Note 16 – Revenue from Contracts with Customers

Revenue Recognition

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, to achieve a consistent application of revenue recognition, resulting in a single revenue model to be applied by reporting companies under U.S. generally accepted accounting principles. Under the new model, recognition of revenue occurs when a customer obtains control of promised goods or services in an amount that reflects the consideration to which the providing entity expects to be entitled in exchange for those goods or services. In addition, the new standard requires that reporting companies disclose the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.

The Company manufactures some products to customer specifications which are customized to such a degree that it is unlikely that another entity would purchase these products or that we could modify these products for another customer. These products are deemed to have no alternative use to the Company whereby we have an enforceable right to payment evidenced by contractual termination clauses. In accordance with ASC 606, for those circumstances we recognize revenue on an over-time basis. Revenue recognition does not occur until the product meets the definition of “no alternative use” and therefore, items that have not yet reached that point in the production process are not included in the population of items with over-time revenue recognition.

As appropriate, we record estimated reductions to revenue for customer returns, allowances, and warranty claims. Provisions for such reductions are made at the time of sale and are typically derived from historical trends and other relevant information.

Performance Obligations

Manufactured goods are our primary performance obligations. Revenue related to our performance obligations is predominantly recognized at a point in time consistent with our shipping terms. For certain products that meet the criteria of no alternative use whereby the Company has the right to payment, we recognize revenue on an over-time basis.

The selection of a method to measure progress toward completion of a contract requires judgment and is based on the nature of the products or services to be provided. We use the cost incurred method to measure the progress of our contracts with no alternative use products whereby the Company has the right to payment as we believe it is the best depiction of the transferring of value to the customer. Under the cost incurred method, the extent of progress toward completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the contract. Contract costs include labor, materials and subcontractors costs, as well as an allocation of indirect costs. Net sales, including estimated fees or profits, are recorded as costs are incurred.

Performance obligations are typically satisfied within three months of receipt of a customer order; therefore, a change in cost estimates will not have a material impact on the percentage of completion noted at the prior quarter end. Our typical payment terms with customers range from 30 days to 105 days. Product pricing is determined and negotiated on a standalone basis. Product pricing is determined without consideration for the pricing, margin, or other information specific to other products that the same customer or other parties related to that customer may also purchase, whether in the same or a different contract. Management allocates the transaction price to its performance obligations primarily based on stand-alone selling prices that may have been developed via specific customer quote for no alternative use products and non-standard products or standard price lists for standard products. The accounting for the estimate of variable consideration is consistent with our current practice.

Contract modifications occur when there is a change to the products, price, or both. Contract modifications are treated as a separate contract if there are additions to promised goods and services that are distinct and if the price for that separate performance obligation reflects the stand-alone selling price for those goods or services. However, if the obligations in the contract modification are not distinct and are part of a single performance obligation that is only partially satisfied, the contract is not determined to be a separate contract and is accounted for as a revision to an existing contract. These modifications are accounted for prospectively when remaining promises are distinct from those previously transferred, or through a cumulative catch-up adjustment.

Contract Balances

The Company has contract assets primarily related to unbilled revenue for revenue recognized related to products that are deemed to have no alternative use whereby we have the right to payment. Revenue is recognized in advance of billing to the customer in these circumstances as billing is typically performed at the time of shipment to the customer. The unbilled revenue is included in the contract assets on the consolidated statements of financial position.

The Company did not have any contract liabilities as of December 31, 2018.

The following table presents contract assets by operating segment as of December 31, 2018:

December 31, 2018

(Dollars in thousands)

Advanced Connectivity Solutions

Elastomeric Material Solutions

Power Electronics Solutions

Other

Total

Contract Assets

—

943

19,738

2,047

22,728

No impairment losses were recognized during the year ended December 31, 2018 on any receivables or contract assets arising from our contracts with customers.

Transition

We adopted ASU 2014-09 in the first quarter of 2018 retrospectively with the cumulative effect of applying the standard recognized at the date of implementation and without restatement of comparative periods. This application of the new standard resulted in an increase to the January 1, 2018 balance of retained earnings of approximately $4.2 million, net of tax.

The guidance was applied to all contracts that were not completed at the date of implementation. The primary reason for the impact of adoption is due to over-time revenue recognition.

If the criteria for over-time recognition are not met, revenue is recognized at a point in time. In considering at what point in time control of the product or service has transferred to the customer, we consider qualitative factors such as: 1) present right to payment; 2) legal title to the asset; 3) physical possession; 4) risks and rewards of ownership; and, 5) customer acceptance.

The impact of adoption using the modified retrospective method on the Company’s consolidated financial statements is as follows:



	As of
Consolidated Statements of Financial Position:	December 31, 2017					January 1, 2018
(Dollars in thousands)	Under ASC 605		Impact of Adoption			Under ASC 606
Contract assets	$	—	$	18,099		$	18,099
Inventories	112,557		(12,307		)	100,250
Deferred income taxes	10,706		1,580			12,286
Retained earnings	684,540		4,212			688,752

The following tables set forth the amount by which each financial statement line item is affected in the current reporting period by the application of ASC 606, as compared to the guidance that was in effect before its adoption. The impact of adoption on the consolidated financial statements as of and for the year ended December 31, 2018 is as follows:



Consolidated Statements of Operations:	Year Ended
Consolidated Statements of Operations:	December 31, 2018				December 31, 2018
(Dollars in thousands, except per share amounts)	Under ASC 605		Impact of Adoption		Under ASC 606
Net sales	$	874,462	$	4,629	$	879,091
Cost of sales	565,160		3,148		568,308
Income tax expense	22,558		380		22,938
Net income	86,550		1,101		87,651

Basic earnings per share	$	4.71	$	0.06	$	4.77
Diluted earnings per share	$	4.64	$	0.06	$	4.70



	As of
Consolidated Statements of Financial Position:	December 31, 2018					December 31, 2018
(Dollars in thousands)	Under ASC 605		Impact of Adoption			Under ASC 606
Contract assets	$	—	$	22,728		$	22,728
Inventories	148,092		(15,455		)	132,637
Deferred income taxes	8,846		1,960			10,806
Retained earnings	771,090		5,313			776,403



	Year Ended
Consolidated Statements of Cash Flows:	December 31, 2018						December 31, 2018
(Dollars in thousands)	Under ASC 605			Impact of Adoption			Under ASC 606
Cash provided by operating activities:
Net income	$	86,550		$	1,101		$	87,651
Deferred income taxes	(3,705		)	380			(3,325		)
Contract assets	—			(22,728		)	(22,728		)
Inventories	(34,468		)	15,455			(19,013		)
Other, net	(4,801		)	5,792			991
Net cash provided by operating activities	66,820			—			66,820

Practical Expedients

The Company recognizes the incremental costs of obtaining a contract as an expense when incurred as the amortization period of the asset is expected to be one year or less. The Company does not adjust the promised amount of consideration for the effects of a significant financing component as we expect, at contract inception, that the period between when the transfer of goods to our customer occurs and when the customer fully pays for the goods will be one year or less. We do not disclose the Company’s unsatisfied performance obligations as they are part of contracts that have an original expected duration of one year or less.