Revenue Recognition

6 Months Ended

Nov. 30, 2023

Revenue Recognition

Revenue Recognition

Note 3 – Revenue Recognition

Revenue is measured based on the consideration specified in a contract with a customer, and excludes any sales incentives and amounts collected on behalf of third parties. We recognize revenue when we satisfy a performance obligation by transferring control over a product or service to a customer.

Our unit of accounting for revenue recognition is a performance obligation included in our customer contracts. A performance obligation reflects the distinct good or service that we must transfer to a customer. At contract inception, we evaluate if the contract should be accounted for as a single performance obligation or if the contract contains multiple performance obligations. In some cases, our contract with the customer is considered one performance obligation as it includes factors such as whether the good or service being provided is significantly integrated with other promises in the contract, whether the service provided significantly modifies or customizes another good or service or whether the good or service is highly interdependent or interrelated. If the contract has more than one performance obligation, we determine the standalone price of each distinct good or service underlying each performance obligation and allocate the transaction price based on their relative standalone selling prices.

The transaction price of a contract, which can include both fixed and variable amounts, is allocated to each performance obligation identified. Some contracts contain variable consideration, which could include incremental fees or penalty provisions related to performance. Variable consideration that can be reasonably estimated based on current assumptions and historical information is included in the transaction price at the inception of the contract but limited to the amount that is probable that a significant reversal in the amount of cumulative revenue recognized will not occur. Variable consideration that cannot be reasonably estimated is recorded when known.

Our performance obligations are satisfied over time as work progresses or at a point in time based on transfer of control of products and services to our customers. The majority of our sales from products typically represent distinct performance obligations and are recognized at a point in time upon transfer of control to the customer, which generally occurs upon shipment. In connection with certain sales of products, we also provide logistics services, which include inventory management, replenishment, and other related services. The price of such services is generally included in the price of the products delivered to the customer, and revenues are recognized upon delivery of the product, at which point the customer has obtained control of the product. We do not account for these services separate from the related product sales as the services are inputs required to fulfill part orders received from customers.

For our performance obligations that are satisfied over time, we measure progress in a manner that depicts the performance of transferring control to the customer. As such, we utilize the input method of cost-to-cost to recognize revenue over time as this depicts when control of the promised goods or services are transferred to the customer. Revenue is recognized based on the relationship of actual costs incurred to date to the estimated total cost at completion of the performance obligation.

We are required to make certain judgments and estimates, including estimated revenues and costs, as well as inflation and the overall profitability of the arrangement. Key assumptions involved can include customer volume, future labor costs and efficiencies, repair or overhaul costs, overhead costs, and ultimate timing of product delivery. Differences may occur between the judgments and estimates made by management and actual program results. For contracts that are deemed to be loss contracts, we establish forward loss reserves for total estimated costs that are in excess of total estimated consideration in the period in which they become known.

We utilize the portfolio approach to estimate the amount of revenue to recognize for certain contracts which require over-time revenue recognition. Such contracts are grouped together either by revenue stream, customer or product line with each portfolio of contracts grouped together based on having similar characteristics. The portfolio approach is utilized only when the result of the accounting is not expected to be materially different than if applied to individual contracts.

We also may enter into offset agreements or conditions as part of obtaining orders for our products and services from certain government customers in foreign countries. These agreements are designed to enhance the social and economic environment of the foreign country by requiring the contractor to promote investment in the country. These agreements also may be satisfied through our use of cash or other means of providing financial support for in-country projects with local companies. The amounts ultimately applied against our offset agreements are based on negotiations with the customer and satisfaction of our offset obligations are included in the estimates of our total costs to complete the contract.

When contracts are modified, we consider whether the modification either creates new or changes the existing enforceable rights and obligations. Contract modifications that are for goods or services that are not distinct from the existing contract, due to the significant integration with the original goods or services provided, are accounted for as if they were part of that existing contract with the effect of the contract modification recognized as an adjustment to revenue on a cumulative catch-up basis. When the modifications include additional performance obligations that are distinct, they are accounted for as a new contract and performance obligation, which are recognized prospectively.

Certain contracts with customers have options for the customer to acquire additional goods or services. In most cases, the pricing of these options are reflective of the standalone selling price of the good or service. These options do not provide the customer with a material right and are accounted for only when the customer exercises the option to purchase the additional goods or services. If the option on the customer contract was not indicative of the standalone selling price of the good or service, the material right would be accounted for as a separate performance obligation.

Under most of our U.S. government contracts, if the contract is terminated for convenience, we are entitled to payment for items delivered and fair compensation for work performed, the costs of settling and paying other claims, and a reasonable profit on the costs incurred or committed.

In the ordinary course of business, agencies of the U.S. and other governments audit our claimed indirect costs and conduct inquiries and investigations of our business practices with respect to government contracts to determine whether our operations are conducted in accordance with these requirements and the terms of the relevant contracts. U.S. government agencies, including the Defense Contract Audit Agency (“DCAA”), routinely audit our claimed indirect costs, for compliance with the Cost Accounting Standards and the Federal Acquisition Regulations. These agencies also conduct reviews and investigations and make inquiries regarding our accounting and other systems in connection with our performance and business practices with respect to our government contracts and subcontracts.

Costs to fulfill and obtain a contract are considered for capitalization based on contract specific facts and circumstances. The incremental costs to fulfill a contract, including setup and implementation costs prior to beginning the period of performance, may be capitalized when expenses are incurred prior to the start of satisfying a performance obligation. The capitalized costs are subsequently expensed over the contract’s period of performance.

We have elected to use certain practical expedients permitted under Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers. Shipping and handling fees and costs incurred associated with outbound freight after control over a product has transferred to a customer are accounted for as a fulfillment cost and are included in Cost of sales on our Condensed Consolidated Statements of Income and are not considered a performance obligation to our customers. Our reported sales on our Condensed Consolidated Statements of Income are net of any sales or related non-income taxes. We also utilize the “as invoiced” practical expedient in certain cases where performance obligations are satisfied over time and the invoiced amount corresponds directly with the value we are providing to the customer.

Cumulative Catch-up Adjustments

Changes in estimates and assumptions related to our arrangements accounted for using the cost-to-cost method are recorded using the cumulative catch-up method of accounting. These changes are primarily adjustments to the estimated profitability for our long-term programs where we provide component inventory management, supply chain logistics programs, and/or repair services.

For the three-month period ended November 30, 2023, we recognized favorable and (unfavorable) cumulative catch-up adjustments of $4.0 million and $(4.3) million, respectively. For the three-month period ended November 30, 2022, we recognized cumulative catch-up adjustments of $4.7 million and $(1.8) million, respectively. When considering these adjustments on a net basis, we recognized adjustments of ($0.3) million and $2.9 million for the three-month periods ended November 30, 2023 and 2022, respectively.

For the six-month period ended November 30, 2023, we recognized cumulative catch-up adjustments of $7.0 million and $(6.8) million, respectively. For the six-month period ended November 30, 2022, we recognized cumulative catch-up adjustments of $7.6 million and $(1.8) million, respectively. When considering these adjustments on a net basis, we recognized adjustments of $0.2 million and $5.8 million for the six-month periods ended November 30, 2023 and 2022, respectively.

Contract Assets and Liabilities

The timing of revenue recognition, customer billings, and cash collections results in a contract asset or contract liability at the end of each reporting period. For instances where we recognize revenue prior to having an unconditional right to payment, we record a contract asset or liability. When an unconditional right to consideration exists, we reduce our contract asset or liability and recognize an unbilled or trade receivable. When amounts are dependent on factors other than the passage of time in order for payment from a customer to be due, we record a contract asset which consists of costs incurred where revenue recognized over time using the cost-to-cost model exceeds the amounts billed to customers. Contract liabilities include advance payments and billings in excess of revenue recognized. Certain customers make advance payments prior to the satisfaction of our performance obligations on the contract. These amounts are recorded as contract liabilities until such performance obligations are satisfied, either over time as costs are incurred or at a point in time when deliveries are made. Contract assets and contract liabilities are determined on a contract-by-contract basis.

Net contract assets and liabilities are as follows:

	November 30,		May 31,
	2023		2023		Change
Contract assets – current	$	99.3	$	86.9	$	12.4
Contract assets – non-current		33.1		27.5		5.6
Contract liabilities:
Deferred revenue – current		(16.6)		(19.7)		3.1
Deferred revenue on long-term contracts		(9.8)		(12.7)		2.9
Net contract assets	$	106.0	$	82.0	$	24.0

Contract assets – non-current is reported within Other non-current assets, contract liabilities – current is reported within Accrued liabilities, and deferred revenue on long-term contracts is reported within Other liabilities on our Condensed Consolidated Balance Sheets. Changes in contract assets and contract liabilities primarily result from the timing difference between our performance of services and payments from customers.

To support our power-by-the-hour customer contracts, we previously entered into an agreement with a component repair facility to outsource a portion of the component repair and overhaul services.  The agreement includes certain minimum repair volume guarantees, which, subject to the amendment noted below, we have historically not met.  To date, we have recognized charges of $8.1 million to reflect our obligations for not achieving the minimum volume guarantees.  During the three-month period ended November 30, 2023, we amended the agreement to eliminate certain minimum repair volume guarantees resulting in the de-recognition of $2.0 million from our remaining loss reserves.  As of November 30, 2023, our Condensed Consolidated Balance Sheet included remaining loss reserves of $3.1 million classified in Accrued liabilities.

Changes in our deferred revenue were as follows for the three- and six-month periods ended November 30, 2023 and 2022:

	Three Months Ended				Six Months Ended
	November 30,				November 30,
	2023		2022		2023		2022
Deferred revenue at beginning of period	$	(37.1)	$	(33.5)	$	(32.4)	$	(30.6)
Revenue deferred		(69.4)		(69.6)		(136.2)		(127.1)
Revenue recognized		81.3		66.6		142.4		120.1
Other (1)		(1.2)		7.7		(0.2)		8.8
Deferred revenue at end of period	$	(26.4)	$	(28.8)	$	(26.4)	$	(28.8)

⁽¹⁾ Other includes cumulative catch-up adjustments, foreign currency translation, and other adjustments.

Remaining Performance Obligations

As of November 30, 2023, we had approximately $720 million of remaining performance obligations, also referred to as firm backlog, which excludes unexercised contract options and potential orders under our indefinite-delivery, indefinite-quantity contracts. We expect that approximately 55% of this backlog will be recognized as revenue over the next 12 months with approximately 50% of the remainder recognized over the next three years. The amount of remaining performance obligations that are expected to be recognized as revenue beyond 12 months, primarily relates to our long-term programs where we provide component inventory management, supply chain logistics programs and/or repair services.

Disaggregation of Revenue

Third-party sales across the major customer markets for each of our operating segments for the three- and six-month periods ended November 30, 2023 and 2022 were as follows:

	Three Months Ended				Six Months Ended
	November 30,				November 30,
	2023		2022		2023		2022
Parts Supply:
Commercial	$	189.4	$	141.5	$	395.4	$	271.3
Government and defense		38.2		42.1		69.0		80.9
	$	227.6	$	183.6	$	464.4	$	352.2
Repair & Engineering:
Commercial	$	130.9	$	122.1	$	252.5	$	234.8
Government and defense		14.5		12.7		30.4		27.6
	$	145.4	$	134.8	$	282.9	$	262.4
Integrated Solutions:
Commercial	$	63.4	$	46.3	$	126.2	$	95.9
Government and defense		93.2		81.0		186.7		159.2
	$	156.6	$	127.3	$	312.9	$	255.1
Expeditionary Services:
Commercial	$	1.5	$	1.9	$	3.6	$	3.4
Government and defense		14.3		22.2		31.3		43.0
	$	15.8	$	24.1	$	34.9	$	46.4

Consolidated sales by geographic region for the three- and six-month periods ended November 30, 2023 and 2022 were as follows:

	Three Months Ended				Six Months Ended
	November 30,				November,
	2023		2022		2023		2022
U.S./Canada	$	405.4	$	377.2	$	814.3	$	722.4
Europe/Africa		81.8		52.5		173.2		115.3
Asia/South Pacific		44.9		32.4		86.1		63.4
Other		13.3		7.7		21.5		15.0
	$	545.4	$	469.8	$	1,095.1	$	916.1