Revenue Recognition

From time to time, ARI enters into contracts with customers for the production of railcars and for the production of railcar and industrial components. ARI’s railcar manufacturing contracts are generally structured as an order for any number of railcars that are generally identical in terms of design, technology and function. Each railcar in an order is priced individually but similar railcars are generally sold at the same price. Certain contracts may be structured to cover the production of multiple types of railcars or railcar and industrial components, and the transaction price for such contracts is allocated to products based upon their standalone selling price. ARI assesses these contracts individually to, among other things, identify individual performance obligations. Generally, the only distinct performance obligations identified are the individual products explicitly stated in the contract. As performance obligations related to manufacturing contracts are satisfied at a point in time, and railcars manufactured by ARI have an alternative use for the Company, manufacturing revenue is recognized at the point in time at which shipment occurs. A related receivable is recognized as the explicitly stated products are transferred to the customer and the customer obtains control, which is typically at the time of shipment, and represents ARI’s unconditional right to consideration.

ARI also enters into contracts with customers for railcar services. Revenues generated from the Railcar Services segment are invoiced to the customer when all agreed-upon services have been provided and the railcar on which the services were performed is shipped from the repair facility or the work has been performed by the Company’s repair mobile unit. However, as the customer controls the railcar while ARI’s repair services are performed under the contract, ARI satisfies its performance obligations as services are rendered, and revenues are recognized over time. As a result, at any given time, a contract asset exists related to railcar services that have been performed but not yet billed. The Company utilizes the input method and performs a calculation at the end of each accounting period whereby it analyzes all work-in-process for the Railcar Services segment, representing the cost of services performed on railcars that have not yet been shipped. The Company then estimates a corresponding amount of revenue based on an average profit margin for the Railcar Services segment. Therefore, the revenue recorded at each period-end reflects the estimated revenue recognition for Railcar Services over time. This method was selected because the costs incurred are proportionate to ARI’s progress in satisfying the performance obligation, and therefore it faithfully depicts ARI’s performance on the contract.

Revenue from contracts with customers is measured as the amount of consideration we expect to receive in exchange for transferring goods or providing services. Sales, use, value added, and other taxes we collect concurrent with revenue-producing activities are excluded from revenue.

As discussed further in Note 8, ARI’s standard warranty is up to one year for parts and services and five years for new railcars. These warranties provide customers with quality assurance that the delivered product is as specified in the contract. In accordance with ASC 606, ARI accounts for all warranty obligations as a cost accrual.

Payment terms for ARI’s products and services do not typically exceed normal payment terms used by the industry, and ARI does not have significant financing components or material collectability concerns in relation to its current contracts. Bill-and-hold arrangements are infrequent, and no bill-and-hold arrangements were in place during the six months ended June 30, 2018.

New railcar manufacturing contracts generally include a base price per railcar as well as a provision that allows the Company to pass on to the customer material cost escalations and surcharges incurred to produce the railcar, should they occur. The escalations and surcharges included as part of the contract with the customer are considered to be variable consideration that is constrained and allocable to a specific performance obligation. While the amounts of the escalations and surcharges are not known at the time at which the contract begins, these costs are known by the time the railcar is shipped, which is the point at which it is invoiced and revenue is recorded. Therefore, while escalations and surcharges are variable in nature, the amounts that are included in the customer invoice and recorded as revenue generally are not subject to change after revenue has been recognized on the transaction.

Revenue Disaggregation

The following table further illustrates the nature of the Company’s revenues arising from contracts with customers. The Railcar Leasing segment has been included in the tables below to reconcile to ARI’s total consolidated revenues; however, revenues generated by the Railcar Leasing segment are recognized in accordance with lease accounting guidance rather than ASC 606.



	Three Months Ended June 30,				Six Months Ended June 30,
	2018		2017		2018		2017
	(in thousands)				(in thousands)
Revenues from Contracts with Customers (Manufacturing and Railcar Services)	$	111,724	$	75,303	$	193,841	$	156,149
Railcar Leasing Segment Revenues	34,804		33,717		68,925		67,552
Total Revenue	$	146,528	$	109,020	$	262,766	$	223,701

The following table presents our revenue disaggregated by type of product or service:



	Three Months Ended June 30,				Six Months Ended June 30,
	2018		2017		2018		2017
	(in thousands)				(in thousands)
Railcar Manufacturing	$	80,004	$	48,872	$	135,434	$	101,643
Railcar and Industrial Components Manufacturing	9,436		6,215		18,147		14,170
Total Manufacturing (1)	89,440		55,087		153,581		115,813

Railcar Leasing (2)	34,804		33,717		68,925		67,552
Railcar Services (3)	22,284		20,216		40,260		40,336
Total Revenue	$	146,528	$	109,020	$	262,766	$	223,701



(1)—	Revenue recognized at a point in time
(2)—	Revenue recognition not in scope of ASC 606
(3)—	Revenue recognized over time

Contract Balances

In considering the distinction between a contract asset and a receivable, as defined in ASC 606, ARI reviewed its practices as follows. ARI bills its customers once services have been rendered or products have been delivered and the Company has an unconditional right to consideration as only the passage of time is required before payment of that consideration is due. The contract assets that ARI maintains are related to unbilled revenues recognized on repair services that have been performed but the entire project has not yet been completed, and the railcar has not yet been shipped to the customer. These contract assets are included within 'accounts receivable' on the condensed consolidated balance sheets. The contract liabilities that ARI maintains represent deferred revenue related to its manufacturing and repair services segments. The short-term contract liabilities are included within 'accrued expenses' and the long-term contract liabilities are included within 'other liabilities' on the condensed consolidated balance sheets.

The allowance for doubtful accounts reflects ARI’s best estimate of probable losses inherent in the accounts receivable balance. The Company determines the allowance based on the history of past write-offs and collections and current credit conditions of its customers. Refer to Note 4 for the balance of the allowance for doubtful accounts for each period presented.

The opening and closing balances of the Company's contract balances are presented below (in thousands):



	2018
	January 1		June 30		$ Change
Contract Assets	$	3,717	$	6,559	$	2,842
Contract Liabilities	1,600		1,600		—

The increase in contract assets from January 1, 2018 to June 30, 2018 was due to ramp up of activity at certain repair shops within the Company’s repair network leading to certain work that ARI expects will be completed and billed to customers in the coming months. There was no change in contract liabilities during the six months ended June 30, 2018, as no revenue was recognized in the current reporting period that was in the contract liability balance at the end of the prior period. Additionally, there were no impairments related to contract assets, including bad debt expense, during the six months ended June 30, 2018.

Contract Costs

ARI has deemed its costs to obtain a contract as described in ASC Topic 340, Other Assets and Deferred Costs (ASC 340) to be immaterial. Further, in accordance with Topic 340, an entity may elect a practical expedient that allows the entity to recognize the incremental costs of obtaining a contract as an expense when incurred if the amortization period of the asset that the entity otherwise would have recognized is one year or less. ARI has determined that its costs to obtain a contract would be amortized over one year or less, and therefore, has elected this practical expedient, and the Company does not recognize assets from the costs to obtain a contract with a customer.

ARI incurs costs in the fulfillment of its contracts such as engineering hours and other salaries and wages. These costs incurred in fulfilling a contract with a customer are within the scope of ASC 330, Inventory. Therefore, in accordance with ASC 340, ARI accounts for these production costs, or costs to fulfill a contract, in accordance with ASC 330, Inventory.

Remaining Performance Obligations

Remaining performance obligations represent the transaction price of firm contractual commitments from customers for which work is partially completed. As of June 30, 2018, the estimated revenue expected to be recognized in the future related to remaining performance obligations was $241.4 million. Of this total, we expect to recognize $98.0 million into revenue during 2018 and $143.4 million thereafter.