MOTORCAR PARTS OF AMERICA INCMPAA
MOTORCAR PARTS OF AMERICA INC Revenue Disclosure
| 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 | ) | ||||
About Revenue Disclosures
Revenue disclosures under ASC 606 explain how a company identifies performance obligations, allocates transaction prices, and determines when revenue is recognized. This section is essential for understanding whether reported revenue reflects genuine economic activity or aggressive accounting choices. Analysts examine the mix of point-in-time versus over-time recognition, which directly affects revenue timing and comparability.
Key signals: rising contract liabilities (deferred revenue) suggest strong future revenue visibility, while declining contract assets may indicate slowing project milestones. Watch for variable consideration estimates — rebates, returns, and performance bonuses that require management judgment. Significant changes in disaggregated revenue by geography or product line can reveal shifting business mix before it appears in headline numbers. Compare revenue growth against contract liability growth to assess sustainability, and scrutinize any changes in the timing of recognition that coincide with earnings pressure.