4.	Revenue Recognition

As a result of the retrospective adoption of ASC 606 and the resultant changes in Company policy discussed in Note 3, the effect of the adoption on the consolidated statements of operations was an increase to the Company’s revised retained earnings as of April 1, 2016 by approximately $345,000, net of tax.

The primary result of the adoption effects upon the financial statement was due to an acceleration of revenue recognition for Remanufactured Cores not expected to be returned to the Company upon the initial recognition of revenue. Prior to adopting ASC 606, the Company had delayed recognizing revenue for sales of cores not expected to be replaced by a similar Used Core sent back under the core exchange program until it believed all of the following criteria were met:

●

The Company has a signed agreement with the customer covering the nominally priced Remanufactured Cores not expected to be replaced by a similar Used Core sent back under the core exchange program. This agreement must specify the number of Remanufactured Cores its customer will pay cash for in lieu of sending back a similar Used Core and the basis on which the nominally priced Remanufactured Cores are to be valued (normally the average price per Remanufactured Core stipulated in the agreement).

●

The contractual date for reconciling the Company’s records and customer’s records of the number of nominally priced Remanufactured Cores not expected to be replaced by a similar Used Core sent back under the core exchange program must be in the current or a prior period.

●

The reconciliation of the nominally priced Remanufactured Cores must be completed and agreed to by the customer.

●

The amount must be billed to the customer.

In order to properly determine the transaction price related to the Company’s sales contracts, the Company has also analyzed its various forms of consideration paid to its customers, including upfront payments for future contracts. Based on the analysis performed, the Company identified no changes to its legacy accounting practices as a result of the adoption of ASC 606 to account for upfront payments to the Company’s customers. Accordingly, if the Company expects to generate future revenues associated with an upfront payment, then an asset is recognized and amortized over the appropriate period of time as a reduction of revenue. If the Company does not expect to generate additional revenue, then the upfront payment is recognized in the consolidated statements of operations when payment occurs as a reduction of revenue.

Similarly, the Company has analyzed discounts and promotions offered to customers. In reviewing these discounts, the Company assessed whether any discounts were offered incremental to the range of discounts typically given for its goods to specific customer classes. In performing this analysis, the Company determined that there are no incremental discounts offered to customers and as such, its discounts do not represent a material right to the Company’s customers. As such, the Company will account for these discounts as variable consideration, as a reduction of revenue in the consolidated statements of operations when the product the discount is applicable to is sold.

The adoption of the new revenue recognition standard impacted the revised consolidated statements of operations for the year ended March 31, 2018 as follows:

	Year Ended March 31, 2018
			Adoption of
	As Revised		ASC 606		As Adjusted

Net sales	$	426,991,000	$	557,000	$	427,548,000
Cost of goods sold		320,449,000		66,000		320,515,000
Gross profit		106,542,000		491,000		107,033,000
Operating expenses:
General and administrative		35,477,000		-		35,477,000
Sales and marketing		15,030,000		-		15,030,000
Research and development		5,692,000		-		5,692,000
Total operating expenses		56,199,000		-		56,199,000
Operating income		50,343,000		491,000		50,834,000
Interest expense, net		15,445,000		-		15,445,000
Income before income tax expense		34,898,000		491,000		35,389,000
Income tax expense		16,072,000		53,000		16,125,000
Net income	$	18,826,000	$	438,000	$	19,264,000
Basic net income per share	$	1.00	$	0.02	$	1.02
Diluted net income per share	$	0.96	$	0.02	$	0.99

The adoption of the new revenue recognition standard impacted the revised consolidated statements of operations for the year ended March 31, 2017 as follows:

	Year Ended March 31, 2017
			Adoption of
	As Revised		ASC 606			As Adjusted

Net sales	$	422,882,000	$	(824,000	)	$	422,058,000
Cost of goods sold		305,926,000		(758,000	)		305,168,000
Gross profit		116,956,000		(66,000	)		116,890,000
Operating expenses:
General and administrative		31,125,000		-			31,125,000
Sales and marketing		12,126,000		-			12,126,000
Research and development		3,824,000		-			3,824,000
Total operating expenses		47,075,000		-			47,075,000
Operating income		69,881,000		(66,000	)		69,815,000
Interest expense, net		13,094,000		-			13,094,000
Income before income tax expense		56,787,000		(66,000	)		56,721,000
Income tax expense		18,011,000		(25,000	)		17,986,000
Net income	$	38,776,000	$	(41,000	)	$	38,735,000
Basic net income per share	$	2.08	$	(0.00	)	$	2.08
Diluted net income per share	$	2.00	$	(0.00	)	$	1.99

Also, as a result of the adoption of ASC 606 and the resultant changes in Company policy noted above, the effect of the adoption on the consolidated balance sheets was to create contract asset and contract liability accounts to reflect those balance sheet items being impacted by the new revenue recognition requirements. The main drivers of the reclassifications were (i) the need to accommodate the aggregation of Remanufactured Core and Unit portion of the product sales under one single performance obligation and (ii) the creation of contract asset and contract liability accounts to appropriately segregate those balance sheet items related to the ongoing transactions under the Company’s customer contracts.

Detailed impacts on specific consolidated balance sheet account can be found in the individual footnotes covering the separate line items on the face of the consolidated balance sheet.

The adoption of the new revenue recognition standard impacted the revised consolidated balance sheet at March 31, 2018 as follows:

	March 31, 2018
				Adoption of
	As Revised			ASC 606			As Adjusted
ASSETS
Current assets:
Cash and cash equivalents	$	13,049,000		$	-		$	13,049,000
Short-term investments		2,828,000			-			2,828,000
Accounts receivable — net		15,738,000			47,436,000			63,174,000
Inventory— net		76,275,000			84,935,000			161,210,000
Inventory unreturned		7,508,000			-			7,508,000
Contract assets		-			23,206,000			23,206,000
Income tax receivable		7,972,000			-			7,972,000
Prepaid expenses and other current assets		15,104,000			(6,496,000	)		8,608,000
Total current assets		138,474,000			149,081,000			287,555,000
Plant and equipment — net		28,322,000			-			28,322,000
Long-term core inventory — net		298,294,000			(298,294,000	)		-
Long-term core inventory deposits		5,569,000			(5,569,000	)		-
Long-term deferred income taxes		6,937,000			(239,000	)		6,698,000
Long-term contract assets		-			222,731,000			222,731,000
Goodwill		2,551,000			-			2,551,000
Intangible assets — net		3,766,000			-			3,766,000
Other assets		21,995,000			(21,191,000	)		804,000
TOTAL ASSETS	$	505,908,000		$	46,519,000		$	552,427,000
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	73,273,000		$	-		$	73,273,000
Accrued liabilities		12,048,000			-			12,048,000
Customer finished goods returns accrual		17,805,000			-			17,805,000
Accrued core payment		16,536,000			(16,536,000	)		-
Contract liabilities		-			32,603,000			32,603,000
Revolving loan		54,000,000			-			54,000,000
Other current liabilities		4,471,000			-			4,471,000
Current portion of term loan		3,068,000			-			3,068,000
Total current liabilities		181,201,000			16,067,000			197,268,000
Term loan, less current portion		13,913,000			-			13,913,000
Long-term accrued core payment		18,473,000			(18,473,000	)		-
Long-term deferred income taxes		226,000			-			226,000
Long-term contract liabilities		-			48,183,000			48,183,000
Other liabilities		5,957,000			-			5,957,000
Total liabilities		219,770,000			45,777,000			265,547,000
Commitments and contingencies
Shareholders' equity:
Preferred stock; par value $.01 per share, 5,000,000 shares authorized; none issued		-			-			-
Series A junior participating preferred stock; par value $.01 per share, 20,000 shares authorized; none issued		-			-			-
Common stock; par value $.01 per share, 50,000,000 shares authorized; 18,893,102 shares issued and outstanding at March 31, 2018		189,000			-			189,000
Additional paid-in capital		213,609,000			-			213,609,000
Retained earnings		77,768,000			742,000			78,510,000
Accumulated other comprehensive loss		(5,428,000	)		-			(5,428,000	)
Total shareholders' equity		286,138,000			742,000			286,880,000
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	505,908,000		$	46,519,000		$	552,427,000

The adoption of the new revenue recognition standard impacted the revised statement of cash flows for the year ended March 31, 2018 as follows:

	Year Ended March 31, 2018
				Adoption of
Cash flows from operating activities:	As Revised			ASC 606			As Adjusted
Net income	$	18,826,000		$	438,000		$	19,264,000
Adjustments to reconcile net income to net cash used in operating activities:
Amortization of core premiums paid to customers		-			3,588,000			3,588,000
Deferred income taxes		1,495,000			53,000			1,548,000
Accounts receivable		10,854,000			(14,152,000	)		(3,298,000	)
Inventory		(6,847,000	)		(26,808,000	)		(33,655,000	)
Prepaid expenses and other current assets		(2,825,000	)		1,860,000			(965,000	)
Other assets		404,000			(524,000	)		(120,000	)
Long-term core inventory		(46,978,000	)		46,978,000			-
Contract assets, net		-			(25,028,000	)		(25,028,000	)
Contract liabilities, net		-			23,871,000			23,871,000
Accrued core payments		10,276,000			(10,276,000	)		-
Net cash used in operating activities	$	(13,944,000	)	$	-		$	(13,944,000	)

The adoption of the new revenue recognition standard impacted the revised statement of cash flows for the year ended March 31, 2017 as follows:

	Year Ended March 31, 2017
				Adoption of
Cash flows from operating activities:	As Revised			ASC 606			As Adjusted
Net income	$	38,776,000		$	(41,000	)	$	38,735,000
Adjustments to reconcile net income to net cash used in operating activities:
Amortization of core premiums paid to customers		-			3,232,000			3,232,000
Deferred income taxes		6,865,000			(25,000	)		6,840,000
Accounts receivable		(18,145,000	)		8,826,000			(9,319,000	)
Inventory		(10,058,000	)		(10,655,000	)		(20,713,000	)
Prepaid expenses and other current assets		(3,251,000	)		1,944,000			(1,307,000	)
Other assets		(4,364,000	)		4,060,000			(304,000	)
Long-term core inventory		(25,245,000	)		25,245,000			-
Contract assets, net		-			(24,584,000	)		(24,584,000	)
Contract liabilities, net		-			(11,182,000	)		(11,182,000	)
Accrued core payments		(3,180,000	)		3,180,000			-
Net cash used in operating activities	$	(5,269,000	)	$	-		$	(5,269,000	)