Revenue Recognition, Contracts with Customers

6 Months Ended

Jun. 30, 2020

Revenue from Contract with Customer [Abstract]

Revenue Recognition, Contracts with Customers

Revenue Recognition, Contracts with Customers

Description of Revenue Generating Activities

We employ sales, marketing and customer service personnel throughout the world who sell and market our products and services to and/or through a large number of distributors, fabricators, converters, e-commerce and mail order fulfillment firms, and contract packaging firms as well as directly to end-users such as food processors, foodservice businesses, supermarket retailers, pharmaceutical companies, healthcare facilities, medical device manufacturers, and other manufacturers.

As discussed in Note 6, "Segments," of the Notes to Condensed Consolidated Financial Statements, our reporting segments are Food and Protective. Our Food applications are largely sold directly to end customers, while our Protective products are sold through business supply distributors and directly to the end customer.

Food:

Food largely serves perishable food processors, predominantly in fresh red meat, smoked and processed meats, poultry and dairy (solids and liquids) markets worldwide, and maintains a leading position in its target applications. Food provides integrated packaging materials and equipment solutions to provide food safety, shelf life extension, and total cost optimization with innovative, sustainable packaging that enables customers to reduce costs and enhance their brands in the marketplace. Food solutions are marketed under the Cryovac^® trademark and other highly recognized trade names including Cryovac Grip & Tear^®, Cryovac Darfresh^®, Cryovac Mirabella^®, Simple Steps^® and OptiDure^™.

Protective:

Protective packaging solutions are utilized across many global markets and are especially valuable to e-Commerce, electronics and industrial manufacturing. Protective solutions are designed to protect valuable goods in shipping, and drive operational excellence for our customers, increasing their order fulfillment velocity while minimizing material usage, dimensional weight and packaging labor requirements. Recent acquisitions in Protective include Automated Packaging Systems, LLC (“Automated”) in 2019.

Protective benefits from the continued expansion of e-Commerce, increasing freight costs, scarcity of labor, and increasing demand for more sustainable packaging. Protective solutions are largely sold through supply distributors that sell to business/industrial end-users. Protective solutions are additionally sold directly to fabricators, original equipment manufacturers, contract manufacturers, third-party logistics partners, e-commerce/fulfillment operations, and at various retail centers. Protective solutions are marketed under brands including Bubble Wrap^® brand inflatable packaging, Sealed Air^® brand performance shrink films and Autobag^® brand bagging systems. Protective product families include additional tradenames including Instapak^® polyurethane foam packaging solutions and Korrvu^® suspension and retention packaging.

Identify Contract with Customer:

For Sealed Air, the determination of whether an arrangement meets the definition of a contract under Accounting Standards Codification 606 (“Topic 606”) depends on whether it creates enforceable rights and obligations. While enforceability is a matter of law, we believe that enforceable rights and obligations in a contract must be substantive in order for the contract to be in scope of Topic 606. That is, the penalty for noncompliance must be significant relative to the minimum obligation. Fixed or minimum purchase obligations with penalties for noncompliance are the most common examples of substantive enforceable rights present in our contracts. We determined that the contract term is the period of enforceability outlined by the terms of the contract. This means that in many cases, the term stated in the contract is different than the period of enforceability. After the minimum purchase obligation is met, subsequent sales are treated as separate contracts on a purchase order by purchase order basis. If no minimum purchase obligation exists, the next level of enforceability is determined, which often represents the individual purchase orders and the agreed upon terms.

Performance Obligations:

The most common goods and services determined to be distinct performance obligations are materials, equipment sales, and maintenance. Free on loan and leased equipment is typically identified as a separate lease component in scope of ASC 842. The other goods or services promised in the contract with the customer in most cases do not represent performance obligations because they are neither separate nor distinct, or they are not material in the context of the contract.

Transaction Price and Variable Consideration:

Sealed Air has many forms of variable consideration present in its contracts with customers, including rebates and other discounts. Sealed Air estimates variable consideration using either the expected value method or the most likely amount method as described in the standard. We include in the transaction price some or all of an amount of variable consideration estimated to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved.

For all contracts that contain a form of variable consideration, Sealed Air estimates at contract inception, and periodically throughout the term of the contract, what volume of goods and/or services the customer will purchase in a given period and determines how much consideration is payable to the customer or how much consideration Sealed Air would be able to recover from the customer based on the structure of the type of variable consideration. In most cases the variable consideration in contracts with customers results in amounts payable to the customer by Sealed Air. Sealed Air adjusts the contract transaction price based on any changes in estimates each reporting period and performs an inception to date cumulative adjustment to the amount of revenue previously recognized. When the contract with a customer contains a minimum purchase obligation, Sealed Air only has enforceable rights to the amount of consideration promised in the minimum purchase obligation through the enforceable term of the contract. This amount of consideration, plus any variable consideration, makes up the transaction price for the contract.

Charges for rebates and other allowances are recognized as a deduction from revenue on an accrual basis in the period in which the associated revenue is recorded. When we estimate our rebate accruals, we consider customer-specific contractual commitments including stated rebate rates and history of actual rebates paid. Our rebate accruals are reviewed at each reporting period and adjusted to reflect data available at that time. We adjust the accruals to reflect any differences between estimated and actual amounts. These adjustments of transaction price impact the amount of net sales recognized by us in the period of adjustment. Revenue recognized for the three and six months ended June 30, 2020 from performance obligations satisfied in previous reporting periods was $1.2 million and $2.2 million, respectively, and $0.7 million and $1.8 million for the three and six months ended June 30, 2019, respectively.

The Company does not adjust consideration in contracts with customers for the effects of a significant financing component if the Company expects that the period between transfer of a good or service and payment for that good or service will be one year or less. This is expected to be the case for the majority of contracts.

Sales taxes collected from customers and remitted to governmental authorities are accounted for on a net basis and therefore are excluded from net sales on the Condensed Consolidated Statements of Operations.

Allocation of Transaction Price:

Sealed Air determines the standalone selling price for a performance obligation by first looking for observable selling prices of that performance obligation sold on a standalone basis. If an observable price is not available, we estimate the standalone selling price of the performance obligation using one of the three suggested methods in the following order of preference: adjusted market assessment approach, expected cost plus a margin approach, and residual approach.

Sealed Air often offers rebates to customers in their contracts that are related to the amount of materials purchased. We believe that this form of variable consideration should only be allocated to materials because the entire amount of variable consideration relates to the customer’s purchase of and Sealed Air’s efforts to provide materials. Additionally, Sealed Air has many contracts that have pricing tied to third-party indices. We believe that variability from index-based pricing should be allocated specifically to materials because the pricing formulas in these contracts are related to the cost to produce materials.

Transfer of Control:

Revenue is recognized upon transfer of control to the customer. Revenue for materials and equipment sales is recognized based on shipping terms, which is the point in time the customer obtains control of the promised goods. Maintenance revenue is recognized straight-line on the basis that the level of effort is consistent over the term of the contract. Lease components within contracts with customers are recognized in accordance with Topic 842.

Disaggregated Revenue

For the three and six months ended June 30, 2020 and 2019, revenues from contracts with customers summarized by Segment Geography were as follows:

	Three Months Ended June 30, 2020
(In millions)	Food		Protective		Total
North America	$	379.2	$	309.2	$	688.4
EMEA	150.2		87.9		238.1
APAC	92.3		77.1		169.4
South America	45.3		2.4		47.7
Topic 606 Segment Revenue	667.0		476.6		1,143.6
Non-Topic 606 Revenue (Leasing: Sales-type and Operating)	6.2		1.4		7.6
Total	$	673.2	$	478.0	$	1,151.2

	Six Months Ended June 30, 2020
(In millions)	Food		Protective		Total
North America	$	780.4	$	617.4	$	1,397.8
EMEA	291.9		191.4		483.3
APAC	186.2		143.8		330.0
South America	94.7		6.1		100.8
Topic 606 Segment Revenue	1,353.2		958.7		2,311.9
Non-Topic 606 Revenue (Leasing: Sales-type and Operating)	10.3		2.9		13.2
Total	$	1,363.5	$	961.6	$	2,325.1

	Three Months Ended June 30, 2019
(In millions)	Food		Protective		Total
North America	$	401.1	$	282.9	$	684.0
EMEA	155.6		89.2		244.8
APAC	96.5		72.5		169.0
South America	52.3		3.8		56.1
Topic 606 Segment Revenue	705.5		448.4		1,153.9
Non-Topic 606 Revenue (Leasing: Sales-type and Operating)	5.5		1.6		7.1
Total	$	711.0	$	450.0	$	1,161.0

	Six Months Ended June 30, 2019
(In millions)	Food		Protective		Total
North America	$	783.9	$	548.7	$	1,332.6
EMEA	296.7		183.0		479.7
APAC	198.7		139.8		338.5
South America	102.9		7.9		110.8
Topic 606 Segment Revenue	1,382.2		879.4		2,261.6
Non-Topic 606 Revenue (Leasing: Sales-type and Operating)	8.8		3.3		12.1
Total	$	1,391.0	$	882.7	$	2,273.7

Contract Balances

The time between when a performance obligation is satisfied and when billing and payment occur is closely aligned, with the exception of equipment accruals. An equipment accrual is a contract offering, whereby a customer is incentivized to use a portion of the materials transaction price for future equipment purchases. Long-term contracts that include an equipment accrual create a timing difference between when cash is collected and the performance obligation is satisfied, resulting in a contract liability (unearned revenue). The opening and closing balances of contract liabilities arising from contracts with customers as of June 30, 2020 and December 31, 2019 were as follows:

(In millions)	June 30, 2020	December 31, 2019
Contract liabilities	16.4	16.7

There were no contract asset balances recorded on the Condensed Consolidated Balance Sheets as of June 30, 2020 and December 31, 2019.

The contract liability balance represents deferred revenue, primarily related to equipment accruals. Revenue recognized in the three and six months ended June 30, 2020 that was included in the contract liability balance at the beginning of the period was $0.4 million and $5.3 million, respectively, and $0.9 million and $1.7 million in the three and six months ended June 30, 2019, respectively. This revenue was driven primarily by equipment performance obligations being satisfied.

Remaining Performance Obligations

The following table summarizes the estimated transaction price from contracts with customers allocated to performance obligations or portions of performance obligations that have not yet been satisfied as of June 30, 2020, as well as the expected timing of recognition of that transaction price.

(In millions)	Short-Term (12 months or less)(1)		Long-Term		Total
Total transaction price	$	7.0	$	9.4	$	16.4

⁽¹⁾ Our enforceable contractual obligations tend to be short term in nature. The table above does not include the transaction price of any remaining performance obligations that are part of the contracts with expected durations of one year or less. 

Assets recognized for the costs to obtain or fulfill a contract

The Company recognizes incremental costs to fulfill a contract as an asset if such incremental costs are expected to be recovered, relate directly to a contract or anticipated contract, and generate or enhance resources that will be used to satisfy performance obligations in the future.

The Company recognizes incremental costs to obtain a contract as an expense when incurred if the amortization period of the asset that otherwise would have been recognized is one year or less. For example, the Company generally expenses sales commissions when incurred because the amortization period would have been one year or less. These costs are recorded within sales and marketing expenses.

Costs for shipping and handling activities performed after a customer obtains control of a good are accounted for as costs to fulfill a contract and are included in cost of goods sold.