3.	Revenues

The Company derives total revenues primarily from the assembly of products under supply agreements with its customers and the fabrication of customized optics and glass. The Company recognizes revenue relating to contracts with customers that depicts the transfer of promised goods or services to customers in an amount reflecting the consideration to which the Company expects to be entitled in exchange for such goods or services. In order to meet this requirement, the Company applies the following five steps: (1) identify the contract with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when a performance obligation is satisfied. Revenue is recognized net of any taxes collected from customers, which is subsequently remitted to governmental authorities.

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer. In contracts with multiple performance obligations, the Company identifies each performance obligation and evaluates whether the performance obligation is distinct within the context of the contract at contract inception. The majority of the Company’s contracts have a single performance obligation as the promise to transfer the individual goods or services is not separately identifiable from other promises in the contracts and, therefore, not distinct.

The Company manufactures products that are customized to customers’ specifications, however, control of the products is typically transferred to the customer at the point in time the product is either shipped or delivered, depending on the terms of the arrangement, as the criteria for overtime recognition are not met. On the evaluation of the contracts the Company identified that it did not have contractual rights to bill profit for work in progress in the event of a contract termination which is expected to be infrequent. Further, in limited circumstances, substantive acceptance by the customer exists which results in the deferral of revenue until acceptance is formally received from the customer. Judgment may be required in determining if the acceptance clause is substantive.

Certain customers may request the Company to store finished products purchased by them at the Company’s warehouse. In these instances, the Company receives a written request from the customer asking the Company to hold the inventory at the Company’s warehouse and the ordered goods cannot be used to fulfill other customer orders. In these situations, revenue is only recognized when the goods are completed and ready for shipment and transferred to the Company’s warehouse.

Our customers generally are obligated to purchase finished goods that we have manufactured according to their demand requirements. Materials that are not consumed by our customers within a specified period of time, or are no longer required due to a product’s cancellation or end-of-life, are typically designated as excess or obsolete inventory under our contracts. Once materials are designated as either excess or obsolete inventory, our customers are typically required to purchase such inventory from us even if they have chosen to cancel production of the related products. The excess or obsolete inventory is shipped to the customer and revenue is recognized upon shipment.

A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. In determining the transaction price, the Company evaluates whether the price is subject to refund or adjustment to determine the net consideration to which the Company expects to be entitled. The Company generally does not grant return privileges, except for defective products during the warranty period. The Company generally provides a warranty of between one to five years on the product.

Warranty provision

Provisions for estimated expenses relating to product warranties are made at the time the products are sold using historical experience. Generally, this warranty is limited to workmanship and the Company’s liability is capped at the price of the product. The provisions will be adjusted when experience indicates an expected settlement will differ from initial estimates.

Contract Assets and Liabilities

A contract asset is recognized when the Company has recognized revenues, but not yet an invoice for payment. Contract assets are classified separately on the condensed consolidated balance sheets and transferred to accounts receivable when rights to payment become unconditional. The following table summarizes the activity in the Company’s contract assets during the three-month period ended September 29, 2018:


(amount in thousands)	Contract Assets
Beginning balance, June 30, 2018	$	—
Cumulative effect adjustment at June 30, 2018		9,877
Revenue recognized		27,954
Amounts collected or invoiced		(27,674	)

Ending balance, September 28, 2018	$	10,157

The Company continually evaluates whether advanced payment arrangements with customers result in the recognition of contract liabilities. No such liabilities existed as of September 28, 2018 or June 29, 2018. Separately, accounts receivable, net, represents receivables from contracts with customers.

Contract Costs

The Company has elected the practical expedient to recognize the incremental costs of obtaining a contract as an expense when incurred if the amortization period of the asset that the Company otherwise would have recognized is one year or less. During the three months ended September 28, 2018, the Company did not have any incremental costs of obtaining the contract.

Shipping and Handling

Shipping costs billed to customers are recorded as revenue. Shipping and handling expense related to costs incurred to deliver product are recognized within cost of goods sold. The Company accounts for shipping and handling activities that occur after control has transferred as a fulfillment cost as opposed to a separate performance obligation, and the costs of shipping and handling are recognized concurrently with the related revenue.

In accordance with the new revenue standard requirements, the disclosure of the impact of adoption on the Company’s unaudited condensed consolidated statements of operations and comprehensive income for the three months ended September 28, 2018 and unaudited condensed consolidated balance sheets as of September 28, 2018 was as follows:

Condensed Consolidated Statement of Operations

Three Months Ended September 28, 2018


	Impact of Adopting ASC 606
(amount in thousands)	As Reported			Adjustment			Balance without ASC 606 Adoption
Revenues	$	377,177		$	(280	)⁽¹⁾	$	376,897
Cost of revenues	$	(336,901	)	$	249	⁽²⁾	$	(336,652	)

Gross profit	$	40,276		$	(31	)⁽³⁾	$	40,245

Net income	$	27,850		$	(31	)⁽³⁾	$	27,819
Earnings per share
Basic	$	0.76		$	(0.00	)	$	0.76

Diluted	$	0.75		$	(0.00	)	$	0.75

⁽¹⁾	Adjustment relates to certain manufacturing contracts with vendor managed inventory arrangements for which revenue was recognized at shipping.

⁽²⁾	Adjustment relates to costs associated with revenue recognized.

⁽³⁾	Adjustment relates to net impact on income upon adoption of ASC 606.

Condensed Consolidated Balance Sheets

As of September 28, 2018


	Impact of Adopting ASC 606
(amount in thousands)	As Reported		Adjustments			Balance without ASC 606 Adoption
Assets
Contract assets	$	10,157	$	(10,157	)⁽¹⁾	$	—
Inventory, net	$	278,397	$	8,921	⁽²⁾	$	287,318
Liabilities and Shareholders’ Equity
Retained earnings	$	661,478	$	(1,236	)⁽³⁾	$	660,242

⁽¹⁾	Majority of adjustment relates to certain manufacturing contracts with vendor managed inventory arrangements for which revenue was recognized on shipment.

⁽²⁾	Adjustment relates to reduction of finished goods inventory for vendor managed inventory.

⁽³⁾	Adjustment relates to cumulative effect adjustment upon adoption of ASC 606.

Revenue by Geographic Area:

Total revenues are attributed to a particular geographic area based on the bill-to-location of the customers. The Company operates primarily in three geographic regions: North America, Asia-Pacific and Europe. The following table presents total revenues by geographic regions:


(amount in thousands)	Three Months Ended September 28, 2018		As a % of Total Revenues
North America	$	179,826		47.7	%
Asia-Pacific		151,947		40.3
Europe		45,404		12.0

	$	377,177		100.0	%

The following table sets forth our revenues by end market.


(amount in thousands)	Three Months Ended September 28, 2018		As a % of Total Revenues
Optical communications	$	280,768		74.4	%
Lasers, sensors and other		96,409		25.6

Total	$	377,177		100.0	%