Gary Maier - Maier & Company, Inc. Selwyn Joffe - Chairman of the Board, President, Chief Executive Officer David Lee - Chief Financial Officer.

Steve Dyer - Craig-Hallum Jimmy Baker - B. Riley & Company Matt Koranda - Capital Partners.

Good day, ladies and gentlemen. Welcome to the Motorcar Parts of America's Fiscal 2015 Third Quarter Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct the question-and-answer session and instructions will follow at that time.

[Operator Instructions] As a reminder, today's conference call is being recorded. I would now like to turn the conference over to Gary Maier of Investor Relations. Sir, you may begin..

Thank you, Shannon. Thanks, everyone, for joining us for today's fiscal third quarter call. Before we begin, I turn the call over to Selwyn Joffe, Chairman, President and Chief Executive Officer and David Lee, the Company's Chief Financial Officer. I would like to remind everyone of the Safe Harbor statements included in today's press release.

The Private Securities Litigation Reform Act of 1995 provides a Safe Harbor for forward certain forward-looking statements, including statements made during the course of today's call. Such forward-looking statements are based on the Company's current expectations and beliefs concerning future developments and their potential effects on the Company.

There can be no assurance that future developments affecting the Company will be those anticipated by Motorcar Parts of America. Actual results may differ from those projected in these forward-looking statements.

These forward-looking statements involve significant risks and uncertainties, some of which are beyond the control of the Company and are subject to change based upon various factors. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

For a more detailed discussion of some of the ongoing risks and uncertainties of the Company's business, I refer you to the various filings with the Securities and Exchange Commission. With that said, I would like to begin the call and turn it over to Selwyn Joffe..

Okay. Thanks, Gary. Good morning. Good afternoon, everybody. I appreciate you joining us today. We are well-positioned for solid growth and continued momentum in our base rotating electrical business as well as further expansion wheel hubs our emerging brake master cylinder business.

This optimism is supported by the ramp up of new business that commenced in January and additional opportunities, including new business from organic growth, accretive acquisitions and new product line expansion, an area that is an ongoing focus. Net sales for the 2015 third quarter climbed 28.1% to $84 million from $65.6 million a year earlier.

Our net income on an adjusted basis climbed 36.1% to $8 million or $0.43 per diluted share from $51 9 million or $0.38 per diluted share in the same fiscal quarter a year ago, which is after a 22% increase in the diluted weighted average shares outstanding.

Current economic conditions along with the growth in aging of the car population continue to provide strong demand for our products, not to mention the anticipated ongoing benefit from lower fuel prices on miles driven. As I have highlighted on previous calls, industry data shows average age of vehicles is 11.4 years.

In addition, as a number of cars in the 12-plus category continues to grow, the replacement rates for these vehicles increased significantly. Current expectations are that the average age of light vehicles will increase and this should be a long-term trend. This continues to bode well for us.

To put our overall potentially and prospective, industry sources estimate the market/our products to be approximately $3.8 billion at the consumer level and the remaining market for hard parts to be approximately $106 billion in the United States.

We are committed to achieving service and quality levels that exceed expectations and believe that this will allow us to successfully grow our business in all of our categories. I complement the work of all of our team members who are successfully executing our business in these exciting and very competitive times.

In addition, our new product team continues to be actively at work looking for the next product line for us to introduce. We supply more than 20,000 stores and our customers continue to gain share in both, the DIY and the professional installer markets.

We continue to see opportunities to leverage our award-winning customer service and product quality to enhance market share for rotating electrical wheel hubs and brake master cylinders, as well as our new products down the line. In short, the company's growth prospects continue to be very positive.

We expect our revenues for this fiscal year ending March 31, 2015, to show strong growth. We had significant new business in all of our product lines with varying dates for initial shipments, bulk of which started shipping last month. I reiterate, business is stronger than ever for us and we expect our excellent growth to continue.

I will turn it over to David to review the results in more detail and then end with my perspectives on our outlook before we entertain questions. David will now discuss the financials..

Thank you, Selwyn. In summary, adjusted net sales for the fiscal 2015 third quarter was $85 million compared with $65.6 million for the prior year third quarter, which represents an increase of $19.5 million or 29.7%.

Adjusted net income for the fiscal 2015 third quarter was $8 million compared with $5.9 million for the prior year third quarter, which represents an increase of $2.1 million or 36.1% and adjusted earnings per share for the third quarter were $0.43 compared with $0.38 for the prior year third quarter which reflects a 22% increase in fully diluted shares outstanding.

Adjusted EBITDA was $17 million, compared with $14.1 million for the prior year third quarter, which represents an increase of $2.9 million or 20.6%.

Results for the three months ended December 31, 2014, include recognition of net revenue related to cores $12.6 million, which was previously deferred, which has a $3.9 million gross profit and EBITDA impact and $0.11 earnings per share impact.

On a comparative basis, the third quarter results reflect continued benefit from the introduction of the new brake master cylinders product line in late July of 2014 and the sales recognition of previously deferred core revenues.

Additionally, the third quarter results were impacted by various factors, including stock adjustment accruals for new business, starting in the fiscal 2015 fourth quarter and ramp up cost for the new business, which I will discuss further when I reviewed the financial results. Let me now review the financial results for the third quarter.

Net sales were $84 million for the third quarter compared with $65.6 million for the prior year comparative quarter. Third quarter results were impacted by stock adjustment accruals of $1.1 million for new business starting in the current fourth quarter.

After adjusting for $1.1 million in stock adjustment accruals, net sales increased by $19.5 million or 29.7% to $85 million for the fiscal third quarter compared with net sales of $65.6 million for the prior period, a year earlier.

The increase in adjusted net sales of $19.5 million was due to an increase in net sales of wheel hub assemblies and wheel hub bearings of $4.9 million or 55.2% to $13.7 million for the third quarter compared with $8.8 million for the prior year third quarter.

Sales of our new brake master cylinders product line of $2 million, which was launched in late July 2014, and rotating electrical net sales increased $12.6 million to $69.3 million for the third quarter compared with $56.7 million for the prior year third quarter, due to the recognition of net revenue related to cores of $12.6 million which was previously deferred.

The gross profit percentage was 29.1% for the third quarter compared with 33.4% for the prior year.

Adjusted for the $1.1 million, our adjustment accruals which were recorded as a reduction of net sales, and a related costs of the stock adjustment accruals of $518,000 and non-cash lower cost for market revaluation charge for cores and customer shelves of $302,000, which are both recorded in cost of goods sold, adjusted gross margin the three months ended December 31, 2014 was 29.7%.

The decrease in the third quarter adjusted gross margin compared to the prior period was due to ramp up costs incurred in the third quarter for new business starting in the current fourth quarter and changes in the mix of product lines sold.

Adjusted for the various items as previously explained, gross profit for the third quarter was $25.3 million compared with $21.9 million for the prior year third quarter which represents an increase of $3.3 million or 15.2%.

General and administrative expenses decreased $136,000 to $6 million after adjusting for non-cash mark-to-market net losses, expenses related to discontinued subsidiaries, severance, FAS 123R non-cash stock compensation expense and other non-recurring expenses.

Sales and marketing expenses increased $376,000 to $2.3 million, due primarily to increased trade show expense and increased commissions. Adjusted operating income for the fiscal 2015 third quarter was $16.1 million compared the prior year third quarter of $13.4 million, which represents an increase of $3 million or 22%.

Adjusted EBITDA for the third quarter was $17 million compared with $14.1 million for the prior year third quarter, which represents an increase of $2.9 million or 20.6%. Depreciation and amortization expense was $617,000 for the third quarter. For the trailing 12 months ended December 31, 2014, adjusted EBITDA is $64.3 million.

Interest expense was $3.2 million for the third quarter compared with $3.7 million for the prior year third quarter, which is adjusted for write-off of prior deferred loan fee or decrease of $550,000, primarily due to lower average outstanding debt balances and bank debt interest rates.

Income tax expense was approximately 49% for the three months ended December 31, 2014. The income tax rates were higher than the federal statutory rate primarily due to state income taxes.

In addition, the income tax rate for the three months ended December 31, 2014, includes the required adjustments reflect the appropriate nine-month rate for fiscal 2015 and the impact of certain non-deductible expenses.

Adjusted net income for the third quarter increased $2.1 million or 36.1% to $8 million or $0.43 per diluted share compared with $5.9 million or $0.38 per diluted share a year ago.

Earnings per share reflect a 22% increase in the weighted average number of diluted shares outstanding due to the public offering of 2,760,000 shares of common stock, which raise approximately net 67 million in September 2014. We will now highlight the results for the nine months ended December 31, 2014.

Adjusted net sales increased $46.5 million or 25.3% to $229.8 million compared with $183.4 million for the prior year nine months period.

Net income adjusted for the items previously noted and summarized in the financial table exhibits of this morning's earnings press release was $22.9 million or $1.33 per share compared with $14.5 million or $0.97 per share for the prior year nine months period, which represent a net income increase of $8.5 million or 58.4%.

Adjusted EBITDA was $49.4 million for the nine months ended December 31, 2014, compared with $37.5 million for the prior nine-month, which represents an increase of $11.9 million or 31.8%.

Results for the nine months ended December 31, 2014, include recognition of net revenue related to cores of $12.6 million, which was previously deferred which had a $3.9 million gross profit and EBITDA impact and $0.12 earnings per share impact.

For certain customers, we had agreed in the past to buy back cores related to existing product offerings with such customers.

We had deferred core revenue from the under return of cores for these customers until there was no expectation that the sales allowances associated with core buybacks from these customers would offset core revenue that would otherwise be recognized.

During the three months ended December 31, 2014, we were able to estimate the cost of the remaining cores that had to be bought back in the future from these customers, therefore we recognize previously deferred core revenue of net $12.6 million and the associated cost of goods sold.

We expect revenue from under return of cores to be a recurring event, but not at the same levels. At December 31, 2014, we had an $86.6 million term-loan, zero borrowings under revolver credit facility and approximately $76.7 million cash resulting in net bank debt of approximately $10 million.

There was availability of approximately $38.9 million on the $40 million revolver credit facility, reflecting approximately $1.1 million of outstanding letters of credit. At December 31, 2014, the company had approximately $374 million in total assets. Current assets were $67 million and current liabilities were $98 million.

Cash flows used in operations during the three months ended December 31, 2014, was approximately $9.7 million, primarily due to building inventory in preparation for new business starting in the fiscal 2015 fourth quarter.

I will now walk you through the income statement exhibits in our press release distributed this morning, which we believe will make it far easier to understand the various expenses and adjustments for the third quarter ended December 31, 2014.

If you can take a moment to turn to the income statement exhibits in the press release starting with Exhibit 1, we can begin.

When you eliminate the effects of our expenses related to discontinued subsidiaries and other one-time and non-cash expenses highlighted in today's earnings press release, for the three months ended December 31, 2014, adjusted net sales was $85,047,000.

Adjusted net income was $8,048,000, adjusted diluted earnings per share was $0.43, adjusted gross margin percentage was 29.7% and adjusted EBITDA was $60,975,000.

As previously indicated, results for the three months ended December 31, 2014, include recognition of net revenue related to cores of $12.6 million, which was previously deferred, which has a $3.9 million gross profit and EBITDA impact and $0.11 earnings per share impact.

Exhibits 2 through 7 are the reconciliation tables to reconcile the reported results to the adjusted results, including net sales, net income, earnings per share gross profit, gross margins and EBITDA. We will now go over the adjusted net sales calculation for the third quarter, so please turn to Exhibit 2.

Starting with reported net sales of $83,992,000 for the three months ended December 31, 2014. We adjust for stock adjustment accruals for new business starting in the fiscal 2015 fourth quarter of $1,055,000, which results in adjusted net sales of $85,047,000.

We will now go over the adjusted net income calculation for the third quarter, so please turn to Exhibit 3.

Starting with reported net income of 2,927,000 or $0.16 earnings per share for the three months ended December 31, 2014, we adjust for the stock adjustment accruals for new business starting into fiscal 2015 fourth quarter of $1,055,000, non-cash lower of cost for market revaluation charge for cores our customers shelf of $302,000, cost of the stock adjustment accruals $518,000, discontinued subsidiaries legal, severance and other cost of $3,140,000, non-cash share-based compensation expense of $599,000 mark-to-market non-cash losses related to warrants and forward contracts of $2,862,000 and cash and tax effect of the above of $2,319,000, which results in adjusted net income of $8,048,000 or $0.42 earnings per share.

Exhibit 4 is the adjusted net income calculation for the nine months ended December 31, 2014 of $22,939,000 or $1.33 earnings per share. Exhibit 5 is a reconciliation of adjusted gross profit and gross margin percentage for the three months ended December 31, 2014.

Starting with reported gross profit of $24,428,000 or 29.1% gross margin percentage, we adjusted for the stock adjustment accruals for new business starting in the fiscal 2015 fourth quarter of $1,055,000, non-cash lower of cost for market revaluation charge for cores and customers shelf of $302,000, cost of stock adjustment accruals $518,000, which results in adjusted gross profit of $25,267,000 or 29.7% gross margin percentage.

Exhibit 6 is the adjusted gross profit and gross margin percentage calculation for the nine months ended December 31, 2014 of $72,945,000 and 31.7%, respectively. Finally, we will go over Exhibit 7, which is the adjusted EBITDA reconciliation. Starting with reported net income of $2,927,000 for the three months ended December 31, 2014.

We adjusted for results from discontinued operations add back interest expense, income tax expense, depreciation and amortization, stock adjustment accrual for new business starting in the fiscal 2015 fourth quarter, non-cash lower of cost for market revaluation charge for cores and customer shelves, cost of the stock adjustment accruals, discontinue subsidiaries' legal severance and other costs, non-cash share-based compensation expense and mark-to-market non-cash losses related to warrants, which results in adjusted EBITDA of $16,975,000.

The same Exhibit 7, using the same calculation of adjustments, adjusted EBITDA the nine months ended December 31, 2014, is $49,387,000. I will now turn the call back to Selwyn..

Okay. Thank you, David. As we approach the end of this fiscal year, we are going through transformational growth in our business. The majority of our new business gains that we referenced on last quarter's conference call began shipping in the current fourth quarter and should be fully ramped by the end of the first quarter of our next fiscal year.

We will also be adding some of this new business in the first quarter of next fiscal year, our traditional business. Overall traction for our products and our program has been very solid and we expect to continue to gain share in our various product lines.

We were actively at work to introduce new product lines and believe we are making solid progress. We have capital to deploy, and while we are quite cautious, we believe that we can deploy our capital on an accretive basis. In summary, we believe there is growth for us in all of our product categories and we can continue to add product lines.

Along with our growth, we continue to solidify infrastructure and believe our team has embraced our position as a growth leader in our industry. Our capacity remains strong and with limited investment is very scalable. In summary, we pride ourselves on our customer service and our superior products.

We are excited about our strong sales momentum and our outlook is quite favorable for both, our existing and new business opportunities. We appreciate your interest in MPA and welcome your questions..

Thank you. [Operator Instructions] Our first question from Steve Dyer of Craig-Hallum. You may begin..

Thanks. Good morning, guys..

Hi, Steve..

Selwyn, it sounds that you had indicated kind of March is a ramp up quarter for a lot of this new business. With that said most of that should be sort of fully ramped into the first quarter.

Looking at that, without giving specific guidance, so are you generally comfortable with consensus estimates for fiscal '16?.

For fiscal '16, yes, we are comfortable with that. We have got significant new business that we have talked about that is ramping this quarter, will finish ramping a little slower this quarter or finish ramping early next quarter. Then we have got additional new business that is starting.

We are optimistic about our new product introductions and feel good. I mean, business is very good and strong, so we feel good about the numbers..

As it relates to new product introductions, you just I think rolled up brake master cylinder not long ago. Do you have another one on the horizon? Maybe some timing for when we could expect another announcement there..

I said we certainly have multiple opportunities that we are evaluating. We are confident that in the next fiscal year, there will be at least one new product line introduction. We have not 100% finalized what that is, but having said that, we have some good alternatives, so we think the current momentum is strong, it will continue on..

Great..

Sorry to interrupt, but that is not to ignore that we saw 55% gross in wheel hubs. You know all of our product lines we expect to see significant growth in every one of their product lines that are already out there..

Okay. That is helpful. As it relates to your term loan, I think that is up for refinance at the moment.

Can you may be share a little bit about your plans for that whether you plan to pay it down or refinance it and may be how much you think if you are refinancing it, how much you think that may be able to save you in fiscal '16?.

Yes. Good point. I mean, we are looking at refinancing. We are not intending to pay down the debt. We think we can deploy our capital at very accretive rates. We have over $100 million in liquidity with our existing financial structure.

We intend to refinance that debt and we think we can say, David, what do you think, at least preliminary estimates of a few points at least on average. We are optimistic interest rates are good.

Certainly, our outlook is very trackable and we think the banks will be able to understand it, so when the time comes to refinance, we believe, there is going to be a lot of opportunities..

From a timeline perspective, is that something you could see done in the March quarter or is that too near-term?.

It is possible that it could be done in the March quarter, but certainly by the end of the first quarter at the latest..

Okay. Great. I will hop back in queue. Thanks..

Thank you. [Operator Instructions] Our next question is from Jimmy Baker of B. Riley & Company. You may begin..

Hi. Good morning, David. Good morning, Selwyn..

Hi, Jimmy..

Good morning..

Hi. Maybe just a quick follow-up here on interest expense, so as we think about that into the calendar year '15 or maybe easy to talk about this in fiscal '16 let's say once the re-price executed.

How should we think about factoring expense going up with the new business? Is that, call it, a $3 million, $3.5 million gross offset to what we would see on the savings side from re-fi?.

With incremental factoring forward the business, yeah. I mean, we are looking at obviously some significant growth and the vast majority of the customers in the industry are using factoring, so probably $100 million of new business, as we get to the new target, so that certainly will cost us factoring in 2% to3% range depending on rates..

Okay. Understood.

Then just a couple of questions here on the core revenue recognition, I know you back out of the lower of cost for market charges to cores in your in your non-GAAP reconciliation, but then when you are recognizing these core revenues, presumably your using the lower of cost of market as the cost positioned, so where do reconcile the accumulated difference between the original cost of those cores and what you are recognizing as cost of goods sold when you are recognizing this revenue?.

That is a great question, and that is pretty hard to give you finite numbers, but you know we do write down the cores on a quarter-to-quarter basis the low of cost to market, so that does reflect the cost that is booked when you recognize revenue against them.

We have taken significant amount of hits buying these cores, which we have never adjusted for either.

On an ongoing basis, now that we have reached this transitional points, where we have bought back all the course on the customers' shelves, we will now be able, that is generally about a 4% under return for cores that you that you saw, so you will be able to recognize as inventory.

The only add-backs we take for the lower of cost to market or for cores that run our customers shelf, right, so we don't adjust for any write-downs of inventory that we have in our premises, so the only things that don't come back, those write-downs just remain there.

I mean, then really not an offset for the write-downs if relate to core inventory that is in our buildings.

Does that make sense to you? Still confusing?.

That does make sense, but it could be that the core was or the accounted for core for was out in the customers' shelves or in the customers' ecosystem, but now you no longer expect to receive that return, so you are recognizing the revenue.

Am I thinking about that right?.

Yes..

Then separately, is that the completion of your core buyback obligation that triggered this kind of outsized recognition in the quarter?.

Correct. Yes. What we are trying to show that this is sort of a higher than normal for the nine-month period. A lot of this revenue if you exclude GAAP would have been recognized during the nine-month period or some of it certainly.

On the GAAP, where you have an anticipated credit that you are going to have to give, you can't book revenue against unanticipated credits. When those credits are anticipated to be over and will been accrued for then you can start taking revenue in and this is my crude sort of explanation of GAAP, because I am certainly no expert.

That is the fundamentals of it. What is going to happen now is that we won't be taking the hits for those core buybacks, because we have already taken those hits and we will have some under return of cores that we will take into revenue on a quarterly basis going forward..

You have already received the cash for the component of those completed good defective core correct, so it is not as if you took $12.6 million in cash during this quarter that had been received during the course of ordinary business in quarters or years passed?.

That is correct..

Okay. I think maybe I got it now. Let me move on, I got a couple of questions on margin, then I will hope back in the queue.

Just on the last conference call, I think rather than the 27.5% to 30% range you indicated you are expecting gross margins to continue at about the rate that we saw in the front half of the fiscal year call it 33% and yet you are well below here this quarter.

I understand there is a ramp with the new business, but you saw that coming, so can you just talk about what maybe unexpectedly pressured costs or were there some left or more severely unfavorable mix than you anticipated when you spoke on the November call?.

I think two things happened. Number one, we ramped for the new business. I think, this is an approximation, but I think we hired and trained 300 new people in the quarter, so I think it is expensive to do that. Relative to the margins, I think, the team did an amazing job getting this ramp-up done.

Our fill rates on the new business are over 98%, close to pushing 99%, so it has been very successful for us. The other thing is mix. I mean, our wheel hub business went up disproportionately to the rotating electrical for the quarter, so you see a mix there which has low margin, but I can tell you there is no fundamental margin change.

We expect the ramp up to stabilize and margins to be what they will be, but to be stable..

Okay. Last one for me and I will back out of the queue. Just can you talk about kind of your preparation for ramping into what is a very large expanded customer, let's say, in the rotating electrical side of your business.

Did you have to go out and procure cores from core brokers, build a bank in excess of what you would naturally acquire and circulate within that customer base.

Then, separately, I know rotating electrical is historically your highest margin, but can you just provide some context into how when this large new business comes into the fold, how that impacts margins for that product line on a consolidated basis..

Yes. I mean, you can see that we actually used cash this quarter despite being very profitable and that was all related to ramping up inventory.

You need to buy cores, you need to buy components, you need to add people, you need to ramp up production times, you need to add core sorting times, you are taking returns back before you actually getting revenue, because you need the core before you manufacture, so all those things are quite frankly have been done and very successfully executed.

Again, for the people who listen to the call in our team, I congratulate them on that and the fill rates have been exceptional, not only exceptional for the new business, but exceptional for all the business that we have and that we have not dropped fill rates anywhere.

We are excited about that, and again that takes some capital and a lot of assets and we expect to start seeing the inventory levels stabilize and positive cash being generated again and very successful new business venture..

Okay, very helpful. Thanks a lot for the color, Selwyn..

Thank you..

Thank you. Our next question is from Matt Koranda of Roth Capital Partners. You may begin..

Hi, guys. Thanks for taking the questions. I just wanted to touch on gross margins going forward here.

Can you just help us understand the impact of falling copper prices on the past quarter? Did you see any gross margin benefit during the quarter and with copper down almost 20% year-over-year now, do you anticipated any benefit to gross margins going forward?.

Yes. You know what is interesting, Matt, for us it is a little bit the antithesis of that, because what happens when copper prices come down, the rates that we can sell ours scrap for come down, so we immediately lose some recognition of potential revenue from the declining and it is not, it is copper and aluminum and other metals too.

When that comes down, you get a short-term hit to your profitability, because your scrap rate levels go down.

Then as you go through time and you replace that inventory, you are able to buy the replacement inventory little cheaper and you don't see that until you turn the inventory and have sold, so we think that the benefits of reduced copper, we have not seen that yet, but we should see it in the next 12 months..

Okay. Great. That is helpful. Along with that line item, can we talk about the impact of the Mexican peso on production costs as well? Do you expect any margin lift there going forward given the depreciation versus the U.S.

dollar?.

Yes. I think what is great for us is, I think, the peso is around 14.8 now 14.9 to the dollar. Certainly, we are a net importer, so the strong dollar helps us.

We hedge our currency nine months forward, we buy 75% of our requirements, nine months forward, so it is at levels about, but in the long-term as these rates, they are accretive to us, I mean margins benefit from higher dollar value, lower peso rates. Same things happened quite frankly in Singapore and Malaysia as well..

Okay. Great. Then last one from me. On new product introductions, just any update on your latest thinking as to kind of if you could share some color on maybe what those products might be. The timing, I think, you said last quarter that it will be in the next six months, so sort of are you talking sort of now in the March, April, and May timeframe.

Is that still fair to say?.

I think, we should see multiple new entries this year. I mean, we hope that we should have some add-ons to our existing product lines that should launch probably in July of this year and we expect new product by the end of this calendar year and another new line. Again, it is a little early, but in general that is our expectation right now..

Okay. That is it for me, guys. Thank you..

Thank you. Our next question is from Jeff [ph]. You may begin..

Hi, guys. Apologize, but I think I really I need a little bit of our reboot on the whole core accounting things.

I am not sure exactly what the transition here has happened with the customers that is having you have a bookkeeping change, so maybe you can just walk through mechanically from, somebody comes in used part, they got hand in the core to get a new part, you get that core to manufacture new part and how the accounting works and what has change there?.

Yes. I think the accounting has not changed, so first let me start with that. It is the same policy we have always had. It is just that in the case of customers what you are buying back cores that are on their shelves, the core portion of their finished goods inventory.

To the extent that there is a balance that you still have to pay for, any under return for that core that you normally we book into revenue has to be deferred..

What is under return?.

In other words if I sell a customer 10 units, 10 finished goods. All those 10 finished goods, there would be a core portion of revenue and there would be a finished portion of revenue. If they don't return the cores the actual broken down unit from their consumer that gives them back that core, they would pay me for the full amount.

If they return the core, they will get a credit against the core portion of that revenue.

Does that make sense?.

Okay.

What is the circumstance in which they under return?.

They generally under return all the time, because they have shrink in their companies. Not everybody returns the core, the broken down core they don’t think it is useful to drive back or return it or they break it when they are replacing the units, so it is not eligible for a credit..

Got you, so only when you have new business are you sort of ahead of returns and then later it goes the other way?.

When you say ahead, when you take on new business, you are shipping in..

Yes..

While you are shipping in, you are going to have more cores going out than coming back..

Got it..

As soon as it stabilizes, you have we have less cores coming back than going out..

Okay.

That is the flip here that triggers the recognition of revenue which previously could not be recognized, because it had a credit against it?.

Correct.

Got you. That is great. Thanks so much..

Yes..

Thank you. I am showing no further questions at this time. I would like to turn the conference call back over to the company for closing remarks..

All right. I appreciate everybody's interest. Once again, I will reiterate business is as good as it has ever been and uncertainly the outlook looks positive. We appreciate you following us and we look forward to further announcements. Thank you..

Ladies and gentlemen, this concludes today's conference. Thank you for your participation in today's conference. You may now disconnect and have a wonderful day..