NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
A
. Basis of Presentation and Summary of Significant 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 months ended September 30, 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,
2017 (“2017 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 2017 Annual Report unless otherwise noted below.
Recent Accounting Pronouncements
In March 2016, the F
inancial Accounting Standards Board issued Accounting Standards Update No. 2016-09, Compensation-Stock Compensation (Topic 718) (ASU 2016-09), which provides guidance improvements to employee share-based payment accounting. The standard amends several aspects of current employee share-based payment accounting including income taxes, forfeitures, earnings per share, and statutory tax withholding requirements, as well as classification in the statement of cash flows. We adopted ASU 2016-09 effective July 1, 2017. ASU 2016-09 also requires all excess tax benefits and tax deficiencies associated with employee stock compensation awards to be recognized as income tax expense or benefit as part of the Statement of Operations. Adopting this standard did not result in any significant impact to our results of operation or financial position. During the quarter ended September 30, 2017, there was no impact to the Statement of Cash Flows.
In March 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (Topic 842) (ASU 2016-02), which amends existing standards for leases to increase transparency and comparability among organizations by requiring recognition of lease assets an
d liabilities on the balance sheet and requiring disclosure of key information about such arrangements. ASU 2016-02 will be effective for us beginning in our first quarter of fiscal 2020. Early adoption is permitted. We are currently evaluating the impact of adopting the new standard on our consolidated financial statements and the timing and presentation of our adoption.
In April 2016, the FASB issued Accounting Standards Update No. 2016-10, Revenue from Contracts with Customers (Topic 606)(ASU 2016-10),
which amends and adds clarity to certain aspects of the guidance set forth in the upcoming revenue standard (ASU 2014-09) related to identifying performance obligations and licensing. In May 2016, the FASB issued Accounting Standards Update No. 2016-11, Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815) (ASU 2016-11), which amends and rescinds certain revenue recognition guidance previously released within ASU 2014-09. In May 2016 the FASB issued Accounting Standards Update No. 2016-12, Revenue from Contracts with Customers (Topic 606) (ASU 2016-12), which provides narrow scope improvements and practical expedients related to ASU 2014-09. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, it is possible that more judgment and estimates may be required within the revenue recognition process than is required under present U.S. GAAP. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price, and allocating the transaction price to each separate performance obligation. The new standard also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments.
All of these new standards will be effective for us concurrently with ASU 2014-09, beginning in our first quarter of fiscal 2019. Early adoption is not permitted. Currently, w
e do not expect our annual revenue to be materially
different under Topic 606. The most significant change will be to our quarterly and annual financial statement disclosures. We are continuing to evaluate the impact of adopting the new standard.
In August 2
017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The ASU is intended to improve and simplify accounting rules around hedge accounting and improve the disclosures of hedging arrangements.
We are currently evaluating the impact of adopting the new standard on our consolidated financial statements. ASU 2017-12 will be effective for us beginning in our first quarter of fiscal 2020.
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 dilute
d net income per common share using the additional dilutive effect of all dilutive securities. The dilutive impact of stock options accounts 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
September 30,
|
|
|
|
201
7
|
|
|
201
6
|
|
Numerator
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,434
|
|
|
$
|
2,490
|
|
Denominator
|
|
|
|
|
|
|
|
|
Basic weighted average common shares outstanding
|
|
|
6,607
|
|
|
|
6,558
|
|
Dilutive effect of stock options
|
|
|
224
|
|
|
|
89
|
|
Diluted weighted average common shares outstanding
|
|
|
6,831
|
|
|
|
6,647
|
|
Basic net income per common share
|
|
$
|
0.22
|
|
|
$
|
0.38
|
|
Diluted net income per common share
|
|
$
|
0.21
|
|
|
$
|
0.37
|
|
No shares related to stock options or restricted stock were excluded for the three months ended
September 30, 2017 or September 30, 2016.
Revenue Recognition
To recognize revenue, four basic cr
iteria must be met: 1) there is evidence that an arrangement with a buyer 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 completion of 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 sales 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.
On August 7, 2017, we entered into three agreements (“
Agreements”), with The Juice Plus+ Company LLC (“Juice Plus+”). The Agreements are an Exclusive Manufacturing Agreement, a Restricted Stock Award Agreement, and an Irrevocable Proxy. Pursuant to the Exclusive Manufacturing Agreement, Juice Plus+ has granted us exclusive rights to manufacture and supply Juice Plus+ with certain Juice Plus+ products within 24 countries where Juice Plus+ currently sells those products. Pursuant to the Restricted Stock Award Agreement, NAI has agreed to grant 500,000 shares of NAI common stock to Juice Plus+, (the “Shares”), and Juice Plus+ agreed the Shares are subject to certain restrictions and risk of forfeiture. Pursuant to the Irrevocable Proxy, Juice Plus+ has granted to the NAI Board of Directors Juice Plus+’s right to vote the Shares as long as the Shares are subject to the associated risk of forfeiture. The Agreements each are for a term of 5 years, and each may be terminated by either party only upon on the occurrence of specified events. For the three months ended September 30, 2017, $163,000 of expense associated with the shares granted to Juice Plus+ was recorded as a reduction to revenue
.
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 and marketed and sold under the CarnoSyn® and SR CarnoSyn® trade names. We recorded beta-alanine raw material sales and royalty and licensing income as a component of revenue in the amount of $5.9 million during the three months ended September 30, 2017 and $6.7 million during the three months ended September 30, 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 patent rights. We recognized royalty expense as a component of cost of goods sold in the amount of $284,000 during the three months ended September 30, 2017
,
and $316,000 during the three months ended September 30, 2016
.
Notes Receivable
On
September 30, 2017, we entered into a note receivable with Kaged Muscle, LLC (“Kaged Muscle”), one of our contract manufacturing customers, converting $1.5 million of trade receivables to a 12 month note. Kaged Muscle is one of our fastest growing sports nutrition customers and we executed this note receivable conversion to assist them with their near term financing needs. The note carries an interest rate of fifteen percent (15%) per annum and is an interest only note secured by the assets of Kaged Muscle and a personal guarantee by the co-founder and President of Kaged Muscle. Interest is due quarterly and the note can be paid down at any time without penalty.
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 Bl
ack-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 to date 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 on the date 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.
The Company did not grant
any options during the three months ended September 30, 2017 or the three months ended September 30, 2016. All remaining outstanding stock options are fully vested
.
No options were exercised during the three months ended September 30, 2017 or three months ended September 30, 2016. During the three months ended September 30, 2017, 5,000 options were forfeited. There were no forfeitures during the three months ended September 30, 2016.
We did not grant any shares to employees during the three months ended September 30, 2017.
We granted 10,000 restricted shares to a new member of management during the three months ended September 30, 2016.
Our net income included stock based compensation expense of approximately $301,000 for the three months ended September 30, 2017, and $250,000 for the three months ended September 30, 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 liabili
ty (i.e., the “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. 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
September 30, 2017 and June 30, 2017, we did not have any financial assets or liabilities classified as Level 1, except for assets and liabilities related to our pension plan. We classify derivative forward exchange contracts as Level 2 assets. The fair value of our forward exchange contracts as of September 30, 2017 was a net liability of $2.3 million. The fair value of our forward exchange contracts as of June 30, 2017 was a net liability of $521
,000.
As of September 30, 2017 and June 30, 2017 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 2017 or the three months ended September 30, 2017
.
B
. Inventories, net
Inventories, net consisted o
f the following (in thousands):
|
|
September 30,
201
7
|
|
|
June 30,
201
7
|
|
Raw materials
|
|
$
|
13,828
|
|
|
$
|
9,469
|
|
Work in progress
|
|
|
3,562
|
|
|
|
1,312
|
|
Finished goods
|
|
|
2,269
|
|
|
|
3,562
|
|
Reserves
|
|
|
(663
|
)
|
|
|
(614
|
)
|
Inventories, net
|
|
$
|
18,996
|
|
|
$
|
13,729
|
|
C
. Property and Equipment
Property and equipment consisted of the following (in thousands):
|
|
Depreciable
Life In Years
|
|
|
September 30,
201
7
|
|
|
June 30,
201
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land
|
|
|
N/A
|
|
|
|
$
|
1,200
|
|
|
$
|
1,200
|
|
Building and building improvements
|
|
7
|
–
|
39
|
|
|
|
3,680
|
|
|
|
3,706
|
|
Machinery and equipment
|
|
3
|
–
|
12
|
|
|
|
24,900
|
|
|
|
24,194
|
|
Office equipment and furniture
|
|
3
|
–
|
5
|
|
|
|
4,073
|
|
|
|
3,954
|
|
Vehicles
|
|
|
3
|
|
|
|
|
209
|
|
|
|
209
|
|
Leasehold improvements
|
|
1
|
–
|
15
|
|
|
|
17,159
|
|
|
|
17,038
|
|
Total property and equipment
|
|
|
|
|
|
|
|
51,221
|
|
|
|
50,301
|
|
Less
: accumulated depreciation and amortization
|
|
|
|
|
|
|
|
(32,852
|
)
|
|
|
(32,165
|
)
|
Property and equipment, net
|
|
|
|
|
|
|
$
|
18,369
|
|
|
$
|
18,136
|
|
D
. Other Comprehensive Loss
O
ther comprehensive (loss) income (“OCL” and “OCI”) consisted of the following during the three months ended September 30, 2017 and September 30
, 2016 (in thousands):
|
|
Defined
Benefit
Pension Plan
|
|
|
Unrealized
Gains
(Losses)
on Cash Flow
Hedges
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 30,
2017
|
|
$
|
(491
|
)
|
|
$
|
(414
|
)
|
|
$
|
(905
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OCI/OCL
before reclassifications
|
|
|
—
|
|
|
|
(1,953
|
)
|
|
|
(1,953
|
)
|
Amounts reclassified from OCI
|
|
|
—
|
|
|
|
178
|
|
|
|
178
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax effect of OCI activity
|
|
|
—
|
|
|
|
641
|
|
|
|
641
|
|
Net current period OCI/OCL
|
|
|
—
|
|
|
|
(1,134
|
)
|
|
|
(1,134
|
)
|
Balance as of September 30,
2017
|
|
$
|
(491
|
)
|
|
$
|
(1,548
|
)
|
|
$
|
(2,039
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 30, 201
6
|
|
$
|
(775
|
)
|
|
$
|
95
|
|
|
$
|
(680
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OCI/OCL
before reclassifications
|
|
|
—
|
|
|
|
(452
|
)
|
|
|
(452
|
)
|
Amounts reclassified from OCI
|
|
|
—
|
|
|
|
(158
|
)
|
|
|
(158
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax effect of OCI
activity
|
|
|
—
|
|
|
|
220
|
|
|
|
220
|
|
Net current period OCI/OCL
|
|
|
—
|
|
|
|
(390
|
)
|
|
|
(390
|
)
|
Balance as of September 30, 201
6
|
|
$
|
(775
|
)
|
|
$
|
(295
|
)
|
|
$
|
(1,070
|
)
|
E
. Debt
The Company has a Credit Agreement with Wells Fargo Bank, N.A.
The Credit Agreement provides us with a credit line of up to $10.0 million and matures on February 1, 2020. The line of credit may be used to finance working capital requirements.
On
September 29, 2017, we executed an amendment to our credit facility with Wells Fargo Bank, N.A, which amendment now allows us to make loans or advances to third parties not exceeding $1.5 million.
We executed this amendment in order to issue a note receivable of $1.5 million to a customer.
There is no commitment fee under this agreement. 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.
During the three months ended
September 30, 2017, we were in compliance with all of the financial and other covenants required under the Credit Agreement.
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, 2019.
We did not use our working capital line of credit nor did we have any long-term debt outstanding during the
three months ended September 30, 2017. As of September 30, 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 (in thousands):
|
|
Three months Ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Customer 1
|
|
$
|
13,157
|
|
|
$
|
17,090
|
|
Customer 2
|
|
|
3,161
|
|
|
(a)
|
|
|
|
$
|
16,318
|
|
|
$
|
17,090
|
|
(a) Sales were less than 10% of the respective period
’s total sales.
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 (in thousands):
|
|
Three months Ended
September 30,
|
|
|
|
201
7
|
|
|
2016
|
|
Supplier
1
|
|
$
|
1,967
|
|
|
|
(b)
|
|
|
|
$
|
1,967
|
|
|
|
(a)
|
|
(b) Purchases were less than 10% of the respective period
’s total raw material purchases.
G
. Segment Information
Our busine
ss consists of two segments for financial reporting purposes, 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 no
t include corporate general and administrative expenses, interest expense and other miscellaneous income and expense items. Corporate general and administrative expenses, which are not allocated to any segment, include, but are not limited to: human resources, corporate legal, finance, information technology, and other corporate level related expenses. 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 2017 Annual Report.
Our operating results by business segment were as follows (in thousands):
|
|
Three Months Ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Net Sales
|
|
|
|
|
|
|
|
|
Private label contract manufacturing
|
|
$
|
22,222
|
|
|
$
|
27,379
|
|
Patent and trademark licensing
|
|
|
5,852
|
|
|
|
6,688
|
|
Total
|
|
$
|
28,074
|
|
|
$
|
34,067
|
|
|
|
Three Months Ended
September 30,
|
|
|
|
201
7
|
|
|
201
6
|
|
Income from Operations
|
|
|
|
|
|
|
|
|
Private label contract manufacturing
|
|
$
|
2,257
|
|
|
$
|
3,314
|
|
Patent and trademark li
censing
|
|
|
1,188
|
|
|
|
1,900
|
|
Income from operations of reportable segments
|
|
|
3,445
|
|
|
|
5,214
|
|
Corporate expenses not allocated to segments
|
|
|
(1,562
|
)
|
|
|
(1,678
|
)
|
Total net sales
|
|
$
|
1,883
|
|
|
$
|
3,536
|
|
|
|
September
30,
201
7
|
|
|
June 30,
201
7
|
|
Total Assets
|
|
|
|
|
|
|
|
|
Private label contract manufacturing
|
|
$
|
67,795
|
|
|
$
|
60,489
|
|
Patent and trademark licensing
|
|
|
13,154
|
|
|
|
12,122
|
|
Total assets
|
|
$
|
80,949
|
|
|
$
|
72,611
|
|
Our private label contract manuf
acturing products are sold both in the U.S. and in markets outside the U.S., including Europe, Australia and Asia, as well as 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.
Net sales by geographic region, based on the customers
’ location, were as follows (in thousands):
|
|
Three Months Ended
September 30,
|
|
|
|
201
7
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
15,194
|
|
|
$
|
15,225
|
|
Markets outside the Unite
d States
|
|
|
12,880
|
|
|
|
18,842
|
|
Total net sales
|
|
$
|
28,074
|
|
|
$
|
34,067
|
|
Products manufactured by NAIE accounted for
75% of net sales in markets outside the U.S. for the three months ended September 30, 2017, and 48% for the three months ended September 30, 2016. No products manufactured by NAIE were sold in the U.S
.
during the three months ended September 30, 2017 and 2016
.
Assets and capital expenditures by geographic region, based on the location of the company or subsidiary at whic
h they were located or made, were as follows (in thousands):
|
|
Long-Lived Assets
|
|
|
Total Assets
|
|
|
Capital Expenditures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
September 30,
201
7
|
|
|
June 30,
201
7
|
|
|
September 30,
201
7
|
|
|
June 30,
201
7
|
|
|
September 30,
201
7
|
|
|
September 30,
2
01
6
|
|
United States
|
|
$
|
10,491
|
|
|
$
|
10,753
|
|
|
$
|
53,045
|
|
|
$
|
47,777
|
|
|
$
|
89
|
|
|
$
|
1,227
|
|
Europe
|
|
|
7,878
|
|
|
|
7,383
|
|
|
|
27,904
|
|
|
|
24,834
|
|
|
|
867
|
|
|
|
489
|
|
|
|
$
|
18,369
|
|
|
$
|
18,136
|
|
|
$
|
80,949
|
|
|
$
|
72,611
|
|
|
$
|
956
|
|
|
$
|
1,716
|
|
H
. Income Taxes
The effective tax rate for the three months ended September
30, 2017 was 28.0%. 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 months ended September 30, 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 b
elieve 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 months ended September 30, 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 as income or expense in the period that includes the enactment date.
We are subject to taxation in the U.S., Switzerl
and and various state jurisdictions. Our tax years for the fiscal year ended June 30, 2014 and forward are subject to examination by the U.S. tax authorities and our tax years for the fiscal year ended June 30, 2007 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 Switzerland 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. 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 three months ended September 30, 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. Under the repurchase plan, we may, from time to time, purchase shares of our common stock, depending upon market conditions, in open market or privately negotiated transactions.
During the three months ended September 30,
2017 and September 30, 2016, we did not repurchase any shares under this repurchase plan.
During the three months ended September 30, 2017, we acquired 734 shares in connection with restricted stock shares that vested during that year at a weighted average cost of $10.70 per share and a total cost of $8,000.
During the three months ended September 30, 2016, we acquired 6,037 shares from employees in connection with restricted stock shares that vested during the year at a weighted average cost of $13.14 per share and a total cost of $79,000. 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 number of shares returned to the Company was calculated based on the closing share price on the date the shares vested.
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 September 30,
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 August 2019. 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 September 30, 2017, we did not have any losses or gains related to the ineffective portion of our hedging instruments. 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 September 30,
2017, the notional amounts of our foreign exchange contracts designated as cash flow hedges were approximately $62.7 million (EUR 54.2 million). As of September 30, 2017, a net loss of approximately $2.4 million related to derivative instruments designated as cash flow hedges was recorded in OCI. It is expected that $1.6 million will be reclassified into earnings in the next 12 months along with the earnings effects of the related forecasted transactions.
As of September 30,
2017, the fair value of our cash flow hedges was a liability of $2.3 million, of which $1.6 million was classified as a current liability, and $689,000 was classified in other noncurrent liabilities in our Consolidated Balance Sheets. During the three months ended September 30, 2017, we recognized $2.2 million of net losses in OCI and reclassified $422,000 of gains from OCI to revenue. As of June 30, 2017, $422,000 of the fair value of our cash flow hedges was classified in accrued liabilities, and $99,000 was classified other noncurrent liabilities, net in our Consolidated Balance Sheets.
During the three months ended September 30, 2016, we recognized $452,000 of net gains in OCI and reclassified $58,000 of losses 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 operations. However, a settlement payment or unfavorable outcome could adversely impact our results of operations. Our evaluation of the likely impact of these actions could change in the future and we could have unfavorable outcomes that we do not expect.