REVENUES FROM CONTRACTS WITH CUSTOMERS

Summary of Accounting Policies on Revenue Recognition

Revenue is recognized upon the transfer of control of promised products or services to the customers in an amount that reflects the consideration the Company expects to receive in exchange for those products and services.

Total revenue, net, includes product sales, product royalties and other revenues, such as fees received from services.

For products shipped with FOB shipping point terms, the control of the product passes to the customer at the time of shipment. For shipments in which the control of the product is transferred when the customer receives the product, the Company recognizes revenue upon receipt by the customer. Certain products that the Company produces for private label customers have no alternative use and the Company has a right of payment for performance to date. Revenues from those products are recognized over the period that the Company manufactures these products, which is approximately one to three months. The Company uses the input method to measure the manufacturing activities completed to date, which depicts the progress of the Company's performance obligation of transferring control of goods being manufactured for private label customers.

A portion of the Company's product revenue is generated from consigned inventory maintained at hospitals and distributors, and also from inventory physically held by field sales representatives. For these types of products sales, the Company retains control until the product has been used or implanted, at which time revenue is recognized.

Revenues from sale of products and services are evidenced by either a contract with the customer or a valid purchase order and an invoice which includes all relevant terms of sale. For product sales, invoices are generally issued upon the transfer of control (or upon the completion of the manufacturing in the case of the private label transactions recognized over time) and are typically payable 30 days after the invoice date. The Company performs a review of each specific customer's creditworthiness and ability to pay prior to acceptance as a customer. Further, the Company performs periodic reviews of its customers' creditworthiness prospectively.

Performance Obligations

The Company's performance obligations consist mainly of transferring control of goods and services identified in the contracts, purchase orders, or invoices. The Company has no significant multi-element contracts with customers.

Significant Judgments

Usage-based royalties and licenses are estimated based on the provisions of contracts with customers and recognized in the same period that the royalty-based products are sold by the Company's strategic partners. The Company estimates and recognizes royalty revenue based upon communication with licensees, historical information, and expected sales trends. Differences between actual reported licensee sales and those that were estimated are adjusted in the period in which they become known, which is typically the following quarter. Historically, such adjustments have not been significant.

The Company estimates returns, price concessions, and discount allowances using the expected value method based on historical trends and other known factors. Rebate allowances are estimated using the most likely method based on each customer contract.

The Company's return policy, as set forth in its product catalogs and sales invoices, requires the Company to review and authorize the return of a product in advance. Upon the authorization, a credit will be issued for the goods returned within a set amount of days from the shipment, which is generally ninety days.

The Company disregards the effects of a financing component if the Company expects, at contract inception, that the period between the transfer and customer payment for the good or services will be one year or less. The Company has no significant revenues recognized on payments expected to be received more than one year after the transfer of control of products or services to customers.

Contract Asset and Liability

Revenues recognized from the Company's private label business that are not invoiced to the customers as a result of recognizing revenue over time are recorded as a contract asset included in the prepaid expenses and other current assets account in the consolidated balance sheet.

Other operating revenues may include fees received under service agreements. Non-refundable fees received under multiple-period service agreements are recognized as revenue as the Company satisfies the performance obligations to the other party. A portion of the transaction price allocated to the performance obligations to be satisfied in the future periods is recognized as contract liability.

The following table summarized the changes in the contract asset and liability balances for the year ended December 31, 2018:



		Total
	(amounts in thousands)
Contract Asset
Contract asset, January 1, 2018		$	3,552
Transferred to trade receivable of contract asset included in beginning of the year contract asset		(3,552		)
Contract asset, net of transferred to trade receivables on contracts during the period		4,193
Contract asset, December 31, 2018		$	4,193

Contract Liability
Contract liability, January 1, 2018		$	11,059
Recognition of revenue included in beginning of year contract liability		(3,081		)
Contract liability, net of revenue recognized on contracts during the period		4,780
Foreign currency translation		(42		)
Contract liability, December 31, 2018		$	12,716

At December 31, 2018, the short-term portion of the contract liability of $3.8 million and the long-term portion of $8.9 million were included in accrued expenses and other current liabilities and other liabilities in the consolidated balance sheet.

As of December 31, 2018, the Company is expected to recognize revenue of approximately $3.8 million in 2019, $2.8 million in 2020, $1.9 million in 2021, $1.2 million in 2022, $0.8 million in 2023, and $2.2 million thereafter.

Shipping and Handling Fees

The Company elected to account for shipping and handling activities as a fulfillment cost rather than a separate performance obligation. Amounts billed to customers for shipping and handling are included as part of the transaction price and recognized as revenue when control of underlying products is transferred to the customer. The related shipping and freight charges incurred by the Company are included in the cost of goods sold.

Product Warranties

Certain of the Company's medical devices, including monitoring systems and neurosurgical systems, are designed to operate over long periods of time. These products are sold with warranties which may extend for up to two years from the date of purchase. The warranties are not considered a separate performance obligation. The Company estimates its product warranties using the expected value method based on historical trends and other known factors. The Company includes them in accrued expenses and other current liabilities in the consolidated balance sheet.

Taxes Collected from Customers

The Company elected to exclude from the measurement of the transaction price all taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected by the entity from a customer.

Disaggregated Revenue

The following table presents revenues disaggregated by the major sources of revenues for the years-ended December 31, 2018 and 2017 (amounts in thousands):



	Year Ended December 31, 2018		Year Ended December 31, 2017		Year Ended December 31, 2016
	(amounts in thousands)
Neurosurgery	684,148		446,994		367,985
Precision Tools and Instruments	279,781		$	273,307	$	264,539
Total Codman Specialty Surgical	963,929		720,301		632,524

Wound Reconstruction	305,465		269,068		178,524
Extremity Orthopedics	96,688		98,876		97,067
Private Label	106,359		99,991		83,960
Total Orthopedics and Tissue Technologies	508,512		467,935		359,551
Total revenue	$	1,472,441	$	1,188,236	$	992,075

See Note 16, Segment and Geographical Information, for details of revenues based on the location of the customer.

Effect of Adoption of ASC Topic 606

On January 1, 2018, the Company adopted Topic 606 using the modified retrospective method. Results of operations for the reporting periods after January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with Topic 605, Revenue Recognition.

The adoption of Topic 606 resulted in an increase to the opening retained earnings of $1.9 million, which was recorded net of taxes as of January 1, 2018 to reflect the change in timing of the recognition of revenue related to the Company's private label business from point in time to over time during the manufacturing process and goods in transit for which control was transferred to customers at the time of shipment. Total assets and liabilities increased by $7.1 million and $5.2 million, respectively, as of January 1, 2018.

The impact of adoption of Topic 606 to the Company's consolidated statement of operations for the year ended December 31, 2018 was as follows:



	Year Ended December 31, 2018
	As Reported			Excluding Impact of Topic 606
	(Amounts in thousands)
Statement of Operations
Total revenue, net	$	1,472,441		$	1,468,075
Cost of goods sold	571,496			570,028
Income tax benefit	(3,398		)	(4,119		)
Net income	60,801			58,624

The adoption of Topic 606 had no significant impact on the Company's consolidated balance sheet as of December 31, 2018.