UNITED STATES | ||||
SECURITIES AND EXCHANGE COMMISSION | ||||
WASHINGTON, D.C. 20549 | ||||
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FORM 10-Q | ||||
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| (Check One) |
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þQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) | ||||
OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
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For the quarterly period ended September 30, | ||||
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oTRANSITION PURSUANT TO SECTION 13 OR 15(D) | ||||
OF THE SECURITIES EXCHANGE ACT | ||||
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For the transition period from ______ to ______ | ||||
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COMMISSION FILE NO. (0-16577) | ||||
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CYBEROPTICS CORPORATION | ||||
(Exact name of registrant as specified in its charter) |
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Minnesota |
| 41-1472057 |
(State or other jurisdiction of |
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incorporation or organization) |
| (I.R.S. Employer Identification No.) |
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5900 Golden Hills Drive |
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MINNEAPOLIS, MINNESOTA |
| 55416 |
(Address of principal executive offices) |
| (Zip Code) |
(763) 542-5000 |
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(Registrant’s telephone number, including area code) | ||
Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934: | ||
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, no par value | CYBE | NASDAQ Stock Market LLC |
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 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 þ No o
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 þ No o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, "smaller reporting company", and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer | ☐ | Accelerated Filer | ☑ | |
Non-Accelerated Filer | ☐ | Smaller Reporting Company | ☑ | |
Emerging Growth Company | ☐ |
If an emerging growth company, indicate 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 Act). Yes oNoþ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. At October 31, 20182019, there were 7,078,190 7,128,199 shares of the registrant’s Common Stock, no par value, issued and outstanding.
1 |
PART I. FINANCIAL INFORMATION
ITEM 1. INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS
CYBEROPTICS CORPORATION
(Unaudited)
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(In thousands, except share information) |
| September 30, |
| December 31, |
| September 30, |
| December 31, | ||||||||
ASSETS |
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Cash and cash equivalents |
| $ | 7,633 |
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| $ | 6,944 |
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| $ | 8,104 |
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| $ | 9,248 |
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Marketable securities |
| 6,396 |
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| 6,670 |
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| 7,792 |
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| 5,771 |
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Accounts receivable, less allowance for doubtful accounts of $290 at September 30, 2018 and $473 at December 31, 2017 |
| 14,525 |
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| 10,772 |
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Accounts receivable, less allowances of $283 at September 30, 2019 and $314 at December 31, 2018 |
| 13,322 |
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| 15,859 |
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Inventories |
| 13,935 |
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| 14,393 |
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| 16,360 |
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| 16,163 |
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Other current assets |
| 2,314 |
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| 1,593 |
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| 1,819 |
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| 2,096 |
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Total current assets |
| 44,803 |
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| 40,372 |
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| 47,397 |
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| 49,137 |
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Marketable securities, long-term |
| 9,806 |
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| 9,073 |
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| 9,392 |
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| 10,322 |
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Equipment and leasehold improvements, net |
| 2,326 |
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| 2,307 |
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| 3,546 |
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| 2,861 |
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Intangible assets, net |
| 333 |
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| 380 |
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| 295 |
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| 333 |
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Goodwill |
| 1,366 |
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| 1,366 |
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| 1,366 |
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| 1,366 |
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Right-of-use assets (operating leases) | 1,985 | — | ||||||||||||||
Other assets |
| 201 |
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| 261 |
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| 249 |
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| 259 |
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Deferred tax assets |
| 5,546 |
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| 5,742 |
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| 5,276 |
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| 5,422 |
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Total assets |
| $ | 64,381 | $ | 59,501 |
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| $ | 69,506 | $ | 69,700 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Accounts payable |
| $ | 5,380 |
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| $ | 4,294 |
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| $ | 4,945 |
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| $ | 8,513 |
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Advance customer payments |
| 1,240 |
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| 393 |
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| 528 |
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| 636 |
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Accrued expenses |
| 2,656 |
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| 2,285 |
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| 2,350 |
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| 3,568 |
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Current operating lease liabilities | 686 | — | ||||||||||||||
Total current liabilities |
| 9,276 |
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| 6,972 |
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| 8,509 |
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| 12,717 |
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Other liabilities |
| 156 |
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| 88 |
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| 162 |
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| 629 |
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Long-term operating lease liabilities | 3,178 | — | ||||||||||||||
Reserve for income taxes |
| 159 |
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| 159 |
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| 143 |
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| 143 |
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Total liabilities |
| 9,591 |
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| 7,219 |
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| 11,992 |
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| 13,489 |
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Commitments and contingencies |
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Stockholders’ equity: |
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Preferred stock, no par value, 5,000,000 shares authorized, none outstanding |
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Common stock, no par value, 25,000,000 shares authorized, 7,064,089 shares issued and outstanding at September 30, 2018 and 6,979,686 shares issued and outstanding at December 31, 2017 |
| 35,452 |
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| 34,080 |
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Preferred stock, no par value, 5,000,000 shares authorized, NaN outstanding |
| — |
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Common stock, no par value, 25,000,000 shares authorized, 7,121,671 shares issued and outstanding at September 30, 2019 and 7,100,825 shares issued and outstanding at December 31, 2018 |
| 36,397 |
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| 35,637 |
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Accumulated other comprehensive loss |
| (1,733 | ) |
| (1,409 | ) |
| (1,786 | ) |
| (1,690 | ) | ||||
Retained earnings |
| 21,071 |
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| 19,611 |
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| 22,903 |
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| 22,264 |
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Total stockholders’ equity |
| 54,790 |
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| 52,282 |
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| 57,514 |
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| 56,211 |
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Total liabilities and stockholders’ equity |
| $ | 64,381 |
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| $ | 59,501 |
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| $ | 69,506 |
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| $ | 69,700 |
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SEE THE ACCOMPANYING NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
2 |
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
CYBEROPTICS CORPORATION
(Unaudited)
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| Three Months Ended September 30, |
| Nine Months Ended September 30, | Three Months Ended September 30, |
| Nine Months Ended September 30, | |||||||||||||||||||||||||
(In thousands, except per share amounts) |
| 2018 |
| 2017 |
| 2018 |
| 2017 | 2019 | 2018 |
| 2019 |
| 2018 | ||||||||||||||||||
Revenues |
| $ | 16,683 |
| $ | 11,828 |
| $ | 46,657 |
| $ | 40,157 |
| $ | 12,391 | $ | 16,683 |
| $ | 42,411 |
| $ | 46,657 |
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Cost of revenues |
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| 9,247 |
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| 6,236 |
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| 25,738 |
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| 21,434 |
| 6,885 | 9,247 |
| 23,290 |
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| 25,738 |
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Gross margin |
| 7,436 |
| 5,592 |
| 20,919 |
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| 18,723 |
| 5,506 | 7,436 |
| 19,121 |
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| 20,919 |
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Research and development expenses |
| 2,162 |
| 1,947 |
| 6,585 |
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| 5,892 |
| 2,408 | 2,162 |
| 6,950 |
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| 6,585 |
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Selling, general and administrative expenses |
| 3,935 |
| 3,793 |
| 12,413 |
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| 11,821 |
| 3,855 | 3,945 |
| 11,779 |
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| 12,448 |
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Amortization of intangibles |
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| 10 |
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| 15 |
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| 35 |
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| 50 |
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Income (loss) from operations |
| 1,329 |
| (163 | ) |
| 1,886 |
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| 960 | (757 | ) | 1,329 |
| 392 |
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| 1,886 | ||||||||||||||
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Interest income and other |
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| 35 |
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| (25 | ) |
| 192 |
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| (141 | ) | 170 | 35 |
| 306 |
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| 192 | |||||||||||
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Income (loss) before income taxes |
| 1,364 |
| (188 | ) |
| 2,078 |
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| 819 | (587 | ) | 1,364 |
| 698 |
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| 2,078 | ||||||||||||||
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Income tax expense (benefit) |
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| 297 |
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| (116 | ) |
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| 444 |
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| 10 | (234 | ) | 297 |
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| 92 |
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| 444 | |||||||||
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Net income (loss) |
| $ | 1,067 |
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| $ | (72 | ) |
| $ | 1,634 |
| $ | 809 | $ | (353 | ) | $ | 1,067 |
| $ | 606 |
| $ | 1,634 | |||||||
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Net income (loss) per share – Basic |
| $ | 0.15 |
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| $ | (0.01 | ) |
| $ | 0.23 |
| $ | 0.12 | $ | (0.05 | ) | $ | 0.15 |
| $ | 0.09 |
| $ | 0.23 | |||||||
Net income (loss) per share – Diluted |
| $ | 0.15 |
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| $ | (0.01 | ) |
| $ | 0.23 |
| $ | 0.11 | $ | (0.05 | ) | $ | 0.15 |
| $ | 0.08 |
| $ | 0.23 | |||||||
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Weighted average shares outstanding – Basic |
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| 7,041 |
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| 6,959 |
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| 7,012 |
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| 6,939 |
| 7,117 | 7,041 |
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| 7,108 |
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| 7,012 |
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Weighted average shares outstanding – Diluted |
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| 7,299 |
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| 6,959 |
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| 7,176 |
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| 7,041 |
| 7,117 | 7,299 |
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| 7,245 |
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| 7,176 |
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SEE THE ACCOMPANYING NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3 |
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
CYBEROPTICS CORPORATION
(Unaudited)
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| Three Months Ended September 30, |
| Nine Months Ended September 30, | Three Months Ended September 30, |
| Nine Months Ended September 30, | ||||||||||||||||||||||||||
(In thousands) |
| 2018 |
| 2017 |
| 2018 |
| 2017 | 2019 | 2018 |
| 2019 |
| 2018 | ||||||||||||||||||
Net income (loss) |
| $ | 1,067 |
| $ | (72 | ) |
| $ | 1,634 |
| $ | 809 |
| $ | (353 | ) | $ | 1,067 |
| $ | 606 |
| $ | 1,634 | |||||||
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Other comprehensive income, before tax: |
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Other comprehensive loss, before tax: |
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Foreign currency translation adjustments |
| (50 | ) |
| 157 |
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| (252 | ) |
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| 587 | (269 | ) | (50 | ) |
| (199 | ) |
| (252 | ) | ||||||||||
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Unrealized gains (losses) on available-for-sale securities: |
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Unrealized gains (losses) |
| 3 |
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| (33 | ) |
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| 31 | 1 | 3 |
| 129 |
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Reclassification adjustment for gains included in net income |
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| (3 | ) |
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| (3 | ) |
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| (3 | ) | |||||||
Total unrealized gains (losses) on available-for-sale securities |
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| (36 | ) |
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| 31 | 1 | — |
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| 129 |
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Other comprehensive income (loss), before tax |
| (50 | ) |
| 157 |
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| (288 | ) |
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| 618 | ||||||||||||||||||||
Income tax provision (benefit), other comprehensive income | — | (35 | ) |
| 8 |
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| (184 | ) | |||||||||||||||||||||||
Other comprehensive income (loss), net of tax |
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| (50 | ) |
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| 122 |
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| (280 | ) |
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| 434 | |||||||||||||||||
Total comprehensive income | $ | 1,017 | $ | 50 | $ | 1,354 |
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| $ | 1,243 |
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Other comprehensive loss before income taxes | (268 | ) | (50 | ) |
| (70 | ) |
| (288 | ) | ||||||||||||||||||||||
Income tax (provision) benefit | — | — |
| (26 | ) |
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| 8 | ||||||||||||||||||||||||
Other comprehensive loss after income taxes | (268 | ) | (50 | ) |
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| (96 | ) |
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| (280 | ) | ||||||||||||||||||||
Total comprehensive income (loss) | $ | (621 | ) | $ | 1,017 | $ | 510 | $ | 1,354 |
SEE THE ACCOMPANYING NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4 |
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
CYBEROPTICS CORPORATION
(Unaudited)
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| Nine Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
(In thousands) | 2018 | 2017 | 2019 | 2018 | ||||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
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Net income | $ | 1,634 | $ | 809 | $ | 606 | $ | 1,634 | ||||||||
Adjustments to reconcile net income to net cash provided by (used in) operating activities: |
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Depreciation and amortization | 1,876 | 1,659 |
| 2,102 | 1,876 |
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Provision for doubtful accounts | (159 | ) | (15 | ) | ||||||||||||
Recovery for doubtful accounts | (31 | ) | (159 | ) | ||||||||||||
Deferred taxes | 261 | (27 | ) | 107 | 261 | |||||||||||
Foreign currency transaction (gains) losses | (140 | ) | 139 | |||||||||||||
Stock based compensation | 701 | 640 |
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Foreign currency transaction gains | (112 | ) | (140 | ) | ||||||||||||
Share-based compensation | 737 | 701 |
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Unrealized loss on available-for-sale equity security | 24 | — |
| 10 | 24 |
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Realized gain on available-for-sale marketable securities | (3 | ) | — |
| — | (3 | ) | |||||||||
Changes in operating assets and liabilities: |
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Accounts receivable | (3,594 | ) | (1,022 | ) | 2,568 | (3,594 | ) | |||||||||
Inventories | (387 | ) |
| (5,260 | ) | (1,123 | ) | (387 | ) | |||||||
Other assets | (692 | ) |
| (133 | ) | 235 | (692 | ) | ||||||||
Accounts payable | 1,124 | 866 | (3,538 | ) | 1,124 | |||||||||||
Advance customer payments | 638 | (3 | ) | (50 | ) | 638 | ||||||||||
Accrued expenses | 382 |
| (1,906 | ) | (1,077 | ) | 382 | |||||||||
Net cash provided by (used in) operating activities | 1,665 |
| (4,253 | ) | ||||||||||||
Operating lease assets and liabilities | 482 | — | ||||||||||||||
Net cash provided by operating activities | 916 | 1,665 | ||||||||||||||
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CASH FLOWS FROM INVESTING ACTIVITIES: |
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Proceeds from maturities of available-for-sale marketable securities | 6,018 | 5,187 |
| 6,144 | 6,018 |
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Proceeds from sales of available-for-sale marketable securities | 480 | — |
| — | 480 |
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Purchases of available-for-sale marketable securities | (7,006 | ) |
| (5,604 | ) | (7,080 | ) | (7,006 | ) | |||||||
Additions to equipment and leasehold improvements | (1,079 | ) |
| (851 | ) | (1,065 | ) | (1,079 | ) | |||||||
Additions to patents | (76 | ) |
| (107 | ) | (88 | ) | (76 | ) | |||||||
Net cash used in investing activities | (1,663 | ) |
| (1,375 | ) | (2,089 | ) | (1,663 | ) | |||||||
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CASH FLOWS FROM FINANCING ACTIVITIES: |
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Proceeds from exercise of stock options | 452 | 330 |
| 173 | 452 |
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Proceeds from issuance of common stock under Employee Stock Purchase Plan | 219 | 258 |
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Repurchase of common stock | (353 | ) | — | |||||||||||||
Proceeds from issuance of common stock under employee stock purchase plan | 203 | 219 | ||||||||||||||
Net cash provided by financing activities | 671 | 588 |
| 23 | 671 |
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Effects of exchange rate changes on cash and cash equivalents | 16 | (7 | ) | 6 | 16 | |||||||||||
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Net increase (decrease) in cash and cash equivalents | 689 |
| (5,047 | ) | (1,144 | ) | 689 | |||||||||
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Cash and cash equivalents – beginning of period | 6,944 | 10,640 |
| 9,248 | 6,944 |
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Cash and cash equivalents – end of period | $ | 7,633 | $ | 5,593 |
| $ | 8,104 | $ | 7,633 |
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SEE THE ACCOMPANYING NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5 |
NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CYBEROPTICS CORPORATION
1. INTERIM REPORTING:
The interim condensed consolidated financial statements of CyberOptics Corporation ("we", "us" or "our") presented herein as of September 30, 20182019, and for the three and nine month periods ended September 30, 20182019 and 20172018, 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, 20182019 do not necessarily indicate the results to be expected for the full year. The December 31, 20172018 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.America ("U.S. GAAP"). 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, 20172018.
2. REVENUE RECOGNITION:RECENT ACCOUNTING DEVELOPMENTS:
Change in Revenue Accounting
EffectiveIn February 2016, the Financial Accounting Standards Board (the "FASB") issued new lease accounting guidance, ASU 2016-02, Leases (also referred to as Topic 842), which we adopted on January 1, 2019. Under Topic 842, at the commencement date, lessees are 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. In July 2018, we adoptedthe FASB issued ASU No. 2014-92018-11, Leases (Topic 842), “Revenue from ContractsTargeted Improvements, which gave companies the option of applying the new standard at the adoption date, rather than retrospectively to the earliest period presented in the financial statements, with Customers” and the related amendments (“Topic 606”) using the modified retrospective method.Topic 606 was applied to all uncompleted contracts by recognizing the cumulative effectrecognition of initially applying Topic 606 as ana cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. We chose the option to apply the new standard at the adoption date, and therefore we were not required to restate the financial statements for prior periods, nor are we required to provide the disclosures required by Topic 842 for prior periods. Upon adoption of Topic 842, we recognized an approximate $2.6 million right-of-use asset, and an approximate $3.2 million lease liability. Our previously recognized liability for lease incentives recorded under prior accounting standards was eliminated. The cumulative-effect adjustment to the opening balance of retained earnings related to our adoption of Topic 842 was inconsequential. Our adoption of Topic 842 did not impact our cash flows or have a material impact on our results of operations. We have expanded our consolidated financial statement disclosures to comply with the requirements of Topic 842.
In February 2018, the FASB issued ASU 2018-02, Reclassification of Tax Effects from Accumulated Other Comprehensive Income ("ASU 2018-02"), which allows an entity to elect an option to reclassify the stranded tax effects related to the application of the Tax Cuts and Jobs Act (the "TCJA") from accumulated other comprehensive income or loss to retained earnings. ASU 2018-02 was effective January 1, 2018.2019 and could be applied either in the period of adoption or retrospectively to all applicable periods. Therefore,We did not elect to reclassify the comparativestranded tax effects related to the application of the TCJA from accumulated other comprehensive loss to retained earnings.
In January 2017, the FASB issued guidance on simplifying the test for goodwill impairment, ASU 2017-04, Simplifying the Test for Goodwill Impairment ("ASU 2017-04"). Under ASU 2017-04, 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 standard 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. ASU 2017-04 is to be applied prospectively to impairment tests beginning January 1, 2020, with early adoption permitted. We are currently evaluating when we will adopt ASU 2017-04 and do not expect the adoption to have a material impact on our consolidated financial information forstatements.
6 |
3. REVENUE RECOGNITION:
Our revenue performance obligations are primarily satisfied at a point in time and limited revenue streams are satisfied over time as work progresses.
The following is a summary of our revenue performance obligations in the three and nine months ended September 30, 20172019 has not been adjusted and continues to be reported under Topicthe 605, “Revenue Recognition”.
Accounting for contracts recognized over time involves the use of various techniques to estimate total contract revenue and costs. Contract estimates are based on various assumptions to project the outcome of future events that may span multiple years. We review and update our contract-related estimates regularly, and record adjustments as needed.
The adoption of Topic 606 caused changes for (1) the impact of volume discounts that represent a material right which will now be estimated and recognized over the contract life rather than on a prospective basis, and (2) revenue will be recognized over time as the products are manufactured under certain contracts where our product is customized rather than at shipment. These changes increased our revenues in the three and nine months ended September 30, 2018 by $123,000 and $232,000, respectively, when compared to revenue recognition under Topic 605 (see:
Three Months Ended September 30, 2019 | Three Months Ended September 30, 2018 | |||||||||||
(In thousands except percentages) | Revenues | Percent of Revenues | Revenues | Percent of Revenues | ||||||||
Revenue recognized over time | $ | 403 | 3 | % | $ | 1,241 | 7 | % | ||||
Revenue recognized at a point in time | 11,988 | 97 | % | 15,442 | 93 | % | ||||||
$ | 12,391 | 100 | % | $ | 16,683 | 100 | % |
Nine Months Ended September 30, 2019 | Nine Months Ended September 30, 2018 | |||||||||||
(In thousands except percentages) | Revenues | Percent of Revenues | Revenues | Percent of Revenues | ||||||||
Revenue recognized over time | $ | 1,041 | 2 | % | $ | 3,262 | 7 | % | ||||
Revenue recognized at a point in time | 41,370 | 98 | % | 43,395 | 93 | % | ||||||
$ | 42,411 | 100 | % | $ | 46,657 | 100 | % |
See Note 1610). for additional information regarding disaggregation of revenue.
Performance Obligations
Under Topic 606, revenue is measured based on consideration specified in the contract with a customer.A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account in Topic 606. Revenue from all customers, including distributors, is recognized when a performance obligation is satisfied by transferring control of a product or service to a customer. Amounts billed to customers for shipping and handling are included in revenue. Taxes collected from customers and remitted to governmental authorities are excluded from revenue on the net basis of accounting. Accounts receivable are due under normal trade terms, typically 90 days or less.
Sales involving multiple performance obligations typically include the sale of an inspection system or metrology product, installation and training, and in some cases, an extended warranty. When a sale involves multiple performance obligations, we account for individual products and services separately if the customer can benefit from the product or service on its own or with other resources that are readily available to the customer and the product or service are separately identifiable from other promises in the arrangement.The consideration is allocated between separate performance obligations in proportion to their estimated stand-alone selling price.If the stand-alone selling price is not directly observable, we use the cost plus margin approach to estimate stand-alone selling price. Costs related to products delivered are recognized in the period revenue is recognized, including product warranties for periods ranging from 1 to 3 years (see Note 7).
Our performance obligations are satisfied at a point in time or over time as work progresses. Revenue from products and services transferred to customers at a point in time in the three and nine months ended September 30, 2018 totaled $15.4 million and $43.4 million, respectively, which represented 93% of our total revenue in both periods. Revenue from these contracts is recognized when obligations under the terms of the contract with our customer are satisfied; generally with the transfer of control upon shipment. Sales of some products may require customer acceptance due to performance or other acceptance criteria that is considered more than a formality. For these product sales, revenue is recognized upon notification of customer acceptance.
Revenue from products and services transferred to customers over time in the three and ninemonths ended September 30, 2018 totaled $1.2 million and $3.3 million, respectively, which represented 7% of our total revenue in both periods. Periodically, sensor product arrangements with our original equipment manufacturers (OEMs) will create an asset with no alternative use and include an enforceable right to payment for cost plus margin.For these arrangements, control is transferred over the manufacturing process; therefore, revenue is recognized over time utilizing an input method based on actual costs incurred in the manufacturing process to date relative to total expected production costs. For certain longer duration 3D scanning service projects, we progress bill as the services are performed.These arrangements create an asset with no alternative use and include an enforceable right to payment.For these arrangements, control is transferred over the hours incurred to complete the scanning project; therefore, revenue is recognized over time utilizing an input method based on actual hours incurred relative to total projected project hours. For maintenance and extended warranty contracts, revenue is recognized over time on a straight-line basis over the term of the contract as the customer simultaneously receives and consumes the benefits of the coverage.
Contract Balances
Contract assets consist of unbilled amounts from sales where we recognize the revenue over time and the revenue recognized exceeds the amount billed to the customer at a point in time. Accounts receivable are recorded when the right to payment becomes unconditional. Contract liabilities consist of payments received in advance of performance under the contract. Contract liabilities are recognized as revenue when we perform under the contract.
The following summarizes our contract assets and contract liabilities:
(In thousands) | September 30, 2019 | December 31, 2018 | ||||||
Contract assets, included in other current assets | $ | 6 |
| $ | — |
| ||
Contract liabilities - advance customer payments | $ | 427 |
| $ | 366 |
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Contract liabilities - deferred warranty revenue | $ | 235 | $ | 218 |
(In thousands) |
| September 30, 2018 |
| January 1, 2018 | ||||
Contract assets, included in other current assets |
| $ | 170 |
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| $ | — |
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Contract liabilities, included in advance customer payments/other liabilities |
| $ | 918 |
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| $ | 443 |
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Changes in contract assets in the nine months ended September 30, 2019 and the nine months ended September 30, 2018 resulted from unbilled amounts under sensor product arrangements and longer duration 3D scanning service projects in which revenue is recognized over time. Changes in contract liabilities primarily resulted from reclassification of beginning contract liabilities to revenue as performance obligations were satisfied or forfrom cash received in advance and not recognized as revenue. Amounts reclassified from beginning contract liabilities to revenue in the three and nine months ended September 30, 2018 totaled $39,000 and $262,000, respectively. See Note 78 for changes in contractual obligations related to deferred warranty revenue. Unsatisfied performance obligations are generally expected to be recognized as revenue over the nextnext one to three years.There were no0 impairment losses for contract assets in the nine months ended September 30, 2019 or the nine months ended September 30, 2018.
Practical Expedients
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
(In thousands) | 2019 | 2018 | 2019 | 2018 | ||||||||||||
Amounts reclassified from beginning contract liabilities to revenue | $ | 342 | $ | 39 |
| $ | 401 |
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| $ | 262 |
| ||||
Amounts reclassified from deferred warranty revenue | 111 | 99 | 334 | 310 | ||||||||||||
Total | $ | 453 | $ | 138 | $ | 735 | $ | 572 |
We generally expense the incremental costs of obtaining a contract when incurred because the amortization period for these costs would be less than one year. These costs primarily relate to sales commissions and are recorded in selling, general and administrative expense in our consolidated statements of operations.
We do not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less. We do not adjust the promised amount of consideration for the effects of a significant financing component if we expect, at contract inception, that the period between when we transfer a promised good or service to a customer and when the customer pays for that good or service will be one year or less.
7 |
3.4. MARKETABLE SECURITIES:
Our investments in marketable securities are classified as available-for-sale and consist of the following:
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| September 30, 2018 |
| September 30, 2019 | ||||||||||||||||||||||||||||
(In thousands) |
| Cost |
| Unrealized |
| Unrealized |
| Fair Value |
| Cost |
| Unrealized |
| Unrealized |
| Fair Value | ||||||||||||||||
Short-Term |
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U.S. government and agency obligations |
| $ | 3,611 |
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| $ | — |
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| $ | (20 | ) |
| $ | 3,591 |
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| $ | 5,138 |
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| $ | 11 |
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| $ | (2 | ) |
| $ | 5,147 |
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Corporate debt securities and certificates of deposit |
| 2,163 |
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| — |
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| (8 | ) |
| 2,155 |
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| 1,170 |
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| 1 |
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| — |
| 1,171 |
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Asset backed securities |
| 654 |
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| — |
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| (4 | ) |
| 650 |
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| 1,469 |
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| 5 |
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| — |
| 1,474 |
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Marketable securities – short-term |
| $ | 6,428 |
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| $ | — |
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| $ | (32 | ) |
| $ | 6,396 |
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| $ | 7,777 |
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| $ | 17 |
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| $ | (2 | ) |
| $ | 7,792 |
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Long-Term |
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U.S. government and agency obligations |
| $ | 6,399 |
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| $ | — |
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| $ | (55 | ) |
| $ | 6,344 |
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| $ | 5,646 |
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| $ | 32 |
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| $ | (1 | ) |
| $ | 5,677 |
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Corporate debt securities and certificates of deposit |
| 230 |
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| — |
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| (3 | ) |
| 227 |
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| 1,602 |
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| 12 |
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| — |
| 1,614 |
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Asset backed securities |
| 3,184 |
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| — |
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| (22 | ) |
| 3,162 |
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| 2,035 |
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| 17 |
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| — |
| 2,052 |
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Equity security |
| 42 |
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| 31 |
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| — |
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| 73 |
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| 42 |
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| 7 |
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| — |
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| 49 |
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Marketable securities – long-term |
| $ | 9,855 |
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| $ | 31 |
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| $ | (80 | ) |
| $ | 9,806 |
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| $ | 9,325 |
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| $ | 68 |
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| $ | (1 | ) |
| $ | 9,392 |
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| December 31, 2018 | |||||||||||||||
(In thousands) |
| Cost |
| Unrealized |
| Unrealized |
| Fair Value | ||||||||
Short-Term |
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U.S. government and agency obligations |
| $ | 3,377 |
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| $ | — |
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| $ | (20 | ) |
| $ | 3,357 |
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Corporate debt securities and certificates of deposit |
| 1,787 |
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| 3 |
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| (5 | ) |
| 1,785 |
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Asset backed securities |
| 633 |
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| — |
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| (4 | ) |
| 629 |
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Marketable securities – short-term |
| $ | 5,797 |
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| $ | 3 |
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| $ | (29 | ) |
| $ | 5,771 |
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Long-Term |
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U.S. government and agency obligations |
| $ | 6,114 |
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| $ | 10 |
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| $ | (23 | ) |
| $ | 6,101 |
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Corporate debt securities and certificates of deposit |
| 754 |
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| 1 |
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| (3 | ) |
| 752 |
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Asset backed securities |
| 3,422 |
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| 2 |
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| (15 | ) |
| 3,409 |
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Equity security |
| 42 |
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| 18 |
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| — |
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| 60 |
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Marketable securities – long-term |
| $ | 10,332 |
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| $ | 31 |
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| $ | (41 | ) |
| $ | 10,322 |
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In Unrealized Loss Position For Less Than 12 Months | In Unrealized Loss Position For Greater Than 12 Months | |||||||||||||||
(In thousands) | Fair Value | Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | ||||||||||||
September 30, 2019 | ||||||||||||||||
U.S. government and agency obligations | $ | 1,057 | $ | (2 | ) | $ | 2,282 | $ | (1 | ) | ||||||
Corporate debt securities and certificates of deposit | 20 | — | 80 | — | ||||||||||||
Asset backed securities | 50 | — | 733 | — | ||||||||||||
Marketable securities | $ | 1,127 | $ | (2 | ) | $ | 3,095 | $ | (1 | ) | ||||||
December 31, 2018 | ||||||||||||||||
U.S. government and agency obligations | $ | 1,548 | $ | (4 | ) | $ | 4,608 | $ | (39 | ) | ||||||
Corporate debt securities and certificates of deposit | 250 | — | 1,178 | (8 | ) | |||||||||||
Asset backed securities | 1,023 | (3 | ) | 2,137 | (16 | ) | ||||||||||
Marketable securities | $ | 2,821 | $ | (7 | ) | $ | 7,923 | $ | (63 | ) |
| December 31, 2017 | |||||||||||||||
(In thousands) |
| Cost |
| Unrealized |
| Unrealized |
| Fair Value | ||||||||
Short-Term |
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U.S. government and agency obligations |
| $ | 4,381 |
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| $ | — |
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| $ | (13 | ) |
| $ | 4,368 |
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Corporate debt securities and certificates of deposit |
| 1,792 |
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| — |
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| (4 | ) |
| 1,788 |
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Asset backed securities |
| 515 |
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| — |
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| (1 | ) |
| 514 |
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Marketable securities – short-term |
| $ | 6,688 |
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| $ | — |
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| $ | (18 | ) |
| $ | 6,670 |
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Long-Term |
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U.S. government and agency obligations |
| $ | 4,801 |
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| $ | — |
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| $ | (33 | ) |
| $ | 4,768 |
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Corporate debt securities and certificates of deposit |
| 1,189 |
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| — |
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| (10 | ) |
| 1,179 |
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Asset backed securities |
| 3,045 |
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| — |
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| (16 | ) |
| 3,029 |
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Equity security |
| 42 |
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| 55 |
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| — |
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| 97 |
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Marketable securities – long-term |
| $ | 9,077 |
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| $ | 55 |
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| $ | (59 | ) |
| $ | 9,073 |
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In Unrealized Loss Position For Less Than 12 Months | In Unrealized Loss Position For Greater Than 12 Months | |||||||||||||||
(In thousands) | Fair Value | Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | ||||||||||||
September 30, 2018 | ||||||||||||||||
U.S. government and agency obligations | $ | 5,185 | $ | (36 | ) | $ | 4,327 | $ | (39 | ) | ||||||
Corporate debt securities and certificates of deposit | 628 | (3 | ) | 1,324 | (8 | ) | ||||||||||
Asset backed securities | 2,343 | (14 | ) | 1,469 | (12 | ) | ||||||||||
Marketable securities | $ | 8,156 | $ | (53 | ) | $ | 7,120 | $ | (59 | ) | ||||||
December 31, 2017 | ||||||||||||||||
U.S. government and agency obligations | $ | 5,593 | $ | (29 | ) | $ | 3,543 | $ | (17 | ) | ||||||
Corporate debt securities and certificates of deposit | 478 | (2 | ) | 1,991 | (12 | ) | ||||||||||
Asset backed securities | 2,312 | (9 | ) | 1,232 | (8 | ) | ||||||||||
Marketable securities | $ | 8,383 | $ | (40 | ) | $ | 6,766 | $ | (37 | ) |
8 |
Effective January 1, 2018, we adopted ASU No. 2016-01, Recognition and Measurement of Financial Assets and Liabilities, which impacted the accounting for our marketable equity security (see Note 16). Our investments inThe marketable debt securities in which we have invested all have maturities of less than five years. Net pre-tax unrealized gains for marketable debt securities of $75,000 at September 30, 2019 and net pre-tax losses for marketable debt securities of$112,000 $54,000 at September 30, 2018 and $22,000 at December 31, 20172018 have been recorded as a component of accumulated other comprehensive loss in stockholders’ equity. We have determined that the net pre-tax unrealized losses for marketable debt securities at September 30, 20182019 and December 31, 20172018 were caused by fluctuations in interest rates and are temporary in nature. We review our marketable debt securities to identify and evaluate investments that have indications of possible impairment. Factors considered in determining whether a loss is other-than-temporary include the length of time and extent to which the fair value of the investment has been less than the cost basis, the credit quality of the investment and our ability and intent to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value. We receivedNaN marketable securities were sold in the three or nine months ended September 30, 2019. In the three and nine months ended September 30, 2018, proceeds from sales of marketable securities oftotaled $410,000 and $480,000, and recognized a $3,000 gain on the sales, inrespectively. In both the three and nine months ended September 30, 2018,. No marketable securities gains of $3,000 were sold inrecognized on the nine months ended September 30, 2017. sales.
Investments in marketable securities classified as cash equivalents of $2.3$3.9 million at September 30, 20182019 and $1.62.5 million atDecember 31, 20172018 consist of corporate debt securities and certificates of deposit. There were no0 unrealized gains or losses associated with respect to any of these securities at September 30, 20182019 or December 31, 20172018.
Cash and marketable securities held by foreign subsidiaries totaled $532,000$405,000 at September 30, 20182019 and $187,000$362,000 at December 31, 20172018.
45. FAIR VALUE MEASUREMENTS:
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(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, to measure fair value, of which the first two are considered observable and the last is considered unobservable.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 table provides information regarding fair value measurements for our marketable securities as of September 30, 20182019 and December 31, 20172018 according to the three-level fair value hierarchy:
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| Fair Value Measurements at | ||||||||||||||
(In thousands) |
| Balance September 30, |
| Quoted Prices |
| Significant |
| Significant | ||||||||
Marketable securities: |
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U.S. government and agency obligations |
| $ | 9,935 |
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| $ | — |
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| $ | 9,935 |
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| $ | — |
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Corporate debt securities and certificates of deposit |
| 2,382 |
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| — |
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| 2,382 |
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| — |
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Asset backed securities |
| 3,812 |
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| — |
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| 3,812 |
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| — |
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Equity security |
| 73 |
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| 73 |
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| — |
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| — |
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Total marketable securities |
| $ | 16,202 |
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| $ | 73 |
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| $ | 16,129 |
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| $ | — |
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| Fair Value Measurements at | ||||||||||||||
(In thousands) |
| Balance September 30, |
| Quoted Prices |
| Significant |
| Significant | ||||||||
Marketable securities: |
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U.S. government and agency obligations |
| $ | 10,824 |
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| $ | — |
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| $ | 10,824 |
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| $ | — |
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Corporate debt securities and certificates of deposit |
| 2,785 |
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| — |
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| 2,785 |
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| — |
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Asset backed securities |
| 3,526 |
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| — |
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| 3,526 |
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| — |
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Equity security |
| 49 |
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| 49 |
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| — |
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| — |
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Total marketable securities |
| $ | 17,184 |
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| $ | 49 |
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| $ | 17,135 |
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| $ | — |
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| Fair Value Measurements at |
| Fair Value Measurements at | ||||||||||||||||||||||||||||
(In thousands) |
| Balance December 31, 2017 |
| Quoted Prices |
| Significant |
| Significant |
| Balance December 31, 2018 |
| Quoted Prices |
| Significant |
| Significant | ||||||||||||||||
Marketable securities: |
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U.S. government and agency obligations |
| $ | 9,136 |
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| $ | — |
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| $ | 9,136 |
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| $ | — |
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| $ | 9,458 |
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| $ | — |
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| $ | 9,458 |
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| $ | — |
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Corporate debt securities and certificates of deposit |
| 2,967 |
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| — |
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| 2,967 |
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| — |
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| 2,537 |
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| — |
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| 2,537 |
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| — |
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Asset backed securities |
| 3,543 |
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| — |
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| 3,543 |
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| — |
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| 4,038 |
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| — |
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| 4,038 |
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| — |
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Equity security |
| 97 |
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| 97 |
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| — |
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| — |
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| 60 |
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| 60 |
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| — |
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| — |
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Total marketable securities |
| $ | 15,743 |
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| $ | 97 |
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| $ | 15,646 |
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| $ | — |
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| $ | 16,093 |
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| $ | 60 |
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| $ | 16,033 |
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| $ | — |
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9 |
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 the valuations 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 and goodwill and other intangible assets are subject to non-recurring fair value measurements if they are deemed impaired. We had no0 re-measurements of non-financial assets to fair value in the nine months ended September 30, 2019 or the nine months ended September 30, 2018 or the nine months ended September 30, 2017.
56. ACCOUNTING FOR STOCK-BASEDSHARE-BASED COMPENSATION:
We have three3 stock-basedshare-based compensation plans that are administered by the Compensation Committee of the Board of Directors. We have (1)(a) 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, (2)(b) an Employee Stock Purchase Plan under which shares of our common stock may be acquired by employees at discounted prices, and (3)(c) a Non-Employee Director Stock Plan that provides for automatic grants of restricted 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, 20182019, there were 336,489273,764 shares of common stock reserved in the aggregate for issuance pursuant to future awards under our Employee Stock Incentive Plan and 534,087524,428 shares of common stock reserved in the aggregate for issuance pursuant to outstanding awards under our Employee Stock Incentive Plan.such 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 one1 share of our common stock for each restricted stock unit. Shares reserved for issuance underReserved shares underlying outstanding awards, including options and restricted stock units, that are forfeited becomeare available under the Employee Stock Incentive Plan for future grants. grant.
Non-Employee Director Stock Plan
As of September 30, 20182019, there were 60,00052,000 shares of common stock reserved in the aggregate for issuance pursuant to future restricted share awardsgrants 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.Plan (which previously authorized the granting of stock options to non-employee directors). Under the terms of the plan, each non-employee director will automatically be grantedreceives annual restricted share grants of 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 provided forThe annual restricted share grants of 2,000 shares of common stock which vest in four4 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.
On the date of our 20182019 annual meeting, we issued a total of 8,000 shares of our common stock to our non-employee directors.directors, which were restricted as specified in the Non-Employee Director Stock Plan. The shares had an aggregate fair market value on the date of grant equal to $130,000$138,000 (grant date fair value of $16.25$17.26 per share). As of September 30, 20182019, 2,000 of these shares were vested. The aggregate fair value of the outstanding6,000 unvested shares based on the closing price of our common stock on September 30, 20182019 was $121,000.$86,000.
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).
10 |
Stock Option Activity
The following is a summary of stock option activity in the nine months ended September 30, 20182019:
|
|
|
|
|
| |||||||
| Options Outstanding |
| Weighted Average Exercise | Options Outstanding |
| Weighted Average Exercise | ||||||
Outstanding, December 31, 2017 | 568,525 |
|
| $ | 10.24 |
| ||||||
Outstanding, December 31, 2018 | 523,042 |
|
| $ | 11.48 |
| ||||||
Granted | — |
|
| — |
| — |
|
| — |
| ||
Exercised | (55,000 | ) |
| 8.20 |
| (21,050 | ) |
| 8.23 |
| ||
Expired | — |
|
| — |
| (5,750 | ) |
| 10.83 |
| ||
Forfeited | (8,650 | ) |
| 14.10 |
| (7,350 | ) |
| 16.67 |
| ||
Outstanding, September 30, 2018 | 504,875 |
|
| $ | 10.39 |
| ||||||
Outstanding, September 30, 2019 | 488,892 |
|
| $ | 11.55 |
| ||||||
|
|
|
|
|
| |||||||
Exercisable, September 30, 2018 | 311,813 |
|
| $ | 8.61 |
| ||||||
Exercisable, September 30, 2019 | 334,768 |
|
| $ | 9.45 |
|
The intrinsic value of an option is the amount by which the market price of the underlying common stock exceeds the option's exercise price. For options outstanding at September 30, 20182019, the weighted average remaining contractual term of all outstanding options was 3.83.3 years and their aggregate intrinsic value was $5.2$2.1 million. At September 30, 20182019, the weighted average remaining contractual term of options that were exercisable was 3.02.6 years and their aggregate intrinsic value was $3.7$1.9 million. The aggregate intrinsic value of stock options exercised in the nine months ended September 30, 20182019 was $572,000.$121,000. We received proceeds from stock option exercises of $173,000 in the nine months ended September 30, 2019 and $452,000 in the nine months ended September 30, 2018 and $330,000 in the nine months ended September 30, 2017. The aggregate fair value of options that vested in the nine months ended September 30, 20182019 was $204,000.$5,000.
Restricted Shares and Restricted Stock Units
Restricted shares are granted under our Non-Employee Director Stock Plan. There were 8,000 restricted shares granted in the nine months ended September 30, 20182019 (weighted average grant date fair value of $16.25 per share). Restricted stock units are granted under our Employee Stock Incentive Plan. NoNaN restricted stock units were granted in the nine months ended September 30, 20182019. The aggregate fair value of outstanding restricted shares and restricted stock units based on the closing share price of our common stock onas of September 30, 20182019 was $1.0 million.$822,000. The aggregate fair value of restricted shares and restricted stock units that vested, in thenine months ended September 30, 2018 was $177,000, based on the closing price of our common stock on the vesting date.date, was $105,000 in thenine months ended September 30, 2019.
AThe following is a summary of activity forin non-vested restricted shares and restricted stock units in the nine months ended September 30, 20182019 is as follows::
|
|
|
|
|
| |||||||||
Non-vested restricted stock units and restricted shares |
| Shares |
| Weighted Average Grant Date Fair Value |
| Shares |
| Weighted Average Grant Date Fair Value | ||||||
Non-vested at December 31, 2017 |
| 54,212 |
|
| $ | 14.86 |
| |||||||
Non-vested at December 31, 2018 |
| 56,411 |
|
| $ | 17.59 |
| |||||||
Granted |
| 8,000 |
|
| 16.25 |
|
| 8,000 |
|
| 17.26 |
| ||
Vested |
| (11,000 | ) |
| 13.72 |
|
| (6,000 | ) |
| 16.59 |
| ||
Forfeited |
| — |
|
| — |
|
| (875 | ) |
| 16.19 |
| ||
Non-vested at September 30, 2018 |
| 51,212 |
|
| $ | 15.32 |
| |||||||
Non-vested at September 30, 2019 |
| 57,536 |
|
| $ | 17.67 |
|
Employee Stock Purchase Plan
We have an Employee Stock Purchase Plan available to eligible U.S. employees. Under the 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.period (which begins on August 1st and ends on July 31st of each year). There were 16,403 17,781 shares issued under this plan in the nine months ended September 30, 2018. At2019. our 2018 annual meeting, our shareholders adopted amendments to the plan increasing the number of shares authorized for issuance under the plan by 150,000 and extending the expiration date of the plan to August 1, 2028. As of September 30, 20182019, 156,688, 174,469 shares remain available for future issuancepurchase under the Employee Stock Purchase Plan.
11 |
Stock BasedShare-Based Compensation Information
All stock basedshare-based compensation awarded to our employees and non-employee directors, representingincluding grants of restricted shares, stock options, and restricted stock units and restricted shares, are required to be recognized as an expense in our consolidated statementstatements of operations based on the grant date fair value of the award. We utilize the straight-line method of expense recognition over the vestingaward's service period for our options subject to time-basedgraded vesting restrictions.options. The fair value of stock options granted has been determined using the Black-Scholes model. We have classified equity-basedemployee share-based compensation expenses within our statementstatements of operations in the same manner as our cash-based employee compensation costs.
Share-based compensation expense in the three months ended September 30, 2019 totaled $244,000, and included $110,000 for stock options, $21,000 for our Employee Stock Purchase Plan, $78,000 for restricted stock units and $35,000 for restricted shares. Share-based compensation expense in the nine months ended September 30, 2019 totaled $737,000, and included $327,000 for stock options, $81,000 for our Employee Stock Purchase Plan, $231,000 for restricted stock units and $98,000 for restricted shares.
Stock-based
Share-based compensation expense in the three months ended September 30, 2018 totaled $217,000, and included $94,000 for stock options, $31,000 for our Employee Stock Purchase Plan, $59,000 for unvested restricted stock units and $33,000 for unvested restricted shares. Stock-basedShare-based compensation expense in the nine months ended September 30, 2018 totaled $701,000, and included $328,000for stock options, $86,000 for our Employee Stock Purchase Plan, $176,000 for unvested restricted stock units and $111,000 for unvested restricted shares.
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, $85,00086,000 for our Employee Stock Purchase Plan, $145,000176,000 for unvested restricted stock units and $65,000$111,000 for unvested restricted shares.
At September 30, 20182019, the total unrecognized compensation cost related to outstanding non-vested stock-basedshare-based compensation arrangements was $1.5$1.6 million and the related weighted average period over which thissuch cost is expected to be recognized was 2.36is 2.35 years.
67. CHANGES IN STOCKHOLDERS’ EQUITY:
A reconciliation of the changes in our stockholders' equity is as follows:
Three months ended September 30, 2019:
| Common Stock | Accumulated Other Comprehensive Loss |
| Retained Earnings | Total Stockholders’ Equity | ||||||||||||||
(In thousands) | Shares |
| Amount |
| |||||||||||||||
Balance, June 30, 2019 | 7,115 |
| $ | 36,189 |
| $ | (1,518 | ) |
| $ | 23,256 |
| $ | 57,927 |
| ||||
Exercise of stock options | 15 | 114 | — | — | 114 | ||||||||||||||
Share-based compensation | — |
|
| 244 |
|
| — |
|
| — |
|
| 244 |
| |||||
Issuance of common stock under Employee Stock Purchase Plan | 18 | 203 | — | — | 203 | ||||||||||||||
Repurchase of common stock | (26 | ) | (353 | ) | — | — | (353 | ) | |||||||||||
Other comprehensive loss, net of tax | — |
|
| — |
|
| (268 | ) |
|
| — |
|
| (268 | ) | ||||
Net loss | — |
|
| — |
|
| — |
|
| (353 | ) |
| (353 | ) | |||||
Balance, September 30, 2019 | 7,122 |
| $ | 36,397 |
| $ | (1,786 | ) |
| $ | 22,903 |
| $ | 57,514 |
|
Nine months ended September 30, 2019:
Common Stock | Accumulated Other Comprehensive Loss | Retained Earnings | Total Stockholders’ Equity | ||||||||||||||||
(In thousands) | Shares | Amount | |||||||||||||||||
Balance, December 31, 2017 | 6,980 | $ | 34,080 | $ | (1,409 | ) | $ | 19,611 | $ | 52,282 | |||||||||
Increase related to adoption of ASU 2016-01 | — | — | (44 | ) | 44 | — | |||||||||||||
Decrease related to adoption of ASU 2014-09 | — | — | — | (218 | ) | (218 | ) | ||||||||||||
Exercise of stock options, vesting of restricted stock units and grants of restricted shares, net of shares exchanged as payment | 68 | 452 | — | — | 452 | ||||||||||||||
Stock-based compensation | — | 701 | — | — | 701 | ||||||||||||||
Issuance of common stock under Employee Stock Purchase Plan | 16 | 219 | — | — | 219 | ||||||||||||||
Other comprehensive income, net of tax | — | — | (280 | ) | — | (280 | ) | ||||||||||||
Net income | — | — | — | 1,634 | 1,634 | ||||||||||||||
Balance, September 30, 2018 | 7,064 | $ | 35,452 | $ | (1,733 | ) | $ | 21,071 | $ | 54,790 |
Common Stock | Accumulated Other Comprehensive Loss | Retained Earnings | Total Stockholders’ Equity | ||||||||||||||||
(In thousands) | Shares | Amount | |||||||||||||||||
Balance, December 31, 2018 | 7,101 | $ | 35,637 | $ | (1,690 | ) | $ | 22,264 | $ | 56,211 | |||||||||
Increase related to adoption of ASU 2016-02 | — | — | — | 33 | 33 | ||||||||||||||
Exercise of stock options | 21 | 173 | — | — | 173 | ||||||||||||||
Share issuances for director compensation | 8 | — | — | — | — | ||||||||||||||
Share-based compensation | — | 737 | — | — | 737 | ||||||||||||||
Issuance of common stock under Employee Stock Purchase Plan | 18 | 203 | — | — | 203 | ||||||||||||||
Repurchase of common stock | (26 | ) | (353 | ) | — | — | (353 | ) | |||||||||||
Other comprehensive loss, net of tax | — | — | (96 | ) | — | (96 | ) | ||||||||||||
Net income | — | — | — | 606 | 606 | ||||||||||||||
Balance, September 30, 2019 | 7,122 | $ | 36,397 | $ | (1,786 | ) | $ | 22,903 | $ | 57,514 |
See Note 16 for further discussion regarding the impact of our adoption of ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, on our consolidated financial statements. See Note 2 and Note 16 for further discussion regarding the impact of our adoption of ASU No. 2014-09, Revenue from Contracts with Customers,on our consolidated financial statements.
7. OTHER FINANCIAL STATEMENT DATA:
The components of our inventories were as follows:
|
|
|
|
|
|
|
|
|
(In thousands) |
| September 30, 2018 |
| December 31, 2017 | ||||
Raw materials and purchased parts |
| $ | 7,383 |
|
| $ | 7,383 |
|
Work in process |
| 1,633 |
|
| 1,666 |
| ||
Finished goods |
| 4,919 |
|
| 5,344 |
| ||
Total inventories |
| $ | 13,935 |
|
| $ | 14,393 |
|
12 |
| Common Stock | Accumulated Other Comprehensive Loss |
| Retained Earnings | Total Stockholders’ Equity | ||||||||||||||
(In thousands) | Shares |
| Amount |
| |||||||||||||||
Balance, June 30, 2018 | 7,024 |
| $ | 34,815 |
| $ | (1,683 | ) |
| $ | 20,004 |
| $ | 53,136 |
| ||||
Exercise of stock options | 24 |
|
| 201 |
|
| — |
|
| — |
|
| 201 |
| |||||
Share-based compensation | — | 217 | — | — | 217 | ||||||||||||||
Issuance of common stock under Employee Stock Purchase Plan | 16 | 219 | — | — | 219 | ||||||||||||||
Other comprehensive loss, net of tax | — |
|
| — |
|
| (50 | ) |
|
| — |
|
| (50 | ) | ||||
Net income | — |
|
| — |
|
| — |
|
| 1,067 |
| 1,067 | |||||||
Balance, September 30, 2018 | 7,064 |
| $ | 35,452 |
| $ | (1,733 | ) |
| $ | 21,071 |
| $ | 54,790 |
|
The componentsNine months ended September 30, 2018:
Common Stock | Accumulated Other Comprehensive Loss | Retained Earnings | Total Stockholders’ Equity | ||||||||||||||||
(In thousands) | Shares | Amount | |||||||||||||||||
Balance December 31, 2017 | 6,980 | $ | 34,080 | $ | (1,409 | ) | $ | 19,611 | $ | 52,282 | |||||||||
Increase related to adoption of ASU 2016-01 | — | — | (44 | ) | 44 | — | |||||||||||||
Decrease related to adoption of ASU 2014-09 | — | — | — | (218 | ) | (218 | ) | ||||||||||||
Exercise of stock options and vesting of restricted stock units | 60 | 452 | — | — | 452 | ||||||||||||||
Share issuances for director compensation | 8 | — | — | — | — | ||||||||||||||
Share-based compensation | — | 701 | — | — | 701 | ||||||||||||||
Issuance of common stock under Employee Stock Purchase Plan | 16 | 219 | — | — | 219 | ||||||||||||||
Other comprehensive loss, net of tax | — | — | (280 | ) | — | (280 | ) | ||||||||||||
Net income | — | — | — | 1,634 | 1,634 | ||||||||||||||
Balance, September 30, 2018 | 7,064 | $ | 35,452 | $ | (1,733 | ) | $ | 21,071 | $ | 54,790 |
8. OTHER FINANCIAL STATEMENT DATA:
Inventories consist of our accrued expenses were as follows:the following:
|
|
|
|
|
|
|
|
|
(In thousands) |
| September 30, 2018 |
| December 31, 2017 | ||||
Wages and benefits |
| $ | 1,607 |
|
| $ | 1,328 |
|
Warranty liability |
| 713 |
|
| 713 |
| ||
Other |
| 336 |
|
| 244 |
| ||
|
| $ | 2,656 |
|
| $ | 2,285 |
|
|
|
|
|
|
|
|
|
|
(In thousands) |
| September 30, 2019 |
| December 31, 2018 | ||||
Raw materials and purchased parts |
| $ | 10,352 |
|
| $ | 8,821 |
|
Work in process |
| 1,426 |
|
| 2,446 |
| ||
Finished goods |
| 4,582 |
|
| 4,896 |
| ||
Total inventories |
| $ | 16,360 |
|
| $ | 16,163 |
|
Accrued expenses consist of the following:
|
|
|
|
|
|
|
|
|
(In thousands) |
| September 30, 2019 |
| December 31, 2018 | ||||
Wages and benefits |
| $ | 1,038 |
|
| $ | 2,166 |
|
Warranty liability |
| 843 |
|
| 758 |
| ||
Income taxes payable | 257 | 393 | ||||||
Other |
| 212 |
|
| 251 |
| ||
|
| $ | 2,350 |
|
| $ | 3,568 |
|
13 |
Warranty costs:
We provide for the estimated cost of product warranties, which cover products for periods ranging from 1one to 3three 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 components provided to us by suppliers, warranty obligations do arise. These obligations are affected by product failure rates, the costscost of materials used in correcting product failures and service delivery expenses incurred in correcting a product failure.to make these corrections. If actual product failure rates and material or service delivery costs differ from our estimates, revisions to the estimated warranty liability are 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, |
| Nine Months Ended September 30, | ||||||||||||
(In thousands) |
| 2018 |
| 2017 |
| 2019 |
| 2018 | ||||||||
Balance at beginning of period |
| $ | 767 |
|
| $ | 790 |
|
| $ | 789 |
|
| $ | 767 |
|
Accrual for warranties |
| 399 |
|
| 362 |
|
| 713 |
|
| 399 |
| ||||
Warranty revision |
| (30 | ) |
| (23 | ) |
| (7 | ) |
| (30 | ) | ||||
Settlements made during the period |
| (368 | ) |
| (413 | ) |
| (626 | ) |
| (368 | ) | ||||
Balance at end of period |
| 768 |
|
| 716 |
|
| 869 |
|
| 768 |
| ||||
Current portion of estimated warranty liability |
| (713 | ) |
| (691 | ) |
| (843 | ) |
| (713 | ) | ||||
Long-term estimated warranty liability |
| $ | 55 |
|
| $ | 25 |
|
| $ | 26 |
|
| $ | 55 |
|
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, |
| Nine Months Ended September 30, | ||||||||||||
(In thousands) |
| 2018 |
| 2017 |
| 2019 |
| 2018 | ||||||||
Balance at beginning of period |
| $ | 259 |
|
| $ | 346 |
|
| $ | 218 |
|
| $ | 259 |
|
Revenue deferrals |
| 289 |
|
| 321 |
|
| 352 |
|
| 289 |
| ||||
Amortization of deferred revenue |
| (310 | ) |
| (325 | ) |
| (335 | ) |
| (310 | ) | ||||
Total deferred warranty revenue |
| 238 |
|
| 342 |
|
| 235 |
|
| 238 |
| ||||
Current portion of deferred warranty revenue |
| (228 | ) |
| (301 | ) |
| (182 | ) |
| (228 | ) | ||||
Long-term deferred warranty revenue |
| $ | 10 |
|
| $ | 41 |
|
| $ | 53 |
|
| $ | 10 |
|
8.9. INTANGIBLE ASSETS:
Intangible assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| September 30, 2019 |
| December 31, 2018 | ||||||||||||||||||||
(In thousands) |
| Gross | Accumulated | Net | Gross | Accumulated | Net | |||||||||||||||||
Patents |
| $ | 2,842 |
|
| $ | (2,630 | ) |
| $ | 212 |
|
| $ | 2,754 |
|
| $ | (2,533 | ) |
| $ | 221 |
|
Software |
| 206 |
|
| (163 | ) |
| 43 |
|
| 206 |
|
| (141 | ) |
| 65 |
| ||||||
Marketing assets and customer relationships |
| 101 |
|
| (61 | ) |
| 40 |
|
| 101 |
|
| (54 | ) |
| 47 |
| ||||||
Non-compete agreements |
| 101 |
|
| (101 | ) |
| — |
|
| 101 |
|
| (101 | ) |
| — |
| ||||||
|
| $ | 3,250 |
|
| $ | (2,955 | ) |
| $ | 295 |
|
| $ | 3,162 |
|
| $ | (2,829 | ) |
| $ | 333 |
|
14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| September 30, 2018 |
| December 31, 2017 | ||||||||||||||||||||
(In thousands) |
| Gross |
| Accumulated |
| Net |
| Gross |
| Accumulated |
| Net | ||||||||||||
Patents |
| $ | 2,727 |
|
| $ | (2,515 | ) |
| $ | 212 |
|
| $ | 2,687 |
|
| $ | (2,463 | ) |
| $ | 224 |
|
Software |
| 206 |
|
| (134 | ) |
| 72 |
|
| 206 |
|
| (111 | ) |
| 95 |
| ||||||
Marketing assets and customer relationships |
| 101 |
|
| (52 | ) |
| 49 |
|
| 101 |
|
| (45 | ) |
| 56 |
| ||||||
Non-compete agreements |
| 101 |
|
| (101 | ) |
| — |
|
| 101 |
|
| (96 | ) |
| 5 |
| ||||||
|
| $ | 3,135 |
|
| $ | (2,802 | ) |
| $ | 333 |
|
| $ | 3,095 |
|
| $ | (2,715 | ) |
| $ | 380 |
|
Amortization expense for our intangible assets in the three and nine months ended September 30, 20182019 and the 2017three and nine months ended September 30, 2018 was as follows:
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||
|
| Three Months Ended September 30, |
| Nine Months Ended September 30, | Three Months Ended September 30, |
| Nine Months Ended September 30, | |||||||||||||||||||||||||
(In thousands) |
| 2018 |
| 2017 |
| 2018 |
| 2017 | 2019 | 2018 |
| 2019 |
| 2018 | ||||||||||||||||||
Patents |
| $ | 28 |
| $ | 31 |
| $ | 84 |
| $ | 82 |
| $ | 33 | $ | 28 |
| $ | 97 |
|
| $ | 84 |
| |||||||
Software |
| 8 |
| 6 |
| 23 |
| 22 |
| 7 | 8 |
|
| 22 |
|
|
| 23 |
| |||||||||||||
Marketing assets and customer relationships |
| 2 |
| 3 |
| 7 |
| 9 |
| 3 | 2 |
|
| 7 |
|
|
| 7 |
| |||||||||||||
Non-compete agreements |
| — |
| 5 |
| 5 |
| 18 |
| — | — |
|
| — |
|
|
| 5 |
| |||||||||||||
|
| $ | 38 |
|
| $ | 45 |
|
| $ | 119 |
|
| $ | 131 |
| $ | 43 | $ | 38 |
| $ | 126 |
|
| $ | 119 |
|
Amortization of patents has been classified as research and development expense in ourthe accompanying consolidated statements of operations. Estimated aggregate future amortization expense based on current intangible assets for the next five years is expected to be as follows: $38,000 $42,000 for the remainder of 2018; $137,000 in 2019; $106,000$149,000 in 2020; $32,000$74,000 in 2021; $19,000 in 2022; $9,000 in 20222023; and $9,000$2,000 in 20232024.
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 is recognized when future undiscounted cash flows expected to result from use of the asset and its eventual disposition are less than the carrying amount. There were 0 impairments in the nine months ended September 30, 2019 or the nine months ended September 30, 2018.
9. 10. REVENUE CONCENTRATIONS, SIGNIFICANT CUSTOMERS AND GEOGRAPHIC AREAS:AREAS:
The following table summarizes our revenue by product line:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
(In thousands) | 2018 | 2017 | 2018 | 2017 | ||||||||||||
High Precision 3D and 2D Sensors | $ | 5,388 | $ | 4,030 | $ | 15,696 | $ | 13,569 | ||||||||
Semiconductor Sensors | 3,463 | 2,228 | 10,564 | 7,698 | ||||||||||||
Inspection and Metrology Systems | 7,832 | 5,570 | 20,397 | 18,890 | ||||||||||||
Total | $ | 16,683 | $ | 11,828 | $ | 46,657 | $ | 40,157 |
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
(In thousands) | 2019 | 2018 | 2019 | 2018 | ||||||||||||
High Precision 3D and 2D Sensors | $ | 3,170 | $ | 5,388 | $ | 8,923 | $ | 15,696 | ||||||||
Semiconductor Sensors | 3,676 | 3,463 | 10,934 | 10,564 | ||||||||||||
Inspection and Metrology Systems | 5,545 | 7,832 | 22,554 | 20,397 | ||||||||||||
Total | $ | 12,391 | $ | 16,683 | $ | 42,411 | $ | 46,657 |
Export sales as a percentage of total sales in the three and nine months ended September 30, 2019 were 77% and 73%, respectively. Export sales as a percentage of total sales in the three and nine months ended September 30, 2018 were 71%71% and 72%, respectively. Export sales as a percentage of total sales in the three and nine months ended September 30, 2017 were 66% and 73%, respectively.respectively. Virtually all of our export sales are negotiated, invoiced and paid in U.S. dollars. Export sales by geographic area are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
(In thousands) |
| 2018 |
| 2017 |
| 2018 |
| 2017 | ||||||||
Americas |
| $ | 355 |
| $ | 159 |
|
| $ | 568 |
|
| $ | 976 |
| |
Europe |
|
| 4,093 |
|
| 2,543 |
|
|
| 9,360 |
|
|
| 9,114 |
| |
Asia |
|
| 7,090 |
|
| 4,959 |
|
|
| 22,948 |
|
|
| 18,933 |
| |
Other |
|
| 348 |
|
| 103 |
|
|
| 548 |
|
|
| 247 |
| |
Total export sales |
| $ | 11,886 |
| $ | 7,764 |
|
| $ | 33,424 |
|
| $ | 29,270 |
|
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
(In thousands) |
| 2019 | 2018 | 2019 |
| 2018 | ||||||||||
Americas |
| $ | 418 | $ | 355 | $ | 994 |
| $ | 568 |
| |||||
Europe |
| 1,926 | 4,093 |
| 6,189 |
|
| 9,360 |
| |||||||
China | 2,135 | 2,354 | 8,469 | 7,750 | ||||||||||||
Taiwan | 842 | 794 | 3,986 | 1,635 | ||||||||||||
Other Asia |
| 4,005 | 3,942 |
| 10,824 |
|
| 13,563 |
| |||||||
Other |
| 248 | 348 |
| 632 |
|
| 548 |
| |||||||
Total export sales |
| $ | 9,574 | $ | 11,886 | $ | 31,094 |
| $ | 33,424 |
|
In the nine months ended September 30, 20182019, sales to significant customer A accounted for 11% of our total revenue and sales to significant customer B accounted for 10%12% of our total revenue. As of September 30, 20182019, accounts receivable from significant customer A were $677,000 and accounts receivable from significant customer B were $1.2 $1.5 million.
15 |
10.11. NET INCOME (LOSS) PER SHARE:
Basic net income (loss) per share for a period is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Common equivalent shares consist of common shares to be issued upon exercise of stock options, vesting of restricted stock units, vesting of restricted shares and from purchases of shares under our Employee Stock Purchase Plan, as calculated using the treasury stock method. 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 common shares to be issued upon exercise of stock options, upon vesting of restricted stock units, upon vesting of restricted shares and from purchases 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 due to their anti-dilutive effect. Common equivalent shares are excluded from the calculation of net income per diluted share if their effect is anti-dilutive. The components of net income (loss) per basic and diluted share were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands except per share amounts) |
| Net Income |
| Weighted Average |
| Per Share Amount | |||||
Three Months Ended September 30, 2018 |
|
|
|
|
|
|
|
|
| ||
Basic |
| $ | 1,067 |
| 7,041 |
|
| $ | 0.15 | ||
Dilutive effect of common equivalent shares |
| — |
|
| 258 |
|
| — | |||
Dilutive |
| $ | 1,067 |
| 7,299 |
|
| $ | 0.15 |
(In thousands except per share amounts) |
| Net Loss |
| Weighted Average |
| Per Share Amount | |||||
Three Months Ended September 30, 2019 |
|
|
|
|
|
|
|
|
| ||
Basic |
| $ | (353 | ) |
| 7,117 |
|
| $ | (0.05 | ) |
Dilutive effect of common equivalent shares |
| — |
|
| — |
|
| — | |||
Dilutive |
| $ | (353 | ) |
| 7,117 |
|
| $ | (0.05 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands except per share amounts) |
| Net Loss |
| Weighted Average |
| 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 |
| Per Share Amount | |||||
Three Months Ended September 30, 2018 |
|
|
|
|
|
|
|
|
| ||
Basic |
| $ | 1,067 |
| 7,041 |
|
| $ | 0.15 | ||
Dilutive effect of common equivalent shares |
| — |
|
| 258 |
|
| — | |||
Dilutive |
| $ | 1,067 |
| 7,299 |
|
| $ | 0.15 |
(In thousands except per share amounts) |
| Net Income |
| Weighted Average |
| Per Share Amount | |||||
Nine Months Ended September 30, 2019 |
|
|
|
|
|
|
|
|
| ||
Basic |
| $ | 606 |
| 7,108 |
|
| $ | 0.09 | ||
Dilutive effect of common equivalent shares |
| — |
|
| 137 |
|
| (0.01 | ) | ||
Dilutive |
| $ | 606 |
| 7,245 |
|
| $ | 0.08 |
(In thousands except per share amounts) |
| Net Income |
| Weighted Average |
| Per Share Amount | |||||
Nine Months Ended September 30, 2018 |
|
|
|
|
|
|
|
|
| ||
Basic |
| $ | 1,634 |
| 7,012 |
|
| $ | 0.23 | ||
Dilutive effect of common equivalent shares |
| — |
|
| 164 |
|
| — | |||
Dilutive |
| $ | 1,634 |
| 7,176 |
|
| $ | 0.23 |
(In thousands except per share amounts) |
| Net Income |
| Weighted Average |
| 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 |
Potentially dilutive shares excluded from the calculations of net income (loss) per diluted share due to their anti-dilutive effect were as follows: 118,000567,000 shares in the three months ended September 30, 20182019; 285,000309,000 shares in the nine months ended September 30, 2019;118,000 shares in the three months ended September 30, 2018; and 285,000 shares in the nine months ended September 30, 2018; 575,000 shares in the three months ended September 30, 2017; and 411,000 shares in the nine months ended September 30, 2017.
16 |
11.12. OTHER COMPREHENSIVE INCOME (LOSS):
LOSS:
Reclassification adjustments are made to avoid double counting for items included in other comprehensive income (loss)loss that are also recorded as part of net income. Otherincome (loss). Reclassifications and taxes related to items of other comprehensive income (loss) consisted of the following:loss are as follows:
Three Months Ended September 30, 2019 | Three Months Ended September 30, 2018 | |||||||||||||||||||||||
(In thousands) | Before Tax | Tax Effect | Net of Tax Amount | Before Tax | Tax Effect | Net of Tax Amount | ||||||||||||||||||
Foreign currency translation adjustments | $ | (269 | ) | $ | — | $ | (269 | ) | $ | (50 | ) | $ | — | $ | (50 | ) | ||||||||
Net changes related to available-for-sale securities: | ||||||||||||||||||||||||
Unrealized gains | 1 | — | 1 | 3 | — | 3 | ||||||||||||||||||
Reclassifications included in interest income and other | — | — | — | (3 | ) | — | (3 | ) | ||||||||||||||||
Net changes related to available-for-sale securities | 1 | — | 1 | — | — | — | ||||||||||||||||||
Other comprehensive loss | $ | (268 | ) | $ | — | $ | (268 | ) | $ | (50 | ) | $ | — | $ | (50 | ) |
Three Months Ended September 30, 2018 | Three Months Ended September 30, 2017 | Nine Months Ended September 30, 2019 | Nine Months Ended September 30, 2018 | |||||||||||||||||||||||||||||||||||||||||||||
(In thousands) | Before Tax | Tax Effect | Net of Tax Amount | Before Tax | Tax Effect | Net of Tax Amount | Before Tax | Tax Effect | Net of Tax Amount | Before Tax | Tax Effect | Net of Tax Amount | ||||||||||||||||||||||||||||||||||||
Foreign currency translation adjustments | $ | (50 | ) | $ | — | $ | (50 | ) | $ | 157 | $ | (35 | ) | $ | 122 | $ | (199 | ) | $ | — | $ | (199 | ) | $ | (252 | ) | $ | — | $ | (252 | ) | |||||||||||||||||
Net changes related to available-for-sale securities: | ||||||||||||||||||||||||||||||||||||||||||||||||
Unrealized losses | 3 | — | 3 | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
Reclassification adjustments for gain included in interest income and other | (3 | ) | — | (3 | ) | — | — | — | ||||||||||||||||||||||||||||||||||||||||
Unrealized gains (losses) | 129 | (26 | ) | 103 | (33 | ) | 8 | (25 | ) | |||||||||||||||||||||||||||||||||||||||
Reclassifications included in interest income and other | — | — | — | (3 | ) | — | (3 | ) | ||||||||||||||||||||||||||||||||||||||||
Net changes related to available-for-sale securities | — | — | — | — | — | — | 129 | (26 | ) | 103 | (36 | ) | 8 | (28 | ) | |||||||||||||||||||||||||||||||||
Other comprehensive income (loss) | $ | (50 | ) | $ | — | $ | (50 | ) | $ | 157 | $ | (35 | ) | $ | 122 | |||||||||||||||||||||||||||||||||
Other comprehensive loss | $ | (70 | ) | $ | (26 | ) | $ | (96 | ) | $ | (288 | ) | $ | 8 | $ | (280 | ) |
Nine Months Ended September 30, 2018 | Nine Months Ended September 30, 2017 | |||||||||||||||||||||||
(In thousands) | Before Tax | Tax Effect | Net of Tax Amount | Before Tax | Tax Effect | Net of Tax Amount | ||||||||||||||||||
Foreign currency translation adjustments | $ | (252 | ) | $ | — | $ | (252 | ) | $ | 587 | $ | (173 | ) | $ | 414 | |||||||||
Net changes related to available-for-sale securities: | ||||||||||||||||||||||||
Unrealized gains (losses) | (33 | ) | 8 | (25 | ) | 31 | (11 | ) | 20 | |||||||||||||||
Reclassification adjustments for gain included in interest income and other | (3 | ) | — | (3 | ) | — | — | — | ||||||||||||||||
Net changes related to available-for-sale securities | (36 | ) | 8 | (28 | ) | 31 | (11 | ) | 20 | |||||||||||||||
Other comprehensive income (loss) | $ | (288 | ) | $ | 8 | $ | (280 | ) | $ | 618 | $ | (184 | ) | $ | 434 |
At September 30, 20182019 and September 30, 20172018, components of accumulated other comprehensive loss wereare as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
| Foreign |
| Available- for-Sale |
| Accumulated | ||||||
Balances at December 31, 2017 |
| $ | (1,394 | ) |
| $ | (15 | ) |
| $ | (1,409 | ) |
Decrease related to adoption of ASU 2016-01 (See Note 16) |
| — |
|
| (44 | ) | (44 | ) | ||||
Other comprehensive income before reclassifications | (252 | ) |
| (25 | ) | (277 | ) | |||||
Amounts reclassified from accumulated other comprehensive loss |
| — |
|
| (3 | ) |
| (3 | ) | |||
Total change for the period |
| (252 | ) |
| (72 | ) |
| (324 | ) | |||
Balances at September 30, 2018 |
| $ | (1,646 | ) |
| $ | (87 | ) |
| $ | (1,733 | ) |
(In thousands) |
| Foreign |
| Available- for-Sale |
| Accumulated | ||||||
Balances at December 31, 2018 |
| $ | (1,649 | ) |
| $ | (41 | ) |
| $ | (1,690 | ) |
Other comprehensive income (loss) for the nine months ended September 30, 2019 | (199 | ) |
| 103 | (96 | ) | ||||||
Balances at September 30, 2019 |
| $ | (1,848 | ) |
| $ | 62 |
| $ | (1,786 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
| Foreign |
| Available- for-Sale |
| Accumulated | ||||||
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 |
| Available- for-Sale |
| Accumulated | ||||||
Balances at December 31, 2017 |
| $ | (1,394 | ) |
| $ | (15 | ) |
| $ | (1,409 | ) |
Decrease related to adoption of ASU 2016-01 | — | (44 | ) | (44 | ) | |||||||
Other comprehensive loss for the nine months ended September 30, 2018 |
| (252 | ) |
| (25 | ) |
| (277 | ) | |||
Amounts reclassified from accumulated other comprehensive loss | — | (3) | (3) | |||||||||
Total change for the period |
| (252 | ) |
| (72 | ) |
| (324 | ) | |||
Balances at September 30, 2018 |
| $ | (1,646 | ) |
| $ | (87 | ) |
| $ | (1,733 | ) |
17 |
1213. INCOME TAXES:
We recorded an income tax expensebenefit of $297,000$234,000 in the three months ended September 30, 2018,2019, compared to an income tax benefitexpense of $116,000297,000 in the three months ended September 30, 20172018.. We recorded income tax expense of $444,000 $92,000in thenine months ended September 30, 20182019,compared to income tax expense of $444,00010,000 in the nine months ended September 30, 2017. Our income tax provision in the nine months ended September 30, 2018. Our income tax benefit in the three months ended September 30, 2019 reflectedan effective income tax rate of approximately 21%. Our40%, compared to an effective tax rate ofapproximately 22% in the three months ended September 30, 2018. Our income tax expense in the nine months ended September 30, 2019 reflected an effective tax rate of approximately 13%, compared to an effective tax rate of approximately 21% in the nine months ended September 30, 2018 was. Fluctuations in our effective tax rate in both the three and nine months ended September 30, 2019 are related to a non-cash income benefit resulting from the completion of an audit of our income taxes in the Singapore tax jurisdiction. In the nine months ended September 30, 2019 and 2018, excess tax benefits related to employee share based payments totaled $11,000 and $70,000, respectively. On a recurring basis, our effective income tax rate is significantly impacted by Global Intangible Low Tax Income (GILTI), U.Sand U.S. federal R&D tax credits and $70,000 of excess tax benefits from employee share-based payments. Our income tax provision in the nine months ended September 30, 2017 reflected an effective income tax rate of approximately 1%. Our effective tax rate in the nine months ended September 30, 2017 differed from the U.S. statutory tax rate of 34%, primarily due to $207,000 of excess tax benefits from employee share-based payments. We recognized $37,000 of excess tax benefits in the three months ended September 30, 2018. Excess tax benefits recognized in the three months ended September 30, 2017 were inconsequential.credits.
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 could be 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 in which we operate, our financial performance in recent quarters, statutory carry forwardcarry-forward periods and tax planning alternatives. In addition, 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.
14. OPERATING LEASES:
We determine if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets, current operating lease liabilities, and long-term operating lease liabilities in our consolidated balance sheets. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. The operating lease ROU assets exclude lease incentives. As our leases do not provide an implicit rate, we use our incremental borrowing rate to determine the present value of lease payments. Our leases may include renewal options to extend the lease term, the exercise of which are at our sole discretion. In our accounting treatment of leases, the lease terms used do not include any option to extend the lease, because it is not reasonably certain that we will exercise the option. Lease expense is recognized on a straight-line basis over the lease term. We have lease agreements with lease and non-lease components (e.g., common-area or other maintenance costs) which are generally accounted for separately and expensed monthly. We do not recognize a ROU asset and lease liability for leases having a term of 12 months or less at the effective date.
We lease a 61,208 square foot mixed-use office and warehouse facility in Golden Valley, Minnesota. The lease has a term of 91 months and expires on July 31, 2026. The lease contains a rent escalation clause, 1 three year renewal option and incentives. Rental expense, including the effects of lease incentives, is recognized on a straight-line basis over the term of the lease. We are also required atto pay insurance, property taxes and other operating expenses related to the leased facility, which are not fixed or tied to an index.
We lease a 19,805 square foot mixed-use office and warehouse facility in Singapore. The lease expires in July 2020, contains a rent escalation clause and 1 three year renewal option. We also have operating leases for sales offices in the United Kingdom and China, which expire in May 2023 and November 2020, respectively. We did not enter into any new leases in the nine months ended September 30, 2019.
18 |
The components of our costs for operating leases in the three and nine months ended September 30, 2019 are as follows:
Three Months Ended | Nine Months Ended | |||||||
Component (in thousands) | September 30, 2019 | September 30, 2019 | ||||||
Operating lease cost | $ | 179 | $ | 538 | ||||
Variable lease cost | 67 | 202 | ||||||
Short-term lease cost | 2 | 5 | ||||||
Total | $ | 248 | $ | 745 |
Variable lease costs generally consists of real estate taxes and insurance for leased facilities, which are paid based on actual costs incurred by the lessor.
At September 30, 20182019, the future maturities of lease liabilities are as follows:
Twelve months ending September 30, | (In thousands) | ||
2020 | $ | 801 | |
2021 | 607 | ||
2022 | 622 | ||
2023 | 638 | ||
2024 | 654 | ||
2025 and thereafter | 1,242 | ||
Total lease payments | 4,564 | ||
Less: amount representing interest | 700 | ||
Present value of operating lease liabilities | $ | 3,864 |
At September 30, 2019, the weighted average remaining term for our operating leases is 6.24 years, and the weighted average discount rate applied to our operating leases was 5.74%.
Cash paid for amounts included in the measurement of operating lease liabilities in the nine months ended September 30, 2019 was $389,000. Incentives recorded as leasehold improvements in the nine months ended September 30, 2019 were $783,000.
The Inland Revenue Authority
Because we have not restated prior year information for our adoption of Singapore is reviewingTopic 842, the following presents our 2016 and 2015 income tax returns. We do not presently anticipate thatfuture minimum lease payments for operating leases under ASC Topic 840. These amounts include common-area or other maintenance costs under ASC Topic 840 (which was replaced by Topic 842). At December 31, 2018, the outcome of these audits will have a significant impact on our financial position or results of operations.future minimum lease payments required under noncancelable operating lease agreements were as follows:
|
|
|
|
Year ending December 31, | (In thousands) | ||
2019 | $ | 1,095 |
|
2020 | 1,298 |
| |
2021 | 1,049 |
| |
2022 | 1,064 | ||
2023 | 1,080 |
| |
2024 & Thereafter | 3,049 | ||
Total | $ | 8,635 |
|
1315. SHARE REPURCHASE: REPURCHASES:
report.
14. NEW LEASE OBLIGATION:
We lease a 50,724 square foot mixed office and warehouse facility built to our specifications in Golden Valley, Minnesota, which functions as our corporate headquarters and primary manufacturing facility for our sensor and semiconductor products. We also lease a 10,165 square foot facility in Bloomington, Minnesota, the term of which expires on December 31, 2018. In May 2018, we finalized an amendment to the lease for our current Golden Valley, Minnesota facility that will become effective on January 1, 2019. The amendment provides that we will lease 61,208 square feet of space in our current facility in Golden Valley, Minnesota through July 31, 2026 (prior to the amendment, the lease provided for an expiration date of December 31, 2018). The increase in the size of the facility will allow us to conduct the operations currently carried out at our Bloomington, Minnesota facility in our current Golden Valley, Minnesota location. Future lease payments due under the amended lease for the period from January 1, 2019 through July 31, 2026, are approximately $7.9 million. We anticipate that our annual rental payments will increase by approximately $200,000when the lease amendment becomes effective in January 2019.
1516. CONTINGENCIES:
We are periodically a defendant in miscellaneous lawsuits, 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 limitlimits the amount of the claim. It is not possible to determine the maximum potential liabilityamount 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.
16. RECENT ACCOUNTING DEVELOPMENTS:
In May 2014, However, there can be no assurance that intellectual property infringement and other claims against us or parties we have indemnified will have the Financial Accounting Standards Board (the "FASB") issued Topic 606, which provided guidance on the recognition of revenue from contracts with customers. Revenue recognition depicts 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. Topic 606 also requires disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. We performed a review of the requirements of the new guidance and identified which of our revenue streams are within the scope of Topic 606. We applied the five-step model of the new standard to a selection of contracts within each of our revenue streams, and compared the results to our current accounting practices. We also performed detailed contract reviews to complete necessary adjustments to our existing accounting policies, and implemented changes to our processes and internal controls to capture new data and address changes in financial reporting. We expanded our consolidated financial statement disclosures to comply with the requirements of Topic 606. We adopted the new standard using the modified retrospective method, with the cumulative effect of initially applying the guidance recognized at the date of initial application. Our adoption of Topic 606 on January 1, 2018 resulted in a $218,000 decrease in retained earnings to record the cumulative effect adjustment. Adoption of Topic 606 increased our revenuessame impact in the three and nine months ended September 30, 2018 by $123,000 and $232,000 respectively, when compared to revenue recognition under Topic 605. Adoption of Topic 606 increased our net income in the three and nine months ended September 30, 2018 by $35,000 and $85,000, respectively, or approximately $0.01 per share in both periods.
In January 2016, the FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Liabilities, which revised the accounting related to (1) the classification and measurement of investments in equity securities and (2) the presentation of certain fair value changes for financial liabilities measured at fair value. ASU No. 2016-01 also amended certain disclosure requirements associated with the fair value of financial instruments. The new guidance requires the fair value measurement of investments in equity securities and other ownership interests in an entity that do not result in consolidation and are not accounted for under the equity method. Entities will need to measure these investments and recognize changes in fair value in net income. Entities will no longer be able to recognize unrealized holding gains and losses on equity securities they classify under current guidance as available-for-sale in other comprehensive income. ASU No. 2016-01 was effective beginning January 1, 2018 and resulted in a cumulative-effect adjustment to beginning retained earnings, except for guidance relative to equity securities without readily determinable fair values which is applied prospectively. Our adoption of ASU 2016-01 on January 1, 2018 resulted in a $44,000 increase in retained earnings and accumulated other comprehensive loss.future.
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 No. 2016-02 for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted. As issued, ASU No. 2016-02 requires reporting companies to adopt the new standard using 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. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842), Targeted Improvements, which gives companies the option of applying the standard at the adoption date, rather than retrospectively to the earliest period presented in the financial statements, and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Under the new option afforded by ASU 2018-11, companies will not be required to restate the financial statements of prior periods, nor will they be required to provide the disclosures required by ASC 842 for those prior periods. We anticipate that we will adopt ASU 2016-02 by utilizing the new option afforded by ASU 2018-11. We are currently evaluating the impact of the new standard on our consolidated financial statements. When implemented, the standard is expected to have a material impact as operating leases will be recognized on our consolidated balance sheet, with an increase to both assets and liabilities. We presently do not believe the standard will have a material impact on our results of operations. The impact of this ASU is non-cash in nature and will not affect our cash flows.
In January 2017, the 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 February 2018, the FASB issued ASU 2018-02, Reclassification of Tax Effects from Accumulated Other Comprehensive Income, which allows entities to elect an option to reclassify the stranded tax effects related to the application of the Tax Cuts and Jobs Act from accumulated other comprehensive loss to retained earnings. The guidance is effective January 1, 2019 with early adoption permitted, and can be applied either in the period of adoption or retrospectively to all applicable periods. We are currently evaluating the impact of the new guidance on our consolidated financial statements.
ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS:
The following management’s discussion and analysis of the financial condition and results of operations of CyberOptics Corporation ("we", "us" and "our") contains a number of estimates and predictions that are forward looking statements rather than statements based on historical fact. Among other matters, we discuss (i) our level of anticipated revenues, gross margins, and expenses; (ii) the timing of orders and shipments of our existing products, particularly the SQ3000, our 3D automated optical inspection ("AOI") system; (iii) the timing of initial revenue and projected improvements in gross margins from sales of new products that have been recently introduced, that we have under development or that we anticipate introducing in the future; (iv) the amount of anticipated revenue and potential revenue opportunity from recently introduced new products or potential new products we may launch in the future; and (v) our assessment of trends in the economy in general economyand, the surface mount technology ("SMT") and semiconductor capital equipment markets in particular, and their impact on the markets for our products.products; and (vi) changes in the level of tariffs and other trade policies of the United States. Although we have made these statements based on our experience and expectations regarding future events, there may be events or factors that we have not anticipated, and the accuracy of our forward-looking statements and estimates are subject to a number of risks, including those risks identified in our Annual Report on Form 10-K for the year ended December 31, 20172018.
RESULTS OF OPERATIONS
General
As a leading global developer and manufacturer of high precision 3D3D sensors, our strategy is to leverage our 3D3D sensor technologies in our key vertical markets that consist of the surface mount technology ("SMT"),SMT and semiconductor and metrologycapital equipment markets. A key element in our strategy is the continued development and sale of new high precision3D sensors based on our proprietary multi-reflection suppression ("MRS") technology. We believe that MRS is a break-through optical technology for high precision inspection and metrology. Our operating results in the three and nine months ended September 30, 2019 were affected by the cyclical, industry-wide slowdown in demand for SMT and semiconductor capital equipment as well as uncertainty surrounding the global trade environment. We believe the three months ended September 30, 2019 marked the trough of the downturn in the SMT and semiconductor capital equipment markets, and that industry conditions will strengthen moving forward. Over the longer-term (i.e. the next several years), we expect a growing number of opportunities in the markets for SMT and semiconductor inspection and metrology, withand we believe MRS has the potential to expand our marketspresence in the future. Unlike competing technologies, our MRS technology has the ability to inhibit reflectionsmarkets for SMT and provide microscopic quality images at production line speeds.semiconductor capital equipment.
Manufacturing yield challenges as electronics and semiconductors become more complex are driving the need for more precise inspection and metrology. As a result, weWe believe 3D inspection and metrology represent high-growth segments in both the SMT and semiconductor capital equipment markets. We expect a growing number of opportunities in the markets for SMT and semiconductor inspection, becausebelieve our 3D3D MRS technology platform is well suited for many ofapplications in these applications,markets, particularly with respect to complex circuit boards and semiconductor mid-end, back-endwafer level and advanced packaging inspection and metrology applications. We are taking advantage of thesecurrent market trends by deploying our 3D MRS sensor technology in the following products:
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• | Our high-precision 3D MRS sensors, which we sell to original equipment manufacturers ("OEMs") and system integrators, that produce inspection and metrology equipment for the SMT and semiconductor industries. |
• | Our next generation ultra-high resolution three micron pixel 3D NanoResolution MRS sensor is capable of measuring feature sizes down to 25 microns accurately and at high speeds, and is suitable for many semiconductor wafer level and advanced packaging inspection and metrology applications. We are targeting one micron, three-sigma accuracy, at speeds that would inspect more than 25300-millimeter wafers in an hour. We have received initial purchase orders for our 3D NanoResolution MRS sensor from three OEM customers, and are currently demonstrating this technology to other OEMs, system integrators and directly to semiconductor manufacturers. We believe sales of 3D MRS-enabled sensors and systems for semiconductor wafer level and advanced packaging inspection and metrology applications represent compelling long-term growth opportunities. |
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RevenueWhile we are optimistic about the future sales of MRS-based products, revenue from MRS basedall MRS-based products increased by $4.5totaled $14.9 million or 43% toin the nine months ended September 30, 2019, a decrease of approximately 1% from $15.0 million in the nine months ended September 30, 2018, from $10.5 million. Sales of 3D MRS sensors decreased 25% on a year-over-year basis in the nine months ended September 30, 20172019. We believe we will be able to increase$4.1 million, as OEM customers reduced their orders due to sluggish market conditions in the global SMT and semiconductor capital equipment markets. Despite the weak market conditions, sales of products based3D MRS-enabled SQ3000 and SQ3000™ 3D CMM AOI systems increased 14% on our MRS technologya year-over-year basis in the SMT, semiconductor and metrology markets, includingnine months ended September 30, 2019 to $10.4 million. In the markets for semiconductor mid-end and advanced packaging inspection applications. Wefuture, we anticipate increasing sales of theseMRS-based products in the SMT and semiconductor capital equipment markets by utilizing new original equipment manufacturer ("OEM")OEM customers and system integrators and by expanding direct sales to end-user customers. Revenue from MRS based products is forecasted to grow significantly on a year-over-year basis in the fourth quarter of 2018.
We have significantly advanced our MRS-enabled3D sensor technology as part of a research initiative aimed at applying our3D MRS technology to semiconductor mid-end and advanced packaging inspection applications. Sales of SQ3000 systems for these applications have started using our high resolution 7-micron pixel sensor. Many customers for these applications are evaluating our next generation ultra-high resolution 3-micron pixel sensor capable of measuring feature sizes down to 30 microns accurately and at high speeds. We are targeting one micron, three-sigma accuracy, at speeds that would inspect more than 20 300 mm wafers per hour. We believe sales of MRS-enabled 3D optical sensors and systems for semiconductor mid-end and advanced packaging inspection applications represent significant long-term growth opportunities for us, and we expect sales of these sensors and systems to ramp up in 2019 and beyond.
We have continued to invest in our semiconductor sensors, principally consisting of our WaferSense® family of products, because fabricators of semiconductors and other customers view these products as valuable tools for improving yields and productivity. Additional WaferSense® applications are currently under development, and we believe WaferSense products will accountdevelopment. Over the longer-term, strong future sales growth is anticipated for a growing proportionour WaferSense® family of our total revenue over the next few years.products.
OverOur backlog was $14.4 million at September 30, 2019, up from $13.0 million at June 30, 2019, but down from $19.7 million at September 30, 2018. Our backlog at September 30, 2019 includes a large order for 3D MRS sensors from an existing OEM customer which are scheduled mostly for delivery after 2019. We are forecasting total sales of $13.5 to $15.0 million for the longer term, wefourth quarter of 2019, down from $18.1 million in the fourth quarter of 2018, but up from $12.4 million in the third quarter of 2019. We believe that anticipated sales growth of our 3D MRS-enabled productsconditions in the SMT and WaferSense sensors should increase our revenues and net income. semiconductor capital equipment markets will strengthen as we progress through 2020. We believe that we have the resources required to attain our growth objectives, given our available cash and marketable securities balances totaling $23.8$25.3 million at September 30, 20182019.
Revenues
Our revenues increaseddecreased by 41%26% to $16.712.4 million in the three months ended September 30, 20182019, from $11.816.7 million in the three months ended September 30, 20172018. Our revenues increaseddecreased by 16%9% to $46.7$42.4 million in the nine months ended September 30, 2019 from $46.7 million in the nine months ended September 30, 2018, from $40.2 million in the nine months ended September 30, 2017. The following table sets forth revenues by product line for the three and nine months ended September 30, 20182019 and 20172018:
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||||||||||||||||
(In thousands) | 2018 | 2017 | % Change | 2018 | 2017 | % Change | 2019 | 2018 | % Change | 2019 | 2018 | % Change | ||||||||||||||||||||||||||||||||||
High Precision 3D and 2D Sensors | $ | 5,388 | $ | 4,030 | 34% | $ | 15,696 | $ | 13,569 | 16% | $ | 3,170 | $ | 5,388 | (41 | ) | % | $ | 8,923 | $ | 15,696 | (43 | ) | % | ||||||||||||||||||||||
Semiconductor Sensors | 3,463 | 2,228 | 55% | 10,564 | 7,698 | 37% | 3,676 | 3,463 | 6 | % | 10,934 | 10,564 | 4 | % | ||||||||||||||||||||||||||||||||
Inspection and Metrology Systems | 7,832 | 5,570 | 41% | 20,397 | 18,890 | 8% | 5,545 | 7,832 | (29 | ) | % | 22,554 | 20,397 | 11 | % | |||||||||||||||||||||||||||||||
Total | $ | 16,683 | $ | 11,828 | 41% | $ | 46,657 | $ | 40,157 | 16% | $ | 12,391 | $ | 16,683 | (26 | ) | % | $ | 42,411 | $ | 46,657 | (9 | ) | % |
Revenues from sales of high precision 3D and 2D sensors increaseddecreased by $1.42.2 million or 34%41% to $3.2 million in the three months ended September 30, 2019, from $5.4 million in the three months ended September 30, 2018, when compared to the three months ended September 30, 2017. Revenues from sales of high precision3D and 2D2D sensorsincreased decreased by $2.16.8 million or43% to $8.916% million in thenine months ended September 30, 20182019, when compared to thenine months ended September 30, 2017. The revenue increases primarily resulted from higher sales of 3D MRS-enabled sensors. Sales of 3D MRS-enabled sensors increased by $710,000 or 64% to $1.8 million in the $15.7three months ended September 30, 2018, when compared to the three months ended September 30, 2017. Sales of 3D MRS-enabled sensors increased by $2.1 million or 61% to $5.5 million in the nine months ended September 30, 2018, when compared to. OEM customers reduced their purchases of high precision 3D and 2D sensors in the three and nine months ended September 30, 20172019 in response to weak. Sales of legacy 2D LaserAlign sensors were also higher conditions in the three months ended September 30, 2018, when compared to the same period last year. global SMT and semiconductor capital equipment markets. Sales of high precision 3D and 2D sensors are dependent on the success of our OEM customers selling products that incorporate our sensors. Due to ongoing market weakness, our 3D and 2D sensor sales are forecasted to decline in the fourth quarter of 2019, both sequentially and on a year-over-year basis. However, we believe sales of 3D MRS-enabled sensors will rebound, starting in early 2020. We believe sales of older 2D legacy sensors will also rebound, but recovery may not happen until later in 2020. We believe sales of our new 3D MRS enabled sensors will represent an increasing percentage of our total high precision 3D3D and 2D2D sensor sales in the future. However, qQuarterlyuarterly sales of high precision 3D and 2D sensors, including 3D MRS enabled sensors, are prone to significant fluctuations both sequentially and on a year-over-year basis.due to variations in market demand.
Revenues from sales of semiconductor sensors, principally our WaferSense product line, increased by $1.2213,000 or 6% to $3.7 million orin the 55%three months ended September 30, 2019, from $3.5 million in the three months ended September 30, 2018, when compared to the three months ended September 30, 2017. RevenuesRevenue from sales of semiconductor sensors increased by $2.9 million370,000 or 37%4 in the% to $10.9 nine months ended September 30, 2018, when compared tomillion in the nine months ended September 30, 20172019, from $10.6 million in the nine months ended September 30, 2018. The revenue increases reflect favorable conditionsWe believe higher sales of semiconductor sensors in the markets forthree months ended September 30, 2019 are due to initial signs of improvement in the global semiconductor capital equipment market, particularly with respect to foundry customers. In the nine months ended September 30, 2019, higher sales of semiconductor sensors are due to the recent improvement in market conditions, and incremental sales of WaferSense products in the first quarter of 2019 to Asian semiconductor manufacturing facilities commissioned in 2018. Sales of semiconductor sensors are forecasted to increase by more than 10% in the fourth quarter of 2019 on a year-over-year basis. Over the longer-term, we anticipate that the benefits from growing acceptancemarket awareness of our WaferSense products, as important productivity enhancement tools by semiconductor manufacturers, and improved account penetration at major semiconductor manufacturers and capital equipment suppliers. We anticipate that the benefits from growing market awarenesssuppliers and new product introductions will lead to additional WaferSense product sales in future periods.sales.
Revenues from sales of inspection and metrology systems decreased by $2.3 million or 29% to $5.5 million in the three months ended September 30, 2019, from $7.8 million in the three months ended September 30, 2018.Revenues from sales of inspection and metrology systems increased by $2.32.2 million or 41%11% to $22.6 million in the three months ended September 30, 2018, when compared to the three months ended September 30, 2017. Revenues from sales of inspection and metrology systems increased by $1.5 million or 8% in the nine months ended September 30, 2018, when compared to the nine months ended September 30, 2017. The revenue increases primarily resulted from higher sales of 3D MRS-enabled SQ3000 3D AOI systems, including the new SQ3000™ 3D CMM system. Sales of SQ3000 systems increased by $2.1 million or 92% to $4.3 million in the three months ended September 30, 20182019, when compared to the from $three months ended September 30, 201720.4. Sales of SQ3000 systems increased by $1.9 million or 28% to $8.7 million in the nine months ended September 30, 2018. The revenue decrease in the three months ended September 30, 2019 was caused by sluggish market conditions in the global SMT and semiconductor capital equipment markets, resulting in lower year-over-year sales of both MRS-enabled SQ3000 3D AOI systems and legacy inspection systems. The revenue increase in the nine months ended September 30, 2019 resulted from higher sales of MRS-enabled SQ30003D AOI systems and sales of MX600 memory module inspection systems. Sales of MRS-enabled SQ3000 3D AOI systems increased by $1.2 million or 14% to $10.4 million in the nine months ended September 30, 2019, when compared to the nine months ended September 30, 2018. Strong year-over-year sales growth is forecasted for MRS-enabled SQ3000 3D AOI systems in the fourth quarter of 2019, due in part to the competitive advantages offered by our MRS technology. Sales of MX600 memory module inspection systems were approximately $600,000 and $3.3 million in the three and nine months ended September 30, 2019, respectively. There were no sales of MX600 memory module inspection systems in the three and nine months ended September 30, 2018.Sales of legacy 2D AOI and solder paste inspection systems were lower in the three and nine months ended September 30, 2019, when compared to the three and nine months ended September 30, 20172018. Despite the anticipated sales growth for MRS-enabled SQ3000 AOI systems, slow sales of legacy products are expected to result in lower year-over-year sales of inspection and metrology systems in this year's fourth quarter.
We believe a growing number of companies are transitioning from 2D AOI to 3D AOI systems to meet the increasingly demanding product inspection requirements in the semiconductor, electronics and industrial markets. As a result, we believe demand for 3D3D AOI systems is growing rapidly. We anticipate sales of our 3D MRS enabled SQ3000 3DSQ30003D AOI systems, including the new SQ3000™ 3D CMM system, will represent an increasing percentage of our total inspection and metrology system sales in the future. Also, we expect that the competitive advantages of our unique 3D MRS technology will provide us with an opportunity to capture significant market share in the 3D AOI systems market.
Export revenuerevenues totaled $9.6 million or 77% of our total revenues in the three months ended September 30, 2019, compared to $11.9 million or 71% of our total revenuerevenues in the three months ended September 30, 2018, . Export revenues totaled $31.1 million or 73% of our total revenues in the nine months ended September 30, 2019compared to $7.833.4 million or 6672% of total revenues in the nine months ended September 30, 2018. Export revenue as a percentage of total revenue was higher in the three months ended September 30, 2017. Export revenue totaled $33.4 million or 72% of total revenue in the nine months ended September 30, 2018, compared to $29.3 million or 73% of total revenue in the nine months ended September 30, 2017. The higher percentage of export revenue in the three months ended September 30, 20182019, when compared to the three months ended September 30, 20172018, wasprimarily due to the increase inlower sales of 3D MRS-enabled sensorsgeneral industrial metrology systems and SQ3000 3D AOI systems, a higher proportion ofservices, which are generallyprimarily sold outsidein the United States. There was no significant change in export revenuerevenues as a percentage of total revenuerevenues in the nine months ended September 30, 2019, when compared to the nine months ended September 30, 2018, when compared to the nine months ended September 30, 2017..
Cost of Revenues and Gross Margin
Cost of revenues increaseddecreased by $3.0$2.4 million or 4826% to $9.26.9 million in the three months ended September 30, 20182019, from $6.29.2 million in the three months ended September 30, 20172018. Cost of revenues increaseddecreased by $4.3$2.4 million or 10% to $23.320million in the nine months ended September 30, 2019, from $25.7 million in the nine months ended September 30, 2018. The decrease in cost of revenues in both periods was due to a corresponding decrease in revenues. In the three and nine months ended September 30, 2019, revenues decreased by 26% and 9%, respectively.
Total gross margin as a percentage of revenues was 44% in the three months ended September 30, 2019, compared to $25.745% in the three months ended September 30, 2018. Total gross margin as a percentage of revenues was 45% in both the nine months ended September 30, 2019 million inand the nine months ended September 30, 2018, from $21.4 million in the nine months ended September 30, 2017. The increasessmall reduction in cost of revenues were mainly due to the corresponding revenue increases in both periods. Revenues increased by 41%gross margin percentage in the three months ended September 30, 20182019 was due to incremental expenses for inventory obsolescence and warranty costs, offset in part by a more favorable product mix. Sales of higher margin semiconductor sensors represented a larger percentage of our total revenues in the three months ended September 30, 2019, when compared to the three months ended September 30, 20172018. Revenues increased by 16% in the nine months ended September 30, 2018, when comparedDue to the nine months ended September 30, 2017. Revenuea more favorable product mix, in the three and nine months ended September 30, 2018 also contributed to the changes in cost of revenues. Items included in cost of revenues that fluctuate with the level of sales include raw materials, direct labor and factory overhead costs.
Totaltotal gross marginmargins as a percentage of revenue was 45% in both the three and nine months ended September 30, 2018, compared to 47% in both the three and nine months ended September 30, 2017. The reduction in gross margin percentage in both periods was mainly due to pricing pressures on 2D and 3D inspection systemsrevenues in the broader SMT market, offset in part byfourth quarter of 2019 are expected to be higher on a change in mix of products sold. year-over-year basis and higher to a lesser extent on a sequential quarterly basis.
Our markets are highly price competitive, particularly insegments of the electronic assembly market.SMT market that have less demanding inspection requirements. As a result, we have experienced continual pressure on our gross margins. We compensate for the pressure to reduce the price of our products by introducing new products with more features and improved performance and through manufacturing cost reduction programs. Sales of many products that we have recently introduced or are about to introduce, including our current and future MRS-enabled SQ30003D AOI systems,products, 3D MRS sensors and WaferSense sensor products, have, or are expected to have, more favorable gross margins than many of our existing products. Our next generation 3D MRS-enabled sensor and system products are being designed for more complex and demanding inspection applications in the SMT and semiconductor markets. Sales prices and gross profit margins for these applications tend to be higher, when compared to the broader SMT market.
Operating Expenses
Research and development ("R&D") expenses were $2.4 million or 19% of revenues in the three months ended September 30, 2019, compared to $2.2 million or 13%13% of revenuerevenues in the three months ended September 30, 2018, compared to. R&D expenses were $1.97.0 million or 16% of revenuerevenues in the threenine months ended September 30, 20172019. Research and development expenses were, compared to $6.6 million or 14% of revenuerevenues in the nine months ended September 30, 2018, compared to $5.9 million or. 15% of revenueThe increases in R&D expenses in both the three and nine months ended September 30, 2017. The increases in research and development expenses2019 were the result of higher compensation costs duefor new and existing R&D employees, and expenses related to hiringdevelopment of additional employees, pay increases for existing employees andour next generation 3D NanoResolution MRS sensor, offset in part by lower bonus accruals for employees who workworking in research and development.our R&D department. Current research and developmentR&D expenditures are primarily focused on continued development of our 3D MRS technology, including 3D sensor subsystems and commercialization of ourthe next generation ultra-high resolution 3-micron pixelNanoResolution sensor, and ongoing development of new applications and products for our WaferSense product line.3D wafer level, advanced packaging and memory module inspection.
Selling, general and administrative ("S,G&A") expenses were $3.9 million or 31% of revenues in the 24%three months ended September 30, 2019, compared to $3.9 million or 24% of revenuerevenues in the three months ended September 30, 2018, compared to. S,G&A expenses were $3.811.8 million or 3228% of revenuerevenues in the threenine months ended September 30, 20172019. Selling, general and administrative expenses were, compared to $12.4 million or 27%27% of revenuerevenues in the nine months ended September 30, 2018, compared to $11.8 million or 29%. The increases in S,G&A expenses as a percentage of revenues reflected our lower revenue levels. However, S,G&A expenses in the three and nine months ended September 30, 2017. The increases in selling, general2019 were favorably impacted by lower compensation costs resulting from employee departures and administrative expenses were due to higherlower bonus accruals and commissions paid to outside sales channel partners,commissions resulting from increasesthe declines in our salesrevenues and profitability in thefinancial performance. In addition, three and nine months ended September 30, 2018, when compared to the same periods of 2017. Selling, general and administrativeS,G&A expenses in the three and nine months ended September 30, 2018 were decreased by an approximately $200,000 reduction in our allowance for doubtful accounts, primarily resulting from collection of a receivable that had been fully reserved for in a prior period. We do not expect further large reductions
Total operating expenses in our allowance for doubtful accounts in future periods.the fourth quarter of 2019 are expected to be virtually unchanged on both a year-over-year and quarterly sequential basis.
Interest Income and Other
Interest incomeincome and other includes interest earned on investments and gains and losses fromassociated with foreign currency transactions, includingprimarily intercompany financing transactions associated with our subsidiaries in the United Kingdom, Singapore and China. WeIn the three months ended September 30, 2019 and 2018, we recognized lossesgains from foreign currency transactions primarily intercompany financingof $71,000 and $37,000 respectively. In the nine months ended September 30, 2019 and 2018, we recognized gains from foreign currency transactions of $45,000 and $102,000, respectively.
Income Taxes
We recorded an income tax benefit of $37,000234,000 in the three months ended September 30, 2019, compared to income tax expense of $297,000 in thethree months ended September 30, 2018, compared to. losses from foreign currency transactionsWe recorded income tax expense of $38,00092,000 in thethree nine months ended September 30, 20172019. We recognized gains from foreign currency transactions, primarily intercompany financing transactions,, compared to income tax expense of $102,000444,000 in the nine months ended September 30, 2018. Our income tax benefit in the three months ended September 30, 2019 reflectedan effectivetax rate of approximately 40%, compared to an effective tax rate ofapproximately 22% in the three months ended September 30, 2018. Our income tax expense in the nine months ended September 30, 20182019, compared to losses from foreign currency transactionsreflectedan effectivetax rate of $194,000 in the nine months ended September 30, 2017.
Income Taxes
We recorded income tax expense of $297,000 in the three months ended September 30, 2018approximately 13%, compared to an incomeeffective tax benefitrate of $116,000approximately 21% in thethree months ended September 30, 2017. We recorded income tax expense of $444,000in the nine months ended September 30, 2018, compared to income tax expense of $10,000. Fluctuations in the nine months ended September 30, 2017. Our income tax provision in thenine months ended September 30, 2018 reflected an effective income tax rate of approximately 21%. Ourour effective tax rate in the nine months ended September 30, 2018 was impacted by Global Intangible Low Tax Income (GILTI), U.S. federal R&D tax credits and $70,000 of excess tax benefits from employee share-based payments. Our income tax provision in the nine months ended September 30, 2017 reflected an effective income tax rate of approximately 1%. Our effective tax rate in the nine months ended September 30, 2017 differed from the U.S. statutory tax rate of 34%, primarily due to $207,000 of excess tax benefits from employee share-based payments. We recognized $37,000 of excess tax benefits in the three months ended September 30, 2018. Excess tax benefits recognized in the three months ended September 30, 2017 were inconsequential. Fluctuations in tax expense and the rate of taxation inboth the three and nine months ended September 30, 2018, when compared2019 are related to a non-cash income benefit resulting from the same periodscompletion of 2017, are mainly due to increases in pre-taxan audit of our income offset in part by the new lower tax rates provided fortaxes in the Tax CutsSingapore tax jurisdiction. In the nine months ended September 30, 2019 and Jobs Act passed by the U.S. Congress in December 2017. We anticipate that our future effective tax rate will be approximately 25%, excluding any2018, excess tax benefits fromrelated to employee share-based payments.share based payments totaled $11,000 and $70,000, respectively. On a recurring basis, our effective income tax rate is significantly impacted by Global Intangible Low Tax Income and U.S. federal R&D tax credits.
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 could be 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 threeyears in each of the tax jurisdictions in which we operate, our financial performance in recent quarters, statutory carry forwardcarry-forward periods and tax planning alternatives. In addition, 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, 2018.required.
The Inland Revenue Authority of Singapore is reviewing our 2016 and 2015 income tax returns. We do not presently anticipate that the outcome of these audits will have a significant impact on our financial position or results of operations.Backlog
Backlog
Backlog totaled $19.7$14.4 million at September 30, 2019, an increase from $13.6 million at December 31, 2018, but down from $19.7 million at September 30, 2018, an increase from $13.8 million at June 30, 2018 and $11.2 million at September 30, 2017. Our products are typically shipped two weeks to two months after receipt of an order. Backlog at September 30, 2018 included $4.4 million of orders for MX600 systems, which are expected to be recognized as revenue in the first half of 2019. Sales of some inspection system products may require customer acceptance due to performance or other acceptance criteria included in the terms of sale. For these product sales, revenue is recognized at the time of customer acceptance. Our backlog at any time may vary significantly based on the timing of orders from OEM customers. In some instances, our OEM customers may place orders for shipment of products covering periods of nine months or longer. Accordingly, backlog may not be an accurate indicator of performance in the future.
Liquidity and Capital Resources
Our cash and cash equivalents increaseddecreased by $689,000$1.1 million in the nine months ended September 30, 20182019. Cash provided by operating activities of $916,000 and proceeds of $1.76.1 million cash from sales and maturities of marketable securities were more than offset by purchases of marketable securities totaling $6.57.1 million and proceeds from the exercise of stock options and share purchases under our Employee Stock Purchase Plan of $671,000, were offset in part by purchases of marketable securities of $7.0 million and fixed asset purchasesassets and capitalized patent costs totaling $1.2 million. Our cash and cash equivalents fluctuate in part because of sales and maturities of marketable securities and investment of cash balances in marketable securities.securities, and from other sources of cash. Accordingly, we believe the combined balances of cash and marketable securities provide a more reliable indication of our available liquidity than cash balances alone. Combined balances of cash and marketable securities increased by approximatelywere $1.1 million to $23.825.3 million as of both September 30, 2018 from $22.7 million as of2019 and December 31, 20172018.
Operating activities provided $1.7$916,000 million of cash in the nine months ended September 30, 20182019. The amount of cash provided by operations was favorably impacted by our net income of $1.6 million$606,000. Net income was affected by non-cash expenses totaling $2.82.6 millionmillion for depreciation and amortization, provision for doubtful accounts, deferred income taxes, non-cash gainslosses from foreign currency transactions, stock-basedshare-based compensation costs and gains and lossesan unrealized loss on our available-for-sale securities. equity security. Changes in operating assets and liabilities providing cash in the nine months ended September 30, 20182019, included an increasea decrease in accounts payablereceivable of $1.1$2.6 million, million, an increasea decrease in advance customer paymentsother assets of $638,000235,000 and an increase in accrued expensesoperating lease assets and liabilities of $382,000.$482,000. Changes in operating assets and liabilities using cash in the nine months ended September 30, 20182019 included an increase in accounts receivable of $3.6 million, an increase in inventories of $387,0001.1 million, a decrease in accounts payable of $3.5 million and an increasea decrease in other assetsaccrued expenses of $692,000$1.1 million. Accounts receivable decreased due to lower sales in the third quarter of 2019, compared to the fourth quarter of 2018, offset in part by slower collection of accounts receivable. Sales of inspection and metrology systems, which typically have longer collection periods than sales of our sensor products, have constituted a larger portion of our revenues in recent quarters. Other assets decreased because deposits previously paid to a key supplier of materials were used to purchase inventories. The increase in operating lease assets and liabilities resulted from lease incentives, including free rent and facility operating costs, and the effects of straight-line rent expense. Inventories increased due to sluggish conditions in the global SMT and semiconductor capital equipment markets, with a corresponding negative impact on sales, causing inventory levels to rise. Accounts payable increaseddecreased in the third quarter of 2019 due to the timing of inventory purchases, with more raw materials being acquired in the later partfourth quarter of 2018 and the first half of 2019. These materials were subsequently paid for prior to September 30, 2019, resulting in a lower accounts payable balance. Accrued expenses decreased due to lower compensation accruals at September 30, 2019, resulting from payment of 2018 bonuses in early 2019, and payment of employee wages near the end of the third quarter of 2018. The timing of these purchases resulted in a higher accounts payable balance at September 30, 2018. Advance customer payments increased due to receipt of deposits from customers for metrology products we expect to ship in the fourth quarter of 2018. Accrued expenses were up due to 2018 bonus accruals that we expect to pay in 2019. Accounts receivable increased due to the higher sales level in the third quarter of 2018, when compared to the fourth quarter of 2017. Inventories increased slightly in 2018 due to changes in anticipated product sales mix. Other assets were up due to payments for supplier deposits. quarter.
Investing activities used $1.7$2.1 million of cash in the nine months ended September 30, 20182019. Changes in the level of investment in marketable securities, resulting from purchases sales and maturities of those securities, used $508,000936,000 of cash in the nine months ended September 30, 20182019. We also used $1.2 million of cash in the nine months ended September 30, 20182019 tofor the purchase of fixed assets and to fund capitalized patent costs.
Financing activities provided $23,000 of cash in the nine months ended September 30, 2019. Proceeds from the exercise of stock options and share purchases under our Employee Stock Purchase Planemployee stock purchase plan provided $671,000$376,000 of cash in the nine months ended September 30, 20182019. In July 2019, our Board of Directors authorized a $3.0. million share repurchase program through June 30, 2020. Share repurchases under this program used $353,000 of cash in the nine months ended September 30, 2019.
At September 30, 20182019, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities. These entities (which are used to establishestablished by some companies for the purpose of establishing off-balance sheet arrangements).arrangements or for other contractually narrow or limited purposes.
We lease a 50,724 square foot mixed office and warehouse facility built to our specifications in Golden Valley, Minnesota, which functions as our corporate headquarters and primary manufacturing facility for our sensor and semiconductor products. We also lease a 10,165 square foot facility in Bloomington, Minnesota, the term of which expires on December 31, 2018. In May 2018, we finalized an amendment to the lease for our current Golden Valley, Minnesota facility that will become effective on January 1, 2019. The amendment provides that we will lease 61,208 square feet of space in our current facility in Golden Valley, Minnesota through July 31, 2026 (prior to the amendment, the lease provided for an expiration date of December 31, 2018). The increase in the size of the facility will allow us to conduct the operations currently carried out at our Bloomington, Minnesota facility in our current Golden Valley, Minnesota location. Future lease payments due under the amended lease for the period from January 1, 2019 through July 31, 2026, are approximately $7.9 million. We anticipate that our annual rental payments will increase by approximately $200,000 when the lease amendment becomes effective in January 2019.
In October 2017, our Board of Directors adopted a program authorizing the purchase of up to $3.0 million of shares of our common stock. The program expired on September 30, 2018. During the nine months ended September 30, 2018, no shares were repurchased under this program.
Our cash, cash equivalents and marketable securities totaled $23.8 million at September 30, 2018. We believe that ouron-hand cash, cash equivalents and marketable securities, coupled with anticipated future cash flow from operations, will be adequate to fund our cash flow needs for the foreseeable future.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES:
The preparation of the financial information contained in this Form 10-Q requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate these estimates, including those estimates related to revenue recognition, bad debts, warranty obligations, inventory valuation, intangible assets and income taxes. We base these estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. These estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Our actual results may differ from these estimates under different assumptions or conditions. These critical accounting policies are discussed in more detail in the Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended December 31, 2017.
Change in Revenue Accounting
Effective January 1, 2018, we adopted ASU No. 2014-9, “Revenue from Contracts with Customers” and the related amendments (“Topic 606”) using the modified retrospective method.Topic 606 was applied to all uncompleted contracts by recognizing the cumulative effect of initially applying Topic 606 as an adjustment to the opening balance of equity at January 1, 2018.Therefore, the comparative financial information for the three and nine months ended September 30, 2017 has not been adjusted and continues to be reported under Topic 605, “Revenue Recognition”.
Accounting for contracts recognized over time involves the use of various techniques to estimate total contract revenue and costs. Contract estimates are based on various assumptions to project the outcome of future events that may span multiple years. We review and update our contract-related estimates regularly, and record adjustments as needed.
The adoption of Topic 606 caused changes for (1) the impact of volume discounts that represent a material right which will now be estimated and recognized over the contract life rather than on a prospective basis, and (2) revenue will be recognized over time as the products are manufactured under certain contracts where our product is customized rather than at shipment. These changes increased our revenues in the three and nine months ended September 30, 2018 by $123,000 and $232,000, respectively, when compared to revenue recognition under Topic 605 (see Note 16). Adoption of Topic 606 increased our net income in the three and nine months ended September 30, 2018 by $35,000 and $85,000, respectively, or approximately $0.01 per share in both periods.
Performance Obligations
Under Topic 606, revenue is measured based on consideration specified in the contract with a customer.A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account in Topic 606. Revenue from all customers, including distributors, is recognized when a performance obligation is satisfied by transferring control of a product or service to a customer. Amounts billed to customers for shipping and handling are included in revenue. Taxes collected from customers and remitted to governmental authorities are excluded from revenue on the net basis of accounting. Accounts receivable are due under normal trade terms, typically 90 days or less.
Sales involving multiple performance obligations typically include the sale of an inspection system or metrology product, installation and training, and in some cases, an extended warranty. When a sale involves multiple performance obligations, we account for individual products and services separately if the customer can benefit from the product or service on its own or with other resources that are readily available to the customer and the product or service are separately identifiable from other promises in the arrangement.The consideration is allocated between separate performance obligations in proportion to their estimated stand-alone selling price.If the stand-alone selling price is not directly observable, we use the cost plus margin approach to estimate stand-alone selling price. Costs related to products delivered are recognized in the period revenue is recognized; including product warranties for periods ranging from 1 to 3 years (see Note 7).
Our performance obligations are satisfied at a point in time or over time as work progresses. Revenue from products and services transferred to customers at a point in time in the three and nine months ended September 30, 2018 totaled $15.4 million and $43.4 million, respectively, which represented 93% of our total revenue in both periods. Revenue from these contracts is recognized when obligations under the terms of the contract with our customer are satisfied; generally with the transfer of control upon shipment. Sales of some products may require customer acceptance due to performance or other acceptance criteria that is considered more than a formality. For these product sales, revenue is recognized upon notification of customer acceptance.
Revenue from products and services transferred to customers over time in the three and nine months ended September 30, 2018 totaled $1.2 million and $3.3 million, respectively, which represented 7% of our total revenue in both periods. Periodically, sensor product arrangements with our original equipment manufacturers (OEM's) will create an asset with no alternative use and include an enforceable right to payment.For these arrangements control is transferred over the manufacturing process; therefore, revenue is recognized over time utilizing an input method based on actual costs incurred in the manufacturing process to date relative to total expected production costs. For certain longer duration 3D scanning service projects, we progress bill as the services are performed.These arrangements create an asset with no alternative use and include an enforceable right to payment.For these arrangements, control is transferred over the hours incurred to complete the scanning project; therefore, revenue is recognized over time utilizing an input method based on actual hours incurred relative to total projected project hours. For maintenance and extended warranty contracts, revenue is recognized over time on a straight-line basis over the term of the contract as the customer simultaneously receives and consumes the benefits of the coverage.
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ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 4 – CONTROLS AND PROCEDURES
a. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective in ensuring that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in applicable rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, in a manner that allows timely decisions regarding required disclosure.
b. There was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the period covered by this quarterly report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 1 – LEGAL PROCEEDINGS
None.
ITEM 1A – RISK FACTORS
In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 20172018, which could materially affect our business, financial condition or future results.
ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES
None.In July 2019, our Board authorized the repurchase of up to $3.0 million of shares of our common stock. The common stock will be acquired from time to time in open market transactions, block purchases and other transactions complying with Rule 10b-18 of the Securities and Exchange Commission.
Company Repurchase of Equity Securities
Period | (a) | (b) | (c) | (d) | ||||||||
July 1, 2019 to July 31, 2019 |
|
| 8,575 |
| $ | 13.61 |
|
| 8,575 |
| $ | 2,883,316 |
August 1, 2019 to August 31, 2019 |
|
| 17,410 |
| $ | 13.60 |
|
| 17,410 |
| $ | 2,646,592 |
|
|
|
|
|
|
|
|
|
|
|
| |
September 1, 2019 to September 30, 2019 |
|
| — |
| $ | — |
|
| — |
| $ | 2,646,592 |
Total |
|
| 25,985 |
| $ | 13.60 |
|
| 25,985 |
| $ | 2,646,592 |
ITEM 3 – DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4 – MINE SAFETY DISCLOSURES
None.
ITEM 5 – OTHER INFORMATION
None.
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ITEM 6 – EXHIBITS
|
|
|
31.1: |
| |
31.2: |
| |
32: |
| |
101: |
| Financial statements formatted in Inline Extensible Business Reporting Language: (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
| CYBEROPTICS CORPORATION |
|
|
| /s/ Subodh Kulkarni |
| By Subodh Kulkarni, President and Chief Executive Officer |
| (Principal Executive Officer and Duly Authorized Officer) |
|
|
| /s/ Jeffrey A. Bertelsen |
| By Jeffrey A. Bertelsen, Vice President, Chief Financial Officer and Chief Operating Officer |
| (Principal Accounting Officer and Duly Authorized Officer) |
Dated: November 6, 20182019