ITEM 1. Financial Statements
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
We are the largest recreational boat and yacht retailer in the United States. We engage primarily in the retail sale, brokerage, and service of new and used boats, motors, trailers, marine parts and accessories and offer slip and storage accommodations in certain locations. In addition, we arrange related boat financing, insurance, and extended service contracts. We also offer the charter of power yachts in the British Virgin Islands. As of December 31, 2018, we operated through 63 retail locations in 16 states, consisting of Alabama, Connecticut, Florida, Georgia, Maryland, Massachusetts, Minnesota, Missouri, New Jersey, New York, North Carolina, Ohio, Oklahoma, Rhode Island, South Carolina and Texas. Our MarineMax Vacations operation maintains a facility in Tortola, British Virgin Islands.
We are the nation’s largest retailer of Sea Ray and Boston Whaler recreational boats and yachts, which are manufactured by Brunswick Corporation (“Brunswick”). Sales of new Brunswick boats accounted for approximately 40% of our revenue in fiscal 2018. Sales of new Sea Ray and Boston Whaler boats, both divisions of Brunswick, accounted for approximately 21% and 17%, respectively, of our revenue in fiscal 2018. Brunswick is a world leading manufacturer of marine products and marine engines. We believe we represented approximately 42% of Brunswick’s Sea Ray boat sales, during our fiscal 2018.
In June 2018 Brunswick announced it will discontinue Sea Ray sport yacht and yacht models. Sea Ray sport yacht and yacht models represented approximately 10% of revenue during fiscal year 2018. We believe our brand and product diversification should allow us to replace the Sea Ray sport yacht and yacht revenue.
We have dealership agreements with Sea Ray, Boston Whaler, Harris, and Mercury Marine, all subsidiaries or divisions of Brunswick. We also have dealer agreements with Italy-based Azimut-Benetti Group’s product line for Azimut Yachts. These agreements allow us to purchase, stock, sell, and service these manufacturers’ boats and products. These agreements also allow us to use these manufacturers’ names, trade symbols, and intellectual properties in our operations.
We have multi-year dealer agreements with Brunswick covering Sea Ray products that appoint us as the exclusive dealer of Sea Ray boats in our geographic markets. We are the exclusive dealer for Boston Whaler through multi-year dealer agreements for many of our geographic markets. In addition, we are the exclusive dealer for Azimut Yachts for the entire United States through a multi-year dealer agreement. Sales of new Azimut boats accounted for approximately 11% of our revenue in fiscal 2018. We believe non-Brunswick brands offer a migration for our existing customer base or fill a void in our product offerings, and accordingly, do not compete with the business generated from our other prominent brands.
As is typical in the industry, we deal with most of our manufacturers, other than Sea Ray, Boston Whaler, and Azimut Yachts, under renewable annual dealer agreements, each of which gives us the right to sell various makes and models of boats within a given geographic region. Any change or termination of these agreements, or the agreements discussed above, for any reason, or changes in competitive, regulatory, or marketing practices, including rebate or incentive programs, could adversely affect our results of operations. Although there are a limited number of manufacturers of the type of boats and products that we sell, we believe that adequate alternative sources would be available to replace any manufacturer other than Sea Ray and Azimut as a product source. These alternative sources may not be available at the time of any interruption, and alternative products may not be available at comparable terms, which could affect operating results adversely.
General economic conditions and consumer spending patterns can negatively impact our operating results. Unfavorable local, regional, national, or global economic developments or uncertainties regarding future economic prospects could reduce consumer spending in the markets we serve and adversely affect our business. Economic conditions in areas in which we operate dealerships, particularly Florida, in which we generated approximately 55%, 55%, and 51% of our revenue during fiscal 2016, 2017, and 2018, respectively, can have a major impact on our operations. Local influences, such as corporate downsizing, military base closings, inclement weather such as Hurricane Sandy in 2012 or Hurricanes Harvey and Irma in 2017, environmental conditions, and specific events, such as the BP oil spill in the Gulf of Mexico in 2010, also could adversely affect, and in certain instances have adversely affected, our operations in certain markets.
7
In an economic downturn, consumer discretionary spending levels generally decline, at times resulting in disproportionately large reductions in the sale of luxury goods. Consumer spending on luxury goods also may decline as a result of lower consumer confidence levels, even if prevailing economic conditions are favorable. As a result, an economic downturn could impact us more than certain of our competitors due to our strategic focus on a higher end of our market. Although we have expanded our operations during periods of stagnant or modestly declining industry trends, the cyclical nature of the recreational boating industry or the lack of industry growth may adversely affect our business, financial condition, and results of operations. Any period of adverse economic condition
s or low consumer confidence is likely to have
a negative effect on our business.
Historically, in periods of lower consumer spending and depressed economic conditions, we have, among other things, substantially reduced our acquisition program, delayed new store openings, reduced our inventory purchases, engaged in inventory reduction efforts, closed a number of our retail locations, reduced our headcount, and amended and replaced our credit facility. Acquisitions and new store openings remain important strategies to our company, and we plan to accelerate our growth through these strategies as industry conditions continue to improve.
2.
|
BASIS OF PRESENTATION:
|
These unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information, the instructions to Quarterly Report on Form 10-Q, and Rule 10-01 of Regulation S-X and should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended September 30, 2018. Accordingly, these unaudited condensed consolidated financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. All adjustments, consisting of only normal recurring adjustments considered necessary for fair presentation, have been reflected in these unaudited condensed consolidated financial statements. As of December 31, 2018, our financial instruments consisted of cash and cash equivalents, accounts receivable, accounts payable, customer deposits, and short-term borrowings. The carrying amounts of our financial instruments reported on the balance sheet as of December 31, 2018, approximated fair value due either to length to maturity or existence of variable interest rates, which approximate prevailing market rates. The operating results for the three months ended December 31, 2018, are not necessarily indicative of the results that may be expected in future periods.
The preparation of unaudited condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the unaudited condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting periods. Significant estimates made by us in the accompanying unaudited condensed consolidated financial statements include valuation allowances, valuation of goodwill and intangible assets, valuation of long-lived assets, and valuation of accruals. Actual results could differ from those estimates.
Unless the context otherwise requires, all references to “MarineMax” mean MarineMax, Inc. prior to its acquisition of five previously independent recreational boat dealers in March 1998 (including their related real estate companies) and all references to the “Company,” “our company,” “we,” “us,” and “our” mean, as a combined company, MarineMax, Inc. and the 28 recreational boat dealers, two boat brokerage operations, and two full-service yacht repair operations acquired as of December 31, 2018 (the “acquired dealers,” and together with the brokerage and repair operations, “operating subsidiaries” or the “acquired companies”).
In order to provide comparability between periods presented, certain amounts have been reclassified from the previously reported unaudited condensed consolidated financial statements to conform to the unaudited condensed consolidated financial statement presentation for the current period. The unaudited condensed consolidated financial statements include our accounts and the accounts of our subsidiaries, all of which are wholly owned. All significant intercompany transactions and accounts have been eliminated.
3.
|
NEW ACCOUNTING PRONOUNCEMENTS:
|
In May 2014, the FASB issued Accounting Standards Update No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”), a converged standard on revenue recognition. The new pronouncement requires revenue recognition to depict 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 specifies the accounting for some costs to obtain or fulfill a contract with a customer, as well as enhanced disclosure requirements. The FASB also subsequently issued several amendments to the standard, including clarification on principal versus agent guidance, identifying performance obligations, and immaterial goods and services in a contract.
8
The new accounting standard update must be applied using either of the following transition me
thods: (i) a full retrospective
approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or
(ii) a modified retrospective approach with the cumulative effect of initially adopting the standard recognized at the date of adoption
(which requires additional footnote disclosures).
The new accounting standard is effective for reporting periods beginning after December 15, 2017. We adopted the accounting standard effective October 1, 2018, using the modified retrospective approach applied only to contracts not completed as of the date of adoption, with no restatement of comparative periods. Therefore, the comparative information has not been adjusted and continues to be reported under ASC Topic 605. We recognized a net after-tax cumulative effect adjustment to retained earnings of $399,000 as of the date of adoption. The details and quantitative impacts of the significant changes are described below.
We previously recognized revenue for parts and service operations (boat maintenance and repairs) when the services were completed and recorded amounts due to us as receivables. Under ASC Topic 606, performance obligations associated with parts and service operations are satisfied over time, which results in the acceleration of revenue recognition, and amounts due to us are reflected as a contract asset until the right to such consideration becomes unconditional, at which time amounts due to us are reclassified to receivables.
Consolidated Balance Sheet Line Items
|
|
|
|
Impact of changes in accounting policies
|
|
|
|
|
|
|
|
Balances without
|
|
|
Impact of
|
|
|
|
|
|
|
|
adoption of ASC
|
|
|
adoption
|
|
December 31, 2018
|
|
As Reported
|
|
|
Topic 606
|
|
|
Higher/(Lower)
|
|
Inventories, net
|
|
$
|
445,465
|
|
|
$
|
446,228
|
|
|
$
|
(763
|
)
|
Prepaid expenses and other current assets
|
|
|
10,904
|
|
|
|
6,940
|
|
|
|
3,964
|
|
Deferred tax assets, net
|
|
|
2,588
|
|
|
|
2,725
|
|
|
|
(137
|
)
|
Accounts payable
|
|
|
11,840
|
|
|
|
11,703
|
|
|
|
137
|
|
Accrued expenses
|
|
|
29,790
|
|
|
|
27,725
|
|
|
|
2,065
|
|
Retained earnings
|
|
|
171,380
|
|
|
|
170,518
|
|
|
|
862
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statements of Operations Line Items
|
|
|
|
Impact of changes in accounting policies
|
|
|
|
|
|
|
|
Balances without
|
|
|
Impact of
|
|
|
|
|
|
|
|
adoption of ASC
|
|
|
adoption
|
|
Three Months Ended December 31, 2018
|
|
As Reported
|
|
|
Topic 606
|
|
|
Higher/(Lower)
|
|
Revenue
|
|
$
|
241,937
|
|
|
$
|
241,130
|
|
|
$
|
807
|
|
Cost of sales
|
|
|
178,459
|
|
|
|
178,252
|
|
|
|
207
|
|
Income from operations
|
|
|
8,986
|
|
|
|
8,386
|
|
|
|
600
|
|
Income before income tax provision
|
|
|
6,470
|
|
|
|
5,870
|
|
|
|
600
|
|
Income tax provision
|
|
|
1,560
|
|
|
|
1,423
|
|
|
|
137
|
|
Net Income
|
|
|
4,910
|
|
|
|
4,447
|
|
|
|
463
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statements of Cash flows
|
|
|
|
Impact of changes in accounting policies
|
|
|
|
|
|
|
|
Balances without
|
|
|
Impact of
|
|
|
|
|
|
|
|
adoption of ASC
|
|
|
adoption
|
|
Three Months Ended December 31, 2018
|
|
As Reported
|
|
|
Topic 606
|
|
|
Higher/(Lower)
|
|
Net income
|
|
$
|
4,910
|
|
|
$
|
4,447
|
|
|
$
|
463
|
|
(Increase) decrease in —
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories, net
|
|
|
(68,946
|
)
|
|
|
(69,154
|
)
|
|
|
208
|
|
Prepaid expenses and other assets
|
|
|
(5,013
|
)
|
|
|
(2,140
|
)
|
|
|
(2,873
|
)
|
Increase (decrease) in —
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
(11,294
|
)
|
|
|
(11,431
|
)
|
|
|
137
|
|
Accrued expenses and other long-term liabilities
|
|
|
(2,093
|
)
|
|
|
(4,158
|
)
|
|
|
2,065
|
|
9
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)” (“ASU 2016-02”). This update requires organizations to recognize lease assets and lease liabilities on the balance sheet and also disclose key information about leasing arrangements. ASU 2016-02 is effective for annu
al reporting periods beginning on or after December 15, 2018, and interim periods within those annual periods. Earlier application is permitted for all entities as of the beginning of an interim or annual period. While we are continuing to evaluate the impact of the adoption of
ASU 2016-02 on
our unaudited condensed consolidated financial statements,
we believe the adoption
of ASU 2016-02 will have a
sign
ificant
and material impact to our
unaudited condensed consolidated
balance sheet given our current lease agreements for our leased retail locations. We are
continuing to evaluate
the impact the adoption of ASU 2016-02 will have
on our other
unaudited condensed
consolidated financial statements. Based on our current assessment, we expect that most of our operating lease commitments will be subject to the new guidance and recognized as operating lease liabilities and right-of-use assets upon adoption, resulting in a material increase in the assets
and liabilities recorded on our
unaudited condensed
consolidated balance sheet.
We expect to elect the majority
of the standard’s available practical
expedients on adoption
.
We are continuing our assessment, which may identify additional impacts this standard will have on our
unaudited condensed
consolidated financial statements and related disclosures and internal control over financial reporting. We plan to adopt ASU 2016-02 in fiscal 2020.
.
The majority of our revenue is from contracts with customers for the sale of boats, motors, and trailers. We recognize revenue from boat, motor, and trailer sales upon transfer of control of the boat, motor, or trailer to the customer, which is generally upon acceptance or delivery to the customer. At the time of acceptance or delivery, the customer is able to direct the use of, and obtain substantially all of the benefits of the boat, motor, or trailer at such time. We recognize commissions earned from a brokerage sale when the related brokerage transaction closes upon transfer of control of the boat, motor, or trailer to the customer, which is generally upon acceptance or delivery to the customer.
We do not directly finance our customers’ boat, motor, or trailer purchases. In many cases, we assist with third-party financing for boat, motor, and trailer sales. We recognize commissions earned by us for placing notes with financial institutions in connection with customer boat financing when we recognize the related boat sales. Pursuant to negotiated agreements with financial institutions, we are charged back for a portion of these fees should the customer terminate or default on the related finance contract before it is outstanding for a stipulated minimum period of time. We base the chargeback allowance, which was not material to the unaudited condensed consolidated financial statements taken as a whole as of December 31, 2018, on our experience with repayments or defaults on the related finance contracts. We recognize variable consideration from commissions earned on extended warranty service contracts sold on behalf of third-party insurance companies at generally the later of customer acceptance of the service contract terms as evidenced by contract execution or recognition of the related boat sale. We also recognize variable consideration from marketing fees earned on insurance products sold by third-party insurance companies at the later of customer acceptance of the insurance product as evidenced by contract execution or when the related boat sale is recognized.
We recognize revenue from parts and service operations (boat maintenance and repairs) over time as services are performed. Each boat maintenance and repair service is a single performance obligation that includes both the parts and labor associated with the service. Payment for boat maintenance and repairs is typically due upon the completion of the service, which is generally completed within a short period of time from contract inception. We satisfy our performance obligations, transfer control, and recognize revenue over time for parts and service operations because we are creating a contract asset with no alternative use and we have an enforceable right to payment for performance completed to date. Contract assets primarily relate to our right to consideration for work in process not yet billed at the reporting date associated with maintenance and repair services. We use an input method to recognize revenue and measure progress based on labor hours expended to satisfy the performance obligation and average labor rates. We have determined labor hours expended to be the relevant measure of work performed to complete the maintenance and repair service for the customer. As a practical expedient, since repair and maintenance service contracts have an original duration of one year or less, we do not consider the time value of money, and we do not disclose estimated revenue expected to be recognized in the future for performance obligations that are unsatisfied (or partially unsatisfied) at the end of the reporting period or when we expect to recognize such revenue. Contract assets, recorded in Prepaid expenses and other current assets, totaled approximately $2.7 million and $4.0 million as of October 1, 2018 (beginning of the period of adoption of ASC 606) and December 31, 2018, respectively.
We recognize deferred revenue from service operations and slip and storage services over time on a straight-line basis over the term of the contract as our performance obligations are met. We recognize income from the rentals of chartering power and sailing yachts over time on a straight-line basis over the term of the contract as our performance obligations are met.
10
The following table sets forth percentages on the timing of revenue recognition for the three months ended December 31, 2018.
|
|
Three Months Ended
|
|
|
|
December 31,
|
|
|
|
2018
|
|
Goods and services transferred at a point in time
|
|
|
88.3
|
%
|
Goods and services transferred over time
|
|
|
11.7
|
%
|
Total Revenue
|
|
|
100.0
|
%
|
Inventory costs consist of the amount paid to acquire inventory, net of vendor consideration and purchase discounts, the cost of equipment added, reconditioning costs, and transportation costs relating to acquiring inventory for sale. We state new and used boat, motor, and trailer inventories at the lower of cost, determined on a specific-identification basis, or net realizable value. We state parts and accessories at the lower of cost, determined on an average cost basis, or net realizable value. We utilize our historical experience, the aging of the inventories, and our consideration of current market trends as the basis for determining a lower of cost or net realizable value valuation allowance. As of September 30, 2018 and December 31, 2018, our lower of cost or net realizable value valuation allowance for new and used boat, motor, and trailer inventories was $1.5 million and $1.8 million, respectively. If events occur and market conditions change, causing the fair value to fall below carrying value, the lower of cost or net realizable value valuation allowance could increase.
6.
|
IMPAIRMENT OF LONG-LIVED ASSETS:
|
FASB Accounting Standards Codification 360-10-40, “Property, Plant, and Equipment - Impairment or Disposal of Long-Lived Assets” (“ASC 360-10-40”), requires that long-lived assets, such as property and equipment and purchased intangibles subject to amortization, be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of the asset is measured by comparison of its carrying amount to undiscounted future net cash flows the asset is expected to generate. If such assets are considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the asset exceeds its fair market value. Estimates of expected future cash flows represent our best estimate based on currently available information and reasonable and supportable assumptions. Any impairment recognized in accordance with ASC 360-10-40 is permanent and may not be restored. The analysis is performed at a regional level for indicators of permanent impairment given the geographical interdependencies among our locations. Based upon our most recent analysis, we believe no impairment of long-lived assets existed as of December 31, 2018.
We account for income taxes in accordance with FASB Accounting Standards Codification 740, “Income Taxes” (“ASC 740”). Under ASC 740, we recognize deferred tax assets and liabilities for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. We measure deferred tax assets and liabilities using enacted tax rates expected to apply to taxable income in the years in which we expect those temporary differences to be recovered or settled. We record valuation allowances to reduce our deferred tax assets to the amount expected to be realized by considering all available positive and negative evidence. As of September 30, 2018 and December 31, 2018, we had a valuation allowance on our deferred tax assets of $119,000.
During the three months ended December 31, 2017 and 2018 we recognized an income tax provision of $2.2 million and $1.6 million, respectively. The effective income tax rate for the three months ended December 31, 2017 and 2018 was 34.8% and 24.1%, respectively
. Due to the passage of the Tax Cuts and Jobs Act legislation in December 2017 which lowered the federal corporate tax rate from 35% to 21% (among other changes), our deferred tax assets were re-measured as of December 31, 2017 resulting in an approximately $889,000 reduction in our beginning deferred tax assets and corresponding increase in our income tax provision for the three months ended December 31, 2017.
11
8.
|
SHORT-TERM BORROWINGS:
|
In October 2018, we amended and restated our Inventory Financing Agreement (the “Amended Credit Facility”), originally entered into in June 2010, as subsequently amended, with Wells Fargo Commercial Distribution Finance LLC (formerly GE Commercial Distribution Finance Corporation). The October 2018 amendment and restatement extended the maturity date of the Credit Facility to October 2021, and the Amended Credit Facility includes two additional one-year extension periods, with lender approval. The October 2018 amendment and restatement, among other things, modified the amount of borrowing availability and maturity date of the Credit Facility. The Amended Credit Facility provides a floor plan financing commitment of up to $400.0 million, an increase from the previous limit of $350.0 million, subject to borrowing base availability resulting from the amount and aging of our inventory.
The Amended Credit Facility has certain financial covenants as specified in the agreement. The covenants include provisions that our leverage ratio must not exceed 2.75 to 1.0 and that our current ratio must be greater than 1.2 to 1.0. The interest rate for amounts outstanding under the Amended Credit Facility is 345 basis points above the one-month London Inter-Bank Offering Rate (“LIBOR”). There is an unused line fee of ten basis points on the unused portion of the Amended Credit Facility.
Advances under the Amended Credit Facility are initiated by the acquisition of eligible new and used inventory or are re-advances against eligible new and used inventory that have been partially paid-off. Advances on new inventory will generally mature 1,080 days from the original invoice date. Advances on used inventory will mature 361 days from the date we acquire the used inventory. Each advance is subject to a curtailment schedule, which requires that we pay down the balance of each advance on a periodic basis starting after six months. The curtailment schedule varies based on the type and value of the inventory. The collateral for the Amended Credit Facility is all of our personal property with certain limited exceptions. None of our real estate has been pledged for collateral for the Amended Credit Facility.
As of December 31, 2018, our indebtedness associated with financing our inventory and working capital needs totaled approximately $270.7 million. As of December 31, 2017 and 2018, the interest rate on the outstanding short-term borrowings was approximately 4.7% and 5.5%, respectively. As of December 31, 2018, our additional available borrowings under our Amended Credit Facility were approximately $60.1 million based upon the outstanding borrowing base availability.
As is common in our industry, we receive interest assistance directly from boat manufacturers, including Brunswick. The interest assistance programs vary by manufacturer, but generally include periods of free financing or reduced interest rate programs. The interest assistance may be paid directly to us or our lender depending on the arrangements the manufacturer has established. We classify interest assistance received from manufacturers as a reduction of inventory cost and related cost of sales as opposed to netting the assistance against our interest expense incurred with our lenders.
The availability and costs of borrowed funds can adversely affect our ability to obtain adequate boat inventory and the holding costs of that inventory as well as the ability and willingness of our customers to finance boat purchases. As of December 31, 2018, we had no long-term debt. However, we rely on our Amended Credit Facility to purchase our inventory of boats. The aging of our inventory limits our borrowing capacity as defined curtailments reduce the allowable advance rate as our inventory ages. Our access to funds under our Amended Credit Facility also depends upon the ability of our lenders to meet their funding commitments, particularly if they experience shortages of capital or experience excessive volumes of borrowing requests from others during a short period of time. Unfavorable economic conditions, weak consumer spending, turmoil in the credit markets, and lender difficulties, among other potential reasons, could interfere with our ability to utilize our Amended Credit Facility to fund our operations. Any inability to utilize our Amended Credit Facility could require us to seek other sources of funding to repay amounts outstanding under the credit agreements or replace or supplement our credit agreements, which may not be possible at all or under commercially reasonable terms.
Similarly, decreases in the availability of credit and increases in the cost of credit adversely affect the ability of our customers to purchase boats from us and thereby adversely affect our ability to sell our products and impact the profitability of our finance and insurance activities.
9.
|
STOCK-BASED COMPENSATION:
|
We account for our stock-based compensation plans following the provisions of FASB Accounting Standards Codification 718, “Compensation — Stock Compensation” (“ASC 718”). In accordance with ASC 718, we use the Black-Scholes valuation model for valuing all stock-based compensation and shares purchased under our Employee Stock Purchase Plan. We measure compensation for restricted stock awards and restricted stock units at fair value on the grant date based on the number of shares expected to vest and the quoted market price of our common stock. We recognize compensation cost for all awards in operations, net of estimated forfeitures, on a straight-line basis over the requisite service period for each separately vesting portion of the award.
12
During the three months ended December 31, 2017 and 2018, we recognized stock-based compensation expense of approximately $1.5 million and $1.4 million, respectively, in selling, general, and administrative expenses in the unaudited condensed consolidated statements of operations.
Cash received from option exercises under all share-based compensation arrangements and the employee stock purchase plan for the three months ended December 31, 2017 and 2018, was approximately $2.4 million and $1.8 million, respectively. We currently expect to satisfy share-based awards with registered shares available to be issued.
10.
|
THE INCENTIVE STOCK PLANS:
|
During February 2017, our shareholders approved a proposal to amend the 2011 Stock-Based Compensation Plan (“2011 Plan”) to increase the 2,200,456 share threshold by 1,000,000 shares to 3,200,456 shares. During January 2011, our shareholders approved a proposal to authorize our 2011 Plan, which replaced our 2007 Incentive Compensation Plan (“2007 Plan”). Our 2011 Plan provides for the grant of stock options, stock appreciation rights, restricted stock, stock units, bonus stock, dividend equivalents, other stock related awards, and performance awards (collectively “awards”), that may be settled in cash, stock, or other property. Our 2011 Plan is designed to attract, motivate, retain, and reward our executives, employees, officers, directors, and independent contractors by providing such persons with annual and long-term performance incentives to expend their maximum efforts in the creation of shareholder value. Subsequent to the February 2017 amendment described above, the total number of shares of our common stock that may be subject to awards under the 2011 Plan is equal to 3,000,000 shares, plus: (i) any shares available for issuance and not subject to an award under the 2007 Plan, which was 200,456 shares at the time of approval of the 2011 Plan; (ii) the number of shares with respect to which awards granted under the 2011 Plan and the 2007 Plan terminate without the issuance of the shares or where the shares are forfeited or repurchased; (iii) with respect to awards granted under the 2011 Plan and the 2007 Plan, the number of shares that are not issued as a result of the award being settled for cash or otherwise not issued in connection with the exercise or payment of the award; and (iv) the number of shares that are surrendered or withheld in payment of the exercise price of any award or any tax withholding requirements in connection with any award granted under the 2011 Plan or the 2007 Plan. The 2011 Plan terminates in January 2021, and awards may be granted at any time during the life of the 2011 Plan. The dates on which awards vest are determined by the Board of Directors or the Plan Administrator. The Board of Directors has appointed the Compensation Committee as the Plan Administrator. The exercise prices of options are determined by the Board of Directors or the Plan Administrator and are at least equal to the fair market value of shares of common stock on the date of grant. The term of options under the 2011 Plan may not exceed ten years. The options granted have varying vesting periods. To date, we have not settled or been under any obligation to settle any awards in cash.
The following table summarizes activity from our incentive stock plans from September 30, 2018 through December 31, 2018:
|
|
Shares
Available
for Grant
|
|
|
Options Outstanding
|
|
|
Aggregate
Intrinsic
Value
(in thousands)
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining Contractual
Life
|
|
Balance as of September 30, 2018
|
|
|
1,047,247
|
|
|
|
611,223
|
|
|
$
|
5,544
|
|
|
$
|
12.18
|
|
|
|
4.4
|
|
Options granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Options cancelled/forfeited/expired
|
|
|
4,667
|
|
|
|
(4,667
|
)
|
|
|
-
|
|
|
|
5.42
|
|
|
|
|
|
Options exercised
|
|
|
-
|
|
|
|
(108,275
|
)
|
|
|
-
|
|
|
|
12.11
|
|
|
|
|
|
Restricted stock awards issued
|
|
|
(319,624
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Restricted stock awards forfeited
|
|
|
2,700
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Additional shares of stock issued
|
|
|
(2,135
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Balance as of December 31, 2018
|
|
|
732,855
|
|
|
|
498,281
|
|
|
$
|
2,986
|
|
|
$
|
12.26
|
|
|
|
4.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable as of December 31, 2018
|
|
|
|
|
|
|
494,947
|
|
|
$
|
2,986
|
|
|
$
|
12.21
|
|
|
|
4.3
|
|
No options were granted for the three months ended December 31, 2017 and 2018. The total intrinsic value of options exercised during the three months ended December 31, 2017 and 2018 was $1.9 million and $1.3 million, respectively. The total fair value of options vested during the three months ended December 31, 2017 and 2018 was approximately $1.3 million and $0, respectively.
We used the Black-Scholes model to estimate the fair value of options granted. The expected term of options granted is estimated based on historical experience. Volatility is based on the historical volatility of our common stock. The risk-free rate for periods within the contractual term of the options is based on the U.S. Treasury yield curve in effect at the time of grant.
13
11.
|
EMPLOYEE STOCK PURCHASE PLAN:
|
During February 2012, our shareholders approved a proposal to amend our 2008 Employee Stock Purchase Plan (“Stock Purchase Plan”) to increase the number of shares available under that plan by 500,000 shares. The Stock Purchase Plan as amended provides for up to 1,000,000 shares of common stock to be available for purchase by our regular employees who have completed at least one year of continuous service. In addition, there were 52,837 shares of common stock available under our 1998 Employee Stock Purchase Plan, which have been made available for issuance under our Stock Purchase Plan. The Stock Purchase Plan provides for implementation of up to 10 annual offerings beginning on the first day of October starting in 2008, with each offering terminating on September 30 of the following year. Each annual offering may be divided into two six-month offerings. For each offering, the purchase price per share will be the lower of: (i) 85% of the closing price of the common stock on the first day of the offering or (ii) 85% of the closing price of the common stock on the last day of the offering. The purchase price is paid through periodic payroll deductions not to exceed 10% of the participant’s earnings during each offering period. However, no participant may purchase more than $25,000 worth of common stock annually.
We used the Black-Scholes model to estimate the fair value of options granted to purchase shares issued pursuant to the Stock Purchase Plan. Volatility is based on the historical volatility of our common stock. The risk-free rate for periods within the contractual term of the options is based on the U.S. Treasury yield curve in effect at the time of grant.
The following are the weighted average assumptions used for each respective period:
|
Three Months Ended
|
|
|
December 31,
|
|
|
2017
|
|
|
2018
|
|
Dividend yield
|
0.0%
|
|
|
0.0%
|
|
Risk-free interest rate
|
1.2%
|
|
|
2.4%
|
|
Volatility
|
50.9%
|
|
|
52.2%
|
|
Expected life
|
Six months
|
|
|
Six months
|
|
As of December 31, 2018, we had issued 891,185 shares of common stock under our Stock Purchase Plan.
12.
|
RESTRICTED STOCK AWARDS:
|
We have granted non-vested (restricted) stock awards (“restricted stock”) and restricted stock units (“RSUs”) to employees and officers pursuant to the 2011 Plan and the 2007 Plan. The restricted stock awards and RSUs have varying vesting periods, but generally become fully vested between two and four years after the grant date, depending on the specific award, performance targets met for performance based awards granted to officers, and vesting period for time based awards. Officer performance based awards are granted at the target amount of shares that may be earned and the actual amount of the award earned generally could range from 0% to 200% of the target number of shares based on the actual specified performance target met. We accounted for the restricted stock awards granted using the measurement and recognition provisions of ASC 718. Accordingly, the fair value of the restricted stock awards, including performance based awards, is measured on the grant date and recognized in earnings over the requisite service period for each separately vesting portion of the award.
The following table summarizes restricted stock award activity from September 30, 2018 through December 31, 2018:
|
|
Shares/ Units
|
|
|
Weighted
Average Grant
Date Fair Value
|
|
Non-vested balance as of September 30, 2018
|
|
|
704,326
|
|
|
$
|
17.61
|
|
Changes during the period
|
|
|
|
|
|
|
|
|
Awards granted
|
|
|
319,624
|
|
|
$
|
20.89
|
|
Awards vested
|
|
|
(35,000
|
)
|
|
$
|
20.40
|
|
Awards forfeited
|
|
|
(2,700
|
)
|
|
$
|
20.60
|
|
Non-vested balance as of December 31, 2018
|
|
|
986,250
|
|
|
|
|
|
14
As of December 31, 2018, we had approximately $11.7 million of total unrecognized compensation cost, assuming applicable performance conditions are met, related to non-vested restricted stock awards. We expect to recognize that cost over a weighted average period of 2.5 years.
13.
|
NET INCOME PER SHARE:
|
The following is a reconciliation of the shares used in the denominator for calculating basic and diluted net income per share:
|
|
Three Months Ended
|
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2018
|
|
Weighted average common shares outstanding used in
calculating basic income per share
|
|
|
21,986,981
|
|
|
|
22,779,567
|
|
Effect of dilutive options and non-vested restricted stock
awards
|
|
|
725,667
|
|
|
|
621,118
|
|
Weighted average common and common equivalent shares
used in calculating diluted income per share
|
|
|
22,712,648
|
|
|
|
23,400,685
|
|
For the three months ended December 31, 2017 and 2018, there were 116,844 and no weighted average shares related to options outstanding and non-vested restricted stock awards, respectively, that were not included in the computation of diluted income per share because the options’ exercise prices or assumed proceeds per share were greater than the average market price of our common stock, and therefore, would have an anti-dilutive effect.
14.
|
COMMITMENTS AND CONTINGENCIES:
|
We are party to various legal actions arising in the ordinary course of business. While it is not feasible to determine the actual outcome of these actions as of December 31, 2018, we believe that these matters should not have a material adverse effect on our unaudited condensed consolidated financial condition, results of operations, or cash flows.
15