REVENUE RECOGNITION

The Company adopted ASC 606 - Revenue from Contracts with Customers using the modified retrospective method effective July 1, 2018. The Company completed an analysis of revenue streams at each of its business units and evaluated the impact of adopting ASC 606 on revenue recognition. The Company primarily sells purchased products and the majority of its revenue is recognized at a point in time. The cumulative effect of initially applying ASC 606 resulted in a net increase to the opening retained earnings balance of $3,429, net of tax, at July 1, 2018. The transition adjustment is comprised of two components. The first component is recognition of revenue from bill and hold arrangements. The second component is recognition of revenue from contracts that meet the criteria to recognize revenue over time as the underlying products have no alternative use and the Company has a right to payment for performance completed to date. Revenue for periods prior to July 1, 2018 has not been adjusted and continues to be reported under ASC Topic 605 - Revenue Recognition.

Revenue Recognition

The Company primarily sells purchased products distributed through its network of service centers and recognizes revenue at a point in time when control of the product transfers to the customer, typically upon shipment from an Applied facility or directly from a supplier. For products that ship directly from suppliers to customers, Applied acts as the principal in the transaction and recognizes revenue on a gross basis. Revenue recognized over time is not significant. Revenue is measured as the amount of consideration expected to be received in exchange for the products and services provided, net of allowances for product returns, variable consideration, and any taxes collected from customers that will be remitted to governmental authorities. Shipping and handling costs are recognized in net sales when they are billed to the customer. The Company has elected to account for shipping and handling activities as fulfillment costs. There are no significant costs associated with obtaining customer contracts.

Payment terms with customers vary by the type and location of the customer and the products or services offered. The Company does not adjust the promised amount of consideration for the effects of significant financing components based on the expectation that the period between when the Company transfers a promised good or service to a customer and when the customer pays for that good or service will be one year or less. Arrangements with customers that include payment terms extending beyond one year are not significant.

Accounts Receivable

Accounts receivable are stated at their estimated net realizable value and consist of amounts billed or billable and currently due from customers. The Company maintains an allowance for doubtful accounts, which reflects management’s best estimate of probable losses based on an analysis of customer accounts, known troubled accounts, historical experience with write-offs, and other currently available evidence.

Variable Consideration

The Company’s products are generally sold with a right of return and may include variable consideration in the form of incentives, discounts, credits or rebates. Product returns are estimated based on historical return rates. The Company estimates and recognizes variable consideration based on historical experience to determine the expected amount to which the Company will be entitled in exchange for transferring the promised goods or services to a customer. The Company records variable consideration as an adjustment to the transaction price in the period it is incurred. The realization of variable consideration occurs within a short period of time from product delivery; therefore, the time value of money effect is not significant.

Contract Assets

The Company’s contract assets consist of un-billed amounts resulting from contracts for which revenue is recognized over time using the cost-to-cost method, and for which revenue recognized exceeds the amount billed to the customer. On July 1, 2018, $13,823 of contract assets were recognized as part of the cumulative effect adjustment resulting from the adoption of ASC 606.

Activity related to contract assets, which are included in other current assets on the condensed consolidated balance sheet, is as follows:



	March 31, 2019		July 1, 2018		$ Change			% Change
Contract assets	$	8,732	$	13,823	$	(5,091	)	(36.8	)%

The following tables summarize the impacts of ASC 606 on the Company's condensed consolidated financial statements:



	Three Months Ended March 31, 2019
	As Reported			Adjustments		Balances without adoption of ASC 606
Net sales	$	885,443		$	569	$	886,012
Cost of sales	629,884			369		630,253
Gross profit	255,559			200		255,759
Selling, distribution and administrative expense, including depreciation	189,456			57		189,513
Intangible Impairment	31,594			—		31,594
Operating income	34,509			143		34,652
Interest expense, net	9,947			—		9,947
Other income, net	(1,256		)	—		(1,256		)
Income before income taxes	25,818			143		25,961
Income tax expense	9,283			37		9,320
Net income	$	16,535		$	106	$	16,641



	Nine Months Ended March 31, 2019
	As Reported			Adjustments		Balances without adoption of ASC 606
Net sales	$	2,589,996		$	4,886	$	2,594,882
Cost of sales	1,839,724			3,472		1,843,196
Gross profit	750,272			1,414		751,686
Selling, distribution and administrative expense, including depreciation	556,865			331		557,196
Intangible Impairment	31,594			—		31,594
Operating income	161,813			1,083		162,896
Interest expense, net	30,001			—		30,001
Other income, net	(549		)	—		(549		)
Income before income taxes	132,361			1,083		133,444
Income tax expense	28,171			273		28,444
Net income	$	104,190		$	810	$	105,000



	As of March 31, 2019
	As Reported		Adjustments			Balances without adoption of ASC 606
Assets
Other current assets	$	49,380	$	(8,732	)	$	40,648
Inventories	454,555		11,461			466,016
Other assets	33,761		209			33,970

Liabilities
Other current liabilities	62,731		6,649			69,380
Compensation and related benefits	69,324		(402		)	68,922
Other liabilities	77,497		(692		)	76,805

Equity
Retained Earnings	$	882,848	$	(2,619	)	$	880,229

Disaggregation of Revenues

The following tables present the Company's net sales by reportable segment and by geographic areas based on the location of the facility shipping the product for the three and nine months ended March 31, 2019. Other countries consist of Mexico, Australia, New Zealand, and Singapore.



	Three Months Ended March 31,
	2019						2018
	Service Center Based Distribution		Fluid Power & Flow Control		Total		Service Center Based Distribution		Fluid Power & Flow Control		Total
Geographic Areas:
United States	$	520,180	$	251,922	772,102		$	491,698	$	222,197	$	713,895
Canada	66,725		—		66,725		68,112		—		$	68,112
Other countries	43,533		3,083		46,616		41,404		4,254		$	45,658
Total	$	630,438	$	255,005	$	885,443	$	601,214	$	226,451	$	827,665



	Nine Months Ended March 31,
	2019						2018
	Service Center Based Distribution		Fluid Power & Flow Control		Total		Service Center Based Distribution		Fluid Power & Flow Control		Total
Geographic Areas:
United States	$	1,490,289	$	756,433	2,246,722		$	1,399,513	$	438,958	$	1,838,471
Canada	204,401		—		204,401		202,408		—		$	202,408
Other countries	129,095		9,778		138,873		123,813		10,861		$	134,674
Total	$	1,823,785	$	766,211	$	2,589,996	$	1,725,734	$	449,819	$	2,175,553

The following tables present the Company’s percentage of revenue by reportable segment and major customer industry for the three and nine months ended March 31, 2019:



	Three Months Ended March 31, 2019
	Service Center Based Distribution		Fluid Power & Flow Control		Total
General Industry	35.8	%	41.7	%	37.5	%
Industrial Machinery	10.2	%	24.2	%	14.2	%
Metals	12.0	%	8.6	%	11.0	%
Food	10.5	%	2.5	%	8.2	%
Oil & Gas	10.1	%	2.3	%	7.9	%
Chem/Petrochem	2.8	%	12.8	%	5.7	%
Forest Products	7.0	%	3.6	%	6.0	%
Cement & Aggregate	6.9	%	1.0	%	5.2	%
Transportation	4.7	%	3.3	%	4.3	%
Total	100.0	%	100.0	%	100.0	%



	Nine Months Ended March 31, 2019
	Service Center Based Distribution		Fluid Power & Flow Control		Total
General Industry	35.9	%	44.0	%	38.2	%
Industrial Machinery	9.7	%	22.0	%	13.3	%
Metals	12.2	%	8.3	%	11.1	%
Food	10.4	%	2.5	%	8.1	%
Oil & Gas	10.0	%	2.2	%	7.7	%
Chem/Petrochem	3.1	%	14.1	%	6.3	%
Forest Products	7.6	%	3.0	%	6.3	%
Cement & Aggregate	6.5	%	1.0	%	4.9	%
Transportation	4.6	%	2.9	%	4.1	%
Total	100.0	%	100.0	%	100.0	%

The following tables present the Company’s percentage of revenue by reportable segment and product line for the three and nine months ended March 31, 2019:



	Three Months Ended March 31, 2019
	Service Center Based Distribution		Fluid Power & Flow Control		Total
Power Transmission	34.5	%	2.3	%	25.2	%
Fluid Power	13.5	%	41.3	%	21.5	%
General Maintenance; Hose Products	24.7	%	4.7	%	18.9	%
Bearings, Linear & Seals	27.3	%	0.4	%	19.6	%
Specialty Flow Control	—	%	51.3	%	14.8	%
Total	100.0	%	100.0	%	100.0	%



	Nine Months Ended March 31, 2019
	Service Center Based Distribution		Fluid Power & Flow Control		Total
Power Transmission	33.8	%	1.7	%	24.3	%
Fluid Power	13.7	%	39.0	%	21.2	%
General Maintenance; Hose Products	26.0	%	5.0	%	19.7	%
Bearings, Linear & Seals	26.5	%	0.3	%	18.8	%
Specialty Flow Control	—	%	54.0	%	16.0	%
Total	100.0	%	100.0	%	100.0	%