NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CYBEROPTICS CORPORATION
1. INTERIM REPORTING:
The interim condensed consolidated financial statements presented herein as of
September 30, 2017
,
and for the
three and nine
month periods ended
September 30, 2017
and
2016
, are unaudited, but in the opinion of management, include all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position, results of operations and cash flows for the periods presented.
The results of operations for the
three and nine
month periods ended
September 30, 2017
do not necessarily indicate the results to be expected for the full year. The
December 31, 2016
consolidated balance sheet data was derived from audited consolidated financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. The unaudited interim condensed consolidated financial statements should be read in conjunction with our consolidated financial statements and notes thereto contained in our Annual Report on Form 10-K for the year ended
December 31, 2016
.
2
. MARKETABLE SECURITIES:
Our investments in marketable securities are classified as available-for-sale and consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
(In thousands)
|
|
Cost
|
|
Unrealized
Gains
|
|
Unrealized
Losses
|
|
Fair Value
|
Short-Term
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agency obligations
|
|
$
|
4,693
|
|
|
$
|
—
|
|
|
$
|
(6
|
)
|
|
$
|
4,687
|
|
Corporate debt securities and certificates of deposit
|
|
1,665
|
|
|
—
|
|
|
(1
|
)
|
|
1,664
|
|
Asset backed securities
|
|
350
|
|
|
—
|
|
|
—
|
|
|
350
|
|
Marketable securities – short-term
|
|
$
|
6,708
|
|
|
$
|
—
|
|
|
$
|
(7
|
)
|
|
$
|
6,701
|
|
Long-Term
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agency obligations
|
|
$
|
4,525
|
|
|
$
|
—
|
|
|
$
|
(13
|
)
|
|
$
|
4,512
|
|
Corporate debt securities and certificates of deposit
|
|
1,566
|
|
|
1
|
|
|
(6
|
)
|
|
1,561
|
|
Asset backed securities
|
|
2,797
|
|
|
—
|
|
|
(5
|
)
|
|
2,792
|
|
Equity security
|
|
42
|
|
|
42
|
|
|
—
|
|
|
84
|
|
Marketable securities – long-term
|
|
$
|
8,930
|
|
|
$
|
43
|
|
|
$
|
(24
|
)
|
|
$
|
8,949
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
(In thousands)
|
|
Cost
|
|
Unrealized
Gains
|
|
Unrealized
Losses
|
|
Fair Value
|
Short-Term
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agency obligations
|
|
$
|
5,005
|
|
|
$
|
4
|
|
|
$
|
(1
|
)
|
|
$
|
5,008
|
|
Corporate debt securities and certificates of deposit
|
|
1,476
|
|
|
1
|
|
|
(1
|
)
|
|
1,476
|
|
Asset backed securities
|
|
9
|
|
|
—
|
|
|
—
|
|
|
9
|
|
Marketable securities – short-term
|
|
$
|
6,490
|
|
|
$
|
5
|
|
|
$
|
(2
|
)
|
|
$
|
6,493
|
|
Long-Term
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agency obligations
|
|
$
|
4,815
|
|
|
$
|
1
|
|
|
$
|
(12
|
)
|
|
$
|
4,804
|
|
Corporate debt securities and certificates of deposit
|
|
2,161
|
|
|
—
|
|
|
(17
|
)
|
|
2,144
|
|
Asset backed securities
|
|
1,732
|
|
|
—
|
|
|
(5
|
)
|
|
1,727
|
|
Equity security
|
|
42
|
|
|
11
|
|
|
—
|
|
|
53
|
|
Marketable securities – long-term
|
|
$
|
8,750
|
|
|
$
|
12
|
|
|
$
|
(34
|
)
|
|
$
|
8,728
|
|
Net pre-tax unrealized gains for marketable securities of
$12,000 at
September 30, 2017
and net pre-tax unrealized losses for marketable securities of
$19,000 at
December 31, 2016
were recorded as a component of accumulated other comprehensive loss in stockholders’
equity.
No marketable securities were sold in the nine months ended September 30, 2017 or the three months ended September 30, 2016.
We received proceeds from the sale of marketable securities in the nine months ended
September 30, 2016
of $1.4 million. No
gain or loss was recognized from the sale of marketable securities during the 2016 period.
Our investments in marketable debt securities all have maturities of less than
five years. At
September 30, 2017
, marketable debt securities valued at
$2.0 million were in an unrealized gain position totaling
$1,000, and marketable debt securities valued at
$13.6 million were in an unrealized loss position totaling
$31,000 (all of these securities had been in an unrealized loss position for less than
12
months). At
December 31, 2016
, marketable debt securities valued at
$6.4 million were in an unrealized gain position totaling
$6,000, and marketable debt securities valued at
$8.8 million were in an unrealized loss position totaling
$36,000 (all of these securities had been in an unrealized loss position for less than
12
months).
Investments in marketable securities classified as cash equivalents of
$3.2
million at
September 30, 2017
and
$
5.2 million
at
December 31, 2016
consist of the following:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
(In thousands)
|
|
Cost
|
|
Unrealized
Gains
|
|
Unrealized
Losses
|
|
Recorded
Basis
|
Money market and certificates of deposit
|
|
$
|
3,164
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,164
|
|
|
|
$
|
3,164
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,164
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
(In thousands)
|
|
Cost
|
|
Unrealized
Gains
|
|
Unrealized
Losses
|
|
Recorded
Basis
|
Money market and certificates of deposit
|
|
$
|
5,195
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5,195
|
|
|
|
$
|
5,195
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5,195
|
|
Cash and marketable securities held by foreign subsidiaries totaled
$197,000 at
September 30, 2017
and
$614,000 at
December 31, 2016
.
3
. DERIVATIVES:
We may enter into foreign exchange forward contracts to hedge against the effect of exchange rate fluctuations on cash flows denominated in foreign currencies associated with our subsidiary in Singapore. These transactions are designated as cash flow hedges and are recorded in the accompanying consolidated balance sheets at fair value.
The effective portion of the gain or loss on these derivatives is reported as a component of other comprehensive income (loss) and reclassified into earnings in the same period during which the hedged transaction affects earnings. Gains and losses on the derivatives representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings. The maximum length of time over which we hedge our exposure to the variability in future cash flows is
12
months.
There were no open cash flow hedges at
December 31, 2016
or at any time during the nine
months ended
September 30, 2017
. In the
nine months ended
September 30, 2016
, h
edge
ineffectiveness and the amounts excluded from effectiveness testing recognized in
earnings on cash flow hedges were not material.
Reclassifications of amounts from accumulated other comprehensive income (loss) into earnings for cash flow hedges include accumulated gains (losses) at the time earnings were impacted by the hedged transaction.
The location in the consolidated statements of operations and consolidated statements of comprehensive income and amounts of gains and losses related to derivative instruments designated as cash flow hedges are as follows:
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|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2016
|
(In thousands)
|
|
Pretax
Gain Recognized
in
Other Comprehensive
Income (Loss)
on
Effective
Portion of Derivative
|
|
Pretax Loss Recognized
in Earnings on Effective
Portion of Derivative as a
Result of Reclassification
from Accumulated Other
Comprehensive Loss
|
Cost of revenues
|
|
$
|
32
|
|
|
$
|
(27
|
)
|
Research and development
|
|
14
|
|
|
(6
|
)
|
Selling, general and administrative
|
|
7
|
|
|
(3
|
)
|
Total
|
|
$
|
53
|
|
|
$
|
(36
|
)
|
At
September 30, 2017
and
December 31, 2016
, there were no amounts recorded in accumulated other comprehensive loss for cash flow hedging instruments.
Additional information with respect to the impact of derivative instruments on other comprehensive income (loss) is included in Note
11
.
4
. FAIR VALUE ME
ASUREMENTS:
We determine the fair value of our assets and liabilities based on the exchange price that would be received for an asset or paid to transfer a liability (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. Valuation techniques used to measure fair value maximize the use of observable inputs and minimize the use of unobservable inputs. We use a fair value hierarchy with
three
levels of inputs, of which the first
two
are considered observable and the last is considered unobservable, to measure fair value. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level
1
). The next highest priority is based on quoted prices for similar assets or liabilities in
active
markets or quoted prices for identical or similar assets or liabilities in non-active markets or other observable inputs (Level
2
). The lowest priority is given to unobservable inputs (Level
3
).
The following provides information regarding fair value measurements for our marketable securities as of
September 30, 2017
and
December 31, 2016
according to the
three
-level fair value hierarchy:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at
September 30, 2017
Using
|
(In thousands)
|
|
Balance
September 30,
2017
|
|
Quoted Prices
in Active
Markets for
Identical
Assets
(Level
1
)
|
|
Significant
Other
Observable
Inputs
(Level
2
)
|
|
Significant
Unobservable
Inputs
(Level
3
)
|
Marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agency obligations
|
|
$
|
9,199
|
|
|
$
|
—
|
|
|
$
|
9,199
|
|
|
$
|
—
|
|
Corporate debt securities and certificates of deposit
|
|
3,225
|
|
|
—
|
|
|
3,225
|
|
|
—
|
|
Asset backed securities
|
|
3,142
|
|
|
—
|
|
|
3,142
|
|
|
—
|
|
Equity security
|
|
84
|
|
|
84
|
|
|
—
|
|
|
—
|
|
Total marketable securities
|
|
$
|
15,650
|
|
|
$
|
84
|
|
|
$
|
15,566
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at
December 31, 2016
Using
|
(In thousands)
|
|
Balance
December 31,
2016
|
|
Quoted Prices
in Active
Markets for
Identical
Assets
(Level
1
)
|
|
Significant
Other
Observable
Inputs
(Level
2
)
|
|
Significant
Unobservable
Inputs
(Level
3
)
|
Marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agency obligations
|
|
$
|
9,812
|
|
|
$
|
—
|
|
|
$
|
9,812
|
|
|
$
|
—
|
|
Corporate debt securities and certificates of deposit
|
|
3,620
|
|
|
—
|
|
|
3,620
|
|
|
—
|
|
Asset backed securities
|
|
1,736
|
|
|
—
|
|
|
1,736
|
|
|
—
|
|
Equity security
|
|
53
|
|
|
53
|
|
|
—
|
|
|
—
|
|
Total marketable securities
|
|
$
|
15,221
|
|
|
$
|
53
|
|
|
$
|
15,168
|
|
|
$
|
—
|
|
During the
nine months ended September 30, 2017
and the year ended
December 31, 2016
, there were no transfers within the
three
level hierarchy. A significant transfer is recognized when the inputs used to value a security have been changed sufficiently to merit a transfer between the disclosed levels of the valuation hierarchy.
The fair value for our U.S. government and agency obligations, corporate debt securities and certificates of deposit and asset backed securities are determined based on valuations provided by external investment managers which obtain them from a variety of industry standard data providers. The fair value for our equity security is based on a quoted market price obtained from an active market.
The carrying amounts of financial instruments such as cash equivalents, accounts receivable, other assets, accounts payable, advance customer payments, accrued expenses and other liabilities are approximately equal to their related fair values due to their short-term maturities. Non-financial assets such as equipment and leasehold improvements, goodwill and intangible assets are subject to non-recurring fair value measurements if they are deemed impaired. We had
no re-measurements of non-financial assets to fair value in the
nine months ended September 30, 2017
or the
nine months ended September 30, 2016
.
5
. ACCOUNTING FOR STOCK-BASED COMPENSATION:
We have
three
stock-based compensation plans that are administered by the Compensation Committee of the Board of Directors. We have an Employee Stock Incentive Plan for officers, other employees, consultants and independent contractors under which we have granted options and restricted stock units to officers and other employees, an Employee Stock Purchase Plan under which shares of our common stock may be acquired by employees at discounted prices, and a Non-Employee Director Stock Plan that provides for automatic grants of shares of our common stock to non-employee directors. New shares of our common stock are issued upon stock option exercises, vesting of restricted stock units, issuances of shares to board members and issuances of shares under the Employee Stock Purchase Plan.
Employee Stock Incentive Plan
As of
September 30, 2017
, there were
429,939
shares of common stock reserved in the aggregate for issuance pursuant to future awards under our Employee Stock Incentive Plan and 530,174 shares of common stock reserved in the aggregate for issuance pursuant to outstanding awards under our Employee Stock Incentive Plan. Although our Compensation Committee has authority to issue options, restricted stock, restricted stock units, share grants and other share based benefits under our Employee Stock Incentive Plan, to date only restricted stock units and stock options have been granted under the plan. Options have been granted at an option price per share equal to the market value of our common stock on the date of grant, vest over a
four year
period and expire
seven years
after the date of grant. Restricted stock units vest over a
four year
period and entitle the holders to
one share of our common stock for each restricted stock unit. Reserved shares underlying outstanding awards, including options and restricted shares, that are forfeited are available under the Employee Stock Incentive Plan for future grants.
Non-Employee Director Stock Plan
As of
September 30, 2017
, there were
68,000
shares of common stock reserved in the aggregate for issuance pursuant to future awards under our Non-Employee Director Stock Plan and 16,000 shares of common stock reserved in the aggregate for issuance pursuant to outstanding stock option awards under our Non-Employee Director Stock Plan. Under the terms of the plan, each non-employee director will automatically be granted 2,000 shares of our common stock on the date of each annual meeting at which such director is elected to serve on the board
. At our May 11, 2017 annual meeting, our shareholders, upon recommendation of the Board of Directors, approved amendments to the Non-Employee Director Stock Plan that eliminated annual stock option grants for non-employee directors and provide for share grants under the Non-Employee Director Stock Plan which will vest in
four
equal quarterly installments during the year after the grant date provided the non-employee director is still serving as a director on the applicable vesting date.
Pursuant to the plan, on the date of our
2017
annual meeting, we issued a total of
8,000
shares of our common stock to our non-employee directors. The shares had an aggregate fair market value on the date of grant equal to $
167,000
(grant date fair value of $20.90 per share).
As of
September 30, 2017
, 2,000 of these shares were vested. The aggregate fair value of the vested shares, based on the closing share price of our common stock on the vesting date, was $31,000.
The aggregate fair value of the outstanding unvested shares based on the closing share price of our common stock on
September 30, 2017
was $98,000.
Pursuant to the original plan, on the date of our
2016
annual meeting, we issued a total of 8,000 shares of our common stock and stock options to acquire 16,000 shares of our common stock to our non-employee directors. Both the shares and the options were fully vested on the date of grant. The shares had an aggregate fair market value on the date of grant equal to $
136,000
(grant date fair value of $16.97 per share) and the options had an aggregate fair market value on the date of grant using the Black-Scholes model equal to $139,000 (grant date fair value of $
8.71
per option to acquire
one
share of our common stock).
Stock Option Activity
The following is a summary of stock option activity in the
nine months ended September 30, 2017
:
|
|
|
|
|
|
|
|
Options Outstanding
|
|
Weighted Average Exercise
Price Per Share
|
Outstanding,
December 31, 2016
|
547,625
|
|
|
$
|
9.39
|
|
Granted
|
—
|
|
|
—
|
|
Exercised
|
(42,000
|
)
|
|
9.24
|
|
Expired
|
—
|
|
|
—
|
|
Forfeited
|
—
|
|
|
—
|
|
Outstanding,
September 30, 2017
|
505,625
|
|
|
$
|
9.41
|
|
|
|
|
|
Exercisable,
September 30, 2017
|
229,063
|
|
|
$
|
7.67
|
|
The intrinsic value of an option is the amount by which the market price of the underlying stock exceeds the option's exercise price. For options outstanding at
September 30, 2017
, the weighted average remaining contractual term of all outstanding options was
4.2 years and their aggregate intrinsic value was
$3.8 million. At
September 30, 2017
, the weighted average remaining contractual term of options that were exercisable was
3.7 years and their aggregate intrinsic value was $2.0 million. The
aggregate intrinsic value of stock options exercised in the
nine months ended September 30, 2017
was
$
679,000
.
We received proceeds from stock option exercises of $330,000 in the
nine months ended September 30, 2017
and $425,000 in the
nine months ended September 30, 2016
. The total fair value of options that vested in the
nine months ended September 30, 2017
was $130,000.
Restricted Stock Units
Restricted stock units are granted under our Employee Stock Incentive Plan. There were
no restricted stock units granted in the nine months ended September 30, 2017.
The aggregate fair value of outstanding restricted stock units based on the closing share price of our common stock on
September 30, 2017
was
$659,000. The aggregate fair value of restricted stock units that vested, based on the closing share price of our common stock on the vesting date,
in the
nine months ended September 30, 2017
was $
170,000
.
A summary of activity for non-vested restricted stock units in the
nine months ended September 30, 2017
is as follows:
|
|
|
|
|
|
|
|
Non-vested restricted stock units
|
|
Shares
|
|
Weighted Average Grant Date Fair Value
|
Non-vested at
December 31, 2016
|
|
45,549
|
|
|
$
|
11.93
|
|
Granted
|
|
—
|
|
|
—
|
|
Vested
|
|
(5,000
|
)
|
|
6.97
|
|
Forfeited
|
|
—
|
|
|
—
|
|
Non-vested at
September 30, 2017
|
|
40,549
|
|
|
$
|
12.54
|
|
Employee Stock Purchase Plan
We have an Employee Stock Purchase Plan available to eligible U.S. employees. Under terms of the plan, eligible employees may designate from
1% to
10% of their compensation to be withheld through payroll deductions, up to a maximum of
$6,500 in each plan year, for the purchase of common stock at
85% of the lower of the market price on the first or last day of the offering period. Shares issued under this plan totaled
18,404 shares
in the
nine months ended September 30, 2017
and 36,481 shares in the
nine months ended September 30, 2016
.
As of
September 30, 2017
,
40,872
shares remain available for future issuance under the Employee Stock Purchase Plan.
Stock Based Compensation Information
All stock based compensation awarded to our employees and non-employee directors, representing grants of shares, stock options and restricted stock units are recognized as an expense in our consolidated statement of operations based on the grant date fair value of the award. We utilize the straight-line method of expense recognition over the vesting period for our options subject to time-based vesting restrictions. The fair value of stock options granted has been determined using the Black-Scholes model. Prior to January 1, 2017, stock compensation expense for all equity based awards was recognized based on the number of awards that were expected to vest. On January 1, 2017, we adopted the provisions of Accounting Standards Update (ASU) No.
2016
-
09
,
Improvements to Employee Share-Based Payment Accounting,
which permits accounting for the impact of stock option forfeitures on stock compensation expense when the forfeitures occur. In the
nine months ended September 30, 2017
, the impact of the change in accounting for stock option forfeitures was inconsequential. We have classified equity-based compensation expenses within our statement of operations in the same manner as our cash based compensation costs.
Stock based compensation expense in the
three months ended September 30, 2017
totaled $240,000, and included $116,000 for stock options,
$33,000 for our Employee
Stock Purchase Plan, $49,000 for unvested restricted stock units and $
42,000
for unvested restricted shares. Stock based compensation expense in the
nine months ended September 30, 2017
totaled $640,000
, and included $
345,000
for stock options, $
85,000
for our Employee Stock Purchase Plan, $
145,000
for unvested restricted stock units and
$
65,000 for unvested restricted shares.
Stock based compensation expense in the
three months ended September 30, 2016
totaled $142,000, and included $88,000 for stock options, $22,000 for our Employee Stock Purchase Plan and $32,000 for unvested restricted stock units.
Stock based compensation expense in the
nine months ended September 30, 2016
totaled $694,000, and included $409,000 for stock options, $54,000 for our Employee Stock Purchase Plan, $95,000 for unvested restricted stock units and $136,000 for shares issued without restriction.
At
September 30, 2017
, the total unrecognized compensation cost related to outstanding non-vested stock based compensation arrangements was
$
1.3
million, and the related weighted average period over which this cost is expected to be recognized is
1.25
years.
6
.
CHANGES IN STOCKHOLDERS’ EQUITY:
A reconciliation of the changes in our stockholders' equity is as follows:
|
|
Common Stock
|
|
Accumulated
Other Comprehensive
Income (Loss)
|
|
Retained
Earnings
|
|
Total Stockholders’
Equity
|
(In thousands)
|
|
Shares
|
|
Amount
|
|
|
|
Balance,
December 31, 2016
|
|
6,902
|
|
|
$
|
32,801
|
|
|
$
|
(1,940
|
)
|
|
$
|
18,037
|
|
|
$
|
48,898
|
|
Increase related to adoption of ASU
2016
-
09
|
|
—
|
|
|
|
23
|
|
|
|
—
|
|
|
|
262
|
|
|
|
285
|
|
Exercise of stock options, vesting of restricted stock units and grants of restricted shares, net of shares exchanged as payment
|
|
53
|
|
|
|
330
|
|
|
|
—
|
|
|
|
—
|
|
|
|
330
|
|
Stock-based compensation
|
|
—
|
|
|
|
640
|
|
|
|
—
|
|
|
|
—
|
|
|
|
640
|
|
Issuance of common stock under Employee Stock Purchase Plan
|
|
18
|
|
|
|
258
|
|
|
|
—
|
|
|
|
—
|
|
|
|
258
|
|
Other comprehensive income, net of tax
|
|
—
|
|
|
|
—
|
|
|
|
434
|
|
|
|
—
|
|
|
|
434
|
|
Net income
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
809
|
|
|
|
809
|
|
Balance,
September 30, 2017
|
|
6,973
|
|
|
$
|
34,052
|
|
|
$
|
(1,506
|
)
|
|
$
|
19,108
|
|
|
$
|
51,654
|
|
See Note 15 for further discussion regarding the impact of our adoption of ASU No. 2016-09,
Improvements to Employee Share-Based Payment Accounting
on our consolidated financial statements.
7. OTHER FINANCIAL STATEMENT DATA:
The components of our inventories are as follows:
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
September 30, 2017
|
|
December 31, 2016
|
Raw materials and purchased parts
|
|
$
|
8,022
|
|
|
$
|
6,475
|
|
Work in process
|
|
1,640
|
|
|
826
|
|
Finished goods
|
|
6,972
|
|
|
4,230
|
|
Total inventories
|
|
$
|
16,634
|
|
|
$
|
11,531
|
|
The components of our accrued expenses are as follows:
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
September 30, 2017
|
|
December 31, 2016
|
Wages and benefits
|
|
$
|
959
|
|
|
$
|
2,673
|
|
Warranty liability
|
|
691
|
|
|
717
|
|
Other
|
|
364
|
|
|
366
|
|
|
|
$
|
2,014
|
|
|
$
|
3,756
|
|
Warranty costs:
We provide for the estimated cost of product warranties, which cover products for periods ranging from
1
to
3 years, at the time revenue is recognized. While we engage in extensive product quality programs and processes, including actively monitoring and evaluating the quality of component suppliers, warranty obligations are affected by product failure rates, material usage and service delivery costs incurred in correcting a product failure. If actual product failure rates, material usage or service delivery costs differ from our estimates, revisions to the estimated warranty liability would be required and could be material. At the end of each reporting period, we revise our estimated warranty liability based on these factors. The current portion of our warranty liability is included as a component of accrued expenses. The long-term portion of our warranty liability is included as a component of other liabilities.
A reconciliation of the changes in our estimated warranty liability is as follows:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
(In thousands)
|
|
2017
|
|
2016
|
Balance at beginning of period
|
|
$
|
790
|
|
|
$
|
645
|
|
Accrual for warranties
|
|
362
|
|
|
615
|
|
Warranty revision
|
|
(23
|
)
|
|
(27
|
)
|
Settlements made during the period
|
|
(413
|
)
|
|
(415
|
)
|
Balance at end of period
|
|
716
|
|
|
818
|
|
Current portion of estimated warranty liability
|
|
(691
|
)
|
|
(736
|
)
|
Long-term estimated warranty liability
|
|
$
|
25
|
|
|
$
|
82
|
|
Deferred warranty revenue:
The current portion of our deferred warranty revenue is included as a component of advance customer payments. The long-term portion of our deferred warranty revenue is included as a component of other liabilities.
A reconciliation of the changes in our deferred warranty revenue is as follows:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
(In thousands)
|
|
2017
|
|
2016
|
Balance at beginning of period
|
|
$
|
346
|
|
|
$
|
199
|
|
Revenue deferrals
|
|
321
|
|
|
490
|
|
Amortization of deferred revenue
|
|
(325
|
)
|
|
(330
|
)
|
Total deferred warranty revenue
|
|
342
|
|
|
359
|
|
Current portion of deferred warranty revenue
|
|
(301
|
)
|
|
(278
|
)
|
Long-term deferred warranty revenue
|
|
$
|
41
|
|
|
$
|
81
|
|
8. INTANGIBLE ASSETS:
Intangible assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
December 31, 2016
|
(In thousands)
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
|
Patents
|
|
$
|
2,673
|
|
|
$
|
(2,433
|
)
|
|
$
|
240
|
|
|
$
|
2,567
|
|
|
$
|
(2,351
|
)
|
|
$
|
216
|
|
Software
|
|
206
|
|
|
(104
|
)
|
|
102
|
|
|
206
|
|
|
(82
|
)
|
|
124
|
|
Marketing assets and customer relationships
|
|
101
|
|
|
(42
|
)
|
|
59
|
|
|
101
|
|
|
(33
|
)
|
|
68
|
|
Non-compete agreements
|
|
101
|
|
|
(89
|
)
|
|
12
|
|
|
101
|
|
|
(71
|
)
|
|
30
|
|
|
|
$
|
3,081
|
|
|
$
|
(2,668
|
)
|
|
$
|
413
|
|
|
$
|
2,975
|
|
|
$
|
(2,537
|
)
|
|
$
|
438
|
|
Amortization expense in the
three and nine
months ended
September 30, 2017
and
2016
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
(In thousands)
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Patents
|
|
$
|
31
|
|
|
$
|
27
|
|
|
$
|
82
|
|
|
$
|
79
|
|
Software
|
|
|
6
|
|
|
|
7
|
|
|
22
|
|
|
22
|
|
Marketing assets and customer relationships
|
|
|
3
|
|
|
|
3
|
|
|
9
|
|
|
9
|
|
Non-compete agreements
|
|
|
5
|
|
|
|
6
|
|
|
18
|
|
|
19
|
|
|
|
$
|
45
|
|
|
$
|
43
|
|
|
$
|
131
|
|
|
$
|
129
|
|
Amortization of patents has been classified as research and development expense in our statements of operations. Estimated aggregate amortization expense based on current intangibles for the next
five
years is expected to be as follows:
$46,000 for the remainder of
2017
;
$142,000 in
2018
;
$109,000 in
2019
;
$76,000 in
2020
;
$20,000 in
2021
; and
$20,000 in
2022
.
Intangible and other long lived assets are reviewed for impairment when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. An impairment loss would be recognized when future undiscounted cash flows expected to result from use of the asset and its eventual disposition are less than the carrying amount.
9. REVENUE CONCENTRATIONS, SIGNIFICANT CUSTOMERS AND GEOGRAPHIC AREAS:
Export sales as a percentage of total sales in the
three and nine
months ended
September 30, 2017
were 66% and 73%, respectively. Export sales as a percentage of total sales in the
three and nine
months ended
September 30, 2016
were 84% and 83%, respectively. Virtually all of our export sales are negotiated, invoiced and paid in U.S. dollars.
Export sales by geographic area are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
(In thousands)
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Americas
|
|
$
|
159
|
|
|
$
|
344
|
|
|
$
|
976
|
|
|
$
|
1,114
|
|
Europe
|
|
|
2,543
|
|
|
|
3,592
|
|
|
9,114
|
|
|
13,463
|
|
Asia
|
|
|
4,959
|
|
|
|
8,675
|
|
|
18,933
|
|
|
29,322
|
|
Other
|
|
|
103
|
|
|
|
10
|
|
|
247
|
|
|
44
|
|
Total export sales
|
|
$
|
7,764
|
|
|
$
|
12,621
|
|
|
$
|
29,270
|
|
|
$
|
43,943
|
|
In the
nine months ended September 30, 2017
, sales to one significant customer accounted for 13% of our total revenue. As of
September 30, 2017
, accounts receivable from this customer were $1.4 million.
10. NET INCOME (LOSS) PER SHARE:
Basic net income (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Net income per diluted share is computed by dividing net income by the weighted average number of common and common equivalent shares outstanding during the period. Common equivalent shares consist of shares of common stock to be issued upon exercise of stock options, the vesting of restricted shares and restricted stock units and the purchase of shares under our Employee Stock Purchase Plan, as calculated using the treasury stock method. All common equivalent shares were excluded from the calculation of net loss per diluted share in the three months ended September 30, 2017 due to their anti-dilutive effect.
The components of net income (loss) per basic and diluted share are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands except per share amounts)
|
|
Net Loss
|
|
Weighted Average
Shares Outstanding
|
|
Per Share Amount
|
Three Months Ended September 30, 2017
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(72
|
)
|
|
6,959
|
|
|
$
|
(0.01
|
)
|
Dilutive effect of common equivalent shares
|
|
—
|
|
|
—
|
|
|
—
|
|
Dilutive
|
|
$
|
(72
|
)
|
|
6,959
|
|
|
$
|
(0.01
|
)
|
(In thousands except per share amounts)
|
|
Net Income
|
|
Weighted Average
Shares Outstanding
|
|
Per Share Amount
|
Three Months Ended September 30, 2016
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1,172
|
|
|
6,859
|
|
|
$
|
0.17
|
|
Dilutive effect of common equivalent shares
|
|
—
|
|
|
295
|
|
|
(0.01
|
)
|
Dilutive
|
|
$
|
1,172
|
|
|
7,154
|
|
|
$
|
0.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands except per share amounts)
|
|
Net Income
|
|
Weighted Average
Shares Outstanding
|
|
Per Share Amount
|
Nine Months Ended September 30, 2017
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
809
|
|
|
6,939
|
|
|
$
|
0.12
|
|
Dilutive effect of common equivalent shares
|
|
—
|
|
|
102
|
|
|
(0.01
|
)
|
Dilutive
|
|
$
|
809
|
|
|
7,041
|
|
|
$
|
0.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands except per share amounts)
|
|
Net Income
|
|
Weighted Average
Shares Outstanding
|
|
Per Share Amount
|
Nine Months Ended September 30, 2016
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
5,476
|
|
|
6,813
|
|
|
$
|
0.80
|
|
Dilutive effect of common equivalent shares
|
|
—
|
|
|
200
|
|
|
(0.02
|
)
|
Dilutive
|
|
$
|
5,476
|
|
|
7,013
|
|
|
$
|
0.78
|
|
Potentially dilutive shares excluded from the calculations of net income (loss) per diluted share due to their anti-dilutive effect were as follows:
575,000
shares in the
three months ended September 30, 2017
;
411,000
shares in the
nine months ended September 30, 2017
;
zero
shares in the
three months ended September 30, 2016
; and
132,000 shares in the
nine months ended September 30, 2016
.
11
. OTHER
COMPREHENSIVE INCOME (LOSS)
:
Reclassification adjustments are made to avoid double counting for items included in comprehensive income that are also recorded as part of net income (loss). Reclassifications to earnings related to cash flow hedging instruments are discussed in Note
3. Other comprehensive income (loss) consists of the following:
|
|
Three Months Ended September 30, 2017
|
|
|
Three Months Ended September 30, 2016
|
(In thousands)
|
|
|
Before Tax
|
|
|
|
Tax Effect
|
|
|
|
Net of Tax
Amount
|
|
|
|
Before Tax
|
|
|
|
Tax Effect
|
|
|
|
Net of Tax
Amount
|
|
Foreign currency translation adjustments
|
|
$
|
157
|
|
|
$
|
(35
|
)
|
|
$
|
122
|
|
|
$
|
(116
|
)
|
|
$
|
—
|
|
|
$
|
(116
|
)
|
Net changes related to available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized losses
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(36
|
)
|
|
|
—
|
|
|
|
(36
|
)
|
Reclassification adjustments
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total net changes related to available-for-sale securities
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(36
|
)
|
|
|
—
|
|
|
|
(36
|
)
|
Other comprehensive income (loss)
|
|
$
|
157
|
|
|
$
|
(35
|
)
|
|
$
|
122
|
|
|
$
|
(152
|
)
|
|
$
|
—
|
|
|
$
|
(152
|
)
|
|
|
Nine Months Ended September 30, 2017
|
|
|
Nine Months Ended September 30, 2016
|
(In thousands)
|
|
|
Before Tax
|
|
|
|
Tax Effect
|
|
|
|
Net of Tax
Amount
|
|
|
|
Before Tax
|
|
|
|
Tax Effect
|
|
|
|
Net of Tax
Amount
|
|
Foreign currency translation adjustments
|
|
$
|
587
|
|
|
$
|
(173
|
)
|
|
$
|
414
|
|
|
$
|
78
|
|
|
$
|
—
|
|
|
$
|
78
|
|
Net changes related to available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains
|
|
|
31
|
|
|
|
(11
|
)
|
|
|
20
|
|
|
|
32
|
|
|
|
—
|
|
|
|
32
|
|
Reclassification adjustments
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total net changes related to available-for-sale securities
|
|
|
31
|
|
|
|
(11
|
)
|
|
|
20
|
|
|
|
32
|
|
|
|
—
|
|
|
|
32
|
|
Net changes related to foreign exchange forward contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
53
|
|
|
|
—
|
|
|
|
53
|
|
Reclassification adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
27
|
|
|
|
—
|
|
|
|
27
|
|
Research and development expenses
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
6
|
|
|
|
—
|
|
|
|
6
|
|
Selling, general and administrative expenses
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3
|
|
|
|
—
|
|
|
|
3
|
|
Total net change related to foreign exchange forward contracts
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
89
|
|
|
|
—
|
|
|
|
89
|
|
Other comprehensive income
|
|
$
|
618
|
|
|
$
|
(184
|
)
|
|
$
|
434
|
|
|
$
|
199
|
|
|
$
|
—
|
|
|
$
|
199
|
|
At
September 30, 2017
and
September 30, 2016
, components of accumulated other comprehensive loss were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Foreign
Currency
Translation
Adjustments
|
|
Available- for-Sale
Securities
|
|
Foreign
Exchange
Forward
Contracts
|
|
Accumulated
Other
Comprehensive
Loss
|
Balances at
December 31, 2016
|
|
$
|
(1,928
|
)
|
|
$
|
(12
|
)
|
|
$
|
—
|
|
|
$
|
(1,940
|
)
|
Other comprehensive income before reclassifications
|
|
414
|
|
|
20
|
|
|
—
|
|
|
434
|
|
Amounts reclassified from accumulated other comprehensive loss
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total change for the period
|
|
414
|
|
|
20
|
|
|
—
|
|
|
434
|
|
Balances at
September 30, 2017
|
|
$
|
(1,514
|
)
|
|
$
|
8
|
|
|
$
|
—
|
|
|
$
|
(1,506
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Foreign
Currency
Translation
Adjustments
|
|
Available- for-Sale
Securities
|
|
Foreign
Exchange
Forward
Contracts
|
|
Accumulated
Other
Comprehensive
Loss
|
Balances at
December 31, 2015
|
|
$
|
(1,545
|
)
|
|
$
|
(17
|
)
|
|
$
|
(147
|
)
|
|
$
|
(1,709
|
)
|
Other comprehensive income before reclassifications
|
|
78
|
|
|
32
|
|
|
53
|
|
|
163
|
|
Amounts reclassified from accumulated other comprehensive loss
|
|
—
|
|
|
—
|
|
|
36
|
|
|
36
|
|
Total change for the period
|
|
78
|
|
|
32
|
|
|
89
|
|
|
199
|
|
Balances at
September 30, 2016
|
|
$
|
(1,467
|
)
|
|
$
|
15
|
|
|
$
|
(58
|
)
|
|
$
|
(1,510
|
)
|
12
. INCOME TAXES:
We recorded an income tax benefit of $116,000 in the
three months ended September 30, 2017
, compared to income tax expense of $21,000 in the
three months ended September 30, 2016
. We recorded income tax expense of $
10,000
in the
nine months ended September 30, 2017
, compared to income tax expense of
$
108,000
in the
nine months ended September 30, 2016
. During the fourth quarter of
2016
, we substantially reduced the valuation allowances recorded against our U.S. and Singapore deferred tax assets, primarily due to significant improvement in our operating results and financial outlook. Our income tax expense in the
nine months ended September 30, 2017
, primarily reflects
a
25.5
% effective
income tax rate and excess tax benefits from employee share-based payments. Our income tax benefit in the three months ended September 30, 2017 reflects the impact of a decline in our effective income tax rate due to a reduction in our anticipated level of profitability for 2017. Income tax expense in the three and nine months ended September 30, 2016 included U.S. federal alternative minimum taxes, minimal state income tax expense and foreign income tax expense incurred by our subsidiaries in the United Kingdom and China.
Effective January 1, 2017, we adopted Accounting Standards Update No.
2016
-
09
,
Improvements to Employee Share-Based Payment Accounting,
which requires recognition of excess tax benefits or tax deficiencies from employee share-based payments in income tax expense or benefit as a discrete item in the reporting period in which they occur. In the three months ended September 30, 2017, the recognized excess tax benefits or tax deficiencies from employee share-based payments were inconsequential. In the
nine months ended September 30, 2017
, we recognized $207,000 of excess tax benefits from employee share-based payments.
We have significant deferred tax assets as a result of temporary differences between taxable income on our tax returns and U.S. GAAP income, research and development tax credit carry forwards and federal, state and foreign net operating loss carry forwards. A deferred tax asset generally represents future tax benefits to be received when temporary differences previously reported in our consolidated financial statements become deductible for income tax purposes, when net operating loss carry forwards are applied against future taxable income, or when tax credit carry forwards are utilized on our tax returns. We assess the realizability of our deferred tax assets and the need for a valuation allowance based on the guidance provided in current financial accounting standards.
Significant judgment is required in determining the realizability of our deferred tax assets. The assessment of whether valuation allowances are required considers, among other matters, the nature, frequency and severity of any current and cumulative losses, forecasts of future profitability, the duration of statutory carry forward periods, our experience with loss carry forwards not expiring unused and tax planning alternatives. In analyzing the need for valuation allowances, we first considered our history of cumulative operating results for income tax purposes over the past three years in each of the tax jurisdictions where we operate, our financial performance in recent quarters, statutory carry forward periods and tax planning alternatives. Finally, we considered both our near-term and long-term financial outlook. After considering all available evidence both positive and negative, we concluded that recognition of valuation allowances for substantially all of our U.S. and Singapore deferred tax assets was not required at September 30, 2017.
13
. SHARE REPURCHASE:
Our Board of Directors has authorized a $3.0 million share repurchase program. The common stock may be acquired from time to time in open market transactions, block purchases and other transactions complying with the Securities and Exchange Commission’s Rule
10
b-
18
. The share repurchase program will terminate on September 30, 2018. As of September 30, 2017, no shares have been repurchased under this program.
14
. CONTINGENCIES:
We are periodically a defendant in miscellaneous claims and disputes in the ordinary course of business. While the outcome of these matters cannot be predicted with certainty, management presently believes the disposition of these matters will not have a material effect on our financial position, results of operations or cash flows.
In the normal course of business to facilitate sales of our products and services, we at times indemnify other parties, including customers, with respect to certain matters. In these instances, we have agreed to hold the other parties harmless against losses arising out of intellectual property infringement or other types of claims. These agreements may limit the time within which an indemnification claim can be made, and almost always limit the amount of the claim. It is not possible to determine the maximum potential liability under these indemnification agreements due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each particular agreement. Historically, payments made, if any, under these agreements have not had a material impact on our operating results, financial position or cash flows.
15
.
ADOPTION OF ACCOUNTING STANDARDS UPDATE NO.
2016
-
09
,
IMPROVEMENTS TO EMPLOYEE SHARE-BASED PAYMENT ACCOUNTING:
O
n January 1, 2017, we adopted ASU No.
2016
-
09
,
Improvements to Employee Share-Based Payment Accounting
(ASU No.
2016
-
09
)
.
The guidance impacted the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification in the consolidated statement of cash flows.
At January 1, 2017, we had excess tax benefits from employee share-based payments that were not recognized because current taxes payable had not been reduced. Under the new guidance, we are required to recognize the excess tax benefits regardless of whether or not they reduce income taxes payable in the current period. The new guidance also requires all excess tax benefits and tax deficiencies to be recognized as income tax expense or benefit in our statement of operations. Prior to our adoption of ASU No.
2016
-
09
, stock compensation expense was based on the number of awards that were expected to vest in the future. Under the new guidance, we are allowed to account for the impact of stock option forfeitures on stock compensation expense when the forfeitures occur.
Recognition of the deferred tax assets for previously unrecognized excess tax benefits and the impact of additional stock compensation expense resulting from the change in the accounting for stock option forfeitures were required to be applied using a modified retrospective approach. At January 1, 2017, we recorded a $278,000 credit to retained earnings and a corresponding debit to deferred tax assets for previously unrecognized excess tax benefits. We also recorded a $23,000 credit to common stock, a $16,000 debit to retained earnings and a $7,000 debit to deferred tax assets for additional stock compensation expense related to the change in accounting for stock option forfeitures.
Our income tax provision in the nine months ended September 30, 2017, includes a $207,000 excess tax benefit from employee share-based payments. The impact of the change in accounting for stock option forfeitures on stock compensation expense in the nine months ended September 30, 2017 was inconsequential.
ASU
2016
-
09
includes an amendment specifying that excess tax benefits are to be classified as an operating activity in the statement of cash flows on either a prospective or retrospective basis. This amendment had no impact on our consolidated statements of cash flows for any period presented because excess tax benefits have not been used to reduce current tax payments.
ASU
2016
-
09
also includes an amendment specifying that payments of employee withholding taxes resulting from stock option exercises, by withholding shares acquired by an option holder, are to be classified as a financing activity in the consolidated statements of cash flows on a retrospective basis. This amendment had no impact on our consolidated statements of cash flows for any period presented because no shares were withheld for payment of employee taxes.
16. RECENT ACCOUNTING DEVELOPMENTS:
In January 2017, the Financial Accounting Standards Board (FASB) issued guidance on simplifying the test for goodwill impairment (ASU No. 2017-04,
Simplifying the Test for Goodwill Impairment)
. Under the new standard, goodwill impairment would be measured as the amount by which a reporting unit's carrying value exceeds its fair value, but not in an amount in excess of the carrying value of goodwill. The new guidance eliminates the requirement to determine goodwill impairment by calculating the implied fair value of goodwill by hypothetically assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. The new guidance is to be applied prospectively to impairment tests beginning January 1, 2020, with early adoption permitted. We are currently evaluating when we will adopt the new guidance.
In May 2014, the FASB issued guidance on the recognition of revenue from contracts with customers (ASU No.
2014
-
09
,
Revenue from Contracts with Customers
). Revenue recognition will 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 requires disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The guidance permits
two
methods of adoption: retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying the guidance recognized on the date of adoption. The FASB has delayed the effective date of the standard by
one
year to January 1, 2018, with early adoption permitted as of the original effective date of January 1, 2017. We have performed a review of the requirements of the new guidance and have identified which of our revenue streams will be within the scope of ASU 2014-09. We have applied the five-step model of the new standard to a selection of contracts within each of our revenue streams, and have compared the results to our current accounting practices. Based on this analysis, we do not currently expect a material impact on our consolidated financial statements. We are continuing to evaluate the impact of the new guidance on our consolidated financial statements, and we anticipate that we will expand our consolidated financial statement disclosures in order to comply with the new ASU. As part of this, we are assessing changes that might be necessary to information technology systems, processes, and internal controls to capture new data and address changes in financial reporting. We now anticipate that we will adopt the new standard retrospectively, with recognition of a cumulative effect adjustment on January 1, 2018, the date of adoption.
In February 2016, the FASB issued new lease accounting guidance (ASU No.
2016
-
02
,
Leases
)
.
Under the new guidance, at the commencement date, lessees will be required (a) to recognize a lease liability, which is a lessee's obligation to make lease payments arising from a lease, measured on a discounted basis, and (b) to record a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. The new guidance is not applicable for leases with a term of
12
months or less. Lessor accounting is largely unchanged. U.S. public companies are required to apply the amendments in ASU
2016
-
02
for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. We are currently evaluating the impact of the new guidance on our consolidated financial statements.
In July 2015, the FASB issued guidance that simplified the measurement of inventory (ASU No.
2015
-
11
,
Simplifying the Measurement of Inventory
)
.
The guidance requires an entity to measure inventory at the lower of cost or net realizable value, which consists of estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The new guidance eliminated unnecessary complexity that existed under previous "lower of cost or market" guidance. The updated guidance was applied prospectively beginning January 1, 2017. Our implementation of this standard did not have a material impact on our consolidated financial statements.