NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS CYBEROPTICS CORPORATION
1. INTERIM REPORTING:
The interim condensed consolidated financial statements presented herein as of
September 30, 2016
, and for the
three and nine
month periods ended
September 30, 2016
and
2015
, are unaudited, but in the opinion of management, include all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position, results of operations and cash flows for the periods presented.
The results of operations for the
three and nine
month periods ended
September 30, 2016
do not necessarily indicate the results to be expected for the full year. The
December 31, 2015
consolidated balance sheet data was derived from audited consolidated financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. These unaudited interim condensed consolidated financial statements should be read in conjunction with our consolidated financial statements and notes thereto contained in our Annual Report on Form 10-K for the year ended
December 31, 2015
.
2. MARKETABLE SECURITIES:
Our investments in marketable securities are classified as available-for-sale and consist of the following:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
(In thousands)
|
|
Cost
|
|
Unrealized
Gains
|
|
Unrealized
Losses
|
|
Fair Value
|
Short-Term
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agency obligations
|
|
$
|
4,455
|
|
|
$
|
6
|
|
|
$
|
—
|
|
|
$
|
4,461
|
|
Corporate debt securities and certificates of deposit
|
|
2,257
|
|
|
1
|
|
|
(1
|
)
|
|
2,257
|
|
Marketable securities – short-term
|
|
$
|
6,712
|
|
|
$
|
7
|
|
|
$
|
(1
|
)
|
|
$
|
6,718
|
|
Long-Term
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agency obligations
|
|
$
|
5,982
|
|
|
$
|
19
|
|
|
$
|
(1
|
)
|
|
$
|
6,000
|
|
Corporate debt securities and certificates of deposit
|
|
1,937
|
|
|
—
|
|
|
(4
|
)
|
|
1,933
|
|
Asset backed securities
|
|
593
|
|
|
—
|
|
|
—
|
|
|
593
|
|
Equity security
|
|
42
|
|
|
1
|
|
|
—
|
|
|
43
|
|
Marketable securities – long-term
|
|
$
|
8,554
|
|
|
$
|
20
|
|
|
$
|
(5
|
)
|
|
$
|
8,569
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
(In thousands)
|
|
Cost
|
|
Unrealized
Gains
|
|
Unrealized
Losses
|
|
Fair Value
|
Short-Term
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agency obligations
|
|
$
|
3,806
|
|
|
$
|
—
|
|
|
$
|
(2
|
)
|
|
$
|
3,804
|
|
Corporate debt securities and certificates of deposit
|
|
1,440
|
|
|
—
|
|
|
(1
|
)
|
|
1,439
|
|
Asset backed securities
|
|
6
|
|
|
—
|
|
|
—
|
|
|
6
|
|
Marketable securities – short-term
|
|
$
|
5,252
|
|
|
$
|
—
|
|
|
$
|
(3
|
)
|
|
$
|
5,249
|
|
Long-Term
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agency obligations
|
|
$
|
6,681
|
|
|
$
|
1
|
|
|
$
|
(18
|
)
|
|
$
|
6,664
|
|
Corporate debt securities and certificates of deposit
|
|
675
|
|
|
—
|
|
|
(1
|
)
|
|
674
|
|
Asset backed securities
|
|
694
|
|
|
—
|
|
|
(1
|
)
|
|
693
|
|
Equity security
|
|
42
|
|
|
11
|
|
|
—
|
|
|
53
|
|
Marketable securities – long-term
|
|
$
|
8,092
|
|
|
$
|
12
|
|
|
$
|
(20
|
)
|
|
$
|
8,084
|
|
Our investments in marketable debt securities all have maturities of less than
five
years. At
September 30, 2016
, marketable debt securities valued at
$11.6 million
were in an unrealized gain position totaling
$26,000
, and marketable debt securities valued at
$3.7 million
were in an unrealized loss position totaling
$6,000
(all had been in an unrealized loss position for less than
12
months). At
December 31, 2015
, marketable debt securities valued at
$2.3 million
were in an unrealized gain position totaling
$1,000
, and marketable debt securities valued at
$11.0 million
were in an unrealized loss position totaling
$23,000
(all had been in an unrealized loss position for less than
12
months).
Net pre-tax unrealized gains for marketable securities of
$21,000
at
September 30, 2016
and net pre-tax unrealized losses for marketable securities of
$11,000
at
December 31, 2015
were recorded as a component of accumulated other comprehensive loss in stockholders’ equity.
No
marketable securities were sold in the three months ended September 30, 2016. We received proceeds from the sale of marketable securities in the nine months ended September 30, 2016 of
$1.4 million
. We received proceeds from the sale of marketable securities in the three and nine month periods ended September 30, 2015 of
$801,000
and
$1.5 million
, respectively.
No
gain or loss was recognized on any of the sales of marketable securities during the nine month periods ended September 30, 2016 or September 30, 2015.
Investments in marketable securities classified as cash equivalents of
$5.0 million
at
September 30, 2016
and
$791,000
at
December 31, 2015
consist of the following:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
(In thousands)
|
|
Cost
|
|
Unrealized
Gains
|
|
Unrealized
Losses
|
|
Recorded
Basis
|
Money market and certificates of deposit
|
|
$
|
4,994
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,994
|
|
|
|
$
|
4,994
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,994
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
(In thousands)
|
|
Cost
|
|
Unrealized
Gains
|
|
Unrealized
Losses
|
|
Recorded
Basis
|
Money market and certificates of deposit
|
|
$
|
791
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
791
|
|
|
|
$
|
791
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
791
|
|
Cash and marketable securities held by foreign subsidiaries totaled
$201,000
at
September 30, 2016
and
$701,000
at
December 31, 2015
.
3. DERIVATIVES:
At no time during the three months ended September 30, 2016 were there any open foreign exchange forward contracts designated as cash flow hedges. Prior to the three months ended September 30, 2016, we had open foreign exchange forward contracts to hedge against the effect of exchange rate fluctuations on cash flows denominated in foreign currencies associated with our subsidiary in Singapore that were designated as cash flow hedges. The effective portion of the gain or loss on these derivatives was reported as a component of other comprehensive income (loss) and reclassified into earnings in the same period during which the hedged transaction affected earnings. Gains and losses on the derivatives representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness were recognized in current earnings. Hedge ineffectiveness and the amounts excluded from effectiveness testing recognized in earnings on cash flow hedges were not material for the nine month period ended
September 30, 2016
or the
three and nine
month periods ended
September 30, 2015
.
At
December 31, 2015
, the dollar equivalent gross notional amount of our foreign exchange forward contracts designated as cash flow hedges was approximately
$1.8 million
. The fair value of these cash flow hedges representing losses in the amount of $
78,000
was recorded in accrued expenses in our December 31, 2015 consolidated balance sheet.
Reclassifications of amounts from accumulated other comprehensive loss into earnings include accumulated gains (losses) at the time earnings were impacted by the hedged transaction. The location in the consolidated statements of operations and consolidated statements of comprehensive income (loss) and amounts of gains and losses related to derivative instruments designated as cash flow hedges are as follows (as noted above, at no time during the three months ended September 30, 2016 were there any open foreign exchange forward contracts designed as cash flows hedges):
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|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2016
|
(In thousands)
|
|
Pretax Amount Recognized
in Other Comprehensive
Income (Loss) on
Effective
Portion of Derivative
|
|
Pretax Amount Recognized
in Earnings on Effective
Portion of Derivative as a
Result of Reclassification
from Accumulated Other
Comprehensive Loss
|
Cost of revenues
|
|
$
|
—
|
|
|
$
|
—
|
|
Research and development
|
|
—
|
|
|
—
|
|
Selling, general and administrative
|
|
—
|
|
|
—
|
|
Total
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2015
|
(In thousands)
|
|
Pretax Loss Recognized
in Other Comprehensive
Income (Loss) on
Effective
Portion of Derivative
|
|
Pretax Loss Recognized
in Earnings on Effective
Portion of Derivative as a
Result of Reclassification
from Accumulated Other
Comprehensive Loss
|
Cost of revenues
|
|
$
|
(135
|
)
|
|
$
|
(102
|
)
|
Research and development
|
|
(56
|
)
|
|
(32
|
)
|
Selling, general and administrative
|
|
(26
|
)
|
|
(27
|
)
|
Total
|
|
$
|
(217
|
)
|
|
$
|
(161
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2016
|
(In thousands)
|
|
Pretax Gain Recognized
in Other Comprehensive
Income (Loss) on
Effective
Portion of Derivative
|
|
Pretax Loss Recognized
in Earnings on Effective
Portion of Derivative as a
Result of Reclassification
from Accumulated Other
Comprehensive Loss
|
Cost of revenues
|
|
$
|
32
|
|
|
$
|
(27
|
)
|
Research and development
|
|
14
|
|
|
(6
|
)
|
Selling, general and administrative
|
|
7
|
|
|
(3
|
)
|
Total
|
|
$
|
53
|
|
|
$
|
(36
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2015
|
(In thousands)
|
|
Pretax Loss Recognized
in Other Comprehensive
Income (Loss) on
Effective
Portion of Derivative
|
|
Pretax Loss Recognized
in Earnings on Effective
Portion of Derivative as a
Result of Reclassification
from Accumulated Other
Comprehensive Loss
|
Cost of revenues
|
|
$
|
(200
|
)
|
|
$
|
(289
|
)
|
Research and development
|
|
(78
|
)
|
|
(93
|
)
|
Selling, general and administrative
|
|
(44
|
)
|
|
(84
|
)
|
Total
|
|
$
|
(322
|
)
|
|
$
|
(466
|
)
|
At September 30, 2016, there were no pretax amounts recorded in accumulated other comprehensive loss for cash flow hedging instruments. The
$89,000
unrealized pretax loss recorded in accumulated other comprehensive loss at December 31, 2015 for cash flow hedging instruments was reclassified to earnings during the nine months ended September 30, 2016. Additional information with respect to the impact of derivative instruments on other comprehensive income (loss) is included in Note 10.
We periodically enter into foreign exchange forward contracts that are not designated as cash flow hedges. These contracts are of short duration, typically ranging from
one
to
five
days, and are used to obtain foreign currencies to meet current requirements. The amounts and fair values associated with these contracts at September 30, 2016 and December 31, 2015 was inconsequential. Additional information with respect to the fair value of derivative instruments is included in Note 4.
4. FAIR VALUE MEASUREMENTS:
We determine the fair value of our assets and liabilities based on the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value maximize the use of observable inputs and minimize the use of unobservable inputs. To measure fair value, we use a fair value hierarchy with three levels of inputs, of which the first two are considered observable and the third one is considered unobservable. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1). The next highest priority is based on quoted prices for similar assets or liabilities in active markets or quoted prices for identical or similar assets or liabilities in non-active markets or other observable inputs (Level 2). The lowest priority is given to unobservable inputs (Level 3). The following provides information regarding fair value measurements for our marketable securities and foreign exchange forward contracts as of
September 30, 2016
and
December 31, 2015
according to the three-level fair value hierarchy:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at
September 30, 2016 Using
|
(In thousands)
|
|
Balance
September 30,
2016
|
|
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
Marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agency obligations
|
|
$
|
10,461
|
|
|
$
|
—
|
|
|
$
|
10,461
|
|
|
$
|
—
|
|
Corporate debt securities and certificates of deposit
|
|
4,190
|
|
|
—
|
|
|
4,190
|
|
|
—
|
|
Asset backed securities
|
|
593
|
|
|
—
|
|
|
593
|
|
|
—
|
|
Equity security
|
|
43
|
|
|
43
|
|
|
—
|
|
|
—
|
|
Total marketable securities
|
|
$
|
15,287
|
|
|
$
|
43
|
|
|
$
|
15,244
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at
December 31, 2015 Using
|
(In thousands)
|
|
Balance December 31,
2015
|
|
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
Marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agency obligations
|
|
$
|
10,468
|
|
|
$
|
—
|
|
|
$
|
10,468
|
|
|
$
|
—
|
|
Corporate debt securities and certificates of deposit
|
|
2,113
|
|
|
—
|
|
|
2,113
|
|
|
—
|
|
Asset backed securities
|
|
699
|
|
|
—
|
|
|
699
|
|
|
—
|
|
Equity security
|
|
53
|
|
|
53
|
|
|
—
|
|
|
—
|
|
Total marketable securities
|
|
$
|
13,333
|
|
|
$
|
53
|
|
|
$
|
13,280
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments-liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange forward contracts
|
|
$
|
78
|
|
|
$
|
—
|
|
|
$
|
78
|
|
|
$
|
—
|
|
During the
nine
months ended
September 30, 2016
and the year ended
December 31, 2015
, there were no transfers within the three level hierarchy. A significant transfer is recognized when the inputs used to value a security have been changed which merit a transfer between the levels of the valuation hierarchy.
The fair value for our U.S. government and agency obligations, corporate debt securities and certificates of deposit and asset backed securities are determined based on valuations provided by external investment managers which obtain them from a variety of industry standard data providers. The fair value for our equity security is based on a quoted market price obtained from an active market.
The fair value for our foreign exchange forward contracts is based on foreign currency spot and forward rates obtained from reputable financial institutions, with resulting valuations periodically validated by obtaining foreign currency spot rate and forward quotes from other industry standard sources or third party or counterparty quotes. At September 30, 2016, there were no open foreign exchange forward contracts designated as cash flow hedges. The fair value of foreign exchange forward contracts designated as cash flow hedges at December 31, 2015 representing losses in the amount of
$78,000
was recorded in accrued expenses. The amounts and fair values of open foreign exchange forward contracts that were not designated as cash flow hedges at September 30, 2016 and December 31, 2015 were inconsequential.
The carrying amounts of financial instruments such as cash equivalents, accounts receivable, other assets, accounts payable, advance customer payments, accrued expenses and other liabilities approximate their related fair values due to their short-term maturities. Non-financial assets such as equipment and leasehold improvements, goodwill and intangible assets are subject to non-recurring fair value measurements if they are deemed impaired. We had
no
re-measurements of non-financial assets to fair value during the
nine
months ended
September 30, 2016
or the
nine
months ended
September 30, 2015
.
5. ACCOUNTING FOR STOCK-BASED COMPENSATION:
We have
four
stock-based compensation plans that are administered by the Compensation Committee of the Board of Directors. We have an Employee Stock Incentive Plan for officers, other employees, consultants and independent contractors under which we have granted options and restricted stock units to officers and other employees, an Employee Stock Purchase Plan under which shares of our common stock may be acquired by employees at discounted prices, and a Non-Employee Director Stock Plan that provides for automatic grants of stock options and shares of our common stock to non-employee directors. We also have another stock incentive plan for non-employee directors, but no further awards are made under this plan. New shares of our common stock are issued upon stock option exercises, vesting of restricted stock units, issuances of shares to board members and issuances of shares under the Employee Stock Purchase Plan.
Employee Stock Incentive Plan
As of
September 30, 2016
, there are
1,015,657
shares of common stock reserved in the aggregate for issuance pursuant to outstanding or future awards under our Employee Stock Incentive Plan. Although our Compensation Committee has authority to issue options, restricted stock, restricted stock units, share grants and other share based benefits under our Employee Stock Incentive Plan, to date only restricted stock units and stock options have been granted under the plan. Options have been granted at an option price per share equal to the market value of our common stock on the date of grant, vest over a
four
-year period and expire
seven
years after the date of grant. Restricted stock units vest over a
four
year period and entitle the holders to
one
share of our common stock for each restricted stock unit.
As of
September 30, 2016
, there were
475,439
shares of common stock available for future awards under our Employee Stock Incentive Plan, including an additional
350,000
shares authorized in May 2016. Reserved shares underlying outstanding awards, including options and restricted shares, that are forfeited are available under the Employee Stock Incentive Plan for future grant.
Non-Employee Director Stock Plan
At our annual meeting on May 20, 2016, our shareholders, upon recommendation of the Board of Directors, approved a new Non-Employee Director Stock Plan. A total of
100,000
shares of common stock were authorized for issuance pursuant to the plan. Under the terms of the new plan, each non-employee director will automatically be granted, on the date of each annual meeting at which such director is elected to serve on the board (beginning with our May 2016 annual meeting),
2,000
shares of our common stock and a stock option to acquire
4,000
shares of our common stock. Shares granted under the plan are not subject to vesting restrictions. Each stock option granted under this plan will be fully exercisable, have an exercise price equal to the closing price of our common stock on the date of grant and have a term of
10 years
.
Pursuant to the plan, on the date of our 2016 annual meeting, we issued a total of
8,000
shares of our common stock and stock options to acquire
16,000
shares of our common stock to our non-employee directors. The shares had a total fair market value on the date of grant equal to
$136,000
(grant date fair value of
$16.97
per share) and the options had a total fair market value on the date of grant using the Black-Scholes model equal to
$139,000
(grant date fair value of
$8.71
per option to acquire
one
share of our common stock). As of September 30, 2016, there were
76,000
shares of common stock available for future awards under the Non-Employee Director Stock Plan.
Stock Option Activity
The following is a summary of stock option activity for all of our plans in the
nine
months ended
September 30, 2016
:
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
Weighted Average Exercise
Price Per Share
|
Outstanding, December 31, 2015
|
570,500
|
|
|
$
|
8.00
|
|
Granted
|
21,000
|
|
|
15.19
|
|
Exercised
|
(74,000
|
)
|
|
9.03
|
|
Expired
|
—
|
|
|
—
|
|
Forfeited
|
—
|
|
|
—
|
|
Outstanding, September 30, 2016
|
517,500
|
|
|
$
|
8.15
|
|
|
|
|
|
Exercisable, September 30, 2016
|
165,335
|
|
|
$
|
8.02
|
|
The intrinsic value of an option is the amount by which the market price of the underlying stock exceeds the option's exercise price. For options outstanding at
September 30, 2016
, the weighted average remaining contractual term of all outstanding options was
4.90
years and their aggregate intrinsic value was
$8.5 million
. At
September 30, 2016
, the weighted average remaining contractual term of options that were exercisable was
3.60
years and their aggregate intrinsic value was $
2.9 million
. The aggregate intrinsic value of stock options exercised was
$578,000
in the
nine
months ended
September 30, 2016
. We received proceeds from stock option exercises of
$425,000
in the
nine
months ended
September 30, 2016
and
$294,000
in the
nine
months ended
September 30, 2015
.
No
tax benefit was realized from the exercise of these stock options, and
no
amounts were credited to additional paid-in capital. The total fair value of options that vested in the
nine
months ended
September 30, 2016
was
$274,000
.
The fair value of stock options granted to our employees and non-employee directors was estimated on the date of grant using the Black-Scholes model. The Black-Scholes valuation model incorporates ranges of assumptions that are disclosed in the table below. The risk-free interest rate is based on the United States Treasury yield curve at the time of grant with a remaining term equal to the expected life of the awards. We used historical experience to estimate the expected term, representing the length of time in years, that the options are expected to be outstanding. Expected volatility was computed based on historical fluctuations in the daily price of our common stock.
For stock options granted in the
nine
months ended
September 30, 2016
, we utilized the fair value of our common stock on the date of grant and employed the following key assumptions in computing fair value using the Black-Scholes option-pricing model:
|
|
|
|
2016
|
Risk-free interest rates
|
1.24% - 1.85%
|
Expected life in years
|
5.10 - 7.50
|
Expected volatility
|
42.22% - 46.67%
|
Dividend yield
|
—%
|
Weighted average fair value on grant date
|
$3.68 - $8.71
|
Restricted Stock Units
Restricted stock units are granted under our Employee Stock Incentive Plan. There were
no
restricted stock units granted in the nine months ended
September 30, 2016
. The aggregate fair value of outstanding restricted stock units based on the closing share price of our common stock on
September 30, 2016
was
$1.2 million
. The aggregate fair value of restricted stock units that vested, based on the closing share price of our common stock on the vesting date, was
$190,000
in the
nine
months ended
September 30, 2016
.
A summary of activity for non-vested restricted stock units in the
nine
months ended
September 30, 2016
is as follows:
|
|
|
|
|
|
|
|
|
Non-vested restricted stock units
|
|
Shares
|
|
Weighted Average Grant Date Fair Value
|
Non-vested at December 31, 2015
|
|
54,315
|
|
|
$
|
7.43
|
|
Granted
|
|
—
|
|
|
—
|
|
Vested
|
|
(6,597
|
)
|
|
7.05
|
|
Forfeited
|
|
—
|
|
|
—
|
|
Non-vested at September 30, 2016
|
|
47,718
|
|
|
$
|
7.48
|
|
Employee Stock Purchase Plan
We have an Employee Stock Purchase Plan available to eligible U.S. employees. Under terms of the plan, eligible employees may designate from
1%
to
10%
of their compensation to be withheld through payroll deductions, up to a maximum of
$6,500
in each plan year, for the purchase of common stock at
85%
of the lower of the market price on the first or last day of the offering period. There were
36,481
shares issued under this plan in the
nine
months ended
September 30, 2016
and
35,845
shares issued under this plan in the
nine
months ended
September 30, 2015
. As of
September 30, 2016
,
59,276
shares remain available for future issuance under the Employee Stock Purchase Plan.
Stock Grant Plan for Non-Employee Directors
Previously, we had a stock grant plan for non-employee directors that provided for automatic grants of
1,000
shares of our common stock to each of our non-employee directors upon their re-election to the Board of Directors. This plan was terminated and our non-employee directors did not receive any share grants under this plan on the date of our 2016 annual meeting at which our shareholders approved the new Non-Employee Director Stock Plan. In the nine months ended
September 30, 2015
, a total of
4,000
shares were issued to non-employee directors under this plan. The shares issued in the nine months ended
September 30, 2015
had a fair market value on the date of grant equal to
$41,000
(grant date fair value of
$10.36
per share).
Stock Based Compensation Information
All equity-based compensation awarded to our employees and non-employee directors, representing grants of shares, stock options and restricted stock units, are recognized as an expense in our consolidated statement of operations based on the grant date fair value of the award. We utilize the straight-line method of expense recognition over the vesting period for our options subject to time-based vesting restrictions. The fair value of stock options granted has been determined using the Black-Scholes model. The compensation expense recognized for all equity based awards is net of estimated forfeitures, which are based on historical data. We have classified equity-based compensation within our statement of operations in the same manner as our cash based compensation costs.
Equity-based compensation expense in the three months ended
September 30, 2016
totaled
$142,000
, and included
$88,000
for stock option awards,
$22,000
for our Employee Stock Purchase Plan and
$32,000
for unvested restricted stock units. Equity-based compensation expense in the
nine
months ended
September 30, 2016
, totaled
$694,000
, and included
$409,000
for stock option awards,
$54,000
for our Employee Stock Purchase Plan,
$95,000
for unvested restricted stock units and
$136,000
for the issuance of shares to our non-employee directors.
Equity-based compensation expense in the three months ended
September 30, 2015
totaled
$110,000
, and included
$63,000
for stock option awards,
$23,000
for our Employee Stock Purchase Plan and
$24,000
for unvested restricted stock units. Equity based compensation expense in the
nine
months ended
September 30, 2015
totaled
$386,000
, and included
$211,000
for stock option awards,
$55,000
for our Employee Stock Purchase Plan,
$79,000
for unvested restricted stock units and
$41,000
for the issuance of shares to our non-employee directors.
At
September 30, 2016
, the total unrecognized compensation cost related to non-vested equity based compensation arrangements was
$1.1 million
, and the related weighted average period over which it is expected to be recognized is
1.97 years
.
6. OTHER FINANCIAL STATEMENT DATA:
The components of our inventories are as follows:
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
September 30, 2016
|
|
December 31, 2015
|
Raw materials and purchased parts
|
|
$
|
6,012
|
|
|
$
|
6,787
|
|
Work in process
|
|
982
|
|
|
508
|
|
Finished goods
|
|
4,809
|
|
|
5,970
|
|
Total inventories
|
|
$
|
11,803
|
|
|
$
|
13,265
|
|
The components of our accrued expenses are as follows:
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
September 30, 2016
|
|
December 31, 2015
|
Wages and benefits
|
|
$
|
2,341
|
|
|
$
|
1,014
|
|
Warranty liability
|
|
736
|
|
|
584
|
|
Other
|
|
298
|
|
|
361
|
|
|
|
$
|
3,375
|
|
|
$
|
1,959
|
|
Warranty costs:
We provide for the estimated cost of product warranties, which covers products for periods ranging from
one
to
three
years, at the time revenue is recognized. While we engage in extensive product quality programs and processes, including actively monitoring and evaluating the quality of component suppliers, warranty obligations are affected by product failure rates, material usage and service delivery costs incurred in correcting a product failure. If actual product failure rates, material usage or service delivery costs differ from our estimates, revisions to the estimated warranty liability would be required and could be material. The current portion of our warranty liability is included as a component of accrued expenses. The long-term portion of our warranty liability is included as a component of other liabilities. At the end of each reporting period, we revise our estimated warranty liability based on these factors.
A reconciliation of the changes in our estimated warranty liability is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
(In thousands)
|
|
2016
|
|
2015
|
Balance at beginning of period
|
|
$
|
645
|
|
|
$
|
839
|
|
Accrual for warranties
|
|
615
|
|
|
376
|
|
Warranty revision
|
|
(27
|
)
|
|
10
|
|
Settlements made during the period
|
|
(415
|
)
|
|
(547
|
)
|
Balance at end of period
|
|
818
|
|
|
678
|
|
Current portion of estimated warranty liability
|
|
(736
|
)
|
|
(611
|
)
|
Long-term estimated warranty liability
|
|
$
|
82
|
|
|
$
|
67
|
|
Deferred warranty revenue:
The current portion of our deferred warranty revenue is included as a component of advance customer payments. The long-term portion of our deferred warranty revenue is included as a component of other liabilities. A reconciliation of the changes in our deferred warranty revenue is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
(In thousands)
|
|
2016
|
|
2015
|
Balance at beginning of period
|
|
$
|
199
|
|
|
$
|
475
|
|
Revenue deferrals
|
|
490
|
|
|
277
|
|
Amortization of deferred revenue
|
|
(330
|
)
|
|
(518
|
)
|
Total deferred warranty revenue
|
|
359
|
|
|
234
|
|
Current portion of deferred warranty revenue
|
|
(278
|
)
|
|
(227
|
)
|
Long-term deferred warranty revenue
|
|
$
|
81
|
|
|
$
|
7
|
|
7. INTANGIBLE ASSETS:
Intangible assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
December 31, 2015
|
(In thousands)
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
|
Patents
|
|
$
|
2,571
|
|
|
$
|
(2,332
|
)
|
|
$
|
239
|
|
|
$
|
2,513
|
|
|
$
|
(2,253
|
)
|
|
$
|
260
|
|
Software
|
|
206
|
|
|
(75
|
)
|
|
131
|
|
|
206
|
|
|
(53
|
)
|
|
153
|
|
Marketing assets and customer relationships
|
|
101
|
|
|
(30
|
)
|
|
71
|
|
|
101
|
|
|
(21
|
)
|
|
80
|
|
Non-compete agreements
|
|
101
|
|
|
(64
|
)
|
|
37
|
|
|
101
|
|
|
(45
|
)
|
|
56
|
|
|
|
$
|
2,979
|
|
|
$
|
(2,501
|
)
|
|
$
|
478
|
|
|
$
|
2,921
|
|
|
$
|
(2,372
|
)
|
|
$
|
549
|
|
Amortization expense for the
three and nine
month periods ended
September 30, 2016
and
2015
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
(In thousands)
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Patents
|
|
$
|
27
|
|
|
$
|
27
|
|
|
$
|
79
|
|
|
$
|
83
|
|
Software
|
|
7
|
|
|
7
|
|
|
22
|
|
|
22
|
|
Marketing assets and customer relationships
|
|
3
|
|
|
4
|
|
|
9
|
|
|
9
|
|
Non-compete agreements
|
|
6
|
|
|
6
|
|
|
19
|
|
|
19
|
|
|
|
$
|
43
|
|
|
$
|
44
|
|
|
$
|
129
|
|
|
$
|
133
|
|
Amortization of patents has been classified as research and development expense in the accompanying statements of operations. Estimated aggregate amortization expense based on current intangibles for the next five years is expected to be as follows:
$44,000
for the remainder of
2016
;
$157,000
in
2017
;
$105,000
in
2018
;
$70,000
in
2019
;
$62,000
in
2020
; and
$40,000
in
2021
.
Intangible and other long lived assets are reviewed for impairment when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. An impairment loss would be recognized when future undiscounted cash flows expected to result from use of the asset and eventual disposition are less than the carrying amount.
8. REVENUE CONCENTRATIONS, SIGNIFICANT CUSTOMERS AND GEOGRAPHIC AREAS:
Export sales as a percentage of total sales in the
three and nine
months ended
September 30, 2016
were
84%
and
83%
, respectively. Export sales as a percentage of total sales in both the
three and nine
months ended
September 30, 2015
were
73%
. Virtually all of our export sales are negotiated, invoiced and paid in U.S. dollars. Export sales by geographic area are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
(In thousands)
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Americas
|
|
$
|
344
|
|
|
$
|
619
|
|
|
$
|
1,114
|
|
|
$
|
888
|
|
Europe
|
|
3,592
|
|
|
3,053
|
|
|
13,463
|
|
|
8,644
|
|
Asia
|
|
8,675
|
|
|
3,559
|
|
|
29,322
|
|
|
11,912
|
|
Other
|
|
10
|
|
|
41
|
|
|
44
|
|
|
282
|
|
Total export sales
|
|
$
|
12,621
|
|
|
$
|
7,272
|
|
|
$
|
43,943
|
|
|
$
|
21,726
|
|
Our LaserAlign sensor products have historically accounted for a significant portion of our revenues and profitability. Our revenue, results of operations and cash flows could be negatively impacted if our LaserAlign customers are unsuccessful selling the products into which our sensors are incorporated, design their products to function without our sensors, purchase sensors from other suppliers, or otherwise terminate their relationships with us.
In the
nine
months ended
September 30, 2016
, sales to significant customer A accounted for
13%
of our total revenue and sales to significant customer B accounted for
13%
of our total revenue. As of
September 30, 2016
, accounts receivable from significant customer A were
$615,000
and accounts receivable from significant customer B were
$3.2 million
.
9. NET INCOME (LOSS) PER SHARE:
Net income (loss) per basic share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Net income per diluted share is computed by dividing net income by the weighted average number of common and common equivalent shares outstanding during the period. Common equivalent shares consist of common shares to be issued upon exercise of stock options, vesting of restricted stock units and from the purchase of shares under our Employee Stock Purchase Plan, as calculated using the treasury stock method. Net loss per diluted share is calculated by dividing net loss by the weighted average number of common shares outstanding during the period. Common equivalent shares are excluded from the calculation of net loss per diluted share due to their anti-dilutive effect. The components of net income (loss) per basic and diluted share are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands except per share amounts)
|
|
Net Income
|
|
Weighted Average
Shares Outstanding
|
|
Per Share Amount
|
Three Months Ended September 30, 2016
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1,172
|
|
|
6,859
|
|
|
$
|
0.17
|
|
Dilutive effect of common equivalent shares
|
|
—
|
|
|
295
|
|
|
(0.01
|
)
|
Dilutive
|
|
$
|
1,172
|
|
|
7,154
|
|
|
$
|
0.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands except per share amounts)
|
|
Net Loss
|
|
Weighted Average
Shares Outstanding
|
|
Per Share Amount
|
Three Months Ended September 30, 2015
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(514
|
)
|
|
6,717
|
|
|
$
|
(0.08
|
)
|
Dilutive effect of common equivalent shares
|
|
—
|
|
|
—
|
|
|
—
|
|
Dilutive
|
|
$
|
(514
|
)
|
|
6,717
|
|
|
$
|
(0.08
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands except per share amounts)
|
|
Net Income
|
|
Weighted Average
Shares Outstanding
|
|
Per Share Amount
|
Nine Months Ended September 30, 2016:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
5,476
|
|
|
6,813
|
|
|
$
|
0.80
|
|
Dilutive effect of common equivalent shares
|
|
—
|
|
|
200
|
|
|
(0.02
|
)
|
Dilutive
|
|
$
|
5,476
|
|
|
7,013
|
|
|
$
|
0.78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands except per share amounts)
|
|
Net Loss
|
|
Weighted Average
Shares Outstanding
|
|
Per Share Amount
|
Nine Months Ended September 30, 2015:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(2,056
|
)
|
|
6,694
|
|
|
$
|
(0.31
|
)
|
Dilutive effect of common equivalent shares
|
|
—
|
|
|
—
|
|
|
—
|
|
Dilutive
|
|
$
|
(2,056
|
)
|
|
6,694
|
|
|
$
|
(0.31
|
)
|
Potentially dilutive shares excluded from the calculations of net income (loss) per diluted share due to their anti-dilutive effect were as follows:
zero
shares in the three months ended
September 30, 2016
;
132,000
shares in the
nine
months ended
September 30, 2016
;
553,000
shares in the three months ended
September 30, 2015
; and
562,000
shares in the
nine
months ended
September 30, 2015
.
10. COMPREHENSIVE INCOME (LOSS):
Reclassification adjustments are made to avoid double counting for items included in comprehensive income (loss) that are also recorded as part of net income (loss). Reclassifications to earnings related to cash flow hedging instruments are discussed in Note 3. Amounts recorded in accumulated other comprehensive loss for foreign exchange forward contracts at
September 30, 2016
are income tax related. We have recorded a valuation allowance against substantially all of our United States and Singapore based deferred tax assets. Accordingly, we do not expect to record a tax provision for items of other comprehensive income (loss), including foreign exchange forward contracts, until such time as the valuation allowance is substantially reduced.
The effect of the reclassifications from comprehensive income (loss) to earnings by line item is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Details about Components
of Accumulated Other
Comprehensive Loss
|
|
Amount Reclassified from
Accumulated Other
Comprehensive Loss
|
|
Affected Line Item in the Statements of Operations
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
(In thousands)
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
|
Unrealized losses on foreign exchange forward contracts
|
|
$
|
—
|
|
|
$
|
(102
|
)
|
|
$
|
(27
|
)
|
|
$
|
(289
|
)
|
|
Cost of revenues
|
|
|
—
|
|
|
(32
|
)
|
|
(6
|
)
|
|
(93
|
)
|
|
Research and development expenses
|
|
|
—
|
|
|
(27
|
)
|
|
(3
|
)
|
|
(84
|
)
|
|
Selling, general and administrative expenses
|
|
|
—
|
|
|
(161
|
)
|
|
(36
|
)
|
|
(466
|
)
|
|
Total before tax
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Income tax provision (benefit)
|
|
|
$
|
—
|
|
|
$
|
(161
|
)
|
|
$
|
(36
|
)
|
|
$
|
(466
|
)
|
|
Net of tax
|
At
September 30, 2016
and
September 30, 2015
, components of accumulated other comprehensive loss are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Foreign
Currency
Translation
Adjustments
|
|
Available-
for-Sale
Securities
|
|
Foreign
Exchange
Forward
Contracts
|
|
Accumulated
Other
Comprehensive
Loss
|
Balances at December 31, 2015
|
|
$
|
(1,545
|
)
|
|
$
|
(17
|
)
|
|
$
|
(147
|
)
|
|
$
|
(1,709
|
)
|
Other comprehensive income before reclassifications
|
|
78
|
|
|
32
|
|
|
53
|
|
|
163
|
|
Amounts reclassified from accumulated other comprehensive loss
|
|
—
|
|
|
—
|
|
|
36
|
|
|
36
|
|
Total change for the period
|
|
78
|
|
|
32
|
|
|
89
|
|
|
199
|
|
Balances at September 30, 2016
|
|
$
|
(1,467
|
)
|
|
$
|
15
|
|
|
$
|
(58
|
)
|
|
$
|
(1,510
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Foreign
Currency
Translation
Adjustments
|
|
Available-
for-Sale
Securities
|
|
Foreign
Exchange
Forward
Contracts
|
|
Accumulated
Other
Comprehensive
Loss
|
Balances at December 31, 2014
|
|
$
|
(920
|
)
|
|
$
|
61
|
|
|
$
|
(412
|
)
|
|
$
|
(1,271
|
)
|
Other comprehensive income (loss) before reclassifications
|
|
(747
|
)
|
|
(14
|
)
|
|
(322
|
)
|
|
(1,083
|
)
|
Amounts reclassified from accumulated other comprehensive loss
|
|
—
|
|
|
—
|
|
|
466
|
|
|
466
|
|
Total change for the period
|
|
(747
|
)
|
|
(14
|
)
|
|
144
|
|
|
(617
|
)
|
Balances at September 30, 2015
|
|
$
|
(1,667
|
)
|
|
$
|
47
|
|
|
$
|
(268
|
)
|
|
$
|
(1,888
|
)
|
11. INCOME TAXES:
We recorded income tax expense of
$108,000
in the
nine
months ended
September 30, 2016
, compared to
$61,000
in the
nine
months ended
September 30, 2015
. At
September 30, 2016
, we continue to have a valuation allowance recorded against all of our U.S. and Singapore based deferred tax assets. Income tax expense in the
three and nine
months ended
September 30, 2016
and the
three and nine
months ended
September 30, 2015
includes minimal state income tax expense and foreign income tax expense incurred by our subsidiaries in the United Kingdom and China. Income tax expense in the three and nine months ended
September 30, 2016
also includes U.S. federal alternative minimum taxes.
We currently have significant deferred tax assets as a result of temporary differences between taxable income on our tax returns and U.S. GAAP income, research and development tax credit carry forwards and federal, state and foreign net operating loss carry forwards. A deferred tax asset generally represents future tax benefits to be received when temporary differences previously reported in our consolidated financial statements become deductible for income tax purposes, when net operating loss carry forwards are applied against future taxable income, or when tax credit carry forwards are utilized on our tax returns. We assess the realizability of our deferred tax assets and the need for a valuation allowance based on the guidance provided in current financial accounting standards.
Significant judgment is required in determining the realizability of our deferred tax assets. The assessment of whether valuation allowances are required considers, among other matters, the nature, frequency and severity of any current and cumulative losses, forecasts of future profitability, the duration of statutory carry forward periods, our experience with loss carry forwards not expiring unused and tax planning alternatives.
At September 30, 2016, we continue to have a valuation allowance recorded against all of our U.S. and Singapore based net deferred tax assets. In analyzing the need for a valuation allowance, we first considered our history of cumulative operating results for income tax purposes over the past
three
years in each of the tax jurisdictions where we operate, our financial performance in recent quarters, statutory carry forward periods and tax planning alternatives. We also considered both our near-term and long-term financial outlook. After considering all available evidence both positive and negative, we concluded that a valuation allowance is needed for all of our U.S. and Singapore based deferred tax assets as of
September 30, 2016
and
December 31, 2015
.
We have generated significant profits in the first nine months of 2016. If this trend were to continue, and based on our favorable long-term financial outlook, we may conclude in the near future that a valuation allowance for all or a portion of our U.S. and Singapore based net deferred tax assets is no longer needed. Reversing all or a portion of the valuation allowance could result in a significant one-time non-cash income tax benefit. In addition, once a significant portion of the valuation allowance is reversed, reported income tax expense will increase in future periods. The timing of cash payments for income taxes would not be impacted.
Deferred tax assets at
September 30, 2016
include net operating loss carry forwards incurred in the United Kingdom by CyberOptics Ltd., which was acquired in 1999. A valuation allowance has not been recorded against these deferred tax assets. The utilization of these net operating loss carry forwards is dependent on CyberOptics Ltd.’s ability to generate sufficient United Kingdom taxable income during a reasonable future period.
The Inland Revenue Authority of Singapore recently completed a review of our 2012 income tax return. The review did not result in payment of any additional tax or change in our taxable income.
During 2015, our wholly owned Singapore subsidiary repatriated approximately
$3.6 million
to our U.S.-based parent, of which approximately $
1.9
million had been previously taxed. We were able to accomplish the repatriation without having to pay cash taxes given available U.S. net operating loss carryforwards. For this reason and given our current tax situation, we concluded that a one-time repatriation of funds was appropriate. It is our current intention to permanently reinvest the remaining undistributed earnings of our international subsidiaries. Accordingly, we have not recorded the related deferred tax liability of approximately
$2.5 million
for U.S.-based income taxes on these earnings. If we were to change our position on permanent reinvestment of undistributed earnings of our international subsidiaries, it is anticipated that any such change would not have a significant impact on our financial position or results of operations. This assessment is based on the amount of remaining undistributed earnings of international subsidiaries and the size of our available U.S. net operating loss carryforwards.
12. SHARE REPURCHASE:
In August of 2015, our Board of Directors authorized a
$2.0 million
share repurchase program. The common stock may be acquired from time to time in open market transactions, block purchases and other transactions complying with the Securities and Exchange Commission’s Rule 10b-18. We did not repurchase any of our common stock in the
nine
months ended
September 30, 2016
.
13. CONTINGENCIES:
We are periodically a defendant in miscellaneous claims and disputes in the ordinary course of business. While the outcome of these matters cannot be predicted with certainty, management presently believes the disposition of these matters will not have a material effect on our financial position, results of operations or cash flows.
In the normal course of business to facilitate sales of our products and services, we at times indemnify other parties, including customers, with respect to certain matters. In these instances, we have agreed to hold the other parties harmless against losses arising out of intellectual property infringement or other types of claims. These agreements may limit the time within which an indemnification claim can be made, and almost always limit the amount of the claim. It is not possible to determine the maximum potential liability under these indemnification agreements due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each particular agreement. Historically, payments made, if any, under these agreements have not had a material impact on our operating results, financial position or cash flows.
14. RECENT ACCOUNTING DEVELOPMENTS:
In May 2014, the Financial Accounting Standards Board (FASB) issued guidance on the recognition of revenue from contracts with customers (Accounting Standards Update (ASU) No. 2014-09,
Revenue from Contracts with Customers
). Revenue recognition will show the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance also requires disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The guidance permits two methods of adoption: a retrospective approach requiring application to each prior reporting period presented or the modified retrospective approach with the cumulative effect of initially applying the guidance recognized at the date of initial application. The FASB has delayed the effective date of the standard by one year to January 1, 2018, with early adoption permitted as of the original effective date of January 1, 2017. We presently anticipate that we will adopt the new standard retrospectively to each prior reporting period presented. We are still currently evaluating the impact of the new guidance on our consolidated financial statements. We presently anticipate that we will have the impact of the new guidance quantified by March 31, 2017.
In March 2016, the FASB issued guidance on simplifying the accounting for stock compensation (ASU No. 2016-09,
Improvements to Employee Share-Based Payment Accounting
)
.
The guidance impacts the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification in the consolidated statement of cash flows. For U.S. public companies, the updated guidance is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years, and early adoption is permitted. We are currently evaluating the impact of the new guidance on our consolidated financial statements.
In February 2016, the FASB issued new lease accounting guidance (ASU No. 2016-02,
Leases
)
.
Under the new guidance, at the commencement date, lessees will be required (a) to recognize a lease liability, which is a lessee's obligation to make lease payments arising from a lease, measured on a discounted basis, and (b) to record
a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. The new guidance is not applicable for leases with a term of 12 months or less. Lessor accounting is largely unchanged. U.S. public companies are required to apply the amendments in ASU 2016-02 for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted.
Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. We are currently evaluating the impact of the new guidance on our consolidated financial statements.
In July 2015, the FASB issued guidance on simplifying the measurement of inventory (ASU No. 2015-11,
Simplifying the Measurement of Inventory
)
.
The guidance requires an entity to measure inventory at the lower of cost or net realizable value, which consists of estimated selling prices in the ordinary course of business, less reasonably predictable cost of completion, disposal, and transportation. The new guidance eliminates unnecessary complexity that exists under current "lower of cost or market" guidance. For U.S. public companies, the updated guidance is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The guidance is to be applied prospectively as of the beginning of an interim or annual reporting period, with early adoption permitted. We do not believe the implementation of this standard will have a material impact on our consolidated financial statements.