Revenue

Adoption of ASC Topic 606, “Revenue from Contracts with Customers”

We adopted ASU No. 2014-09, Revenue from Contracts with Customers (ASC Topic 606), effective January 1, 2018 using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. Results for reporting beginning after January 1, 2018 are presented under ASC Topic 606, while prior period amounts are not adjusted and will continue to be reported in accordance with our historic accounting under ASC Topic 605, Revenue Recognition.

Due to the cumulative impact, net of tax, of adopting ASC Topic 606, we recorded a net increase of $6.3 million to opening retained earnings as of January 1, 2018. The impact is primarily related to our bundled arrangements where we sell software licenses and implementation services, in addition to equipment, consumables and solutions. Under ASC Topic 605, revenue for the equipment was recognized upon delivery and software licenses and implementation services were typically recognized over the contract term. Under ASC Topic 606, revenue for the bundled equipment, software and software implementation services are recognized upon implementation. This results in an acceleration of software related revenue, offset by a delay in the recognition of related revenue of the equipment. Under ASC Topic 605, consumables and solutions revenues were typically recognized upon delivery. Under ASC 606, consumables and solutions revenues are recognized as the customer obtains control of the asset, which is at shipping point. This results in an acceleration in the recognition of consumables and solutions revenue.

Additionally, the timing of revenue recognition for software license renewals changed under ASC Topic 606. Under ASC Topic 605, revenue related to software renewals was recognized on a ratable basis over the license period. Under ASC Topic 606, the license, which is considered functional IP, is considered to be transferred to the customer at a point in time, specifically, at the start of each annual renewal period. As a result, under ASC Topic 606, revenue related to our annual software license renewals is accelerated when compared to ASC Topic 605.

Revenues are recognized when control of the promised goods or services is transferred to the customer, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services.

The following tables represent the amounts by which each financial statement line item is affected in the current year as a result of applying ASC Topic 606 (in thousands):



	For the year ended December 31, 2018
	As Reported		Without Adoption of ASC 606		Effect of Adoption
Revenue	$	1,400,040	$	1,388,923	$	11,117
Cost of goods sold	$	830,012	$	826,607	$	3,405
Gross Profit	$	570,028	$	562,316	$	7,712



	As of December 31, 2018
	As Reported		Without Adoption of ASC Topic 606		Effect of Adoption
Prepaid expenses and other current assets	$	25,980	$	32,487	$	(6,507	)
Accrued liabilities	$	128,820	$	151,408	$	(22,588	)
Deferred income taxes	$	38,654	$	40,653	$	(1,999	)

Revenue Recognition

We report revenue on a "where sold" basis, which reflects the revenue within the country or region in which the ultimate sale is made to our external customer.

The following table represents our revenues disaggregated by geography (in thousands):



	For the year ended December 31,
Geography	2018		2017 ⁽¹⁾		2016⁽¹⁾
Europe, the Middle East and Africa	$	134,363	$	119,934	$	50,105
Other Foreign	210,996		192,640		67,573
Total Foreign	345,359		312,574		117,678
United States	1,054,681		980,039		261,694
Total Revenues	$	1,400,040	$	1,292,613	$	379,372

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⁽¹⁾As noted above, prior period amounts have not been adjusted under the modified retrospective method.

Domestic sales accounted for 75%, 76% and 69% of total revenue in 2018, 2017 and 2016, respectively. International sales accounted for 25%, 24% and 31% of total revenue in 2018, 2017 and 2016, respectively.

The following table represents our revenues disaggregated by product line (in thousands) and our disaggregated product line revenue as a percentage of total revenue:



	For the year ended December 31,
	2018				2017 ⁽¹⁾				2016⁽¹⁾
Product line	Revenue		% of Revenue		Revenue		% of Revenue		Revenue		% of Revenue
Infusion Consumables	$	483,039	35	%	$	365,665	28	%	$	324,868	86	%
IV Solutions	507,985		36	%	521,963		40	%	—		—	%
Infusion Systems	355,484		25	%	290,207		23	%	—		—	%
Critical Care	53,532		4	%	49,961		4	%	53,601		14	%
Other	—		—	%	64,817		5	%	903		—	%
Total Revenues	$	1,400,040	100	%	$	1,292,613	100	%	$	379,372	100	%

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⁽¹⁾As noted above, prior period amounts have not been adjusted under the modified retrospective method.

Our primary product lines are Infusion Consumables, IV Solutions, Infusion Systems and Critical Care. The vast majority of our sales of these products are made on a stand-alone basis to hospitals, group purchasing organization member hospitals, distributors and to other non-acute facilities. Our product sales are typically free on board shipping point and ownership of the product transfers to the customer upon shipment. As a result, revenue is typically recognized upon transfer of control of the products, which we deem to be at point of shipment.

Payment is typically due in full within 30 days of invoicing. Revenue is recorded in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. We offer certain volume-based rebates to our distribution customers, which we record as variable consideration when calculating the transaction price. We also provide chargebacks to distributors that sell to end-customers at prices determined under a contract between us and the end-customer.

We use information available at the time and our historical experience to estimate and record provisions for rebates and chargebacks.

We also warrant products against defects and have a policy permitting the return of defective products, for which we accrue and expense at the time of sale using information available and our historical experience. We also provide for extended service-type warranties, which we consider to be separate performance obligations. We allocate a portion of the transaction price to the extended service-type warranty based on its estimated relative selling price, and recognize revenue over the period the warranty service is provided. Our revenues are recorded at the net sales price, which includes an estimate for variable consideration related to rebates, chargebacks and product returns.

Arrangements with Multiple Performance Obligations

We also enter into arrangements which include multiple performance obligations, see Note 1, Basis of Presentation and Summary of Significant Accounting Policies.

The most significant judgments related to these arrangements include:


•	Identifying the various performance obligations of these arrangements.


•	Estimating the relative standalone selling price of each performance obligation, typically using directly observable method or calculated on a cost plus margin basis method.

Contract balances

Our contract balances (deferred revenue) are recorded in accrued liabilities and other long-term liabilities in our consolidated balance sheet (see Note 10, Accrued Liabilities). The following table presents our changes in the contract balances for the year ended December 31, 2018, (in thousands):



	Contract Liabilities
Beginning balance, January 1, 2018	$	(7,066	)
Equipment revenue recognized	6,696
Equipment revenue deferred due to implementation	(4,196		)
Software revenue recognized	6,553
Software revenue deferred due to implementation	(6,269		)
Ending balance, December 31, 2018	$	(4,282	)

As of December 31, 2018, revenue from remaining performance obligations related to implementation of software and equipment is $2.9 million. We expect to recognize substantially all of this revenue within the next three months. Revenue from remaining performance obligations related to annual software licenses is $1.6 million. We expect to recognize substantially all of this revenue over the next twelve months.

Costs to Obtain a Contract with a Customer

As part of the cost to obtain a contract, we may pay incremental commissions to sales employees upon entering into a sales contract. Under ASC Topic 606, we have elected to expense these costs as incurred as the period of benefit is less than one year.

Practical expedients and exemptions

In addition to the practical expedient applied to sales commissions, under ASC Topic 606, we elected to apply the practical expedient for shipping and handling costs incurred after the customer has obtained control of a good. We will continue to treat these costs as a fulfillment cost rather than as an additional promised service.