NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
A. Basis of Presentation and Summary of Si
gnificant Accounting Policies
The accompanying interim unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and applicable rules and regulations. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles
(U.S. GAAP) have been condensed or omitted pursuant to such rules and regulations. In management’s opinion, all adjustments necessary for a fair presentation of the financial position, results of operations and cash flows have been included and are of a normal, recurring nature. The results of operations for the three and nine months ended March 31, 2017 are not necessarily indicative of the operating results for the full fiscal year or any future periods.
You should read the financial statements and these notes, which are an integral part of the financial statements, together with our audited financial statements included in our Annual Report on Form 10-K for the fiscal year ended June 30,
2016 (“2016 Annual Report”). The accounting policies used to prepare the financial statements included in this report are the same as those described in the notes to the consolidated financial statements in our 2016 Annual Report unless otherwise noted below.
Net Income per Common Share
We compute net income per common share using the weighted average number of common shares outstanding during the period, and diluted net income per common share using the additional dilutive effect of all dilutive securities. The dilutive impact of stock
options account for the additional weighted average shares of common stock outstanding for our diluted net income per common share computation. We calculated basic and diluted net income per common share as follows (in thousands, except per share data):
|
|
Three
Months Ended
March
31,
|
|
|
Nine
Months Ended
March
31,
|
|
|
|
201
7
|
|
|
201
6
|
|
|
201
7
|
|
|
201
6
|
|
Numerator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
745
|
|
|
$
|
3,023
|
|
|
$
|
5,701
|
|
|
$
|
6,104
|
|
Denominator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average common shares outstanding
|
|
|
6,582
|
|
|
|
6,511
|
|
|
|
6,569
|
|
|
|
6,514
|
|
Dilutive effect of stock options
|
|
|
32
|
|
|
|
52
|
|
|
|
79
|
|
|
|
115
|
|
Diluted weighted average common shares outstanding
|
|
|
6,614
|
|
|
|
6,563
|
|
|
|
6,648
|
|
|
|
6,629
|
|
Basic net income per common share
|
|
$
|
0.11
|
|
|
$
|
0.46
|
|
|
$
|
0.87
|
|
|
$
|
0.94
|
|
Diluted net income per common share
|
|
$
|
0.11
|
|
|
$
|
0.46
|
|
|
$
|
0.86
|
|
|
$
|
0.92
|
|
No shares related to stock options were excluded for the three or nine months ended March 31, 201
7 and March 31, 2016.
Revenue Recognition
To recognize revenue, four basic criteria must be met:
(1) there is evidence that an arrangement exists; (2) delivery has occurred; (3) the fee is fixed or determinable; and (4) collectability is reasonably assured. Revenue from sales transactions where the buyer has the right to return the product is recognized at the time of sale only if (a) the seller’s price to the buyer is substantially fixed or determinable at the date of sale; (b) the buyer has paid the seller, or the buyer is obligated to pay the seller and the obligation is not contingent on resale of the product; (c) the buyer’s obligation to the seller would not be changed in the event of theft or physical destruction or damage of the product; (d) the buyer acquiring the product for resale has economic substance apart from that provided by the seller; (e) the seller does not have significant obligations for future performance to directly bring about resale of the product by the buyer; and (f) the amount of future returns can be reasonably estimated. We recognize revenue upon determination that all criteria for revenue recognition have been met. The criteria are usually met at the time title passes to the customer, which usually occurs upon shipment. Revenue from shipments where title passes upon delivery is deferred until the shipment has been delivered.
We record reductions to gross revenue for estimated returns of private label contract manufacturing products and
beta-alanine raw material sales. The estimated returns are based on the trailing six months of private-label contract manufacturing gross sales and our historical experience for both private label contract manufacturing and beta-alanine raw material product returns. However, the estimate for product returns does not reflect the impact of a potential large product recall resulting from product nonconformance or other factors as such events are not predictable nor is the related economic impact estimable.
We currently own certain U.S. patents, and each patent
’s corresponding foreign patent applications. All of these patents and patent rights relate to the ingredient known as beta-alanine marketed and sold under the CarnoSyn® and SR Carnosyn® trademarks. We recorded royalty and licensing income as a component of revenue in the amount of $6.6 million during the three months ended March 31, 2017 and $20.0 million during the nine months ended March 31, 2017. We recorded beta-alanine raw material sales and royalty and licensing income as a component of revenue in the amount of $5.5 million during the three months ended March 31, 2016 and $16.1 million during the nine months ended March 31, 2016. These royalty income and raw material sale amounts resulted in royalty expense paid to the original patent holders from whom NAI acquired its patents and its patent rights. We recognized royalty expense as a component of cost of goods sold in the amount of $233,000 during the three months ended March 31, 2017 and $799,000 during the nine months ended March 31, 2017.
We recognized royalty expense as a component of cost of goods sold in the amount of $193,000 during the three months ended March 31, 2016 and $666,000 during the nine months ended March 31, 2016.
Stock-Based Compensation
We have an omnibus incentive plan that was approved by our Board of Directors effective as of October
15, 2009 and approved by our stockholders at the Annual Meeting of Stockholders held on November 30, 2009. Under the plan, we may grant nonqualified and incentive stock options and other stock-based awards to employees, non-employee directors and consultants.
We estimate the fair value of stock option awards at the date of grant using the Black-Scholes option valuation model. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. Option valuation models require the input of highly subjective assumptions. Black-Scholes uses assumptions related to volatility, the risk-free interest rate, the dividend yield (which we assume to be zero, as we have not paid any cash dividends) and employee exercise behavior. Expected volatilities used in the model are based on the historical volatility of our stock price. The risk-free interest rate is derived from the U.S. Treasury yield curve in effect in the period of grant. The expected life of stock option grants is derived from historical experience. The fair value of restricted stock shares granted is based on the market price of our common stock on the date of grant. We amortize the estimated fair value of our stock awards to expense over the related vesting periods.
On March
28, 2017, the Board of Directors approved the grant of 140,000 shares of restricted stock to the members of our Board of Directors and certain key members of our management team pursuant to our 2009 Omnibus Incentive Plan. On March 23, 2016, the Board of Directors approved the grant of 130,000 shares of restricted stock to the members of our Board of Directors and certain key members of our management team pursuant to our 2009 Omnibus Incentive Plan. These restricted stock grants will vest over three years and the unvested shares cannot be sold or otherwise transferred and the rights to receive dividends, if declared by our Board of Directors, are forfeitable until the shares become vested.
Our net income included stock based compensation expense of
approximately $223,000 for the three months ended March 31, 2017 and approximately $729,000 for the nine months ended March 31, 2017. Our net income included stock based compensation expense of approximately $183,000 for the three months ended March 31, 2016 and approximately $463,000 for the nine months ended March 31, 2016.
Fair Value of Financial Instruments
Fair value is defined as the exchange price that would be received to sell an asset or paid to transfer a liability (i.e., the “exit price”) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. We use a three-level hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from independent sources. Unobservable inputs are inputs that reflect our assumptions about the inputs that market participants would use in pricing the asset or liability and are developed based on the best information available under the circumstances.
The fair value hierarchy is broken down into three levels based on the source of inputs. In general, fair values determined by Level 1 inputs use quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. We classify cash, cash equivalents, and marketable securities balances as Level 1 assets. Fair values determined by Level 2 inputs are based on quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active and models for which all significant inputs are observable or can be corroborated, either directly or indirectly by observable market data. Level 3 inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. These include certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.
As of
March 31, 2017 and June 30, 2016, we did not have any financial assets or liabilities classified as Level 1. We classify derivative forward exchange contracts as Level 2 assets. The fair value of our forward exchange contracts as of March 31, 2017 was a net asset of $1.1 million. The fair value of our forward exchange contracts as of June 30, 2016 was a net asset of $250,000. As of March 31, 2017 and June 30, 2016, we did not have any financial assets or liabilities classified as Level 3. We did not transfer any assets or liabilities between Levels during fiscal 2016 or the three and nine month periods ended March 31, 2017.
B
. Inventories
, net
Inventories, net consisted of the following (
dollars in thousands):
|
|
March
31,
201
7
|
|
|
June
30,
201
6
|
|
Raw materials
|
|
$
|
10,043
|
|
|
$
|
14,751
|
|
Work in progress
|
|
|
3,019
|
|
|
|
3,487
|
|
Finished goods
|
|
|
3,014
|
|
|
|
2,832
|
|
Reserves
|
|
|
(110
|
)
|
|
|
(302
|
)
|
Inventories, net
|
|
$
|
15,966
|
|
|
$
|
20,768
|
|
C
. Property and Equipment
, net
Property and equipment
consisted of the following (dollars in thousands):
|
|
Depreciable
Life In Years
|
|
|
March
31,
201
7
|
|
|
June
30,
201
6
|
|
Land
|
|
|
N/A
|
|
|
|
$
|
1,200
|
|
|
$
|
1,200
|
|
Building and building improvements
|
|
7
|
–
|
39
|
|
|
|
3,675
|
|
|
|
3,324
|
|
Machinery and equipment
|
|
3
|
–
|
12
|
|
|
|
24,450
|
|
|
|
23,846
|
|
Office equipment and furniture
|
|
3
|
–
|
5
|
|
|
|
3,749
|
|
|
|
2,994
|
|
Vehicles
|
|
|
3
|
|
|
|
|
209
|
|
|
|
209
|
|
Leasehold improvements
|
|
1
|
–
|
15
|
|
|
|
17,008
|
|
|
|
15,261
|
|
Total property and equipment
|
|
|
|
|
|
|
|
50,291
|
|
|
|
46,834
|
|
Less: accumulated depreciation and amortization
|
|
|
|
|
|
|
|
(32,503
|
)
|
|
|
(31,667
|
)
|
Property and equipment, net
|
|
|
|
|
|
|
$
|
17,788
|
|
|
$
|
15,167
|
|
D.
Accumulated
Other
C
omprehensive
(Loss)
Income
Accumulated other comprehensive
(loss) income (“OCL” and “OCI”) consisted of the following during the three and nine months ended March 31, 2017 and March 31, 2016 (dollars in thousands):
|
|
Three Months Ended
March
31, 201
7
|
|
|
|
Defined Benefit
Pension Plan
|
|
|
Unrealized
Gain
s
(losses)
on Cash
Flow Hedges
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
(775
|
)
|
|
$
|
947
|
|
|
$
|
172
|
|
OCI/OCL
before reclassifications
|
|
|
—
|
|
|
|
(322
|
)
|
|
|
(322
|
)
|
Amounts reclassified from OCI
|
|
|
—
|
|
|
|
(383
|
)
|
|
|
(383
|
)
|
Tax effect of OCI activity
|
|
|
—
|
|
|
|
254
|
|
|
|
254
|
|
Net current period OCI/OC
L
|
|
|
—
|
|
|
|
(451
|
)
|
|
|
(451
|
)
|
Ending balance
|
|
$
|
(775
|
)
|
|
$
|
496
|
|
|
$
|
(279
|
)
|
|
|
Nine
Months Ended
March
31, 201
7
|
|
|
|
Defined Benefit
Pension Plan
|
|
|
Unrealized
Gains
(
Losses
)
on Cash
Flow Hedges
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
(775
|
)
|
|
$
|
95
|
|
|
$
|
(680
|
)
|
OCI/OCL
before reclassifications
|
|
|
—
|
|
|
|
1,512
|
|
|
|
1,512
|
|
Amounts reclassified from OCI
|
|
|
—
|
|
|
|
(884
|
)
|
|
|
(884
|
)
|
Tax effect of OCI activity
|
|
|
—
|
|
|
|
(227
|
)
|
|
|
(227
|
)
|
Net current period OCI/OCL
|
|
|
—
|
|
|
|
401
|
|
|
|
401
|
|
Ending balance
|
|
$
|
(775
|
)
|
|
$
|
496
|
|
|
$
|
(279
|
)
|
|
|
Three Months Ended
March
31, 201
6
|
|
|
|
Defined Benefit
Pension Plan
|
|
|
Unrealized
Gain
s
(
L
osses)
on Cash
Flow Hedges
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
(643
|
)
|
|
$
|
151
|
|
|
$
|
(492
|
)
|
OCI/OCL
before reclassifications
|
|
|
—
|
|
|
|
(613
|
)
|
|
|
(613
|
)
|
Amounts reclassified from OCI
|
|
|
—
|
|
|
|
(120
|
)
|
|
|
(120
|
)
|
Tax effect of OCI activity
|
|
|
—
|
|
|
|
260
|
|
|
|
260
|
|
Net current period OCI/OCL
|
|
|
—
|
|
|
|
(473
|
)
|
|
|
(473
|
)
|
Ending balance
|
|
$
|
(643
|
)
|
|
$
|
(322
|
)
|
|
$
|
(965
|
)
|
|
|
Nine
Months Ended
March
31, 201
6
|
|
|
|
Defined Benefit Pension Plan
|
|
|
Unrealized
Gains (
Losses
)
on Cash Flow Hedges
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
(643
|
)
|
|
$
|
(123
|
)
|
|
$
|
(766
|
)
|
OCI/OCL
before reclassifications
|
|
|
—
|
|
|
|
(131
|
)
|
|
|
(131
|
)
|
Amounts reclassified from OCI
|
|
|
—
|
|
|
|
(178
|
)
|
|
|
(178
|
)
|
Tax effect of OCI activity
|
|
|
—
|
|
|
|
110
|
|
|
|
110
|
|
Net current period OCI/OCL
|
|
|
—
|
|
|
|
(199
|
)
|
|
|
(199
|
)
|
Ending balance
|
|
$
|
(643
|
)
|
|
$
|
(322
|
)
|
|
$
|
(965
|
)
|
During the thre
e months ended March 31, 2017, the amounts reclassified from OCI were comprised of $278,000 of gains reclassified to net revenues and $106,000 related to the amortization of forward points reclassified to other income. During the nine months ended March 31, 2017, the amounts reclassified from OCI were comprised of $549,000 of gains reclassified to net revenues and $336,000 related to the amortization of forward points reclassified to other income.
During the three months ended
March 31, 2016, the amounts reclassified from OCI were comprised of $118,000 of gains reclassified to net revenues and $2,000 related to the amortization of forward points reclassified to other income. During the nine months ended March 31, 2016, the amounts reclassified from OCI were comprised of $125,000 of gains reclassified to net revenues and $53,000 related to the amortization of forward points reclassified to other income.
E. Debt
On March 28, 2017, we executed an amendment to our credit facility with Wells Fargo Bank, N.A. to extend the maturity date for our working line of credit from January 31, 2019 to February
1, 2020. The Credit Agreement provides us with a credit line of up to $10.0 million. The line of credit may be used to finance working capital requirements. There was no commitment fee required as part of this amendment. There are no amounts currently drawn under the line of credit.
Under the terms of the Credit Agreement, borrowings are subject to eligibility requirements including maintaining (i)
a ratio of total liabilities to tangible net worth of not greater than 1.25 to 1.0 at any time; and (ii) a ratio of total current assets to total current liabilities of not less than 1.75 to 1.0 at each fiscal quarter end. Any amounts outstanding under the line of credit will bear interest at a fixed or fluctuating interest rate as elected by NAI from time to time; provided, however, that if the outstanding principal amount is less than $100,000 such amount shall bear interest at the then applicable fluctuating rate of interest. If elected, the fluctuating rate per annum would be equal to 1.25% above the daily one month LIBOR rate as in effect from time to time. If a fixed rate is elected, it would equal a per annum rate of 1.25% above the LIBOR rate in effect on the first day of the applicable fixed rate term. Any amounts outstanding under the line of credit must be paid in full on or before the maturity date. Amounts outstanding that are subject to a fluctuating interest rate may be prepaid at any time without penalty. Amounts outstanding that are subject to a fixed interest rate may be prepaid at any time in minimum amounts of $100,000, subject to a prepayment fee equal to the sum of the discounted monthly differences for each month from the month of prepayment through the month in which the then applicable fixed rate term matures.
Our obligations under the Credit Agreement are secured by our accounts receivable and other rights to payment, general intangibles, inventory, equipment and fixtures. We also have a foreign exchange facility with Wells Fargo
Bank, N.A. in effect until January 31, 2019, and with Bank of America, N.A. in effect until August 15, 2017.
On
March 31, 2017, we were in compliance with all of the financial and other covenants required under the Credit agreement.
We did not use our working capital line of credit nor did we have any long-term debt outstanding during the nine months ended March 31, 201
7. As of March 31, 2017, we had $10.0 million available under our credit facilities.
F
. Economic Dependency
We had substantial net sales to certain customers during the periods shown in the following table. The loss of any of these customers, or a significant decline in sales to these customers, the growth rate of sales to these customers
, or in these customers’ ability to make payments when due, could have a material adverse impact on our net sales and net income. Net sales to any one customer representing 10% or more of the respective period’s consolidated net sales were as follows (dollars in thousands):
|
|
Three Months Ended March
31,
|
|
|
Nine Months Ended March
31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
Net
Sales by
Customer
|
|
|
Net
Sales by
Customer
|
|
|
Net
Sales by
Customer
|
|
|
Net
Sales by
Customer
|
|
Customer
1
|
|
$
|
11,046
|
|
|
$
|
13,023
|
|
|
$
|
43,198
|
|
|
$
|
31,714
|
|
Customer
2
|
|
|
(a
|
)
|
|
|
3,367
|
|
|
|
(a
|
)
|
|
|
9,705
|
|
Customer
3
|
|
|
(a
|
)
|
|
|
3,196
|
|
|
|
(a
|
)
|
|
|
(a
|
)
|
|
|
$
|
11,046
|
|
|
$
|
19,586
|
|
|
$
|
43,198
|
|
|
$
|
41,419
|
|
|
(a)
|
Sales were less than 10% of the respective period
’s total private revenues.
|
We buy certain products
, including beta-alanine, from a limited number of raw material suppliers. The loss of any of these suppliers could have a material adverse impact on our net sales and net income. Raw material purchases from any one supplier representing 10% or more of the respective period’s total raw material purchases were as follows (dollars in thousands):
|
|
Three Months Ended
March
31,
|
|
|
Nine
Months Ended
March
31,
|
|
|
|
201
7
|
|
|
201
6
|
|
|
201
7
|
|
|
201
6
|
|
|
|
Raw
Material
Purchases by
Supplier
|
|
|
%
of Total
Raw
Material
Purchases
|
|
|
Raw
Material
Purchases by
Supplier
|
|
|
%
of Total
Raw
Material
Purchases
|
|
|
Raw
Material
Purchases by
Supplier
|
|
|
%
of Total
Raw
Material
Purchases
|
|
|
Raw
Material
Purchases by
Supplier
|
|
|
%
of Total
Raw
Material
Purchases
|
|
Supplier
1
|
|
$
|
1,683
|
|
|
|
16
|
%
|
|
|
(a
|
)
|
|
|
(a
|
)
|
|
|
(a
|
)
|
|
|
(a
|
)
|
|
|
(a
|
)
|
|
|
(a
|
)
|
Supplier 2
|
|
|
1,646
|
|
|
|
16
|
|
|
|
(a
|
)
|
|
|
(a
|
)
|
|
|
(a
|
)
|
|
|
(a
|
)
|
|
|
(a
|
)
|
|
|
(a
|
)
|
Supplier 3
|
|
|
1,317
|
|
|
|
13
|
|
|
|
(a
|
)
|
|
|
(a
|
)
|
|
|
(a
|
)
|
|
|
(a
|
)
|
|
|
(a
|
)
|
|
|
(a
|
)
|
|
|
$
|
4,646
|
|
|
|
45
|
%
|
|
|
(a
|
)
|
|
|
(a
|
)
|
|
|
(a
|
)
|
|
|
(a
|
)
|
|
|
(a
|
)
|
|
|
(a
|
)
|
|
|
|
|
(a)
|
Purchases were less than 10% of the respective period’s total raw material purchases.
|
G
. Segment Information
Our business consists of
two segments for financial reporting purposes. The two segments are identified as (i) private label contract manufacturing, which primarily relates to the provision of private label contract manufacturing services to companies that market and distribute nutritional supplements and other health care products, and (ii) patent and trademark licensing, which primarily includes direct raw material sales and royalty income from our license and supply agreements associated with the sale and use of beta-alanine under our CarnoSyn® trade name.
We evaluate performance based on a number of factors. The primary performance measures for each segment are net sales and income or loss from operations before corporate allocations. Operating income or loss for each segment does not include corporate gen
eral and administrative expenses, interest expense and other miscellaneous income and expense items. Corporate general and administrative expenses include, but are not limited to: human resources, corporate legal, finance, information technology, and other corporate level related expenses, which are not allocated to any segment. The accounting policies of our segments are the same as those described in Note A above and in the consolidated financial statements included in our 2016 Annual Report.
Our operating results
by business segment were as follows (in thousands):
|
|
Three Months Ended
March 31,
|
|
|
Nine Months Ended
March 31,
|
|
|
|
201
7
|
|
|
2016
|
|
|
201
7
|
|
|
2016
|
|
Net Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private label contract manufacturing
|
|
$
|
18,544
|
|
|
$
|
24,493
|
|
|
$
|
69,787
|
|
|
$
|
62,377
|
|
Patent and trademark licensing
|
|
|
6,591
|
|
|
|
5,513
|
|
|
|
19,974
|
|
|
|
16,125
|
|
|
|
$
|
25,135
|
|
|
$
|
30,006
|
|
|
$
|
89,761
|
|
|
$
|
78,502
|
|
|
|
Three Months Ended
March 31,
|
|
|
Nine Months Ended
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Income from Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private label contract manufacturing
|
|
$
|
749
|
|
|
$
|
2,915
|
|
|
$
|
6,182
|
|
|
$
|
7,518
|
|
Patent and trademark licensing
|
|
|
1,786
|
|
|
|
1,750
|
|
|
|
6,026
|
|
|
|
4,440
|
|
Income from operations of reportable segments
|
|
|
2,535
|
|
|
|
4,665
|
|
|
|
12,208
|
|
|
|
11,958
|
|
Corporate expenses not allocated to segments
|
|
|
(1,542
|
)
|
|
|
(1,560
|
)
|
|
|
(4,566
|
)
|
|
|
(4,390
|
)
|
|
|
$
|
993
|
|
|
$
|
3,105
|
|
|
$
|
7,642
|
|
|
$
|
7,568
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
|
201
7
|
|
|
201
6
|
|
Total Assets
|
|
|
|
|
|
|
|
|
Private label contract manufacturing
|
|
$
|
58,867
|
|
|
$
|
66,375
|
|
Patent and trademark licensing
|
|
|
11,120
|
|
|
|
7,800
|
|
|
|
$
|
69,987
|
|
|
$
|
74,175
|
|
Our private label contract manufacturing products are sold both in the U.S. and in markets outside the U.S., including Europe,
Australia, Asia, Canada, Mexico, and South Africa. Our primary market outside the U.S. is Europe. Our patent and trademark licensing activities are primarily based in the U.S. and our branded products were only sold in the U.S.
Net sales by geographic region, based on the customers
’ location, were as follows (in thousands):
|
|
Three Months Ended
March 31,
|
|
|
Nine Months Ended
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Net Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
14,605
|
|
|
$
|
13,374
|
|
|
$
|
43,484
|
|
|
$
|
38,665
|
|
Markets outside the United States
|
|
|
10,530
|
|
|
|
16,632
|
|
|
|
46,277
|
|
|
|
39,837
|
|
|
|
$
|
25,135
|
|
|
$
|
30,006
|
|
|
$
|
89,761
|
|
|
$
|
78,502
|
|
Products manufactured by NAIE accounted for
approximately 62% of consolidated net sales in markets outside the U.S. for the three months ended March 31, 2017 and 57% for the three months ended March 31, 2016. Products manufactured by NAIE accounted for 55% of consolidated net sales in markets outside the U.S. for the nine months ended March 31, 2017 and 67% for the nine months ended March 31, 2016. No products manufactured by NAIE were sold in the U.S. during the nine months ended March 31, 2017 and 2016.
Assets and capital expenditures by geographic region, based on the location of the company or subsidiary at which they were located or made, were as follows (in thousands):
|
|
Long-Lived Assets
|
|
|
Total Assets
|
|
|
Capital Expenditures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
Months Ended
|
|
|
|
March
31,
201
7
|
|
|
June
30,
201
6
|
|
|
March
31,
201
7
|
|
|
June
30,
201
6
|
|
|
March
31,
2017
|
|
|
March
31,
2016
|
|
United States
|
|
$
|
10,827
|
|
|
$
|
9,678
|
|
|
$
|
45,599
|
|
|
$
|
49,755
|
|
|
$
|
2,090
|
|
|
$
|
5,004
|
|
Europe
|
|
|
6,961
|
|
|
|
5,489
|
|
|
|
24,388
|
|
|
|
24,420
|
|
|
|
2,242
|
|
|
|
1,955
|
|
|
|
$
|
17,788
|
|
|
$
|
15,167
|
|
|
$
|
69,987
|
|
|
$
|
74,175
|
|
|
$
|
4,332
|
|
|
$
|
6,959
|
|
H
. Income Taxes
The effective tax rate for the three
months ended March 31, 2017 was an expense of 29.0% and the effective tax rate for the nine months ended March 31, 2017 was an expense of 29.9%. The rate differs from the U.S. federal statutory rate of 34% primarily due to the favorable impact of foreign earnings taxed at less than the U.S. statutory rate.
To determine our quarterly provision for income taxes, we use an estimated annual effective tax rate, which is based on expected annual
income, statutory tax rates and tax planning opportunities available in the various jurisdictions to which we are subject. Certain significant or unusual items are separately recognized in the quarter in which they occur and can be a source of variability in the effective tax rate from quarter to quarter. There were no significant discrete items for the three and nine months ended March 31, 2017. We recognize interest and penalties related to uncertain tax positions, if any, as an income tax expense.
We record valuation allowances to reduce our deferred tax assets to an amount that we believe is more likely than not to be realized.
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. During the three and nine months ended March 31, 2017, there was no change to our valuation allowance.
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are measured using enacted tax rates, for each of the jurisdictions in which we operate, expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
We are subject to taxation in the U.S., Switzerland and various state jurisdictions. Our tax years for the fiscal year ended June
30, 2013 and forward are subject to examination by the U.S. tax authorities and our years for the fiscal year ended June 30, 2008 and forward are subject to examination by the state tax authorities. Our tax years for the fiscal year ended June 30, 2015 and forward are subject to examination by the Swiss tax authorities.
We do not record U.S. income tax expense for NAIE
’s retained earnings that are declared as indefinitely reinvested offshore, thus reducing our overall income tax expense. The amount of earnings designated as indefinitely reinvested in NAIE is based on the actual deployment of such earnings in NAIE’s assets and our expectations of the future cash needs of our U.S. and foreign entities. Currently income tax laws are also a factor in determining the amount of foreign earnings to be indefinitely reinvested offshore.
It is our policy to establish reserves based on management
’s assessment of exposure for certain positions taken in previously filed tax returns that may become payable upon audit by tax authorities. The tax reserves are analyzed quarterly and adjustments are made as events occur that we believe warrant adjustments to the reserves. There were no adjustments to reserves in the nine months ended March 31, 2017.
I
. Treasury Stock
On June
2, 2011, the Board of Directors authorized the repurchase of up to $2.0 million of our common stock. On February 6,
2015, the Board of Directors authorized a $1.0 million increase to our stock repurchase plan bringing the total authorized repurchase amount to $3.0 million.
On May 11, 2015, the Board of Directors authorized a $2.0 million increase to our stock repurchase plan bringing the total authorized repurchase amount to $5.0 million. On March 28, 2017, the Board of Directors authorized a $2.0 million increase to our stock repurchase plan bringing the total authorized repurchase amount to $7.0 million.
When we do so we may purchase the shares in open market or privately negotiated transactions.
During the nine
months ended March 31, 2017, we purchased 39,547 shares under this plan at a weighted average cost of $8.74 per share and a total cost of $345,000 including commissions and fees.
During the nine months ended March 31, 2016, we purchased 52,603 shares
under this plan at a weighted average cost of $6.26 per share and a total cost of $329,000 including commissions and fees.
During the nine months ended March 31, 2017, we acquired 38,729 shares from employees in connection with restricted stock that vested during the year. During the nine months ended March 31, 2016, we acquired 27,195 shares from employees in connection with restricted stock that vested during the year. These shares were returned to the Company by the related employees and in return the Company paid each employee's required tax withholding. The valuation of the shares acquired and thereby the amount of shares returned to the Company was calculated based on the closing price on the date the shares vested.
Unvested restricted stock grants that are forfeited are returned to treasury stock.
During the nine months ended March
31, 2017, employees forfeited 7,000 shares of unvested restricted stock grants.
During the nine months ended March 31, 2016, employees forfeited 2,667 shares of unvested restricted stock grants.
J
. Derivatives and Hedging
We are exposed to gains and losses resulting from fluctuations in foreign currency exchange rates relating to forecasted product sales denominated in foreign currencies and transactions of NAIE, our foreign subsidiary. As part of our overall strategy to manage the level of exposure to the risk of fluctuations in foreign currency exchange rates, we may use foreign exchange contracts in the form of forward contracts. To the extent we enter into such contracts, there can be no guarantee any such contracts will be effective hedges against our foreign currency exchange risk.
As of
March 31, 2017, we had forward contracts designated as cash flow hedges primarily to protect against the foreign exchange risks inherent in our forecasted sales of products at prices denominated in currencies other than the U.S. Dollar. These contracts are expected to be settled through February 2018. For derivative instruments that are designated and qualify as cash flow hedges, we record the effective portion of the gain or loss on the derivative in accumulated other comprehensive income (“OCI”) as a separate component of stockholders’ equity and subsequently reclassify these amounts into earnings in the period during which the hedged transaction is recognized in earnings.
For foreign currency contracts designated as cash flow hedges, hedge effectiveness is measured using the spot rate. Changes in the spot-forward differential are excluded from the test of hedge effectiveness and are recorded currently in earnings as interest expense. We measure effectiveness by comparing the cumulative change in the hedge contract with the cumulative change in the hedged item. During the three months ended
March 31, 2017, we recorded a $97,000 gain related to the ineffective portion of our hedging instruments to other income. During the nine months ended March 31, 2017, we recorded a $189,000 gain related to the ineffective portion of our hedging instruments to other income. We did not have any losses or gains related to the ineffective portion of our hedging instruments during the three and nine months ended March 31, 2016.
No hedging relationships were terminated as a result of ineffective hedging or forecasted transactions no longer probable of occurring for foreign currency forward contracts. We monitor the probability of forecasted transactions as part of the hedge effectiveness testing on a quarterly basis.
As of
March 31, 2017, the notional amounts of our foreign exchange contracts designated as cash flow hedges were approximately $23.1 million (EUR 20.4 million). As of March 31, 2017, a net gain of approximately $776,000 related to derivative instruments designated as cash flow hedges was recorded in OCI. It is expected that a majority of the OCI balance will be reclassified into earnings in the next 12 months along with the earnings effects of the related forecasted transactions.
As of
March 31, 2017, the fair value of our cash flow hedges was a net asset of $1.1 million, which was classified as prepaids and other current assets in our Condensed Consolidated Balance Sheets. During the three months ended March 31, 2017 we recognized $322,000 of losses in OCI and reclassified $278,000 of gains from OCI to revenue. During the nine months ended March 31, 2017 we recognized $1.5 million of gains in OCI and reclassified $549,000 of gains from OCI to revenue. As of June 30, 2016, $226,000 of the fair value of our cash flow hedges was classified in prepaids and other current assets in our Consolidated Balance Sheets. During the three months ended March 31, 2016 we recognized $118,000 of gains in OCI and reclassified $2,000 of gains from OCI to revenue. During the nine months ended March 31, 2016 we recognized $125,000 of gains in OCI and reclassified $53,000 of gains from OCI to revenue.
K
. Contingencies
From time
to time, we become involved in various investigations, claims and legal proceedings that arise in the ordinary course of our business. These matters may relate to product liability, employment, intellectual property, tax, regulation, contract or other matters. The resolution of these matters as they arise will be subject to various uncertainties and, even if such claims are without merit, could result in the expenditure of significant financial and managerial resources. While unfavorable outcomes are possible, based on available information, we generally do not believe the resolution of these matters will result in a material adverse effect on our business, consolidated financial condition, or results of operation. However, a settlement payment or unfavorable outcome could adversely impact our results of operation. Our evaluation of the likely impact of these actions could change in the future and we could have unfavorable outcomes we do not expect.