Revenue

Adoption of ASC 606

On January 1, 2018, we adopted ASC 606, on a modified retrospective basis, applied to those contracts which were not completed as of January 1, 2018. As a result of our adoption, we recorded a cumulative-effect adjustment of $11.4 million within retained earnings in our condensed consolidated balance sheet as of January 1, 2018, to reflect a change in the timing of revenue recognition under ASC 606, from point in time to over time, on our Contract-Manufactured Products product sales, certain Proprietary Products product sales, development and tooling agreements, as well as an acceleration on a portion of the remaining unearned income from a nonrefundable customer payment.

Results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported under the accounting standards in effect for those periods.

The cumulative effect of the changes made to our condensed consolidated January 1, 2018 balance sheet for the adoption of ASC 606 was as follows:



($ in millions)	Balance at December 31, 2017		Adjustments Due to ASC 606			Balance at January 1, 2018
Assets:
Accounts receivable, net	$	253.2	$	25.0		$	278.2
Inventories	215.2		(20.8		)	194.4
Other current assets	39.2		(8.4		)	30.8

Liabilities and Equity:
Other current liabilities	$	77.0	$	(13.7	)	$	63.3
Deferred income taxes	10.4		3.0			13.4
Other long-term liabilities	42.6		(4.9		)	37.7
Retained earnings	1,178.2		11.4			1,189.6

The impact of the adoption of ASC 606 on our condensed consolidated income statement for the three months ended June 30, 2018 was as follows:



($ in millions)	As Reported		Balances without Adoption of ASC 606		Effects of Change (Lower)/Higher
Net sales	$	447.5	$	452.6	$	(5.1	)
Cost of goods and services sold	305.3		305.9		(0.6		)
Research and development	10.8		10.9		(0.1		)
Other expense	1.1		0.9		0.2
Income tax expense	6.0		6.8		(0.8		)
Net income	$	56.1	$	59.9	$	(3.8	)

The impact of the adoption of ASC 606 on our condensed consolidated income statement for the six months ended June 30, 2018 was as follows:



($ in millions)	As Reported		Balances without Adoption of ASC 606		Effects of Change (Lower)/Higher
Net sales	$	863.2	$	870.9	$	(7.7	)
Cost of goods and services sold	586.6		588.6		(2.0		)
Research and development	20.4		20.5		(0.1		)
Other expense	4.2		3.9		0.3
Income tax expense	18.5		19.7		(1.2		)
Net income	$	99.7	$	104.4	$	(4.7	)

The impact of the adoption of ASC 606 on our condensed consolidated balance sheet as of June 30, 2018 was as follows:



($ in millions)	As Reported		Balances without Adoption of ASC 606		Effects of Change Higher/(Lower)
Assets:
Accounts receivable, net	$	296.7	$	276.8	$	19.9
Inventories	208.2		225.0		(16.8		)
Other current assets	36.5		46.1		(9.6		)

Liabilities and Equity:
Other current liabilities	$	86.2	$	96.5	$	(10.3	)
Deferred income taxes	11.8		10.0		1.8
Other long-term liabilities	42.4		47.1		(4.7		)
Retained earnings	1,258.0		1,251.3		6.7

Revenue Recognition

Our revenue results from the sale of goods or services and reflects the consideration to which we expect to be entitled to in exchange for those goods or services. We record revenue based on a five-step model, in accordance with ASC 606. Following the identification of a contract with a customer, we identify the performance obligations (goods or services) in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract, and recognize the revenue when (or as) we satisfy the performance obligations by transferring the promised goods or services to our customers. A good or service is transferred when (or as) the customer obtains control of that good or service.

We recognize the majority of our revenue, primarily relating to Proprietary Products product sales, at a point in time, following the transfer of control of our products to our customers, which typically occurs upon shipment or delivery, depending on the terms of the related agreements.

We recognize revenue relating to our Contract-Manufactured Products product sales and certain Proprietary Products product sales over time, as our performance does not create an asset with an alternative use to us and we have an enforceable right to payment for performance completed to date.

We recognize revenue relating to our development and tooling agreements over time, as our performance creates or enhances an asset that the customer controls as the asset is created or enhanced.

For revenue recognized over time, revenue is recognized by applying a method of measuring progress toward complete satisfaction of the related performance obligation. When selecting the method for measuring progress, we select the method that best depicts the transfer of control of goods or services promised to our customers.

Revenue for our Contract-Manufactured Products product sales, certain Proprietary Products product sales, and our development and tooling agreements is recorded under an input method, which recognizes revenue on the basis of our efforts or inputs to the satisfaction of a performance obligation (for example, resources consumed, labor hours expended, costs incurred, time elapsed, or machine hours used) relative to the total expected inputs to the satisfaction of that performance obligation. The input method that we use is based on costs incurred.

The majority of the performance obligations within our contracts are satisfied within one year or less. Performance obligations satisfied beyond one year include those relating to a nonrefundable customer payment of $20.0 million received in June 2013 in return for the exclusive use of the SmartDose^® technology platform within a specific therapeutic area. As of June 30, 2018, there was $6.9 million of unearned income related to this payment, of which $0.9 million was included in other current liabilities and $6.0 million was included in other long-term liabilities. The unearned income is being recognized as income on a straight-line basis over the remaining term of the agreement. The agreement does not include a future minimum purchase commitment from the customer.

Our revenue can be generated from contracts with multiple performance obligations. When a sales agreement involves multiple performance obligations, each obligation is separately identified and the transaction price is allocated based on the amount of consideration we expect to be entitled to in exchange for transferring the promised good or service to the customer.

Some customers receive pricing rebates upon attaining established sales volumes. We record rebate costs when sales occur based on our assessment of the likelihood that the required volumes will be attained. We also maintain an allowance for product returns, as we believe that we are able to reasonably estimate the amount of returns based on our substantial historical experience.

The following table presents the approximate percentage of our net sales by market group:



	Three Months Ended June 30,				Six Months Ended June 30,
	2018		2017⁽¹⁾		2018		2017⁽¹⁾
Biologics	21	%	23	%	22	%	23	%
Generics	21	%	20	%	21	%	20	%
Pharma	35	%	36	%	35	%	37	%
Contract-Manufactured Products	23	%	21	%	22	%	20	%
	100	%	100	%	100	%	100	%
(1) As noted above, prior period amounts have not been adjusted under the modified retrospective method.

The following table presents the approximate percentage of our net sales by product category:



	Three Months Ended June 30,				Six Months Ended June 30,
	2018		2017⁽¹⁾		2018		2017⁽¹⁾
High-Value Components	43	%	41	%	42	%	42	%
Standard Packaging	31	%	34	%	32	%	34	%
Delivery Devices	3	%	4	%	4	%	4	%
Contract-Manufactured Products	23	%	21	%	22	%	20	%
	100	%	100	%	100	%	100	%
(1) As noted above, prior period amounts have not been adjusted under the modified retrospective method.

The following table presents the approximate percentage of our net sales by geographic location:



	Three Months Ended June 30,				Six Months Ended June 30,
	2018		2017⁽¹⁾		2018		2017⁽¹⁾
Americas	48	%	52	%	47	%	52	%
Europe, Middle East, Africa	44	%	41	%	45	%	41	%
Asia Pacific	8	%	7	%	8	%	7	%
	100	%	100	%	100	%	100	%
(1) As noted above, prior period amounts have not been adjusted under the modified retrospective method.

Contract Assets and Liabilities

Contract assets or liabilities result from transactions with revenue recorded over time. If the measure of remaining rights exceeds the measure of the remaining performance obligations, we record a contract asset. Contract assets are recorded on the condensed consolidated balance sheet in accounts receivable, net, and other assets (current and noncurrent portions, respectively). Contract assets included in accounts receivable, net, relate to the unbilled amounts of our product sales for which we have recognized revenue over time. Contract assets included in other assets represent the remaining performance obligations of our development and tooling agreements. Conversely, if the measure of the remaining performance obligations exceeds the measure of the remaining rights, we record a contract liability. Contract liabilities are recorded on the condensed consolidated balance sheet in other liabilities (current and noncurrent portions, respectively) and represent cash payments received in advance of our performance.

The following table summarizes our contract assets and liabilities, excluding contract assets included in accounts receivable, net:



	($ in millions)
Contract assets, December 31, 2017	$	7.5
Contract assets, June 30, 2018	6.0
Change in contract assets - (decrease) increase	$	(1.5	)

Deferred income, December 31, 2017	$	(33.6	)
Deferred income, June 30, 2018	(24.2		)
Change in deferred income - decrease (increase)	$	9.4

The decrease in deferred income during the six months ended June 30, 2018 was primarily due to the recognition of revenue of $48.4 million, including $25.4 million of revenue that was included in deferred income at the beginning of the year, partially offset by additional cash payments of $35.3 million received in advance of satisfying future performance obligations along with $3.7 million in other adjustments.

Practical Expedients and Exemptions

We have elected to disregard the effects of a significant financing component, as we expect, at the inception of our contracts, that the period between when we transfer a promised good or service to the customer and when the customer pays for that good or service will be one year or less.

In addition, we have elected to omit the disclosure of the majority of our remaining performance obligations, which are satisfied within one year or less.