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Section 1: 10-Q (10-Q)

20171231 10Q Q2_Taxonomy2017



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549



FORM 10-Q



Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended December 31, 2017.



Commission file number:  0-20206



PERCEPTRON, INC.

(Exact Name of Registrant as Specified in Its Charter)





 

Michigan

(State or Other Jurisdiction of

Incorporation or Organization)

38-2381442

(I.R.S. Employer

Identification No.)

47827 Halyard Drive, Plymouth, Michigan

(Address of Principal Executive Offices)

48170-2461

(Zip Code)



(734) 414-6100

(Registrant’s Telephone Number, Including Area Code)



Not Applicable

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)



Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.



 

Yes 

No



Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T(§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).



 



 

Yes 

No



Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):



 



 



 

Large accelerated filer

Accelerated filer

Non-accelerated filer

(Do not check if a smaller reporting company)

Smaller reporting company

 

Emerging growth company 

 



If an emerging growth company, indicated by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.



Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).



 



 

Yes

No 



The number of shares outstanding of each of the issuer’s classes of common stock as of February 2, 2018, was:





 

 

Common Stock, $0.01 par value

 

9,552,065

Class

 

Number of shares





1


 



PERCEPTRON, INC. AND SUBSIDIARIES

INDEX TO FORM 10-Q

For the Quarter Ended December 31, 2017







 



 



Page
Number

COVER

1

INDEX

2

PART I.  FINANCIAL INFORMATION

 

Item 1.    Financial Statements

3

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

20

Item 3.  Quantitative and Qualitative Disclosures about Market Risk

29

Item 4.  Controls and Procedures

29

PART II.  OTHER INFORMATION

 

Item 1A.  Risk Factors

30

Item 2.     Unregistered Sales of Equity Securities and Use of Proceeds

30

Item 6.   Exhibits

31

SIGNATURES

32



2


 

+

  



 

 

 

 

 

 



 

 

 

 

 

 

PERCEPTRON, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS



 

 

 

 

 



 

December 31,

 

June 30,

(In Thousands, Except Per Share Amount)

 

2017

 

2017



 

(unaudited)

 

 

 

ASSETS

 

 

 

 

 

 



 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

Cash and cash equivalents

 

$

6,346 

 

$

3,704 

Short-term investments

 

 

2,639 

 

 

1,572 

Receivables:

 

 

 

 

 

 

Billed receivables, net of allowance for doubtful accounts

 

 

27,582 

 

 

31,776 

of $240 and $253, respectively

 

 

 

 

 

 

Other receivables

 

 

327 

 

 

167 

Inventories, net of reserves of $1,957 and $1,918, respectively

 

 

15,320 

 

 

11,466 

Short-term deferred income tax asset

 

 

 -

 

 

438 

Other current assets

 

 

1,736 

 

 

1,515 

Total current assets

 

 

53,950 

 

 

50,638 



 

 

 

 

 

 

Property and Equipment, Net

 

 

7,365 

 

 

7,377 

Goodwill

 

 

8,250 

 

 

7,793 

Intangible Assets, Net

 

 

3,688 

 

 

4,073 

Long-Term Investments

 

 

725 

 

 

725 

Long-Term Deferred Income Tax Asset

 

 

919 

 

 



 

 

 

 

 

 

Total Assets

 

$

74,897 

 

$

70,615 



 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS' EQUITY

 

 

 

 

 

 



 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

Line of credit and short-term notes payable

 

$

1,821 

 

$

1,705 

Accounts payable

 

 

9,209 

 

 

8,280 

Accrued liabilities and expenses

 

 

3,860 

 

 

3,952 

Accrued compensation

 

 

2,111 

 

 

2,600 

Current portion of taxes payable

 

 

657 

 

 

791 

Short-term deferred income tax liability

 

 

 -

 

 

752 

Income taxes payable

 

 

394 

 

 

477 

Reserves for restructuring and other charges

 

 

1,244 

 

 

1,113 

Deferred revenue

 

 

8,679 

 

 

8,485 

Total current liabilities

 

 

27,975 

 

 

28,155 



 

 

 

 

 

 

Long-Term Taxes Payable

 

 

719 

 

 

969 

Long-Term Deferred Income Tax Liability

 

 

1,709 

 

 

871 

Other Long-Term Liabilities

 

 

680 

 

 

785 



 

 

 

 

 

 

Total Liabilities

 

$

31,083 

 

$

30,780 



 

 

 

 

 

 

Shareholders' Equity

 

 

 

 

 

 

Preferred stock, no par value, authorized 1,000 shares, issued none

 

 

 -

 

 

 -

Common stock, $0.01 par value, authorized 19,000 shares, issued

 

 

 

 

 

 

and outstanding 9,500 and 9,438, respectively

 

 

95 

 

 

94 

Accumulated other comprehensive loss

 

 

(1,315)

 

 

(2,721)

Additional paid-in capital

 

 

47,336 

 

 

46,688 

Retained deficit

 

 

(2,302)

 

 

(4,226)



 

 

 

 

 

 

Total Shareholders' Equity

 

$

43,814 

 

$

39,835 



 

 

 

 

 

 

Total Liabilities and Shareholders' Equity

 

$

74,897 

 

$

70,615 



 

 

 

 

 

 

The notes to the consolidated financial statements are an integral part of these statements.

 

3


 





 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

PERCEPTRON, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)



 

 

 

 

 

 



 

Three Months Ended

 

Six Months Ended



 

December 31,

 

December 31,

(In Thousands, Except Per Share Amounts)

 

2017

 

2016

 

2017

 

2016



 

 

 

 

 

 

 

 

 

 

 

 

Net Sales

 

$

20,433 

 

$

21,751 

 

$

39,702 

 

$

39,271 

Cost of Sales

 

 

13,026 

 

 

12,307 

 

 

24,645 

 

 

25,253 

Gross Profit

 

 

7,407 

 

 

9,444 

 

 

15,057 

 

 

14,018 



 

 

 

 

 

 

 

 

 

 

 

 

Operating Expenses

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

 

4,497 

 

 

4,469 

 

 

8,921 

 

 

8,756 

Engineering, research and development

 

 

1,797 

 

 

1,657 

 

 

3,530 

 

 

3,267 

Severance, impairment and other charges

 

 

658 

 

 

61 

 

 

606 

 

 

717 

Total operating expenses

 

 

6,952 

 

 

6,187 

 

 

13,057 

 

 

12,740 



 

 

 

 

 

 

 

 

 

 

 

 

Operating Income

 

 

455 

 

 

3,257 

 

 

2,000 

 

 

1,278 



 

 

 

 

 

 

 

 

 

 

 

 

Other Income and (Expenses)

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

 

(42)

 

 

(61)

 

 

(84)

 

 

(118)

Foreign currency loss, net

 

 

(57)

 

 

(393)

 

 

(79)

 

 

(344)

Other income (expenses), net

 

 

(5)

 

 

23 

 

 

25 

 

 

24 

Total other income and (expenses)

 

 

(104)

 

 

(431)

 

 

(138)

 

 

(438)



 

 

 

 

 

 

 

 

 

 

 

 

Income Before Income Taxes

 

 

351 

 

 

2,826 

 

 

1,862 

 

 

840 



 

 

 

 

 

 

 

 

 

 

 

 

Income Tax Benefit (Expense)

 

 

15 

 

 

(302)

 

 

62 

 

 

(671)



 

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

$

366 

 

$

2,524 

 

$

1,924 

 

$

169 



 

 

 

 

 

 

 

 

 

 

 

 

Income Per Common Share

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.04 

 

$

0.27 

 

$

0.20 

 

$

0.02 

Diluted

 

$

0.04 

 

$

0.27 

 

$

0.20 

 

$

0.02 



 

 

 

 

 

 

 

 

 

 

 

 

Weighted Average Common Shares Outstanding

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

9,491 

 

 

9,381 

 

 

9,455 

 

 

9,376 

Dilutive effect of stock options

 

 

106 

 

 

35 

 

 

72 

 

 

33 

Diluted

 

 

9,597 

 

 

9,416 

 

 

9,527 

 

 

9,409 



 

 

 

 

 

 

 

 

 

 

 

 

The notes to the consolidated financial statements are an integral part of these statements.







4


 









 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

PERCEPTRON, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)



 

 

 

 

 

 

 

 

 

 

 

 



 

Three Months Ended

 

Six Months Ended



 

December 31,

 

December 31,

(In Thousands)

 

2017

 

2016

 

2017

 

2016



 

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

$

366 

 

$

2,524 

 

$

1,924 

 

$

169 

Other Comprehensive Income (Loss):

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

611 

 

 

(1,340)

 

 

1,406 

 

 

(1,167)



 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive Income (Loss)

 

$

977 

 

$

1,184 

 

$

3,330 

 

$

(998)



 

 

 

 

 

 

 

 

 

 

 

 

The notes to the consolidated financial statements are an integral part of these statements.

 

 

 

 

 

 



5


 







































 

 

 

 

 

 



 

 

 

 

 

 

PERCEPTRON, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOW

(UNAUDITED)



 

Six Months Ended



 

December 31,

(In Thousands)

 

2017

 

2016



 

 

 

 

 

 

Cash Flows from Operating Activities

 

 

 

 

 

 

Net income

 

$

1,924 

 

$

169 

Adjustments to reconcile net income to net cash provided by

 

 

 

 

 

 

(used for) operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

 

1,139 

 

 

1,142 

Stock compensation expense

 

 

653 

 

 

323 

Asset impairment and related inventory write-down

 

 

(56)

 

 

542 

Deferred income taxes

 

 

(449)

 

 

323 

Loss (Gain) on disposal of assets

 

 

 

 

(2)

Allowance for doubtful accounts

 

 

(13)

 

 

10 

Changes in assets and liabilities

 

 

 

 

 

 

Receivables

 

 

4,963 

 

 

(4,534)

Inventories

 

 

(3,532)

 

 

1,087 

Accounts payable

 

 

689 

 

 

(502)

Accrued liabilities and expenses

 

 

(735)

 

 

(7)

Deferred revenue

 

 

42 

 

 

(871)

Other assets and liabilities

 

 

(660)

 

 

(701)

Net cash provided by (used for) operating activities

 

 

3,969 

 

 

(3,021)



 

 

 

 

 

 

Cash Flows from Investing Activities

 

 

 

 

 

 

Purchases of short-term investments

 

 

(2,788)

 

 

(1,425)

Sales of short-term investments

 

 

1,802 

 

 

2,353 

Capital expenditures

 

 

(501)

 

 

(168)

Net cash (used for) provided by investing activities

 

 

(1,487)

 

 

760 



 

 

 

 

 

 

Cash Flows from Financing Activities

 

 

 

 

 

 

(Payments to) proceeds from line of credit and short-term borrowings, net

 

 

(1)

 

 

1,347 

Proceeds from stock plans

 

 

15 

 

 

56 

Shares surrendered upon restricted stock units and awards to cover taxes

 

 

(19)

 

 

 -

Net cash (used for) provided by financing activities

 

 

(5)

 

 

1,403 



 

 

 

 

 

 

Effect of Exchange Rate Changes on Cash and Cash Equivalents

 

 

165 

 

 

(275)



 

 

 

 

 

 

Net Increase (Decrease) in Cash and Cash Equivalents

 

 

2,642 

 

 

(1,133)

Cash and Cash Equivalents, July 1

 

 

3,704 

 

 

6,787 

Cash and Cash Equivalents, December 31

 

$

6,346 

 

$

5,654 



 

 

 

 

 

 

Supplemental Disclosure of Cash Flow Information

 

 

 

 

 

 

Cash paid during the period for interest

 

$

100 

 

$

191 

Cash paid during the period for income taxes

 

$

422 

 

$

42 



 

 

 

 

 

 



 

 

 

 

 

 



 

 

 

 

 

 

The notes to the consolidated financial statements are an integral part of these statements.

















6


 

PERCEPTRON, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1.Accounting Policies



Perceptron, Inc. (“Perceptron” “we”, “us” or “our”) develops, produces and sells a comprehensive range of automated industrial metrology products and solutions to manufacturers for dimensional gauging, dimensional inspection and 3D scanning.  Our products provide solutions for manufacturing process control as well as sensor and software technologies for non-contact measurement, scanning and inspection applications. We also offer value added services such as training and customer support.  



Basis of Presentation and Principles of Consolidation

The accompanying unaudited Consolidated Financial Statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) for interim financial information and within the rules and regulations of the Securities and Exchange Commission (“SEC”).  Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements.  Our Consolidated Financial Statements include the accounts of Perceptron and our wholly-owned subsidiaries.  All significant intercompany accounts and transactions have been eliminated in consolidation.  In our opinion, these statements include all normal recurring adjustments necessary for a fair presentation of the financial statements for the periods presented.  The results of operations for any interim period are not necessarily indicative of the results of operations for a full fiscal year.  The accompanying unaudited Consolidated Financial Statements should be read in conjunction with our audited Consolidated Financial Statements in our 2017 Annual Report on Form 10-K for the fiscal year ended June 30, 2017.



Use of Estimates

Management is required to make certain estimates and assumptions under U.S. GAAP during the preparation of these Consolidated Financial Statements.  These estimates and assumptions may affect the reported amounts of assets and liabilities as well as the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.



Reclassification

Certain prior period amounts have been reclassified in the Consolidated Statements of Cash Flow to conform to the current period presentation.



2.New Accounting Pronouncements    



In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09), which supersedes nearly all existing revenue recognition guidance under U.S. GAAP.  The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services.  ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP.  In March 2016, the FASB issued the final guidance to clarify the principal versus agent guidance (i.e., whether an entity should report revenue gross or net).  In April 2016, the FASB issued final guidance to clarify identifying performance obligation and the licensing implementation guidance.  In May 2016, FASB updated the guidance in ASU No. 2014-09, which updated implementation of certain narrow topics within ASU 2014-09.  Finally, in December 2016, the FASB issued several technical corrections and improvements, which clarify the previously issued standards and corrected unintended application of previous guidance.  These standards (collectively “ASC 606”) will be effective for annual periods beginning after December 15, 2017 (as amended in August 2015, by ASU 2015-14, Deferral of the Effective Date), and interim periods therein, using either of the following transition methods:  (i) a full retrospective approach reflecting the applications of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures).  We have commenced a detailed analysis of our contracts under ASC 606.  Based on our preliminary analyses, we have decided to utilize the cumulative effect method. Furthermore, we expect changes in timing of revenue recognition related to several of our performance obligations; in general, we believe we will be recognizing revenue more quickly than under current revenue recognition guidance.  Finally, we believe that our Consolidated Balance Sheet will be impacted as we identify Contract Assets and Contract Liabilities.  We do not expect a change to the level of disaggregation for our disclosures, although we do expect to provide additional detail about the timing of revenue recognition for several of our performance obligations and about our Contract Assets and Contract Liabilities.



In January 2016, the FASB issued Accounting Standards Update No. 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (ASU 2016-01), which amends certain aspects of recognition, measurement, presentation and disclosure of financial instruments.  ASC 2016-01 is effective for Perceptron on July 1, 2018 and is not expected to have a significant impact on our consolidated financial statements or disclosures.



7


 

In February 2016, the FASB issued Accounting Standards Update No. 2016-02 Leases (ASU 2016-2), which establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months.  ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted.  A modified retrospective transition approach is required for lessees with capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements.   In January 2018, the FASB issued Accounting Standards Update No. 2018-01, Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842, which permits an entity to elect an optional transition practical expedient to not evaluate land easements under Topic 842We are currently evaluating the impact of the adoption of ASU 2016-02 on our consolidated financial statements.



In June 2016, the FASB issued Accounting Standards Update No. 2016-13, Financial Instruments – Credit Losses (Topic 326) (ASU 2016-13), which requires the measurement of all expected credit losses for financial assets held at the reporting date to be based on historical experience, current conditions as well as reasonable and supportable forecasts.  ASU 2016-13 is effective for fiscal years beginning after December 15, 2019 including interim periods within those fiscal years, with early adoption permitted.  We are currently evaluating the impact of the adoption of ASU 2016-13 on our consolidated financial statements.



In August 2016, the FASB issued Accounting Standards Update No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (ASU 2016-15), which will make eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows.  ASU 2016-15 is effective for Perceptron beginning on July 1, 2018 and requires us to utilize a retrospective adoption unless it is impracticable for us to apply, in which case, we would be required to apply the amendment prospectively as of the earliest date practicable.  We are currently evaluating the impact of the adoption of ASU 2016-15 on our consolidated statement of cash flows.



In October 2016, the FASB issued Accounting Standards Update No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory (ASU 2016-16), which requires that an entity should recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs.  ASU 2016-16 is effective for annual reporting periods beginning after December 15, 2017, with early adoption permitted as of the beginning of an annual reporting period for which financial statements (interim or annual) have not been issued or made available for issuance.  We are currently evaluating the impact of the adoption of ASU 2016-16 on our consolidated financial statements.



In November 2016, the FASB issued Accounting Standards Update No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (ASU 2016-18), which requires a company to present their Statement of Cash Flows including amounts generally described as restricted cash or restricted cash equivalents with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows.  ASU 2016-18 is effective for annual reporting periods beginning after December 15, 2017, with early adoption permitted.  We are currently evaluating the impact of the adoption of ASU 2016-18 on our consolidated statement of cash flows.



In January 2017, the FASB issued Accounting Standards Update No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business (ASU 2017-01), which clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses.  ASU 2017-01 is effective for Perceptron on July 1, 2018 and is not expected to have a significant impact on our consolidated financial statements or disclosures.



In January 2017, the FASB issued Accounting Standards Update No. 2017-04, Intangibles—Goodwill and Other (Topic 350) (ASU 2017-04), which simplifies the Test for Goodwill Impairment. ASU 2017-04 is effective for annual reporting periods beginning after December 15, 2019 with early adoption permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We are currently evaluating the impact of the adoption of ASU 2017-04 on our consolidated financial statements and disclosures.



In February 2017, the FASB issued Accounting Standards Update No. 2017-05, Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets (ASU 2017-05), which clarifies the scope of Subtopic 610-20 and adds guidance for partial sales of nonfinancial assets. Subtopic 610-20, which was issued in May 2014 as a part of Accounting Standards Update No. 2014-09, provides guidance for recognizing gains and losses from the transfer of nonfinancial assets in contracts with noncustomers.  ASU 2017-05 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period with early application permitted only as of annual reporting periods beginning after December 15, 2016. We do not expect ASU 2017-05 to have a significant impact on our consolidated financial statements or disclosures.







8


 

In May 2017, the FASB issued Accounting Standards Update No. 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting (ASU 2017-09), which provide clarity and reduce both (1) diversity in practice and (2) cost and complexity when applying the guidance in Topic 718, Compensation—Stock Compensation, to a change to the terms or conditions of a share-based payment award. ASU 2017-09 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. We do not expect ASU 2017-09 to have a significant impact on our consolidated financial statements or disclosures.



Recently Adopted Accounting Pronouncements

In July 2015, the FASB issued Accounting Standards Update No. 2015-11, Simplifying the Measurement of Inventory (ASU 2015-11), which requires an entity to measure inventory at the lower of cost and net realizable value.  Net realizable value is defined as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.  We adopted this standard on July 1, 2017. Adoption of this guidance did not have a material impact on our consolidated financial statements.



In November 2015, the FASB issued Accounting Standards Update No. 2015-17, Balance Sheet Classification of Deferred Taxes (ASU 2015-17), which requires all deferred tax assets and liabilities, including related valuation allowances, be classified as non-current on our consolidated balance sheets.  We adopted this standard on July 1, 2017, and as a result, reclassified $438,000 of previously ‘Short-term deferred income tax assets’ to ‘Long-Term Deferred Income Tax Asset’ and reclassified $752,000 of previously ‘Short-term deferred income tax liability’ to ‘Long-Term Deferred Income Tax Liability’ on our consolidated balance sheet.  Our Consolidated Balance Sheet as of June 30, 2017 was not retrospectively adjusted.



In March 2016, the FASB issued Accounting Standards Update No. 2016-09, Compensation - Stock Compensation (Topic 718) (ASU 2016-09), which simplifies several aspects of accounting for share-based payment award transactions, including income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. Certain of these changes are required to be applied retrospectively, while other changes are required to be applied prospectively. We adopted this standard on July 1, 2017. ASU 2016-09 requires prospective recognition of excess tax benefits and deficiencies in the income statement.  Due to the fact that our U.S. Federal Deferred Taxes have a full valuation allowance, there was no net impact to our consolidated financial statements related to our adoption of ASU 2016-09.  We elected to continue to estimate forfeiture rates at the time of grant, instead of accounting for them as they occur.  Finally, as excess tax benefits are no longer recognized in additional paid-in capital, we excluded the excess tax benefits from the assumed proceeds available to repurchase shares in the computation of diluted earnings per share for the six months ended December 31, 2017.





3.Goodwill



Goodwill represents the excess purchase price over the fair value of the net amounts assigned to assets acquired and liabilities assumed in connection with our acquisitions.  Under ASC Topic 805 Business Combinations”, we are required to test goodwill for impairment annually or more frequently, whenever events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit with goodwill below its carrying amount.  Application of the goodwill impairment test requires judgment, including assignment of assets and liabilities to reporting units, assignment of goodwill to reporting units and determination of the fair value of each reporting unit.



The qualitative events or circumstances that could affect the fair value of a reporting unit could include economic conditions; industry and market considerations, including competition; increases in raw materials, labor, or other costs; overall financial performance such as negative or declining cash flows; relevant entity-specific events such as changes in management, key personnel, strategy, or customers; sale or disposition of a significant portion of a reporting unit and regulatory or political developments.  Companies have the option under ASC Topic 350 “Intangibles – Goodwill and Other” to evaluate goodwill based upon these qualitative factors, and if it is more likely than not that the fair value of the reporting unit is greater than its carrying amount, then no further goodwill impairment tests are necessary.  If the qualitative review indicates it is more likely than not that the fair value of the reporting unit is less than its carrying amount, or if we choose not to perform a qualitative assessment, a two-step quantitative impairment test is performed to identify potential goodwill impairment and measure the amount of goodwill impairment loss to be recognized, if any.  In fiscal year 2017, we elected the two-step quantitative goodwill impairment test.



Step 1 is to identify potential impairment by comparing fair value of a reporting unit with its carrying value, including goodwill.  If the fair value is lower than the carrying value, this is an indication of goodwill impairment and Step 2 must be performed.  Under Step 2, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of that goodwill.  This analysis requires significant judgment in developing assumptions, such as estimating future cash flows, which is dependent on internal forecasts, estimating the long-term rate of growth for our business, estimating the useful life over which cash flows will occur and calculating our weighted average cost of capital.  The estimates used to calculate the fair value of a reporting unit change from year to year based on operating results, market conditions, foreign currency fluctuations and other factors.  Changes in these estimates and assumptions could materially affect the determination of fair value and could result in goodwill impairment for a reporting unit, negatively impacting our results of operations for the period and financial position.

9


 

During the fourth quarter of fiscal year 2017, we completed Step 1 of our goodwill impairment testing.  Based on the results of this test, the fair value of our tested reporting unit exceeded our carrying value by 26%.  Furthermore, through December 31, 2017, there are no indicators of impairment; therefore we did not complete a quantitative assessment this quarter.



Goodwill is recorded on the local books of Coord3 and NMS and foreign currency effects will impact the balance of goodwill in future periods. Our goodwill balance was $8,250,000 and $7,793,000 as of December 31, 2017, and June 30, 2017, respectively, with the increase due to the differences in foreign currency rates at December 31, 2017 compared to June 30, 2017.



4.Intangibles



We acquired intangible assets in addition to goodwill in connection with the acquisitions of Coord3 and NMS in the second quarter of fiscal 2015.  These assets are susceptible to shortened estimated useful lives and changes in fair value due to changes in their use, market or economic changes, or other events or circumstances. We evaluate the potential impairment of these intangible assets whenever events or circumstances indicate their carrying value may not be recoverable.  Factors that could trigger an impairment review include historical or projected results that are less than the assumptions used in the original valuation of an intangible asset, a change in our business strategy or our use of an intangible asset or negative economic or industry trends.    



If an event or circumstance indicates that the carrying value of an intangible asset may not be recoverable, we assess the recoverability of the asset by comparing the carrying value of the asset to the sum of the undiscounted future cash flows that the asset is expected to generate over its remaining economic life. If the carrying value exceeds the sum of the undiscounted future cash flows, we compare the fair value of the intangible asset to the carrying value and record an impairment loss for the difference.  We generally estimate the fair value of our intangible assets using the income approach based on a discounted cash flow model. The income approach requires the use of many assumptions and estimates including future revenues and expenses, discount factors, income tax rates, the identification of groups of assets with highly independent cash flows, and assets’ economic lives. Volatility in the global economy makes these assumptions and estimates more judgmental. Actual future operating results and the remaining economic lives of our intangible assets could differ from those used in assessing the recoverability of these assets and could result in an impairment of intangible assets in future periods.  Through December 31, 2017, there are no indications of potential impairment of these intangible assets.



Our intangible assets are as follows (in thousands):





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

December 31,

 

 

 

 

 

December 31,

 

 

June 30,

 

 

 

 

 

June 30,



 

 

2017

 

 

 

 

 

2017

 

 

2017

 

 

 

 

 

2017



 

 

Gross

 

 

 

 

 

Net

 

 

Gross

 

 

 

 

 

Net



 

 

Carrying

 

 

Accumulated

 

 

Carrying

 

 

Carrying

 

 

Accumulated

 

 

Carrying



 

 

Amount

 

 

Amortization

 

 

Amount

 

 

Amount

 

 

Amortization

 

 

Amount

Customer/Distributor Relationships

 

$

3,425 

 

$

(1,942)

 

$

1,483 

 

$

3,263 

 

$

(1,524)

 

$

1,739 

Trade Name

 

 

2,659 

 

 

(753)

 

 

1,906 

 

 

2,533 

 

 

(591)

 

 

1,942 

Software

 

 

677 

 

 

(385)

 

 

292 

 

 

677 

 

 

(312)

 

 

365 

Other

 

 

127 

 

 

(120)

 

 

 

 

121 

 

 

(94)

 

 

27 

Total

 

$

6,888 

 

$

(3,200)

 

$

3,688 

 

$

6,594 

 

$

(2,521)

 

$

4,073 





Amortization expense was $280,000 and $286,000 for the three month periods ended December 31, 2017 and 2016, respectively.  Amortization expense was $562,000 and $542,000 for the six month periods ended December 31, 2017 and 2016, respectively.  The change in the gross carrying value of $294,000 is due to changes in foreign currency rates from June 30, 2017 to December 31, 2017.



The estimated amortization of the remaining intangible assets by year is as follows (in thousands):







 

 



 

 

Years Ending June 30,

Amount

2018 (excluding the six months ended December 31, 2017)

 

584 

2019

 

1,141 

2020

 

722 

2021

 

266 

2022

 

266 

after 2022

 

709 



$

3,688 









10


 

5.Revenue Recognition



Revenue related to products and services is recognized upon shipment when title and risk of loss has passed to the customer or upon completion of the service, there is persuasive evidence of an arrangement, the sales price is fixed or determinable, collection of the related receivable is reasonably assured and customer acceptance criteria, if any, have been successfully demonstrated.



We also have multiple element arrangements in our Measurement Solutions product line, which may include elements such as, equipment, installation, labor support and/or training.  Each element has value on a stand-alone basis and the delivered elements do not include general rights of return.  Accordingly, each element is considered a separate unit of accounting.  When available, we allocate arrangement consideration to each element in a multiple element arrangement based upon vendor specific objective evidence (“VSOE”) of fair value of the respective elements. When VSOE cannot be established, we attempt to establish the selling price of each element based on relevant third-party evidence.  Our products contain a significant level of proprietary technology, customization or differentiation; therefore, comparable pricing of products with similar functionality cannot be obtained.  In these cases, we utilize our best estimate of selling price (“BESP”).  We determine the BESP for a product or service by considering multiple factors including, but not limited to, pricing practices, internal costs, geographies and gross margin.



For multiple element arrangements, we defer from revenue recognition the greater of the relative fair value of any undelivered elements of the contract or the portion of the sales price of the contract that is not payable until the undelivered elements are completed.  As part of this evaluation, we limit the amount of revenue recognized for delivered elements to the amount that is not contingent on the future delivery of products or services, including a consideration of payment terms that delay payment until those future deliveries are completed. 



Some multiple element arrangements contain installment payment terms with a final payment (“final buy-off”) due upon the completion of all elements in the arrangement or when the customer’s final acceptance is received.  We recognize revenue for each completed element of a contract when it is both earned and realizable.  A provision for final customer acceptance generally does not preclude revenue recognition for the delivered equipment element because we rigorously test equipment prior to shipment to ensure it will function in our customer’s environment.  The final acceptance amount is assigned to specific element(s) identified in the contract, or if not specified in the contract, to the last element or elements to be delivered that represent an amount at least equal to the final payment amount.



Our Measurement Solutions are designed and configured to meet each customer’s specific requirements.  Timing for the delivery of each element in the arrangement is primarily determined by the customer’s requirements and the number of elements ordered.  Delivery of all of the multiple elements in an order will typically occur over a three to 15 month period after the order is received.



We do not have price protection agreements or requirements to buy back inventory.  Our history demonstrates that sales returns have been insignificant.



6.Short-Term and Long-Term Investments



We account for our investments in accordance with ASC 320, “Investments – Debt and Equity Securities”.  Investments with a term to maturity between three months to one year are considered short-term investments and are classified as available-for-sale investments. Investments with a term to maturity beyond one year may be classified as available for sale if we reasonably expect the investment to be realized in cash or sold or consumed during the normal operating cycle of the business.  Investments are classified as held-to-maturity if the term to maturity is greater than one year and we have the intent and ability to hold such investments to maturity. All investments are initially recognized at fair value.  Subsequent measurement for available-for-sale investments is recorded at fair value.  Unrealized gains and losses on available-for-sale investments are recorded in other comprehensive income. Held-to-maturity investments are subsequently measured at amortized cost.  At each balance sheet date, we evaluate all investments for possible other-than-temporary impairment, which involves significant judgment.  In making this judgment, we review factors such as the length of time and extent to which fair value has been below the cost basis, the anticipated recovery period, the financial condition of the issuer, the credit rating of the instrument and our ability and intent to hold the investment for a period of time which may be sufficient for recovery of the cost basis. Any losses determined to be other-than-temporary are charged as an impairment loss and recorded in earnings. If market, industry, and/or investee conditions deteriorate, future impairments may be incurred.



As of December 31, 2017 and June 30, 2017, we held restricted cash in short-term bank guarantees.    The restricted cash provides financial assurance that we will fulfill certain customer obligations in China.  The cash is restricted as to withdrawal or use while the related bank guarantee is outstanding.  Interest is earned on the restricted cash and recorded as interest income.  At December 31, 2017 and June 30, 2017,  we had short-term bank guarantees of $46,000 and $239,000 respectively.





11


 

At December 31, 2017,  we held a long-term investment in preferred stock that is not registered under the Securities Act of 1933, as amended and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements. The preferred stock investment is currently recorded at $725,000 after consideration of impairment charges recorded in fiscal years 2008 and 2009.  We estimated that the fair market value of this investment at December 31, 2017 exceeded $725,000 based on an internal valuation model, which included the use of a discounted cash flow model. The fair market analysis considered the following key inputs:





 

 



(i)

the underlying structure of the security;



(ii)

the present value of the future principal, discounted at rates considered to reflect current market conditions; and



(iii)

the time horizon that the market value of the security could return to its cost and be sold.



Under ASC 820 “Fair Value Measurements and Disclosures (“ASC 820”) such valuation assumptions are defined as Level 3 inputs. 



The following table presents our Short-Term and Long-Term Investments by category at December 31, 2017 and June 30, 2017 (in thousands):



















 

 

 

 

 



 

 

 

 

 



December 31, 2017



Cost

 

Fair Value or
Carrying Value

Short-Term Investments

 

 

 

 

 

Bank Guarantees

$

46 

 

$

46 

Mutual Funds

 

47 

 

 

47 

Time/Fixed Deposits

 

2,546 

 

 

2,546 

Total Short-Term Investments

$

2,639 

 

$

2,639 



 

 

 

 

 

Long-Term Investments

 

 

 

 

 

Preferred Stock

$

3,700 

 

$

725 

Total Long-Term Investments

 

3,700 

 

 

725 



 

 

 

 

 

Total Investments

$

6,339 

 

$

3,364 



 

 

 

 

 



 

 

 

 

 



June  30, 2017



Cost

 

Fair Value or
Carrying Value

Short-Term Investments

 

 

 

 

 

Bank Guarantees

$

239 

 

$

239 

Time/Fixed Deposits

 

1,333 

 

 

1,333 

Total Short-Term Investments

$

1,572 

 

$

1,572 



 

 

 

 

 

Long-Term Investments

 

 

 

Preferred Stock

$

3,700 

 

$

725 

Total Long-Term Investments

$

3,700 

 

$

725 



 

 

 

 

 

Total Investments

$

5,272 

 

$

2,297 





7.Financial Instruments



For a discussion on our fair value measurement policies for Financial Instruments, refer to Note 1 in our Consolidated Financial Statements, “Summary of Significant Accounting Policies – Financial Instruments”, of our Annual Report on Form 10-K for fiscal year ended June 30, 2017.



We have not changed our valuation techniques in measuring the fair value of any financial assets and liabilities during the period.











12


 

The following table presents our investments at December 31, 2017 and June 30, 2017 that are measured and recorded at fair value on a recurring basis consistent with the fair value hierarchy provisions of ASC 820 (in thousands).  The fair value of our short-term investments approximates their cost basis.





 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

Description

December 31, 2017

 

Level 1

 

Level 2

 

Level 3

Mutual Funds

$

47 

 

$

47 

 

$

 -

 

$

 -

Time/Fixed Deposits and Bank Guarantees

 

2,592 

 

 

 -

 

 

2,592 

 

 

 -

Preferred Stock

 

725 

 

 

 -

 

 

 -

 

 

725 

Total

$

3,364 

 

$

47 

 

$

2,592 

 

$

725 



 

 

 

 

 

 

 

 

 

 

 

Description

June 30, 2017

 

Level 1

 

Level 2

 

Level 3

Time/Fixed Deposits and Bank Guarantees

$

1,572 

 

$

 -

 

$

1,572 

 

$

 -

Preferred Stock

 

725 

 

 

 -

 

 

 -

 

 

725 

Total

$

2,297 

 

$

 -

 

$

1,572 

 

$

725 



Fair value estimates are made at a specific point in time based on relevant market information and information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore, cannot be determined with precision. Changes in assumptions could significantly affect these estimates.



8.Inventory



Inventory is stated at the lower of cost or net realizable value using the first-in, first-out (“FIFO”) method.  We provide a reserve for obsolescence to recognize inventory impairment for the effects of engineering change orders, age and use of inventory that affect the value of the inventory.  The reserve for obsolescence creates a new cost basis for the impaired inventory.  When inventory that has previously been impaired is sold or disposed of, the related obsolescence reserve is reduced resulting in the reduced cost basis being reflected in cost of goods sold.  A detailed review of the inventory is performed annually with quarterly updates for known changes that have occurred since the annual review.  Inventory, net of reserves of $1,957,000 and $1,918,000 at December 31, 2017 and June 30, 2017, respectively, is comprised of the following (in thousands):









 

 

 

 

 



 

 

 

 

 



At December 31,

 

At June 30,



2017

 

2017

Component Parts

$

5,055 

 

$

4,445 

Work in Process

 

5,032 

 

 

3,864 

Finished Goods

 

5,233 

 

 

3,157 

Total

$

15,320 

 

$

11,466 





9.Property and Equipment



Our property and equipment consisted of the following as of December 31, 2017 and June 30, 2017 (in thousands):



 

 

 

 

 

 



 

 

 

 

 



At December 31,

 

At June 30,



2017

 

2017

Building and Land

$

7,874 

 

$

7,788 

Machinery and Equipment

 

15,288 

 

 

16,414 

Furniture and Fixtures

 

1,062 

 

 

1,054 



 

24,224 

 

 

25,256 

Less: Accumulated Depreciation

 

(16,859)

 

 

(17,879)



$

7,365 

 

$

7,377 



Depreciation expense was $307,000 and $294,000 for the three month periods ended December 31, 2017 and 2016, respectively. Depreciation expense was $577,000 and $600,000 for the six month periods ended December 31, 2017 and 2016, respectively.



10.Warranty



Our In-Line and Near-Line Measurement Solutions generally carry a one to three-year warranty for parts and a one-year warranty for labor and travel related to warranty.  Product sales to the forest products industry carry a three-year warranty for TriCam® sensors.  Sales of ScanWorks® have a one-year warranty for parts.  Sales of WheelWorks products have a two-year warranty for parts.  We provide a reserve for warranty based on our experience and knowledge.  Our Off-Line Measurement Solutions generally carry a twelve-month warranty after the machine passes the acceptance test or a fifteen-month warranty from the date of shipment, whichever date comes first, on parts only.

13


 



Factors affecting our warranty reserve include the number of units sold or in-service as well as historical and anticipated rates of claims and cost per claim.  We periodically assess the adequacy of our warranty reserve based on changes in these factors.  If a special circumstance arises which requires a higher level of warranty, we make a special warranty provision commensurate with the facts.

Changes to our warranty reserve is as follows (in thousands):





 

 

 

 

 



 

 

 



2017

 

2016

Beginning Balance at July 1,

$

548 

 

$

370 

Accruals - Current Year

 

486 

 

 

423 

Settlements/Claims (in cash or in kind)

 

(610)

 

 

(401)

Effects of Foreign Currency

 

 

 

(2)

Ending Balance at December 31,

$

429 

 

$

390 





11.Credit Facilities



We had approximately $1,821,000 and $1,705,000 outstanding under our lines of credit and short-term notes payable at December 31, 2017 and June 30, 2017, respectively.  In addition, we had approximately $72,000 of long-term debt outstanding at December 31, 2017 and $171,000 of long-term debt outstanding at June 30, 2017, which is included in ‘Other Long-Term Liabilities’ on our Consolidated Balance Sheet. 



On December 4, 2017, we entered into a Loan Agreement (the “Loan Agreement”) with Chemical Bank (“Chemical”), and related documents, including a Promissory Note.  The Loan Agreement is an on-demand line of credit and is cancelable at any time by either Perceptron or Chemical and any amounts outstanding would be immediately due and payable.  The Loan Agreement is guaranteed by our U.S. subsidiaries.  The Loan Agreement allows for maximum permitted borrowings of $8.0 million.  The borrowing base is calculated at the lesser of (i) $8.0 million or (ii) the sum of 80% of eligible accounts receivable balances of U.S. customers and subject to limitations, certain foreign customers, plus the lesser of 50% of eligible inventory or $3.0 million. At December 31, 2017, our additional available borrowing under this facility was approximately $4.2  million. Security for the Loan Agreement is substantially all of our assets in the U.SInterest is calculated at 2.65% above the 30 day LIBOR rate. We are not allowed to pay cash dividends under the Loan Agreement. We had $1,605,000 in borrowings outstanding under the Loan Agreement at December 31,  2017. 



Prior to December 4, 2017, we were party to an Amended and Restated Credit Agreement with Comerica Bank.  We had $1,500,000 outstanding at June 30, 2017 under this agreementOn December 4, 2017, in connection with entering into the Loan Agreement, we repaid in full and terminated our Amended and Restated Credit Agreement with Comerica Bank and related documents.  There were no prepayment fees payable in connection with the repayment of the loan.



During the third quarter of fiscal 2016, our Italian subsidiary, Coord3, exercised an option to purchase their current manufacturing facility.  The total remaining principal payments of €240,000 (equivalent to approximately $288,000) payable over the following 16 months at a 7.0% annual interest rate are recorded in ‘Short-term notes payable’ and ‘Other Long-Term Liabilities’ on our Consolidated Balance Sheet at December 31, 2017.



Our Brazilian subsidiary (“Brazil”) has several credit lines and overdraft facilities with their current local bank.  Brazil can borrow a total of B$401,000  (equivalent to approximately $121,000).  The Brazil facilities are cancelable at any time by either Brazil or the bank and any amounts then outstanding would become immediately due and payable.  The monthly interest rates for these facilities range from 2.75% to 12.30%.  We had no borrowings under these facilities at December 31, 2017 and June 30, 2017, respectively.



12.Severance, Impairment and Other Charges



During the third quarter of fiscal 2016, we announced a financial improvement plan that resulted in a reduction in global headcount of approximately 11%.  This plan was implemented to re-align our fixed costs with our near-term to mid-term expectations for our business.  In addition, during the first quarter of fiscal 2017, we decided to terminate production and marketing of a specific product line due to limitations in its design.  Since this decision was made, we have written off $293,000, net related to inventory and impaired certain customer receivable balances in the amount of $127,000.  We have substantially completed the plan that was announced; as of December 31, 2017, we have incurred total pre-tax cash and non-cash charges relating to the original restructuring plan, as well as the additional charges from the terminated product line, of $3,534,000.    



In July 2017, we announced that we had entered into an agreement to settle the civil suit that was filed by 3CEMS, a Cayman Island and People’s Republic of China corporation, in January 2015 (see Note 17, “Commitments and Contingencies – Legal Proceedings” for further discussion)The settlement of $1,000,000 was recorded as a liability in fiscal 2017.



14


 

In January 2018,  a judge in a trade secrets case brought by Perceptron granted the defendants’ motions for recovery of their attorney fees (see Note 19, “Subsequent Events” for further discussion relating to this matter).  A charge in the amount of $675,000 was recorded as a liability at December 31, 2017.



The charges recorded as Severance, Impairment and Other Charges are as follows (in thousands):





 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 



Three Months Ended December 31,

 

Six Months Ended December 31,



2017

 

2016

 

2017

 

2016

Severance and Related Costs

$

(17)

 

$

61 

 

$

(13)

 

$

175 

Court Award

 

675 

 

 

 -

 

 

675 

 

 

 -

Impairment

 

 -

 

 

 -

 

 

(42)

 

 

145 

Inventory Write-Off

 

 -

 

 

 -

 

 

(14)

 

 

397 

Total

$

658 

 

$

61 

 

$

606 

 

$

717 



Severance income for the three months ended December 31, 2017 was primarily associated with an adjustment at our Chinese location.



Severance expense for the three months ended December 31, 2016 was associated with an adjustment at our U.S. location.



Severance income for the six months ended December 31, 2017 was associated with adjustments at our China (income of $15,000) and U.S. (expense of $2,000) locations as we reached final settlements related to several individuals impacted by the reduction in force.  The decrease in the impairment for the six months ended December 31, 2017 was due to a collection of an accounts receivable balance that was previously written off. The decrease of the inventory write-off was due to finding other uses for some of the inventory originally designated as impaired.



Severance expense (income) for the six months ended December 31, 2016 was associated with adjustments at our U.S. (expense of $171,000), Chinese (expense of $82,000) and German (income of $78,000) locations, as we reached final settlements related to several individuals impacted by the reduction in force.    



The following table reconciles the activity for the Reserves for Restructuring and Other Charges (in thousands):





 

 

 

 

 



 

 

 

 

 



2017

 

2016

Beginning Balance at July 1,

$

1,113 

 

$

814 

Accruals - Severance Related

 

(13)

 

 

175 

Accruals - Court Award

 

675 

 

 

 -

Payments

 

(531)

 

 

(676)

Ending Balance at December 31,

$

1,244 

 

$

313 



The remaining accrued balance at December 31, 2017 includes payments to be made related to our legal settlement with 3CEMS, which is expected to be paid out over the next 5 months and the China reduction in force, which is expected to be paid within our third quarter of fiscal 2018.  Furthermore, due to our plans to appeal the court decisions in the trade secrets case, the timing of any payments related to this matter is unknown to us at this time.



13.Current and Long-Term Taxes Payable



We acquired current and long-term taxes payable as part of the purchase of Coord3.  The tax liabilities represent income and payroll related taxes that are payable in accordance with government authorized installment payment plans.  These installment plans require varying monthly payments through January 2021. 



14.Other Long-Term Liabilities



Other long-term liabilities at December 31, 2017 and June 30, 2017 include $608,000 and $614,000, respectively for long-term contractual and statutory severance liabilities acquired as part of the purchase of Coord3 that represent amounts that will be payable to employees upon termination of employment.  See Note 11, “Credit Facilities”, for the description of long-term debt included in ‘Other Long-Term Liabilities’ at December 31, 2017. 



15


 

15.Stock-Based Compensation



We maintain a 2004 Stock Incentive Plan (“2004 Plan”) covering substantially all company employees, non-employee directors and certain other key persons.  The 2004 Plan is administered by a committee of our Board of Directors: The Management Development, Compensation and Stock Option Committee.





Awards under the 2004 Plan may be in the form of stock options, stock appreciation rights, restricted stock or restricted stock units, performance share awards, director stock purchase rights and deferred stock units, or any combination thereof.  The terms of the awards are determined by the Management Development, Compensation and Stock Option Committee, except as otherwise specified in the 2004 Plan. 



Stock Options



Options outstanding under the 2004 Plan generally become exercisable at 25% or 33.3% per year beginning one year after the date of grant and expire ten years after the date of grant.  Option prices from options granted under these plans must not be less than the fair market value of our stock on the date of grant.  We use the Black-Scholes model for determining stock option valuations.  The Black-Scholes model requires subjective assumptions, including future stock price volatility and expected time to exercise, which affect the calculated values.  The expected term of option exercises is derived from historical data regarding employee exercises and post-vesting employment termination behavior.  The risk-free rate of return is based on published U.S. Treasury rates in effect for the corresponding expected term.  The expected volatility is based on historical volatility of our stock price.  These factors could change in the future, which would affect the stock-based compensation expense in future periods. 



We recognized operating expense for non-cash stock-based compensation costs related to stock options in the amount of $142,000 and $197,000 in the three and six month periods ended December 31, 2017, respectively.    We recognized operating expense for non-cash stock-based compensation costs related to stock options in the amount of $80,000 and $220,000 in the three and six month periods ended December 31, 2016, respectively.  As of December 31, 2017, the total remaining unrecognized compensation cost related to non-vested stock options amounted to approximately $531,000.  We expect to recognize this cost over a weighted average vesting period of 2.1 years.



We  granted 100,000 and 100,000 stock options in the three and six month periods ended December 31, 2017, respectively. We granted 100,000 and 131,500 stock options in the three and six month periods ended December 31, 2016, respectively. The estimated fair value as of the date options were granted during the periods presented, using the Black-Scholes option-pricing model, is shown in the table below.





 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 



Three Months Ended December 31,

 

Six Months Ended December 31,



2017

 

2016

 

2017

 

2016

Weighted average estimated fair value per

 

 

 

 

 

 

 

 

 

 

 

share of options granted during the period

$

3.96 

 

$

3.02 

 

$

3.96 

 

$

3.00 

Assumptions:

 

 

 

 

 

 

 

 

 

 

 

Dividend Yield

 

 -

 

 

 -

 

 

 -

 

 

 -

Common Stock Price Volatility

 

48.70% 

 

 

48.14% 

 

 

48.70% 

 

 

48.05% 

Risk Free Rate of Return

 

2.05% 

 

 

1.94% 

 

 

2.05% 

 

 

1.77% 

Expected Option Term (In Years)

 

6.4 

 

 

5.4 

 

 

6.4 

 

 

5.5 



We received zero cash from option exercises under all share-based payment arrangements for both the three and six month periods ended December 31, 2017, respectively.  We received approximately $55,000 and $56,000 in cash from option exercises under all share-based payment arrangements for the three and six month periods ended December 31, 2016, respectively. 



Restricted Stock and Restricted Stock Units



Our restricted stock and restricted stock units under the 2004 Plan generally have been awarded by four methods as follows:



(1)

Awards that are earned based on an individual’s achievement of performance goals during the initial fiscal year with either a subsequent one-year service vesting period or with a one-third vesting requirement on the first,  second and third anniversaries of the issuance, provided the individual’s employment has not terminated prior to the vesting date and are freely transferable after vesting;

(2)

Awards that are earned based on achieving certain revenue and operating income results with a subsequent one-third vesting requirement on the first,  second and third anniversaries of the issuance provided the individual’s employment has not terminated prior to the vesting date and are freely transferable after vesting; 

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(3)

Awards to non-management members of our Board of Directors with a subsequent one-third vesting requirement on the first,  second and third anniversaries of the issuance provided the service of the non-management member of our Board of Directors has not terminated prior to the vesting date and are freely transferable after vesting, and

(4)

Awards that are granted with a one-third vesting requirement on the first,  second and third anniversaries of the issuance provided the individual’s employment has not terminated prior to the vesting date and are freely transferable after vesting, including restricted stock units granted as part of the Fiscal Year 2018 Long-Term Incentive Compensation Plan.



The grant date fair value associated with granted restricted stock is calculated in accordance with ASC 718 “Compensation – Stock Compensation”.  Compensation expense related to restricted stock awards is based on the closing price of our Common Stock on the grant date authorized by our Management Development, Compensation and Stock Option Committee, multiplied by the number of restricted stock and restricted stock unit awards expected to be issued and vested and is amortized over the combined performance and service periods.  The non-cash stock-based compensation expense recorded for restricted stock and restricted stock unit awards for the three and six month periods ended December 31, 2017 was $56,000 and $132,000, respectively.    The non-cash stock-based compensation expense recorded for restricted stock and restricted stock unit awards for the three and six month periods ended December 31, 2016 was $31,000 and $103,000, respectively.  As of December 31, 2017, the total remaining unrecognized compensation cost related to the restricted stock and restricted stock unit awards is approximately $308,000. We expect to recognize this cost over a weighted average vesting period of 2.7 years.



A summary of the status of restricted stock and restricted stock unit awards issued at December 31, 2017 is presented in the table below.



 

 

 

 

 



 

 

 

 

 



 

 

 

Weighted Average



Nonvested

 

Grant Date



Shares

 

Fair Value

Non-vested at June 30, 2017

 

11,776 

 

$

8.08 

Granted

 

85,512 

 

 

7.67 

Vested

 

(21,518)

 

 

7.75 

Forfeited or Expired

 

(400)

 

 

7.95 

Non-vested at December 31, 2017

 

75,370 

 

$

7.71 



Performance Stock Units



During the three months ended December 31, 2017, our Management Development, Compensation and Stock Option Committee granted certain employees 40,150 shares of Performance Share Units (“PSUs”) as part of the Fiscal Year 2018 Long-Term Incentive Compensation Plan.  The Performance Measures were defined by the Committee as a specific Target level of Revenue and Operating Income for each of the following: fiscal year 2018, fiscal year 2019 and fiscal year 2020Up to one third of the PSUs can be earned each year based upon actual performance levels achieved in that fiscal year. One half of the award earned each fiscal year is based upon the achievement of each Performance Target in that fiscal year, provided that a minimum level of Operating Income is achieved for that fiscal year.  The actual award level for each fiscal year can range from 50% to 150% (for Revenue Target) or 75% to 200% (for Operating Income Target) of the target awards depending on actual performance levels achieved in each fiscal year compared to that year’s target.    The non-cash stock-based compensation expense recorded for performance  share unit awards for the three month periods ended December 31, 2017 was $67,000.    As of December 31, 2017, the total remaining unrecognized compensation cost related to performance  share unit awards is approximately $279,000. We expect to recognize this cost over a weighted average vesting period of 1.6 years.



Board of Directors Fees



Our Board of Directors’ fees are typically payable in cash on September 1, December 1, March 1, and June 1 of each fiscal year; however, under our 2004 Plan each director can elect to receive our stock in lieu of cash on a calendar year election.  Each of our Directors has elected to receive stock in lieu of cash for calendar year 2017.  On each payment date, we determine the number of shares of Common Stock each Director has earned by dividing their earned fees by the closing market price of our Common Stock on that date.  We issued 12,061 shares and recorded expense of $125,000 to our Directors for their fees during the three month periods ended December 31, 2017.  We issued 29,527 shares and recorded expense of $257,000 to our Directors for their fees during the six month periods ended December 31, 2017.    







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16.Earnings Per Share



Basic earnings per share (“EPS”) is calculated by dividing net income by the weighted average number of common shares outstanding during the period.  Other obligations, such as stock options and restricted stock awards, are considered to be potentially dilutive common shares.  Diluted EPS assumes the issuance of potential dilutive common shares outstanding during the period and adjusts for any changes in income and the repurchase of common shares that would have occurred from the assumed issuance, unless such effect is anti-dilutive.  The calculation of diluted shares also takes into effect the average unrecognized non-cash stock-based compensation expense and additional adjustments for tax benefits related to non-cash stock-based compensation expense. Furthermore, we exclude all outstanding options to purchase common stock from the computation of diluted EPS in periods of net losses because the effect is anti-dilutive.



Options to purchase 45,217 and 387,774 shares of common stock outstanding in the three months ended December 31, 2017 and 2016, respectively, were not included in the computation of diluted EPS because the effect would have been anti-dilutive.  Options to purchase 73,017 and 479,397 shares of common stock outstanding in the six months ended December 31, 2017 and 2016, respectively, were not included in the computation of diluted EPS becau