent incentives reflected in transaction price are not earned, there could be reductions in, or reversals of, previously recognized revenues.

Unpriced change orders, which represent contract variations for which the Company has project-owner directive for additional work or other authorization for a scope change, but not for the price associated with the corresponding additional effort, are included in the transaction price and reflected in revenues when it is probable that the applicable costs will be recovered through a change in the contract price. The amounts of unpriced change orders included in transaction prices that were used to determine project-to-date revenues at April 30 and January 31, 2018 were $4.3 million and $9.3 million, respectively. Amounts of identified change orders that are not yet considered probable as of the corresponding balance sheet date are excluded from transaction prices. Revenues may be impacted by changes in the amounts of change orders that the Company expects to receive. The effects of any resulting revisions to revenues can be determined at any time and they could be material. Actual costs related to change orders are expensed as they are incurred. Changes to total estimated contract costs or losses, if any, are recognized in the period in which they are determined. In general, a contract claim is included in the corresponding transaction price only when an agreement on the amount has been reached with the project owner. Change orders are generally not distinct from the existing contract due to the significant integration service provided in the context of the contract and are accounted for as modifications to the existing contracts and performance obligations.

The Company’s long-term contracts typically have schedule dates and other performance obligations that if not achieved could subject the Company to liquidated damages. These contract requirements generally relate to specified activities that must be completed by an established date or by achievement of a specified level of output or efficiency. Each contract defines the conditions under which a project owner may make a claim for liquidated damages. At the outset of the Company’s contracts, the potential amounts of liquidated damages typically are not constrained, or subtracted, from the transaction price as the Company believes that it has included activities in its contract plan, and the associated costs, that will be effective in preventing such damages. Of course, circumstances may change as the Company executes the corresponding contract. The transaction price is reduced by an applicable amount when the Company no longer considers it probable that a future reversal of revenues will not occur when the matter is resolved.

In some instances, potential liquidated damages are not asserted by a project owner, but may be considered during the negotiation or settlement of claims and the close-out of a contract. In general, the Company considers potential liquidated damages, the costs of other related items and potential mitigating factors in determining the adequacy of its regularly updated estimates of costs expected to be incurred to complete active projects.

Remaining Unsatisfied Performance Obligations

The amount of the Company’s remaining unsatisfied performance obligations (“RUPO”) represents the unrecognized revenue value of contracts with customers as determined under ASC Topic 606. Additions to RUPO represent the total expected revenue value of new performance obligations determined during a given period, as well as the growth in value on existing contracts. The amounts of additions may vary significantly each reporting period based on the timing of major new contract commitments and the Company’s RUPO may fluctuate with currency movements.

At April 30, 2018, the Company had RUPO of $289.5 million. Approximately 91% of the Company’s RUPO as of April 30, 2018 is anticipated to be recognized as revenues during the nine months ending January 31, 2019, with the remainder recognized as revenues during the year ending January 31, 2020. Although the amount of reported RUPO includes business that is considered to be firm, it is important to note that cancellations, deferrals or scope adjustments may occur. RUPO may be adjusted to reflect any known project cancellations, revisions to project scope and cost, foreign currency exchange fluctuations and project deferrals, as appropriate.

The amount of revenues recognized during the three months ended April 30, 2018 related to performance obligations that were satisfied or partially satisfied as of January 31, 2018 was $128.0 million. The amount of revenues recognized in the three months ended April 30, 2018 that was included in contract liabilities as of January 31, 2018 was $24.3 million.

Disaggregation of Revenues

The following table presents consolidated revenues for the three months ended April 30, 2018 and 2017 disaggregated by the geographic area where the work was performed.

	Three Months Ended April 30,
	2018		2017

United States	$	124,154	$	227,780
United Kingdom	14,468		499
Republic of Ireland	2,744		2,210


Consolidated Revenues	$	141,366	$	230,489

The consolidated revenues are disaggregated by reportable segment in Note 14 to the condensed consolidated financial statements. Prior period financial operating results have not been adjusted for the adoption of ASC Topic 606 under the modified retrospective method.