aaoi_Current_Folio_10Q

Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2017

 

OR

 

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from __________ to __________

 

Commission File Number: 001-36083

 

Applied Optoelectronics, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware

76-0533927

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

 

13139 Jess Pirtle Blvd.

Sugar Land, TX 77478

(Address of principal executive offices)

 

(281) 295-1800

(Registrant’s telephone number)

 

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 (“Exchange Act”) during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No 

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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

(Do not check if a smaller reporting company)

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 Exchange Act). Yes ☐ No ☒

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: as of November 3, 2017 there were 19,382,186 shares of the registrant’s Common Stock outstanding.

 

 

 

 


 

Table of Contents

Applied Optoelectronics, Inc.

Table of Contents

 

 

 

Page

Part I. Financial Information 

 

 

 

Item 1. 

Condensed Consolidated Financial Statements (Unaudited)

3

 

 

 

 

Condensed Consolidated Balance Sheets as of September 30, 2017 (Unaudited) and December 31, 2016

3

 

 

 

 

Condensed Consolidated Statements of Operations for the Three and Nine Months ended September 30, 2017 and 2016 (Unaudited)

4

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months ended September 30, 2017 and 2016 (Unaudited)

5

 

 

 

 

Condensed Consolidated Statements of Stockholders’ Equity for the Nine Months ended September 30, 2017 (Unaudited)

6

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Nine Months ended September 30, 2017 and 2016 (Unaudited)

7

 

 

 

 

Notes To Condensed Consolidated Financial Statements (Unaudited)

8

 

 

 

Item 2. 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

20

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

31

 

 

 

Item 4. 

Controls and Procedures

31

 

 

 

Part II. Other Information 

 

 

 

Item 1. 

Legal Proceedings

33

 

 

 

Item 1A. 

Risk Factors

33

 

 

 

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

52

 

 

 

Item 3. 

Defaults Upon Senior Securities

52

 

 

 

Item 4. 

Mine Safety Disclosures

52

 

 

 

Item 5. 

Other Information

52

 

 

 

Item 6. 

Exhibits

52

 

 

 

 

Signatures

55

 

 

2


 

Table of Contents

Part I. Financial Information

 

Item 1. Condensed Consolidated Financial Statements

 

Applied Optoelectronics, Inc. and Subsidiaries

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

 

 

    

2017

    

2016

 

ASSETS

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

70,930

 

$

50,224

 

Restricted cash

 

 

1,072

 

 

1,732

 

Short-term investments

 

 

36

 

 

44

 

Accounts receivable - trade, net of allowance of $31

 

 

73,029

 

 

49,766

 

Inventories

 

 

74,552

 

 

51,817

 

Prepaid expenses and other current assets

 

 

10,448

 

 

3,969

 

Total current assets

 

 

230,067

 

 

157,552

 

Cash restricted for construction in progress

 

 

 —

 

 

 8

 

Property, plant and equipment, net

 

 

181,481

 

 

144,098

 

Land use rights, net

 

 

797

 

 

778

 

Intangible assets, net

 

 

4,041

 

 

3,993

 

Deferred income tax assets

 

 

15,167

 

 

11,421

 

Other assets, net

 

 

7,151

 

 

4,468

 

TOTAL ASSETS

 

$

438,704

 

$

322,318

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

Current portion of notes payable and long-term debt

 

$

3,638

 

$

7,865

 

Accounts payable

 

 

50,993

 

 

36,375

 

Bank acceptance payable

 

 

 —

 

 

307

 

Accrued income taxes

 

 

5,459

 

 

974

 

Accrued liabilities

 

 

16,801

 

 

14,452

 

Total current liabilities

 

 

76,891

 

 

59,973

 

Notes payable and long-term debt, less current portion

 

 

37,371

 

 

34,961

 

TOTAL LIABILITIES

 

 

114,262

 

 

94,934

 

Stockholders' equity:

 

 

 

 

 

 

 

Preferred Stock; 5,000 shares authorized at $0.001 par value; no shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively

 

 

 —

 

 

 —

 

Common Stock; 45,000 shares authorized at $0.001 par value; 19,359 and 18,400 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively

 

 

19

 

 

18

 

Additional paid-in capital

 

 

285,600

 

 

265,264

 

Accumulated other comprehensive gain (loss)

 

 

6,400

 

 

(885)

 

Retained earnings (accumulated deficit)

 

 

32,423

 

 

(37,013)

 

TOTAL STOCKHOLDERS' EQUITY

 

 

324,442

 

 

227,384

 

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

 

$

438,704

 

$

322,318

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

3


 

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Applied Optoelectronics, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited, in thousands, except share and per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30, 

 

Nine months ended September 30, 

 

 

    

2017

    

2016

    

2017

    

2016

    

Revenue, net

 

$

88,879

 

$

70,137

 

$

302,474

 

$

175,813

 

Cost of goods sold

 

 

49,507

 

 

46,976

 

 

168,348

 

 

121,097

 

Gross profit

 

 

39,372

 

 

23,161

 

 

134,126

 

 

54,716

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

9,190

 

 

8,362

 

 

24,695

 

 

24,572

 

Sales and marketing

 

 

2,551

 

 

1,594

 

 

6,612

 

 

4,884

 

General and administrative

 

 

9,580

 

 

6,445

 

 

26,188

 

 

18,084

 

Total operating expenses

 

 

21,321

 

 

16,401

 

 

57,495

 

 

47,540

 

Income from operations

 

 

18,051

 

 

6,760

 

 

76,631

 

 

7,176

 

Other income (expense)

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

61

 

 

40

 

 

166

 

 

206

 

Interest expense

 

 

(248)

 

 

(462)

 

 

(792)

 

 

(1,313)

 

Other income (expense), net

 

 

(354)

 

 

66

 

 

(898)

 

 

(532)

 

Total other income (expense)

 

 

(541)

 

 

(356)

 

 

(1,524)

 

 

(1,639)

 

Income before income taxes

 

 

17,510

 

 

6,404

 

 

75,107

 

 

5,537

 

Income tax (expense) benefit

 

 

1,865

 

 

11,332

 

 

(6,872)

 

 

11,472

 

Net income

 

$

19,375

 

$

17,736

 

$

68,235

 

$

17,009

 

Net income per share

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

1.00

 

$

1.03

 

$

3.59

 

$

1.00

 

Diluted

 

$

0.95

 

$

0.97

 

$

3.39

 

$

0.95

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares used to compute net income per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

19,294,022

 

 

17,151,031

 

 

18,993,068

 

 

17,057,687

 

Diluted

 

 

20,422,609

 

 

18,360,531

 

 

20,133,644

 

 

17,954,229

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

4


 

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Applied Optoelectronics, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited, in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30, 

 

Nine months ended September 30, 

 

 

    

2017

    

2016

    

2017

    

2016

    

Net income

 

$

19,375

 

$

17,736

 

$

68,235

 

$

17,009

 

Gain on foreign currency translation adjustment

 

 

2,032

 

 

1,323

 

 

7,285

 

 

1,821

 

Comprehensive income

 

$

21,407

 

$

19,059

 

$

75,520

 

$

18,830

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

5


 

Table of Contents

Applied Optoelectronics, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Nine months ended September 30, 2017

(Unaudited, in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

Retained

 

 

 

 

 

 

Preferred Stock

 

Common Stock 

 

Additional

 

other

 

earnings/

 

 

 

 

 

 

Number

 

 

 

 

Number

 

 

 

 

paid-in

 

comprehensive

 

(Accumulated

 

Stockholders'

 

 

    

of shares

    

Amount

    

of shares

    

Amount

    

capital

    

gain (loss)

    

deficit)

    

equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

January 1, 2017

 

 —

 

$

 —

 

18,400

 

$

18

 

$

265,264

 

$

(885)

 

$

(37,013)

 

$

227,384

 

Public offering of common stock, net

 

 —

 

 

 —

 

459

 

 

 1

 

 

21,571

 

 

 —

 

 

 —

 

 

21,572

 

Stock options exercised, net of shares withheld for employee tax

 

 —

 

 

 —

 

356

 

 

 —

 

 

(4,930)

 

 

 —

 

 

 —

 

 

(4,930)

 

Issuance of restricted stock, net of shares withheld for employee tax

 

 —

 

 

 —

 

144

 

 

 —

 

 

(2,161)

 

 

 —

 

 

 —

 

 

(2,161)

 

Share based compensation

 

 —

 

 

 —

 

 —

 

 

 —

 

 

5,849

 

 

 —

 

 

 —

 

 

5,849

 

Cumulative effect of previously unrecognized tax benefits

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

1,207

 

 

1,207

 

Foreign currency translation adjustment

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

7,285

 

 

 —

 

 

7,285

 

Other

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 7

 

 

 —

 

 

(6)

 

 

 1

 

Net income

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

68,235

 

 

68,235

 

September 30, 2017

 

 —

 

$

 —

 

19,359

 

$

19

 

$

285,600

 

$

6,400

 

$

32,423

 

$

324,442

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

6


 

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Applied Optoelectronics, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 

 

 

    

2017

    

2016

    

Operating activities:

 

 

 

 

 

 

 

Net income

 

$

68,235

 

$

17,009

 

Adjustments to reconcile net income to net cash provided by

 

 

 

 

 

 

 

operating activities:

 

 

 

 

 

 

 

Lower of cost or market adjustment to inventory

 

 

1,365

 

 

2,799

 

Depreciation and amortization

 

 

14,332

 

 

9,926

 

Deferred income taxes, net

 

 

(2,495)

 

 

(11,856)

 

Loss on disposal of assets

 

 

51

 

 

89

 

Share-based compensation

 

 

5,849

 

 

2,830

 

Unrealized foreign exchange loss

 

 

(308)

 

 

(3,509)

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable, trade

 

 

(23,261)

 

 

(5,412)

 

Inventories

 

 

(21,113)

 

 

9,423

 

Other current assets

 

 

(6,062)

 

 

3,450

 

Accounts payable

 

 

14,618

 

 

3,886

 

Accrued income taxes

 

 

4,360

 

 

177

 

Accrued liabilities

 

 

1,927

 

 

(444)

 

Net cash provided by operating activities

 

 

57,498

 

 

28,368

 

Investing activities:

 

 

 

 

 

 

 

Maturities of short-term investments

 

 

 8

 

 

7,749

 

Change in restricted cash for construction in progress

 

 

 8

 

 

(847)

 

Purchase of property, plant and equipment

 

 

(46,529)

 

 

(40,333)

 

Proceeds from disposal of equipment

 

 

171

 

 

1,306

 

Deposits and prepaid for equipment

 

 

(2,369)

 

 

659

 

Purchase of intangible assets

 

 

(407)

 

 

(440)

 

Net cash used in investing activities

 

 

(49,118)

 

 

(31,906)

 

Financing activities:

 

 

 

 

 

 

 

Proceeds from issuance of notes payable and long-term debt

 

 

 —

 

 

28,858

 

Principal payments of long-term debt and notes payable

 

 

(38,300)

 

 

(3,995)

 

Proceeds from line of credit borrowings

 

 

36,000

 

 

115,798

 

Repayments of line of credit borrowings

 

 

 —

 

 

(114,542)

 

Proceeds from bank acceptance payable

 

 

 —

 

 

5,850

 

Repayments of bank acceptance payable

 

 

(307)

 

 

(5,531)

 

Repayments of note payable

 

 

 —

 

 

(750)

 

Exercise of stock options

 

 

1,399

 

 

480

 

Payments of tax withholding on behalf of employees related to share-based compensation

 

 

(8,490)

 

 

 —

 

Proceeds from common stock offering, net

 

 

21,572

 

 

 —

 

Net cash provided by financing activities

 

 

11,874

 

 

26,168

 

Effect of exchange rate changes on cash

 

 

(208)

 

 

4,769

 

Net increase in cash, cash equivalents and restricted cash

 

 

20,046

 

 

27,399

 

Cash, cash equivalents and restricted cash at beginning of period

 

 

51,956

 

 

32,793

 

Cash, cash equivalents and restricted cash at end of period

 

$

72,002

 

$

60,192

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

Cash paid for:

 

 

 

 

 

 

 

Interest

 

$

730

 

$

1,277

 

Income taxes

 

 

4,992

 

 

(12)

 

Non-cash investing and financing activities:

 

 

 

 

 

 

 

Net change in accounts payable related to property and equipment additions

 

 

(1,091)

 

 

 —

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

7


 

Table of Contents

Applied Optoelectronics, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 1.   Description of Business

 

Business Overview

 

Applied Optoelectronics, Inc. (“AOI” or the “Company”) was incorporated in Texas on February 28, 1997.  In March 2013, the Company converted into a Delaware corporation. The Company is a leading, vertically integrated provider of fiber-optic networking products, primarily for four networking end-markets: internet data center, cable television, fiber-to-the-home and telecommunications. The Company designs and manufactures a wide range of optical communications products at varying levels of integration, from components, subassemblies and modules to complete turn-key equipment.

 

The Company has manufacturing and research and development facilities located in the U.S., Taiwan and China. At its corporate headquarters and manufacturing facilities in Sugar Land, Texas, the Company primarily manufactures lasers and laser components and performs research and development activities for laser component and optical module products. The Company operates in Taipei, Taiwan and Ningbo, China through its wholly-owned subsidiary Prime World International Holdings, Ltd. (“Prime World”, incorporated in the British Virgin Islands). Prime World is the parent of Global Technology, Inc. (“Global”, incorporated in the People’s Republic of China).  Through Global, the Company primarily manufactures certain of our data center transceiver products, including subassemblies, as well as Cable TV Broadband (“CATV”) systems and equipment, and performs research and development activities for the CATV products. Prime World also operates a branch in Taiwan, which primarily manufactures transceivers. The Company also has a research and development center in Lawrenceville, Georgia. 

 

Interim Financial Statements

 

The unaudited condensed consolidated financial statements of the Company as of September 30, 2017 and December 31, 2016 and for the three and nine months ended September 30, 2017 and September 30, 2016, have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim information and with the instructions on Form 10-Q and Rule 10-01 of Regulation S-X pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). In accordance with those rules and regulations, the Company has omitted certain information and notes required by GAAP for annual consolidated financial statements. In the opinion of management, the condensed consolidated financial statements contain all adjustments, except as otherwise noted, necessary for the fair presentation of the Company’s financial position and results of operations for the periods presented. The year-end condensed balance sheet data was derived from audited financial statements. These condensed consolidated financial statements should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in the Company’s Annual Report on Form 10-K (“Annual Report”) for the fiscal year ended December 31, 2016. The results of operations for the three and nine months ended September 30, 2017 are not necessarily indicative of the results expected for the entire fiscal year. All significant intercompany accounts and transactions have been eliminated.

 

Use of Estimates

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported. Actual results could differ from those estimates in the consolidated financial statements and accompanying notes. Significant estimates and assumptions that impact these financial statements and the accompanying notes relate to, among other things, allowance for doubtful accounts, inventory reserve, product warranty costs, share-based compensation expense, estimated useful lives of property and equipment, and taxes.

 

Note 2.   Significant Accounting Policies

 

There have been no changes in the Company’s significant accounting policies for the three and nine months ended September 30, 2017, as compared to the significant accounting policies described in its 2016 Annual Report, except as described below.

8


 

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Recent Accounting Pronouncements

 

Recent Accounting Pronouncements Adopted in 2017 

 

In March 2016, the FASB issued Accounting Standards Update (ASU) No. 2016-09, Improvements to Employee Share-Based Payment Accounting, to simplify several aspects of accounting for share-based payment transactions, including the following areas: accounting for excess tax benefits and tax deficiencies; classifying excess tax benefits on the statement of cash flows; accounting for forfeitures; classifying awards that permit share repurchases to satisfy statutory tax withholding requirements; classifying tax payments on behalf of employees on the statement of cash flows; and, for nonpublic entities only, determining the expected term and electing the intrinsic value measurement alternative for stock option awards. The guidance is effective for public business entities in fiscal years beginning after December 15, 2016, and in the interim periods within those fiscal years. The guidance requires a mix of prospective, modified retrospective and retrospective transition. The Company adopted the provisions of ASU 2016-09 as of January 1, 2017. The impact from adoption of the provisions related to forfeiture rates was reflected in the Company's condensed consolidated financial statements on a modified retrospective basis, resulting in an adjustment of $0.01 million to retained earnings. Provisions related to windfall tax benefits have been adopted prospectively resulting in an adjustment of $1.2 million to retained earnings. Provisions related to the statement of cash flows remain unchanged from prior periods.

 

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows:  Restricted Cash, providing guidance on the presentation of restricted cash or restricted cash equivalents in the statement of cash flows.  ASU 2016-18 is effective for interim and annual periods beginning after December 15, 2017, with early adoption permitted.  The amendments in this ASU would be applied using a retrospective approach.  The Company adopted the provisions of ASU 2016-18 as of July 1, 2017 with no material impact on the financial statements. 

 

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.  The ASU update addresses eight specific cash flow issues that currently result in diverse practices, including debt prepayment or debt extinguishment costs, contingent consideration payments made after a business combination and separately identifiable cash flows and applicability of the predominance principle.  ASU 2016-15 is effective for interim and annual periods beginning after December 15, 2017, with early adoption permitted. The Company adopted the provisions of ASU 2016-15 as of July 1, 2017 with no material impact on the financial statements. 

 

In May 2017, the FASB issued ASU No. 2017-09, Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting, which clarifies when modification accounting should be applied for changes to terms or conditions of a share-based payment award. This ASU will be applied prospectively and is effective for fiscal years beginning after December 15, 2017, and interim periods within those years, with early adoption permitted. The Company adopted the provisions of ASU 2017-09 as of July 1, 2017 with no material impact on the financial statements. 

 

Recent Accounting Pronouncements Yet to be Adopted

 

The FASB issued ASU No. 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The guidance is intended to improve the recognition and measurement of financial instruments. The ASU affects public and private companies, not-for-profit organizations, and employee benefit plans that hold financial assets or owe financial liabilities. The guidance is effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is evaluating the impact of the accounting standard on its financial statements.

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). The amendments in ASU 2015-14 defer the effective date of ASU 2014-09 for all entities by one year. Public business entities should apply the guidance in ASU 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. In applying the new guidance, the Company will: 1) identify the contracts with its customers, 2) identify the performance obligations in the contracts, 3) determine the transaction price, 4) allocate the transaction price to the performance obligations of the contract, and 5) recognize revenue when (or as) the Company satisfies a performance obligation. Since this guidance was issued, the Company has undertaken an accounting assessment phase focusing on developing a scoping plan and a review plan to determine the

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gaps between existing revenue recognition policies and the requirements of the new revenue guidance.  This accounting assessment involved developing a training and education process for the Company personnel, performing sales contract walkthroughs to identify financial obligations, reviewing existing revenue streams and mapping contract features to revenue streams.  The Company is in the process of developing any necessary accounting policy changes to adopt new standards on the effective date. The Company’s assessment has determined that nearly all of the Company’s revenue is derived from sales of products to customers.  Contracts governing the terms and conditions of these sales include purchase orders and various master purchase agreements or similar contracts.  These contracts specify terms associated with these sales and the Company recognizes revenue when the products are delivered according to the terms specified in the contracts.  The new guidance will not affect this revenue recognition practice.  For this reason, the Company does not believe that the new standard will have a material effect on its financial statements. The Company is continuing its evaluation of any  required disclosures and changes to its accounting policies, as well as any other potential effects on its consolidated financial position, results of operations and cash flows as a result of this new standard. The Company plans to adopt the new standards after December 15, 2017.

 

On February 25, 2016, the FASB released ASU No. 2016-02, Leases, to complete its project to overhaul lease accounting. The ASU codifies ASC 842, Leases, which will replace the guidance in ASC 840. The guidance will require lessees to recognize most leases on the balance sheet for capital and operating leases. The guidance is effective for public business entities in fiscal years beginning after December 15, 2018. The Company is evaluating the impact of the accounting standard on its financial statements by reviewing the standard itself, as well as reviewing literature about the new standard produced by nationally-recognized accounting firms and other third parties.

 

Note 3.   Cash, Cash Equivalents and Restricted Cash

 

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the statement of financial position that sum to the total of the same such amounts in the statement of cash flows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 

 

 

December 31, 

 

 

September 30, 

 

 

December 31, 

 

 

    

2017

 

2016

 

 

2016

 

2015

 

Cash and cash equivalents

$

70,930

 

$

50,224

 

$

55,907

 

$

28,074

 

Restricted cash

 

1,072

 

 

1,732

 

 

4,285

 

 

4,719

 

Total cash, cash equivalents and restricted cash shown in the statement of cash flows

$

72,002

 

$

51,956

 

$

60,192

 

$

32,793

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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Restricted cash includes guarantee deposits for customs duties and compensating balances required for certain credit facilities.

 

Note 4.   Fair Value of Financial Instruments

 

The following table presents a summary of the Company’s financial instruments measured at fair value on a recurring basis for the periods indicated (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of September 30, 2017

 

As of December 31, 2016

 

 

    

(Level 1)

    

(Level 2)

    

(Level 3)

    

Total

    

(Level 1)

    

(Level 2)

    

(Level 3)

    

Total

 

Assets:

 

 

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

 

 

 

 

  

 

 

 

Cash and cash equivalents

 

$

70,930

 

$

 —

 

$

 —

 

$

70,930

 

$

50,224

 

$

 —

 

$

 —

 

$

50,224

 

Restricted cash

 

 

1,072

 

 

 —

 

 

 —

  

 

1,072

 

 

1,740

 

 

 —

 

 

 —

  

 

1,740

 

Short term investments

 

 

36

 

 

 —

 

 

 —

  

 

36

 

 

44

 

 

 —

 

 

 —

  

 

44

 

Total assets

 

$

72,038

 

$

 —

 

$

 —

 

$

72,038

 

$

52,008

 

$

 —

 

$

 —

 

$

52,008

 

Liabilities:

 

 

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

 

 

 

 

  

 

 

 

Bank acceptance payable

 

 

 —

 

 

 —

  

 

 —

 

 

 —

 

 

 —

 

 

307

  

 

 —

 

 

307

 

Total liabilities

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

307

 

$

 —

 

$

307

 

 

The carrying value amounts of accounts receivable, prepaid expenses and other current assets, accounts payable, accrued expenses and other current liabilities approximate fair value because of the short-term maturity of these instruments. The carrying value of the term loans approximate fair value due to the variable interest rates.

 

Note 5.   Earnings Per Share

 

Basic net income per share has been computed using the weighted-average number of shares of common stock outstanding during the period. Diluted net income per share has been computed using the weighted-average number of shares of common stock and dilutive potential common shares from stock options and restricted stock units outstanding during the period.

 

The following table sets forth the computation of the basic and diluted net income per share for the periods indicated (in thousands, except per share amounts):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30, 

 

Nine months ended September 30, 

 

 

    

2017

    

2016

    

2017

    

2016

    

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

19,375

 

$

17,736

 

$

68,235

 

$

17,009

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares used to compute net income per share

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

19,294

 

 

17,151

 

 

18,993

 

 

17,058

 

Effective of dilutive options and restricted stock units

 

 

1,129

 

 

1,210

 

 

1,141

 

 

897

 

Diluted

 

 

20,423

 

 

18,361

 

 

20,134

 

 

17,954

 

Net income per share

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

1.00

 

$

1.03

 

$

3.59

 

$

1.00

 

Diluted

 

$

0.95

 

$

0.97

 

$

3.39

 

$

0.95

 

 

There were no securities that were excluded from the computation of diluted net income per share.

 

 

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Note 6.   Inventories

 

Inventories, net of inventory writedowns, consist of the following for the periods indicated (in thousands):

 

 

 

 

 

 

 

 

 

 

    

September 30, 2017

    

December 31, 2016

 

Raw materials

 

$

22,574

 

$

21,518

 

Work in process and sub-assemblies

 

 

30,906

  

 

24,334

 

Finished goods

 

 

21,072

  

 

5,965

 

 

 

$

74,552

 

$

51,817

 

 

The lower of cost or market adjustment expensed for inventory for the three months ended September 30, 2017 and 2016 was $0.7 million and $0.9 million, respectively.  The lower of cost or market adjustment expensed for inventory for the nine months ended September 30, 2017 and 2016 was $1.4 million and $2.8 million, respectively.

 

Note 7.   Property, Plant & Equipment

 

Property, plant and equipment consisted of the following for the periods indicated (in thousands):

 

 

 

 

 

 

 

 

 

 

    

September 30, 2017

    

December 31, 2016

 

Land improvements

 

$

797

 

$

792

 

Building and improvements

 

 

73,729

 

 

69,368

 

Machinery and equipment

 

 

149,510

 

 

108,724

 

Furniture and fixtures

 

 

4,595

 

 

4,227